10-Q
Table of Contents    

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 March 31, 2016

OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from            to           
 
Commission File Number: 1-11884
ROYAL CARIBBEAN CRUISES LTD.
(Exact name of registrant as specified in its charter)
 
Republic of Liberia
 
98-0081645
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
1050 Caribbean Way, Miami, Florida 33132
(Address of principal executive offices) (zip code)
 
(305) 539-6000
(Registrant’s telephone number, including area code)
 
N/A
(Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ý  No o
 
Indicate by check mark whether the registrant has submitted electronically 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.
 
Large accelerated filer x
 
Accelerated filer o
 
Non-accelerated filer o
 
Smaller reporting company o
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No ý
 
There were 215,241,400 shares of common stock outstanding as of April 22, 2016.
 


Table of Contents    

ROYAL CARIBBEAN CRUISES LTD.
 
TABLE OF CONTENTS
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



Table of Contents    

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 March 31,
 
2016
 
2015
Passenger ticket revenues
$
1,378,167

 
$
1,306,779

Onboard and other revenues
539,628

 
508,820

Total revenues
1,917,795

 
1,815,599

Cruise operating expenses:
 

 
 

Commissions, transportation and other
324,890

 
324,418

Onboard and other
103,654

 
116,239

Payroll and related
227,441

 
211,591

Food
121,510

 
119,786

Fuel
175,862

 
205,276

Other operating
288,221

 
245,307

Total cruise operating expenses
1,241,578

 
1,222,617

Marketing, selling and administrative expenses
302,021

 
286,832

Depreciation and amortization expenses
210,764

 
200,468

Restructuring charges
305

 

Operating Income
163,127

 
105,682

Other income (expense):
 

 
 

Interest income
2,720

 
3,737

Interest expense, net of interest capitalized
(65,446
)
 
(70,159
)
Other (expense) income (including a $21.7 million loss related to the 2016 elimination of the Pullmantur reporting lag)
(1,261
)
 
5,970

 
(63,987
)
 
(60,452
)
Net Income
$
99,140

 
$
45,230

Earnings per Share:
 

 
 

Basic
$
0.46

 
$
0.21

Diluted
$
0.46

 
$
0.20

Weighted-Average Shares Outstanding:
 

 
 

Basic
216,914

 
219,626

Diluted
217,869

 
220,842

Comprehensive Income
 

 
 

Net Income
$
99,140

 
$
45,230

Other comprehensive income (loss):
 

 
 

Foreign currency translation adjustments
6,648

 
(31,544
)
Change in defined benefit plans
(3,512
)
 
(1,493
)
Gain (loss) on cash flow derivative hedges
2,737

 
(260,949
)
Total other comprehensive income (loss)
5,873

 
(293,986
)
Comprehensive Income (Loss)
$
105,013

 
$
(248,756
)
 
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
 
March 31,
 
December 31,
 
2016
 
2015
 
(unaudited)
 
 
Assets
 

 
 

Current assets
 

 
 

Cash and cash equivalents
$
117,360

 
$
121,565

Trade and other receivables, net
253,303

 
238,972

Inventories
121,392

 
121,332

Prepaid expenses and other assets
279,707

 
220,579

Derivative financial instruments
120,524

 
134,574

Total current assets
892,286

 
837,022

Property and equipment, net
18,828,743

 
18,777,778

Goodwill
286,852

 
286,764

Other assets
955,532

 
880,479

 
$
20,963,413

 
$
20,782,043

Liabilities and Shareholders’ Equity
 

 
 

Current liabilities
 
 
 
Current portion of long-term debt
$
895,490

 
$
899,542

Accounts payable
371,854

 
302,072

Accrued interest
80,888

 
38,325

Accrued expenses and other liabilities
525,551

 
658,601

Derivative financial instruments
577,493

 
651,866

Customer deposits
1,946,668

 
1,742,286

Total current liabilities
4,397,944

 
4,292,692

Long-term debt
7,806,690

 
7,627,701

Other long-term liabilities
871,010

 
798,611

Commitments and contingencies (Note 6)


 


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; 234,544,116 and 233,905,166 shares issued, March 31, 2016 and December 31, 2015, respectively)
2,345

 
2,339

Paid-in capital
3,298,515

 
3,297,619

Retained earnings
6,962,858

 
6,944,862

Accumulated other comprehensive loss
(1,322,560
)
 
(1,328,433
)
Treasury stock (18,697,703 and 15,911,971 common shares at cost, March 31, 2016 and December 31, 2015, respectively)
(1,053,389
)
 
(853,348
)
Total shareholders’ equity
7,887,769

 
8,063,039

 
$
20,963,413

 
$
20,782,043

.
 
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)
 
Three Months Ended March 31,
 
2016
 
2015
Operating Activities
 

 
 

Net income
$
99,140

 
$
45,230

Adjustments:
 

 
 

Depreciation and amortization
210,764

 
200,468

Net deferred income tax expense (benefit)
827

 
(520
)
(Gain) loss on derivative instruments not designated as hedges
(14,455
)
 
28,083

Changes in operating assets and liabilities:
 

 
 

Decrease in trade and other receivables, net
10,094

 
18,095

Decrease (increase) in inventories
274

 
(2,615
)
Increase in prepaid expenses and other assets
(50,524
)
 
(67,772
)
Increase in accounts payable
68,515

 
9,341

Increase in accrued interest
42,564

 
28,774

Decrease in accrued expenses and other liabilities
(53,108
)
 
(53,681
)
Increase in customer deposits
178,316

 
208,423

Other, net
(14,511
)
 
12,601

Net cash provided by operating activities
477,896

 
426,427

Investing Activities
 

 
 

Purchases of property and equipment
(249,840
)
 
(304,644
)
Cash received (paid) on settlement of derivative financial instruments
13,101

 
(45,182
)
Investments in and loans to unconsolidated affiliates

 
(54,250
)
Cash received on loans to unconsolidated affiliates
7,104

 
8,280

Other, net
(7,111
)
 
(3,780
)
Net cash used in investing activities
(236,746
)
 
(399,576
)
Financing Activities
 

 
 

Debt proceeds
1,519,000

 
749,800

Debt issuance costs
(22,566
)
 
(16,493
)
Repayments of debt
(1,382,270
)
 
(587,111
)
Purchases of treasury stock
(200,040
)
 

Dividends paid
(162,890
)
 
(131,745
)
Proceeds from exercise of common stock options
1,345

 
4,615

Other, net
659

 
587

Net cash (used in) provided by financing activities
(246,762
)
 
19,653

Effect of exchange rate changes on cash
1,407

 
(6,040
)
Net (decrease) increase in cash and cash equivalents
(4,205
)
 
40,464

Cash and cash equivalents at beginning of period
121,565

 
189,241

Cash and cash equivalents at end of period
$
117,360

 
$
229,705

Supplemental Disclosure
 

 
 

Cash paid during the period for:
 

 
 

Interest, net of amount capitalized
$
18,670

 
$
33,664


 
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, 2015, 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, 2015 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 4. 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. 

Prior to January 1, 2016, we consolidated the operating results of Pullmantur and CDF Croisières de France on a two-month reporting lag to allow for more timely preparation of our consolidated financial statements. Effective January 1, 2016, we eliminated the two-month reporting lag to reflect Pullmantur's and CDF Croisières de France's financial position, results of operations and cash flows concurrently and consistently with the fiscal calendar of the Company ("elimination of the Pullmantur reporting lag"). The elimination of the Pullmantur reporting lag represents a change in accounting principle which we believe to be preferable because it provides more current information to the users of our financial statements. A change in accounting principle requires retrospective application, if material. The impact of the elimination of the reporting lag was immaterial to prior periods and is expected to be immaterial for our fiscal year ended December 31, 2016. As a result, we have accounted for this change in accounting principle in our consolidated results for the first quarter of 2016. Accordingly, the results of Pullmantur and CDF Croisières de France for November and December 2015, in addition to the three months ended March 31, 2016, are included in our statement of comprehensive income (loss) for the quarter ended March 31, 2016. The effect of this change was a decrease to net income of $21.7 million and this amount is reported within Other (expense) income in our consolidated statements of comprehensive income (loss) for the quarter ended March 31, 2016.



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Note 2. Summary of Significant Accounting Policies

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. Additionally, in March 2016, amended GAAP guidance was issued clarifying the implementation guidance on principal versus agent considerations. Also under the revenue recognition guidance, in April 2016, amended GAAP guidance was issued to improve the accounting of revenue from contracts with customers. The amendments clarify the guidance associated with identifying performance obligations and licensing. The revenue recognition guidance discussed above must be applied using one of two retrospective application methods and will 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 the revenue recognition 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 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 November 2015, amended GAAP guidance was issued to simplify the presentation of deferred income taxes. The amendments require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position and eliminates the classification between current and noncurrent amounts. The guidance will be effective for financial statements issued for fiscal years beginning after December 15, 2016 and interim periods within those fiscal years. An entity can elect to adopt the amendments either prospectively or retrospectively. 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 January 2016, amended GAAP guidance was issued to address certain aspects of recognition, measurement, presentation and disclosure of financial instruments.  The amendments primarily impact the accounting for certain equity investments, the accounting for financial liabilities subject to the fair value option and the presentation and disclosure requirements for financial instruments. The guidance will be effective for financial statements issued for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. Early adoption is permitted for financial statements of fiscal years and interim periods that have not yet been issued or that have not yet been made available for issuance as of the beginning of the fiscal year of adoption.  The adoption of this newly issued guidance is not expected to have a material impact to our consolidated financial statements.

In February 2016, amended GAAP guidance was issued to increase the transparency and comparability of lease accounting among organizations. For leases with a term greater than 12 months, the amendments require the lease rights and obligations arising from the leasing arrangements, including operating leases, to be recognized as assets and liabilities on the balance sheet. The amendments also expand the required disclosures surrounding leasing arrangements. The guidance must be applied using a retrospective application method and will be effective for financial statements issued for fiscal years beginning after December 15, 2018 and interim periods within those years. Early adoption is permitted. We are currently evaluating the impact of the adoption of this newly issued guidance to our consolidated financial statements.

In March 2016, amended GAAP guidance was issued addressing the effect of derivative contract novations on existing hedge accounting relationships. The amendments clarify that a change in the counterparty to a derivative instrument that has been designated as a hedging instrument does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. The guidance must be applied using a prospective or modified retrospective application method and will be effective for financial statements issued for fiscal years beginning after December 15, 2016 and

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interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The adoption of this newly issued guidance is not expected to have a material impact to our consolidated financial statements.

In March 2016, amended GAAP guidance was issued addressing contingent put and call options in debt instruments. The amendments clarify the requirements for assessing whether contingent call and put options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts, or whether the embedded call and put options should be bifurcated from the related debt instrument and accounted for separately as a derivative. The guidance must be applied using a modified retrospective approach and will be effective for financial statements issued for fiscal years beginning after December 15, 2016 and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. We are currently evaluating the impact, if any, of the adoption of this newly issued guidance to our consolidated financial statements.

In March 2016, amended GAAP guidance was issued to simplify the transition to the equity method of accounting. The amendments eliminate the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations and retained earnings retroactively on a step-by step basis as if the equity method had been in effect during all previous periods that the investment had been held. The guidance must be applied prospectively and will be effective for financial statements issued for fiscal years beginning after December 15, 2016 and interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the impact, if any, of the adoption of this newly issued guidance to our consolidated financial statements.

In March 2016, amended GAAP guidance was issued to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The guidance will be effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods. Early adoption is permitted, including adoption in an interim period. We are currently evaluating the impact of the adoption of this newly issued guidance 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 $144.4 million and $127.1 million for the first quarters of 2016 and 2015, respectively.

Reclassifications

On January 1, 2016, we adopted ASC 835, Presentation of Debt Issuance Costs ("ASC 835"), using the retrospective approach. Due to the adoption of ASC 835, $139.8 million of debt issuance costs have been reclassified in the consolidated balance sheet, as of December 31, 2015, from Other assets to either Current portion of long-term debt or Long-term debt in order to conform to the current year presentation.

Note 3. Earnings Per Share
 
A reconciliation between basic and diluted earnings per share is as follows (in thousands, except per share data):
 
 
Quarter Ended March 31,
 
2016
 
2015
Net income for basic and diluted earnings per share
$
99,140

 
$
45,230

Weighted-average common shares outstanding
216,914

 
219,626

Dilutive effect of stock options, performance share awards and restricted stock awards
955

 
1,216

Diluted weighted-average shares outstanding
217,869

 
220,842

Basic earnings per share
$
0.46

 
$
0.21

Diluted earnings per share
$
0.46

 
$
0.20

 
There were no antidilutive shares for the quarters ended March 31, 2016 and March 31, 2015, respectively.
 

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Note 4. Other Assets

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

We have determined that TUI Cruises GmbH, our 50%-owned joint venture, which operates the brand TUI Cruises, is a VIE. As of March 31, 2016 and December 31, 2015, our equity investment in TUI Cruises was approximately $306.5 million and $293.8 million, respectively. 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. As of March 31, 2016, the outstanding principal amount of the loan was €132.1 million, or approximately $150.6 million based on the exchange rate at March 31, 2016. While this loan matures May 2022, the lenders have agreed to release each shareholder's guarantee in 2018. The loan amortizes quarterly and is 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.

In April 2016, we completed the previously announced sale of Splendour of the Seas to TUI Cruises for €188 million, or $213 million. Concurrently with the acquisition, TUI Cruises leased the ship to Thomson Cruises, a subsidiary of TUI Group, who will operate the ship. In connection with the sale, we provided TUI Cruises with seller's financing to be repaid to us over 10 years. The resulting term loan is 50% guaranteed by TUI AG and is secured by a first priority mortgage on the ship. Interest accrues at the rate of 6.25% per annum. The sale resulted in an immaterial gain.

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

As of March 31, 2016, TUI Cruises has four newbuild ships on order scheduled to be delivered in each of 2016, 2017, 2018 and 2019. TUI Cruises has in place agreements for the secured financing of each of the ships on order for up to 80% of the contract price. Finnvera, the official export credit agency of Finland, has agreed to guarantee to the lenders payment of 95% of each financing. The remaining portion of the contract price of the ships is expected to be funded through an existing €150.0 million bank facility and TUI Cruises’ cash flows from operations. The various ship construction and financing 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.

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. During the quarter ended March 31, 2016, we made payments of $21.1 million to Grand Bahama for ship repair and maintenance services. We have determined that we are not the primary beneficiary of this facility as we do not have the power to direct the activities that most significantly impact the facility’s economic performance. Accordingly, we do not consolidate this entity and we account for this investment under the equity method of accounting. As of March 31, 2016, the net book value of our investment in Grand Bahama was approximately $49.0 million, consisting of $17.5 million in equity and a loan of $31.5 million. As of December 31, 2015, the net book value of our investment in Grand Bahama was approximately $51.2 million, consisting of $12.6 million in equity and a loan of $38.6 million. These amounts represent our maximum exposure to loss related to our investment in Grand Bahama. Our debt agreement with Grand Bahama was amended during the quarter ended March 31, 2016 to extend the maturity by 10 years and increase the applicable interest rate to the lower of (i) LIBOR plus 3.50% and (ii) 5.5%. Interest payable on the loan is due on a semi-annual basis. We will continue to classify the loan, as modified, as non-accrual status. The loan balance is included within Other assets in our consolidated balance sheets. During the quarter ended March 31, 2016, we received principal payments of approximately $7.1 million. We monitor credit risk associated with the loan through our participation on Grand Bahama’s board of directors along with our review of Grand Bahama’s financial statements and projected cash flows. Based on this review, we believe the risk of loss associated with the outstanding loan is not probable as of March 31, 2016.

We have determined that Skysea Holding International Ltd. ("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

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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 December 2014, 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 first priority mortgages on the ship, Golden Era. As of March 31, 2016 and December 31, 2015, our investment in Skysea Holding and its subsidiaries, including equity and loans, was approximately $96.9 million and $99.8 million, respectively. These amounts were included within Other assets in our consolidated balance sheets and represent our maximum exposure to loss related to our investment in Skysea Holding.

Our share of income from investments accounted for under the equity method of accounting, including the entities discussed above, was $21.0 million and $9.2 million for the quarters ended March 31, 2016 and March 31, 2015, respectively, and was recorded within Other (expense) income. We received $0.8 million and $1.2 million of dividends from our equity method investees for the quarters ended March 31, 2016 and March 31, 2015, respectively. We also provide ship management and procurement services to TUI Cruises GmbH and Skysea Holding and recorded $4.4 million and $5.7 million in revenues and $3.5 million and $3.2 million in expenses for these services during the quarters ended March 31, 2016 and March 31, 2015, respectively. These amounts were recorded within Onboard and other revenues and Other operating expenses, respectively.

.
Note 5. Long-Term Debt

In February 2016, we amended our unsecured term loans for Oasis of the Seas and Allure of the Seas to reduce the margins on those facilities and incorporate certain covenant improvements included in our more recent credit facilities. The interest rate on both the $420.0 million floating rate tranche of the Oasis of the Seas term loan and the $1.1 billion Allure of the Seas term loan was reduced from LIBOR plus 1.85% to LIBOR plus 1.65%. These amendments did not result in the extinguishment of debt.

In February 2016, we agreed with the lenders on our €365.0 million unsecured term loan due 2017 to convert €247.5 million, or $273.2 million, of the outstanding principal balance from Euro to US dollars. Interest on the new US dollar tranche accrues at a floating rate based on LIBOR plus the applicable margin. The balance of the facility of €117.5 million will remain outstanding in Euro and will continue to accrue interest at a floating rate based on EURIBOR plus the applicable margin. The applicable margin varies with our debt rating and was 1.75% as of March 31, 2016. The amendment did not result in the extinguishment of debt.

In April 2016, we took delivery of Ovation of the Seas. To finance the purchase, we borrowed $841.8 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 1.00%, currently totaling 1.91%. During 2015, we entered into forward-starting interest rate swap agreements which effectively converted $830.0 million of the loan from the floating rate available to us per the credit agreement to a fixed rate, including the applicable margin, of 3.16% effective from April 2016 through the term of the loan. See Note 9. Fair Value Measurements and Derivative Instruments for further information regarding these agreements.

In April 2016, we entered into and drew in full on a credit agreement which provides an unsecured term loan in the amount of $200 million. The loan is due and payable at maturity in April 2017. Interest on the loan accrues at a floating rate based on LIBOR plus a margin of 1.30%, currently totaling 1.74%. The proceeds from this loan were used to repay amounts outstanding under our unsecured revolving credit facilities.

Note 6. Commitments and Contingencies

As of March 31, 2016, the aggregate cost of our ships on order, not including the TUI Cruises' ships on order, was approximately $8.0 billion, of which we had deposited $554.1 million as of such date. Approximately 58.0% of the aggregate cost was exposed to fluctuations in the Euro exchange rate at March 31, 2016. Refer to Note 9. Fair Value Measurements and Derivative Instruments for further information.

Litigation
 
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

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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. In February 2016, we settled this matter as to all demanding crew members in exchange for our payment in the aggregate of an immaterial amount.

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 any person acquires ownership of more than 50% of our common stock or, subject to certain exceptions, during any 24-month period, a majority of 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 credit facilities, which we may be unable to replace on similar terms. Our public debt securities also contain change of control provisions that would be triggered by a third-party acquisition of greater than 50% of our common stock coupled with a ratings downgrade. If this were to occur, it would have an adverse impact on our liquidity and operations.

Note 7. Shareholders’ Equity

During the first quarter of 2016, we declared and paid a cash dividend on our common stock of $0.375 per share. During the first quarter of 2016, we also paid a cash dividend on our common stock of $0.375 per share which was declared during the fourth quarter of 2015.

During the first quarter 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.

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 depend on a variety of factors including price and market conditions. During the first quarter of 2016, we purchased 2.8 million shares for a total of $200.0 million in open market transactions that were recorded within Treasury stock in our consolidated balance sheet. During April 2016, we purchased an additional 0.6 million shares for a total of $50.0 million in open market transactions. Following these repurchases, as well as the $200.0 million repurchase in the fourth quarter of 2015, we have $50 million that remains available for future stock repurchase transactions under our Board approved program. Future stock repurchase transactions could include open market purchases or accelerated share repurchases. We expect to complete the program by the end of 2016.

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Note 8. Changes in Accumulated Other Comprehensive Income (Loss)
 
The following table presents the changes in accumulated other comprehensive income (loss) by component for the quarters ended March 31, 2016 and 2015 (in thousands):
 
Accumulated Other Comprehensive Income (Loss) for the Quarter Ended March 31, 2016
 
Accumulated Other Comprehensive Income (Loss) for the Quarter Ended March 31, 2015
 
Changes
related to
cash flow
derivative
hedges
 
Changes in
defined
benefit plans
 
Foreign
currency
translation
adjustments
 
Accumulated other
comprehensive loss
 
Changes
related to
cash flow
derivative
hedges
 
Changes in
defined
benefit plans
 
Foreign
currency
translation
adjustments
 
Accumulated other
comprehensive loss
Accumulated comprehensive loss at beginning of the year
$
(1,232,073
)
 
$
(26,447
)
 
$
(69,913
)
 
$
(1,328,433
)
 
$
(826,026
)
 
$
(31,207
)
 
$
(39,761
)
 
$
(896,994
)
Other comprehensive (loss) income before reclassifications
(99,659
)
 
(3,797
)
 
6,648

 
(96,808
)
 
(322,383
)
 
(2,056
)
 
(31,544
)
 
(355,983
)
Amounts reclassified from accumulated other comprehensive loss
102,396

 
285

 

 
102,681

 
61,434

 
563

 

 
61,997

Net current-period other comprehensive income (loss)
2,737

 
(3,512
)
 
6,648

 
5,873

 
(260,949
)
 
(1,493
)
 
(31,544
)
 
(293,986
)
Ending balance
$
(1,229,336
)
 
$
(29,959
)
 
$
(63,265
)
 
$
(1,322,560
)
 
$
(1,086,975
)
 
$
(32,700
)
 
$
(71,305
)
 
$
(1,190,980
)

The following table presents reclassifications out of accumulated other comprehensive income (loss) for the quarters ended March 31, 2016 and 2015 (in thousands):
 
 
 
Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income (Loss) into Income
 
 
Details About Accumulated Other
Comprehensive Income (Loss) Components
 
Quarter Ended March 31, 2016
 
Quarter Ended March 31, 2015
 
Affected Line Item in  Statements of
Comprehensive Income (Loss)
Loss on cash flow derivative hedges:
 
 

 
 
 
 
Interest rate swaps
 
$
(9,128
)
 
$
(6,786
)
 
Interest expense, net of interest capitalized
Foreign currency forward contracts
 
(718
)
 
(718
)
 
Depreciation and amortization expenses
Foreign currency forward contracts
 
6,087

 
(238
)
 
Other (expense) income
Foreign currency collar options
 
(602
)
 

 
Depreciation and amortization expenses
Fuel swaps
 
(7,335
)
 

 
Other (expense) income
Fuel swaps
 
(90,700
)
 
(53,692
)
 
Fuel
 
 
(102,396
)
 
(61,434
)
 
 
Amortization of defined benefit plans:
 
 

 
 
 
 
Actuarial loss
 
(285
)
 
(354
)
 
Payroll and related
Prior service costs
 

 
(209
)
 
Payroll and related
 
 
(285
)
 
(563
)
 
 
Total reclassifications for the period
 
$
(102,681
)
 
$
(61,997
)
 
 

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Note 9. Fair Value Measurements and Derivative Instruments
 
Fair Value Measurements
 
The estimated fair value of our financial instruments that are not measured at fair value, categorized based upon the fair value hierarchy, are as follows (in thousands):
 
 
 
Fair Value Measurements at March 31, 2016 Using
 
Fair Value Measurements at December 31, 2015 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)
 
$
117,360

 
$
117,360

 
$
117,360

 
$

 
$

 
$
121,565

 
$
121,565

 
$
121,565

 
$

 
$

Total Assets
 
$
117,360

 
$
117,360

 
$
117,360

 
$

 
$

 
$
121,565

 
$
121,565

 
$
121,565

 
$

 
$

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Long-term debt (including current portion of long-term debt)(5)
 
$
8,655,603

 
$
9,039,755

 
$
1,546,938

 
$
7,492,817

 
$

 
$
8,478,473

 
$
8,895,009

 
$
1,536,629

 
$
7,358,380

 
$

Total Liabilities
 
$
8,655,603

 
$
9,039,755

 
$
1,546,938

 
$
7,492,817

 
$

 
$
8,478,473

 
$
8,895,009

 
$
1,536,629

 
$
7,358,380

 
$


(1) Inputs based on quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access. Valuation of these items does not entail a significant amount of judgment.
(2) Inputs other than quoted prices included within Level 1 that are observable for the liability, either directly or indirectly. For unsecured revolving credit facilities and unsecured term loans, fair value is determined utilizing the income valuation approach. This valuation model takes into account the contract terms of our debt such as the debt maturity and the interest rate on the debt. The valuation model also takes into account the creditworthiness of the Company.
(3) Inputs that are unobservable. The Company did not use any Level 3 inputs as of March 31, 2016 and December 31, 2015.
(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 March 31, 2016 and December 31, 2015.
 
Assets and liabilities that are recorded at fair value have been categorized based upon the fair value hierarchy. The following table presents information about the Company’s financial instruments recorded at fair value on a recurring basis (in thousands):
 
 
Fair Value Measurements at March 31, 2016 Using
 
Fair Value Measurements at December 31, 2015 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)
 
$
137,463

 
$

 
$
137,463

 
$

 
$
134,574

 
$

 
$
134,574

 
$

Investments(5)
 
$
3,804

 
3,804

 

 

 
$
3,965

 
3,965

 

 

Total Assets
 
$
141,267

 
$
3,804

 
$
137,463

 
$

 
$
138,539

 
$
3,965

 
$
134,574

 
$

Liabilities:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Derivative financial instruments(6)
 
$
1,017,967

 
$

 
$
1,017,967

 
$

 
$
1,044,292

 
$

 
$
1,044,292

 
$

Total Liabilities
 
$
1,017,967

 
$

 
$
1,017,967

 
$

 
$
1,044,292

 
$

 
$
1,044,292

 
$


11

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(1) Inputs based on quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access. Valuation of these items does not entail a significant amount of judgment.
(2) Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. For foreign currency forward contracts, interest rate swaps, 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 March 31, 2016 and December 31, 2015.
(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 reported within Other assets in our consolidated balance sheets.
(6) 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.
 
The reported fair values are based on a variety of factors and assumptions. Accordingly, the fair values may not represent actual values of the financial instruments that could have been realized as of March 31, 2016 or December 31, 2015, or that will be realized in the future, and do not include expenses that could be incurred in an actual sale or settlement.

We have master International Swaps and Derivatives Association (“ISDA”) agreements in place with our derivative instrument counterparties. These ISDA agreements 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 March 31, 2016 and December 31, 2015, 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.

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 March 31, 2016
 
As of December 31, 2015
 
 
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
 
$
137,463

 
$
(137,463
)
 
$

 
$

 
$
134,574

 
$
(129,815
)
 
$

 
$
4,759

Total
 
$
137,463

 
$
(137,463
)
 
$

 
$

 
$
134,574

 
$
(129,815
)
 
$

 
$
4,759



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


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Gross Amounts not Offset in the Consolidated Balance Sheet that are Subject to Master Netting Agreements
 
 
As of March 31, 2016
 
As of December 31, 2015
 
 
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
 
$
(1,017,967
)
 
$
137,463

 
$

 
$
(880,504
)
 
$
(1,044,292
)
 
$
129,815

 
$

 
$
(914,477
)
Total
 
$
(1,017,967
)
 
$
137,463

 
$

 
$
(880,504
)
 
$
(1,044,292
)
 
$
129,815

 
$

 
$
(914,477
)

Concentrations of Credit Risk
 
We monitor our credit risk associated with financial and other institutions with which we conduct significant business and, to minimize these risks, we select counterparties with credit risks acceptable to us and we seek to limit our exposure to an individual counterparty. Credit risk, including but not limited to counterparty nonperformance under derivative instruments, our credit facilities and new ship progress payment guarantees, is not considered significant, as we primarily conduct business with large, well-established financial institutions, insurance companies and export credit agencies many of which we have long-term relationships with and which have credit risks acceptable to us or where the credit risk is spread out among a large number of counterparties. As of March 31, 2016, we did not have any exposure under our derivative instruments. As of December 31, 2015, we had counterparty credit risk exposure under our derivative instruments of approximately $4.8 million, which was limited to the cost of replacing the contracts in the event of non-performance by the counterparties to the contracts, all of which are currently our lending banks. 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 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 use non-derivative financial instruments designated as hedges of our net investment in our foreign operations and investments.
 
At inception of the hedge relationship, a derivative instrument that hedges the exposure to changes in the fair value of a firm commitment or a recognized asset or liability is designated as a fair value hedge. A derivative instrument that hedges a forecasted transaction or the variability of cash flows related to a recognized asset or liability is designated as a cash flow hedge.
 
Changes in the fair value of derivatives that are designated as fair value hedges are offset against changes in the fair value of the underlying hedged assets, liabilities or firm commitments. Gains and losses on derivatives that are designated as cash flow hedges are recorded as a component of Accumulated other comprehensive loss until the underlying hedged transactions are recognized in earnings. The foreign currency transaction gain or loss of our non-derivative financial instruments and the changes in the fair value of derivatives designated as hedges of our net investment in foreign operations and investments are recognized as a component of Accumulated other comprehensive loss along with the associated foreign currency translation adjustment of the foreign operation.
 
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

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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 (expense) 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 March 31, 2016 and December 31, 2015, approximately 31% of our long-term debt was effectively fixed. We use interest rate swap agreements to modify our exposure to interest rate movements and to manage our interest expense.
 
Market risk associated with our 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 March 31, 2016 and December 31, 2015, 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 $210.0 million as of March 31, 2016, from a fixed rate of 5.41% to a LIBOR-based floating rate equal to LIBOR plus 3.87%, currently approximately 4.40%. 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 5.25% to a LIBOR-based floating rate equal to LIBOR plus 3.63%, currently approximately 4.25%. These interest rate swap agreements are accounted for as fair value hedges.
 
Market risk associated with our long-term floating rate debt is the potential increase in interest expense from an increase in interest rates. We use interest rate swap agreements that effectively convert a portion of our floating-rate debt to a fixed-rate basis to manage this risk. At March 31, 2016 and December 31, 2015, we maintained forward-starting interest rate swap agreements that hedge the anticipated unsecured Euro 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 $790.1 million based on the exchange rate at March 31, 2016, 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 addition, at March 31, 2016 and December 31, 2015, we maintained 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 March 31, 2016 and December 31, 2015, 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 $490.9 million from LIBOR plus 0.40% to a fixed rate (including applicable margin) of 2.85% through the term of the loan. Additionally, at March 31, 2016 and December 31, 2015, 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 $673.8 million from LIBOR plus 1.30% to a fixed rate of 3.74% (inclusive of margin) through the term of the loan. Furthermore, at March 31, 2016 and December 31, 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 $694.8 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.

14

Table of Contents    

 
The notional amount of interest rate swap agreements related to outstanding debt and on our current unfunded financing arrangements as of March 31, 2016 and December 31, 2015 was $4.3 billion.
 
Foreign Currency Exchange Rate Risk

Derivative Instruments
 
Our primary exposure to foreign currency exchange rate risk relates to our ship construction contracts denominated in Euros, our foreign currency denominated debt and our international business operations. We enter into foreign currency forward contracts, collar options and cross currency swap agreements to manage portions of the exposure to movements in foreign currency exchange rates. As of March 31, 2016, the aggregate cost of our ships on order, not including the TUI Cruises' ships on order, was approximately $8.0 billion, of which we had deposited $554.1 million as of such date. At March 31, 2016 and December 31, 2015, approximately 58% of the aggregate cost of the ships under construction was exposed to fluctuations in the Euro exchange rate. 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 first quarter of 2016, we maintained an average of approximately $516.2 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 gain (loss), of approximately $15.4 million and $(28.1) million during the quarters ended March 31, 2016 and March 31, 2015, respectively, that were recognized in earnings within Other (expense) 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 March 31, 2016, we maintained foreign currency forward contracts and designated them as hedges of a portion of our net investment in TUI cruises of €272.0 million, or approximately $309.9 million based on the exchange rate at March 31, 2016. These forward currency contracts mature in April 2016.

The notional amount of outstanding foreign exchange contracts including our forward contracts as of March 31, 2016 and December 31, 2015 was $3.6 billion and $2.4 billion, 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 March 31, 2016, we have hedged the variability in future cash flows for certain forecasted fuel transactions occurring through 2020. As of March 31, 2016 and December 31, 2015, we had the following outstanding fuel swap agreements:
 
 
Fuel Swap Agreements
 
As of March 31, 2016
 
As of December 31, 2015
 
(metric tons)
2016
692,000

 
930,000

2017
854,000

 
854,000

2018
583,000

 
583,000

2019
308,000

 
231,000

2020
79,000

 

 

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Fuel Swap Agreements
 
As of March 31, 2016
 
As of December 31, 2015
 
(% hedged)
Projected fuel purchases:
 

 
 

2016
65
%
 
65
%
2017
60
%
 
59
%
2018
40
%
 
40
%
2019
20
%
 
15
%
2020
5
%
 

 
At March 31, 2016 and December 31, 2015, $294.7 million and $321.0 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 March 31, 2016
 
As of December 31, 2015
 
Balance Sheet Location
 
As of March 31, 2016
 
As of December 31, 2015
 
 
 
Fair Value
 
Fair Value
 
 
Fair Value
 
Fair Value
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives designated as hedging instruments under ASC 815-20(1)
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
Other assets
 
$
13,046

 
$

 
Other long-term liabilities
 
$
139,805

 
$
67,371

Foreign currency forward contracts
 
Derivative financial instruments
 
78,179

 
93,996

 
Derivative financial instruments
 
139,456

 
320,873

Fuel swaps
 
Derivative financial instruments
 

 

 
Derivative financial instruments
 
284,336

 
307,475

Fuel swaps
 
Other assets
 
3,893

 

 
Other long-term liabilities
 
300,669

 
325,055

Total derivatives designated as hedging instruments under 815-20
 
 
 
95,118

 
93,996

 
 
 
864,266

 
1,020,774

Derivatives not designated as hedging instruments under ASC 815-20
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency forward contracts
 
Derivative financial instruments
 
$
33,779

 
$
32,339

 
Derivative financial instruments
 
$
129,817

 
$

Fuel swaps
 
Derivative financial instruments
 
8,566

 
8,239

 
Derivative financial instruments
 
23,884

 
23,518

Total derivatives not designated as hedging instruments under 815-20
 
 
 
42,345

 
40,578

 
 
 
153,701

 
23,518

Total derivatives
 
 
 
$
137,463

 
$
134,574

 
 
 
$
1,017,967

 
$
1,044,292


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

As of March 31, 2016 and December 31, 2015, there were no non-derivative instruments designated as hedging instruments recorded within our consolidated balance sheets.

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 March 31, 2016
 
Quarter Ended March 31, 2015
 
Quarter Ended March 31, 2016
 
Quarter Ended March 31, 2015
(In thousands)
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
Interest expense, net of interest capitalized
 
$
2,362

 
$
2,976

 
$
3,925

 
$
3,882

Interest rate swaps
 
Other (expense) income
 
26,268

 
15,152

 
(23,700
)
 
(12,341
)
 
 
 
 
$
28,630

 
$
18,128

 
$
(19,775
)
 
$
(8,459
)

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

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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 March 31, 2016
 
Quarter Ended March 31, 2015
 
 
Quarter Ended March 31, 2016
 
Quarter Ended March 31, 2015
(In thousands)
 
 

 
 

 
 
 
 

 
 

Interest rate swaps
 
$
(97,371
)
 
$
(35,815
)
 
Interest expense, net of interest capitalized
 
$
(9,128
)
 
$
(6,786
)
Interest rate swaps
 

 

 
Other (expense) income
 

 

Foreign currency forward contracts
 
46,049

 
(172,822
)
 
Depreciation and amortization expenses
 
(718
)
 
(718
)
Foreign currency forward contracts
 

 

 
Other (expense) income
 
6,087

 
(238
)
Foreign currency collar options
 

 
(64,833
)
 
Depreciation and amortization expenses
 
(602
)
 

Fuel swaps
 

 

 
Other (expense) income
 
(7,335
)
 

Fuel swaps
 
(48,337
)
 
(48,913
)
 
Fuel
 
(90,700
)
 
(53,692
)
 
 
$
(99,659
)
 
$
(322,383
)
 
 
 
$
(102,396
)
 
$
(61,434
)

 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 March 31, 2016
 
Quarter Ended March 31, 2015
(In thousands)
 
 
 
 

 
 

Interest rate swaps
 
Other (expense) income
 
(900
)
 

Interest rate swaps
 
Other (expense) income
 

 
38

Fuel swaps
 
Other (expense) income
 
(16
)
 
182

 
 
 
 
$
(916
)
 
$
220


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 March 31, 2016
 
Quarter Ended March 31, 2015
(In thousands)
 
 

 
 

Foreign Currency Debt
 
$

 
$
12,137

 
 
$

 
$
12,137


There was no amount recognized in income (ineffective portion and amount excluded from effectiveness testing) for the quarters ended March 31, 2016 and March 31, 2015, respectively.

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

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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 March 31, 2016
 
Quarter Ended March 31, 2015
(In thousands)
 
 
 
 

 
 

Foreign currency forward contracts
 
Other (expense) income
 
$
14,455

 
$
(28,083
)
Fuel swaps
 
Other (expense) income
 
22

 
(129
)
 
 
 
 
$
14,477

 
$
(28,212
)
 
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 March 31, 2016 and December 31, 2015 were $139.8 million and $67.4 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 March 31, 2016, we were not required to post collateral for any of our derivative transactions.


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Note 10. Restructuring Charges

Pullmantur's strategy over the last several years had focused both on its core cruise market in Spain and on expansion throughout Latin America, especially Brazil. However, due to significant and increased challenges facing Pullmantur's Latin American operations, in 2015, we decided to significantly change our 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.

During the first quarter of 2016, we moved forward with activities related to this right-sizing strategy. The activities included the closing of Pullmantur's regional head office in Brazil and the redeployment of Pullmantur’s Empress to the Royal Caribbean International brand. The closure of the Brazil office resulted in the recognition of a liability for one-time termination benefits during the first quarter of 2016. We also incurred contract termination costs related to this activity.

As a result of these actions, we incurred restructuring exit costs of $0.3 million for the quarter ended March 31, 2016, which are reported within Restructuring charges in our consolidated statements of comprehensive income (loss). We expect to incur additional restructuring exit costs of approximately $2.3 million, through the end of 2016, to implement our right-sizing strategy.

The following table summarizes our restructuring exit costs related to the above strategy (in thousands):

 
 
Beginning
Balance
January 1, 2016
 
Accruals
 
Payments
 
Ending Balance March 31, 2016
 
Cumulative
Charges
Incurred
Termination benefits
 
$

 
$
237

 
$

 
$
237

 
$
237

Contract termination costs
 
 

 
 
68

 
 

 
 
68

 
 
68

Other related costs
 
 

 
 

 
 

 
 

 
 

Total
 
$

 
$
305

 
$

 
$
305

 
$
305


In connection with this strategy, we incurred approximately $2.9 million of other costs during the quarter ended March 31, 2016 that primarily consisted of costs associated with the redeployment of Pullmantur's Empress to the Royal Caribbean International brand that were reported within Cruise operating expenses and Depreciation and amortization expenses in our consolidated statements of comprehensive income (loss). We expect to incur additional other costs of $1.9 million, through the end of 2016, to implement our right-sizing strategy.

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 second quarter and full year of 2016 and our earnings and yield estimates for 2016 set forth under the heading "Outlook" below and expectations regarding the timing and results of our Double-Double Program), 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, 2015 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.

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Table of Contents    

 
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 ended March 31, 2016 compared to the same period in 2015;

a discussion of our business outlook, including our expectations for selected financial items for the second quarter and full year of 2016; and

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

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, 2015.

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 the Caribbean, Asia and Australia during that period.
 
Financial Presentation
 
Description of Certain Line Items
 
Revenues
 
Our revenues are comprised of the following:

Passenger ticket revenues, which consist of revenue recognized from the sale of passenger tickets and the sale of air transportation to and from our ships; and

Onboard and other revenues, which consist primarily of revenues from the sale of goods and/or services onboard our ships not included in passenger ticket prices, cancellation fees, sales of vacation protection insurance and pre- and post-cruise tours. 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;

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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, entertainment and gains and /or losses related to the sale of our ships, if any.
 
We do not allocate payroll and related expenses, food expenses, fuel expenses or other operating expenses to the expense categories attributable to passenger ticket revenues or onboard and other revenues since they are incurred to provide the total cruise vacation experience.

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 net loss related to the elimination of the Pullmantur reporting lag, restructuring charges, and other initiative costs related to our Pullmantur right-sizing strategy.

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. Net Cruise Costs excludes initiative costs related to our Pullmantur right-sizing strategy reported within Cruise 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).
 
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

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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.
 
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.

Results of Operations
 
Summary
 
Our net income and Adjusted Net Income for the first quarter of 2016 was $99.1 million and $124.0 million, or $0.46 and $0.57 per share on a diluted basis, as compared to both net income and Adjusted Net Income of $45.2 million, or $0.20 per share on a diluted basis, for the first quarter of 2015.
 
Significant items for the quarter ended March 31, 2016 include:

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 $65.3 million for the quarter ended March 31, 2016 as compared to the same period in 2015 and a decrease to cruise operating expenses of $18.8 million for the quarter ended March 31, 2016 as compared to the same period in 2015;

Total revenues, excluding the unfavorable effect of changes in foreign currency exchange rates increased $167.5 million for the quarter ended March 31, 2016 as compared to the same period in 2015. The increase was primarily due to an increase in ticket prices and capacity.

Total Cruise operating expenses, excluding the favorable effect of changes in foreign currency exchange rates, increased $37.8 million for the quarter ended March 31, 2016 as compared to the same period in 2015. The increase was primarily due to an increase in capacity.

Effective January 1, 2016, we eliminated Pullmantur's and CDF Croisières de France's two-month reporting lag to be consistent with the fiscal calendar of the Company. As a result of this change, the results of Pullmantur and CDF Croisières de France for November and December 2015, in addition to the three months ended March 31, 2016, are included in our statement of comprehensive income (loss) for the quarter ended March 31, 2016. The effect of this change was a decrease to net income of $21.7 million and this amount is reported within Other (expense) income in our consolidated statements

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of comprehensive income (loss) for the quarter ended March 31, 2016. Refer to Note 1. Financial Statements to our consolidated financial statements for further information on the elimination of the Pullmantur reporting lag.

Other Items

In April 2016, we took delivery of Ovation of the Seas. To finance the purchase, we borrowed $841.8 million under a previously committed 12-year unsecured term loan, which is 95% guaranteed by Hermes. Refer to Note 5. Long-Term Debt to our consolidated financial statements for further information.

Operating results for the quarter ended March 31, 2016 compared to the same period in 2015 are shown in the following table (in thousands, except per share data):

 
Quarter Ended March 31,
 
2016
 
2015
 
 
 
% of Total
Revenues
 
 
 
% of Total
Revenues
Passenger ticket revenues
$
1,378,167

 
71.9
 %
 
$
1,306,779

 
72.0
 %
Onboard and other revenues
539,628

 
28.1
 %
 
508,820

 
28.0
 %
Total revenues
1,917,795

 
100.0
 %
 
1,815,599

 
100.0
 %
Cruise operating expenses:
 

 
 

 
 

 
 

Commissions, transportation and other
324,890

 
16.9
 %
 
324,418

 
17.9
 %
Onboard and other
103,654

 
5.4
 %
 
116,239

 
6.4
 %
Payroll and related
227,441

 
11.9
 %
 
211,591

 
11.7
 %
Food
121,510

 
6.3
 %
 
119,786

 
6.6
 %
Fuel
175,862

 
9.2
 %
 
205,276

 
11.3
 %
Other operating
288,221

 
15.0
 %
 
245,307

 
13.5
 %
Total cruise operating expenses
1,241,578

 
64.7
 %
 
1,222,617

 
67.3
 %
Marketing, selling and administrative expenses
302,021

 
15.7
 %
 
286,832

 
15.8
 %
Depreciation and amortization expenses
210,764

 
11.0
 %
 
200,468

 
11.0
 %
Restructuring charges
305

 
 %
 

 
 %
Operating Income
163,127

 
8.5
 %
 
105,682

 
5.8
 %
Other income (expense):
 

 
 

 
 

 
 

Interest income
2,720

 
0.1
 %
 
3,737

 
0.2
 %
Interest expense, net of interest capitalized
(65,446
)
 
(3.4
)%
 
(70,159
)
 
(3.9
)%
Other (expense) income
(1,261
)
 
(0.1
)%
 
5,970

 
0.3
 %
 
(63,987
)
 
(3.3
)%
 
(60,452
)
 
(3.3
)%
Net Income
$
99,140

 
5.2
 %
 
$
45,230

 
2.5
 %
Diluted Earnings per Share
$
0.46

 
 

 
$
0.20

 
 



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Adjusted Net Income and Adjusted Earnings per Share were calculated as follows (in thousands, except per share data):
 
 
Quarter Ended March 31,
 
2016
 
2015
Adjusted Net Income
$
123,956

 
$
45,230

Net income
99,140

 
45,230

Net Adjustments to Net Income- Increase
$
24,816

 
$

Adjustments to Net Income:
 
 
 
Net loss related to the elimination of the Pullmantur reporting lag
$
21,656

 

Restructuring charges
305

 

Other initiative costs
2,855

 

Net Adjustments to Net Income- Increase
$
24,816

 
$

 
 
 
 
Basic:
 

 
 

   Earnings per Share
$
0.46

 
$
0.21

   Adjusted Earnings per Share
$
0.57

 
$
0.21

 
 
 
 
Diluted:
 
 
 
   Earnings per Share
$
0.46

 
$
0.20

   Adjusted Earnings per Share
$
0.57

 
$
0.20

 
 
 
 
Weighted-Average Shares Outstanding:
 
 
 
Basic
216,914

 
219,626

Diluted
217,869

 
220,842


Selected statistical information is shown in the following table:
 
 
Quarter Ended March 31,
 
2016(1)
 
2015
Passengers Carried
1,402,922

 
1,335,518

Passenger Cruise Days
9,658,990

 
9,214,643

APCD
9,192,563

 
8,778,945

Occupancy
105.1
%
 
105.0
%

(1) Does not include November and December 2015 amounts related to the elimination of the Pullmantur reporting lag.

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Table of Contents    

Gross Yields and Net Yields were calculated as follows (in thousands, except APCD and Yields):
 
 
Quarter Ended March 31,
 
2016
 
2016 On a Constant Currency Basis
 
2015
Passenger ticket revenues
$
1,378,167

 
$
1,438,485

 
$
1,306,779

Onboard and other revenues
539,628

 
544,591

 
508,820

Total revenues
1,917,795

 
1,983,076

 
1,815,599

Less:
 

 
 

 
 

Commissions, transportation and other
324,890

 
337,298

 
324,418

Onboard and other
103,654

 
104,977

 
116,239

Net Revenues
$
1,489,251

 
$
1,540,801

 
$
1,374,942

 
 
 
 
 
 
APCD
9,192,563

 
9,192,563

 
8,778,945

Gross Yields
$
208.62

 
$
215.73

 
$
206.81

Net Yields
$
162.01

 
$
167.61

 
$
156.62

 

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Table of Contents    

Gross Cruise Costs, Net Cruise Costs and Net Cruise Costs Excluding Fuel were calculated as follows (in thousands, except APCD and costs per APCD):
 
 
Quarter Ended March 31,
 
2016
 
2016 On a Constant Currency Basis
 
2015
Total cruise operating expenses
$
1,241,578

 
$
1,260,440

 
$
1,222,617

Marketing, selling and administrative expenses
302,021

 
306,797

 
286,832

Gross Cruise Costs
1,543,599

 
1,567,237

 
1,509,449

Less:
 

 
 

 
 

Commissions, transportation and other
324,890

 
337,298

 
324,418

Onboard and other
103,654

 
104,977

 
116,239

Net Cruise Costs including other initiative costs
1,115,055

 
1,124,962

 
1,068,792

Less:
 

 
 

 
 

Other initiative costs included within cruise operating expenses
2,491

 
2,551

 

Net Cruise Costs
1,112,564

 
1,122,411

 
1,068,792

Less:
 
 
 
 
 
Fuel(1)
175,438

 
176,015

 
205,276

Net Cruise Costs Excluding Fuel
$
937,126

 
$
946,396

 
$
863,516

 
 
 
 
 
 
APCD
9,192,563

 
9,192,563

 
8,778,945

Gross Cruise Costs per APCD
$
167.92

 
$
170.49

 
$
171.94

Net Cruise Cost per APCD
$
121.03

 
$
122.10

 
$
121.74

Net Cruise Costs Excluding Fuel per APCD
$
101.94

 
$
102.95

 
$
98.36


(1) For 2016, amount does not include fuel expense of $0.4 million included within other initiative costs associated with the redeployment of Pullmantur’s Empress to the Royal Caribbean International brand.

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Table of Contents    

2016 Outlook

On April 29, 2016, we announced the following second quarter and full year 2016 guidance based on fuel pricing, interest rates and currency exchange rates at that time:

Full Year 2016
 
 
As Reported
Constant Currency
Net Yields
1.3% to 2.8%
2.5% to 4.0%
Net Cruise Costs per APCD
(1.5%) to (2.0%)
(1.3%) to (1.8%)
Net Cruise Costs per APCD, Excluding Fuel
1.0% or less
Approx. 1.0%
Capacity Increase
6.0%
 
Depreciation and Amortization
$898 to $908 million
 
Interest Expense, net
$282 to $292 million
 
Fuel Consumption (metric tons)
1,411,000
 
Fuel Expenses
$734 million
 
Percent Hedged (fwd consumption)
65%
 
Impact of 10% change in fuel prices
$11 million
 
Adjusted Earnings per Share-Diluted
$6.15 to $6.35
 

Second Quarter 2016
 
 
As Reported
Constant Currency
Net Yields
Approx. Flat
Approx. 1.0%
Net Cruise Costs per APCD
Flat to (1.0%)
Flat to (1.0%)
Net Cruise Costs per APCD, Excluding Fuel
1.5% to 2.0%
Approx. 2.0%
Capacity Increase
5.7%
 
Depreciation and Amortization
$220 to $225 million
 
Interest Expense, net
$71 to $76 million
 
Fuel Consumption (metric tons)
353,000
 
Fuel Expenses
$191 million
 
Percent Hedged (fwd consumption)
67%
 
Impact of 10% change in fuel prices
$4 million
 
Adjusted Earnings per Share-Diluted
Approx. $1.00
 

Volatility in foreign currency exchange rates affects the US dollar value of our earnings. Based on our highest net exposure for each quarter and the full year 2016, the top five foreign currencies are ranked below. For example, the Australian Dollar is the most impactful currency in the first and fourth quarters of 2016. The first quarter of 2016 rankings are based on actual results. Rankings for the remaining quarters and full year are based on estimated net exposures.

Ranking
 
Q1
 
Q2
 
Q3
 
Q4
 
FY 2016
1
 
AUD
 
GBP
 
GBP
 
AUD
 
GBP
2
 
CAD
 
AUD
 
CNH
 
GBP
 
CNH
3
 
GBP
 
CAD
 
EUR
 
CNH
 
AUD
4
 
CNH
 
CNH
 
CAD
 
CAD
 
CAD