Table of Contents    

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
 
ýQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2017March 31, 2018

OR
oTRANSITION 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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer x
 
Accelerated filer o
 
Non-accelerated filer o
 
Smaller reporting company o
Emerging growth company o
 (Do not check if a smaller reporting company)
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No ý
 
There were 214,088,950211,746,787 shares of common stock outstanding as of October 30, 2017.April 19, 2018.
 

Table of Contents    

ROYAL CARIBBEAN CRUISES LTD.
 
TABLE OF CONTENTS
 
 Page
  
PART I. FINANCIAL INFORMATION
 
  
Item 1. Financial Statements
1
  
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
2122
  
Item 3. Quantitative and Qualitative Disclosures About Market Risk
3936
  
Item 4. Controls and Procedures
3936
  
PART II. OTHER INFORMATION
 
  
Item 1. Legal Proceedings
4037
  
Item 1A. Risk Factors
4037
  
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
4845
  
Item 6. Exhibits
4946
  
SIGNATURES
5047


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 September 30,
 2017 2016
Passenger ticket revenues$1,893,152
 $1,899,956
Onboard and other revenues676,392
 663,785
Total revenues2,569,544
 2,563,741
Cruise operating expenses: 
  
Commissions, transportation and other409,597
 400,933
Onboard and other157,041
 159,887
Payroll and related210,764
 214,081
Food126,223
 125,732
Fuel160,752
 178,772
Other operating253,892
 260,718
Total cruise operating expenses1,318,269
 1,340,123
Marketing, selling and administrative expenses273,637
 259,327
Depreciation and amortization expenses240,150
 229,328
Operating Income737,488
 734,963
Other income (expense): 
  
Interest income4,693
 6,472
Interest expense, net of interest capitalized(73,233) (82,610)
Equity investment income85,120
 46,539
Other expense(1,226) (12,107)
 15,354
 (41,706)
Net Income$752,842
 $693,257
Earnings per Share: 
  
Basic$3.51
 $3.23
Diluted$3.49
 $3.21
Weighted-Average Shares Outstanding: 
  
Basic214,694
 214,819
Diluted215,824
 215,667
Comprehensive Income 
  
Net Income$752,842
 $693,257
Other comprehensive income (loss): 
  
Foreign currency translation adjustments5,889
 4,043
Change in defined benefit plans(1,990) (5,051)
Gain on cash flow derivative hedges230,245
 95,536
Total other comprehensive income234,144
 94,528
Comprehensive Income$986,986
 $787,785
The accompanying notes are an integral part of these consolidated financial statements.

Table of Contents

ROYAL CARIBBEAN CRUISES LTD.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited; in thousands, except per share data)
Nine Months Ended September 30,Quarter Ended March 31,
2017 20162018 2017
Passenger ticket revenues$4,892,760
 $4,794,653
$1,425,644
 $1,418,223
Onboard and other revenues1,880,618
 1,792,145
602,112
 590,337
Total revenues6,773,378
 6,586,798
2,027,756
 2,008,560
Cruise operating expenses: 
  
 
  
Commissions, transportation and other1,060,176
 1,060,391
290,609
 310,248
Onboard and other395,472
 399,739
99,537
 105,994
Payroll and related636,861
 671,955
227,156
 215,735
Food369,198
 371,759
119,642
 121,211
Fuel508,914
 531,283
160,341
 177,414
Other operating780,257
 857,161
278,734
 245,222
Total cruise operating expenses3,750,878
 3,892,288
1,176,019
 1,175,824
Marketing, selling and administrative expenses874,957
 852,435
337,361
 317,465
Depreciation and amortization expenses710,836
 661,712
240,230
 235,749
Operating Income1,436,707
 1,180,363
274,146
 279,522
Other income (expense): 
  
 
  
Interest income16,756
 14,875
7,733
 6,252
Interest expense, net of interest capitalized(230,182) (226,803)(67,878) (80,317)
Equity investment income120,359
 94,832
28,752
 11,880
Other expense (including a $21.7 million loss related to the first quarter 2016 elimination of the Pullmantur reporting lag)(6,546) (40,965)
Impairment loss related to Skysea Holding(23,343) —
Other expense(757) (2,611)
(99,613) (158,061)(55,493) (64,796)
Net Income$1,337,094
 $1,022,302
$218,653
 $214,726
Earnings per Share: 
  
 
  
Basic$6.22
 $4.74
$1.03
 $1.00
Diluted$6.19
 $4.72
$1.02
 $0.99
Weighted-Average Shares Outstanding: 
  
 
  
Basic214,882
 215,663
212,610
 214,870
Diluted215,905
 216,575
213,602
 215,813
Comprehensive Income 
  
 
  
Net Income$1,337,094
 $1,022,302
$218,653
 $214,726
Other comprehensive income (loss): 
  
 
  
Foreign currency translation adjustments14,210
 8,423
1,160
 2,342
Change in defined benefit plans(6,280) (12,148)7,760
 (641)
Gain on cash flow derivative hedges381,660
 254,624
142,530
 22,461
Total other comprehensive income389,590
 250,899
151,450
 24,162
Comprehensive Income$1,726,684
 $1,273,201
$370,103
 $238,888
 
The accompanying notes are an integral part of these consolidated financial statements.

Table of Contents    

ROYAL CARIBBEAN CRUISES LTD.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
As ofAs of
September 30, December 31,March 31, December 31,
2017 20162018 2017
(unaudited)  (unaudited)  
Assets 
  
 
  
Current assets 
  
 
  
Cash and cash equivalents$139,950
 $132,603
$111,245
 $120,112
Trade and other receivables, net285,332
 291,899
387,862
 318,641
Inventories119,949
 114,087
110,826
 111,393
Prepaid expenses and other assets200,125
 209,716
350,653
 258,171
Derivative financial instruments52,796
 —
73,940
 99,320
Total current assets798,152
 748,305
1,034,526
 907,637
Property and equipment, net19,688,872
 20,161,427
21,207,786
 19,735,180
Goodwill288,517
 288,386
288,479
 288,512
Other assets1,323,773
 1,112,206
1,440,181
 1,429,597
$22,099,314
 $22,310,324
$23,970,972
 $22,360,926
Liabilities and Shareholders’ Equity 
  
 
  
Current liabilities      
Current portion of long-term debt$1,515,708
 $1,285,735
$1,144,017
 $1,188,514
Accounts payable384,536
 305,313
454,576
 360,113
Accrued interest92,914
 46,166
90,388
 47,469
Accrued expenses and other liabilities748,442
 692,322
680,397
 903,022
Derivative financial instruments89,333
 146,592
40,314
 47,464
Customer deposits2,226,179
 1,965,473
2,785,462
 2,308,291
Total current liabilities5,057,112
 4,441,601
5,195,154
 4,854,873
Long-term debt6,076,499
 8,101,701
7,664,722
 6,350,937
Other long-term liabilities530,215
 645,610
464,300
 452,813
Commitments and contingencies (Note 7)

 



 

Shareholders’ equity 
  
 
  
Preferred stock ($0.01 par value; 20,000,000 shares authorized; none outstanding)—
 —
—
 —
Common stock ($0.01 par value; 500,000,000 shares authorized; 235,134,180 and 234,613,486 shares issued, September 30, 2017 and December 31, 2016, respectively)2,351
 2,346
Common stock ($0.01 par value; 500,000,000 shares authorized; 235,738,538 and 235,198,901 shares issued, March 31, 2018 and December 31, 2017, respectively)2,357
 2,352
Paid-in capital3,375,969
 3,328,517
3,390,055
 3,390,117
Retained earnings8,862,369
 7,860,341
9,090,544
 9,022,405
Accumulated other comprehensive loss(526,894) (916,484)(182,815) (334,265)
Treasury stock (21,059,191 and 20,019,237 common shares at cost, September 30, 2017 and December 31, 2016, respectively)(1,278,307) (1,153,308)
Treasury stock (24,008,342 and 21,861,308 common shares at cost, March 31, 2018 and December 31, 2017, respectively)(1,653,345) (1,378,306)
Total shareholders’ equity10,435,488
 9,121,412
10,646,796
 10,702,303
$22,099,314
 $22,310,324
$23,970,972
 $22,360,926
.
 
The accompanying notes are an integral part of these consolidated financial statements.

Table of Contents    

ROYAL CARIBBEAN CRUISES LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited; in thousands)
 Nine Months Ended September 30,
 2017 2016
Operating Activities 
  
Net income$1,337,094
 $1,022,302
Adjustments: 
  
Depreciation and amortization710,836
 661,712
Net deferred income tax expense516
 1,601
(Gain) loss on derivative instruments not designated as hedges(56,836) 6,353
Share-based compensation expense52,469
 22,041
Equity investment income(120,359) (94,832)
Amortization of debt issuance costs37,562
 39,425
Gain on sale of property and equipment(30,902) —
Changes in operating assets and liabilities: 
  
Decrease in trade and other receivables, net16,245
 9,823
Increase in inventories(6,131) (6,379)
Decrease (increase) in prepaid expenses and other assets10,211
 (8,794)
Increase (decrease) in accounts payable77,436
 (17,313)
Increase in accrued interest46,748
 56,787
Increase in accrued expenses and other liabilities12,870
 17,929
Increase in customer deposits256,855
 197,277
Dividends received from unconsolidated affiliates107,267
 71,370
Other, net2,720
 21,650
Net cash provided by operating activities2,454,601
 2,000,952
Investing Activities 
  
Purchases of property and equipment(387,335) (2,313,831)
Cash received (paid) on settlement of derivative financial instruments57,004
 (172,878)
Investments in and loans to unconsolidated affiliates—
 (8,611)
Cash received on loans to unconsolidated affiliates31,633
 22,470
Proceeds from the sale of property and equipment230,000
 —
Other, net (1)
(9,313) (44,709)
Net cash used in investing activities(78,011) (2,517,559)
Financing Activities 
  
Debt proceeds3,682,000
 6,038,560
Debt issuance costs(25,987) (83,793)
Repayments of debt(5,598,198) (4,818,262)
Purchases of treasury stock(124,999) (299,959)
Dividends paid(309,162) (243,557)
Proceeds from exercise of common stock options2,499
 1,782
Other, net4,137
 2,179
Net cash (used in) provided by financing activities(2,369,710) 596,950
Effect of exchange rate changes on cash467
 (23,480)
Net increase in cash and cash equivalents7,347
 56,863
Cash and cash equivalents at beginning of period132,603
 121,565
Cash and cash equivalents at end of period$139,950
 $178,428
Supplemental Disclosure 
  
Cash paid during the period for: 
  
Interest, net of amount capitalized$147,789
 $140,335
Non-cash Investing Activities 
  
Notes receivable issued upon sale of property and equipment$—
 $213,042

(1) Amount includes $26.0 million in 2016 related to cash included in the divestiture of our 51% interest in Pullmantur Holdings.
 Quarter Ended March 31,
 2018 2017
Operating Activities 
  
Net income$218,653
 $214,726
Adjustments: 
  
Depreciation and amortization240,230
 235,749
Impairment loss related to Skysea Holding23,343
 —
Net deferred income tax (benefit) expense(1,504) 610
Gain on derivative instruments not designated as hedges(7,810) (13,812)
Share-based compensation expense20,164
 17,262
Equity investment income(28,752) (11,880)
Amortization of debt issuance costs10,108
 13,256
Gain on sale of property and equipment—
 (30,902)
Changes in operating assets and liabilities: 
  
Increase in trade and other receivables, net(10,181) (828)
Decrease in inventories567
 5,391
Increase in prepaid expenses and other assets(89,725) (32,083)
Increase in accounts payable110,467
 56,373
Increase in accrued interest42,919
 45,206
Decrease in accrued expenses and other liabilities(109,136) (57,344)
Increase in customer deposits477,878
 333,735
Dividends received from unconsolidated affiliates37,918
 27,997
Other, net(11,017) (6,930)
Net cash provided by operating activities924,122
 796,526
Investing Activities 
  
Purchases of property and equipment(1,720,232) (122,783)
Cash received on settlement of derivative financial instruments64,487
 13,812
Cash received on loans to unconsolidated affiliates13,953
 5,011
Proceeds from the sale of property and equipment—
 230,000
Other, net(3,353) (2,440)
Net cash (used in) provided by investing activities(1,645,145) 123,600
Financing Activities 
  
Debt proceeds2,544,737
 1,006,000
Debt issuance costs(41,344) (10,383)
Repayments of debt(1,394,222) (1,840,402)
Purchases of treasury stock(275,038) —
Dividends paid(127,840) (102,942)
Proceeds from exercise of common stock options3,863
 2,100
Other, net1,697
 1,233
Net cash provided by (used in) financing activities711,853
 (944,394)
Effect of exchange rate changes on cash303
 974
Net decrease in cash and cash equivalents(8,867) (23,294)
Cash and cash equivalents at beginning of period120,112
 132,603
Cash and cash equivalents at end of period$111,245
 $109,309
Supplemental Disclosure 
  
Cash paid during the period for: 
  
Interest, net of amount capitalized$16,953
 $24,296

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

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”Cruises,” and “Azamara Club Cruises” refer to our wholly-owned global cruise brands. Throughout this Quarterly Report on Form 10-Q,report, we also refer to regional brands in which we hold an ownership interest, including “TUI Cruises,” “Pullmantur” and “SkySea Cruises.” However, because these regional brands are unconsolidated investments, our operating results and other disclosures herein do not include these brands unless otherwise specified. In accordance with cruise vacation industry practice, the term “berths” is determined based on double occupancy per cabin even though many cabins can accommodate three or more passengers. This Quarterly Report on Form 10-Qreport should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2016,2017, including the audited consolidated financial statements and related notes included therein.
 
This Quarterly Report on Form 10-Q also includes trademarks, trade names and service marks of other companies.  Use or display by us of other parties’ trademarks, trade names or service marks is not intended to and does not imply a relationship with, or endorsement or sponsorship of us by, these other parties other than as described herein.

Note 1. General

Description of Business
 
We are a global cruise company.  As of September 30, 2017,March 31, 2018, we own and operate three global cruise brands: Royal Caribbean International, Celebrity Cruises and Azamara Club Cruises (collectively, our "Global Brands"). We also own a 50% joint venture interest in the German brand TUI Cruises, a 49% interest in the Spanish brand Pullmantur and have a minority36% interest in the Chinese brand SkySea Cruises (collectively, our "Partner Brands"). We account for our investments in our Partner Brands under the equity method of accounting.

PriorIn March 2018, we and Ctrip.com International Ltd. ("Ctrip") announced the decision to August 2016, Pullmantur Holdings S.L.end the Skysea Holding International Ltd. ("Pullmantur Holdings"Skysea Holding") venture. Skysea Holding expects to cease business operations by the end of 2018. The Golden Era, the parent company of the Pullmantur brand (formerly known as Royal Caribbean Holdings de Españship operated by SkySea Cruises and owned by a S.L.), was wholly owned by us. Effective July 31, 2016, wesubsidiary of Skysea Holding,is expected to be sold 51%to an affiliate of TUI AG, our interestjoint venture partner in Pullmantur Holdings. We retain a 49% interestTUI Cruises, and is expected to be delivered in Pullmantur Holdings as well as full ownership of the four vessels currently operated by the Pullmantur brand under bareboat charter arrangements. We accountDecember 2018. Refer to Note 5. Other Assets for the bareboat charters of the vessels to Pullmantur Holdings as operating leases. We also provide certain ship management services and other related services to Pullmantur Holdings.further information regarding our investment in SkySea Holding.

Basis for Preparation of Consolidated Financial Statements
 
The unaudited consolidated financial statements are presented pursuant to the rules and regulations of the Securities and
Exchange Commission. In our opinion, these statements include all adjustments necessary for a fair statement of the results of the interim periods reported herein. Adjustments consist only of normal recurring items, except for any discussed in the notes below. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted as permitted by such rules and regulations. Estimates are required for the preparation of financial statements in accordance with GAAP and 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, 20162017 for a discussion of our significant accounting policies.
 
All significant intercompany accounts and transactions are eliminated in consolidation. We consolidate entities over which we have control, usually evidenced by a direct ownership interest of greater than 50%, and variable interest entities where we are determined to be the primary beneficiary. Refer to Note 5. Other Assets for further information regarding our variable interest entities. For affiliates we do not control but over which we have significant influence on financial and operating policies, usually evidenced by a direct ownership interest from 20% to 50%, the investment is accounted for using the equity method. 

Prior to January 1, 2016, we consolidated the operating results of Pullmantur Holdings 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 Holding's financial position, results of operations and cash flows concurrently and consistently with the fiscal calendar of the Company (the "elimination of the Pullmantur reporting lag"). The elimination of the Pullmantur reporting lag represented a change in accounting principle which we believed to be preferable because it provided more current

Table of Contents    

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 Pullmantur reporting lag was immaterial to prior periods and was 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 Holdings for November and December 2015 are included in our statement of comprehensive income (loss) for the nine months ended September 30, 2016. The effect of this change was a decrease to net income of $21.7 million, which has been reported within Other expense in our consolidated statements of comprehensive income (loss) for the nine months ended September 30, 2016.

Note 2. Summary of Significant Accounting Policies

RecentAdoption of Accounting Pronouncements

On January 1, 2018, we adopted the guidance in Accounting Standard Codification 606 ("ASC 606"), Revenue from Contracts with Customers

In May 2014, amended GAAP, and applied the guidance to all contracts using the modified retrospective method. The new standard converged wide-ranging revenue recognition concepts and requirements that lead to diversity in application for particular industries and transactions into a single revenue standard containing comprehensive principles for recognizing revenue. The cumulative effect of applying the newly issued guidance was issued to clarify the principles used to recognize revenue for all entities. The guidance also requires more detailed disclosuresnot material and provides additional guidance for transactions that were not comprehensively addressed in the prior accounting guidance. This guidance must be applied using one of two retrospective application methods and will be effective for our annual reporting period beginning after December 15, 2017, including interim periods therein.

We haveaccordingly there was no adjustment made significant progress toward completing our evaluation of potential changes to our core revenues usingretained earnings upon adoption on January 1, 2018. We do not expect the five-step model supported by the new revenue standard. Currently, we are in the process of finalizing our analysis and quantifying the effects of adoption, if any, on how we account for our customer loyalty programs and promotional offerings, as the new standard has changed the method of accounting for loyalty points fromnewly issued guidance to have a cost-based model to a revenue deferral model using a relative stand-alone selling price method. We expect to complete this analysis and conclude our evaluation on thematerial impact of adopting this new standard on our consolidated financial statements duringon an ongoing basis. The comparative information presented has not been restated and continues to be reported under the fourth quarter of fiscal 2017. Based on our assessmentaccounting standards in effect for those periods; however, due to date, we do not expect the adoption of the new standardASC 606, we currently present prepaid commissions as an asset within Prepaid expenses and other assets. Prior to materially change the timingadoption, prepaid commissions were netted against our customer deposits in our consolidated balance sheets. In order to conform to current year presentation, as of recognitionDecember 31, 2017, we have reclassified prepaid commissions of $64.6 million from Customer deposits to Prepaid expenses and other assets in our core revenues, but we do anticipate enhancing ourconsolidated balance sheets. Refer to Note 3. Revenues for disclosures with respect to our revenue recognition policies in compliance with the new standard.policies.

On January 1, 2018, we adopted the guidance in Accounting Standard Update ("ASU") 2016-16, Income Taxes 740: Intra-Entity Transfers of Assets Other Than Inventory, which requires the income tax consequences of an intra-entity transfer of an asset, other than inventory, to be recognized at the time that the transfer occurs, rather than when the asset is sold to an outside party. We adopted the standard using the modified retrospective method and recorded a cumulative-effect adjustment to reduce retained earnings as of January 1, 2018 by $6.6 million, which reflects the elimination of the deferred tax asset related to intercompany asset transfers.

On January 1, 2018, we adopted the guidance in ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, that was issued to simplify and align the financial reporting of hedging relationships to the economic results of an entity’s risk management activities. We adopted the amended guidance using the modified retrospective approach. Adoption of the guidance allowed us to modify the designated risk in our fair value interest rate hedges to the benchmark interest rate component, resulting in changes to the cumulative and ongoing fair value measurement for the hedged debt. Upon adoption, we intendalso elected to electhedge the modified retrospective method. Thiscontractually specified components of our commodities purchase contracts. For our cash flow hedges, there will involve applyingbe no periodic measurement or recognition of ineffectiveness. For all hedges, the guidance retrospectively only toearnings effect of the most current period presentedhedging instrument will be reported in the consolidated financial statementssame period  and recognizingin the cumulativesame income statement line item in which the earnings effect of initially applying the hedged item is reported. As a result of the adoption of this guidance, as anwe recorded a cumulative-effect adjustment to thereduce retained earnings as of January 1, 2018 opening balanceby $16.9 million. The cumulative-effect adjustment includes an increase to the debt carrying value of retained earnings.$14.4 million for our fair value interest rate hedges as of January 1, 2018, which reflects the cumulative fair value measurement change to debt at adoption resulting from the modified designated risk. The cumulative-effect adjustment also includes an increase to other comprehensive income of $2.5 million, which represents an increase to the deferred gain on active cash flow hedges at adoption. Additionally, the new standard requires modifications to existing presentation and disclosure requirements on a prospective basis. As such, certain disclosures for the quarter ended March 31, 2018 conform to these disclosure requirements. Refer to Note 9. Changes in Accumulated Other Comprehensive Income (Loss) and Note 10. Fair Value Measurements and Derivative Instruments for additional information.

Recent Accounting Pronouncements

Leases

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.

Classification of Certain Cash Receipts and Cash PaymentsChange in Accounting Principle - Stock-based Compensation

In August 2016, amended GAAP guidance was issuedJanuary 2018, we elected to clarify how certain cash receipts and cash payments are presented and classified inchange our accounting policy for recognizing stock-based compensation expense from the statement of cash flows. The amendments are aimed at reducing the existing diversity in practice. The guidance should be applied using a retrospective transitiongraded attribution method to each period presented and will be effectivethe straight-line attribution method for annual periods beginning after December 15, 2017 and interim periods within those annual periods. Early adoption is permitted, including adoption in an interim period. We intend to adopt the guidance on the date of initial application, January 1, 2018.time-based stock awards. The adoption of this newly issued guidance is not expected to havethe straight-line attribution method for time-based stock awards represents a material impact to our consolidated financial statements.

Intra-Entity Transfers of Assets Other Than Inventory

In October 2016, amended GAAP guidance was issued that requires the income tax consequences of an intra-entity transfer of an asset, other than inventory,change in accounting principle which we believe to be recognized at the time that the transfer occurs, rather than when the asset is sold to an outside party. The new guidance is effective for annual and interim reporting periods beginning after December 15, 2017. Early adoption is permitted as of the beginning of an annual period for which financial statements have not been issued. The guidance is required to be adopted retrospectively by recording a cumulative-effect adjustment to retained earnings as of the beginning ofpreferable
Table of Contents    

because it is the adoption period. The adoption of this newly issued guidance is not expected to have a material impact topredominant method used in our consolidated financial statements.

Service Concession Arrangements

In May 2017, amended GAAP guidance was issued to clarify who should be viewed as the customer under service concession arrangements.industry. A service concession arrangement is an arrangement under which a public sector entity (“grantor”), such as a Port Authority,  grants a private entity (“operator”), such as the Company, the right to operate the grantor's infrastructure for a specified period of time. The amended guidance will require the Company to evaluate the relationship with the grantor and identify the multiple performance obligations that may exist under these concession arrangements, including consideration of construction services that may be performed, operational services, and any other maintenance or ancillary services performed under the service concession. In addition, the amended guidance will require that all revenue streams identified under such arrangements be evaluated with the grantor as the customer, irrespective of whether some of the revenues are paid by third-party users of the infrastructure under concession. The clarification will enable a more consistent application of the new Revenue from Contracts with Customers guidance,  which along with this clarification guidance, will be effective for our annual reporting period beginning after December 15, 2017, including interim periods therein. This guidance must be applied using one of twochange in accounting principle requires retrospective application, methods. We are currently evaluating theif material. The impact of the adoption of this newly issued guidancethe straight-line attribution method to our consolidated financial statements.

Derivativestime-based awards was immaterial to prior periods and Hedging

In August 2017, amended GAAP guidance was issuedis expected to simplify and improve the financial reporting of hedging relationships to better portray the economic results of an entity's risk management activities in its financial statements. In addition to changes in designation and measurementbe immaterial for qualifying hedge relationships, the guidance requires an entity to report the earnings effect of the hedging instrument in the same income statement line item in which the earnings effect of the hedged item is reported.our fiscal year ended December 31, 2018. As a result, hedge ineffectiveness will no longer be separately measured or reported. This guidance will be effectivewe have accounted for this change in accounting principle in our annual reporting period beginning after December 15, 2018, including interim periods therein. Early adoption is permitted in any interim period after issuanceconsolidated results for the first quarter of this guidance. All transition requirements and elections should be applied to hedging relationships existing on the date of adoption.2018. The effect of the adoption should be reflected asthis change was an increase to net income of the beginning of the fiscal year of adoption. We are currently evaluating the impact of the adoption of this newly issued guidance to our consolidated financial statements.

Other
Revenues$9.2 million, or $0.04 per share for basic 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 $135.9 milliondiluted earnings per share, and $158.7 million for the third quarters of 2017 and 2016, respectively, and $413.7 million and $443.1 million for the nine months ended September 30, 2017 and 2016, respectively.

Reclassifications

For the third quarter and nine months ended September 30, 2016, restructuring charges of $1.9 million and $6.6 million, respectively, have been reclassified intois reported within Marketing, selling and administrative expenses in theour consolidated statements of comprehensive income (loss) for the quarter ended March 31, 2018.

Note 3. Revenues

Revenue Recognition

Revenues are measured based on consideration specified in orderour contracts with customers and are recognized as the related performance obligations are satisfied.

The majority of our revenues are derived from passenger cruise contracts which are reported within Passenger ticket revenues in our Consolidated Statements of Comprehensive Income (Loss). Our performance obligation under these contracts is to conformprovide a cruise vacation in exchange for the ticket price. We satisfy this performance obligation and recognize revenue over the duration of each cruise, which range from two to the current year presentation.23 nights.

For the nine months ended September 30, 2016, share-based compensation expensePassenger ticket revenues include charges to our guests for port costs that vary with passenger head counts. These type of $22.0 million, equity investment incomeport costs, along with port costs that do not vary by passenger head counts, are included in our operating expenses. The amounts of $94.8port costs charged to our guests and included within Passenger ticket revenues on a gross basis were $136.7 million and amortization$134.5 million for the first quarter of debt issuance costs2018 and 2017, respectively.

Our total revenues also include onboard and other revenues, which consist primarily of $22.9 million,revenues from the sale of goods and services onboard our ships that are not included in passenger ticket prices. We receive payment before or concurrently with the transfer of these goods and services to passengers during a cruise and recognize revenue at the time of transfer over the duration of the related cruise.

As a practical expedient, we have been reclassified inomitted disclosures on our remaining performance obligations as the consolidated statementsduration of cash flows from our contracts with customers is less than a year.

Disaggregated Revenues

The following table disaggregates our total revenues by geographic regions where we provide cruise itineraries (in thousands):
 Quarter Ended March 31,
 2018 2017
Total revenues by itinerary   
North America(1)
$1,347,260
 $1,352,169
Asia/Pacific(2)
532,979
 525,856
Europe(3)
—
 —
Other regions77,185
 65,232
Total revenues by itinerary1,957,424
 1,943,257
Other revenues(4)
70,332
 65,303
Total revenues$2,027,756
 $2,008,560

(1)Other, net to Share-based compensation expense, Equity investment incomeIncludes the United States, Canada, Mexico and Amortization of debt issuance costs, respectively, within Net cash provided by operating activities in order to conform to the current year presentation.Caribbean.

Additionally,(2)Includes Southeast Asia (e.g., Singapore, Thailand and the Philippines), East Asia (e.g., China and Japan), South Asia (e.g., India and Pakistan) and Oceania (e.g., Australia and Fiji Islands) regions.

(3) Includes European countries (e.g., Nordics, Germany, France, Italy, Spain and the United Kingdom). During the quarters ended March 31, 2018 and 2017, there were no cruise itineraries in Europe.

Table of Contents

(4) Includes revenues of $47.4 million and $42.6 million for the nine monthsquarter ended September 30, 2016, amortizationMarch 31 2018 and 2017, respectively, related to cancellation fees, sales of debt issuance costsvacation protection insurance and pre- and post-cruise tours and revenues of $11.3$23.0 million and $5.3$21.8 million for the quarter ended March 31 2018 and 2017, respectively, primarily related to our bareboat charter, procurement and management related services we perform on behalf of our unconsolidated affiliates.

Passenger ticket revenues are attributed to geographic areas based on where the reservation originates. For the quarter ended March 31, 2018 and March 31, 2017, our guests were sourced from the following areas:

 Quarter Ended March 31,
 2018 2017
Passenger ticket revenues:   
United States60% 60%
Australia13% 12%
All other countries (1)
27% 28%

(1) No other individual country's revenue exceeded 10% for the quarter ended March 31, 2018 and 2017, respectively.

Customer Deposits and Contract Liabilities

Our payment terms generally require an upfront deposit to confirm a reservation, with the balance due prior to the cruise. Deposits received on sales of passenger cruises are initially recorded as Customer deposits in our consolidated balance sheets and subsequently recognized as passenger ticket revenues during the duration of the cruise. ASC 606 defines a “contract liability” as an entity’s obligation to transfer goods or services to a customer for which the entity has received consideration from the customer. We do not consider customer deposits to be a contract liability until the customer no longer retains the unilateral right, resulting from the passage of time, to cancel such customer's reservation and receive a full refund. Customer deposits presented in our consolidated balance sheets include contract liabilities of $1.8 billion and $1.4 billion as of March 31, 2018 and December 31, 2017, respectively. During the quarter ended March 31, 2018, we recognized revenues related to our contract liabilities as of December 31, 2017 of $1.3 billion.
Contract Receivables and Contract Assets

Although we generally require full payment from our customers prior to their cruise, we grant credit terms to a relatively small portion of our revenue source in select markets outside of the United States. As a result, we have been reclassifiedoutstanding receivables from passenger cruise contracts in those markets. We also have receivables from credit card merchants for cruise ticket purchases and goods and services sold to guests during cruises that are collected before, during or shortly after the cruise voyage. In addition, we have receivables due from concessionaires onboard our vessels. These receivables are included within DecreaseTrade and other receivables, net(increase) in prepaidour consolidated balance sheets. We have contract assets that are conditional rights to consideration for satisfying the construction services performance obligations under a service concession arrangement. As of March 31, 2018 and December 31, 2017, our contract assets were $59.5 million and $60.1 million, respectively, and were included within Other assets in our consolidated balance sheets. Given the short duration of our cruises and our collection terms, we do not have any other significant contract assets.

Assets Recognized from the Costs to Obtain a Contract with a Customer

Prepaid travel agent commissions are an incremental cost of obtaining contracts with customers that we recognize as an asset and include within Prepaid expenses and other assets in our consolidated balance sheets. Prepaid travel agent commissions increased to $80.2 million at March 31, 2018 from $64.6 million at December 31, 2017 because of increased bookings in the first quarter of 2018. Primarily all of our prepaid travel agent commissions at December 31, 2017 were expensed and fromreported within Increase in accrued expensesCommissions, transportation and other liabilities, respectively, in theour consolidated statements of cash flows to Amortization of debt issuance costs, within Net cash provided by operating activities in order to conform tocomprehensive income (loss) for the current year presentation.quarter ended March 31, 2018.

Table of Contents    

Note 3.4. Earnings Per Share
 
A reconciliation between basic and diluted earnings per share is as follows (in thousands, except per share data):
Quarter Ended September 30, Nine Months Ended September 30,Quarter Ended March 31,
2017 2016 2017 20162018 2017
Net income for basic and diluted earnings per share$752,842
 $693,257
 $1,337,094
 $1,022,302
$218,653
 $214,726
Weighted-average common shares outstanding214,694
 214,819
 214,882
 215,663
212,610
 214,870
Dilutive effect of stock options, performance share awards and restricted stock awards1,130
 848
 1,023
 912
Dilutive effect of stock-based awards and stock options992
 943
Diluted weighted-average shares outstanding215,824
 215,667
 215,905
 216,575
213,602
 215,813
Basic earnings per share$3.51
 $3.23
 $6.22
 $4.74
$1.03
 $1.00
Diluted earnings per share$3.49
 $3.21
 $6.19
 $4.72
$1.02
 $0.99
 
There were no antidilutive shares for the quarters and nine month periods ended September 30, 2017March 31, 2018 and September 30, 2016.March 31, 2017.
 
Note 4. Property and Equipment

In March 2017, we sold Legend of the Seas to an affiliate of TUI AG, our joint venture partner in TUI Cruises. The sale resulted in a gain of $30.9 million and is reported within Other operating within Cruise operating expenses in our consolidated statements of comprehensive income (loss) for the nine months ended September 30, 2017.

In April 2016, we sold Splendour of the Seas to TUI Cruises. Concurrent with the acquisition, TUI Cruises leased the ship to the same TUI AG affiliate mentioned above, which now operates the ship. The gain recognized did not have a material effect to our consolidated financial statements and was also reported in Other operating within Cruise operating expenses in our consolidated statements of comprehensive income (loss) for the nine months ended September 30, 2016.

Note 5. Other Assets

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

We have determined that TUI Cruises GmbH, our 50%-owned joint venture, which operates the brand TUI Cruises, is a VIE. As of September 30,March 31, 2018, the net book value of our investment in TUI Cruises was approximately $627.5 million, primarily consisting of $425.4 million in equity and a loan of €162.5 million, or approximately $199.9 million based on the exchange rate at March 31, 2018. As of December 31, 2017, the net book value of our investment in TUI Cruises was approximately $582.5$624.5 million, primarily consisting of $379.3$422.8 million in equity and a loan of €170.4€166.5 million, or approximately $201.5 million based on the exchange rate at September 30, 2017. As of December 31, 2016, the net book value of our investment in TUI Cruises was approximately $517.0 million, primarily consisting of $323.5 million in equity and a loan of €182.3 million, or approximately $192.4$199.8 million based on the exchange rate at December 31, 2016.2017. The loan, which was made in connection with the sale of Splendour of the Seas in April 2016, accrues interest at a rate of 6.25% per annum and is payable over 10 years. This loan is 50% guaranteed by TUI AG, our joint venture partner in TUI Cruises, and is secured by a first priority mortgage on the ship. Refer to Note 4. Property and Equipment for further information. The majority of these amounts were included within Other assets in our consolidated balance sheets.

 In addition, we and TUI AG have each guaranteed the repayment by TUI Cruises of 50% of a bank loan. As of September 30, 2017,March 31, 2018, the outstanding principal amount of the loan was €100.4€89.1 million, or approximately $118.7$109.6 million based on the exchange rate at September 30, 2017. While this loan matures in May 2022, the lenders have agreed to release each shareholder's guarantee if certain conditions are met by AprilMarch 31, 2018. The loan amortizes quarterly and is secured by first mortgages on the Mein Schiff 1 and Mein Schiff 2 vessels. In April 2018, Mein Schiff 1 was sold to an affiliate of TUI AG. The proceeds were used to repay €44.2 million of the bank loan and secure the release of the first mortgage on Mein Schiff 1. Based on current facts and circumstances, we do not believe potential obligations under our guarantee of this bank loan are probable.

Our investment amount, outstanding term loan andand the potential obligations under the bank loan guarantee are substantiallysubstantially 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
Table of Contents

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.

TUI Cruises has two newbuild ships on order scheduled to be delivered in each of 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. The remaining portion of the contract price of the ships is expected to be funded through an existing €150.0 million, or approximately $184.5 million based on the exchange rate at March 31, 2018, 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 Pullmantur Holdings S.L. ("Pullmantur Holdings"), in which we have a 49% noncontrolling interest, is a VIE for which we are not the primary beneficiary, as we do not have the power to direct the activities that most significantly impact the entity's economic performance. Accordingly, following the sale of our 51% interest in Pullmantur Holdings to Springwater Capital LLC ("Springwater"), we do not consolidate this entity and we account for this investment under
Table of Contents

the equity method of accounting. As of September 30,March 31, 2018, our maximum exposure to loss in Pullmantur Holdings was approximately $54.6 million consisting of loans and other receivables. As of December 31, 2017, our maximum exposure to loss in Pullmantur Holdings was approximately $50.9 million consisting of loans and other receivables. As of December 31, 2016, our maximum exposure to loss in Pullmantur Holdings was approximately $40.3$53.7 million consisting of loans and other receivables. These amounts were included within Trade and other receivables, net and Other assets in our consolidated balance sheets.

In conjunction with the sale of our 51% interest in Pullmantur Holdings, we agreed to provideWe have provided a non-revolving working capital facility to a Pullmantur Holdings subsidiary in the amount of up to €15.0 million or approximately $17.7$18.5 million based on the exchange rate at September 30, 2017.March 31, 2018. Proceeds of the facility, which may be drawn through July 2018, will bear interest at the rate of 6.5% per annum and are payable through 2022. Springwater Capital LLC, 51% owner of Pullmantur Holdings, has guaranteed repayment of 51% of the outstanding amounts under the facility. As of September 30, 2017,March 31, 2018, no amounts had been drawn on this facility.

We have determined that Grand Bahama Shipyard Ltd. (“Grand Bahama”), a ship repair and maintenance facility in which we have a 40% noncontrolling interest, is a VIE. This facility serves cruise and cargo ships, oil and gas tankers and offshore units.  We utilize this facility, among other ship repair facilities, for our regularly scheduled drydocks and certain emergency repairs as may be required. During the quarter ended March 31, 2018 and nine months ended September 30,March 31, 2017, we made payments of $1.9$22.3 million and $7.5$1.7 million respectively, to Grand Bahama for ship repair and maintenance services. We have determined that we are not the primary beneficiary of this facility as we do not have the power to direct the activities that most significantly impact the facility’s economic performance. Accordingly, we do not consolidate this entity and we account for this investment under the equity method of accounting. As of September 30,March 31, 2018, the net book value of our investment in Grand Bahama was approximately $55.6 million, consisting of $38.7 million in equity and a loan of $16.9 million. As of December 31, 2017, the net book value of our investment in Grand Bahama was approximately $50.4$49.4 million, consisting of $30.8$32.4 million in equity and a loan of $19.6 million. As of December 31, 2016, the net book value of our investment in Grand Bahama was approximately $47.0 million, consisting of $23.2 million in equity and a loan of $23.8$17.0 million. These amounts represent our maximum exposure to loss related to our investment in Grand Bahama. Our debt agreementloan with Grand Bahama was amended during the quarter endedmatures on March 31, 2016 to extend the maturity by 10 years2025 and increase the applicablebears interest rate toat 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 continue to classifyhave experienced strong payment performance on the loan since its amendment in 2016, and as modified,a result completed an evaluation and review of the loan resulting in a reclassification of the loan to accrual status as non-accrual status.of October 2017. During the quarter ended March 31, 2018, we received principal and interest payments of approximately $3.0 million. During the quarter ended March 31, 2017, we received principal payments of approximately $0.3 million. The loan balance is included within Other assets in our consolidated balance sheets. The loan is currently accruing interest under the effective yield method, which includes the recognition of previously unrecognized interest that accumulated while the loan was in non-accrual status.

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 September 30, 2017.March 31, 2018.

We have determined that Skysea Holding International Ltd. ("Skysea Holding"), in which we currently have a 36% noncontrolling interest, is a VIE. During the second quarter of 2017, we made an equity contribution of $7.1 millionVIE for which increased our equity interest from 35% to 36%. The contribution was made pursuant to a funding arrangement in which the entity's three largest investors agreed to contribute a total of $30.0 million in proportion to their equity interest in a series of installments. We have determined that we are not the primary beneficiary, of Skysea Holding as we do not have the power to direct the activities that most significantly impact the entity's economic performance. Accordingly, we do not consolidate this entity and we account for this investment under the equity method of accounting. In December 2014, we and Ctrip.com International Ltd,Ctrip, which also owns 36% 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, currently accrues at amillion, with an applicable interest rate of 6.5% per annum.annum, which originally matured in January 2030. 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. Due to payment performance, the loans were classified to non-accrual status in 2017.

In March 2018, the Skysea Holding's board of directors agreed to exit the business given increasing challenges faced by the brand. We expect Skysea Holding will cease business operations by the end of 2018. In connection with the decision to dissolve the brand, SkySea Holding has agreed to sell the Golden Era to an affiliate of TUI AG, our joint venture partner in TUI Cruises.

We review our equity method investments for impairment whenever events or changes in circumstances indicate that the carrying amount of the investment may not be recoverable. Given SkySea Holding’s planned dissolution and sale of Golden Era, we reviewed the recoverability of our investment, debt facility and other receivables due from the brand. As a result of this analysis, we determined that our investment in SkySea Holding and the carrying value of our debt facility and other receivables due from the brand were impaired as of March 31, 2018 and recognized an impairment charge of $23.3 million. This impairment charge was recognized in Impairment loss related to Skysea Holding within our consolidated statements of comprehensive income (loss) for the quarter ended March 31, 2018. The charge reflects a full impairment of our investment in SkySea Holding and other receivables due to us and reduces the debt facility and the related accrued interest due to us from SkySea Holding to its net realizable value. Refer to Note 10. Fair Value Measurements and Derivative Instruments for further information on the fair value calculation of the debt facility.

Table of Contents

As of September 30,March 31, 2018, the net book value of our investment in Skysea Holding and its subsidiaries was approximately $69.6 million, consisting of the remaining balance of the $80.0 million debt facility and its related accrued interest. Due to the expected sale of Golden Era in December of 2018, the amount was included within Trade and other receivables, net and represents our maximum exposure to loss related to our investment in Skysea Holding as of March 31, 2018. As of December 31, 2017, the net book value of our investment in Skysea Holding and its subsidiaries was approximately $97.3$96.0 million, consistingwhich consisted of $6.5$4.4 million in equity and loans and other receivables of $90.8 million. As of December 31, 2016, the net book value of our investment in Skysea Holding and its subsidiaries was approximately $98.0 million, consisting of $9.2 million in equity and loans and other receivables of $88.8$91.6 million. The majority of these amounts were included within Other assets in our consolidated balance sheets and representrepresented our maximum exposure to loss related to our investment in Skysea Holding.

TableHolding as of Contents
December 31, 2017.

The following table setstables set forth information regarding our investments accounted for under the equity method of accounting, including the entities discussed above (in thousands):
 Quarter Ended September 30, 2017 Quarter Ended September 30, 2016 Nine Months Ended September 30, 2017 Nine Months Ended September 30, 2016 Quarter Ended March 31, 2018 Quarter Ended March 31, 2017
Share of equity income from investments $85,120
 $46,539
 $120,359
 $94,832
 $28,752
 $11,880
Dividends received $49,865
 $47,491
 $107,267
 $71,370
 $37,918
 $27,997

  As of March 31, 2018 As of December 31, 2017
Total notes receivable due from equity investments $291,116
 $314,323
Less-current portion(1)
 95,865
 38,658
Long-term portion(2)
 $195,251
 $275,665

(1)     Included within Trade and other receivables, net in our consolidated balance sheets.

(2)Included within Other assets in our consolidated balance sheets.

We also provide ship management services to TUI Cruises GmbH, Pullmantur Holdings and Skysea Holding. Additionally, we bareboat charter to Pullmantur Holdings the vessels currently operated by its brands, which were retained by us following the sale of our 51% interest in Pullmantur Holdings. We recorded the following as it relates to these services in our operating results within our consolidated statements of comprehensive income (loss) (in thousands):

 Quarter Ended September 30, 2017 Quarter Ended September 30, 2016 Nine Months Ended September 30, 2017 Nine Months Ended September 30, 2016 Quarter Ended March 31, 2018 Quarter Ended March 31, 2017
Revenues $14,054
 $9,300
 $39,987
 $17,888
 $14,073
 $12,615
Expenses $3,770
 $2,410
 $11,503
 $8,930
 $3,638
 $3,713

Note 6. Long-Term Debt

In October 2017,March 2018, we amendedtook delivery of Symphony of the Seas. We had previously entered into a financing arrangement for the United States dollar financing of this ship in January 2015. Through the financing arrangement, we had the right, but not the obligation, to satisfy the obligations to be incurred upon delivery and restated ouracceptance of the vessel under the shipbuilding contract by assuming through a novation agreement, at delivery and acceptance, the debt indirectly incurred by the shipbuilder during the construction of the ship. We borrowed a total of $1.2 billion under our previously committed unsecured revolvingterm loan, which includes the execution of the novation to satisfy a portion of our final obligation under our shipbuilding agreement. The loan amortizes semi-annually over 12 years and bears interest at a fixed rate of 3.82%. In our consolidated statement of cash flows for the quarter ended March 31, 2018, the acceptance of the ship and satisfaction of our obligation under the shipbuilding contract was classified as an outflow and constructive disbursement within Investing Activities while the amounts novated and effectively advanced from our lender under our previously committed unsecured term loan were classified as an inflow and constructive receipt within Financing Activities.

In March 2018, we entered into and drew in full on a credit facilityagreement in the amount of $130.0 million due August 2018.January 2023. The amendment reduced theloan accrues interest at a floating rate of LIBOR plus an applicable margin and extended the termination date to October 2022.margin. The applicable margin and facility fee varyvaries with our debt rating and are currently 1.175% and 0.20%, respectively. We havewas 1.32% as of March 31, 2018. Amounts from the ability to increase the capacityissuance of the amended facility by an additional $500 million, subject to the receipt of additional or increased lender commitments, and to extend the termination date by up to two years, subject to lender consent. These amendments did not result in the extinguishment of debt.this loan were used for capital expenditures.

Table of Contents

Note 7. Commitments and Contingencies

Ship Purchase Obligations

Our future capital commitments consist primarily of new ship orders. As of September 30, 2017,March 31, 2018, we had two Quantum-class ships, twoone Oasis-class shipsship and two ships of a new generation of ships, known as "Project Icon,"our Icon-class, on order for our Royal Caribbean International brand with an aggregate capacity of approximately 30,50025,250 berths. Additionally, as of September 30, 2017,March 31, 2018, we have four ships of a new generation of ships, known as our Edge-class, shipsand a ship designed for the Galapagos Islands on order for our Celebrity Cruises brand with an aggregate capacity of approximately 11,60012,200 berths. The following provides further information on recent developments with respect to our ship orders.

During the second quarter of 2017, we entered into agreements with Meyer Turku to build two "Project Icon" ships. Subsequently, in October 2017, we entered into credit agreements for the unsecured financing of these ships for up to 80% of each ship’s contract price. For each ship, the official Finnish export credit agency, Finnvera, plc, has agreed to guarantee to the lenders a substantial majority of the financing, with a smaller portion of the financing to be 95% guaranteed by Euler Hermes, the official German export credit agency. The maximum loan amount under each facility is not to exceed €1.4 billion, or approximately $1.7 billion, based on the exchange rate at September 30, 2017. Interest on approximately 75% of each loan will accrue at a fixed rate of 3.56% and 3.76% for the first and the second Icon-class ships, respectively, and the balance will accrue interest at a floating rate ranging from LIBOR plus 1.10% to 1.15% and LIBOR plus 1.15% to 1.20% for the first and the second Icon-class ships, respectively. Each loan will amortize semi-annually and will mature 12 years following delivery of each ship. The first and second Icon-class ships will each have a capacity of approximately 5,650 berths and are expected to enter service in the second quarters of 2022 and 2024, respectively.

In July 2017, we entered into credit agreements for the unsecured financing of the third and fourth Edge-class ships and the fifth Oasis-class ship for up to 80% of each ship’s contract price through facilities to be guaranteed 100% by Bpifrance Assurance Export, the official export credit agency of France. Under these financing arrangements, we have the right, but not the obligation, to satisfy the obligations to be incurred upon delivery and acceptance of each ship under the shipbuilding contract by assuming, at delivery and acceptance, the debt indirectly incurred by the shipbuilder during the construction of each ship. The maximum loan amount under each facility is not to exceed €684.2 million in the case of the third Edge-class ship and the United States dollar equivalent of €714.6 million and €1.1 billion in the case of the fourth Edge-class ship and fifth Oasis-class ship, or approximately $844.7 million and $1.3 billion, respectively, based on the exchange rate at September 30, 2017. The loans will amortize semi-annually and will mature 12 years following delivery of each ship. Interest on the loans will accrue at a fixed rate of 1.28% for the third Edge-class ship and at a fixed rate of 3.18% for both, the fourth Edge-class ship and the fifth Oasis-class ship. The third
Table of Contents

and fourth Edge-class ships, each of which will have a capacity of approximately 2,900 berths, are expected to enter service in the fourth quarters of 2021 and 2022, respectively. The fifth Oasis-class ship will have a capacity of approximately 5,450 berths and is expected to enter service in the second quarter of 2021.

In September 2017, we entered into an agreement to purchase a ship for our Azamara Club Cruises brand. The sale is expected to be completed with the delivery of the ship scheduled for March 2018.

As of September 30, 2017,March 31, 2018, the aggregate cost of our ships on order, not including any ships on order by our Partner Brands, was approximately $13.0$11.7 billion, of which we had deposited $323.2$419.0 million as of such date. Approximately 53.8%55.9% of the aggregate cost was exposed to fluctuations in the Euro exchange rate at September 30, 2017.March 31, 2018. Refer to Note 10. Fair Value Measurements and Derivative Instruments for further information.

Litigation

We are routinely involved in claims typical within the cruise vacation industry. The majority of these claims are covered by insurance. We believe the outcome of such claims, net of expected insurance recoveries, will not have a material adverse impact on our financial condition or results of operations and cash flows.

Other

In July 2016, we executed an agreement with Miami Dade County (“MDC”), which was simultaneously assigned to Sumitomo Banking Corporation (“SMBC”), to lease land from MDC and construct a new cruise terminal at PortMiami in Miami, Florida. The terminal is expected to be approximately 170,000 square feet and will serve as a homeport. During the construction period, SMBC will fund the costs of the terminal’s construction and land lease. Upon completion of the terminal's construction, we will operate and lease the terminal from SMBC for a five-year term. We determined that the lease arrangement between SMBC and us should be accounted for as an operating lease upon completion of the terminal.
 
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 8. Shareholders’ Equity

In September 2017,During the first quarter of 2018, we declared a cash dividend on our common stock of $0.60 per share which was paid in October 2017.April 2018. During the first and second quartersquarter of 2018, we also paid a cash dividend on our common stock of $0.60 per share which was declared during the fourth quarter of 2017.

During the first quarter of 2017, we declared a cash dividend on our common stock of $0.48 per share which was paid in April 2017 and July 2017, respectively.2017. During the first quarter of 2017, we also paid a cash dividend on our common stock of $0.48 per share which was declared during the fourth quarter of 2016.

During the third quarter of 2016, we declared a cash dividend on our common stock of $0.48 per share which was paid in October 2016. During the first and second quarters 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.

In April 2017, our board of directors authorized a 12-month common stock repurchase program for up to $500 million. The timing and number of shares to be repurchased will depend on a variety of factors including price and market conditions. Repurchases under the program may be made at management's discretion from time to time on the open market or through privately negotiated transactions.$500.0 million that was completed in February 2018. During the thirdfirst quarter of 2017,2018, we repurchased 1.02.1 million shares of our common stock for a total of $125.0$275.0 million in open market transactions that were recorded within Treasury stock in our consolidated balance sheets. With thesesheet. Our repurchases we have $375.0under this program, including the 1.8 million that remain availableshares repurchased for future stock repurchase transactions under our Board approved program.$225.0 million during 2017, totaled $500.0 million.


Note 9. Changes in Accumulated Other Comprehensive Income (Loss)
 
The following table presents the changes in accumulated other comprehensive income (loss) by component for the nine monthsquarters ended September 30,March 31, 2018 and 2017 and 2016 (in thousands):

Accumulated Other Comprehensive Income (Loss) for the Nine Months Ended September 30, 2017 Accumulated Other Comprehensive Income (Loss) for the Nine Months Ended September 30, 2016Accumulated Other Comprehensive Income (Loss) for the Quarter Ended March 31, 2018 Accumulated Other Comprehensive Income (Loss) for the Quarter Ended March 31, 2017
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		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$(820,850) $(28,083) $(67,551) $(916,484) $(1,232,073) $(26,447) $(69,913) $(1,328,433)$(250,355) $(33,666) $(50,244) $(334,265) $(820,850) $(28,083) $(67,551) $(916,484)
Other comprehensive income (loss) before reclassifications230,341
 (7,130) 14,210
 237,421
 (9,150) (13,521) 8,423
 (14,248)127,616
 7,417
 1,160
 136,193
 (30,929) (904) 2,342
 (29,491)
Amounts reclassified from accumulated other comprehensive loss151,319
 850
 —
 152,169
 263,774
 1,373
 —
 265,147
14,914
 343
 —
 15,257
 53,390
 263
 —
 53,653
Net current-period other comprehensive income (loss)381,660
 (6,280) 14,210
 389,590
 254,624
 (12,148) 8,423
 250,899
142,530
 7,760
 1,160
 151,450
 22,461
 (641) 2,342
 24,162
Ending balance$(439,190) $(34,363) $(53,341) $(526,894) $(977,449) $(38,595) $(61,490) $(1,077,534)$(107,825) $(25,906) $(49,084) $(182,815) $(798,389) $(28,724) $(65,209) $(892,322)

The following table presents reclassifications out of accumulated other comprehensive income (loss) for the quarters ended March 31, 2018 and nine months ended September 30, 2017 and 2016 (in thousands):

 Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income (Loss) into Income   Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income (Loss) into Income  
Details About Accumulated Other Comprehensive Income (Loss) Components Quarter Ended September 30, 2017 Quarter Ended September 30, 2016 Nine Months Ended September 30, 2017 Nine Months Ended September 30, 2016 Affected Line Item in  Statements of
Comprehensive Income (Loss)		 Quarter Ended March 31, 2018 Quarter Ended March 31, 2017 Affected Line Item in  Statements of
Comprehensive Income (Loss)
Loss on cash flow derivative hedges:  
    
      
    
Interest rate swaps $(7,860) $(11,953) $(24,580) $(32,019) Interest expense, net of interest capitalized $(6,838) $(8,857) Interest expense, net of interest capitalized
Foreign currency forward contracts (2,710) (2,710) (8,130) (5,408) Depreciation and amortization expenses
Foreign currency forward contracts (1,512) (3,465) (9,187) (10,206) Other expense (3,312) (2,710) Depreciation and amortization expenses
Foreign currency forward contracts —
 —
 —
 (207) Other operating 42
 (3,570) Other expense
Foreign currency collar options (602) (601) (1,806) (1,806) Depreciation and amortization expenses —
 (602) Depreciation and amortization expenses
Fuel swaps 1,758
 2,760
 6,533
 9,356
 Other expense 325
 2,277
 Other expense
Fuel swaps (32,386) (64,654) (114,149) (223,484) Fuel (5,131) (39,928) Fuel
 (43,312) (80,623) (151,319) (263,774)   (14,914) (53,390)  
Amortization of defined benefit plans:  
          
    
Actuarial loss (293) (285) (850) (1,373) Payroll and related (343) (263) Payroll and related
 (293) (285) (850) (1,373)   (343) (263)  
Total reclassifications for the period $(43,605) $(80,908) $(152,169) $(265,147)   $(15,257) $(53,653)  
Table of Contents    

Note 10. Fair Value Measurements and Derivative Instruments
 
Fair Value Measurements
 
The estimated fair value of our financial instruments that are not measured at fair value, categorized based upon the fair value hierarchy, are as follows (in thousands): 
 Fair Value Measurements at September 30, 2017 Using Fair Value Measurements at December 31, 2016 Using Fair Value Measurements at March 31, 2018 Using Fair Value Measurements at December 31, 2017 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)
 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)
 $139,950
 $139,950
 $139,950
 $—
 $—
 $132,603
 $132,603
 $132,603
 $—
 $—
 $111,245
 $111,245
 $111,245
 $—
 $—
 $120,112
 $120,112
 $120,112
 $—
 $—
Total Assets $139,950
 $139,950
 $139,950
 $—
 $—
 $132,603
 $132,603
 $132,603
 $—
 $—
 $111,245
 $111,245
 $111,245
 $—
 $—
 $120,112
 $120,112
 $120,112
 $—
 $—
Liabilities:                                        
Long-term debt (including current portion of long-term debt)(5)
 $7,557,801
 $8,111,168
 $—
 $8,111,168
 $—
 $9,347,051
 $9,859,266
 $—
 $9,859,266
 $—
 $8,762,052
 $9,333,745
 $—
 $9,333,745
 $—
 $7,506,312
 $8,038,092
 $—
 $8,038,092
 $—
Total Liabilities $7,557,801
 $8,111,168
 $—
 $8,111,168
 $—
 $9,347,051
 $9,859,266
 $—
 $9,859,266
 $—
 $8,762,052
 $9,333,745
 $—
 $9,333,745
 $—
 $7,506,312
 $8,038,092
 $—
 $8,038,092
 $—

(1)Inputs based on quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access. Valuation of these items does not entail a significant amount of judgment.
(2)Inputs other than quoted prices included within Level 1 that are observable for the liability, either directly or indirectly. For unsecured revolving credit facilities and unsecured term loans, fair value is determined utilizing the income valuation approach. This valuation model takes into account the contract terms of our debt such as the debt maturity and the interest rate on the debt. The valuation model also takes into account the creditworthiness of the Company.
(3)Inputs that are unobservable. The Company did not use any Level 3 inputs as of September 30, 2017 and December 31, 2016.
(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. This does not include our capital lease obligations.
(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, 2018 and December 31, 2017.
(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. This does not include our capital lease obligations.
Table of Contents    

Other Financial Instruments
 
The carrying amounts of accounts receivable, accounts payable, accrued interest and accrued expenses approximate fair value at September 30, 2017March 31, 2018 and December 31, 2016.2017.
 
Assets and liabilities that are recorded at fair value have been categorized based upon the fair value hierarchy. The following table presents information about the Company’s financial instruments recorded at fair value on a recurring basis (in thousands):
 Fair Value Measurements at September 30, 2017 Using Fair Value Measurements at December 31, 2016 Using Fair Value Measurements at March 31, 2018 Using Fair Value Measurements at December 31, 2017 Using
Description Total 
Level 1(1)
 
Level 2(2)
 
Level 3(3)
 Total 
Level 1(1)
 
Level 2(2)
 
Level 3(3)
 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)
 $221,258
 $—
 $221,258
 $—
 $19,397
 $—
 $19,397
 $—
 $391,116
 $—
 $391,116
 $—
 $320,385
 $—
 $320,385
 $—
Investments(5)
 $3,237
 3,237
 —
 —
 $3,576
 3,576
 —
 —
 $5
 5
 —
 —
 $3,340
 3,340
 —
 —
Total Assets $224,495
 $3,237
 $221,258
 $—
 $22,973
 $3,576
 $19,397
 $—
 $391,121
 $5
 $391,116
 $—
 $323,725
 $3,340
 $320,385
 $—
Liabilities:  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
Derivative financial instruments(6)
 $189,163
 $—
 $189,163
 $—
 $373,497
 $—
 $373,497
 $—
 $118,117
 $—
 $118,117
 $—
 $115,961
 $—
 $115,961
 $—
Total Liabilities $189,163
 $—
 $189,163
 $—
 $373,497
 $—
 $373,497
 $—
 $118,117
 $—
 $118,117
 $—
 $115,961
 $—
 $115,961
 $—

(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 September 30, 2017 and December 31, 2016.
(4)
(1) Inputs based on quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access. Valuation of these items does not entail a significant amount of judgment.
(2) Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. For foreign currency forward contracts, interest rate swaps and fuel swaps, fair value is derived using valuation models that utilize the income valuation approach. These valuation models take into account the contract terms, such as maturity, as well as other inputs, such as foreign exchange rates and curves, fuel types, fuel curves and interest rate yield curves. 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, 2018 and December 31, 2017.
(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.
(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 September 30, 2017March 31, 2018 or December 31, 2016,2017, or that will be realized in the future, and do not include expenses that could be incurred in an actual sale or settlement.

The following table presents information about the fair value of our equity method investment and note and other receivables due related to SkySea Holding, further discussed in Note 5. Other Assets, recorded at fair value on a nonrecurring basis (in thousands):

  Fair Value Measurements at March 31, 2018 Using
Description Total Carrying Amount Total Fair Value Level 3 Total Impairment
Equity-method investment- SkySea Holding (1)
 $—
 $—
 $—
 $509
Debt facility and other receivables due from Skysea Holding (2)
 $69,562
 $69,562
 $69,562
 $22,834
Total $69,562
 $69,562
 $69,562
 $23,343

(1) Due to the expectation that Skysea Holding will cease business operations by the end of 2018, we do not deem our investment balance to be recoverable and therefore, we estimated the fair value of our investment to be zero as of March 31, 2018.

(2) We estimated the fair value of our debt facility and other receivables due from Skysea Holding based on the fair value of the collateral of the debt facility, Skysea Holding's ship, Golden Era. During the quarter ended March 31, 2018, Skysea Holding agreed to sell Golden Era to an affiliate of TUI AG, our joint venture partner in TUI Cruises. The fair value of the ship represents the net realizable value based on the agreed upon sale price of the ship. The sale of the ship is expected to be completed in December 2018. For further information on the Skysea Holding impairment, refer to Note 5. Other Assets.

Table of Contents

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.
Table of Contents

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 Gross Amounts not Offset in the Consolidated Balance Sheet that are Subject to Master Netting Agreements
 As of September 30, 2017 As of December 31, 2016 As of March 31, 2018 As of December 31, 2017
 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		 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 $221,258
 $(117,065) $—
 $104,193
 $19,397
 $(19,397) $—
 $—
 $391,116
 $(110,989) $—
 $280,127
 $320,385
 $(104,751) $—
 $215,634
Total $221,258
 $(117,065) $—
 $104,193
 $19,397
 $(19,397) $—
 $—
 $391,116
 $(110,989) $—
 $280,127
 $320,385
 $(104,751) $—
 $215,634

The following table presents information about the Company’s offsetting of financial liabilities under master netting agreements with derivative counterparties:
 Gross Amounts not Offset in the Consolidated Balance Sheet that are Subject to Master Netting Agreements Gross Amounts not Offset in the Consolidated Balance Sheet that are Subject to Master Netting Agreements
 As of September 30, 2017 As of December 31, 2016 As of March 31, 2018 As of December 31, 2017
 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		 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 $(189,163) $117,065
 $—
 $(72,098) $(373,497) $19,397
 $7,213
 $(346,887) $(118,117) $110,989
 $—
 $(7,128) $(115,961) $104,751
 $—
 $(11,210)
Total $(189,163) $117,065
 $—
 $(72,098) $(373,497) $19,397
 $7,213
 $(346,887) $(118,117) $110,989
 $—
 $(7,128) $(115,961) $104,751
 $—
 $(11,210)

Concentrations of Credit Risk
 
We monitor our credit risk associated with financial and other institutions with which we conduct significant business and, to minimize these risks, we select counterparties with credit risks acceptable to us and we seek to limit our exposure to an individual counterparty. Credit risk, including but not limited to counterparty nonperformance under derivative instruments, our credit facilities and new ship progress payment guarantees, is not considered significant, as we primarily conduct business with large, well-established financial institutions, insurance companies and export credit agencies many of which we have long-term relationships with and which have credit risks acceptable to us or where the credit risk is spread out among a large number of counterparties. As of September 30,March 31, 2018 and December 31, 2017, we had counterparty credit risk exposure under our derivative instruments of approximately $101.6$273.4 million and $212.8 million, respectively, which waswere limited to the cost of replacing the contracts in the event of non-performance by the counterparties to the contracts, the majority of which are currently our lending banks. As of December 31, 2016, we did not have any exposure under our derivative instruments. We do not anticipate nonperformance by any of our significant counterparties. In addition, we have established guidelines we follow regarding credit ratings and instrument maturities to maintain safety and liquidity. We do not normally require collateral or other security to support credit relationships; however, in certain circumstances this option is available to us.
Table of Contents    

Derivative Instruments
 
We are exposed to market risk attributable to changes in interest rates, foreign currency exchange rates and fuel prices. We try to mitigate these risks through a combination of our normal operating and financing activities and through the use of derivative financial instruments pursuant to our hedging practices and policies. The financial impact of these hedging instruments is primarily offset by corresponding changes in the underlying exposures being hedged. We achieve this by closely matching the notional amount, term and conditions of the derivative instrument with the underlying risk being hedged. Although certain of our derivative financial instruments do not qualify or are not accounted for under hedge accounting, our objective is not to hold or issue derivative financial instruments for trading or other speculative purposes. 
 
We enter into various forward, swap and option contracts to manage our interest rate exposure and to limit our exposure to fluctuations in foreign currency exchange rates and fuel prices. These instruments are recorded on the balance sheet at their fair value and the vast majority are designated as hedges. We also use non-derivative financial instruments designated as hedges of our net investment in our foreign operations and investments.
 
At inception of the hedge relationship, a derivative instrument that hedges the exposure to changes in the fair value of a firm commitment or a recognized asset or liability is designated as a fair value hedge. A derivative instrument that hedges a forecasted transaction or the variability of cash flows related to a recognized asset or liability is designated as a cash flow hedge.
 
Changes in the fair value of derivatives that are designated as fair value hedges are offset against changes in the fair value of the underlying hedged assets, liabilities or firm commitments. Gains and losses on derivatives that are designated as cash flow hedges are recorded as a component of Accumulated other comprehensive loss until the underlying hedged transactions are recognized in earnings. The foreign currency transaction gain or loss of our non-derivative financial instruments and the changes in the fair value of derivatives designated as hedges of our net investment in foreign operations and investments are recognized as a component of Accumulated other comprehensive loss along with the associated foreign currency translation adjustment of the foreign operation or investment.investment, with the amortization of excluded components affecting earnings.
 
On an ongoing basis, we assess whether derivatives used in hedging transactions are “highly effective” in offsetting changes in the fair value or cash flow of hedged items. We use the long-haul method to assess hedge effectiveness using regression analysis for each hedge relationship under our interest rate, foreign currency and fuel hedging programs. We apply the same methodology on a consistent basis for assessing hedge effectiveness to all hedges within each hedging program (i.e., interest rate, foreign currency and fuel). We perform regression analyses over an observation period of up to three years, utilizing market data relevant to the hedge horizon of each hedge relationship. High effectiveness is achieved when a statistically valid relationship reflects a high degree of offset and correlation between the changes in the fair values of the derivative instrument and the hedged item. 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 in our consolidated statements of comprehensive income (loss).
 
Cash flows from derivative instruments that are designated as fair value or cash flow hedges are classified in the same category as the cash flows from the underlying hedged items. In the event that hedge accounting is discontinued, cash flows subsequent to the date of discontinuance are classified within investing activities. Cash flows from derivative instruments not designated as hedging instruments are classified as investing activities.
 
We consider the classification of the underlying hedged item’s cash flows in determining the classification for the designated derivative instrument’s cash flows. We classify derivative instrument cash flows from hedges of benchmark interest rate or hedges of fuel expense as operating activities due to the nature of the hedged item. Likewise, we classify derivative instrument cash flows from hedges of foreign currency risk on our newbuild ship payments as investing activities and derivative instrument cash flows from hedges of foreign currency risk on debt payments as financing activities.

Interest Rate Risk
 
Our exposure to market risk for changes in interest rates relates to our long-term debt obligations including future interest payments. At September 30, 2017March 31, 2018 and December 31, 2016,2017, approximately 48.8%60.9% and 40.5%57.4%, respectively, 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.
Table of Contents

Market risk associated with our long-term fixed rate debt is the potential increase in fair value resulting from a decrease in interest rates. We use interest rate swap agreements that effectively convert a portion of our fixed-rate debt to a floating-rate basis to manage this risk. At September 30, 2017March 31, 2018 and December 31, 2016,2017, we maintained interest rate swap agreements on the following fixed-rate debt instruments:
Table of Contents
Debt Instrument
Swap Notional as of September 30, 2017 (In thousands)
MaturityDebt Fixed RateSwap Floating Rate: LIBOR plusAll-in Swap Floating Rate as of September 30, 2017
Oasis of the Seas term loan
$157,500
October 20215.41%3.87%5.29%
Unsecured senior notes650,000
November 20225.25%3.63%4.95%
 $807,500
    

Debt Instrument
Swap Notional as of March 31, 2018 (In thousands)
MaturityDebt Fixed RateSwap Floating Rate: LIBOR plusAll-in Swap Floating Rate as of March 31, 2018
Oasis of the Seas term loan
$140,000
October 20215.41%3.87%5.44%
Unsecured senior notes650,000
November 20225.25%3.63%5.47%
 $790,000
    

These interest rate swap agreements are accounted for as fair value hedges.

Market risk associated with our long-term floating rate debt is the potential increase in interest expense from an increase in interest rates. We use interest rate swap agreements that effectively convert a portion of our floating-rate debt to a fixed-rate basis to manage this risk. At September 30, 2017March 31, 2018 and December 31, 2016,2017, we maintained interest rate swap agreements on the following floating-rate debt instruments:
Debt Instrument
Swap Notional as of September 30, 2017 (In thousands)
MaturityDebt Floating RateAll-in Swap Fixed Rate
Swap Notional as of March 31, 2018 (In thousands)
MaturityDebt Floating RateAll-in Swap Fixed Rate
Celebrity Reflection term loan
$409,063
October 2024LIBOR plus0.40%2.85%$381,792
October 2024LIBOR plus0.40%2.85%
Quantum of the Seas term loan
581,875
October 2026LIBOR plus1.30%3.74%551,250
October 2026LIBOR plus1.30%3.74%
Anthem of the Seas term loan
604,167
April 2027LIBOR plus1.30%3.86%573,958
April 2027LIBOR plus1.30%3.86%
Ovation of the Seas term loan
760,833
April 2028LIBOR plus1.00%3.16%726,250
April 2028LIBOR plus1.00%3.16%
Harmony of the Seas term loan (1)
751,362
May 2028EURIBOR plus1.15%2.26%746,332
May 2028EURIBOR plus1.15%2.26%
$3,107,300
 $2,979,582
 

(1) Interest rate swap agreements hedging the Euro-denominated term loan for Harmony of the Seas include EURIBOR zero-floorszero-floor matching the hedged debt EURIBOR zero-floor. Amount presented is based on the exchange rate as of September 30, 2017.March 31, 2018.

These interest rate swap agreements are accounted for as cash flow hedges.
 
The notional amount of interest rate swap agreements related to outstanding debt as of September 30, 2017March 31, 2018 and December 31, 20162017 was $3.9 billion and $4.0 billion, respectively.$3.8 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 September 30, 2017,March 31, 2018, the aggregate cost of our ships on order, not including the TUI Cruises'any ships on order and those subject to conditions to effectiveness,by our Partner Brands, was approximately $13.0$11.7 billion, of which we had deposited $323.2$419.0 million as of such date. At September 30, 2017March 31, 2018 and December 31, 2016,2017, approximately 53.8%55.9% and 66.7%54.0%, respectively, 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 thirdfirst quarter of 2017,2018, we maintained an average of approximately $823.0$770.5 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 $22.0$5.6 million and $(2.5)$13.8 million during the quarters ended September 30,March 31, 2018 and March 31, 2017, and September 30, 2016, respectively, and approximately $57.1 million and $(11.8) million, during the nine months ended September 30, 2017 and September 30, 2016, respectively, that were recognized in earnings within Other expense in our consolidated statements of comprehensive income (loss).

Table of Contents

We consider our investments in our foreign operations to be denominated in relatively stable currencies and of a long-term nature. As of September 30, 2017,March 31, 2018, we maintained foreign currency forward contracts and designated them as hedges of a portion of our net investmentinvestments primarily in TUI cruises of €101.0 million, or approximately $119.4$124.2 million based on the exchange rate at September 30, 2017.March 31, 2018. These forward currency contracts mature in October 2021.

Table of Contents

The notional amount of outstanding foreign exchange contracts including our forward contracts as of September 30, 2017March 31, 2018 and December 31, 20162017 was $4.1$4.0 billion and $1.3$4.6 billion, respectively.

Non-Derivative Instruments

We also address the exposure of our investments in foreign operations by denominating a portion of our debt in our subsidiaries’ and investments’ functional currencies and designating it as a hedge of these subsidiaries and investments. We had designated debt as a hedge of our net investments primarily in TUI Cruises of approximately €241.0€301.0 million, or approximately $284.9$370.6 million, as of September 30, 2017.March 31, 2018. As of December 31, 2017, we had designated debt as a hedge of our net investments in TUI Cruises of approximately €246.0 million, or approximately $295.3 million.

 Fuel Price Risk
 
Our exposure to market risk for changes in fuel prices relates primarily to the consumption of fuel on our ships. We use fuel swap agreements to mitigate the financial impact of fluctuations in fuel prices.
 
Our fuel swap agreements are accounted for as cash flow hedges. At September 30, 2017,March 31, 2018, we have hedged the variability in future cash flows for certain forecasted fuel transactions occurring through 2021.2022. As of September 30, 2017March 31, 2018 and December 31, 2016,2017, we had the following outstanding fuel swap agreements:
Fuel Swap AgreementsFuel Swap Agreements
As of September 30, 2017 As of December 31, 2016As of March 31, 2018 As of December 31, 2017
(metric tons)(metric tons)
2017218,600
 799,065
2018756,700
 616,300
512,800
 673,700
2019668,500
 521,000
668,500
 668,500
2020531,200
 306,500
531,200
 531,200
2021224,900
 —
224,900
 224,900
2022—
 —
Fuel Swap AgreementsFuel Swap Agreements
As of September 30, 2017 As of December 31, 2016As of March 31, 2018 As of December 31, 2017
(% hedged)(% hedged)
Projected fuel purchases: 
  
 
  
201765% 60%
201856% 44%50% 50%
201947% 35%47% 46%
202036% 20%36% 36%
202114% —
14% 14%
2022—
 —
 
Table of Contents

At September 30, 2017March 31, 2018 and December 31, 2016, $81.72017, $19.7 million and $138.5$23.7 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.

The fair value and line item caption of derivative instruments recorded within our consolidated balance sheets were as follows:
Table of Contents
  Fair Value of Derivative Instruments
  Asset Derivatives Liability Derivatives
  Balance Sheet Location As of September 30, 2017 As of December 31, 2016 Balance Sheet Location As of September 30, 2017 As of December 31, 2016
   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 $1,760
 $5,246
 Other long-term liabilities $52,611
 $57,679
Foreign currency forward contracts Derivative financial instruments 45,583
 —
 Derivative financial instruments —
 5,574
Foreign currency forward contracts Other assets 136,534
 —
 Other long-term liabilities 4,479
 68,165
Fuel swaps Derivative financial instruments 7,213
 —
 Derivative financial instruments 81,981
 129,486
Fuel swaps Other assets 29,721
 13,608
 Other long-term liabilities 40,517
 95,125
Total derivatives designated as hedging instruments under 815-20   220,811
 18,854
   179,588
 356,029
Derivatives not designated as hedging instruments under ASC 815-20            
Fuel swaps Derivative financial instruments —
 —
 Derivative financial instruments 7,352
 11,532
Fuel swaps Other Assets 447
 543
 Other long-term liabilities 2,223
 5,936
Total derivatives not designated as hedging instruments under 815-20   447
 543
   9,575
 17,468
Total derivatives   $221,258
 $19,397
   $189,163
 $373,497

  Fair Value of Derivative Instruments
  Asset Derivatives Liability Derivatives
  Balance Sheet Location As of March 31, 2018 As of December 31, 2017 Balance Sheet Location As of March 31, 2018 As of December 31, 2017
   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 $38,096
 $7,330
 Other long-term liabilities $47,251
 $46,509
Foreign currency forward contracts Derivative financial instruments 42,688
 68,352
 Derivative financial instruments 1,390
 —
Foreign currency forward contracts Other assets 235,802
 158,879
 Other long-term liabilities 12,426
 6,625
Fuel swaps Derivative financial instruments 22,061
 13,137
 Derivative financial instruments 31,235
 38,488
Fuel swaps Other assets 38,562
 51,265
 Other long-term liabilities 15,180
 13,411
Total derivatives designated as hedging instruments under 815-20   377,209
 298,963
   107,482
 105,033
Derivatives not designated as hedging instruments under ASC 815-20            
Foreign currency forward contracts Derivative financial instruments $4,361
 $9,945
 Derivative financial instruments $2,369
 $2,933
Foreign currency forward contracts Other assets 4,413
 2,793
 Other long-term liabilities 2,762
 1,139
Fuel swaps Derivative financial instruments 4,830
 7,886
 Derivative financial instruments 5,320
 6,043
Fuel swaps Other Assets 303
 798
 Other long-term liabilities 184
 813
Total derivatives not designated as hedging instruments under 815-20   13,907
 21,422
   10,635
 10,928
Total derivatives   $391,116
 $320,385
   $118,117
 $115,961

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

The location and amount of gain or (loss) recognized in income on fair value and cash flow hedging relationships were as follows (in thousands):

Table of Contents

    Quarter Ended March 31, 2018Quarter Ended March 31, 2017
     Fuel Expense Depreciation and Amortization Expenses Interest Income (Expense) Other Income (Expense) Fuel Expense Depreciation and Amortization Expenses Interest Income (Expense) Other Income (Expense)
                    
Total amounts of income and expense line items presented in the statement of financial performance in which the effects of fair value or cash flow hedges are recorded 160,341 240,230 (60,145) (757) 177,414 235,749 (74,065) (2,611)
                    
The effects of fair value and cash flow hedging:                
 Gain or (loss) on fair value hedging relationships in Subtopic 815-20                
  Interest contracts                
   Hedged items n/a n/a 13,182 n/a n/a n/a n/a 2,457
   Derivatives designated as hedging instruments n/a n/a (12,570) n/a n/a n/a 1,173 (1,531)
 Gain or (loss) on cash flow hedging relationships in Subtopic 815-20                
  Interest contracts                
   Amount of gain or (loss) reclassified from accumulated other comprehensive income into income n/a n/a (6,838) n/a n/a n/a (8,857) n/a
   Amount of gain or (loss) reclassified from accumulated other comprehensive income into income as a result that a forecasted transaction is no longer probable of occurring n/a n/a n/a n/a n/a n/a n/a n/a
  Commodity contracts                
   Amount of gain or (loss) reclassified from accumulated other comprehensive loss into income (5,131) n/a n/a 325
 (39,928) n/a n/a 2,277
   Amount excluded from effectiveness testing recognized in earnings based on changes in fair value n/a n/a n/a n/a n/a n/a n/a n/a
  Foreign exchange contracts                
   Amount of gain or (loss) reclassified from accumulated other comprehensive income into income n/a (3,312) n/a 42
 n/a (3,312) n/a (3,570)
   Amount excluded from effectiveness testing recognized in earnings based on changes in fair value n/a n/a n/a n/a
 n/a n/a n/a n/a

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

    Carrying Value
Non-derivative instrument designated as
hedging instrument under ASC 815-20		 Balance Sheet Location As of September 30, 2017 As of December 31, 2016
(In thousands)      
Foreign currency debt Current portion of long-term debt $69,023
 $61,601
Foreign currency debt Long-term debt 215,863
 249,624
    $284,886
 $311,225
Table of Contents
    Carrying Value
Non-derivative instrument designated as
hedging instrument under ASC 815-20		 Balance Sheet Location As of March 31, 2018 As of December 31, 2017
(In thousands)      
Foreign currency debt Current portion of long-term debt $88,353
 $70,097
Foreign currency debt Long-term debt 281,907
 225,226
    $370,260
 $295,323

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:
Table of Contents
Derivatives and Related Hedged Items under ASC 815-20 Fair Value Hedging Relationships Location of Gain (Loss) Recognized in Income on Derivative and Hedged Item Amount of Gain (Loss)
Recognized in
Income on Derivative		 Amount of Gain (Loss)
Recognized in
Income on Hedged Item
Quarter Ended September 30, 2017 Quarter Ended September 30, 2016 Nine Months Ended September 30, 2017 Nine Months Ended September 30, 2016 Quarter Ended September 30, 2017 Quarter Ended September 30, 2016 Nine Months Ended September 30, 2017 Nine Months Ended September 30, 2016
(In thousands)                  
Interest rate swaps Interest expense, net of interest capitalized $600
 $1,737
 $2,642
 $6,075
 $—
 $—
 $—
 $7,203
Interest rate swaps Other expense (545) (7,662) 3,275
 28,592
 1,013
 7,423
 (841) (24,878)
    $55
 $(5,925) $5,917
 $34,667
 $1,013
 $7,423
 $(841) $(17,675)

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, 2018 Quarter Ended March 31, 2017 Quarter Ended March 31, 2018 Quarter Ended March 31, 2017
(In thousands)          
Interest rate swaps Interest expense, net of interest capitalized $(12,570) $1,173
 $13,182
 $—
Interest rate swaps Other expense —
 (1,531) —
 2,457
    $(12,570) $(358) $13,182
 $2,457

The fair value and line item caption of derivative instruments recorded within our consolidated balance sheets for the cumulative basis adjustment for fair value hedges were as follows (in thousands):

Line Item in the Statement of Financial PositionWhere the Hedged Item is Included Carrying Amount of the Hedged Assets/(Liabilities) Cumulative amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets/(Liabilities)
 As of March 31, 2018 As of December 31, 2017 As of March 31, 2018 As of December 31, 2017
         
Current portion of long-term debt and Long-term debt $751,014
 $749,155
 $(33,274) $(34,813)
  $751,014
 $749,155
 $(33,274) $(34,813)

The effect of derivative instruments qualifying and designated as cash flow hedging instruments on the consolidated financial statements was as follows:
Derivatives
under ASC 815-20 Cash Flow Hedging Relationships		 
Amount of Gain (Loss) Recognized in
Accumulated Other
Comprehensive Income (Loss) on Derivative 
(Effective Portion)
 Location of
Gain (Loss)
Reclassified
from
Accumulated
Other Comprehensive
Loss into Income
(Effective
Portion)		 Amount of Gain (Loss) Reclassified from
Accumulated Other Comprehensive Income (Loss) into Income  (Effective Portion)		 
Amount of Gain (Loss) Recognized in
Accumulated Other
Comprehensive Income (Loss) on Derivative 
(Effective Portion)
 Location of
Gain (Loss)
Reclassified
from
Accumulated
Other Comprehensive
Loss into Income
(Effective
Portion)		 Amount of Gain (Loss) Reclassified from
Accumulated Other Comprehensive Income (Loss) into Income  (Effective Portion)
Quarter Ended September 30, 2017 Quarter Ended September 30, 2016 Nine Months Ended September 30, 2017 Nine Months Ended September 30, 2016 Quarter Ended September 30, 2017 Quarter Ended September 30, 2016 Nine Months Ended September 30, 2017 Nine Months Ended September 30, 2016Quarter Ended March 31, 2018 Quarter Ended March 31, 2017 Quarter Ended March 31, 2018 Quarter Ended March 31, 2017
(In thousands)  
  
  
  
    
  
  
  
  
  
    
  
Interest rate swaps $(3,154) $6,598
 $(24,703) $(126,505) Interest expense, net of interest capitalized $(7,860) $(11,953) $(24,580) $(32,019) $37,191
 $(2,489) Interest expense, net of interest capitalized $(6,838) $(8,857)
Foreign currency forward contracts 122,211
 11,405
 221,861
 22,715
 Depreciation and amortization expenses (2,710) (2,710) (8,130) (5,408) 95,366
 2,129
 Depreciation and amortization expenses (3,312) (2,710)
Foreign currency forward contracts —
 —
 —
 —
 Other expense (1,512) (3,465) (9,187) (10,206) —
 —
 Other expense 42
 (3,570)
Foreign currency forward contracts —
 —
 —
 —
 Other operating —
 —
 —
 (207)
Foreign currency collar options —
 —
 —
 —
 Depreciation and amortization expenses (602) (601) (1,806) (1,806) —
 —
 Depreciation and amortization expenses —
 (602)
Fuel swaps —
 —
 —
 —
 Other expense 1,758
 2,760
 6,533
 9,356
 —
 —
 Other expense 325
 2,277
Fuel swaps 67,878
 (3,090) 33,183
 94,640
 Fuel (32,386) (64,654) (114,149) (223,484) (4,941) (30,569) Fuel (5,131) (39,928)
 $186,935
 $14,913
 $230,341
 $(9,150)   $(43,312) $(80,623) $(151,319) $(263,774) $127,616
 $(30,929)   $(14,914) $(53,390)

Gain (Loss) Recognized in Income (Net Investment Excluded Components) (1)
  
(In thousands)  
Net inception fair value at January 1, 2018 $(11,335)
Fair value at March 31, 2018 (8,861)
Change in fair value at March 31, 2018
(2,474)
Amount of gain recognized in income for the quarter ended March 31, 2018 744
Amount of gain recognized in accumulated other comprehensive loss
$(1,730)

Table of Contents    

Derivatives under ASC 815-20 
Cash Flow Hedging Relationships
 Location of Gain (Loss)
Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)		 Amount of Gain (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
Quarter Ended September 30, 2017 Quarter Ended September 30, 2016 Nine Months Ended September 30, 2017 Nine Months Ended September 30, 2016
(In thousands)    
  
  
  
Interest rate swaps Other expense —
 90
 —
 (1,152)
Foreign currency forward contracts Other expense 75
 —
 100
 (57)
Fuel swaps Other expense 3,351
 (8) 1,014
 (3,949)
    $3,426
 $82
 $1,114
 $(5,158)
(1) Represents amounts excluded from the assessment of effectiveness for which the difference between changes in fair value and periodic amortization is recorded in other comprehensive income.

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) Amount of Gain (Loss) Recognized in Other Comprehensive Income (Loss)
Non-derivative instruments under ASC 815-20 Net
Investment Hedging Relationships		 Quarter Ended September 30, 2017 Quarter Ended September 30, 2016 Nine Months Ended September 30, 2017 Nine Months Ended September 30, 2016 Quarter Ended March 31, 2018 Quarter Ended March 31, 2017
(In thousands)  
  
  
  
  
  
Foreign Currency Debt $7,949
 $(3,382) $34,206
 $1,313
 $(8,244) $4,369
 $7,949
 $(3,382) $34,206
 $1,313
 $(8,244) $4,369

There was no amount recognized in income (ineffective portion and amount excluded from effectiveness testing) for the quarters and nine months ended September 30, 2017March 31, 2018 and September 30, 2016,March 31, 2017, respectively.

The effect of derivatives not designated as hedging instruments on the consolidated financial statements was as follows:
   Amount of Gain (Loss) Recognized in Income on Derivatives   Amount of Gain (Loss) Recognized in Income on Derivatives
Derivatives Not Designated as Hedging
Instruments under ASC 815-20		 Location of
Gain (Loss) Recognized in
Income on Derivatives		 Quarter Ended September 30, 2017 Quarter Ended September 30, 2016 Nine Months Ended September 30, 2017 Nine Months Ended September 30, 2016 Location of
Gain (Loss) Recognized in
Income on Derivatives		 Quarter Ended March 31, 2018 Quarter Ended March 31, 2017
(In thousands)    
  
  
  
    
  
Foreign currency forward contracts Other expense $21,951
 $(2,464) $57,019
 $(11,712) Other expense $5,635
 $13,812
Fuel swaps Other expense (175) (1,172) (255) (1,224) Other expense (30) (60)
Fuel swaps Fuel 2,205
 —
   $21,776
 $(3,636) $56,764
 $(12,936)   $7,810
 $13,752
 
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 are below specified levels. Specifically, if on the fifth anniversary of executing a derivative instrument, or on any succeeding fifth-year anniversary, our credit ratings for our senior unsecured debt were to be rated below BBB- by Standard & Poor’s and Baa3 by Moody’s, then the counterparty may periodically demand that we post collateral in an amount equal to the difference between (i) the net market value of all derivative transactions with such counterparty that have reached their fifth year anniversary, to the extent negative, and (ii) the applicable minimum call amount.

The amount of collateral required to be posted following such event will change as, and to the extent, our net liability position increases or decreases by more than the applicable minimum call amount. If our credit rating for our senior unsecured debt is subsequently equal to or above BBB- by Standard & Poor’s or Baa3 by Moody’s, then any collateral posted at such time will be released to us and we will no longer be required to post collateral unless we meet the collateral trigger requirement at the next fifth-year anniversary. At September 30, 2017,March 31, 2018, four of our interest rate derivative instruments had reached their fifth anniversary; however, our senior unsecured debt credit rating was BBB- by Standard & Poor’s and Baa3 by Moody’s and, accordingly, we were not required to post any collateral as of such date. As of December 31, 2016, two of our interest rate derivative instruments had reached their fifth anniversary. As our unsecured debt credit rating at December 31, 2016 was below BBB-/Baa3, we had posted $7.2 million in collateral as of such date. Consistent with the provisions of our interest rate derivatives instruments, all collateral that was posted with our counterparties was returned upon reaching investment grade.
Table of Contents    


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 fourthsecond quarter and full year of 20172018 and our earnings and yield estimates for 20172018 set forth under the heading "Outlook" below), 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," "driving" and similar expressions are intended to further identify any of these forward-looking statements. Forward-looking statements reflect management's current expectations but they are based on judgments and are inherently uncertain. Furthermore, they are subject to risks, uncertainties and other factors that could cause our actual results, performance or achievements to differ materially from the future results, performance or achievements expressed or implied in those forward-looking statements. Examples of these risks, uncertainties and other factors include, but are not limited to, those discussed in this Quarterly Report on Form 10-Q and, in particular, the risks discussed under the caption "Risk Factors" in Part II, Item 1A herein.
 
All forward-looking statements made in this Quarterly Report on Form 10-Q speak only as of the date of this document.  Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
 
Overview
 
The discussion and analysis of our financial condition and results of operations has been organized to present the following:

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

a discussion of our results of operations for the quarter and nine months ended September 30, 2017March 31, 2018 compared to the same periodsperiod in 2016;2017;

a discussion of our business outlook, including our expectations for selected financial items for the fourthsecond quarter and full year of 2017;2018; and

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

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, 2016.2017.


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 our bareboat charter, procurement and management related services we perform on behalf of our unconsolidated affiliates.
 
Cruise Operating Expenses
 
Our cruise operating expenses are comprised of the following:

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

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

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

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

Fuel expenses, which include fuel and related delivery, storage and emission consumable costs and the financial impact of fuel swap agreements; and

Other operating expenses, which consist primarily of operating costs such as repairs and maintenance, port costs that do not vary with passenger head counts, vessel related insurance, entertainment and gains and/orand /or losses related to the sale of our ships.ships, if any.
 
Table of Contents

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.
Table of Contents


Selected Operational and Financial Metrics
 
We utilize a variety of operational and financial metrics which are defined below to evaluate our performance and financial condition. As discussed in more detail herein, certain of these metrics are non-GAAP financial measures. These non-GAAP financial measures are provided along with the related GAAP financial measures as we believe they provide useful information to investors as a supplement to our consolidated financial statements, which are prepared and presented in accordance with GAAP. The presentation of non-GAAP financial information is not intended to be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP.
 
Adjusted Earnings per Share ("Adjusted EPS") 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 netimpairment loss related to Skysea Holding and the eliminationimpact of the Pullmantur reporting lag, the net gainchange in accounting principle related to the 51% salerecognition of stock-based compensation expense from the Pullmantur and CDF Croisières de France ("CDF") brands, restructuring charges and other initiative costs relatedgraded attribution method to our Pullmantur right-sizing strategy and other restructuring initiatives.the straight-line attribution method for time-based stock awards.

Available Passenger Cruise Days (“(APCD“APCD””) is our measurement of capacity and represents double occupancy per cabin multiplied by the number of cruise days for the period , which excludes canceled cruise days and drydock days. 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. For the periods presented, Net Cruise Costs excludesexclude the net gainimpact of the change in accounting principle related to the 51% salerecognition of stock-based compensation expense from the Pullmanturgraded attribution method to the straight-line attribution method for time-based stock awards, which was included within Marketing, selling and CDF brands, restructuring charges and other initiative costs related to our Pullmantur right-sizing strategy and other restructuring initiatives.administrative 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 they are the most relevant measures of our pricing performance because they reflect 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. Net Yields excludes initiative costs related to the sale of the Pullmantur and CDF brands.
 
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.

Return on Invested Capital ("ROIC") is defined to mean “Operating Profit” divided by “Invested Capital,” whereby (i) “Operating Profit” is  adjusted operating income (including income from equity pick-ups and related items) minus taxes, and (ii) “Invested Capital” is the most recent five-quarter average of total debt (i.e., current portion of long-term debt plus long-term debt) plus shareholders equity. This is effective as of January 1, 2018.

Table of Contents

 
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 isare just one of many elements impacting our revenues and expenses, itthey 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.
 
Table of Contents

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 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.

We have not provided a quantitative reconciliation of (i) projected Total revenues to projected Net Revenues, (ii) projected Gross Yields to projected Net Yields, (iii) projected Gross Cruise Costs to projected Net Cruise Costs and projected Net Cruise Costs Excluding Fuel and (iv) projected Net Income and Earnings per Share to projected Adjusted Net Income and Adjusted Earnings per Share because preparation of meaningful GAAP projections of Total revenues,, Gross Yields, Gross Cruise Costs, Net Income and Earnings per Share would require unreasonable effort. Due to significant uncertainty, we are unable to predict, without unreasonable effort, the future movement of foreign exchange rates, fuel prices and interest rates inclusive of our related hedging programs. In addition, we are unable to determine the future impact of restructuring expenses or other non-core business related gains and losses which may result from strategic initiatives. These items are uncertain and could be material to our results of operations in accordance with GAAP. Due to this uncertainty, we do not believe that reconciling information for such projected figures would be meaningful.

Results of Operations
 
Summary
 
Both our netNet income and Adjusted Net Income for the thirdfirst quarter of 2017 were $752.82018 was $218.7 million and $232.8 million, or $3.49$1.02 and $1.09 per share on a diluted basis, respectively, compared to both net income and Adjusted Net Income of $693.3 million and $690.9$214.7 million, or $3.21 and $3.20$0.99 per share on a diluted basis, respectively, for the thirdfirst quarter of 2016.2017.

Both our net income and Adjusted Net Income for the nine months ended September 30, 2017 were $1.3 billion, or $6.19 per share on a diluted basis as compared to net income and Adjusted Net Income of $1.0 billion and $1.1 billion, or $4.72 and $4.85, per share on a diluted basis, respectively, for the nine months ended September 30, 2016.

Significant items for the quarter and nine months ended September 30, 2017March 31, 2018 include:

The estimated negative impact resulting from third quarter 2017 hurricane-related disruptions was approximately $0.20 per share on a diluted basis to our net income and Adjusted Net IncomeTotal revenues, excluding the favorable effect of changes in foreign currency exchange rates, decreased $19.4 million for the quarter and nine months ended September 30,March 31, 2018 as compared to the same period in 2017. The decrease was primarily due to the decrease in capacity, partially offset by the increase in ticket prices, which are further discussed below.

The effect of changes in foreign currency exchange rates related to our passenger ticket and onboard and other revenue transactions denominated in currencies other than the United States dollar, resulted in an increase in total revenues of $14.8$38.6 million for the quarter and a decrease of $16.6 million for the nine months ended September 30, 2017, respectively, asMarch 31, 2018 compared to the same periodsperiod in 2016.2017.

Total revenues,cruise operating expenses, excluding the unfavorable effect of changes in foreign currency exchange rates, decreased $9.0 million and increased $203.2$10.6 million for the quarter and nine months ended September 30, 2017, respectively,March 31, 2018 as compared to the same periodsperiod in 2016.2017. The decrease during the quarter was due to the decrease in capacity, including the hurricane-related disruptions during the third quarter of 2017, and the increase during the nine months was primarily due to an increase in ticket prices and onboard spending on a per passenger basis, which are further discussed below.

Total cruise operating expenses decreased $21.9 million and $141.4 million for the quarter and nine months ended September 30, 2017, respectively, as compared to the same periods in 2016. The decreases were primarily due to the decrease in capacity which is further discussed below. Additionally, we recognized abelow, partially offset by the gain of $30.9 million gainrecognized on the sale of Legend of the Seasin March 2017.2017 that did not recur in 2018.

The effect of changes in foreign currency exchange rates related to our cruise operating expenses, denominated in currencies other than the United States dollar, was immaterial to our consolidated statementsresulted in an increase in total operating expenses of comprehensive income (loss)$10.8 million for the quarter and nine months ended September 30,March 31, 2018 compared to the same period in 2017.

Table of Contents    

The recognition of an impairment loss of $23.3 million related to the Skysea Holding investment, debt facility and other receivables due, which is reported within Impairment loss related to SkySea Holding within our consolidated statements of comprehensive income (loss). Refer to Note 5. Other Assets for further discussion on the impairment.

Other Items

In May 2017, TUI Cruises, our 50% joint venture,March 2018, we took delivery of Mein Schiff 6Symphony of the Seas. To finance the purchase, we borrowed $1.2 billion under a previously committed unsecured term loan. Refer to Note 6. Long-Term Debt to our consolidated financial statements for further information. The ship entered service at the end of the first quarter of 2018.

DuringIn March 2018, we completed the secondpurchase of Azamara Pursuit. The ship is expected to enter service during the third quarter of 2017, we2018.

We entered into agreements with Meyer Turku to build two "Project Icon" ships. In October 2017, we entered intoand drew in full on a credit agreements foragreement in the unsecured financingamount of these ships for up to 80% of each ship's contract price.$130.0 million. Refer to Note 7.6. Commitments and ContingenciesLong-Term Debt to our consolidated financial statements for further information.

During the third quarter of 2017, we entered into an agreement to purchase a ship for our Azamara Club Cruises brand. The sale is expected to be completed with the delivery of the ship scheduled for March 2018.

Table of Contents

Operating results for the quarter and nine months ended September 30, 2017March 31, 2018 compared to the same period in 20162017 are shown in the following table (in thousands, except per share data):
Quarter Ended September 30, Nine months ended September 30,Quarter Ended March 31,
2017 2016 2017 20162018 2017
  % of Total
Revenues		   % of Total
Revenues		   % of Total
Revenues		   % of Total
Revenues		  % of Total
Revenues		   % of Total
Revenues
Passenger ticket revenues$1,893,152
 73.7 % $1,899,956
 74.1 % $4,892,760
 72.2 % $4,794,653
 72.8 %$1,425,644
 70.3 % $1,418,223
 70.6 %
Onboard and other revenues676,392
 26.3 % 663,785
 25.9 % 1,880,618
 27.8 % 1,792,145
 27.2 %602,112
 29.7 % 590,337
 29.4 %
Total revenues2,569,544
 100.0 % 2,563,741
 100.0 % 6,773,378
 100.0 % 6,586,798
 100.0 %2,027,756
 100.0 % 2,008,560
 100.0 %
Cruise operating expenses: 
  
  
  
  
  
  
  
 
  
  
  
Commissions, transportation and other409,597
 15.9 % 400,933
 15.6 % 1,060,176
 15.7 % 1,060,391
 16.1 %290,609
 14.3 % 310,248
 15.4 %
Onboard and other157,041
 6.1 % 159,887
 6.2 % 395,472
 5.8 % 399,739
 6.1 %99,537
 4.9 % 105,994
 5.3 %
Payroll and related210,764
 8.2 % 214,081
 8.4 % 636,861
 9.4 % 671,955
 10.2 %227,156
 11.2 % 215,735
 10.7 %
Food126,223
 4.9 % 125,732
 4.9 % 369,198
 5.5 % 371,759
 5.6 %119,642
 5.9 % 121,211
 6.0 %
Fuel160,752
 6.3 % 178,772
 7.0 % 508,914
 7.5 % 531,283
 8.1 %160,341
 7.9 % 177,414
 8.8 %
Other operating253,892
 9.9 % 260,718
 10.2 % 780,257
 11.5 % 857,161
 13.0 %278,734
 13.7 % 245,222
 12.2 %
Total cruise operating expenses1,318,269
 51.3 % 1,340,123
 52.3 % 3,750,878
 55.4 % 3,892,288
 59.1 %1,176,019
 58.0 % 1,175,824
 58.5 %
Marketing, selling and administrative expenses273,637
 10.6 % 259,327
 10.1 % 874,957
 12.9 % 852,435
 12.9 %337,361
 16.6 % 317,465
 15.8 %
Depreciation and amortization expenses240,150
 9.3 % 229,328
 8.9 % 710,836
 10.5 % 661,712
 10.0 %240,230
 11.8 % 235,749
 11.7 %
Operating Income737,488
 28.7 % 734,963
 28.7 % 1,436,707
 21.2 % 1,180,363
 17.9 %274,146
 13.5 % 279,522
 13.9 %
Other income (expense): 
  
  
  
  
  
  
  
 
  
  
  
Interest income4,693
 0.2 % 6,472
 0.3 % 16,756
 0.2 % 14,875
 0.2 %7,733
 0.4 % 6,252
 0.3 %
Interest expense, net of interest capitalized(73,233) (2.9)% (82,610) (3.2)% (230,182) (3.4)% (226,803) (3.4)%(67,878) (3.3)% (80,317) (4.0)%
Equity investment income85,120
 3.3 % 46,539
 1.8 % 120,359
 1.8
 94,832
 1.4 %28,752
 1.4 % 11,880
 0.6 %
Impairment loss related to Skysea Holding(23,343) (1.2)% —
 — %
Other expense(1,226) — % (12,107) (0.5)% (6,546) (0.1)% (40,965) (0.6)%(757) — % (2,611) (0.1)%
15,354
 0.6 % (41,706) (1.6)% (99,613) (1.5)% (158,061) (2.4)%(55,493) (2.7)% (64,796) (3.2)%
Net Income$752,842
 29.3 % $693,257
 27.0 % $1,337,094
 19.7 % $1,022,302
 15.5 %$218,653
 10.8 % $214,726
 10.7 %
Diluted Earnings per Share$3.49
  
 $3.21
  
 $6.19
  
 $4.72
  
$1.02
  
 $0.99
  

Table of Contents    

Adjusted Net Income and Adjusted Earnings per Share were calculated as follows (in thousands, except per share data):
Quarter Ended September 30, Nine Months Ended September 30,Quarter Ended March 31,
2017 2016 2017 20162018 2017
Net Income$752,842
 $693,257
 $1,337,094
 $1,022,302
$218,653
 $214,726
Adjusted Net income752,842
 690,911
 1,337,094
 1,050,031
232,758
 214,726
Net Adjustments to Net Income- (Decrease) Increase$—
 $(2,346) $—
 $27,729
Net Adjustments to Net Income- Increase$14,105
 $—
Adjustments to Net Income:          
Net loss related to the elimination of the Pullmantur reporting lag$—
 $—
 —
 21,656
Net gain related to the sale of the Pullmantur and CDF Croisières de France brands—
 (3,834) —
 (3,834)
Restructuring charges—
 1,897
 —
 6,627
Other initiative costs—
 (409) —
 3,280
Net Adjustments to Net Income- (Decrease) Increase$—
 $(2,346) $—
 $27,729
Impairment loss related to Skysea Holding$23,343
 $—
Impact of change in accounting principle(1)
(9,238) —
Net Adjustments to Net Income- Increase$14,105
 $—
          
Basic: 
  
  
  
 
  
Earnings per Share$3.51
 $3.23
 $6.22
 $4.74
$1.03
 $1.00
Adjusted Earnings per Share$3.51
 $3.22
 $6.22
 $4.87
$1.09
 $1.00
          
Diluted:          
Earnings per Share$3.49
 $3.21
 $6.19
 $4.72
$1.02
 $0.99
Adjusted Earnings per Share$3.49
 $3.20
 $6.19
 $4.85
$1.09
 $0.99
          
Weighted-Average Shares Outstanding:          
Basic214,694
 214,819
 214,882
 215,663
212,610
 214,870
Diluted215,824
 215,667
 215,905
 216,575
213,602
 215,813

(1) In January 2018, we elected to change our accounting policy for recognizing stock-based compensation expense from the graded attribution method to the straight-line attribution method for time-based stock awards. Refer to Note 2. Summary of Significant Accounting Policies for further information.

Selected statistical information is shown in the following table:
Quarter Ended September 30, Nine Months Ended September 30,Quarter Ended March 31,
2017 2016 2017 
2016(1)
2018 2017
Passengers Carried1,512,363
 1,558,224
 4,371,235
 4,365,144
1,404,951
 1,425,533
Passenger Cruise Days10,189,900
 10,727,918
 30,100,035
 30,367,048
9,625,781
 9,959,565
APCD9,214,470
 9,766,482
 27,646,779
 28,503,681
8,915,706
 9,279,410
Occupancy110.6% 109.8% 108.9% 106.5%108.0% 107.3%

(1) Does not include November and December 2015 amounts for Pullmantur as the net Pullmantur result for those months was included within Other expense in our consolidated statements of comprehensive income (loss) for the nine months ended September 30, 2016, as a result of the elimination of the Pullmantur reporting lag, and did not affect Gross Yields, Net Yields, Gross Cruise Costs, Net Cruise Costs and Net Cruise Costs Excluding Fuel.
Table of Contents    

Gross Yields and Net Yields were calculated as follows (in thousands, except APCD and Yields):
 Quarter Ended September 30, Nine Months Ended September 30,
 2017 2017 On a Constant Currency Basis 2016 2017 2017 On a Constant Currency Basis 2016
Passenger ticket revenues$1,893,152
 $1,880,360
 $1,899,956
 $4,892,760
 $4,907,927
 $4,794,653
Onboard and other revenues676,392
 674,382
 663,785
 1,880,618
 1,882,049
 1,792,145
Total revenues2,569,544
 2,554,742
 2,563,741
 6,773,378
 6,789,976
 6,586,798
Less: 
  
  
  
  
  
Commissions, transportation and other409,597
 406,500
 400,933
 1,060,176
 1,062,632
 1,060,391
Onboard and other157,041
 155,818
 159,887
 395,472
 394,316
 399,739
Net Revenues including other initiative costs2,002,906
 1,992,424
 2,002,921
 5,317,730
 5,333,028
 5,126,668
Less:           
Other initiative costs included within Net Revenues—
 —
 (1,843) —
 —
 (1,843)
Net Revenues$2,002,906
 $1,992,424
 $2,004,764
 $5,317,730
 $5,333,028
 $5,128,511
            
APCD9,214,470
 9,214,470
 9,766,482
 27,646,779
 27,646,779
 28,503,681
Gross Yields$278.86
 $277.25
 $262.50
 $245.00
 $245.60
 $231.09
Net Yields$217.37
 $216.23
 $205.27
 $192.35
 $192.90
 $179.92
Table of Contents
 Quarter Ended March 31,
 2018 2018 On a Constant Currency Basis 2017
Passenger ticket revenues$1,425,644
 $1,392,314
 $1,418,223
Onboard and other revenues602,112
 596,842
 590,337
Total revenues2,027,756
 1,989,156
 2,008,560
Less: 
  
  
Commissions, transportation and other290,609
 285,594
 310,248
Onboard and other99,537
 99,360
 105,994
Net Revenues$1,637,610
 $1,604,202
 $1,592,318
      
APCD8,915,706
 8,915,706
 9,279,410
Gross Yields$227.44
 $223.11
 $216.45
Net Yields$183.68
 $179.93
 $171.60

Gross Cruise Costs, Net Cruise Costs and Net Cruise Costs Excluding Fuel were calculated as follows (in thousands, except APCD and costs per APCD):
Quarter Ended September 30, Nine Months Ended September 30,Quarter Ended March 31,
2017 2017 On a Constant Currency Basis 2016 2017 2017 On a Constant Currency Basis 20162018 2018 On a Constant Currency Basis 2017
Total cruise operating expenses$1,318,269
 $1,311,964
 $1,340,123
 $3,750,878
 $3,753,441
 $3,892,288
$1,176,019
 $1,165,178
 $1,175,824
Marketing, selling and administrative expenses(1)
273,637
 273,121
 257,430
 874,957
 881,067
 845,808
346,599
 340,960
 317,465
Gross Cruise Costs1,591,906
 1,585,085
 1,597,553
 4,625,835
 4,634,508
 4,738,096
1,522,618
 1,506,138
 1,493,289
Less: 
  
  
  
  
  
 
  
  
Commissions, transportation and other409,597
 406,500
 400,933
 1,060,176
 1,062,632
 1,060,391
290,609
 285,594
 310,248
Onboard and other157,041
 155,818
 159,887
 395,472
 394,316
 399,739
99,537
 99,360
 105,994
Net Cruise Costs including other initiative costs1,025,268
 1,022,767
 1,036,733
 3,170,187
 3,177,560
 3,277,966
Less: 
  
  
  
  
  
Net gain related to the sale of Pullmantur and CDF Croisières de France brands included within other operating expenses—
 —
 (3,834) —
 —
 (3,834)
Other initiative costs included within cruise operating expenses and marketing, selling and administrative expenses—
 —
 (2,252) —
 —
 1,073
Net Cruise Costs1,025,268
 1,022,767
 1,042,819
 3,170,187
 3,177,560
 3,280,727
1,132,472
 1,121,184
 1,077,047
Less:                
Fuel(2)
160,752
 160,751
 178,772
 508,914
 508,911
 530,859
Fuel160,341
 160,341
 177,414
Net Cruise Costs Excluding Fuel$864,516
 $862,016
 $864,047
 $2,661,273
 $2,668,649
 $2,749,868
$972,131
 $960,843
 $899,633
                
APCD9,214,470
 9,214,470
 9,766,482
 27,646,779
 27,646,779
 28,503,681
8,915,706
 8,915,706
 9,279,410
Gross Cruise Costs per APCD$172.76
 $172.02
 $163.58
 $167.32
 $167.63
 $166.23
$170.78
 $168.93
 $160.92
Net Cruise Costs per APCD$111.27
 $111.00
 $106.78
 $114.67
 $114.93
 $115.10
$127.02
 $125.75
 $116.07
Net Cruise Costs Excluding Fuel per APCD$93.82
 $93.55
 $88.47
 $96.26
 $96.53
 $96.47
$109.04
 $107.77
 $96.95

(1) For the quarter and nine months ended September 30, 2016, amounts do not include restructuring charges of $1.9 million and $6.6 million, respectively.

(2) For the nine months ended September 30, 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.
(1)
For the quarter ended March 31, 2018, amount does not include the impact of the change in accounting principle of $9.2 million related to the recognition of stock-based compensation expense. Refer to Note 2. Summary of Significant Accounting Policies for further information.
Table of Contents    

20172018 Outlook

The Company does not make predictions about fuel pricing, interest rates or currency exchange rates but does provide guidance about its future business activities. On November 7, 2017,April 26, 2018, we announced the following full year and fourthsecond quarter 20172018 guidance based on the then current fuel pricing, interest rates and currency exchange rates:

Full Year 20172018
 As ReportedConstant Currency
Net YieldsApprox. 6.0%3.5% to 4.5%Approx. 6.0%2.0% to 3.75%
Net Cruise Costs per APCD1.0% to 1.5%Approx. 2.0%Approx. 1.5%
Net Cruise Costs per APCD, Excluding FuelApprox. 2.0%3.0% to 3.5%Approx. 2.0%Approx 2.5%
Capacity DecreaseChange(2.4%)3.7% 
Depreciation and AmortizationApprox. $950$1,040 to $1,050 million 
Interest Expense, netApprox. $280$280 to $290 million 
Fuel Consumption (metric tons)1,315,8001,338,900 
Fuel Expenses$686678 million 
Percent Hedged (fwd consumption)65%50% 
Impact of 10% change in fuel prices$729 million
1% Change in Currency$14 million
1% Change in Net Yield$58 million
1% Change in NCC x Fuel$28 million
100 basis pt. Change in LIBOR$21 million
Adjusted Earnings per Share-Diluted$8.70 to $8.90

Second Quarter 2018
As ReportedConstant Currency
Net Yields3.0% to 3.5%1.5% to 2.0%
Net Cruise Costs per APCDApprox. 4.5%Approx. 4.0%
Net Cruise Costs per APCD, Excluding Fuel5.5% to 6.0%Approx. 5.0%
Capacity Change2.7%
Depreciation and Amortization$255 to $260 million
Interest Expense, net$75 to $80 million
Fuel Consumption (metric tons)337,000
Fuel Expenses$173 million
Percent Hedged (fwd consumption)50%
Impact of 10% change in fuel prices$10 million 
1% Change in Currency$4 million 
1% Change in Net Yield$1618 million 
1% Change in NCC exx Fuel$910 million 
1%100 basis pt. Change in LIBOR$65 million 
Adjusted Earnings per Share-Diluted$7.351.85 to $7.40

Fourth Quarter 2017
As ReportedConstant Currency
Net YieldsApprox. 3.5%2.0% to 2.5%
Net Cruise Costs per APCDApprox. 7.0%Approx. 6.5%
Net Cruise Costs per APCD, Excluding FuelApprox. 9.0%Approx. 8.5%
Capacity Decrease(0.6%)
Depreciation and AmortizationApprox. $240 million
Interest Expense, netApprox. $65 million
Fuel Consumption (metric tons)334,800
Fuel Expenses$177 million
Percent Hedged (fwd consumption)65%
Impact of 10% change in fuel prices$7 million
1% Change in Currency$4 million
1% Change in Net Yield$16 million
1% Change in NCC ex Fuel$9 million
1% Change in LIBOR$6 million
Adjusted Earnings per Share-Diluted$1.15 to $1.201.90 

Table of Contents    

Volatility in foreign currency exchange rates affects the USUnited States dollar value of our earnings. Based on our highest net exposure for each quarter and the full year 2017,2018, the top five foreign currencies are ranked below. For example, the Australian DollarBritish Pound is the most impactful currency in the firstsecond, third and fourth quarters of 2017.2018. The first second and third quartersquarter of 20172018 rankings are based on actual results. Rankings for the fourth quarterremaining quarters and full year are based on estimated net exposures.
Ranking Q1 Q2 Q3 Q4 FY 20172018
1 AUD GBP GBP AUDGBP GBP
2 CAD CNHAUD CNH GBPAUD AUD
3 GBP AUDCAD EUR CAD CAD
4 CNH CADCNH CAD EUR CNHEUR
5 BRLEUR MXNEUR MXNAUD CNH EURCNH

The currency abbreviations above are defined as follows:
Currency Abbreviation Currency
AUD Australian Dollar
BRLBrazilian Real
CAD Canadian Dollar
CNH Chinese Yuan
EUR Euro
GBP British Pound
MXNMexican Peso

Quarter Ended September 30, 2017March 31, 2018 Compared to Quarter Ended September 30, 2016March 31, 2017
 
In this section, references to 2018 refer to the quarter ended March 31, 2018 and references to 2017 refer to the quarter ended September 30, 2017 and references to 2016 refer to the quarter ended September 30, 2016.March 31, 2017.
 
Revenues
 
Total revenues for 20172018 increased $5.8$19.2 million, or 0.2%1.0%, from 2016.2017.
 
Passenger ticket revenues comprised 73.7%70.3% of our 20172018 total revenues. Passenger ticket revenues and decreasedfor 2018 increased by $6.8$7.4 million, or 0.4%0.5%, from 2016.2017. The decreaseincrease was primarily driven by a 5.7% decrease in capacity, which decreased passenger ticket revenues by $107.4 million primarily due to the sale of our majority interest in Pullmantur Holdings during the third quarter of 2016, and to a lesser extent, the sale of to:Legend of the Seas in the first quarter of 2017, as well as the impact of canceled sailings resulting from hurricane-related disruptions during the third quarter of 2017.

The decrease was partially offset by:

an $88.0 million increase in ticket prices driven by the improvement in our ticket price on a per passenger basis due to the exit of the Pullmantur ships, as well as higher pricing on North America and Europe sailings. The increase in ticket prices was partially offset by lower pricing on Asia/Pacific sailings; and

a favorable effect of changes in foreign currency exchange rates related to our revenue transactions denominated in currencies other than the United States dollar of approximately $12.8 million.$33.3 million; and

an increase of $29.7 million in ticket prices primarily driven by higher pricing on our Asia/Pacific sailings.

The increase in passenger ticket revenues was partially offset by a 3.9% decrease in capacity, which decreased passenger ticket revenues by $55.6 million primarily due to the sale of Legend of the Seas in the first quarter of 2017 and additional drydock days in 2018 compared to 2017.

The remaining 26.3%29.7% of 20172018 total revenues was comprised of onboard and other revenues, which increased $12.6$11.8 million, or 1.9%2.0%, to $676.4$602.1 million in 20172018 from $663.8$590.3 million in 2016.2017. The increase in onboard and other revenues was primarily due to:

a $30.7$24.6 million increase in onboard revenue attributable to higher spending on a per passenger basis primarily due to our revenue enhancing initiatives, including beverage package sales and promotions, new strategies and promotionpromotions on our specialty restaurants, gaming initiatives and the increased revenue associated with internet and other telecommunication services. services; and

a favorable effect of changes in foreign currency exchange rates related to our onboard and other revenue transactions denominated in currencies other than the United States dollar of approximately $5.3 million.

The increase is alsoin onboard and other revenues was partially offset by a $22.6 million decrease attributable to port activities mainly due to itinerary changes; andthe 3.9% decrease in capacity noted above.
Table of Contents    


a $13.8 million increase in other revenue primarily due to charter revenue and management fees earned from Pullmantur Holdings.

The increase was partially offset by a $36.8 million decrease attributable to the 5.7% decrease in capacity noted above, including the impact of canceled sailings resulting from hurricane-related disruptions during the third quarter of 2017.

Onboard and other revenues included concession revenues of $87.3$80.0 million in 20172018 and $86.6$79.3 million in 2016.2017.

Cruise Operating Expenses

Total cruise operating expenses for 2017 decreased $21.9 million, or 1.6%, from 2016.2018 remained consistent at $1.2 billion compared to 2017. The decrease was primarily due to a $75.5 million decrease attributable to the 5.7% decrease in capacity noted above.

The decrease was partially offset by:

a $14.6 million increase in commissions expense mainly due to the increase in ticket prices discussed above andmore notable changes in commission incentives;

a $10.2 million increase in head taxes due to itinerary changes;within cruise operating expenses were as follows:

a $9.6$30.9 million increase in other operating expenses primarily due to an immaterial gain recognized in 2016 as a result of2017 resulting from the sale of our majority interestLegend of the Seas which did not recur in Pullmantur Holdings; and2018;

an $8.7a $19.6 million increase in payroll and related expenses primarily driven by changes in our gratuity structure;

an unfavorable effect of changes in foreign currency exchange rates related to our cruise operating expenses denominated in currencies other than the United States dollar of approximately $10.8 million; and

a $7.3 million increase in vessel maintenance primarily due to an increasethe timing of scheduled drydocks.

The above increases in crew benefits.cruise operating expenses were mostly offset by:

a 3.9% decrease in capacity noted above, which decreased cruise operating expenses by $47.1 million;

a $10.7 million decrease in head taxes primarily due to the timing of payments and itinerary changes; and

a $10.2 million decrease in fuel expense, excluding the impact of the decrease in capacity. Our cost of fuel (net of the financial impact of fuel swap agreements) for 2018 decreased 5.8% per metric ton compared to 2017.

Marketing, Selling and Administrative Expenses

Marketing, selling and administrative expenses for 20172018 increased $14.3$19.9 million, or 5.5%6.3%, to $273.6$337.4 million from $259.3$317.5 million in 2016.2017. The increase was primarily due to an increase in payrollhigher spending on advertisement and benefits driven by higher stock prices year over year related to our performance share awards, partially offset by a decrease in expenses due to the sale of our majority interest in Pullmantur Holdings.media promotions.

Depreciation and Amortization Expenses
 
Depreciation and amortization expenses for 20172018 increased $10.8$4.5 million, or 4.7%1.9%, to $240.2 million from $229.3$235.7 million in 2016.2017. The increase was primarily due to new shipboard additions associated with our ship upgrade projects and to a lesser extent, additions related to our shoreside projects,projects. The increase was partially offset by the decrease in depreciation associated with the sale of Legend of the Seas in the first quarter of 2017.

Other Income (Expense)
 
Interest expense, net of interest capitalized for 20172018 decreased $9.4$12.4 million, or 11.4%15.5%, to $73.2$67.9 million from $82.6$80.3 million in 2016.2017. The decrease was primarily due to a lower average debt level in 20172018 compared to 2016,2017 and an increase in capitalized interest primarily due to our ships on order, partially offset by higher interest rates in 2017 compared to 2016.rates.

Equity investment income increased $38.6$16.9 million, or 82.9%142.0%, to $85.1$28.8 million in 2018 from $11.9 million in 2017 from $46.5 million in 2016 primarilymainly due to an increase in income from TUI Cruises.

Other expenseImpairment loss related to Skysea Holding decreased $10.9 million, or 89.9%, to $1.2was $23.3 million in 2017 from $12.1 million in 2016 primarily due to fuel hedge ineffectiveness gains in 20172018 compared to lossesno impairment loss in 20162017. During 2018, we recognized an impairment charge to write down our investment balance, debt facility and a decrease in foreign exchange losses in 2017, netother receivables due from Skysea Holding to its implied fair value. Refer to Note 5. Other Assets, for further information.

Table of hedges.Contents

Gross and Net Yields
 
Gross Yields and Net Yields increased 6.2%5.1% and 5.9%7.0%, respectively, in 2017, respectively,2018 compared to 20162017 primarily due to the increase in passenger ticket and onboard and other revenues discussed above. Gross Yields and Net Yields on a Constant Currency basis increased 5.6%3.1% and 5.3%4.9%, respectively, in 2017, respectively,2018 compared to 2016.2017.
 
Gross and Net Cruise Costs
Table of Contents

Gross Cruise Costs in 2017 was consistent with 2016 and Net Cruise Costs decreased 1.7%increased 2.0% and 5.1%, respectively, in 20172018 compared to 2016 primarily due to the decrease in capacity discussed above.2017 and Gross Cruise Costs per APCD and Net Cruise Costs per APCD increased 5.6%6.1% and 4.2%9.4%, respectively, in 2017, respectively,2018 compared to 2016. 2017 primarily due to the gain of $30.9 million recognized on the sale of Legend of the Seas in March 2017 that did not recur in 2018. Gross and Net Cruise Costs per APCD on a Constant Currency basis increased 5.0% and 8.3%, respectively, in 2018 compared to 2017.
Net Cruise Costs Excluding Fuel
Net Cruise Costs Excluding Fuel per APCD increased 6.0%12.5% in 20172018 compared to 2016. The increases2017 and increased 11.2% in 2018 compared to 2017 were primarily due to the increase in cruise operating expenses discussed above. Additionally, the hurricane-related disruptions during the third quarter of 2017 reduced our capacity; however, certain operating expenses were still incurred, negatively impacting our metrics per APCD.on a Constant Currency basis.

Other Comprehensive Income (Loss)

Other comprehensive income in 20172018 was $234.1$151.5 million compared to $94.5$24.2 million in 2016.2017. The increase of $139.6$127.3 million or 147.7%,534.6% was primarily due to the Gain on cash flow derivative hedges in 20172018 of $230.2$142.5 million compared to $95.5$22.5 million in 2016.2017. The increase of $134.7$120.1 million in 2017 was primarily due to higher foreign currency forward contract and fuel swap instrument values in 2017 compared to 2016, partially offset by lower amounts of fuel swap losses reclassified to income in 2017 .

Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016

In this section, references to 2017 refer to the nine months ended September 30, 2017 and references to 2016 refer to the nine months ended September 30, 2016.

Revenues
Total revenues for 2017 increased $186.6 million, or 2.8%, from 2016.
Passenger ticket revenues comprised 72.2% of our 2017 total revenues. Passenger ticket revenues for 2017 increased by $98.1 million, or 2.0%, from 2016, despite the impact of canceled sailings resulting from hurricane-related disruptions during the third quarter of 2017. The increase2018 was primarily due to an increase of $258.1 million in ticket prices primarily driven by the improvement in our ticket price on a per passenger basis due to the exit of the Pullmantur ships and the addition of Harmony of the Seas and Ovation of the Seas, as well as higher pricing on North America and Europe sailings. The increase in ticket prices on these itineraries was partially offset by lower pricing on Asia/Pacific sailings.

The increase was partially offset by:

a 3.0% decrease in capacity, which decreased passenger ticket revenues by$144.2 million primarily due to the sale of our majority interest in Pullmantur Holdings during the third quarter of 2016, the sale of Splendour of the Seas in the second quarter of 2016 and the sale of Legend of the Seas in first quarter of 2017, which was partially offset by an increase in capacity due to the addition of Ovation of the Seas and Harmony of the Seas into our fleet during the second quarter of 2016; and

an approximate $15.2 million unfavorable effect of changes in foreign currency exchange rates related to our passenger ticket revenue transactions denominated in currencies other than the United States dollar.

The remaining 27.8% of 2017 total revenues was comprised of onboard and other revenues, which increased $88.5 million, or 4.9%, in 2017 from 2016. The increase in onboard and other revenues was primarily due to:

a $99.8 million increase in onboard revenue attributable to higher spending on a per passenger basis primarily due to our revenue enhancing initiatives, including beverage package sales and promotions, gaming initiatives, new strategies and promotions on specialty restaurants and the increased revenue associated with internet and other telecommunication services. The increase is also attributable to port activities mainly due to itinerary changes; and

a $39.4 million increase in other revenue primarily due to charter revenue and management fees earned from Pullmantur Holdings.

The increase was partially offset by a $53.1 million decrease attributable to the 3.0% decrease in capacity noted above, including the impact of canceled sailings resulting from hurricane-related disruptions during the third quarter of 2017.

Onboard and other revenues included concession revenues of $244.4 million in 2017 and $240.8 million in 2016.

Cruise Operating Expenses
Table of Contents


Total cruise operating expenses for 2017 decreased $141.4 million, or 3.6%, from 2016. 

The decrease was primarily due to:

a $116.6 million decrease attributable to the 3.0% decrease in capacity noted above;

a $30.9 million gain resulting from the sale of Legend of the Seas in 2017 compared to an immaterial gain from the sale of Splendour of the Seas in 2016;

a $32.6 million decrease in air expense due to itinerary changes and lower ticket costs; and

a $23.9 million decrease in vessel maintenance primarily due to the timing of scheduled drydocks.

The net decrease was partially offset by an increase in commissions expense of $26.0 million mainly due to the increase in ticket prices discussed above.

Marketing, Selling and Administrative Expenses

Marketing, selling and administrative expenses for 2017 increased $22.5 million, or 2.6%, to $875.0 million from $852.4 million in 2016. The increase was primarily due to an increase in payroll and benefits which was driven by an increase in our stock price year over year related to our performance share awards, partially offset by a decrease in expenses due to the sale of our majority interest in Pullmantur Holdings.

Depreciation and Amortization Expenses
Depreciation and amortization expenses for 2017 increased $49.1 million, or 7.4%, to $710.8 million from $661.7 million in 2016. The increase was primarily due to the addition of Ovation of the Seas and Harmony of the Seas in the second quarter of 2016 into our fleet, and to a lesser extent, new shipboard additions associated with our ship upgrade projects. The increase was partially offset by the decrease in depreciation associated with the sale of Splendour of the Seas in the second quarter of 2016 and the sale of Legend of the Seas in first quarter of 2017.
Other Income (Expense)
Interest expense, net of interest capitalized, for 2017increased $3.4 million, or 1.5%, to $230.2 million from $226.8 million in 2016. The increase was primarily due to higher interest rates in 2017 compared to 2016, partially offset by lower average debt in 2017 compared to 2016.

Equity investment income increased $25.5 million, or 26.9%, to $120.4 million in 2017 from $94.8 million in 2016 primarily due to an increase in income from TUI Cruises, partially offset by losses associated with Pullmantur Holdings in 2017. Effective July 31, 2016, as a result of the sale of 51% of our interest in Pullmantur Holdings, we account for our investment in Pullmantur Holdings under the equity method of accounting.

Other expense decreased $34.4 million, or 84.0%, to $6.5 million in 2017 from $41.0 million in 2016 primarily due to the 2016 net loss of $21.7 million related to the elimination of the Pullmantur reporting lag that did not recur in 2017.
Gross and Net Yields
Gross Yields and Net Yields increased 6.0% and 6.9% in 2017, respectively, compared to 2016 primarily due to the increase in passenger ticket and onboard and other revenues discussed above. Gross Yields and Net Yields, on a Constant Currency basis, increased 6.3% and 7.2% in 2017, respectively, compared to 2016.

Gross and Net Cruise Costs

Gross Cruise Costs and Net Cruise Costs decreased 2.4% and 3.4% in 2017, respectively compared to 2016 primarily due to the decrease in capacity and cruise operating expenses discussed above. In 2017, Gross Cruise Costs per APCD, Net Cruise Costs per APCD and Net Cruise Costs Excluding Fuel were consistent with 2016, as reported and on a Constant Currency basis. The hurricane-related disruptions during the third quarter of 2017 reduced our capacity; however, certain operating expenses were still incurred, negatively impacting our metrics per APCD.
Table of Contents


Other Comprehensive Income (Loss)

Other comprehensive income in 2017 was $389.6 million compared to $250.9 million in 2016. The increase of $138.7 million, or 55.3%, was primarily due to the Gain on cash flow derivative hedges in 2017 of $381.7 million compared to $254.6 million in 2016. The increase of $127.1 million in 2017 was primarily due to higher foreign currency forward contract and interest rate swap instrument values in 2017 compared to 2016, partially offset by lower fuel swap instrument values and lower amounts of fuel swap losses reclassified to income in 2017.2018.


Future Application of Accounting Standards
 
Refer to Note 2. Summary of Significant Accounting Policies to our consolidated financial statements for further information on Recent Accounting Pronouncements.
 
Liquidity and Capital Resources
 
Sources and Uses of Cash

Cash flow generated from operations provides us with a significant source of liquidity. Net cash provided by operating activities increased $453.6$127.6 million to $2.5 billion$924.1 million for the first ninethree months in 20172018 compared to $2.0 billion$796.5 million for the same period in 2016.2017. The increase in cash provided by operating activities was primarily attributable to an increase in proceeds from customer deposits and a decrease in fuel costs during the first ninethree months in 20172018 compared to the same period in 2016.2017. Additionally, dividends received from unconsolidated affiliates increased by $35.9$9.9 million.
Net cash used in investing activities decreased$2.4was $1.6 billionto $78.0 millionfor the first ninethree months in 20172018 compared to $2.5 billionNet cash provided in investing activities of $123.6 million for the same period in 2016.2017. The decreasechange was primarily attributable to a decreasean increase in capital expenditures of $1.9$1.6 billion primarily due to ship deliveries in 2016,the delivery of OvationSymphony of the Seas and the purchase of HarmonyAzamara Pursuit during the first three months of the Seas,2018 compared to no ship deliveries or purchases for the same period in 2017. In addition, we received2017, partially offset by $230.0 million of proceeds received from the sale of property and equipment in 2017, which did not occurrecur in 2016. Furthermore, during 2017, we received2018.
Net cash of $57.0provided in financing activities was$711.9 million on settlements on our foreign currency forward contractsfor the first three months in 2018 compared to cash paid of $172.9 million during 2016.
Net cash used in financing activities was $2.4 billion for the first nine months in 2017 compared to ofNet cash provided in financing activities of $0.6 billion$944.4 million for the same period in 2016.2017. The change was primarily attributable to a decreasean increase in debt proceeds of $2.4$1.5 billion an increaseduring the first three months of 2018 compared to the same period in debt2017 and a decrease in repayments of $0.8 billiondebt of $446.2 million during the first three months of 2018 compared to the same period in 2017, partially offset by stock repurchases of $275.0 million during the first three months of 2018 that did not occur during the same period in 2017 and a higher amount of dividends paid during the first ninethree months of 20172018 compared to the same period in 2016, partially offset by a decrease of stock repurchases of $175.0 million during the first nine months of 2017 compared to the same period in 2016.2017. The decreaseincrease in debt proceeds was primarily due to the $841.8 million$1.2 billion unsecured term loan borrowed in April 2016 to finance OvationSymphony of the SeaSeas s and the €700.7$130.0 million and $226.1 million unsecured term loanscredit facility, both borrowed in May 2016March 2018. The decrease in repayment of debt was due to finance Harmony of the Seas that did not recur in 2017and lower drawingspayments on our revolving credit facilities during the first ninethree months of 2017in 2018 compared to the same period in 2016.2017.
Table of Contents    

Future Capital Commitments

Capital Expenditures
 
As of September 30, 2017,March 31, 2018, our Global Brands and our Partner Brands have 12twelve ships on order. The expected dates that these ships will enter service and their approximate berths are as follows:
Ship 
Expected to Enter
Service
 
Approximate
Berths
Royal Caribbean International —    
Oasis-class:    
Symphony of the Seas1st Quarter 20185,450
Unnamed 2nd Quarter 2021 5,450
Quantum-class:    
Spectrum of the Seas 2nd Quarter 2019 4,150
4,250
Unnamed 4th Quarter 2020 4,150
4,250
Project Icon:Icon-class:    
Unnamed 2nd Quarter 2022 5,650
Unnamed 2nd Quarter 2024 5,650
Celebrity Cruises —
Edge-class:    
Celebrity Edge 4th Quarter 2018 2,900
Celebrity Beyond 2nd Quarter 2020 2,900
Unnamed 4th Quarter 2021 2,900
3,200
Unnamed 4th Quarter 2022 2,9003,200
Celebrity Flora
2nd Quarter 2019100
TUI Cruises (50% joint venture) (1)—
    
UnnamedMein Schiff 1 (new) 2nd Quarter 2018 2,850
Unnamed 1st Quarter 2019 2,850
Total Berths   47,800
43,250


(1)
TUI Cruises plans to offset thisThe additional capacity is partially offset through the planned transfer of the their first two ships,original Mein Schiff 1 and Mein Schiff 2, to an affiliate of TUI AG, our joint venture partner in TUI Cruises, in 2018 and 2019, respectively.April 2018.

During the second quarter of 2017, we entered into agreementsIn February 2018, TUI Cruises signed a conditional agreement with Meyer Turku to build two ships of a new generation of ships for Royal Caribbean International,ship, known as “Project Icon.“Mein Schiff 7.” Subsequently,The ship will have a capacity of approximately 2,850 berths and is expected to enter service in October 2017, we entered into credit agreements for the unsecured financing2023. TUI Cruises' agreement with Meyer Turku is contingent upon completion of these ships for up to 80% of each ship's contract price. Refer to Note 7. Commitments and Contingencies to our consolidated financial statements under Item 1. Financial Statements for further information.conditions precedent, including financing.

Our future capital commitments consist primarily of new ship orders. As of September 30, 2017,March 31, 2018, the aggregate cost of our ships on order, not including the TUI Cruises'any ships on order by our Partner Brands, was approximately $13.0$11.7 billion, of which we had deposited $323.2$419.0 million as of such date. Approximately 53.8%55.9% of the aggregate cost was exposed to fluctuations in the Euro exchange rate at September 30, 2017.March 31, 2018. Refer to Note 10. Fair Value Measurements and Derivative Instruments to our consolidated financial statements under Item 1. Financial Statements for further information.

In September 2017, we entered into an agreement to purchase a ship for our Azamara Club Cruises brand. The sale is expected to be completed with the delivery of the ship, scheduled for March 2018.

As of September 30, 2017,March 31, 2018, we anticipate overall full year capital expenditures, not including the TUI Cruises'any ships on order by our Partner Brands, will be approximately $0.6 billion for 2017, $3.2$3.4 billion for 2018, $2.1 billion for 2019, $2.5 billion for 2020, and $2.5 billion for 2021.2021 and $2.9 billion for 2022.
 
Table of Contents    

Contractual Obligations

As of September 30, 2017,March 31, 2018, our contractual obligations were as follows (in thousands):
Payments due by periodPayments due by period
  Less than 1-3 3-5 More than  Less than 1-3 3-5 More than
Total 1 year years years 5 yearsTotal 1 year years years 5 years
Operating Activities: 
  
  
  
  
 
  
  
  
  
Operating lease obligations(1)
$242,989
 $28,742
 $42,299
 $24,910
 $147,038
$243,017
 $29,367
 $46,253
 $24,772
 $142,625
Interest on long-term debt(2)
1,073,803
 233,134
 352,304
 246,912
 241,453
1,600,356
 313,971
 523,539
 364,746
 398,100
Other(3)
850,768
 170,063
 297,523
 165,395
 217,787
962,789
 197,164
 330,401
 203,518
 231,706
Investing Activities:0
  
  
  
  
0
  
  
  
  
Ship purchase obligations(4)
10,692,368
 1,658,774
 2,751,170
 4,230,704
 2,051,720
9,885,801
 1,028,701
 3,148,916
 4,307,100
 1,401,084
Financing Activities:0
  
  
  
  
0
  
  
  
  
Long-term debt obligations(5)
7,557,801
 1,511,773
 1,991,501
 1,209,893
 2,844,634
8,762,052
 1,136,401
 2,302,874
 2,425,480
 2,897,297
Capital lease obligations(6)
34,406
 3,935
 7,051
 8,272
 15,148
46,687
 7,616
 14,765
 11,371
 12,935
Other(7)
33,684
 8,525
 20,012
 5,147
 —
27,407
 10,487
 15,451
 1,469
 —
Total$20,485,819
 $3,614,946
 $5,461,860
 $5,891,233
 $5,517,780
$21,528,109
 $2,723,707
 $6,382,199
 $7,338,456
 $5,083,747

(1)
We are obligated under noncancelable operating leases primarily for offices, warehouses and motor vehicles. Amounts represent contractual obligations with initial terms in excess of one year.
(2)  
Long-term debt obligations mature at various dates through fiscal year 20282030 and bear interest at fixed and variable rates. Interest on variable-rate debt is calculated based on forecasted debt balances, including the impact of interest rate swap agreements using the applicable rate at September 30, 2017.March 31, 2018. Debt denominated in other currencies is calculated based on the applicable exchange rate at September 30, 2017.March 31, 2018.
(3)Amounts primarily represent future commitments with remaining terms in excess of one year to pay for our usage of certain port facilities, marine consumables, services and maintenance contracts. Amounts do not include the PortMiami lease further discussed below under Off-Balance Sheet Arrangements
(4)Amounts do not include potential obligations which remain subject to cancellation at our sole discretion.
(5)Amounts represent debt obligations with initial terms in excess of one year. Debt denominated in other currencies is calculated based on the applicable exchange rate at March 31, 2018.
(6)Amounts represent capital lease obligations with initial terms in excess of one year.
(7)Amounts represent fees payable to sovereign guarantors in connection with certain of our export credit debt facilities and facility fees on our revolving credit facilities.

Please refer to Funding Needs and Sources for discussion on the planned funding of the above contractual obligations.
 
As a normal part of our business, depending on market conditions, pricing and our overall growth strategy, we continuously consider opportunities to enter into contracts for the building of additional ships. We may also consider the sale of ships or the purchase of existing ships. We continuously consider potential acquisitions and strategic alliances. If any of these were to occur, they would be financed through the incurrence of additional indebtedness, the issuance of additional shares of equity securities or through cash flows from operations.

Off-Balance Sheet Arrangements

We and TUI AG have each guaranteed the repayment by TUI Cruises of 50% of a bank loan provided to TUI Cruises which is due 2022. Notwithstanding this, the lenders have agreed to release each shareholder’s guarantee if certain conditions are met by April 2018.loan. As of September 30, 2017, €100.4March 31, 2018, the outstanding principal amount of the loan was €89.1 million, or approximately $118.7$109.6 million based on the exchange rate at September 30, 2017, remains outstanding.March 31, 2018. The loan amortizes quarterly and is secured by first mortgages on the Mein Schiff 1 and Mein Schiff 2 vessels. In April 2018, Mein Schiff 1 was sold to an affiliate of TUI AG. The proceeds were used to repay €44.2 million of the bank loan and secure the release of the first mortgage on Mein Schiff 1. Based on current facts and circumstances, we do not believe potential obligations under our guarantee of this guaranteebank loan are probable.

TUI Cruises has entered into various ship construction and credit agreements that 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.

Table of Contents

In July 2016, we executed an agreement with Miami Dade County (“MDC”), which was simultaneously assigned to Sumitomo Banking Corporation (“SMBC”), to lease land from MDC and construct a new cruise terminal at PortMiami in Miami, Florida. The terminal is expected to be approximately 170,000 square feet and will serve as a homeport. During the construction period, SMBC will fund the costs of the terminal’s construction and land lease. Upon completion of the terminal's construction, we will
Table of Contents

operate and lease the terminal from SMBC for a five-year term. We determined that the lease arrangement between SMBC and us should be accounted for as an operating lease upon completion of the terminal.

Some of the contracts that we enter into include indemnification provisions that obligate us to make payments to the counterparty if certain events occur. These contingencies generally relate to changes in taxes, increased lender capital costs and other similar costs. The indemnification clauses are often standard contractual terms and are entered into in the normal course of business.  There are no stated or notional amounts included in the indemnification clauses and we are not able to estimate the maximum potential amount of future payments, if any, under these indemnification clauses. We have not been required to make any payments under such indemnification clauses in the past and, under current circumstances, we do not believe an indemnification obligation is probable.
 
As of September 30, 2017,March 31, 2018, other than the items described above, we are not party to any other off-balance sheet arrangements, including guarantee contracts, retained or contingent interest, certain derivative instruments and variable interest entities, that either have, or are reasonably likely to have, a current or future material effect on our financial position.

Funding Needs and Sources
 
We have significant contractual obligations of which our debt service obligations and the capital expenditures associated with our ship purchases represent our largest funding needs. As of September 30, 2017,March 31, 2018, we had approximately $3.6$2.7 billion in contractual obligations due through September 30, 2018,March 31, 2019, of which approximately $1.5$1.1 billion relates to debt maturities, $233.1$314.0 million relates to interest on long-term debt and $1.7$1.0 billion relates to progress payments on our ship purchase payments, includingorders and the final installment payable due upon the delivery of Symphony of the SeasCelebrity Edge in the firstfourth quarter of 2018. We have historically relied on a combination of cash flows provided by operations, drawdowns under our available credit facilities, the incurrence of additional debt and/or the refinancing of our existing debt and the issuance of additional shares of equity securities to fund these obligations.

We had a working capital deficit of $4.3$4.2 billion and $3.7$3.9 billion as of September 30, 2017March 31, 2018 and December 31, 2016,2017, respectively. Included within our working capital deficit is $1.5$1.1 billion and $1.3$1.2 billion of current portion of long-term debt, including capital leases, as of September 30, 2017March 31, 2018 and December 31, 2016,2017, respectively. Similar to others in our industry, we operate with a substantial working capital deficit. This deficit is mainly attributable to the fact that, under our business model, a vast majority of our passenger ticket receipts are collected in advance of the applicable sailing date. These advance passenger receipts remain a current liability until the sailing date. The cash generated from these advance receipts is used interchangeably with cash on hand from other sources, such as our revolving credit facilities and other cash from operations. The cash received as advanced receipts can be used to fund operating expenses for the applicable future sailing or otherwise, pay down our revolving credit facilities, invest in long term investments or any other use of cash. In addition, we have a relatively low-level of accounts receivable and rapid turnover results in a limited investment in inventories. We generate substantial cash flows from operations and our business model, along with our unsecured revolving credit facilities, has historically allowed us to maintain this working capital deficit and still meet our operating, investing and financing needs. We expect that we will continue to have working capital deficits in the future.

As of September 30, 2017,March 31, 2018, we had liquidity of $1.9$2.0 billion, consisting of approximately $140.0$111.2 million in cash and cash equivalents and $1.8$1.9 billion available under our unsecured revolving credit facilities. We anticipate that our cash flows from operations and our current financing arrangements, as described above, will be adequate to meet our capital expenditures and debt repayments over the next twelve-month period.

In April 2017, Moody's changed our senior unsecured debt credit rating to Baa3 withboard of directors authorized a stable outlook.  Consistent with the provisions of our interest rate derivatives instruments, all collateral that was posted with our counterparties as of that date was returned in April 2017.

We have $375.0 million that remains available for future common stock repurchase transactions under our Board approved program. Future repurchases may be made at management's discretion from timeprogram for up to time on the open market or through privately negotiated transactions. Repurchases under the program are expected to be funded from available cash or borrowings under our revolving credit facilities.$500 million that was completed in February 2018. Refer to Note 8. 7. Shareholders' Equity to our consolidated financial statements under Item 1. Financial Statements for further information.

If any person acquires ownership of more than 50% of our common stock or, subject to certain exceptions, during any 24-month period, a majority of 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.

Table of Contents    


Debt Covenants
 
Certain of our financing agreements contain covenants that require us, among other things, to maintain minimum net worth of at least $7.9$8.1 billion, a fixed charge coverage ratio of at least 1.25x and limit our net debt-to-capital ratio to no more than 62.5%.  The fixed charge coverage ratio is calculated by dividing net cash from operations for the past four quarters by the sum of dividend payments plus scheduled principal debt payments in excess of any new financings for the past four quarters. Our minimum net worth and maximum net debt-to-capital calculations exclude the impact of Accumulated other comprehensive loss on Total shareholders’ equity. We were well in excess of all debt covenant requirements as of September 30, 2017.March 31, 2018. The specific covenants and related definitions can be found in the applicable debt agreements, the majority of which have been previously filed with the Securities and Exchange Commission.

Dividends

In September 2017,During the first quarter of 2018, we declared a cash dividend on our common stock of $0.60 per share which was paid in October of 2017.April 2018. During the first and second quartersquarter of 2018, we also paid a cash dividend on our common stock of $0.60 per share which was declared during the fourth quarter of 2017.

During the first quarter of 2017, we declared a cash dividend on our common stock of $0.48 per share which was paid in April 2017 and July 2017, respectively.2017. During the first quarter of 2017, we also paid a cash dividend on our common stock of $0.48 per share which was declared during the fourth quarter of 2016.


Item 3. Quantitative and Qualitative Disclosures About Market Risk
 
For a discussion of our market risks, refer to Part II, Item 7A. Quantitative and Qualitative Disclosures About Market Risk in our Annual Report on Form 10-K for the year ended December 31, 2016.2017. There have been no significant developments or material changes since the date of our Annual Report.

Item 4. Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures
 
Our management, with the participation of our Chairman and Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures, as such term is defined in Exchange Act Rule 13a-15(e), as of the end of the period covered by this Quarterly Report on Form 10-Q.report. Based upon such evaluation, our Chairman and Chief Executive Officer and Chief Financial Officer concluded that those controls and procedures are effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to management, including our Chairman and Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure and are effective to provide reasonable assurance that such information is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms.
 
Changes in Internal Control Over Financial Reporting
 
There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Exchange Act Rule 13a-15(d) during the quarter ended September 30, 2017March 31, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
Inherent Limitations on Effectiveness of Controls
 
Readers are cautioned that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system will be met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there is only reasonable assurance that our controls will succeed in achieving their goals under all potential future conditions.

Table of Contents    

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

We are routinely involved in claims typical within the cruise vacation industry. The majority of these claims are covered by insurance. We believe the outcome of such claims, net of expected insurance recoveries, will not have a material adverse impact on our financial condition or results of operations and cash flows.

Item 1A. Risk Factors

The risk factors set forth below and elsewhere in this Quarterly Report on Form 10-Q are important factors that could cause actual results to differ from expected or historical results. It is not possible to predict or identify all such risks. There may be additional risks that we consider not to be material, or which are not known, and any of these risks could have the effects set forth below. The ordering of the risk factors set forth below is not intended to reflect any Company indication of priority or likelihood. See Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations for a cautionary note regarding forward-looking statements.

Adverse worldwide economic or other conditions could reduce the demand for cruises and passenger spending, adversely impacting our operating results, cash flows and financial condition including potentially impairing the value of our ships and other assets.

The demand for cruises is affected by international, national and local economic conditions. Weak or uncertain economic conditions impact consumer confidence and pose a risk as vacationers may postpone or reduce discretionary spending. This, in turn, may result in cruise booking slowdowns, decreased cruise prices and lower onboard revenues. Given the global nature of our business, we are exposed to many different economies and our business could be hurt by challenging conditions in any of our markets. Any significant deterioration of global,international, national or local economic conditions could result in a prolonged period of booking slowdowns, depressed cruise prices and reduced onboard revenues.

Fears of terrorist attacks, war, and other hostilities could have a negative impact on our results of operations.

Events such as terrorist attacks, war (or war-like conditions), conflicts (domestic or cross-border), civil unrest and other hostilities, including an escalation in the frequency or severity of incidents, and the resulting political instability, travel restrictions and advisories, and concerns over safety and security aspects of traveling or the fear of any of the foregoing have had, and could have in the future, a significant adverse impact on demand and pricing in the travel and vacation industry. In view of our global operations, we are susceptible to a wide range of adverse events. These events could also result in additional security measures taken by local authorities which may potentially impact access to ports and/or destinations.

Our operating costs could increase due to market forces and economic or geo-political factors beyond our control.

Our operating costs, including fuel, food, payroll and benefits, airfare, taxes, insurance and security costs are all subject to increases due to market forces and economic or politicalgeo-political conditions or other factors beyond our control. Increases in these operating costs could adversely affect our profitability.

Fluctuations in foreign currency exchange rates, fuel prices and interest rates could affect our financial results.

We are exposed to market risk attributable to changes in foreign currency exchange rates, fuel prices and interest rates. Significant changes in any of the foregoing could have a material impact on our financial results, net of the impact of our hedging activities and natural offsets. Our operating results have been and will continue to be impacted, often significantly, by changes in each of these factors. The value of our earnings in foreign currencies is adversely impacted by a strong United States dollar. In addition, any significant increase in fuel prices could materially and adversely affect our business as fuel prices not only impact our fuel costs, but also some of our other expenses, such as crew travel, freight and commodity prices. See “ItemPart 1, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “ItemItem 3. Quantitative and Qualitative Disclosures About Market Risk” for more information.

Conducting business globally may result in increased costs and other risks.

We operate our business globally. Operating internationally exposes us to a number of risks, including increased exposure to a wider range of regional and local economic conditions, volatile local political conditions, potential changes in duties and taxes, including changing and/or uncertain interpretations of existing tax laws and regulations, required compliance with additional laws
Table of Contents    

and policies affecting cruising, vacation or maritime businesses or governing the operations of foreign-based companies, currency fluctuations, interest rate movements, difficulties in operating under local business environments, port quality and availability in certain regions, U.S. and global anti-bribery laws or regulations, imposition of trade barriers and restrictions on repatriation of earnings.

Our future growth strategies increasingly depend on the growth and sustained profitability of certain international markets, such as China. Some factors that will be critical to our success in developing these markets may be different than those affecting our more-established North American and European markets. In the Chinese market, in particular, our future success depends on our ability to continue to raise awareness of our products, evolve the available distribution channels and adapt our offerings to best suit the Chinese consumer. China’s economy differs from the economies of other developed countries in many respects and, as the legal and regulatory system in China continues to evolve, there may be greater uncertainty as to the interpretation and enforcement of applicable laws and regulations. In March 2017, China's National Tourism Administration issued a directive to travel agents to halt sales of holiday packages to South Korea. This travel restriction has had a direct impact on our related itineraries impacting the overall performance of our China business. It is uncertain what the ultimate scope and duration of this restriction will be, but to the extent that this or similar sanctions affecting regional travel and/or tourism continues or are put in place, it may impact local demand, available cruise itineraries and the overall financial performance of the China market.

Operating globally also exposes us to numerous and sometimes conflicting legal, regulatory and tax requirements. In many parts of the world, including countries in which we operate, practices in the local business communities might not conform to international business standards. We must adhere to policies designed to promote legal and regulatory compliance as well as applicable laws and regulations. However, we might not be successful in ensuring that our employees, agents, representatives and other third parties with whom we associate throughout the world properly adhere to them. Failure by us, our employees or any of these third parties to adhere to our policies or applicable laws or regulations could result in penalties, sanctions, damage to our reputation and related costs which in turn could negatively affect our results of operations and cash flows.

We have operations in and source passengers from the United Kingdom and other member countries of the European Union. In March 2017, the United Kingdom notified the European Council of its intent to withdraw from the European Union. Since the initial referendum in June 2016, the proposedexpected withdrawal has resulted in increased volatility in the global financial markets and, in particular, in global currency exchange rates. The expected withdrawal could potentially adversely affect tax, legal and regulatory regimes to which our business in the region is subject. The expected withdrawal could also, among other potential outcomes, disrupt the free movement of goods, services and people between the United Kingdom and the European Union. Further, as the expected withdrawal approaches, continued uncertainty around these issues could lead to adverse effects on the economy of the United Kingdom, including the value of the British Pound, and the other economies in which we operate, making it more difficult to source passengers from these regions. These risks may be exacerbated if voters of other countries within the European Union similarly elect to exit the European Union in future referendums.

As a global operator, our business may be also impacted by changes in U.S. policy or priorities in areas such as trade, immigration and/or environmental or labor regulations, among others. Depending on the nature and scope of theseany such changes, they could impact our domestic and international business operations. While still unclear, theseAny such changes, and any international response to them, could potentially introduce new barriers to passenger or crew travel and/or cross border transactions, impact our guest experience and/or increase our operating costs.

If we are unable to address these risks adequately, our financial position and results of operations could be adversely affected, including potentially impairing the value of our ships and other assets.

Price increases for commercial airline service for our guests or major changes or reduction in commercial airline service and/or availability could adversely impact the demand for cruises and undermine our ability to provide reasonably priced vacation packages to our guests.

Many of our guests depend on scheduled commercial airline services to transport them to or from the ports where our cruises embark or disembark. Increases in the price of airfare would increase the overall price of the cruise vacation to our guests, which may adversely impact demand for our cruises. In addition, changes in the availability of commercial airline services could adversely affect our guests’ ability to obtain airfare, as well as our ability to fly our guests to or from our cruise ships, which could adversely affect our results of operations.

Incidents or adverse publicity concerning our ships and/or passengers or the cruise vacation industry in general, unusual weather conditions and other natural disasters or disruptions could affect our reputation as well as impact our sales and results of operations.

Table of Contents    

The ownership and/or operation of cruise ships, airplanes, private destinations, port facilities and shore excursions involves the risk of accidents, illnesses, mechanical failures, environmental incidents and other incidents which may bring into question safety, health, security and vacation satisfaction which could negatively impact our reputation. Incidents involving cruise ships, and, in particular the safety, health and security of guests and crew and media coverage thereof have impacted and could in the future impact demand for our cruises and pricing in the industry. Our reputation and our business could also be damaged by negative publicity regarding the cruise industry in general, including publicity regarding the spread of contagious disease and the potentially adverse environmental impacts of cruising. The considerable expansion in the use of social media and digital marketing over recent years has compounded the potential scope of any negative publicity. If any such incident or news cycle occurs during a time of high seasonal demand, the effect could disproportionately impact our results of operations for the year. In addition, incidents involving cruise ships may result in additional costs to our business, increasing government or other regulatory oversight and, in the case of incidents involving our ships, potential litigation.

Our cruise ships and port facilities may also be adversely impacted by unusual weather patterns or natural disasters or disruptions, such as hurricanes. We are often forced to alter itineraries and occasionally cancel a cruise or a series of cruises or to redeploy our ships due to these or other factors,types of events, which could have an adverse effect on our sales and profitability.profitability in the current and future periods. For example, the 2017 hurricane season was particularly impactful to our operations in the Caribbean. Increases in the frequency, severity or duration of severe weather events, including those related to climate change, could exacerbate the impact and cause further disruption to our operations. In addition, these and any other events which impact the travel industry more generally may negatively impact our ability to deliver guests or crew to our cruises and/or interrupt our ability to obtain services and goods from key vendors in our supply chain. Any of the foregoing could have an adverse impact on our results of operations and on industry performance.

An increase in capacity worldwide or excess capacity in a particular market could adversely impact our cruise sales and/or pricing.

Although our ships can be redeployed, cruise sales and/or pricing may be impacted by the introduction of new ships into the marketplace, reductions in cruise capacity, overall market growth and deployment decisions of ourselves and our competitors. As of December 31, 2016, aA total of 6275 new ships with approximately 173,000184,000 berths are on order for delivery through 20212022 in the cruise industry. The further net growth in capacity from these new ships and future orders, without an increase in the cruise industry’s demand and/or share of the vacation market, could depress cruise prices and impede our ability to achieve yield improvement.

In addition, to the extent that we or our competitors deploy ships to a particular itinerary and the resulting capacity in that region exceeds the demand, we may lower pricing and profitability may be lower than anticipated. This risk exists in emerging cruise markets, such as China, where capacity has grown rapidly over the past few years and in mature markets where excess capacity is typically redeployed. Any of the foregoing could have an adverse impact on our results of operations, cash flows and financial condition, including potentially impairing the value of our ships and other assets.

Unavailability of ports of call may adversely affect our results of operations.

We believe that port destinations are a major reason why guests choose to go on a particular cruise or on a cruise vacation. The availability of ports is affected by a number of factors, including existing capacity constraints, constraints related to the size of certain ships, security, environmental and health concerns, adverse weather conditions and natural disasters, financial limitations on port development, exclusivity arrangements that ports may have with our competitors, local governmental regulations and local community concerns about port development and other adverse impacts on their communities from additional tourists.tourists and overcrowding. In addition, fuel costs may adversely impact the destinations on certain of our itineraries. Any limitations on the availability or feasibility of our ports of call or on the availability of shore excursions and other service providers at such ports could adversely affect our results of operations.

Our reliance on shipyards, and their subcontractors and our suppliers to implement our newbuild and ship upgrade programs and to repair and maintain our ships exposes us to risks which, if realized, could adversely impact our business.

We rely on shipyards, and their subcontractors and our suppliers to effectively construct our new ships and to repair, maintain and upgrade our existing ships on a timely basis and in a cost effective manner.

There are a limited number of shipyards with the capability and capacity to build our new ships and, accordingly, increased demand for available new construction slots and/or continued consolidation in the cruise shipyard industry (including completion of Italian shipbuilder Fincantieri's bid for STX France) could impact our ability to construct new ships when and as planned, cause us to continue to commit to new ship orders earlier than we have historically done so and/or result in stronger bargaining power
Table of Contents    

on the part of the shipyards and the export credit agencies providing financing for the project.  Our inability to timely and cost-effectively procure new capacity could have a significant negative impact on our future business plans and results of operations.

Building, repairing, maintaining and/or upgrading a ship is sophisticated work that involves significant risks, and shipyardsrisks. In addition, the prices of labor and/or various commodities that are used in the construction of ships can be subject to volatile price changes, including the impact of fluctuations in foreign exchange rates. Shipyards, their subcontractors and/or our suppliers may encounter financial, technical or design problems when doing these jobs.  If materialized, these problems  could impact the timely delivery or costs of new ships or the ability of shipyards to repair and upgrade our fleet in accordance with our needs or expectations.  In addition, delays or mechanical faults may result in cancellation of cruises or, in more severe situations, new ship orders, or necessitate unscheduled drydocks and repairs of ships. These events and any related adverse publicity could result in lost revenue, increased operating expenses, or both, and thus adversely affect our results of operations.

We may lose business to competitors throughout the vacation market.

We operate in the vacation market and cruising is one of many alternatives for people choosing a vacation. We therefore risk losing business not only to other cruise lines, but also to other vacation operators, which provide other leisure options including hotels, resorts, internet-based alternative lodging sites and package holidays and tours.

We face significant competition from other cruise lines on the basis of cruise pricing, travel agent preference and also in terms of the nature of ships and services we offer to guests. Our principal competitors within the cruise vacation industry include Carnival Corporation & plc, which owns, among others, Aida Cruises, Carnival Cruise Line, Costa Cruises, Cunard Line, Holland America Line, P&O Cruises, Princess Cruises and Princess Cruises;Seabourn; Disney Cruise Line; MSC Cruises; and Norwegian Cruise Line Holdings Ltd, which owns Norwegian Cruise Line, Oceania Cruises and Regent Seven Seas Cruises. Our revenues are sensitive to the actions of other cruise lines in many areas including pricing, scheduling, capacity and promotions, which can have a substantial adverse impact not only on our revenues, but on overall industry revenues.

In the event that we do not effectively market or differentiate our cruise brands from our competitors or otherwise compete effectively with other vacation alternatives and new or existing cruise companies, our results of operations and financial position could be adversely affected.

We may not be able to obtain sufficient financing or capital for our needs or may not be able to do so on terms that are acceptable or consistent with our expectations.

To fund our capital expenditures (including new ship orders), operations and scheduled debt payments, we have historically relied on a combination of cash flows provided by operations, drawdowns under available credit facilities, the incurrence of additional indebtedness and the sale of equity or debt securities in private or public securities markets. Any circumstance or event which leads to a decrease in consumer cruise spending, such as worsening global economic conditions or significant incidents impacting the cruise industry, could negatively affect our operating cash flows. See “-Adverse worldwide economic geopolitical or other conditions…” and “-Incidents or adverse publicity concerning our ships and/or passengers or the cruise vacation industry…” for more information.

Although we believe we can access sufficient liquidity to fund our operations, investments and obligations as expected, there can be no assurances to that effect. Our ability to access additional funding as and when needed, our ability to timely refinance and/or replace our outstanding debt securities and credit facilities on acceptable terms and our cost of funding will depend upon numerous factors including, but not limited to, the vibrancy of the financial markets, our financial performance, the performance of our industry in general and the size, scope and timing of our financial needs. In addition, even where financing commitments have been secured, significant disruptions in the capital and credit markets could cause our banking and other counterparties to breach their contractual obligations to us. This could include failures of banks or other financial service companies to fund required borrowings under our loan agreements or to pay us amounts that may become due or return collateral that is refundable under our derivative contracts for hedging of fuel prices, interest rates and foreign currencies or other agreements. If any of the foregoing occurs it may have a negative impact on our cash flows, including our ability to meet our obligations, our results of operations and our financial condition.

Our liquidity could be adversely impacted if we are unable to satisfy the covenants required by our credit facilities.

Our debt agreements contain covenants, including covenants restricting our ability to take certain actions and financial covenants. In addition, our ability to make borrowings under our available credit facilities is subject to the absence of material adverse changes in our business. Our ability to maintain our credit facilities may also be impacted by changes in our ownership base. More specifically, we may be required to prepay our bank financing facilities if any person acquires ownership of more than 50% of our common stock or, subject to certain exceptions, during any 24-month period, a majority of the Board is no longer comprised of individuals
Table of Contents    

comprised of individuals who were members of the Board on the first day of such period.  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.

Our failure to comply with the terms of our debt facilities could result in an event of default. Generally, if an event of default under any debt agreement occurs, then pursuant to cross default acceleration clauses, our outstanding debt and derivative contract payables could become due and/or terminated. In addition, in such events, our credit card processors could hold back payments to create a reserve. We cannot provide assurances that we would have sufficient liquidity to repay, or the ability to refinance the debt if such amounts were accelerated upon an event of default.

If we are unable to appropriately balance our cost management and capital allocation strategies with our goal of satisfying guest expectations, it may adversely impact our business success.

Our goals call for us to provide high quality products and deliver high quality services. There can be no assurance that we can successfully balance these goals with our cost management and capital allocation strategies. Our business also requires us to make capital allocation decisions, such as ordering new ships and/or upgrading our existing fleet, based on expected market preferences and projected demand. There can be no assurance that our strategies will be successful, which could adversely impact our business, financial condition and results of operations. Investments in older tonnage, in particular, run the risk of not meeting expected returns and diluting related asset values.

Our attempts to expand our business into new markets and new ventures may not be successful.

We opportunistically seek to grow our business through, among other things, expansion into new destination or source markets and establishment of new ventures complementary to our current offerings. These attempts to expand our business increase the complexity of our business, require significant levels of investment and can strain our management, personnel, operations and systems. There can be no assurance that these business expansion efforts will develop as anticipated or that we will succeed, and if we do not, we may be unable to recover our investment, which could adversely impact our business, financial condition and results of operations.

Our reliance on travel agencies to sell and market our cruises exposes us to certain risks which, if realized, could adversely impact our business.

We rely on travel agencies to generate the majority of bookings for our ships. Accordingly, we must ensure that our commission rates and incentive structures remain competitive. If we fail to offer competitive compensation packages, these agencies may be incentivized to sell cruises offered by our competitors to our detriment, which could adversely impact our operating results. Our reliance on third-party sellers is particularly pronounced in certain markets, such as China, where we have a large number of travel agent charter and group sales and less retail agency and direct booking. In addition, the travel agent industry is sensitive to economic conditions that impact discretionary income. Significant disruptions, especially disruptions impacting those agencies that sell a high volume of our business, or contractions in the industry could reduce the number of travel agencies available for us to market and sell our cruises, which could have an adverse impact on our financial condition and results of operations.

Disruptions in our shoreside or shipboard operations or our information systems may adversely affect our results of operations.

Our principal executive office and principal shoreside operations are located in Florida and we have shoreside offices throughout the world. Actual or threatened natural disasters (e.g., hurricanes/typhoons, earthquakes, tornadoes, fires or floods) or similar events in these locations may have a material impact on our business continuity, reputation and results of operations. In addition, substantial or repeated information systems failures, computer viruses or cyber-attacks impacting our shoreside or shipboard operations could adversely impact our business. We do not generally carry business interruption insurance for our shoreside or shipboard operations or our information systems. As such, any losses or damages incurred by us could have an adverse impact on our results of operations.

The loss of key personnel, our inability to recruit or retain qualified personnel, or disruptions among our shipboard personnel due to strained employee relations could adversely affect our results of operations.

Our success depends, in large part, on the skills and contributions of key executives and other employees, and on our ability to recruit, develop and retain high quality personnel. As demand for qualified personnel in the industry grows, we must continue to effectively recruit, train, motivate and retain our employees, both shoreside and on our ships, in order to effectively compete in our industry, maintain our current business and support our projected global growth.
Table of Contents

As of December 31, 2016,2017, 85% of our shipboard employees were covered by collective bargaining agreements. A dispute under our collective bargaining agreements could result in a work stoppage of those employees covered by the agreements. We may not be able to satisfactorily renegotiate
Table of Contents

these collective bargaining agreements when they expire. In addition, existing collective bargaining agreements may not prevent a strike or work stoppage on our ships. We may also be subject to or affected by work stoppages unrelated to our business or collective bargaining agreements. Any such work stoppages or potential work stoppages could have a material adverse effect on our financial results, as could a loss of key employees, our inability to recruit or retain qualified personnel or disruptions among our personnel.

Business activities that involve our co-investment with third parties may subject us to additional risks.

Partnerships, joint ventures, and other business structures involving our co-investment with third parties, generally include some form of shared control over the operations of the business and create additional risks, including the possibility that other investors in such ventures could become bankrupt or otherwise lack the financial resources to meet their obligations, or could have or develop business interests, policies or objectives that are inconsistent with ours. With the sale of 51% of our interest in Pullmantur Holdings in July 2016, we continue to expand the breadth of our co-investment activities, which also include TUI Cruises, SkySea Cruises, Grand Bahama Shipyard and minority ownership investments in various port development and other projects. In addition to financial risks, our co-investment activities may also present managerial and operational risks and expose us to reputational or legal concerns. These or other issues related to our co-investment with third parties could adversely impact our operations.

We rely on supply chain vendors and third-party service providers who are integral to the operations of our businesses. These vendors and service providers may be unable or unwilling to deliver on their commitments or may act in ways that could harm our business.

We rely on supply chain vendors to deliver key products to the operations of our businesses around the world. Any event impacting a vendor’s ability to deliver goods of the required quality at the location and time needed could negatively impact our ability to deliver our cruise experience. Events impacting our supply chain could be caused by factors beyond the control of our suppliers or us, including inclement weather, natural disasters, increased demand, problems in production or distribution and/or disruptions in third party logistics or transportation systems. Interruptions to our supply chain could increase costs and could limit the availability of products critical to our operations.

In order to achieve cost and operational efficiencies, we outsource to third-party vendors certain services that are integral to the operations of our global businesses, such as our onboard concessionaires, certain of our call center operations and operation of a large part of our information technology systems. We are subject to the risk that certain decisions are subject to the control of our third-party service providers and that these decisions may adversely affect our activities. A failure to adequately monitor a third-party service provider’s compliance with a service level agreement or regulatory or legal requirements could result in significant economic and reputational harm to us. There is also a risk the confidentiality, privacy and/or security of data held by third parties or communicated over third-party networks or platforms could become compromised.

A failure to keep pace with developments in technology or technological obsolescence could impair our operations or competitive position.

Our business continues to demand the use of sophisticated technology and systems. These technologies and systems require significant investment and must be proven, refined, updated, and/or replaced with more advanced systems in order to continue to meet our customers’ demands and expectations. If we are unable to do so in a timely manner or within reasonable cost parameters or if we are unable to appropriately and timely train our employees to operate any of these new systems, our business could suffer. We also may not achieve the benefits that we anticipate from any new technology or system, and a failure to do so could result in higher than anticipated costs or could impair our operating results.

We may be exposed to cyber attacks and/or data breaches, including the risks and costs associated with cyber securityprotecting our key operating systems and data privacy, including protecting themaintaining integrity and security of our guests’, employees’business information, as well as personal data of our guests, employees and business partners’ personal information.partners.

WeCyber attacks can vary in scope and intent from economically driven attacks to malicious attacks targeting our key operating systems with the intent to disrupt, disable or otherwise cripple our maritime and /or shoreside operations. This can include any combination of phishing attacks, malware and/or viruses targeted at our key systems. The breadth and scope of this threat has grown over time, and the techniques and sophistication used to conduct cyber attacks, as well as the sources and targets of the attacks, change frequently. While we invest time, effort and capital resources to secure our key systems and networks, our security measures cannot provide absolute assurance that we will be successful in preventing or responding to all such attacks.

Table of Contents

A successful cyber attack may target us directly, or may be the result of a third party vendor's inadequate care. In either scenario, the Company may suffer damage to its key systems and/or data that could interrupt our operations, adversely impact our reputation and brand and expose us to increased risks of governmental investigation, litigation and other liability, any of which could adversely affect our business. Furthermore, responding to such an attack and mitigating the risk of future attacks could result in additional operating and capital costs in systems technology, personnel, monitoring and other investments.

In addition to malicious cyber attacks, we are also subject to various risks associated with the collection, handling, storage and transmission of sensitive information, including risks related to compliance with applicable laws and other contractual obligations, as well as the risk that our systems collecting such information could be compromised.information. In the course of doing business, we collect large volumes of internal, customer and customerother third-party data, including personally identifiable information and individual credit data, for various business purposes. We are subject to federal, state and international laws (including the European Union General Data Protection Regulation which is expected towill take effect in May 2018), as well as industry standards, relating to the collection, use, retention, security and transfer of personally identifiable information and individual credit data. In many cases, these laws apply not only to third-party transactions, but also
Table of Contents

to transfers of information between the Company and its subsidiaries, and among the Company, its subsidiaries and other parties with which the Company has commercial relations. Several jurisdictions have passed laws in this area, and other jurisdictions are considering imposing additional restrictions. These laws continue to develop and may be inconsistent from jurisdiction to jurisdiction. Complying with emerging and changing international requirements has caused, and may cause us to incur substantial costs or require us to change our business practices. If we fail to comply with the various applicable data collection and privacy laws, we could be exposed to fines, penalties, restrictions, litigation or other expenses, and our business could be adversely impacted.

In addition, evenEven if we are fully compliant with legal and/or industry standards and any relevant contractual requirements, we still may not be able to prevent security breaches involving sensitive data and/or critical systems. Any breach, theft, loss, or fraudulent use of guest, employee, third-party or company data, or breach of any critical systems used in our land based or marine operations, could adversely impact our reputation and brand and our ability to retain or attract new customers, and expose us to risks of data loss, business disruption, governmental investigation, litigation and other liability, any of which could adversely affect our business.

Significant capital investments and other expenditures could be required to remedy the problem and prevent future breaches, including costs associated with additional security technologies, personnel, experts and credit monitoring services for those whose data has been breached. Further, if we or our vendors experience significant data security breaches or fail to detect and appropriately respond to significant data security breaches, we could be exposed to government enforcement actions and private litigation. Additionally, the techniques and sophistication used to conduct cyber-attacks and breaches of information technology systems, as well as the sources and targets of these attacks, change frequently and are often not recognized until such attacks are launched or have been in place for a period of time. Our security measures cannot provide assurance that we will be successful in preventing or identifying such breaches.

The potential unavailability of insurance coverage or an inability to obtain insurance coverage at commercially reasonable rates may adversely affect our financial condition or results of operations.

We seek to maintain appropriate insurance coverage at commercially reasonable rates. We normally insure based on the cost of an asset rather than replacement value and we also elect to self-insure, co-insure, or use deductibles in certain circumstances for certain risks such as loss of use of a ship or a cyber-security breach. The limits of insurance coverage we purchase are based on the availability of the coverage, evaluation of our risk profile and cost of coverage. Accordingly, we are not protected against all risks which could result in an unexpected decrease in our revenue and results of operations in the event of an incident.

Our protectionWe are members of three Protection and indemnity (“Indemnity ("P&I”&I") liability insuranceclubs, which are part of a worldwide group of 13 P&I clubs, known as the International Group of P&I Clubs (the “IG”). P&I coverage provided by the clubs is placed on a mutual basis and we are subject to additional premium calls in amounts based on claim recordsthe event of all membersa catastrophic loss incurred by any member of the 13 P&I Club.clubs, whereby the reinsurance limits purchased by the IG are exhausted. We are also subject to additional premium assessments including, but not limited to,calls based on investment orand underwriting shortfalls experienced by the P&I Club.our own individual insurers.

We cannot be certain that insurance and reinsurance coverage will be available to us and at commercially reasonable rates in the future. Additionally, if we or other insureds sustain significant losses, the result may be higher insurance premiums, cancellation of coverage, or the inability to obtain coverage. Such events could adversely affect our financial condition or results of operations.

Environmental, labor, health and safety, financial responsibility and other maritime regulations could affect operations and increase operating costs.

The United States and various state and foreign government or regulatory agencies have enacted or may enact environmental regulations or policies, such as requiring the use of low sulfur fuels, that could increase our direct cost to operate in certain markets, increase our cost for fuel, limit the supply of compliant fuel, cause us to incur significant expenses to purchase and/or develop new equipment and adversely impact the cruise vacation industry. While we have taken and expect to continue to take a number of actions to mitigate the potential impact of certain of these regulations, there can be no assurances that these efforts will be successful or completed on a timely basis.

Table of Contents

There is increasing global regulatory focus on climate change and greenhouse gas (GHG) emissions. These regulatory efforts, both internationally and in the United States are still developing, and we cannot yet determine what the final regulatory programs or their impact will be in any jurisdiction where we do business. However, such climate change-related regulatory activity in the future may adversely affect our business and financial results by requiring us to reduce our emissions, purchase allowances or otherwise pay for our emissions. Such activity may also impact us by increasing our operating costs, including fuel costs.

Some environmental groups have also lobbied for more stringent regulation of cruise ships and have generated negative publicity about the cruise vacation industry and its environmental impact. See Item 1. Business-Regulation-Environmental Regulations of our Annual Report on Form 10-K for the year ended December 31, 2016.2017.

Table of Contents

In addition, we are subject to various international, national, state and local laws, regulations and treaties that govern, among other things, discharge from our ships, safety standards applicable to our ships, treatment of disabled persons, health and sanitary standards applicable to our guests, security standards on board our ships and at the ship/port interface areas, and financial responsibilities to our guests. These issues are, and we believe will continue to be, an area of focus by the relevant authorities throughout the world. This could result in the enactment of more stringent regulation of cruise ships that could subject us to increasing compliance costs in the future.

A change in our tax status under the United States Internal Revenue Code, or other jurisdictions, may have adverse effects on our income.

We and a number of our subsidiaries are foreign corporations that derive income from a U.S. trade or business and/or from sources within the United States. Drinker Biddle & Reath LLP, our U.S. tax counsel, has delivered to us an opinion, based on certain representations and assumptions set forth in it, to the effect that this income, to the extent derived from or incidental to the international operation of a ship or ships, is excluded from gross income for U.S. federal income tax purposes pursuant to Section 883 of the Internal Revenue Code. We believe that most of our income (including that of our subsidiaries) is derived from or incidental to the international operation of a ship or ships.

Our ability to rely on Section 883 could be challenged or could change in the future. Provisions of the Internal Revenue Code, including Section 883, are subject to legislative change at any time. Moreover, changes could occur in the future with respect to the identity, residence or holdings of our direct or indirect shareholders, trading volume or trading frequency of our shares, or relevant foreign tax laws of Liberia such that it no longer qualifies as an equivalent exemption jurisdiction, that could affect our eligibility for the Section 883 exemption. Accordingly, there can be no assurance that we will continue to be exempt from U.S. income tax on U.S. source shipping income in the future. If we were not entitled to the benefit of Section 883, we and our subsidiaries would be subject to U.S. taxation on a portion of the income derived from or incidental to the international operation of our ships, which would reduce our net income.

Additionally, portions of our business are operated by companies that are within the United Kingdom tonnage tax regime. Further, some of our operations are conducted in jurisdictions where we rely on tax treaties to provide exemption from taxation. To the extent the United Kingdom tonnage tax laws change or we do not continue to meet the applicable qualification requirements or if tax treaties are changed or revoked, we may be required to pay higher income tax in these jurisdictions, adversely impacting our results of operations.

As budgetary constraints continue to adversely impact the jurisdictions in which we operate, increases in income tax regulations, tax audits or tax reform affecting our operations may be imposed.

Litigation, enforcement actions, fines or penalties could adversely impact our financial condition or results of operations and/or damage our reputation.

Our business is subject to various United States and international laws and regulations that could lead to enforcement actions, fines, civil or criminal penalties or the assertion of litigation claims and damages. In addition, improper conduct by our employees, agents or joint venture partners could damage our reputation and/or lead to litigation or legal proceedings that could result in civil or criminal penalties, including substantial monetary fines. In certain circumstances it may not be economical to defend against such matters and/or a legal strategy may not ultimately result in us prevailing in a matter. Such events could lead to an adverse impact on our financial condition or results of operations.

We are not a United States corporation and our shareholders may be subject to the uncertainties of a foreign legal system in protecting their interests.

Table of Contents

Our corporate affairs are governed by our Articles of Incorporation and By-Laws and by the Business Corporation Act of Liberia. The provisions of the Business Corporation Act of Liberia resemble provisions of the corporation laws of a number of states in the United States. However, while most states have a fairly well developed body of case law interpreting their respective corporate statutes, there are very few judicial cases in Liberia interpreting the Business Corporation Act of Liberia. As such, the rights and fiduciary responsibilities of directors under Liberian law are not as clearly established as the rights and fiduciary responsibilities of directors under statutes or judicial precedent in certain United States jurisdictions. For example, the right of shareholders to bring a derivative action in Liberian courts may be more limited than in United States jurisdictions. There may also be practical difficulties for shareholders attempting to bring suit in Liberia and Liberian courts may or may not recognize and enforce foreign judgments. Thus, our public shareholders may have more difficulty in protecting their interests with respect to actions by management, directors or controlling shareholders than would shareholders of a corporation incorporated in a United States jurisdiction.
Table of Contents


Provisions of our Articles of Incorporation, By-Laws and Liberian law could inhibit others from acquiring us, prevent a change of control, and may prevent efforts by our shareholders to change our management.

Certain provisions of our Articles of Incorporation and By-Laws and Liberian law may inhibit third parties from effectuating a change of control of the Company without Board approval which could result in the entrenchment of current management. These include provisions in our Articles of Incorporation that prevent third parties, other than A. Wilhelmsen AS. and Cruise Associates, from acquiring beneficial ownership of more than 4.9% of our outstanding shares without the consent of our Board of Directors.


Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Share Repurchases

The following table presents the total number of shares of our common stock that we repurchased during the quarter ended September 30, 2017:March 31, 2018:

PeriodTotal number of shares purchased Average price paid per share 
Total number of shares purchased as part of publicly announced plans or programs(1)
 Approximate dollar value of shares that may yet be purchased under the plans or programs
July 1, 2017 - July 31, 2017— — — $500,000,000
August 1, 2017 - August 31, 2017827,826 $120.78 827,826 $400,000,000
September 1, 2017 - September 30, 2017212,128 $117.83 212,128 $375,000,000
Total1,039,954   1,039,954  
PeriodTotal number of shares purchased Average price paid per share 
Total number of shares purchased as part of publicly announced plans or programs(1)
 Approximate dollar value of shares that may yet be purchased under the plans or programs
January 1, 2018 - January 31, 2018— — — $275,000,000
February 1, 2018 - February 28, 20182,147,034 $128.08 2,147,034 $—
March 1, 2018 - March 31, 2018— — — $—
Total2,147,034   2,147,034  

(1)On April 28, 2017, we announced that our board of directors authorized a 12-month common stock repurchase program for up to $500 million. The timing and number of sharesmillion that was completed in February 2018. For further information on our stock repurchase transactions, please refer to be repurchased will depend on a variety of factors including price and market conditions. During the third quarter of 2017, we repurchased 1.0 million shares of our common stock for a total of $125.0 million in open market transactions that were recorded withinNote 8. Treasury stockShareholders' Equity into our consolidated balance sheet. Repurchases under the program may be made at management's discretion from time to time on the open market or through privately negotiated transactions.financial statements.


Table of Contents    

Item 6. Exhibits
 
10.1
 
NovationHull No. B34 Credit Agreement, dated as of July 24, 2017,January 30, 2015, as novated, amended and restated on the Actual Delivery Date pursuant to a novation agreement dated January 30, 2015 (as amended), between Hibisyeu Finance Ltd., Royal Caribbean Cruises Ltd., Citibank Europe Plc, UK Branch, Citicorp Trustee Company Limited, Citibank N.A., London Branch, HSBC France, Sumitomo Mitsui Banking CorporationCitibank Europe Limited, Parisplc, UK Branch, and the banks and financial institutions as lender parties thereto (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on July 28, 2017).thereto.*
   
10.218.1
 
Novation Agreement, dated as of July 24, 2017, between Hoediscus Finance Ltd., Royal Caribbean Cruises Ltd., Citibank Europe Plc, UK Branch, Citicorp Trustee Company Limited, Citibank N.A., London Branch, HSBC France, Sumitomo Mitsui Banking Corporation Europe Limited, Paris Branch and the banks and financial institutions as lender parties thereto (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on July 28, 2017).Preferability Letter Regarding Change in Accounting Principle*
10.3
Novation Agreement, dated as of July 24, 2017, between Houatorris Finance Ltd., Royal Caribbean Cruises Ltd., Citibank Europe Plc, UK Branch, Citicorp Trustee Company Limited, Citibank N.A., London Branch, HSBC France, Sumitomo Mitsui Banking Corporation Europe Limited, Paris Branch and the banks and financial institutions as lender parties thereto (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on July 28, 2017).
10.4
Icon 1 Hull No. S-1400 Credit Agreement, dated as of October 11, 2017, between Royal Caribbean Cruises Ltd., as the Borrower, the Lenders from time to time party thereto, KfW IPEX-Bank GmbH, as Hermes Agent, Facility Agent, Documentation Agent and Initial Mandated Lead Arranger and BNP Paribas Fortis SA/NV as Finnvera Agent (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on October 17, 2017).

��
10.5
Icon 2 Hull No. S-1401 Credit Agreement, dated as of October 11, 2017, between Royal Caribbean Cruises Ltd., as the Borrower, the Lenders from time to time party thereto, KfW IPEX-Bank GmbH, as Hermes Agent, Facility Agent, Documentation Agent and Initial Mandated Lead Arranger and BNP Paribas Fortis SA/NV as Finnvera Agent (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on October 17, 2017).

10.6
Amendment to the Credit Agreement, dated as of October 12, 2017, among Royal Caribbean Cruises Ltd., the various financial institutions as are or shall become parties thereto and Nordea Bank AB (PUBL), New York branch, as administrative agent for the lender parties (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on October 17, 2017).

10.7
Form of 2008 Equity Incentive Plan Restricted Stock Unit Agreement - Executive Officer Grants (Non-Vesting Into Retirement)*

   
31.1
 
Certification of the Chairman and Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934*
   
31.2
 
Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934*
   
32.1
 
Certifications of the Chairman and Chief Executive Officer and the Chief Financial Officer pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934 and Section 1350 of Chapter 63 of Title 18 of the United States Code**

* Filed herewith
** Furnished herewith
 
Interactive Data File
 
101                         The following financial statements of Royal Caribbean Cruises Ltd. for the periodquarter ended September 30, 2017,March 31, 2018, formatted in XBRL are filed herewith:
 
(i)                     the Consolidated Statements of Comprehensive Income (Loss) for the quarter ended March 31, 2018 and nine months ended September 30, 2017 and 2016;2017;

(ii)the Consolidated Balance Sheets at September 30, 2017March 31, 2018 and December 31, 2016;2017;
 
(iii)                the Consolidated Statements of Cash Flows for the ninethree months ended September 30, 2017March 31, 2018 and 2016;2017; and
 
(iv)                   the Notes to the Consolidated Financial Statements, tagged in summary and detail.

Table of Contents    

SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
  ROYAL CARIBBEAN CRUISES LTD.
  (Registrant)
   
   
  /s/ JASON T. LIBERTY
  Jason T. Liberty
  Executive Vice President, Chief Financial Officer
November 7, 2017April 30, 2018 (Principal Financial Officer and duly authorized signatory)


5047