| Fair Value Measurements, Derivative Instruments and Hedging Activities and Financial Risks | Fair Value Measurements, Derivative Instruments and Hedging Activities and Financial Risks Fair Value Measurements Fair value is defined as the amount that would be received for selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date and is measured using inputs in one of the following three categories: • Level 1 measurements are based on unadjusted quoted prices 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. • Level 2 measurements are based on quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active or market data other than quoted prices that are observable for the assets or liabilities. • Level 3 measurements are based on unobservable data that are supported by little or no market activity and are significant to the fair value of the assets or liabilities. Considerable judgment may be required in interpreting market data used to develop the estimates of fair value. Accordingly, certain estimates of fair value presented herein are not necessarily indicative of the amounts that could be realized in a current or future market exchange. Financial Instruments that are not Measured at Fair Value on a Recurring Basis May 31, 2021 November 30, 2020 Carrying Fair Value Carrying Fair Value (in millions) Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 Assets Long-term other assets (a) $ 43 $ — $ 26 $ 19 $ 45 $ — $ 17 $ 18 Total $ 43 $ — $ 26 $ 19 $ 45 $ — $ 17 $ 18 Liabilities Fixed rate debt (b) $ 19,087 $ — $ 20,880 $ — $ 15,547 $ — $ 16,258 $ — Floating rate debt (b) 12,389 — 11,872 — 12,034 — 11,412 — Total $ 31,475 $ — $ 32,751 $ — $ 27,581 $ — $ 27,670 $ — (a) Long-term other assets are comprised of notes receivable. The fair values of our Level 2 notes receivable were based on estimated future cash flows discounted at appropriate market interest rates. The fair values of our Level 3 notes receivable were estimated using risk-adjusted discount rates. (b) The debt amounts above do not include the impact of interest rate swaps or debt issuance costs. The fair values of our publicly-traded notes were based on their unadjusted quoted market prices in markets that are not sufficiently active to be Level 1 and, accordingly, are considered Level 2. The fair values of our other debt were estimated based on current market interest rates being applied to this debt. Financial Instruments that are Measured at Fair Value on a Recurring Basis May 31, 2021 November 30, 2020 (in millions) Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 Assets Cash and cash equivalents $ 7,067 $ — $ — $ 9,513 $ — $ — Restricted cash 150 — — 179 — — Short-term investments (a) 2,204 — — — — — Total $ 9,422 $ — $ — $ 9,692 $ — $ — Liabilities Derivative financial instruments $ — $ 8 $ — $ — $ 10 $ — Total $ — $ 8 $ — $ — $ 10 $ — Nonfinancial Instruments that are Measured at Fair Value on a Nonrecurring Basis Valuation of Goodwill and Trademarks As a result of the phased resumption of guest cruise operations and its effect on our expected future operating cash flows, we performed interim discounted cash flow analyses for certain reporting units with goodwill as of May 31, 2021, and determined there was no impairment. For the three and six months ended May 31, 2020, we recognized goodwill impairment charges of $1.4 billion and $2.1 billion, respectively. We also performed trademark impairment reviews and determined there was no impairment to our trademarks. The determination of the fair value of our reporting units’ goodwill and trademarks includes numerous assumptions that are subject to various risks and uncertainties. The effect of COVID-19 and the phased resumption have created some uncertainty in forecasting the operating results and future cash flows used in our impairment analyses. We believe that we have made reasonable estimates and judgments. A change in the conditions, circumstances or strategy (including decisions about the allocation of new ships amongst brands and the transfer of ships between brands), which influence determinations of fair value, may result in a need to recognize an additional impairment charge . The principal assumptions, all of which are considered Level 3 inputs, used in our cash flow analyses consisted of: • The timing of our return to service, changes in market conditions and port or other restrictions • Forecasted revenues net of our most significant variable costs, which are travel agent commissions, costs of air and other transportation, and certain other costs that are directly associated with onboard and other revenues including credit and debit card fees • The allocation of new ships and the timing of the transfer or sale of ships amongst brands, as well as the estimated proceeds from ship sales • Weighted-average cost of capital of market participants, adjusted for the risk attributable to the geographic regions in which these cruise brands operate Refer to Note 1 - “ General, COVID-19 and the Use of Estimates and Risks and Uncertainty ” for additional discussion. Goodwill (in millions) NAA EA Total November 30, 2020 $ 579 $ 228 $ 807 Foreign currency translation adjustment — 11 11 May 31, 2021 $ 579 $ 239 $ 818 (a) North America and Australia ( “ NAA”) (b) Europe and Asia ( “ EA”) Trademarks (in millions) NAA EA Total November 30, 2020 $ 927 $ 253 $ 1,180 Foreign currency translation adjustment — 12 12 May 31, 2021 $ 927 $ 265 $ 1,192 Impairment of Ships We review our long-lived assets for impairment whenever events or circumstances indicate potential impairment. As a result of the effect of COVID-19 on our business, we determined that one ship, which we expect to dispose of, had a net carrying value that exceeded its estimated undiscounted future cash flows as of May 31, 2021. We determined the fair value of this ship based on its estimated selling value. We believe that we have made reasonable estimates and judgments. A change in the principal assumptions, which influences the determination of fair value, may result in a need to perform additional impairment reviews. The principal assumptions, all of which are considered Level 3 inputs, used in our 2020 cash flow analyses consisted of: • Timing of the respective ship's return to service, changes in market conditions and port or other restrictions • Forecasted ship revenues net of our most significant variable costs, which are travel agent commissions, costs of air and other transportation and certain other costs that are directly associated with onboard and other revenues, including credit and debit card fees • Timing of the sale of ships and estimated proceeds We recognized a ship impairment charge of $49 million in our EA segment for both the three and six months ended May 31, 2021 . For the three months ended May 31, 2020, we recognized $348 million and $150 million of ship impairment charges in our NAA and EA segments respectively, and $520 million and $308 million of ship impairment charges in our NAA and EA segments, respectively for the six months ended May 31, 2020. These impairments are included in other operating expenses of our Consolidated Statements of Income (Loss). Refer to Note 1 - “ General, COVID-19 and the Use of Estimates and Risks and Uncertainty ” for additional discussion. Derivative Instruments and Hedging Activities (in millions) Balance Sheet Location May 31, 2021 November 30, 2020 Derivative liabilities Derivatives designated as hedging instruments Interest rate swaps (a) Accrued liabilities and other $ 4 $ 5 Other long-term liabilities 4 5 Total derivative liabilities $ 8 $ 10 (a) We have interest rate swaps designated as cash flow hedges whereby we receive floating interest rate payments in exchange for making fixed interest rate payments. These interest rate swap agreements effectively changed $212 million at May 31, 2021 and $248 million at November 30, 2020 of EURIBOR-based floating rate euro debt to fixed rate euro debt. At May 31, 2021, these interest rate swaps settle through 2025. Our derivative contracts include rights of offset with our counterparties. We have elected to net certain of our derivative assets and liabilities within counterparties. May 31, 2021 (in millions) Gross Amounts Gross Amounts Offset in the Balance Sheet Total Net Amounts Presented in the Balance Sheet Gross Amounts not Offset in the Balance Sheet Net Amounts Assets $ — $ — $ — $ — $ — Liabilities $ 8 $ — $ 8 $ — $ 8 November 30, 2020 (in millions) Gross Amounts Gross Amounts Offset in the Balance Sheet Total Net Amounts Presented in the Balance Sheet Gross Amounts not Offset in the Balance Sheet Net Amounts Assets $ — $ — $ — $ — $ — Liabilities $ 10 $ — $ 10 $ — $ 10 The effect of our derivatives qualifying and designated as hedging instruments recognized in other comprehensive income (loss) and in net income (loss) was as follows: Three Months Ended May 31, Six Months Ended (in millions) 2021 2020 2021 2020 Gains (losses) recognized in AOCI: Cross currency swaps - net investment hedges - included component $ — $ 133 $ — $ 131 Cross currency swaps - net investment hedges - excluded component $ — $ (43) $ — $ (1) Foreign currency zero cost collars - cash flow hedges $ — $ 1 $ — $ (1) Foreign currency forwards - cash flow hedges $ — $ 38 $ — $ 53 Interest rate swaps - cash flow hedges $ 1 $ 4 $ 2 $ 4 Gains (losses) reclassified from AOCI - cash flow hedges: Interest rate swaps - Interest expense, net of capitalized interest $ (1) $ (1) $ (3) $ (3) Foreign currency zero cost collars - Depreciation and amortization $ — $ — $ 1 $ — Gains (losses) recognized on derivative instruments (amount excluded from effectiveness testing – net investment hedges) Cross currency swaps - Interest expense, net of capitalized interest $ — $ 2 $ — $ 12 The amount of estimated cash flow hedges’ unrealized gains and losses that are expected to be reclassified to earnings in the next twelve months is not material. Financial Risks Fuel Price Risks We manage our exposure to fuel price risk by managing our consumption of fuel. Substantially all of our exposure to market risk for changes in fuel prices relates to the consumption of fuel on our ships. We manage fuel consumption through ship maintenance practices, modifying our itineraries and implementing innovative technologies. Foreign Currency Exchange Rate Risks Overall Strategy We manage our exposure to fluctuations in foreign currency exchange rates through our normal operating and financing activities, including netting certain exposures to take advantage of any natural offsets and, when considered appropriate, through the use of derivative and non-derivative financial instruments. Our primary focus is to monitor our exposure to, and manage, the economic foreign currency exchange risks faced by our operations and realized if we exchange one currency for another. We currently only hedge certain of our ship commitments and net investments in foreign operations. The financial impacts of the hedging instruments we do employ generally offset the changes in the underlying exposures being hedged. Operational Currency Risks Our operations primarily utilize the U.S. dollar, Australian dollar, euro or sterling as their functional currencies. Our operations also have revenue and expenses denominated in non-functional currencies. Movements in foreign currency exchange rates affect our financial statements. Investment Currency Risks We consider our investments in foreign operations to be denominated in stable currencies and of a long-term nature. We partially mitigate the currency exposure of our investments in foreign operations by designating a portion of our foreign currency debt and derivatives as hedges of these investments. As of May 31, 2021, we have designated $497 million of our sterling-denominated debt as non-derivative hedges of our net investments in foreign operations. For the three and six months ended May 31, 2021, we recognized $8 million and $50 million of losses on these non-derivative net investment hedges in the cumulative translation adjustment section of other comprehensive income (loss). We also have $9 billion of euro-denominated debt, which provides an economic offset for our operations with euro functional currency. Newbuild Currency Risks Our shipbuilding contracts are typically denominated in euros. Our decision to hedge a non-functional currency ship commitment for our cruise brands is made on a case-by-case basis, considering the amount and duration of the exposure, market volatility, economic trends, our overall expected net cash flows by currency and other offsetting risks. We use foreign currency derivative contracts to manage foreign currency exchange rate risk for some of our ship construction payments. At May 31, 2021, our remaining newbuild currency exchange rate risk primarily relates to euro-denominated newbuild contract payments to non-euro functional currency brands, which represent a total unhedged commitment of $6.8 billion for newbuilds scheduled to be delivered through 2025. The cost of shipbuilding orders that we may place in the future that is denominated in a different currency than our cruise brands’ will be affected by foreign currency exchange rate fluctuations. These foreign currency exchange rate fluctuations may affect our decision to order new cruise ships. Interest Rate Risks We manage our exposure to fluctuations in interest rates through our debt portfolio management and investment strategies. We evaluate our debt portfolio to determine whether to make periodic adjustments to the mix of fixed and floating rate debt through the use of interest rate swaps and the issuance of new debt. Concentrations of Credit Risk As part of our ongoing control procedures, we monitor concentrations of credit risk associated with financial and other institutions with which we conduct significant business. We seek to manage these credit risk exposures, including counterparty nonperformance primarily associated with our cash equivalents, investments, notes receivables, future financing facilities, contingent obligations, derivative instruments, insurance contracts, long-term ship charters and new ship progress payment guarantees, by: • Conducting business with well-established financial institutions, insurance companies and export credit agencies • Diversifying our counterparties • Having guidelines regarding credit ratings and investment maturities that we follow to help safeguard liquidity and minimize risk • Generally requiring collateral and/or guarantees to support notes receivable on significant asset sales, long-term ship charters and new ship progress payments to shipyards At May 31, 2021, our exposures under derivative instruments were not material. We also monitor the creditworthiness of travel agencies and tour operators in Asia, Australia and Europe, which includes charter-hire agreements in Asia and credit and debit card providers to which we extend credit in the normal course of our business. Concentrations of credit risk associated with trade receivables and other receivables, charter-hire agreements and contingent obligations are not considered to be material, principally due to the large number of unrelated accounts, the nature of these contingent obligations and their short maturities. Normally, we have not required collateral or other security to support normal credit sales. Historically, we have not experienced significant credit losses, including counterparty nonperformance, however, because of the impact COVID-19 is having on economies, we have experienced, and may continue to experience, an increase in credit losses. |
