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Fair Value Measurements, Derivative Instruments and Hedging Activities and Financial Risks

6 Months Ended

May 31, 2020

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, 2020																		November 30, 2019
	Carrying Value		Fair Value														Carrying Value		Fair Value
(in millions)					Level 1			Level 2			Level 3					Level 1					Level 2	Level 3
Assets
Long-term other assets (a)	$	94	$	—		$	30		$	62		$	181	$	—		$	31	$	149
Total	$	94	$	—		$	30		$	62		$	181	$	—		$	31	$	149
Liabilities
Fixed rate debt (b)	$	13,061	$	—		$	12,901		$	—		$	7,438	$	—		$	7,782	$	—
Floating rate debt (b)	8,362		—			7,112			—			4,195		—			4,248		—
Total	$	21,422	$	—		$	20,013		$	—		$	11,634	$	—		$	12,030	$	—

(a)Long-term other assets are comprised of notes receivables, which include loans on ship sales. The fair values of our Level 2 notes receivables 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, 2020										November 30, 2019
(in millions)	Level 1		Level 2		Level 3		Level 1		Level 2		Level 3
Assets
Cash and cash equivalents	$	6,881	$	—	$	—	$	518	$	—	$	—
Restricted cash	15		—		—		13		—		—

Derivative financial instruments	—		—		—		—		58		—
Total	$	6,896	$	—	$	—	$	530	$	58	$	—
Liabilities
Derivative financial instruments	$	—	$	12	$	—	$	—	$	25	$	—
Total	$	—	$	12	$	—	$	—	$	25	$	—

Nonfinancial Instruments that are Measured at Fair Value on a Nonrecurring Basis

Valuation of Goodwill and Trademarks

As a result of the effect of COVID-19 on our expected future operating cash flows, we performed interim discounted cash flow analyses for certain reporting units with goodwill as of February 29, 2020 and for all reporting units with goodwill as of May 31, 2020. During the six months ended May 31, 2020, we determined that the estimated fair values of two of our North America & Australia (“NAA”) segment reporting units and two of our Europe & Asia (“EA”) segment reporting units no longer exceeded their carrying values. We recognized goodwill impairment charges of $1.4 billion and $2.1 billion during the three and six months ended May 31, 2020, respectively and have no remaining goodwill for those reporting units. We also performed trademark impairment reviews and determined there was no impairment to our trademarks.

The determination of our reporting units' goodwill and trademark fair values includes numerous assumptions that are subject to various risks and uncertainties. The principal assumptions, all of which are considered Level 3 inputs, used in our cash flow analyses consisted of:

•Changes in market conditions, port restrictions or strategy, including decision about the allocation of new ships amongst brands and the transfer of ships between brands

•Forecasted future operating results, including net revenue yields and fuel expenses

•Weighted-average cost of capital of market participants, adjusted for the risk attributable to the geographic regions in which these cruise brands operate

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. Refer to Note 1 - "General, COVID-19 Use of Estimates and Risks and Uncertainty" for additional discussion.


	Goodwill
(in millions)	NAA Segment		EA Segment		Total
At November 30, 2019	$	1,898	$	1,014	$	2,912
Impairment charges	(1,319)		(777)		(2,096)
Foreign currency translation adjustment	—		(26)		(26)
At May 31, 2020	$	579	$	211	$	790


	Trademarks
(in millions)	NAA Segment		EA Segment		Total
At November 30, 2019	$	927	$	240	$	1,167
Foreign currency translation adjustment	—		(6)		(6)
At May 31, 2020	$	927	$	234	$	1,162

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 expected future operating cash flows, we determined certain impairment triggers had occurred. Accordingly, we performed undiscounted cash flow analyses on some ships in our fleet as of February 29, 2020 and May 31, 2020. Based on these undiscounted cash flow analyses, we determined that certain ships had net carrying values that exceeded their estimated undiscounted future cash flows. We estimated the fair values of these ships based on their discounted cash flows or estimated selling value. We then compared these estimated fair values to the net carrying values and, as a result, we recognized the following ship impairment charges:

•$348 million and $150 million of ship impairment charges in the NAA and EA segments, respectively for the three months ended May 31, 2020.

•$520 million and $308 million of ship impairment charges in the NAA and EA segments, respectively for the six months ended May 31, 2020.

The principal assumptions used in our analyses consisted of changes in strategy (including decisions about the sale of ships, estimated sale proceeds and timing, as well as the transfer of ships between brands), return to service, forecasted future operating results, including net revenue yields and fuel expenses. All principal assumptions are considered Level 3 inputs. Refer to Note 1 - "General, COVID-19 Use of Estimates and Risks and Uncertainty" for additional discussion.

Derivative Instruments and Hedging Activities


(in millions)	Balance Sheet Location	May 31, 2020		November 30, 2019
Derivative assets
Derivatives designated as hedging instruments
Cross currency swaps (a)	Prepaid expenses and other	$	—	$	32
	Other assets	—		25
Total derivative assets		$	—	$	58
Derivative liabilities
Derivatives designated as hedging instruments

Cross currency swaps (a)	Accrued liabilities and other	$	—	$	1
	Other long-term liabilities	—		9
Foreign currency zero cost collars (b)	Accrued liabilities and other	2		1
Interest rate swaps (c)	Accrued liabilities and other	5		6
	Other long-term liabilities	6		9
Total derivative liabilities		$	12	$	25

(a)At May 31, 2020, we had no cross currency swaps. At November 30, 2019, we had cross currency swaps totaling $1.9 billion that were designated as hedges of our net investment in foreign operations with a euro-denominated functional currency.

(b)At May 31, 2020 and November 30, 2019, we had foreign currency derivatives consisting of foreign currency zero cost collars designated as foreign currency cash flow hedges for a portion of our euro-denominated shipbuilding payments. See “Newbuild Currency Risks” below for additional information regarding these derivatives.

(c)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 $266 million at May 31, 2020 and $300 million at November 30, 2019 of EURIBOR-based floating rate euro debt to fixed rate euro debt. At May 31, 2020, 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, 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	$	12	$	—	$	12	$	—	$	12

	November 30, 2019
(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	$	58	$	—	$	58	$	(4)	$	54
Liabilities	$	25	$	—	$	25	$	(4)	$	21

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 May 31,
(in millions)	2020		2019		2020		2019
Gains (losses) recognized in AOCI:
Cross currency swaps - net investment hedges - included component	$	133	$	18	$	131	$	20
Cross currency swaps - net investment hedges - excluded component	$	(43)	$	10	$	(1)	$	(1)
Foreign currency zero cost collars - cash flow hedges	$	1	$	(1)	$	(1)	$	(1)
Foreign currency forwards - cash flow hedges	$	38	$	—	$	53	$	—
Interest rate swaps - cash flow hedges	$	4	$	—	$	4	$	1
Gains (losses) reclassified from AOCI - cash flow hedges:
Interest rate swaps - Interest expense, net of capitalized interest	$	(1)	$	(2)	$	(3)	$	(4)
Gains (losses) recognized on derivative instruments (amount excluded from effectiveness testing – net investment hedges)
Cross currency swaps - Interest expense, net of capitalized interest	$	2	$	6	$	12	$	11

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 significant.

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 will affect our financial statements.

Investment Currency Risks

We consider our investments in foreign operations to be denominated in stable currencies and are 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, 2020, we have designated $816 million of our sterling-denominated debt as non-derivative hedges of our net investments in foreign operations and for the three and six months ended May 31, 2020, we recognized $36 million and $38 million of gains on these non-derivative net investment hedges in the cumulative translation adjustment section of other comprehensive income (loss). We also have $5.3 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, 2020, for the following newbuilds, we had foreign currency contracts for a portion of our euro-denominated shipyard payments. These contracts are designated as cash flow hedges.


	Entered Into	Matures In	Weighted-Average Floor Rate		Weighted- Average Ceiling Rate
Foreign currency zero cost collars
Enchanted Princess	2019	June 2020	$	1.04	$	1.28
Mardi Gras	2019	October 2020	$	1.05	$	1.28

If the spot rate is between the ceiling and floor rates on the date of maturity, then we would not owe or receive any payments under the zero cost collars.

At May 31, 2020, 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 $7.3 billion for newbuilds scheduled to be delivered from 2020 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, issuance of new debt, amendment of existing debt or early retirement of existing 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 minimize these credit risk exposures, including counterparty nonperformance primarily associated with our cash equivalents, investments, notes receivables, committed 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, 2020, 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. Our credit exposure also includes contingent obligations related to cash payments received directly by travel agents and tour operators for cash collected by them on cruise sales in Australia and most of Europe where we are obligated to honor our guests’ cruise payments made by them to their travel agents and tour operators regardless of whether we have received these payments. 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. Because of the impact COVID-19 is having on economies, we have experienced, and expect to continue to experience, an increase in credit losses.