Impairment of Pullmantur Related Assets

9 Months Ended

Sep. 30, 2015

Goodwill and Intangible Assets Disclosure [Abstract]

Goodwill and Intangible Assets Disclosure

Note 3. Impairment of Pullmantur Related Assets

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

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

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

As a result of these developments, we performed an interim impairment evaluation of Pullmantur’s goodwill and trademarks and trade names in connection with the preparation of our financial statements for the quarter ended September 30, 2015. We estimated the fair value of the Pullmantur reporting unit using a probability-weighted discounted cash flow model. The estimation of future cash flows requires our significant judgment when making assumptions of expected revenues, operating costs, marketing, selling and administrative expenses, interest rates, ship additions and retirements as well as assumptions regarding the cruise vacation industry’s competitive environment and general and economic business conditions, among other factors.

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

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

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



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

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

Pullmantur had recognized a deferred tax liability of $43.4 million, which represented the tax effect of the basis difference between the tax and book values of Pullmantur’s trademarks and trade names. In addition, Pullmantur had recognized a net deferred tax asset relating to net operating losses with an unlimited carryforward period. The benefit of the deferred tax asset was previously assumed through the future realization of the deferred tax liability. A partial valuation allowance was previously established against the deferred tax asset since the utilization of the net operating losses is subject to a 70% annual limitation. As a result of the impairment of the trademarks and trade names, we reversed the deferred tax liability of $43.4 million and increased the valuation allowance by $31.4 million, or to 100% of the deferred tax asset balance, resulting in a $12.0 million deferred tax benefit recognized during the quarter ended September 30, 2015.

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

- Definition

The entire disclosure for the aggregate amount of goodwill and a description of intangible assets, which may include (a) for amortizable intangible assets (also referred to as finite-lived intangible assets), the carrying amount, the amount of any significant residual value, and the weighted-average amortization period, (b) for intangible assets not subject to amortization (also referred to as indefinite-lived intangible assets), the carrying amount, and (c) the amount of research and development assets acquired and written off in the period, including the line item in the income statement in which the amounts written off are aggregated, if not readily apparent from the income statement. Also discloses (a) for amortizable intangibles assets in total and by major class, the gross carrying amount and accumulated amortization, the total amortization expense for the period, and the estimated aggregate amortization expense for each of the five succeeding fiscal years, (b) for intangible assets not subject to amortization the carrying amount in total and by major class, and (c) for goodwill, in total and for each reportable segment, the changes in the carrying amount of goodwill during the period (including the aggregate amount of goodwill acquired, the aggregate amount of impairment losses recognized, and the amount of goodwill included in the gain (loss) on disposal of a reporting unit). If any part of goodwill has not been allocated to a reportable segment, discloses the unallocated amount and the reasons for not allocating. For each impairment loss recognized related to an intangible asset (excluding goodwill), discloses: (a) a description of the impaired intangible asset and the facts and circumstances leading to the impairment, (b) the amount of the impairment loss and the method for determining fair value, (c) the caption in the income statement or the statement of activities in which the impairment loss is aggregated, and (d) the segment in which the impaired intangible asset is reported. For each goodwill impairment loss recognized, discloses: (a) a description of the facts and circumstances leading to the impairment, (b) the amount of the impairment loss and the method of determining the fair value of the associated reporting unit, and (c) if a recognized impairment loss is an estimate not finalized and the reasons why the estimate is not final. May also disclose the nature and amount of any significant adjustments made to a previous estimate of an impairment loss.

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