ROYAL CARIBBEAN CRUISES LTD 10-Q

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 Quarterly Report on Form 10-Q includes "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact, 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," "driving," "estimate," "expect," "goal," "intend," "may," "plan," "project," "seek," "should," "will," "would," "considering" 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 filing. 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 is organized to present the following: • a review of our financial presentation, including discussion of certain operational and financial metrics we utilize to assist us in managing our business; • a discussion of our results of operations for the quarter ended March 31, 2021, compared to the same period in 2020; • a discussion of our business outlook; and • a discussion of our liquidity and capital resources, including our future capital and contractual commitments and potential funding sources. 33 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, 2020. Seasonality Historically, our revenues are seasonal based on demand for cruises. Demand has historically been 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, pre- and post-cruise tours and fees for operating certain port facilities. Onboard and other revenues also include 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/or losses related to the sale of our ships, if any. We do not allocate payroll and related expenses, food expenses, fuel expenses or other operating expenses to the expense categories attributable to passenger ticket revenues or onboard and other revenues since they are incurred to provide the total cruise vacation experience. Selected Operational and Financial Metrics We utilize a variety of operational and financial metrics which are defined below to evaluate our performance and financial condition. As discussed in more detail herein, certain of these metrics are non-GAAP financial measures. These non-GAAP 34 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 Loss per Share ("Adjusted EPS") represents Adjusted Net Loss attributable to Royal Caribbean Cruises Ltd. 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 Loss represents net loss less net income attributable to noncontrolling interest 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 (i) loss on the extinguishment of debt; (ii) the amortization of non-cash debt discount on our convertible notes; (iii) the estimated cash refund expected to be paid to Pullmantur guests and other expenses incurred as part of the Pullmantur S.A. reorganization; (iv) impairment and credit losses recognized in the first quarter of 2020 as a result of the impact of COVID-19 and, in 2021, recovery of credit losses recognized during 2020; (v) equity investment asset impairments; (vi) net insurance recoveries related to the collapse of the drydock structure at the Grand Bahama Shipyard involving Oasis of the Seas; (vii) restructuring charges incurred in relation to the reduction in our U.S. workforce and other initiative expenses; (viii) the change in the fair value in the Silversea Cruises contingent consideration and the amortization of the Silversea Cruises intangible assets resulting from the our acquisition of a 66.7% interest in Silversea Cruises in 2018; (ix) the noncontrolling interest adjustment to exclude the impact of the contractual accretion requirements associated with the put option held by Heritage Cruise Holding Ltd.'s (previously known as Silversea Cruises Group Ltd.) noncontrolling interest in Silversea Cruises; and (x) the net gain recognized in the first quarter of 2021 in relation to the sale of the Azamara brand. Available Passenger Cruise Days ( “APCD” ) is our measurement of capacity and represents double occupancy per cabin multiplied by the number of cruise days for the period, 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. 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. Although discussed in previous periods, we did not report nor reconcile our Gross Yields, Net Yields, Gross Cruise Costs, Net Cruise Costs and Net Cruise Costs Excluding Fuel, as defined in our Annual Report on Form 10-K for the year ended December 31, 2019. Historically, we have utilized these financial metrics to measure relevant rate comparisons to other periods. However, our 2020 and 2021 reduction in capacity and revenues and the shift in the nature of our running costs due to the suspension of our operations do not allow for a meaningful analysis and comparison of these metrics and as such these metrics have been excluded from this report. Recent Developments: COVID-19 Return to Healthy Sailing Our voluntary suspension of our Global Brands’ cruise operations established in March 2020 in an effort to contain COVID-19, has been extended through at least June 30, 2021, for most of our cruise operations. The disruptions to our operations resulting from COVID-19 have had, and continue to have, a material negative impact on our financial condition and results of operations. The outbreak of COVID-19 has resulted in an unprecedented global response to contain the spread of the disease. These global efforts have resulted in travel restrictions and created significant uncertainty regarding worldwide port closures and availability of ports and destinations generally. We have begun certain limited operations and have announced additional, limited cruise operations on 13 out of our 59 Global and Partner Brand ships, in each case, outside of the U.S. with reduced guest occupancy, modified itineraries, and enhanced health, safety and vaccination protocols for our crew and guests, developed in collaboration with governments and health authorities and under the advice of the Healthy Sail Panel (“HSP”). The HSP was formed in June 2020 by us and Norwegian Cruise Line Holdings Ltd. and composed of leading experts in relevant fields, including epidemiology, infectious diseases, public policy, applicable regulations, engineering and general health safety. CDC Framework for Conditional Sailing Order On and effective as of October 30, 2020, the U.S. Centers for Disease Control and Prevention ("CDC") issued a Framework for Conditional Sailing Order (the “Conditional Order”), and recently issued technical instructions under the 35 Conditional Order, that will permit cruise ship passenger operations in U.S. waters under certain conditions and using a phased approach. The Conditional Order will remain in effect until the earlier of (1) the expiration of the Secretary of Health and Human Services’ declaration that COVID-19 constitutes a public health emergency, (2) the rescission or modification by the CDC Director of the Conditional Order based on specific public health or other considerations, or (3) November 1, 2021. We continue to work with the CDC, other U.S. and non-U.S. regulatory agencies and the HSP to develop our plan to return to service in consideration of global vaccination efforts. For cruise ship operations in U.S. waters, our return to service plan also considers the requirements of the CDC's framework for the Conditional Order, including recently issued technical instructions. On April 28, 2021, the CDC issued a letter to members of the cruising industry communicating that it remains committed to the resumption of cruise ship passenger operations in the U.S. following the requirements of the Conditional Order by mid-summer 2021. In the communication, the CDC provided clarifications to its previously issued technical instructions regarding several matters including port operations and COVID-19 testing and vaccination protocols. We are currently evaluating the impact of these clarifications on the technical instructions. Many uncertainties remain as to the specifics, timing and costs of administering and implementing the requirements of the Conditional Order, some of which may be significant. Further, the Conditional Order contemplates that the CDC may issue additional requirements through additional technical instructions or orders as needed and that the phases described above will be further determined based on public health considerations, including the trajectory of the pandemic, variants of disease and the ability of cruise ship operators to successfully employ measures that mitigate the risk of COVID-19. Based on our assessment of these conditions or for other reasons, we may determine it necessary to further extend our voluntary suspension of our Global Brands’ cruise sailings which currently extends through at least June 30, 2021, for most of our cruise operations. Update on Bookings Booking activity for the second half of 2021 is aligned with our anticipated resumption of cruising. Pricing on these bookings is higher than 2019 both including and excluding the dilutive impact of future cruise credits ("FCC"s). Cumulative advance bookings for the first half of 2022 are within historical ranges and at higher prices when compared to 2019. This was achieved with minimal sales and marketing spend, which we believe highlights a strong long-term demand for cruising Since our annual filing, approximately 75% of bookings made for the remainder of 2021 are new and the rest are due to the redemption of FCCs and our “Lift & Shift” program. We continue to provide guests who were booked on a suspended sailing with the option to request a refund, to receive an FCC, or to “Lift and Shift” their booking to the following year. As of March 31, 2021 we had $1.8 billion in customer deposits, of which approximately 45% are FCCs. Approximately 50% of the guests booked on cancelled sailings since our suspension of operations have requested cash refunds. Update on Recent Liquidity Actions and Ongoing Uses of Cash As of March 31, 2021, we had liquidity of approximately $5.8 billion in the form of cash and cash equivalents of $5.1 billion and a $0.7 billion commitment expiring on August 12, 2022 for a 364-day term loan facility. As of March 31, 2021, our revolving credit facilities were fully utilized through a combination of amounts drawn and letters of credit issued under the facilities. Given the current environment, we continue to prioritize and bolster liquidity through significant cost and capital expenditure reductions, cash conservation and additional financing sources, as described below, to ensure that we are well positioned for recovery. Reduced Operating Expenses We have taken significant actions to reduce operating expenses during the suspension of our global cruise operations. In particular, we: • significantly reduced ship operating expenses, including crew payroll, food, fuel, insurance and port charges; • further reduced operating expenses as the Company’s ships are currently transitioning into various levels of layup with several ships in the fleet transitioning into cold layup; • significantly reduced marketing and selling expenses; • reduced and furloughed our workforce, with approximately 23% of our US shoreside employee base being impacted in 2020; and • suspended travel for shoreside employees and instituted a hiring freeze across the organization. The average monthly cash burn rate for the first quarter of 2021 was approximately $300 million. This is slightly higher than the previously announced range driven mainly by fleet wide restart expenses and timing. 36 As we transition back to operations, we expects to incur incremental spend related to bringing ships back to operating status, returning crew members to ships and implementing enhanced health and safety protocols. The decision to return each vessel considers many variables, including deployment opportunities, commercial potential, cost of operations and cash flow. Given the fluidity of return to service decisions and costs related to the ramp-up, we cannot reasonably estimate a monthly average cash burn rate or related offsets to the cash burn generated by revenue and deposits from returning ships. Monthly average cash burn rate for ships that are still in lay-up status will remain consistent with previous expectations. Capital Expenditures COVID-19 has impacted shipyard operations which have and may continue to result in delays of our previously contracted ship deliveries. Based upon current ship orders and delivery schedules, we project capital expenditures of $1.1 billion for the remainder of 2021. We took delivery of Odyssey of the Seas during the first quarter ended March 31, 2021 and expect delivery of Silver Dawn during the fourth quarter of 2021. For 2022, we have two ship deliveries scheduled: Wonder of the Seas and Celebrity Beyond . Excluding newbuild deliveries, our capital expenditures for 2022 will depend on our schedule to return to service. Debt Maturities, New Financings and Other Liquidity Actions During the quarter ended March 31, 2021, the Company continued to take actions to further improve its liquidity position and manage cash flow. In particular, we: • extended the maturity date or termination date, as applicable, of certain of the advances and commitments held by consenting lenders under our $1.0 billion unsecured loan due April 2022 and our $1.55 billion unsecured revolving credit facility due October 2022, each by 18 months to October 2023 and April 2024, respectively; • extended the period during which we may draw upon our binding commitment for a $700.0 million 364-day term loan facility by one year, which is now available for draw any time prior to August 12, 2022; • issued $1.5 billion of senior unsecured notes due in 2028 for net proceeds of approximately $1.48 billion; interest on the senior notes accrues at 5.5% per annum and is payable semi-annually; • issued 16.9 million shares of common stock for approximately $1.5 billion; • amended $4.9 billion of our non-export-credit facilities and certain of our credit card processing agreements to extend the waiver of the financial covenants through and including the third quarter of 2022 and to implement modified covenants for the period starting fourth quarter of 2022 and extending through and including the fourth quarter of 2023 ; and • amended $6.3 billion of our export-credit facilities to extend the waiver of the financial covenants through and including the third quarter of 2022 and defer $1.15 billion of principal payments due between April 2021 and April 2022. Expected debt maturities for the remainder 2021 are $0.2 billion and $2.2 billion for 2022. As we gradually return our fleet into service, we will continue to incur incremental spend as we bring the ships out of their various levels of layup, return the crew to our vessels, take the necessary steps to ensure compliance with the recommended protocols and gear up our sales and marketing activities. We continue to identify and evaluate further actions to enhance our liquidity and support our recovery. These include and are not limited to further reductions in capital expenditures, operating expenses and administrative costs and additional financings and refinancings. Results of Operations Summary Net Loss attributable to Royal Caribbean Cruises Ltd. and Adjusted Net Loss attributable to Royal Caribbean Cruises Ltd. for the first quarter of 2021 were $(1.13) billion and $(1.08) billion, or $(4.66) and $(4.44) per share on a diluted basis, respectively, reflecting the impact of our suspension of global fleet sailings, compared to Net Loss attributable to Royal Caribbean Cruises Ltd. and Adjusted Net Loss attributable Royal Caribbean Cruises Ltd. of $(1.44) billion and $(310.4) million, or $(6.91) and $(1.48) per share on a diluted basis, respectively, for the first quarter of 2020. Significant items for the quarter ended March 31, 2021 include: 37 • Total revenues, excluding the effect of changes in foreign currency exchange rates, decreased $2.0 billion for the quarter ended March 31, 2021 as compared to the same period in 2020, reflecting the volume impact of our cancelled sailings during the first quarter of 2021, as a result of the continued impact of COVID-19, which was higher than the volume impact of cancelled sailings during the first quarter of 2020. APCDs for the first quarter ended March 31, 2021 were 384,224 compared to 8,217,133 in the same period in 2020. • 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 $2.5 million for the quarter ended March 31, 2021 compared to the same period in 2020. • Total cruise operating expenses, excluding the effect of changes in foreign currency exchange rates, decreased $1.2 billion for the quarter ended March 31, 2021 as compared to the same period in 2020. The decrease was primarily due to lower costs incurred as a result of our suspension of operations due to COVID-19. • The effect of changes in foreign currency exchange rates related to our cruise operating expenses, denominated in currencies other than the U.S. dollar, resulted in an increase in total operating expenses of $4.1 million for the quarter ended March 31, 2021, compared to the same period in 2020. • Our consolidated results of operations include Silversea Cruises’ results of operations on a three-month reporting lag for October, November and December 2020, for the quarter ended March 31, 2021. • In March 2021, we extended the maturity date or termination date of certain of the advances and commitments, as applicable, held by consenting lenders under our $1.0 billion unsecured loan due April 2022 and our $1.55 billion unsecured revolving credit facility due October 2022, by 18 months to October 2023 and April 2024, respectively. • In March 2021, we extended our binding commitment for a $700.0 million 364-day term loan facility by one year which is currently available for draw any time prior to August 12, 2022; • In March 2021, we issued $1.50 billion of senior unsecured notes due in 2028. Interest on the senior notes accrues at 5.5% and is payable semi-annually. • In March 2021, we issued 16.9 million shares of common stock, par value $0.01 per share, at an average price of $91.00 per share for net proceeds of $1.5 billion. • In March 2021, we amended $4.9 million of our non-export-credit facilities and certain of our credit card processing agreements to extend the waiver of the financial covenants through and including the third quarter of 2022. • In March 2021, we amended $6.3 million of our export-credit facilities to extend the waiver of the financial covenants through and including the third quarter of 2022; including the deferral of up to $1.15 billion of principal payments due between April 2021 and April 2022. • In March 2021, we entered into amendments to our drawn and undrawn ECA facilities to provide for the issuance of guarantees in satisfaction of existing obligations under these facilities. • In March 2021, we took delivery of Odyssey of the Seas. 38 Operating results for the quarter ended March 31, 2021 compared to the same period in 2020 are shown in the following table (in thousands, except per share data): Quarter Ended March 31, 2021 2020 % of Total Revenues % of Total Revenues Passenger ticket revenues $ 20,844 49.6 % $ 1,376,851 67.7 % Onboard and other revenues 21,170 50.4 % 655,899 32.3 % Total revenues 42,014 100.0 % 2,032,750 100.0 % Cruise operating expenses: Commissions, transportation and other 2,949 7.0 % 317,129 15.6 % Onboard and other 4,481 10.7 % 123,718 6.1 % Payroll and related 96,636 230.0 % 330,390 16.3 % Food 8,472 20.2 % 121,316 6.0 % Fuel 41,822 99.5 % 194,268 9.6 % Other operating 129,127 307.3 % 423,998 20.9 % Total cruise operating expenses 283,487 674.7 % 1,510,819 74.3 % Marketing, selling and administrative expenses 258,041 614.2 % 395,890 19.5 % Depreciation and amortization expenses 310,166 738.2 % 324,330 16.0 % Impairment and credit losses (449) (1.1) % 1,108,118 54.5 % Operating Loss (809,231) (1,926.1) % (1,306,407) (64.3) % Other (expense) income: Interest income 4,861 11.6 % 5,534 0.3 % Interest expense, net of interest capitalized (272,514) (648.6) % (92,911) (4.6) % Equity investment loss (59,871) (142.5) % (10,392) (0.5) % Other income (expense) 5,033 12.0 % (32,859) (1.6) % (322,491) (767.6) % (130,628) (6.4) % Net Loss (1,131,722) (2,693.7) % (1,437,035) (70.7) % Less: Net Income attributable to noncontrolling interest — — % 7,444 0.4 % Net Loss attributable to Royal Caribbean Cruises Ltd. $ (1,131,722) (2,693.7) % $ (1,444,479) (71.1) % Diluted Loss per Share $ (4.66) $ (6.91) 39 Adjusted Net Loss attributable to Royal Caribbean Cruises Ltd. and Adjusted Loss per Share attributable to Royal Caribbean Cruises Ltd. were calculated as follows (in thousands, except per share data): Quarter Ended March 31, 2021 2020 Net Loss attributable to Royal Caribbean Cruises Ltd. $ (1,131,722) $ (1,444,479) Adjusted Net Loss attributable to Royal Caribbean Cruises Ltd. (1,078,279) (310,412) Net Adjustments to Net Loss attributable to Royal Caribbean Cruises Ltd. $ 53,443 $ 1,134,067 Adjustments to Net Loss attributable to Royal Caribbean Cruises Ltd.: Loss on extinguishment of debt (1) $ 1,314 $ — Convertible debt amortization of debt discount (2) 26,073 — Pullmantur reorganization settlement (3) 5,000 — Impairment and credit losses (4) (449) 1,108,118 Equity investment impairment (5) 26,042 39,735 Oasis of the Seas incident, Grand Bahama's drydock write-off and other incidental expenses (6) (1,321) (1,938) Restructuring charges and other initiatives expense (7) 1,317 12,043 Change in the fair value of contingent consideration and amortization of Silversea Cruises intangible assets related to Silversea Cruises acquisition (8) 1,623 (47,950) Noncontrolling interest adjustment (9) — 24,059 Net gain related to the sale of the Azamara brand (10) (6,156) — Net Adjustments to Net Loss attributable to Royal Caribbean Cruises Ltd. $ 53,443 $ 1,134,067 Basic: Loss per Share $ (4.66) $ (6.91) Adjusted Loss per Share $ (4.44) $ (1.48) Diluted: Loss per Share $ (4.66) $ (6.91) Adjusted Loss per Share $ (4.44) $ (1.48) Weighted-Average Shares Outstanding: Basic 243,004 209,097 Diluted 243,004 209,097 (1) Represents a debt extinguishment loss on the partial repayment of the $1.55 billion unsecured revolving credit facility. (2) Represents the amortization of non-cash debt discount on our convertible notes. (3) Represents estimated cash refunds expected to be paid to Pullmantur guests and other expenses incurred as part of the Pullmantur S.A. reorganization. (4) In 2021, represents the recovery of credit losses recognized during 2020. In 2020, represents asset impairment and credit losses recorded in the first quarter of 2020 as a result of the impact of COVID-19. (5) Represent equity investment asset impairments, primarily for our investment in TUI Cruises GmbH in 2021 and Grand Bahama Shipyard in 2020, as a result of the impact of COVID-19. (6) Amounts includes net insurance recoveries related to the collapse of the drydock structure at the Grand Bahama Shipyard involving Oasis of the Seas. (7) Represents primarily restructuring charges incurred in relation to the reduction in our U.S. workforce and other initiatives expenses. Refer to Note 13. Restructuring Charges to our consolidated financial statements under Item 1. Financial Statements for further information on the restructuring activities. (8) Related to the Silversea Cruises acquisition. 40 (9) Adjustment made to exclude the impact of the contractual accretion requirements associated with the put option held by Heritage Cruise Holding Ltd.'s (previously known as Silversea Cruises Group Ltd.'s) noncontrolling interest. (10) Represents the net gain recognized in the first quarter of 2021 in relation to the sale of the Azamara brand. Selected statistical information is shown in the following table: Quarter Ended March 31, (1) 2021 2020 Passengers Carried 41,209 1,239,817 Passenger Cruise Days 144,916 8,467,106 APCD 384,224 8,217,133 Occupancy 37.7 % 103.0 % (1) Due to the three-month reporting lag, these metrics include October, November and December amounts for Silversea Cruises. 41 2021 Outlook The Company’s operations are still heavily impacted by the magnitude, duration, speed and geographic reach of COVID-19 and its related variants. As a consequence, we cannot reasonably estimate the impact of COVID-19 on our business, financial condition or near or longer-term financial or operational results. The adverse impact of the COVID-19 pandemic on our revenues, consolidated results of operations, cash flows and financial condition has been and will continue to be material in 2021. We expect to incur a net loss on both a U.S. GAAP and adjusted basis for our second quarter and our 2021 fiscal year, the extent of which will depend on many factors including the timing and extent of our return to service. See Recent Developments: COVID-19 – Update on Bookings for further indication of the booking environment for 2021 and 2022. 42 Quarter Ended March 31, 2021 Compared to Quarter Ended March 31, 2020 In this section, references to 2021 refer to the quarter ended March 31, 2021 and references to 2020 refer to the quarter ended March 31, 2020. Revenues Total revenues for 2021 decreased $2.0 billion, or 97.9%, to $42.0 million from $2.0 billion in 2020. Passenger ticket revenues comprised 49.6% of our 2021 total revenues. Passenger ticket revenues for 2021 decreased by $1.4 billion, or 98.5%, from 2020. The decrease was due to a decrease in capacity, driven by a higher amount of cancelled sailings in 2021 resulting from the suspension of our global fleet operations in response to COVID-19, which began in mid-March 2020. The remaining 50.4% of 2021 total revenues was comprised of Onboard and other revenues , which decreased $634.7 million, or 96.8%, to $21.2 million in 2021 from $655.9 million in 2020. The decrease in Onboard and other revenues was primarily due to the decrease in capacity noted above. Favorable movements in foreign currency exchange rates related to our revenue transactions denominated in currencies other than the United States dollar increased Onboard and other revenues by $2.5 million. Onboard and other revenues included concession revenues of $0.7 million in 2021 and $72.0 million in 2020. Cruise Operating Expenses Total Cruise operating expenses for 2021 decreased $1.2 billion, or 81.2%, to $0.3 billion from $1.5 billion in 2020. The decrease was primarily due to: • a decrease in commissions as a result of sailing cancellations, including those reported in Other operating; • a $233.8 million decrease in Payroll and related; • a $152.4 million increase in Fuel expenses ; and • a $119.2 million decrease in Onboard and other expenses and $112.8 million decrease in Food due to the decrease in capacity discussed above. The decrease Cruise operating expenses was partially offset by the 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 $4.1 million. Marketing, Selling and Administrative Expenses Marketing, selling and administrative expenses for 2021 decreased $137.8 million, or 34.8%, to $258.0 million from $395.9 million in 2020. The decrease was primarily due to the reduction and deferral of global sales and marketing activities due to the suspension of our operations and a decrease in payroll and benefits due to our reduced headcount. The decrease is partially offset by the impact of a higher stock price year-over-year on our performance share awards. Depreciation and Amortization Expenses Depreciation and amortization expenses for 2021 decreased $14.2 million, or 4.4%, to $310.2 million from $324.3 million in 2020. The decrease was primarily due to a reduction in the carrying value of depreciable assets, resulting from the 2020 asset impairments, that exceeded the carrying value of assets placed in service during the same period. Additionally, we ceased the recognition of depreciation expense on the Azamara fleet during the quarter ended March 31, 2021. The decreases were partially offset by the addition of Celebrity Apex in 2020. Impairment and Credit Losses Impairment and credit losses for 2021 decreased by $1.1 billion as a result of charges recorded during the quarter ended March 31, 2020 due to the impact of COVID-19 on our operations and cash flows, impacting our long-lived assets related to goodwill, intangibles, vessels and operating lease right-of-use asset, as well as incurring credit losses. Other Income (Expense) Interest expense, net of interest capitalized for 2021 increased $179.6 million, or 193.3%, to $272.5 million from $92.9 million in 2020. The increase was primarily due to new debt issuances after the first quarter of 2020 and through the first quarter of 2021, higher interest rates on our new debt and a higher average balance on our revolver. 43 Equity investment loss increased by $49.5 million to $59.9 million from $10.4 million mainly due to continued losses reported by our equity investments as a result of the adverse impact of COVID-19 on their operations and earnings. Other income (expense) We recognized Other income of $5.0 million in 2021, compared to Other expense of $32.9 million in 2020. The $37.9 million increase in income was primarily due to: the 2020 recognition of $65.7 million expense related to the change in fair value of mostly fuel swap derivative instruments with no hedge accounting, compared to $14.3 million in income recognized in 2021, resulting in a change of $80.0 million of income; an increase of $6.4 million in foreign exchange gain on remeasurement of our monetary assets, net of hedging, and an increase of $6.7 million in net tax benefit mostly attributable to the suspension in our operations in 2021 compared to 2020. The increases in income were partially offset by $51.0 million in income recognized in 2020, which did not recur in 2021, for the change in fair value of contingent consideration related to our acquisition of 66.7% interest in Silversea Cruises in 2018. Due to the settlement of the contingent consideration in 2020, there was no impact for the three months ended March 31, 2021. Other Comprehensive Income (Loss) Other comprehensive income in 2021 was $30.5 million compared to Other comprehensive loss of $297.9 million in 2020. The increase in income of $328.4 million was primarily due to a Gain on cash flow derivative hedges in 2021 of $10.3 million compared to a Loss on cash flow derivative hedges in 2020 of $300.6 million, as a result of an increase in the fair value of our fuel swaps and interest rate swaps in 2021 compared to a decrease in the fair value of our fuel swaps and interest rate swaps in 2020. 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 Net cash used by operating activities decreased $1.0 billion to $(0.8) billion for the first quarter of 2021 compared to Net cash provided by operating activities of $198.7 million for the same period in 2020. The continued suspension of the majority of our global sailings as a result of COVID-19 has significantly affected our liquidity and cash flow resulting in decreased guest ticket collections and a decrease of Onboard and other revenues of $634.7 million during the first three months in 2021, compared to the same period in 2020. We also began to incur return to service expenses for certain ships in our fleet during the first quarter of 2021, as we have announced additional limited sailings for the summer of 2021. Net cash used in investing activities decreased $373.6 million to $1.0 billion for the first three months in 2021, compared to $1.3 billion for the same period in 2020. The decrease was primarily attributable to a decrease in capital expenditures of $190.9 million during the first quarter of 2021, compared to the same period in 2020 and an increase in proceeds from the sale of property and equipment and other assets of $175.4 million during the first quarter of 2021 compared to 2020. Net cash provided by financing activities was $3.2 billion for the first quarter of 2021, compared to $4.8 billion for the same period in 2020. The decrease of $1.6 billion was primarily attributable to a decrease in debt proceeds and issuance of commercial paper notes of $11.0 billion, partially offset by lower repayments of debt and commercial paper notes of $7.6 million during the first quarter of 2021, compared to the same period in 2020. The $3.4 billion decrease in net debt and commercial paper notes proceeds, was further offset by $1.6 billion of proceeds from common stock issuances during the first quarter of 2021. 44 Future Capital Commitments Capital Expenditures COVID-19 has impacted shipyard operations which have and may continue to result in delays of our previously contracted ship deliveries. As of March 31, 2021, the dates that the ships on order by our Global and Partner Brands are expected to be delivered, subject to change in the event of construction delays, and their approximate berths are as follows: Ship Shipyard Expected Delivery Date Approximate Berths Royal Caribbean International — Oasis-class: Wonder of the Seas Chantiers de l'Atlantique 1st Quarter 2022 5,700 Unnamed Chantiers de l'Atlantique 2nd Quarter 2024 5,700 Icon-class: Unnamed Meyer Turku Oy 3rd Quarter 2023 5,600 Unnamed Meyer Turku Oy 2nd Quarter 2025 5,600 Unnamed Meyer Turku Oy 2nd Quarter 2026 5,600 Celebrity Cruises — Edge-class: Celebrity Beyond Chantiers de l'Atlantique 2nd Quarter 2022 3,250 Unnamed Chantiers de l'Atlantique 4th Quarter 2023 3,250 Silversea Cruises Muse-Class: Silver Dawn Fincantieri 4th Quarter 2021 600 Evolution Class: Unnamed Meyer Werft 2nd Quarter 2023 700 Unnamed Meyer Werft 2nd Quarter 2024 700 TUI Cruises (50% joint venture) Mein Schiff 7 Meyer Turku Oy 2nd Quarter 2024 2,900 Unnamed Fincantieri 3rd Quarter 2024 4,100 Unnamed Fincantieri 1st Quarter 2026 4,100 Hapag-Lloyd Cruises (50% joint venture) — Hanseatic Spirit Vard Fincantieri 2nd Quarter 2021 230 Total Berths 48,030 In April 2019, we entered into an agreement with Chantiers de l’Atlantique to build the fifth Edge-class ship for Celebrity Cruises. The ship is expected to have an aggregate capacity of approximately 3,200 berths and is expected to enter service in the fourth quarter of 2025. The order with Chantiers de l’Atlantique is contingent upon completion of conditions precedent and financing. Our future capital commitments consist primarily of new ship orders. As of March 31, 2021, the aggregate cost of our ships on order presented in the table above, excluding any ships on order by our Partner Brands, was $12.9 billion, of which we had deposited $602.5 million. Approximately 70.5% of the aggregate cost was exposed to fluctuations in the Euro exchange rate at March 31, 2021. Decreased demand for cruising as a result of concerns regarding COVID-19 has had, and is expected to continue to have, a material impact on our cash flows, liquidity and financial position. In order to preserve liquidity throughout the COVID-19 pandemic, we deferred a significant portion of our planned 2020 and 2021 capital expenditures. As of March 31, 2021, we anticipate overall full year capital expenditures, based on our existing ships on order, will be approximately $2.1 billion for 2021. This amount does not include any ships on order by our Partner Brands. Contractual Obligations As of March 31, 2021, our contractual obligations were as follows (in thousands): 45 Payments due by period Less than 1-3 3-5 More than Total 1 year years years 5 years Operating Activities: Operating lease obligations(1) $ 876,664 $ 96,265 $ 232,039 $ 162,019 $ 386,341 Interest on debt(2) 4,105,547 981,396 1,632,850 820,719 670,582 Other(3) 578,637 192,420 321,536 42,922 21,759 Investing Activities: 0 Ship purchase obligations(4) 10,536,398 1,807,228 4,020,000 3,373,314 1,335,856 Financing Activities: 0 Debt obligations(5) 20,725,927 171,774 7,598,959 7,859,138 5,096,056 Finance lease obligations(6) 209,748 49,525 20,913 10,423 128,887 Other(7) 25,763 11,193 14,456 114 — Total $ 37,058,684 $ 3,309,801 $ 13,840,753 $ 12,268,649 $ 7,639,481 (1) We are obligated under noncancelable operating leases primarily for preferred berthing arrangements, real estate and shipboard equipment. Amounts represent contractual obligations with initial terms in excess of one year. (2) Long-term debt obligations mature at various dates through fiscal year 2033 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 March 31, 2021. Debt denominated in other currencies is calculated based on the applicable exchange rate at March 31, 2021. (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. (4) Amounts are based on contractual installment and delivery dates for our ships on order. Included in these figures are $8.3 billion in final contractual installments, which have committed financing. COVID-19 has impacted shipyard operations and we expect that this will result in delivery delays of ships on order and will adjust the timing of our contractual ship deliveries. Amounts do not include potential obligations which remain subject to cancellation at our sole discretion or any agreements entered for ships on order that remain contingent upon completion of conditions precedent. Additionally, amounts do not include activity related to Silversea Cruises, including ships placed on order, if any, during the three-month reporting lag period. (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, 2021. In addition, debt obligations presented above are net of debt issuance costs of $363.3 million as of March 31, 2021. (6) Amounts represent finance lease obligations with initial terms in excess of one year, net of imputed interest. (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 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 May 2033. 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 46 any payments under such indemnification clauses in the past and, under current circumstances, we do not believe an indemnification obligation is probable. We have a residual value guarantee associated with our operating lease of a terminal at Port of Miami in Miami, Florida that approximates a percentage of cost of the asset as of the inception of the lease. We consider the possibility of incurring costs associated with the residual value guarantee to be remote. Also in connection with the Port of Miami terminal operating lease, we are required to deliver on or before July 18, 2021, cash collateral in an amount equal to the lesser of our residual value guarantee or the aggregate balance of the lessors' terminal construction debt, estimated at $181.1 million as of March 31, 2021. The collateral is to be issued to an escrow agent and pledged to the benefit of the terminal construction debt lenders until all amounts due by us under the lease have been paid in full. On February 25, 2021, S&P Global downgraded our senior unsecured rating from B+ to B, which had no financial impact, and downgraded our $3.32 billion Senior Secured Notes and Silversea Notes from BB to BB-. This downgrade had no impact on the terms of the notes. Certain of our surety agreements with third party providers for the benefit of certain agencies and associations that provide travel related bonds, allow the sureties to request collateral. We also have agreements with our credit card processors relating to customer deposits received by us for future voyages. These agreements allow the credit card processors to require us, under certain circumstances, including breach of the financial covenants, the existence of other material adverse changes, excessive chargebacks, and other triggering events, to maintain a reserve that can be satisfied by posting collateral. As of March 31, 2021, we have posted letters of credit as collateral with our sureties and credit card processors, under our revolving credit facilities in the amount of $172.7 million. Executed amendments are in place for the majority of our credit card processors, waiving reserve requirements tied to breach of our financial covenants through at least September 30, 2022, and as such, we do not anticipate any incremental collateral requirements for the processors covered by these waivers in the next 12 months. We have a reserve with a processor where the agreement was amended in the first quarter of 2021, such that proceeds are withheld in reserve, until the sailing takes place or the funds are refunded to the customer. The maximum projected exposure with the processor, including amounts currently withheld and reported in Trade and other receivables , is approximately $170.6 million. The amount and timing are dependent on future factors that are uncertain, such as the date we return to operations, volume and value of future deposits and whether we transfer our business to other processors. If we require additional waivers on the credit card processing agreements and are not able to obtain them, this could lead to the termination of these agreements or the trigger of reserve requirements. As of March 31, 2021, 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 Historically, we 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 our obligations. The impact of COVID-19 has resulted in our voluntary suspension of global cruise operations from March 2020 through at least June 30, 2021, for most of our cruise operations. This suspension of operations has strained our sources of cash flow and liquidity, causing us to take actions resulting in reductions in our operating expenses, reductions in our capital expenses and new financings and other liquidity actions. The Company continues to identify and evaluate further actions to improve its liquidity. These include and are not limited to: further reductions in capital expenditures, operating expenses and administrative costs and additional financings. See further discussion on these liquidity actions at Recent Developments - COVID-19. 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 March 31, 2020, we had $10.5 billion of committed financing for final delivery installments on our ships on order. As of March 31, 2021, we had $3.3 billion in contractual obligations due through March 31, 2022, of which approximately $0.2 billion relates to debt maturities, $981.4 million relates to interest on debt and $1.8 billion relates to progress payments on our ship orders and the final installments payable due upon the delivery of Silver Dawn and Wonder of the Seas , based on their expected delivery dates. As of March 31, 2021, we had liquidity of $5.8 billion, consisting of cash and cash equivalents of $5.1 billion and a $0.7 billion commitment through August 12, 2022 for a 364-day term loan facility. As of March 31, 2021, our revolving credit facilities were fully utilized through a combination of amounts drawn and letters of credit issued under the facilities. We have 47 agreed with certain of our lenders not to pay dividends or engage in stock repurchases. Refer to Note 10 . Shareholders' Equity to our consolidated 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 our board of directors is no longer comprised of individuals who were members of our board of directors 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. Based on our assumptions and estimates and our financial condition, we believe that the liquidity resulting from the actions mentioned above will be sufficient to fund our liquidity requirements over at least the next twelve months. However, there is no assurance that our assumptions and estimates are accurate due to possible unknown variables related to this unprecedented suspension of our operations and, as such, there is inherent uncertainty in our ability to predict future liquidity requirements. Debt Covenants Both our export credit facilities and our non-export credit facilities contain covenants that require us, among other things, to maintain a fixed charge coverage ratio of at least 1.25x and limit our net debt-to-capital ratio to no more than 62.5%, and under certain facilities, to maintain a minimum level of shareholders' equity. 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. During the first quarter of 2021, we amended $4.9 billion of our non-export credit facilities and $6.3 billion of our export credit facilities, and certain credit card processing agreements, to extend the waiver of our financial covenants through and including at least the third quarter of 2022. In addition, pursuant to the amendments for the non-export credit facilities, we have modified the manner in which such covenants are calculated, temporarily in certain cases and permanently in others, as well as the levels at which our net debt to capitalization covenant will be tested during the period commencing immediately following the end of the waiver period and continuing through the end of 2023. The amendments impose a monthly-tested minimum liquidity covenant of $350 million. In addition, the amendments to the non-export credit facilities place restrictions on paying cash dividends and effectuating share repurchases through the end of the third quarter of 2022, while the export credit facility amendments require us to prepay any deferred amounts if we elect to issue dividends or complete share repurchases. As of March 31, 2021, we were in compliance with the applicable minimum liquidity covenant and we estimate that we will be in compliance for at least the next twelve months. In the first quarter of 2021, we amended our Port of Miami Terminal "A" operating lease agreement to obtain a financial covenant waiver through the end of the third quarter of 2022, on the same terms as apply to the non-export credit facilities. As of March 31, 2021, we were in compliance with the amended covenants under the lease agreement. Any further covenant waivers may lead to increased costs, increased interest rates, additional restrictive covenants and other available lender protections as may be agreed with our lenders. There can be no assurance that we would be able to obtain additional waivers in a timely manner, or on acceptable terms. If we require additional waivers and are not able to obtain them or repay the debt facilities, this would lead to an event of default and potential acceleration of amounts due under all of our outstanding debt and derivative contracts. If we require additional waivers on the credit card processing agreements and are not able to obtain them, this could lead to the termination of these agreements or the trigger of reserve requirements. Dividends 48 During the first quarter of 2020, we declared a cash dividend on our common stock of $0.78 per share, which was paid in April 2020. During the first quarter of 2020, we also paid a cash dividend on our common stock of $0.78 per share, which was declared during the fourth quarter of 2019. During the second quarter of 2020, we agreed with certain of our lenders not to pay dividends or engage in common stock repurchases for so long as our debt covenant waivers are in effect. In addition, in the event we declare a dividend or engage in share repurchases, we will need to repay the amounts deferred under our export credit facilities. Accordingly, we did not declare a dividend during the four consecutive quarters ending March 31, 2021. Pursuant to amendments made to these agreements during the first quarter of 2021, the restrictions on paying cash dividends and effectuating share repurchases were extended through and including the third quarter of 2022. 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, 2020. T here have been no significant developments or material changes since the date of our 2020 Annual Report.