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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☑			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended February 29, 2020

OR

☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission file number: 001-9610        Commission file number: 001-15136

Carnival Corporation

Carnival plc

(Exact name of registrant as specified in its charter)

(Exact name of registrant as specified in its charter)

Republic of Panama

England and Wales

(State or other jurisdiction of incorporation or organization)

(State or other jurisdiction of incorporation or organization)

59-1562976

98-0357772

(I.R.S. Employer Identification No.)

(I.R.S. Employer Identification No.)

3655 N.W. 87th Avenue

Carnival House, 100 Harbour Parade

Miami,

Florida

33178-2428

Southampton

SO15 1ST

United Kingdom

(Address of principal executive offices) (Zip Code)

(Address of principal executive offices) (Zip Code)

(305)			599-2600						011			44 23 8065 5000
(Registrant’s telephone number, including area code)												(Registrant’s telephone number, including area code)
None												None
(Former name, former address and former fiscal year, if changed since last report)												(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class			Trading Symbol(s)			Name of each exchange on which registered
Common Stock ($0.01 par value)			CCL			New York Stock Exchange, Inc.
Ordinary Shares each represented by American Depository Shares ($1.66 par value), Special Voting Share, GBP 1.00 par value and Trust Shares of beneficial interest in the P&O Princess Special Voting Trust			CUK			New York Stock Exchange, Inc.
1.625% Senior Notes due 2021			CCL21			New York Stock Exchange LLC
1.875% Senior Notes due 2022			CUK22			New York Stock Exchange LLC
1.000% Senior Notes due 2029			CUK29			New York Stock Exchange LLC

Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

Indicate by check mark whether the registrants have submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrants were required to submit such files). Yes ☑ No ☐

Indicate by check mark whether the registrants are large accelerated filers, accelerated filers, non-accelerated filers, smaller reporting companies, or emerging growth companies. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filers

☑

Accelerated filers

☐

Non-accelerated filers

☐

Smaller reporting companies

☐

Emerging growth companies

☐

---

If emerging growth companies, indicate by check mark if the registrants have elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrants are shell companies (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑

At March 25, 2020, Carnival Corporation had outstanding 527,817,680 shares of Common Stock, $0.01 par value.						At March 25, 2020, Carnival plc had outstanding 182,536,832 Ordinary Shares $1.66 par value, one Special Voting Share, GBP 1.00 par value and 527,817,680 Trust Shares of beneficial interest in the P&O Princess Special Voting Trust.

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Table of Contents

CARNIVAL CORPORATION & PLC

TABLE OF CONTENTS

Page

PART I - FINANCIAL INFORMATION

Item 1.

Financial Statements

3

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

22

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

37

Item 4.

Controls and Procedures

38

PART II - OTHER INFORMATION

Item 1.

Legal Proceedings

39

Item 1A.

Risk Factors

39

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

39

Item 6.

Exhibits

45

SIGNATURES

47

2

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Table of Contents

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

CARNIVAL CORPORATION & PLC

CONSOLIDATED STATEMENTS OF INCOME (LOSS)

(UNAUDITED)

(in millions, except per share data)

 

			Three Months Ended February 29/28,
			2020						2019
Revenues
Passenger ticket			$	3,234					$	3,199
Onboard and other			1,556						1,474
			4,789						4,673
Operating Costs and Expenses
Commissions, transportation and other			766						709
Onboard and other			471						467
Payroll and related			610						557
Fuel			396						381
Food			277						268
Other operating			1,001						759
			3,523						3,142
Selling and administrative			678						629
Depreciation and amortization			570						516
Goodwill impairment			731						—
			5,502						4,287
Operating Income (Loss)			(713)						386
Nonoperating Income (Expense)
Interest income			5						4
Interest expense, net of capitalized interest			(55)						(51)
Other income (expense), net			(7)						(2)
			(57)						(49)
Income (Loss) Before Income Taxes			(770)						338
Income Tax Expense, Net			(11)						(2)
Net Income (Loss)			$	(781)					$	336
Earnings Per Share
Basic			$	(1.14)					$	0.48
Diluted			$	(1.14)					$	0.48

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

3

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Table of Contents

CARNIVAL CORPORATION & PLC

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

(in millions)

 

			Three Months Ended February 29/28,
			2020						2019
Net Income (Loss)			$	(781)					$	336
Items Included in Other Comprehensive Income (Loss)
Change in foreign currency translation adjustment			25						79
Other			13						—
Other Comprehensive Income (Loss)			38						79
Total Comprehensive Income (Loss)			$	(743)					$	415

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

4

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Table of Contents

CARNIVAL CORPORATION & PLC

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(in millions, except par values)

 

			February 29, 2020						November 30, 2019
ASSETS
Current Assets
Cash and cash equivalents			$	1,354					$	518
Trade and other receivables, net			405						444
Inventories			440						427
Prepaid expenses and other			687						671
Total current assets			2,885						2,059
Property and Equipment, Net			38,023						38,131
Operating Lease Right-of-Use Assets (a)			1,469						—
Goodwill			2,176						2,912
Other Intangibles			1,173						1,174
Other Assets			1,216						783
			$	46,943					$	45,058
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Short-term borrowings			$	1,004					$	231
Current portion of long-term debt			2,196						1,596
Current portion of operating lease liabilities (a)			168						—
Accounts payable			904						756
Accrued liabilities and other			1,754						1,809
Customer deposits			4,690						4,735
Total current liabilities			10,716						9,127
Long-Term Debt			9,738						9,675
Long-Term Operating Lease Liabilities (a)			1,312						—
Other Long-Term Liabilities			887						890
Contingencies
Shareholders’ Equity
Common stock of Carnival Corporation, $0.01 par value; 1,960 shares authorized; 658 shares at 2020 and 657 shares at 2019 issued			7						7
Ordinary shares of Carnival plc, $1.66 par value; 217 shares at 2020 and 2019 issued			359						358
Additional paid-in capital			8,829						8,807
Retained earnings			25,527						26,653
Accumulated other comprehensive income (loss) (“AOCI”)			(2,028)						(2,066)
Treasury stock, 130 shares at 2020 and 2019 of Carnival Corporation and 60 shares at 2020 and 2019 of Carnival plc, at cost			(8,404)						(8,394)
Total shareholders’ equity			24,290						25,365
			$	46,943					$	45,058

(a)We adopted the provisions of Leases on December 1, 2019.

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

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CARNIVAL CORPORATION & PLC

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(in millions)

 

			Three Months Ended February 29/28,
			2020						2019
OPERATING ACTIVITIES
Net income (loss)			$	(781)					$	336
Adjustments to reconcile net income (loss) to net cash provided by operating activities
Depreciation and amortization			570						516
Impairments			1,062						—
Share-based compensation			20						20
Other, net			(73)						12
			798						884
Changes in operating assets and liabilities
Receivables			21						(50)
Inventories			(15)						7
Prepaid expenses and other			(120)						(154)
Accounts payable			148						65
Accrued liabilities and other			120						5
Customer deposits			(36)						358
Net cash provided by operating activities			916						1,116
INVESTING ACTIVITIES
Purchases of property and equipment			(1,326)						(2,129)
Proceeds from sales of ships			226						—
Payments of fuel derivative settlements			—						(6)
Other, net			(61)						76
Net cash provided by (used in) investing activities			(1,161)						(2,059)
FINANCING ACTIVITIES
Proceeds from (repayments of) short-term borrowings, net			779						(81)
Principal repayments of long-term debt			(132)						(95)
Proceeds from issuance of long-term debt			823						1,439
Dividends paid			(344)						(348)
Purchases of treasury stock			(12)						(274)
Other, net			(24)						(29)
Net cash provided by (used in) financing activities			1,089						612
Effect of exchange rate changes on cash, cash equivalents and restricted cash			(7)						1
Net increase (decrease) in cash, cash equivalents and restricted cash			838						(331)
Cash, cash equivalents and restricted cash at beginning of period			530						996
Cash, cash equivalents and restricted cash at end of period			$	1,368					$	665

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

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CARNIVAL CORPORATION & PLC

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(UNAUDITED)

(in millions)

			Common stock						Ordinary shares						Additional paid-in capital						Retained earnings						AOCI						Treasury stock						Total shareholders’ equity
At November 30, 2018			$	7					$	358					$	8,756					$	25,066					$	(1,949)					$	(7,795)					$	24,443
Changes in accounting principles (a)			—						—						—						(24)						—						—						(24)
Net income (loss)			—						—						—						336						—						—						336
Other comprehensive income (loss)			—						—						—						—						79						—						79
Cash dividends declared ($0.50 per share)			—						—						—						(345)						—						—						(345)
Purchases of treasury stock under the Repurchase Program and other			—						—						20						—						—						(268)						(248)
At February 28, 2019			$	7					$	358					$	8,776					$	25,033					$	(1,869)					$	(8,063)					$	24,241
At November 30, 2019			$	7					$	358					$	8,807					$	26,653					$	(2,066)					$	(8,394)					$	25,365
Net income (loss)			—						—						—						(781)						—						—						(781)
Other comprehensive income (loss)			—						—						—						—						38						—						38
Cash dividends declared ($0.50 per share)			—						—						—						(344)						—						—						(344)
Purchases of treasury stock under the Repurchase Program and other			—						—						22						—						—						(10)						12
At February 29, 2020			$	7					$	359					$	8,829					$	25,527					$	(2,028)					$	(8,404)					$	24,290

(a)We adopted the provisions of Revenue from Contracts with Customers and Derivatives and Hedging on December 1, 2018.

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

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CARNIVAL CORPORATION & PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 1 – General

The consolidated financial statements include the accounts of Carnival Corporation and Carnival plc and their respective subsidiaries. Together with their consolidated subsidiaries, they are referred to collectively in these consolidated financial statements and elsewhere in this joint Quarterly Report on Form 10-Q as “Carnival Corporation & plc,” “our,” “us” and “we.”

Liquidity and Management’s Plans

Due to the spread of COVID-19 and the effects of growing port restrictions around the world, we previously announced a voluntary pause of our global fleet cruise operations. Significant events affecting travel, including COVID-19, typically have an impact on booking patterns, with the full extent of the impact generally determined by the length of time the event influences travel decisions. We believe the ongoing effects of COVID-19 on our operations and global bookings have had, and will continue to have a material negative impact on our financial results and liquidity, and such negative impact may continue well beyond the containment of such outbreak.

We cannot assure you that our assumptions used to estimate our liquidity requirements will be correct because we have never previously experienced a complete cessation of our cruising operations, and as a consequence, our ability to be predictive is uncertain. In addition, the magnitude, duration and speed of the global pandemic is uncertain. As a consequence, we cannot estimate the impact on our business, financial condition or near- or longer-term financial or operational results with reasonable certainty, but we expect a net loss on both a U.S. GAAP and adjusted basis for the fiscal year ending November 30, 2020. On March 13, 2020, we fully drew down our $3.0 billion multi-currency revolving credit facility (the “Existing Multicurrency Facility”). We are taking further actions to improve our liquidity, including capital expenditure and operating expense reductions, suspending dividend payments on, and the repurchase of, the common stock of Carnival Corporation and the ordinary shares of Carnival plc and pursuing additional financing. Based on these actions and assumptions regarding the impact of COVID-19, we have concluded that we will be able to generate sufficient liquidity to satisfy our obligations and remain in compliance with our existing debt covenants for the next twelve months prior to giving effect to any additional financing that may occur.

At February 29, 2020, we were in compliance with all of our debt covenants. After considering the effect of COVID-19 on our consolidated EBITDA, the actions we have taken and the other options available to us, we expect to remain in compliance with our current minimum debt service coverage ratio in certain of our debt instruments that requires a minimum of 3:1 ratio of EBITDA to Consolidated Net Interest Charges. If we expected to be out of compliance, we would seek waivers from the lenders prior to any covenant violation. Any covenant waiver may lead to increased costs, increased interest rates, additional restrictive covenants and other available lender protections that would be applicable. There can be no assurance that we would be able to obtain waivers in a timely manner, or on acceptable terms at all. If we were not able to obtain waivers 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 contract payables. As a result, the failure to obtain waivers would have a material adverse effect on us.

On April 1, 2020, we announced the pricing of the private offerings of $4.0 billion first-priority senior secured notes due 2023 (“Secured Notes”) and $1.75 billion senior convertible notes due 2023 ($2.0125 billion if the initial purchasers exercise their option to purchase additional notes) (“Convertible Notes”), and a public offering of $500 million of common stock ($575 million if the underwriters exercise their option to purchase additional shares in full) of Carnival Corporation (“Public Equity Offering”), collectively referred to within this document as the “April 1 financing transactions”. The closings of these offerings are subject to customary conditions and are expected to occur in early April. The net proceeds from the offering of Secured Notes will be deposited in to a segregated escrow account, pending the releases in accordance with certain collateral perfection thresholds.

Basis of Presentation

The Consolidated Statements of Income (Loss), the Consolidated Statements of Comprehensive Income (Loss), the Consolidated Statements of Cash Flows and the Consolidated Statements of Shareholders’ Equity for the three months ended February 29/28, 2020 and 2019, and the Consolidated Balance Sheet at February 29, 2020 are unaudited and, in the opinion of our management, contain all adjustments, consisting of only normal recurring adjustments, necessary for a fair statement. Our interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the related notes included in the Carnival Corporation & plc 2019 joint Annual Report on Form 10-K (“Form 10-K”) filed with the U.S. Securities and Exchange Commission on January 28, 2020. Our operations are seasonal and results for interim periods are not necessarily indicative of the results for the entire year.

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For the three months ended February 28, 2019, we reclassified $29 million from tour and other revenues to onboard and other revenues as well as $29 million from tour and other costs and expenses to other operating cost and expenses in order to conform to the current year presentation.

Accounting Pronouncements

On December 1, 2019, we adopted the FASB issued guidance, Leases, using the modified retrospective approach, which allows entities to either apply the new lease standard to the beginning of the earliest period presented or only to the consolidated financial statements in the period of adoption without restating prior periods. We have elected to apply the new guidance at the date of adoption without restating prior periods.

We have implemented changes to our internal controls to address the collection, recording, and accounting for leases in accordance with the new guidance. Upon adoption of the new guidance, the most significant impact was the recognition of $1.4 billion of right-of-use assets and lease liabilities relating to operating leases, reported within operating lease right-of-use assets and long-term operating lease liabilities, with the current portion of the liability reported within current portion of operating lease liabilities, in our Consolidated Balance Sheet as of December 1, 2019. There was no cumulative effect of applying the new standard and accordingly there was no adjustment to our retained earnings upon adoption. This guidance had an immaterial impact on our Consolidated Statements of Income (Loss), Consolidated Statements of Comprehensive Income (Loss), Consolidated Statements of Cash Flows and the compliance with debt-covenants under our current agreements.

The FASB issued amended guidance, Intangibles - Goodwill and Other - Internal-Use Software, which requires a customer in a cloud computing arrangement that is a service contract to follow the internal-use software guidance to determine which implementation costs to capitalize as assets or expense as incurred. The expense related to deferred implementation costs is required to be presented in the same net income (loss) line item as the related hosting fees. Additionally, the payments for deferred implementation costs are required to be presented in the same line item in the Consolidated Statements of Cash Flows as payments for the related hosting fees. This guidance is required to be adopted by us in the first quarter of 2021 and must be applied using either a prospective or a retrospective approach. Early adoption is permitted. We are currently evaluating the impact this guidance will have on our consolidated financial statements.

The FASB issued amended guidance, Financial Instruments - Credit Losses, which requires an entity to present the net amount expected to be collected for certain financial assets, including trade receivables. On initial recognition and at each reporting period, this guidance will require an entity to recognize an allowance that reflects the entity's current estimate of credit losses expected to be incurred over the life of the financial instrument. This guidance is required to be adopted by us in the first quarter of 2021 and will be applied prospectively with a cumulative-effect adjustment to retained earnings. Early adoption is permitted. We are currently evaluating the impact this guidance will have on our consolidated financial statements.

NOTE 2 – Revenue and Expense Recognition

Guest cruise deposits represent unearned revenues and are initially included in customer deposit liabilities when received. Customer deposits are subsequently recognized as cruise revenues, together with revenues from onboard and other activities, and all associated direct costs and expenses of a voyage are recognized as cruise costs and expenses, upon completion of voyages with durations of ten nights or less and on a pro rata basis for voyages in excess of ten nights. The impact of recognizing these shorter duration cruise revenues and costs and expenses on a completed voyage basis versus on a pro rata basis is not significant. Certain of our product offerings are bundled and we allocate the value of the bundled services and goods between passenger ticket revenues, onboard and other revenues and tour and other revenues based upon the estimated standalone selling prices of those goods and services.

Future travel discount vouchers are included as a reduction of cruise passenger ticket revenues when such vouchers are utilized. Guest cancellation fees are recognized in cruise passenger ticket revenues at the time of cancellation.

Our sale to guests of air and other transportation to and from airports near the home ports of our ships are included in passenger ticket revenues, and the related cost of purchasing these services are included in transportation costs. The proceeds that we collect from the sales of third-party shore excursions are included in onboard and other revenues and the related costs are included in onboard and other costs. The amounts collected on behalf of our onboard concessionaires, net of the amounts remitted to them, are included in onboard and other revenues as concession revenues. All of these amounts are recognized on a completed voyage or pro rata basis as discussed above.

Passenger ticket revenues include fees, taxes and charges collected by us from our guests. A portion of these fees, taxes and charges vary with guest head counts and are directly imposed on a revenue-producing arrangement. This portion of the fees,

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taxes and charges is expensed in commissions, transportation and other costs when the corresponding revenues are recognized. For the three months ended February 29/28, fees, taxes and charges included in commissions, transportation and other costs were $174 million in 2020 and $163 million and in 2019. The remaining portion of fees, taxes and charges are expensed in other operating expenses when the corresponding revenues are recognized.

Revenues and expenses from our hotel and transportation operations, which are included in our Tour and Other segment, are recognized at the time the services are performed. Revenues from the long-term leasing of ships, which are also included in our Tour and Other segment, are recognized ratably over the term of the agreement.

Customer Deposits

Our payment terms generally require an initial deposit to confirm a reservation, with the balance due prior to the voyage. Cash received from guests in advance of the cruise is recorded in customer deposits and in other long-term liabilities on our Consolidated Balance Sheets. These amounts include refundable deposits. We had customer deposits of $4.9 billion as of February 29, 2020 and November 30, 2019. During the three months ended February 28/29, 2020 and 2019, we recognized revenues of $3.0 billion related to our customer deposits as of November 30, 2019 and December 1, 2018. Our customer deposits balance changes due to the seasonal nature of cash collections, the recognition of revenue, refund of customer deposits and foreign currency translation.

Contract Receivables

Although we generally require full payment from our customers prior to or concurrently with their cruise, we grant credit terms to a relatively small portion of our revenue source. We also have receivables from credit card merchants for cruise ticket purchases and onboard revenue. These receivables are included within trade and other receivables, net.

Contract Assets

Contract assets are amounts paid prior to the start of a voyage, which we record as an asset within prepaid expenses and other and which are subsequently recognized as commissions, transportation and other at the time of revenue recognition. We have contract assets of $134 million and $154 million as of February 29, 2020 and December 1, 2019.

NOTE 3 – Unsecured Debt

At February 29, 2020, our short-term borrowings consisted of euro-denominated commercial paper of $1.0 billion. For the three months ended February 29/28, 2020 and 2019, there were no borrowings or repayments of commercial paper with original maturities greater than three months.

In December 2019, we borrowed $823 million under an export credit facility due in semi-annual installments through fiscal year 2032.

In February 2020, we extended a $452 million sterling-denominated floating rate bank loan, originally maturing in 2022, to 2025 with an option to extend to 2026.

Refer to Note 11 - "Subsequent Events" for a discussion of events that occurred subsequent to February 29, 2020.

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NOTE 4 – Contingencies

Litigation

On May 2, 2019, two lawsuits were filed against Carnival Corporation in the U.S. District Court for the Southern District of Florida under Title III of the Cuban Liberty and Democratic Solidarity Act, also known as the Helms-Burton Act. The complaint filed by Havana Docks Corporation alleges it holds an interest in the Havana Cruise Port Terminal and the complaint filed by Javier Garcia-Bengochea alleges that he holds an interest in the Port of Santiago, Cuba, both of which were expropriated by the Cuban Government. The complaints further allege that Carnival Cruise Line “trafficked” in those properties by embarking and disembarking passengers at these facilities. The plaintiffs seek all available statutory remedies, including the value of the expropriated property, plus interest, treble damages, attorneys’ fees and costs. The court denied our motion to dismiss the complaint filed by Javier Garcia-Bengochea, on August 26, 2019. While on August 28, 2019, the court denied our motion to dismiss the complaint filed by Havana Docks Corporation, later on January 6, 2020, it dismissed virtually identical cases brought by Havana Docks Corporation against other cruise lines, on the grounds raised in our motion to dismiss. In doing so, the court explicitly reversed its position on the issue and acknowledged the conflict with our case. Therefore, on January 6, 2020, we asked the court to formally dismiss the Havana Docks Corporation complaint.

We believe we have meritorious defenses to the claims and we intend to vigorously defend against them. We do not believe that it is likely that the outcome of these matters will be material, but litigation is inherently unpredictable and there can be no assurances that the final outcome of the case might not be material to our operating results or financial condition.

Additionally, in the normal course of our business, various claims and lawsuits have been filed or are pending against us. Most of these claims and lawsuits, or any settlement of claims and lawsuits, are covered by insurance and the maximum amount of our liability, net of any insurance recoverables, is typically limited to our self-insurance retention levels. We believe the ultimate outcome of these claims, lawsuits and settlements, as applicable, each and in the aggregate, will not have a material impact on our consolidated financial statements.

Contingent Obligations – Indemnifications

Some of the debt contracts we enter into include indemnification provisions obligating us to make payments to the counterparty if certain events occur. These contingencies generally relate to changes in taxes or changes in laws which increase our lender’s costs. 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.

NOTE 5 – 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.

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Financial Instruments that are not Measured at Fair Value on a Recurring Basis 

			February 29, 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)			$	177					$	—					$	30					$	145					$	181					$	—					$	31					$	149
Total			$	177					$	—					$	30					$	145					$	181					$	—					$	31					$	149
Liabilities
Fixed rate debt (b)			$	7,351					$	—					$	7,548					$	—					$	7,438					$	—					$	7,782					$	—
Floating rate debt (b)			5,740						—						5,656						—						4,195						—						4,248						—
Total			$	13,091					$	—					$	13,204					$	—					$	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

			February 29, 2020																														November 30, 2019
(in millions)			Level 1						Level 2						Level 3						Level 1						Level 2						Level 3
Assets
Cash and cash equivalents			$	1,354					$	—					$	—					$	518					$	—					$	—
Restricted cash			15						—						—						13						—						—
Derivative financial instruments			—						102						—						—						58						—
Total			$	1,368					$	102					$	—					$	530					$	58					$	—
Liabilities
Derivative financial instruments			$	—					$	17					$	—					$	—					$	25					$	—
Total			$	—					$	17					$	—					$	—					$	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 discounted cash flow analyses and determined that the estimated fair values of a North America & Australia (“NAA”) segment reporting unit, and a Europe & Asia (“EA”) segment reporting unit, no longer exceeded their carrying values. We recognized goodwill impairment charges of $731 million for these reporting units during the first quarter of 2020.

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

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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 11 - "Subsequent Events" for a discussion of events that occurred subsequent to February 29, 2020.

			Goodwill
(in millions)			NAA Segment						EA Segment						Total
At November 30, 2019			$	1,898					$	1,014					$	2,912
Impairment charges			(300)						(431)						(731)
Foreign currency translation adjustment			—						(5)						(5)
At February 29, 2020			$	1,598					$	578					$	2,176

			Trademarks
(in millions)			NAA Segment						EA Segment						Total
At November 30, 2019			$	927					$	240					$	1,167
Foreign currency translation adjustment			—						—						—
At February 29, 2020			$	927					$	240					$	1,167

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 certain ships as of February 29, 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 February 29, 2020 fair values of these ships based on their discounted cash flows. We then compared these estimated fair values to the net carrying values and, as a result, we recognized $172 million and $158 million of ship impairment charges in the NAA and EA segments, respectively, included in other operating expenses of our Consolidated Statements of Income (Loss) for the first quarter of 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), forecasted future operating results, including net revenue yields and fuel expenses. All principal assumptions are considered Level 3 inputs.

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Derivative Instruments and Hedging Activities

(in millions)			Balance Sheet Location						February 29, 2020						November 30, 2019
Derivative assets
Derivatives designated as hedging instruments
Cross currency swaps (a)			Prepaid expenses and other						$	39					$	32
			Other assets						49						25
Foreign currency forwards (b)			Prepaid expenses and other						14						—
Total derivative assets									$	102					$	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						6						6
			Other long-term liabilities						9						9
Total derivative liabilities									$	17					$	25

 

(a)At February 29, 2020 and November 30, 2019, we had cross currency swaps totaling $1.9 billion, respectively, that are designated as hedges of our net investment in foreign operations with a euro-denominated functional currency. At February 29, 2020, these cross currency swaps settle through 2031.

(b)At February 29, 2020, we had foreign currency derivatives consisting of foreign currency zero cost collars and foreign currency forwards that are 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 $288 million at February 29, 2020 and $300 million at November 30, 2019 of EURIBOR-based floating rate euro debt to fixed rate euro debt. At February 29, 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.

						February 29, 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						$	102					$	—					$	102					$	(5)					$	97
Liabilities						$	18					$	—					$	17					$	(5)					$	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

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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 February 29/28,
(in millions)			2020						2019
Gains (losses) recognized in AOCI:
Cross currency swaps - net investment hedges - included component			$	(2)					$	2
Cross currency swaps - net investment hedges - excluded component			$	42					$	(12)
Foreign currency zero cost collars - cash flow hedges			$	(1)					$	—
Foreign currency forwards - cash flow hedges			$	14					$	—
Interest rate swaps - cash flow hedges			$	1					$	1
Gains (losses) reclassified from AOCI - cash flow hedges:
Interest rate swaps - Interest expense, net of capitalized interest			$	(2)					$	(2)
Gains (losses) recognized on derivative instruments (amount excluded from effectiveness testing – net investment hedges)
Cross currency swaps - Interest expense, net of capitalized interest			$	10					$	4

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.

Refer to Note 11 - "Subsequent Events" for a discussion of derivative transactions that occurred subsequent to February 29, 2020.

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. We are also adding new, more fuel efficient ships to our fleet and are strategically disposing of smaller, less fuel efficient ships.

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 February 29, 2020, we have designated $852 million of our sterling-denominated debt as non-derivative hedges of our net investments in foreign operations and for the three months ended February 29, 2020, we recognized $2 million of gains on these non-derivative net investment hedges in the cumulative translation adjustment section of other comprehensive income (loss). We also have $8.2 billion of euro-denominated debt,

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including the effect of cross currency swaps, 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 February 29, 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						Weighted-Average Forward Rate
Foreign currency zero cost collars
Enchanted Princess			2019						June 2020						$	1.04					$	1.28
Mardi Gras			2019