Royal Caribbean Cruise Lines 2013 Annual Report Download - page 45
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PART II
review of our trademarks and trade names using a
discounted cash flow model and the relief-from-royalty
method. Based on the results of our testing, we did
not record an impairment of Pullmantur’s tradenames
and trademarks for the year ended December 31, 2013.
During the fourth quarter of 2012, we performed the
annual impairment evaluation of our goodwill and
trademarks and trade names and we recognized total
impairment related charges of $413.9 million associated
with our Pullmantur brand. Included in this amount
was a 100% valuation allowance of our deferred tax
assets which resulted in a deferred income tax expense
of $33.7 million recorded during the fourth quarter
of 2012. In addition, Pullmantur has a deferred tax lia-
bility that was recorded at the time of acquisition.
This liability represents the tax effect of the basis
difference between the tax and book values of the
trademarks and trade names that were acquired at
the time of the acquisition. Due to the 2012 impair-
ment charge related to these intangible assets, we
reduced the deferred tax liability and recorded a
deferred tax benefit of $5.2 million during the fourth
quarter of 2012. The net $28.5 million impact of these
adjustments was recognized in earnings during the
fourth quarter of 2012 and was reported within Other
(expense) income in our statements of comprehensive
income (loss).
In connection with the December 2013 agreement to
sell a majority stake in Pullmantur’s non-core busi-
nesses, we have agreed to retain certain long-lived
assets, consisting of the aircraft owned and operated
by Pullmantur Air. Due to an anticipated change in
the nature of the cash flows to be generated by the
Pullmantur aircraft, we reviewed the aircraft for impair-
ment. We identified that the undiscounted future cash
flows of the aircraft were less than their carrying
value and recorded an impairment charge of $13.5
million during the fourth quarter of 2013, which is
reported in Restructuring and related impairment
charges in our consolidated statements of compre-
hensive income (loss).
Pullmantur is a brand targeted primarily at the Spanish,
Portuguese and Latin American markets, with an
increasing focus on Latin America. The persistent
economic instability in these markets has created sig-
nificant uncertainties in forecasting operating results
and future cash flows used in our impairment analy-
ses. We continue to monitor economic events in these
markets for their potential impact on Pullmantur’s
business and valuation. Further, the estimation of fair
value utilizing discounted expected future cash flows
includes numerous uncertainties which require our
significant judgment when making assumptions of
expected revenues, operating costs, marketing, selling
and administrative expenses, interest rates, ship addi-
tions and retirements as well as assumptions regarding
the cruise vacation industry’s competitive environment
and general economic and business conditions, among
other factors. The opening of a regional head office
in Latin America was a significant factor in shaping
these assumptions.
If there are relatively modest changes to the projected
future cash flows used in the impairment analyses,
especially in Net Yields or if certain transfers of ves-
sels from our other cruise brands to the Pullmantur
fleet do not take place, it is reasonably possible that
an impairment charge of Pullmantur’s reporting unit’s
goodwill and trademark and trade names may be
required. Of these factors, the planned transfers of
vessels to the Pullmantur fleet is most significant to
the projected future cash flows. If the transfers do not
occur, we will likely fail step one of the impairment
test. As of December 31, 2013, the carrying amount of
goodwill attributable to our Pullmantur reporting unit
was $152.1 million.
Royal Caribbean International
During the fourth quarter of 2013, we performed
a qualitative assessment of the Royal Caribbean
International reporting unit. Based on our qualitative
assessment, we concluded that it was more-likely-
than-not that the estimated fair value of the Royal
Caribbean International reporting unit exceeded its
carrying value and thus, we did not proceed to the
two-step goodwill impairment test. No indicators of
impairment exist primarily because the reporting
unit’s fair value has consistently exceeded its carrying
value by a significant margin, its financial performance
has been solid in the face of mixed economic environ-
ments and forecasts of operating results generated
by the reporting unit appear sufficient to support its
carrying value. As of December 31, 2013, the carrying
amount of goodwill attributable to our Royal Caribbean
International reporting unit was $287.1 million.
Derivative Instruments
We enter into various forward, swap and option con-
tracts to manage our interest rate exposure and to
limit our exposure to fluctuations in foreign currency
exchange rates and fuel prices. These instruments are
recorded on the balance sheet at their fair value and
the vast majority are designated as hedges. We also
have non-derivative financial instruments designated
as hedges of our net investment in our foreign oper-
ations and investments. The fuel options we entered
into represent economic hedges which were not des-
ignated as hedging instruments for accounting pur-
poses and thus, changes in their fair value were