Attached files

file filename
EX-32 - EXHIBIT 32 - Belmond Ltd.bel-ex32_20170331x10q.htm
EX-31 - EXHIBIT 31 - Belmond Ltd.bel-ex31_20170331x10q.htm

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
 
 
 
 
 

 FORM 10-Q
(Mark One)
 
 
 
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2017
OR
o
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 001-16017
 
 
 
 
 
BELMOND LTD.
(Exact name of registrant as specified in its charter) 
Bermuda
 
98-0223493
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 

22 Victoria Street,
Hamilton HM 12, Bermuda
(Address of principal executive offices)(Zip code)
Registrant’s telephone number, including area code:  (441) 295-2244

 
 
 
 
 


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x  No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

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

Large Accelerated Filer x
 
Accelerated Filer o
Non-Accelerated Filer o
 
Smaller reporting company o
(Do not check if a smaller reporting company)
 
Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has 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. o

 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o  No x

 As of May 5, 2017, 102,121,870 class A common shares and 18,044,478 class B common shares of the registrant were outstanding.  All of the class B shares are owned by a subsidiary of the registrant.
 



Table of Contents
 


1


PART I — FINANCIAL INFORMATION

ITEM 1. Financial Statements


Belmond Ltd. and Subsidiaries
Condensed Consolidated Balance Sheets (unaudited)
 
 
March 31,
2017
 
December 31,
2016
 
 
 $’000
 
 $’000
Assets
 
 

 
 

Cash and cash equivalents
 
130,953

 
153,425

Restricted cash
 
7,043

 
1,830

Accounts receivable, net of allowances of $461 and $420
 
28,703

 
25,775

Due from unconsolidated companies
 
15,445

 
12,165

Prepaid expenses and other
 
14,600

 
12,262

Inventories
 
23,977

 
23,931

Total current assets
 
220,721

 
229,388

 
 
 
 
 
Property, plant and equipment, net of accumulated depreciation of $386,924 and $368,939
 
1,089,083

 
1,074,676

Investments in unconsolidated companies
 
75,948

 
79,327

Goodwill
 
114,891

 
113,343

Other intangible assets
 
14,276

 
13,877

Other assets
 
12,950

 
13,457

Total assets (1)
 
1,527,869

 
1,524,068

 
 
 
 
 
Liabilities and Equity
 
 

 
 

Accounts payable
 
13,201

 
16,366

Accrued liabilities
 
70,862

 
69,046

Deferred revenue
 
46,894

 
31,350

Current portion of long-term debt and obligations under capital leases
 
5,307

 
5,284

Total current liabilities
 
136,264

 
122,046

 
 
 
 
 
Long-term debt and obligations under capital leases
 
587,101

 
585,768

Liability for pension benefit
 
1,005

 
1,447

Other liabilities
 
4,816

 
5,366

Deferred income taxes
 
114,049

 
122,291

Liability for uncertain tax positions
 
340

 
318

Total liabilities (1)
 
843,575

 
837,236

 
 
 
 
 
Commitments and contingencies (Note 17)
 


 


 
 
 
 
 
Equity:
 
 

 
 

 
 
 
 
 
Shareholders’ equity:
 
 

 
 

Preferred shares $0.01 par value (30,000,000 shares authorized, issued Nil)
 

 

Class A common shares $0.01 par value (240,000,000 shares authorized):
 
 

 
 

Issued — 102,120,268 (2016 — 101,793,829)
 
1,021

 
1,018

Class B common shares $0.01 par value (120,000,000 shares authorized):
 
 

 
 

Issued — 18,044,478 (2016 — 18,044,478)
 
181

 
181

 
 
 
 
 
Additional paid-in capital
 
980,993

 
979,458

Retained earnings
 
40,202

 
58,313

Accumulated other comprehensive loss
 
(338,401
)
 
(352,339
)
Less: Reduction due to class B common shares owned by a subsidiary — 18,044,478 (2016 — 18,044,478)
 
(181
)
 
(181
)
Total shareholders’ equity
 
683,815

 
686,450

Non-controlling interests
 
479

 
382

Total equity
 
684,294

 
686,832

 
 
 
 
 
Total liabilities and equity
 
1,527,869

 
1,524,068



Belmond Ltd. and Subsidiaries
Condensed Consolidated Balance Sheets (unaudited) (continued)

(1) Included in Belmond Ltd.’s consolidated assets and liabilities are assets of consolidated variable interest entities (“consolidated VIEs”) that can only be used to settle obligations of the consolidated VIEs and liabilities of consolidated VIEs whose creditors have no recourse to Belmond Ltd. The Company’s only consolidated VIE at March 31, 2017 and December 31, 2016 is Charleston Center LLC. These assets and liabilities at March 31, 2017 and December 31, 2016 are as follows:
 
 
March 31,
2017
 
December 31,
2016
 
 
 $’000
 
 $’000
 
 
 
 
 
Assets
 
 
 
 
Cash and cash equivalents
 
719

 
2,233

Accounts receivable, net of allowances of $Nil and $Nil
 
3,314

 
3,066

Prepaid expenses and other
 
1,052

 
365

Inventories
 
1,292

 
1,296

Total current assets
 
6,377

 
6,960

 
 
 
 
 
Property, plant and equipment, net of accumulated depreciation of $37,535 and $35,902
 
200,864

 
201,861

Other assets
 
1,393

 
1,455

Total assets
 
208,634

 
210,276

 
 
 
 
 
Liabilities
 
 
 
 
Accounts payable
 
1,880

 
4,558

Accrued liabilities
 
3,254

 
3,099

Deferred revenue
 
3,283

 
1,714

Current portion of long-term debt and obligations under capital leases
 
245

 
242

Total current liabilities
 
8,662

 
9,613

 
 
 
 
 
Long-term debt and obligations under capital leases
 
111,935

 
111,968

Other liabilities
 

 
40

Total liabilities
 
120,597

 
121,621


See further description in note 4, Variable interest entities.

See notes to condensed consolidated financial statements.
2




Belmond Ltd. and Subsidiaries
Statements of Condensed Consolidated Operations (unaudited)

 
 
Three months ended
 
 
March 31,
2017
 
March 31,
2016
 
 
$’000
 
$’000
 
 
 
 
 
Revenue
 
95,361

 
97,402

 
 
 
 
 
Expenses:
 
 

 
 

Cost of services
 
45,919

 
45,104

Selling, general and administrative
 
51,754

 
46,644

Depreciation and amortization
 
13,728

 
13,067

 
 
 
 
 
Total operating costs and expenses
 
111,401

 
104,815

 
 
 
 
 
Gain on disposal of property, plant and equipment
 
150

 
150

 
 
 
 
 
Losses from operations
 
(15,890
)
 
(7,263
)
 
 
 
 
 
Interest income
 
146

 
116

Interest expense
 
(7,676
)
 
(7,510
)
Foreign currency, net
 
(234
)
 
2,858

 
 
 
 
 
Losses before income taxes and earnings from unconsolidated companies, net of tax
 
(23,654
)
 
(11,799
)
 
 
 
 
 
Benefit from income taxes
 
5,266

 
9,596

 
 
 
 
 
Losses before earnings from unconsolidated companies, net of tax
 
(18,388
)
 
(2,203
)
 
 
 
 
 
Earnings from unconsolidated companies, net of tax provision of $246 and $876
 
376

 
835

 
 
 
 
 
Losses from continuing operations
 
(18,012
)
 
(1,368
)
 
 
 
 
 
Net earnings/(losses) from discontinued operations, net of tax provision/(benefit) of $Nil and $Nil
 
35

 
(101
)
 
 
 
 
 
Net losses
 
(17,977
)
 
(1,469
)
 
 
 
 
 
Net earnings attributable to non-controlling interests
 
(134
)
 
(99
)
 
 
 
 
 
Net losses attributable to Belmond Ltd.
 
(18,111
)
 
(1,568
)
 



See notes to condensed consolidated financial statements.
3



Belmond Ltd. and Subsidiaries
Statements of Condensed Consolidated Operations (unaudited) (continued)

 
 
Three months ended
 
 
March 31,
2017
 
March 31,
2016
 
 
$
 
$
 
 
 
 
 
Basic earnings per share
 
 

 
 
Net earnings/(losses) from continuing operations
 
(0.18
)
 
(0.01
)
Net earnings/(losses) from discontinued operations
 

 

Basic net earnings/(losses) per share attributable to Belmond Ltd.
 
(0.18
)
 
(0.02
)
 
 
 
 
 
Diluted earnings per share
 
 

 
 

Net earnings/(losses) from continuing operations
 
(0.18
)
 
(0.01
)
Net earnings/(losses) from discontinued operations
 

 

Diluted net earnings/(losses) per share attributable to Belmond Ltd.
 
(0.18
)
 
(0.02
)
 
 
 
 
 
 

See notes to condensed consolidated financial statements.
4



Belmond Ltd. and Subsidiaries
Statements of Condensed Consolidated Comprehensive Income (unaudited)

 
 
Three months ended
 
 
March 31,
2017
 
March 31,
2016
 
 
$’000
 
$’000
 
 
 
 
 
Net losses
 
(17,977
)
 
(1,469
)
 
 
 
 
 
Other comprehensive income/(losses), net of tax:
 
 

 
 
Foreign currency translation adjustments, net of tax benefit of $Nil and $Nil
 
13,081

 
15,074

Change in fair value of derivatives, net of tax provision/(benefit) of $175 and $(459)
 
664

 
(1,468
)
Change in pension liability, net of tax provision of $32 and $29
 
156

 
133

Total other comprehensive income, net of tax
 
13,901

 
13,739

 
 
 
 
 
Total comprehensive (loss)/income
 
(4,076
)
 
12,270

 
 
 
 
 
Comprehensive income attributable to non-controlling interests
 
(97
)
 
(146
)
 
 
 
 
 
Comprehensive income attributable to Belmond Ltd.
 
(4,173
)
 
12,124

 
 
 
 
 


See notes to condensed consolidated financial statements.
5


Belmond Ltd. and Subsidiaries
Statements of Condensed Consolidated Cash Flows (unaudited)

 
 
Three months ended
 
 
March 31,
2017
 
March 31,
2016
 
 
$'000
 
$'000
 
 
 
 
 
Cash flows from operating activities:
 
 

 
 

Net losses
 
(17,977
)
 
(1,469
)
Less: Net earnings/(losses) from discontinued operations, net of tax
 
35

 
(101
)
 
 
 
 
 
Net losses from continuing operations
 
(18,012
)
 
(1,368
)
Adjustments to reconcile net losses to net cash used in operating activities:
 
 

 
 

Depreciation and amortization
 
13,728

 
13,067

Gain on disposal of property, plant and equipment
 
(150
)
 
(150
)
Earnings from unconsolidated companies, net of tax
 
(376
)
 
(835
)
Amortization of debt issuance costs and discount on secured term loan
 
720

 
708

Share-based compensation
 
1,535

 
1,642

Change in provisions for uncertain tax positions
 
17

 
68

Benefit from deferred income tax
 
(9,611
)
 
(14,595
)
Other non-cash movements
 
602

 
466

Effect of exchange rates on net losses
 
(396
)
 
(4,084
)
Change in assets and liabilities, net of effects from acquisitions:
 
 

 
 

Accounts receivable
 
(2,510
)
 
(684
)
Due from unconsolidated companies
 
(369
)
 
(917
)
Prepaid expenses and other
 
(2,182
)
 
(826
)
Inventories
 
365

 
(904
)
Escrow and prepaid customer deposits
 
(5,139
)
 
(3,881
)
Accounts payable
 
(4,612
)
 
(3,945
)
Accrued liabilities
 
750

 
970

Deferred revenue
 
14,936

 
12,651

Other, net
 
262

 
(219
)
Other cash movements:
 
 
 
 
Dividends from equity method investees
 
960

 
1,106

 
 
 
 
 
Net cash used in operating activities from continuing operations
 
(9,482
)
 
(1,730
)
Net cash provided by/(used in) operating activities from discontinued operations
 

 
(101
)
 
 
 
 
 
Net cash used in operating activities
 
(9,482
)
 
(1,831
)

See notes to condensed consolidated financial statements.
6


Belmond Ltd. and Subsidiaries
Statements of Condensed Consolidated Cash Flows (unaudited) (continued)

 
 
Three months ended
 
 
March 31,
2017
 
March 31,
2016
 
 
$'000
 
$'000
 
 
 
 
 
Cash flows from investing activities:
 
 

 
 

Capital expenditure to acquire property, plant and equipment
 
(11,995
)
 
(11,013
)
Release of restricted cash
 
69

 
80

 
 
 
 
 
Net cash used in investing activities from continuing operations
 
(11,926
)
 
(10,933
)
Net cash provided by investing activities from discontinued operations
 

 

 
 
 
 
 
Net cash used in investing activities
 
(11,926
)
 
(10,933
)
 
 
 
 
 
Cash flows from financing activities:
 
 

 
 

Repurchase of shares
 

 
(1,992
)
Exercised share options and vested share awards
 
4

 
3

Dividend to non-controlling interest
 

 
(7
)
Principal payments under long-term debt
 
(1,670
)
 
(1,342
)
 
 
 
 
 
Net cash used in financing activities from continuing operations
 
(1,666
)
 
(3,338
)
Net cash used in financing activities from discontinued operations
 

 

 
 
 
 
 
Net cash used in financing activities
 
(1,666
)
 
(3,338
)
 
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
 
602

 
1,487

 
 
 
 
 
Net decrease in cash and cash equivalents
 
(22,472
)
 
(14,615
)
 
 
 
 
 
Cash and cash equivalents at beginning of period (includes $Nil and $Nil of cash presented within assets held for sale)
 
153,425

 
135,599

 
 
 
 
 
Cash and cash equivalents at end of period (includes $Nil and $Nil of cash presented within assets held for sale)
 
130,953

 
120,984




See notes to condensed consolidated financial statements.
7


Belmond Ltd. and Subsidiaries
Statements of Condensed Consolidated Total Equity (unaudited)
 
 
 
Preferred
shares at
par value
$’000
 
Class A
common
shares at
par value
$’000
 
Class B
common
shares at
par value
$’000
 
Additional
paid-in
capital
$’000
 
Retained earnings
$’000
 
Accumulated
other
comprehensive
loss
$’000
 
Class B
common
shares held by
a subsidiary
$’000
 
Non-
controlling
interests
$’000
 
Total
$’000
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, January 1, 2016
 

 
1,015

 
181

 
975,419

 
16,172

 
(334,542
)
 
(181
)
 
361

 
658,425

Share-based compensation
 

 

 

 
1,642

 

 

 

 

 
1,642

Exercised share options and vested share awards
 

 
3

 

 

 

 

 

 

 
3

Repurchase of shares
 

 
(2
)
 

 
(2,245
)
 
255

 

 

 

 
(1,992
)
Dividend to non-controlling interest
 

 

 

 

 

 

 

 
(97
)
 
(97
)
Comprehensive income/(losses):
 
 
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Net losses attributable to common shares
 

 

 

 

 
(1,568
)
 

 

 
99

 
(1,469
)
Other comprehensive income
 

 

 

 

 

 
13,692

 

 
47

 
13,739

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, March 31, 2016
 

 
1,016

 
181

 
974,816

 
14,859

 
(320,850
)
 
(181
)
 
410

 
670,251

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, January 1, 2017
 

 
1,018

 
181

 
979,458

 
58,313

 
(352,339
)
 
(181
)
 
382

 
686,832

Share-based compensation
 

 

 

 
1,535

 

 

 

 

 
1,535

Exercised stock options and vested share awards
 

 
3

 

 

 

 

 

 

 
3

Comprehensive income/(losses):
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Net losses attributable to common shares
 

 

 

 

 
(18,111
)
 

 

 
134

 
(17,977
)
Other comprehensive income
 

 

 

 

 

 
13,938

 

 
(37
)
 
13,901

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, March 31, 2017
 

 
1,021

 
181

 
980,993

 
40,202

 
(338,401
)
 
(181
)
 
479

 
684,294

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

See notes to condensed consolidated financial statements.
8


Belmond Ltd. and Subsidiaries
 
Notes to Condensed Consolidated Financial Statements (unaudited)
 
1.    Basis of financial statement presentation
 
Business
 
The terms “Belmond” and the “Company” are used in this report to refer to Belmond Ltd. and Belmond Ltd. and its subsidiaries, unless otherwise stated.

At March 31, 2017, Belmond owned, partially-owned or managed 34 deluxe hotels and resort properties operating in the United States, Mexico, the Caribbean, Europe, Southern Africa, South America, and Southeast Asia, one stand-alone restaurant in New York, seven tourist trains in Europe, Southeast Asia and Peru, two river cruise businesses in Myanmar (Burma) and one canal boat business in France. In addition, there is one hotel scheduled for future opening over the coming twelve months, Belmond Cadogan Hotel in England. Subsequent to the balance sheet date, the Company launched the Belmond Andean Explorer luxury sleeper train in Peru in May 2017, and completed the acquisition of a hotel in Colca Canyon, Peru through the Company’s existing 50/50 joint venture with local partners in April 2017.

Basis of presentation

The accompanying condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) for quarterly reporting on Form 10-Q. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States (“U.S. GAAP”) for complete financial statements. In the opinion of the management of the Company, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of financial position, operating results and cash flows for the interim period have been included in these condensed consolidated financial statements.

The interim results presented are not necessarily indicative of results that may be expected for any subsequent interim period or the fiscal year ending December 31, 2017.
 
These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. See Note 2 to the consolidated financial statements in the 2016 Annual Report on Form 10-K for additional information regarding significant accounting policies.
 
For interim reporting purposes, Belmond calculates its tax expense by estimating its global annual effective tax rate and applies that rate in providing for income taxes on a year-to-date basis. Belmond has calculated an expected annual effective tax rate, excluding significant or unusual items, and the tax effect of jurisdictions with losses for which a tax benefit cannot be recognized. The income tax expense (or benefit) related to all other items is individually computed and recognized when the items occur.

Reclassifications

In the period, the Company has corrected a prior period misstatement to reclassify an immaterial deferred tax entry related to a change of functional currency at the Company's Brazilian subsidiaries in 2014. As a result, opening Retained earnings has increased by $5,562,000 and opening Accumulated other comprehensive income has decreased by $5,562,000, with no net change in Total Equity. There is no impact on net earnings, EPS or cash flows in any period presented.

Accounting policies
 
The accounting policies used in preparing these condensed consolidated financial statements are the same as those applied in the prior year.


9


Accounting pronouncements to be adopted

In May 2014, the FASB issued new guidance which is intended to improve the comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets. The guidance supersedes existing revenue recognition guidance and requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Entities will have the option of using either a full retrospective approach or a modified approach to adopt the new guidance. In March 2016, the FASB issued additional guidance which amends the principal-versus-agent implementation guidance and illustrations in the original accounting pronouncement. In May 2016, the FASB issued an update that clarified guidance in certain narrow aspects of the topic. The guidance was originally effective for annual and interim periods beginning after December 15, 2016, however in July 2015 the FASB confirmed that the effective date would be deferred by one year, to annual and interim periods beginning after December 15, 2017. Early adoption is permitted only for periods beginning after December 15, 2016. Belmond is currently evaluating the impact of the adoption of this guidance on its condensed consolidated financial statements.

In February 2016, the FASB issued its new standard on accounting for leases, which introduces a lessee model that brings most leases on the balance sheet. A distinction between finance leases and operating leases is retained, with the result that the effect of leases in the statement of comprehensive income and the statement of cash flows is largely unchanged from previous lease guidance. The guidance is effective for annual and interim periods beginning after December 15, 2018, with early adoption permitted. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. Belmond is currently evaluating the impact of the adoption of this guidance on its condensed consolidated financial statements.

In August 2016, the FASB issued new guidance which clarifies the classification of certain cash receipts and payments in the statement of cash flows. The guidance is effective for annual and interim periods beginning after December 15, 2017, with early adoption permitted. The new guidance will be applied on a retrospective basis where applicable. Belmond is currently evaluating the impact, if any, of the adoption of this guidance on its condensed consolidated financial statements.

In October 2016, the FASB issued new guidance which is intended to simplify the tax consequences of certain types of intra-entity asset transfers. The guidance is effective for annual periods ending after December 15, 2017, and interim periods thereafter, with early adoption permitted. The new guidance will be applied on a modified retrospective basis. Belmond is currently evaluating the impact of the adoption of this guidance on its condensed consolidated financial statements.

In November 2016, the FASB issued new guidance which clarifies the classification and presentation of restricted cash in the statement of cash flows. The guidance is effective for fiscal years beginning after December 15, 2017, including interim periods therein, with early adoption permitted. Belmond is currently assessing what impact the adoption of this guidance will have on its consolidated financial statements.

In January 2017, the FASB issued new guidance to simplify the accounting for goodwill impairment by eliminating step 2 from the goodwill impairment test. A goodwill impairment will now be measured as the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The guidance is effective for annual and interim impairment tests for periods beginning after December 15, 2019, with early adoption permitted for any impairment tests performed after January 1, 2017. The new guidance will be applied on a prospective basis. Belmond is currently assessing what impact the adoption of this guidance will have on its consolidated financial statements.

In January 2017, the FASB issued new guidance to clarify the definition of a business.The guidance is effective in annual periods beginning after December 15, 2017, including interim periods therein, with early adoption permitted. The new guidance will be applied on a prospective basis. Belmond is currently assessing what impact the adoption of this guidance will have on its consolidated financial statements.


10


2.     Earnings per share
 
The calculation of basic and diluted earnings per share including a reconciliation of the numerator and denominator is as follows:
 
 
Three months ended
 
 
March 31,
2017
 
March 31,
2016
 
 
 
 
 
Numerator ($'000)
 
 
 
 
Net earnings/(losses) from continuing operations
 
(18,012
)
 
(1,368
)
Net earnings/(losses) from discontinued operations
 
35

 
(101
)
Net losses/(earnings) attributable to non-controlling interests
 
(134
)
 
(99
)
 
 
 
 
 
Net earnings/(losses) attributable to Belmond Ltd.
 
(18,111
)
 
(1,568
)
 
 
 
 
 
Denominator (shares '000)
 
 
 
 
Basic weighted average shares outstanding
 
101,863

 
101,315

Effect of dilution
 

 

 
 
 
 
 
Diluted weighted average shares outstanding
 
101,863

 
101,315

 
 
 
 
 
 
 
$
 
$
Basic earnings per share
 
 
 
 
Net earnings/(losses) from continuing operations
 
(0.177
)
 
(0.014
)
Net earnings/(losses) from discontinued operations
 

 
(0.001
)
Net losses/(earnings) attributable to non-controlling interests
 
(0.001
)
 
(0.001
)
 
 
 
 
 
Net earnings/(losses) attributable to Belmond Ltd.
 
(0.178
)
 
(0.016
)
 
 
 
 
 
Diluted earnings per share
 
 
 
 
Net earnings/(losses) from continuing operations
 
(0.177
)
 
(0.014
)
Net earnings/(losses) from discontinued operations
 

 
(0.001
)
Net losses/(earnings) attributable to non-controlling interests
 
(0.001
)
 
(0.001
)
 
 
 
 
 
Net earnings/(losses) attributable to Belmond Ltd.
 
(0.178
)
 
(0.016
)

The total number of share options and share-based awards excluded from computing diluted earnings per share was as follows: 
 
 
Three months ended
 
 
March 31,
2017
 
March 31,
2016
 
 
 
 
 
Share options
 
2,415,014

 
2,754,007

Share-based awards
 
1,422,565

 
1,442,405

 
 
 
 
 
Total
 
3,837,579

 
4,196,412

 
The number of share options and share-based awards unexercised at March 31, 2017 was 3,837,579 (March 31, 2016 - 4,196,412).


11


3.    Assets held for sale and discontinued operations
 
 
 
(a)    Results of discontinued operations

Belmond had been operating the hotel Ubud Hanging Gardens under a long-term lease arrangement with a third-party owner. The existing lease arrangement continues to 2030. Following the owner's unannounced dispossession of Belmond from the hotel in November 2013, however, Belmond was unable to continue to operate the hotel. Belmond believed that the owner's actions were unlawful and constituted a wrongful dispossession and has pursued its legal remedies under the lease. See Note 17. As Belmond is unable to operate Ubud Hanging Gardens for the foreseeable future, the hotel has been presented as a discontinued operation for all periods shown. The assets and liabilities of the hotel have not been classified as held for sale, as the hotel has not been disposed of through a sale transaction.

The Porto Cupecoy development was sold in January 2013, with the final unit disposed of in September 2014. Residual costs relating to the sale of Porto Cupecoy are presented within discontinued operations for all periods shown.

Summarized operating results of the properties classified as discontinued operations for the three months ended March 31, 2017 and 2016 are as follows:
 
 
Three months ended March 31, 2017
 
 
Ubud Hanging Gardens
 
Porto Cupecoy
 
Total
 
 
$'000
 
$'000
 
$'000
 
 
 
 
 
 
 
Revenue
 

 

 

 
 
 
 
 
 
 
Earnings before tax, gain on sale and impairment
 

 
35

 
35

 
 
 
 
 
 
 
Earnings before tax
 

 
35

 
35

 
 
 
 
 
 
 
Net earnings from discontinued operations
 

 
35

 
35

 
 
Three months ended March 31, 2016
 
 
Ubud Hanging Gardens
 
Porto Cupecoy
 
Total
 
 
$'000
 
$'000
 
$'000
 
 
 
 
 
 
 
Revenue
 

 

 

 
 
 
 
 
 
 
Losses before tax, gain on sale and impairment
 
(97
)
 
(4
)
 
(101
)
 
 
 
 
 
 
 
Losses before tax
 
(97
)
 
(4
)
 
(101
)
 
 
 
 
 
 
 
Net losses from discontinued operations
 
(97
)
 
(4
)
 
(101
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The results of discontinued operations for the three months ended March 31, 2017 included earnings of $35,000 at Porto Cupecoy due to the release of remaining accruals that Belmond is discharged from. The results of discontinued operations for the three months ended March 31, 2016 comprised legal fees of $97,000 in relation to Ubud Hanging Gardens, as Belmond is pursuing legal remedies following its dispossession by the owner in November 2013. See Note 17.


12


(b)    Assets and liabilities held for sale

There were no assets or liabilities classified as held for sale at March 31, 2017 and December 31, 2016.
 
 
 
4.    Variable interest entities
 
(a)    VIEs of which Belmond is the primary beneficiary
 
Belmond holds a 19.9% equity investment in Charleston Center LLC, owner of Belmond Charleston Place, Charleston, South Carolina. Belmond has also made a number of loans to the hotel. Belmond concluded that Charleston Center LLC is a VIE because the total equity at risk is insufficient for the entity to fund its operations without additional subordinated financial support, the majority of which has been provided by Belmond. Belmond is the primary beneficiary of this VIE because it is expected to absorb a majority of the VIE’s expected losses and residual gains through the subordinated financial support it has provided, and has the power to direct the activities that impact the VIE’s performance, based on the current organizational structure.
 
 
 
 
 
Assets of Charleston Center LLC that can only be used to settle obligations of the consolidated VIEs and liabilities of Charleston Center LLC whose creditors have no recourse to Belmond are presented as a footnote to the consolidated balance sheets. The third-party debt of Charleston Center LLC is secured by its net assets and is non-recourse to its members, including Belmond. The hotel's separate assets are not available to pay the debts of Belmond and the hotel's separate liabilities do not constitute obligations of Belmond. The assets of Charleston Center LLC that can be used only to settle obligations of Charleston Center LLC totaled $208,634,000 at March 31, 2017 (December 31, 2016 - $210,276,000) and exclude goodwill of $40,395,000 (December 31, 2016 - $40,395,000). The liabilities of Charleston Center LLC for which creditors do not have recourse to the general credit of Belmond totaled $120,597,000 at March 31, 2017 (December 31, 2016 - $121,621,000).

All deferred taxes attributable to the Company’s investment in the LLC arise at the investor level and are therefore not included in the footnote to the condensed consolidated balance sheets.

(b)    VIEs of which Belmond is not the primary beneficiary

Belmond holds a 25% equity investment in Eastern and Oriental Express Ltd., which operates the Eastern & Oriental Express luxury tourist train in Southeast Asia. Belmond concluded that the Eastern & Oriental Express joint venture is a variable interest entity because the total equity at risk is insufficient for it to fund its operations without additional subordinated financial support. Belmond is not the primary beneficiary of the joint venture because it does not have the power to direct the activities that most significantly impact the economic performance of the entity. The joint venture is accounted for under the equity method of accounting and included in earnings/(losses) before income taxes and earnings from unconsolidated companies in the statements of condensed consolidated operations.

The carrying amounts and maximum exposure to loss as a result of Belmond's involvement with its Eastern & Oriental Express joint venture are as follows:
 
 
Carrying amounts
 
Maximum exposure
 
 
March 31,
2017
 
December 31,
2016
 
March 31,
2017
 
December 31,
2016
 
 
$’000
 
$’000
 
$’000
 
$’000
 
 
 
 
 
 
 
 
 
Investment
 
2,858

 
2,818

 
2,858

 
2,818

Due from unconsolidated company
 
4,797

 
4,771

 
4,797

 
4,771

Guarantees
 

 

 

 

Contingent guarantees
 

 

 

 

 
 
 
 
 
 
 
 
 
Total
 
7,655

 
7,589

 
7,655

 
7,589


5.    Investments in unconsolidated companies
 
Investments in unconsolidated companies represent equity interests of 50% or less and in which Belmond exerts significant influence, but does not have effective control of these unconsolidated companies and, therefore, accounts for these investments

13


using the equity method. As at March 31, 2017, these investments include the 50% ownership in rail and hotel joint venture operations in Peru, the 25% ownership in Eastern and Oriental Express Ltd, and the Buzios land joint venture which is 50% owned and is further described below.

In June 2007, a joint venture in which Belmond holds a 50% equity interest acquired real estate in Buzios, a beach resort area in Brazil, for a cash consideration of $5,000,000. Belmond planned to build a hotel and villas on the acquired land and to purchase the remaining share of the joint venture company when the building permits were obtained from the local authorities. In February 2009, the Municipality of Buzios commenced a process for the expropriation of the land in exchange for a payment of fair compensation to the joint venture. In April 2011, the State of Rio de Janeiro took over the expropriation process as part of a broader State plan to develop a coastal environmental park. Under applicable law, the State had five years to carry out the expropriation in exchange for fair value, which it failed to do by the April 18, 2016 deadline. As a result, the land returned unencumbered to the joint venture, although is subject to expropriation again. The Company and its joint venture partner are assessing their options, including negotiation with or litigation against the State to seek a permanent resolution of the status of the land, but in any case, the Company expects to recover its investment in the project.
 
 
 
Summarized financial data for Belmond’s unconsolidated companies are as follows:
 
 
March 31,
2017
 
December 31,
2016
 
 
$’000
 
$’000
 
 
 
 
 
Current assets
 
83,258

 
96,247

 
 
 
 
 
Property, plant and equipment, net of accumulated depreciation
 
298,338

 
295,662

Other non-current assets
 
29,651

 
29,442

Non-current assets
 
327,989


325,104

 
 
 
 
 
Total assets
 
411,247

 
421,351

 
 
 
 
 
Current liabilities, including $21,120 and $21,021 current portion of third-party debt
 
91,252

 
89,785

 
 
 
 
 
Long-term debt
 
148,709

 
153,876

Other non-current liabilities
 
28,005

 
27,545

Non-current liabilities
 
176,714

 
181,421

 
 
 
 
 
Total shareholders’ equity
 
143,281

 
150,145

 
 
 
 
 
Total liabilities and shareholders’ equity
 
411,247

 
421,351

 
 
Three months ended
 
 
March 31,
2017
 
March 31,
2016
 
 
$’000
 
$’000
 
 
 
 
 
Revenue
 
39,465

 
38,738

 
 
 
 
 
Gross profit1
 
25,519

 
25,844

 
 
 
 
 
Net earnings2
 
827

 
1,804

1 Gross profit is defined as revenues less cost of services of the unconsolidated companies.
2 There were no discontinued operations or cumulative effects of a change in an accounting principle in the unconsolidated companies.


14


Included in unconsolidated companies are Belmond’s hotel and rail joint ventures in Peru, under which Belmond and the other 50% participant must contribute equally additional equity needed for the businesses. If the other participant does not meet this obligation, Belmond has the right to dilute the other participant and obtain a majority equity interest in the affected joint venture company. Belmond also has rights to purchase the other participant’s interests, which rights are exercisable in limited circumstances such as the other participant’s bankruptcy.

There are contingent guarantees to unconsolidated companies which are not recognized in the condensed consolidated financial statements. The contingent guarantees for each Peruvian joint venture may only be enforced in the event there is a change in control of the relevant joint venture, which would occur only if Belmond’s ownership of the economic and voting interests in the joint venture falls below 50%, an event which has not occurred and is not expected to occur. As at March 31, 2017, Belmond does not expect that it will be required to fund these guarantees relating to these joint venture companies.

Belmond has contingently guaranteed, through 2021, $17,267,000 of debt obligations of the joint venture in Peru that operates four hotels and has contingently guaranteed the Peru rail joint venture’s obligations relating to the performance of its governmental rail concessions, currently in the amount of $7,261,000, through May 2017.

6.    Property, plant and equipment
 
The major classes of property, plant and equipment are as follows:
 
 
March 31,
2017
 
December 31,
2016
 
 
$’000
 
$’000
 
 
 
 
 
Land and buildings
 
1,026,444

 
1,010,362

Machinery and equipment
 
185,587

 
179,537

Fixtures, fittings and office equipment
 
244,896

 
235,098

River cruise ship and canal boats
 
19,080

 
18,618

 
 
 
 
 
 
 
1,476,007

 
1,443,615

Less: Accumulated depreciation
 
(386,924
)
 
(368,939
)
 
 
 
 
 
Total property, plant and equipment, net of accumulated depreciation
 
1,089,083

 
1,074,676

 
 
 
 
 
The depreciation charge on property, plant and equipment for the three months ended March 31, 2017 was $13,595,000 (March 31, 2016 - $12,944,000).

The table above includes property, plant and equipment, net of accumulated depreciation, of Charleston Center LLC, a consolidated VIE, of $200,864,000 at March 31, 2017 (December 31, 2016 - $201,861,000).

There were no impairments of property, plant and equipment in the three months ended March 31, 2017 and in the three months ended March 31, 2016.

In the three months ended March 31, 2017, Belmond considered whether the decline in performance of Belmond Road to Mandalay caused by increased competition in Myanmar indicated that the carrying amount of the business’s fixed assets may not be recoverable. Belmond concluded that an impairment trigger existed and an impairment test was required. Under the first step of the fixed assets impairment test, the sum of the undiscounted cash flows expected to result from Belmond Road to Mandalay was approximately 23% in excess of its carrying value. The impairment test remains sensitive to changes in assumptions; factors that could reasonably be expected to potentially have an adverse effect on the sum of the undiscounted cash flows of the asset group include the future operating projections of the river cruise business, particularly passenger numbers, ticket prices and fixed costs. Any failure to meet these assumptions may result in an impairment charge that would write down the carrying value of assets to fair value in future periods.

In the three months ended March 31, 2017, Belmond considered whether the decline in performance of Belmond Northern Belle caused by a reduction in passenger numbers sourced mainly from regional markets in the U.K. indicated that the carrying amount of the business’s fixed assets may not be recoverable. While Belmond concluded that there was no impairment trigger in the current quarter, it is carefully monitoring the situation. The impairment test remains sensitive to changes in assumptions; factors that could

15


reasonably be expected to potentially have an adverse effect on the sum of the undiscounted cash flows of the asset group include the future operating projections of the train, particularly passenger numbers, ticket prices and maintenance spend, and any deterioration in the U.K. regional economy. Any failure to meet these assumptions may result in an impairment charge that would write down the carrying value of assets to fair value in future periods.

There was no capitalized interest in the three months ended March 31, 2017 and 2016.

7.    Goodwill

The changes in the carrying amount of goodwill for the three months ended March 31, 2017 are as follows:
 
 
At January 1, 2017
 
 
 
 
 
At March 31, 2017
 
 
Gross goodwill amount
 
Accumulated impairment
 
Net goodwill amount
 
Impairment
 
Foreign currency translation adjustment
 
Gross goodwill amount
 
Accumulated impairment
 
Net goodwill amount
 
 
$'000
 
$'000
 
$'000
 
$'000
 
$'000
 
$'000
 
$'000
 
$'000
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Owned hotels:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Europe
 
64,459

 
(14,202
)
 
50,257

 

 
1,355

 
65,814

 
(14,202
)
 
51,612

North America
 
66,101

 
(16,110
)
 
49,991

 

 

 
66,101

 
(16,110
)
 
49,991

Rest of world
 
20,581

 
(13,149
)
 
7,432

 

 
105

 
20,686

 
(13,149
)
 
7,537

Owned trains and cruises
 
6,325

 
(662
)
 
5,663

 

 
88

 
6,413

 
(662
)
 
5,751

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
157,466

 
(44,123
)
 
113,343

 

 
1,548

 
159,014

 
(44,123
)
 
114,891



16


8.    Other intangible assets
 
Other intangible assets consist of the following as of March 31, 2017:
 
 
Favorable lease assets
 
Internet sites
 
Trade names
 
Total
 
 
$'000
 
$'000
 
$'000
 
$'000
 
 
 
 
 
 
 
 
 
Carrying amount:
 
 
 
 
 
 
 
 
Balance at January 1, 2017
 
8,501

 
1,658

 
7,579

 
17,738

Additions
 

 

 

 

Foreign currency translation adjustment
 
50

 
26

 
493

 
569

 
 
 
 
 
 
 
 
 
Balance at March 31, 2017
 
8,551

 
1,684

 
8,072

 
18,307

 
 
 
 
 
 
 
 
 
Accumulated amortization:
 
 
 
 
 
 
 
 
Balance at January 1, 2017
 
2,636

 
1,225

 
 
 
3,861

Charge for the period
 
92

 
41

 
 
 
133

Foreign currency translation adjustment
 
17

 
20

 
 
 
37

 
 
 
 
 
 
 
 
 
Balance at March 31, 2017
 
2,745

 
1,286

 
 
 
4,031

 
 
 
 
 
 
 
 
 
Net book value:
 
 
 
 
 
 
 
 
At March 31, 2017
 
5,806

 
398

 
8,072

 
14,276

 
 
 
 
 
 
 
 
 
At December 31, 2016
 
5,865

 
433

 
7,579

 
13,877


Favorable lease intangible assets are amortized over the terms of the leases, which are between 19 and 60 years. Internet sites are amortized over a period of five to ten years. Trade names have an indefinite life and therefore are not amortized, but are assessed for impairment annually or when events indicate that impairment may have occurred.

Amortization expense for the three months ended March 31, 2017 was $133,000 (March 31, 2016 - $123,000). Estimated total amortization expense for the remainder of the year ending December 31, 2017 is $399,000 and for each of the years ending December 31, 2018 to December 31, 2021 is $532,000.


17


9.    Debt and obligations under capital lease
 
(a)    Long-term debt and obligations under capital lease

Long-term debt and obligations under capital lease consist of the following:
 
 
March 31,
2017
 
December 31,
2016
 
 
$’000
 
$’000
 
 
 
 
 
Loans from banks and other parties collateralized by tangible and intangible personal property and real estate with a maturity of three to four years (2016 - two to five years), with a weighted average interest rate of 4.27% (2016 - 4.27%)
 
602,777

 
602,083

Obligations under capital lease
 
13

 
19

 
 
 
 
 
Total long-term debt and obligations under capital lease
 
602,790

 
602,102

 
 
 
 
 
Less: Current portion
 
5,307

 
5,284

Less: Discount on secured term loan
 
1,434

 
1,515

Less: Debt issuance costs
 
8,948

 
9,535

 
 
 
 
 
Non-current portion of long-term debt and obligations under capital lease
 
587,101

 
585,768

 
Belmond is financed with a $489,737,000 secured term loan and a $105,000,000 revolving credit facility.

The term loan has two tranches, a U.S. dollar tranche ($334,415,000 currently outstanding) and a euro-denominated tranche (€145,398,000 currently outstanding, equivalent to $155,322,000 as at March 31, 2017). The dollar tranche bears interest at a rate of LIBOR plus 3% per annum, and the euro tranche bears interest at a rate of EURIBOR plus 3% per annum. Both tranches are subject to a 1% interest rate floor. The term loan matures in 2021 and the annual mandatory amortization is 1% of the principal amount.
The revolving credit facility matures in March 2019 and bears interest at a rate of LIBOR plus 2.75% per annum, with a commitment fee of 0.4% paid on the undrawn amount.
The term loan and revolving credit facility are secured by pledges of shares in certain Company subsidiaries and by security interests in tangible and intangible personal property. There are no mortgages over real estate.

In August 2014, Charleston Center LLC entered into an $86,000,000 loan secured on its real and personal property. The loan had a 2019 maturity and bore interest at a rate of LIBOR plus 2.12% per annum. In June 2016, Charleston Center LLC refinanced this loan with a $112,000,000 new loan with the same 2019 maturity. The interest rate on the new loan is LIBOR plus 2.35% per annum, has no amortization and is non-recourse to Belmond. The additional proceeds were used to repay a 1984 development loan from a municipal agency in the principal amount of $10,000,000 and accrued interest of $16,819,000. In connection with the early repayment of the loan, Belmond negotiated a discount that resulted in a net gain reported in the statement of consolidated operations during the year ended December 31, 2016 of $1,200,000 upon extinguishment of debt, including the payment of a tax indemnity to our partners of $2,800,000 in respect of their income from the discount arising on the cancellation of indebtedness.

18


The following is a summary of the aggregate maturities of consolidated long-term debt, including obligations under capital lease, at March 31, 2017:
 
 
$’000
 
 
 
Remainder of 2017
 
3,636

2018
 
5,311

2019
 
117,322

2020
 
5,337

2021
 
471,184

2022 and thereafter
 

 
 
 
Total long-term debt and obligations under capital lease
 
602,790

 
The Company has guaranteed $489,737,000 of the long-term debt of its subsidiary companies as at March 31, 2017 (December 31, 2016 - $488,985,000).
 
The tables above include the debt of Charleston Center LLC of $113,040,000 at March 31, 2017 (December 31, 2016 - $113,098,000). The debt is non-recourse to Belmond and includes $112,000,000 which was refinanced in June 2016.

Debt issuance costs related to the above outstanding long-term debt were $8,948,000 at March 31, 2017 (December 31, 2016 - $9,535,000), including $860,000 at March 31, 2017 (December 31, 2016 - $888,000) related to the debt of Charleston Center LLC, a consolidated VIE, and are amortized to interest expense over the term of the corresponding long-term debt.

(b)                              Revolving credit and working capital facilities

Belmond had approximately $105,533,000 of revolving credit and working capital facilities at March 31, 2017 (December 31, 2016 - $105,525,000) of which $105,533,000 was available (December 31, 2016 - $105,525,000).

10.    Other liabilities
 
The major balances in other liabilities are as follows:
 
 
March 31,
2017
 
December 31,
2016
 
 
$’000
 
$’000
 
 
 
 
 
Interest rate swaps (see Note 19)
 
663

 
1,054

Deferred gain on sale of Inn at Perry Cabin by Belmond
 
1,200

 
1,350

Deferred lease incentive
 
153

 
162

Tax indemnity provision on extinguishment of debt (see Note 9)
 
2,800

 
2,800

 
 
 
 
 
Total other liabilities
 
4,816

 
5,366

 

19


11.    Pensions
 
Components of net periodic pension benefit cost are as follows:
 
 
Three months ended
 
 
March 31,
2017
 
March 31,
2016
 
 
$’000
 
$’000
 
 
 
 
 
Service cost
 

 

Interest cost on projected benefit obligation
 
171

 
226

Expected return on assets
 
(240
)
 
(295
)
Net amortization and deferrals
 
188

 
162

 
 
 
 
 
Net periodic benefit cost
 
119

 
93


From January 1, 2003, a number of non-U.S. Belmond employees participated in a funded defined benefit pension plan in the United Kingdom called the Belmond (UK) Ltd. 2003 Pension Scheme. On May 31, 2006, the plan was closed for future benefit accruals.

Belmond (UK) Ltd., a wholly owned subsidiary of the Company (“Belmond UK”), is obligated to the plan’s trust to pay £1,272,000 (equivalent to $1,590,000 at March 31, 2017) annually until the plan is fully funded, which, based on its December 2015 actuarial assessment (prepared using assumptions which differ in some respects to those used to value the liability for these financial statements), is projected to occur in 2017. During the three months ended March 31, 2017, contributions of $394,000 (March 31, 2016 - $455,000) were made to the pension plan and Belmond anticipates contributing an additional $1,196,000 to fund the plan in 2017 for a total of $1,590,000.

Once the plan is fully funded, Belmond UK will remain obligated to restore the plan to a fully funded balance should its position deteriorate. In May 2014, Belmond guaranteed the payment obligations of Belmond UK through 2023, subject to a cap of £8,200,000 (equivalent to $10,250,000 at March 31, 2017), which reduces commensurately with every payment made to the plan since December 31, 2012. As part of the U.K. statutorily-mandated negotiation between pension plan sponsors and pension plans that occurs every three year, Belmond expects to reinstate this guarantee by May 31, 2017, through 2026 and reset the cap at £8,200,000.

12.    Income taxes
 
In the three months ended March 31, 2017, the income tax benefit was $5,266,000 (March 31, 2016 - $9,596,000). This reduction in income tax benefits is mainly as a result of not being able to recognize a deferred tax credit in respect of certain UK costs in the three months ended March 31, 2017.

13.    Interest expense
 
The balances in interest expense are as follows:
 
 
Three months ended
 
 
March 31,
2017
 
March 31,
2016
 
 
$’000
 
$’000
 
 
 
 
 
Interest expense on long-term debt and obligations under capital lease
 
6,907

 
6,660

 
 
 
 
 
Interest on legal settlements
 
49

 
142

 
 
 
 
 
Amortization of debt issuance costs and discount on secured term loan
 
720

 
708

 
 
 
 
 
Total interest expense
 
7,676

 
7,510



20


14.    Supplemental cash flow information

 
 
Three months ended
 
 
March 31,
2017
 
March 31,
2016
 
 
$’000
 
$’000
 
 
 
 
 
Cash paid during the period for:
 
 
 
 
Interest
 
6,600

 
6,313

 
 
 
 
 
Income taxes, net of refunds
 
4,328

 
4,931


To reflect the actual cash paid for capital expenditure to acquire property, plant and equipment, increases in accounts payable for capital expenditure are non-cash and excluded from capital expenditure, while decreases are cash payments and included. The change in accounts payable was a increase of $1,219,000 for the three months ended March 31, 2017 (March 31, 2016 - increase of $845,000).

15.    Restricted cash

The major balances in restricted cash are as follows:
 
 
March 31,
2017
 
December 31,
2016
 
 
$’000
 
$’000
 
 
 
 
 
Cash deposits required to be held with lending banks as collateral
 
686

 
755

Prepaid customer deposits which will be released to Belmond under its revenue recognition policy
 
6,576

 
1,341

Bonds and guarantees
 
467

 
489

 
 
 
 
 
Total restricted cash
 
7,729

 
2,585


Restricted cash classified as long-term and included in other assets on the condensed consolidated balance sheets at March 31, 2017 was $686,000 (December 31, 2016 - $755,000).

16.    Share-based compensation plans
 
At March 31, 2017, Belmond had two share-based compensation plans, the 2004 stock option plan and the 2009 share award and incentive plan. The compensation cost that has been charged to selling, general and administrative expense for these plans for the three months ended March 31, 2017 was $1,535,000 (March 31, 2016 - $1,642,000). The total compensation cost related to unexercised options and unvested share awards at March 31, 2017 to be recognized over the period April 1, 2017 to March 31, 2021 was $11,468,000 and the weighted average period over which it is expected to be recognized is 30 months. Measured from the grant date, substantially all awards of deferred shares and restricted shares have a maximum term of up to four years, and substantially all awards of share options have a maximum term of ten years. There were no grants under the 2004 stock option plan during the three months ended March 31, 2017.


21


2009 share award and incentive plan
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
During the three months ended March 31, 2017, the following deferred and restricted share awards were made under the 2009 share award and incentive plan on the following dates:
2009 share award and incentive plan
 
Class A common shares
 
Date granted
 
Vesting date
 
Purchase price
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Restricted shares without performance criteria
 
34,450

 
March 17, 2017
 
March 17, 2018
 
$0.01
Restricted shares without performance criteria
 
34,450

 
March 17, 2017
 
March 17, 2019
 
$0.01
Restricted shares without performance criteria
 
117,231

 
March 17, 2017
 
March 17, 2020
 
$0.01
Restricted shares without performance criteria
 
34,450

 
March 17, 2017
 
March 17, 2021
 
$0.01
Deferred shares with performance criteria
 
228,500

 
March 17, 2017
 
March 17, 2020
 
$0.01

17.    Commitments and contingencies
 
Belmond Copacabana Palace
 
In February 2013, the State of Rio de Janeiro Court of Justice affirmed a 2011 decision of a Rio state trial court against Sea Containers Ltd (“SCL”) in lawsuits brought against SCL by minority shareholders in Companhia Hoteis Palace (“CHP”), the company that owns Belmond Copacabana Palace, relating to the recapitalization of CHP in 1995, but the Court reduced the total award against SCL to approximately $27,000,000. SCL further appealed the judgments during the second quarter of 2013 to the Superior Court of Justice in Brasilia. SCL sold its shares in CHP to the Company in 2000. Years later, in 2006, SCL entered insolvency proceedings in the U.S. and Bermuda that are continuing in Bermuda. Possible claims could be asserted against the Company or CHP in connection with this Brazilian litigation that has to date only involved SCL, although no claims have been asserted.
 
As a precautionary measure to defend the hotel, CHP commenced a declaratory lawsuit in the Rio state court in December 2013 seeking judicial declarations that no fraud was committed against the SCL plaintiffs when the shares in CHP were sold to the Company in 2000 and that the sale of the shares did not render SCL insolvent. Pending rulings on those declarations, the court granted CHP an injunction preventing the SCL plaintiffs from provisionally enforcing their 2011 judgments against CHP, which judgment was subsequently reversed on appeal in May 2014. In September 2014, CHP sought reconsideration from the appellate court of this decision, but the court dismissed its request, resulting in the return of the declaratory lawsuit proceedings to the Rio State Court.

Management cannot estimate the range of possible loss if the SCL plaintiffs assert claims against the Company or CHP, and Belmond has made no accruals in respect of this matter. If any such claims were brought, Belmond would continue to defend its interests vigorously.

Ubud Hanging Gardens

In November 2013, the third-party owner of Ubud Hanging Gardens in Bali, Indonesia dispossessed Belmond from the hotel under long-term lease without prior notice. As a result, Belmond was unable to continue operating the hotel and, accordingly, to prevent any confusion to its guests, Belmond ceased referring to the property in its sales and marketing materials, including all electronic marketing.

Belmond believed that the owner's actions were unlawful and in breach of the lease arrangement and constituted a wrongful dispossession. Belmond pursued its legal remedies through arbitration proceedings required under the lease. In June 2015, a Singapore arbitration panel issued its final award in favor of Belmond, holding that the owner had breached Indonesian law and the lease, and granting monetary damages and costs to the Company in an amount equal to approximately $8,500,000. Since its receipt of the arbitral award, Belmond has been engaged in the process of enforcing this arbitral award in the Indonesian courts. Starting in April 2014, the Indonesian trial courts have dismissed six separate actions filed by the owner for lack of jurisdiction due to the arbitration clause in the parties’ lease. The owner has appealed these decisions, one of which was reversed by the Appellate Court in October 2014. Belmond appealed this case to the Indonesian Supreme Court, which in December 2016 affirmed the Appellate Court's decision. Belmond is considering its position but is likely to seek review for reconsideration by the Supreme

22


Court. As supplemental proceedings to its arbitration claim, Belmond commenced contempt proceedings in the High Court in London, England, where the owner resided, for pursuing the Indonesian proceedings contrary to an earlier High Court injunction, and obtained against the owner in July 2014 a contempt order, which subsequently resulted in the court issuing a committal order of imprisonment for 120 days. The owner left England before the court order was issued and has not yet served the sentence.

Belmond does not believe there is any merit in the owner’s outstanding Indonesian actions and is vigorously defending its rights while it seeks to enforce the Singapore arbitral award. While the Company can give no assurances, it believes that it should ultimately be able to enforce its arbitral award. Given the uncertainty involved in this litigation, Belmond recorded in the year ended December 31, 2013, a non-cash impairment charge in the amount of $7,031,000 relating to long-lived assets and goodwill of Ubud Hanging Gardens and has not booked a receivable in respect of the award.

Belmond Hotel das Cataratas

In September 2014, the Brazilian Ministry of Planning, Budget and Management notified the Company that it was denying the Company's application to extend the term or reduce the rent under the lease for Belmond Hotel das Cataratas, which was entered into in 2007. Belmond had applied for the amendment in 2009 based on its claim that it suffered additional unanticipated and/or unforeseeable costs in performing the refurbishment of the hotel as required by the lease and related tender documentation in order to raise the standard of the property to a five star luxury standard.

Prior to August 2014, with the agreement of the Ministry, the Company had been paying the base annual rent without an annual adjustment for inflation as provided for in the lease, pending resolution of Belmond’s application. Throughout this period, the Company had expensed the full rental amount and has fully accrued the difference between the rental charge and the amount actually paid. Based on the Ministry’s decision denying any relief, the Ministry directed the Company that it would henceforth assess rent at the contractual rate, which has been included in the table of future rental payments as at March 31, 2017, and that it must pay the difference between the contractual rent and the rent that had been actually paid. On March 20, 2015, the Ministry provided notice to the hotel that an aggregate amount of approximately R$17,000,000 ($5,365,000) was due on March 31, 2015 as a result of its rejection of any relief sought by Belmond.

The Company appealed to the Ministry to reconsider its decision on both procedural and substantive grounds. Pending this requested reconsideration and exhaustion of administrative remedies, the Company did not pay to the Ministry the amount claimed. The Company filed a lawsuit in the Federal Court in Paraná State in August 2016 against the Government of Brazil regarding the Ministry’s failure to properly consider and modify the lease concession for Belmond Hotel das Cataratas. The Federal Court granted the Company’s request for an injunction against the Government enforcing its claim and granted the Company’s request for a 25% preliminary reduction in rent, pending a decision on the merits, which the Superior Court upheld on appeal in a decision rendered in September 2016. The Government appealed to a three judge panel of the Superior Court, which upheld the decision of the Federal Court in favor of the Company in a judgment rendered in January 2017. A discovery calendar has been agreed for the litigation on the merits in the Federal Court where the Company intends to continue to pursue its claims vigorously.

In the meantime, the Company is paying rent at the reduced amount but continues to accrue rent at the full contractual amount. Amounts accrued at March 31, 2017 totaled R$22,171,000 ($6,998,000). The Company does not believe that any loss above the amounts accrued is likely.  

Belmond Miraflores Park

The Company is contesting a claim by the municipality of Miraflores in Lima, Peru, the location of its Belmond Miraflores Park Hotel (“BMP”), that BMP has violated municipal nuisance ordinances by generating noise and vibration that disturbed certain owners of apartments in an adjoining residential building. The local administrative court ruled in favor of the municipality, levying a nominal fine and injunctive relief that included the potential closure of BMP until the noise and vibration has been eliminated. In March 2016, after the administrative court's ruling was affirmed at the trial and subsequently, the appellate court level, BMP appealed to the Supreme Court of Peru. Enforcement of the ruling has been stayed pending the appeal. BMP does not expect to receive a ruling and formal notification from the Supreme Court until at least May 15, 2017, but BMP is aware that the Supreme Court has ruled in favor of the municipality. Nonetheless, management believes that the risk of closure of BMP is remote because BMP has completed its remediation and expects to be currently in compliance with municipal noise ordinances and may also seek to acquire the apartments of the owners who had originally complained about being disturbed. Accordingly, management does not believe that a material loss is probable and no accrual has been made in respect of this matter.


23


Cupecoy Village Development N.V.

In July 2015, Cupecoy Village Development N.V. ("Cupecoy") received notification from the tax authorities in Sint Maarten of an intention to issue tax assessments for periods 2007-2010 in respect of wages taxes, social security, turnover tax and penalties, which Belmond believes indicates a maximum possible loss of $16,500,000. Belmond believes that the report received from the tax authorities contained a number of material miscalculations and misinterpretations of fact and law. The Company had provided a written response to the tax authorities disputing their assessment and expected the resolution of this dispute to result in only an immaterial cost. However, the tax authorities consistently failed to respond or otherwise engage with Belmond or Cupecoy. After multiple attempts to meet with the tax authorities, the Company provided them formal notice of its intention to wind up Cupecoy, which the Company did after receiving no response from the authorities to either a first or second notice. In October 2016, following our application to the court, Cupecoy was declared technically insolvent in light of the 2015 tax claim, at which point the Company determined that any liability in respect of Cupecoy was effectively discharged. A final bankruptcy declaration in respect of Cupecoy was made by the local Dutch court in February 2017.

“Cipriani” Trademark

In May 2010, after prevailing in litigation at the trial and appellate court levels, Belmond settled litigation in the United Kingdom for infringement of its U.K. and Community (European wide) registrations for the “Cipriani” trademark. Defendants paid the amount of $3,947,000 to Belmond in March 2010 with the balance of $9,833,000 being payable in installments over five years with interest. Belmond received the final payment in the amount of $1,178,000 in June 2015. Subsequent to Belmond’s success before the U.K. courts, there have arisen a number of European trademark opposition and infringement cases relating to Belmond "Cipriani" and "Hotel Cipriani" Community trademarks. These include an ongoing invalidity action filed by Arrigo Cipriani in the European Trade Mark Office against Belmond’s "Cipriani" Community trademark. To date, Belmond has successfully rebutted this challenge at every level of administrative appeal, and this case is now before the General Court where Belmond also expects to prevail. Belmond has recently been successful in securing the cancellation in Portugal of a trademark application filed by an affiliated company of the Cipriani family for “Cipriani”. Belmond has also been successful in obtaining cancellations of "Cipriani" trademark applications made by the Cipriani family's corporate entity in Russia. In addition, there are a number of ongoing trademark disputes with the Cipriani family in Italy: in January 2015, the Cipriani family and affiliated entities commenced proceedings against Belmond in the Court of Venice, asserting that a 1967 agreement pursuant to which the family sold their interest in the Hotel Cipriani constituted a coexistence agreement allowing both the Company to use “Hotel Cipriani” and the Cipriani family to use “Cipriani” and in August 2015, pursuant to a separate claim filed by the Cipriani family, the Court of Venice ruled in favor of the Cipriani family, determining that their use of their full name (rather than just an initial with their surname), would not constitute infringement of the Company’s registered trademark. The Court’s ruling purports to apply to hotels and restaurants on an EU - wide basis (other than the U.K.) rather than only Italy. The Company has appealed this decision. Separate proceedings brought by Belmond in Spain to defend Belmond's marks against a use by the Cipriani family and its affiliated entities of "Cipriani" to promote a restaurant have been stayed pending the outcome of the Venice appeal. While Belmond believes that it has meritorious cases in all of these Italian proceedings, Belmond cannot estimate the range of possible additional loss to Belmond if it should not prevail in any or all of these cases and Belmond has made no accruals in these matters.

The Company and certain of its subsidiaries are parties to various legal proceedings arising in the normal course of business. These proceedings generally include matters relating to labor disputes, tax claims, personal injury cases, lease negotiations and ownership disputes. The outcome of each of these matters cannot be determined with certainty, and the liability that the relevant parties may ultimately incur with respect to any one of these matters in the event of a negative outcome may be in excess of amounts currently accrued for with respect to these matters. Where a reasonable estimate can be made, the additional losses or range of loss that may be incurred in excess of the amount recognized from the various legal proceedings arising in the normal course of business are disclosed separately for each claim, including a reference to where it is disclosed. However, for certain of the legal proceedings, management is unable to estimate the loss or range of loss that may result from these claims due to the highly complex nature or early stage of the legal proceedings. 

Belmond has granted to James Sherwood, a former director of the Company, a right of first refusal to purchase the Belmond Hotel Cipriani in Venice, Italy in the event Belmond proposes to sell it. The purchase price would be the offered sale price in the case of a cash sale or the fair market value of the hotel, as determined by an independent valuer, in the case of a non-cash sale. Mr. Sherwood has also been granted an option to purchase the hotel at fair market value if a change in control of the Company occurs. Mr. Sherwood may elect to pay 80% of the purchase price if he exercises his right of first refusal, or 100% of the purchase price if he exercises his purchase option, by a non-recourse promissory note secured by the hotel payable in ten equal annual installments with interest at LIBOR. This right of first refusal and purchase option are not assignable and expire one year after Mr. Sherwood’s death. These agreements relating to Belmond Hotel Cipriani between Mr. Sherwood and Belmond and its predecessor companies have been in place since 1983 and were last amended and restated in 2005.


24


Capital Commitments

Outstanding contracts to purchase property, plant and equipment were approximately $12,203,000 at March 31, 2017 (December 31, 2016 - $7,772,000).
 
Future rental payments and rental expense under operating leases

Future rental payments as at March 31, 2017 under operating leases in respect of equipment rentals and leased premises are payable as follows:
 
 
$’000
 
 
 
Remainder of 2017
 
9,541

2018
 
12,524

2019
 
10,796

2020
 
10,663

2021
 
11,401

2022
 
9,289

2023 and thereafter
 
62,755

 
 
 
Future rental payments under operating leases
 
126,969

 
Rental expense for the three months ended March 31, 2017 amounted to $3,498,000 (March 31, 2016 - $2,620,000).
 
18.    Fair value measurements

(a)     Financial instruments recorded at fair value
  
The following tables summarize the valuation of Belmond’s financial instruments recorded at fair value by the fair value hierarchy at March 31, 2017 and December 31, 2016:
 
 
Level 1
 
Level 2
 
Level 3
 
Total
March 31, 2017
 
$’000
 
$’000
 
$’000
 
$’000
 
 
 
 
 
 
 
 
 
Assets at fair value:
 
 

 
 
 
 
 
 
Derivative financial instruments
 

 

 

 

 
 
 
 
 
 
 
 
 
Total assets
 

 

 

 

 
 
 
 
 
 
 
 
 
Liabilities at fair value:
 
 

 
 
 
 

 
 
Derivative financial instruments
 

 
(2,513
)
 

 
(2,513
)
 
 
 
 
 
 
 
 
 
Total net liabilities
 

 
(2,513
)
 

 
(2,513
)


25


 
 
Level 1
 
Level 2
 
Level 3
 
Total
December 31, 2016
 
$’000
 
$’000
 
$’000
 
$’000
 
 
 
 
 
 
 
 
 
Assets at fair value:
 
 

 
 
 
 
 
 
Derivative financial instruments
 

 

 

 

 
 
 
 
 
 
 
 
 
Total assets
 

 

 

 

 
 
 
 
 
 
 
 
 
Liabilities at fair value:
 
 

 
 

 
 

 
 
Derivative financial instruments
 

 
(3,364
)
 

 
(3,364
)
 
 
 
 
 
 
 
 
 
Total net liabilities
 

 
(3,364
)
 

 
(3,364
)
 
During the three months ended March 31, 2017, there were no transfers between levels of the fair value hierarchy.

(b)    Other financial instruments
 
Certain methods and assumptions are used to estimate the fair value of each class of financial instruments. The carrying amount of current assets and current liabilities as disclosed on the condensed consolidated balance sheets approximate their fair value due to the short-term nature of those instruments.
 
The fair value of Belmond's long-term debt, excluding interest rate swaps and caps, is determined using the contractual cash flows and credit-adjusted discount curves. The fair value of the debt is the present value of those contractual cash flows which are discounted at the current market cost of debt and adjusted for the credit spreads. Credit spreads take into consideration general market conditions, maturity and collateral.

The estimated carrying values, fair values, and levels of the fair value hierarchy of Belmond's long-term debt as of March 31, 2017 and December 31, 2016 were as follows:
 
 
 
March 31, 2017
 
December 31, 2016
 
 
 
Carrying
amounts
$’000
 
Fair value
$’000
 
Carrying
amounts
$’000
 
Fair value
$’000
 
 
 
 
 
 
 
 
 
 
Total long-term debt, before deduction of discount on secured term loan and debt issuance costs, excluding obligations under capital leases
Level 2
 
602,777

 
626,222

 
602,083

 
626,613


(c)    Non-financial assets measured at fair value on a non-recurring basis

There were no non-financial assets measured at fair value on a non-recurring basis for the three months ended March 31, 2017 and 2016.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

26


19.    Derivatives and hedging activities
 
Belmond hedges its interest rate risk, ensuring that an element of its floating rate interest is fixed by using interest rate derivatives. Belmond designates these derivatives as cash flow hedges. Additionally, Belmond designates its foreign currency borrowings and currency derivatives as net investment hedges of overseas operations.

Cash flow hedges of interest rate risk
 
As of March 31, 2017 and December 31, 2016, Belmond had the following outstanding interest rate derivatives stated at their notional amounts in local currency that were designated as cash flow hedges of interest rate risk: 
 
 
March 31,
2017
 
December 31,
2016
 
 
’000
 
’000
 
 
 
 
 
Interest rate swaps
 
72,750

 
72,938

Interest rate swaps
 
$
210,325

 
$
210,756

Interest rate caps
 
$
17,200

 
$
17,200


Fair value

The table below presents the fair value of Belmond’s derivative financial instruments and their classification as of March 31, 2017 and December 31, 2016
 
 
 
 
Fair value as of March 31, 2017
 
Fair value as of
December 31, 2016
 
 
Balance sheet location
 
$’000
 
$’000
Derivatives designated in a cash flow hedging relationship:
 
 
 
 

 
 

Interest rate derivatives
 
Accrued liabilities
 
(1,850
)
 
(2,310
)
Interest rate derivatives
 
Other liabilities
 
(663
)
 
(1,054
)
 
 
 
 
 
 
 
Total
 
 
 
(2,513
)
 
(3,364
)
 
Offsetting

There was no offsetting within derivative assets or derivative liabilities at March 31, 2017 and December 31, 2016. However, these derivatives are subject to master netting arrangements.

Other comprehensive loss

Information concerning the movements in other comprehensive income/(loss) for cash flow hedges of interest rate risk is shown in Note 20. At March 31, 2017, the amount accounted for in other comprehensive income/(loss) which is expected to be reclassified to interest expense in the next 12 months is $1,821,000. Movement in other comprehensive income/(loss) for net investment hedges recorded through foreign currency translation adjustments for the three months ended March 31, 2017 was a loss of $2,342,000 (March 31, 2016 - loss of $7,661,000).
 
 
 
 
 
 
 
 
 
Credit-risk-related contingent features
 
Belmond has agreements with some of its derivative counterparties that contain provisions under which, if Belmond defaults on the debt associated with the hedging instrument, Belmond could also be declared in default in respect of its derivative obligations.

As of March 31, 2017, the fair value of derivatives in a net liability position, which includes accrued interest and an adjustment for non-performance risk, related to these agreements was $2,513,000 (December 31, 2016 - $3,364,000). If Belmond breached any of the provisions, it would be required to settle its obligations under the agreements at their termination value of $2,513,000 (December 31, 2016 - $3,370,000).


27


Non-derivative financial instruments — net investment hedges
 
Belmond uses certain of its debt denominated in foreign currency to hedge portions of its net investments in foreign operations against adverse movements in exchange rates. Belmond designates its euro-denominated indebtedness as a net investment hedge of long-term investments in its euro-functional subsidiaries. These contracts are included in non-derivative hedging instruments. The notional value of non-derivative hedging instruments was $155,323,000 at March 31, 2017, being a liability of Belmond (December 31, 2016 - $153,472,000).

20.    Accumulated other comprehensive income/loss
 
Changes in accumulated other comprehensive income/(loss) (“AOCI”) by component (net of tax) are as follows:
 
 
Foreign currency translation adjustments
 
Derivative financial instruments
 
Pension liability
 
Total
Three months ended March 31, 2017
 
$’000
 
$’000
 
$’000
 
$’000
 
 
 
 
 
 
 
 
 
Balance at January 1, 2017
 
(337,053
)
 
(3,224
)
 
(12,062
)
 
(352,339
)
 
 
 
 
 
 
 
 
 
Other comprehensive income before reclassifications, net of tax provision of $Nil, $39 and $32
 
13,118

 
147

 
156

 
13,421

 
 
 
 
 
 
 
 
 
Amounts reclassified from AOCI, net of tax provision of $Nil, $136 and $Nil
 

 
517

 

 
517

 
 
 
 
 
 
 
 
 
Net current period other comprehensive income
 
13,118

 
664

 
156

 
13,938

 
 
 
 
 
 
 
 
 
Balance at March 31, 2017
 
(323,935
)
 
(2,560
)
 
(11,906
)
 
(338,401
)

Reclassifications out of AOCI (net of tax) are as follows:
 
 
Amount reclassified from AOCI
 
 
 
 
Three months ended
 
 
 
 
March 31, 2017
 
March 31, 2016
 
 
Details about AOCI components
 
$’000
 
$’000
 
Affected line item in the statement of operations
 
 
 
 
 
 
 
Derivative financial instruments:
 
 
 
 
 
 
Cash flows from derivative financial instruments related to interest payments made for hedged debt instruments
 
517

 
709

 
Interest expense
 
 
 
 
 
 
 
Total reclassifications for the period
 
517

 
709

 
 
 
 
 
 
 
 
 
21.    Segment information
 
Segment performance is evaluated by the chief operating decision maker based upon adjusted earnings before interest, tax, depreciation and amortization (“adjusted EBITDA”).

For reporting periods prior to the quarter ended March 31, 2017, the Company disclosed certain disaggregated segment profitability information in its periodic reports in accordance with applicable U.S. GAAP accounting principles, ASC 280 Segment Reporting, in the form of earnings before gains/(losses) on disposal, impairments, central costs, interest income, interest expense, foreign currency, tax (including tax on earnings from unconsolidated companies), depreciation and amortization, share-based compensation and gains/(losses) on extinguishment of debt (“segment profit/(loss)”). This is a measure of unadjusted EBITDA and, consistent with ASC 280, has represented the way management traditionally have evaluated the operating performance of each of the

28


Company’s reportable segments. The format of the segment performance information provided to the chief operating decision maker for these purposes has evolved over time to focus primarily on adjusted EBITDA as the key measure of segment profitability. Adjusted EBITDA excludes gains/(losses) on disposal, impairments, restructuring and other special items, interest income, interest expense, foreign currency, tax (including tax on earnings from unconsolidated companies), depreciation and amortization and gains/(losses) on extinguishment of debt. In order to better reflect management’s internal evaluation of segment performance under ASC 280, as of the quarterly reporting period ended March 31, 2017, Belmond has disclosed adjusted EBITDA in place of segment profit/(loss) as the primary metric used by the chief operating decision maker to evaluate segment performance. In management’s view, adjusted EBITDA allows the Company’s segment performance to be evaluated more effectively and on a consistent basis by removing the impact of certain items that management believes do not reflect the underlying operations. Belmond notes that adjusted EBITDA is not a term defined under GAAP. As a result, Belmond provides reconciliations to the GAAP number immediately following tables using this non-GAAP term.

Belmond's operating segments are aggregated into six reportable segments primarily around the type of service being provided—hotels, trains and cruises, and management business/part ownership interests—and are secondarily organized by geography for the hotels, as follows:

Owned hotels in each of Europe, North America and Rest of world which derive earnings from the hotels that Belmond owns including its one stand-alone restaurant;
Owned trains and cruises which derive earnings from the train and cruise businesses that Belmond owns;
Part-owned/managed hotels which derive earnings from hotels that Belmond jointly owns or manages; and
Part-owned/managed trains which derive earnings from the train businesses that Belmond jointly owns or manages.

The following tables present information regarding these reportable segments.

Revenue from external customers by segment:
 
 
Three months ended
 
 
March 31,
2017
 
March 31,
2016
 
 
$’000
 
$’000
 
 
 
 
 
Owned hotels:
 
 
 
 
Europe
 
12,015

 
13,425

North America
 
39,886

 
39,602

Rest of world
 
35,963

 
35,268

Total owned hotels
 
87,864

 
88,295

Owned trains and cruises
 
5,140

 
6,439

Part-owned/managed hotels
 
534

 
674

Part-owned/managed trains
 
1,823

 
1,994

Total management fees
 
2,357

 
2,668

 
 
 
 
 
Revenue
 
95,361

 
97,402



29


Reconciliation of consolidated earnings/(losses) from continuing operations to adjusted EBITDA:
 
 
Three months ended
 
 
March 31,
2017
 
March 31,
2016
 
 
$’000
 
$’000
 
 
 
 
 
Adjusted EBITDA
 
 
 
 
Owned hotels:
 
 
 
 
Europe
 
(8,120
)
 
(5,617
)
North America
 
9,895

 
10,063

Rest of world
 
9,946

 
11,511

Total owned hotels
 
11,721

 
15,957

Owned trains and cruises
 
(4,233
)
 
(2,819
)
Part-owned/managed hotels
 
259

 
668

Part-owned/managed trains
 
2,729

 
3,720

Total adjusted share of earnings from unconsolidated companies and management fees
 
2,988

 
4,388

 
 
 
 
 
Unallocated corporate:
 
 
 
 
Central costs
 
(9,400
)
 
(7,890
)
Share-based compensation
 
(1,535
)
 
(1,742
)
 
 
 
 
 
Adjusted EBITDA
 
(459
)
 
7,894

 
 
 
 
 
Reconciliation from losses from continuing operations to adjusted EBITDA:
 
 
 
 
 
 
 
 
 
Losses from continuing operations
 
(18,012
)
 
(1,368
)
   Depreciation and amortization
 
13,728

 
13,067

   Interest income
 
(146
)
 
(116
)
   Interest expense
 
7,676

 
7,510

   Foreign currency, net
 
234

 
(2,858
)
   Benefit from income taxes
 
(5,266
)
 
(9,596
)
   Share of provision for income taxes of unconsolidated companies
 
246

 
876

 
 
(1,540
)
 
7,515

   Gain on disposal of property, plant and equipment
 
(150
)
 
(150
)
   Restructuring and other special items
 
1,231

 
529

 
 
 
 
 
Adjusted EBITDA
 
(459
)
 
7,894



30


Earnings from unconsolidated companies, net of tax:
 
 
Three months ended
 
 
March 31,
2017
 
March 31,
2016
 
 
$’000
 
$’000
 
 
 
 
 
Part-owned/managed hotels
 
(217
)
 
(87
)
Part-owned/managed trains
 
593

 
922

 
 
 
 
 
Total earnings from unconsolidated companies, net of tax
 
376

 
835


Reconciliation of capital expenditure to acquire property, plant and equipment by segment:
 
 
Three months ended
 
 
March 31,
2017
 
March 31,
2016
 
 
$’000
 
$’000
 
 
 
 
 
Owned hotels:
 
 
 
 
Europe
 
6,230

 
3,078

North America
 
1,097

 
2,169

Rest of world
 
1,701

 
1,885

Total owned hotels
 
9,028

 
7,132

Owned trains and cruises
 
2,537

 
3,349

 
 
 
 
 
Unallocated corporate
 
430

 
532

 
 
 
 
 
Total capital expenditure to acquire property, plant and equipment
 
11,995

 
11,013


Revenue from external customers in Belmond’s country of domicile and significant countries (based on the location of the property):
 
 
Three months ended
 
 
March 31,
2017
 
March 31,
2016
 
 
$’000
 
$’000
 
 
 
 
 
Bermuda
 

 

Italy
 
1,367

 
2,243

United Kingdom
 
6,087

 
6,798

United States
 
26,557

 
24,095

Brazil
 
18,163

 
18,443

All other countries
 
43,187

 
45,823

 
 
 
 
 
Total revenue
 
95,361

 
97,402

 
22.    Related party transactions
 
Belmond manages, under long-term contract, the tourist train owned by Eastern and Oriental Express Ltd., in which Belmond has a 25% ownership interest. In the three months ended March 31, 2017, Belmond earned management fees from Eastern and Oriental Express Ltd. of $114,000 (March 31, 2016 - $122,000) which are recorded in revenue. The amount due to Belmond from Eastern and Oriental Express Ltd. at March 31, 2017 was $4,797,000 (December 31, 2016 - $4,886,000).

31


 
Belmond manages, under long-term contracts in Peru, Belmond Hotel Monasterio, Belmond Palacio Nazarenas, Belmond Sanctuary Lodge, Belmond Hotel Rio Sagrado, PeruRail and Ferrocarril Transandino, in all of which Belmond has a 50% ownership interest. Belmond provides loans, guarantees and other credit accommodation to these joint ventures. In the three months ended March 31, 2017, Belmond earned management and guarantee fees from its Peruvian joint ventures of $2,243,000 (March 31, 2016 - $2,575,000) which are recorded in revenue. The amount due to Belmond from its Peruvian joint ventures at March 31, 2017 was $10,244,000 (December 31, 2016 - $6,907,000).

Belmond owns 50% of a company holding real estate in Buzios, Brazil. The amount due to Belmond from the joint venture at March 31, 2017 was $404,000 (December 31, 2016 - $372,000).
 


32


ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-looking statements
 
Forward-looking statements concerning the operations, performance, financial condition, plans and prospects of the Company and its subsidiaries are based on the current expectations, assessments and assumptions of management, are not historical facts, and are subject to various risks and uncertainties.
 
Forward-looking statements can be identified by the fact that they do not relate only to historical or current facts, and often use words such as “anticipate”, “target”, “expect”, “estimate”, “intend”, “plan”, “goal”, “believe” or other words of similar meaning.
 
Actual results could differ materially from those anticipated in the forward-looking statements due to a number of factors, including those described in this Quarterly Report on Form 10-Q for the quarter ended March 31, 2017 and in Item 1—Business, Item 1A—Risk Factors, Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations, Item 7A—Quantitative and Qualitative Disclosures about Market Risk, and Item 12—Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.
 
Investors are cautioned not to place undue reliance on these forward-looking statements which are based on currently available operational, financial, and competitive information and as such, are not guarantees of future performance.  Except as otherwise required by law, the Company undertakes no obligation to update or revise publicly any forward-looking statement, whether as a result of new information, future events or otherwise.

Introduction

Belmond currently owns, partially-owns or manages 48 properties (including one scheduled for future opening over the coming twelve months, Belmond Cadogan Hotel in London, England, the Belmond Andean Explorer train in Peru which launched in May 2017 and the recent acquisition of a hotel in Colca Canyon, Peru, in April 2017).

Belmond has six reportable segments: owned hotels in (1) Europe, (2) North America (including one stand-alone restaurant) and (3) Rest of world, (4) Owned trains and cruises, (5) Part-owned/managed hotels and (6) Part-owned/managed trains.

For reporting periods prior to the quarter ended March 31, 2017, the Company disclosed certain disaggregated segment profitability information in its periodic reports in accordance with applicable U.S. GAAP accounting principles, ASC 280 Segment Reporting, in the form of earnings before gains/(losses) on disposal, impairments, central costs, interest income, interest expense, foreign currency, tax (including tax on earnings from unconsolidated companies), depreciation and amortization, share-based compensation and gains/(losses) on extinguishment of debt (“segment profit/(loss)”). This is a measure of unadjusted EBITDA and, consistent with ASC 280, has represented the way management traditionally have evaluated the operating performance of each of the Company’s reportable segments. The format of the segment performance information provided to the chief operating decision maker for these purposes has evolved over time to focus primarily on adjusted EBITDA as the key measure of segment profitability. Adjusted EBITDA excludes gains/(losses) on disposal, impairments, restructuring and other special items, interest income, interest expense, foreign currency, tax (including tax on earnings from unconsolidated companies), depreciation and amortization and gains/(losses) on extinguishment of debt. In order to better reflect management’s internal evaluation of segment performance under ASC 280, as of the quarterly reporting period ended March 31, 2017, Belmond has disclosed adjusted EBITDA in place of segment profit/(loss) as the primary metric used by the chief operating decision maker to evaluate segment performance. In management’s view, adjusted EBITDA allows the Company’s segment performance to be evaluated more effectively and on a consistent basis by removing the impact of certain items that management believes do not reflect the underlying operations. Belmond notes that adjusted EBITDA is not a term defined under GAAP. As a result, Belmond provides reconciliations to the GAAP number immediately following tables using this non-GAAP term.

Hotels represent the largest part of Belmond’s business with the vast majority of the Company's revenues in 2016 and 2015, respectively, derived primarily from the Europe, North America and Rest of world segments.

At March 31, 2017, hotels consisted of 29 deluxe hotels which were wholly or majority owned by Belmond or, in the case of Belmond Charleston Place, owned by a consolidated variable interest entity. Eleven of the owned hotels are located in Europe, five in North America and thirteen in the rest of the world. In addition, Belmond owns and operates the stand-alone restaurant ‘21’ Club in New York which is included within the North America owned hotels segment.


33


Belmond's part-owned/managed hotels segment consisted of five hotels which Belmond operates under management contracts in Peru and the United States. Belmond has unconsolidated equity interests in four of the managed hotels. In addition, in April 2017, the Company acquired a hotel in Colca Canyon, Peru. The 20-key Las Casitas del Colca hotel was acquired through the Company’s existing 50/50 joint venture with local partners.

In recent years, Belmond has sold to third parties a number of properties not considered key to Belmond’s portfolio of unique, high-valued properties as part of management's long-term strategy to reduce leverage and redeploy the capital in properties with higher potential returns.

Belmond's owned trains and cruises segment consisted of five European tourist trains, two river cruise ships in Myanmar and one French canal cruise business. In August 2016, the Company commenced operations of Belmond Grand Hibernian, the first luxury overnight train to travel throughout the island of Ireland.

Belmond's part-owned/managed trains segment consisted of two train businesses in Southeast Asia and Peru which Belmond operates under management contracts. Belmond has unconsolidated equity interests in each of these train businesses. In addition, in May 2017, the Company launched the Belmond Andean Explorer luxury sleeper train, located in Peru. 

Revenue per available room (“RevPAR”) is calculated by dividing room revenue by room nights available for the period. Same store RevPAR is a comparison of RevPAR based on the operations of the same units in each period, by excluding the effect of any hotel acquisitions in the period or major refurbishment where a property is closed for a full quarter or longer. The comparison also excludes the effect of dispositions (including discontinued operations) or closures. Management uses RevPAR and same store RevPAR to identify trend information with respect to room revenue and to evaluate the performance of a specific hotel or group of hotels in a given period.  

Average daily rate ("ADR") is calculated by dividing room revenue by total rooms sold for the period. Management uses ADR to measure the level of pricing achieved by a specific hotel or group of hotels in a given period.

Occupancy is calculated by dividing total rooms sold by total rooms available for the period. Occupancy measures the utilization of a hotel’s available capacity. Management uses occupancy to measure demand at a specific hotel or group of hotels in a given period.

ADR and RevPAR are measures for a point in time (a day, month or year) and are most often compared across like time periods. Current ADR and RevPAR are not necessarily indicators of future performance.

Constant currency

Belmond analyzes certain key financial measures on a constant currency basis as this helps identify underlying business trends, without distortion from the effects of currency movements. Measurement on a constant currency basis means the results exclude the effect of foreign currency translation and are calculated by translating prior year results at current year exchange rates.
 

34


Results of Operations

Belmond’s operating results for the three months ended March 31, 2017 compared to the three months ended March 31, 2016, expressed as a percentage of revenue, are as follows:
 
 
Three months ended
 
 
March 31,
2017
 
March 31,
2016
 
 
%
 
%
 
 
 
 
 
Revenue:
 
 
 
 
Owned hotels:
 
 
 
 
Europe
 
12

 
13

North America
 
42

 
41

Rest of world
 
38

 
36

Total owned hotels
 
92

 
90

Owned trains and cruises
 
5

 
7

Part-owned/managed hotels
 
1

 
1

Part-owned/managed trains
 
2

 
2

Total management fees
 
3

 
3

 
 
 
 
 
Revenue
 
100

 
100

 
 
 
 
 
Cost of services
 
(48
)
 
(46
)
Selling, general and administrative
 
(54
)
 
(48
)
Depreciation and amortization
 
(14
)
 
(13
)
Interest income, interest expense and foreign currency, net
 
(8
)
 
(5
)
Losses before income taxes and earnings from unconsolidated companies, net of tax
 
(24
)
 
(12
)
Benefit from income taxes
 
6

 
10

Earnings from unconsolidated companies, net of tax
 

 
1

Losses from continuing operations
 
(18
)
 
(1
)
Net (losses)/earnings from discontinued operations, net of tax
 

 

 
 
 
 
 
Net losses
 
(18
)
 
(1
)


35


Operating information for Belmond’s owned hotels for the three months ended March 31, 2017 and 2016 is as follows:
 
 
Three months ended
 
 
March 31,
2017
 
March 31,
2016
 
 
 
 
 
Rooms available
 
 
 
 
Europe
 
43,040
 
43,785
North America
 
64,170
 
64,883
Rest of world
 
92,880
 
93,457
Worldwide
 
200,090
 
202,125
 
 
 
 
 
Rooms sold
 
 
 
 
Europe
 
18,477
 
19,072
North America
 
43,983
 
44,753
Rest of world
 
56,654
 
63,024
Worldwide
 
119,114
 
126,849
 
 
 
 
 
Occupancy (percentage)
 
 
 
 
Europe
 
43
 
44
North America
 
69
 
69
Rest of world
 
61
 
67
Worldwide
 
60
 
63
 
 
 
 
 
Average daily rate (in U.S. dollars)
 
 
 
 
Europe
 
319
 
355
North America
 
466
 
468
Rest of world
 
410
 
366
Worldwide
 
417
 
401
 
 
 
 
 
RevPAR (in U.S. dollars)
 
 
 
 
Europe
 
137
 
155
North America
 
320
 
323
Rest of world
 
250
 
247
Worldwide
 
248
 
251
 
 
Three months ended March 31,
 
Change %
 
 
2017
 
2016
 
Dollars
 
Constant currency
 
 
 
 
 
 
 
 
 
Same Store RevPAR (in dollars)
 
 

 
 

 
 

 
 

Europe
 
137

 
155

 
(11
)%
 
(11
)%
North America
 
320

 
323

 
(1
)%
 
(1
)%
Rest of world
 
250

 
247

 
1
 %
 
(12
)%
Worldwide
 
248

 
251

 
(1
)%
 
(7
)%

 
 
 
 
 
 
 
 
 







36


Overview

Three months ended March 31, 2017 compared to three months ended March 31, 2016

The net losses attributable to Belmond Ltd. for the three months ended March 31, 2017 were $18.1 million ($0.18 per common share) on revenue of $95.4 million, compared with net losses of $1.6 million ($0.02 per common share) on revenue of $97.4 million for the three months ended March 31, 2016. The increase in net losses was partly due to a decrease in earnings year-on-year at the Brazilian hotels as they continued to face a challenging economic situation. In addition, central costs increased on the prior year quarter as a result of an increase in information technology costs and costs associated with expanding the resources of the development team. There was a decrease in tax benefit of $4.3 million mainly as a result of not being able to recognize a deferred tax credit in respect of certain UK costs in the three months ended March 31, 2017. The increase in net loss was also as a result of a foreign exchange loss of $0.2 million recognized in the three months ended March 31, 2017, compared with a foreign exchange gain of $2.9 million recognized in the three months ended March 31, 2016.

Revenue
 
 
 
Three months ended
 
 
March 31,
2017
 
March 31,
2016
 
 
$ millions
 
$ millions
 
 
 
 
 
Revenue:
 
 
 
 
Owned hotels:
 
 
 
 
Europe
 
12.0

 
13.4

North America
 
39.9

 
39.6

Rest of world
 
36.0

 
35.3

Total owned hotels
 
87.9

 
88.3

Owned trains and cruises
 
5.1

 
6.4

Part-owned/managed hotels
 
0.6

 
0.7

Part-owned/managed trains
 
1.8

 
2.0

Total management fees
 
2.4

 
2.7

 
 
 
 
 
Revenue
 
95.4

 
97.4


Three months ended March 31, 2017 compared to three months ended March 31, 2016

Total revenue was $95.4 million for the three months ended March 31, 2017, a decrease of $2.0 million, or 2%, from $97.4 million for the three months ended March 31, 2016. Owned hotels revenue was $87.9 million for the three months ended March 31, 2017, a decrease of $0.4 million or 1%, from $88.3 million for the three months ended March 31, 2016. The decrease in owned hotels revenue was partially due to a revenue decrease of $1.8 million at Belmond La Samanna, St. Martin, French West Indies, due to decreased visitation. In addition, the year-over-year revenue decline was a result of a $1.4 million revenue decrease for the Company's Italian hotels partly as a result of a shift in the Easter holiday from the first quarter of 2016 to the second quarter of 2017. The Brazilian hotels had a revenue decrease of $4.6 million on a constant currency basis, largely due to the country's challenging economic situation and a stronger Brazilian real, both of which contributed to decreased demand from international markets. Revenue from owned total trains and cruises was $5.1 million for the three months ended March 31, 2017, a decrease of $1.3 million, or 20%, from $6.4 million for the three months ended March 31, 2016, which was largely due to a combined revenue decrease of $1.1 million at Belmond Road to Mandalay and Belmond Orcaella, the Company’s two river cruise ships in Myanmar, as a result of increased local competition. These decreases were offset by favorable foreign exchange variances of $4.9 million following a year-over-year appreciation in the Brazilian real, South African rand and Russian ruble.
 





37


Owned hotels - Europe 
 
 
Three months ended
 
 
March 31,
2017
 
March 31,
2016
 
 
 
 
 
Rooms available
 
43,040

 
43,785

Rooms sold
 
18,477

 
19,072

Occupancy (percentage)
 
43

 
44

Average daily rate (in U.S. dollars)
 
319

 
355

RevPAR (in U.S. dollars)
 
137

 
155

Same store RevPAR (in U.S. dollars)
 
137

 
155


Three months ended March 31, 2017 compared to three months ended March 31, 2016

Revenue was $12.0 million for the three months ended March 31, 2017, a decrease of $1.4 million, or 10%, from $13.4 million for the three months ended March 31, 2016. In constant currency, revenue for the region for the first quarter decreased $1.3 million or 10% from the prior-year quarter in the region's seasonally low quarter, during which the Company's Italian and Spanish hotels are closed for the majority of the period. The year-over-year revenue decrease was partially due to a revenue decrease of $0.6 million at Belmond Hotel Cipriani, Venice, Italy partly as a result of the shift in the Easter holiday from the first quarter of 2016 to the second quarter of 2017. In addition, Belmond Le Manoir aux Quat’Saisons, Oxfordshire, England had a revenue decrease of $0.8 million which was partly attributable to the 13% year-over-year depreciation of the British pound against the U.S. dollar. ADR in U.S. dollar terms for the European owned hotels segment decreased to $319 in the three months ended March 31, 2017 from $355 in the three months ended March 31, 2016. Occupancy decreased to 43% in the three months ended March 31, 2017 from 44% in the three months ended March 31, 2016. Same store RevPAR decreased by 11% in U.S. dollars, to $137 in the three months ended March 31, 2017 from $155 in the three months ended March 31, 2016.

Owned hotels - North America 
 
 
Three months ended
 
 
March 31,
2017
 
March 31,
2016
 
 
 
 
 
Rooms available
 
64,170

 
64,883

Rooms sold
 
43,983

 
44,753

Occupancy (percentage)
 
69

 
69

Average daily rate (in U.S. dollars)
 
466

 
468

RevPAR (in U.S. dollars)
 
320

 
323

Same store RevPAR (in U.S. dollars)
 
320

 
323


Three months ended March 31, 2017 compared to three months ended March 31, 2016

Revenue was $39.9 million for the three months ended March 31, 2017, an increase of $0.3 million, or 1%, from $39.6 million for the three months ended March 31, 2016. This increase was due to revenue growth of $1.0 million or 6% at Belmond Charleston Place, South Carolina, due to strong group bookings; $0.9 million or 24% at Belmond El Encanto, Santa Barbara, California, partly as a result of year-over-year growth in group revenue; and $0.6 million or 19% at '21' Club in New York City primarily due to increased demand for the main restaurant and banqueting venues. Growth from these properties was partially offset by a $1.8 million or 17% revenue decrease at Belmond La Samanna, which was negatively impacted by an overall decline in visitation. ADR for the North American owned hotels segment decreased to $466 in the three months ended March 31, 2017 from $468 in the three months ended March 31, 2016. Occupancy remained consistent at 69% for the three months ended March 31, 2017 and March 31, 2016. Same store RevPAR decreased by 1% to $320 for the three months ended March 31, 2017 from $323 in the three months ended March 31, 2016.


38


Owned hotels - Rest of world 
 
 
Three months ended
 
 
March 31,
2017
 
March 31,
2016
 
 
 
 
 
Rooms available
 
92,880

 
93,457

Rooms sold
 
56,654

 
63,024

Occupancy (percentage)
 
61

 
67

Average daily rate (in U.S. dollars)
 
410

 
366

RevPAR (in U.S. dollars)
 
250

 
247

Same store RevPAR (in U.S. dollars)
 
250

 
247

    
Three months ended March 31, 2017 compared to three months ended March 31, 2016

Revenue was $36.0 million for the three months ended March 31, 2017, an increase of $0.7 million, or 2%, from $35.3 million for the three months ended March 31, 2016. This increase was largely due to favorable exchange rate movements of $5.5 million resulting from the year-over-year appreciation of the Brazilian real and the South African rand against the U.S. dollar, which were offset by revenue declines on a constant currency basis of $4.8 million, particularly at the Brazilian properties. In constant currency, there was a combined revenue decrease of $4.6 million at Belmond Copacabana Palace, Rio Janeiro, Brazil and at Belmond Hotel das Cataratas, Iguassu Falls, Brazil, as a result of the country's challenging economic situation and a stronger Brazilian real, both of which contributed to decreased demand from international markets. These declines were offset by revenue growth on a constant currency basis of $1.0 million or 15% at Belmond Mount Nelson, Cape Town, South Africa. Belmond Mount Nelson achieved strong constant currency ADR growth of 33% due to the investments made to renovate the hotel’s room product over the past several years. ADR in U.S. dollar terms for the Rest of world owned hotels segment increased to $410 in the three months ended March 31, 2017 from $366 in the three months ended March 31, 2016. Occupancy decreased to 61% for the three months ended March 31, 2017 from 67% for the three months ended March 31, 2016. Same store RevPAR increased by 1% in U.S. dollars, to $250 for the three months ended March 31, 2017 from $247 for the three months ended March 31, 2016, a decrease of 12% on a constant currency basis.

Owned trains and cruises 

Three months ended March 31, 2017 compared to three months ended March 31, 2016

Revenue was $5.1 million for the three months ended March 31, 2017, a decrease of $1.3 million, or 20%, from $6.4 million for the three months ended March 31, 2016. This was partially as a result of unfavorable exchange rate movements of $0.4 million million resulting from the 13% year-over-year depreciation of the British pound against the U.S. dollar and a combined revenue decrease of $1.1 million on a constant currency basis at Belmond Road to Mandalay and Belmond Orcaella, the Company’s two river cruise ships in Myanmar, due to decreased demand when compared to the prior-year quarter.

Part-owned/managed hotels 

Three months ended March 31, 2017 compared to three months ended March 31, 2016

Revenue was $0.5 million for the three months ended March 31, 2017, a decrease of $0.2 million, or 29%, from $0.7 million for the three months ended March 31, 2016. This was due to a decline in revenue from the Company's Peru hotels joint venture primarily as a result of a decrease in ADR at the Peru joint venture hotels as well as a drop in bookings due to flooding caused by El Nino.

Part-owned/managed trains

Three months ended March 31, 2017 compared to three months ended March 31, 2016

Revenue was $1.8 million in the three months ended March 31, 2017, a decrease of $0.2 million, or 10%, from $2.0 million in the three months ended March 31, 2016. The PeruRail joint venture’s tourist train operations were negatively impacted partly by the shift in the Easter holiday from the first quarter of 2016 to the second quarter of 2017.

39



Cost of services

Three months ended March 31, 2017 compared to three months ended March 31, 2016

Cost of services was $45.9 million for the three months ended March 31, 2017, an increase of $0.8 million, or 2%, from $45.1 million for the three months ended March 31, 2016. As a percentage of revenue, cost of services increased to 48% in the three months ended March 31, 2017, from 46% in the three months ended March 31, 2016. This is partly due to a decrease in margins for the first quarter following a change in the seasonal allocation of annual expenses at the Italian hotels.

Selling, general and administrative expenses

Three months ended March 31, 2017 compared to three months ended March 31, 2016

Selling, general and administrative expenses were $51.8 million for the three months ended March 31, 2017, an increase of $5.2 million, or 11%, from $46.6 million for the three months ended March 31, 2016. As a percentage of revenue, selling, general and administrative expenses increased to 54% in the three months ended March 31, 2017, from 48% in the three months ended March 31, 2016. This is partly due to a decrease in margins for the first quarter following a change in the seasonal allocation of annual expenses at the Italian hotels. In addition, there was an increase in central costs due to costs associated with expanding the resources of the development team.

Central costs within selling, general and administrative expenses were $11.0 million for the three months ended March 31, 2017 (including $1.5 million of non-cash share-based compensation expense), an increase of $1.3 million, or 13%, from $9.7 million for the three months ended March 31, 2016 (including $1.7 million of non-cash share-based compensation expense). As a percentage of revenue, central costs increased to 12% for the three months ended March 31, 2017, from 10% for the three months ended March 31, 2016, mainly due to increased development and other corporate headcount to support the 2020 strategic growth plan and greater information technology expenses.
    































40


Segment performance

Segment performance is evaluated by the chief operating decision maker based upon adjusted EBITDA, which excludes gains/(losses) on disposal, impairments, restructuring and other special items, interest income, interest expense, foreign currency, tax (including tax on earnings from unconsolidated companies), depreciation and amortization and gains/(losses) on extinguishment of debt.

Segment performance for the three months ended March 31, 2017 and 2016 is analyzed as follows:
 
 
Three months ended
 
 
March 31,
2017
 
March 31,
2016
 
 
$ millions
 
$ millions
 
 
 
 
 
Adjusted EBITDA:
 
 

 
 
Owned hotels:
 
 
 
 
Europe
 
(8.1
)
 
(5.6
)
North America
 
9.9

 
10.1

Rest of world
 
9.9

 
11.5

Total owned hotels
 
11.7

 
16.0

Owned trains and cruises
 
(4.2
)
 
(2.8
)
Part-owned/managed hotels
 
0.3

 
0.7

Part-owned/managed trains
 
2.7

 
3.7

Total adjusted share of earnings from unconsolidated companies and management fees
 
3.0

 
4.4

 
 
 
 
 
Unallocated corporate:
 
 
 
 
Central costs
 
(9.5
)
 
(8.0
)
Share-based compensation
 
(1.5
)
 
(1.7
)
 
 
 
 
 
Adjusted EBITDA
 
(0.5
)
 
7.9

 
 
 
 
 
Reconciliation from losses from continuing operations to adjusted EBITDA:
 
 
 
 
 
 
 
 
 
Losses from continuing operations
 
(18.0
)
 
(1.4
)
   Depreciation and amortization
 
13.7

 
13.1

   Interest income, interest expense and foreign currency, net
 
7.9

 
4.5

   Benefit from income taxes
 
(5.3
)
 
(9.6
)
   Share of provision for income taxes of unconsolidated companies
 
0.2

 
0.9

 
 
(1.5
)
 
7.5

   Gain on disposal of property, plant and equipment
 
(0.2
)
 
(0.2
)
   Restructuring and other special items
 
1.2

 
0.6

 
 
 
 
 
Adjusted EBITDA
 
(0.5
)
 
7.9



41


Three months ended March 31, 2017 compared to three months ended March 31, 2016

The European owned hotels reported an adjusted EBITDA loss of $8.1 million for the three months ended March 31, 2017, which compared to an adjusted EBITDA loss of $5.6 million for the three months ended March 31, 2016. The increase in loss was mainly due to a $1.5 million decrease in adjusted EBITDA for the Company's Italian hotels partly as a result of the shift in timing of the Easter holiday and a change in the seasonal allocation of annual expenses. In addition, adjusted EBITDA for Belmond Reid's Palace, Madeira declined by $0.4 million following a 10% decrease in ADR as the company entered into a number of promotions to stimulate business for the first quarter of 2017. As a percentage of European owned hotels revenue, the reported loss was 68% for the three months ended March 31, 2017 compared to 42% for the three months ended March 31, 2016 due to lower margins earned at the European hotels.

The North American owned hotels reported adjusted EBITDA of $9.9 million for the three months ended March 31, 2017, a decrease of $0.2 million, or 2%, from $10.1 million for the three months ended March 31, 2016. This was partially due to a $1.0 million adjusted EBITDA decrease at Belmond La Samanna, St. Martin, French West Indies, which was negatively impacted by an overall decline in visitation. Offsetting this decrease, there was earnings growth of $0.4 million or 8% at Belmond Charleston Place, South Carolina, $0.3 million or 38% at Belmond El Encanto, Santa Barbara, California, and $0.4 million or 150% at '21' Club in New York City. Year-over-year earnings growth at Belmond Charleston Place and Belmond El Encanto was partly the result of increased group business and earnings growth at '21' Club was primarily due to increased demand for the main restaurant and banqueting venues. As a percentage of North American owned hotels revenue, adjusted EBITDA remained consistent at 25% for the three months ended March 31, 2017 and 2016.

The Rest of world owned hotels reported adjusted EBITDA of $9.9 million for the three months ended March 31, 2017, a decrease of $1.6 million, or 14%, from $11.5 million for the three months ended March 31, 2016. This was principally as a result of a combined earnings decrease of $1.6 million at Belmond Hotel das Cataratas and Belmond Copacabana Palace, both largely as a result of the negative impact on demand of Brazil’s challenging economic situation and a lull following the Summer Olympic Games in August 2016. Offsetting this decline in earnings, Belmond Mount Nelson had earnings growth of $1.4 million for the three months ended March 31, 2017. The hotel achieved strong ADR growth of 59% compared to the three months ended March 31, 2016 due to the investments made to renovate the hotel’s room product over the past several years. As a percentage of Rest of world owned hotels revenue, adjusted EBITDA was 28% for the three months ended March 31, 2017 compared to 33% for the three months ended March 31, 2016 due to the lower margins earned at the Brazilian hotels.

Owned trains and cruises reported an adjusted EBITDA loss of $4.2 million for the three months ended March 31, 2017 compared to an adjusted EBITDA loss of $2.8 million for the three months ended March 31, 2016. The increase in loss was largely due to adjusted EBITDA declines of $0.6 million for the Venice Simplon-Orient-Express train due in part to a change in the seasonal allocation of annual expenses and $0.3 million for the Company's two river cruisers in Myanmar. Additionally, Belmond Grand Hibernian, the Company's new Irish train, which commenced operations in August 2016, recorded a $0.4 million adjusted EBITDA loss in the first quarter of 2017 largely as a result of seasonality, as the train concluded its 2016 operating season in mid-October for what will be its annual winter closure period. The train commenced its 2017 operating season in April.

The Part-owned/managed hotels reported adjusted EBITDA of $0.3 million for the three months ended March 31, 2017, a decrease of $0.4 million from earnings of $0.7 million for the three months ended March 31, 2016 primarily as a result of a decrease in ADR at the Peru joint venture hotels as well as a drop in bookings due to the flooding caused by El Nino.

The Part-owned/managed trains reported adjusted EBITDA of $2.7 million for the three months ended March 31, 2017, a decrease of $1.0 million, or 27%, from $3.7 million for the three months ended March 31, 2016, due to a decrease in management fee income and share of earnings from the Company's PeruRail joint venture partly as a result of the negative impact of the shift in the Easter holiday from the first quarter of 2016 to the second quarter of 2017 on the joint venture's tourist train operations.

Gain on disposal of property, plant and equipment

Three months ended March 31, 2017 compared to three months ended March 31, 2016

A gain on disposal of $0.2 million was recorded in the three months ended March 31, 2017 and 2016. The gain in both periods relates to the recognition of the deferred gain following the March 2014 sale of Inn at Perry Cabin by Belmond, which Belmond has continued to manage under a management contract.

42


    
Impairment of goodwill, property, plant and equipment

Three months ended March 31, 2017 compared to three months ended March 31, 2016

There were no impairments of goodwill, property, plant and equipment in the three months ended March 31, 2017 and 2016. See Notes 6 and 7 for consideration of potential impairment triggers.

Depreciation and amortization

Three months ended March 31, 2017 compared to three months ended March 31, 2016

Depreciation and amortization was $13.7 million for the three months ended March 31, 2017, an increase of $0.6 million, or 5%, from $13.1 million for the three months ended March 31, 2016. Depreciation and amortization as a percentage of revenue increased slightly to 14% for the three months ended March 31, 2017 from 13% for the three months ended March 31, 2016.

Interest income, interest expense and foreign currency, net

Three months ended March 31, 2017 compared to three months ended March 31, 2016

Interest income, interest expense and foreign currency, net was an expense of $7.8 million for the three months ended March 31, 2017, an increase of $3.3 million, or 73%, from an expense of $4.5 million for the three months ended March 31, 2016. The increase in net expense was primarily due to a foreign exchange loss of $0.2 million that was recognized in the three months ended March 31, 2017, compared to a foreign exchange gain of $2.9 million in the three months ended March 31, 2016.

Benefit from income taxes

Three months ended March 31, 2017 compared to three months ended March 31, 2016

In the three months ended March 31, 2017, the income tax benefit was $5.3 million (March 31, 2016 - $9.6 million). This reduction in additional income tax benefits is mainly as a result of not being able to recognize a deferred tax credit in respect of certain UK costs in the three months ended March 31, 2017.

Earnings from unconsolidated companies

Three months ended March 31, 2017 compared to three months ended March 31, 2016

Earnings from unconsolidated companies net of tax were $0.4 million for the three months ended March 31, 2017, a decrease of $0.4 million, or 50%, from $0.8 million for the three months ended March 31, 2016. This was largely due to a decrease in earnings from the Company's PeruRail joint venture partly as a result of the negative impact of the shift in the Easter holiday from the first quarter of 2016 to the second quarter of 2017 on the joint venture's tourist train operations.

Net earnings/(losses) from discontinued operations

Three months ended March 31, 2017 compared to three months ended March 31, 2016

The earnings from discontinued operations for the three months ended March 31, 2017 were $Nil, compared with losses of $0.1 million for the three months ended March 31, 2016. Losses from discontinued operations for the three months ended March 31, 2016 comprised legal fees in relation to Ubud Hanging Gardens, as Belmond is pursuing legal remedies following the wrongful dispossession by the owner in November 2013 and residual operating losses from Porto Cupecoy which was sold in January 2013.

Other comprehensive income/(losses): Foreign currency translation adjustments, net

Foreign currency translation adjustments for the three months ended March 31, 2017 were a gain of $13.1 million, compared to a gain of $15.0 million for the three months ended March 31, 2016, arising from the retranslation of Belmond’s net investment in subsidiary accounts denominated in foreign currencies into the Company’s reporting currency of U.S. dollars.


43


The gain in the three months ended March 31, 2017 was due to the majority of Belmond's operating currencies appreciating against the U.S. dollar from the rate at December 31, 2016. In particular, the 8%, 3% and 2% appreciation of the Russian ruble, Brazilian real, and euro against the U.S. dollar, respectively, positively impacted the carrying value of Belmond’s net investments denominated in those currencies.

The gain in the three months ended March 31, 2016 was due to the majority of Belmond's operating currencies appreciating against the U.S. dollar from the rate at December 31, 2015. In particular, the 10%, 8% and 5% appreciation of the Brazilian real, Russian ruble and euro against the U.S. dollar, respectively, positively impacted the carrying value of Belmond’s net investments denominated in those currencies.

Liquidity and Capital Resources
 
Overview

Belmond’s primary short-term cash needs include payment of compensation, general business expenses, capital commitments and contractual payment obligations, which include principal and interest payments on its debt facilities. Long-term liquidity needs may include existing and ongoing property refurbishments, potential investment in strategic acquisitions, and the repayment of long-term debt. At March 31, 2017, total debt and obligations under capital leases, including debt of consolidated variable interest entities, amounted to $602.8 million (December 31, 2016 - $602.1 million), including a current portion of $5.3 million (December 31, 2016 - $5.3 million). See Note 9 to the Financial Statements. Additionally, Belmond had capital commitments at March 31, 2017 amounting to $12.2 million (December 31, 2016 - $7.8 million).

Belmond had cash and cash equivalents of $131.0 million at March 31, 2017, compared to $153.4 million at December 31, 2016. In addition, Belmond had restricted cash balances of $7.7 million, of which $7.0 million is classified as current restricted cash on the consolidated balance sheets and $0.7 million is classified in other assets (December 31, 2016 - $2.6 million, of which $1.8 million was classified in restricted cash and $0.8 million was classified in other assets). At March 31, 2017, there were undrawn amounts available to Belmond under committed lines of credit of $105.5 million (December 31, 2016 - $105.5 million), bringing total cash availability at March 31, 2017 to $236.5 million (December 31, 2016 - $258.9 million), excluding restricted cash. When assessing cash and cash equivalents within Belmond, management considers the availability of those cash resources held within local business units to meet the strategic needs of Belmond.

At March 31, 2017, Belmond had $5.3 million of scheduled debt repayments due within one year. Belmond expects to meet these repayments and fund working capital and capital expenditure commitments for the foreseeable future from cash resources, operating cash flow and available committed borrowing.

In order to ensure that Belmond has sufficient liquidity for the future, Belmond’s cash flow projections and available funds are reviewed with the Company’s board of directors on a regular basis.

Recent Events Affecting Belmond’s Liquidity and Capital Resources
In March 2015, Belmond’s board of directors approved a program enabling the Company to repurchase its shares of class A common stock up to the value of $75.0 million. No shares were repurchased during the three months ended March 31, 2017. To date the Company has acquired 3,574,667 shares of class A common stock for consideration of $40.0 million.

Covenant Compliance

Belmond is financed with a $489.7 million secured term loan and a $105.0 million revolving credit facility. The credit agreement limits Belmond’s ability to incur additional debt unless certain covenants are met. These covenants are measured on the performance of the consolidated group. The revolving credit facility in the credit agreement contains two financial covenants, a maximum net leverage test and a minimum interest cover test, which are both measured quarterly based on Belmond’s trailing 12 months results. In addition, there is debt held by consolidated variable interest entities of $113.0 million relating to Charleston Center LLC. One of the loans ($112.0 million) contains two financial covenants, a minimum interest cover test and minimum debt service ratio, both measured quarterly based on the trailing 12 months results of Charleston Center LLC.
If Belmond does not comply with its financial covenants and the banks that provide the revolving credit facility declare a default and accelerate the repayment of their debt, this will cause an event of default under the credit agreement. The cross default threshold in the credit agreement to other debt that is recourse to Belmond is $25.0 million.

44


Belmond continues to closely monitor projected covenant compliance, and if there was a possibility of non-compliance with a covenant, Belmond would proactively meet with the agent or lending bank or banks of the relevant facility to seek an amendment or waiver. Obtaining a waiver may result in additional bank fees or an increase in the interest cost.

Based on its current financial forecasts, Belmond believes it will comply with all of the financial covenants in its loan facilities.

Working Capital
  
Current assets less current liabilities, including the current portion of long-term debt, resulted in a working capital surplus of $84.4 million at March 31, 2017 (December 31, 2016 - $107.4 million).

Cash Flow - Sources and Uses of Cash

At March 31, 2017 and December 31, 2016, Belmond had cash and cash equivalents of $131.0 million and $153.4 million, respectively. In addition, Belmond had restricted cash of $7.7 million (of which $7.0 million was classified as current restricted cash on the condensed consolidated balance sheets and $0.7 million was classified in other assets) and $2.6 million (of which $1.8 million was classified in restricted cash on the condensed consolidated balance sheets and $0.8 million was classified in other assets) as of March 31, 2017 and December 31, 2016, respectively.

Operating Activities. Net cash used in operating activities for the three months ended March 31, 2017 was $9.5 million, compared to $1.8 million for the three months ended March 31, 2016.
 
The primary driver of operating cash flows is the result for the period, adjusted for any non-cash components. Net losses from continuing operations were $18.0 million for the three months ended March 31, 2017, a decrease of $16.6 million from net losses of $1.4 million for the three months ended March 31, 2016. Operating cash flows were also affected by the fact that net losses from continuing operations for the three months ended March 31, 2017 included a non-cash loss from foreign currency translation of $0.2 million, compared to a non-cash gain from foreign currency translation of $2.9 million for the three months ended March 31, 2016.

Investing Activities. Net cash used in investing activities was $11.9 million for the three months ended March 31, 2017, compared to net cash used in investing activities of $10.9 million for the three months ended March 31, 2016.

Capital expenditure to acquire property, plant and equipment of $12.0 million during the three months ended March 31, 2017 included $3.7 million for project and maintenance capital expenditures incurred at Belmond’s Italian hotels during their annual winter closure periods, $1.6 million on the Venice Simplon-Orient-Express mainly for required statutory works and $1.4 million at Belmond Grand Hotel Europe largely on the refurbishment of the hotel's ballroom, with the balance being for routine capital expenditures.

Capital expenditure to acquire property, plant and equipment of $11.0 million during the three months ended March 31, 2016 included $2.2 million for project and maintenance capital expenditures incurred at Belmond’s Italian hotels during their annual winter closure periods, $2.0 million at Belmond Charleston Place largely to add a new high-end sports pub as well as for final payments related to the hotel’s rooms renovation project, $1.5 million on the Belmond Grand Hibernian luxury sleeper train and $1.3 million on the Venice Simplon-Orient-Express and Belmond British Pullman mainly related to statutory safety works, with the balance being for routine capital expenditures.

Financing Activities. Net cash used in financing activities for the three months ended March 31, 2017 was $1.7 million, compared to net cash used in financing activities of $3.3 million for the three months ended March 31, 2016.

Principal repayments under long-term debt were $1.7 million for the three months ended March 31, 2017 compared to $1.3 million for the three months ended March 31, 2016.

The three months ended March 31, 2016 included a cash outflow of $2.0 million in relation to repurchases of Belmond’s class A common stock. There were no share repurchases in the three months ended March 31, 2017.

Cash Flows from Discontinued Operations. The results of Ubud Hanging Gardens and Porto Cupecoy have been presented as discontinued operations for all periods presented.


45


Capital Commitments

Belmond routinely makes capital expenditures to enhance its business. These capital expenditures relate to maintenance, improvements to existing properties and investment in new properties. These capital commitments are expected to be funded through current cash balances, cash flows from operations and existing debt facilities.
 
There were $12.2 million of capital commitments outstanding at March 31, 2017 (December 31, 2016 - $7.8 million) relating to project developments and refurbishment for existing properties.
 
Indebtedness
 
At March 31, 2017, Belmond had $602.8 million (December 31, 2016 - $602.1 million) of consolidated debt and obligations under capital leases, including the current portion and including debt held by consolidated variable interest entities. Total debt on the consolidated balance sheets at March 31, 2017 is net of the unamortized original issue discount of $1.4 million (December 31, 2016 - $1.5 million) and unamortized debt issuance costs of $8.9 million (December 31, 2016 - $9.5 million), both of which will be amortized through interest expense over the term of the loans.

Belmond is financed with a $489.7 million secured term loan and a $105.0 million revolving credit facility.

The term loan has two tranches, a U.S. dollar tranche ($334.4 million currently outstanding) and a euro-denominated tranche (€145.4 million currently outstanding, equivalent to $155.3 million as at March 31, 2017). The dollar tranche bears interest at a rate of LIBOR plus 3% per annum, and the euro tranche bears interest at a rate of EURIBOR plus 3% per annum. Both tranches are subject to a 1% interest rate floor. The term loan matures in 2021 and the annual mandatory amortization is 1% of the principal amount.
The revolving credit facility matures in March 2019 and bears interest at a rate of LIBOR plus 2.75% per annum, with a commitment fee of 0.4% paid on the undrawn amount. At March 31, 2017 the facility was undrawn and including other working capital facilities, the Company has $105.5 million available to draw.
The term loan and revolving credit facility are secured by pledges of shares in certain Company subsidiaries and by security interests in tangible and intangible personal property. There are no mortgages over real estate.

The weighted average duration of Belmond’s debt, including debt held by consolidated variable interest entities, is 3.7 years, and the weighted average interest rate is 4.27% which incorporates the effect of derivatives which are used to mitigate interest rate risk. See Note 9 to the Financial Statements regarding the maturity of long-term debt.

Debt of consolidated variable interest entities at March 31, 2017 included above comprised $113.0 million (December 31, 2016 - $113.1 million), including the current portion but before deduction of unamortized debt issuance costs, of debt obligations of Charleston Center LLC, owner of Belmond Charleston Place in which Belmond has a 19.9% equity investment.

In June 2016, Charleston Center LLC amended its secured loan of $86.0 million increasing the amount of the loan to $112.0 million but keeping the original 2019 maturity. The interest rate on the new loan is LIBOR plus 2.35% per annum and has no amortization and is non-recourse to Belmond. The additional funds were used to repay a development loan and associated accrued interest.

Including debt of consolidated variable entities, approximately 26% of the outstanding principal amount of Belmond’s consolidated debt is in euros and the balance primarily in U.S. dollars. At March 31, 2017, 52% of borrowings of Belmond were at floating interest rates.


46


Belmond has contingently guaranteed debt obligations of certain of its joint ventures. The following table summarizes these commitments at March 31, 2017:
 
 
Contingent guarantee
 
Duration
March 31, 2017
 
$ millions
 
 
 
 
 
 
 
PeruRail joint venture:
 
 
 
 
Concession performance
 
7.3

 
through May 2017
Peru hotel joint venture:
 
 
 
 
Debt obligations
 
17.3

 
through 2021
 
 
 
 
 
Total
 
24.6

 
 

Belmond has contingently guaranteed, through 2021, $17.3 million of debt obligations of the joint venture in Peru that operates four hotels and has also contingently guaranteed the Peru rail joint venture’s obligations relating to the performance of its governmental rail concessions, currently in the amount of $7.3 million, through May 2017. The contingent guarantees for each Peruvian joint venture may only be enforced in the event there is a change in control of the relevant joint venture, which would occur only if Belmond’s ownership of the economic and voting interests in the joint venture falls below 50%, an event which has not occurred and is not expected to occur.

Recent Accounting Pronouncements

As of March 31, 2017, Belmond had adopted all relevant accounting guidance, as reported in Note 1 to the condensed consolidated financial statements. Accounting pronouncements to be adopted are also reported in Note 1.

Critical Accounting Policies and Estimates

For a discussion of these, see Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates in the Company’s 2016 Annual Report on Form 10-K.

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
 
Belmond is exposed to market risk from changes in interest rates and foreign currency exchange rates.  These exposures are monitored and managed as part of its overall risk management program, which recognizes the unpredictability of financial markets and seeks to mitigate material adverse effects on consolidated earnings and cash flow. Belmond does not hold market rate sensitive financial instruments for trading purposes.
 
The market risk relating to interest rates arises mainly from the financing activities of Belmond. Earnings are affected by changes in interest rates on floating rate borrowings, principally based on U.S. dollar LIBOR and EURIBOR. Belmond management assesses market risk based on changes in interest rates using a sensitivity analysis. If the rate paid by Belmond increased by 100 basis points with all other variables held constant and after taking into account the 1% floor on the corporate term loan, annual net finance costs of Belmond would have increased by approximately $2.4 million based on borrowings outstanding at March 31, 2017.
 
The market risk relating to foreign currencies arises from holding assets, buying, selling and financing in currencies other than the U.S. dollar, principally the euro, British pound, South African rand, Russian ruble and Brazilian real. Some non-U.S. subsidiaries of the Company borrow in local currencies, and Belmond may in the future enter into forward exchange contracts relating to purchases denominated in foreign currencies.

47



Twelve of Belmond’s owned properties in 2017 operated in European euro territories, two in Brazilian real, one in South African rand, five in British pounds, three in Botswana pula, two in Mexican peso, one in Peruvian nuevo sol, one in Russian ruble and eight in various Southeast Asian currencies. Revenue derived by Venice Simplon-Orient-Express was recorded primarily in British pounds, but its operating costs were mainly denominated in euros. Revenue derived by Belmond Maroma Resort and Spa, Belmond La Samanna and Belmond Miraflores Park was recorded in U.S. dollars, but the majority of the hotels’ expenses were denominated in Mexican pesos, European euros and Peruvian nuevo soles, respectively. Both revenue and the majority of expenses for Belmond Governor's Residence, Belmond La Résidence D'Angkor, Belmond Road to Mandalay and Belmond Orcaella were recorded in U.S. dollars.
 
Except for the specific instances described above, Belmond’s properties seek to match foreign currency earnings and costs as far as possible to provide a natural hedge against currency movements. The extent to which such a match is possible depends on the property, its guest base and the currency of the majority of its costs. Belmond hedges the U.S. dollar value of its euro denominated net assets by drawing part of its debt in euros and designating that debt as a net investment hedge. In addition, a significant proportion of the guests at Belmond hotels located outside of the United States originate from the United States. When a foreign currency in which Belmond operates depreciates against the U.S. dollar, Belmond has some flexibility to increase prices in local currency, or vice versa. Management believes that when these factors are combined, Belmond does not face a material exposure to its net earnings from currency movements, although the reporting of Belmond’s revenue and costs translated into U.S. dollars can, from period to period, be materially affected.

Belmond management uses a sensitivity analysis to assess the potential impact on net earnings of changes in foreign currency financial instruments from hypothetical changes in the foreign currency exchange rates. The primary assumption used in this model is a hypothetical 10% weakening or strengthening of the foreign currencies against the U.S. dollar. However, because Belmond does not have at March 31, 2017 any significant financial instruments in a currency other than the functional currency of the operation concerned, apart from the euro-denominated indebtedness designated as a net investment hedge discussed in Note 19, there is no material potential impact on net earnings at March 31, 2017 as a result of hypothetical changes in the foreign currency exchange rates.

ITEM 4. Controls and Procedures
 
Disclosure Controls and Procedures
 
The Company’s chief executive officer and chief financial officer have evaluated the effectiveness of Belmond’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) to ensure that the information required to be disclosed in reports filed or submitted under the Exchange Act is accumulated and communicated to Belmond management to allow timely decisions regarding required disclosure and to provide reasonable assurance that the information is recorded, processed, summarized and reported within the appropriate time periods. Based on that evaluation, Belmond management has concluded that these disclosure controls and procedures were effective as of March 31, 2017.

Changes in Internal Control over Financial Reporting
 
There have been no changes in Belmond’s internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) during the first quarter of 2017 that have materially affected, or are reasonably likely to materially affect, Belmond’s internal control over financial reporting.

48


PART II — OTHER INFORMATION

ITEM 1.    Legal Proceedings

The information set forth under Note 17 to the accompanying consolidated financial statements included in this Quarterly Report on Form 10-Q is incorporated herein by reference.

ITEM 1A.    Risk Factors

There have been no material changes in the Company’s risk factors as previously disclosed in Part I, Item IA of the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

ITEM 6.    Exhibits

The exhibit index appears on the page immediately following the signature page to this report.


49


SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
Dated:  May 9, 2017
 
 
BELMOND LTD.
 
 
 
 
 
By:
/s/ Martin O’Grady
 
 
Martin O’Grady
 
 
Executive Vice President, Chief Financial Officer
(Principal Accounting Officer)


50


EXHIBIT INDEX
Exhibit No.
 
Incorporated by Reference to
 
Description
 
 
 
 
 
3.1
 
Exhibit 3.1 to July 2, 2014 Form 8-K Current Report (File No. 001-16017)
 
Memorandum of Association and Certificate of Incorporation of Belmond Ltd.

3.2
 
Exhibit 3.2 to June 15, 2007 Form 8-K Current Report (File No. 001-16017)
 
Bye-Laws of Belmond Ltd.
3.3
 
Exhibit 1 to April 23, 2007 Amendment No. 1 to Form 8-A Registration Statement
(File No. 001-16017)
 
Rights Agreement dated June 1, 2000, and amended and restated April 12, 2007, between Orient-Express Hotels Ltd. and Computershare Trust Company N.A., as Rights Agent
3.4
 
Exhibit 4.2 to December 10, 2007 Form 8-K Current Report (File No. 001-16017)
 
Amendment No. 1 dated December 10, 2007 to Amended and Restated Rights Agreement (Exhibit 3.3)
3.5
 
Exhibit 4.3 to May 27, 2010 Form 8-K Current Report (File 001-16017)
 
Amendment No. 2 dated May 27, 2010 to Amended and Restated Rights Agreement (Exhibit 3.3)
10.1
 
Exhibit 10.1 to June 2, 2015 Form 8-K Current Report (File 001-16017)
 
First Amendment dated June 2, 2015, among Belmond Ltd., Belmond Interfin Ltd., Barclays Bank PLC, JPMorgan Chase Bank, N.A., and Credit Agricole Corporate and Investment Bank
31
 
 
 
Rule 13a-14(a)/15d-14(a) Certifications
32
 
 
 
Section 1350 Certification
101
 
 
 
Interactive data file



51