Royal Caribbean Cruises Ltd. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Financial amounts below are in U.S. dollars; income statement and cash flow amounts are generally rounded to millions. The filing was signed August 2, 2018.
Business context
Royal Caribbean operated three wholly owned global cruise brands and held equity-method interests in TUI Cruises, Pullmantur and SkySea Cruises. Symphony of the Seas entered service in March. The company announced after quarter-end that it acquired a 66.7% stake in Silversea Cruises on July 31 for approximately $1.0 billion.
Financial performance and liquidity
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $2,337.6m | $2,195.3m | $4,365.4m | $4,203.8m |
| Operating income | $456.9m | $419.7m | $731.0m | $699.2m |
| Net income | $466.3m | $369.5m | $684.9m | $584.3m |
| Diluted EPS | $2.19 | $1.71 | $3.21 | $2.71 |
| Operating margin | 19.5% | 19.1% | 16.7% | 16.6% |
| Net margin | 19.9% | 16.8% | 15.7% | 13.9% |
Q2 revenue increased 6.5% year over year; management attributed growth mainly to higher pricing on Europe and Asia/Pacific sailings, capacity additions and stronger onboard spending. For the first half, revenue rose 3.8%. Net yields increased 3.8% in Q2 and 5.5% in the first half; on a constant-currency basis, increases were 2.8% and 3.9%, respectively.
Q2 net income included $21.8m of deferred gain recognized after TUI Cruises sold the original Mein Schiff 1 and a $13.7m gain on sale of a travel-agency investment. First-half results also included a $23.3m SkySea impairment. Adjusted diluted EPS was $2.27 for Q2 and $3.36 for the first half, versus reported diluted EPS of $2.19 and $3.21.
First-half operating cash flow was $1,931.6m, compared with $1,659.3m a year earlier. Property and equipment purchases were $2,212.9m, yielding operating cash flow less these purchases of approximately negative $281m. Investing cash outflow was $2,141.0m; financing cash inflow was $214.0m. Cash declined $11.1m to $109.0m.
At June 30, cash and cash equivalents were $109.0m; current assets were $1,099.9m and current liabilities $5,502.4m, including $3,049.1m of customer deposits. Reported working-capital deficit was $4.4bn. Long-term debt, including current maturities, totaled approximately $8.52bn, versus $7.54bn at year-end 2017. The company reported $2.0bn of liquidity: $109m cash and $1.9bn available under unsecured credit facilities. It said operating cash flows and financing arrangements were expected to cover capital expenditures and debt repayments over the next 12 months.
Material changes and unusual items
- Q2 cruise operating expenses rose 4.6%, below revenue growth; reported operating margin increased to 19.5%. Marketing, selling and administrative costs rose 10.2%, including tour-business exit costs and Silversea transaction costs.
- First-half cruise operating costs were affected by the absence of a $30.9m ship-sale gain recorded in 2017. Fuel expense fell to $332.7m from $348.2m, while payroll and related expense increased.
- SkySea planned to cease operations by year-end 2018. The company recorded a $23.3m impairment in the first quarter; remaining exposure to SkySea was reported at $64.7m, primarily debt and other receivables tied to the expected sale of its ship.
- Capital spending and ship commitments are substantial: ships on order for the company’s global brands had an aggregate estimated cost of $11.4bn, with $586.1m deposited. Contractual obligations totaled $20.45bn, including $9.20bn of ship purchase obligations.
- The company authorized a $1.0bn share repurchase program in May and repurchased $137.5m of shares in Q2. First-half treasury-stock purchases totaled $369.5m. Quarterly dividend declared was $0.60 per share, up from $0.48 in 2017.
Guidance, outlook and risks
Management’s August 2, 2018 outlook, based on then-current fuel, interest and exchange rates, forecast full-year 2018 adjusted diluted EPS of $8.70–$8.90. It projected net yield growth of 3.25%–4.25% as reported (2.75%–3.75% constant currency), net cruise cost per available passenger cruise day growth of 2.0%–2.5%, and capacity growth of 3.7%. Q3 adjusted diluted EPS guidance was $3.90–$3.95, with net yield growth of approximately 1.5% as reported and 2.0% constant currency. Guidance excluded Silversea’s operating results, though it included related incremental interest expense.
The filing highlights exposure to foreign exchange, fuel and interest-rate movements; discretionary consumer demand; severe weather and itinerary disruption; industry capacity and pricing competition; shipbuilding delays and cost increases; cyber and data-security incidents; and regulatory, environmental and geopolitical developments. Management reported compliance with debt covenants and stated it was well above required thresholds. The company also noted a $700m acquisition financing facility drawn after quarter-end, due July 2019, and $415m of commercial paper outstanding as of July 31.
Key investor verification points
- Assess whether yield growth and onboard spending can offset rising non-fuel costs, capacity additions and currency or fuel volatility.
- Review funding and refinancing needs against $8.52bn of debt, the $4.4bn working-capital deficit, ship commitments and the Silversea acquisition financing.
- Track Silversea integration, contingent share consideration and the effect of its results entering consolidation in Q4 2018.
- Monitor recovery of the $64.7m SkySea receivable exposure and completion of the Golden Era sale, as well as the planned SkySea closure.
- Compare actual results with 2018 guidance and verify the impact of the unusual gains, impairments, tour-business exit costs and accounting-policy change on adjusted measures.