Royal Caribbean Cruises Ltd. — FY2017 Form 10-K
Business and period: Annual report for the year ended December 31, 2017, filed February 20, 2018. Royal Caribbean operates three wholly owned global cruise brands and holds equity-method interests in TUI Cruises, Pullmantur and SkySea Cruises. Its Global and Partner Brands operated 49 ships with approximately 124,070 berths at year-end; Partner Brand results are generally not consolidated.
Financial and operating performance
- Revenue: $8.78 billion, up 3.3% from $8.50 billion in 2016. Passenger ticket revenue was $6.31 billion; onboard and other revenue was $2.46 billion.
- Profit: Operating income was $1.74 billion, up from $1.48 billion; net income was $1.63 billion, versus $1.28 billion. Diluted EPS was $7.53, versus $5.93. Adjusted diluted EPS was also $7.53, compared with $6.08 in 2016.
- Margins: Operating margin increased to 19.9% from 17.4%; net margin increased to 18.5% from 15.1%.
- Yields and costs: Net yields increased 6.5% reported and 6.4% on a constant-currency basis. Net Cruise Costs Excluding Fuel per available passenger cruise day increased 2.0% on a constant-currency basis.
- Operations: Passengers carried were 5.77 million, occupancy was 108.4% versus 106.4%, and available passenger cruise days decreased 2.4%.
- Cash flow: Operating cash flow was $2.87 billion, compared with $2.52 billion. Investing cash outflow was $214 million, versus $2.72 billion, largely reflecting lower ship-related capital spending. Financing cash outflow was $2.68 billion.
- Debt and liquidity: Total debt, including capital leases, was $7.54 billion, down from $9.39 billion. Cash was $120 million and available revolving credit capacity was $2.1 billion, for reported liquidity of $2.2 billion. Working capital deficit was $3.9 billion, largely reflecting customer deposits collected before sailings. The company reported compliance with debt covenants.
- Capital returns: Dividends declared were $2.16 per share for 2017. The company repurchased $225 million of shares during the year under its $500 million authorization.
Material changes and unusual items
- Revenue grew despite a 2.4% capacity decline, supported by higher ticket prices and per-passenger onboard spending. Onboard revenue yield increased 6.8% year over year on a constant-currency basis.
- The 2017 hurricane disruptions reduced net income and adjusted net income by an estimated $0.26 per diluted share. China-related travel restrictions affecting South Korea itineraries also weighed on performance.
- A $30.9 million gain from the sale of Legend of the Seas contributed to lower cruise operating expenses. The sale of Pullmantur’s majority interest in 2016 means Pullmantur is now an equity-method investment; the 2016 comparison also included a $21.7 million loss from eliminating its reporting lag.
- The company completed its Double-Double targets, reporting adjusted EPS of $7.53 against a $6.78 target and ROIC above 10%. Moody’s and S&P upgraded its senior unsecured debt rating to investment grade during 2017.
- At year-end, the company had approximately $13.3 billion of ship-order commitments, excluding Partner Brand orders. Expected capital expenditures were approximately $3.4 billion in 2018, $2.1 billion in 2019, and $2.5 billion in each of 2020 and 2021.
Outlook, risks and contingencies
- 2018 guidance: Management forecast adjusted diluted EPS of $8.55–$8.75 and capacity growth of 3.9%. Constant-currency net yield growth was projected at 1.5%–3.5%; constant-currency Net Cruise Costs per available passenger cruise day were projected to rise 0.5%–1.0%, or 1.5%–2.0% excluding fuel. Management said bookings remained consistent with expectations after its January 24, 2018 guidance.
- Three Global Brands were expected to receive ships in 2018: Symphony of the Seas, Azamara Pursuit and Celebrity Edge. Management anticipated increased Caribbean capacity and lower Asia/Pacific capacity as ships were redeployed.
- Key exposures include discretionary consumer demand, geopolitical events and travel restrictions, severe weather, fuel prices, foreign exchange and interest rates, industry capacity growth, port access, shipyard delivery and cost risks, cybersecurity, and evolving environmental and privacy regulation. The company does not carry business interruption insurance for its ships.
- Fuel rules require the worldwide sulfur limit to tighten to 0.5% in 2020; ineffective mitigation could materially increase fuel costs. A hypothetical 10% increase in fuel prices was estimated to increase 2018 fuel costs by $38 million, net of hedges.
- Ship purchase obligations, debt service and other contractual obligations totaled $20.85 billion at year-end, including $10.89 billion of ship purchase obligations. The company expected operating cash flows and financing arrangements to cover obligations over the next 12 months.
- Routine industry-related claims are mostly insured; management did not expect their net outcome to materially affect financial condition or results. Royal Caribbean guaranteed 50% of a TUI Cruises bank loan, with approximately $114 million outstanding; management said a loss under the guarantee was not probable. SkySea-related loans and receivables were approximately $91.6 million and had been placed on non-accrual status in 2017.
Important facts for investors to verify
- Whether 2018 yield and EPS guidance is achieved, and how much depends on pricing, occupancy, new-ship launches and currency movements.
- Funding plans, delivery schedules and return assumptions for the large shipbuilding program, including the company’s exposure to euro movements.
- Liquidity and refinancing capacity given the working-capital deficit, near-term debt maturities and substantial ship commitments.
- The continuing effects of severe weather, China travel restrictions and capacity growth on itineraries, pricing and demand.
- Fuel-cost sensitivity and the effectiveness and cost of emissions-compliance measures and hedges.
- Credit quality and recoverability of amounts due from unconsolidated affiliates, particularly SkySea and Pullmantur.