Royal Caribbean Cruises Ltd. — Q3 2014 Form 10-Q
Business context and reporting period
Global cruise operator reporting the quarter and nine months ended September 30, 2014, compared with the corresponding 2013 periods. The company owns Royal Caribbean International, Celebrity Cruises, Pullmantur, Azamara Club Cruises and CDF Croisières de France, and holds a 50% interest in unconsolidated joint venture TUI Cruises. Results are seasonal.
Financial and operating performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $2.389 billion | $2.312 billion | $6.256 billion | $6.106 billion |
| Operating income | $529.5 million | $444.2 million | $822.5 million | $723.2 million |
| Operating margin | 22.2% | 19.2% | 13.1% | 11.8% |
| Net income | $490.2 million | $365.7 million | $654.4 million | $466.7 million |
| Net margin | 20.5% | 15.8% | 10.5% | 7.6% |
| Diluted GAAP EPS | $2.19 | $1.65 | $2.93 | $2.11 |
Adjusted diluted EPS, a non-GAAP measure, was $2.20 for Q3 and $3.07 for the first nine months, versus $1.71 and $2.22, respectively. Q3 passenger-ticket revenue rose 6.9%, while onboard and other revenue declined 5.9%. Nine-month passenger-ticket revenue rose 3.6%; onboard and other revenue declined 0.4%.
For the first nine months, net cash from operations was $1.460 billion, investing cash use was $344.8 million, and financing cash use was $1.132 billion. Cash fell $21.5 million to $183.2 million. Capital expenditure purchases of property and equipment were $559.0 million. Dividends paid were $131.9 million.
At September 30, 2014, total debt was $6.986 billion, compared with $8.075 billion at December 31, 2013; net debt was $6.803 billion, compared with $7.870 billion. Net debt-to-capital was 43.0%, down from 47.2%. Liquidity was reported as $1.6 billion, including $183.2 million cash and approximately $1.4 billion available under unsecured credit facilities. Working capital deficit was $2.9 billion, largely reflecting advance passenger receipts and current debt.
Material changes and notable items
- Revenue increased 3.3% in Q3 and 2.5% year to date. Capacity grew 2.3% in Q3 and 2.4% year to date; stronger close-in European and Asian ticket prices were partly offset by weaker Caribbean pricing.
- Q3 operating expenses rose 0.7%; nine-month cruise operating expenses rose 1.0%. Lower interest expense—down 24.5% in both comparisons—also supported earnings.
- The company changed its voyage revenue and cost recognition method to prorate all uncompleted voyages. Management said this increased 2014 net income by $16.3 million in both the quarter and nine-month period; the change was not applied retrospectively.
- Celebrity Century was sold for $220 million in September, with a $17.4 million loss. The company chartered the vessel back through April 2015 to meet existing passenger commitments.
- Pullmantur sold most of its non-core land-tour, travel-agency and air-business interests in March. Related results and the sale impact were reported in Q2; the company retained 19% interests in the businesses and ownership of the aircraft leased to Pullmantur Air.
- Other comprehensive income included a $323.2 million nine-month loss on cash-flow derivative hedges, versus a $56.5 million gain in 2013, primarily reflecting movements in Euro, fuel and LIBOR forward rates. This reduced comprehensive income but is distinct from net income.
Outlook, commentary, risks and contingencies
Management’s 2014 guidance was adjusted diluted EPS of approximately $3.45 for the full year and $0.35–$0.40 for Q4. Full-year reported net-yield growth was forecast at 1.5%–2.0% and constant-currency growth at approximately 2.5%. Q4 reported net-yield growth was forecast at approximately 2% and constant-currency growth at approximately 3.5%. Management said early 2015 bookings, load factors and rates were ahead of the prior year, and expressed comfort with then-current Street consensus adjusted EPS of $4.55; this was not presented as formal company guidance.
Management expected operating cash flows and existing financing arrangements to cover capital expenditures and debt repayments over the next 12 months. Contractual obligations totaled $13.856 billion, including $4.551 billion of ship-purchase obligations. Five company ships were on order, with an aggregate cost of approximately $6.0 billion; anticipated capital expenditures were $1.4 billion in 2014, $1.4 billion in 2015, $2.2 billion in 2016, $0.3 billion in 2017 and $1.5 billion in 2018.
- Fuel-price, foreign-exchange and interest-rate movements affect results. At September 30, fuel hedges covered 52% of projected 2014 fuel consumption, 56% for 2015, 41% for 2016 and 20% for 2017. Management estimated a 10% fuel-price change would affect fuel expense by approximately $10 million under its outlook assumptions.
- Pullmantur goodwill and trademarks totaled $139.5 million and $196.3 million, respectively. Economic uncertainty and planned vessel transfers create impairment sensitivity; management said an impairment was not then warranted but identified a possible charge if projections weaken or vessel transfers do not occur. Annual testing was scheduled for Q4 2014.
- More than 450 crew members submitted individual arbitration demands alleging wage-related violations; claimed damages were indeterminate, and the company said it could not estimate the possible impact. It intended to defend the claims.
- The company guaranteed 50% of a TUI Cruises bank loan with €121.5 million remaining outstanding and reported additional exposure through its TUI investment and lending. Management did not consider guarantee payments probable. Other contingencies include a disputed UK tax characterization of the Brilliance of the Seas lease; potential indemnification was not considered probable, but the maximum amount was not estimable.
- Credit agreements include covenants and change-of-control provisions that could require debt prepayment. The company said it was well within covenant requirements. Its senior unsecured ratings were BB with positive outlook at S&P and Ba1 with stable outlook at Moody’s.
Most important facts for investors to verify
- How much of earnings growth reflects underlying pricing and cost performance versus capacity changes, divestitures, the voyage-accounting change and other adjustments.
- Whether reported and constant-currency yield trends and the Q4 and 2015 booking commentary support the stated outlook.
- Shipbuilding funding requirements, debt maturities, available credit facilities and the sustainability of liquidity given the working-capital deficit.
- Potential Pullmantur impairment exposure, the crew arbitration claims and contingent obligations relating to TUI Cruises and the Brilliance lease.
- The effects of fuel, foreign-exchange and interest-rate movements, including the substantial derivative-related loss recorded in other comprehensive income.