Royal Caribbean Cruises Ltd. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. The company operates multiple cruise brands and has a 50% investment in unconsolidated joint venture TUI Cruises. Amounts below are in U.S. dollars; financial statement amounts are shown in millions unless stated otherwise.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Total revenue | $2,311.7 | $2,226.4 | $6,105.7 | $5,881.9 |
| Operating income | $444.2 | $452.1 | $723.2 | $684.4 |
| Operating margin | 19.2% | 20.3% | 11.8% | 11.6% |
| Net income | $365.7 | $367.8 | $466.7 | $411.1 |
| Net margin | 15.8% | 16.6% | 7.6% | 7.0% |
| Diluted EPS | $1.65 | $1.68 | $2.11 | $1.87 |
| Adjusted diluted EPS | $1.71 | $1.68 | $2.18 | $1.87 |
Q3 adjusted net income was $377.9 million; nine-month adjusted net income was $480.6 million. The company defines these non-GAAP measures as excluding restructuring charges.
- Revenue and yields: Revenue increased 3.8% in both comparison periods. Management attributed growth to ticket pricing, onboard spending, capacity, and Pullmantur travel agency and air charter activity. Net yields rose 2.6% in Q3 and 2.6% for nine months (2.9% for nine months on a constant-currency basis).
- Costs: Cruise operating expenses increased 5.1% in Q3 and 3.2% for nine months. Net cruise costs per available passenger cruise day (APCD) increased 3.7% in Q3 and 1.7% year to date. Higher crew, food, capacity, and other expenses contributed; Q3 costs also included restructuring charges.
- Cash flow: Nine-month operating cash flow was $1,230.1 million, versus $1,172.3 million. Investing cash outflow was $578.4 million, including $534.0 million of property and equipment purchases and $60.4 million invested in unconsolidated affiliates. Financing cash outflow was $637.6 million. Cash increased $14.7 million to $209.6 million.
- Debt and liquidity: Total debt was $7,923.8 million at September 30, down from $8,489.9 million at December 31, 2012; net debt was $7,714.2 million. Net debt-to-capital was 46.8%, compared with 50.0%. Reported liquidity was $2.6 billion, comprising $209.6 million of cash and $2.4 billion available under unsecured credit facilities. Working capital deficit was $3.8 billion, including $1.9 billion of current debt maturities.
- Capital commitments: Ships on order had an aggregate cost of approximately $4.7 billion, with $335.7 million deposited. Estimated capital expenditures were $0.7 billion for 2013, $1.2 billion each for 2014 and 2015, and $2.0 billion for 2016.
Material changes versus comparable periods
- Q3 revenue growth did not translate into higher operating or net income: operating income fell to $444.2 million from $452.1 million and net income to $365.7 million from $367.8 million. Nine-month operating income and net income increased year over year.
- Q3 ticket revenue rose 2.3%; onboard and other revenue rose 8.2%. The filing cites stronger European ticket demand and higher per-passenger onboard spending, partly offset by unscheduled drydocks of Celebrity Millennium and Grandeur of the Seas.
- Interest expense declined in both periods, partly reflecting lower interest rates, while average debt was higher. The company recorded a $4.2 million loss in 2013 on repurchasing $21.0 million of senior notes; the comparable 2012 extinguishment loss was $7.5 million.
- A prospective depreciation estimate change for five ships increased operating and net income by $3.4 million in Q3 and $7.2 million for nine months. Management estimated a full-year 2013 benefit of approximately $11 million, or $0.05 per share.
- Restructuring charges were $12.2 million in Q3 and $13.9 million for nine months; there were none in the comparable 2012 periods.
Outlook, commentary, risks and contingencies
- 2013 guidance: Full-year adjusted diluted EPS of $2.30–$2.35; Q4 adjusted diluted EPS of $0.15–$0.20. Full-year net yields were forecast to increase 2%–3% as reported (approximately 3% constant currency); Q4 net yields were forecast to rise approximately 2% as reported and 2%–3% constant currency. Management cited uncertainty about remaining profitability-program costs as the reason for providing adjusted rather than GAAP EPS guidance.
- Costs and fuel: Full-year 2013 fuel expense guidance was $920 million, with 63% of forecast consumption hedged; Q4 fuel expense was forecast at $230 million, also 63% hedged. Management estimated an $8 million impact from a 10% change in fuel prices.
- 2014 commentary: Management said the order book was ahead on load factor and rate and expected a fifth consecutive year of yield growth. Most markets and products showed year-over-year improvement, while advance Caribbean bookings were described as somewhat weaker. Current adjusted EPS estimates were consistent with Street consensus of $3.06; this is management commentary, not formal numerical guidance.
- Liquidity and refinancing: Management expected operating cash flows and financing arrangements to cover capital expenditures and debt repayments over the next twelve months. Approximately $1.9 billion of debt and $745.1 million of other contractual obligations were due through September 30, 2014. The company reported it was well within its debt covenant requirements.
- Newbuilds and currency: Six ships across the company and TUI Cruises were on order, with total planned capacity of 22,850 berths. Approximately 45.0% of ship-order costs were exposed to euro fluctuations at quarter-end; after October hedges, management reported exposure of approximately 36.7% as of the filing date.
- Impairment and legal matters: Pullmantur’s Spanish, Portuguese and Latin American markets remained subject to economic uncertainty. The company reported $149.4 million of Pullmantur goodwill and $210.4 million of trademarks and trade names, and warned that weaker projected cash flows, particularly net yields, could require further impairment. A securities class action was dismissed with prejudice and closed; a separate crew wage class action remained on appeal, with potential impact not estimable from the filing.
- Other risks: The filing highlights demand and economic conditions, fuel and foreign-exchange rates, interest rates, competition, safety incidents, regulation, ship construction or repair delays, and litigation. A change-of-control event could trigger accelerated debt repayment. Management said potential guarantees and indemnification payments described in the filing were not considered probable under current circumstances.
Key facts for investors to verify
- Whether 2013 adjusted EPS and yield guidance was achieved, and how actual results compared with the stated ranges.
- Whether operating cash flow and available credit were sufficient to manage near-term maturities, ship spending, and the reported working capital deficit.
- Execution, financing, delivery timing, and foreign-exchange exposure of the $4.7 billion ship order book.
- Pullmantur’s operating performance and the outcome of the fourth-quarter 2013 impairment review.
- Progress and total costs of the profitability program, including the estimated $26 million of remaining cash outlays and expected savings.
- Developments in the crew wage appeal and any changes to the disclosed guarantees, lease-related contingencies, or debt covenant position.