Royal Caribbean Cruises Ltd. — FY2010 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended December 31, 2010; it is an annual report, not a standalone Q4 filing. Royal Caribbean operated 40 ships across five wholly owned brands, with approximately 92,300 berths reported at year-end, and held a 50% interest in the TUI Cruises joint venture. The company reports as one operating segment.
Financial results and key metrics
| Metric | FY2010 | FY2009 |
|---|---|---|
| Total revenue | $6.753 billion | $5.890 billion |
| Operating income | $802.6 million | $488.5 million |
| Net income | $547.5 million | $162.4 million |
| Diluted EPS | $2.51 | $0.75 |
| Operating margin | 11.9% | 8.2% |
| Net margin | 8.1% | 2.7% |
| Operating cash flow | $1.663 billion | $844.9 million |
| Capital expenditures | $2.187 billion | $2.478 billion |
| Total debt, including capital leases | $9.150 billion | $8.420 billion |
| Cash and cash equivalents | $419.9 million | $284.6 million |
- Revenue rose 14.6%, reflecting an 11.1% increase in available passenger cruise days (APCD) and a 4.2% increase in Net Yields. Occupancy improved to 104.3% from 102.5%.
- Net Cruise Costs per APCD declined 1.8%; fuel expense per APCD, net of fuel swaps, declined 3.0%. Total operating expenses increased with capacity.
- Results included an approximately $89 million net gain from settlement of the Rolls Royce case. Interest expense, net, increased to $339.4 million from $300.0 million.
- Liquidity was approximately $1.6 billion, including cash and $1.2 billion available on unsecured revolving facilities. Working capital deficit widened to $2.4 billion from $1.7 billion.
- Net debt-to-capital rose to 52.4% from 52.0%; debt-to-capital rose to 53.5% from 52.9%. The company reported it was well within its debt covenants.
- No common dividends were declared in 2010 or 2009; the quarterly dividend was discontinued in Q4 2008.
Q4 2010 supplemental results
Fourth-quarter revenue was $1.604 billion versus $1.452 billion in Q4 2009; operating income was $121.7 million versus $82.4 million; and net income was $42.7 million versus $3.4 million. The filing does not provide a separate Q4 cash-flow figure in the supplied text.
Material changes versus the prior comparable period
FY2010 marked a recovery from the weak FY2009 comparison: revenue, operating income, net income, EPS, occupancy, and operating cash flow improved. Management attributed revenue gains to capacity additions, higher ticket prices, better occupancy, improving demand, and the strong performance of newer ships. Currency movements partly offset revenue gains. Debt increased by approximately $730 million, while cash increased by approximately $135 million. Capacity additions included Allure of the Seas and Celebrity Eclipse; capital spending remained substantial.
Guidance, outlook, risks, contingencies, and unusual items
- 2011 outlook, as announced January 27, 2011: Net Yields expected to rise 4%–6% (4%–5% constant currency); Net Cruise Costs per APCD expected to rise about 2% (1%–2% constant currency); capacity expected to increase 7.4%; diluted EPS forecast at $3.25–$3.45, assuming stated fuel and exchange-rate conditions. Fuel prices and currency rates had moved significantly since the announcement, and management cautioned forecasts could change.
- Management expected 2011 operating cash flows, existing facilities, and financing arrangements to cover scheduled maturities and obligations; it did not foresee a need to access capital markets during 2011, though it could do so opportunistically. Debt maturities included approximately $1.199 billion in 2011.
- Planned commitments included two Celebrity Solstice-class ships costing approximately $1.8 billion in aggregate, with delivery expected in 2011 and 2012. A conditional agreement announced in February 2011 contemplated a new Royal Caribbean ship for 2014, subject to conditions including financing.
- Key risks include discretionary-spending and booking weakness, industry capacity and pricing pressure, fuel and foreign-exchange volatility, high debt and refinancing/covenant risk, shipbuilding or repair delays, regulatory and environmental cost increases, safety or disease events, and international-market exposure, particularly Spain.
- Fuel hedging covered approximately 58% of projected 2011 requirements at year-end; management estimated a 10% fuel-price change would affect 2011 fuel expense by about $28 million after hedges. Future sulfur-emissions requirements could materially increase costs, particularly the 0.1% ECA limit scheduled for 2015.
- Material disclosed claims included Puerto Rico distributorship counterclaims seeking substantial damages and crew gratuity claims with estimated class damages exceeding $200 million. The company disputed the claims; it stated that, under then-current circumstances, the crew matter was no longer considered material. Most arbitration demands had been dismissed, with five pending determination.
- Pullmantur goodwill and trademarks were not impaired, but their valuation depended on estimates and the Spanish economy; a weaker or slower recovery could trigger impairment. The company also identified uncertainty around recoverability of Pullmantur deferred tax assets.
Important facts for investors to verify
- Whether booking trends, pricing, occupancy, and 2011 Net Yield guidance were achieved, and how much performance depended on new-ship capacity.
- Debt maturities, available revolver capacity, covenant headroom, and funding for ship commitments; assess the working-capital deficit in light of advance customer deposits.
- Actual fuel costs and hedge outcomes, interest-rate exposure, and foreign-currency effects versus management’s assumptions.
- Potential outcomes and financial exposure from the Puerto Rico claims, crew claims, and Brilliance of the Seas lease-related indemnities.
- Pullmantur’s performance and the assumptions supporting its goodwill, trademark, and deferred-tax-asset valuations.
- The $89 million Rolls Royce settlement gain and other nonrecurring items when assessing recurring earnings. PwC issued an unqualified audit opinion and reported effective internal control over financial reporting as of December 31, 2010.