Royal Caribbean Cruises Ltd. - 10-Q Summary (Q3 2006)
Business Context and Reporting Period
This report covers the quarterly period ended September 30, 2006, and the nine months ended on that date. Royal Caribbean Cruises Ltd. operates two primary brands: Royal Caribbean International and Celebrity Cruises. The company reported 212,064,644 shares of common stock outstanding as of October 19, 2006.
Key Financial Metrics
| Metric | Q3 2006 | Q3 2005 | 9 Months 2006 | 9 Months 2005 |
|---|---|---|---|---|
| Total Revenues | $1,636.9 million | $1,502.2 million | $4,076.4 million | $3,873.5 million |
| Operating Income | $419.6 million | $400.5 million | $744.9 million | $815.8 million |
| Net Income | $345.4 million | $374.7 million | $587.3 million | $719.6 million |
| Diluted EPS | $1.63 | $1.64 | $2.70 | $3.22 |
| Operating Cash Flow (9mo) | $908.0 million (vs. $983.8 million prior year) | |||
| Net Debt-to-Capital | 41.2% (as of Sept 30, 2006) | |||
| Liquidity | $1.0 billion ($220.5m cash + $0.8m credit facility) |
Material Changes vs. Prior Period
- Revenue Growth: Q3 revenues increased 9.0% year-over-year, driven by a 3.8% increase in Gross Yields and a 5.0% increase in capacity (addition of Freedom of the Seas).
- Profitability Decline: Net income decreased 7.8% in Q3 and 18.4% for the nine-month period. The Q3 decline was partially offset by a $44.2 million gain in Q3 2005 from the redemption of an investment in First Choice Holidays PLC, which did not recur in 2006.
- Cost Pressures: Fuel expenses increased 27.4% in Q3 and 39.8% for the nine months, significantly impacting margins. Net Cruise Costs per APCD increased 4.5% in Q3.
- Accounting Changes: The company adopted SFAS 123R (Share-Based Payment) in 2006, reducing net income by approximately $2.9 million for Q3 and $8.5 million for the nine months.
- Debt Restructuring: The company redeemed $530.6 million of LYONs and called for redemption of zero-coupon convertible notes, most of which were converted to equity rather than redeemed for cash.
Guidance, Outlook, and Risks
- Full Year 2006 Guidance:
- Net Yields expected to increase 3% to 4% vs. 2005.
- Net Cruise Costs per APCD expected to increase ~6% (fuel accounts for ~3.9 percentage points).
- Depreciation and amortization expected between $420 million and $425 million.
- Net interest expense expected between $265 million and $270 million.
- EPS Guidance: $2.90 to $2.95 (includes Pullmantur acquisition impact).
- Q4 2006 Outlook: Net Yields expected to show year-over-year increases consistent with Q3. Net Cruise Costs per APCD expected to decrease ~4%. EPS expected in the range of $0.20 to $0.25.
- Acquisition: Agreed to acquire Pullmantur S.A. for approximately $559 million plus assumption of ~$351 million debt. Closing expected mid-November 2006.
- Risks and Contingencies:
- Legal: Pending class actions regarding crew wages and intellectual property; a $193 million jury award in a Legionnaires' disease case is subject to appeal.
- Capital Expenditures: $5.3 billion in ship orders outstanding; anticipated capex of $1.2 billion for 2006.
- Market Risks: Exposure to fuel price volatility, foreign exchange fluctuations (10.5% of ship costs exposed to Euro), and potential changes in ownership triggering debt prepayment clauses.
Investor Verification Checklist
- Fuel Hedging Effectiveness: Verify the extent of fuel swap agreements and the sensitivity of future margins to the current $388/ton fuel price.
- Pullmantur Integration: Assess the financial impact and integration risks of the pending $559 million acquisition of Pullmantur.
- Legal Exposure: Monitor the status of the $193 million Legionnaires' disease verdict and the crew wage class actions for potential cash outflows.
- Debt Covenants: Confirm continued compliance with debt covenants, particularly the debt-to-capital ratio, given the high level of capital expenditures.
- Share Dilution: Review the impact of the conversion of zero-coupon notes and the ASR transaction on future earnings per share.