Royal Caribbean Cruises Ltd. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. The company operates Royal Caribbean International, Celebrity Cruises and Silversea Cruises, and holds a 50% interest in TUI Cruises. Its full fleet returned to service by June 2022 after the COVID-19 suspension.
Financial results
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $2.993 billion | $457 million | $6.237 billion | $550 million |
| Operating income (loss) | $298 million | $(1.006) billion | $(779) million | $(2.839) billion |
| Net income (loss) | $33 million | $(1.425) billion | $(1.656) billion | $(3.904) billion |
| Diluted EPS | $0.13 | $(5.59) | $(6.49) | $(15.56) |
Q3 operating margin was 10.0% and net margin 1.1%, versus losses in the prior-year quarter. For the first nine months, operating and net margins remained negative at approximately 12.5% and 26.5%, respectively. Q3 adjusted net income, a non-GAAP measure, was $66 million; nine-month adjusted net loss was $1.629 billion.
- Operating recovery: Q3 occupancy was 96.3%, compared with 36.4% a year earlier. Nine-month occupancy was 81.2%, versus 35.7%. Q3 passengers carried were 1.71 million, versus 252,000.
- Cash flow: For the nine months, operating cash use was $95 million, investing cash use $2.871 billion, and financing cash provided $1.833 billion. Cash declined $1.136 billion to $1.566 billion.
- Debt and liquidity: Total debt, net of issuance costs, was $23.329 billion at quarter-end; current debt was $3.945 billion. Reported liquidity was $3.1 billion, including $1.6 billion cash, $0.8 billion undrawn revolving capacity and a $0.7 billion term-loan commitment available through August 2023. Weighted-average debt interest rate was 7.19%.
- Capital and balance sheet: Total assets were $33.464 billion and shareholders’ equity $3.205 billion. Nine-month property and equipment purchases were $2.543 billion.
Changes and management commentary
Revenue growth and the move to Q3 profitability primarily reflect the fleet’s return to service, rather than a like-for-like operating comparison. Q3 revenue rose to $2.993 billion from $457 million; management reported that revenue excluding foreign-exchange effects increased $2.6 billion. Nine-month revenue increased to $6.237 billion from $550 million. The company also recorded $74 million of Q3 equity-investment income, compared with a $29 million loss, primarily due to improved results at TUI Cruises.
Costs rose as ships and crews returned to service. Management said Q3 fuel cost per metric ton, net of fuel-swap effects, was up 56% year over year; food and fuel inflation and supply-chain pressures were expected to continue weighing on 2022 costs. It expected ramp-up and health-protocol costs to normalize as occupancy and staffing approached full levels, partly offset by inflation.
Outlook, financing and risks
- Management reported booking volumes in Q3 were significantly above the comparable 2019 period. About 95% of Q3 bookings were new bookings rather than future-cruise-credit redemptions. Guests were booking closer to sailing, and China remained closed to cruising.
- The company expected approximately $3.2 billion of 2022 capital expenditures for its existing ship orders, excluding Partner Brand ships. Global Brand ship orders had an aggregate expected cost of $9.1 billion, with $0.7 billion deposited; delivery timing remains subject to construction delays.
- The company refinanced $6.9 billion of 2022 and 2023 maturities during the first nine months. In October 2022, it issued $2.0 billion of notes due 2029 and used proceeds and cash to redeem 2023 notes. Management said it believed resources were sufficient for obligations for at least 12 months from issuance of the financial statements, while noting liquidity estimates depend on uncertain assumptions. The company was covenant-compliant at September 30 and estimated continued compliance for the next 12 months.
- Debt service and ship commitments remain substantial. The filing lists $4.062 billion of net debt maturities in 2023 as of September 30; the subsequent October financing addressed $2.0 billion of 2023 maturities. The company said it may pursue further financing, refinancing, and cost or capital-expenditure reductions. Dividends and share repurchases remained restricted; none were declared in the period.
- Litigation: In the Havana Docks Helms-Burton case, the court had ruled for the plaintiff on liability. The plaintiff sought approximately $110 million plus attorney fees in October 2022. The company assessed loss as reasonably possible, recorded no liability, and said it would defend and appeal; the outcome could be material.
- Key risks include renewed COVID-19 disruption, weaker discretionary travel demand, inflation in fuel and food, interest-rate and currency movements, shipyard and supply-chain delays, high leverage and refinancing needs, covenant compliance, and potential legal or regulatory costs. Approximately 25% of debt was variable-rate; a hypothetical 1% rate increase was estimated to add about $9.8 million to forecast 2022 interest expense.
Investor facts to verify
- Whether occupancy, booking trends and pricing sustain the recovery, and whether 2022 cost normalization offsets inflation.
- Cash burn, available liquidity, covenant headroom and the execution and cost of future debt refinancing.
- Actual capital spending, ship-delivery schedules and committed financing for newbuilds.
- Developments and potential damages in the Havana Docks litigation, including the court’s final judgment.
- Exposure to variable interest rates, fuel prices and foreign exchange, and the effects of hedging.