Royal Caribbean Cruises Ltd. — 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2020. Royal Caribbean operates Royal Caribbean International, Celebrity Cruises, Azamara and Silversea; it also holds a 50% interest in the TUI Cruises joint venture. Global-brand sailings were voluntarily suspended from March 13, 2020, through at least December 31, 2020, except for sailings from Singapore.
Financial performance and position
| Metric | Q3 2020 | Nine months 2020 |
|---|---|---|
| Revenue | $(33.7) million; $3,186.9 million in Q3 2019 | $2,174.7 million; $8,433.2 million in 2019 |
| Operating income (loss) | $(996.1) million; $890.8 million in Q3 2019 | $(3,585.0) million; $1,783.3 million in 2019 |
| Net income (loss) attributable to RCL | $(1,346.8) million; diluted EPS $(6.29) | $(4,430.5) million; diluted EPS $(21.01) |
| Operating cash flow | Not separately presented for the quarter | $(2,906.3) million; $3,107.1 million provided in 2019 |
Q3 revenue was negative because activity was nearly halted and included a $67.9 million correction to previously recognized cancellation revenue. Q3 passengers carried were 1,230 versus 1.73 million a year earlier. The filing reports Q3 total cruise operating expenses of $308.6 million and interest expense, net, of $259.3 million. No conventional revenue margin comparison is meaningful given the near-total suspension and negative reported revenue.
Nine-month impairment and credit-loss charges were $1,354.5 million, including impairments of Silversea goodwill ($576.2 million), its trade name ($30.8 million), ships and other long-lived assets, and credit-loss provisions. Q3 charges were $89.9 million, primarily for construction-in-progress projects. Total debt, net of issuance costs, was $18.89 billion at September 30, compared with $11.03 billion at December 31, 2019; the weighted-average interest rate rose to 6.00% from 3.99%.
Cash and cash equivalents were $3.02 billion. Reported liquidity was approximately $3.7 billion, including a $700 million one-year term-loan commitment. Revolving credit facilities were fully utilized, including amounts drawn and letters of credit. Current liabilities were $4.63 billion, including $1.82 billion of customer deposits. Shareholders’ equity was $8.33 billion.
Changes, outlook and management commentary
- Revenue and operating results deteriorated sharply from 2019 as sailings were cancelled; operating-expense reductions did not offset lost revenue and fixed costs. Nine-month interest expense rose to $571.1 million from $313.8 million in 2019, partly due to new borrowing and the extinguishment of debt.
- The company estimated monthly cash burn of approximately $250 million–$290 million during a prolonged suspension. The estimate excludes cash refunds of customer deposits, commissions, debt obligations and cash inflows from bookings. Q3 cash spend was approximately $1.1 billion.
- Management withdrew 2020 guidance and said it could not reasonably estimate the pandemic’s impact. It expected a GAAP and adjusted net loss for Q4 and full-year 2020. Management believed available liquidity would cover requirements for at least 12 months from issuance of the statements, but highlighted substantial uncertainty.
- Management planned a phased restart, with reduced occupancy, modified itineraries and enhanced health protocols. Limited operations had resumed outside the U.S.; the company anticipated Quantum of the Seas would sail from Singapore in December 2020. The CDC’s Conditional Sailing Order introduced testing, simulated-voyage, certification and port-approval requirements; timing, cost and implementation remained uncertain.
- Liquidity actions included new debt, covenant relief, debt-amortization deferrals, cost reductions and approximately $4.2 billion of capital-expenditure reductions or deferrals identified for 2020–2021. In October, the company issued $575 million of convertible notes and 9.6 million shares for approximately $575 million gross proceeds ($557.4 million net). The minimum-liquidity covenant was reduced from $500 million to $350 million after October capital raising.
- Dividends and share repurchases were restricted during covenant-waiver periods; no dividend was declared in Q2 or Q3. The company disclosed credit-rating downgrades, potential additional collateral needs, and risks of further covenant restrictions or default if waivers cannot be maintained.
Risks, contingencies and unusual items
- COVID-19-related operating suspensions, weak bookings, customer refunds, regulatory restrictions and restart costs may continue to materially affect revenue, cash flow and liquidity. Approximately half of September 30 customer deposits were future cruise credits; about half of guests on cancelled sailings had requested cash refunds.
- Debt and contractual commitments are substantial: the filing lists $18.29 billion of debt obligations, $3.84 billion of future interest and $11.30 billion of ship-purchase obligations. Shipyard delays and future delivery timing remained under discussion.
- Potential collateral requirements included up to approximately $75 million under credit-card processing agreements, approximately $80 million under surety agreements, and $181.1 million for the Port of Miami terminal lease. The company also identified possible additional derivative collateral needs.
- Pullmantur entered Spanish reorganization; RCL suspended equity-method accounting and recorded related credit losses, settlement costs and currency-translation losses. The company acquired the remaining 33.3% of Silversea in July for 5.2 million shares, with no gain or loss recognized.
- Two shareholder securities class actions filed in October allege COVID-19-related misrepresentations and seek unspecified damages. A Cuban port-related action was dismissed for lack of standing, subject to possible appeal; a separate Havana Docks action remained pending. Management said it believed the claims were without merit but acknowledged litigation could be costly and material.
Important facts for investors to verify
- Whether sailings resume on the anticipated timetable and what CDC, government and port requirements will cost.
- Actual cash burn, refund requests, customer-deposit conversion to revenue or refunds, and the availability of additional financing.
- Compliance with minimum-liquidity covenants and the ability to maintain waivers, meet debt service and obtain any further lender relief.
- Debt maturities, interest costs, shipbuilding commitments and the effects of delivery delays or further capital-spending changes.
- Whether additional asset impairments, collateral postings or material litigation developments arise.