Royal Caribbean Cruises Ltd. — Q3 2018 Form 10-Q
Business context and reporting period. Global cruise operator reporting the quarter and nine months ended September 30, 2018, compared with the same periods in 2017. Results include the company’s global brands; Silversea Cruises was acquired July 31, 2018, but its operating results were not yet consolidated in these periods because of a three-month reporting lag.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $2.796bn | $2.570bn | $7.162bn | $6.773bn |
| Operating income | $799.7m | $737.5m | $1.531bn | $1.437bn |
| Operating margin | 28.6% | 28.7% | 21.4% | 21.2% |
| Net income | $810.4m | $752.8m | $1.495bn | $1.337bn |
| Net margin | 29.0% | 29.3% | 20.9% | 19.7% |
| Diluted EPS | $3.86 | $3.49 | $7.05 | $6.19 |
- Q3 revenue increased 8.8% year over year; nine-month revenue increased 5.7%. Management attributed growth primarily to added capacity, higher ticket pricing in Europe and Asia/Pacific, and increased onboard spending.
- Q3 adjusted net income was $836.3m and adjusted diluted EPS was $3.98, versus $752.8m and $3.49 a year earlier. Nine-month adjusted net income was $1.551bn and adjusted diluted EPS was $7.32, versus $1.337bn and $6.19. Adjustments included Silversea transaction costs, SkySea impairment, tour-business exit costs, and the stock-compensation accounting change.
- Q3 net yield rose 1.8% reported (2.6% constant currency); nine-month net yield rose 4.4% (3.8% constant currency). Nine-month net cruise costs per available passenger cruise day rose 3.5% reported and 3.1% constant currency; excluding fuel, the reported increase was 4.4%.
- Operating cash flow for the first nine months was $2.747bn, versus $2.455bn. Investing cash outflow was $3.359bn, including $2.509bn of property and equipment purchases and $916m net cash paid for Silversea. Financing cash inflow was $766m. Cash ended the period at $254.8m.
Balance sheet, debt and liquidity
- At September 30, 2018, total assets were $27.094bn and total liabilities were $15.218bn. Current assets were $1.359bn and current liabilities $7.073bn, producing a $5.7bn working-capital deficit. The filing says this is typical of the cruise business, in part because customers pay before sailing.
- Current and long-term debt totaled approximately $9.176bn on the balance sheet; commercial paper outstanding was $998.8m. Commercial paper carried a 2.73% weighted-average interest rate and approximately 32-day weighted-average maturity. The company reported $1.5bn of liquidity: $254.8m cash and $1.2bn available under unsecured credit facilities, net of commercial paper.
- Customer deposits were $3.112bn. Management expected operating cash flows and financing arrangements to cover capital expenditures and debt repayments over the following 12 months. The company reported that it was well in excess of its debt-covenant requirements.
Material changes, outlook and notable items
- Silversea acquisition: Royal Caribbean acquired 66.7% for $1.02bn cash plus contingent consideration valued at $44m, with potential additional consideration tied to 2019–2020 performance. The preliminary allocation included $1.087bn goodwill and $490.8m intangible assets; the remaining 33.3% is a redeemable noncontrolling interest valued at $537.8m. Acquisition-related costs were $25.9m in Q3 and $30.6m year to date.
- Q3 cost increases reflected capacity growth and fuel: fuel expense rose 13.5% to $182.4m, and fuel cost per metric ton, net of fuel swaps, increased 8.0%. Interest expense also increased, principally because of higher average debt and interest rates.
- SkySea Holding planned to cease operations by year-end 2018. The company recorded a $23.3m impairment in the first quarter; sale of its Golden Era vessel was expected to close in December 2018.
- For full-year 2018, guidance issued October 25 included adjusted diluted EPS of $8.75–$8.85, reported net yield growth of approximately 4.5%, and capacity growth of 4.0%. For Q4, adjusted diluted EPS guidance was $1.45–$1.50, with reported net yield growth of 5.5%–6.0% and capacity growth of 9.7%. Guidance included Silversea. Management cautioned that results are exposed to foreign exchange, fuel prices and interest rates.
- Capital commitments are substantial: ship purchase obligations in the contractual-obligations table totaled $9.843bn, and the reported aggregate cost of company-brand ships on order was $12.2bn, with 54.3% exposed to euro exchange-rate movements. Estimated 2018 capital expenditures were approximately $4.7bn.
- Key risks include demand and pricing sensitivity to economic conditions, fuel and currency volatility, severe weather and operational incidents, capacity and competition, shipyard delivery risks, financing and covenant risks, and regulatory, environmental and cyber risks. The company disclosed unauthorized access to some employee email communications discovered in September 2018; it reported no material losses to date but cannot assure future impact will be immaterial.
- A proposed class action filed in September 2018 challenges marketing and sales of the Travel Protection Program and seeks unspecified damages. The company said it believes it has meritorious defenses and does not expect a material financial impact.
Most important facts for investors to verify
- Whether yield growth and cost-per-capacity guidance were achieved, particularly as fuel, foreign exchange and interest rates changed.
- Silversea’s eventual contribution to results, integration progress, final purchase-price allocation, contingent consideration and any exercise of the seller’s put rights.
- Funding and refinancing needs against substantial ship commitments, short-term commercial paper, and the reported working-capital deficit.
- Progress and financial effects of the SkySea wind-down, including the expected Golden Era sale, and the outcome of the Travel Protection Program litigation.
- Whether the disclosed employee-email incident or other cyber, weather, regulatory or operational risks lead to material costs or disruption.