Royal Caribbean Cruises Ltd. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; filed February 22, 2019. The filing is an annual report, not a standalone Q4 filing. Quarterly figures below are unaudited. Amounts are in U.S. dollars unless stated otherwise.
Business context
Royal Caribbean operates Royal Caribbean International, Celebrity Cruises, Azamara Club Cruises and, following its 2018 acquisition, Silversea Cruises. It also holds equity-method interests in TUI Cruises and Pullmantur. Its global and partner brands operated 60 ships with approximately 135,520 berths at year-end, serving more than 1,000 destinations. The brands are reported as one operating segment.
Financial and operating performance
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Total revenue | $9.494 billion | $8.778 billion |
| Operating income | $1.895 billion | $1.744 billion |
| Net income attributable to Royal Caribbean | $1.811 billion | $1.625 billion |
| Diluted EPS | $8.56 | $7.53 |
| Adjusted diluted EPS (non-GAAP) | $8.86 | $7.53 |
| Operating margin | 20.0% | 19.9% |
| Net margin attributable to Royal Caribbean | 19.1% | 18.5% |
| Net cash from operating activities | $3.479 billion | $2.875 billion |
Revenue grew 8.2% year over year. Passenger ticket revenue rose 7.6%, and onboard and other revenue rose 9.6%. Capacity increased 4.0%; occupancy was 108.9%, versus 108.4%. Net yields increased 4.5% reported and 4.4% in constant currency. Net cruise costs excluding fuel per available passenger cruise day increased 4.4% reported and 4.1% in constant currency. Fuel expense was $711 million, or 7.5% of revenue.
Fourth-quarter revenue was $2.332 billion, operating income $364 million, net income attributable to Royal Caribbean $316 million, and diluted EPS $1.50, compared with $2.004 billion, $307 million, $288 million and $1.34, respectively, in Q4 2017.
Investing cash outflow was $4.489 billion, including $3.660 billion in property and equipment purchases and $916 million, net of acquired cash, for Silversea. Financing cash inflow was $1.198 billion. Year-end cash was $288 million. Total debt, including commercial paper and capital leases, was $10.778 billion net of debt issuance costs ($10.984 billion before those costs), compared with $7.539 billion net at year-end 2017.
Year-end liquidity was $1.3 billion, comprising $288 million cash and $1.0 billion available under unsecured credit facilities, net of commercial paper. Working capital was negative $5.9 billion, versus negative $3.9 billion a year earlier; management attributes the recurring deficit in part to advance customer deposits. The company said operating cash flows and financing arrangements were expected to cover capital expenditures and debt repayments over the following 12 months. Debt covenants were reported as comfortably met.
Material changes and unusual items
- Revenue growth reflected higher capacity, ticket prices and onboard spending. Onboard yield grew 5.1% in constant currency, supported by beverage, gaming, shore excursion, specialty dining and Internet initiatives.
- Silversea was acquired on July 31, 2018: Royal Caribbean purchased a 66.7% stake for $1.02 billion in cash plus contingent consideration valued at $44 million. Because of a three-month reporting lag, 2018 consolidated results include only August and September Silversea results: $130 million revenue and $3 million net income. Silversea’s remaining 33.3% interest is subject to put options and is recorded as redeemable noncontrolling interest.
- Adjusted 2018 results exclude, among other items, a $23 million SkySea impairment, $32 million Silversea transaction costs, $11 million tour-business exit costs, and acquisition-related amortization and noncontrolling-interest adjustments. A stock-compensation accounting change increased 2018 net income by $9 million. Adjusted EPS is a non-GAAP measure.
- Operating cash flow increased, while investment outflow rose substantially with ship deliveries and the Silversea acquisition. Gross debt increased year over year; net interest expense rose 11.2% to $334 million.
- Other comprehensive loss was $293 million, compared with $582 million of comprehensive income in 2017, principally reflecting the reversal in fair values of cash-flow hedges.
Outlook, risks and contingencies
Initial 2019 guidance, announced January 30, 2019, called for capacity growth of 8.6%, constant-currency net-yield growth of 6.5%–8.5%, and adjusted diluted EPS of $9.75–$10.00. Reported net-yield growth was forecast at 6.0%–8.0%. Net cruise costs per available passenger cruise day were forecast to rise 5.25%–5.75% reported; costs excluding fuel were forecast to rise 8.25%–8.75% reported. Management said bookings remained consistent with expectations after the guidance announcement, while fuel prices and exchange rates continued to fluctuate. Guidance is sensitive to those factors.
Planned capital spending based on existing ship orders was approximately $2.9 billion in 2019, $3.3 billion in 2020, $2.9 billion in 2021 and $3.4 billion in 2022. Ship purchase obligations were approximately $9.1 billion in the contractual-obligations schedule; the broader estimated cost of orders was $11.4 billion, with $652 million deposited. A sixth Oasis-class ship was ordered in February 2019, subject to conditions and financing.
Key risks include economic or geopolitical shocks that weaken discretionary travel demand; fuel, currency and interest-rate volatility; industry capacity growth and pricing pressure; weather and port-access disruptions; shipyard delivery and construction risks; maritime, environmental and labor regulation; cyber and privacy incidents; and financing or covenant risks. In September 2018, unauthorized access to some employee email accounts was discovered; the company reported no material loss from that incident but cannot assure future incidents will not have material effects. The 2020 global sulfur-emissions limit was not expected by management to have a material effect, partly because of emissions-purification systems, though future regulation could raise costs.
A proposed class action concerning the Travel Protection Program was dismissed with prejudice in November 2018; no appeal was filed. The company stated that other routine industry claims, mostly insured, were not expected to have a material adverse effect. The filing also notes a 50% guarantee of a TUI Cruises bank loan; management did not consider a payment under the guarantee probable.
Important facts for investors to verify
- Compare reported and constant-currency yield and cost trends, and assess whether 2019 guidance was achieved as capacity expanded.
- Review debt maturities, commercial-paper refinancing, credit-facility availability and the effect of higher interest rates on liquidity and interest expense.
- Track Silversea integration, full-year contribution, contingent consideration and potential exercise of the minority-interest put options.
- Assess the funding, delivery timing and returns of the substantial shipbuilding program and related euro exposure.
- Monitor customer deposits, cancellations and bookings, as well as fuel prices, exchange rates, port restrictions and cyber, safety and environmental developments.