Royal Caribbean Cruises Ltd. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparisons are with Q1 2015 unless noted. Royal Caribbean operates multiple cruise brands and owns a 50% unconsolidated joint venture, TUI Cruises.
Financial and operating performance
| Metric | Q1 2016 | Q1 2015 | Change / context |
|---|---|---|---|
| Total revenue | $1.918 billion | $1.816 billion | Up 5.6% |
| Operating income | $163.1 million | $105.7 million | Operating margin 8.5%, versus 5.8% |
| Net income | $99.1 million | $45.2 million | Net margin 5.2%, versus 2.5% |
| Diluted EPS | $0.46 | $0.20 | Adjusted diluted EPS: $0.57 versus $0.20 |
| Operating cash flow | $477.9 million | $426.4 million | Up $51.5 million |
| Cash and cash equivalents | $117.4 million | $121.6 million at Dec. 31, 2015 | Quarter-end cash decreased $4.2 million |
| Debt, balance-sheet carrying amounts | $8.702 billion | $8.527 billion at Dec. 31, 2015 | Current and long-term debt combined |
Passenger ticket revenue was $1.378 billion and onboard and other revenue was $539.6 million. Capacity increased 4.7%; occupancy was 105.1%, compared with 105.0%. Net yields rose 3.4% as reported and 7.0% on a constant-currency basis. Net cruise costs per available passenger cruise day (APCD) were $121.03, versus $121.74; excluding fuel, they were $101.94, up from $98.36.
Cash flow from investing activities was a $236.7 million use, primarily reflecting $249.8 million of property and equipment purchases. Financing activities used $246.8 million, including $200.0 million of share repurchases and $162.9 million of dividends, partly offset by debt proceeds. Current assets were $892.3 million and current liabilities $4.398 billion; the company reported a $3.5 billion working-capital deficit, largely associated with customer deposits collected before sailings. Stated liquidity was approximately $0.7 billion: $117.4 million cash and $543.0 million available under unsecured credit facilities.
Material changes versus Q1 2015
- Revenue increased $102.2 million, principally from higher ticket pricing, increased capacity and onboard spending; unfavorable currency movements reduced revenue by $65.3 million.
- Operating income rose $57.4 million. Fuel expense declined $29.4 million in reported results, reflecting lower fuel costs, while payroll, other operating expenses, marketing and depreciation increased.
- Net income included a $21.7 million loss from eliminating the two-month reporting lag for Pullmantur and CDF Croisières de France. The company included November and December 2015 results as well as Q1 2016 results in this quarter. Adjusted net income, which excludes this item and Pullmantur restructuring and initiative costs, was $124.0 million.
- Other comprehensive income was $5.9 million, compared with a $294.0 million loss, mainly because Q1 2015 had substantially larger deferred cash-flow hedge losses.
Outlook, management commentary and risks
Management’s April 29, 2016 guidance, based on then-current fuel prices, interest rates and exchange rates, was:
| Measure | Full-year 2016 | Q2 2016 |
|---|---|---|
| Net yields, reported / constant currency | Up 1.3%–2.8% / 2.5%–4.0% | Approximately flat / up approximately 1.0% |
| Net cruise costs per APCD, reported | Down 1.5%–2.0% | Flat to down 1.0% |
| Net cruise costs per APCD excluding fuel | Up no more than 1.0% | Up 1.5%–2.0% |
| Capacity increase | 6.0% | 5.7% |
| Adjusted diluted EPS | $6.15–$6.35 | Approximately $1.00 |
For 2016, the company estimated depreciation and amortization of $898–$908 million, net interest expense of $282–$292 million, fuel expense of $734 million and fuel consumption of 1.411 million metric tons. It expected 65% of forward fuel consumption to be hedged. Management said operating cash flows and current financing arrangements should cover capital expenditures and debt repayments over the next 12 months.
- Capital commitments: Company ship orders, excluding TUI Cruises, had an aggregate cost of approximately $8.0 billion, with $554.1 million deposited; approximately 58% was exposed to euro exchange-rate movements. Estimated 2016 capital expenditures were $2.4 billion. Contractual obligations totaled $16.8 billion, including $5.75 billion of ship purchase obligations.
- Market and financing risks: Currency, fuel and interest-rate movements affect results. The company had hedged 65% of projected 2016 fuel purchases. Its senior unsecured ratings were BB+ (S&P) and Ba1 (Moody’s); certain long-term interest-rate derivatives may require collateral if ratings remain below specified thresholds at applicable fifth anniversaries. No collateral was required at quarter-end.
- Debt and liquidity: Approximately $3.1 billion of contractual obligations were due through March 31, 2017, including about $0.9 billion of debt maturities, $1.7 billion of ship-related payments and $242.8 million of interest. The company said it was well in excess of its debt covenant requirements at quarter-end.
- Other exposures and unusual items: Royal Caribbean and TUI AG each guaranteed 50% of a TUI Cruises bank loan; the company did not consider a payment under its guarantee probable. Pullmantur’s Latin American retrenchment generated $0.3 million of Q1 restructuring charges; approximately $2.3 million of additional exit costs and $1.9 million of other related costs were expected through year-end.
- Contingencies: A crew wage-arbitration matter was settled in February 2016 for an immaterial amount. Alaska regulators had issued notices alleging emissions violations; the company said it had defenses and did not expect a material adverse effect. Other routine claims were largely insured, and management did not expect a material adverse effect from them.
Important facts for investors to verify
- Reconcile reported versus adjusted earnings, especially the $21.7 million Pullmantur reporting-lag charge and the treatment of initiative costs.
- Check whether yield, cost-per-APCD and adjusted EPS guidance was achieved, and how currency and fuel assumptions changed after April 29, 2016.
- Track ship-delivery spending, financing, euro exposure and the company’s ability to fund substantial contractual obligations while maintaining liquidity.
- Monitor debt maturities, available credit facilities, covenant headroom and any collateral requirements tied to credit ratings or derivative positions.
- Review the effect of repurchases and dividends on cash, leverage and shares outstanding; the filing said $50 million remained under the repurchase authorization after April 2016 purchases.