Royal Caribbean Cruises Ltd. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. Royal Caribbean is a global cruise company operating several cruise brands and holding a 50% interest in the unconsolidated TUI Cruises joint venture. Financial statements are unaudited and prepared under U.S. GAAP.
Financial and operating performance
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Total revenue | $1.887 billion | $1.911 billion |
| Operating income | $97.5 million | $165.6 million |
| Operating margin | 5.2% | 8.7% |
| Net income | $26.5 million | $76.2 million |
| Diluted EPS | $0.12 | $0.35 |
| Operating cash flow | $315.8 million | $241.3 million |
| Cash and cash equivalents, quarter-end | $216.5 million | $215.9 million |
Passenger ticket revenue fell 3.3% to $1.348 billion; onboard and other revenue grew 4.2% to $539.0 million. Net Yield declined 2.7% reported and 0.3% at constant currency. Occupancy was 104.5%, versus 104.9%; capacity, measured by available passenger cruise days, increased approximately 0.5%.
Cruise operating expenses rose 1.7% to $1.304 billion. Fuel expense was $244.5 million, compared with $241.7 million. Marketing, selling and administrative expense increased 5.9% to $290.3 million. Interest expense, net of capitalized interest, declined 24.0% to $68.6 million. Adjusted net income, a non-GAAP measure, was $46.1 million, or $0.21 diluted EPS, versus $78.2 million, or $0.35.
Comprehensive loss was $26.0 million, principally reflecting $52.9 million of losses on cash-flow derivative hedges. Net cash used in investing was $197.4 million, including $177.8 million of property and equipment purchases. Net cash used in financing was $107.5 million, including $76.3 million of dividends.
Balance sheet and liquidity
At March 31, 2014, total debt was $7.997 billion, cash was $216.5 million, and net debt was $7.781 billion. Net debt-to-capital was 47.0%, compared with 47.2% at December 31, 2013. Shareholders’ equity was $8.777 billion. Reported liquidity was $918.5 million, comprising cash and $702.0 million available under unsecured credit facilities.
Working capital deficit was $2.4 billion, down from $3.3 billion at year-end, mainly because current debt maturities declined. The company notes that advance customer ticket receipts are a normal source of working capital funding. Management expected operating cash flows and existing financing arrangements to cover capital expenditures and debt repayments over the next 12 months.
Material changes and significant items
- Revenue declined 1.3%; management attributed the decrease mainly to unfavorable currency movements, voyage disruptions, and lower Caribbean ticket prices.
- Operating income fell approximately 41% and net income approximately 65% year over year. Management cited cost increases, including vessel maintenance and Pullmantur-related expenses, alongside weaker ticket revenue. Lower interest expense partly offset the decline.
- In January, the company borrowed $380 million under a term loan due in 2018 and repaid €745 million of 5.625% notes due January 2014, using the term loan and revolving credit facilities. It also amended certain term loans to reduce margins and lender exit rights.
- Pullmantur sold most of its non-core land-tour, travel-agency and air-business interests on March 31. Because Pullmantur results are consolidated on a two-month lag, the sale impact was to be reported in Q2. The company expected a $6–$9 million net loss in Q2.
- Q1 restructuring charges were $1.7 million. Separate costs associated with profitability initiatives were included in other expense lines; adjusted earnings exclude specified restructuring and initiative costs and estimated effects of the businesses held for sale.
Outlook, risks and contingencies
Management’s 2014 guidance was 2%–3% Net Yield growth, flat to 1% growth in Net Cruise Costs per available passenger cruise day, and diluted adjusted EPS of $3.25–$3.45. For Q2 2014, guidance was 1.5%–2.5% Net Yield growth and diluted adjusted EPS of $0.45–$0.55. These are management estimates and non-GAAP measures; the filing notes that projected Net Yield and cost measures are not quantitatively reconciled to GAAP measures.
Four Royal Caribbean ships were on order, with an aggregate cost of approximately $4.8 billion and $483.2 million deposited; about 23.9% of the cost was exposed to euro exchange-rate fluctuations. The company estimated capital expenditures of $1.3 billion in 2014, $1.3 billion in 2015 and $2.1 billion in 2016. It expected approximately $30 million of remaining cash outlays for profitability initiatives, mostly through year-end 2014.
Key exposures include fuel prices, interest rates, foreign currency movements, shipbuilding commitments and Pullmantur’s operating outlook. Pullmantur had $152.2 million of goodwill and $214.2 million of trademarks and trade names; management said relatively modest changes in projections, particularly failure to transfer planned vessels to Pullmantur, could lead to impairment. The company also disclosed potential contingent exposures involving a UK ship lease, guarantees for TUI Cruises debt, and change-of-control provisions that could accelerate debt. Management said it was in compliance with debt covenants and did not consider the cited guarantee or lease indemnity payments probable. The wage-related class action had been dismissed and the dismissal affirmed on appeal; the company said it could not estimate any possible impact.
Important facts for investors to verify
- Whether the expected Q2 and full-year yield, cost and adjusted EPS guidance was achieved, and the assumptions underlying these non-GAAP measures.
- Whether the Pullmantur sale produced the expected $6–$9 million Q2 loss and whether its remaining assets or investments require impairment.
- Funding, financing availability and currency exposure for the $4.8 billion ship order book and planned capital spending.
- Trends in ticket pricing, voyage disruptions, customer deposits, operating costs and cash generation.
- Debt maturities, credit-facility capacity, covenant headroom, and exposure to floating interest rates, fuel prices and foreign exchange.