Royal Caribbean Cruises Ltd. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. The company operates multiple cruise brands, including Royal Caribbean International, Celebrity Cruises and Pullmantur, and owns a 50% joint venture interest in TUI Cruises. Amounts below are in U.S. dollars unless noted.
Financial performance and position
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenue | $2.523 billion | $2.389 billion | $6.397 billion | $6.256 billion |
| Operating income | $258.0 million | $529.5 million | $625.0 million | $822.5 million |
| Net income | $228.8 million | $490.2 million | $459.0 million | $654.4 million |
| Diluted EPS | $1.03 | $2.19 | $2.08 | $2.93 |
| Adjusted net income and diluted EPS | $628.1 million; $2.84 | $492.9 million; $2.20 | $858.3 million; $3.88 | $685.7 million; $3.07 |
Q3 reported operating margin was 10.2%, versus 22.2% a year earlier; the 2015 result included a $411.3 million Pullmantur impairment charge. Excluding the impairment and related tax benefit, adjusted earnings rose year over year. The company reported a $399.3 million net impairment loss after a $12.0 million deferred tax benefit.
- Revenue and operating drivers: Q3 revenue rose 5.6%; capacity increased 6.7%. Constant-currency net yields increased 5.1% in Q3 and 3.1% for the nine months, while reported net yields were flat in Q3 and down 1.5% year to date.
- Costs: Q3 cruise operating expenses fell 2.8%, helped by lower fuel prices and favorable currency effects despite higher capacity. Net cruise costs per available passenger cruise day (APCD) fell 7.5% in Q3 and 5.9% for the nine months; constant-currency decreases were 5.2% and 3.5%, respectively.
- Cash flow: Nine-month operating cash flow was $1.608 billion, investing cash outflow was $1.470 billion, and financing cash outflow was $171 million. Cash declined $41.8 million to $147.4 million. Property and equipment purchases were $1.361 billion.
- Debt and liquidity: At September 30, current and long-term debt totaled approximately $8.490 billion. Cash was $147.4 million; reported liquidity was approximately $1.0 billion, including $858 million available under credit facilities. Working capital deficit was $3.5 billion, largely reflecting customer deposits and current debt; management said advance ticket receipts are typical in the industry and expected operating cash flows and financing arrangements to cover needs over the next 12 months.
- Other measures: Occupancy was 107.5% in Q3 and 105.8% for the nine months. Derivative liabilities had a reported fair value of $925.2 million, while derivative assets were $113.3 million; the company had not been required to post collateral as of quarter-end.
Material changes versus comparable periods
- Revenue increased, supported by higher capacity, ticket pricing and onboard spending. Currency movements reduced revenue by $126.5 million in Q3 and $302.7 million for the nine months versus 2014.
- GAAP earnings declined substantially because of the Pullmantur impairment. The impairment eliminated the brand’s recorded goodwill and trademarks and trade names. Adjusted earnings increased in both comparison periods.
- Fuel expense declined as fuel prices fell; the company reported net fuel price decreases of 14.2% per metric ton in Q3 and 15.5% for the nine months versus 2014.
- Interest expense rose 11.2% in Q3 and 10.1% for the nine months, primarily due to higher average debt associated with new ships.
- The company changed voyage revenue and expense recognition to prorate all voyages beginning in 2014. Management estimated this change reduced 2015 net income versus the comparable periods by $31.7 million in Q3 and $53.2 million for the nine months.
Outlook, commentary and risks
- 2015 guidance, announced October 23: Adjusted diluted EPS of approximately $4.80 for the full year and $0.90 for Q4. Full-year net yields were forecast down approximately 1.0% as reported and up approximately 3.5% at constant currency; Q4 net yields were forecast up 1.3%–1.8% as reported and 4.5%–5.0% at constant currency.
- Full-year net cruise costs per APCD were forecast down approximately 6.5% as reported and 4.5% at constant currency; Q4 costs were forecast down approximately 8.5% and 7.5%, respectively. Full-year capacity growth was forecast at 5.4%. Guidance was based on fuel prices, interest rates and exchange rates at the time and is forward-looking.
- Pullmantur: Weak Latin American economies and currency depreciation, including an approximately 22% decline in the Brazilian real against the U.S. dollar during Q3, led management to reduce Latin American exposure, refocus on Spain and shrink the fleet. The company redeployed Empress to Royal Caribbean International and canceled the planned transfer of Majesty of the Seas to Pullmantur.
- Investment and commitments: The company had approximately $5.0 billion of ship orders at quarter-end, excluding Project Edge and TUI Cruises orders; 43.7% of that aggregate cost was exposed to euro fluctuations. Estimated capital expenditures were $1.6 billion in 2015 and $2.3 billion in 2016. October 2015 agreements made two Project Edge ship orders effective.
- Capital return: In October 2015, the board authorized up to $500 million of share repurchases; a $200 million accelerated repurchase agreement was executed. The company also declared a $0.375 per-share dividend in September, paid in Q4.
- Contingencies and risk: Approximately 575 crew members have brought individual wage-related arbitration demands; the company cannot estimate the potential impact and disputes the claims. Alaska regulators issued notices alleging emissions-standard violations; management does not expect a material adverse impact. The company guarantees 50% of a TUI Cruises bank loan, with approximately €142.7 million outstanding; management did not consider a guarantee payment probable. Debt covenants include minimum net worth, fixed-charge coverage and leverage tests, all of which the company said it exceeded.
Important facts for investors to verify
- Whether Pullmantur’s revised strategy and impairment assumptions adequately reflect ongoing economic, currency and fleet risks.
- Whether 2015 guidance assumptions for pricing, capacity, fuel, foreign exchange and costs were achieved; the guidance was not a guarantee of results.
- Funding, delivery schedules and foreign-exchange exposure for the newbuild program, alongside debt maturities and capital spending.
- Derivative valuations, potential collateral triggers and the effects of fuel and currency hedges on earnings and cash flows.
- Potential outcomes of crew arbitrations, Alaska notices and guarantees or other commitments involving joint ventures.
- The ultimate cost, timing and share-count impact of the $500 million repurchase authorization and $200 million accelerated repurchase.