Royal Caribbean Cruises Ltd. — Q3 2010 Form 10-Q
Business context and period. Global cruise operator with five cruise brands and a 50% investment in TUI Cruises. This unaudited filing covers the quarter and nine months ended September 30, 2010; comparisons are with the corresponding 2009 periods. Results are seasonal and interim results may not indicate full-year performance.
Financial performance
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Total revenue | $2,060.7 | $1,763.5 | $5,148.0 | $4,438.2 |
| Operating income | $445.5 | $306.8 | $680.9 | $406.2 |
| Operating margin | 21.6% | 17.4% | 13.2% | 9.2% |
| Net income | $356.8 | $230.4 | $504.8 | $159.1 |
| Net margin | 17.3% | 13.1% | 9.8% | 3.6% |
| Diluted EPS | $1.64 | $1.07 | $2.32 | $0.74 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $1,435.9 | $663.8 |
- Q3 revenue rose 16.8%; capacity (APCD) increased 12.7% and Net Yields increased 5.2% (7.2% at constant currency). Occupancy was 107.3%, versus 105.4%.
- For the first nine months, revenue increased 16.0%; capacity rose 12.1% and Net Yields rose 4.4%. Occupancy was 104.7%, versus 103.0%.
- Net Cruise Cost per APCD declined 2.3% in Q3 and 2.5% for the nine months; reported net cruise costs increased as capacity expanded.
- Fuel expense was $164.8 million in Q3 and $483.8 million for the nine months. Interest expense, net, was $82.5 million and $250.3 million, respectively.
Balance sheet, debt and liquidity
- At September 30, 2010, cash and cash equivalents were $441.9 million; total debt was $8.085 billion, including $1.105 billion current and $6.980 billion long-term. Total debt was $8.420 billion at December 31, 2009.
- Net debt was $7.643 billion, compared with $8.135 billion at year-end 2009. Net debt-to-capital improved to 49.3% from 52.0%; debt-to-capital was 50.7% versus 52.9%.
- Reported liquidity was $1.3 billion, consisting of $441.9 million cash and $870 million available under the unsecured revolving credit facility. Working capital deficit widened to $2.4 billion from $1.7 billion at year-end.
- Nine-month investing cash outflow was $939.4 million, including $925.8 million of property and equipment purchases. Financing cash outflow was $341.3 million, reflecting $1.081 billion of debt proceeds and $1.378 billion of repayments. Cash increased $157.3 million over the period.
- Management said it was in compliance with debt covenants. Net worth was $7.9 billion against a $5.4 billion minimum; net debt-to-capital was below the 62.5% maximum.
Material changes and unusual items
- Q3 revenue and earnings benefited from higher ticket prices, occupancy, and capacity, including Oasis of the Seas and Celebrity Eclipse. Management cited improving market conditions and the absence of Q3 2009 H1N1-related itinerary and demand effects.
- Nine-month 2010 results included an $85.6 million one-time gain from the Rolls-Royce settlement over recurring Mermaid pod failures. The company received $68 million net and expects a further $20 million within five years. This materially contributed to the year-over-year net income increase.
- In April 2010, the company borrowed $566.1 million to finance Celebrity Eclipse, under a 12-year term loan guaranteed 95% by Germany’s export credit agency. On October 26, it borrowed $1.1 billion, guaranteed 95% by Finland’s export credit agency, to finance Allure of the Seas.
- Pullmantur’s goodwill and trademarks/trade names were $482 million and $230 million. The company found no impairment in its Q3 interim review but warned that relatively minor adverse changes in assumptions could lead to impairment. Pullmantur’s deferred tax assets were approximately $33 million.
Outlook, risks and contingencies
- Q4 2010 guidance: Net Yields expected to rise 4%–5% (about 5% at constant currency); Net Cruise Costs per APCD expected to rise about 2% (3% constant currency). Expected diluted EPS was $0.08–$0.12, assuming fuel prices remained at then-current levels. Operational disruptions on Pacific Dream and Celebrity Century reduced EPS guidance by about $0.05.
- Full-year 2010 guidance: Net Yields expected to increase 4%–5%; Net Cruise Costs per APCD expected to decrease about 1%. Expected diluted EPS was $2.43–$2.47. Capacity was expected to increase 11%. Fuel was approximately 50% hedged; management estimated a 10% fuel-price change would alter full-year fuel expense by about $9 million after hedges.
- 2011 commentary: Management’s early view was for full-year Net Yield growth at a similar proportion to 2010 and Q1 2011 Net Yield improvement of 2%–4%; it said definitive guidance was premature.
- Three ships were on order, with aggregate cost of approximately $3.4 billion and $433.5 million deposited. Expected capital expenditures, including ships on order, were about $2.2 billion in 2010 and $1.0 billion in each of 2011 and 2012. Management anticipated available cash flows, facilities and financing arrangements would cover foreseeable needs.
- Material risks include economic weakness affecting cruise demand and financing, fuel and currency movements, competition and capacity, ship construction or delivery issues, safety and health incidents, weather, regulation, and litigation. A Puerto Rico representative’s counterclaims seek more than $40 million on each of several claims and treble damages of $120 million on several; the company disputes the claims. Pending cabin-steward arbitration demands allege damages exceeding $200 million for a purported class. The company says it intends to defend these matters.
- Other exposures include a possible Brilliance of the Seas lease termination payment of approximately $189.7 million in 2012 and contingent UK tax-related lease indemnities whose maximum amount cannot be estimated. The company said an indemnification was not considered probable. A change-of-control provision could accelerate substantial debt under specified circumstances.
Important facts for investors to verify
- Whether yield, occupancy and booking trends continue, and how capacity growth translates into pricing and margins.
- Actual Q4 and full-year performance against EPS, yield, cost, fuel-price and capacity assumptions; guidance depends on fuel prices remaining at stated levels.
- Funding and delivery progress for Allure of the Seas and the remaining ship orders, alongside debt maturities and the working-capital deficit.
- Potential Pullmantur goodwill, trademark or deferred-tax-asset impairment if earnings or economic assumptions weaken.
- Developments and potential financial exposure in the Puerto Rico and crew-related disputes, plus any lease indemnity or change-of-control obligations.
- The quality and repeatability of nine-month cash generation, which included higher customer deposits and approximately $173 million of cash received from derivative settlements.