Business Context and Reporting Period
Company: Royal Caribbean Cruises Ltd.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2009
Overview: The Company is the world's second-largest cruise operator, managing 38 ships across five brands (Royal Caribbean International, Celebrity Cruises, Pullmantur, Azamara Club Cruises, and CDF Croisières de France) with approximately 84,050 berths. The 2009 fiscal year was significantly impacted by the global economic downturn, the H1N1 virus, and a stronger U.S. dollar, which collectively reduced consumer discretionary spending and cruise demand.
Key Financial Metrics
| Metric | 2009 | 2008 | Change |
|---|---|---|---|
| Total Revenues | $5.89 billion | $6.53 billion | -9.8% |
| Operating Income | $488.5 million | $832.0 million | -41.3% |
| Net Income | $162.4 million | $573.7 million | -71.7% |
| Diluted EPS | $0.75 | $2.68 | -72.0% |
| Operating Cash Flow | $844.9 million | $1.07 billion | -21.1% |
| Total Debt | $8.42 billion | $7.01 billion | +20.1% |
| Liquidity | $0.9 billion | N/A | N/A |
| Net Debt-to-Capital | 52.0% | 49.3% | +2.7 pts |
Note: Liquidity as of Dec 31, 2009, consisted of $284.6 million in cash and $575.0 million available under an unsecured revolving credit facility.
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased 9.8% primarily due to lower ticket prices (higher discounts) and reduced onboard spending. Net Yields (revenue per available passenger cruise day) dropped 14.2% compared to 2008.
- Occupancy Pressure: Occupancy rates fell to 102.5% in 2009 from 104.5% in 2008, driven by economic conditions and the H1N1 virus impact on the Spanish market and Caribbean itineraries.
- Cost Management: Despite revenue declines, Net Cruise Costs per APCD decreased 9.8%. Fuel expenses per APCD dropped 20.9% due to lower fuel prices and hedging strategies.
- Debt Increase: Total debt rose to $8.42 billion to finance the delivery of new vessels (Oasis of the Seas and Celebrity Equinox) and refinance existing obligations. The Company issued $300 million in senior unsecured notes.
- Dividend Suspension: The Company discontinued its quarterly dividend commencing in Q4 2008 to preserve liquidity; no dividends were paid in 2009.
Guidance, Outlook, and Risks
Management Outlook (2010)
- Net Yields: Expected to increase 3% to 6% compared to 2009.
- Costs: Net Cruise Costs per APCD expected to be flat to slightly up compared to 2009.
- Capacity: Anticipated 11.4% increase in capacity driven by new ships (Celebrity Eclipse and Allure of the Seas) and full-year operations of recently delivered vessels.
- Earnings: Full-year 2010 diluted EPS projected between $2.00 and $2.20, assuming fuel prices remain at January 2010 levels.
Key Risks and Contingencies
- Economic Environment: Continued weakness in consumer confidence and discretionary spending could prolong booking slowdowns and pricing pressure.
- Financing: Credit ratings are BB- (S&P) and Ba3 (Moody's) with negative outlooks. Further downgrades could increase financing costs or require collateral on derivative instruments.
- Legal Proceedings:
- Rolls Royce Settlement: Reached a settlement regarding Mermaid pod-propulsion failures; expected to receive ~$85.6 million (net) in Q1 2010.
- Art Auction Litigation: Multiple class actions alleging misrepresentation of artwork sold by Park West Galleries; Company believes it has meritorious defenses.
- Gratuities Arbitration: Demands for arbitration regarding cabin steward gratuities seeking damages in excess of $200 million; Company intends to vigorously defend.
- Regulatory: Potential increases in fuel costs due to stricter sulfur emission regulations (MARPOL) and potential tax status changes under U.S. Internal Revenue Code Section 883.
Investor Verification Checklist
- Yield Recovery: Verify if 2010 Net Yields meet the 3-6% growth guidance despite industry capacity expansion.
- Debt Covenants: Monitor compliance with debt covenants, specifically the Net Debt-to-Capital ratio (limit 62.5%) and Fixed Charge Coverage ratio (minimum 1.25x).
- Ship Deliveries: Confirm on-time delivery and financing of Allure of the Seas (Q4 2010) and Celebrity Eclipse (Q2 2010), noting the requirement to secure Allure if credit ratings fall below specific thresholds.
- Legal Exposure: Track the status of the Park West art auction litigation and the cabin steward gratuities arbitration, as potential liabilities could be material.
- International Markets: Assess the recovery of the Spanish market (Pullmantur brand) and the success of international expansion strategies in Brazil, Asia, and Europe.