Business context and reporting period
Royal Caribbean Cruises Ltd. filed this Form 10-K for the fiscal year ended December 31, 2020. The company operates Royal Caribbean International, Celebrity Cruises, Azamara and Silversea Cruises, and owns a 50% interest in TUI Cruises, which operates TUI Cruises and Hapag-Lloyd Cruises. Together, the Global and Partner Brands operated 61 ships at year-end. Most Global Brand sailings were suspended from March 13, 2020, and the suspension had been extended through at least April 30, 2021, for most operations.
Financial and operating performance
| Metric | 2020 | 2019 |
|---|---|---|
| Total revenue | $2.21 billion | $10.95 billion |
| Operating income (loss) | $(4.60) billion | $2.08 billion |
| Net income (loss) attributable to Royal Caribbean | $(5.80) billion | $1.88 billion |
| Adjusted net income (loss), non-GAAP | $(3.92) billion | $2.00 billion |
| Diluted EPS | $(27.05) | $8.95 |
| Cash from (used in) operating activities | $(3.73) billion | $3.72 billion |
| Cash and cash equivalents at year-end | $3.68 billion | $0.24 billion |
| Total debt, net of issuance costs, including commercial paper and finance leases | $19.33 billion | $11.03 billion |
| Occupancy | 101.9% | 108.1% |
| Passengers carried | 1.30 million | 6.55 million |
Revenue fell 79.8% year over year, primarily because capacity declined 79.4% following the cancellation of sailings. Cruise operating expenses fell 54.4% to $2.77 billion, but fixed and ongoing costs, higher interest expense and impairment charges contributed to the loss. Operating margin was approximately negative 208.3%, compared with positive 19.0% in 2019. Capital expenditures, measured as purchases of property and equipment, were $1.97 billion. Financing activities provided $9.35 billion of cash.
Year-end liquidity was approximately $4.4 billion, comprising cash and cash equivalents of $3.7 billion and a $0.7 billion 364-day term-loan commitment. Revolving credit facilities were fully utilized through borrowings and letters of credit. Current liabilities exceeded current assets at year-end; customer deposits were $1.78 billion, compared with $3.43 billion a year earlier. The company estimated cash burn of $250 million to $290 million per month during a prolonged suspension.
Fourth-quarter 2020 revenue was $34.1 million and the net loss attributable to Royal Caribbean was $1.37 billion, or $6.09 per diluted share. Fourth-quarter revenue includes the impact of the suspended operations; the filing also notes an immaterial revenue correction recorded in the third quarter.
Material changes and unusual items
- COVID-19 drove the collapse in revenue and operating cash flow, the suspension of most sailings, customer refunds and credits, and substantial cost and capital-spending reductions.
- The company recorded $1.57 billion of impairment and credit losses, including goodwill and intangible-asset impairment, ship and other long-lived-asset impairments, and credit losses. Adjusted net loss excludes specified items; it is a non-GAAP measure.
- Interest expense, net of capitalized interest, rose to $844 million from $409 million, mainly due to new borrowing and higher revolver balances.
- Debt increased materially after financing actions that included secured notes with 10.875% and 11.5% coupons, unsecured notes at 9.125%, $1.725 billion of convertible notes, and equity issuance. The company issued approximately 22.6 million common shares for about $1.6 billion.
- In July 2020, the company acquired the remaining 33.3% of Silversea Cruises in exchange for 5.2 million shares. Its 50%-owned joint venture acquired Hapag-Lloyd Cruises in June 2020. Pullmantur and certain subsidiaries filed for reorganization in Spain.
- In January 2021, the company agreed to sell Azamara, including its three ships and associated intellectual property, for $201 million, subject to closing conditions.
Outlook, management commentary and risks
The company withdrew its 2020 guidance and said it could not reasonably estimate the pandemic’s impact on near- or longer-term results. It expected a GAAP and adjusted net loss in the first quarter of 2021. Management anticipated a phased restart with reduced occupancy, modified itineraries and enhanced health protocols, subject to CDC requirements and other local restrictions. The filing provided no full-year 2021 earnings or revenue guidance.
Management reported that second-half 2021 bookings were aligned with its anticipated restart and priced above 2019, both including and excluding the dilutive effect of future cruise credits. First-half 2022 advance bookings were within historical ranges and at higher prices. These booking observations are not a guarantee of future demand or realized fares.
Management believed available liquidity would fund obligations for at least 12 months from issuance of the financial statements, based on assumptions about restart timing, occupancy and added health-protocol costs. The auditor highlighted that approximately $1.0 billion of long-term debt due in April 2022 may need refinancing or extension if operations do not resume on management’s anticipated timeline. Management said it expected to address this before the due date, but gave no assurance of success.
Key risks include further sailing delays, costly or changing health requirements, weaker demand or pricing, continued cash burn, refinancing and covenant risk, credit-rating downgrades, potential shareholder dilution, and shipyard delivery delays. The company agreed with certain lenders to suspend dividends and share repurchases through the third quarter of 2022. The filing also identifies foreign-exchange, fuel-price and interest-rate exposure; a 1% rate increase was estimated to raise forecast 2021 interest expense by $59.4 million. Litigation includes Cuban port claims; the separate shareholder securities class action was voluntarily dismissed without prejudice on February 25, 2021.
Important facts for investors to verify
- Whether and when sailings resume, and whether occupancy, bookings and pricing support management’s recovery assumptions.
- Cash burn, available liquidity and compliance with minimum-liquidity requirements; confirm the status and terms of the $0.7 billion loan commitment and revolving facilities.
- Debt maturities, the April 2022 refinancing need, deferred principal payments, covenant waivers and the cost or availability of further financing.
- Potential further impairments, customer refunds and future-cruise-credit redemptions, and whether reported bookings convert into sailings and cash receipts.
- Completion and proceeds of the Azamara sale, and developments at Pullmantur and the TUI Cruises/Hapag-Lloyd joint venture.
- For comparability, note that Silversea results are reported on a three-month lag and that adjusted net loss is a non-GAAP measure.