Royal Caribbean Cruises Ltd. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing also provides unaudited fourth-quarter results. Royal Caribbean operates four consolidated global cruise brands and accounts for TUI Cruises and Pullmantur as equity-method investments. Silversea Cruises is consolidated, with results included on a three-month reporting lag.
Financial and operating performance
| Metric | 2019 | 2018 | Change or context |
|---|---|---|---|
| Revenue | $10.951 billion | $9.494 billion | Up 15.3% |
| Operating income | $2.083 billion | $1.895 billion | Up 9.9%; operating margin 19.0%, versus 20.0% |
| Net income attributable to Royal Caribbean | $1.879 billion | $1.811 billion | Up 3.7%; net margin 17.2%, versus 19.1% |
| Adjusted net income | $2.003 billion | $1.873 billion | Adjusted diluted EPS was $9.54, up from $8.86 |
| Cash from operating activities | $3.716 billion | $3.479 billion | Up $237 million |
| Cash used in investing activities | $3.091 billion | $4.489 billion | Included $3.025 billion of property and equipment purchases in 2019 |
| Total debt, net of issuance costs | $11.035 billion | $10.778 billion | Includes commercial paper and finance leases |
Passenger ticket revenue was $7.857 billion (71.7% of revenue); onboard and other revenue was $3.094 billion (28.3%). Passenger capacity rose 7.8%; gross yields increased 7.0% and net yields 6.7% (8.2% and 8.0%, respectively, on a constant-currency basis). Occupancy was 108.1%, compared with 108.9% in 2018. Net cruise costs excluding fuel per available passenger cruise day rose 10.8% (11.4% constant currency). Fuel expense was $698 million, down from $711 million.
Fourth quarter: Revenue was $2.517 billion versus $2.332 billion. Operating income was $299 million versus $364 million; net income attributable to Royal Caribbean was $273 million versus $316 million; diluted EPS was $1.30 versus $1.50.
Liquidity, debt and capital commitments
- Year-end cash and cash equivalents were $244 million. The company reported $1.5 billion of liquidity, including $1.3 billion available under unsecured credit facilities, net of commercial paper.
- Working capital deficit was $6.8 billion, versus $5.9 billion in 2018. Management said this is typical of its business model, in which guests generally pay in advance and customer deposits are recorded as current liabilities.
- Commercial paper outstanding was $1.434 billion. Debt maturities for 2020 totaled $2.621 billion, including commercial paper. The company stated it expected operating cash flow and financing arrangements to cover capital spending and debt repayments over the next 12 months, and was well within its debt covenant requirements.
- Ship orders represented approximately $14.8 billion of aggregate cost, with $882 million deposited. Expected capital expenditures were approximately $4.7 billion in 2020, $3.5 billion in 2021, $3.6 billion in 2022 and $2.9 billion in 2023. The company reported 17 ships on order across its global and partner brands.
- Cash dividends declared were $2.96 per share in 2019, up from $2.60. The company repurchased approximately $100 million of stock during 2019 and had approximately $600 million remaining under its authorized repurchase program.
Changes, unusual items and management commentary
- Revenue growth reflected added capacity, higher ticket prices and onboard spending, including contributions from new ships, the Silversea acquisition, Perfect Day at CocoCay and the PortMiami terminal. The company said 2019 was its tenth consecutive year of revenue growth.
- Expenses also increased: cruise operating costs rose 15.2%, while marketing, selling and administrative expenses rose 19.7%. Management cited capacity growth, Silversea, CocoCay, the Miami terminal, advertising and payroll. Higher debt levels and interest rates contributed to a 22.4% increase in net interest expense.
- The drydock structure incident involving Oasis of the Seas, the end of Cuba cruise sailings following a U.S. policy change, and hurricane-related disruption reduced 2019 adjusted EPS by an estimated $0.80 in total: approximately $0.36, $0.29 and $0.15, respectively.
- The company extended the estimated useful life of Oasis-class ships from 30 years with a 15% residual value to 35 years with a 10% residual value. This prospective accounting estimate change increased 2019 operating and net income by approximately $4.6 million, or $0.02 per share.
- Silversea’s acquisition-related contingent consideration was remeasured, producing an $18.4 million expense in 2019. The company also recorded $12.0 million of restructuring charges tied to centralizing international sales and marketing.
Outlook and risks
Before incorporating coronavirus effects, management’s February 4, 2020 full-year guidance was adjusted diluted EPS of $10.40–$10.70, net yield growth of 2.5%–4.5% as reported, capacity growth of 4.8%, and net cruise cost growth per available passenger cruise day of 1.75%–2.25%. This guidance excluded coronavirus impacts. Management estimated that 30 canceled or modified Southeast Asia sailings would reduce 2020 financial performance by about $0.90 per share; cancellation of all remaining Asia sailings through April would have an additional estimated $0.30 impact. The company said the outbreak’s full effect could not be reasonably forecast and could materially affect bookings, operations and financial performance.
Key risks include disease outbreaks and travel restrictions; consumer demand and discretionary spending; fuel prices, foreign exchange and interest rates; substantial shipbuilding commitments and delivery risk; competition and excess industry capacity; port access and anti-tourism restrictions; safety, environmental and regulatory obligations; cyber and data-security incidents; and access to financing. The company had hedged 54% of projected 2020 fuel requirements. A 10% fuel-price change was estimated to affect 2020 fuel expense by $37 million, while a 100-basis-point change in LIBOR was estimated to affect interest expense by $37 million.
Two lawsuits allege violations of the Helms-Burton Act relating to Cuban port facilities and seek statutory damages, including treble damages. Royal Caribbean said it has meritorious defenses and believes a material adverse outcome is unlikely, but noted litigation outcomes are uncertain.
Investor verification points
- Track coronavirus-related cancellations, restrictions, bookings, liquidity and the extent to which the initial 2020 guidance remains achievable.
- Reconcile reported and adjusted earnings, including the company’s adjustment items and the effects of the Oasis incident, Cuba policy change and hurricanes.
- Review debt maturities, commercial-paper refinancing, available credit facilities, covenant headroom and funding for the shipbuilding program.
- Assess whether yield growth can outpace rising costs, particularly non-fuel costs, and whether new ships and destination investments deliver expected returns.
- Monitor the Cuban-port litigation and other contingent liabilities, as well as foreign-exchange exposure on ship orders and sensitivity to fuel and interest rates.