Royal Caribbean Cruises Ltd. — FY2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The filing also provides unaudited fourth-quarter results. Royal Caribbean operated five wholly owned cruise brands and held a 50% interest in TUI Cruises, an unconsolidated joint venture.
Business context and operating performance
The company operated 44 ships across its brands, including TUI Cruises, with approximately 110,900 berths. It carried 5.40 million passengers in 2015, up from 5.15 million in 2014. Capacity increased 5.4%; occupancy was 105.1%, versus 105.6% a year earlier.
| Metric | FY2015 | FY2014 |
|---|---|---|
| Total revenue | $8.299 billion | $8.074 billion |
| Operating income | $874.9 million | $941.9 million |
| GAAP net income | $665.8 million | $764.1 million |
| Diluted GAAP EPS | $3.02 | $3.43 |
| Adjusted net income | $1.065 billion | $755.7 million |
| Adjusted diluted EPS | $4.83 | $3.39 |
| Operating margin | 10.5% | 11.7% |
| Net margin | 8.0% | 9.5% |
Passenger ticket revenue was $6.059 billion (73% of total); onboard and other revenue was $2.240 billion (27%). Net yields fell 1.0% as reported but rose 3.5% on a constant-currency basis. Net cruise costs per available passenger cruise day (APCD) declined 6.9% as reported and 4.7% on a constant-currency basis. Net cruise costs excluding fuel per APCD declined 3.2% as reported and were flat on a constant-currency basis.
Fourth quarter: Revenue was $1.902 billion, operating income $249.9 million, and net income $206.8 million, with diluted EPS of $0.94. In Q4 2014, the comparable figures were $1.818 billion, $119.3 million, $109.8 million, and $0.49, respectively.
Cash flow, debt and liquidity
- Cash from operating activities was $1.946 billion, up from $1.744 billion in 2014.
- Capital expenditures were $1.613 billion. Cash used in investing activities was $1.743 billion; cash used in financing activities was $253.5 million.
- Total debt, including capital leases, was $8.667 billion at year-end, compared with $8.444 billion in 2014. Cash and cash equivalents were $121.6 million.
- Reported liquidity was $859.6 million, comprising cash and $738.0 million available under unsecured credit facilities. The company reported a $3.5 billion working capital deficit, which it attributed largely to customer deposits collected before sailings and described as customary in the cruise industry.
- Year-end customer deposits were $1.742 billion. The company said operating cash flows and existing financing arrangements should be adequate for capital spending and debt repayments over the following 12 months.
Changes, unusual items and management commentary
- Revenue rose 2.8% year over year, while reported operating income and GAAP net income declined. Adjusted net income increased more than 40%, reflecting management’s exclusion of specified items.
- A $411.3 million pretax impairment charge was recorded in Q3 for Pullmantur goodwill, trademarks and trade names, and certain ships and aircraft. The net earnings impact was $399.3 million after a $12.0 million deferred tax benefit. The impairment followed a strategy shift to reduce Latin American exposure, refocus Pullmantur on Spain and shrink its fleet.
- Currency movements reduced 2015 revenue by $384.4 million and reduced cruise operating expenses by $157.6 million versus 2014. Management cited Latin American currency weakness, including the Brazilian real, as a headwind. Lower fuel costs partly offset other pressures: fuel expense was $795.8 million, down from $947.4 million.
- Management said constant-currency net yields increased for a sixth consecutive year and that 2015 adjusted earnings grew by more than 40% for a second consecutive year. It cited stronger Caribbean pricing, resilient European itineraries and high yields in China, while noting Latin American weakness.
- The company continued fleet investment: year-end commitments for wholly owned brands included seven ships with aggregate expected cost of approximately $7.8 billion. Management also cited expansion of capacity in Asia-Pacific and Europe in 2016.
2016 outlook and key risks
Initial 2016 guidance, based on fuel prices, interest rates and exchange rates as of February 2, 2016, projected diluted adjusted EPS of $5.90–$6.10, capacity growth of 6.3%, and reported net yields flat to up 2.0% (up 2.0%–4.0% in constant currency). Net cruise costs per APCD were forecast to decline 2.5%–3.0% as reported; excluding fuel, costs were expected to rise no more than 0.5% as reported. Management said bookings remained encouraging and the forecast was essentially unchanged since its earnings release.
Material risks include discretionary-spending and geopolitical shocks, safety or health incidents and adverse publicity, severe weather, fuel and interest-rate increases, foreign-exchange volatility, global capacity additions and pricing pressure, shipyard delays, regulatory and environmental compliance costs, cyber incidents, and reliance on travel agencies. The company also disclosed covenant and change-of-control provisions that could affect liquidity. Fuel and currency exposures are partly hedged; 31.2% of long-term debt was effectively fixed-rate at year-end.
Most important facts for investors to verify
- Reconcile GAAP and adjusted earnings, especially the $411.3 million Pullmantur impairment and the company’s non-GAAP adjustments.
- Assess whether 2016 EPS and yield guidance is supported by booking trends, capacity deployment and foreign-exchange assumptions.
- Review the shipbuilding funding schedule, debt maturities, available credit and ability to maintain liquidity amid the working capital deficit.
- Monitor Pullmantur’s right-sizing execution and continued Latin American currency and demand exposure.
- Track fuel prices, hedge coverage, interest-rate sensitivity, and the potential cost of future environmental requirements.