ROYAL CARIBBEAN CRUISES LTD annual report, FY2012

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Royal Caribbean Cruises Ltd. — 2012 Form 10-K Summary

Business context and reporting period

Annual report for the fiscal year ended December 31, 2012, filed February 25, 2013. Royal Caribbean operates five wholly owned cruise brands and holds a 50% interest in TUI Cruises, which is accounted for under the equity method. The combined fleet operated 41 ships with approximately 98,650 berths and served about 455 destinations. Results are consolidated as one reportable segment.

Financial and operating performance

  • Revenue: $7.688 billion, up 2.0% from $7.537 billion in 2011. Passenger ticket revenue was $5.595 billion; onboard and other revenue was $2.093 billion.
  • Profit: Operating income was $403.1 million, down from $931.6 million; GAAP net income was $18.3 million versus $607.4 million. Diluted EPS was $0.08 versus $2.77. The 2012 results included $385.4 million in Pullmantur asset impairments and a net $28.5 million deferred-tax charge related to Pullmantur. Excluding these charges, management reported non-GAAP net income of $432.2 million and diluted EPS of $1.97; these are non-GAAP measures.
  • Margins: GAAP operating margin was 5.2%, compared with 12.4% in 2011; net margin was 0.2%, compared with 8.1%. Fuel expense rose to $909.7 million from $764.8 million and represented 11.8% of revenue, versus 10.1%.
  • Cash flow and investment: Operating cash flow was $1.382 billion, down from $1.456 billion. Capital expenditures were $1.291 billion; cash used in investing was $1.263 billion. Cash and cash equivalents ended the year at $194.9 million.
  • Debt and liquidity: Total debt, including capital leases, was $8.490 billion, broadly unchanged from $8.496 billion; net debt was $8.295 billion. Available liquidity was approximately $2.2 billion, including $2.0 billion of available unsecured credit facilities. Working capital deficit was $3.2 billion, including $1.5 billion of current debt maturities. The company said it was in compliance with debt covenants.
  • Selected operating metrics: Passengers carried were 4.852 million; available passenger cruise days increased 1.4% to 33.706 million. Occupancy was 104.4%, versus 104.8%. Net Yields increased 1.5% reported, or 3.0% on a constant-currency basis; Net Cruise Costs per APCD increased 5.4% reported.
  • Fourth quarter: Revenue was $1.806 billion versus $1.775 billion in fourth-quarter 2011. Operating loss was $281.3 million versus income of $106.2 million; net loss was $392.8 million versus income of $36.6 million. The quarter included the Pullmantur impairment and related tax adjustments.

Material changes versus prior period

  • Revenue growth reflected higher yields, 1.4% capacity growth, increased Pullmantur land-tour and package activity, and higher onboard spending. Foreign exchange movements reduced reported revenue by approximately $126.9 million.
  • Operating income and net income fell sharply, principally due to the Pullmantur impairment and tax charges. Before those charges, management reported 2012 net income of $432.2 million.
  • Operating costs rose faster than revenue: cruise operating expenses increased 4.3%, with fuel costs and Pullmantur land-based activities among the drivers. Net Cruise Costs per APCD increased 5.4%.
  • Debt maturities shifted toward the near term: current debt increased to $1.519 billion from $638.9 million. The company issued $650 million of 5.25% senior notes due 2022 and borrowed $290 million under a term loan, while repurchasing approximately $328 million principal amount of 2014 euro notes.

Outlook, commentary, risks and contingencies

  • 2013 guidance: Full-year EPS of $2.30–$2.50; reported Net Yields growth of 3%–5% (2%–4% constant currency); capacity growth of 1.4%; and fuel expense of approximately $960 million. Management said bookings remained encouraging and outlook was essentially unchanged from its February 4, 2013 announcement.
  • Management priorities: Cost containment, fuel efficiency, revenue initiatives, fleet revitalization, investment in digital and revenue-management systems, and growth in Asian and Australian markets. Planned initiatives included beverage packages, retail and casino enhancements, and other onboard revenue projects.
  • Funding and capital commitments: Management expected operating cash flow, available facilities and financing arrangements to cover the next 12 months, while anticipating additional capital- or credit-market funding to refinance 2013–2014 maturities. Ship orders totaled approximately $3.6 billion; anticipated capital expenditures were $0.7 billion in 2013, $1.2 billion in 2014, $1.2 billion in 2015 and $1.3 billion in 2016.
  • Key risks: Weak consumer demand, European economic uncertainty and geopolitical disruption; further Pullmantur impairment; fuel-price and foreign-exchange exposure; cruise-industry overcapacity; safety incidents and adverse publicity; and increased environmental or other regulatory costs. The company estimated that the 0.1% sulfur-fuel requirement in designated emission-control areas could add $65–$70 million to fuel costs based on the stated assumptions.
  • Contingencies: Securities class-action litigation concerning 2011 outlook statements remained pending; a crew wage-related case was dismissed, with plaintiffs seeking to renew an appeal. The company could not estimate the possible impact of these matters. A TUI Cruises shipyard was experiencing financial difficulties, potentially affecting delivery, cost or support needs. The filing also describes possible indemnification exposure under the Brilliance of the Seas lease, while stating payment was not considered probable.

Important facts for investors to verify

  • Reconcile the $413.9 million total Pullmantur impairment-related charges with the $385.4 million asset impairment and $28.5 million net tax adjustment, and assess whether further impairment indicators emerged.
  • Review the timing and refinancing plan for 2013–2014 debt maturities, available credit capacity and covenant definitions; current maturities rose materially year over year.
  • Test the assumptions underlying 2013 EPS and yield guidance against fuel prices, bookings, foreign exchange and European demand.
  • Monitor newbuild spending, shipyard execution—particularly TUI Cruises—and the company’s capacity deployment amid industry-wide ship additions.
  • Assess the potential financial effects of the pending litigation, lease indemnification, fuel regulation and other disclosed contingencies.