Royal Caribbean Cruises Ltd. — 2011 Form 10-K
Business and reporting period. Annual report for the fiscal year ended December 31, 2011, filed February 29, 2012. Royal Caribbean operated 39 ships across five wholly owned brands and held a 50% interest in TUI Cruises. It carried approximately 4.85 million passengers; occupancy was 104.8%. The company reports one operating segment.
Financial performance
| Metric | 2011 | 2010 | Change / context |
|---|---|---|---|
| Total revenue | $7.537 billion | $6.753 billion | Up 11.6% |
| Operating income | $931.6 million | $802.6 million | Up 16.1%; operating margin 12.4% vs. 11.9% |
| Net income | $607.4 million | $515.7 million | Up 17.8%; net margin 8.1% vs. 7.6% |
| Diluted EPS | $2.77 | $2.37 | Up from revised 2010 results |
| Net cash from operations | $1.456 billion | $1.663 billion | Down $207.3 million |
| Capital expenditures | $1.174 billion | $2.187 billion | Lower, mainly due to fewer ship deliveries |
| Total debt, including capital leases | $8.496 billion | $9.150 billion | Down $654.3 million |
| Cash and cash equivalents | $262.2 million | $419.9 million | Down $157.7 million |
Passenger ticket revenue was $5.526 billion, or 73.3% of total revenue; onboard and other revenue was $2.011 billion. Capacity (APCD) increased 7.5%, Net Yields rose 4.1% (2.4% in constant currency), and occupancy improved from 104.3%. Fuel expense increased 18.4% per metric ton; fuel represented 10.1% of revenue versus 9.6% in 2010. Net Cruise Costs per APCD rose 3.7% (2.7% in constant currency); excluding fuel, the increase was 2.3% (1.3% in constant currency).
Fourth-quarter revenue was $1.775 billion versus $1.604 billion in 2010; operating income was $106.2 million versus $121.7 million, and net income was $36.6 million versus $31.9 million. Results are seasonal, with demand typically strongest in Northern Hemisphere summer and holidays.
Liquidity, debt and capital commitments
- Year-end liquidity was approximately $1.1 billion: $262.2 million cash plus $810 million available under revolving facilities. Total revolving credit capacity was $1.4 billion, with facilities maturing in 2014 and 2016.
- Net debt-to-capital improved to 49.5% from 52.5%; debt-to-capital fell to 50.3% from 53.7%. The company reported compliance with debt covenants, including a maximum net debt-to-capital ratio of 62.5%.
- Working capital deficit was $2.1 billion, which management said is typical of the business model, where customers generally pay deposits in advance and ship purchases are financed with long-term debt.
- Operating cash flow was lower partly because 2010 included substantially more cash from derivative settlements and a litigation settlement. 2011 investing cash use was $924.6 million; financing cash use was $676.5 million, including $2.179 billion of debt repayments.
- Capital expenditures were expected to be about $1.3 billion in 2012, $600 million in 2013, $1.1 billion in 2014 and $1.0 billion in 2015, including the second Project Sunshine ship ordered in February 2012. Total cost of ships on order, including that ship, was approximately $2.8 billion.
Material changes and unusual items
- Revenue growth reflected higher capacity, ticket pricing and favorable currency movements, partially offset by geopolitical disruptions in the Eastern Mediterranean and Northern Africa and the Japan earthquake-related events.
- Net income benefited from $22.2 million of income from unconsolidated subsidiaries and an $18.9 million gain on fuel call options. 2010 included an approximately $89 million net gain from litigation settlement that did not recur.
- The company sold Celebrity Mercury to its TUI Cruises joint venture for €234.3 million (approximately $290 million); the $24.2 million gain is being recognized primarily over the ship’s estimated remaining 17-year life.
- Prior-period results were revised for errors in amortizing export credit agency guarantee fees. The revisions reduced reported 2010 net income by $31.8 million and 2009 net income by $9.9 million; the company deemed the errors not material and stated they did not affect operating income or cash flows.
- The board reinstated the quarterly dividend in July 2011; dividends declared were $0.20 per share for the year.
Outlook, management commentary and risks
Management’s initial 2012 guidance was EPS of $1.90–$2.30 for the full year and $0.10–$0.20 for the first quarter. Full-year Net Yield guidance was flat to up 4% as reported (up 1%–5% constant currency); Net Cruise Costs per APCD were expected to rise 5%–6% (6%–7% constant currency), and costs excluding fuel 3%–4% (4%–5% constant currency). After the Ocean Dream charter, expected 2012 capacity growth was revised from 2.1% to approximately 1.5%. Following fuel-price increases, estimated 2012 fuel expense was revised to $921 million, including $229 million in the first quarter; management cited a net positive currency impact of about $0.04 per share.
Before the Costa Concordia disaster, bookings were about 5% ahead of the prior year at higher prices. New bookings slowed significantly immediately afterward, particularly for the first three quarters of 2012; management later reported booked load factors approximately in line with the prior year at modestly higher prices. Management said the near-term earnings impact was uncertain but did not expect a significant long-term effect. The company initiated a cross-brand review of safety and emergency-response procedures.
- Principal risks include discretionary-spending weakness, European economic and geopolitical conditions, cruise-industry capacity growth, fuel and other cost inflation, foreign-exchange and interest-rate movements, and the ability to finance ship commitments and refinance debt.
- Environmental and labor rules may raise costs, including future low-sulfur fuel requirements and the Maritime Labour Convention. The company warned that later sulfur limits could significantly increase fuel costs.
- Potential goodwill, trademark and deferred-tax-asset impairment at Pullmantur is sensitive to Spain’s economy, yields and planned ship transfers. No impairment was recorded in 2011.
- Pending matters include a securities class action alleging misleading 2011 outlook statements, a crew wage class action, and Puerto Rico distributor counterclaims seeking more than $40 million on each claim and treble damages of $120 million on several claims. The company disputes the claims; outcomes and any ultimate exposure are uncertain.
- The company has no business-interruption insurance for its ships. It also disclosed a Brilliance of the Seas lease tax-indemnity contingency whose potential maximum amount is not estimable; management did not consider payment probable.
Important facts for investors to verify
- Whether post-Costa Concordia booking trends, pricing and the stated 2012 EPS guidance were sustained or revised in subsequent reports.
- Actual fuel prices, hedge coverage and fuel costs against the $921 million 2012 estimate; also assess the effect of future emissions rules.
- Cash generation, debt maturities, covenant headroom and financing for the shipbuilding program, particularly given the working capital deficit and capital commitments.
- Pullmantur’s performance in Spain and Latin America and the assumptions supporting its goodwill, trademarks and deferred tax assets.
- Developments and potential financial effects of the disclosed lawsuits, lease indemnity and other contingencies.
- The filing’s comparative figures are revised for guarantee-fee amortization; use the revised figures when comparing periods.