Royal Caribbean Cruises Ltd. — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011; comparisons are with the corresponding 2010 periods. The company operates five cruise brands and holds a 50% interest in TUI Cruises. Figures below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $2,322 | $2,061 | $5,762 | $5,148 |
| Operating income | $508 | $446 | $825 | $681 |
| Net income | $399 | $350 | $571 | $484 |
| Diluted EPS | $1.82 | $1.61 | $2.60 | $2.23 |
| Operating margin | 21.9% | 21.6% | 14.3% | 13.2% |
| Net margin | 17.2% | 17.0% | 9.9% | 9.4% |
- Revenue drivers: Q3 revenue grew 12.7%, supported by 6.3% higher capacity and 5.3% higher Net Yields. Nine-month revenue rose 11.9%, with capacity up 7.6% and Net Yields up 4.3%. Management cited ticket-price growth and favorable foreign exchange, partly offset by itinerary changes and pricing effects linked to unrest in Northern Africa and the Japan earthquake.
- Costs and earnings: Q3 cruise operating expenses increased 13.4% to $1,405 million, including fuel expense up 22.9% in total; management said fuel expense per metric ton rose 26.3%. Nine-month cruise operating expenses increased 10.2%; fuel expense rose 15.0%. Higher fuel, commissions, port costs, capacity and international expansion spending tempered revenue gains.
- Other items affecting comparisons: Nine-month 2011 results included an $11.7 million gain on fuel call options, versus a $4.2 million loss in 2010. 2010 included an approximately $85.6 million litigation-settlement gain that did not recur. Q3 2011 other expense included a $13.1 million fuel-option loss and a $7.9 million provision related to an uncertain tax position.
- Cash flow, nine months: Operating cash flow was $1,273 million versus $1,436 million. Investing cash outflow was $775 million, including $1,030 million of property and equipment purchases; ship-sale proceeds of $345 million partly offset spending. Financing cash outflow was $451 million. Cash increased $32 million to $451 million.
- Balance sheet and liquidity: At September 30, cash was $451 million; current assets were $1,223 million and current liabilities $3,115 million. Total debt was $8,776 million, down from $9,150 million at December 31, 2010; net debt was $8,324 million. Net debt-to-capital improved to 49.7% from 52.5%. Reported liquidity was $1.3 billion, including cash and $840 million available under revolving facilities. Working capital deficit was $1.9 billion, versus $2.4 billion at year-end 2010.
Material changes and management outlook
- Capacity increased with the addition of Allure of the Seas and Celebrity Silhouette and a full nine months of Celebrity Eclipse service; Celebrity Mercury was sold. Occupancy was 107.9% in Q3 versus 107.3% in 2010.
- The company delivered Celebrity Silhouette, financed with a $632 million, 12-year term loan. It extended one revolving credit facility to July 2016 and reduced its size to $875 million; combined revolving capacity was $1.4 billion. It also amended Oasis and Allure debt margins and prepaid $200 million of Allure debt.
- The board reinstated a quarterly dividend; $0.10 per share was paid in Q3. The company expects 2011 capital expenditures of approximately $1.1 billion and has about $1.9 billion of aggregate ship-order costs, with $185.8 million deposited.
- 2011 guidance: Full-year diluted EPS of $2.70–$2.80, assuming stated fuel-price and currency assumptions; Net Yields expected up approximately 4% (2%–3% constant currency), and capacity up 7.5%. Q4 diluted EPS guidance was $0.09–$0.19, with Net Yields expected up 3%–4%. Management estimated full-year fuel expense at approximately $761 million if pump prices remained at then-current levels; about 57% of remaining 2011 fuel needs were hedged. A 10% fuel-price change was estimated to change full-year expense by about $9 million.
- Management said operating cash flows, available credit facilities and financing arrangements should be adequate for capital spending and debt repayments over the next 12 months. It also reported that the company was well within its debt-covenant requirements. Guidance depends on fuel prices, foreign exchange and operating assumptions and is forward-looking.
Risks, contingencies and unusual disclosures
- Prior-period correction: The company revised prior results for errors in amortization of export-credit-agency loan guarantee fees and, to a lesser extent, revolving-facility fees. The correction increased previously reported interest expense and reduced prior net income, including 2010 nine-month net income by $21.0 million. The company said the errors were not material to prior statements and did not affect operating income or total operating cash flow.
- Litigation: The filing describes a Puerto Rico distributor dispute, a crew wage class action and three purported securities class actions. The securities complaints seek unspecified damages; the distributor seeks substantial damages and other relief. The company disputes the claims and intends to defend them.
- Operating and financial exposure: Key risks include fuel and foreign-exchange movements, interest rates, economic weakness and cruise demand, geopolitical disruptions, competition, shipbuilding and operational disruptions, and litigation. The company hedged fuel purchases through 2015, but hedges do not eliminate price exposure.
- Other contingencies: Pullmantur goodwill and trademarks could be impaired if Spain’s economy or projected Net Yields underperform; $35.6 million of Pullmantur deferred tax assets also depends on future taxable income. The Brilliance of the Seas lease continues beyond 2012; a possible 2020 termination payment is approximately $104 million, and related tax indemnities are not quantifiable. Change-of-control or board-composition events could trigger accelerated debt repayment.
- Credit ratings were BB (S&P) and Ba2 (Moody’s), both stable. Certain long-term derivatives could require collateral beginning in July 2012 if specified ratings conditions are met; no collateral was required at quarter-end.
Important facts for investors to verify
- Whether full-year EPS guidance of $2.70–$2.80 is achieved, given fuel-price, currency and demand assumptions.
- How fuel costs and hedging coverage affect margins as fuel expense rises; review actual prices, hedge positions and subsequent-period results.
- Whether liquidity remains sufficient for scheduled debt service and ship commitments, including the timing and financing of newbuild payments.
- Developments in the securities, wage and distributor litigation, Pullmantur impairment indicators, and the Brilliance lease-related tax dispute.
- The effect of the prior-period guarantee-fee correction on any comparative financial information presented in later filings.