Business context and reporting period
Royal Caribbean Cruises Ltd. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2010. The global cruise company operates Royal Caribbean International, Celebrity Cruises, Pullmantur, Azamara Club Cruises and CDF Croisières de France, and holds a 50% interest in TUI Cruises. Unless noted otherwise, financial amounts below are in U.S. dollars.
Financial performance and position
Amounts in the table are millions, rounded; income-statement comparisons are with the same 2009 period. Cash flow is for the six months ended June 30.
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Revenue | $1,601.7 | $1,349.0 | $3,087.3 | $2,674.6 |
| Operating income | $143.7 | $55.1 | $235.4 | $99.3 |
| Operating margin | 9.0% | 4.1% | 7.6% | 3.7% |
| Net income (loss) | $60.5 | $(35.1) | $148.0 | $(71.3) |
| Net margin | 3.8% | (2.6)% | 4.8% | (2.7)% |
| Diluted EPS | $0.28 | $(0.16) | $0.68 | $(0.33) |
- Q2 capacity grew 14.6%; net yields increased 4.9% (5.4% at constant currency), while net cruise costs per available passenger cruise day (APCD) fell 2.8% (2.0% at constant currency). Occupancy was 103.6%, versus 102.3%.
- For the first half, capacity increased 11.8%, net yields rose 3.8% (2.5% at constant currency), and net cruise costs per APCD decreased 2.5% (2.6% at constant currency). Occupancy rose to 103.4% from 101.7%.
- First-half operating cash flow was $1,010.9 million, versus $342.9 million. Investing cash outflow was $862.9 million, including $847.5 million of property and equipment purchases; financing cash outflow was $112.7 million. Cash increased $34.2 million to $318.8 million.
- At June 30, total debt was $8,110.4 million and net debt was $7,791.5 million; reported net debt-to-capital was 51.8%, compared with 52.0% at year-end 2009. Shareholders’ equity was $7,247.8 million, down from $7,499.7 million.
- Liquidity was approximately $1.0 billion: $318.8 million cash plus $685.0 million available under the revolving credit facility. Working capital deficit was $2.5 billion, versus $1.7 billion at December 31, 2009. Current debt maturities were $1,001.3 million.
Material changes versus the prior comparable period
- Revenue gains reflected higher capacity, improved ticket prices and onboard spending; management also cited improved occupancy for the first half. Newer ships included Oasis of the Seas, Celebrity Equinox and Celebrity Eclipse.
- Operating expenses rose in dollars with capacity, but costs per APCD improved. Fuel expense increased in Q2 year over year; for the first half, lower fuel expense per passenger, improved fuel efficiency and lower air-charter costs partly offset capacity-related cost increases.
- First-half 2010 other income included an $85.6 million one-time gain from the Rolls-Royce settlement. The company received $68.0 million net and recorded the present value of an additional $20.0 million due within five years. This gain was recorded in Q1, not Q2.
- Interest expense increased in both comparative periods, primarily due to higher average debt levels. Q2 other expense was lower than in 2009, mainly because foreign-exchange losses decreased.
- Debt and liquidity activity included a $566.1 million unsecured loan for Celebrity Eclipse and net cash proceeds of approximately $115.4 million from terminating certain interest-rate and cross-currency swaps. The company also received approximately $57.5 million upon terminating fuel swaps with a counterparty.
Guidance, outlook, risks and unusual items
- Q3 2010 outlook: Management forecast net yields up approximately 4% (7% constant currency), net cruise costs per APCD down approximately 1%, and capacity up 12.7%. Assuming fuel prices remained at then-current pump levels, it expected diluted EPS of $1.52–$1.57.
- Full-year 2010 outlook: Net yields were expected to rise 3%–4% (4%–5% constant currency); net cruise costs per APCD were expected to decline 1%–2%. Capacity was expected to increase 11.5%. Assuming fuel prices remained at then-current levels, management forecast diluted EPS of $2.25–$2.35. These forecasts depend on fuel prices, hedging and other assumptions.
- Fuel expense was estimated at $170 million for Q3 and $652 million for full-year 2010 at then-current prices; approximately 47% and 48% of fuel requirements, respectively, were hedged. A 10% fuel-price change was estimated to affect expense by about $9 million for Q3 and $17 million for the year, after hedges.
- Three ships were on order, with aggregate cost of approximately $3.4 billion and $433.5 million deposited as of June 30. Expected capital expenditures, including ships on order, were approximately $2.2 billion in 2010 and $1.0 billion in each of 2011 and 2012. Management said operating cash flows, available facilities and committed ship financing should meet foreseeable needs, while noting the economic environment had adversely affected operating cash flow.
- Management reported compliance with debt covenants. It cited covenant net worth of $7.5 billion against a $5.2 billion minimum, covenant net-debt-to-capital of 51.0% against a 62.5% maximum, and fixed-charge coverage above the 1.25x minimum. Covenant calculations exclude accumulated other comprehensive income or loss.
- Principal risks include cruise demand and access to credit, fuel and currency movements, competition and industry capacity, ship construction or delivery problems, safety and health incidents, weather and natural disasters, regulation, litigation, and counterparty performance. Senior debt was rated BB- by S&P and Ba3 by Moody’s, both with stable outlooks; certain long-term derivatives could require collateral beginning in 2012 if ratings remain below specified thresholds.
- Legal matters include arbitration demands alleging improper sharing of Celebrity crew gratuities, with claimed class-wide damages estimated above $200 million; Park West artwork-auction suits, in which the company was dismissed but plaintiffs sought leave to amend; and an EEOC matter in which the agency declined to sue, while an individual retained a 90-day period to file. The company stated it believed it had meritorious defenses. It also disclosed a Brilliance of the Seas lease tax indemnity exposure that it did not consider probable, but whose maximum amount it could not estimate.
- The quarterly dividend had been discontinued beginning in Q4 2008. The filing stated that a specified change-of-control scenario could require prepayment of debt under most credit facilities and adversely affect liquidity.
Important facts for investors to verify
- How much of the first-half profit improvement is attributable to the one-time $85.6 million Rolls-Royce settlement gain, and how results compare excluding it.
- Whether bookings, ticket pricing, occupancy and net yields support the Q3 and full-year EPS forecasts, particularly under changing economic and currency conditions.
- Fuel-price sensitivity, hedge coverage and the effect of derivatives on earnings, cash flow and potential collateral requirements.
- Funding plans for near-term ship commitments and debt maturities, the availability of the revolving facility, and the continued ability to meet covenants despite the working capital deficit.
- Developments in the crew gratuity arbitrations, Park West litigation and other contingencies, including any changes to the company’s assessment of exposure.