Royal Caribbean Cruises Ltd. - 10-Q Summary (Q2 2006)
Business Context and Reporting Period
This report covers the quarterly period ended June 30, 2006, for Royal Caribbean Cruises Ltd. The company operates two primary cruise brands: Royal Caribbean International and Celebrity Cruises. The reporting period includes the delivery of the Freedom of the Seas in April 2006 and significant capital market activities, including debt issuances and an accelerated share repurchase (ASR) transaction.
Key Financial Metrics
| Metric | Q2 2006 | Q2 2005 | 6 Months 2006 | 6 Months 2005 |
|---|---|---|---|---|
| Total Revenues | $1,292,984 | $1,203,242 | $2,439,520 | $2,371,319 |
| Operating Income | $184,244 | $214,135 | $325,295 | $415,313 |
| Net Income | $122,427 | $155,240 | $241,926 | $344,849 |
| Diluted EPS | $0.57 | $0.72 | $1.12 | $1.58 |
| Operating Cash Flow (6mo) | $683,719 (vs. $771,242 prior year) | |||
| Cash & Equivalents | $323,183 (as of June 30, 2006) | |||
| Net Debt-to-Capital | 43.4% (as of June 30, 2006) |
Note: All figures in thousands except per share data and percentages.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 7.4% in Q2 2006 compared to Q2 2005, driven by a 5.9% increase in Gross Yields and a 1.5% increase in capacity (Available Passenger Cruise Days).
- Profitability Decline: Net income decreased 21.1% in Q2 2006. This decline was primarily due to a 39.3% increase in fuel expenses per metric ton, increased ship refurbishment costs, and higher marketing expenses.
- Cost Pressures: Net Cruise Costs per APCD increased 14.4% year-over-year. Fuel expenses rose from 7.3% to 9.4% of total revenues in Q2.
- Accounting Changes: The company adopted SFAS 123R (Share-Based Payment) effective Jan 1, 2006, reducing net income by approximately $2.7 million for the quarter. The prior year (2005) included a one-time gain of $52.5 million from a change in accounting for drydocking costs, which is not present in 2006.
Guidance, Outlook, and Risks
- Full Year 2006 Guidance:
- Net Yields expected to increase 3% to 4%.
- Net Cruise Costs per APCD expected to increase 6% to 7% (approx. 3.9 points due to fuel).
- Depreciation and amortization expected between $425M and $435M.
- Net interest expense expected between $255M and $265M.
- EPS Guidance: $2.90 to $3.00.
- Q3 2006 Outlook: Net Yields expected to increase 1% to 2%; Net Cruise Costs per APCD expected to increase approx. 4%. EPS expected in the range of $1.52 to $1.57.
- Capital Expenditures: Anticipated CAPEX is $1.2B for 2006, rising to $2.0B in 2009 and $1.0B in 2010, driven by five ships on order (aggregate cost ~$4.6B) and a new Solstice-class ship ordered in July 2006.
- Risks and Contingencies:
- Fuel Prices: Current "at-the-pump" price is $448/ton (25% higher than 2005 average). Further increases could materially impact costs.
- Litigation: A $193M jury award in a Legionnaires' disease case is pending appeal; outcome uncertain. A class action regarding cabin steward gratuities is on appeal after dismissal.
- Debt Covenants: Change in control provisions could trigger prepayment of indebtedness if principal shareholders lose majority control.
Investor Verification Checklist
- Fuel Hedging Effectiveness: Verify the extent of fuel swap agreements and their ability to mitigate the 39%+ increase in fuel costs.
- Capital Expenditure Funding: Confirm the company's ability to fund the $4.6B ship order book and $1.2B+ annual CAPEX without diluting equity or breaching debt covenants.
- Share Repurchase Settlement: Monitor the settlement of the Accelerated Share Repurchase (ASR) transaction in August 2006 to determine the final share count and cost basis.
- Legal Outcomes: Track the appeal status of the $193M Legionnaires' disease verdict and the cabin steward gratuity lawsuit.
- Convertible Note Conversion: Assess the dilution impact from the expected conversion of zero-coupon convertible notes due 2021.