Royal Caribbean Cruises Ltd. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017; unaudited. Amounts are U.S. dollars unless stated otherwise. Royal Caribbean operates Royal Caribbean International, Celebrity Cruises and Azamara, and holds equity-method interests in TUI Cruises, Pullmantur and SkySea Cruises.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $2.570bn | $2.564bn | $6.773bn | $6.587bn |
| Operating income | $737.5m | $735.0m | $1.437bn | $1.180bn |
| Net income | $752.8m | $693.3m | $1.337bn | $1.022bn |
| Diluted EPS | $3.49 | $3.21 | $6.19 | $4.72 |
| Net margin | 29.3% | 27.0% | 19.7% | 15.5% |
Revenue increased 0.2% in Q3 and 2.8% year to date; net income rose 8.6% and 30.8%, respectively. Q3 operating income was nearly flat, while year-to-date operating income increased about 21.7%. Equity investment income contributed $85.1m in Q3, up from $46.5m, primarily reflecting higher TUI Cruises income.
For the first nine months, operating cash flow was $2.455bn, versus $2.001bn in 2016. Investing activities used $78.0m, compared with $2.518bn, largely reflecting lower ship-related capital spending after 2016 ship deliveries and $230m of asset-sale proceeds. Financing activities used $2.370bn, versus providing $597m in 2016. Cash increased $7.3m to $140.0m.
Balance sheet and liquidity
- At September 30, 2017, cash was $140.0m and total current assets were $798.2m. Current liabilities were $5.057bn, including $2.226bn in customer deposits and $1.516bn of current long-term debt.
- Long-term debt was $6.076bn; including its current portion, balance-sheet debt was approximately $7.592bn, down from approximately $9.387bn at December 31, 2016. The filing reports $7.558bn of debt in its fair-value disclosure; the filing text does not reconcile this amount to the balance-sheet presentation.
- Management reported $1.9bn of liquidity: approximately $140m cash plus $1.8bn available under unsecured revolving credit facilities. Working capital deficit was $4.3bn, which management attributed mainly to advance passenger receipts and described as typical for the business model.
- Management said operating cash flow and current financing arrangements should cover capital expenditures and debt repayments over the next 12 months. The company was well above its stated debt covenant thresholds at quarter-end.
Material changes and operating drivers
- Q3 passenger ticket revenue declined $6.8m, while onboard and other revenue increased $12.6m. For the first nine months, ticket revenue rose $98.1m and onboard and other revenue rose $88.5m.
- Capacity declined 5.7% in Q3 and 3.0% year to date, reflecting divestitures and ship sales, partly offset by newer ships. Q3 occupancy improved to 110.6% from 109.8%; year-to-date occupancy was 108.9% versus 106.5%.
- Reported Q3 net yields increased 5.9% (5.3% constant currency); year-to-date net yields increased 6.9% (7.2% constant currency). Q3 net cruise costs per available passenger cruise day rose 4.2%, and costs excluding fuel per day rose 6.0%; year-to-date costs per day were broadly flat.
- Q3 cruise operating expenses decreased $21.9m, partly due to lower capacity. Year-to-date expenses fell $141.4m, including a $30.9m gain on the sale of Legend of the Seas. Depreciation and amortization increased to $710.8m year to date from $661.7m, mainly due to fleet additions and ship upgrades.
- Fuel expense decreased to $508.9m year to date from $531.3m. Interest expense increased slightly year to date to $230.2m, while Q3 interest expense declined to $73.2m from $82.6m.
Outlook, commitments and risks
- November 7, 2017 guidance forecast full-year 2017 diluted adjusted EPS of $7.35–$7.40 and Q4 diluted adjusted EPS of $1.15–$1.20. Full-year net yields were expected to increase about 6.0%; Q4 net yields about 3.5% reported and 2.0%–2.5% constant currency. Guidance depends on then-current fuel, interest and foreign-exchange assumptions.
- Management estimated hurricane-related disruptions reduced Q3 and year-to-date 2017 net income and adjusted net income by about $0.20 per diluted share. It also noted that reduced sailing capacity left some operating costs in place, raising costs per available passenger cruise day.
- Ship purchase obligations were $10.692bn in the contractual-obligations table; aggregate cost of ships on order was approximately $13.0bn, with $323.2m deposited. Planned capital expenditures were approximately $0.6bn in 2017, $3.2bn in 2018 and $2.1bn in 2019. These commitments create significant funding needs.
- In October 2017, the company amended its $1.2bn revolving facility, extending maturity to October 2022 and reducing the applicable margin. It also arranged financing for Project Icon ships of up to 80% of contract price. These are post-quarter developments.
- Key stated risks include weaker consumer demand, severe weather and itinerary disruption, fuel/foreign-exchange/interest-rate volatility, competition and industry capacity growth, shipyard delays, access to financing, cyber and data-security events, and regulatory or environmental cost increases. Most routine industry claims are insured; management did not expect them, net of recoveries, to materially affect results.
- The company paid $309.2m of dividends in the first nine months and repurchased $125.0m of shares in Q3. A $500m repurchase authorization had $375m remaining at September 30. The Q3 dividend of $0.60 per share was paid in October.
Important facts for investors to verify
- Whether Q4 and full-year guidance was achieved, particularly adjusted EPS, yields and cost-per-day assumptions.
- The realized financial and operational effects of 2017 hurricane disruptions and any subsequent weather events.
- Funding, delivery timing and foreign-exchange exposure for the substantial shipbuilding program, alongside debt maturities and planned capital spending.
- How much of the year-to-date improvement came from recurring operating performance versus capacity changes, equity-method income and the Legend of the Seas gain.
- Developments in liquidity, covenant headroom, fuel and currency hedges, and the working-capital deficit as customer deposits and near-term obligations change.