Royal Caribbean Cruises Ltd. — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. The filing also provides unaudited fourth-quarter results. Royal Caribbean operated five wholly owned cruise brands and held a 50% interest in TUI Cruises, which is accounted for under the equity method. Its brands and TUI Cruises operated 43 ships with about 105,750 berths at year-end.
Financial performance and position
| Metric | 2014 | 2013 |
|---|---|---|
| Total revenue | $8.074 billion | $7.960 billion |
| Operating income | $941.9 million | $798.1 million |
| Net income | $764.1 million | $473.7 million |
| Diluted EPS | $3.43 | $2.14 |
| Adjusted diluted EPS (non-GAAP) | $3.39 | $2.44 |
| Operating margin | 11.7% | 10.0% |
| Net margin | 9.5% | 6.0% |
| Net cash from operating activities | $1.744 billion | $1.412 billion |
| Total debt, including capital leases | $8.444 billion | $8.075 billion |
| Cash and cash equivalents | $189.2 million | $204.7 million |
| Net debt-to-capital (non-GAAP) | 49.9% | 47.2% |
Revenue comprised $5.894 billion in passenger tickets and $2.180 billion in onboard and other sales. Passenger ticket revenue was 73% of total revenue. Cruise occupancy was 105.6%, versus 104.7%, and passengers carried rose to 5.15 million from 4.88 million. Net yields increased 2.4% on a constant-currency basis; onboard revenue yield rose 3.8% on that basis. Net cruise cost per available passenger cruise day, excluding fuel, decreased 0.6% on a constant-currency basis.
Capital expenditures for property and equipment were $1.811 billion, compared with $763.8 million in 2013; investing cash outflow was $1.770 billion. The company reported $1.0 billion of liquidity at year-end, including $800.9 million available under unsecured credit facilities. Working capital was negative $3.0 billion, which management attributed largely to advance passenger deposits and current debt maturities. The company stated it was in compliance with its financial covenants.
Fourth-quarter results
Fourth-quarter revenue was $1.818 billion, down from $1.854 billion in 2013. Operating income increased to $119.3 million from $75.0 million, and net income rose to $109.8 million from $7.0 million. Diluted EPS was $0.49, versus $0.03. The 2014 quarter included a $33.5 million Spanish tax benefit; the 2013 quarter included a $33.5 million impairment charge. The 2014 quarter also benefited from the voyage-proration accounting change.
Material changes and notable items
- Annual revenue increased 1.4%, while operating income rose 18.0% and net income rose 61.3%. Results benefited from higher capacity and ticket prices, lower interest expense, equity-method earnings, and fewer restructuring and impairment charges than in 2013.
- The 2014 net income comparison includes a $33.5 million deferred tax benefit following Spanish tax reform. A change in voyage-proration methodology increased 2014 operating income and net income by $53.2 million, or $0.24 per diluted share; prior periods were not retrospectively adjusted.
- Onboard and other revenue fell 2.6%, primarily because Pullmantur sold most of its non-core tour, travel agency, and air-business interests. Higher onboard spending partially offset the decline.
- Interest expense, net of capitalized interest, declined 22.3% to $258.3 million, mainly due to lower rates and lower average debt.
- Cash flow from operations increased, but property and equipment purchases exceeded operating cash flow. Debt rose by $369.1 million, and net debt-to-capital increased 2.7 percentage points.
- The company sold Celebrity Century for $220 million, recording a $17.4 million loss, and purchased Brilliance of the Seas for approximately $275.4 million. It also repurchased 3.5 million shares from its largest shareholder for $236.1 million.
Outlook, commentary, risks and contingencies
Management’s “Double-Double” program targets double-digit return on invested capital and doubling 2014 adjusted EPS by 2017. Management said 2014 performance was on track and emphasized yield growth, cost discipline, and moderate capacity growth. For 2015, management expected Caribbean pricing challenges to persist in the first quarter and improve thereafter, while noting stronger U.S. consumer prospects, more restrained European spending, and continued growth in Asia.
| 2015 guidance | Full year | First quarter |
|---|---|---|
| Adjusted diluted EPS | $4.65–$4.85 | $0.10–$0.15 |
| Net yields, as reported | (0.5%) to 1.5% | Approximately (5.0%) |
| Net yields, constant currency | 2.5%–4.5% | (1.5%) to (2.0%) |
| Capacity increase | 5.5% | 3.8% |
| Fuel expense | $806 million | $207 million |
Guidance also included expected full-year depreciation and amortization of $840–$850 million and net interest expense of $260–$270 million. Management cautioned that fuel-price and currency movements create earnings volatility despite hedging. At year-end, fuel swaps covered 58% of projected 2015 fuel requirements; derivatives had a net liability fair value of $767.6 million. The company estimated a 10% fuel-price increase would add about $22.7 million to 2015 fuel cost, net of swaps.
Key risks include economic or geopolitical deterioration, safety or health incidents and related adverse publicity, weather disruptions, industry capacity growth and pricing pressure, fuel and foreign-exchange volatility, interest-rate exposure, financing access and covenant requirements, ship construction or repair delays, regulatory costs, cyber threats, and dependence on travel agencies and third-party providers. Environmental rules require lower-sulfur fuel in emission-control areas from 2015; management expected the near-term cost impact to be not significant, but warned that a possible worldwide sulfur limit in 2020 could materially increase fuel costs absent mitigation.
Approximately 575 crew members have filed individual arbitration demands alleging wage-related violations; the company said it could not estimate the potential impact and intends to defend the claims. The company also guarantees 50% of a TUI Cruises bank loan; it did not consider a payment under the guarantee probable. Management reported effective disclosure controls and internal control over financial reporting.
Important facts for investors to verify
- Assess how much 2014 earnings growth reflects recurring operations versus the $53.2 million voyage-proration benefit and $33.5 million tax benefit.
- Track 2015 yield performance against guidance, particularly Caribbean pricing and the anticipated recovery later in the year.
- Review newbuild spending, financing availability, debt maturities, covenant headroom, and the effect of higher leverage on liquidity.
- Monitor fuel-price and foreign-exchange exposures, hedge coverage, and the size and timing of derivative losses reclassified to earnings.
- Follow the crew arbitration claims and Pullmantur valuation assumptions, including planned ship transfers that support goodwill and trademark values.