Royal Caribbean Cruises Ltd. — 2016 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2016; it is not a standalone fourth-quarter filing. Royal Caribbean operates Royal Caribbean International, Celebrity Cruises and Azamara, and holds equity-method interests in TUI Cruises, Pullmantur and SkySea Cruises. Its global and partner brands operated 49 ships with approximately 123,270 berths at year-end. The company reports one operating segment.
Financial and operating performance
| Metric | 2016 | 2015 | Change / context |
|---|---|---|---|
| Total revenue | $8.496 billion | $8.299 billion | Up 2.4% |
| Operating income | $1.477 billion | $874.9 million | Operating margin 17.4%, versus 10.5% |
| Net income | $1.283 billion | $665.8 million | Diluted EPS $5.93 versus $3.02 |
| Adjusted net income | $1.315 billion | $1.065 billion | Adjusted diluted EPS $6.08 versus $4.83 |
| Operating cash flow | $2.517 billion | $1.946 billion | Increase mainly from customer deposits, onboard receipts and lower fuel costs |
| Capital spending | $2.494 billion | $1.613 billion | Higher chiefly due to deliveries of Ovation and Harmony of the Seas |
| Total debt, including capital leases | $9.387 billion | $8.527 billion | Up $860 million |
| Year-end cash | $132.6 million | $121.6 million | Available credit facilities added $848.0 million to reported liquidity |
Revenue, yields and costs. Passenger ticket revenue was $6.149 billion, or 72.4% of total revenue; onboard and other revenue was $2.347 billion. Net yield increased 1.6% reported and 3.9% on a constant-currency basis. Net cruise cost per available passenger cruise day (APCD) declined 2.2% reported; net cruise cost excluding fuel per APCD was essentially flat reported and increased 0.9% in constant currency. Fuel expense was $713.7 million, down from $795.8 million; fuel represented 8.4% of revenue versus 9.6%.
Fourth-quarter context. Unaudited Q4 revenue was $1.910 billion versus $1.902 billion in 2015; operating income was $296.8 million versus $249.9 million, and net income was $261.1 million versus $206.8 million. Q4 diluted EPS was $1.21 versus $0.95.
Operating indicators. Passengers carried increased to 5.75 million from 5.40 million; APCD grew 3.3% to 37.84 million; occupancy was 106.4%, compared with 105.1%. The two new ships delivered in 2016 supported capacity and yields. North American sailings performed well, while China demand was softer than expected and geopolitical disruption weighed on European demand.
Material changes versus prior periods
- Net income nearly doubled year over year, but comparison is affected by the $411.3 million Pullmantur-related impairment recognized in 2015. Adjusted diluted EPS rose to $6.08 from $4.83.
- Revenue rose 2.4%; foreign exchange reduced 2016 revenue by approximately $187.9 million versus 2015. Capacity growth and improved ticket and onboard yields partly offset currency headwinds.
- In July 2016, the company sold 51% of Pullmantur Holdings, retained 49% and deconsolidated the business effective August. The four vessels operated by Pullmantur remain company-owned and are bareboat-chartered to the affiliate.
- Interest expense increased to $307.4 million from $277.7 million, primarily due to higher debt associated with new ships. Equity-method income increased to $128.4 million from $81.0 million, mainly reflecting TUI Cruises.
- The company completed its $500 million share repurchase program, including $300 million of purchases in 2016, and increased the quarterly dividend to $0.48 per share in the second half of the year.
Liquidity, debt and commitments
Year-end liquidity was $980.6 million, comprising $132.6 million cash and $848.0 million available under unsecured credit facilities. Working capital was negative $3.7 billion, compared with negative $3.5 billion a year earlier; management attributes the structural deficit largely to advance customer payments recorded as current liabilities and says operating cash generation and credit facilities have historically supported the model. Management expected available cash flows and financing arrangements to cover capital spending and debt repayments over the following 12 months.
Total debt including capital leases was $9.387 billion, with $1.286 billion classified as current. Contractual obligations totaled $18.093 billion, including $6.454 billion of ship purchase obligations and $9.147 billion of long-term debt obligations. Expected capital expenditures based on existing ship orders were approximately $0.6 billion in 2017, $2.6 billion in 2018, $1.5 billion in 2019 and $2.0 billion in 2020. The company reported that it was well within its debt covenant requirements at year-end.
Guidance, management commentary and risks
For full-year 2017, management forecast adjusted diluted EPS of $6.90–$7.10; constant-currency net yield growth of 4.0%–6.0%; and constant-currency net cruise cost per APCD, excluding fuel, approximately flat. Reported net yield growth guidance was 3.3%–5.3%. Management said bookings remained encouraging and its forecast was essentially unchanged after the January 26, 2017 earnings release. First-quarter 2017 adjusted diluted EPS guidance was approximately $0.90.
Management’s Double-Double program targets adjusted EPS of $6.78 and ROIC of 10% by the end of 2017. The company said it had achieved three consecutive years of record adjusted EPS and continued to focus on yield growth, cost controls and moderate fleet expansion. Caribbean capacity was expected to increase in 2017, while capacity in Europe was expected to decline; Asia-Pacific capacity was forecast to grow 5%.
- Demand and geopolitical exposure: Cruises are discretionary purchases; economic weakness, terrorism, political instability and travel advisories may weaken bookings, pricing and onboard spending. European incidents affected demand in 2016, and China demand was softer than expected.
- Fuel, currency and interest rates: The company is exposed to fuel-price, foreign-exchange and interest-rate movements despite hedging. At year-end, 60% of projected 2017 fuel requirements were hedged; management estimated a 10% fuel-price increase would add about $30 million to 2017 fuel costs. A 1 percentage-point interest-rate increase was estimated to raise forecast 2017 interest expense by about $42.7 million.
- Capacity and capital intensity: Industry-wide new ship deliveries may pressure pricing if demand does not keep pace. Royal Caribbean had approximately $8.4 billion of ship orders in its reported committed order set; about 66.7% of the cost was exposed to euro fluctuations. New Project Icon ships remained subject to conditions, including financing.
- Operational, regulatory and other risks: Ship incidents, severe weather, port availability, shipyard delays, environmental rules, cybersecurity, labor relations, insurance availability, tax status and compliance could increase costs or disrupt operations. The company does not carry business interruption insurance for its ships.
- Contingencies and unusual items: The 2016 Pullmantur reporting-lag change reduced net income by $21.7 million. The February 2017 Alaska emissions settlement required payment and remedial actions that management characterized as immaterial. Other routine claims were described as largely insured and not expected to have a material adverse effect.
Most important facts for investors to verify
- Reconcile GAAP earnings growth with the 2015 Pullmantur impairment and 2016 Pullmantur deconsolidation and reporting-lag adjustment.
- Track whether 2017 yield, cost and adjusted EPS guidance is achieved, particularly as capacity and deployment change across regions.
- Assess debt maturities, refinancing needs, shipbuilding commitments, available revolving credit and the sustainability of the working-capital deficit.
- Monitor foreign-exchange, fuel and interest-rate exposures, including hedge coverage, collateral requirements and euro sensitivity of newbuild costs.
- Review demand trends in China and Europe, industry capacity additions, and the execution, delivery timing and financing conditions for ships on order.