Royal Caribbean Cruises Ltd. — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. This is an annual filing; fourth-quarter figures are noted separately below. The company operates five consolidated cruise brands and holds a 50% equity-method interest in TUI Cruises.
Financial and operating performance
| Metric | 2013 | 2012 |
|---|---|---|
| Total revenue | $7.960 billion | $7.688 billion |
| Operating income | $798.1 million | $403.1 million |
| Net income | $473.7 million | $18.3 million |
| Diluted GAAP EPS | $2.14 | $0.08 |
| Diluted adjusted EPS | $2.40 | $1.97 |
| Operating margin | 10.0% | 5.2% |
| Net margin | 6.0% | 0.2% |
Revenue grew 3.5%, primarily from higher ticket prices and onboard spending. Passenger ticket revenue was $5.723 billion (71.9% of revenue), up 2.3%; onboard and other revenue was $2.237 billion, up 6.9%. Net Yields increased 2.7% reported and 3.2% on a constant-currency basis. Capacity rose 0.8%; occupancy was 104.7%, versus 104.4% in 2012.
Net cash provided by operations was $1.412 billion, compared with $1.382 billion in 2012. Investing activities used $824.5 million, including $763.8 million of property and equipment purchases; financing activities used $576.6 million. Cash and cash equivalents ended the year at $204.7 million.
Total debt, including capital leases, was $8.075 billion, down from $8.490 billion; net debt was $7.870 billion. Net debt-to-capital was 47.2%, versus 50.0%. Reported liquidity was $1.9 billion, comprising cash and $1.7 billion available under unsecured credit facilities. Working capital deficit was $3.3 billion, largely reflecting current debt and advance customer deposits, a customary feature of the company’s booking model.
Fourth-quarter results and changes versus prior periods
Fourth-quarter 2013 revenue was $1.854 billion, versus $1.806 billion in fourth-quarter 2012. Operating income was $75.0 million and net income was $7.0 million, compared with an operating loss of $281.3 million and net loss of $392.8 million in the prior-year quarter. The 2012 comparison was heavily affected by Pullmantur impairment charges.
For the full year, operating income and net income improved substantially from 2012, but comparisons are affected by the $385.4 million Pullmantur impairment recorded in 2012. In 2013, the company recorded $56.9 million of restructuring and related impairment charges, including $23.4 million of restructuring exit costs and $33.5 million of impairments. Revenue growth outpaced the 2.9% increase in cruise operating expenses, although Net Cruise Costs per available passenger cruise day rose 1.9%.
Outlook, management commentary, and risks
- 2014 full-year guidance: Net Yields expected to increase approximately 2% reported and 2%–3% constant currency; Net Cruise Costs per available passenger cruise day expected approximately flat; capacity expected to rise 1.7%. Adjusted diluted EPS guidance was $3.20–$3.40. Management did not provide GAAP EPS guidance, citing uncertainty in items used to calculate adjusted EPS.
- First-quarter 2014 guidance: Adjusted diluted EPS of $0.20–$0.30; Net Yields approximately 2% lower reported and approximately flat constant currency. Fuel expense was forecast at $242 million, with 52% of forward fuel consumption hedged.
- Management cited continued investment in Asia, revenue management, ship revitalizations and onboard revenue initiatives, alongside cost control. It expected approximately $23 million of additional restructuring and related costs in 2014; the filing separately estimates $32 million of remaining cash outlays for the profitability initiatives, mostly through year-end 2014.
- Four Royal Caribbean International ships were on order at year-end, with aggregate cost of approximately $4.7 billion and expected capital expenditures of $1.3 billion in 2014, $1.3 billion in 2015 and $2.1 billion in 2016. Newbuilds are expected to increase capacity materially through 2016.
- Key risks include discretionary-spending and geopolitical weakness, cruise incidents and adverse publicity, fuel-price and foreign-exchange volatility, increased industry capacity, shipyard delays, regulatory and environmental costs, and refinancing or covenant risks. The company reported compliance with its debt covenants at year-end. The Pullmantur goodwill fair value exceeded carrying value by approximately 8%, but management warned that modest adverse forecast changes or failure to transfer planned ships could trigger further impairment.
- Environmental cost exposure includes the 2015 requirement for lower-sulfur fuel in Emission Control Areas and a possible 2020 worldwide fuel-sulfur limit. The company said mitigation plans were underway but acknowledged that failure to develop effective technical solutions could significantly raise fuel costs.
- The Pullmantur agreement to sell a majority interest in its non-core land-tour, travel-agency and air businesses remained subject to customary closing conditions. Royal Caribbean expected to retain a 19% interest and retain aircraft for lease to Pullmantur Air.
Most important facts for investors to verify
- Reconcile adjusted earnings and yield measures to GAAP results, including the effects of the 2012 Pullmantur impairment and 2013 restructuring charges.
- Confirm the timing, completion terms and proceeds or continuing obligations associated with the Pullmantur non-core business sale.
- Monitor 2014 booking trends, pricing, occupancy and performance against the company’s yield, cost and adjusted EPS guidance.
- Assess funding and execution of the newbuild program, scheduled debt maturities, available credit facilities and the company’s ability to reduce leverage.
- Track Pullmantur’s performance and planned fleet transfers, given the narrow reported goodwill valuation cushion and stated risk of additional impairment.
- Evaluate exposure to fuel prices, foreign exchange, shipyard delivery risk and evolving environmental regulation, including the adequacy of hedges and mitigation measures.