Royal Caribbean Cruises Ltd. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Royal Caribbean is a global cruise company operating several cruise brands and holding a 50% interest in TUI Cruises. Amounts below are in U.S. dollars unless noted.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Total revenue | $1.883 billion | $1.821 billion | $3.794 billion | $3.655 billion |
| Operating income | $113.3 million | $96.9 million | $279.0 million | $232.3 million |
| Operating margin | 6.0% | 5.3% | 7.4% | 6.4% |
| Net income (loss) | $24.7 million | ($3.7 million) | $101.0 million | $43.3 million |
| Diluted EPS | $0.11 | ($0.02) | $0.46 | $0.20 |
Q2 revenue rose 3.4%, mainly from higher ticket prices, onboard spending and capacity. For the first half, revenue increased 3.8%. Q2 net income improved from a loss; lower interest and other expense also supported earnings. Q2 net margin was 1.3%, versus a 0.2% loss margin in 2012.
For the first six months, operating cash flow was $672.8 million, compared with $583.5 million. Investing cash use was $444.9 million, including $396.1 million in property and equipment purchases; financing cash use was $217.8 million. Cash ended June at $205.2 million, up from $194.9 million at year-end 2012.
Total debt was $8.254 billion, including $1.906 billion due within one year; net debt was $8.049 billion. Net debt-to-capital was 49.0%, versus 50.0% at December 31, 2012. Current liabilities exceeded current assets by $3.8 billion, a deficit the company says is typical of its business model, in part because passenger receipts are collected before sailings. Reported liquidity was $1.5 billion: $205.2 million cash and $1.3 billion available under unsecured credit facilities.
Changes, unusual items and management commentary
- Q2 Net Yields increased 2.4% reported and 2.8% on a constant-currency basis. Net Cruise Costs per available passenger cruise day (APCD) rose 1.2% reported; excluding fuel, they rose 2.4%. First-half Net Yields increased 2.6% reported and 3.3% constant currency; Net Cruise Costs per APCD rose 0.8% reported.
- An onboard incident led to an unscheduled Grandeur of the Seas drydock and cancelled sailings. The net impact reduced Q2 diluted EPS by $0.05; management estimated a $0.10 full-year 2013 impact. The ship returned to service in July.
- A $15.2 million out-of-period correction for an understated credit-card rewards liability reduced Q2 onboard and other revenue. The company said it was not material to prior years or expected to be material to full-year 2013.
- Effective January 2013, estimated lives and residual values for five ships were revised. The change increased Q2 operating and net income by $3.0 million, first-half income by $3.9 million, and was estimated to add about $11 million to 2013 income.
- Management described a broad profitability program targeting revenue growth and expense reduction, including Pullmantur and international cost initiatives. Some 2013 restructuring charges were expected. The company’s stated 2014 objective was yield improvement and at least flat Net Cruise Costs Excluding Fuel per APCD.
Outlook, commitments and risks
- Full-year 2013 guidance: EPS $2.20–$2.30; constant-currency Net Yields growth 2%–3% (approximately 2% reported); Net Cruise Costs per APCD growth 1%–2%; capacity growth 1%. Fuel expense was estimated at $923 million, with 60% of forecast consumption hedged.
- Q3 2013 guidance: EPS $1.60–$1.70; constant-currency Net Yields growth 1%–2%; Net Cruise Costs per APCD growth 3%–4% constant currency; capacity growth 1.8%. Management cited weaker yield expectations in China and Pullmantur Caribbean for specific reasons.
- Six ships were on order, with aggregate costs of approximately $4.5 billion and $288.8 million deposited. Planned capital expenditures were approximately $0.7 billion in 2013, $1.2 billion in each of 2014 and 2015, and $2.0 billion in 2016. Management anticipated available cash, credit and financing arrangements, and operating cash flows would cover capital expenditures and debt repayments over the next 12 months; it also expected to pursue additional market financing for remaining 2013–2014 maturities.
- Material exposures include fuel prices, foreign exchange, interest rates, global demand, competition, operating incidents, shipbuilding execution and financing access. About 56.4% of ship-order costs were exposed to euro fluctuations. The company reported compliance with debt covenants, while noting change-of-control provisions could accelerate debt repayment. Its senior unsecured ratings were BB (S&P) and Ba1 (Moody’s); certain long-term interest-rate derivatives could require collateral beginning in 2016 if specified rating triggers apply.
- A securities class action was dismissed with prejudice, with plaintiffs retaining an appeal right. A separate crew wage case was on appeal after dismissal based on arbitration requirements. The company said it could not estimate possible impacts. It also disclosed a U.K. tax dispute concerning the Brilliance of the Seas lease and a guarantee of half of TUI Cruises’ outstanding €144 million bank loan; it did not consider related indemnity or guarantee payments probable.
Important facts for investors to verify
- Whether yield gains and the profitability program deliver against guidance, particularly with Q3 cost-per-APCD growth expected to exceed yield growth.
- Funding, delivery timing and foreign-exchange exposure for the $4.5 billion ship-order program, alongside debt maturities and planned refinancing.
- The realized financial effects of the Grandeur incident, the rewards-liability correction and the ship-life accounting estimate.
- Liquidity and covenant headroom, including the company’s reliance on advance customer deposits and access to credit markets.
- Developments in the crew litigation appeal, U.K. lease tax dispute, TUI Cruises guarantee exposure and derivative collateral triggers.