Business context and reporting period
Royal Caribbean Cruises Ltd. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2021. The company operates Royal Caribbean International, Celebrity Cruises and Silversea Cruises, and owns 50% of TUI Cruises. Results remained heavily affected by the phased restart of cruising after the company suspended global operations in March 2020.
By September 30, 38 Global and Partner Brand ships were operating, about 63% of the fleet, and the company reported having carried more than 500,000 passengers since service resumed. Silversea results are included on a three-month reporting lag.
Financial results and liquidity
Amounts below are in U.S. dollars; financial statement figures are rounded to millions unless otherwise noted.
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue | $457 million | $(34) million | $550 million | $2,175 million |
| Operating loss | $(1,006) million | $(996) million | $(2,839) million | $(3,585) million |
| Net loss attributable to Royal Caribbean | $(1,425) million | $(1,347) million | $(3,904) million | $(4,431) million |
| Diluted loss per share | $(5.59) | $(6.29) | $(15.56) | $(21.01) |
| Adjusted net loss | $(1,250) million | $(1,204) million | $(3,615) million | $(2,797) million |
| Adjusted diluted loss per share | $(4.91) | $(5.62) | $(14.41) | $(13.26) |
Q3 2020 revenue was negative, reflecting, among other items, a $67.9 million correction to cancellation revenue; the filing cautions that the correction was immaterial. The unusual negative comparative revenue makes simple year-over-year percentage comparisons less informative.
Margins: Operating loss was 220.1% of revenue in Q3 2021 and 516.2% for the first nine months of 2021, as reported. These ratios reflect the very low revenue base during the restart.
Cash flow: For the first nine months, operating cash use was $1.67 billion, investing cash use was $1.56 billion, and financing cash provided was $2.84 billion. Cash declined $395 million from year-end 2020 to $3.29 billion. Operating cash use improved from $2.91 billion in the prior-year period, supported in part by a $1.03 billion increase in customer deposits.
Balance sheet and liquidity: At September 30, cash was $3.29 billion; current assets were $4.17 billion and current liabilities $5.24 billion. Total debt, net of issuance costs, was $20.84 billion, including $956.7 million current; shareholders’ equity was $6.47 billion. The company reported $4.1 billion of liquidity, comprising cash, $0.1 billion of undrawn revolving capacity and a $0.7 billion term-loan commitment available to draw through August 12, 2022. Revolving facilities were mostly utilized. Customer deposits totaled $2.77 billion, including about $650 million of unredeemed future cruise credits (FCCs).
Debt and financing: The company issued $3.15 billion of senior notes during 2021, raised about $1.5 billion through a common-stock offering, and repaid or redeemed certain higher-cost debt. The weighted-average interest rate on total debt was 5.65% at quarter-end. Debt maturities net of issuance costs were $2.18 billion in 2022 and $5.37 billion in 2023. Covenant waivers and payment deferrals were extended; the company said it was compliant with its applicable minimum-liquidity covenant.
Material changes versus comparable periods
- Q3 revenue rose with the resumption of sailings, but operating costs also increased as ships returned to service. Q3 operating loss widened modestly and net loss increased year over year; interest expense rose substantially, including a $141.9 million debt-extinguishment loss.
- Nine-month revenue fell 74.7% year over year, reflecting a 41.1% capacity decline and the lay-up of most of the fleet in the first half of 2021. Cruise operating expenses fell 39.1%, less than revenue, while interest expense increased 76.5% to $1.01 billion.
- Nine-month GAAP net loss improved versus 2020, when the company recorded $1.35 billion of impairment and credit losses. However, adjusted net loss worsened, reflecting that the prior-year adjusted result excluded substantial COVID-related impairment charges.
- Occupancy was 36.4% in Q3 2021 versus 100.0% in Q3 2020; the company carried 251,744 passengers versus 1,230. These comparisons reflect suspended operations in the prior-year quarter and reduced capacity during the restart.
- The company sold Azamara in March 2021 for $201 million before closing adjustments, issued 16.9 million shares for approximately $1.5 billion net proceeds, and purchased PortMiami Terminal A for $220 million.
Outlook, management commentary and risks
Management expected a GAAP and adjusted net loss for both Q4 2021 and full-year 2021, with the extent dependent on the timing and scale of the return to service. The company said it could not reasonably estimate the pandemic’s financial impact.
- Management expected approximately 80% of fleet capacity to be operating by year-end 2021, with 50 of 61 Global Brand ships back in service. It anticipated Q4 overall load factors of 60%–65% and 65%–70% on core itineraries; it expected ships on core Q4 itineraries to be cash-flow accretive, including start-up costs.
- The company expected remaining Global Brand ships to return by spring 2022 and historical load factors in Q3 2022. It anticipated serving more than 1 million passengers by December 31, 2021.
- Bookings improved after a summer slowdown associated with the Delta variant. September bookings for 2022 sailings were more than 60% above the monthly average in Q2 2021. Full-year 2022 sailings were booked within historical ranges and at higher prices than 2019, according to management; near-term 2022 load factors remained below historical levels.
- Estimated 2021 capital expenditures were approximately $2.1 billion, excluding Partner Brand ship orders. The company had $12.8 billion of aggregate cost for its own ships on order, with $784.8 million deposited; deliveries remain subject to shipyard delays.
- Management stated that available resources were sufficient for at least the next 12 months, based on assumptions including gradual resumption, lower occupancy during ramp-up and incremental restart spending. It cautioned that these estimates are uncertain.
Key risks and contingencies: COVID-19, variants, regulatory requirements, outbreaks and travel demand may delay or disrupt sailings and continue to materially affect revenue, cash flows and liquidity. Restart costs, health protocols, refunds and FCC redemption or expiry are uncertain. High leverage, interest costs, future refinancing needs, covenant compliance after waivers expire, and possible credit-card processor reserve requirements pose liquidity risks. Other identified risks include shipyard delays and cost increases, fuel, foreign-exchange and interest-rate movements, port access, competition, cyber incidents, and litigation. A Cuban port-related Helms-Burton claim remained pending, with trial scheduled for February 28, 2022; another claim had been dismissed, subject to appeal. The company said it believed material adverse outcomes were unlikely but could not assure the final outcomes would not be material.
Unusual items: Q3 2021 included the $141.9 million debt-extinguishment loss from partial repayment of 11.50% secured notes. The first nine months included a $40.6 million impairment of construction-in-progress assets. The nine-month 2020 comparison included substantial pandemic-related impairments and credit losses. Cash dividends and share repurchases remained restricted under lender agreements, generally through Q3 2022.
Investor facts to verify
- Whether the fleet ramp-up, occupancy and booking trends developed as management projected, and whether expected core-itinerary cash-flow accretion was achieved.
- Cash burn, customer-deposit and FCC balances, refund exposure, and whether the reported $4.1 billion liquidity remained available under actual operating conditions.
- Debt maturities, interest costs, refinancing availability, covenant waiver expiry and compliance, and any collateral or reserve demands from lenders or card processors.
- Ship delivery timing, capital spending and financing commitments, including sensitivity to shipyard delays and euro exchange rates.
- Developments in the Havana Docks litigation and other material legal or regulatory matters.