Royal Caribbean Cruises Ltd. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016; comparisons are with the corresponding 2015 periods. Amounts are in U.S. dollars unless stated otherwise. The company operates Royal Caribbean International, Celebrity Cruises and Azamara, and holds interests in TUI Cruises and Pullmantur/CDF.
Financial performance
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Revenue | $2,563.7m | $2,523.1m | $6,586.8m | $6,397.0m |
| Operating income | $735.0m | $258.0m | $1,180.4m | $625.0m |
| Operating margin | 28.7% | 10.2% | 17.9% | 9.8% |
| Net income | $693.3m | $228.8m | $1,022.3m | $459.0m |
| Diluted EPS | $3.21 | $1.03 | $4.72 | $2.08 |
| Adjusted diluted EPS (non-GAAP) | $3.20 | $2.84 | $4.85 | $3.88 |
Q3 revenue increased 1.6%; nine-month revenue rose 3.0%. Reported net income and margins benefited substantially from comparison with 2015, which included a $411.3m Pullmantur asset impairment. Excluding specified items, adjusted net income was $690.9m in Q3 versus $628.1m, and $1,050.0m for nine months versus $858.3m. Adjusted results are non-GAAP measures.
- Revenue, capacity and yields: Q3 capacity (APCD) grew 3.2%; passenger ticket revenue increased 1.4% and onboard/other revenue 2.3%. Net yield was $205.27 per APCD, broadly flat year over year, and up 2.9% on a constant-currency basis. For nine months, capacity rose 4.5%; net yield increased 0.9% reported and 3.4% constant currency.
- Costs and margins: Q3 cruise operating expenses fell 3.4% to $1,340.1m, helped by lower fuel costs; fuel expense was $178.8m versus $199.8m. Net cruise cost per APCD declined 4.2% reported. For nine months, cruise operating expenses decreased 0.9%, but net cruise cost excluding fuel per APCD increased 1.1% reported (1.7% constant currency).
- Cash flow: Nine-month operating cash flow was $2,001.0m, up from $1,607.9m. Investing cash use was $2,517.6m, including $2,313.8m of property and equipment purchases; financing provided $597.0m. Cash at period-end was $178.4m.
- Debt and liquidity: Balance-sheet current and long-term debt totaled approximately $9.718bn, compared with $8.527bn at December 31, 2015. Liquidity was $1.1bn, comprising $178.4m cash and $898.0m available under unsecured credit facilities. The company reported a $3.7bn working-capital deficit, which it says is typical for its model because passenger receipts are collected in advance; current debt was also a significant factor.
Material changes and unusual items
- In July 2016, the company sold 51% of RCHE, parent of Pullmantur and CDF, retained 49% and kept ownership of the vessels and aircraft. It ceased consolidating RCHE from August and accounts for the retained interest under the equity method. The sale generated an immaterial gain.
- Effective January 1, 2016, the company eliminated RCHE’s former two-month reporting lag. The nine-month 2016 results include RCHE’s November and December 2015 results, reducing reported net income by $21.7m.
- Ovation of the Seas and Harmony of the Seas entered service in 2016. Their financing contributed to increased debt and interest expense; higher depreciation also reflected these deliveries.
- Q3 included $1.9m of restructuring charges. Nine-month restructuring charges were $6.6m; related restructuring and other initiative costs totaled $9.9m. The company completed its $500m share repurchase program in August 2016.
- Other comprehensive income was $94.5m in Q3 and $250.9m for nine months, compared with losses in 2015, largely reflecting changes in cash-flow hedge valuations.
Outlook, risks and contingencies
- 2016 guidance announced October 28: Full-year adjusted diluted EPS of $6.00–$6.10; reported net yield growth of 1.7%–2.0% (constant currency 4.0% or better); and net cruise costs per APCD expected to decline about 2.0% reported. Q4 adjusted diluted EPS guidance was approximately $1.20, with net yield growth of about 4.5% reported and 6.0% constant currency. These are management estimates, not guarantees.
- Management expected operating cash flows and existing financing arrangements to cover capital expenditures and debt repayments over the next 12 months. It reported compliance with debt covenants, including minimum net worth of $7.1bn, fixed-charge coverage of 1.25x and a maximum net debt-to-capital ratio of 62.5%.
- Firm ship orders had an aggregate cost of approximately $5.3bn, with $282m deposited; scheduled ship-purchase obligations in the contractual-obligations table were $4.063bn. Planned capital expenditures were approximately $2.4bn for 2016 and $2.6bn for 2018. Additional announced ship agreements were conditional, including on financing.
- Key exposures include fuel prices, interest rates and foreign exchange, including euro exposure on shipbuilding commitments. The company hedged 68% of projected 2016 fuel consumption; derivative liabilities totaled $507.2m at quarter-end. Four interest-rate hedges were expected to reach their fifth anniversary within 12 months; hypothetical maximum collateral exposure was $96.8m if applicable rating triggers were met. Credit ratings were BB+ (stable) at S&P and Ba1 (positive) at Moody’s.
- The company guaranteed 50% of a TUI Cruises bank loan, with $136.6m outstanding; management said a loss under the guarantee was not probable and noted release was agreed for 2018. It also disclosed Alaska emissions notices and other routine claims, stating it did not expect material adverse outcomes. Change-of-control provisions could require debt prepayment or affect liquidity.
- Management cautioned that forward-looking estimates depend on fuel prices, interest rates, currency rates and other uncertain conditions. No material change to previously disclosed risk factors was reported.
Important facts for investors to verify
- How much of the reported earnings increase reflects the absence of the 2015 Pullmantur impairment versus underlying operating improvement; compare GAAP and adjusted results.
- Whether the 2016 EPS, yield and cost guidance was achieved, and how constant-currency performance compares with reported results.
- Funding plans and cash generation against debt maturities, shipbuilding commitments and the working-capital deficit.
- Ongoing fuel, foreign-exchange and interest-rate exposures, including hedge settlements and potential collateral requirements.
- Financial effects of deconsolidating RCHE, retained vessel charters and the company’s equity-method investments and guarantees.