Royal Caribbean Cruises Ltd. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; comparisons are with Q1 2011 unless otherwise stated. The company operates five cruise brands and has a 50% investment in TUI Cruises. Amounts below are U.S. dollars.
Financial performance and position
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Total revenue | $1.834 billion | $1.672 billion | +9.7% |
| Operating income | $135.4 million | $149.5 million | −9.5% |
| Operating margin | 7.4% | 8.9% | −1.5 percentage points |
| Net income | $47.0 million | $78.4 million | −40.1% |
| Net margin | 2.6% | 4.7% | −2.1 percentage points |
| Diluted EPS | $0.21 | $0.36 | −41.7% |
| Operating cash flow | $215.2 million | $285.4 million | −$70.2 million |
- Revenue growth reflected higher ticket prices, a 2.5% capacity increase, and changes to the international distribution system. Passenger ticket revenue was $1.352 billion; onboard and other revenue was $482.2 million.
- Total cruise operating expenses rose 14.0% to $1.255 billion. Fuel expense increased 37.9% to $229.0 million; management cited higher fuel prices, deployment initiatives, and increased commissions, food costs and passenger head taxes.
- Net Yields increased 6.4% (7.0% constant currency). Net Cruise Costs per APCD increased 10.1%; excluding fuel, costs per APCD increased 5.1%. Occupancy was 104.6%, compared with 104.3%.
- At March 31, 2012, cash was $277.5 million, total debt was $8.538 billion, net debt was $8.261 billion and shareholders’ equity was $8.593 billion. Net debt-to-capital was 49.0%, versus 49.5% at year-end 2011.
- Current liabilities exceeded current assets by approximately $2.0 billion. Management described the working-capital deficit as customary for the cruise industry, citing advance customer receipts and the timing of voyage-related payables.
- Liquidity was approximately $1.1 billion: $277.5 million cash plus $805.0 million available under revolving facilities. The filing states total revolving capacity was $1.46 billion at quarter-end and increased to $1.5 billion in April 2012.
- Investing used $158.4 million, including $177.2 million of property and equipment purchases. Financing used $44.6 million; the company paid $43.5 million in dividends during the quarter.
Material changes and notable items
- Net income fell despite revenue growth, as operating costs increased and other income declined. Other expense was $2.1 million in Q1 2012, compared with other income of $25.7 million in Q1 2011, largely reflecting lower gains on fuel call options ($2.7 million versus $24.2 million).
- Operating cash flow declined primarily due to payment timing for accounts payable. Q1 2011 investing cash flow had benefited from $345 million in ship-sale proceeds, which did not recur.
- The company revised Q1 2011 interest expense and net income for a noncash error in amortizing loan guarantee fees. Revised Q1 2011 net income was $78.4 million, $13.1 million below the amount previously reported; operating income and total operating cash flow were unaffected.
- Capital commitments included approximately $3.0 billion for ships on order, with $227.9 million deposited; 46.3% of the aggregate cost was exposed to euro exchange-rate movements. The company exercised its option for a second Project Sunshine ship, expected in Q2 2015.
Outlook, risks and contingencies
- 2012 guidance: EPS of $1.80–$2.10; reported Net Yields growth of 1%–4% (2%–5% constant currency); reported Net Cruise Costs per APCD growth of 6%–7% (7%–8% constant currency). Fuel expense was estimated at $923 million, with 55% of forward consumption hedged. A 10% fuel-price change was estimated to affect results by $32 million.
- Q2 2012 guidance: EPS of −$0.05 to $0.05; reported Net Yields growth of 2%–3% (4%–5% constant currency); fuel expense of $232 million, with 51% of forward consumption hedged. A 10% fuel-price change was estimated to affect results by $12 million.
- Management said the Costa Concordia tragedy negatively affected Q1 results and expected its greatest impact in Q2 and Q3 2012. Bookings for Q4 2012 and 2013 were described as strong, with load factors and pricing ahead of the same time a year earlier; management did not expect a significant long-term business impact.
- Management expected operating cash flow, available credit facilities and financing arrangements to cover capital expenditures and debt repayments over the next 12 months. Anticipated capital expenditures were approximately $1.3 billion in 2012, $600 million in 2013, $1.1 billion in 2014 and $1.0 billion in 2015.
- Key risks include demand and economic conditions, fuel and currency volatility, interest rates, shipbuilding and repair delays, safety incidents, competition, regulation and litigation. The filing identifies uncertainty around Spanish economic conditions and Pullmantur cash flows; deterioration could require impairment of Pullmantur goodwill, trademarks or deferred tax assets.
- Pending matters include a securities class action seeking unspecified damages, a crew wage class action, and a Puerto Rico representative’s claims seeking more than $40 million on each of several counterclaims and specified treble damages. The company disputes the claims and intends to defend them.
- The company reported it was well above its debt covenant requirements. Certain change-of-control events could require accelerated repayment of debt. It also disclosed possible indemnification exposure tied to the Brilliance of the Seas lease and guarantees related to TUI Cruises; management did not consider material payments probable based on circumstances at filing.
Important facts for investors to verify
- Whether Q2 and Q3 trading results reflect the anticipated Costa Concordia impact, and whether Q4 2012 and 2013 booking strength persists.
- Actual fuel prices, fuel consumption, hedge effectiveness and realized costs compared with guidance.
- Progress on ship construction, the approximately $3.0 billion order book, euro exposure and planned capital spending.
- Liquidity, debt maturities, revolving-credit availability and covenant headroom as funding needs evolve.
- Developments in the disclosed litigation and in the Spanish economy, Pullmantur forecasts and related impairment assumptions.
- The effect of the prior-period fee-amortization revision when comparing reported Q1 2011 earnings with earlier company disclosures.