ROYAL CARIBBEAN CRUISES LTD quarterly report, Q1 FY2011

Business context and reporting period

Royal Caribbean Cruises Ltd. filed this unaudited Form 10-Q for the quarter ended March 31, 2011. The company operates five cruise brands and has a 50% investment in TUI Cruises. Results are seasonal and the company cautions that a quarter is not necessarily indicative of full-year performance.

Financial and operating performance

Unless noted otherwise, amounts are in U.S. dollars.

• Revenue increased 12.5%, reflecting 10.1% capacity growth and 4.0% higher Net Yields. Occupancy rose to 104.3% from 103.1%.
• Net Cruise Costs per Available Passenger Cruise Day (APCD), a company-defined non-GAAP measure, were $119.40, essentially flat year over year; constant-currency costs per APCD were also approximately flat.
• Net income included a $24.1 million unrealized gain on fuel call options. Q1 2010 included an approximately $85.6 million Rolls-Royce settlement gain that did not recur.
• Cash and cash equivalents were $470.3 million at March 31, 2011. Total debt was $8.779 billion and net debt was $8.309 billion. Net debt-to-capital was 50.1%, down from 52.4% at December 31, 2010.
• Current liabilities were $3.011 billion; management reported a $1.8 billion working-capital deficit. Liquidity was approximately $1.6 billion, including $1.1 billion available under unsecured revolving credit facilities.

Material changes versus the prior comparable period

• Revenue rose $186.3 million, primarily from added capacity, higher ticket prices, improved occupancy, and favorable currency effects. Newer ships included Allure of the Seas and Celebrity Eclipse; the Celebrity Mercury sale partially offset capacity growth.
• Operating income increased $57.8 million, with operating margin improving to 8.9% from 6.2%. Net income rose more modestly because other income was lower: the prior-year period included the Rolls-Royce settlement.
• Operating cash flow fell $127.5 million, reflecting timing of receivable collections and payments, slower growth in customer deposits, and the absence of $68.0 million in Rolls-Royce settlement cash received in Q1 2010.
• Investing cash flow was $217.8 million provided, versus $168.7 million used in Q1 2010, largely due to ship-sale proceeds of approximately $345 million; capital expenditures were $66.3 million versus $166.4 million.
• Financing activities used $452.7 million, including $944.3 million of debt repayments and $485.5 million of proceeds. Debt included repayment of a $500 million note; the company also borrowed and repaid amounts under revolving facilities.

Guidance, outlook, risks and contingencies

• 2011 outlook: Management forecast diluted EPS of $3.10–$3.30, assuming fuel at $581 per metric ton and exchange rates of $1.47 per euro and $1.66 per pound. It expected Net Yields to increase 5%–7% and Net Cruise Costs per APCD to rise 5%–6%; expected capacity growth was 7.5%.
• Q2 2011 outlook: Management forecast diluted EPS of $0.40–$0.45, assuming fuel at $596 per metric ton and the same stated euro and pound exchange rates. Expected capacity growth was 6.6%.
• Fuel remains a key exposure: approximately 56% of remaining-2011 fuel expense was hedged. A 10% fuel-price change was estimated to affect full-year expense by about $31 million after hedges. Results also face currency, interest-rate, demand, competitive, operating-cost, safety, weather, regulatory, and geopolitical risks.
• Ship orders totaled approximately $2.8 billion, with $199.3 million deposited; anticipated capital expenditures were approximately $1.1 billion in 2011, $1.2 billion in 2012, $500 million in 2013, and $1.1 billion in 2014. The first ship of a new generation is expected to enter service in Q4 2014; an option for a second ship expires February 28, 2012.
• The company expected operating cash flows, credit facilities, and committed financing to cover capital expenditures and debt repayments over the next 12 months. A $1.225 billion revolving facility was scheduled to mature in June 2012; management expected to extend or replace it before maturity.
• Debt covenants require minimum net worth of $5.5 billion, fixed-charge coverage of at least 1.25x, and net debt-to-capital no higher than 62.5%. Management said the company was well within requirements.
• A Puerto Rico representative’s counterclaims seek more than $40 million on each claim and treble damages of $120 million on several claims, plus other relief. The company disputes the claims and intends to defend itself.
• Potential additional exposures include a disputed U.K. tax treatment associated with the Brilliance of the Seas lease, guarantees related to TUI Cruises financing, and possible accelerated debt repayment following specified changes in ownership and board control. Management did not consider material payment under these contingencies probable based on circumstances at filing.
• Pullmantur’s weak Spanish-market outlook could affect goodwill, trademarks, and $37.2 million of deferred tax assets; management said no interim impairment test was required at quarter-end.

Important facts for investors to verify

• Whether booking trends, occupancy, and Net Yields supported the full-year and Q2 outlook, and how capacity additions affect returns.
• Fuel prices, hedge coverage, and the sensitivity of earnings and cash flows to fuel and currency movements.
• Operating cash generation, customer deposits, liquidity availability, and progress on refinancing the $1.225 billion facility before June 2012.
• Shipbuilding spending, financing availability, delivery schedules, and the economics of the TUI Cruises loans and guarantees.
• Developments in the Puerto Rico litigation, U.K. lease tax dispute, and Pullmantur impairment and deferred-tax-asset assessments.