ROYAL CARIBBEAN CRUISES LTD quarterly report, Q2 FY2020

Royal Caribbean Cruises Ltd. — Q2 2020 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2020. The company operates Royal Caribbean International, Celebrity Cruises, Azamara and Silversea Cruises, and holds a 50% interest in TUI Cruises. The COVID-19 suspension of global cruise operations began March 13, 2020; the suspension was extended through at least October 31, 2020, excluding China and Australia.

Financial performance and liquidity

Amounts below are in U.S. dollars; financial-statement amounts are converted from thousands to millions for readability.

Metric	Q2 2020	Q2 2019	Six months 2020	Six months 2019
Total revenue	$175.6 million	$2,806.6 million	$2,208.4 million	$5,246.4 million
Operating income (loss)	$(1,282.5) million	$573.7 million	$(2,588.9) million	$892.5 million
Net income (loss) attributable to RCL	$(1,639.3) million	$472.8 million	$(3,083.8) million	$722.5 million
Diluted EPS	$(7.83)	$2.25	$(14.74)	$3.44
Adjusted net income (loss), non-GAAP	$(1,282.6) million	$532.7 million	$(1,593.0) million	$808.6 million
Adjusted diluted EPS, non-GAAP	$(6.13)	$2.54	$(7.61)	$3.85

Q2 revenue fell 93.7% year over year; six-month revenue fell 57.9%. Management attributed the decline mainly to cancelled sailings and reduced capacity.
Q2 cruise operating expenses declined 55.9% year over year, but remained far above revenue during the shutdown. Marketing, selling and administrative expense fell 20.0% in Q2; depreciation and amortization rose 2.6%.
Impairment and credit-loss charges were $156.5 million in Q2 and $1.265 billion for the six months. The six-month charges included goodwill, trade-name, vessel and right-of-use asset impairments, as well as receivable credit losses. Silversea goodwill impairment was $576.2 million; its trade-name impairment was $30.8 million.
Net interest expense was $218.9 million in Q2, up from $111.3 million, and $311.8 million for the six months, up from $211.7 million. The increases reflected new borrowing, higher revolver balances and a $40.3 million debt-extinguishment loss.
At June 30, cash and cash equivalents were $4.147 billion, versus $243.7 million at December 31, 2019. Current assets were $4.684 billion and current liabilities $4.737 billion.
Total debt, net of issuance costs, was $18.829 billion, including $368.952 million of U.K. commercial paper; total debt before issuance costs was $19.143 billion. Long-term debt was $17.753 billion. The weighted-average interest rate on total debt was 5.68%, versus 3.99% at year-end 2019.
For the six months, operating cash flow was $(2.049) billion, investing cash flow $(1.591) billion and financing cash flow $7.544 billion. The operating outflow included a $1.623 billion reduction in customer deposits. Property and equipment purchases were $1.392 billion.

Material changes and notable items

The company raised substantial financing and fully utilized its $3.5 billion revolving credit capacity. 2020 financings included $3.32 billion of secured notes, $1.0 billion of unsecured notes, $1.15 billion of convertible notes, and £300 million (about $370.8 million) of U.K. government-program commercial paper. The secured notes carry rates of 10.875% and 11.5%; the unsecured notes carry 9.125%; the convertible notes carry 4.25%.
Debt rose sharply from year-end 2019, when debt net of issuance costs was $11.035 billion. The company also deferred approximately $0.9 billion of export-credit-backed debt amortization for 12 months, with deferred amounts payable over four years afterward.
Financial covenant testing on facilities with approximately $11 billion of outstanding principal was waived. After quarter-end, waivers were extended through Q4 2021, with a minimum-liquidity covenant of $500 million, as applicable. Dividend and share-repurchase restrictions apply during the waiver period. No Q2 dividend was declared.
Customer deposits were $1.806 billion at June 30, down from $3.428 billion at year-end. Refunds due to customers were $467.9 million; about 48% of guests on cancelled sailings had requested cash refunds. The company said it could not estimate how much of deposits would ultimately be refunded, credited or recognized as revenue by year-end.
Pullmantur filed for reorganization in Spain. RCL terminated three ship charters, agreed to sell the vessels, suspended equity-method accounting and recognized $69.0 million of currency-translation losses and $21.6 million of settlement-related expense. RCL reported no remaining credit-loss exposure to Pullmantur at June 30.
On July 9, 2020, after quarter-end, RCL acquired the remaining 33.3% of Silversea in exchange for 5.2 million RCL shares. The filing says the acquisition will be recorded as an equity transaction, with no gain or loss in earnings.
RCL’s S&P rating was downgraded from BBB- to BB and Moody’s from Baa3 to Ba2. Management said the downgrades increase financing costs and can limit access to secured debt.

Outlook, risks and contingencies

RCL withdrew its 2020 guidance on March 10 and said it could not reasonably estimate the pandemic’s financial or operational impact. It expected a GAAP and adjusted net loss in Q3 and for full-year 2020; the scale would depend on the timing and extent of a return to service.
Management estimated cash burn of approximately $250 million to $290 million per month during a prolonged suspension. The estimate includes interest, ship operating and administrative costs, hedging costs and necessary capital expenditure; it excludes customer-deposit refunds, commissions, debt obligations and booking-related cash inflows.
Management believed available liquidity would fund requirements for at least the next 12 months, but cautioned that this depended on uncertain assumptions, including government restrictions, the resumption of cruising, booking demand and cash refunds. The company said it was considering further cost, capital-spending and financing actions.
Bookings for the remainder of 2020 were materially below the prior year and at lower prices. Management described the 2021 booked position as within historical ranges; pricing was relatively flat year over year including the yield effect of future cruise credits, and slightly higher excluding them. Approximately 60% of 2021 bookings over the prior two months were new bookings; the rest reflected future cruise credit redemptions and “Lift & Shift.”
RCL identified about $4.4 billion of capital expenditure reductions or deferrals for 2020–2021. It estimated capital expenditures of approximately $0.6 billion in 2020 and $1.8 billion in 2021, excluding partner-brand ships. Shipyard delays affected planned deliveries; the timing remained under discussion with shipyards.
Ship orders represented approximately $13.9 billion of aggregate cost, excluding partner brands, with $833.1 million deposited; about 62.5% of the cost was exposed to euro exchange-rate changes. The filing also lists $10.9 billion of ship-purchase obligations and substantial debt service obligations.
Other material risks include further COVID-19 disruption, weak demand or pricing, additional asset impairments, financing availability and covenant compliance, rising debt-service costs, fuel, interest-rate and foreign-exchange exposure, and possible additional collateral needs. Potential additional collateral or reserves under credit-card processing agreements were estimated at up to $75 million in the next 12 months; derivative collateral posted at June 30 was $20.2 million, with up to $73.6 million of additional collateral potentially required.
Two Helms-Burton Act lawsuits concerning Cuban port facilities seek statutory damages, including treble damages. RCL said it intends to defend the cases and considers a material adverse outcome unlikely, while acknowledging litigation uncertainty. A $181.1 million cash-collateral obligation related to the Port of Miami terminal lease was due by July 18, 2021.

Most important facts for investors to verify

Whether and when sailings resume, and the resulting booking levels, pricing, cancellation rates and customer-refund cash needs.
Actual monthly cash burn and liquidity runway against the $250–$290 million estimate, minimum-liquidity covenants and near-term debt maturities.
Debt terms, interest burden, covenant-waiver conditions and the company’s ability to refinance or obtain additional financing.
Execution and funding of deferred shipbuilding commitments, delivery schedules and the stated capital-spending plans.
Potential further asset impairments, receivable losses and outcomes of Pullmantur-related matters and Cuban-port litigation.
Effects of the July 2020 Silversea share issuance and any future conversion or settlement of the $1.15 billion convertible notes.