Royal Caribbean Cruises Ltd. — Q1 2010 Form 10-Q
Reporting period: Three months ended March 31, 2010; comparisons are with Q1 2009 unless noted. The company operates five cruise brands and holds a 50% interest in TUI Cruises.
Financial results
| Metric | Q1 2010 | Q1 2009 |
|---|---|---|
| Total revenue | $1.486 billion | $1.326 billion |
| Operating income | $91.8 million; 6.2% margin | $44.3 million; 3.3% margin |
| Net income (loss) | $87.4 million; 5.9% margin | $(36.2) million; (2.7)% margin |
| Diluted earnings (loss) per share | $0.40 | $(0.17) |
| Cash from operating activities | $412.9 million | $113.9 million |
| Capital expenditures | $166.4 million | $219.3 million |
Passenger ticket revenue rose 14.0% to $1.083 billion; onboard and other revenue increased 7.1% to $403.1 million. Capacity grew 9.1%, occupancy improved to 103.1% from 101.2%, and net yield increased 2.6%. Net cruise costs per available passenger cruise day (APCD) declined 2.2% to $119.22.
Total cruise operating expenses increased 7.7% to $1.025 billion; marketing, selling and administrative expenses rose 11.6% to $211.0 million, and depreciation and amortization increased 12.7% to $157.6 million. Fuel expense was essentially flat at $154.9 million. Interest expense, net of capitalized interest, increased to $83.9 million from $79.5 million.
Liquidity, debt and capital commitments
- Cash was $278.1 million at March 31, down from $284.6 million at year-end. Total debt was $8.103 billion, including $1.256 billion classified as current; shareholders’ equity was $7.465 billion.
- Net debt was $7.825 billion and net debt-to-capital was 51.2%, compared with 52.0% at December 31, 2009. The company reported liquidity of $1.1 billion, comprising cash and $795.0 million available under its unsecured revolving credit facility.
- Working capital deficit widened to $2.5 billion from $1.7 billion at year-end. Management said advance passenger receipts and the company’s operating model support managing this industry-common deficit.
- Contractual obligations totaled $13.858 billion, including $3.289 billion of ship purchase obligations and $8.048 billion of long-term debt obligations. Four ships were on order at an aggregate estimated cost of $4.2 billion; $528.6 million had been deposited. Expected capital expenditures were approximately $2.2 billion in 2010, $1.0 billion in 2011 and $1.0 billion in 2012.
- The company reported compliance with debt covenants: net worth of $7.4 billion versus a $5.2 billion minimum, net debt-to-capital of 51.3% versus a 62.5% maximum, and fixed-charge coverage above the 1.25x minimum.
Changes and unusual items
- Q1 revenue rose 12.1%, primarily reflecting 9.1% capacity growth, higher occupancy, ticket prices and onboard spending. Operating income more than doubled.
- Q1 2010 net income included an $85.6 million one-time gain from the Rolls-Royce settlement, recorded in other income. The company received $68.0 million net in the quarter and is due an additional $20.0 million within five years. The settlement materially contributed to the year-over-year earnings turnaround.
- Operating cash flow increased by $299.0 million, partly because customer deposits increased; the filing attributes $294.5 million more cash from customer deposits than in Q1 2009 to higher booking prices and faster booking volumes.
- In March, the company arranged up to approximately $1.1 billion of financing for Allure of the Seas, subject to terms and conditions. After quarter-end, it drew $566.1 million under a 12-year term loan to finance Celebrity Eclipse, delivered in April.
- Comprehensive loss was $54.8 million despite net income, reflecting a $111.9 million loss related to cash-flow derivative hedges and a $30.4 million foreign-currency translation loss.
Outlook and risks
- Q2 2010 outlook: Net yields expected to rise about 6%; net cruise costs per APCD expected to rise about 1% (decline about 1% excluding fuel); capacity expected to increase 14.6%. EPS guidance was $0.16–$0.21, assuming fuel prices remain at then-current pump prices. Fuel expense was estimated at $170 million and approximately 50% hedged.
- Full-year 2010 outlook: Net yields expected to increase 4%–5%; net cruise costs per APCD expected to be approximately flat to slightly lower (down about 1% excluding fuel); capacity expected to grow 11.5%. EPS guidance was $2.15–$2.25, assuming fuel prices remain at then-current pump prices. Estimated fuel expense was $678 million and approximately 48% hedged. A 10% fuel-price change was estimated to affect annual fuel expense by about $29 million after hedging.
- Management said operating cash flows, available credit facilities and financing arrangements were expected to cover capital expenditures and debt repayments over the next 12 months. It also noted that weaker consumer spending had adversely affected operating cash flow, credit ratings were BB- and Ba3 with negative outlooks, and further rating deterioration or renewed credit-market disruption could impair financing access.
- Other stated risks include demand and economic conditions, fuel, foreign exchange and interest rates, industry competition and capacity, shipyard or delivery delays, litigation, regulation, travel disruptions, disease, weather and safety or security incidents. The company had hedged about 51% of projected 2010 fuel requirements and 53% of 2011 requirements through fuel swaps.
- Material disclosed contingencies include cabin-steward gratuity arbitration demands estimating damages above $200 million for a proposed broader group; an EEOC matter in which the agency had proposed approximately $27 million in sanctions (no legal proceeding had been initiated); and copyright litigation seeking at least $10 million, plus other remedies. The company stated it believes it has defenses. It also disclosed a possible lease indemnity related to the Brilliance of the Seas and a potential debt-prepayment trigger following specified ownership changes.
Important facts for investors to verify
- How much of Q1’s earnings improvement reflects recurring operations versus the $85.6 million Rolls-Royce settlement gain.
- Whether yield and booking trends, occupancy and customer deposits continued to support the stated 2010 guidance.
- Whether shipbuilding commitments, debt maturities and the working capital deficit remain manageable against available liquidity and operating cash flow.
- Actual fuel prices, hedge performance and foreign-exchange movements relative to management’s assumptions.
- Developments in the crew-gratuity, EEOC, copyright and lease-indemnity matters, and any change in debt ratings or covenant headroom.