Royal Caribbean Cruises Ltd. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. The company operates five cruise brands and has a 50% investment in TUI Cruises. Financial amounts below are in U.S. dollars; statements report amounts in thousands unless noted. Interim results are seasonal and are not necessarily indicative of full-year performance.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $1,767.9M | $1,601.7M | $3,439.9M | $3,087.3M |
| Operating income | $168.2M | $143.7M | $317.7M | $235.4M |
| Operating margin | 9.5% | 9.0% | 9.2% | 7.6% |
| Net income | $93.5M | $53.7M | $171.9M | $133.6M |
| Diluted EPS | $0.43 | $0.25 | $0.78 | $0.61 |
| Net margin | 5.3% | 3.4% | 5.0% | 4.3% |
| Operating cash flow | Not provided by quarter | Not provided by quarter | $766.7M | $1,010.9M |
Q2 revenue rose 10.4%; management attributed the increase mainly to 6.6% greater capacity and 3.8% higher Net Yields. For the half year, revenue rose 11.4%, reflecting 8.3% greater capacity and 3.8% higher Net Yields. Net Yields benefited from currency movements and, to a lesser extent, ticket pricing; geopolitical disruptions and related itinerary changes and discounting partly offset gains.
Q2 cruise operating expenses increased 9.1% to $1,185.4M, including fuel expense of $188.1M, up from $164.1M. Marketing, selling and administrative expense rose 14.4% to $242.3M, primarily with international expansion. Net Cruise Costs per available passenger cruise day (APCD) increased 3.3% in Q2; on a constant-currency basis, the increase was 1.2%. Six-month Net Cruise Costs per APCD rose 1.7%, or 0.6% on a constant-currency basis.
Cash, debt and liquidity
- At June 30, cash and cash equivalents were $551.5M, versus $419.9M at December 31, 2010. Total debt was $8,604.9M, down from $9,150.1M; net debt was $8,053.4M.
- Net debt-to-capital declined to 49.1% from 52.5% at year-end; debt-to-capital declined to 50.8% from 53.7%. Shareholders’ equity was $8,348.3M.
- Six-month operating cash flow fell $244.2M to $766.7M. The filing cites nonrecurring 2010 cash from derivative settlements and litigation, as well as timing of receivable collections and payments, partly offset by accounts-payable timing.
- Investing activities provided $46.0M, compared with $862.9M used in the prior-year period. This included $251.6M of capital expenditures and $345.0M of ship-sale proceeds. Financing activities used $684.3M, mainly reflecting debt repayments.
- Working capital deficit was $2.0B, compared with $2.4B at December 31, 2010. Management says advance passenger receipts, rapid inventory turnover and voyage-related payment timing support the business model.
- At June 30, the company reported approximately $1.3B of liquidity, comprising cash and $725.0M available under revolving facilities. After quarter-end, it amended a facility and reported combined revolving-credit capacity of $1.4B, with the amended facility extended to July 2016.
- Debt covenants include minimum net worth of $5.2B, minimum fixed-charge coverage of 1.25x and maximum net-debt-to-capital of 62.5%; the company said it was well within requirements.
Material changes and unusual items
- The company identified an error in amortizing export-credit-agency guarantee fees and, to a lesser extent, revolving-credit fees. It will revise previously issued statements; it judged the errors immaterial to those periods. The noncash correction does not affect operating income or cash flows. Revised Q2 2010 net income was $53.7M, reduced by $6.8M from the amount previously reported.
- First-half 2011 results included a $24.8M gain on fuel call options, versus a $7.3M loss in the first half of 2010. Conversely, the prior-year period included an $85.6M litigation-settlement gain that did not recur.
- Celebrity Mercury was sold to TUI Cruises for approximately $290M; the $24.2M gain is being recognized primarily over the ship’s estimated remaining 17-year life. Bleu de France was also sold for $55M.
- The company entered financing arrangements for Project Sunshine, scheduled for delivery in Q3 2014. The ship-order book was approximately $2.7B at June 30, with $294.8M deposited; aggregate 2011–2014 capital expenditures were projected at approximately $1.1B, $1.2B, $0.5B and $1.1B, respectively.
- In July 2011, the company took delivery of Celebrity Silhouette, financed with a $632M term loan. It also reinstated its quarterly dividend and declared $0.10 per share payable August 30, 2011.
Outlook, risks and contingencies
2011 outlook: Management projected diluted EPS of $2.85–$2.95, assuming fuel at $578 per metric ton and exchange rates of $1.45 per euro and $1.64 per British pound. It expected Net Yields to increase approximately 5% (2%–3% constant currency), capacity to rise 7.6%, and Net Cruise Costs per APCD to increase approximately 4% (approximately 3% constant currency). Interest expense, net, was projected at $355M–$365M. The fee-amortization revision was expected to reduce full-year diluted EPS by approximately $0.20.
Q3 2011 outlook: Management projected diluted EPS of $1.85–$1.90, assuming fuel at $603 per metric ton and the same euro and pound exchange-rate assumptions. It expected capacity growth of 6.3%, Net Yield growth of approximately 5% (1%–2% constant currency), and Net Cruise Costs per APCD growth of approximately 6%.
- Fuel prices, foreign exchange, interest rates, economic conditions, cruise demand, competition, geopolitical events, weather, health and safety events, shipyard delays, regulation and litigation could affect results. A 10% fuel-price change was estimated to alter full-year 2011 fuel expense by approximately $20M after hedges; approximately 55% of remaining-2011 fuel expense was hedged.
- Pullmantur’s goodwill and trademarks could be impaired if the Spanish economy or future Net Yields perform worse than assumed. The company also identified risk to recovery of Pullmantur’s $38.4M deferred-tax assets if future taxable income falls short of expectations.
- Disclosed legal matters include Puerto Rico distributor claims seeking substantial damages and a June 2011 crew wage class action seeking damages in an indeterminate amount. The company disputes the claims and intends to defend them.
- The Brilliance of the Seas lease was extended through 2020 after neither party elected to cancel in 2012. Potential indemnities tied to a UK tax dispute cannot be quantified; management said payment was not considered probable based on information available.
- A change-of-control provision could require repayment of debt under most credit facilities in specified ownership circumstances, potentially harming liquidity. Management cautioned that forward-looking statements are subject to risks and assumptions.
Investor verification priorities
- Confirm the revised comparative statements and assess the financing-fee amortization change, including the forecast $0.20 EPS effect.
- Track Net Yield and cost-per-APCD trends against guidance, separating capacity, currency, ticket pricing and fuel effects.
- Verify available revolver borrowings and upcoming ship, debt and interest commitments against liquidity and operating cash generation.
- Monitor fuel-price exposure and hedge coverage, and review assumptions behind the $2.85–$2.95 full-year EPS outlook.
- Follow Pullmantur impairment and deferred-tax-asset recoverability, the disclosed lawsuits and the Brilliance lease-related tax contingency.