Royal Caribbean Cruises Ltd. — Q1 2020 Form 10-Q
Business context and reporting period. The filing covers the quarter ended March 31, 2020. Royal Caribbean operates four global cruise brands and holds interests in TUI Cruises and Pullmantur. The report was filed May 21, 2020, after a COVID-19-related delay. Global cruise operations were suspended from March 13 through at least July 31, 2020; China sailings were suspended through at least June 30, 2020.
Financial results and liquidity
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Total revenue | $2.033 billion | $2.440 billion |
| Operating income (loss) | $(1.306) billion; margin (64.3%) | $318.8 million; margin 13.1% |
| Net income (loss) attributable to Royal Caribbean | $(1.444) billion | $249.7 million |
| Diluted EPS | $(6.91) | $1.19 |
| Adjusted diluted EPS | $(1.48) | $1.31 |
| Net cash from operating activities | $198.7 million | $1.078 billion |
| Capital expenditures / investing cash flow | $1.253 billion / $(1.341) billion | $470.1 million / $(450.4) million |
Revenue fell 16.7% year over year, principally reflecting reduced capacity and sailings canceled as the suspension began in mid-March. Passenger ticket revenue declined 19.5%; onboard and other revenue declined 10.1%. Occupancy was 103.0%, versus 107.1%. Net yields were down 1.6% reported (down 0.5% on a constant-currency basis). Net cruise costs per available passenger cruise day rose 31.4%.
Operating cash flow declined $879.7 million year over year, including a $959.6 million decrease in customer deposits. It remained positive partly due to working-capital movements, including higher accounts payable. Financing activities provided $4.790 billion, lifting cash and cash equivalents to $3.891 billion from $243.7 million at year-end. At March 31, liquidity was reported as $3.6 billion after outstanding commercial paper.
At March 31, total debt was $16.284 billion before unamortized issuance costs ($16.029 billion net); current debt and commercial paper were substantial. Long-term debt was $12.273 billion. Cash exceeded commercial paper outstanding of $343.6 million, but revolving facilities totaling $3.475 billion were fully drawn. Total liabilities were $22.636 billion.
Material changes and unusual items
- GAAP results included $1.108 billion of impairment and credit losses: $576.2 million goodwill impairment for Silversea, $30.8 million Silversea trade-name impairment, $463.0 million for vessels and right-of-use assets, and credit-loss charges. A further $39.7 million equity-investment impairment was recorded, primarily for Grand Bahama Shipyard.
- Q1 cruise operating expenses increased 6.9% despite lower capacity. Payroll and related costs rose $60.8 million, largely from crew contract terminations and repatriation; fuel expense rose $34.1 million. Depreciation and amortization increased 11.0%.
- Other comprehensive loss was $297.9 million, mainly reflecting a $300.6 million loss on cash-flow derivative hedges. Derivative liabilities increased to $557.5 million from $257.7 million at year-end.
- Customer deposits were $2.373 billion at quarter-end, down from $3.428 billion at December 31, 2019. Refunds due to customers were $847.2 million. The company said it could not estimate what portion of deposits would ultimately be recognized as revenue, refunded, or converted to future-cruise credits.
Outlook, financing, and key risks
The company withdrew full-year 2020 guidance on March 10 and said it expected losses in Q2 and full-year 2020, with magnitude dependent on when operations resume. Management targeted a mid-summer 2020 restart, subject to public-health requirements and government restrictions, and warned that an extension of the cruising ban beyond Q3 would materially harm forecast liquidity. Management believed available liquidity would fund requirements for at least 12 months, but emphasized substantial uncertainty.
Management estimated average cash burn of $250–$275 million per month during a prolonged suspension, excluding customer-deposit refunds and cash inflows from bookings. Ongoing ship and administrative expenses were estimated at $150–$170 million monthly. The company reported approximately $2.3 billion of cash liquidity as of April 30, 2020.
- After quarter-end, the company issued $3.32 billion of senior secured notes in May, bearing 10.875% and 11.5% interest and maturing in 2023 and 2025. Proceeds repaid the $2.35 billion 364-day secured loan, with remaining proceeds intended for general corporate purposes.
- Export-credit-backed facilities received a 12-month debt-amortization and covenant holiday, deferring about $0.8 billion of payments. Certain other facilities received covenant waivers through Q1 2021; conditions include maintaining at least $300 million of cash and restrictions on dividends and share repurchases.
- Credit ratings were downgraded: S&P to BB on April 2 and Moody’s to Ba2 on May 13. The company expected to post about $80.4 million of collateral on certain derivatives by September 23, 2020.
- Capital-spending reductions or deferrals identified since February were approximately $3.0 billion for 2020 and $1.4 billion for 2021. Management expected shipyard disruptions and delivery delays; ships on order represented about $13.8 billion of company-brand commitments, with $8.8 billion of committed financing for final installments.
- Further risks include weak demand or pricing after restart, additional cancellations and refunds, port or travel restrictions, further impairments, higher debt costs, refinancing and covenant risk, fuel/foreign-exchange/interest-rate volatility, and litigation. Two Helms-Burton lawsuits concerning Cuban port properties remained pending; the company said it would defend them and considered a material adverse outcome unlikely, while acknowledging uncertainty.
Most important facts for investors to verify
- Actual restart timing, applicable sailing restrictions, and the pace of bookings, cancellations, refunds, and future-cruise-credit redemption.
- Liquidity and monthly cash burn, including any additional financing, collateral calls, or restrictions imposed by lenders and credit-card processors.
- Compliance with covenant-waiver conditions and the duration and terms of dividend and repurchase restrictions.
- Debt maturities, interest expense, secured borrowing capacity, and the effect of ratings downgrades.
- Potential further impairments, ship-delivery delays, and the accuracy of the assumptions underlying management’s liquidity outlook.