RCL

Royal Caribbean Cruises Ltd. 10-Q Summary

Business Context and Reporting Period

This filing is a Quarterly Report (Form 10-Q) for Royal Caribbean Cruises Ltd. for the period ended March 31, 2007. The company operates three cruise brands: Royal Caribbean International, Celebrity Cruises, and Pullmantur Cruises. The first quarter of 2007 includes the results of the Pullmantur acquisition (completed November 2006) on a two-month lag. The company reported 212,460,419 shares of common stock outstanding as of April 24, 2007.

Key Financial Metrics

Liquidity: Cash and cash equivalents totaled $199.6 million as of March 31, 2007. Total liquidity, including the unsecured revolving credit facility, was approximately $1.2 billion.

Debt: Total debt was $5.37 billion. The company issued €1.0 billion ($1.3 billion) of senior unsecured notes in January 2007 to refinance bridge loans related to the Pullmantur acquisition.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 6.7% year-over-year, driven by a 9.7% increase in capacity (Available Passenger Cruise Days). This was partially offset by a 2.7% decrease in Gross Yields and a 3.4% decrease in Net Yields due to challenging demand in Caribbean itineraries and lower ticket prices.
• Profitability Decline: Net income dropped significantly from $119.5 million to $8.8 million. The prior year (Q1 2006) included a one-time net gain of $36.0 million from a partial lawsuit settlement regarding Mermaid pod-propulsion system failures, which did not recur in 2007.
• Expense Increases: Net Cruise Costs per APCD increased 5.4%, attributed to the inclusion of Pullmantur's tour business and higher payroll expenses. Interest expense increased due to higher average debt levels.
• Capital Structure: Net Debt-to-Capital increased to 45.9% from 40.7% as the company leveraged debt to fund the Pullmantur acquisition and new ship construction.

Guidance, Outlook, and Risks

Full Year 2007 Outlook:

• Earnings Per Share: Expected to be in the range of $3.05 to $3.20.
• Capacity: Expected to increase 12.2% (5.0% on a comparable basis excluding Pullmantur), driven by the Pullmantur acquisition and the delivery of Liberty of the Seas.
• Yields: Net Yields expected to increase around 2% (flat on a comparable basis).
• Costs: Net Cruise Costs per APCD expected to increase around 3% (decrease around 2% on a comparable basis).
• Fuel: Current "at-the-pump" price is $412 per metric ton. The company is 50% hedged for 2007.

Second Quarter 2007 Outlook:

• Earnings Per Share: Expected to be in the range of $0.59 to $0.63.
• Capacity: Expected to increase 12.6% (6.3% on a comparable basis).

Risks and Contingencies:

• Litigation: Pending class action lawsuits regarding crew wages and gratuities; a new trial is scheduled for June 2007 regarding a $193 million Legionnaires' disease verdict against Essef Corp.
• Capital Expenditures: Significant commitments remain for new ships, with aggregate costs of approximately $5.4 billion for ships on order. Anticipated capital expenditures are $1.2 billion for 2007.
• Market Risks: Exposure to fuel price volatility, foreign currency fluctuations (Euro), and changes in interest rates. The company has entered into interest rate and cross-currency swap agreements to mitigate some of this risk.

Investor Verification Checklist

• Verify the impact of the Pullmantur acquisition on comparable year-over-year growth metrics, as the filing notes a two-month lag in reporting.
• Confirm the status of the Essef Corp. litigation and the potential financial impact of the new trial scheduled for June 2007.
• Monitor fuel price trends and the effectiveness of the company's 50% hedging strategy for 2007.
• Review the progress of the $5.4 billion shipbuilding program and adherence to the $1.2 billion capital expenditure budget for 2007.
• Assess the company's ability to maintain debt covenants given the increased Net Debt-to-Capital ratio of 45.9%.