RCL

Royal Caribbean Cruises Ltd. 10-Q Summary

Business Context and Reporting Period

This is a Quarterly Report (Form 10-Q) for Royal Caribbean Cruises Ltd. for the period ended September 30, 2005. The company operates two primary cruise brands: Royal Caribbean International and Celebrity Cruises. The report covers the third quarter and the first nine months of fiscal year 2005.

Key Financial Metrics

Key Operational Metrics (Q3 2005):

• Occupancy: 109.3% (vs 109.0% in Q3 2004)
• Net Yields: $203.18 per APCD (up 6.9% vs prior year)
• Net Cruise Costs per APCD: $113.45 (up 6.4% vs prior year)

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 8.4% in Q3 and 7.9% for the nine months ended September 30, 2005. Growth was driven by higher cruise ticket prices, a 1.9% increase in capacity (Q3), and increased onboard spending.
• Profitability: Net income rose 32.6% in Q3 and 43.8% for the nine-month period. Operating margins improved to 26.7% in Q3 2005 from 25.9% in Q3 2004.
• Cost Pressures: Net Cruise Costs increased primarily due to higher fuel prices (up 54% per metric ton in Q3) and payroll costs. Fuel costs represented 6.6% of total revenues in Q3 2005, compared to 4.7% in Q3 2004.
• Accounting Change: The company changed its accounting method for drydocking costs from "accrual in advance" to "deferral." This resulted in a one-time cumulative gain of $52.5 million ($0.22 diluted EPS) recorded in the first quarter of 2005.
• Investment Gain: A $44.2 million gain was recorded in Q3 2005 from the redemption of First Choice Holidays PLC convertible preferred shares.

Guidance, Outlook, and Risks

• 2005 Outlook: Management expects full-year 2005 Net Yields to increase approximately 6.5% versus the prior year. Full-year 2005 diluted EPS is estimated at approximately $2.75 (excluding the cumulative effect of the accounting change).
• Fuel Price Risk: Fuel prices remain a significant concern. Prices were 54% higher in Q3 2005 compared to Q3 2004. Management estimates that if fuel prices remain at current levels, Q4 2005 fuel costs will increase by $24 million, negatively impacting EPS by $0.10. For 2006, sustained high fuel prices could increase costs by $140 million, impacting EPS by $0.60.
• Capital Expenditures: Anticipated capital expenditures are $0.5 billion for 2005, $1.1 billion for 2006 and 2007, and $1.6 billion for 2008. This includes four ships on order with an aggregate cost of $3.2 billion.
• Liquidity: As of September 30, 2005, liquidity totaled $1.3 billion, comprising cash, a term loan facility, and a $1.0 billion revolving credit facility.
• Legal Proceedings: A class action lawsuit regarding cabin steward gratuities is pending; the company intends to defend vigorously. A separate lawsuit regarding shore excursion profits was dismissed in September 2005.
• Share Repurchase: The company entered into an Accelerated Share Repurchase (ASR) transaction in September 2005, purchasing 5.5 million shares for approximately $249.1 million.

Investor Verification Checklist

• Fuel Hedging Effectiveness: Verify the extent of fuel swap agreements and their ability to mitigate the 54% increase in fuel prices.
• Debt Maturity Profile: Review the $4.15 billion debt structure, noting $559 million due within one year and the impact of potential prepayment triggers if principal shareholders reduce their holdings.
• Capital Expenditure Funding: Assess the ability to fund the $3.2 billion in ship orders and $1.6 billion in 2008 capex given the reduction in cash reserves from $628 million to $189 million.
• Accounting Change Impact: Confirm the long-term impact of the drydocking cost accounting change on future expense recognition.
• 2006 Demand: Monitor advance booking trends for 2006 to validate management's optimism regarding yield improvements despite fuel cost headwinds.