Business Context and Reporting Period
Company: Royal Caribbean Cruises Ltd.
Filing Type: Form 20-F (Annual Report)
Period Ended: December 31, 2003
Business Overview: The Company operates two cruise brands, Royal Caribbean International and Celebrity Cruises, with a fleet of 28 ships and 58,448 berths as of year-end 2003. It is the world's second-largest cruise company, operating worldwide itineraries calling on approximately 160 destinations. The Company is incorporated in the Republic of Liberia with principal executive offices in Miami, Florida.
Key Financial Metrics
| Metric (in thousands, except per share) | 2003 | 2002 |
|---|---|---|
| Total Revenues | $3,784,249 | $3,434,347 |
| Operating Income | $526,185 | $550,975 |
| Net Income | $280,664 | $351,284 |
| Diluted Earnings Per Share | $1.42 | $1.79 |
| Operating Cash Flow | $857,803 | $870,470 |
| Total Assets | $11,322,742 | $10,538,531 |
| Total Debt (incl. capital leases) | $5,835,804 | $5,444,838 |
| Shareholders' Equity | $4,262,897 | $4,034,694 |
| Occupancy Percentage | 103.2% | 104.5% |
Liquidity: As of December 31, 2003, liquidity totaled approximately $1.1 billion, consisting of $330.1 million in cash and cash equivalents and $780.0 million available under an unsecured revolving credit facility.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 10.2% to $3.78 billion, driven by a 12.1% increase in capacity due to new ship deliveries (Serenade of the Seas, Mariner of the Seas). This was partially offset by lower cruise ticket prices and occupancy levels (103.2% vs. 104.5% in 2002) attributed to consumer apprehension regarding the war in Iraq and economic uncertainty.
- Profitability Decline: Operating income decreased 4.5% to $526.2 million, and Net Income decreased 20.1% to $280.7 million. The decline in net income was influenced by higher operating costs (fuel, payroll, marketing) and the absence of a $33.0 million gain in 2002 from the termination of a merger agreement with P&O Princess Cruises plc.
- Expense Increases: Operating expenses rose 12.7% to $2.38 billion. Marketing, selling, and administrative expenses increased 19.3% due to new initiatives for the Celebrity Cruises brand and a return to normalized spending levels post-9/11. Fuel costs as a percentage of revenue increased to 5.2% from 4.5%.
- Capital Expenditures: Capital expenditures were approximately $1.0 billion in 2003, primarily for new ship deliveries and progress payments.
Guidance, Outlook, and Risks
2004 Outlook:
- Earnings Per Share: Management expects 2004 diluted EPS to be in the range of $2.10 to $2.30.
- Net Yields: Expected to increase 5% to 7% for the full year 2004, assuming no external events and continued positive booking trends.
- Costs: Net Cruise Costs per Available Passenger Cruise Day are expected to increase 1% to 2% due to higher fuel, insurance, and port expenses.
Material Risks and Contingencies:
- Taxation (Section 883): New IRS regulations effective in 2004 narrow the scope of income exempt from U.S. taxation. The Company estimates this will reduce 2004 earnings by approximately $0.04 to $0.05 per share.
- Convertible Notes: Zero coupon convertible notes may become convertible in Q1 2004 if stock price thresholds are met, potentially reducing EPS by $0.01 for the quarter and up to $0.06 for the full year. Liquid Yield Option Notes may also become convertible, potentially reducing full-year EPS by $0.02.
- Operational Disruptions: An unanticipated drydock in March 2004 resulted in a one-week sailing cancellation, estimated to negatively impact net income by $0.02 to $0.03 per share.
- Market Risks: Significant exposure to fuel price volatility, interest rate fluctuations, and foreign currency exchange rates (hedged via swaps and options). Competition from Carnival Corporation and P&O Princess Cruises plc following their merger poses a strategic risk.
Investor Verification Checklist
- Tax Impact: Verify the actual financial impact of the new Section 883 regulations on 2004 taxable income regarding air transportation and shore excursions.
- Convertible Debt Triggers: Monitor stock price performance to determine if zero coupon convertible notes or Liquid Yield Option Notes become convertible, which would dilute earnings.
- Cost Inflation: Track fuel prices and insurance premiums to validate the 1-2% increase in Net Cruise Costs projected for 2004.
- Shareholder Structure: Note that A. Wilhelmsen AS. (21.7%) and Cruise Associates (24.4%) control the board; verify if any changes in their ownership could trigger debt prepayment clauses.
- Ship Deliveries: Confirm the on-time delivery of the Jewel of the Seas (Q2 2004) and the Ultra-Voyager (Q2 2006) to ensure capacity expansion targets are met.