Business Context and Reporting Period
Company: Royal Caribbean Cruises Ltd.
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2001
Business Overview: The Company operates two cruise brands, Royal Caribbean International and Celebrity Cruises, with a fleet of 22 ships and 45,854 berths. It is the world's second-largest cruise company, operating worldwide itineraries calling on approximately 200 destinations.
Key Financial Metrics (Year Ended Dec 31, 2001)
| Metric | 2001 | 2000 | 1999 |
|---|---|---|---|
| Revenues | $3,145,250 | $2,865,846 | $2,546,152 |
| Operating Income | $455,605 | $569,540 | $480,174 |
| Net Income | $254,457 | $445,363 | $383,853 |
| Diluted EPS | $1.32 | $2.31 | $2.06 |
| Operating Margin | 14.5% | 19.9% | 18.8% |
| Net Margin | 8.1% | 15.5% | 15.0% |
| Total Assets | $10,368,782 | $7,828,465 | $6,380,511 |
| Total Debt (incl. capital leases) | $5,646,112 | $3,410,096 | $2,342,177 |
| Shareholders' Equity | $3,756,584 | $3,615,915 | $3,261,156 |
| Cash & Cash Equivalents | $727,178 | $177,810 | $63,470 |
| Operating Cash Flow | $633,689 | $703,316 | $583,358 |
Values in thousands, except per share data and percentages.
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 9.7% to $3.1 billion, driven primarily by a 20.8% increase in capacity due to new ship deliveries (Infinity, Radiance of the Seas, Summit, Adventure of the Seas). This was partially offset by a 9.1% decline in gross revenue per available passenger cruise day.
- Profitability Decline: Net income decreased 42.9% to $254.5 million. The decline was primarily attributed to:
- Approximately $47.7 million in lost revenues and extra costs directly associated with the September 11, 2001 terrorist attacks.
- Approximately $30.7 million in negative impact from the cancellation of nine weeks of sailings due to ship incidents.
- General softness in the U.S. economy and increased fleet capacity diluting yields.
- Expense Increases: Operating expenses rose 17.1% due to increased capacity. Depreciation and amortization increased 30.4% to $301.2 million due to new ships. Gross interest expense increased to $290.2 million due to higher debt levels associated with fleet expansion.
- Balance Sheet: Total debt increased significantly to $5.6 billion to fund capital expenditures. Cash and cash equivalents grew to $727 million, supported by $1.8 billion in net proceeds from debt issuances.
Guidance, Outlook, Risks, and Unusual Items
Proposed Merger and Joint Ventures
- P&O Princess Merger: On November 19, 2001, the Company entered into an agreement for a dual-listed company merger with P&O Princess Cruises plc. The transaction is subject to shareholder and regulatory approval. Shareholder meetings were adjourned in February 2002 following a competing pre-conditional offer from Carnival Corporation. If terminated under certain circumstances, a $62.5 million break fee is payable.
- Joint Venture: A joint venture with P&O Princess was formed to target southern European customers. Each party committed up to $500 million in equity. Two ship-build contracts (Serenade of the Seas and Jewel of the Seas) are committed to this venture.
Capital Expenditures
- Capital expenditures for 2001 were approximately $2.1 billion.
- Future commitments include six ships on order with an aggregate contract price of approximately $2.6 billion.
- Projected capital expenditures are approximately $1.1 billion for 2002, $1.1 billion for 2003, and $1.0 billion for 2004.
Risks and Contingencies
- September 11 Impact: The attacks significantly impacted demand and pricing. The Company noted that booking patterns shifted to closer-in sailing dates and required substantial discounts to recover.
- Financing Environment: Credit ratings were lowered by Standard & Poor's (to BB+) and Moody's (to Ba2) in Q4 2001, increasing borrowing costs. The Company noted that the availability of financing is indeterminable due to market conditions post-September 11.
- Tax Status: The Company relies on Section 883 of the Internal Revenue Code for exemption from U.S. income tax on international shipping income. There is no assurance that this exemption will be maintained or that regulations will not change.
- Legal: Ongoing litigation regarding crew wages (filed in 1999) remains unresolved; the Company cannot estimate the potential impact.
Investor Verification Checklist
- Merger Status: Verify the current status of the P&O Princess merger given the competing offer from Carnival Corporation and the adjournment of shareholder meetings.
- Debt Covenants: Confirm continued compliance with debt covenants (liquidity, net worth, fixed charge coverage) given the credit rating downgrade and increased leverage.
- September 11 Recovery: Assess the sustainability of the booking recovery and pricing trends post-September 11, 2001, and the extent of remaining capacity constraints.
- Tax Exemption: Review the stability of the Section 883 tax exemption status and any pending regulatory changes that could affect U.S. source income taxation.
- Capital Commitments: Evaluate the ability to fund the $2.6 billion in ship orders and $500 million joint venture commitment amidst a potentially constrained credit market.