Business Context and Reporting Period
Company: Royal Caribbean Cruises Ltd.
Filing Type: Annual Report on Form 20-F
Period Ended: December 31, 2002
Business Overview: The Company operates two cruise brands, Royal Caribbean International and Celebrity Cruises, with a combined fleet of 25 ships and 53,042 berths. It is the world's second-largest cruise company, operating worldwide itineraries calling on approximately 200 destinations. The Company is incorporated in the Republic of Liberia with principal executive offices in Miami, Florida.
Key Financial Metrics
| Metric (in thousands) | 2002 | 2001 | 2000 |
|---|---|---|---|
| Revenues | $3,434,347 | $3,145,250 | $2,865,846 |
| Operating Income | $550,975 | $455,605 | $569,540 |
| Net Income | $351,284 | $254,457 | $445,363 |
| Diluted EPS | $1.79 | $1.32 | $2.31 |
| Operating Cash Flow | $870,470 | $633,689 | $703,316 |
| Total Assets | $10,538,531 | $10,368,782 | $7,828,465 |
| Total Debt (incl. capital leases) | $5,444,838 | $5,646,112 | $3,410,096 |
| Shareholders' Equity | $4,034,694 | $3,756,584 | $3,615,915 |
Operational Data (2002):
- Guests Carried: 2,768,475
- Occupancy Percentage: 104.5%
- Capital Expenditures: Approximately $1.0 billion
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 9.2% to $3.4 billion, driven primarily by a 15.0% increase in capacity due to new ship deliveries (Constellation, Brilliance of the Seas, Navigator of the Seas). This was partially offset by a 5.1% decline in gross revenue per available passenger cruise day due to lower air passage bookings and post-9/11 pricing pressures.
- Profitability: Net income increased 38.1% to $351.3 million. This improvement was aided by a net gain of $33.0 million from the termination of a proposed merger with P&O Princess (break fee of $62.5 million less $29.5 million in costs). Conversely, 2001 results were negatively impacted by approximately $47.7 million in costs related to the September 11, 2001 attacks.
- Expense Management: Operating expenses increased 9.2%, but operating costs per available passenger cruise day declined 5.0%. Marketing, selling, and administrative expenses decreased 5.1% due to economies of scale and cost reduction initiatives.
- Debt Structure: Total debt decreased slightly to $5.4 billion. The Company paid down $603.3 million in principal during 2002. A $1.0 billion revolving credit facility expires in June 2003 and requires replacement.
Guidance, Outlook, and Risks
Outlook and Guidance:
- 2003 Expectations: Management expects net yields for the first quarter of 2003 to increase by 2% to 4%, though bookings have softened due to the Iraq conflict and economic uncertainty. Net yields for the second quarter are expected to be below 2002 levels.
- Capital Expenditures: Anticipated capital expenditures are approximately $1.1 billion for 2003, $0.5 billion for 2004, and $0.1 billion for 2005.
- Fleet Expansion: Three ships are on order (Mariner of the Seas, Serenade of the Seas, Jewel of the Seas) with deliveries expected in 2003 and 2004.
Risks and Contingencies:
- Geopolitical and Economic Uncertainty: Demand is sensitive to terrorist attacks, war (specifically the conflict in Iraq), and economic conditions affecting disposable income.
- Competition: The proposed combination of Carnival Corporation and P&O Princess creates a larger competitor with greater financial flexibility and market access.
- Financing: The $1.0 billion revolving credit facility expires in June 2003. Replacement terms are uncertain due to market volatility.
- Taxation: The Company relies on Section 883 of the U.S. Internal Revenue Code for exemption from U.S. income tax on shipping income. Changes in regulations or ownership could jeopardize this status.
- Operational Disruptions: Five weeks of sailings were canceled in Q1 2003 due to an unanticipated drydock, estimated to negatively impact net income by $0.06 per share.
Investor Verification Checklist
- Credit Facility Renewal: Verify the status of the $1.0 billion revolving credit facility expiring in June 2003 and the terms of its replacement.
- Q1 2003 Performance: Monitor actual Q1 2003 net yields against the 2-4% growth guidance, considering the impact of the Iraq conflict and the unanticipated drydock.
- Section 883 Tax Status: Confirm continued compliance with U.S. tax exemption requirements given the concentration of ownership by two principal shareholders (A. Wilhelmsen AS. and Cruise Associates).
- Competitive Landscape: Assess the impact of the Carnival/P&O Princess merger on market share and pricing power.
- Capital Expenditure Execution: Track the delivery schedule and financing of the three ships on order (Mariner, Serenade, Jewel) against the $1.1 billion 2003 capex budget.