RCL

Business Context and Reporting Period

Company: Royal Caribbean Cruises Ltd.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2005
Business Overview: The Company is the world's second-largest cruise operator, managing two brands: Royal Caribbean International (contemporary/premium) and Celebrity Cruises (premium). As of year-end 2005, the fleet consisted of 28 ships with approximately 59,450 berths, operating worldwide itineraries. The Company is incorporated in the Republic of Liberia.

Key Financial Metrics

Operational Statistics:

• Passengers Carried: 3,476,287 (2005) vs. 3,405,227 (2004)
• Occupancy Rate: 106.6% (2005) vs. 105.7% (2004)
• Net Yields per APCD: $171.90 (2005) vs. $160.10 (2004)

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 7.6% to $4.9 billion, driven primarily by a 7.4% increase in Net Yields due to higher ticket prices and onboard spending, alongside a 1.4% capacity increase.
• Profitability: Net income rose 50.8% to $716 million. This includes a one-time gain of $52.5 million from a change in accounting principle for drydocking costs and a $44.2 million gain from the redemption of an investment in First Choice Holidays PLC.
• Cost Pressures: Fuel costs increased 46.0% year-over-year, rising from 5.5% to 7.5% of total revenues. Net Cruise Costs per APCD increased 6.3%.
• Balance Sheet: The Company significantly strengthened its balance sheet, reducing the net debt-to-capital ratio from 51.5% to 42.0% through debt repayments totaling approximately $932 million and an Accelerated Share Repurchase (ASR) of 5.5 million shares.

Guidance, Outlook, and Risks

2006 Outlook:

• Net Yields: Forecast to increase 2% to 4% compared to 2005.
• Costs: Net Cruise Costs per APCD expected to increase 3% to 5%, driven largely by higher fuel prices (estimated $90 million increase if prices remain at Feb 2006 levels).
• Earnings: Full-year 2006 diluted EPS expected in the range of $2.95 to $3.15, including a $36.0 million gain from a legal settlement with Alstom.
• Capital Expenditures: Anticipated to be approximately $1.2 billion in 2006, rising to $1.9 billion in 2009 due to new ship deliveries.

Key Risks and Contingencies:

• Fuel Prices: Significant exposure to volatile fuel costs; hedging strategies are in place but do not eliminate risk.
• Regulatory/Tax: New IRS regulations under Section 883 reduced 2005 net income by approximately $14 million and are expected to have ongoing impacts. Potential passport requirement changes (Western Hemisphere Travel Initiative) could negatively impact bookings.
• Legal: Pending class action lawsuits regarding cabin steward gratuities and intellectual property infringement; outcomes are currently unestimable.
• Geopolitical: Risks related to terrorism, war, and contagious diseases affecting travel demand.

Investor Verification Checklist

• Accounting Change Impact: Verify the sustainability of earnings excluding the $52.5 million one-time gain from the drydocking accounting change.
• Fuel Hedging Effectiveness: Assess the adequacy of fuel swap agreements against the projected 19% increase in fuel prices for 2006.
• Debt Maturities: Review the schedule of debt maturities, noting $600.9 million due in 2006 and the potential prepayment triggers if principal shareholder ownership changes.
• Capital Commitments: Confirm funding sources for the $3.2 billion in ship construction contracts and the $1.2 billion 2006 capital expenditure plan.
• Tax Exposure: Monitor the ongoing impact of Section 883 regulations on non-incidental income (e.g., shore excursions, air transport).