Royal Caribbean Cruise Lines 2003 Annual Report Download - page 10

As used in this document, the terms “Royal Caribbean,” “we,”
“our” and “us” refer to Royal Caribbean Cruises Ltd., the term
“Celebrity” refers to Celebrity Cruises Lines Inc. and the
terms “Royal Caribbean International” and “Celebrity Cruises”
refer to our two cruise brands. In accordance with cruise indus-
try practice, the term “berths” is determined based on double
occupancy per cabin even though many cabins can accommo-
date three or more passengers.
Certain statements under this caption “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations,” in our letter to shareholders and elsewhere in this
document constitute forward-looking statements under the
Private Securities Litigation Reform Act of 1995. Forward-look-
ing statements do not guarantee future performance and may
involve risks, uncertainties and other factors which could cause
our actual results, performance or achievements to differ mate-
rially from the future results, performance or achievements
expressed or implied in those forward-looking statements.
Examples of these risks, uncertainties and other factors
include, but are not limited to:
• general economic and business conditions,
• vacation industry competition, including cruise industry competition,
• changes in vacation industry capacity, including cruise capacity,
• the impact of tax laws and regulations affecting our business
or our principal shareholders,
• the impact of changes in other laws and regulations affecting
our business,
• the impact of pending or threatened litigation,
• the delivery of scheduled new ships,
• emergency ship repairs,
• incidents involving cruise ships,
• reduced consumer demand for cruises as a result of any
number of reasons, including armed conflict, terrorist
attacks, geo-political and economic uncertainties or the
unavailability of air service,
• changes in our stock price, interest rates or oil prices, and
• weather.
The above examples are not exhaustive and new risks emerge
from time to time. We undertake no obligation to publicly
update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise.
CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements are prepared in accor-
dance with accounting principles generally accepted in the
United States. (See Note 1. General and Note 2. Summary of
Significant Accounting Policies.) Certain of our accounting poli-
cies are deemed “critical,” as they require management’s high-
est degree of judgment, estimates and assumptions. We have
discussed these accounting estimates and disclosures with the
audit committee of our board of directors. We believe our most
critical accounting policies are as follows:
SHIP ACCOUNTING
Our ships represent our most significant assets and we state
them at cost less accumulated depreciation or amortization.
Depreciation of ships, which includes amortization of ships under
capital leases, is computed net of a 15% projected residual value
using the straight-line method over estimated service lives of pri-
marily 30 years. Improvement costs that we believe add value to
our ships are capitalized as additions to the ship and depreciat-
ed over the improvements’ estimated useful lives. The estimat-
ed cost and accumulated depreciation of refurbished or replaced
ship components are written-off and any resulting gain or loss
is recognized in operating expenses. Repairs and maintenance
activities are charged to expense as incurred.
Our service life and residual value estimates take into consid-
eration the impact of anticipated technological changes, long-
term cruise and vacation market conditions and historical use-
ful lives of similarly-built ships. In addition, we take into consid-
eration our estimates of the average useful lives of the ships’
major component systems, such as hull, superstructure, main
electric, engines and cabins. Given the very large and complex
nature of our ships, our accounting estimates related to ships
and determinations of ship improvement costs to be capitalized
require considerable judgment and are inherently uncertain. We
do not have cost segregation studies performed to specifically
componentize our ship systems; therefore, we estimate the
costs of component systems based principally on general and
technical information known about major ship component sys-
tems and their lives and our knowledge of the cruise industry.
We do not identify and track depreciation by ship component
systems, but instead utilize these estimates to determine the
net cost basis of assets replaced or refurbished.
We believe we have made reasonable estimates for ship
accounting purposes. However, should certain factors or cir-
cumstances cause us to revise our estimates of ship service
lives or projected residual values, depreciation expense could
be materially higher or lower. If circumstances cause us to
change our assumptions in making determinations as to
whether ship improvements should be capitalized, the amounts
ROYAL CARIBBEAN CRUISES LTD.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS