Royal Caribbean Cruise Lines 2005 Annual Report Download - page 20

As used in this document, the terms “Royal Caribbean,” “Company,”
“we,” “our” and “us” refer to Royal Caribbean Cruises Ltd., the term
“Celebrity” refers to Celebrity Cruise Lines Inc. and the terms “Royal
Caribbean International” and “Celebrity Cruises” refer to our two
cruise brands. In accordance with cruise vacation industry practice,
the term “berths” is determined based on double occupancy per
cabin even though many cabins can accommodate 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. Words such as “expect,” “anticipate,” “goal,”
“project,” “plan,” “believe,” “seek” and similar expressions are
intended to identify these forward-looking statements. Forward-
looking 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 materially 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 vacation indus-
try competition,
•changes in vacation industry capacity, including over capacity in
the cruise vacation industry,
•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,
•negative incidents involving cruise ships including those involv-
ing the health and safety of passengers,
•reduced consumer demand for cruises as a result of any num-
ber of reasons, including geo-political and economic uncertain-
ties and the unavailability of air service.
•fears of terrorist attacks, armed conflict and the spread of con-
tagious diseases and the resulting concerns over safety and
security aspects of traveling.
•the impact of the spread of contagious diseases,
•our ability to obtain financing on terms that are favorable or
consistent with our expectations,
•changes in our stock price or principal shareholders,
•the impact of changes in operating and financing costs, includ-
ing changes in foreign currency, interest rates, fuel, food, pay-
roll, insurance and security costs,
•the implementation of regulations in the United States requiring
United States citizens to obtain passports for travel to addition-
al foreign destinations, 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 informa-
tion, future events or otherwise.
Critical Accounting Policies
Our consolidated financial statements are prepared in accordance
with accounting principles generally accepted in the United States.
(See Note 1.
General and Note 2. Summary of Significant Accounting
Policies
to our consolidated financial statements.) Certain of our
accounting policies are deemed “critical,” as they require manage-
ment’s highest degree of judgment, estimates and assumptions. We
have discussed these accounting policies and estimates with the
audit committee of our board of directors. We believe our most crit-
ical accounting policies are as follows:
Our ships represent our most significant assets and are stated 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 primarily 30 years.
Improvement costs that we believe add value to our ships are capi-
talized as additions to the ship and depreciated over the improve-
ments’ estimated useful lives. The estimated cost and accumulated
depreciation of refurbished or replaced ship components are writ-
ten-off and any resulting gain or loss is recognized in cruise operat-
ing expenses. Repairs and maintenance activities are charged to
expense as incurred. In the third quarter of 2005, we changed our
method of accounting for drydocking costs from the accrual in
advance to the deferral method. Under the accrual in advance
method, estimated drydocking costs are accrued evenly over the
period to the next scheduled drydock. Under the deferral method,
drydocking costs incurred are deferred and charged to expense on a
straight-line basis over the period to the next scheduled drydock.
(See Note 2.
Summary of Significant Accounting Policies to our con-
solidated financial statements.)
Our service life and residual value estimates take into consideration
the impact of anticipated technological changes, long-term cruise
and vacation market conditions and historical useful lives of similar-
ly-built ships. In addition, we take into consideration 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 account-
ing estimates related to ships and determinations of ship improve-
ment costs to be capitalized require considerable judgment and are
inherently uncertain. We do not have cost segregation studies per-
formed to specifically componentize our ship systems; therefore, we
estimate the costs of component systems based principally on gen-
eral and technical information known about major ship component
systems and their lives and our knowledge of the cruise vacation
18 Royal Caribbean Cruises Ltd.
Management’s Discussion and
Analysis of Financial Condition
and Results of Operations