Royal Caribbean Cruise Lines 2005 Annual Report Download - page 37

in foreign currency exchange rates and fuel prices. Generally these
instruments are designated as hedges and are recorded on the bal-
ance sheet at their fair value. Our derivative instruments are not held
for trading or speculative purposes.
At inception of the hedge relationship, a derivative instrument that
hedges the exposure to changes in the fair value of a recognized
asset or liability, or a firm commitment is designated as a fair value
hedge. A derivative instrument that hedges a forecasted transaction
or the variability of cash flows related to a recognized asset or liabil-
ity is designated as a cash flow hedge.
Changes in the fair value of derivatives that are designated as fair
value hedges are offset against changes in the fair value of the
underlying hedged assets, liabilities or firm commitments. Changes
in fair value of derivatives that are designated as cash flow hedges
are recorded as a component of accumulated other comprehensive
(loss) income until the underlying hedged transactions are recog-
nized in earnings. On an ongoing basis, we assess whether deriva-
tives used in hedging transactions are “highly effective” in offsetting
changes in fair value or cash flow of hedged items. If it is determined
that a derivative is not highly effective as a hedge, changes in fair
value of the derivatives are recognized in earnings immediately. The
ineffective portion of hedges is recognized in earnings immediately.
The majority of our transactions are settled in United States dollars.
Gains or losses resulting from transactions denominated in other
currencies are recognized in income at each balance sheet date.
Basic earnings per share is computed by dividing net income by the
weighted-average number of shares of common stock outstanding
during each period. Diluted earnings per share incorporates the
incremental shares issuable upon the assumed exercise of stock
options and conversion of potentially dilutive securities, including
shares contingently issuable under our convertible debt instru-
ments. In addition, net income is adjusted to add back the amount
of interest recognized in the period associated with the dilutive
securities. (See Note 7.
Earnings Per Share. )
We use the intrinsic value method to account for stock-based
employee compensation. The following table illustrates the effect on
income before cumulative effect of a change in accounting principle,
net income and earnings per share as if we had applied the fair
value recognition provisions of Statement of Financial Accounting
Standards (“SFAS”) No. 123, “Accounting for Stock-Based
Compensation,” to such compensation (in thousands, except per
share data):
Year Ended December 31,
2005 2004 2003
Income before cumulative
effect of a change in
accounting principle $ 663,465 $ 474,691 $ 280,664
Deduct: Total stock-based
employee compensation
expense determined
under fair value
method for all awards (9,732) (9,502) (11,834)
Pro forma income before
cumulative effect of a
change in accounting
principle 653,733 465,189 268,830
Add: Interest on dilutive
convertible notes 48,128 54,530 –
Pro forma income before
cumulative effect of a
change in accounting
principle for diluted
earnings per share $ 701,861 $ 519,719 $ 268,830
Net income, as reported $ 715,956 $ 474,691 $ 280,664
Deduct: Total stock-based
employee compensation
expense determined
under fair value
method for all awards (9,732) (9,502) (11,834)
Pro forma net income 706,224 465,189 268,830
Add: Interest on dilutive
convertible notes 48,128 54,530 –
Pro forma net income
for diluted earnings
per share $ 754,352 $ 519,719 $ 268,830
Weighted-average
common shares
outstanding 206,217 198,946 194,074
Dilutive effect of stock
options and restricted
stock awards 2,498 3,888 3,023
Dilutive effect of
convertible notes 25,772 31,473 –
Diluted weighted-average
shares outstanding 234,487 234,307 197,097
Royal Caribbean Cruises Ltd. 35
Notes to the Consolidated
Financial Statements (continued)