Royal Caribbean Cruise Lines 2004 Annual Report Download - page 26

casted transaction or the variability of cash flows related to a
recognized asset or liability 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 income until the underlying hedged trans-
actions are recognized in earnings. On an ongoing basis, we
assess whether derivatives 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 deriva-
tives are recognized in earnings immediately.
FOREIGN CURRENCY TRANSACTIONS
The majority of our transactions are settled in United States
dollars. Gains or losses resulting from transactions denomi-
nated in other currencies are recognized in income at each
balance sheet date.
EARNINGS PER SHARE
Basic earnings per share is computed by dividing net
income by the weighted-average number of shares of com-
mon stock outstanding during each period. Diluted earnings
per share incorporates the incremental shares issuable
upon the assumed exercise of stock options and conver-
sion of potentially dilutive securities. In addition, net
income is adjusted to add back the amount of interest rec-
ognized in the period associated with the dilutive securi-
ties. (See Note 8.
Earnings Per Share .)
STOCK-BASED EMPLOYEE COMPENSATION
We use the intrinsic value method to account for stock-based
employee compensation. The following table illustrates the
effect on 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 com-
pensation (in thousands, except per share data):
Year Ended December 31,
2004 2003 2002
Net income, as reported $474,691 $280,664 $351,284
Deduct: Total stock-based
employee compensation
expense determined
under fair value method
for all awards (9,502) (11,834) (20,544)
Pro forma net income $465,189 $268,830 $330,740
Add: Interest on dilutive
convertible notes 54,530 –18,202
Pro forma net income
for diluted earnings
per share $519,719 $268,830 $348,942
Weighted-average
common shares
outstanding 198,946 194,074 192,485
Dilutive effect of stock
options and restricted
stock awards 3,888 3,023 2,926
Dilutive effect of
convertible notes 31,473 – 13,834
Diluted weighted-
average shares
outstanding 234,307 197,097 209,245
Earnings per share:
Basic – as reported $ 2.39 $1.45 $1.82
Basic – proforma $ 2.34 $1.39 $1.72
Diluted – as reported
(Note 8) $ 2.26 $1.42 $1.76
Diluted – pro forma $ 2.22 $1.36 $1.67
ROYAL CARIBBEAN CRUISES LTD.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)