Royal Caribbean Cruise Lines 2005 Annual Report Download - page 42

Note 7. Earnings Per Share
A reconciliation between basic and diluted earnings per share is as
follows (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
Cumulative effect of a
change in accounting
principle (Note 2) 52,491 ––
Net income 715,956 474,691 280,664
Interest on dilutive
convertible notes 48,128 54,530 18,893
Net income for diluted
earnings per share $ 764,084 $ 529,221 $ 299,557
Weighted-average common
shares outstanding 206,217 198,946 194,074
Dilutive effect of stock
options and restricted
stock awards 2,725 4,161 3,267
Dilutive effect of
convertible notes 25,772 31,473 13,834
Diluted weighted-average
shares outstanding 234,714 234,580 211,175
Basic earnings per share:
Income before cumulative
effect of a change in
accounting principle $ 3.22 $ 2.39 $ 1.45
Cumulative effect
of a change in
accounting principle $ 0.25 $–$ –
Net income $ 3.47 $ 2.39 $ 1.45
Diluted earnings per share:
Income before cumulative
effect of a change in
accounting principle $ 3.03 $ 2.26 $ 1.42
Cumulative effect
of a change in
accounting principle $ 0.22 $–$ –
Net income $ 3.26 $ 2.26 $ 1.42
Diluted earnings per share did not include options to purchase 1.3
million shares for each of the years ended December 31, 2005 and
2004 because the effect of including them would have been antidi-
lutive. For the year ended December 31, 2003, diluted earnings per
share did not include options to purchase 5.3 million shares as well
as 17.7 million shares of our common stock issuable upon conver-
sion of our Liquid Yield Option™ Notes because the effect of includ-
ing them would have been antidilutive. Also, diluted earnings per
share in 2005 did not include 0.2 million shares we received in 2006
in connection with the settlement of an ASR transaction because the
effect of including them would have been antidilutive (see Note 6.
Shareholders’ Equity ).
Note 8. Retirement Plan
We maintain a defined contribution pension plan covering full-time
shoreside employees who have completed the minimum period of
continuous service. Annual contributions to the plan are based on
fixed percentages of participants’ salaries and years of service, not
to exceed certain maximums. Pension cost was $12.8 million, $12.2
million and $9.4 million for the years ended December 31, 2005,
2004 and 2003, respectively.
Note 9. Income Taxes
We and the majority of our subsidiaries are currently exempt from
United States corporate tax on income from the international opera-
tion of ships pursuant to Section 883 of the Internal Revenue Code.
Income tax expense related to our remaining subsidiaries was not
significant for the years ended December 31, 2005, 2004 and 2003.
Final regulations under Section 883 were published on August 26,
2003, and were effective for the year ended December 31, 2005.
These regulations confirmed that we qualify for the exemption pro-
vided by Section 883, but also narrowed the scope of activities
which are considered by the Internal Revenue Service to be inciden-
tal to the international operation of ships. The activities listed in the
regulations as not being incidental to the international operation of
ships include income from the sale of air and other transportation
such as transfers, shore excursions and pre and post cruise tours. To
the extent the income from such activities is earned from sources
within the United States, such income will be subject to United
States taxation. The application of these new regulations reduced
our net income for the year ended December 31, 2005 by approxi-
mately $14 million.
40 Royal Caribbean Cruises Ltd.
Notes to the Consolidated
Financial Statements (continued)