Royal Caribbean Cruise Lines 2006 Annual Report Download - page 12

As used in this document, the terms “Royal Caribbean,” the
“Company,” “we,” “our” and “us” refer to Royal Caribbean Cruises
Ltd., the term “Celebrity” refers to Celebrity Cruise Lines Inc., the
term “Pullmantur” refers to Pullmantur S.A. and the terms “Royal
Caribbean International,” “Celebrity Cruises” and “Pullmantur
Cruises” refer to our three 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” 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 for-
ward-looking statements. Forward-looking statements do not guar-
antee 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, perform-
ance or achievements expressed or implied in those forward-looking
statements. Examples of these risks, uncertainties and other factors
include, but are not limited to the following:
• general economic and business conditions,
• vacation industry competition and changes in industry capacity
and overcapacity,
• 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 involving
the health and safety of passengers,
• reduced consumer demand for cruises as a result of any number
of reasons, including geo-political and economic uncertainties
and the unavailability of air service,
• fears of terrorist attacks, armed conflict and the resulting con-
cerns over safety and security aspects of traveling,
• the impact of the spread of contagious diseases,
• the availability under our unsecured revolving credit facility, cash
flows from operations and our ability to obtain new borrowings
and raise new capital on terms that are favorable or consistent
with our expectations to fund operations, debt payment require-
ments, capital expenditures and other commitments,
• changes in our stock price or principal shareholders,
• the impact of changes in operating and financing costs, including
changes in foreign currency, interest rates, fuel, food, payroll,
insurance and security costs,
• 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 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 management’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 critical accounting policies are as follows:
Ship Accounting
Our ships represent our most significant assets and are stated at
cost less accumulated depreciation or amortization. Depreciation of
ships is generally computed net of a 15% projected residual value
using the straight-line method over estimated service lives of prima-
rily 30 years. Improvement costs that we believe add value to our
ships are capitalized as additions to the ship and depreciated over
the improvements’ estimated useful lives. The estimated cost and
accumulated depreciation of refurbished or replaced ship compo-
nents are written off and any resulting losses are recognized in
cruise operating expenses. Repairs and maintenance activities are
charged to expense as incurred. We use the deferral method to
account for drydocking costs. Under the deferral method, drydock-
ing 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
consolidated 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
industry. We do not identify and track depreciation by ship compo-
nent 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 account-
ing purposes. However, should certain factors or circumstances
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 we expense each year as repairs and
maintenance costs could increase, partially offset by a decrease in
depreciation expense. If we had reduced our estimated average 30-
year ship service life by one year, depreciation expense for 2006
10 ROYAL CARIBBEAN CRUISES LTD.
Management’s Discussion and Analysis of Financial Condition and Results of Operations