Royal Caribbean Cruise Lines 2007 Annual Report Download - page 38

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
NOTE 9. EARNINGS PER SHARE
Areconciliation between basic and diluted earnings per share is
as follows (in thousands, except per share data):
Year Ended December 31, 2007 2006 2005
Income before cumulative
effect of a change in
accounting principle $603,405 $633,922 $663,465
Cumulative effect of a
change in accounting
principle (Note 2) – – 52,491
Net income 603,405 633,922 715,956
Interest on dilutive
convertible notes – 17,237 48,128
Net income for diluted
earnings per share $603,405 $651,159 $764,084
Weighted-average common
shares outstanding 212,784 210,703 206,217
Dilutive effect of stock
options and restricted
stock awards 1,471 1,725 2,725
Dilutive effect of
convertible notes – 9,057 25,772
Diluted weighted-average
shares outstanding 214,255 221,485 234,714
Basic earningsper share:
Income beforecumulative
effectof a changein
accounting principle $ 2.84 $ 3.01 $ 3.22
Cumulative effect of a
change in accounting
principle (Note 2) $– $ – $ 0.25
Net income $ 2.84 $ 3.01 $ 3.47
Diluted earningsper share:
Income before cumulative
effect of a change in
accounting principle $ 2.82 $ 2.94 $ 3.03
Cumulativeeffect of a
change in accounting
principle (Note 2) $– $ – $ 0.22
Net income $ 2.82 $ 2.94 $ 3.26
Diluted earningsper share did not include options to purchase
2.8 million, 3.2 million and 1.3 million shares for each of the years
ended December 31, 2007, 2006 and 2005, respectively, because
the effect of including 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 Accelerated Share Repurchase (“ASR”) transaction because
the effect of including them would have been antidilutive.
NOTE 10. 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 expenses were $15.1 million,
$13.9 million and $12.8 million for the years ended December 31, 2007,
2006 and 2005, respectively, for the plan.
NOTE 11. INCOME TAXES
We and the majority of our subsidiaries are currently exempt
from United States corporate tax on United States source income
from the international operation of ships pursuant to Section 883
of the Internal Revenue Code. Regulations under Section 883 have
limited the activities that are considered the international opera-
tion of a ship or incidental thereto. Accordingly, our provision
for United States federal and state income taxes includes taxes
on certain activities not considered incidental to the international
operation of our ships.
Additionally, some of our ship-operating subsidiaries are subject to
income tax under the tonnage tax regimes of Malta or the United
Kingdom. Under these regimes, income from qualifying activities is
not subject to corporate income tax. Instead, these subsidiaries are
subjectto a tonnage tax computed by reference to the tonnage of
the ship or ships registered under the relevant provisions of the tax
regimes. Income from activities not considered qualifying activities,
which we do not consider significant, remains subject to Maltese
or United Kingdom corporate income tax.
Income tax expense for items not qualifying under Section 883 or
under tonnage tax regimes, and for the remainder of our subsidiaries
was not significant for the years ended December 31, 2007, 2006
and 2005.
We do not expect to incur income taxes on future distributions
of undistributed earningsof foreign subsidiaries. Consequently, no
deferred income taxes have been provided for the distribution of
these earnings.
NOTE 12. DERIVATIVES
Fair Value Hedges
During 2007, 2006 and 2005, we recognized in earnings a net
loss of approximately $8.4 million, $1.2 million and $0.7 million,
respectively, which represented the total ineffectiveness of all fair
value hedges. During 2007, we recognized a gain of approximately
$21.4 million related to derivative instruments associated with
firm commitments which no longer qualified as fair value hedges.
The gain primarily represents changes in the fair value of the
derivativeinstruments from the last date the instruments were
effective to the termination of the instruments. These amounts
are reported in other income (expense) in our consolidated state-
ments of operations.
Cash FlowHedges
During 2007, 2006 and 2005, we recognized in earnings, a net gain
of $1.1 million, a net loss of $0.5 million and a net gain of $1.4 mil-
lion, respectively,which represented the total ineffectiveness of
all cash flowhedges. In addition, we recognized a gain of $1.7 mil-
lion related to certain derivative instruments which were no longer
effective as cash flow hedges. These amounts are reported in other
income (expense) in our consolidated statements of operations.