November 15, 2007. We are currently evaluating the impact, if any, the adoption of this statement will have on our consolidated financial statements.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 forward-looking statements. Forward-looking statements do not guarantee 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, performance 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 concerns 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 requirements, 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; and
• weather.
The above examples are not exhaustive and new risks emerge from time to time. We undertake
10
no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
This report should be read in conjunction with our annual report on Form 10-K for the year ended December 31, 2006.
Terminology and Non-GAAP Financial Measures
Available Passenger Cruise Days (“APCD”) are our measurement of capacity and represent double occupancy per cabin multiplied by the number of cruise days for the period.
Gross Cruise Costs represent the sum of total cruise operating expenses plus marketing, selling and administrative expenses.
Gross Yields represent total revenues per APCD.
Net Cruise Costs represent Gross Cruise Costs excluding commissions, transportation and other expenses and onboard and other expenses (each of which is described below under the Overview heading). In measuring our ability to control costs in a manner that positively impacts net income, we believe changes in Net Cruise Costs to be the most relevant indicator of our performance. A reconciliation of historical Gross Cruise Costs to Net Cruise Costs is provided below under Summary of Historical Results of Operations. We have not provided a quantitative reconciliation of projected Gross Cruise Costs to projected Net Cruise Costs due to the significant uncertainty in projecting the costs deducted to arrive at this measure. Accordingly, we do not believe that reconciling information for such projected figures would be meaningful.
Net Debt-to-Capital is a ratio which represents total long-term debt, including current portion of long-term debt, less cash and cash equivalents (“Net Debt”) divided by the sum of Net Debt and shareholders' equity. We believe Net Debt and Net Debt-to-Capital, along with total long-term debt and shareholders' equity are useful measures of our capital structure. A reconciliation of historical Debt-to-Capital to Net Debt-to-Capital is provided below under Summary of Historical Results of Operations.
Net Yields represent Gross Yields less commissions, transportation and other expenses and onboard and other expenses (each of which is described below under the Overview heading) per APCD. We utilize Net Yields to manage our business on a day-to-day basis and believe that it is the most relevant measure of our pricing performance because it reflects the cruise revenues earned by us net of our most significant variable costs. A reconciliation of historical Gross Yields to Net Yields is provided below under Summary of Historical Results of Operations. We have not provided a quantitative reconciliation of projected Gross Yields to projected Net Yields due to the significant uncertainty in projecting the costs deducted to arrive at this measure. Accordingly, we do not believe that reconciling information for such projected figures would be meaningful.
Occupancy, in accordance with cruise vacation industry practice, is calculated by dividing Passenger Cruise Days by APCD. A percentage in excess of 100% indicates that three or more passengers occupied some cabins.
Passenger Cruise Days represent the number of passengers carried for the period multiplied by the number of days of their respective cruises.
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Overview
Our revenues consist of the following:
• | Passenger ticket revenues consist of revenue recognized from the sale of passenger tickets and the sale of air transportation to our ships. |
• | Onboard and other revenues consist primarily of revenues from the sale of goods and/or services onboard our ships not included in passenger ticket prices, cancellation fees, sales of vacation protection insurance, pre and post cruise tours, hotel and air packages. Also included are revenues we receive from independent third party concessionaires that pay us a percentage of their revenues in exchange for the right to provide selected goods and/or services onboard our ships. |
Our cruise operating expenses consist of the following:
• | Commissions, transportation and other expenses consist of those costs directly associated with passenger ticket revenues, including travel agent commissions, air and other transportation expenses, port costs that vary with passenger head counts and related credit card fees. |
• | Onboard and other expenses consist of the direct costs associated with onboard and other revenues. These costs include the cost of products sold onboard our ships, vacation protection insurance premiums, costs associated with pre and post tours and related credit card fees. Concession revenues have minimal costs associated with them, as the costs related to these activities are incurred by the concessionaires. |
• | Payroll and related expenses consist of costs for shipboard personnel. |
• | Food expenses include food costs for both passengers and crew. |
• | Fuel expenses include fuel costs, net of the financial impact of fuel swap agreements and fuel delivery costs. |
• | Other operating expenses consist of operating costs such as repairs and maintenance, port costs that do not vary with passenger head counts, Pullmantur’s land-based tours, insurance, entertainment and all other operating costs. |
We do not allocate payroll and related costs, food costs, fuel costs or other operating costs to the expense categories attributable to passenger ticket revenues or onboard and other revenues since they are incurred to provide the total cruise vacation experience.
Summary of Historical Results of Operations
We experienced a challenging demand environment for our Caribbean itineraries during the first quarter of 2007 when compared to the same period in 2006. We believe the demand was impacted by general economic conditions affecting the discretionary spending of our customers. This resulted in a decrease in Net Yields of 3.4% and a decrease of 4.2% on a comparable basis (i.e., excluding Pullmantur) for the first quarter of 2007 compared to the same period in 2006. The decrease in Net Yields, however, was offset by an increase in our capacity resulting in an increase in total revenues for the first quarter 2007 as compared to the same period in 2006. The first quarter of 2006 includes a net gain of $36.0 million, or $0.16 per share, related to the partial settlement of a lawsuit. Our net income for the first quarter of 2007 was $8.8 million or $0.04 per share on a diluted basis compared to $119.5 million or $0.55 per share for the first quarter of 2006.
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Highlights for the first quarter include:
• | Total revenues increased by approximately 6.7% to $1.2 billion from total revenues of $1.1 billion for the same period in 2006 primarily due to a 9.7% increase in capacity partially offset by a 2.7% decrease in Gross Yields. |
• | Net Cruise Costs per APCD increased 5.4% compared to the same period in 2006 primarily as a result of the addition of Pullmantur’s tour business and an increase in payroll and related expenses. |
• | Net Debt-to-Capital increased to 45.9% compared to 40.7% for the same period in 2006. Similarly, our Debt-to-Capital ratio increased to 46.8% compared to 42.4% for the same period in 2006. |
• | We issued €1.0 billion, or approximately $1.3 billion, of 5.625% senior unsecured notes due 2014 at a price of 99.638% of par. The net proceeds from the offering were used to retire the €701.0 million, or approximately $906.5 million, outstanding balance on our unsecured bridge loan facility obtained to finance our acquisition of Pullmantur. The remainder of the net proceeds, approximately €289.0 million, or approximately $374.8 million, was used to repay a portion of the outstanding balance on our unsecured revolving credit facility. |
• | We entered into interest rate swap agreements that effectively change €1.0 billion of fixed rate debt with a weighted-average fixed rate of 5.625% to EURIBOR-based floating rate debt. We also entered into cross currency swap agreements that effectively changes €300.0 million of floating EURIBOR-based debt to $389.1 million floating LIBOR-based debt. |
• | Majesty of the Seas underwent a revitalization which included the addition of new dining and entertainment options, the upgrade of guest suites and staterooms and the expansion of the day spa and fitness center. |
• | We announced the redeployment of Empress of the Seas to Pullmantur. The redeployment is scheduled for 2008. |
• | We entered into a $589.0 million unsecured term loan due through 2014 at a rate of 4.215%. The proceeds from this unsecured loan were used towards the purchase of Liberty of the Seas, which was delivered in April 2007. |
Our revenues are seasonal based on the demand for cruises. Demand is strongest for cruises during the summer months and holidays.
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The following table presents historical operating data as a percentage of total revenues:
| Quarter Ended |
| March 31, |
|
|
| 2007 | 2006 |
|
|
|
Passenger ticket revenues | 71.2 | 73.5 |
Onboard and other revenues | 28.8 | 26.5 |
|
|
|
Total revenues | 100.0% | 100.0% |
| | |
Cruise operating expenses | | |
Commissions, transportation and other | 18.0 | 17.7 |
Onboard and other | 5.4 | 5.2 |
Payroll and related | 11.2 | 10.2 |
Food | 6.0 | 5.7 |
Fuel | 9.6 | 9.8 |
Other operating | 18.6 | 15.1 |
|
|
|
Total cruise operating expenses | 68.8 | 63.7 |
Marketing, selling and administrative expenses | 15.2 | 15.1 |
Depreciation and amortization expenses | 9.5 | 8.9 |
|
|
|
Operating income | 6.5 | 12.3 |
Other income (expense) | (5.8) | (1.9) |
|
|
|
Net income | 0.7% | 10.4% |
|
|
|
Unaudited selected historical statistical information is shown in the following table:
| First Quarter Ended |
| March 31, |
|
|
| 2007 | 2006 |
|
|
|
Passengers Carried | 918,865 | 875,051 |
Passenger Cruise Days | 6,029,987 | 5,574,349 |
APCD | 5,816,046 | 5,303,570 |
Occupancy | 103.7% | 105.1% |
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Gross Yields and Net Yields were calculated as follows (in thousands, except APCD and Yields):
| | Quarter Ended |
| | March 31, |
|
|
| 2007 | 2006 |
|
|
|
Passenger ticket revenues | $ 870,416 | $ 842,263 |
Onboard and other revenues | 352,710 | 304,273 |
|
|
|
Total revenues | 1,223,126 | 1,146,536 |
|
|
|
Less: | | |
Commissions, transportation and other | 219,685 | 202,265 |
Onboard and other | 66,403 | 59,852 |
|
|
|
Net revenues | $ 937,038 | $ 884,419 |
|
|
|
| | |
APCD | 5,816,046 | 5,303,570 |
Gross Yields | $ 210.30 | $ 216.18 |
Net Yields | $ 161.11 | $ 166.76 |
| | | | |
Gross Cruise Costs and Net Cruise Costs were calculated as follows (in thousands, except APCD and costs per APCD):
| | Quarter Ended |
| | March 31, |
|
|
| 2007 | 2006 |
|
|
|
Total cruise operating expenses | $ 841,341 | $ 730,134 |
Marketing, selling and administrative expenses | 186,184 | 173,192 |
|
|
|
Gross Cruise Costs | 1,027,525 | 903,326 |
|
|
|
Less: | | |
Commissions, transportation and other | 219,685 | 202,265 |
Onboard and other | 66,403 | 59,852 |
|
|
|
Net Cruise Costs | $ 741,437 | $ 641,209 |
|
|
|
| | |
APCD | 5,816,046 | 5,303,570 |
Gross Cruise Costs per APCD | $ 176.67 | $ 170.32 |
Net Cruise Costs per APCD | $ 127.48 | $ 120.90 |
| | | |
Net Debt-to-Capital was calculated as follows (in thousands):
| | Quarter Ended |
| | March 31, |
|
|
| 2007 | 2006 |
|
|
|
Long-term debt, net of current portion | $ 4,845,962 | $ 3,592,772 |
Current portion of long-term debt | 523,142 | 595,653 |
|
|
|
Total debt | 5,369,104 | 4,188,425 |
Less: Cash and cash equivalents | 199,616 | 271,977 |
|
|
|
Net Debt | $ 5,169,488 | $ 3,916,448 |
|
|
|
| | |
Total shareholders’ equity | $ 6,096,067 | $ 5,694,709 |
Debt | 5,369,104 | 4,188,425 |
|
|
|
Debt and shareholder’s equity | 11,465,171 | 9,883,134 |
|
|
|
Debt-to-Capital | 46.8% | 42.4% |
Net Debt | 5,169,488 | 3,916,448 |
|
|
|
Net Debt and shareholder’s equity | $ 11,265,555 | $ 9,611,157 |
|
|
|
Net Debt-to-Capital | 45.9% | 40.7% |
| | |
| | | | |
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Outlook
Full Year 2007
We anticipate the following estimates for the full year 2007. For purposes of comparison to full year 2006, “comparable” estimates exclude Pullmantur.
We expect Net Yields will increase in a range around 2% compared to 2006, and on a comparable basis to be flat.
We expect Net Cruise Costs per APCD to increase in a range around 3% compared to 2006, and on a comparable basis to decrease in a range around 2%.
We expect Net Cruise Costs per APCD, excluding fuel, to increase in a range around 5% compared to 2006, and on a comparable basis to be flat.
Our current “at-the-pump” price is $412 per metric ton. This is higher than the February 5, 2007 figure, and represents a negative impact of $0.05 per share versus our previous guidance. We are currently 50% hedged for 2007 and estimate that a 10% change in the market price of fuel would result in an $18.0 million change in fuel costs, after taking into account existing hedges.
We expect a 12.2% increase in capacity, driven by the acquisition of Pullmantur, the April delivery of Liberty of the Seas, and a full year of Freedom of the Seas. On a comparable basis, we expect a 5.0% increase.
Depreciation and amortization is expected to be in the range of $490.0 million to $510.0 million, and interest expense is expected to be in the range of $325.0 million to $345.0 million.
Based on the expectations contained in this Outlook section, and assuming that fuel prices remain at the level mentioned herein, we expect full year 2007 earnings per share to be in the range of $3.05 to $3.20.
Second Quarter 2007
We anticipate the following estimates for the second quarter of 2007. For purposes of comparison to the second quarter of 2006, “comparable” estimates exclude Pullmantur.
We expect Net Yields to be flat compared to 2006 and on a comparable basis to decrease in a range around 1%.
We expect Net Cruise Costs per APCD to be flat compared to 2006, and on a comparable basis to decrease in a range around 3%.
We expect Net Cruise Costs per APCD, excluding fuel, to increase in a range around 3%, and on a comparable basis to decrease in a range around 1%.
Our current “at-the-pump” price is $412 per metric ton. For the second quarter our fuel expense is 56% hedged. We estimate that a 10% change in the market price of fuel would result in a $5.0 million impact on our second quarter results.
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We expect a 12.6% increase in capacity, driven by Pullmantur, and the April delivery of Liberty of the Seas. On a comparable basis we expect an increase in a range around 6.3%.
Depreciation and amortization is expected to be in the range of $120.0 million to $125.0 million and interest expense is expected to be in the range of $83.0 million to $88.0 million.
Based on the expectations contained in this Outlook section, and assuming that fuel prices remain at the level mentioned herein, we expect second quarter 2007 earnings per share to be in the range of $0.59 to $0.63.
Quarter Ended March 31, 2007 Compared to Quarter Ended March 31, 2006
Revenues
Net revenues increased 5.9% in 2007 compared to the same period in 2006 primarily due to a 9.7% increase in capacity partially offset by a 3.4% decrease in Net Yields. The increase in capacity was primarily attributed to the addition of Freedom of the Seas in the second quarter of 2006 and the additional capacity obtained as a result of the acquisition of Pullmantur. The decrease in Net Yields was primarily attributed to a decrease in ticket prices on a per passenger basis partially offset by the addition of Pullmantur’s tour business. Occupancy in the first quarter of 2007 was 103.7% compared to 105.1% for the same period in 2006. The decreases in ticket prices and occupancy were primarily attributed to lower demand and general economic conditions affecting the discretionary spending of our customers. Gross Yields decreased 2.7% in the first quarter of 2007 compared to 2006 primarily due to the same reasons discussed above for Net Yields.
Concession revenues, included within onboard and other revenues, remained consistent in 2007 when compared to the same period in 2006.
Expenses
Net Cruise Costs increased 15.6% in 2007 compared to the same period in 2006 due to a 9.7% increase in capacity and a 5.4% increase in Net Cruise Costs per APCD. Approximately 4.7 percentage points of the increase in Net Cruise Costs per APCD were primarily attributed to the addition of Pullmantur’s tour business included within other operating expenses. The remaining percentage points of the increase in Net Cruise Costs per APCD were primarily attributed to increases in payroll and related expenses. Payroll and related expenses increased due to increases in payroll costs associated with our crew personnel including the costs associated with the addition of Pullmantur. Gross Cruise Costs increased 13.7% in 2007 compared to the same period in 2006, which was a lower percentage increase than Net Cruise Costs primarily due to the fact that commissions, transportation and other and onboard and other expenses remained relatively consistent.
Depreciation and amortization expenses increased 13.5% in 2007 compared to the same period in 2006. The increase was primarily due to the addition of Freedom of the Seas in the second quarter of 2006 and the addition of the Pullmantur fleet.
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Other Income (Expense)
Gross interest expense increased to $90.6 million in 2007 from $64.7 million for the same period in 2006. The increase was primarily attributable to higher average debt level and, to a lesser extent, higher interest rates. Interest capitalized during 2007 increased to $10.1 million from $7.1 million during the same period in 2006 primarily due to a higher average level of investment in ships under construction.
In January 2006, we partially settled a pending lawsuit against Rolls Royce and Alstom Power Conversion, co-producers of the Mermaid pod-propulsion system on Millennium-class ships, for the recurring Mermaid pod failures. Under the terms of the partial settlement, we received $38.0 million from Alstom and released them from the suit, which remains pending against Rolls Royce, resulting in a net gain of $36.0 million included in the results of the first quarter of 2006.
Liquidity and Capital Resources
Sources and Uses of Cash
Cash flow generated from operations provides us with a significant source of liquidity. Net cash provided by operating activities was $359.9 million for the first quarter of 2007 compared to $343.9 million for the same period in 2006. This increase was primarily a result of an increase in customer deposits of approximately $114.6 million and an increase in accrued expenses and other liabilities of approximately $55.7 million. This increase was partially offset by an increase in trade and other receivables of approximately $33.5 million and an increase in prepaid expenses and other assets of approximately $24.7 million.
Net cash used in investing activities was $159.5 million for the first quarter of 2007 compared to $237.3 million for the same period in 2006. The decrease was primarily due to the purchase of $100.0 million of notes from First Choice Holidays PLC in the first quarter of 2006 that did not recur in the first quarter of 2007, partially offset by an increase in capital expenditures. Our capital expenditures increased to approximately $152.2 million in the first quarter of 2007 from $135.9 million for the same period in 2006, primarily due to ships under construction and the revitalization of Majesty of the Seas.
Net cash used in financing activities was $105.4 million in the first quarter of 2007 compared to net cash provided by financing activities of $40.0 million for the same period in 2006. The change was primarily due to repayments of debt of approximately $1.4 billion partially offset by net proceeds from debt issuances of approximately $1.3 billion. During the first quarter of 2007, we received net proceeds of approximately €990.9 million, or approximately $1.3 billion, from a bond offering consisting of approximately €1.0 billion, or approximately $1.3 billion, of 5.625% senior unsecured notes due 2014. In addition, we drew $20.0 million on our revolving credit facility. During the first quarter of 2007, we made debt repayments on various loan facilities and capital leases, including a payment of approximately $906.5 million to retire the €701.0 million, outstanding balance on our unsecured bridge loan facility. In addition, we made approximately $465.0 million in payments towards our $1.0 billion revolving credit facility. During the first quarter of 2007, we also received $3.1 million in connection with the exercise of common stock options and we paid cash dividends on our common stock of $34.4 million. Net Debt-to-Capital increased to 45.9% in the first quarter of 2007 compared to 40.7% for the same period in 2006.
Interest capitalized during the first quarter of 2007 increased to $10.1 million from $7.1 million for the same period in 2006 due to a higher average level of investment in ships under construction.
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Future Capital Commitments
As of March 31, 2007, we had on order two Freedom-class ships and one ship of a new class designated for Royal Caribbean International, and three Solstice-class ships designated for Celebrity Cruises, for an aggregate additional capacity of approximately 21,150 berths. The aggregate cost of the six ships on order is approximately $5.4 billion, of which we have deposited approximately $473.4 million as of March 31, 2007. Approximately 0.7% of the aggregate cost of the ships was exposed to fluctuations in the euro exchange rate at March 31, 2007.
In March 2007, we exercised our option to purchase a second ship of an unnamed new class for Royal Caribbean International, for an additional capacity of approximately 5,400 berths. The contract, which is subject to the satisfaction of a certain singular condition, provides for the ship to be delivered in the third quarter of 2010. Including this additional ship, we anticipate overall capital expenditures as of March 31, 2007 to be approximately $1.2 billion for 2007, $1.8 billion for 2008, $2.0 billion for 2009, $2.1 billion for 2010 and $300.0 million for 2011.
Contractual Obligations and Off-Balance Sheet Arrangements
As of March 31, 2007, our contractual obligations were as follows (in thousands):
| Payments due by period |
|
|
|---|
| | Less than 1 | 1-3 | 3-5 | More than 5 |
| Total | year | years | years | years |
|
|
|
|
|
|
Long-term debt obligations(1) | $5,321,658 | $521,927 | $391,630 | $1,230,382 | $3,177,719 |
Capital lease obligations(1) | 47,446 | 1,215 | 2,935 | 3,338 | 39,958 |
Operating lease obligations(2)(3) | 602,916 | 67,284 | 125,902 | 102,767 | 306,963 |
Ship purchase obligations(4)(5) | 4,256,857 | 792,218 | 2,878,493 | 586,146 | - |
Other(6) | 426,038 | 126,062 | 138,957 | 57,261 | 103,758 |
|
|
|
|
|
|
Total | $10,654,915 | $1,508,706 | $3,537,917 | $1,979,894 | $3,628,398 |
|
|
|
|
|
|
| | | | | |
(1) | Amounts exclude interest. | |
(2) | We are obligated under noncancelable operating leases primarily for a ship, offices, warehouses and motor vehicles. |
(3) | Under the Brilliance of the Seas lease agreement, we may be required to make a termination payment of approximately £126.0 million, or approximately $250.5 million based on the exchange rate at March 31, 2007, if the lease is canceled in 2012. This amount is included in the More than 5 years column. |
(4) | Amounts represent contractual obligations with initial terms in excess of one year. |
(5) | Amounts do not include our anticipated capital expenditures related to the purchase of a second ship of an unnamed class for Royal Caribbean International, since we did not have a firm commitment as of March 31, 2007. |
(6) | Amounts represent future commitments with remaining terms in excess of one year to pay for our usage of certain port facilities, marine consumables, services and maintenance contracts. |
Under the Brilliance of the Seas operating lease, we have agreed to indemnify the lessor to the extent its after-tax return is negatively impacted by unfavorable changes in corporate tax rates and capital allowance deductions. These indemnifications could result in an increase in our lease payments. We are unable to estimate the maximum potential increase in such lease payments due to the various circumstances, timing or combination of events that could trigger such indemnifications. Under current circumstances we do not believe an indemnification in any material amount is probable.
Some of the contracts that we enter into include indemnification provisions that obligate us to make payments to the counterparty if certain events occur. These contingencies generally relate to changes in taxes, increased lender capital costs and other similar costs. The indemnification clauses are often standard contractual terms and are entered into in the normal course of business. There are no stated or notional amounts included in the indemnification clauses and we are not able to estimate the maximum potential amount of future payments, if any, under these indemnification clauses. We have not been required to make any payments under such indemnification clauses in the past and, under current circumstances, we do not believe an indemnification in any material amount is probable.
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As a normal part of our business, depending on market conditions, pricing and our overall growth strategy, we continuously consider opportunities to enter into contracts for the building of additional ships. We may also consider the sale of ships. We continuously consider potential acquisitions and strategic alliances. If any of these were to occur, they would be financed through the incurrence of additional indebtedness, the issuance of additional shares of equity securities or through cash flows from operations.
Funding Sources
As of March 31, 2007, our liquidity was $1.2 billion consisting of approximately $0.2 billion in cash and cash equivalents and $1.0 billion available under our unsecured revolving credit facility. We have contractual obligations of approximately $1.5 billion due during the twelve-month period ending March 31, 2008. We anticipate these contractual obligations could be funded through a combination of cash flows from operations, drawdowns under our available unsecured revolving credit facility, the incurrence of additional indebtedness and the sales of equity or debt securities in private or public securities markets. Although we believe our existing unsecured revolving credit facility, cash flows from operations, our ability to obtain new borrowings and/or raise new capital or a combination of these sources will be sufficient to fund operations, debt payment requirements, capital expenditures and other commitments over the next twelve-month period, there can be no assurances that these sources of cash will be available in accordance with our expectations.
Our financing agreements contain covenants that require us, among other things, to maintain minimum net worth, and fixed charge coverage ratio and limit our net debt-to-capital ratio. We were in compliance with all covenants as of March 31, 2007.
If any person other than A. Wilhelmsen AS. and Cruise Associates, our two principal shareholders, acquires ownership of more than 30% of our common stock and our two principal shareholders, in the aggregate, own less of our common stock than such person and do not collectively have the right to elect, or to designate for election, at least a majority of the board of directors, we may be obligated to prepay indebtedness outstanding under the majority of our credit facilities, which we may be unable to replace on similar terms. If this were to occur, it could have an adverse impact on our liquidity and operations.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
In February 2007, we entered into interest rate swap agreements that effectively change €1.0 billion of fixed rate debt with a weighted-average fixed rate of 5.625% to EURIBOR-based floating rate debt. We also entered into cross currency swap agreements that effectively changes €300.0 million of floating EURIBOR-based debt to $389.1 million floating LIBOR-based debt.
For a further discussion of certain market risks related to our business, see Part II, Item 7A. Quantitative and Qualitative Disclosures About Market Risk in our annual report on Form 10-K for the year ended December 31, 2006.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We carried out under the supervision and with the participation of our management, including our Chairman and Chief Executive Officer and Executive Vice President and Chief Financial Officer, an evaluation of the effectiveness of our disclosure controls and procedures, as such term is defined in Exchange Act Rule 13a-15(e), as of the end of the period covered by this report and concluded that those controls and procedures were effective.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 and 15d-15 during the quarter ended March 31, 2007 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system will be met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there is only reasonable assurance that our controls will succeed in achieving their goals under all potential future conditions.
21
PART II. OTHER INFORMATION
Item 5. Other Information
We have entered into an agreement dated May 1, 2007 with Mr. Richard D. Fain, our Chairman and Chief Executive Officer, which governs the terms and conditions of his employment with the Company. A copy of this agreement is filed as Exhibit 10.2 to this Quarterly Report on Form 10-Q.
Item 6. Exhibits
10.1 | Credit Agreement dated as of March 27, 2007 among Royal Caribbean Cruises Ltd. and various financial institutions and Citibank, N.A., as Administrative Agent (incorporated by reference to Exhibit No. 10.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on March 29, 2007). |
10.2 | Employment Agreement dated May 1, 2007 between the Company and Richard D. Fain. |
31 | Certifications required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities and Exchange Act of 1934. |
32 | Certifications pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code. |
22
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ROYAL CARIBBEAN CRUISES LTD.
/s/ BRIAN J. RICE |
|
| Brian J. Rice | |
| Executive Vice President and | |
| Chief Financial Officer | |
| (Principal Financial Officer) | |
| | | | | |
Date: May 1, 2007
23
