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| Certain statements under this caption "Management's Discussion and Analysis of Financial Condition and Results of Operations," may constitute "forward-looking statements" under the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are not guarantees of future performance and involve known and unknown risks, uncertainties and other factors, which may cause the actual results, performance or achievements to differ materially from the future results, performance or achievements expressed or implied in such forward-looking statements. Such factors include inter alia general economic and business conditions, cruise industry competition, the impact of tax laws and regulations affecting the Company and its principal shareholders, changes in other laws and regulations affecting the Company, delivery schedule of new vessels, emergency ship repairs, incidents involving cruise vessels at sea, changes in interest rates, Year 2000 compliance and weather. | ||
General Summary
Royal Caribbean Cruises Ltd. (the "Company") reported improved revenues,
operating income, net income and earnings per share for the year ended
December 31, 1998 as shown in the table below. The improvements were driven
primarily by capacity increases resulting from the acquisition of Celebrity
Cruise Lines Inc. ("Celebrity") in July 1997 and additions to the Royal
Caribbean International brand as well as improved revenue per available
lower berth ("Yield"). Net income for 1998 included a $9.0 million charge
related to a plea agreement with the U.S. Department of Justice in the
second quarter and a reduction in earnings of approximately $9.0 million
related to the grounding of Monarch of the Seas in the fourth quarter.
Also included in net income for 1998 is a $31.0 million gain on the sale
of Song of America and a $32.0 million write-down of Viking Serenade to
reflect its estimated fair value. Net income for 1997 included an extraordinary
loss of $7.6 million resulting from the early extinguishment of debt as
well as a gain of $4.0 million from the sale of Sun Viking. Accordingly,
on a comparable basis, before these items, earnings increased to $349.8
million or $1.93 per share in 1998, from $178.7 million or $1.17 per share
in 1997. |
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Fleet Expansion
The Company's fleet expansion continued in 1998 with the delivery of the
last of the six Vision-class vessels in the Royal Caribbean International
fleet, Vision of the Seas, in April 1998. With the delivery of
these six ships and the acquisition of Celebrity in 1997, the Company's
capacity has increased approximately 119.3% from 14,228 berths at December
31, 1994 to 31,200 at December 31, 1998.The Company has nine ships on order. The planned passenger capacity and expected delivery dates of the ships on order are as follows: |
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The Eagle-class vessels will be the largest passenger cruise ships built to date. The Vantage-class vessels are a progression from Royal Caribbean International's Vision-class vessels, while the Millennium-class vessels are a progression from Celebrity Cruises' Century-class vessels. Between 1998 and 2002, the Company's year-end berth capacity is expected to increase 64.4% from 31,200 to 51,300 berths. In May 1998, the Company sold Song of America for $94.5 million and recognized a gain on the sale of $31.0 million. The Company will continue to operate Song of America under a charter agreement until March 1999. Results of Operations The following table presents operating data as a percentage of revenues: |
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Year Ended December 31, 1998 Compared to Year Ended December 31, 1997 Revenues
Revenues increased 36.0% to $2.6 billion compared to $1.9 billion in 1997.
The increase in revenues was primarily due to a 31.2% increase in capacity
and a 3.6% increase in Yield. The acquisition of Celebrity (which occurred
in July 1997) accounted for approximately two-thirds of the capacity increase,
while additions to the Royal Caribbean International fleet accounted for
the balance of the increase. The increase in Yield was due to an increase
in occupancy levels to 105.2% as compared to 104.2% in 1997 as well as
an increase in cruise ticket per diems, partially offset by a reduction
in shipboard revenue per diems. The reduction in shipboard revenue per
diems is due to the inclusion of Celebrity's results for the full year
1998 as compared to six months in 1997. Celebrity derives a higher percentage
of its shipboard revenue from concessionaires than does Royal Caribbean
International, resulting in a dilutive effect on the per diem. Concessionaires
pay a net commission to the Company which is recorded as revenue, in contrast
to in-house operations, where shipboard revenues and related cost of sales
are recorded on a gross basis.Expenses
Operating expenses increased 30.7% in 1998 to $1.6 billion as compared
to $1.2 billion in 1997. The increase in operating expenses was primarily
due to the increase in capacity. Included in operating expenses is a $9.0
million charge related to the plea agreement with the U.S. Department
of Justice. As a percentage of revenues, operating expenses decreased
2.4% in 1998 primarily due to improved ticket pricing as well as the inclusion
of Celebrity results for the full year of 1998 versus six months of 1997.
Celebrity's operating expenses as a percentage of revenues were lower
than Royal Caribbean International's due to lower shipboard cost of sales
as a result of the higher use of concessionaires onboard Celebrity vessels
as discussed above.Marketing, selling and administrative expenses increased 31.9% in 1998 to $359.2 million from $272.4 million in 1997. The increase was primarily due to the acquisition of Celebrity as well as higher advertising and staffing costs. As a percentage of revenues, marketing, selling and administrative expenses decreased to 13.6% in 1998 as a result of economies of scale. Depreciation and amortization increased to $194.6 million in 1998 from $143.8 million in 1997. The increase was primarily due to the acquisition of Celebrity as well as additions to the Royal Caribbean International fleet. |
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Other Income (Expense)
Interest expense, net of capitalized interest, increased to $167.9
million in 1998 as compared to $128.5 million in 1997. The increase is
due to the increase in the average debt level as a result of the Company's
fleet expansion program as well as the acquisition of Celebrity in July
1997.Included in Other income (expense) in 1998 is a $31.0 million gain from the sale of Song of America as well as a $32.0 million charge related to the write-down to fair market value of Viking Serenade. Based on the Company's strategic objective to maintain a modernized fleet, the unique circumstances of this vessel and indications of the current value of Viking Serenade, the Company recorded a write-down of the carrying value to its current estimated fair market value. The Company continues to operate and depreciate the vessel which is classified as part of Property and Equipment on the balance sheet. On December 15, 1998, Monarch of the Seas experienced significant damage to the ship's hull and equipment, resulting in the ship being out of service until mid-March 1999. The incident resulted in a net reduction in earnings of approximately $9.0 million or $0.05 per share in the fourth quarter of 1998. This reduction is comprised of lost revenue, net of related variable expenses, of $5.2 million, and costs associated with repairs to the ship, passenger transportation and lodging, commissions and various other costs, net of estimated insurance recoveries, of $3.8 million. The costs of $3.8 million were included in Other income (expense) for the quarter and year ended December 31, 1998. Included in Other income (expense) in 1997 is a $4.0 million gain from the sale of Sun Viking. Extraordinary Item
Included in 1997 is an extraordinary charge of $7.6 million or $0.05 per
share related to the early extinguishment of debt.Year Ended December 31, 1997 Compared to Year Ended December 31, 1996 Revenues
Revenues increased 42.9% in 1997 to $1.9 billion compared to $1.4 billion
in 1996 as a result of a 40.7% increase in capacity as well as an increase
in Yield. The acquisition of Celebrity contributed 22.1% of the capacity
increase while additions to the Royal Caribbean International fleet accounted
for 18.6% of the increase. Yield for the year increased 1.5% over 1996 as
a result of an increase in occupancy. Occupancy levels increased to 104.2%
in 1997 as compared to 101.3% in 1996.Expenses
Operating expenses increased 42.7% to $1.2 billion in 1997 as compared to
$854.5 million in 1996. This increase in operating expenses was primarily
due to the 40.7% increase in capacity and higher variable costs associated
with the increased occupancy.Marketing, selling and administrative expenses increased 39.9% in 1997 to $272.4 million versus $194.6 million in 1996. The increase was primarily due to the acquisition of Celebrity, an increase in staffing and additional advertising costs. These expenses decreased as a percentage of revenues in 1997 as a result of the economies of scale achieved with the increase in capacity. Depreciation and amortization increased to $143.8 million in 1997 from $91.2 million in 1996. The increase was primarily due to the acquisition of Celebrity as well as additions to the Royal Caribbean International fleet. Other Income (Expense)
Interest expense, net of capitalized interest, increased to $128.5 million
in 1997 from $76.5 million in 1996. The increase was a result of an increase
in the average debt level associated with the Company' fleet expansion program
and from the acquisition of Celebrity in July 1997.Other income (expense) in 1997 includes a gain of $4.0 million from the sale of Sun Viking as compared to 1996 which includes a gain of $10.3 million from the sale of Song of Norway. Extraordinary Item
In May 1997, the Company redeemed the remaining $104.5 million of 11 3/8%
Senior Subordinated Notes and incurred an extraordinary charge of $7.6
million or $0.05 per share on the early extinguishment of debt.Liquidity and Capital Resources Sources and Uses of Cash
The Company generated substantial cash flows resulting in net cash provided
by operating activities of $526.9 million in 1998 as compared to $434.1
million in 1997 and $299.5 million in 1996. The increase was primarily due
to higher net income as well as timing differences in cash payments relating
to operating assets and liabilities.In March 1998, the Company issued $150.0 million of 6.75% Senior Notes due 2008 and $150.0 million of 7.25% Senior Debentures due 2018. The net proceeds to the Company were approximately $296.1 million. In March 1998, the Company issued 6,100,690 shares of common stock. The net proceeds to the Company were approximately $165.5 million. (See Note 7–Shareholders' Equity.) During the year ended December 31, 1998, the Company' capital expenditures were approximately $557.0 million as compared to $1.1 billion during 1997 and $722.4 million during 1996. The largest portion of capital expenditures related to the delivery of Vision of the Seas in 1998, delivery of Rhapsody of the Seas, Enchantment of the Seas and Mercury in 1997, delivery of Splendour of the Seas and Grandeur of the Seas in 1996, as well as progress payments for ships under construction during 1998, 1997 and 1996. Also included in capital expenditures are shoreside capital expenditures and costs for vessel refurbishing to maintain consistent fleet standards. The Company received proceeds of $94.5 and $100.0 million from the sale of vessels during 1998 and 1997, respectively. Capitalized interest decreased to $15.0 million in 1998 from $15.8 million in 1997 and $15.9 million in 1996. The decrease during 1998 was due to a reduction in the level of construction-in-progress expenditures associated with the Company' fleet expansion program. During 1998, the Company paid quarterly cash dividends on its common stock totaling $55.2 million as well as quarterly cash dividends on its preferred stock, totaling $12.5 million. During 1997, the Company paid quarterly cash dividends totaling $40.8 and $9.2 million on its common stock and preferred stock, respectively. The Company made principal payments totaling approximately $335.1 and $245.4 million under various term loans and capital leases during 1998 and 1997, respectively. Future Commitments
The Company currently has nine ships on order for an additional capacity
of 21,500 berths. The aggregate contract price of the nine ships, which
excludes capitalized interest and other ancillary costs, is approximately
$3.6 billion, of which the Company deposited $144.6 million during 1998
and $74.3 million during 1997. Additional deposits are due prior to the
dates of delivery of $237.4 million in 1999, $88.1 million in 2000 and $25.0
million in 2001. The Company anticipates that overall capital expenditures
will be approximately $997, $1,196 and $1,368 million for 1999, 2000 and
2001, respectively.The Company has $2.5 billion of long-term debt of which $127.9 million is due during the 12-month period ending December 31, 1999. (See Note 6–Long-Term Debt.) In addition, the Company continuously considers potential acquisitions, strategic alliances and adjustments to its fleet composition, including the acquisition or disposition of vessels. If any such acquisitions, strategic alliances and adjustments to its fleet composition were to occur, they would be financed through the issuance of additional shares of equity securities, by the incurrence of additional indebtedness or from cash flows from operations. Funding Sources
As of December 31, 1998, the Company' liquidity was $1.2 billion consisting
of $172.9 million in cash and cash equivalents and $1.0 billion available
under its $1.0 billion unsecured revolving credit facility (the "$1 Billion
Revolving Credit Facility"). The capital expenditures and scheduled debt
payments will be funded through a combination of cash flows provided by
operations, drawdowns under the $1 Billion Revolving Credit Facility, and
sales of securities in private or public securities markets. In addition,
the agreements related to the ships scheduled for delivery subsequent to
1999 require the shipyards to make available export financing for up to
80% of the contract price of the vessels.The Company' cash management practice is to utilize excess cash to reduce outstanding balances on the $1 Billion Revolving Credit Facility, and to the extent the cash balances exceed the amounts drawn under the $1 Billion Revolving Credit Facility, the Company invests in short-term securities. Other
The Company enters into interest rate swap agreements to manage interest
costs as part of its liability risk management program. The differential
in interest rates to be paid or received under these agreements is recognized
in income as part of interest expense over the life of the contracts. The
objective of the program is to modify the Company' exposure to interest
rate movements. The Company continuously evaluates its debt portfolio, including
its interest rate swap agreements, and makes periodic adjustments to the
mix of fixed rate and floating rate debt based on its view of interest rate
movements. (See Note 12 – Financial Instruments.)Impact of Year 2000 The "Year 2000 issue" is the result of computer programs that were written using two digits rather than four to define the applicable year. If the Company' computer programs with date-sensitive functions are not Year 2000 compliant, they may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions to operations. State of Readiness
The Company continuously upgrades its computer systems. In 1992, the Company
implemented a new computer reservation and passenger services system which
was designed to be Year 2000 compliant. Since then, the Company has sought
to fix Year 2000 issues as an indirect part of its efforts to upgrade many
of its internally developed computer systems. Prior to 1998, the Company
did not separately track associated Year 2000 software compliant costs.In 1997, the Company engaged a third-party consultant to assess the status of the Company relative to the Year 2000 issue. The assessment was completed in early 1998. The Company then formed an internally staffed program management office that is conducting a comprehensive review of computer programs to address the impact of the Year 2000 issue on its operations and otherwise address the Year 2000 issues identified by the third-party consultant (the "Year 2000 Project"). Employees in various departments throughout the Company are assisting the program management office by addressing Year 2000 issues applicable to their departments. The Company has identified three major categories of Year 2000 risk:
The general phases common to all three categories are (1) inventorying Year 2000 items, (2) assessing the Year 2000 compliance of key items, (3) repairing or replacing key internally developed and third-party supplied non-compliant items, (4) testing and certifying key internally developed and third-party supplied items, and (5) designing and implementing contingency plans as needed. The Company has substantially completed its inventory of all internally developed and third-party supplied software systems and equipment and has identified external vendors and suppliers whose system failures potentially could have a significant impact on the Company's operations ("Key External Vendors"). The Company has completed its assessment of its internally developed software systems. Through the use of questionnaires and other communications, the Company has contacted substantially all third-party suppliers of critical software and equipment and Key External Vendors to ascertain whether their systems and/or equipment are Year 2000 compliant. The Company has been receiving responses from these third parties and is evaluating them as they are received. The Company has repaired substantially all internally developed software systems that were determined non-compliant. By mid-1999, the Company plans to complete testing and certification of these systems, at which time it expects that its key internally developed software systems will be Year 2000 compliant. As the Company identifies non-compliant systems and equipment supplied by third parties or used by Key External Vendors, it will request that they be remediated. If a party's response is unsatisfactory, the Company will implement appropriate contingency plans, including, when possible, the repair or replacement of supplied systems or equipment or the replacement of a vendor. The Company's objective is to complete all assessment, remediation and certification of third-party supplied software systems and equipment in the third quarter of 1999. Over the next few months, as the Company receives more information on the extent of the Year 2000 compliance by third-party suppliers and Key External Vendors, the nature of any contingency plans that may be needed will evolve. The Company is currently preparing contingency plans to identify and determine how to handle its most reasonably likely worst-case scenarios. It expects to complete these plans in the third quarter of 1999 in conjunction with completion of its assessment, remediation, testing and certification phases. The Company has not retained third-party consultants to assist it in the remediation, testing or certification phases, although it may choose to do so in the future. Risks
Based on its current assessment efforts, the Company does not believe
that Year 2000 issues will have a material adverse effect on the results
of its operations, liquidity or financial condition. However, this assessment
is dependent on the ability of third-party suppliers and others whose
system failures potentially could have a significant impact on the Company's
operations to be Year 2000 compliant. For instance, the operations of
the Company could be impacted by disruptions in airlines, port authorities,
travel agents or others in the transportation or sales distribution channels
whose systems are not Year 2000 compliant. Although the Company cannot
control the conduct of these third parties, the Year 2000 Project is expected
to reduce the Company's level of uncertainty and the adverse effect that
any such failures may have.Costs
The total cost associated with required modifications to become Year 2000
compliant are not expected to be material to the company's financial position.The Company estimates that it will incur approximately $6.0 million in expense on efforts directly related to fixing the Year 2000 issue, as well as an additional $5.0 million of capital expenditures related to the accelerated replacement of non-compliant systems. The Company has incurred approximately $2.0 million in expense since January 1, 1998, and spent an additional $2.0 million for capital expenditures related to the accelerated replacement of non-compliant systems. Estimated costs do not include costs that may be incurred by the Company as a result of the failure of any third parties to become Year 2000 compliant or costs to implement any contingency plans. The information contained in this "Impact of Year 2000" section is a Year 2000 Readiness Disclosure pursuant to the Year 2000 Information and Disclosure Act. |
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