Carnival Corporation & plc — 2014 Q2 Form 10-Q Summary
Business Context and Reporting Period
Joint quarterly filing for Carnival Corporation and Carnival plc, covering the three and six months ended May 31, 2014. The companies operate global cruise brands across North America and Europe, Australia and Asia, plus cruise-support and tour operations. Results are seasonal, with the third quarter typically producing the largest share of operating income. Financial statements are unaudited and presented in U.S. dollars, in millions except per-share data.
Key Financial Metrics
| Metric | Three Months Ended May 31, 2014 | Three Months Ended May 31, 2013 | Six Months Ended May 31, 2014 | Six Months Ended May 31, 2013 |
|---|---|---|---|---|
| Revenue | $3,633 | $3,479 | $7,218 | $7,072 |
| Operating income | $155 | $152 | $227 | $297 |
| Income before taxes | $107 | $41 | $93 | $80 |
| Net income | $106 | $41 | $91 | $78 |
| Diluted EPS | $0.14 | $0.05 | $0.12 | $0.10 |
| Net cash from operations | Not separately provided | Not separately provided | $1,673 | $1,556 |
- Revenue mix: Six-month passenger ticket revenue was $5,425 million and onboard and other revenue was $1,755 million.
- Margins: Operating margin was approximately 4.3% for the quarter and 3.1% for the six-month period. Total costs and expenses represented 95.7% of quarterly revenue and 96.9% of six-month revenue.
- Capacity and utilization: Six-month available lower berth days increased 3.3% to 37.2 million. Occupancy was 102.6%, compared with 103.7% in the prior-year period.
- Cash flow and capital spending: Operating cash flow was $1,673 million; capital expenditures were $1,329 million, including $782 million for new shipbuilding, principally Regal Princess.
- Liquidity: Cash and cash equivalents were $343 million at May 31, 2014, compared with $462 million at November 30, 2013. Management reported approximately $5.7 billion of liquidity, including cash available for operations, revolving facilities and committed future ship-financing facilities.
- Debt: Current borrowings totaled $1,556 million, consisting of $508 million of short-term borrowings and $1,048 million of current long-term debt. Long-term debt was $7,880 million. Approximately 59% of debt bore fixed rates and 41% floating rates, including swaps.
- Dividends: Dividends declared were $0.25 per share for the quarter and $0.50 per share for the six-month period. Cash dividends paid during the six months were $388 million.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue increased 4.4%, while six-month revenue increased 2.1%.
- Quarterly net income rose $65 million, or approximately 159%, primarily due to improved fuel-derivative results and lower interest expense. Six-month net income increased $13 million, while operating income declined $70 million, or 24%.
- North America operating income declined to $73 million from $144 million for the quarter and to $128 million from $249 million for the six-month period. The principal pressures were lower ticket pricing, lower occupancy, higher capacity-related costs and increased advertising.
- Europe, Australia and Asia operating income increased to $130 million from $51 million for the quarter and to $184 million from $122 million for the six-month period.
- Constant-dollar net revenue yield declined 2.2% for both the quarter and six-month period, primarily because of lower passenger-ticket yields. North American passenger-ticket yields were pressured by promotional pricing in the Caribbean amid increased industry capacity.
- Constant-dollar net cruise cost excluding fuel per available lower berth day increased 1.2% for the quarter and 2.2% for the six-month period, reflecting higher advertising, dry-dock, repair and maintenance, and other operating costs.
- Fuel expense declined 5.0% for the quarter and 5.8% for the six-month period, due to lower consumption per available lower berth day and lower fuel prices.
- Fuel-derivative results improved from a $31 million loss to an $11 million gain for the quarter and from a $59 million loss to a $6 million loss for the six-month period.
- Cash from operations increased 7.5%, but cash declined $119 million after capital spending, debt repayments, dividends and other financing activity.
Guidance, Outlook, Risks and Unusual Items
- Guidance: Management expected 2014 third-quarter non-GAAP diluted EPS of $1.38 to $1.44 and full-year non-GAAP diluted EPS of $1.60 to $1.75. Guidance assumed fuel prices of $673 per metric ton for the third quarter and $665 for the full year, with specified euro, sterling and Australian-dollar exchange rates.
- Unusual items: The quarter included a $37 million gain on the sale of Costa Voyager and a $22 million impairment charge for Grand Celebration, for a net $15 million gain. Grand Celebration was expected to transfer to Costa Cruises as Ibero operations were absorbed. Grand Holiday was being marketed for sale and could generate an impairment charge if sold below carrying value.
- Fleet and capacity: Expected year-over-year capacity growth was 2.2% in the third quarter and 2.7% in the fourth quarter of 2014. Annual capacity growth was expected to be 2.9% in 2014, 2.5% in 2015 and 4.7% in 2016.
- Financing: In June 2014, the company replaced its $2.5 billion revolving facility with a $2.6 billion facility expiring in June 2019, with extension options through 2021. Management stated that it was in compliance with debt covenants.
- Contingencies: Litigation and regulatory matters related to the January 2012 Costa Concordia incident remained unresolved, with significant jurisdictional uncertainty. Management did not expect a significant operating impact because of insurance coverage, but the ultimate outcome could not be determined.
- Other exposures: Key risks include fuel prices, foreign exchange, adverse economic conditions, safety incidents, weather and geopolitical events, contagious disease, negative publicity, litigation, regulatory compliance, port availability, shipbuilding and repair execution, cybersecurity, competition, labor issues, insurance availability and access to financing.
Most Important Facts for Investors to Verify
- Whether lower North American ticket pricing and occupancy continue to offset capacity growth and onboard-spending gains.
- Whether the stated non-GAAP EPS guidance is achieved and how fuel-derivative gains or losses reconcile to GAAP earnings.
- Liquidity after funding newbuild commitments, debt maturities, dividends and other capital expenditures.
- Progress and final cost of Regal Princess and other shipbuilding commitments.
- Potential impairment or sale outcomes for Grand Holiday and the operational integration of Ibero into Costa.
- Developments in Costa Concordia-related litigation, regulatory proceedings and insurance recoveries.
- Exposure to fuel prices, foreign currencies, interest rates and the company’s ability to maintain investment-grade ratings and debt-covenant compliance.