Carnival Corporation & plc: 2013 Q3 Form 10-Q Summary
Business context and reporting period
Joint quarterly filing of Carnival Corporation and Carnival plc for the quarter and nine months ended August 31, 2013. The group operates North America and Europe, Australia and Asia cruise brands, cruise-support activities, and tour operations. Results are unaudited, seasonal, and the third quarter is typically the company’s strongest operating period.
Key financial metrics
| Metric | Three months ended August 31, 2013 | 2012 | Nine months ended August 31, 2013 | 2012 |
|---|---|---|---|---|
| Revenue | $4.726 billion | $4.684 billion | $11.798 billion | $11.804 billion |
| Operating income | $951 million | $1.295 billion | $1.249 billion | $1.466 billion |
| Operating margin | 20.1% | 27.6% | 10.6% | 12.4% |
| Net income | $934 million | $1.330 billion | $1.012 billion | $1.205 billion |
| Diluted EPS | $1.20 | $1.71 | $1.30 | $1.55 |
| Net cash from operations | Not separately provided | Not separately provided | $2.359 billion | $2.476 billion |
- Third-quarter revenue increased 0.9%, while operating income declined 26.6% and net income declined 29.8%.
- Nine-month revenue was essentially flat; operating income declined 14.8% and net income declined 16.0%.
- Passenger ticket revenue was $3.598 billion in the quarter and $8.951 billion for the nine months. Onboard and other revenue was $987 million and $2.670 billion, respectively.
- Capacity, measured by available lower berth days, increased 3.4% in the quarter and 2.8% for the nine months. Occupancy was 110.7% in the quarter and 106.1% for the nine months, compared with 110.8% and 106.3% in the prior-year periods.
- Constant-dollar net revenue yield declined 3.8% in the quarter and 2.7% for the nine months. Net cruise costs excluding fuel per ALBD increased 4.6% and 3.9%, respectively.
Balance sheet, debt, liquidity and cash flow
- At August 31, 2013, cash and cash equivalents were $981 million, compared with $465 million at November 30, 2012.
- Total debt carrying value was approximately $10.018 billion, comprising $2.226 billion of current debt and $7.792 billion of long-term debt. Debt fair value was $10.342 billion.
- Current liabilities exceeded current assets by $4.9 billion. This included $3.0 billion of customer deposits and approximately $2.2 billion of current debt obligations; management reported adjusted working capital of $352 million after excluding those items.
- Reported liquidity was $6.7 billion, consisting of $738 million of available cash, $2.4 billion available under revolving facilities net of commercial paper borrowings, and $3.6 billion of committed export-credit and other financing.
- Nine-month capital expenditures were $1.812 billion, including $1.2 billion for newbuilds, $490 million for ship improvements and replacements, and $143 million for information technology and other assets.
- Financing activities included $1.837 billion of long-term debt issuance, $942 million of long-term debt repayments, $970 million of dividends paid, and $103 million of share repurchases.
Material changes versus the prior comparable period
- Ticket pricing weakened materially despite higher capacity. The company attributed the decline to promotional discounting at Carnival Cruise Lines and continued economic weakness in Europe affecting Northern European brands.
- Third-quarter operating costs rose 12.3% to $2.917 billion, substantially faster than revenue, due partly to $176 million of impairment charges for two smaller Costa ships, higher capacity, repair and maintenance expense, air transportation costs, currency effects, and a $15 million British Merchant Navy Officers’ Pension Fund assessment.
- Nine-month operating costs increased 3.0% despite lower fuel costs. The period included $176 million of Costa ship impairments and $53 million of additional costs associated with 2013 Carnival Triumph voyage disruptions.
- Fuel expense was broadly flat in the quarter at $544 million but declined 6.7% for the nine months to $1.659 billion, reflecting lower fuel consumption per ALBD and lower fuel prices.
- North America operating income declined to $672 million in the quarter and $922 million for the nine months. EAA operating income declined in the quarter to $239 million but increased for the nine months to $361 million.
- Non-GAAP diluted EPS was $1.38 for the quarter and $1.54 for the nine months, excluding specified impairments, ship-sale losses and unrealized fuel-derivative gains or losses.
Guidance, outlook, commentary and unusual items
- On September 24, 2013, management guided to 2013 fourth-quarter non-GAAP diluted EPS of $(0.03) to $0.03 and full-year non-GAAP diluted EPS of $1.51 to $1.57. Guidance assumed fuel prices of $687 per metric ton and specified euro, sterling, and Australian dollar exchange rates.
- Management expected first-half 2014 net revenue yields to decline at a rate similar to the second half of 2013 and full-year 2014 net cruise costs excluding fuel per ALBD to increase at a rate similar to 2013.
- The company expected fleet capacity growth of 2.9% in 2013, 2.1% in 2014, 4.3% in 2015, and 3.8% in 2016, excluding unannounced future orders, acquisitions, retirements, charters, or sales.
- A fleet-wide operational enhancement program following recent incidents was expected to cost $600 million to $700 million over several years.
- Quarterly results included $176 million of Costa ship impairments, $13 million of Ibero trademark impairment, and $14 million of investment impairment. Management noted that further Ibero ship impairments remain possible if Spanish economic conditions or operating assumptions deteriorate.
- The company reported $64 million of unrealized fuel-derivative gains in the quarter, versus $136 million in the prior-year quarter. These gains are excluded from management’s non-GAAP guidance.
- Litigation and regulatory matters related to the January 2012 Costa Concordia incident remained unresolved. The filing states that insurance is expected to cover third-party claims, but ultimate outcomes cannot currently be determined. A UK investigation into alleged Caribbean Princess pollution-law violations was also underway, with potential sanctions not ascertainable.
- Management stated that it was in compliance with debt covenants and expected continued compliance, but noted that further credit-rating downgrades could increase financing costs or reduce access to debt markets. Moody’s downgraded senior unsecured ratings to Baa1 in June 2013.
Most important facts for investors to verify
- Whether ticket pricing and net revenue yields stabilize, particularly at Carnival Cruise Lines and the Northern European brands.
- The sustainability of cost increases excluding fuel, including repair and maintenance, insurance, disruption-related costs, and fleet-enhancement spending.
- Liquidity and refinancing capacity given the $2.2 billion of current debt obligations, planned capital expenditures, and expected future reliance on debt issuance.
- Potential additional impairments involving Ibero ships, Costa assets, goodwill, and trademarks.
- Developments in Costa Concordia litigation, Caribbean Princess regulatory proceedings, and related insurance recoveries or sanctions.
- Actual performance against the company’s non-GAAP 2013 EPS guidance and the assumptions for fuel prices and foreign exchange rates.
- The effect of future capacity additions on occupancy, pricing, revenue yields, and per-ALBD costs.