Carnival Corporation & plc 2010 Form 10-K Summary
Business Context and Reporting Period
Joint annual report filed by Carnival Corporation, incorporated in Panama, and Carnival plc, incorporated in England and Wales. The companies operate as a dual-listed company with one management team and a combined economic enterprise. The report covers the fiscal year ended November 30, 2010; it is an annual filing rather than a standalone fourth-quarter filing.
Carnival operated 98 cruise ships across North America and Europe, Australia & Asia, together with cruise-support facilities and Holland America Princess Alaska Tours. Major brands included Carnival Cruise Lines, Princess, Holland America Line, Seabourn, Costa, AIDA, Cunard, Ibero, P&O Cruises and P&O Cruises Australia.
Key Operating and Financial Metrics
| Metric | 2010 | Comparable information |
|---|---|---|
| Cruise passengers | 9.147 million | 8.519 million in 2009; approximately 7.4% increase |
| Year-end passenger capacity | 191,464 lower berths | 180,746 in 2009; approximately 5.9% increase |
| Occupancy | 105.6% | 105.5% in 2009 |
| Passengers sourced outside the U.S. | 54% of revenues | 52% in 2009 and 50% in 2008 |
| Grand Bahamas Shipyard revenue | $98 million | Facility-level revenue; not consolidated Carnival revenue |
| Grand Bahamas Shipyard net investment, including notes receivable | $72 million | At November 30, 2010 |
The supplied filing text does not provide clear consolidated values for revenue, operating income, net income, earnings per share, operating cash flow, free cash flow, margins, total debt, cash, current liquidity or interest expense. Those financial statements and the related management discussion are incorporated by reference from Exhibit 13 but are not included in the supplied text.
Carnival stated that its ability to generate significant operating cash flow had historically funded most capital investment. Management expected slower newbuilding activity to support increasing free cash flow in 2011 and beyond, but the filing text does not provide a quantified cash-flow forecast.
Material Changes Versus Prior Comparable Period
- Cruise passengers increased from 8.519 million to 9.147 million, while year-end capacity increased from 180,746 to 191,464 lower berths.
- Occupancy was broadly stable at approximately 105.6% versus 105.5% in 2009.
- International sourcing increased, with passengers outside the U.S. representing 54% of revenues versus 52% in 2009.
- The company reinstated its quarterly dividend at $0.10 per share beginning in March 2010 after no dividends in fiscal 2009. The board subsequently approved a $0.25 per-share dividend for March 2011.
- Under the stock-swap program, 14.8 million Carnival plc ordinary shares were sold for gross proceeds of $549 million and net proceeds of $545 million; substantially all proceeds were used to purchase 14.8 million Carnival Corporation common shares.
- The fleet expanded through deliveries including AIDAblu, Nieuw Amsterdam, Queen Elizabeth and other brand additions. Ten additional ships were under contract as of January 31, 2011, with expected service dates from April 2011 through June 2014.
Guidance, Outlook, Risks and Unusual Items
- Management expected most near-term growth to come from European brands, with North America capacity expected to grow approximately 3% compounded annually through 2013 and European capacity approximately 7% compounded annually through 2013.
- The company planned to add an average of two to three ships annually from 2012 onward and expected the ten contracted ships to increase passenger capacity by approximately 13.7%, net of the Artemis withdrawal.
- Management viewed demand growth and slowing industry supply growth as favorable as global economies recovered, but acknowledged that the outlook depended on pricing, booking levels, occupancy, fuel costs and economic conditions.
- Fuel and environmental regulation are material cost risks. Carnival estimated that North American, Puerto Rican and U.S. Virgin Islands emission-control requirements could increase annual fuel costs by approximately $25 million to $35 million, with an additional $185 million to $205 million annually from the 0.1% sulfur requirement expected from 2015 in applicable areas.
- Principal risks include discretionary consumer demand, economic downturns, foreign-exchange movements, fuel-price volatility, overcapacity, competition, accidents, contagious disease, adverse weather, terrorism, piracy, environmental regulation, shipbuilding delays and cost overruns, insurance availability, labor relations, information-technology disruption and tax-law changes.
- Carnival relied on foreign tax exemptions and tonnage-tax regimes. Loss or modification of these regimes could materially increase taxes and reduce net income.
- The dual-listed structure, foreign incorporation, concentrated ownership and takeover restrictions may create governance and shareholder risks. A group including members of the Arison family controlled approximately 27% of combined voting power as of January 14, 2011.
Most Important Facts to Verify
- Retrieve Exhibit 13 to verify consolidated 2010 and 2009 revenue, profit, EPS, cash flow, margins, cash, debt, liquidity and segment results.
- Confirm the effect of fuel prices, fuel supplements, foreign-currency movements and emission-control compliance costs on 2011 earnings and cash flow.
- Review shipbuilding commitments, required progress payments, financing arrangements, delivery schedules and potential liquidated damages.
- Assess whether occupancy and pricing trends supported revenue-yield improvement, particularly in the weaker Spanish market affecting Ibero.
- Verify the sustainability of the reinstated dividend against projected free cash flow, capital expenditures and debt maturities.
- Review tax exposures, environmental and maritime contingencies, insurance coverage, self-insurance levels and any subsequent events after January 31, 2011.