Carnival Corporation & plc — Q1 2010 Form 10-Q Summary
Business context and reporting period
Carnival Corporation and Carnival plc operate as a dual-listed company and report as one economic enterprise. The filing covers the unaudited three months ended February 28, 2010, compared with the three months ended February 28, 2009. Results are seasonal, with the largest share of operating income generally earned in the third fiscal quarter.
Financial performance and key metrics
| Metric | Q1 2010 | Q1 2009 | Change |
|---|---|---|---|
| Revenue | $3.095 billion | $2.864 billion | +8.1% |
| Operating income | $255 million | $311 million | -18.0% |
| Income before taxes | $160 million | $238 million | -32.8% |
| Net income | $175 million | $260 million | -32.7% |
| Diluted EPS | $0.22 | $0.33 | Down $0.11 |
| Net cash from operations | $396 million | $305 million | +29.8% |
- Passenger-ticket revenue increased 6.3% to $2.358 billion, while onboard and other revenue increased 15.0% to $729 million.
- Operating costs increased 13.5% to $2.099 billion. Fuel expense increased to $397 million from $208 million, reflecting an approximately 80% increase in fuel cost per metric ton to $497.
- Total costs and expenses were 91.8% of revenue, compared with 89.1% in the prior-year quarter. Operating margin declined to approximately 8.2% from 10.9%.
- Net revenue yields increased 1.0% on a reported basis but declined 2.3% on a constant-dollar basis. Net cruise costs per available lower berth day increased 6.2%, or 3.5% on a constant-dollar basis.
- Passengers carried increased to 2.049 million from 1.869 million. Occupancy was 103.5%, compared with 103.9%.
- Capital expenditures were $1.169 billion, including approximately $1.0 billion for new ships. Net cash used in investing activities was $1.116 billion.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $753 million at February 28, 2010, compared with $538 million at November 30, 2009.
- Short-term borrowings were $927 million and current maturities of long-term debt were $785 million. Long-term debt was $8.933 billion. Total reported debt was approximately $10.645 billion, excluding other financing classifications not identified as debt in the balance sheet.
- The company reported a $3.9 billion working-capital deficit, including $2.5 billion of customer deposits and $1.7 billion of current debt obligations. Management stated that customer deposits are largely advance passenger receipts rather than conventional operating liabilities.
- Adjusted working capital, excluding customer deposits and current debt obligations, was $305 million.
- Liquidity was reported at $5.4 billion, consisting of $469 million of available cash excluding $284 million used for current operations, $2.0 billion of available revolver and backup facilities, and $2.9 billion of committed financing.
- Management expected operating cash flow and committed financing to fund 2010 requirements and stated that the company was in compliance with its debt covenants at quarter-end.
Material changes versus the prior comparable period
- Revenue growth was driven primarily by a 9.6% increase in available lower berth day capacity and favorable foreign exchange translation. The benefit was partly offset by lower ticket pricing and lower air-transportation revenue.
- Fuel prices, capacity growth and foreign exchange increased operating costs faster than revenue, reducing operating income and net income.
- Net cash from operations improved by $91 million, while capital spending increased substantially from $306 million to $1.169 billion, principally because of ship deliveries and newbuild payments.
- Financing activities provided $976 million of cash, compared with a $20 million use of cash in the prior-year quarter. The company borrowed $809 million net through short-term borrowings and issued $553 million of other long-term debt.
- Accumulated other comprehensive income changed from a $462 million balance to a $273 million loss, primarily because of foreign-currency translation losses of $702 million. Total comprehensive loss was $560 million, compared with comprehensive income of $36 million.
- The prior-year period included a $15 million nonoperating gain from unwinding a lease-in, lease-out transaction; this gain did not recur.
Guidance, outlook, risks and unusual items
- As of March 23, 2010, management guided to fully diluted EPS of $0.26–$0.30 for the second quarter and $2.25–$2.35 for full-year 2010. The assumptions included fuel prices of $511 per metric ton for the second quarter and $507 for the full year, a euro exchange rate of $1.38, and sterling exchange rates of $1.52 and $1.54, respectively.
- Expected year-over-year capacity growth was 7.5% for fiscal 2010, 5.3% for 2011 and 4.4% for 2012, excluding unannounced orders, acquisitions, retirements, charters and sales.
- Key risks include discretionary consumer demand, fuel prices and supply, foreign exchange, geopolitical events, terrorism and piracy, competition and overcapacity, contagious disease, adverse weather, accidents, regulatory and environmental requirements, labor and port access, shipbuilding execution, financing availability, counterparty performance and information-technology disruptions.
- The company does not hedge fuel-price exposure with financial instruments. At quarter-end, 68% of debt was fixed-rate and 32% floating-rate after swaps; debt was 55% U.S. dollar, 42% euro and 3% sterling denominated.
- Contingent obligations associated with two LILO transactions totaled an estimated $537 million, excluding potential termination payments. A default scenario could require an estimated $104 million termination payment; a decline in Carnival Corporation’s credit rating below BBB could require a $60 million standby letter of credit or equivalent ship mortgages.
- Management stated that no goodwill or trademark impairment was identified, but future impairment charges could result from adverse changes in operating forecasts, fuel prices, currency rates, discount rates or regional economic conditions.
- An $18 million income-tax benefit was associated substantially with an Italian investment incentive relating to two newbuilds. The filing also notes a retrospective accounting adoption that reduced retained earnings and increased additional paid-in capital by $209 million at November 30, 2009.
Important facts for investors to verify
- Whether ticket pricing and constant-dollar revenue yields recover as capacity expands.
- The sensitivity of earnings and cash flow to fuel prices, which rose sharply year over year and is not hedged.
- The funding schedule for approximately $2.9 billion of committed financing and the company’s ability to refinance its principal revolver before its 2012 maturity.
- Newbuild delivery timing, remaining shipbuilding commitments and related foreign-currency exposure.
- Compliance with debt covenants and the effect of current maturities and short-term borrowings on liquidity.
- Potential effects of foreign-currency translation, LILO contingencies, litigation, regulatory changes and any future goodwill or trademark impairment.