Carnival Corporation & plc 2019 Q3 Form 10-Q Summary
Business context and reporting period
Joint unaudited quarterly report for Carnival Corporation and Carnival plc for the three and nine months ended August 31, 2019, compared with the corresponding 2018 periods. Carnival operates cruise brands across North America & Australia and Europe & Asia, plus Cruise Support and Tour and Other businesses. Results are seasonal, with the third quarter typically generating the largest share of annual operating income.
Key financial metrics
| Metric | Three months ended August 31, 2019 | Three months ended August 31, 2018 | Nine months ended August 31, 2019 | Nine months ended August 31, 2018 |
|---|---|---|---|---|
| Revenue | $6.533 billion | $5.836 billion | $16.043 billion | $14.425 billion |
| Operating income | $1.890 billion | $1.794 billion | $2.791 billion | $2.772 billion |
| Net income | $1.780 billion | $1.707 billion | $2.567 billion | $2.659 billion |
| Diluted EPS | $2.58 | $2.41 | $3.71 | $3.72 |
| Operating margin | 28.9% | 30.7% | 17.4% | 19.2% |
| Net margin | 27.2% | 29.2% | 16.0% | 18.4% |
| Net cash from operating activities | Not separately provided for the quarter | Not separately provided for the quarter | $4.414 billion | $4.436 billion |
Third-quarter revenue increased 11.9%, operating income increased 5.3%, and net income increased 4.3%. Nine-month revenue increased 11.2%, while operating income increased 0.7% and net income declined 3.5%. The reported third-quarter and nine-month revenue increases include $449 million and $1.115 billion, respectively, from the gross presentation of certain shore excursion and onboard amounts following adoption of ASC 606; the corresponding costs also increased, with no impact on operating income or net income.
Revenue, operations, cash flow, debt and liquidity
- Third-quarter cruise passenger ticket revenue rose 2.9% to $4.477 billion; onboard and other revenue rose 41% to $1.855 billion, including the ASC 606 presentation change; Tour and Other revenue rose 20% to $200 million.
- Nine-month cruise passenger ticket revenue rose 2.2% to $10.934 billion; onboard and other revenue rose 37% to $4.811 billion, primarily because of the ASC 606 gross presentation, higher capacity and guest spending.
- Available lower berth days increased 5.8% in the quarter and 4.9% for the nine months. Occupancy was 113.0% and 107.8%, respectively, versus 112.6% and 107.8% in the prior-year periods.
- Third-quarter net revenue yield declined 2.3% reported and 0.5% on a constant-currency basis. Nine-month net revenue yield declined 2.3% reported but increased 0.2% on a constant-currency basis.
- Net cruise costs excluding fuel per available lower berth day declined 4.7% in the quarter and 3.5% for the nine months on a reported basis; constant-currency declines were 3.2% and 1.2%, respectively.
- Fuel expense declined 7.7% in the quarter to $401 million because of lower prices and consumption per available lower berth day. For the nine months, fuel expense increased 3.3% to $1.204 billion because of higher capacity and prices, partly offset by lower consumption per available lower berth day.
- Cash and cash equivalents were $1.153 billion at August 31, 2019, compared with $982 million at November 30, 2018. Cash, cash equivalents and restricted cash totaled $1.170 billion.
- Nine-month capital expenditures were $3.448 billion, comprising $2.2 billion for newbuilds and $1.2 billion for ship improvements, replacements, information technology, and buildings. Investing cash outflow was $3.317 billion.
- Nine-month financing cash outflow was $912 million, including $1.041 billion of dividends, $472 million of share repurchases, $472 million of long-term debt repayments, and $1.722 billion of long-term debt issuance.
- Debt consisted of $238 million of short-term borrowings, $1.607 billion of current long-term debt, and $8.893 billion of long-term debt. Debt fair value was $11.285 billion versus a $10.839 billion carrying value, excluding interest-rate swaps and debt issuance costs.
- The company reported a $6.2 billion working-capital deficit, largely reflecting $4.674 billion of customer deposits collected before voyages. Management states that this is normal for its business model and expects future working-capital deficits.
- Reported liquidity was $14.5 billion, consisting of $750 million of available cash, $3.1 billion available under revolving credit facilities net of commercial paper, and $10.7 billion of committed future ship-export financing. The amended revolving credit facility totals $3.0 billion and generally expires in 2024.
Material changes versus the prior comparable period
- Capacity expanded through new ships, particularly in the Europe & Asia segment, whose third-quarter available lower berth days increased 13%. Nine-month Europe & Asia operating income declined 5.1% to $933 million, while North America & Australia operating income increased 6.1% to $2.079 billion.
- Foreign currency effects were unfavorable: management identified $92 million of net unfavorable effects on third-quarter net cruise revenue and $316 million for the nine months.
- Third-quarter net passenger ticket revenue yields declined 3.4% reported and 1.3% on a constant-currency basis, primarily reflecting weaker Continental European sourcing, partly offset by Caribbean pricing improvements.
- The company adopted ASC 606 and related derivatives guidance on December 1, 2018. ASC 606 increased reported revenue and corresponding expenses but did not affect operating income or net income; it also produced a $24 million cumulative reduction to retained earnings related to loyalty programs.
- Long-term debt increased from $7.897 billion at November 30, 2018 to $8.893 billion at August 31, 2019, while short-term borrowings declined from $848 million to $238 million.
- Share repurchases declined year over year: $472 million was spent during the first nine months of 2019 compared with $1.205 billion in 2018. The company paid $1.041 billion in dividends during the first nine months of 2019.
Guidance, outlook, management commentary, risks and unusual items
- Management forecasts annual capital expenditures of $6.6 billion in 2019, $5.8 billion in 2020, $5.9 billion in 2021 and $5.4 billion in 2022. Forecast annual capacity growth is 4.2%, 7.0%, 5.3% and 5.3%, respectively.
- Management believes operating cash flow, liquidity and financing capacity will be sufficient to fund capital improvements, new ships, debt maturities and dividends, and states that the company was in compliance with debt covenants at August 31, 2019.
- The filing references September 26, 2019 guidance but does not provide a complete forecasted earnings or revenue target in the supplied text. A 10% fuel-price change was estimated to affect fourth-quarter 2019 adjusted diluted EPS by approximately $0.05; a 10% currency change was estimated to affect fourth-quarter adjusted diluted EPS by less than $0.01.
- Key risks include travel demand shocks, ship or guest incidents, adverse weather, health and safety events, regulatory and environmental compliance, cybersecurity, fuel prices and availability, foreign exchange, competition and overcapacity, shipbuilding execution, and the ability to recruit and retain shipboard personnel.
- Two Helms-Burton Act lawsuits filed in May 2019 concern alleged use of expropriated Cuban port facilities. Motions to dismiss were denied in August 2019. Carnival believes it has meritorious defenses and does not believe a material outcome is likely, while noting that litigation remains unpredictable.
- The company had $7.5 billion of unhedged euro-denominated newbuild commitments scheduled for delivery from 2020 through 2025. It also had cross-currency swaps totaling $943 million and interest-rate swaps effectively converting $326 million of floating-rate euro debt to fixed-rate debt.
- Third-quarter adjusted net income was $1.819 billion and adjusted diluted EPS was $2.63, compared with $1.673 billion and $2.36 in 2018. Adjustments primarily related to ship sales and impairments and other items.
Most important facts for investors to verify
- Separate the underlying operating trend from the ASC 606 gross-presentation effect on revenue and expenses.
- Monitor ticket pricing and net revenue yields, particularly continued weakness in Continental European sourcing and the performance of the Europe & Asia segment.
- Assess whether planned capacity growth and $5.4 billion to $6.6 billion of annual capital expenditures can be funded while maintaining dividends and reducing leverage.
- Review debt maturities, floating-rate exposure, covenant compliance, and reliance on committed export-credit facilities.
- Track fuel prices, foreign exchange rates, newbuild execution, unhedged euro commitments, and the potential financial or reputational effects of litigation and operational incidents.