Carnival Corporation & plc — 2016 Q3 Form 10-Q Summary
Business context and reporting period
Joint quarterly report for Carnival Corporation and Carnival plc, covering the three and nine months ended August 31, 2016, compared with the corresponding 2015 periods. The company operates global cruise brands across North America, Europe, Australia and Asia. Results are seasonal, with the third quarter generally producing the largest share of annual operating income.
Financial performance and key metrics
| Metric | Q3 2016 | Q3 2015 | Change |
|---|---|---|---|
| Revenue | $5.097 billion | $4.883 billion | +4.4% |
| Operating income | $1.562 billion | $1.510 billion | +3.4% |
| Operating margin | 30.6% | 30.9% | Down slightly |
| Net income | $1.424 billion | $1.216 billion | +17.1% |
| Diluted EPS | $1.93 | $1.56 | +23.7% |
| Adjusted diluted EPS | $1.92 | $1.75 | +9.7% |
| Dividends declared per share | $0.35 | $0.30 | +16.7% |
| Metric | Nine months 2016 | Nine months 2015 | Change |
|---|---|---|---|
| Revenue | $12.454 billion | $12.003 billion | +3.8% |
| Operating income | $2.474 billion | $2.064 billion | +19.9% |
| Operating margin | 19.9% | 17.2% | Up approximately 2.7 points |
| Net income | $2.171 billion | $1.487 billion | +46.0% |
| Diluted EPS | $2.88 | $1.91 | +50.8% |
| Adjusted diluted EPS | $2.77 | $2.20 | +25.9% |
Q3 occupancy was 111.4%, compared with 110.9% in 2015. Available lower berth days increased 3.9%, and passengers carried increased to 3.265 million from 3.068 million. Nine-month occupancy was 106.6%, compared with 105.6%.
Q3 net revenue yield increased 0.4% as reported and 2.7% on a constant-currency basis. Q3 net cruise costs excluding fuel per available lower berth day increased 4.3% as reported and 5.5% on a constant-currency basis. For the nine-month period, net revenue yield increased 0.7% as reported and 3.9% on a constant-currency basis, while net cruise costs excluding fuel per available lower berth day increased 0.4% as reported and 1.6% on a constant-currency basis.
Fuel expense declined to $265 million in Q3 from $345 million and to $648 million for nine months from $996 million. Net losses on fuel derivatives were $36 million in Q3 versus $197 million in 2015, and $102 million for nine months versus $378 million.
Cash flow, debt and liquidity
- Cash provided by operating activities was $4.110 billion for the first nine months, up from $3.567 billion.
- Investing cash outflow was $2.622 billion, including $2.416 billion of property and equipment additions. Approximately $1.5 billion was spent on newbuildings, $657 million on ship improvements and replacements, and $257 million on information technology, buildings and other assets.
- Financing cash outflow was $2.426 billion, including $971 million of long-term debt repayments, $721 million of dividends and $2.110 billion of treasury-stock purchases, partly offset by $1.044 billion of long-term debt issuance and $301 million of net short-term borrowings.
- Cash and cash equivalents were $462 million at August 31, 2016, compared with $1.395 billion at November 30, 2015. The company reported liquidity of $10.8 billion, consisting of $220 million of cash equivalents excluding $242 million of cash on hand, $2.9 billion of available borrowing capacity and $7.7 billion of committed future financings.
- Total debt, including short-term borrowings and the current portion of long-term debt, was approximately $9.393 billion at August 31, 2016, compared with $8.787 billion at November 30, 2015. Debt was 62% fixed-rate and 38% floating-rate, including swaps.
- Working capital was negative $5.5 billion, including $3.6 billion of customer deposits and approximately $1.0 billion of current debt obligations. Excluding those items, adjusted working capital was negative $0.9 billion.
- The company stated that it was in compliance with debt covenants and expected to remain compliant for the foreseeable future.
Material changes versus the prior comparable period
- Revenue growth was supported by higher capacity, occupancy, ticket pricing in selected markets and onboard spending. Capacity increased 3.9% in Q3 and 3.2% for nine months.
- North America Q3 operating income increased 11% to $1.051 billion, while EAA operating income declined 2.7% to $522 million. For nine months, North America operating income increased 22% to $1.767 billion and EAA increased 19% to $837 million.
- Lower fuel prices materially improved profitability, although higher repair, maintenance, dry-dock, selling and administrative and depreciation expenses offset part of the benefit.
- The stronger U.S. dollar reduced reported EAA revenue and expenses and contributed to a $366 million Q3 other comprehensive loss from foreign-currency translation, compared with $80 million of income in 2015.
- The company repurchased 43.6 million Carnival Corporation shares for $2.1 billion during the first nine months. The board increased repurchase authorization by $1.0 billion in June 2016; $531 million remained available at September 23, 2016.
- Capital spending and committed shipbuilding obligations increased. Estimated capital expenditures, including contracted ships and improvements, were $2.0 billion for the remainder of 2016 and range from $2.0 billion to $4.5 billion annually through 2022.
Guidance, outlook, risks and unusual items
- Management's September 26, 2016 guidance called for adjusted diluted EPS of $0.55 to $0.59 for Q4 2016 and $3.33 to $3.37 for full-year 2016. The company does not provide U.S. GAAP EPS guidance because a reliable reconciliation would require unreasonable effort.
- Management expected 2017 depreciation expense of approximately $1.9 billion, with 2017 earnings per share adversely affected by approximately $0.24 from fuel prices, including fuel derivatives, and $0.04 from foreign exchange, based on then-current assumptions.
- Management expected annual capacity growth of 3.6% in 2016, 2.6% in 2017, 3.0% in 2018, 5.3% in 2019 and 8.0% in 2020. Three additional ships ordered under a September 2016 memorandum of agreement were subject to satisfactory financing.
- Fuel derivative liabilities were $515 million at August 31, 2016, including $454 million related to fuel derivatives. Unrealized losses on outstanding fuel derivatives were $436 million. The company does not apply hedge accounting to fuel derivatives.
- The UK Maritime & Coastguard Agency and U.S. Department of Justice were investigating alleged pollution-law violations involving Caribbean Princess. Carnival was cooperating and did not expect a material impact, but the ultimate outcome was not determinable.
- Other principal risks include ship, safety, security, health and weather incidents; fuel-price and foreign-exchange volatility; regulatory and environmental compliance; cyber and information-technology disruption; competition and industry overcapacity; shipbuilding execution; port availability; vendor and travel-agent dependence; litigation; and the effects of the United Kingdom's vote to leave the European Union.
- Annual goodwill and trademark impairment reviews identified no impairment charges, although future changes in operating results, market conditions, discount rates or other assumptions could require impairment.
- Disclosure controls were deemed effective, and management reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether adjusted EPS guidance was achieved and how fuel derivatives, foreign exchange and other non-GAAP adjustments reconciled to U.S. GAAP results.
- The pace and funding of the large shipbuilding and refurbishment program, including the $7.7 billion of committed future financing and scheduled capital expenditures.
- Whether higher non-fuel costs, depreciation and dry-dock activity offset continued capacity and yield growth.
- The effect of currency movements on EAA results, accumulated other comprehensive income and the unhedged $5.8 billion of euro-denominated newbuild commitments.
- Progress and ultimate resolution of the Caribbean Princess pollution investigations and any related penalties or operational restrictions.
- The sustainability of shareholder returns given the working-capital deficit, reduced cash balance, debt increase, dividends and $2.1 billion of share repurchases.