Carnival Corporation & plc — 2012 Q3 Form 10-Q Summary
Business context and reporting period
Carnival Corporation and Carnival plc operate as a dual-listed single economic enterprise with cruise brands in North America, Europe, Australia and Asia, plus tour and other operations. This unaudited joint Form 10-Q covers the three and nine months ended August 31, 2012, compared with the corresponding 2011 periods. Results are seasonal, with the third quarter typically generating the largest share of annual operating income.
Key financial metrics
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Revenue | $4,684 million | $5,058 million | $11,804 million | $12,096 million |
| Operating income | $1,295 million | $1,433 million | $1,466 million | $1,947 million |
| Net income | $1,330 million | $1,337 million | $1,205 million | $1,695 million |
| Diluted EPS | $1.71 | $1.69 | $1.55 | $2.14 |
| Operating margin | 27.6% | 28.3% | 12.4% | 16.1% |
| Total costs and expenses as a percentage of revenue | 72.4% | 71.7% | 87.6% | 83.9% |
| Net cash provided by operations | Not separately provided | Not separately provided | $2,476 million | $3,016 million |
Q3 passenger ticket revenue fell 8.9% to $3.6 billion, while onboard and other revenue rose 3.1% to $965 million. Nine-month passenger ticket revenue declined 3.6% to $9.0 billion, while onboard and other revenue increased 4.3% to $2.6 billion.
- Q3 passengers carried increased to 2.804 million from 2.676 million; occupancy declined to 110.8% from 111.9%.
- Nine-month passengers carried increased to 7.400 million from 7.192 million; occupancy declined to 106.3% from 107.2%.
- Q3 net revenue yield declined 9.0% reported and 5.3% on a constant-dollar basis. Nine-month net revenue yield declined 4.2% reported and 1.9% on a constant-dollar basis.
- Q3 net cruise costs excluding fuel per available lower berth day declined 6.9% reported and 3.0% on a constant-dollar basis. Nine-month costs declined 2.7% reported and 0.4% on a constant-dollar basis.
- Fuel expense declined 6.9% in Q3 to $541 million, but increased 10.4% for the nine months to $1.778 billion because of higher fuel prices and capacity growth.
Liquidity, debt and cash flow
- Cash and cash equivalents were $568 million at August 31, 2012, compared with $450 million at November 30, 2011.
- Total debt was approximately $9.1 billion of carrying value, consisting of $754 million of current long-term debt, $9 million of short-term borrowings and $8.289 billion of long-term debt.
- Net cash from operations was $2.476 billion for the first nine months, down $540 million, or 17.9%, from 2011.
- Capital expenditures were $2.164 billion, including approximately $1.7 billion for new ships, $0.3 billion for ship improvements and replacements, and $0.2 billion for information technology, buildings and other assets.
- Liquidity was reported at approximately $6.0 billion, including $313 million of available cash, $2.5 billion available under revolving credit facilities and $3.2 billion of committed ship financings.
- The company reported a $4.0 billion working-capital deficit, substantially reflecting $3.1 billion of customer deposits and $763 million of current debt obligations. Excluding those items, adjusted working-capital deficit was $154 million.
- Management stated that operating cash flow, available financing and liquidity should be sufficient for expected capital projects, debt service, working capital, firm commitments and dividends over the next several years.
Material changes versus the prior comparable period
- Q3 revenue decreased 7.4%, operating income decreased 9.6%, and reported net income decreased 0.5% versus Q3 2011. The Q3 EPS increase was supported by lower weighted-average shares.
- For the first nine months, revenue decreased 2.4%, operating income decreased 24.7%, and net income decreased 28.9%.
- North America brands performed relatively better: Q3 operating income increased 4.8% to $834 million, while EAA brands’ operating income decreased 30.7% to $408 million. For nine months, EAA operating income fell 59.4% to $342 million.
- Reported results were adversely affected by lower ticket pricing, weaker European demand, reduced occupancy, the Costa Concordia incident and unfavorable currency translation. Capacity increased approximately 2.9% in Q3 and for the nine-month period.
- The stronger U.S. dollar reduced reported EAA revenue and expenses. On a constant-dollar basis, the decline in revenue yields was less severe than on a reported basis.
Guidance, outlook and unusual items
- On September 25, 2012, management forecast non-GAAP diluted EPS of $0.07–$0.11 for the fourth quarter and $1.83–$1.87 for full-year 2012. Guidance assumed fuel prices of $739 per metric ton and exchange rates of $1.30 per euro, $1.62 per sterling and $1.04 per Australian dollar.
- Expected capacity growth was 3.0% in fiscal 2012, 3.4% in 2013, 1.8% in 2014 and 4.7% in 2015, based primarily on contracted new ships.
- The Costa Concordia was written off at $515 million in the first quarter. The company received $508 million of insurance proceeds and recognized $17 million of excess proceeds as a reduction of ship operating expenses. It also recognized $30 million of uninsured incident-related costs.
- Costa Allegra fire damage resulted in a $34 million impairment charge. Ibero goodwill and trademark impairment charges totaled $173 million, including $153 million of goodwill and $20 million of trademarks.
- Q3 included a $136 million unrealized gain and a $12 million realized loss on fuel derivatives. Management excludes unrealized fuel-derivative gains and losses from non-GAAP earnings and guidance because they relate to future periods and may not be realized.
- Litigation, regulatory actions and investigations related to the Costa Concordia incident remain unresolved. The company believes additional costs will generally be recoverable through insurance, but the ultimate outcome and future costs cannot currently be determined.
Principal risks and contingencies
- Fuel prices, foreign currency movements, interest rates, economic conditions, overcapacity and pricing pressure may materially affect results.
- Accidents, contagious disease, adverse weather, terrorism, geopolitical events, negative publicity and environmental matters could reduce demand or increase costs.
- The company faces Costa Concordia-related personal injury, property, environmental, business interruption, enforcement and regulatory claims.
- Debt refinancing, covenant compliance, access to capital markets and counterparty performance remain important liquidity considerations. Management reported compliance with debt covenants at August 31, 2012.
- At August 31, 2012, the company had estimated contingent obligations of $422 million related to two lease-out and lease-back transactions, with an estimated potential termination payment of $43 million under specified circumstances.
Most important facts for investors to verify
- Whether ticket pricing, occupancy and revenue yields recover, particularly in the EAA brands and European markets.
- The ultimate insurance recoveries, litigation exposure and regulatory consequences from Costa Concordia and other ship incidents.
- The sustainability of operating cash flow after newbuild capital expenditures, debt repayments and dividends.
- Actual fuel prices, derivative settlements and the effect of currency movements versus management’s guidance assumptions.
- Progress on capacity growth, new ship deliveries, debt maturities and committed financing availability.
- The reconciliation of non-GAAP EPS guidance to eventual GAAP results, including impairment charges and fuel-derivative gains or losses.