Carnival Corporation & plc — Form 10-Q Summary
Business context and reporting period
Joint quarterly report for Carnival Corporation and Carnival plc, which operate as a dual-listed company and single economic enterprise. The filing covers the three and six months ended May 31, 2011, compared with the same periods in 2010. The company operates North America and Europe, Australia & Asia cruise brands, Cruise Support operations, and Tour and Other activities. Results are seasonal, with the third quarter typically generating the largest share of operating income.
Key financial metrics
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $3.620 billion | $3.267 billion | $7.039 billion | $6.445 billion |
| Operating income | $279 million | $349 million | $514 million | $604 million |
| Operating margin | 7.7% | 10.7% | 7.3% | 9.4% |
| Net income | $206 million | $252 million | $358 million | $427 million |
| Net margin | 5.7% | 7.7% | 5.1% | 6.6% |
| Diluted EPS | $0.26 | $0.32 | $0.45 | $0.54 |
| Dividends declared per share | $0.25 | $0.10 | $0.50 | $0.20 |
- Q2 revenue increased 10.8%, while operating income declined 20.1% and net income declined 18.3%.
- Six-month revenue increased 9.2%, while operating income declined 14.9% and net income declined 16.2%.
- Six-month net cash provided by operating activities was $1.801 billion, compared with $1.794 billion in 2010.
- Capital expenditures were $1.625 billion, including $1.4 billion for new ships. Cash used in investing activities was $1.625 billion.
- Cash and cash equivalents were $557 million at May 31, 2011, compared with $429 million at November 30, 2010.
- At May 31, total reported debt comprised $274 million of short-term borrowings, $890 million of current long-term debt, and $8.678 billion of long-term debt.
- Working capital was negative $5.0 billion, including $3.668 billion of customer deposits and approximately $1.2 billion of current debt obligations. Excluding those items, adjusted working capital was negative $190 million.
- Reported liquidity was $5.6 billion, consisting of $257 million of available cash excluding $300 million of operating cash, $2.4 billion available under revolving facilities, and $2.9 billion of committed ship financings.
Material changes versus the prior comparable period
- Cruise passenger ticket revenue increased 11.2% in Q2 and 9.9% for the six months, primarily from 5.0% capacity growth, improved pricing, and foreign-currency translation.
- Onboard and other revenue increased 10.9% in Q2 and 7.4% for the six months, supported by capacity growth, currency translation, and higher guest spending.
- Fuel expense increased 39.2% in Q2 to $579 million and 26.6% for the six months to $1.029 billion. The filing states that higher fuel prices accounted for $151 million of the Q2 increase and $190 million of the six-month increase.
- Q2 operating costs and expenses increased 16.4%, causing total costs and expenses as a percentage of revenue to rise to 92.3% from 89.3%. For the six months, the ratio increased to 92.7% from 90.6%.
- North America operating income declined to $164 million in Q2 from $236 million, while Europe, Australia & Asia operating income increased to $142 million from $137 million. For the six months, North America operating income declined to $315 million from $425 million, while EAA operating income increased to $253 million from $237 million.
- Net revenue yield increased 2.3% on a constant-dollar basis in Q2 and 2.2% for the six months. However, Q2 net cruise costs excluding fuel per available lower berth day increased 2.7% on a constant-dollar basis, and six-month costs increased 2.8%.
- Cash flow from operations was broadly stable despite lower net income, aided by higher customer deposits. Investing outflows declined from $2.094 billion to $1.625 billion, while financing activities changed from $425 million of net inflows to $59 million of net outflows.
- The company entered into a five-year $2.5 billion multi-currency revolving credit facility, replacing a $2.0 billion facility. It also borrowed $990 million under two export credit facilities to fund portions of the AIDAsol and Carnival Magic purchases.
Guidance, outlook, risks, and unusual items
- Management’s June 21, 2011 guidance called for fully diluted fiscal 2011 EPS of $2.40–$2.50 and third-quarter EPS of $1.60–$1.64. Assumptions included fuel prices of $639 per metric ton for the full year and $670 for the third quarter, plus specified euro, sterling, and Australian-dollar exchange rates.
- Expected year-over-year available lower berth day capacity growth was 4.8% in the third quarter, 5.8% in the fourth quarter, 5.2% for fiscal 2011, 5.3% for 2012, and 3.6% for 2013.
- Management expected two to three new cruise ships to enter service annually in 2012 and later years and believed existing liquidity and future operating cash flow would fund capital projects, shipbuilding commitments, debt service, working capital, and other firm commitments.
- Material operating risks include fuel-price volatility, foreign-currency movements, economic weakness, cruise overcapacity and competition, geopolitical events, adverse weather, accidents, contagious disease, regulatory changes, safety and security incidents, vendor or shipyard performance, insurance availability, and financing-market conditions.
- The company does not hedge fuel-price exposure with financial instruments. At May 31, 66% of debt was fixed-rate and 34% floating-rate, including the effects of interest-rate swaps.
- At May 31, 42% of newbuild passenger capacity under euro-denominated contracts was exposed to currency risk and was not hedged.
- In April 2011, the company unwound $87 million of a lease-out and lease-back contingent liability transaction. Remaining estimated LILO contingent obligations were $418 million, with an estimated potential termination payment of $60 million in a specified default scenario.
- The filing identifies potential future goodwill impairment risk for Ibero, whose estimated fair value exceeded carrying value by 24% at the latest annual review; relatively minor adverse changes in assumptions could eliminate that excess.
- The six-month comparison was affected by the nonrecurrence of a $44 million gain recognized in 2010 from the sale of P&O Cruises UK’s Artemis and by the nonrecurrence of an $18 million Italian investment tax benefit recognized in 2010.
- Management stated that it was in compliance with debt covenants and expected to remain compliant over the next several years. Disclosure controls were assessed as effective, with no material changes in internal control over financial reporting.
Most important facts for an investor to verify
- Whether fuel prices and currency rates remain consistent with the EPS guidance assumptions.
- Whether capacity growth and pricing improvements offset rising fuel, labor, food, maintenance, and other operating costs.
- The sustainability and quality of operating cash flow, particularly the contribution from customer deposits.
- The timing and funding of committed shipbuilding payments, including the $2.9 billion of committed ship financings.
- Debt maturities, revolving-credit availability, covenant compliance, and the effect of any credit-rating change on borrowing costs and liquidity.
- Potential impairment of Ibero goodwill and other sensitivity to changes in cruise pricing, demand, currency rates, and regional economic conditions.
- Exposure to unhedged fuel prices and unhedged euro-denominated newbuild commitments.
- The impact of geopolitical events, including the Middle East and North Africa disruptions and the Japan earthquake and nuclear disaster, on itinerary changes, bookings, and yields.