Carnival Corp Ltd. annual report, FY2020

Carnival Corporation & plc 2020 Form 10-K Summary

Business context and reporting period

This joint Form 10-K covers Carnival Corporation and Carnival plc, which operate as a single economic enterprise through a dual-listed company arrangement. The company operates nine cruise brands across North America, Australia, Europe and Asia, plus cruise-support, port, hotel and tour businesses. The reporting period is the fiscal year ended November 30, 2020; the filing is an annual report, not a quarterly filing. COVID-19 caused a near-complete suspension of guest cruise operations beginning in mid-March 2020. Limited operations resumed in September and October, but no ships were operating with guests as of January 14, 2021.

Financial performance and key metrics

Metric	2020	2019	Change
Revenue	$5.595 billion	$20.825 billion	Down 73%
Operating income (loss)	$(8.865) billion	$3.276 billion	Decrease of $12.141 billion
Net income (loss)	$(10.236) billion	$2.990 billion	Decrease of $13.226 billion
Adjusted net income (loss)	$(5.793) billion	$3.041 billion	Turned to loss
Adjusted EBITDA	$(2.692) billion	$5.455 billion	Turned negative
Diluted EPS	$(13.20)	$4.32	Turned negative
Net cash from operating activities	$(6.301) billion	$5.475 billion	Decrease of $11.776 billion

Revenue consisted of $3.684 billion of passenger ticket revenue and $1.910 billion of onboard and other revenue. Operating margin was approximately negative 158%, compared with approximately 16% in 2019; net margin was approximately negative 183%, compared with approximately 14% in 2019. The results included $2.096 billion of goodwill impairments, $1.967 billion of ship and other impairments, $464 million of loss on repurchases of convertible notes and $47 million of restructuring expenses.

Cash and cash equivalents were $9.513 billion at November 30, 2020, compared with $518 million at November 30, 2019; cash, cash equivalents and restricted cash totaled $9.692 billion.
Total debt, net of issuance costs, was $26.957 billion, compared with $11.503 billion in 2019. Reported long-term debt was $22.130 billion, and short-term borrowings plus current long-term debt totaled $4.826 billion.
Debt fair value was $27.670 billion versus a carrying value of $27.581 billion.
Working capital was $1.9 billion, compared with a $7.1 billion deficit in 2019, primarily because of higher cash and lower customer deposits.
Customer deposits were $2.2 billion at November 30, 2020, versus $4.9 billion a year earlier; approximately 55% of affected guests had requested cash refunds.
Fourth-quarter 2020 revenue was $34 million, operating loss was $1.642 billion and net loss was $2.222 billion. Management reported an average fourth-quarter monthly cash burn of approximately $500 million.

Material changes versus the prior comparable period

Revenue fell 73% as the operating pause reduced passenger ticket revenue by 74% and onboard and other revenue by 72%.
Operating costs declined 36%, but fixed costs, financing costs and impairment charges remained substantial. Interest expense increased to $895 million from $206 million.
Operating cash flow shifted from a $5.475 billion inflow to a $6.301 billion outflow, while capital expenditures declined to $3.620 billion from $5.429 billion.
Financing activities provided $18.650 billion, including $15.020 billion of long-term debt issuance, $2.852 billion of net short-term borrowings and $3.249 billion of common-stock issuance.
The company raised approximately $19 billion through debt, equity and other financing transactions since March 2020. This materially increased leverage, interest expense, collateral requirements and covenant restrictions.
Dividends were suspended after March 30, 2020, and the share repurchase program was terminated on June 15, 2020.
The company accelerated disposal of 19 ships, representing approximately 13% of pre-pause capacity; 15 had left the fleet by January 14, 2021. Future capacity growth was reduced and newbuild deliveries were delayed.
Average employees onboard ships declined to 58,000 from 92,000, while average shoreside employment also declined.

Guidance, outlook, risks and unusual items

Management expects a net loss on both a U.S. GAAP and adjusted basis for fiscal 2021 and cannot predict when the entire fleet will return to normal operations.
Management expected first-quarter 2021 monthly cash burn of approximately $600 million, excluding scheduled debt maturities and certain future collateral requirements.
Management concluded that available liquidity was sufficient to satisfy obligations for at least twelve months from the financial statement issuance date, based on assumptions of a gradual return to service, lower initial occupancy and higher health-protocol costs. This conclusion is subject to substantial uncertainty.
Additional financial covenant amendments for export credit facilities will be needed beginning with the February 28, 2022 testing date. Failure to obtain amendments could result in defaults, refinancing requirements or acceleration of debt.
As of November 30, 2020, the company was in compliance with applicable covenants, but Moody’s and S&P Global had downgraded its ratings to non-investment grade.
Return to service depends on CDC, port and other governmental approvals, testing, simulated voyages, health protocols, medical and quarantine arrangements, and changing travel restrictions. These requirements may increase costs and delay operations.
COVID-19-related litigation, governmental investigations, environmental compliance obligations and reputational damage could produce material costs. The company disclosed more than 100 individual COVID-19-related guest actions, class actions and governmental inquiries, with potential damages generally unspecified.
The company detected ransomware attacks in August and December 2020. The August incident involved access to certain personal information; the December investigation was ongoing at filing, with no indication of misuse reported.
Insurance does not cover loss of ship revenue or earnings. COVID-19-related P&I coverage carries a $10 million deductible per occurrence and may not fully reimburse liabilities and costs.
The company has approximately $13.0 billion of new ship growth capital commitments through 2025 and total contractual cash obligations of approximately $49.5 billion, including debt, leases, newbuilds and other commitments.

Most important facts for investors to verify

Current fleet operating status, booking trends, occupancy, pricing and monthly cash burn.
Available unrestricted cash, restricted cash, customer deposits, refund requests and future cruise credit utilization.
Debt maturities, interest expense, secured collateral, credit ratings and compliance with amended financial covenants, particularly the February 2022 testing date.
Ability to obtain additional financing or equity on acceptable terms if the operational pause or losses continue.
Timing and cost of CDC, port and international regulatory approvals for resumed sailings.
Potential additional ship, goodwill or trademark impairments if recovery assumptions weaken.
Progress on ship disposals, newbuild deliveries, capital commitments and resulting capacity and cost reductions.
Outcomes of COVID-19 litigation, governmental investigations, environmental compliance proceedings and cybersecurity matters.