Carnival Corporation & plc 2019 First-Quarter Form 10-Q Summary
Business context and reporting period
Carnival Corporation and Carnival plc jointly reported unaudited results for the three months ended February 28, 2019. The cruise operator reports North America & Australia, Europe & Asia, Cruise Support, and Tour and Other segments. Results are seasonal, with the largest share of operating income typically earned during the Northern Hemisphere summer.
Financial performance and key metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue | $4.673 billion | $4.232 billion | +10.4% |
| Operating income | $386 million | $419 million | -7.7% |
| Operating margin | 8.3% | 9.9% | Down 1.6 percentage points |
| Net income | $336 million | $391 million | -14.1% |
| Net margin | 7.2% | 9.2% | Down 2.0 percentage points |
| Diluted EPS | $0.48 | $0.54 | -11.1% |
| Net cash from operating activities | $1.116 billion | $1.064 billion | +4.8% |
| Capital expenditures | $2.129 billion | $574 million | Substantially higher |
- Passenger ticket revenue increased 1.6% to $3.199 billion. Onboard and other revenue increased 35% to $1.446 billion, including a $323 million gross-presentation effect from adopting ASC 606.
- Available lower berth days increased 4.1% to 21.3 million; occupancy was 104.8%, compared with 104.7%. Passengers carried increased to 2.937 million from 2.860 million.
- Net revenue yield decreased 2.5% on a reported basis but increased 0.5% on a constant-currency basis. Constant-currency net onboard and other revenue yield increased 3.1%, while net passenger ticket revenue yield decreased 0.4%.
- Operating costs and expenses increased 16% to $3.142 billion. Reported fuel expense increased 6.1% to $381 million, driven by higher fuel prices and capacity growth, partly offset by lower fuel consumption per ALBD.
- Adjusted net income was $338 million and adjusted diluted EPS was $0.49, compared with $375 million and $0.52, respectively, in the prior-year quarter. The adjustment primarily excluded ship-sale and impairment items in 2019 and fuel-derivative gains in 2018.
Liquidity, debt and cash flow
- Cash and cash equivalents were $649 million at February 28, 2019, compared with $982 million at November 30, 2018. Cash, cash equivalents and restricted cash totaled $665 million.
- Net cash used in investing activities was $2.059 billion, including $1.7 billion for new shipbuilding and $428 million for ship improvements, replacements, information technology, and buildings.
- Financing activities provided $612 million, including $1.439 billion of long-term debt issuance, partly offset by $95 million of long-term debt repayments, $348 million of dividends, and $274 million of share repurchases.
- Balance-sheet debt comprised $768 million of short-term borrowings, $1.684 billion of current long-term debt, and $9.134 billion of long-term debt. The filing reports $11.697 billion of debt fair value, excluding interest-rate swaps and debt issuance costs.
- Working capital deficit was $7.5 billion, primarily reflecting $4.8 billion of customer deposits collected in advance of sailings. Management stated that this operating model historically supports a working capital deficit while funding operations and other needs.
- Management reported $13.5 billion of liquidity, consisting of $324 million of available cash, $2.2 billion available under revolving credit facilities net of commercial paper, and $11.0 billion of committed future ship-export financing.
- The company was in compliance with its debt covenants and stated that it expects to remain compliant for the foreseeable future.
Material changes versus the prior comparable period
- Revenue growth was largely capacity-driven and affected by the ASC 606 gross presentation of certain shore-excursion and onboard revenues and costs; this accounting change did not affect operating income or net income.
- North America and Australia operating income increased 7.5% to $386 million, while Europe and Asia operating income declined 39% to $93 million, primarily reflecting foreign-currency effects and cost pressures.
- Operating income and net income declined despite higher revenue because of increased capacity-related costs, higher fuel prices, higher depreciation, and the absence of the $16 million net fuel-derivative gain recognized in Q1 2018.
- Debt increased following export-credit borrowings of $852 million in December 2018 and $587 million in February 2019. The company also entered into an additional $899 million export-credit facility available for drawdown in 2023.
- The company adopted ASC 606 and updated derivatives-and-hedging guidance on December 1, 2018. ASC 606 resulted in a $24 million cumulative reduction to retained earnings related to loyalty programs.
Guidance, outlook, commentary and risks
- Forecast annual capital expenditures were $6.7 billion for 2019, $5.7 billion for 2020, $5.9 billion for 2021, and $5.3 billion for 2022. Forecast annual capacity increases were 4.6%, 6.4%, 6.6%, and 4.8%, respectively.
- Management stated that operating cash flow, liquidity, financing access, and investment-grade credit ratings should be sufficient to fund capital improvements, new ships, debt maturities, and dividends.
- Fuel prices and foreign exchange remain material sensitivities. Based on the assumptions used in March 26, 2019 guidance, a 10% fuel-price change would affect adjusted diluted EPS guidance by approximately $0.18 per share for the remaining three quarters of 2019 and $0.06 for the second quarter. A 10% currency change would affect EPS guidance by approximately $0.20 and $(0.01), respectively.
- Unhedged foreign-currency exposure for newbuild commitments was $9.3 billion for ships scheduled for delivery from 2019 through 2025. The company also had $7.3 billion of euro-denominated and $876 million of sterling-denominated debt, including the effect of cross-currency swaps.
- Key risks include cruise demand and adverse world events, ship incidents, weather and natural disasters, regulatory and environmental compliance, cybersecurity, labor availability, fuel prices, foreign exchange, competition and overcapacity, and execution of shipbuilding, repairs, and maintenance programs.
- On April 1, 2019, an incident damaged a dock at Grand Bahama Shipyard Ltd., in which Carnival holds a minority interest. The extent of damage and operational impact remained under assessment, and the financial impact was not yet clear.
- Legal matters included an appealed €118,000 French environmental fine and a U.S. Department of Justice petition seeking possible revocation of Princess Cruises’ environmental probation. Management stated that ordinary litigation and the disclosed claims were not expected to have a material financial impact, although an adverse probation outcome could result in additional fines or other actions.
Important facts for investors to verify
- Separate the underlying revenue and cost trends from the significant ASC 606 gross-presentation effect.
- Assess whether the decline in net revenue yield, operating margin, and earnings persists as capacity expands.
- Review the funding requirements and execution risk associated with the $6.7 billion 2019 capital-expenditure forecast and contracted newbuild program.
- Monitor debt growth, refinancing needs, interest-rate exposure, foreign-exchange exposure, and continued compliance with covenants.
- Evaluate the effect of fuel prices, currency movements, and European segment performance on future earnings.
- Follow developments concerning the Grand Bahama Shipyard dock incident and the environmental probation petition.
- Confirm the company’s stated liquidity calculation, including available cash, revolving credit capacity, and committed export-credit facilities.