Carnival Corporation & plc 10-Q Summary
Business Context and Reporting Period
Carnival Corporation & plc operates global cruise brands, cruise-support businesses, and Holland America Princess Alaska Tours. This joint Form 10-Q covers the three months ended February 28, 2018, compared with the three months ended February 28, 2017. The interim financial statements are unaudited, and results are seasonal, with the largest share of operating income historically generated during the third quarter.
Key Financial Metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $4.232 billion | $3.791 billion | +11.6% |
| Operating income | $419 million | $368 million | +13.9% |
| Operating margin | 9.9% | 9.7% | Expanded approximately 20 bps |
| Net income | $391 million | $352 million | +11.1% |
| Net margin | 9.2% | 9.3% | Essentially stable |
| Diluted EPS | $0.54 | $0.48 | +12.5% |
| Adjusted diluted EPS | $0.52 | $0.38 | +36.8% |
| Operating cash flow | $1.064 billion | $932 million | +14.2% |
- Cruise passenger ticket revenue increased 12% to $3.148 billion; onboard and other revenue increased 9.5% to $1.071 billion.
- Available lower berth days increased 2.2% to 20.462 million, occupancy was 104.7%, and passengers carried increased to 2.860 million from 2.769 million.
- Net revenue yield increased 3.9% on a constant-currency basis. Net cruise costs excluding fuel per available lower berth day increased 1.0% on a constant-currency basis.
- Fuel expense increased 21% to $359 million, primarily because of higher fuel prices. Fuel cost per metric ton rose to $437 from $362.
- Cash and cash equivalents were $453 million at February 28, 2018, compared with $395 million at November 30, 2017.
- Total debt, calculated from short-term borrowings, current debt maturities, and long-term debt, was approximately $9.559 billion at February 28, 2018, compared with approximately $9.195 billion at November 30, 2017.
- Working capital deficit was $7.2 billion, including $4.3 billion of customer deposits. Management attributes the deficit primarily to advance collection of passenger receipts.
- Liquidity was reported at $14.4 billion, consisting of $157 million of available cash, $2.1 billion of revolving credit availability net of commercial paper borrowings, and $12.1 billion of committed future ship-export-credit financing.
Material Changes Versus the Prior Comparable Period
- Revenue growth reflected a $149 million foreign-currency translation benefit, $76 million of price improvements, $61 million from increased capacity, $36 million of higher air transportation revenue, and $18 million of higher other passenger revenue.
- Operating costs and expenses increased 11% to $2.709 billion. Key drivers included foreign-currency translation, $61 million of higher fuel costs, capacity growth, and higher commissions, transportation, and other costs.
- Operating income benefited from stronger results in both principal cruise segments. North America and Australia operating income increased 6.4% to $360 million, while Europe and Asia operating income increased 97% to $154 million.
- Net income included a lower net gain on fuel derivatives of $16 million versus $27 million in the prior year. The 2018 period also included $16 million of losses on ship sales and impairments for adjusted earnings purposes.
- Cash flow improved, but investing uses increased to $591 million from $474 million, primarily because capital expenditures rose to $574 million from $412 million.
- Financing cash use declined to $428 million from $615 million. The company repaid $963 million of long-term debt, issued $469 million under a sterling-denominated term loan, paid $323 million in dividends, and repurchased $218 million of shares.
- The company repurchased 3.0 million Carnival plc ordinary shares and 0.2 million Carnival Corporation common shares. Remaining repurchase authorization was $370 million at February 28, 2018.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management stated that future operating cash flow and liquidity are expected to fund shipbuilding commitments, ship improvements, debt service, working capital, and other commitments over the next several years. The filing text references March 22, 2018 guidance but does not provide a clear full-year adjusted EPS or other principal guidance value.
- Planned capital expenditures were estimated at $4.7 billion in 2018, $5.3 billion in 2019, $5.5 billion in 2020, $5.1 billion in 2021, $4.3 billion in 2022, and $2.5 billion in 2023. Contracted ship orders were expected to drive annual capacity increases ranging from 2.0% in 2018 to 7.6% in 2021.
- At February 28, 2018, the company had $8.2 billion of unhedged euro-denominated newbuild commitments, substantially relating to ships scheduled for delivery from 2019 through 2022.
- Fuel-price, foreign-exchange, interest-rate, operational, health and safety, weather, cybersecurity, regulatory, environmental, labor, vendor, competition, and shipbuilding risks could materially affect results.
- A 10% change in fuel prices was estimated to affect adjusted diluted EPS guidance by $0.15 per share for the remaining three quarters of 2018. A 10% change in relevant currency exchange rates was estimated to affect that guidance by $0.32 per share. These sensitivities relate to guidance referenced in the filing and are not forecasts of actual results.
- Fuel derivatives generated a $16 million net gain, including $32 million of unrealized gains and $16 million of realized losses. Derivatives also hedge portions of foreign-currency ship commitments, foreign investments, and floating-rate debt.
- NOAA continued investigating vessel discharges reported in the expanded Farallones Islands National Marine Sanctuary. Management did not expect the matter to have a material impact on the consolidated financial statements.
- Management stated that pending litigation in the ordinary course is generally insured and is not expected to have a material financial impact. The company was in compliance with its debt covenants and reported no material off-balance-sheet arrangements.
- Internal control disclosure controls were assessed as effective at a reasonable level of assurance, with no material changes to internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Confirm the March 22, 2018 full-year and quarterly guidance figures, which are not clearly included in the supplied filing text.
- Assess whether higher pricing and constant-currency yields can continue to offset fuel inflation, currency movements, capacity growth, and rising capital costs.
- Review the timing, funding, and delivery risk associated with the multibillion-dollar shipbuilding program and the $8.2 billion unhedged euro-denominated commitments.
- Reconcile reported liquidity with immediately available cash, revolving credit capacity, committed future financing, and upcoming debt maturities.
- Monitor the effect of advance customer deposits and the recurring $7.2 billion working capital deficit on liquidity and operating cash flow.
- Evaluate sensitivity to fuel prices, Brent derivative settlements, foreign exchange, floating interest rates, and potential changes in derivative fair values.
- Review the NOAA investigation, ordinary-course litigation, environmental compliance matters, and the risk factors incorporated from the 2017 Form 10-K.