Carnival Corp Ltd. quarterly report, Q2 FY2016

Carnival Corporation & plc — 2016 Q2 Form 10-Q Summary

Business Context and Reporting Period

Joint quarterly report for Carnival Corporation and Carnival plc covering the three and six months ended May 31, 2016. The unaudited statements consolidate cruise, cruise-support, tour and other operations and should be read with the 2015 Form 10-K. Results are seasonal, with the largest share of operating income typically earned in the third quarter.

Key Financial Metrics

Metric	Three months ended May 31, 2016	Three months ended May 31, 2015	Six months ended May 31, 2016	Six months ended May 31, 2015
Revenue	$3.705 billion	$3.590 billion	$7.357 billion	$7.120 billion
Operating income	$478 million	$289 million	$912 million	$554 million
Operating margin	12.9%	8.0%	12.4%	7.8%
Net income	$605 million	$222 million	$747 million	$271 million
Diluted EPS	$0.80	$0.29	$0.98	$0.35
Adjusted diluted EPS	$0.49	$0.25	$0.88	$0.45
Operating cash flow	Not separately provided	Not separately provided	$2.681 billion	$2.286 billion

Revenue increased 3.2% in the quarter and 3.3% year to date. Operating income increased 66% and 65%, respectively. Net income increased 173% in the quarter and 176% year to date. Results benefited substantially from lower fuel costs and favorable fuel-derivative valuation changes.

Cruise passenger ticket revenue was $2.696 billion in the quarter and $5.414 billion year to date.
Onboard and other revenue was $978 million in the quarter and $1.901 billion year to date.
Fuel expense declined 41% year over year to $196 million in the quarter and $383 million year to date.
Occupancy increased to 104.1% from 102.8% in the quarter and to 104.1% from 102.9% year to date.
Available lower berth days increased 2.0% in the quarter and 2.9% year to date.
Net revenue yield increased 1.2% in the quarter and 0.8% year to date on a reported basis; constant-currency increases were 3.6% and 4.6%, respectively.
Net cruise costs excluding fuel per available lower berth day decreased 1.4% in both the quarter and year-to-date periods on a reported basis.

Liquidity, Debt and Capital Allocation

Cash and cash equivalents were $519 million at May 31, 2016, compared with $1.395 billion at November 30, 2015.
Total debt, including short-term borrowings and current maturities, was approximately $9.429 billion at May 31, 2016, compared with $8.787 billion at November 30, 2015.
The company reported a $6.2 billion working-capital deficit, including $4.3 billion of customer deposits and $1.2 billion of current debt obligations. Excluding those items, adjusted working-capital deficit was $720 million.
Reported liquidity was $10.7 billion, consisting of $290 million of cash and cash equivalents as defined by management, $2.6 billion available under revolving facilities net of commercial paper, and $7.8 billion of committed future ship-export-credit financing.
The revolving credit facility was extended to June 2021 and increased to $2.7 billion.
Six-month investing cash outflow was $2.173 billion, including $1.966 billion of property and equipment additions. Financing cash outflow was $1.381 billion.
The company repurchased 28.2 million Carnival Corporation shares for $1.4 billion during the six months and paid $459 million of dividends. The quarterly dividend was increased 17% to $0.35 per share.
Expected capital expenditures were $2.0 billion for the remainder of 2016 and $3.0 billion, $4.0 billion, $4.6 billion and $4.5 billion for 2017 through 2020, respectively.

Material Changes Versus the Prior Comparable Period

Lower fuel prices reduced quarterly fuel expense by $136 million and six-month expense by approximately $280 million.
Operating costs and expenses declined 6.1% in the quarter and 5.0% year to date despite capacity growth.
North America operating income increased 80% in the quarter and 45% year to date; EAA operating income increased 30% and 91%, respectively.
Fuel derivatives produced a $171 million net gain in the quarter versus a $13 million loss in 2015. Year to date, derivatives produced a $65 million net loss versus a $181 million loss in 2015.
Quarterly adjusted EPS rose to $0.49 from $0.25, while year-to-date adjusted EPS rose to $0.88 from $0.45. Adjusted results exclude, among other items, unrealized fuel-derivative gains or losses.
Customer deposits increased to $4.275 billion from $3.272 billion at November 30, 2015, reflecting the seasonal booking and sailing cycle.

Guidance, Outlook, Risks and Unusual Items

Management projected 2016 third-quarter adjusted diluted EPS of $1.83 to $1.87 and full-year adjusted diluted EPS of $3.25 to $3.35. Guidance was not provided on a U.S. GAAP basis.
Guidance assumed third-quarter and full-year fuel costs of $339 and $280 per metric ton, respectively, with specified euro, sterling, Australian dollar and Canadian dollar exchange rates.
Management expects annual capacity growth of 3.6% in 2016, 2.4% in 2017, 3.1% in 2018, 5.3% in 2019 and 7.7% in 2020, excluding future unannounced orders, acquisitions, retirements, charters or sales.
At May 31, 2016, the estimated unrealized loss on outstanding fuel derivatives was $461 million. A 10% fuel-price change was estimated to affect annualized 2016 adjusted EPS by approximately $0.14.
Currency exposure remains material. A 10% change in currencies versus the U.S. dollar was estimated to affect annualized 2016 adjusted EPS by approximately $0.27. Unhedged euro-denominated newbuild commitments totaled $2.6 billion.
The UK Maritime & Coastguard Agency and U.S. Department of Justice were investigating alleged pollution-law violations involving Caribbean Princess. Management did not expect a material operating impact, but the outcome could not be determined.
Other risks include ship or security incidents, contagious disease, adverse weather, terrorism, regulatory and environmental compliance, fuel and currency volatility, financing availability, shipbuilding execution, technology and cybersecurity, competition, labor matters, insurance limitations and the effects of the UK vote to leave the EU.
The company entered a bareboat charter/sale agreement for Pacific Pearl, with ownership transferring to the buyer in April 2027; the arrangement will be accounted for as an operating lease.
Disclosure controls were deemed effective. A significant Oracle enterprise reporting upgrade was implemented during the quarter without management identifying a control deficiency.

Important Facts for Investors to Verify

Reconcile GAAP earnings with adjusted EPS, particularly the significant impact of unrealized fuel-derivative gains and losses.
Assess whether low fuel prices, derivative results and reduced dry-dock costs are sustainable and distinguishable from recurring operating improvements.
Review the company’s $10.7 billion liquidity calculation, committed ship financing, debt maturities and covenant compliance.
Evaluate the scale and timing of planned capital expenditures and newbuild capacity additions through 2020.
Monitor foreign-exchange sensitivity, the $2.6 billion unhedged euro newbuild exposure and the $461 million unrealized fuel-derivative loss.
Follow the Caribbean Princess pollution investigation and any resulting fines, remediation costs or reputational effects.
Consider the seasonal nature of the business and the reliance on third-quarter demand, occupancy and pricing.