Carnival Corp Ltd. quarterly report, Q2 FY2013

Carnival Corporation & plc — 2013 Q2 Form 10-Q Summary

Business context and reporting period

This joint, unaudited Form 10-Q covers Carnival Corporation and Carnival plc for the three and six months ended May 31, 2013. The companies operate global cruise brands across North America, Europe, Australia and Asia, plus cruise support and tour operations. Results are seasonal, with the largest share of operating income historically generated in the third quarter.

Financial performance and key metrics

Metric	Three months ended May 31, 2013	Three months ended May 31, 2012	Six months ended May 31, 2013	Six months ended May 31, 2012
Revenue	$3.479 billion	$3.538 billion	$7.072 billion	$7.120 billion
Operating income	$152 million	$253 million	$297 million	$171 million
Operating margin	4.4%	7.1%	4.2%	2.4%
Net income (loss)	$41 million	$14 million	$78 million	$(125) million
Basic and diluted EPS	$0.05	$0.02	$0.10	$(0.16)
Net cash from operations	Not provided for the quarter	Not provided for the quarter	$1.556 billion	$1.458 billion

Second-quarter passenger ticket revenue declined 2.3% to $2.613 billion, primarily from lower ticket pricing, currency effects and lower air transportation revenue. A 1.2% capacity increase and slightly higher occupancy partly offset the decline.
Six-month revenue decreased 0.7%, while operating income increased 74% because 2012 included $173 million of Ibero goodwill and trademark impairment charges and other 2012 incident-related costs.
Second-quarter operating income fell 40% as lower pricing, Carnival Triumph voyage disruption costs and higher non-fuel expenses outweighed lower fuel costs.
Fuel expense decreased 14.0% in the quarter to $555 million and 9.9% for the six months to $1.115 billion. Fuel consumption per available lower berth day declined to 0.045 metric tons in the quarter from 0.048.
Six-month occupancy was 103.7%, compared with 103.9% in the prior-year period. Available lower berth days increased 2.5% to 35.972 million, and passengers carried increased to 4.669 million from 4.596 million.
Six-month net revenue yield declined 2.2% to $157.64 per available lower berth day, while net cruise costs excluding fuel per available lower berth day increased 2.5% to $96.77.

Balance sheet, debt, liquidity and cash flow

At May 31, 2013, cash and cash equivalents were $711 million, total assets were $39.979 billion and shareholders’ equity was $23.280 billion.
Current debt totaled approximately $2.014 billion, including $2.000 billion of current long-term debt. Long-term debt was $7.848 billion; total debt carrying value was approximately $9.862 billion.
Working capital was negative $5.7 billion, largely because of $3.626 billion of customer deposits and $2.0 billion of current debt obligations. Management reported adjusted working capital of negative $91 million after excluding those items.
Reported liquidity was $6.3 billion, consisting of $434 million of available cash, $2.5 billion available under revolving credit facilities and $3.4 billion of committed ship financings. The filing separately reports $711 million of total cash and cash equivalents, including cash used for current operations.
Six-month capital expenditures were $1.447 billion, including $991 million for new ships, $396 million for ship improvements and replacements, and $60 million for information technology and other assets.
Six-month financing included $1.837 billion of long-term debt proceeds, $830 million of long-term principal repayments, $777 million of dividends paid and $103 million of share repurchases, partly offset by $35 million of treasury-stock sales.
Debt issuances and borrowings funded AIDAstella and Royal Princess purchases and refinanced certain floating-rate export credit facilities. Debt was 58% fixed-rate and 42% floating-rate at May 31, 2013.

Material changes versus the prior comparable periods

Quarterly revenue declined 1.7%, and operating income declined $101 million. The main pressures were lower cruise ticket pricing, promotional discounting at Carnival Cruise Lines, the challenging European economy, and $33 million of Carnival Triumph disruption costs.
Six-month operating income increased $126 million. EAA operating income improved to $122 million from a $67 million loss, primarily because the prior-year period included the Ibero impairment charge and Costa Allegra and Costa Concordia-related costs. North America operating income declined to $249 million from $308 million.
Quarterly total costs and expenses as a percentage of revenue increased to 95.6% from 92.8%. For the six months, the ratio improved to 95.8% from 97.6%, primarily because of the nonrecurrence of the 2012 Ibero impairment charge.
Net unrealized losses on fuel derivatives decreased to $31 million in the quarter from $145 million and to $59 million for the six months from $124 million. No realized gains or losses were recognized on fuel derivatives in either comparable period.
Foreign currency translation contributed to other comprehensive losses of $72 million for the quarter and $280 million for the six months in 2013.

Guidance, outlook, commentary and risks

Management’s June 25, 2013 guidance called for non-GAAP diluted EPS of $1.25–$1.33 for the 2013 third quarter and $1.45–$1.65 for full-year 2013. Guidance assumed fuel prices of $671 per metric ton and specified euro, Australian dollar and sterling exchange-rate assumptions.
Management attributed the 2013 outlook pressure to lower cruise ticket pricing, promotional discounting at Carnival Cruise Lines and economic weakness in Europe. Guidance excludes unrealized fuel-derivative gains and losses; management was not forecasting realized fuel-derivative gains or losses for 2013 under its then-current portfolio.
Expected year-over-year capacity growth was 3.6% in the third quarter, 3.3% in the fourth quarter and 3.0% for full-year 2013. Planned annual capacity growth was 2.0% in 2014, 4.7% in 2015 and 3.8% in 2016.
A fleet-wide safety and operational enhancement program related to recent incidents was expected to cost $600 million to $700 million over several years.
Management identified potential impairment risk for Ibero assets because of continued weakness in Spain. Ibero’s three ships and trademarks had net carrying values of $226 million and $13 million, respectively. Annual goodwill impairment testing for Costa and Carnival Cruise Lines was scheduled for July 31, 2013.
Litigation, investigations and regulatory actions related to the January 2012 Costa Concordia incident remained outstanding. Management could not determine the ultimate outcome but expected insurance coverage to limit the impact of third-party claims.
Other principal risks include fuel prices, foreign exchange, economic conditions, safety incidents, adverse publicity, regulatory compliance, insurance availability, shipbuilding and maintenance costs, financing access, information technology disruptions and competition.
Moody’s downgraded senior unsecured credit ratings to Baa1 in June 2013. Management stated that the downgrade was not expected to significantly affect operations, but a further downgrade could increase borrowing costs or restrict access to debt markets.

Most important facts for investors to verify

Whether pricing and yield trends stabilize, particularly at Carnival Cruise Lines and Northern European brands.
The effect and timing of the $600 million–$700 million fleet safety enhancement program on capital spending, cash flow and leverage.
Progress on refinancing approximately $2.0 billion of current debt and the availability of committed ship financings and revolving facilities.
Results of the July 2013 goodwill and trademark impairment testing, especially for Costa, Carnival Cruise Lines and Ibero.
Developments in Costa Concordia litigation, regulatory matters and insurance recoveries.
Actual performance against the non-GAAP third-quarter and full-year 2013 EPS guidance, including the impact of fuel prices, currency movements and realized fuel-derivative results.