Carnival Corporation & plc — Form 10-Q Summary
Business context and reporting period
Carnival Corporation and Carnival plc operate as a dual-listed company and are reported as one economic enterprise. The filing covers the quarter and nine months ended August 31, 2010, with comparisons to the corresponding 2009 periods. Operations are seasonal, with the third quarter typically producing the largest share of annual operating income.
Key financial metrics
| Metric | Q3 2010 | Q3 2009 | 9M 2010 | 9M 2009 |
|---|---|---|---|---|
| Revenue | $4.426 billion | $4.139 billion | $10.716 billion | $9.951 billion |
| Operating income | $1.402 billion | $1.196 billion | $2.006 billion | $1.860 billion |
| Net income | $1.303 billion | $1.073 billion | $1.730 billion | $1.597 billion |
| Diluted EPS | $1.62 | $1.33 | $2.16 | $2.00 |
| Operating margin | 31.7% | 28.9% | 18.7% | 18.7% |
| Net margin | 29.4% | 25.9% | 16.1% | 16.0% |
- Q3 revenue increased 6.9%; operating income increased 17.2%; net income increased 21.4%; diluted EPS increased 21.8%.
- Nine-month revenue increased 7.7%; operating income increased 7.8%; net income increased 8.3%; diluted EPS increased 8.0%.
- Q3 cruise passenger ticket revenue rose 8.8% to $3.377 billion, while onboard and other revenue rose 2.7% to $847 million. Tour and other revenue declined to $202 million from $209 million.
- Nine-month cruise passenger ticket revenue rose 7.9% to $8.162 billion, and onboard and other revenue rose 8.5% to $2.313 billion.
- Q3 occupancy was 111.1% versus 111.4%; nine-month occupancy was 106.2% versus 106.4%. Passengers carried increased 5.3% in Q3 and 7.9% for nine months.
- Q3 net revenue yield increased 6.2% on a constant-dollar basis. Nine-month constant-dollar net revenue yield increased 2.3%.
- Q3 fuel expense increased $69 million to $396 million, and nine-month fuel expense increased $431 million to $1.209 billion. Fuel cost per metric ton increased to $473 from $405 in Q3 and to $489 from $330 for nine months.
- Q3 net cruise costs excluding fuel per ALBD declined 2.4% on a constant-dollar basis; the nine-month decline was 4.7%.
Cash flow, liquidity, debt and capital allocation
- Net cash provided by operating activities was $3.084 billion for the nine months, up from $2.630 billion in 2009.
- Capital expenditures were $2.838 billion, including approximately $2.4 billion for new ships. Net cash used in investing activities was $2.736 billion.
- Cash and cash equivalents were $527 million at August 31, 2010, compared with $538 million at November 30, 2009.
- Current debt consisted of $415 million of short-term borrowings and $1.153 billion of current long-term debt. Long-term debt was $7.644 billion, for reported debt of approximately $9.212 billion.
- Liquidity was reported at approximately $6.0 billion, consisting of $200 million of available operating cash, $2.3 billion available under revolving credit facilities and $3.5 billion of committed financing.
- The company reported a $4.4 billion working-capital deficit, substantially reflecting $2.8 billion of customer deposits and $1.6 billion of current debt obligations. Excluding those items, adjusted working-capital deficit was $87 million.
- Cash dividends paid during the first nine months totaled $158 million. The company also used the stock-swap program to fund repurchases of 14.4 million Carnival Corporation shares.
Material changes, outlook and unusual items
- Revenue growth reflected a 6.2% Q3 and 7.9% nine-month increase in available lower berth day capacity, improved cruise pricing and scale benefits. European brand capacity grew faster than North American capacity.
- Higher fuel prices, capacity growth and a $41 million Merchant Navy Officers Pension Fund assessment increased costs. These pressures were partly offset by cost reductions, economies of scale, favorable operating leverage and currency effects.
- Nine-month results benefited from $61 million of gains related to the sale of P&O Cruises’ Artemis and a litigation settlement. Q3 results also included a $17 million litigation settlement gain within the constant-dollar cost analysis.
- Management issued fourth-quarter 2010 diluted EPS guidance of $0.32 to $0.36, based on fuel prices of $479 per metric ton, an exchange rate of $1.27 per euro and $1.54 per sterling.
- Expected ALBD capacity growth was 7.4% for fiscal 2010, 5.4% for 2011, 4.4% for 2012 and 3.9% for 2013, excluding unannounced orders, acquisitions, retirements, charters and sales.
- The company announced a cash redemption of its 2% convertible notes on October 25, 2010. Two Princess ships with an aggregate cost of approximately $1.4 billion were expected in May 2013 and May 2014, and an approximately $420 million AIDA ship was expected in spring 2013, subject to financing.
- Goodwill and trademark impairment reviews identified no impairment. However, Ibero’s goodwill had only a 24% estimated fair-value cushion, and management stated that relatively minor changes in assumptions could result in impairment.
- Key risks include discretionary consumer demand, fuel prices, foreign exchange, economic weakness, overcapacity, weather and disease events, geopolitical disruptions, safety incidents, regulatory changes, shipyard execution, financing access and counterparty performance. The company does not hedge fuel-price exposure.
Investor verification priorities
- Verify fourth-quarter EPS guidance against actual results and the stated fuel and currency assumptions.
- Assess whether revenue-yield gains continue after adjusting for capacity growth, litigation settlements, concession minimum guarantees and currency movements.
- Monitor fuel prices, fuel consumption and the effect of unhedged fuel exposure on margins and cash flow.
- Review debt maturities, convertible-note redemption funding, revolver refinancing requirements and compliance with debt covenants.
- Track committed shipbuilding payments, delivery schedules and financing conditions for the Princess and AIDA newbuilds.
- Evaluate Ibero’s goodwill impairment sensitivity, the MNOPF pension exposure and the $547 million of LILO contingent obligations, including the estimated $106 million termination payment exposure.