Carnival Corp Ltd. 10-Q Summary: Period Ended May 31, 2004
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended May 31, 2004, and the six months ended May 31, 2004, for Carnival Corporation & plc. The company operates as a dual-listed company (DLC) structure combining Carnival Corporation (Panama) and Carnival plc (England and Wales). The reporting period includes the full integration of P&O Princess Cruises operations, which were acquired in April 2003. The company operates a single reportable cruise segment and a smaller "other" segment comprising hotel, tour, and travel agency operations.
Key Financial Metrics
| Metric | Six Months Ended May 31, 2004 | Six Months Ended May 31, 2003 | Three Months Ended May 31, 2004 | Three Months Ended May 31, 2003 |
|---|---|---|---|---|
| Revenues | $4,239 million | $2,377 million | $2,256 million | $1,342 million |
| Operating Income | $665 million | $300 million | $405 million | $168 million |
| Net Income | $535 million | $255 million | $332 million | $128 million |
| Diluted EPS | $0.66 | $0.40 | $0.41 | $0.19 |
| Operating Cash Flow | $1,707 million | $665 million | N/A | N/A |
| Capital Expenditures | $2,648 million | $613 million | N/A | N/A |
| Long-Term Debt | $6,623 million | $6,918 million | N/A | N/A |
| Cash and Equivalents | $443 million | $1,070 million | N/A | N/A |
Liquidity: As of May 31, 2004, total liquidity was $2.57 billion, comprising $445 million in cash/short-term investments and $2.13 billion available under revolving credit facilities.
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 78% for the six months ended May 31, 2004, compared to the prior year. This is primarily attributed to the inclusion of P&O Princess results for the full period (vs. partial in 2003), a 19.6% increase in capacity (ALBDs), and higher net revenue yields.
- Profitability: Net income more than doubled to $535 million. Operating income rose to $665 million, driven by improved yields and economies of scale, despite higher depreciation ($388 million vs. $241 million) and interest expenses.
- Cost Management: Net cruise costs per Available Lower Berth Day (ALBD) decreased 0.4% compared to pro forma 2003, aided by a 5.4% reduction in fuel prices and synergy savings, offsetting the impact of a weaker U.S. dollar.
- Capital Deployment: Capital expenditures surged to $2.65 billion, primarily for new ship deliveries (including Queen Mary 2, Diamond Princess, and Sapphire Princess) and ship improvements.
- Debt Structure: The company borrowed $739 million in February and May 2004 to finance new ships and extinguished $237 million of unsecured debt. Total long-term debt decreased slightly due to repayments, though short-term borrowings increased.
Guidance, Outlook, and Risks
Outlook: Management expects full-year 2004 net revenue yields to increase 6% to 8% (4% to 6% on a constant dollar basis) compared to pro forma 2003. Full-year 2004 earnings per share are forecasted in the range of $2.10 to $2.20. Third-quarter 2004 EPS is expected to be $1.16 to $1.20.
Accounting Change: The Emerging Issues Task Force (EITF) tentatively concluded that shares contingently issuable under convertible notes must be included in diluted EPS calculations using the "if converted" method. If adopted, this would reduce the full-year 2004 diluted EPS forecast by $0.02 to $0.03.
Risks and Contingencies:
- Environmental Litigation: Ongoing investigations regarding wastewater discharge incidents on Holland America Line ships (Ryndam and Noordam). Potential penalties include fines and debarment from Glacier Bay National Park, though management believes alternative destinations exist.
- Legal Proceedings: Pending class-action lawsuits regarding unsolicited facsimile advertisements and an antitrust challenge to the DLC transaction by Festival Crociere S.p.A.
- Operational Risks: Exposure to geopolitical instability, terrorist threats (specifically noted regarding the 2004 Athens Olympics), fuel price volatility, and foreign currency fluctuations.
Investor Verification Checklist
- Pro Forma Comparisons: Verify that year-over-year comparisons utilize pro forma 2003 data (which includes P&O Princess for the full year) rather than reported 2003 data to accurately assess organic growth.
- Convertible Note Impact: Monitor the final adoption of EITF 04-8 and its retroactive impact on diluted EPS calculations for prior periods and future guidance.
- Environmental Liabilities: Track the resolution of the Holland America Line wastewater investigations to assess potential fines or operational restrictions in Alaska.
- Currency Sensitivity: Review the impact of the U.S. dollar's strength/weakness against the Euro and Sterling on reported revenues and costs, as a significant portion of operations are non-U.S. based.
- Capital Expenditure Schedule: Confirm the timing and funding of remaining shipbuilding commitments, particularly the new Costa Cruises ship contract (450 million euros).