CCL

Carnival Corp Ltd. 10-K Summary: Fiscal Year Ended November 30, 2002

Business Context and Reporting Period

This Annual Report covers the fiscal year ended November 30, 2002. Carnival Corporation is a global cruise vacation and leisure travel company operating six brands: Carnival Cruise Lines (CCL), Costa Cruises, Holland America Line, Cunard Line, Seabourn Cruise Line, and Windstar Cruises. The company also operates Holland America Tours, a leading cruise/tour operator in Alaska and the Canadian Yukon. As of January 31, 2003, the company operated a fleet of 45 ships with a passenger capacity of 67,282 lower berths.

Key Financial Metrics

Liquidity: As of November 30, 2002, the company held $706 million in cash, cash equivalents, and short-term investments, with an additional $1.5 billion available under revolving credit facilities.

Material Changes vs. Prior Period

• Revenue Decline: Total revenues decreased 3.7% to $4.37 billion. Cruise revenues dropped 3.0% primarily due to a 7.0% decrease in gross revenue per passenger cruise day, driven by a significant decline in guests purchasing air transportation through the company and lower ticket prices following the September 11, 2001 events.
• Profitability Increase: Despite lower revenues, Net Income increased 9.7% to $1.02 billion. This was driven by a 16.9% increase in Operating Income, aided by a $57 million income tax benefit (largely from a new Italian investment incentive for Costa) and reduced operating expenses.
• Cost Reductions: Operating expenses decreased 6.4% to $2.31 billion. Savings were realized through reduced air travel costs and lower commissions, partially offset by increased fuel costs and capacity expansion.
• Impairment Charges: The company recorded a $20 million impairment charge in 2002 (compared to $140 million in 2001) related to the reduction of a ship's carrying value.
• Capital Spending: Capital expenditures surged 140% to $1.99 billion, primarily due to a $1.76 billion investment in the ongoing shipbuilding program.

Guidance, Outlook, and Risks

Proposed Dual-Listed Company (DLC) Transaction: On January 8, 2003, Carnival entered into an agreement to combine with P&O Princess Cruises plc under a DLC structure. If completed, the Combined Group would become the world's largest cruise vacation group. The transaction is subject to shareholder approval and regulatory clearance. If not completed by September 30, 2003, the company may incur a write-off of approximately $45 million to $50 million in transaction costs.

Fiscal 2003 Outlook:

• Bookings: Booking volumes have been impacted by the uncertain economic environment, concerns regarding war in Iraq, and security alerts. First-quarter net revenue yields are expected to be approximately equal to the prior year (revised down from a previous guidance of up 1-3%) due to pricing reductions and a mix shift toward lower-priced contemporary products.
• Costs: Fuel prices have increased considerably. Operating costs per available berth day are expected to rise 6-8% in Q1 and 10-12% in Q2 compared to the prior year, with approximately 50% of the increase attributed to fuel.
• Insurance Recoveries: The company expects nonoperating income of approximately $0.03 per share from insurance recoveries in Q1 2003.

Key Risks:

• Market Conditions: Overcapacity in the cruise industry and competition from land-based vacations could negatively impact net revenue yields.
• Geopolitical & Security: International political climate, terrorist threats, and safety concerns continue to affect travel demand.
• Environmental & Legal: Ongoing investigations regarding a wastewater discharge incident on the Holland America ship Ryndam in Alaska could result in fines or debarment from Glacier Bay. The company also faces potential increased compliance costs from new environmental regulations.
• Financing: Access to financing depends on maintaining strong credit ratings; a downgrade resulting from the DLC transaction could increase borrowing costs.

Investor Verification Checklist

• DLC Transaction Status: Verify the progress of the P&O Princess combination, including shareholder approval dates and potential break fees ($49 million).
• Shipbuilding Commitments: Confirm the $5.2 billion in remaining shipbuilding commitments and the schedule for the 13 new ships under construction.
• Environmental Litigation: Monitor the outcome of the Ryndam wastewater discharge investigation and potential impact on Alaska operations.
• Fuel Price Sensitivity: Assess the impact of rising bunker fuel prices on future margins, given the company's expectation of 10-12% cost increases in Q2 2003.
• Goodwill Accounting: Note the cessation of goodwill amortization effective December 1, 2001, under SFAS No. 142, and review future impairment testing results.