Carnival Corporation & plc — 2014 Third-Quarter Form 10-Q
Business context and reporting period
Joint unaudited quarterly report for Carnival Corporation and Carnival plc, covering the three and nine months ended August 31, 2014. Results are seasonal, with the third quarter typically producing the largest share of annual operating income. The company operates North America and Europe, Australia & Asia cruise brands, Cruise Support, and Tour and Other activities.
Key financial metrics
| Metric | Three months ended Aug. 31, 2014 | Three months ended Aug. 31, 2013 | Nine months ended Aug. 31, 2014 | Nine months ended Aug. 31, 2013 |
|---|---|---|---|---|
| Revenue | $4.947 billion | $4.726 billion | $12.165 billion | $11.798 billion |
| Operating income | $1.298 billion | $951 million | $1.525 billion | $1.249 billion |
| Net income | $1.247 billion | $934 million | $1.338 billion | $1.012 billion |
| Diluted EPS | $1.60 | $1.20 | $1.72 | $1.30 |
| Operating margin | 26.2% | 20.1% | 12.5% | 10.6% |
| Net margin | 25.2% | 19.8% | 11.0% | 8.6% |
| Dividend declared per share | $0.25 | $0.25 | $0.75 | $0.75 |
Third-quarter revenue increased 4.7%, operating income increased 36%, and net income increased 33%. Nine-month revenue increased 3.1%, operating income increased 22%, and net income increased 32%. Income tax expense was negligible in both periods.
- Third-quarter cruise passenger ticket revenue rose 3.4% to $3.719 billion, while onboard and other revenue rose 9.8% to $1.084 billion.
- Third-quarter net revenue yield increased 3.3% to $203.35 per available lower berth day, or 1.8% on a constant-dollar basis.
- Third-quarter net cruise costs excluding fuel increased 4.3%; constant-dollar cost per available lower berth day increased 0.5% to $91.51.
- Occupancy declined to 109.1% from 110.7%, while capacity increased 2.2% and passengers carried increased to 2.983 million from 2.881 million.
- Fuel expense declined 4.8% to $518 million in the third quarter; fuel cost per metric ton declined to $650 from $674.
- Nine-month net cash provided by operating activities was $2.793 billion, up from $2.359 billion. Capital expenditures were $1.677 billion, and cash flow after capital expenditures was approximately $1.116 billion before financing activity.
- Cash and cash equivalents were $436 million at August 31, 2014, compared with $462 million at November 30, 2013.
- Debt carrying value was approximately $8.867 billion, comprising $1.900 billion of current debt and $6.967 billion of long-term debt, compared with approximately $9.560 billion at November 30, 2013.
- Current customer deposits were $3.130 billion and total current liabilities were $7.056 billion. Reported working capital deficit was $5.5 billion, or $424 million after excluding customer deposits and current debt obligations.
Material changes versus the prior comparable period
- Margin expansion primarily reflected the nonrecurrence of 2013 impairment charges related to Costa Classica and Costa Voyager, lower fuel costs and consumption, lower air transportation costs, and reduced dry-dock costs in the third quarter.
- Third-quarter EAA brand operating income increased 127% to $543 million, while North America brand operating income increased 8.6% to $730 million.
- For the nine-month period, EAA operating income increased 101% to $726 million, but North America operating income decreased 6.8% to $859 million. North America was affected by lower occupancy and promotional pricing in the Caribbean.
- Nine-month results included a $37 million gain on the sale of Costa Voyager and a $22 million impairment charge for Grand Celebration. The prior-year period included substantially higher ship impairment charges, additional voyage-disruption costs, and a $15 million gain on a former Holland America Line ship sale.
- Selling and administrative expense increased 9.6% in the third quarter and 12% for the nine-month period, driven primarily by higher advertising, capacity growth, and currency effects.
- Cash flow from operations improved, but financing cash flow was negative $1.188 billion because of $1.513 billion of long-term debt repayments and $582 million of dividends, partly offset by $829 million of new long-term borrowings.
Guidance, outlook, commentary, and risks
- On September 23, 2014, management projected non-GAAP diluted EPS of $0.15–$0.19 for fourth-quarter 2014 and $1.84–$1.88 for full-year 2014. Guidance assumed fourth-quarter fuel prices of $635 per metric ton and exchange rates of $1.30 per euro, $1.63 per sterling, and $0.94 per Australian dollar.
- First-half 2015 cumulative bookings were ahead of the prior year at higher prices; management expected positive net revenue yield growth for full-year 2015.
- Full-year 2015 net cruise costs excluding fuel per available lower berth day were expected to increase approximately 3%, primarily because of elevated dry-dock activity and installation of air-emissions and fuel-efficiency technology.
- Management expected scrubber technology on 70% of the fleet by 2016. New emissions requirements were expected to increase 2015 fuel costs by approximately $0.10 per share, with the impact reduced by half in 2016 and mostly offset by 2017.
- Expected annual capacity growth was 2.8% in 2014, 2.5% in 2015, 4.2% in 2016, and 3.3% in 2017, primarily from contracted new ships.
- Liquidity was reported at $6.5 billion, consisting of $212 million of cash available after excluding $224 million used for current operations, $3.2 billion of available revolving facilities and other borrowing capacity, and $3.1 billion of committed future ship-export-credit financings.
- Management stated that operating cash flow and liquidity should fund expected capital projects, shipbuilding commitments, debt service, working capital, and other obligations. The company reported compliance with debt covenants and expected continued compliance.
- Key risks include fuel prices, foreign exchange, interest rates, lower occupancy or pricing, industry overcapacity, accidents, health and safety events, adverse weather, geopolitical events, environmental regulation, litigation, regulatory investigations, shipbuilding and dry-dock execution, insurance availability, counterparty performance, and refinancing requirements.
- Litigation and investigations related to the January 2012 ship incident remained unresolved. The UK Maritime & Coastguard Agency and U.S. Department of Justice were investigating alleged pollution-law breaches by Caribbean Princess. Management did not expect a significant impact, citing insurance coverage and current assessments.
- Grand Holiday was being marketed for sale; a sale below carrying value could result in an impairment charge. The filing stated that no impairment was required as of August 31, 2014.
Most important facts for investors to verify
- Whether booking strength and pricing improvements persist, particularly in North America, where occupancy and ticket yields weakened during the nine-month period.
- Whether the company achieves its 2014 non-GAAP EPS guidance and whether fuel and currency assumptions remain valid.
- The effect of 2015 dry-dock spending, emissions compliance, scrubber installation, and related fuel savings on costs and cash flow.
- The timing and cost of contracted newbuilds, including the approximately $0.8 billion Princess ship expected for 2017, and the $3.1 billion of committed future financings.
- Debt maturities, refinancing access, covenant compliance, interest-rate exposure, and the company’s ability to maintain liquidity despite its recurring working capital deficit.
- Potential financial exposure from the Caribbean Princess pollution investigation, Costa Concordia-related claims, other litigation, and any uninsured or self-insured losses.
- The sensitivity of reported results to foreign exchange, fuel-price hedges, and the distinction between GAAP earnings and management’s non-GAAP measures.