Carnival Corporation & plc — Form 10-Q Summary
Business context and reporting period
Carnival Corporation and Carnival plc operate as a dual-listed company and report as one economic enterprise. The unaudited filing covers the three and six months ended May 31, 2012, compared with the corresponding 2011 periods. The business consists primarily of North America and Europe, Australia and Asia cruise brands, with additional cruise support and tour operations. Results are seasonal, with the largest share of operating income historically generated in the third quarter.
Key financial metrics
| Metric | Three months ended May 31, 2012 | Three months ended May 31, 2011 | Six months ended May 31, 2012 | Six months ended May 31, 2011 |
|---|---|---|---|---|
| Revenue | $3.538 billion | $3.620 billion | $7.120 billion | $7.039 billion |
| Operating income | $253 million | $279 million | $171 million | $514 million |
| Net income (loss) | $14 million | $206 million | $(125) million | $358 million |
| Diluted EPS | $0.02 | $0.26 | $(0.16) | $0.45 |
| Net cash from operating activities | Not separately provided | Not separately provided | $1.458 billion | $1.801 billion |
Three-month operating margin was approximately 7.2%, compared with 7.7% in 2011. Six-month operating margin was approximately 2.4%, compared with 7.3% in 2011. Six-month net margin was approximately negative 1.8%, compared with 5.1% in 2011.
- Cruise passenger ticket revenue was $2.675 billion in the quarter, down 3.7%, while onboard and other revenue increased 3.3% to $844 million.
- Quarterly occupancy declined to 102.6% from 104.5%; six-month occupancy declined to 103.9% from 104.8%.
- Fuel cost increased 11.4% in the quarter to $645 million and 20.2% for the six months to $1.237 billion. Fuel cost per metric ton increased to $756 from $673 in the quarter and to $732 from $609 for the six months.
- Six-month net revenue increased 2.2% to $5.658 billion, but net cruise costs excluding fuel increased 2.5% to $3.314 billion. Net cruise costs per available lower berth day increased 3.7% to $129.67.
- North America brands produced quarterly operating income of $193 million, up from $164 million. EAA brands produced $85 million, down from $142 million. For the six months, North America operating income was $308 million versus $315 million, while EAA reported a $67 million operating loss versus $253 million of income.
Liquidity, cash flow and debt
- Cash and cash equivalents were $900 million at May 31, 2012, compared with $450 million at November 30, 2011.
- Current assets were $2.169 billion and current liabilities were $7.262 billion, resulting in a working capital deficit of approximately $5.1 billion. The deficit included $3.634 billion of customer deposits and approximately $1.6 billion of current debt obligations.
- Management reported adjusted working capital of $149 million after excluding customer deposits and current debt obligations.
- Total debt, based on reported short-term borrowings, current long-term debt and long-term debt, was approximately $10.0 billion at May 31, 2012. Debt comprised 57% fixed-rate and 43% floating-rate obligations.
- Six-month capital expenditures were $1.997 billion, including approximately $1.7 billion for new ships. Financing included $946 million of long-term debt issuance and $262 million of net short-term borrowings. Dividends paid were $388 million.
- Reported liquidity was $5.9 billion, consisting of $662 million of available cash excluding $238 million used for current operations, $2.1 billion available under revolving credit facilities net of commercial paper borrowings, and $3.2 billion of committed ship financings.
- Management stated that operating cash flow, liquidity and access to capital markets should be sufficient to fund capital projects, debt service, working capital, commitments and dividends over the next several years. The company reported compliance with debt covenants at May 31, 2012.
Material changes versus the prior comparable period
- Quarterly revenue decreased 2.3%, operating income decreased 9.3%, and net income decreased 93.2% year over year.
- Six-month revenue increased 1.2%, but operating income fell 66.7% and net income changed from $358 million of income to a $125 million loss.
- Six-month results included $173 million of Ibero goodwill and trademark impairment charges, comprising $153 million of goodwill and $20 million of trademark impairment.
- Reported earnings included unrealized fuel derivative losses of $145 million in the quarter and $124 million for the six months. Management excludes these unrealized amounts from non-GAAP earnings because they relate to future periods.
- The stronger U.S. dollar reduced reported EAA revenue and expenses. EAA ticket pricing and occupancy were also affected by the Costa Concordia incident and difficult European economic conditions.
- Capacity increased approximately 2.2% in the quarter and 2.9% for the six months, while occupancy and ticket yields weakened.
Guidance, outlook, risks and unusual items
- On June 22, 2012, management forecast non-GAAP diluted EPS of $1.42 to $1.46 for the 2012 third quarter and $1.80 to $1.90 for full-year 2012. Guidance assumed fuel prices of $620 per metric ton for the third quarter and $677 for the full year, with specified euro, sterling and Australian dollar exchange-rate assumptions.
- Expected year-over-year capacity growth was 2.9% in the third quarter and 3.0% in the fourth quarter of 2012; annual capacity growth was expected at 3.0% in 2012, 3.1% in 2013, 2.0% in 2014 and 4.7% in 2015.
- Costa Concordia was written off at a net carrying value of $515 million. The company received $508 million of insurance proceeds and recorded $17 million of excess proceeds as a reduction of ship operating expenses. It also recognized $30 million of uninsured incident-related costs.
- Costa Allegra fire damage resulted in $34 million of impairment charges and the ship was withdrawn from service. The remaining carrying value was not significant at May 31, 2012.
- Litigation, regulatory actions and investigations related to Costa Concordia remain unresolved. The company reported $403 million of short-term insurance recoverables and $479 million of short-term claims reserves, substantially related to the incident, and expects additional incident-related costs but believes insurance will substantially cover them.
- Key ongoing risks include fuel prices, foreign exchange, economic weakness, cruise incidents, safety and security events, adverse publicity, litigation, regulatory compliance, shipbuilding execution, competition and overcapacity, port availability, vendor and travel-agent viability, insurance availability, technology disruptions and access to financing.
- At May 31, 2012, fuel derivatives had a net fair-value liability of $123 million and covered portions of estimated fuel consumption through fiscal 2015. In June 2012, the company entered into currency collars covering a portion of Royal Princess shipyard payments.
Important facts for investors to verify
- Whether EAA booking trends, occupancy and pricing recovered after the Costa Concordia incident and amid European economic weakness.
- The ultimate insurance recoveries, litigation exposure, regulatory outcomes and total costs related to Costa Concordia and Costa Allegra.
- The sensitivity of earnings and cash flow to fuel prices, fuel derivative settlements and foreign exchange rates.
- Whether the company achieves its non-GAAP third-quarter and full-year 2012 EPS guidance and the assumptions underlying that guidance.
- The funding schedule and execution risk for newbuild commitments, particularly against the company’s working capital deficit and approximately $10.0 billion of reported debt.
- Changes in customer deposits, operating cash flow, committed financing availability and debt covenant compliance.
- The sustainability of the $0.25 per-share quarterly dividend and future capital allocation given elevated capital expenditures and debt obligations.