Carnival Corp Ltd. 10-Q Summary: Period Ended May 31, 2006
Business Context and Reporting Period
This is a Quarterly Report (Form 10-Q) for Carnival Corporation & plc, a dual-listed company (DLC) incorporated in Panama and England/Wales, operating as a single economic enterprise. The report covers the six-month and three-month periods ended May 31, 2006. The company operates a global cruise line business and related tour operations. Results are seasonal, with the third quarter typically being the strongest due to Northern Hemisphere summer demand.
Key Financial Metrics
| Metric (in millions) | Six Months Ended May 31, 2006 | Six Months Ended May 31, 2005 | Three Months Ended May 31, 2006 | Three Months Ended May 31, 2005 |
|---|---|---|---|---|
| Total Revenues | $5,125 | $4,914 | $2,662 | $2,516 |
| Operating Income | $797 | $884 | $448 | $462 |
| Net Income | $631 | $736 | $380 | $388 |
| Diluted EPS | $0.77 | $0.89 | $0.46 | $0.47 |
| Operating Cash Flow | $1,885 | $1,761 | N/A | N/A |
| Capital Expenditures | ($1,483) | ($1,109) | N/A | N/A |
| Cash & Equivalents (End of Period) | $570 | $721 | N/A | N/A |
| Total Debt (Short + Long Term) | $7,029 | $7,069 | N/A | N/A |
Note: Debt figures include short-term borrowings, current portion of long-term debt, convertible debt subject to put option, and long-term debt.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 4.3% year-over-year for the six-month period, driven by a 3.8% increase in Available Lower Berth Days (ALBDs) and a 1.3% increase in net revenue yields. Gross revenue yields rose to $209.63 per ALBD from $208.45.
- Profitability Decline: Net income decreased 14.3% to $631 million. Operating income fell 9.8% to $797 million. The decline is primarily attributed to a significant increase in fuel costs and a change in accounting policy for dry-docking.
- Fuel Costs: Fuel cost per metric ton surged 51.5% to $336 from $222 in the prior year, adding approximately $157 million to expenses for the six-month period.
- Accounting Changes: The company changed its method of accounting for dry-dock costs from deferral to direct expense. This change reduced reported net income by $49 million for the six months ended May 31, 2006, compared to the prior method. Additionally, the adoption of SFAS No. 123(R) for share-based compensation reduced net income by approximately $27 million.
- Liquidity: Cash and cash equivalents decreased from $1,178 million to $570 million, largely due to capital expenditures of $1.48 billion, debt repayments of $959 million, and share repurchases of $473 million.
Guidance, Outlook, and Risks
- Guidance: As of June 16, 2006, management projected diluted earnings per share for the third quarter of 2006 to be between $1.45 and $1.47, and for the full fiscal year 2006 between $2.65 and $2.75. This guidance assumes fuel prices of $364/ton for Q3 and $366/ton for the second half of the year.
- Capacity Outlook: ALBD capacity is expected to increase by 5.1% in Q3, 5.8% in Q4, and 4.6% for the full year 2006 due to new ship deliveries.
- Capital Projects: Significant commitments remain for new ship construction, including a 2,260-passenger ship for Costa Cruises (service spring 2009) and a 2,050-passenger ship for AIDA Cruises (service spring 2010).
- Risks and Contingencies:
- Litigation: Pending wage actions against crew members (two settled pending court approval, three ongoing); copyright infringement claims regarding musical plays; and arbitration regarding the Costa Classica ship conversion contract.
- War Risk: The company obtained additional war risk insurance for all 36 ships, covering chemical/biological attacks and terrorism, though policies can be cancelled with seven days' notice.
- Market Factors: Risks include fuel price volatility, foreign currency exchange rates (stronger USD negatively impacts reported revenue from Euro/Sterling operations), and general economic conditions affecting consumer disposable income.
Investor Verification Checklist
- Fuel Price Sensitivity: Verify current forward fuel price curves against the $364-$366/ton assumption used in management's full-year guidance.
- Accounting Policy Impact: Confirm the long-term impact of the shift from deferred to direct expense accounting for dry-docking on future earnings volatility.
- Litigation Exposure: Monitor the status of the preliminary court approval for the crew wage settlement and the outcome of the Costa Classica arbitration.
- Share Repurchase Program: Note that the $1 billion repurchase program authorized in 2004 was completed in June 2006, and a new $1 billion authorization was approved in June 2006.
- Debt Covenants: Review compliance with debt covenants, particularly given the high capital expenditure requirements for new ship deliveries.