Carnival Corp Ltd. 10-Q Summary
Business Context and Reporting Period
This report covers the quarterly period ended August 31, 2006, for Carnival Corporation & plc, a dual-listed company (DLC) operating as a single economic enterprise. The company operates a fleet of cruise ships under various brands (including Carnival, Princess, Holland America, and Costa) and provides related tour and transportation services. The financial statements are unaudited and reflect a change in accounting policy regarding dry-docking costs, which were retrospectively applied.
Key Financial Metrics
| Metric | Nine Months Ended Aug 31, 2006 | Nine Months Ended Aug 31, 2005 | Three Months Ended Aug 31, 2006 | Three Months Ended Aug 31, 2005 |
|---|---|---|---|---|
| Total Revenues | $9,029 million | $8,521 million | $3,905 million | $3,607 million |
| Operating Income | $2,137 million | $2,205 million | $1,340 million | $1,321 million |
| Net Income | $1,863 million | $1,917 million | $1,232 million | $1,181 million |
| Diluted EPS | $2.25 | $2.29 | $1.49 | $1.40 |
| Operating Cash Flow | $2,828 million | $2,792 million | N/A | N/A |
| Capital Expenditures | $2,182 million | $1,632 million | N/A | N/A |
| Cash & Equivalents (End Period) | $594 million | $1,139 million | N/A | N/A |
| Total Debt (Short + Long Term) | $7,338 million | $7,069 million | 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 5.9% for the nine months ended August 31, 2006, driven by a 4.3% increase in Available Lower Berth Days (ALBDs) and a 1.3% increase in net revenue yields. Gross cruise revenues rose to $8.67 billion.
- Cost Pressures: Net cruise costs increased 10.3% year-over-year. The primary driver was a 43% increase in fuel costs per metric ton (rising from $239 to $341), adding approximately $211 million in expenses. Share-based compensation also increased by $41 million due to the adoption of SFAS No. 123(R).
- Profitability: Despite revenue growth, Net Income decreased slightly by 2.8% for the nine-month period ($1,863 million vs. $1,917 million) due to the aforementioned cost increases and a $10 million write-down of a non-cruise investment.
- Accounting Change: The company changed its accounting method for dry-docking costs from deferral to direct expense. This change reduced reported net income by $43 million for the nine months ended August 31, 2006, compared to the prior method.
- Liquidity: Cash and cash equivalents decreased by $584 million during the nine-month period, primarily due to significant capital expenditures ($2.18 billion) and share repurchases ($793 million), partially offset by strong operating cash flow.
Guidance, Outlook, and Risks
- Guidance: Management expects diluted earnings per share for the fourth quarter of 2006 to be approximately $0.46 to $0.48. This guidance assumes a fuel price of $323 per metric ton and specific currency exchange rates ($1.27 to the euro, $1.87 to sterling).
- Outlook: Booking levels for the first quarter of 2007 are modestly down on a capacity-adjusted basis. Demand in the Caribbean remains sluggish, while European brands are performing ahead of last year's pace. Net revenue yields for Q1 2007 are expected to be flat to slightly down on a constant-dollar basis.
- Capacity Growth: Excluding future orders, ALBD capacity is expected to grow 5.5% in Q4 2006, followed by 8.5% in 2007, 7.9% in 2008, 7.2% in 2009, and 6.2% in 2010, driven by new ship deliveries.
- Risks and Contingencies:
- Litigation: A class action was filed against Holland America Line regarding shore excursion disclosures and Passenger Vessel Services Act fines. Wage action settlements are pending court approval for Carnival Corporation and Princess Cruises.
- Fuel Costs: Continued volatility in fuel prices remains a significant risk to operating margins.
- War Risk: The company has obtained war risk insurance for its fleet, but policies can be cancelled with seven days' notice.
- Seasonality: Results are heavily seasonal, with the third quarter typically generating the largest share of net income.
Key Investor Verification Points
- Fuel Price Sensitivity: Verify the impact of current fuel prices against the $323/ton assumption used in Q4 guidance.
- Caribbean Demand: Monitor booking trends in the Caribbean region, which management cites as "sluggish" and a drag on Q1 2007 yields.
- Capital Expenditure Schedule: Confirm the timing and cost of upcoming ship deliveries (Noordam, Crown Princess, Costa Concordia) and new construction contracts (Costa and AIDA ships).
- Litigation Outcomes: Track the status of the wage action settlements and the new class action against Holland America Line for potential financial impact.
- Share Repurchases: Note the completion of the $1 billion 2004 repurchase program and the initiation of a new $1 billion authorization in June 2006.