Carnival Corporation & plc — Q3 2022 Form 10-Q Summary
Business context and reporting period
Joint quarterly report for Carnival Corporation and Carnival plc for the three and nine months ended August 31, 2022, filed September 30, 2022. The company continued restarting cruise operations after the COVID-19 suspension. By August 31, 2022, 93% of capacity was serving guests, compared with 35% a year earlier.
Financial performance and key metrics
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Revenue | $4.305 billion | $546 million | $8.329 billion | $621 million |
| Operating income (loss) | $(279) million | $(2.057) billion | $(3.244) billion | $(5.196) billion |
| Net income (loss) | $(770) million | $(2.836) billion | $(4.495) billion | $(6.881) billion |
| Diluted EPS | $(0.65) | $(2.50) | $(3.89) | $(6.14) |
| Operating margin | (6.5%) | (376.7%) | (38.9%) | (836.5%) |
| Net margin | (17.9%) | (519.4%) | (54.0%) | (1,107.4%) |
- Q3 revenue increased $3.760 billion year over year, primarily because substantially more ships returned to service. Passenger ticket revenue was $2.595 billion and onboard and other revenue was $1.711 billion.
- Occupancy increased to 84% from 54%; passenger cruise days rose to 17.7 million from 2.1 million. Nine-month occupancy was 71%, compared with 50%.
- Operating costs and expenses increased to $3.379 billion from $1.616 billion. Fuel expense rose to $668 million from $182 million, reflecting higher consumption and a $421 increase in fuel cost per metric ton.
- Q3 operating loss improved by $1.778 billion. The comparison benefited from the absence of the $475 million of ship impairment charges recorded in Q3 2021. Nine-month ship impairment charges were $8 million versus $524 million in 2021.
- Interest expense was $422 million in Q3 and $1.161 billion for nine months. Total debt was $34.808 billion at August 31, 2022, including $28.518 billion of long-term debt, compared with total debt of $33.970 billion at November 30, 2021.
- Cash and cash equivalents were $7.071 billion, down from $8.939 billion at November 30, 2021. Reported liquidity was approximately $7.4 billion, including cash and available revolving-facility borrowings; only approximately $0.3 billion remained available under the revolving facility.
- Operating activities used $1.553 billion of cash in the first nine months. Investing activities used $3.467 billion, including $3.759 billion of property and equipment purchases. Financing activities provided $3.217 billion, including $3.334 billion of long-term debt issuance and $1.180 billion of net common-stock issuance.
- Working capital deficit was $4.5 billion, largely reflecting $4.5 billion of customer deposits and $2.877 billion of current long-term debt. Management notes that advance customer receipts are a normal funding source under its business model.
Material changes versus the prior comparable period
- Capacity in service, revenue, passenger volumes and occupancy increased sharply as operations resumed. NAA occupancy reached 92% in Q3 versus 68%; EA occupancy reached 73% versus 47%.
- Losses narrowed substantially, but the company remained unprofitable because restart costs, fuel costs, inflation, staffing constraints, supply-chain disruptions, depreciation and high interest expense continued to exceed revenue.
- Customer deposits increased to $4.8 billion from $3.5 billion at November 30, 2021, providing cash funding but also creating refund and cancellation exposure.
- The company completed a public offering of 117.5 million Carnival Corporation shares at $9.95 per share, generating $1.2 billion of net proceeds and increasing dilution.
- In May 2022, the company issued $1.0 billion of 10.5% senior unsecured notes due 2030. During August 2022, it exchanged $339 million of 2023 convertible notes for new 2024 convertible notes.
- During the first nine months, the company borrowed $2.3 billion under export credit facilities and had $2.9 billion of undrawn export credit facilities for planned ship deliveries through 2024.
Guidance, outlook, risks and unusual items
- Management expects a net loss for the fourth quarter of 2022 and continues to expect a net loss for full-year 2022.
- Management expects continued operational recovery, with eight of nine brands expected to have their full fleets serving guests by the end of Q4 2022. Costa’s Asia deployment remains constrained, particularly because China remained closed to cruising.
- Liquidity forecasts assume continued resumption of cruises, higher per-passenger revenue in 2023 versus 2019, improving occupancy, moderating fuel prices, and continued access to financing. Management concluded that available liquidity is sufficient for at least the next twelve months, but stated that its estimates are subject to significant uncertainty.
- Inflation, elevated fuel prices, higher interest rates, supply-chain constraints and onboard staffing shortages are expected to continue pressuring costs and profitability. Staffing issues have constrained occupancy on certain voyages.
- Debt covenants include minimum liquidity of $1.5 billion, minimum shareholders’ equity of $5.0 billion and debt-to-capital limits. The company was in compliance at August 31, 2022, and obtained waivers of specified interest-coverage testing requirements through February 2024.
- Debt maturities totaled $34.808 billion, including $991 million in the remainder of 2022, $2.377 billion in 2023 and $4.935 billion in 2024. The company must refinance or otherwise address substantial future maturities.
- Material contingencies include the Havana Docks litigation under the Helms-Burton Act, COVID-19-related claims and investigations, cybersecurity matters, and potential Clean Water Act penalties. The company states that it believes these matters are unlikely to have a material impact, although unfavorable outcomes could be significant.
- Remaining new-ship capital commitments totaled $5.748 billion, including $1.117 billion for the remainder of 2022 and $2.268 billion in 2023. Unhedged foreign-currency exposure for newbuild commitments through 2025 was approximately $5.2 billion.
Investor verification points
- Verify the pace of fleet reactivation, occupancy recovery and pricing improvement, particularly in the EA segment and Costa’s Asia operations.
- Assess whether operating cash flow can turn positive before significant debt maturities and shipbuilding commitments become due.
- Review liquidity after restricted cash, customer-deposit obligations, credit-card reserve requirements and the limited undrawn revolving capacity.
- Monitor fuel prices, interest rates, inflation, staffing availability and supply-chain costs because each materially affects the path to profitability.
- Review debt covenant waivers, refinancing plans and the 2023–2025 maturity schedule, including floating-rate and LIBOR-linked exposure.
- Evaluate dilution from the 117.5 million-share offering and any future equity financing needs.
- Track the Havana Docks litigation, regulatory investigations, environmental matters and COVID-19 claims for changes in estimated liability or cash exposure.