Carnival Corporation & plc Form 10-Q Summary
Business Context and Reporting Period
Joint filing by Carnival Corporation and Carnival plc for the quarter and nine months ended August 31, 2020. Carnival paused global guest cruise operations in mid-March 2020 because of COVID-19; substantially all operations remained paused throughout the third quarter. Limited guest operations resumed in September 2020 through a phased return to service.
Key Financial Metrics
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $31 million | $6.533 billion | $5.561 billion | $16.043 billion |
| Operating income (loss) | $(2.333) billion | $1.890 billion | $(7.223) billion | $2.791 billion |
| Net income (loss) | $(2.858) billion | $1.780 billion | $(8.014) billion | $2.567 billion |
| Diluted EPS | $(3.69) | $2.58 | $(11.03) | $3.71 |
| Adjusted EBITDA | $(844) million | $2.458 billion | $(1.702) billion | $4.418 billion |
| Cash flow from operations | Not separately reported for the quarter | Not separately reported for the quarter | $(4.649) billion | $4.414 billion |
- Third-quarter passenger ticket revenue was zero; onboard and other revenue was $31 million, compared with $2.056 billion in the prior-year quarter.
- Third-quarter operating costs and expenses were $1.549 billion, including $910 million of ship and other impairment charges. Depreciation and amortization was $551 million.
- Nine-month results included $2.096 billion of goodwill impairments and $1.829 billion of ship and other impairments. The company also recorded a $224 million loss on repurchase of convertible notes.
- Cash and cash equivalents were $8.176 billion at August 31, 2020; cash, cash equivalents and restricted cash totaled $8.191 billion.
- Total debt, including current and long-term debt, was approximately $24.9 billion at August 31, 2020, compared with approximately $11.5 billion at November 30, 2019. Debt fair value was $24.080 billion, excluding certain effects noted in the filing.
- Working capital deficit was $916 million at August 31, 2020, versus $7.1 billion at November 30, 2019. Customer deposits were $2.4 billion, including $2.1 billion classified as current; approximately 55% of affected guests had requested cash refunds as of September 20, 2020.
- Third-quarter average cash burn was $770 million per month. Management expected fourth-quarter 2020 average cash burn of approximately $530 million and estimated fourth-quarter non-newbuild capital expenditures of approximately $130 million.
Material Changes Versus the Prior Comparable Period
- Revenue declined 100% in the quarter and 65% for the nine-month period, reflecting the operating pause. Nine-month passenger ticket revenue fell 66%, while onboard and other revenue fell 63%.
- Operating results shifted from profit to substantial loss. Nine-month operating income declined by $10.015 billion, and net income declined by $10.581 billion.
- Fuel expense fell 70% in the quarter and 40% year to date, while payroll and related expense fell 55% in the quarter. These reductions were insufficient to offset the loss of revenue and ongoing fixed costs.
- Cash used in operating activities was $4.649 billion, compared with $4.414 billion of cash provided in the prior-year period. Financing activities provided $13.699 billion, primarily from new debt and equity financing.
- The company raised approximately $12.5 billion through financing transactions from March 2020 through October 2, 2020, including secured debt, convertible notes, common-stock offerings and borrowings under its revolving facility.
- The company sold seven North America and Australia segment ships and three Europe and Asia segment ships during 2020, and expected to dispose of eight additional ships. Management expected 18 ships to be removed in total, representing approximately 12% of pre-pause capacity.
- Dividends and share repurchases were suspended, and the share repurchase program was terminated in June 2020.
Guidance, Outlook, Risks and Unusual Items
- Management expected a net loss on both a U.S. GAAP and adjusted basis for the quarter and year ending November 30, 2020 and stated that it could not provide an earnings forecast or predict the timing of a complete return to service.
- Limited Costa operations resumed in September 2020, with AIDA operations anticipated to begin in October. Initial voyages used reduced capacity and enhanced testing, health and hygiene protocols.
- As of September 20, 2020, cumulative bookings for second-half 2021 capacity available for sale were at the high end of the historical range, but pricing was lower by mid-single digits versus the comparable 2019 period, partly because of future cruise credits.
- Management concluded that planned actions and assumptions supported sufficient liquidity for at least the following twelve months, but emphasized that the forecast was highly uncertain because the company had never experienced a complete cessation of guest operations.
- At August 31, 2020, the company was in compliance with applicable debt covenants. Numerous covenant waivers were obtained, but certain facilities totaling approximately $1.3 billion remained subject to discussions regarding extension of waivers. Failure to obtain required waivers could result in defaults, cross-defaults and acceleration of debt.
- Credit ratings were downgraded below investment grade by Moody’s and S&P Global. The company’s commercial paper rating prevented it from issuing additional commercial paper.
- On August 15, 2020, Carnival detected a ransomware attack and unauthorized access to information technology systems. The investigation was ongoing; early indications suggested access to certain personal information of some guests, employees and crew, with no indication at the filing date of misuse.
- The company faced COVID-19-related lawsuits, governmental inquiries and investigations, including personal injury, wrongful death and economic-loss claims. Management believed it had meritorious defenses but could not estimate potential damages.
- Ship commitments totaled approximately $14.574 billion, including $1.776 billion due during the remainder of 2020 and $3.122 billion in 2021. The company also had approximately $8.4 billion of unhedged euro-denominated newbuild commitments scheduled for delivery from 2020 through 2025.
- Insurance covered certain COVID-19 liabilities and costs, subject to a $10 million deductible per occurrence, but did not cover lost revenue or earnings.
Investor Verification Items
- Verify the pace, duration and profitability of the phased return to service, including occupancy, pricing, cancellations, refunds and future cruise credit utilization.
- Reconcile liquidity against monthly cash burn, scheduled debt maturities, customer refunds, cash-collateral requirements and capital expenditures.
- Monitor covenant-waiver expirations, unresolved waiver discussions and the risk of cross-default or accelerated debt.
- Assess refinancing and equity-raising requirements given below-investment-grade ratings, high interest expense and approximately $24.9 billion of reported debt.
- Review additional impairment risk for ships, goodwill and trademarks if operating assumptions, asset-sale proceeds or return-to-service timing deteriorate.
- Track the ransomware investigation, potential data-protection costs, regulatory actions and COVID-19 litigation developments.
- Evaluate whether ship disposals, delayed newbuild deliveries and reduced capacity produce the projected operating and fuel efficiencies without impairing future revenue growth.