Carnival Corporation & plc — Q1 2020 Form 10-Q Summary
Business context and reporting period
The filing covers the three months ended February 29, 2020, compared with the three months ended February 28, 2019. Carnival operates global cruise brands through North America & Australia, Europe & Asia, Cruise Support, and Tour and Other segments. The quarter was materially affected by the emerging COVID-19 pandemic, including cancelled voyages, vessel disruptions, port restrictions, and a subsequent voluntary pause of global cruise operations announced March 13, 2020.
Financial performance and key metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $4.789 billion | $4.673 billion | Up 2.5% |
| Operating income (loss) | $(713) million | $386 million | Down $1.099 billion |
| Net income (loss) | $(781) million | $336 million | Down $1.117 billion |
| Diluted EPS | $(1.14) | $0.48 | Down $1.62 |
| Adjusted net income | $150 million | $338 million | Down 56% |
| Adjusted EPS | $0.22 | $0.49 | Down $0.27 |
| Net cash from operating activities | $916 million | $1.116 billion | Down 18% |
- Revenue growth reflected a 3.2% increase in available lower berth days, partially offset by cancelled voyages and disruptions attributable to COVID-19, weaker European sourcing, and unfavorable foreign currency effects.
- Operating margin declined to approximately (14.9%) from approximately 8.3%; net margin declined to approximately (16.3%) from approximately 7.2%.
- Operating costs and expenses increased 12% to $3.523 billion. Selling and administrative expenses rose 7.9% to $678 million, while depreciation and amortization increased 10% to $570 million.
- Constant-currency net revenue yield declined 1.2%, while net cruise costs excluding fuel per available lower berth day increased 3.3%.
- Occupancy was 104.3%, compared with 104.8% in the prior-year quarter. Passengers carried increased to 3.063 million from 2.937 million.
Cash flow, liquidity, debt, and balance sheet
- Cash and cash equivalents were $1.354 billion at February 29, 2020, up from $518 million at November 30, 2019. Cash, cash equivalents, and restricted cash totaled $1.368 billion.
- Investing cash outflow was $1.161 billion, including $1.326 billion of property and equipment purchases and $226 million of proceeds from ship sales.
- Financing cash inflow was $1.089 billion, including $779 million of net short-term borrowings and $823 million of long-term debt issuance. The company paid $344 million of dividends.
- At February 29, 2020, current debt included $1.004 billion of short-term borrowings and $2.196 billion of current long-term debt; long-term debt was $9.738 billion. The balance sheet also included $1.480 billion of operating lease liabilities following adoption of the lease standard.
- Working capital deficit was approximately $7.8 billion, including $4.7 billion of customer deposits. Management states that the deficit is customary for its advance-payment business model but warned that COVID-19-related refunds could materially pressure liquidity.
- Before subsequent financing, management described immediate liquidity of approximately $3.0 billion, consisting of cash and available borrowings under its revolving facility, plus committed export credit facilities for ship deliveries. The company fully drew its $3.0 billion multicurrency revolving facility on March 13, 2020.
Material changes versus the prior comparable period
- COVID-19 drove a sharp deterioration in profitability despite modest revenue growth. The company recorded a $731 million goodwill impairment charge and $330 million of ship impairment charges.
- Goodwill impairment comprised $300 million in North America & Australia and $431 million in Europe & Asia. Further impairment charges remain possible if expected operating cash flows decline.
- Adjusted net income excluded $928 million of ship sale and impairment items and other charges, resulting in $150 million of adjusted net income versus $338 million in Q1 2019.
- Net cash from operations decreased by $199 million, while capital expenditures remained substantial at $1.326 billion.
- Capacity increased, but COVID-19 caused five North America & Australia ships and six Europe & Asia ships to be out of service during February.
- The company adopted the new lease standard on December 1, 2019, recognizing approximately $1.4 billion of operating lease right-of-use assets and lease liabilities without a material income-statement impact.
Guidance, outlook, management commentary, risks, and unusual items
- Management expects a net loss on both a U.S. GAAP and adjusted basis for fiscal 2020 and stated that it cannot estimate the pandemic’s eventual financial or operational impact with reasonable certainty.
- Global fleet operations were voluntarily paused. Management estimated ongoing ship and administrative operating costs during a prolonged pause at approximately $200 million to $300 million per month and total liquidity requirements at approximately $1.0 billion per month on average.
- As of March 15, 2020, bookings for the remainder of 2020 were significantly behind the prior year at materially lower prices. First-half 2021 bookings were initially slightly ahead but subsequently weakened substantially.
- Customers may elect cash refunds or future cruise credits for cancelled voyages. Approximately 45% of guests who contacted the company during the two weeks ended March 15 accepted future cruise credits; cash refund volumes could materially reduce liquidity.
- On April 1, 2020, Carnival announced proposed financing consisting of $4.0 billion of 11.5% first-priority secured notes due 2023, $1.75 billion of 5.75% convertible notes due 2023, and a $500 million common-stock offering. The filing states that these transactions were subject to customary closing conditions at the time.
- Credit ratings were downgraded by Moody’s and S&P Global, with further downgrade reviews noted. Additional financing may increase interest expense, leverage, collateral requirements, and restrictive covenants.
- The company was in compliance with debt covenants at February 29, 2020, but warned that a prolonged operating pause could cause noncompliance with a 3.0-to-1.0 EBITDA-to-consolidated-net-interest coverage covenant applicable to facilities with approximately $8.4 billion of outstanding principal. Failure to obtain waivers could result in defaults and acceleration.
- Other risks include delayed ship deliveries, weaker demand and pricing, reputational effects from COVID-19 incidents, passenger and crew litigation, refund obligations, fuel and currency volatility, and limited insurance coverage for lost revenue or earnings.
Most important facts for investors to verify
- Whether the announced secured debt, convertible debt, and equity offerings closed on the stated terms and how proceeds affected cash, leverage, collateral, and covenants.
- The duration of the global cruise suspension, the timing and cost of restarting operations, and the pace of bookings and pricing recovery.
- Actual cash refunds versus future cruise credit elections and the resulting customer-deposit balance and liquidity burn rate.
- Compliance with debt-service coverage and other maintenance covenants after the operating pause and subsequent borrowings.
- Potential additional goodwill, ship, or trademark impairments based on revised cash-flow forecasts and vessel valuations.
- Exposure from COVID-19-related passenger, crew, environmental, and other litigation, including insurance recoveries and deductibles.