Carnival Corporation & plc — 2017 Third-Quarter Form 10-Q Summary
Business Context and Reporting Period
Carnival Corporation and Carnival plc jointly reported unaudited results for the three and nine months ended August 31, 2017, with comparisons to the corresponding 2016 periods. The group operates cruise brands across North America, Europe, Australia and Asia, as well as cruise-support and tour businesses. Results are seasonal, with the third quarter typically producing the largest share of annual operating income.
Key Financial Metrics
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Revenue | $5.515 billion | $5.097 billion | $13.251 billion | $12.454 billion |
| Operating income | $1.393 billion | $1.562 billion | $2.261 billion | $2.474 billion |
| Operating margin | 25.3% | 30.6% | 17.1% | 19.9% |
| Net income | $1.329 billion | $1.424 billion | $2.060 billion | $2.171 billion |
| Net margin | 24.1% | 27.9% | 15.5% | 17.4% |
| Diluted EPS | $1.83 | $1.93 | $2.84 | $2.88 |
| Dividends declared per share | $0.40 | $0.35 | $1.15 | $1.00 |
Q3 passenger ticket revenue increased 8.8% to $4.138 billion, while onboard and other revenue increased 6.7% to $1.223 billion. Nine-month passenger ticket revenue increased 6.5% to $9.814 billion, and onboard and other revenue increased 6.2% to $3.237 billion.
Q3 available lower berth days increased 2.7% to 21.1 million, passengers carried increased 5.4% to 3.441 million, and occupancy was broadly stable at 111.3% versus 111.4%. Constant-currency net revenue yield increased 5.1% for the quarter and 4.6% for the nine-month period.
Q3 net cruise costs excluding fuel per available lower berth day increased 0.2% on a constant-currency basis. Nine-month net cruise costs excluding fuel per available lower berth day increased 1.6% on a constant-currency basis. Fuel cost per metric ton rose to $378 in Q3 from $335 and to $371 for nine months from $268.
Cash Flow, Debt and Liquidity
- Net cash provided by operating activities was $4.298 billion for the first nine months, compared with $4.110 billion in 2016.
- Net cash used in investing activities was $2.419 billion, including $2.296 billion of additions to property and equipment.
- Net cash used in financing activities was $2.004 billion, including $1.012 billion of long-term debt repayments, $797 million of dividends and $305 million of share repurchases.
- Cash and cash equivalents were $489 million at August 31, 2017, compared with $603 million at November 30, 2016.
- Reported debt consisted of $182 million of short-term borrowings, $1.265 billion of current long-term debt and $7.723 billion of long-term debt.
- Management reported $13.5 billion of liquidity, comprising $157 million of cash available after excluding cash used for current operations, $2.8 billion of revolving-credit availability net of commercial paper, and $10.6 billion of committed future ship-export financing.
- Working capital was negative $6.3 billion, primarily because customer deposits increased to $4.038 billion. Management states that advance passenger receipts are a recurring feature of the business model and are used to fund operations and other cash needs.
- The company was in compliance with its debt covenants at August 31, 2017 and expected continued compliance based on its forecasts.
Material Changes Versus the Prior Comparable Period
- Revenue increased 8.2% in Q3 and 6.4% for the first nine months, supported by pricing, higher onboard spending, capacity growth and favorable Q3 foreign-currency translation.
- Operating income declined 10.8% in Q3 and 8.6% for the first nine months, despite revenue growth, because of impairments, higher fuel prices, capacity-related expenses, port costs and other operating-cost increases.
- North America segment operating income increased 14% in Q3 and 12% for nine months. EAA segment operating income declined 63% in Q3 and 54% for nine months.
- The EAA segment recorded $304 million of ship impairment charges and $89 million of goodwill and trademark impairment charges, principally following a strategic decision to realign the Australian business and reduce P&O Cruises (Australia) capacity.
- Q3 net income declined 6.7% and nine-month net income declined 5.1%. Adjusted diluted EPS, which excludes selected non-core items and unrealized fuel-derivative gains or losses, was $2.29 in Q3 versus $1.92 and $3.19 for nine months versus $2.77.
- Share repurchases totaled $305 million during the first nine months, and $830 million remained available under the repurchase program at August 31, 2017.
Guidance, Outlook, Risks and Unusual Items
On September 26, 2017, management guided to adjusted EPS of $0.44–$0.50 for the fourth quarter and $3.64–$3.70 for full-year 2017. The guidance assumed fourth-quarter fuel prices of $397 per metric ton and specified euro, sterling and Australian-dollar exchange rates. Management did not provide a reconciliation to forecast U.S. GAAP EPS because of the difficulty of forecasting fuel prices, foreign exchange rates, unrealized derivative gains and losses, ship-sale gains or losses, restructuring and other non-core items.
Capital expenditures were expected to total approximately $3.1 billion in 2017, $4.1 billion in 2018 and $5.0 billion in 2019, with contracted capacity increases ranging from 2.2% to 7.5% annually through 2022. Management believes operating cash flow, existing liquidity and access to financing will fund expected shipbuilding, debt-service, working-capital and other commitments.
- Key risks include fuel-price volatility, foreign-currency exposure, ship incidents, adverse weather and natural disasters, contagious disease, security events, regulatory compliance, information-technology disruption, overcapacity, competition, vendor and travel-agent credit risk, shipbuilding execution and access to financing.
- The company had $7.0 billion of unhedged euro-denominated newbuild commitments at August 31, 2017, principally for deliveries from 2019 through 2022.
- Fuel derivatives covered a portion of estimated consumption through 2018; unrealized losses on outstanding fuel derivatives were $187 million at August 31, 2017.
- A NOAA investigation concerning discharges by certain Holland America Line and Princess Cruises vessels remained pending. Management did not expect a material financial impact.
- Management reported no material changes to previously disclosed risk factors, no material off-balance-sheet arrangements and effective disclosure controls.
Investor Verification Checklist
- Verify the sustainability of pricing and net revenue-yield gains after the 2017 capacity additions and seasonal Q3 benefit.
- Assess whether the Australian strategic realignment and related impairments have been fully reflected or could result in additional charges.
- Reconcile reported cash of $489 million with management’s $13.5 billion liquidity measure and review the availability and conditions of committed future financing.
- Review the timing, funding and returns associated with projected capital expenditures of $3.1 billion to $5.0 billion annually through 2022.
- Monitor fuel prices, derivative settlements, foreign-exchange movements and the $7.0 billion unhedged euro newbuild exposure.
- Compare subsequent results with the disclosed adjusted EPS guidance of $3.64–$3.70 for full-year 2017.