Carnival Corporation & plc — 2015 Third-Quarter Form 10-Q Summary
Business context and reporting period
Joint quarterly report for Carnival Corporation and Carnival plc, covering the three and nine months ended August 31, 2015. The companies operate global cruise brands across North America and Europe, Australia and Asia, plus cruise-support and tour operations. Results are seasonal, with the third quarter typically producing the highest demand, occupancy and operating income.
The filing revises certain 2014 comparative periods to correct the accounting and classification of marine and technical spare parts. Management concluded the revision was not material to previously issued financial statements and said it had no effect on operating cash flow.
Financial performance and key metrics
| Metric | Three months ended Aug. 31, 2015 | Three months ended Aug. 31, 2014 | Nine months ended Aug. 31, 2015 | Nine months ended Aug. 31, 2014 |
|---|---|---|---|---|
| Revenue | $4,883 million | $4,947 million | $12,003 million | $12,165 million |
| Operating income | $1,510 million | $1,292 million | $2,064 million | $1,506 million |
| Operating margin | 30.9% | 26.1% | 17.2% | 12.4% |
| Net income | $1,216 million | $1,241 million | $1,487 million | $1,319 million |
| Diluted EPS | $1.56 | $1.60 | $1.91 | $1.70 |
| Net cash from operating activities | Not provided for the quarter | Not provided for the quarter | $3,567 million | $2,793 million |
- Third-quarter revenue declined 1.3%, while operating income increased 16.9%. Net income declined 2.0%, primarily reflecting a $197 million net loss on fuel derivatives and $34 million of income tax expense.
- Nine-month revenue declined 1.3%, but operating income increased 37.1% and net income increased 12.7%. Diluted EPS increased 12.4%.
- Fuel expense declined 33% in the quarter to $345 million and 37% for the nine months to $996 million. Fuel cost per metric ton fell to $439 from $650 in the quarter and to $418 from $654 for the nine months.
- Occupancy improved to 110.9% from 109.1% in the quarter and to 105.6% from 104.8% for the nine months. ALBD capacity increased 0.6% in the quarter and 1.5% for the nine months.
- Constant-dollar net revenue yield increased 4.3% in the quarter and 3.5% for the nine months, despite reported declines of 1.6% and 2.2%, respectively, caused principally by foreign-currency translation.
- Net cruise costs excluding fuel per ALBD decreased 4.7% in the quarter but increased 2.3% for the nine months on a reported basis. On a constant-dollar basis, the nine-month measure increased 3.2%, primarily because of higher dry-dock expense.
- At August 31, 2015, cash and cash equivalents were $539 million. Current liabilities were $6.7 billion, including $3.3 billion of customer deposits and $1.3 billion of current debt obligations. Total debt carrying value was approximately $7.9 billion, comprising $1.3 billion of current debt and $6.6 billion of long-term debt.
- Net cash used in investing activities was $1.8 billion, including $1.7 billion of property and equipment additions. Net cash used in financing activities was $1.5 billion, including debt repayments, $584 million of dividends and $166 million of treasury-stock purchases.
Material changes versus the prior comparable period
- Reported revenue was pressured by a stronger U.S. dollar, which reduced third-quarter revenue by approximately $290 million and nine-month revenue by approximately $720 million across ticket and onboard revenue categories.
- North America brands were the primary operating improvement driver: third-quarter operating income rose 31% to $951 million, while nine-month operating income rose 72% to $1.4 billion. EAA operating income declined slightly in the quarter and 3.5% for the nine months.
- Lower fuel prices and favorable currency translation reduced operating costs, while higher occupancy and modest capacity growth supported revenue. Dry-dock expense increased by $122 million for the nine-month period.
- Net interest expense declined 23% in the quarter and 22% for the nine months, primarily due to lower average borrowings.
- Fuel derivative results changed materially from a $15 million gain in the 2014 quarter and a $10 million gain in the 2014 nine-month period to losses of $197 million and $378 million, respectively, in 2015. The August 31, 2015 fair value of fuel derivatives was a $446 million liability.
- The quarterly dividend was increased 20%, from $0.25 to $0.30 per share. The company also continued its stock-swap activity and repurchase program.
Guidance, outlook, commentary and risks
- Management’s September 22, 2015 guidance called for non-GAAP diluted EPS of $0.36–$0.40 for the fourth quarter and $2.56–$2.60 for full-year 2015. Guidance assumed fourth-quarter fuel cost of $366 per metric ton and full-year fuel cost of $405, with specified currency assumptions.
- Bookings for the first half of 2016 were nearly 20% above the prior year against capacity growth of less than 3%, although at lower constant-dollar prices. Management expected 2016 constant-currency net revenue yield improvement, slightly higher net cruise costs excluding fuel per ALBD, 1%–2% lower fuel consumption per ALBD and approximately $1.8 billion of depreciation expense.
- Management reported liquidity of $8.2 billion as adjusted for five export-credit facilities entered into in September 2015: $275 million of available cash, $2.8 billion available under revolving facilities and $5.1 billion of committed future financing.
- The company expects continued working-capital deficits because customer deposits are recorded as current liabilities. Management believes operating cash flow, committed financing and revolving facilities will fund capital projects, debt service and other obligations.
- Capital commitments include new ships, including five ships under a strategic memorandum with Fincantieri for delivery from 2019 through 2022, subject to conditions including satisfactory financing. AIDAprima delivery was delayed into 2016, with expected liquidated damages from the shipbuilder.
- Principal risks include fuel prices, foreign exchange, health and safety incidents, severe weather, geopolitical events, environmental and regulatory compliance, litigation, shipbuilding and repair execution, information-security events, competition and overcapacity, vendor and travel-agent viability, financing access and counterparty performance.
- Litigation and investigations remain related to the January 2012 ship incident and alleged pollution-law breaches involving Caribbean Princess. Management cannot determine the ultimate outcomes but does not expect a significant operating impact, citing insurance coverage and current assessments.
- The filing states that disclosure controls were effective and that there were no material changes in internal control over financial reporting during the quarter.
Most important facts for an investor to verify
- Reconcile GAAP EPS of $1.56 for the quarter and $1.91 year to date with non-GAAP EPS of $1.75 and $2.20, including fuel-derivative and restructuring adjustments.
- Assess the sustainability of reported earnings improvement after separating lower fuel prices, foreign-currency translation and derivative valuation effects from underlying pricing, occupancy and cost performance.
- Review the $7.9 billion debt balance, debt maturities, covenant compliance, floating-rate exposure and availability of committed financing.
- Evaluate the $446 million fuel-derivative liability, collateral requirements and the extent to which fuel consumption is hedged through 2018.
- Monitor EAA brand performance, foreign-exchange sensitivity and the approximately $1.5 billion of unhedged euro-denominated newbuild commitments.
- Review future shipbuilding commitments, delayed deliveries, capital spending and the company’s ability to maintain dividends and repurchases while funding fleet growth.
- Follow the Caribbean Princess investigations, January 2012 incident claims, environmental compliance matters and the assumptions supporting goodwill and trademark valuations.