Carnival Corporation & plc — Form 10-Q Summary
Business context and reporting period
Carnival Corporation & plc is a global cruise operator with North America and Europe, Australia and Asia (EAA) cruise brands, cruise support operations, and tour and other activities. This joint Form 10-Q covers the three months ended February 28, 2013, compared with February 29, 2012. Results are seasonal and the first quarter is not necessarily indicative of full-year performance.
Key financial metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Revenue | $3.593 billion | $3.582 billion | +$11 million |
| Operating income (loss) | $145 million | $(82) million | +$227 million |
| Income (loss) before taxes | $39 million | $(141) million | +$180 million |
| Net income (loss) | $37 million | $(139) million | +$176 million |
| Diluted EPS | $0.05 | $(0.18) | +$0.23 |
| Non-GAAP diluted EPS | $0.08 | $0.02 | +$0.06 |
| Net cash from operations | $399 million | $322 million | +$77 million |
| Capital expenditures | $241 million | $267 million | $(26) million |
- Passenger ticket revenue declined $24 million to $2.740 billion, while onboard and other revenue increased $35 million to $844 million.
- Operating costs and expenses declined $95 million to $2.599 billion. Selling and administrative expense increased $39 million to $460 million, and depreciation and amortization increased $13 million to $389 million.
- Operating margin was approximately 4.0%, compared with negative 2.3% in the prior-year quarter. Total costs and expenses were 96% of revenue versus 102% in Q1 2012; excluding the prior-year Ibero impairment, the comparable ratio was 96% versus 98%.
- Net unrealized losses on fuel derivatives were $28 million, compared with a $21 million unrealized gain in Q1 2012. There were no realized fuel-derivative gains or losses in either period.
- Passengers carried increased to 2.305 million from 2.262 million. Capacity, measured in ALBDs, increased 3.9%, while occupancy declined to 104.0% from 105.3%.
- Net revenue yield declined 1.9% on a reported basis and 2.3% on a constant-dollar basis. Net cruise costs excluding fuel per ALBD declined 2.7% reported and 3.1% constant-dollar.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $476 million at February 28, 2013, compared with $465 million at November 30, 2012.
- Total debt, including short-term borrowings and current and long-term debt, was approximately $9.4 billion at February 28, 2013, compared with approximately $8.9 billion at November 30, 2012. Debt fair value was approximately $9.9 billion.
- Current liabilities exceeded current assets by approximately $5.0 billion. This included $3.0 billion of customer deposits and $1.8 billion of current debt obligations; management reported adjusted working capital deficit of approximately $210 million after excluding those items.
- Reported liquidity was $5.9 billion, consisting of $202 million of cash available for liquidity purposes, $2.4 billion available under revolving credit facilities net of commercial paper borrowings, and $3.3 billion of committed ship financings.
- In February 2013, Carnival issued $500 million of 1.2% notes due 2016 and used the proceeds to repay $500 million of floating-rate export credit facilities. It also issued $500 million of 1.9% notes in December 2012 due 2017.
- The company stated that it was in compliance with debt covenants and expected to remain compliant for the foreseeable future.
Material changes versus the prior comparable period
- The return to operating and net profitability primarily reflected the absence of the $173 million Ibero goodwill and trademark impairment charge recorded in Q1 2012, the nonrecurrence of certain Costa Allegra and Costa Concordia-related expenses, lower fuel and dry-dock costs, and lower commissions and transportation costs.
- Operating income from EAA brands improved to $72 million from a $152 million loss, while North America brand operating income declined to $105 million from $114 million.
- Revenue growth was limited by lower ticket pricing, lower occupancy, and weaker EAA demand following the Costa Concordia incident and amid challenging European economic conditions. Capacity growth and higher onboard spending partially offset these pressures.
- Fuel expense declined $33 million to $559 million, driven by lower consumption per ALBD and lower fuel prices, partly offset by increased capacity.
- Operating cash flow increased 24% to $399 million. Financing cash use increased to $203 million, primarily due to $582 million of dividends, debt repayments, and $78 million of share repurchases, partly offset by $1.0 billion of long-term debt issuance.
Guidance, outlook, commentary and risks
- Management’s March 15, 2013 guidance called for non-GAAP diluted EPS of $0.04–$0.08 for the second quarter and $1.80–$2.10 for full-year 2013. Guidance assumed fuel prices of $688 per metric ton for the second quarter and $691 for the full year, together with specified foreign exchange rates.
- Management included a preliminary $0.05-per-share estimate of 2013 operating expenses for fleetwide safety and redundancy enhancements following recent voyage disruptions. The company had not fully quantified the timing or total capital and operating costs of the review.
- Management expected 2013 capacity growth of 3.1% overall, with second-, third- and fourth-quarter year-over-year increases of 2.4%, 3.8% and 3.3%, respectively.
- Key risks include fuel prices, adverse incidents, health and safety events, weather and geopolitical developments, negative publicity, litigation and regulatory actions, European economic conditions, foreign currency movements, shipbuilding and repair costs, information technology disruptions, competition, insurance availability, counterparty performance, and access to debt financing.
- Litigation and investigations related to the January 2012 Costa Concordia incident remained ongoing. Management stated that insurance coverage was expected to limit the impact of third-party claims and that the ultimate outcome could not yet be determined.
- At February 28, 2013, the company had $407 million of estimated contingent obligations related to two lease-out/lease-back transactions, although the obligations were considered extinguished for balance-sheet purposes. A potential termination payment of $33 million could arise under specified circumstances.
Most important facts for investors to verify
- Whether lower ticket pricing and occupancy, particularly in the EAA segment, improve as the Costa Concordia effects and European economic pressures moderate.
- The ultimate cost and timing of fleet safety, redundancy, fire-prevention and emergency-power enhancements.
- The company’s ability to refinance approximately $1.8 billion of current debt while continuing substantial dividends and share repurchases.
- Progress and financial exposure associated with Costa Concordia litigation, regulatory proceedings and insurance recoveries.
- Actual fuel prices, foreign exchange rates, derivative results, and the extent to which fuel hedges mitigate future cash-flow volatility.
- Reconciliation and comparability of management’s non-GAAP EPS guidance with U.S. GAAP results, particularly because guidance excludes unrealized fuel-derivative gains and losses.