Carnival Corporation & plc 2013 Form 10-K Summary
Business context and reporting period
This joint Form 10-K covers Carnival Corporation, incorporated in Panama, and Carnival plc, incorporated in England and Wales. The companies operate under a dual-listed-company structure as a single economic enterprise with common management and boards. The reporting period is the fiscal year ended November 30, 2013; the filing is an annual report, not a standalone fourth-quarter filing.
Carnival was the largest cruise company, with approximately 46% global market share, 101 ships, ten brands and more than 10 million guests. Its reportable cruise segments were North America and Europe, Australia & Asia, supplemented by Cruise Support and Tour and Other operations.
Key financial and operating metrics
- Financial statements, including revenue, net income, operating income, cash flow, debt, liquidity and margins, are incorporated by reference from Exhibit 13. The provided filing text does not include clear numerical values for those consolidated financial statement metrics.
- Approximately 56% of 2013 revenue was generated from guests sourced outside the United States, compared with 46% in 2007.
- Carnival carried an estimated 10.061 million guests in 2013, compared with 9.829 million in 2012, an increase of approximately 2.4%.
- Weighted-average passenger capacity increased to approximately 205,000 lower berths in 2013 from 200,000 in 2012.
- Onboard and other activities represented 23% of 2013 revenue, excluding amounts included in cruise ticket prices.
- Fuel represented 21% of cruise operating expenses in 2013, compared with 23% in 2012 and 21% in 2011.
- Ship fuel consumption declined to 89 grams per available lower berth kilometer in 2013 from 92 in 2012. Total ship-fuel greenhouse-gas emissions declined to 10.285 million tonnes of CO2e from 10.562 million tonnes.
- The company reported a 21% cumulative reduction in unit fuel consumption since 2007.
- The filing states that Carnival’s operating cash flows historically allow it to fund capital investments internally, but the provided text does not state the 2013 operating cash flow or free cash flow amount.
- The company declared quarterly dividends of $0.25 per share throughout 2013. No repurchases were made under the principal repurchase program during the quarter ended November 30, 2013; remaining availability was $975 million as of January 22, 2014.
Material changes versus prior comparable periods
- Estimated guests carried increased approximately 2.4% from 2012 to 2013, while Carnival’s passenger capacity increased approximately 2.5% based on the disclosed lower-berth data.
- Passenger capacity shifted toward Asia/Australia, which represented 12% of capacity in 2014 planning versus 10% in 2013 and 8% in 2012. Caribbean capacity increased to 35% in 2014 planning from 33% in 2013, while Europe declined to 29% from 31%.
- Carnival more than doubled its presence in China during 2013 and launched its first season of cruises originating from Japan. It also opened sales offices throughout Asia.
- Costa returned to profitability in 2013 excluding impairment charges related to two smaller vessels, according to management. The filing does not provide the underlying profit amount in the supplied text.
- Fuel-efficiency measures continued to reduce normalized consumption and emissions, although total emissions remained 2.8% above 2008 levels because of fleet and capacity growth.
- Management realigned leadership and work processes to increase cross-brand coordination, cost containment and revenue opportunities. Arnold Donald became President and Chief Executive Officer in July 2013, replacing Micky Arison, who became Chairman.
Guidance, outlook, commentary, risks and unusual items
- Management expected passenger capacity to grow approximately 4% annually through 2016 based on current orders and announced withdrawals; the detailed industry table indicated Carnival capacity growth of approximately 3.3% compounded annually from 2012 through 2016.
- Eight ships were scheduled to enter service between May 2014 and June 2016, adding more than 24,700 lower berths. The filing states that some older, smaller or less efficient ships could be sold, chartered or retired.
- Management expected Costa profitability to improve in 2014 and anticipated continued recovery of the Carnival Cruise Lines brand following voyage disruptions and negative publicity in 2012 and 2013.
- The Costa Concordia salvage operation was expected to continue in 2014. As of January 22, 2014, 94% of crew claims and 75% of guest claims had been settled; management stated that substantially all removal costs and current and future claims would be covered by insurance.
- Carnival Cruise Lines announced an estimated $300 million vessel enhancement program. A broader corporate-wide safety and redundancy program was expected to cost as much as $700 million over several years.
- The company planned to install scrubbers on most ships between 2014 and 2016 to address stricter sulfur requirements and expected additional installations between 2017 and 2019 for anticipated global requirements. Management stated that scrubbers should limit the financial impact of these regulations.
- Major risks include discretionary consumer demand, fuel prices, ship incidents, contagious disease, severe weather, terrorism and political instability, negative publicity, litigation, environmental compliance, currency movements, shipbuilding and dry-dock execution, port availability, vendor and travel-agent concentration, information-technology disruptions, competition, overcapacity, labor relations, insurance availability and access to financing.
- The company maintained fuel derivatives, foreign-currency derivatives and other hedging arrangements, which can reduce exposure but may create earnings volatility and may not fully offset underlying price or currency movements.
- The filing disclosed legal proceedings related to the 2012 ship incident and an investigation by UK and U.S. authorities into alleged pollution-law violations involving Caribbean Princess.
- Costa entered into an Iranian general sales-agent agreement contrary to company policy. The agreement was terminated January 27, 2014 after discovery; related cruise ticket payments were approximately $215,000, net of $31,000 in retained commissions.
- Management concluded that disclosure controls and internal control over financial reporting were effective as of November 30, 2013. PricewaterhouseCoopers also audited internal control effectiveness.
Most important facts for investors to verify
- Retrieve Exhibit 13 to verify 2013 versus 2012 revenue, operating income, net income, diluted EPS, operating cash flow, capital expenditures, debt, cash, liquidity and segment results.
- Review impairment charges, ship disposals and Costa-related charges to distinguish recurring operating performance from unusual items.
- Assess booking trends, pricing, occupancy and net revenue yields following the 2012 and 2013 incidents, particularly for Carnival Cruise Lines and Costa.
- Verify total shipbuilding commitments, expected progress payments, financing arrangements and the effect of new ships on capacity and leverage.
- Evaluate fuel-price sensitivity, hedge coverage, scrubber installation costs and compliance costs for the 2015 and later sulfur-emission requirements.
- Review the status, insurance coverage and potential uninsured exposure associated with Costa Concordia claims, salvage costs, pollution investigations and other litigation.
- Confirm the sustainability of the $0.25 quarterly dividend and the practical availability of the disclosed share-repurchase authorizations against earnings, liquidity and capital requirements.