Carnival Corporation & plc — Q1 2016 Form 10-Q Summary
Business Context and Reporting Period
Carnival Corporation and Carnival plc jointly reported unaudited results for the three months ended February 29, 2016, compared with February 28, 2015. The company operates global cruise brands across North America and Europe, Australia and Asia, plus cruise-support and tour operations. Results are seasonal, with the largest share of operating income typically generated during the Northern Hemisphere summer.
Key Financial Metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Revenue | $3.651 billion | $3.531 billion | +3.4% |
| Operating income | $434 million | $266 million | +63% |
| Income before taxes | $143 million | $52 million | +175% |
| Net income | $142 million | $49 million | +190% |
| Diluted EPS | $0.18 | $0.06 | + $0.12 |
| Adjusted diluted EPS | $0.39 | $0.20 | +95% |
| Net cash from operations | $798 million | $771 million | +3.5% |
- Revenue growth was driven by a 3.8% increase in available lower berth days, slightly higher occupancy and improved ticket pricing. Passenger ticket revenue rose 3.3% to $2.718 billion, while onboard and other revenue rose 3.9% to $923 million.
- Occupancy increased to 104.0% from 103.1%, and passengers carried increased to 2.559 million from 2.463 million.
- Operating costs and expenses declined 3.9% to $2.243 billion, primarily because fuel costs fell 41% to $187 million. Selling and administrative expense rose 4.1% to $551 million, and depreciation and amortization rose 5.5% to $423 million.
- Operating margin improved to approximately 11.9% from 7.5%; net margin improved to approximately 3.9% from 1.4%.
- Net cruise revenue increased 4.2% to $2.942 billion. Reported net revenue yield rose 0.3%, while constant-currency net revenue yield increased 5.7%.
- Net cruise costs excluding fuel per available lower berth day increased 1.3% on a reported basis and 1.6% on a constant-currency basis.
- Fuel derivative losses increased to $236 million from $169 million, including $145 million of unrealized losses. These losses reduced GAAP earnings but were excluded from adjusted EPS.
Liquidity, Debt and Cash Flow
- Cash and cash equivalents were $778 million at February 29, 2016, compared with $1.395 billion at November 30, 2015.
- Net cash used in investing activities was $459 million, including $330 million of property and equipment additions, $88 million of fuel-derivative settlements and $57 million of collateral postings.
- Net cash used in financing activities was $947 million, reflecting $628 million of long-term debt repayments, $555 million of new debt issuance, $232 million of dividends and $916 million of share repurchases.
- Total debt, including current and long-term debt, was approximately $9.068 billion at quarter-end, compared with $8.787 billion at November 30, 2015. Debt fair value was estimated at $9.259 billion.
- In February 2016, Carnival issued $555 million of euro-denominated notes bearing 1.625% interest and maturing in February 2021.
- Management reported liquidity of $8.4 billion, consisting of $505 million of available cash, $2.5 billion of revolving-credit availability net of commercial paper borrowings and $5.4 billion of committed future ship-financing facilities.
- Working capital was negative $4.8 billion, including $3.3 billion of customer deposits and $1.1 billion of current debt obligations. Excluding those items, adjusted working capital was negative $391 million.
- Management stated that the company was in compliance with debt covenants and expected to remain compliant for the foreseeable future.
Material Changes Versus the Prior Comparable Period
- North America brand operating income increased 19% to $337 million, while EAA brand operating income increased 265% to $157 million.
- EAA capacity increased 12.6%, primarily from a new P&O Cruises UK ship, transferred ships and fewer dry-dock days. North America capacity declined 1.4%.
- Fuel prices averaged $229 per metric ton versus $406 in the prior-year quarter, producing significant operating-cost savings, although derivative losses increased.
- Capital expenditures declined to $330 million from $942 million, largely because the prior-year period included substantial spending on P&O Cruises UK’s Britannia.
- The company repurchased 18.4 million Carnival Corporation shares for $877 million under its repurchase program and paid dividends of $232 million, compared with $194 million in the prior-year quarter.
- Total comprehensive loss was $60 million, despite net income of $142 million, primarily because of a $208 million foreign-currency translation loss.
Guidance, Outlook, Risks and Unusual Items
- On March 30, 2016, management forecast adjusted diluted EPS of $0.34 to $0.38 for the second quarter and $3.20 to $3.40 for full-year 2016. Guidance assumes fuel costs of $239 per metric ton for the second quarter and $244 for the full year, with specified euro, sterling, Australian-dollar and Canadian-dollar exchange rates.
- Expected year-over-year capacity growth was 3.5% in 2016, 2.4% in 2017, 3.1% in 2018, 5.3% in 2019 and 7.2% in 2020, based primarily on contracted new ships.
- Key risks include fuel-price and foreign-currency volatility, ship incidents, adverse weather, contagious disease, terrorism and geopolitical events, environmental and regulatory matters, cybersecurity, competition and overcapacity, port availability, vendor and travel-agent viability, shipbuilding execution, financing access and litigation.
- Fuel derivatives had an estimated fair-value liability of $652 million at February 29, 2016. The company had unhedged euro-denominated newbuild commitments of approximately $1.9 billion scheduled through 2019.
- UK and U.S. authorities were investigating alleged international pollution-law violations involving Caribbean Princess. Management did not expect a material impact, but the outcome could not be determined.
- The company entered into a future bareboat charter and sale arrangement for Pacific Pearl in March 2016; the transaction will be accounted for as an operating lease through April 2027.
- Management stated that disclosure controls were effective and that there had been no material change in internal control over financial reporting.
Important Facts for Investors to Verify
- Reconcile adjusted EPS of $0.39 with GAAP EPS of $0.18, particularly the treatment of unrealized fuel-derivative losses and other adjustments.
- Assess whether lower fuel costs, stronger occupancy and higher yields can offset capacity growth, currency headwinds and rising nonfuel costs.
- Review liquidity availability, committed ship-financing facilities, debt maturities, covenant requirements and the substantial working-capital deficit.
- Monitor the $652 million fuel-derivative liability, collateral requirements and exposure to Brent-versus-marine-fuel basis risk.
- Evaluate the effect of continued share repurchases and dividends on cash balances and leverage.
- Track foreign-currency exposure, including the $1.9 billion unhedged newbuild commitment and the impact of a hypothetical 10% currency movement on guidance.
- Follow the Caribbean Princess pollution investigation, other litigation and environmental contingencies.
- Confirm that seasonal Q1 performance is not extrapolated to the full year, given the company’s concentration of earnings in the third quarter.