Carnival Corporation & plc — Q2 2015 Form 10-Q Summary
Business context and reporting period
Joint quarterly filing for Carnival Corporation and Carnival plc, covering the three and six months ended May 31, 2015. The unaudited results reflect a global cruise business with North America and Europe, Australia & Asia (EAA) cruise segments, Cruise Support, and Tour and Other operations. Results are seasonal, with the third quarter historically generating the largest share of operating income.
Financial performance and key metrics
| Metric | Three months ended May 31 | Six months ended May 31 |
|---|---|---|
| Revenue | $3.59 billion, versus $3.63 billion | $7.12 billion, versus $7.22 billion |
| Operating income | $289 million, versus $147 million | $554 million, versus $214 million |
| Operating margin | 8.0%, versus 4.0% | 7.8%, versus 3.0% |
| Net income | $222 million, versus $98 million | $271 million, versus $78 million |
| Diluted EPS | $0.29, versus $0.13 | $0.35, versus $0.10 |
| Net margin | 6.2%, versus 2.7% | 3.8%, versus 1.1% |
| Dividends declared per share | $0.25, unchanged | $0.50, unchanged |
- Six-month operating cash flow was $2.286 billion, up from $1.673 billion. Customer deposits contributed $969 million to operating cash flow.
- Capital expenditures were $1.381 billion, including $685 million for newbuilds, $585 million for ship improvements and replacements, and $110 million for information technology, buildings and other assets.
- Six-month free cash flow before financing was approximately $859 million, based on operating cash flow less capital expenditures.
- Cash and cash equivalents were $298 million at May 31, 2015, versus $331 million at November 30, 2014.
- Total debt, including short-term borrowings and current maturities, was approximately $8.269 billion. The filing reports $6.648 billion of long-term debt, $1.316 billion of current long-term debt, and $305 million of short-term borrowings.
- Reported working capital deficit was $6.2 billion, including $3.9 billion of customer deposits and $1.6 billion of current debt obligations. Adjusted for those items, management reported a non-GAAP working capital deficit of $676 million.
- Liquidity was reported at $4.9 billion, comprising $60 million of cash available for immediate liquidity needs, $2.5 billion available under revolving credit facilities net of commercial paper borrowings, and $2.4 billion of committed future ship-financing facilities.
- Occupancy was 102.8% for the quarter and 102.9% for the six months, compared with 102.2% and 102.6%, respectively. Available lower berth days increased 2.3% for the quarter and 2.0% for the six months.
Material changes versus the prior comparable period
- Quarterly revenue declined 1.2% and six-month revenue declined 1.4%, primarily because the stronger U.S. dollar reduced reported EAA revenue. Constant-dollar net revenue yields increased 4.1% for the quarter and 3.1% for the six months.
- Operating income increased 97% for the quarter and 159% for the six months. Lower fuel prices were the principal benefit, supplemented by currency-related expense reductions and the absence of the prior-year Grand Celebration impairment.
- Fuel expense declined 37% for the quarter and 38% for the six months. Fuel cost per metric ton fell to $411 and $408, respectively, from $657 and $655.
- Net cruise costs excluding fuel per available lower berth day increased 6.1% on a constant-dollar basis for the quarter and 4.3% for the six months, primarily because of higher dry-dock, repair and maintenance costs.
- North America operating income rose to $210 million for the quarter and $493 million for the six months. EAA operating income declined to $121 million and $165 million, respectively, reflecting currency effects and lower occupancy.
- Net losses on fuel derivatives were $13 million for the quarter and $181 million for the six months, versus a $11 million gain and a $6 million loss in the prior periods. The six-month loss included $78 million of unrealized losses and $103 million of realized losses.
- Other comprehensive loss was $140 million for the quarter and $863 million for the six months, largely reflecting foreign currency translation losses.
Guidance, outlook, risks and unusual items
- On June 23, 2015, management guided to non-GAAP diluted EPS of $1.56–$1.60 for the third quarter and $2.35–$2.50 for full-year 2015. Guidance assumed fuel costs of $492 per metric ton for the third quarter and $444 for the full year, together with specified foreign exchange rates.
- Guidance excludes unrealized fuel-derivative gains and losses and is not reconciled to U.S. GAAP EPS in the filing.
- Management expects annual capacity growth of approximately 2.0% in 2015, 3.7% in 2016, 3.5% in 2017 and 2.0% in 2018, primarily from contracted new ships.
- Management stated that operating cash flow, liquidity and committed financing should be sufficient for shipbuilding, capital projects, debt service and other obligations over the next several years. Debt covenants were reported to be in compliance.
- Fuel derivatives covered approximately 50% of estimated fiscal 2015 fuel consumption, 46% of fiscal 2016 consumption, 43% of fiscal 2017 consumption and 30% of fiscal 2018 consumption. Their estimated fair value was a $305 million liability at May 31, 2015.
- Unhedged euro-denominated newbuild commitments totaled approximately $1.4 billion, substantially relating to ships scheduled for delivery in 2018. Foreign currency and fuel prices remain significant earnings sensitivities.
- On March 26, 2015, Carnival signed memorandums relating to nine new ships for delivery from 2019 through 2022. On June 15, 2015, it signed a multi-billion-dollar contract for four ships scheduled for delivery in 2019–2020, subject to the stated contractual conditions.
- The company revised prior-period financial statements for marine and technical spare-parts accounting. The revision reduced six-month 2014 net income by $13 million and November 30, 2014 retained earnings by $84 million, but did not affect operating cash flow.
- Legal and regulatory matters include litigation and investigations related to the January 2012 ship incident, Caribbean Princess pollution allegations, and Alaska visible-emissions notices. Management did not expect these matters to have a significant or material adverse effect, although outcomes remain uncertain.
- Principal risks include fuel prices, foreign exchange, economic and geopolitical conditions, health and safety incidents, environmental and regulatory compliance, shipbuilding and maintenance costs, competition, cybersecurity, insurance availability, litigation, vendor and counterparty performance, and access to financing.
Most important facts for an investor to verify
- Whether lower fuel prices and improved North America performance offset persistent EAA currency, occupancy and demand pressures.
- The sustainability of constant-dollar yield growth after accounting for higher dry-dock, repair and maintenance costs.
- The effect of fuel-derivative settlements, unrealized derivative changes and the $305 million derivative liability on future earnings and cash flow.
- The adequacy and timing of the $4.9 billion liquidity figure, including availability of committed ship-financing facilities and revolving credit capacity.
- Debt maturities, refinancing requirements, covenant compliance and the impact of interest-rate and currency movements.
- Execution, financing and delivery risks associated with the existing newbuild program and the additional 2019–2022 ship commitments.
- Developments in the disclosed environmental investigations, litigation and regulatory proceedings.