Carnival Corporation & plc — 2015 First-Quarter Form 10-Q Summary
Business context and reporting period
Carnival Corporation & plc operates global cruise brands, including Carnival Cruise Line, Princess, Holland America Line, Seabourn, AIDA, Costa, Cunard and P&O Cruises. This joint Form 10-Q covers the three months ended February 28, 2015, compared with the three months ended February 28, 2014. Interim results are seasonal and are not necessarily indicative of full-year performance; the third quarter typically generates the largest share of operating income.
Key financial metrics
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Revenue | $3.531 billion | $3.585 billion |
| Operating income | $266 million | $67 million |
| Operating margin | 7.5% | 1.9% |
| Income before taxes | $52 million | $(19) million |
| Net income (loss) | $49 million | $(20) million |
| Diluted EPS | $0.06 | $(0.03) |
| Net cash provided by operations | $771 million | $477 million |
| Capital expenditures | $942 million | $353 million |
| Cash and cash equivalents | $280 million | $421 million at February 28, 2014 |
Revenue declined 1.5%, primarily because a stronger U.S. dollar reduced the reported value of European and Australian operations. Passenger ticket revenue decreased 3.5% to $2.632 billion, while onboard and other revenue increased 4.6% to $889 million. Occupancy improved slightly to 103.1% from 102.9%, passengers carried increased to 2.463 million from 2.408 million, and available lower berth days increased 1.6%.
Operating costs and expenses decreased 9.9% to $2.335 billion. Fuel expense fell 39% to $318 million, reflecting lower fuel prices and lower fuel consumption per available lower berth day. Total costs and expenses represented 92% of revenue versus 98% in the prior-year quarter. Net revenue yield declined 2.3% on a reported-dollar basis but increased 2.0% on a constant-dollar basis. Net cruise costs excluding fuel per available lower berth day increased 2.4% on a constant-dollar basis.
Reported net income included a $169 million net loss on fuel derivatives, including $112 million of unrealized losses. Excluding the gain on a ship sale and unrealized fuel-derivative losses, non-GAAP net income was $159 million and non-GAAP diluted EPS was $0.20, compared with non-GAAP net loss of $3 million and approximately $0.00 per share in Q1 2014.
At February 28, 2015, current liabilities were $7.412 billion, including $3.147 billion of customer deposits and $2.195 billion of short-term borrowings and current long-term debt. Long-term debt was $6.944 billion, for reported debt of approximately $9.139 billion. Shareholders’ equity was $23.350 billion. The company reported a working-capital deficit of $6.0 billion, or $644 million after excluding customer deposits and current debt obligations.
Operating cash flow increased 62% to $771 million, supported by improved operating results and a $160 million increase in customer deposits. Investing cash outflow was $974 million, including $584 million for new shipbuilding, $307 million for ship improvements and replacements, and $51 million for information technology, buildings and other assets. Financing activities provided $151 million, including $472 million of new long-term debt, net short-term borrowings of $210 million, $336 million of long-term debt repayments and $194 million of dividends paid.
Material changes versus the prior comparable period
- Operating income rose $199 million, or 297%, to $266 million. North America operating income increased $234 million to $283 million, while EAA operating income declined $12 million to $43 million.
- Lower fuel prices reduced expense by approximately $194 million, while foreign currency translation reduced revenue by approximately $142 million and operating costs by approximately $110 million.
- Capacity increased 1.6%, including a 2.8% increase in North America capacity. Occupancy and passenger volumes improved modestly.
- Net interest expense decreased $15 million to $57 million, but net fuel-derivative losses increased $153 million to $169 million.
- The company revised prior-period accounting for marine and technical spare parts. The revision reduced Q1 2014 operating income by $5 million, net income by $5 million and diluted EPS by $0.01; management stated that the revision was not material to previously issued financial statements and did not affect operating cash flow.
- Accumulated other comprehensive loss increased to $1.339 billion from $616 million, primarily due to a $683 million foreign-currency translation loss in the quarter.
Guidance, outlook, risks and unusual items
On March 27, 2015, management provided non-GAAP diluted EPS guidance of $0.11 to $0.15 for the second quarter and $2.30 to $2.50 for full-year 2015. Guidance assumed fuel prices of $402 per metric ton for the second quarter and $406 for the full year, together with specified euro, sterling, Australian-dollar and Canadian-dollar exchange rates. The filing does not provide a comparable GAAP EPS reconciliation for this guidance because unrealized fuel-derivative gains and losses are highly uncertain.
Management reported liquidity of approximately $4.5 billion, consisting of $39 million of excess cash and cash equivalents, $2.2 billion available under revolving credit facilities net of commercial paper borrowings, and $2.3 billion of committed future ship-export financing. Management expected operating cash flow and available financing to fund shipbuilding, debt service, working capital and other commitments, and stated that debt covenants were satisfied and expected to remain in compliance.
Fuel-derivative liabilities had an estimated fair value of $340 million at February 28, 2015. Fuel derivatives covered approximately 50% of estimated fiscal 2015 consumption, 44% of fiscal 2016 consumption, 41% of fiscal 2017 consumption and 29% of fiscal 2018 consumption. A 10% hypothetical currency movement was estimated to affect 2015 guidance by approximately $0.26 per share annually.
Key risks include fuel-price volatility, foreign currency movements, ship incidents, contagious disease, adverse weather, geopolitical and security events, environmental and regulatory matters, litigation, information-technology disruption, competition and overcapacity, financing and liquidity conditions, shipbuilding execution, insurance availability and counterparty performance. Litigation and regulatory investigations related to the January 2012 ship incident and alleged pollution-law violations involving Caribbean Princess remained unresolved; management did not expect a significant impact based on available insurance and current assessments.
On March 26, 2015, Carnival signed conditional memorandums of agreement for nine new ships to be delivered from 2019 through 2022, subject in part to satisfactory financing. The company also disclosed approximately $1.6 billion of unhedged euro-denominated newbuild commitments, substantially related to ships scheduled for delivery in 2018.
Most important facts for investors to verify
- Whether reported earnings improvement is sustained after excluding lower fuel prices, currency effects, litigation settlement gains and unrealized fuel-derivative losses.
- The effect of continued U.S.-dollar strength on EAA revenue, earnings, equity and debt metrics.
- Liquidity, debt maturities, refinancing requirements and compliance with financial covenants, particularly given the $6.0 billion working-capital deficit.
- Execution, financing and total cost of the announced nine-ship program and existing newbuild commitments.
- Future realized and unrealized fuel-derivative gains or losses and the degree of protection provided by the company’s fuel hedges.
- Developments in the Caribbean Princess investigations, January 2012 ship-incident claims and other litigation or regulatory matters.
- Whether constant-dollar revenue yields and cost trends support management’s full-year 2015 non-GAAP EPS guidance.