Carnival Corporation & plc — Fiscal 2012 Form 10-K
Business context and reporting period
Joint annual report for Carnival Corporation, incorporated in Panama, and Carnival plc, incorporated in England and Wales. The companies operate as a dual-listed company with a single economic enterprise, shared management and identical boards. The reporting period ended November 30, 2012; the filing was signed January 29, 2013.
Carnival operated 100 cruise ships across 10 brands, organized principally into North America and Europe, Australia & Asia cruise segments, with additional Cruise Support and Tour and Other activities. The company reported approximately 202,784 lower-berth passenger capacity as of January 22, 2013 and carried an estimated 9.829 million cruise passengers in 2012.
Financial metrics, liquidity and capital allocation
- The provided filing text incorporates selected financial data, MD&A and financial statements by reference to Exhibit 13, but does not include clear values for fiscal 2012 revenue, net income, operating income, cash flow, margins, total debt, cash, liquidity or leverage.
- Fuel represented 23% of cruise operating expenses in 2012, compared with 21% in 2011 and 18% in 2010.
- Passenger-sourced revenue from outside the United States represented 54% of 2012 revenue, compared with 56% in 2011 and 54% in 2010.
- The company stated that operating cash flow historically funded capital investment while leaving free cash flow available for dividends and share repurchases; the filing text does not provide the related cash amounts.
- Dividends declared in 2012 totaled $1.50 per share, including a regular quarterly dividend of $0.25 and a special dividend of $0.50 for the quarter ended November 30, 2012.
- During 2012, Carnival repurchased 2.6 million Carnival Corporation shares for $90 million. At January 22, 2013, the repurchase authorization had been restored to $1 billion.
- The company had nine ships under contract for delivery between March 2013 and March 2016, representing approximately 29,834 additional lower berths. Financing commitments for two newbuilds were expected to be finalized in 2013.
Material changes versus prior comparable periods
- Estimated Carnival passenger volume increased 2.8% from 2011 to 2012, while global cruise passenger volume also increased 2.8%.
- Carnival’s passenger capacity increased from 195,000 weighted-average lower berths in 2011 to 200,000 in 2012.
- Passenger capacity deployment shifted toward Europe and Asia/Australia: Europe increased from 29% to 31% of capacity and Asia/Australia from 8% to 10%, while the Caribbean declined from 35% to 33%.
- Fuel expense pressure increased, with fuel rising to 23% of cruise operating expenses from 21% in 2011.
- The Costa Concordia incident in January 2012 led to extensive safety reviews, operational changes, brand-rebuilding initiatives and litigation. As of January 22, 2013, settlements covered 93% of crew and 62% of guests; the company stated that substantially all ship-removal costs and claim costs were expected to be covered by insurance.
Guidance, outlook, risks and unusual items
- Management expected capacity growth of approximately 4% compounded annually through 2016, with an intended average of two to three new ships entering service annually and increased deployment in Asia.
- The company expected to recover over the next few years from the Costa Concordia incident and continued to invest in Costa’s safety procedures, marketing and reputation.
- Beginning in January 2015, stricter sulfur limits in designated emission-control areas were expected to increase annual fuel costs by approximately $255 million to $275 million based on 2013 itineraries, fuel consumption and then-current prices.
- Compliance with the Maritime Labour Convention was expected to increase annual ship operating costs by an estimated $15 million to $25 million.
- Principal risks included discretionary consumer demand, fuel prices, safety incidents, contagious disease, adverse weather, terrorism and political instability, negative publicity, litigation, environmental regulation, foreign-currency movements, shipbuilding and repair costs, vendor and travel-agent stability, information technology disruption, competition, overcapacity and financing availability.
- Legal proceedings related to the Costa Concordia incident included multiple passenger, crew and third-party actions in the United States and potential proceedings under Italian Law 231. Management stated that it believed it had meritorious defenses and that potential Law 231 liability was not expected to materially affect financial results.
- Management concluded that disclosure controls and internal control over financial reporting were effective as of November 30, 2012. PricewaterhouseCoopers LLP audited both the financial statements and internal control effectiveness.
Most important facts to verify
- Retrieve Exhibit 13 and verify fiscal 2012 revenue, operating income, net income, EPS, operating cash flow, capital expenditures, cash, debt, liquidity and segment results.
- Assess the financial statement impact, insurance recoveries, reserves and remaining exposure from Costa Concordia claims and removal costs.
- Review the maturity schedule, interest rates, covenants and committed financing for existing debt and the nine-ship construction program.
- Test management’s capacity-growth assumptions against booking trends, occupancy, pricing and net revenue yields.
- Quantify the expected effects of sulfur regulations, fuel prices, currency movements and labor-cost requirements on future margins and cash flow.
- Evaluate dividend sustainability and remaining share-repurchase capacity against free cash flow and newbuild obligations.