CCL

Carnival Corp Ltd. 10-Q Summary: Period Ended August 31, 2003

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended August 31, 2003, and the nine months ended on that date. The filing represents the first consolidated report following the completion of the Dual Listed Company (DLC) transaction on April 17, 2003, which combined Carnival Corporation and Carnival plc (formerly P&O Princess Cruises plc). The company operates as a global cruise operator with 13 brands and 70 ships, serving markets in North America, Europe, the UK, Australia, and Germany.

Key Financial Metrics

Liquidity: As of August 31, 2003, total liquidity was approximately $3.69 billion, comprising $1.05 billion in cash and short-term investments, $1.90 billion in available revolving credit, and $736 million in committed ship financing.

Material Changes vs. Prior Period

• Revenue Growth: Nine-month revenues increased 46.6% to $4.90 billion, driven primarily by the consolidation of Carnival plc (approx. $1.10 billion of the increase) and a 17.0% increase in Carnival Corporation's standalone capacity.
• Profitability: Net income rose 20% to $989 million for the nine-month period. Operating margins improved to 22.6% for the nine months ended August 31, 2003, compared to 25.6% in the prior year, though the prior year figure included a $20 million impairment charge not present in the current period's operating income calculation (though noted in expenses).
• Debt Levels: Total debt more than doubled to $6.94 billion due to the acquisition of Carnival plc. Interest expense increased significantly, though partially offset by lower average borrowing rates.
• Yields: Pro forma net revenue yields declined 2.9% compared to the prior year, attributed to lower cruise ticket prices and consumer concerns regarding travel safety and the global economy.

Guidance, Outlook, and Risks

• Outlook: Management estimates fourth-quarter 2003 earnings per share to be in the range of $0.24 to $0.28. Capacity is expected to increase 19.2% in Q4 2003 on a pro forma basis.
• Tax Impact: New IRS regulations effective for fiscal 2004 are expected to reduce earnings per share by approximately $0.02 to $0.03 due to the taxation of certain international ship operation earnings.
• Capital Expenditures: The company has $6.42 billion in non-cancelable shipbuilding commitments, with $2.97 billion due in the next 12 months.
• Risks: Key risks include the uncertainty of the DLC tax structure, foreign currency exchange fluctuations (sterling and euro), fuel price volatility, and potential impacts from geopolitical events or terrorist attacks on travel demand.
• Contingencies: Pending litigation includes a wastewater discharge incident involving the Holland America ship Ryndam in Alaska and arbitration regarding a ship conversion contract with Cammell Laird. Management does not expect these to have a material financial impact at this time.

Investor Verification Checklist

• DLC Integration: Verify the realization of projected cost synergies and the stability of the Dual Listed Company governance structure.
• Debt Servicing: Assess the ability to service the increased debt load ($6.94 billion) amidst potential interest rate fluctuations and fuel cost increases.
• Shipbuilding Commitments: Confirm funding sources for the $6.42 billion in shipbuilding commitments, particularly the $2.97 billion due in fiscal 2004.
• Regulatory Tax Impact: Monitor the final impact of the new Section 883 IRS regulations on 2004 earnings.
• Yield Trends: Track net revenue yields to ensure pricing power is maintained despite increased capacity and competitive pressures.