Carnival Corporation & plc — Q1 2014 Form 10-Q Summary
Business context and reporting period
Carnival Corporation & plc operates global cruise brands across North America and Europe, Australia and Asia, supported by cruise-related facilities and tour operations. This joint Form 10-Q covers the three months ended February 28, 2014, compared with the three months ended February 28, 2013. Results are seasonal, with the largest share of operating income generally earned during the Northern Hemisphere summer. All amounts are in millions unless otherwise stated.
Key financial metrics
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Revenue | $3,585 | $3,593 | Down $8 |
| Operating income | $72 | $145 | Down $73, or 50% |
| Net income | $(15) | $37 | Decrease of $52 |
| Diluted EPS | $(0.02) | $0.05 | Down $0.07 |
| Net cash from operations | $477 | $399 | Up $78, or 20% |
| Capital expenditures | $353 | $241 | Up $112 |
| Cash and cash equivalents | $421 | $476 at February 28, 2013 | Down $55 year over year |
| Total debt, including short-term borrowings and current debt | $9,610 | $9,560 at November 30, 2013 | Up $50 from year-end |
| Liquidity | $6.6 billion | Not provided | Includes cash, undrawn facilities and committed future financings |
Revenue was broadly flat. Passenger ticket revenue declined $13 to $2,727, while onboard and other revenue increased $6 to $850. Operating costs and expenses decreased $11 to $3,513, but selling and administrative expense increased $61, primarily from higher advertising, and depreciation and amortization increased $15. Total costs and expenses rose to 98% of revenue from 96%.
Net interest expense declined to $72 from $83, and net losses on fuel derivatives declined to $16 from $28. The company reported non-GAAP net income of $2, or approximately $0.00 per diluted share, excluding $17 of unrealized fuel-derivative losses; Q1 2013 non-GAAP net income was $67, or $0.08 per share.
Operating and margin indicators
- Available lower berth days increased 1.7% to 18.3 million.
- Occupancy declined to 102.9% from 104.0%.
- Passengers carried increased to 2.408 million from 2.305 million.
- Net revenue yield declined 1.6% to $155.48 per ALBD; on a constant-dollar basis, it declined 2.1%.
- Net cruise costs per ALBD increased 1.0% to $128.98; excluding fuel, costs increased 3.9% to $100.38.
- Fuel consumption per ALBD improved to 0.044 metric tons from 0.046, and fuel cost per metric ton declined to $654 from $677.
- North America cruise operating income declined to $54 from $105; EAA cruise operating income declined to $55 from $72.
Cash flow, liquidity and debt
Operating cash flow of $477 exceeded capital expenditures of $353, producing positive operating cash flow after capital spending before financing activities. Capital expenditures included $93 for new shipbuilding, $187 for ship improvements and replacements, and $73 for information technology, buildings and other assets.
Financing cash outflows included $312 of long-term debt repayments and $194 of dividends. These were partly offset by $344 of net short-term borrowings. The company declared dividends of $0.25 per share, unchanged from Q1 2013.
At February 28, 2014, current liabilities exceeded current assets by approximately $5.0 billion. This included $3.1 billion of customer deposits and $1.6 billion of current debt obligations. Excluding those items, management reported adjusted working capital deficit of $345. Management stated that operating cash flow, revolving facilities and committed financing should be sufficient for expected capital projects, debt service and other obligations, while noting that refinancing access and costs could be affected by credit-market conditions or a ratings downgrade.
At February 28, 2014, 62% of debt was fixed-rate and 38% floating-rate. Debt was 66% U.S.-dollar denominated and 34% euro denominated, including the effect of swaps. The company stated that it was in compliance with debt covenants.
Material changes versus the prior comparable period
- Operating income fell 50% despite essentially flat revenue, primarily because of lower ticket pricing and occupancy, higher advertising expense, and higher depreciation.
- Passenger ticket pricing declined $71 million and the occupancy decrease reduced ticket revenue by approximately $29 million; these effects were partly offset by capacity growth, currency translation and higher air transportation revenue.
- Net cruise revenue remained approximately $2.8 billion, but constant-dollar net revenue yield declined 2.1%.
- Net cruise costs excluding fuel increased $97, or 5.6%, driven by higher costs per ALBD, capacity growth and currency effects.
- Fuel expense decreased $36, or 6.4%, due to lower consumption per ALBD and lower fuel prices.
- Operating cash flow improved 20%, although investing cash outflows increased because of higher capital spending and the prior-year period included $70 of ship-sale proceeds.
- Foreign currency translation generated $116 of other comprehensive income versus a $208 loss in Q1 2013, resulting in total comprehensive income of $97 versus a loss of $155.
Guidance, outlook, commentary and risks
On March 25, 2014, management provided non-GAAP diluted EPS guidance of $(0.02) to $0.02 for the second quarter and $1.50 to $1.70 for full-year 2014. Guidance assumed fuel prices of $649 per metric ton for the second quarter and $653 for the full year, together with specified euro, Australian dollar and sterling exchange rates. Guidance excludes future unrealized fuel-derivative gains and losses.
Expected year-over-year capacity growth was 4.9% in the second quarter, 2.2% in the third quarter and 2.6% in the fourth quarter. Annual capacity growth was expected to be 2.8% in 2014, 4.0% in 2015 and 3.9% in 2016, primarily from new ships, partly offset by fleet departures.
Key risks include fuel-price volatility, foreign exchange movements, economic conditions, safety or health incidents, adverse weather, geopolitical events, negative publicity, litigation and regulatory actions, shipbuilding and maintenance execution, aging-fleet costs, port availability, vendor and travel-agent viability, cybersecurity and information-technology disruptions, competition and overcapacity, insurance availability, financing access, and the continued strength of the company’s brands.
Litigation and regulatory matters related to the January 2012 Costa Concordia incident remain unresolved. Management stated that insurance coverage is expected to limit the financial impact, but the ultimate outcome cannot be determined. The company also reported estimated contingent obligations of $389 related to two lease-out and lease-back transactions; a potential termination payment was estimated at $30 if Carnival defaulted under specified circumstances.
In March 2014, Carnival sold Costa Voyager and expects to record a $37 gain in the second quarter. The ship had previously incurred a $73 impairment charge in July 2013.
Important facts for investors to verify
- Whether ticket pricing, occupancy and net revenue yields recover as capacity expands.
- The reconciliation and comparability of non-GAAP EPS guidance, including the treatment of unrealized fuel-derivative results.
- Actual fuel prices, fuel-consumption efficiency and the effectiveness of fuel hedges, which cover only a portion of expected consumption.
- The timing and funding of the $3.8 billion of committed future financings and the company’s ability to refinance current debt.
- Execution of the shipbuilding program and the effect of planned ship deliveries and fleet departures on capacity and margins.
- Developments in Costa Concordia-related litigation, investigations, insurance recoveries and other contingencies.
- Whether the reported $6.6 billion liquidity measure, debt covenant compliance and investment-grade ratings remain intact.
- The impact of foreign exchange movements on reported EAA revenue, expenses, debt and comprehensive income.