Carnival Corporation & plc — Q3 2018 Form 10-Q Summary
Business context and reporting period
Joint quarterly filing for Carnival Corporation and Carnival plc, covering the three and nine months ended August 31, 2018. Carnival operates cruise brands primarily through its North America & Australia (NAA) and Europe & Asia (EA) segments, supplemented by Cruise Support and Tour and Other operations. Results are seasonal, with the third quarter generally producing the highest revenue and operating income.
Key financial metrics
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Revenue | $5.836 billion | $5.515 billion | $14.425 billion | $13.251 billion |
| Operating income | $1.794 billion | $1.393 billion | $2.772 billion | $2.261 billion |
| Net income | $1.707 billion | $1.329 billion | $2.659 billion | $2.060 billion |
| Diluted EPS | $2.41 | $1.83 | $3.72 | $2.84 |
| Dividend declared per share | $0.50 | $0.40 | $1.45 | $1.15 |
| Operating margin | 30.7% | 25.2% | 19.2% | 17.1% |
| Net margin | 29.3% | 24.1% | 18.4% | 15.5% |
Revenue increased 5.8% in the quarter and 8.9% year to date. Cruise passenger ticket revenue rose 5.2% in Q3 and 9.0% year to date, while onboard and other cruise revenue rose 7.6% and 8.4%, respectively. Occupancy increased to 112.6% from 111.3% in Q3 and to 107.8% from 106.7% year to date. Available lower berth days increased 1.7% in Q3 and 1.8% year to date.
Net revenue yield increased 3.3% in Q3 and 6.3% year to date on a reported basis; constant-currency growth was 2.9% and 3.7%, respectively. Net cruise costs excluding fuel per available lower berth day increased 2.8% in Q3 and 5.1% year to date on a reported basis, or 2.7% and 2.4% on a constant-currency basis.
Fuel expense increased 41% in Q3 to $434 million and 28% year to date to $1.166 billion, primarily because of higher fuel prices. Fuel cost per metric ton increased to $531 in Q3 from $378 and to $474 year to date from $371.
Cash flow, debt, liquidity and capital allocation
- Operating cash flow was $4.436 billion for the first nine months, compared with $4.298 billion in the prior-year period.
- Investing cash outflow was $2.606 billion, including $2.784 billion of property and equipment purchases and $282 million of ship-sale proceeds.
- Financing cash outflow was $1.707 billion, including $1.003 billion of dividends, $1.205 billion of treasury-stock purchases, $1.271 billion of long-term debt repayments and $1.618 billion of long-term debt issuance.
- Cash and cash equivalents were $526 million at August 31, 2018, compared with $395 million at November 30, 2017.
- Reported short-term borrowings were $632 million, current long-term debt was $688 million and long-term debt was $8.297 billion, for total reported debt of approximately $9.617 billion.
- Working capital was negative $6.3 billion, primarily because of $4.418 billion of customer deposits collected before sailings. Management expects the business model to continue producing working-capital deficits.
- Management reported liquidity of $14.5 billion, comprising $245 million of available cash after excluding $281 million used for current operations, $2.6 billion of revolving-credit availability net of commercial paper, and $11.7 billion of committed future ship-financing facilities.
- Management stated that it expects operating cash flow and liquidity to fund capital projects, shipbuilding commitments, debt service and working capital needs. The company was in compliance with its debt covenants at August 31, 2018.
Material changes versus the prior comparable period
- Operating income increased 29% in Q3 and 23% year to date. NAA operating income increased 25% in Q3 and 15% year to date; EA operating income increased 36% and 49%, respectively.
- Q3 operating-cost comparisons benefited from $304 million of ship impairments recorded in 2017 and $26 million of 2018 ship-sale gains. Year-to-date comparisons similarly benefited from the absence of 2017 ship impairments and from 2018 ship-sale gains.
- 2017 included $89 million of goodwill and trademark impairment charges; no comparable impairment charge was recorded in 2018.
- Net income benefited from higher revenue, occupancy and yields, partly offset by higher fuel, commissions, transportation, repair and maintenance, selling and administrative, and depreciation expenses.
- Weighted-average diluted shares declined to 707 million in Q3 from 726 million and to 714 million year to date from 727 million, reflecting share repurchases. The company repurchased $1.205 billion of shares during the first nine months and had $987 million remaining under the repurchase authorization at August 31.
- Annual capital expenditures were expected to be approximately $4.6 billion in 2018, $5.6 billion in 2019, $5.6 billion in 2020, $5.5 billion in 2021 and $4.8 billion in 2022. Contracted capacity increases were projected at 2.0%, 4.7%, 6.2%, 8.0% and 5.0%, respectively.
Outlook, risks, contingencies and unusual items
The filing references management guidance dated September 27, 2018, but the provided filing text does not state a clear numerical earnings or revenue guidance range. It does provide sensitivity information: a 10% change in fuel prices would change fourth-quarter adjusted diluted EPS guidance by approximately $0.06 per share, while a 10% change in relevant currency rates would change it by less than $0.01 per share.
- Major operating risks include weaker cruise demand, adverse travel or geopolitical events, ship or security incidents, contagious disease, severe weather, regulatory and environmental obligations, cyber and data-security events, labor availability, fuel prices, foreign exchange, competition, vendor and travel-agent viability, and shipbuilding or refurbishment delays and cost overruns.
- Unhedged euro-denominated newbuild commitments totaled approximately $10.5 billion for ships scheduled for delivery from 2019 through 2025.
- Fuel collars covered a portion of fuel exposure through the end of 2018. Derivative liabilities were $40 million at August 31, 2018, compared with $161 million at November 30, 2017.
- Pending matters included an investigation concerning an inadvertent discharge of liquid food waste near the Great Barrier Reef and a proposed class action concerning the Carnival Vacation Protection product. Management stated that neither matter was expected to have a material financial impact.
- Management stated that litigation in the ordinary course is generally insured and is not expected to materially affect the financial statements.
- The company adopted pension-cost presentation guidance during the period. It planned to adopt the revenue-recognition standard in the first quarter of 2019 using the modified retrospective method; the standard was expected to change the gross presentation of certain revenues and costs but not materially change revenue timing.
Most important facts for investors to verify
- Whether revenue yields and occupancy remain strong enough to offset fuel-price, labor, repair and maintenance, and other cost inflation.
- The actual fourth-quarter and full-year guidance issued on September 27, 2018, which is not fully reproduced in the provided text.
- The funding requirements and execution risk associated with approximately $4.6 billion to $5.6 billion of annual capital expenditures and $10.5 billion of unhedged newbuild commitments.
- The composition and maturity profile of approximately $9.6 billion of reported debt, including floating-rate and foreign-currency exposure.
- The sustainability of cash returns, including the $0.50 quarterly dividend and remaining share-repurchase authorization, while funding fleet expansion.
- The company’s liquidity calculation, particularly the distinction between $526 million of balance-sheet cash and $245 million of cash included in management’s reported liquidity.
- Potential effects of fuel prices, exchange rates, environmental matters, litigation and other operational risks on future results.