Carnival Corporation & plc — Q1 2017 Form 10-Q Summary
Business context and reporting period
Carnival Corporation and Carnival plc jointly reported unaudited results for the three months ended February 28, 2017, compared with the three months ended February 29, 2016. The company operates cruise brands across North America, Europe, Australia and Asia, with additional cruise-support and tour operations. Results are seasonal, with the largest share of operating income historically generated in the third quarter.
Key financial metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue | $3.791 billion | $3.651 billion | +3.8% |
| Operating income | $368 million | $434 million | -15.3% |
| Operating margin | 9.7% | 11.9% | Down 2.2 percentage points |
| Net income | $352 million | $142 million | +147.9% |
| Diluted EPS | $0.48 | $0.18 | +$0.30 |
| Adjusted diluted EPS | $0.38 | $0.39 | -$0.01 |
| Net cash from operating activities | $932 million | $798 million | +16.8% |
| Capital expenditures | $412 million | $330 million | +$82 million |
| Cash and cash equivalents | $437 million | $603 million at Nov. 30, 2016 | -$166 million |
Cruise passenger ticket revenue increased 3.2% to $2.804 billion, while onboard and other revenue increased 6.0% to $978 million. Available lower berth days increased 3.8% to 20.0 million, occupancy increased to 104.6% from 104.0%, and passengers carried increased to 2.769 million from 2.559 million.
Net revenue yields increased 1.1% on a reported basis and 3.8% on a constant-currency basis. Net cruise costs excluding fuel per available lower berth day increased 1.5% on a reported basis and 3.2% on a constant-currency basis.
Fuel expense increased 58.8% to $297 million, primarily because fuel cost per metric ton increased to $362 from $229. Consolidated fuel-derivative gains were $27 million, compared with a $236 million loss in the prior-year quarter, including a $72 million unrealized gain in 2017 versus a $145 million unrealized loss in 2016.
At February 28, 2017, total debt on the balance sheet was approximately $9.1 billion, comprising $169 million of short-term borrowings, $1.127 billion of current long-term debt and $7.796 billion of long-term debt. The company reported a working-capital deficit of $5.9 billion, principally reflecting $3.7 billion of customer deposits and current debt maturities. Management stated that it was in compliance with debt covenants.
Material changes versus the prior comparable period
- Revenue growth reflected 3.8% capacity growth, improved pricing and higher onboard spending, partly offset by unfavorable foreign-currency translation and lower air-transportation revenue.
- Operating income declined because fuel, port, payroll, dry-dock, repair and maintenance costs increased faster than revenue.
- North America operating income increased 1.5% to $342 million, while Europe, Australia and Asia operating income declined 52.4% to $74 million, primarily due to cost increases and currency effects.
- GAAP net income benefited materially from the favorable year-over-year change in fuel-derivative results; adjusted net income declined to $279 million from $301 million.
- Operating cash flow increased by $134 million, substantially due to a $219 million increase in customer deposits during the quarter.
- Financing cash outflows were $615 million, including $289 million of net short-term debt repayments, $254 million of dividends and $69 million of share repurchases.
- The company repurchased 1.4 million Carnival plc ordinary shares for $75 million during the quarter and declared dividends of $0.35 per share, compared with $0.30 in the prior-year quarter.
Guidance, outlook, commentary and risks
On March 28, 2017, management provided adjusted diluted EPS guidance of $0.43 to $0.47 for the second quarter and $3.50 to $3.70 for full-year 2017. Guidance assumed fuel prices of $359 per metric ton for the second quarter and $362 for the full year, together with specified euro, sterling and Australian-dollar exchange rates. The filing does not provide a reconciliation of forecast adjusted EPS to forecast GAAP EPS.
Management expected operating cash flow and available liquidity to fund shipbuilding commitments, capital projects, debt service, working capital and other obligations. Reported liquidity was $10.5 billion, consisting of $182 million of cash considered available for liquidity purposes, $2.7 billion of revolving-credit availability net of commercial paper and $7.6 billion of committed future ship-export financing.
Expected capital expenditures were $3.0 billion in 2017, $3.7 billion in 2018, $4.6 billion in 2019, $4.5 billion in 2020, $3.5 billion in 2021 and $2.8 billion in 2022. Contracted capacity growth was expected to range from 2.7% to 7.8% annually over 2017–2022.
Principal risks include ship, security, health, weather and environmental incidents; fuel-price and foreign-currency volatility; economic and geopolitical conditions; regulatory changes; information-technology and cybersecurity failures; competition and industry overcapacity; dependence on travel agents, vendors, ports and third parties; shipbuilding and maintenance execution; litigation; insurance limitations; and the ability to generate sufficient cash flow or obtain financing.
At February 28, 2017, the company had $249 million of unrealized losses on outstanding fuel derivatives and approximately $5.6 billion of unhedged euro-denominated newbuild commitments, substantially relating to ships scheduled for delivery from 2019 through 2022. Management stated that ordinary-course litigation was not expected to have a material effect.
Investor verification points
- Reconcile reported GAAP EPS of $0.48 with adjusted EPS of $0.38 and assess the sustainability of fuel-derivative gains.
- Evaluate whether pricing and yield improvements can offset higher fuel, labor, port, maintenance and dry-dock costs.
- Monitor EAA segment performance, foreign-exchange effects and regional booking trends.
- Assess liquidity relative to approximately $3.0 billion of 2017 capital expenditures and the $5.6 billion unhedged newbuild commitment.
- Review the dependence of operating cash flow on advance customer deposits and the resulting working-capital deficit.
- Compare future results with the company’s $3.50–$3.70 full-year adjusted EPS guidance and its fuel and currency assumptions.