Carnival Corporation & plc — Form 10-Q Summary
Business context and reporting period
Carnival Corporation and Carnival plc jointly reported unaudited results for the three and six months ended May 31, 2017. The company operates cruise brands across North America and Europe, Australia and Asia, supported by port, tour and other businesses. Results are seasonal, with the third quarter historically generating the largest share of operating income.
Financial performance and key metrics
| Metric | Three months ended May 31, 2017 | Three months ended May 31, 2016 | Six months ended May 31, 2017 | Six months ended May 31, 2016 |
|---|---|---|---|---|
| Revenue | $3.945 billion | $3.705 billion | $7.736 billion | $7.357 billion |
| Operating income | $500 million | $478 million | $868 million | $912 million |
| Net income | $379 million | $605 million | $730 million | $747 million |
| Diluted EPS | $0.52 | $0.80 | $1.00 | $0.98 |
| Adjusted diluted EPS | $0.52 | $0.49 | $0.90 | $0.88 |
| Operating margin | 12.7% | 12.9% | 11.2% | 12.4% |
- Second-quarter revenue increased 6.5%, while operating income increased 4.6%. Net income declined 37.4%, primarily because the prior-year quarter included a $242 million unrealized fuel-derivative gain, compared with a $2 million unrealized loss in 2017.
- Six-month revenue increased 5.2%, but operating income declined 4.8% and net income declined 2.3%. Reported diluted EPS increased because weighted-average diluted shares declined to 727 million from 761 million.
- Constant-currency net revenue yield increased 5.1% in the quarter and 4.4% year to date. Net cruise costs excluding fuel per available lower berth day increased 1.5% in the quarter and 2.3% year to date.
- Occupancy was 104.1% in the quarter and 104.3% year to date. Available lower berth days increased 3.6% and 3.7%, respectively.
- Fuel expense increased 58% to $310 million in the quarter and $607 million year to date, primarily because of higher fuel prices.
Cash flow, liquidity and debt
- Six-month operating cash flow was $2.849 billion, compared with $2.681 billion in the prior-year period. The increase was principally driven by a $1.239 billion increase in customer deposits.
- Investing cash use was $1.934 billion, including $1.859 billion of property and equipment additions. Financing cash use was $935 million.
- Approximate capital spending less operating cash flow was $990 million of positive cash generation before financing activities.
- Cash and cash equivalents were $597 million at May 31, 2017, compared with $603 million at November 30, 2016.
- Balance-sheet debt comprised $675 million of short-term borrowings, $1.108 billion of current long-term debt and $7.635 billion of long-term debt, or approximately $9.418 billion in total. Debt fair value was $9.474 billion.
- Reported liquidity was $11.9 billion, consisting of $348 million of available cash, $2.3 billion available under revolving credit facilities net of commercial paper, and $9.3 billion of committed future ship-financing facilities.
- Working capital deficit increased to $7.3 billion from $5.4 billion, largely because customer deposits increased to $4.8 billion from $3.5 billion. Management attributes the deficit primarily to advance passenger receipts, which are recorded as current liabilities until sailing.
- The company was in compliance with its debt covenants and stated that it expects to remain compliant for the foreseeable future.
Material changes versus the prior comparable period
- North America performed strongly: quarterly operating income rose 17% to $443 million and six-month operating income rose 9.6% to $785 million.
- EAA operating income weakened: quarterly operating income fell 28% to $113 million and six-month operating income fell 40% to $188 million. The decline reflected foreign-currency translation, lower occupancy primarily in China programs, and higher fuel and operating costs.
- Passenger ticket revenue benefited from pricing improvements in Caribbean, European and Alaska programs, but China programs underperformed.
- The company repaid $620 million of export credit facilities in May 2017 and borrowed $367 million under an export credit facility. It also entered into approximately $2.4 billion of export credit facilities expected to be drawn in 2021 and 2022.
- Dividends declared increased to $0.40 per share from $0.35. The company repurchased 2.8 million Carnival plc shares for $156 million during the first six months, with $989 million remaining under the repurchase authorization at May 31.
- In April 2017, the company transferred a 1,550-passenger EAA ship under a bareboat charter that was accounted for as a sale.
Guidance, outlook, risks and unusual items
- Management’s June 22, 2017 guidance called for adjusted EPS of $2.16–$2.20 for the 2017 third quarter and $3.60–$3.70 for full-year 2017. Assumptions included fuel prices of $372 per metric ton for the third quarter and $367 for the full year.
- Planned annual capital expenditures were $3.0 billion in 2017, $3.8 billion in 2018, $4.8 billion in 2019, $4.6 billion in 2020, $3.6 billion in 2021 and $2.8 billion in 2022. Contracted capacity increases were expected to range from 2.5% to 8.2% over 2017–2022.
- At May 31, 2017, unrealized losses on outstanding fuel derivatives were $252 million. Fuel collars covered portions of expected consumption through 2018, but Brent prices may not closely track the company’s marine-fuel costs.
- Remaining unhedged euro-denominated newbuild commitments were approximately $5.9 billion, principally for ships scheduled for delivery from 2019 through 2022.
- Key risks include ship, security, health and weather incidents; regulatory and environmental compliance; fuel prices; foreign-exchange movements; cyber and information-technology disruptions; overcapacity and competition; shipbuilding execution; port availability; vendor and travel-agent viability; financing and liquidity; litigation; and reputational damage.
- Holland America and Princess settled Alaska emissions claims in May 2017. NOAA was investigating discharges by certain vessels in the expanded Farallones Islands National Marine Sanctuary; management did not expect a material financial impact.
- Management reported no material change to previously disclosed risk factors, no material off-balance-sheet arrangements, and effective disclosure controls.
Most important facts for investors to verify
- Whether pricing and occupancy improvements, particularly in North America, offset fuel inflation and the weaker EAA and China performance.
- The sensitivity of 2017 earnings guidance to fuel and currency movements; management estimated that a 10% change in fuel prices would affect adjusted EPS by $0.04 for the third quarter and $0.08 for the remaining two quarters.
- The funding plan and execution risk for approximately $3.0 billion of 2017 capital expenditures and substantial contracted spending through 2022.
- The sustainability of cash generation given reliance on advance customer deposits and the company’s substantial working capital deficit.
- Debt maturities, future export-credit drawdowns, covenant compliance and the effect of interest-rate and foreign-currency exposure on future results.
- The treatment and future earnings impact of fuel-derivative gains and losses, ship sales, restructuring items and other non-GAAP adjustments.