Carnival Corporation & plc — Q3 2011 Form 10-Q Summary
Business context and reporting period
Joint quarterly report for Carnival Corporation and Carnival plc, which operate as a dual-listed single economic enterprise. The filing covers the three and nine months ended August 31, 2011, with comparisons to the corresponding 2010 periods. Results are seasonal, with the third quarter typically generating the largest share of operating income.
Key financial metrics
| Metric | Q3 2011 | Q3 2010 | 9M 2011 | 9M 2010 |
|---|---|---|---|---|
| Revenue | $5.06 billion | $4.53 billion | $12.10 billion | $10.97 billion |
| Operating income | $1.43 billion | $1.40 billion | $1.95 billion | $2.01 billion |
| Net income | $1.34 billion | $1.30 billion | $1.70 billion | $1.73 billion |
| Diluted EPS | $1.69 | $1.62 | $2.14 | $2.16 |
| Operating margin | 28.3% | 31.0% | 16.1% | 18.3% |
| Net margin | 26.4% | 28.8% | 14.0% | 15.8% |
| Net cash from operations | Not provided for quarter | Not provided for quarter | $3.02 billion | $3.08 billion |
Q3 revenue increased 11.7%, while operating income increased 2.2% and net income increased 2.6%. For the first nine months, revenue increased 10.2%, but operating income declined 2.9% and net income declined 2.0%.
- Passenger ticket revenue increased 12.3% in Q3 and 10.9% for the nine-month period.
- Onboard and other revenue increased 10.5% in Q3 and 8.6% for the nine-month period.
- Q3 fuel expense rose 46.7% to $581 million; nine-month fuel expense rose 33.3% to $1.61 billion.
- Q3 total costs and expenses were 71.7% of revenue, compared with 69.0% in 2010. For the nine-month period, the ratio increased to 83.9% from 81.7%.
- Q3 occupancy was 111.9%, compared with 111.1%; nine-month occupancy was 107.2%, compared with 106.2%.
- Q3 passengers carried increased to 2.676 million from 2.617 million; nine-month passengers increased to 7.192 million from 6.888 million.
Liquidity, debt and capital resources
- Cash and cash equivalents were $430 million at August 31, 2011, versus $429 million at November 30, 2010.
- Current liabilities were $6.88 billion, including $3.14 billion of customer deposits, $912 million of short-term borrowings and $1.20 billion of current long-term debt.
- Long-term debt was $7.71 billion, compared with $8.01 billion at November 30, 2010. Total reported debt, including current obligations and short-term borrowings, was approximately $9.82 billion.
- The company reported $6.0 billion of liquidity, consisting of $129 million of unrestricted cash, $2.0 billion available under revolving credit facilities net of commercial paper, and $3.9 billion of committed ship financings.
- Net cash used in investing activities was $2.41 billion, including $2.44 billion of property and equipment additions. Net cash used in financing activities was $608 million.
- Capital expenditures included $2.1 billion for new ships, including final delivery payments for AIDAsol, Carnival Magic, Costa Favolosa and Seabourn Quest.
- The company paid $474 million in dividends and repurchased $288 million of shares during the nine months.
- Management stated that it was in compliance with debt covenants and expected to remain compliant based on its forecasts.
Material changes versus the prior comparable period
- Revenue growth was driven by approximately 4.8% to 4.9% capacity growth, favorable foreign currency translation, and improved ticket pricing.
- Higher fuel prices added approximately $181 million to Q3 fuel costs and $370 million to nine-month fuel costs. Fuel cost per metric ton increased to $686 in Q3 from $473.
- Constant-dollar net revenue yield increased 2.6% in Q3 and 2.3% for the nine-month period.
- Constant-dollar net cruise cost excluding fuel per available lower berth day increased 2.8% in both periods, reflecting inflation in crew travel, food, freight and other hotel operating costs.
- North America operating income increased 4.5% in Q3 but declined 6.4% for the nine-month period. EAA operating income declined 0.3% in Q3 but increased 1.8% for the nine-month period.
- Results were affected by changes in itineraries following geopolitical events in the Middle East and North Africa, as well as the Japan earthquake and nuclear disaster during the nine-month period.
- Foreign currency translation benefited reported revenue and expenses because the U.S. dollar weakened against the euro, sterling and Australian dollar.
Guidance, outlook, risks and unusual items
- On September 20, 2011, management forecast fourth-quarter 2011 diluted EPS of $0.26 to $0.30 and full-year diluted EPS of $2.40 to $2.44. The fourth-quarter outlook assumed fuel of $686 per metric ton and exchange rates of $1.36 per euro, $1.58 per sterling and $1.03 per Australian dollar.
- Expected year-over-year ALBD capacity growth was 5.8% for Q4 2011 and 5.2%, 4.5%, 3.2% and 2.4% for fiscal 2011 through 2014, respectively.
- Management expected an average of two to three new ships to enter service annually in 2012 and thereafter, with a slower newbuilding pace expected to support higher free cash flow.
- The company recorded a $13 million impairment charge related to the expected November 2011 sale of Costa Marina.
- Ibero’s goodwill was $167 million and its estimated fair value exceeded carrying value by only 2%, or $12 million. Management stated that relatively minor changes in assumptions could result in an impairment, particularly if the Spanish economy and vacation industry remain weak.
- At August 31, 2011, 32% of newbuild passenger capacity under euro-denominated contracts was exposed to currency risk and was unhedged.
- Principal risks include fuel prices, foreign exchange, economic weakness, geopolitical events, accidents, contagious disease, adverse weather, regulatory changes, overcapacity, shipbuilding execution, financing access, vendor and counterparty performance, litigation, insurance availability and information technology disruptions.
- In April 2011, the company voluntarily unwound an $87 million LILO contingent liability transaction. Estimated remaining LILO contingent obligations were $421 million, with a potential $61 million termination payment under specified circumstances.
- Management concluded that disclosure controls were effective and that no material change in internal control over financial reporting occurred during the quarter.
Important facts for investors to verify
- Reconcile the reported $6.0 billion liquidity figure, including cash available for operations, revolver availability and committed ship financing.
- Assess whether fuel inflation and non-fuel cost growth continue to exceed net revenue yield growth.
- Review debt maturities, interest-rate exposure and the availability and terms of committed ship financings.
- Monitor Ibero’s goodwill for impairment indicators and the sensitivity of brand valuations to pricing, capacity, fuel and foreign exchange assumptions.
- Evaluate the effect of MENA-related itinerary changes, European demand and foreign currency movements on EAA pricing and yields.
- Confirm the assumptions underlying the fourth-quarter and full-year 2011 EPS guidance, particularly fuel prices, exchange rates and capacity.
- Review future shipbuilding commitments, including approximately $3.0 billion of aggregate costs for four EAA ships expected for delivery from October 2014 through March 2016.