Carnival Corporation & plc — Form 10-Q Summary
Business context and reporting period
Joint quarterly report for Carnival Corporation and Carnival plc, which operate as a single economic enterprise under a dual-listed company structure. The filing covers the three and six months ended May 31, 2010; amounts are in millions except per-share data unless stated otherwise. Results are seasonal, with the third quarter typically generating the largest share of operating income.
Financial performance and liquidity
| Metric | Three months ended May 31, 2010 | Three months ended May 31, 2009 | Six months ended May 31, 2010 | Six months ended May 31, 2009 |
|---|---|---|---|---|
| Revenue | $3,195 | $2,948 | $6,290 | $5,812 |
| Operating income | $349 | $353 | $604 | $664 |
| Net income | $252 | $264 | $427 | $524 |
| Diluted EPS | $0.32 | $0.33 | $0.54 | $0.66 |
| Operating margin | 10.9% | 12.0% | 9.6% | 11.4% |
- Revenue increased 8.4% in the quarter and 8.2% year to date, primarily from higher passenger capacity and onboard revenue.
- Operating income declined 1.1% in the quarter and 9.0% year to date. Net margin was approximately 7.9% in the quarter and 6.8% year to date, compared with 9.0% in both prior-year periods.
- Six-month net cash provided by operations was $1,794, up from $1,441. Capital expenditures were $2,168, resulting in negative operating cash flow less capital expenditures of approximately $374.
- Cash and cash equivalents were $594 at May 31, 2010, compared with $538 at November 30, 2009. The company reported $5.5 billion of liquidity, including $336 million of available cash excluding $258 million used for current operations, $1.8 billion of revolving-credit availability and $3.4 billion of committed financing.
- Total reported debt was approximately $9.8 billion at May 31, 2010, comprising $2.1 billion of current debt and $7.7 billion of long-term debt. Current liabilities also included $3.2 billion of customer deposits.
- Working capital was negative $5.2 billion, but adjusted working capital excluding customer deposits and current debt was $110 million. Management stated that operating cash flow and committed financing were expected to fund 2010 requirements.
Material changes versus the prior comparable period
- Passenger ticket revenue rose 8.3% in the quarter and 7.3% year to date; onboard and other revenue rose 9.5% and 12.2%, respectively.
- Capacity increased 8.1% in the quarter and 8.9% year to date. Occupancy was 103.8% in the quarter and 103.7% year to date, versus 103.3% and 103.6%.
- Fuel cost per metric ton increased to $498 in the quarter from $304 and to $497 year to date from $291. Higher fuel prices increased operating costs by approximately $162 million in the quarter and $338 million year to date.
- Net revenue yield increased 2.4% in the quarter and 1.7% year to date; on a constant-dollar basis, the year-to-date yield was approximately flat. Net cruise cost per ALBD increased 4.9% in the quarter and 5.5% year to date.
- Six-month operating costs rose 12.2%, exceeding revenue growth, while depreciation and amortization increased 10.5% to $694.
- Other expense was $5 million year to date versus $24 million of other income in 2009, primarily because a $15 million gain from unwinding a LILO transaction did not recur. The company also recognized a $44 million gain on the sale of P&O Cruises’ Artemis.
- Foreign currency translation produced a $1.5 billion six-month other comprehensive loss, reducing shareholders’ equity to $20.9 billion from $22.0 billion at November 30, 2009.
Guidance, outlook, risks and unusual items
- As of June 22, 2010, management expected fully diluted EPS of $1.43–$1.47 for the third quarter and $2.25–$2.35 for full-year 2010. The assumptions included fuel prices of $493 and $495 per metric ton, euro exchange rates of $1.24 and $1.29, and sterling exchange rates of $1.48 and $1.51, respectively.
- Expected ALBD capacity growth was 7.5% for fiscal 2010, 5.0% for 2011 and 4.7% for 2012. Two Princess ships were contracted for delivery in May 2013 and May 2014 at an aggregate estimated cost of approximately $1.4 billion.
- Major risks include fuel-price volatility, foreign-exchange movements, economic weakness and discretionary-spending pressure, industry overcapacity, geopolitical events, disease outbreaks, weather and natural disasters, accidents, regulatory and environmental requirements, port availability, labor matters, insurance limitations and access to financing.
- The company does not hedge fuel-price exposure. At May 31, 2010, 73% of debt was fixed-rate and 27% floating-rate, including swaps; 63% was U.S.-dollar denominated, 34% euro denominated and 3% sterling denominated.
- LILO transactions had estimated contingent obligations of $542 million, with an estimated termination payment of approximately $105 million if specified defaults occurred. The company stated that it was in compliance with debt covenants and expected to remain compliant through fiscal 2010.
- Management concluded that disclosure controls were effective and that no material changes had occurred in internal control over financial reporting.
Important facts for investors to verify
- Whether fuel prices, currency rates and capacity growth support the stated 2010 EPS guidance.
- The sustainability of revenue yields and occupancy as European capacity expands and industry capacity remains elevated.
- Cash generation relative to approximately $2.2 billion of capital expenditures and contracted newbuild commitments.
- Refinancing requirements, including current debt, convertible notes subject to a 2011 holder put option and the principal revolver maturing in 2012.
- Exposure to fuel costs, foreign-exchange translation losses and the large reported working-capital deficit driven by customer deposits.
- Potential effects of environmental regulations, including higher-priced low-sulfur fuel requirements expected in 2012.