Carnival Corp Ltd. quarterly report, Q2 FY2020

Carnival Corporation & plc — Form 10-Q Summary

Business context and reporting period

This joint Form 10-Q covers Carnival Corporation and Carnival plc for the quarter and six months ended May 31, 2020, filed July 10, 2020. The company paused global guest cruise operations in mid-March 2020 because of COVID-19, materially disrupting most of the second quarter. The filing presents unaudited U.S. GAAP results.

Financial performance and key metrics

Metric	Three months ended May 31, 2020	Three months ended May 31, 2019	Six months ended May 31, 2020	Six months ended May 31, 2019
Revenue	$740 million	$4.838 billion	$5.529 billion	$9.511 billion
Operating income (loss)	$(4.177) billion	$515 million	$(4.891) billion	$902 million
Net income (loss)	$(4.374) billion	$451 million	$(5.155) billion	$787 million
Diluted EPS	$(6.07)	$0.65	$(7.34)	$1.13
Adjusted EBITDA	$(1.640) billion	$1.056 billion	$(859) million	$1.959 billion

Quarterly revenue declined 85%, including an 86% decline in passenger ticket revenue and an 81% decline in onboard and other revenue. Six-month revenue declined 42%.
Approximate operating margins were negative 564% for the quarter and negative 88% for the six-month period, versus positive operating margins of approximately 11% and 9%, respectively, in the comparable 2019 periods.
Quarterly and six-month net losses included goodwill impairment charges of $1.364 billion and $2.096 billion, respectively, and ship impairment charges of $498 million and $828 million, respectively. The filing also reported $39 million of restructuring costs in the six-month period.
Passengers carried declined to 426,000 in the quarter and 3.489 million for the six months, compared with 3.101 million and 6.038 million, respectively, in 2019. Occupancy was 96.1% for the quarter and 103.1% for the six months, versus 105.3% and 105.0% in 2019.
Net cash used in operating activities was $1.804 billion for the six months, compared with $3.169 billion of cash provided in 2019. Net investing cash use was $1.256 billion, while financing activities provided $9.425 billion.
Cash and cash equivalents were $6.881 billion at May 31, 2020, compared with $518 million at November 30, 2019. Cash, cash equivalents and restricted cash totaled $6.896 billion.
Reported current liabilities exceeded current assets by approximately $3.6 billion. Customer deposits were $2.9 billion, including $2.6 billion classified as current, and included future cruise credits and deposits potentially subject to cash refunds.

Debt, liquidity and capital resources

At May 31, 2020, the balance sheet included $3.562 billion of short-term borrowings, $2.373 billion of current long-term debt and $14.870 billion of long-term debt. The filing reported debt carrying value of $21.422 billion for fair-value disclosure purposes, excluding debt issuance costs and interest-rate swaps.
In April 2020, Carnival issued $4.0 billion of 11.5% first-priority senior secured notes due 2023 and $2.0 billion of 5.75% convertible senior notes due 2023. It also raised $556 million net from a common-stock offering.
The company stated that available liquidity was $7.6 billion at May 31, 2020, supplemented by $8.8 billion of committed export credit facilities for ship deliveries. The estimated cash burn rate for the second half of 2020 was approximately $650 million per month, including approximately $250 million of ongoing ship operating and administrative expenses.
Management concluded that available and expected liquidity would be sufficient to satisfy obligations for at least the next twelve months, based on its assumptions and planned cost reductions. The company nevertheless emphasized that those assumptions are highly uncertain.
Carnival was in compliance with its debt covenants at May 31, 2020, but obtained covenant waivers and debt-payment holidays for certain facilities. Failure to obtain future waivers or meet future testing requirements could trigger defaults, cross-defaults and acceleration.
Moody’s and S&P Global downgraded Carnival’s long-term and short-term ratings during March through June 2020. The downgrades prevented additional commercial-paper issuance except through government-backed programs and placed long-term ratings under review for further downgrade.

Material changes versus the prior comparable period

Operations shifted from normal cruise activity to a prolonged fleet pause, causing the sharp revenue contraction, negative operating results and negative adjusted EBITDA.
Payroll and related costs increased 24% in the quarter and 17% for the six months despite lower activity, while depreciation and amortization also increased. The company began layoffs, furloughs, reduced work weeks and salary reductions.
Goodwill and ship impairments totaled $3.015 billion for the six months, compared with negligible impairments in 2019. Goodwill declined from $2.912 billion at November 30, 2019 to $790 million at May 31, 2020.
Leverage increased substantially as Carnival drew its $3.0 billion revolving facility and issued new secured and convertible debt. Interest expense increased to $182 million in the quarter and $237 million for the six months, compared with $54 million and $105 million, respectively, in 2019.
Capital expenditures fell to $1.668 billion for the six months from $3.021 billion in 2019. The company expected only five of nine ships originally scheduled for delivery in fiscal 2020 and 2021 to be delivered by the end of fiscal 2021.
Dividends and share repurchases were suspended, and the repurchase program was terminated in June 2020.

Guidance, outlook, risks and unusual items

Management could not provide an earnings forecast and expected a net loss on both a U.S. GAAP and adjusted basis for the second half of 2020.
The company expected a phased resumption of guest operations, subject to government and health-authority approval, with moderated capacity, delayed deliveries and accelerated removal of ships. Thirteen ships were expected to leave the fleet, representing nearly 9% of current capacity.
As of July 7, 2020, 53 ships were in full pause status; substantially all ships were expected to reach that status during the third quarter. Ongoing ship operating and administrative costs were estimated at approximately $250 million per month once the fleet was fully paused.
As of June 21, approximately half of guests affected by canceled sailings had requested cash refunds. 2021 advanced bookings were within historical ranges, but prices were down in the low-to-mid single digits and booking volumes for the nine weeks ended June 21 were meaningfully below the prior year.
The principal risks were the duration and severity of COVID-19, weak demand and pricing, travel restrictions, delayed reopening of ports, health and safety costs, cash refunds, further credit-rating deterioration, financing access, covenant compliance, variable interest rates, litigation, governmental investigations and reputational damage.
COVID-19-related litigation included purported class actions and individual claims involving alleged exposure, illness and deaths, as well as securities claims. Governmental inquiries and investigations were ongoing, including matters related to the Ruby Princess.
The company disclosed no insurance coverage for lost revenue or earnings, although certain COVID-19 liabilities and costs may be covered subject to policy terms and a $10 million deductible per occurrence.

Important facts for investors to verify

Whether cruise operations resumed as planned and whether actual cash burn remained near the estimated $650 million monthly rate.
The timing and cash impact of customer refunds versus future cruise credits, including the $2.9 billion customer-deposit balance.
Future covenant-testing dates, available waivers, minimum debt-service coverage requirements and the risk of default or acceleration.
Liquidity after the June 2020 $2.8 billion secured term loan, subsequent financing needs and the effect of further credit-rating actions.
Actual proceeds and timing from announced ship disposals, fleet-capacity reductions and delayed newbuild deliveries.
Potential additional goodwill, ship or trademark impairments if operating assumptions, demand, port access or ship-sale values deteriorate.
The outcomes and insurance recoveries associated with COVID-19 litigation, governmental investigations and related regulatory actions.