Carnival Corporation & plc — Q1 2011 Form 10-Q Summary
Business context and reporting period
Carnival Corporation and Carnival plc operate as a dual-listed company and are presented as one economic enterprise. The unaudited filing covers the three months ended February 28, 2011, compared with the three months ended February 28, 2010. Results are seasonal, with the largest share of operating income generally earned in the third quarter.
The company reports North America cruise brands, Europe, Australia & Asia cruise brands, Cruise Support, and Tour and Other. Prior-period segment information was restated to conform to the revised segment presentation and the company reclassified certain port costs to a gross presentation; the latter increased reported revenue and commissions expense by $83 million in 2010 without affecting operating or net income.
Financial performance and key metrics
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Revenue | $3.419 billion | $3.178 billion | +7.6% |
| Operating income | $235 million | $255 million | -7.8% |
| Operating margin | 6.9% | 8.0% | Down approximately 110 basis points |
| Income before taxes | $157 million | $160 million | -1.9% |
| Net income | $152 million | $175 million | -13.1% |
| Basic and diluted EPS | $0.19 | $0.22 | Down $0.03 |
| Net margin | 4.4% | 5.5% | Down approximately 110 basis points |
| Dividends declared per share | $0.25 | $0.10 | Increased $0.15 |
- Passenger ticket revenue rose 8.6% to $2.652 billion, primarily from a 5.0% increase in available lower berth days and improved ticket pricing.
- Onboard and other revenue increased 3.8% to $757 million.
- Operating costs increased 9.8% to $2.395 billion. Fuel expense increased 13.3% to $450 million, reflecting higher fuel prices and increased capacity.
- Selling and administrative expense increased 6.6% to $422 million, while depreciation and amortization increased 6.4% to $367 million.
- Net revenue yields increased 0.9%, or 2.0% on a constant-dollar basis. Net cruise costs excluding fuel per available lower berth day increased 1.9%, or 2.9% on a constant-dollar basis.
- Passengers carried increased to 2.185 million from 2.049 million, and occupancy increased to 105.0% from 103.5%.
- North America revenue increased to $1.928 billion, but operating income declined to $151 million from $189 million. EAA revenue increased to $1.460 billion and operating income increased to $110 million from $99 million.
Cash flow, liquidity, debt and balance sheet
| Metric | February 28, 2011 | November 30, 2010 |
|---|---|---|
| Cash and cash equivalents | $465 million | $429 million |
| Total assets | $37.965 billion | $37.490 billion |
| Current liabilities | $6.009 billion | $5.755 billion |
| Long-term debt | $7.815 billion | $8.011 billion |
| Shareholders’ equity | $23.435 billion | $23.031 billion |
- Net cash provided by operating activities was $412 million, up from $396 million.
- Capital expenditures were $172 million, including $53 million for new shipbuilding, $63 million for ship improvements and replacements, and $56 million for buildings, information technology and other assets.
- Investing activities used $158 million, compared with $1.116 billion in the prior-year period, which included substantially higher property and equipment additions.
- Financing activities used $230 million, including $63 million of net short-term debt repayments, $135 million of other long-term debt repayments, and $79 million of dividends paid.
- Total debt, including short-term borrowings and the current portion of long-term debt, was approximately $9.305 billion at February 28, 2011. The filing states that 70% of debt was fixed-rate and 30% floating-rate, including swaps.
- Reported working capital was negative $4.6 billion, primarily because of $2.9 billion of customer deposits and $1.5 billion of current debt obligations. Management describes adjusted working capital, excluding those items, as a deficit of $272 million.
- Liquidity was stated as $5.7 billion, consisting of $144 million of cash available for liquidity purposes, $1.8 billion available under revolving credit facilities, and $3.8 billion of committed ship financings.
- Management believed existing liquidity and future operating cash flow would fund expected capital projects, debt service, working capital and other commitments, assuming refinancing of the principal revolver before its October 2012 maturity.
Material changes, outlook and unusual items
- Revenue growth was more than offset by capacity-related costs, higher fuel prices, and the nonrecurrence of a $44 million gain from the 2010 sale of P&O Cruises (UK)’s Artemis.
- The 2010 comparison benefited from an $18 million Italian investment incentive tax benefit related substantially to two newbuilds. Q1 2011 reported a $5 million tax expense versus a $15 million tax benefit in Q1 2010.
- Comprehensive income was $547 million versus a comprehensive loss of $560 million, largely because of foreign-currency translation adjustments of $355 million in 2011 compared with a loss of $702 million in 2010.
- Management’s March 22, 2011 guidance called for fully diluted fiscal 2011 EPS of $2.55 to $2.65 and second-quarter EPS of $0.20 to $0.24. The guidance assumed fuel prices of $631 per metric ton for the full year and $659 for the second quarter, together with specified euro, Australian dollar and sterling exchange rates.
- Available lower berth capacity was expected to grow 5.2% in fiscal 2011, 4.9% in 2012 and 3.9% in 2013. Management intended to average two to three new ships entering service annually in 2012 and beyond.
- Goodwill was not impaired, but management identified Ibero’s goodwill as particularly sensitive to relatively minor changes in assumptions because of weakness in the Spanish economy and vacation industry.
- The company does not hedge fuel-price exposure with financial instruments. Foreign-exchange and interest-rate derivatives are used for hedging rather than trading.
Risks and contingencies
- Key risks include economic conditions, fuel prices, foreign-exchange movements, competition and overcapacity, geopolitical events, terrorism and piracy, accidents, disease outbreaks, severe weather, adverse publicity, regulatory changes, shipbuilding and maintenance execution, vendor and counterparty performance, insurance limitations, technology disruptions, labor issues and port availability.
- Contingent obligations related to two lease-out and lease-back transactions totaled an estimated $514 million, excluding potential termination payments. A default scenario could require an estimated termination payment of approximately $106 million.
- If Carnival Corporation’s credit rating falls below BBB, it may be required to provide a $55 million standby letter of credit or mortgages on two ships.
- Management stated that litigation not covered by insurance was not expected to have a material adverse effect and that the company was in compliance with its debt covenants.
- Approximately 87% of revolving credit facilities were scheduled to mature in 2012, creating a refinancing consideration despite the company’s stated liquidity position.
Investor verification points
- Verify the assumptions underlying the $2.55–$2.65 fiscal 2011 EPS guidance, particularly fuel prices, exchange rates, pricing and occupancy.
- Monitor whether higher fuel costs and operating expenses continue to outpace revenue growth and pressure margins.
- Assess refinancing plans for the principal revolver and the concentration of revolving-credit maturities in 2012.
- Review newbuild commitments, scheduled committed financing, capacity growth and the effect of ship deliveries on cash flow and leverage.
- Evaluate Ibero goodwill impairment sensitivity and broader exposure to weak European economies.
- Track foreign-exchange exposure, fuel-price volatility, geopolitical and health-related travel disruptions, and insurance or litigation developments.
- Confirm the effects of the port-cost classification change and segment restatement when comparing reported results with earlier filings.