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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended August 31, 2004
or
|_| Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ______________ to ________________
Commission File Number: 1-9610 Commission File Number: 1-15136
Carnival Corporation Carnival plc
(Exact name of registrant as (Exact name of registrant as
specified in its charter) specified in its charter)
Republic of Panama England and Wales
(State or other jurisdiction of (State or other jurisdiction of
incorporation or organization) incorporation or organization)
59-1562976 none
(I.R.S. Employer (I.R.S. Employer
Identification No.) Identification No.)
3655 N.W. 87th Avenue Carnival House, 5 Gainsford Street,
Miami, Florida 33178-2428 London SE1 2NE, United Kingdom
(Address of principal (Address of principal
executive offices) executive offices)
(Zip code) (Zip code)
(305) 599-2600 011 44 20 7940 5381
(Registrant's telephone number, (Registrant's telephone number,
including area code) including area code)
None None
(Former name, former address (Former name, former address
and former fiscal year, if and former fiscal year, if
changed since last report.) changed since last report.)
Indicate by check mark whether the registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrants are accelerated filers (as
defined in Rule 12b-2 of the Exchange Act). Yes |X| No |_|
At September 30, 2004, Carnival At September 30, 2004, Carnival plc
Corporation had outstanding 633,273,375 had outstanding 212,053,984
shares of Common Stock, $.01 par value. Ordinary Shares $1.66 stated value,
one Special Voting Share, GBP 1.00
par value and 633,273,375 Trust
Shares of beneficial interest in
the P&O Princess Special Voting
Trust.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
CARNIVAL CORPORATION & PLC
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in millions, except per share data)
Nine Months Three Months
Ended August 31, Ended August 31,
------------------ ------------------
2004 2003 2004 2003
---- ---- ---- ----
Revenues
Cruise
Passenger tickets $5,663 $3,671 $2,444 $1,863
Onboard and other 1,555 1,003 579 467
Other 267 227 222 194
------ ------ ------ ------
7,485 4,901 3,245 2,524
------ ------ ------ ------
Costs and Expenses
Operating
Cruise
Commissions, transportation
and other 1,227 748 467 361
Onboard and other 270 155 92 83
Payroll and related 739 520 253 218
Food 412 276 149 118
Other ship operating 1,285 864 468 369
Other 183 162 140 129
------ ------ ------ ------
Total 4,116 2,725 1,569 1,278
Selling and administrative 944 650 306 261
Depreciation and amortization 599 417 210 176
------ ------ ------ ------
5,659 3,792 2,085 1,715
------ ------ ------ ------
Operating Income 1,826 1,109 1,160 809
------ ------ ------ ------
Nonoperating (Expense) Income
Interest income 12 20 3 7
Interest expense, net of
capitalized interest (212) (129) (76) (58)
Other (expense) income, net (9) 9 (2) 5
------ ------ ------ ------
(209) (100) (75) (46)
------ ------ ------ ------
Income Before Income Taxes 1,617 1,009 1,085 763
Income Tax Expense, Net (56) (20) (60) (29)
------ ------ ------ ------
Net Income $1,561 $ 989 $1,025 $ 734
====== ====== ====== ======
Earnings Per Share
Basic $ 1.95 $ 1.43 $ 1.28 $ 0.92
====== ====== ====== ======
Diluted $ 1.90 $ 1.42 $ 1.23 $ 0.90
====== ====== ====== ======
Dividends Per Share $0.375 $0.315 $0.125 $0.105
====== ====== ====== ======
The accompanying notes are an integral part of these consolidated financial
statements.
1
CARNIVAL CORPORATION & PLC
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in millions, except par/stated values)
August 31, November 30,
2004 2003
---- ----
ASSETS
Current Assets
Cash and cash equivalents $ 594 $ 1,070
Accounts receivable, net 434 403
Inventories 223 171
Prepaid expenses and other 229 213
Fair value of derivative contracts 102 275
------- -------
Total current assets 1,582 2,132
------- -------
Property and Equipment, Net 19,899 17,522
Goodwill 3,259 3,031
Trademarks 1,279 1,324
Other Assets 417 482
------- -------
$26,436 $24,491
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Short-term borrowings $ 48 $ 94
Current portion of long-term debt 639 392
Convertible debt subject to current
put option 600 --
Accounts payable 728 640
Accrued liabilities and other 455 426
Customer deposits 1,715 1,352
Dividends payable 100 100
Fair value of hedged firm commitments 95 264
------- -------
Total current liabilities 4,380 3,268
------- -------
Long-Term Debt 6,224 6,918
Other Long-Term Liabilities and Deferred Income 530 512
Contingencies (Note 5)
Shareholders' Equity
Common stock of Carnival Corporation; $.01 par
value; 1,960 shares authorized; 633 shares
at 2004 and 630 shares at 2003 issued and outstanding 6 6
Ordinary shares of Carnival plc; $1.66 stated value;
226 shares authorized; 212 shares at 2004 and
210 shares at 2003 issued 352 349
Additional paid-in capital 7,279 7,163
Retained earnings 8,450 7,191
Unearned stock compensation (19) (18)
Accumulated other comprehensive income 292 160
Treasury stock, 42 shares of Carnival plc at cost (1,058) (1,058)
------- -------
Total shareholders' equity 15,302 13,793
------- -------
$26,436 $24,491
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
2
CARNIVAL CORPORATION & PLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in millions)
Nine Months Ended August 31,
2004 2003
---- ----
OPERATING ACTIVITIES
Net income $1,561 $ 989
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation and amortization 599 417
Accretion of original issue discount 16 15
Other 12 2
Changes in operating assets and liabilities,
excluding business acquired
(Increase) decrease in
Receivables (33) (89)
Inventories (55) (9)
Prepaid expenses and other (27) 31
Increase (decrease) in
Accounts payable 90 61
Accrued and other liabilities 115 (8)
Customer deposits 344 (14)
------ ------
Net cash provided by operating activities 2,622 1,395
------ ------
INVESTING ACTIVITIES
Additions to property and equipment (2,865) (1,896)
Cash acquired from the acquisition of P&O Princess, net 141
Proceeds from retirement of property and equipment 77 51
Other, net (15) (26)
------ ------
Net cash used in investing activities (2,803) (1,730)
------ ------
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt 843 1,478
Principal repayments of long-term debt (887) (663)
(Payments) proceeds from short-term borrowings, net (46) 65
Dividends paid (300) (207)
Proceeds from exercise of stock options 111 40
Other (5) (13)
------ ------
Net cash (used in) provided by financing
activities (284) 700
------ ------
Effect of exchange rate changes on cash
and cash equivalents (11) (44)
------ ------
Net (decrease) increase in cash and
cash equivalents (476) 321
Cash and cash equivalents at beginning of period 1,070 667
------ ------
Cash and cash equivalents at end of period $ 594 $ 988
====== ======
The accompanying notes are an integral part of these consolidated financial
statements.
3
CARNIVAL CORPORATION & PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - Basis of Presentation
Carnival Corporation is a Panamanian corporation, and Carnival plc is
incorporated in England and Wales. Together with their consolidated subsidiaries
they are referred to collectively in these consolidated financial statements and
elsewhere in this joint Quarterly Report on Form 10-Q as "Carnival Corporation &
plc," "our," "us," and "we." Our consolidated financial statements only include
the consolidated results of the former P&O Princess Cruises plc operations since
April 17, 2003.
On April 17, 2003, Carnival Corporation and Carnival plc (formerly known
as P&O Princess Cruises plc or "P&O Princess") completed a dual listed company
("DLC") transaction (the "DLC transaction"), which implemented Carnival
Corporation & plc's DLC structure. The DLC transaction combined the businesses
of Carnival Corporation and Carnival plc through a number of contracts and
amendments to Carnival Corporation's articles of incorporation and by-laws and
to Carnival plc's memorandum of association and articles of association. The two
companies have retained their separate legal identities, however, they operate
as if they were a single economic enterprise.
The accompanying consolidated balance sheet at August 31, 2004, the
consolidated statements of operations for the nine and three months ended August
31, 2004 and 2003 and the consolidated statements of cash flows for the nine
months ended August 31, 2004 and 2003 are unaudited and, in the opinion of our
management, contain all adjustments, consisting of only normal recurring
adjustments, except as noted in the second paragraph of Note 3, necessary for a
fair presentation. Our interim consolidated financial statements should be read
in conjunction with the audited consolidated financial statements and the
related notes included in the Carnival Corporation & plc 2003 joint Annual
Report on Form 10-K. Our operations are seasonal and results for interim periods
are not necessarily indicative of the results for the entire year.
Reclassifications have been made to prior period amounts to conform to the
current period presentation.
Note 2 - Stock-Based Compensation
Pursuant to Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation," as amended, we elected to use the
intrinsic value method of accounting for our employee and director stock-based
compensation awards instead of the fair value method. Accordingly, we have not
recognized compensation expense for our noncompensatory employee and director
stock option awards. Our adjusted net income and adjusted earnings per share,
had we elected to adopt the fair value approach of SFAS No. 123, which charges
earnings for the estimated fair value of stock options, would have been as
follows (in millions, except per share data):
4
Nine Months Three Months
Ended August 31, Ended August 31,
---------------- ----------------
2004 2003 2004 2003
---- ---- ---- ----
Net income, as reported $1,561 $ 989 $1,025 $ 734
Stock-based compensation
expense included in
net income, as reported 9 5 4 2
Total stock-based compensation
expense determined under
the fair value based method
for all awards (56)(a) (27) (12) (10)
------ ------ ------ ------
Adjusted net income for basic
earnings per share 1,514 967 1,017 726
Interest on dilutive convertible
notes 21 5 9 5
------ ------ ------ ------
Adjusted net income for diluted
earnings per share $1,535 $ 972 $1,026 $ 731
====== ====== ====== ======
Earnings per share
Basic
As reported $ 1.95 $ 1.43 $ 1.28 $ 0.92
====== ====== ====== ======
Adjusted $ 1.89 $ 1.40 $ 1.27 $ 0.91
====== ====== ====== ======
Diluted
As reported $ 1.90 $ 1.42 $ 1.23 $ 0.90
====== ====== ====== ======
Adjusted $ 1.84 $ 1.39 $ 1.22 $ 0.89
====== ====== ====== ======
(a) During the nine months ended August 31, 2004, we completed a corporate re-
organization. As a result of that reorganization, 2.3 million unvested
options held by employees vested immediately. This vesting occurred either
in accordance with the terms of the option plan or to avoid having these
employees and Carnival Corporation incur unduly burdensome taxes upon the
exercise of such options at a later date. As a result of this accelerated
vesting, we included an additional nonrecurring amount of $23 million, or
$0.03 diluted earnings per share, of stock-based compensation expense
determined under the fair value based method in the adjusted net income
for the nine months ended August 31, 2004.
NOTE 3 - DLC Transaction
The DLC transaction has been accounted for as an acquisition of P&O
Princess by Carnival Corporation, using the purchase method of accounting. P&O
Princess' accounting policies have been conformed to Carnival Corporation's
policies. P&O Princess' reporting period has been changed to Carnival
Corporation's reporting period, and the pro forma information presented below
covers the same period of time for both companies. P&O Princess changed its name
to Carnival plc upon completion of the DLC transaction. The P&O Princess
purchase price was $5.36 billion, and the number of additional shares
effectively issued in the combined entity for purchase accounting purposes was
209.6 million.
During the three months ended May 31, 2004, we increased the fair values
of the P&O Princess publicly traded debt, and correspondingly, goodwill, by $87
million to take into account the extension of Carnival Corporation's guarantee
to cover this debt as of the acquisition date. In addition, at August 31, 2004,
we reduced the fair value of P&O Princess' trademarks and, correspondingly
increased goodwill by $54 million to properly value our acquired trademarks as
of the acquisition date. The impact of these changes on our current and prior
period financial statements was immaterial. There have been no other significant
changes to our goodwill carrying amounts since November 30, 2003, other than the
changes resulting from using different foreign currency translation rates at
each balance sheet date.
The following pro forma information has been prepared assuming the DLC
transaction had occurred on December 1, 2002, rather than April 17, 2003 and has
not been adjusted to reflect any net transaction benefits. In addition the pro
forma information does not purport to represent what the results of operations
actually could have been if the DLC transaction had occurred on December 1, 2002
or what those results will be for any
5
future periods. For the nine months ended August 31, 2003, our pro forma
revenues would have been $5.78 billion, our pro forma net income would have been
$959 million and our pro forma earnings per share would have been $1.21 (basic)
and $1.19 (diluted). These pro forma results were prepared by management and are
based on the companies' reported financial information. Finally, in accordance
with SFAS No. 141, "Business Combinations," our pro forma net income was reduced
by $51 million for the nonrecurring P&O Princess costs related to the DLC
transaction, which were expensed by P&O Princess prior to April 17, 2003.
NOTE 4 - Debt
In February and May 2004, we borrowed an aggregate of $739 million to
finance a portion of the Diamond Princess and Sapphire Princess purchase prices,
pursuant to committed financing arrangements. These loans have both a fixed and
variable interest rate component, mature through May 2016, and had a
weighted-average interest rate of 4.1% at August 31, 2004. In addition, in March
2004 we extinguished $237 million of unsecured debt, which bore interest at
USD-Libor plus 1.33%, before its July 2008 maturity date.
In March 2004, Carnival plc entered into a 600 million euro unsecured
364-day multi-currency revolving credit facility, guaranteed by Carnival
Corporation, which currently bears interest at eurolibor plus 30 basis points
("BPS"), which interest rate spread over the base rate will vary based on
changes to Carnival plc's senior unsecured credit rating. This facility also has
a nine BPS commitment fee on the undrawn portion and expires in March 2005 but
provides Carnival plc with the option to extend the repayment date of the then
existing outstanding borrowings to June 2006. At August 31, 2004, there were no
borrowings outstanding under this facility. In connection with obtaining this
revolver, Carnival plc repaid, prior to its maturity date, the $93 million
outstanding under the P&O Princess Cruises International Limited ("POPCIL") $710
million revolving credit facilities, which facilities were then terminated prior
to their September 2005 maturity dates. In June 2004, Carnival plc established a
U.S. dollar commercial paper program, which is supported by this 600 million
euro revolving credit facility and, accordingly, any amounts outstanding under
this commercial paper program, none at August 31, 2004, will reduce the
aggregate amount available under the facility.
At August 31, 2004, our $600 million 2% convertible notes were classified
as a current liability, since we may be required to redeem the notes at the
option of the holders on April 15, 2005 at their face value plus any unpaid
accrued interest. If the noteholders do not exercise this option, then we will
change the classification of the notes to long-term, as the next optional
redemption date does not occur until April 15, 2008. We do not currently expect
noteholders to exercise their put options, as the current market value of the 2%
convertible notes is greater than the redemption price.
In connection with a corporate reorganization that was completed in late
February 2004, the POPCIL deed of guarantee dated June 19, 2003, which
guaranteed substantially all of Carnival Corporation's debt, was terminated in
accordance with its terms. The deeds of guarantee between Carnival Corporation
and Carnival plc are still in effect, thus effectively cross guaranteeing all
Carnival Corporation and Carnival plc indebtedness and other monetary
obligations.
NOTE 5 - Contingencies
Litigation
In 2002, two actions (collectively, the "Facsimile Complaints") were filed
against Carnival Corporation on behalf of purported classes of persons who
received unsolicited advertisements via facsimile, alleging that Carnival
Corporation and other defendants distributed unsolicited advertisements via
facsimile in contravention of the U.S. Telephone Consumer Protection Act. The
plaintiffs seek to enjoin the sending of unsolicited facsimile advertisements
and statutory damages. The advertisements referred to in the Facsimile
Complaints that reference a Carnival Cruise Lines product were not sent by
Carnival Corporation, but rather were distributed by a professional faxing
company at the behest of travel agencies. We do not advertise directly to the
traveling public through the use of facsimile transmission. The ultimate
outcomes of
6
the Facsimile Complaints cannot be determined at this time. We believe that we
have meritorious defenses to these claims and, accordingly, we intend to
vigorously defend against these actions.
In February 2001, Holland America Line-USA, Inc. ("HAL-USA"), our
wholly-owned subsidiary, received a grand jury subpoena requesting that it
produce documents and records relating to the air emissions from Holland America
Line ("HAL") ships in Alaska. HAL-USA responded to the subpoena.
On August 17, 2002, an incident occurred in Juneau, Alaska onboard HAL's
Ryndam involving a wastewater discharge from the ship. As a result of this
incident, the Office of the U.S. Attorney in Anchorage, Alaska initiated a grand
jury proceeding. The State of Alaska is separately investigating this incident.
On March 5, 2004, HAL notified the United States and Netherlands
governmental authorities that one of its chief engineers had admitted to
improperly processing bilge water on the Noordam. A subsequent internal
investigation has determined that the improper operation may have begun in
January 2004 and may have continued sporadically through March 4, 2004. HAL and
three shipboard engineers have received grand jury subpoenas from the Office of
the U.S. Attorney in Tampa, Florida.
If the Ryndam or Noordam investigations result in charges being filed, a
judgment could include, among other forms of relief, fines and debarment from
federal contracting, which would prohibit operations in Glacier Bay National
Park and Preserve ("Glacier Bay") during the period of debarment. The ultimate
outcomes of these matters cannot be determined at this time. However, if HAL
were to lose its Glacier Bay permits, we would not expect the impact on our
financial statements to be material to us since we believe there are additional
attractive alternative destinations in Alaska that can be substituted for
Glacier Bay.
Costa Cruises ("Costa") has instituted arbitration proceedings in Italy to
confirm the validity of its November 2000 decision not to deliver its ship, the
Costa Classica, to the shipyard of Cammell Laird Holdings PLC ("Cammell Laird")
under a 79 million euro denominated contract for the conversion and lengthening
of the ship. Costa has also given notice of termination of the contract. It is
now expected that the arbitration tribunal's decision will be made in 2005. In
the event that an award is given in favor of Cammell Laird, the amount of
damages, which Costa would have to pay, if any, is not currently determinable.
The ultimate outcome of this matter cannot be determined at this time.
On April 23, 2003, Festival Crociere S.p.A. ("Festival") commenced an
action against the European Commission (the "Commission") in the Court of First
Instance of the European Communities in Luxembourg seeking to annul the
Commission's antitrust approval of the DLC transaction (the "Festival Action").
We were granted leave to intervene in the Festival Action and filed a Statement
in Intervention with the court. Festival was declared bankrupt on May 27, 2004
and Festival did not submit observations on our Statement in Intervention. A
date for an oral hearing will be set in due course, unless Festival withdraws
its action. A successful third party challenge of an unconditional Commission
clearance decision would be unprecedented. Based on a review of the law and the
factual circumstances of the DLC transaction, as well as the Commission's
approval decision in relation to the DLC transaction, we believe that the
Festival Action will not have a material adverse effect on the companies or the
DLC transaction. However, the ultimate outcome of this matter cannot be
determined at this time.
In the normal course of our business, various other claims and lawsuits
have been filed or are pending against us. Most of these claims and lawsuits are
covered by insurance and, accordingly, the maximum amount of our liability is
typically limited to
7
our self-insurance retention levels. However, the ultimate outcomes of these
claims and lawsuits which are not covered by insurance cannot be determined at
this time.
Contingent Obligations
At August 31, 2004, Carnival Corporation had contingent obligations
totaling $1.07 billion to participants in lease out and lease back type
transactions for three of its ships. At the inception of the leases, the entire
amount of the contingent obligations was paid by Carnival Corporation to major
financial institutions to enable them to directly pay these obligations.
Accordingly, these obligations were considered extinguished, and neither the
funds nor the contingent obligations have been included on our balance sheets.
Carnival Corporation would only be required to make any payments under these
contingent obligations in the remote event of nonperformance by these financial
institutions, all of which have long-term credit ratings of AAA or AA. In
addition, Carnival Corporation obtained a direct guarantee from another AAA
rated financial institution for $290 million of the above noted contingent
obligations, thereby further reducing the already remote exposure to this
portion of the contingent obligations. If the major financial institutions'
credit ratings fall below AA-, Carnival Corporation would be required to move a
majority of the funds from these financial institutions to other highly-rated
financial institutions. If Carnival Corporation's credit rating falls below BBB,
it would be required to provide a standby letter of credit for $87 million, or
alternatively provide mortgages in the aggregate amount of $87 million on two of
its ships.
In the unlikely event that Carnival Corporation were to terminate the
three lease agreements early or default on its obligations, it would, as of
August 31, 2004, have to pay a total of $177 million in stipulated damages. As
of August 31, 2004, $186 million of standby letters of credit have been issued
by a major financial institution in order to provide further security for the
payment of these contingent stipulated damages. In the event Carnival
Corporation were to default under its $1.4 billion revolving credit facility, it
would be required to post cash collateral to support the stipulated damages
standby letters of credit. Between 2017 and 2022, Carnival Corporation has the
right to exercise options that would terminate these transactions at no cost to
it. As a result of these three transactions, we have $38 million and $40 million
of deferred income recorded on our balance sheets as of August 31, 2004 and
November 30, 2003, respectively, which is being amortized to nonoperating income
through 2022.
Some of the debt agreements that we enter into include indemnification
provisions that obligate us to make payments to the counterparty if certain
events occur. These contingencies generally relate to changes in taxes, changes
in laws that increase lender capital costs and other similar costs. The
indemnification clauses are often standard contractual terms and were entered
into in the normal course of business. There are no stated or notional amounts
included in the indemnification clauses and we are not able to estimate the
maximum potential amount of future payments, if any, under these indemnification
clauses. We have not been required to make any material payments under such
indemnification clauses in the past and, under current circumstances, we do not
believe a request for material future indemnification payments is probable.
8
NOTE 6 - Comprehensive Income
Comprehensive income was as follows (in millions):
Nine Months Three Months
Ended August 31, Ended August 31,
---------------- ----------------
2004 2003 2004 2003
---- ---- ---- ----
Net income $1,561 $ 989 $1,025 $ 734
Items included in accumulated
other comprehensive income:
Foreign currency translation
adjustment 135 86 (40) (77)
Changes related to cash flow
derivative hedges (3) 4 4 13
Unrealized gains on
marketable securities 4 1
------ ------ ------ ------
Total comprehensive income $1,693 $1,083 $ 989 $ 671
====== ====== ====== ======
NOTE 7 - Segment Information
Our cruise segment includes all of our cruise brands, which have been
aggregated as a single reportable segment based on the similarity of their
economic and other characteristics. Our other segment represents the hotel, tour
and transportation operations of Holland America Tours and Princess Tours and
the business-to-business travel agency operations of P&O Travel Ltd., the latter
two since completion of the DLC transaction on April 17, 2003.
Selected segment information for our cruise and other segments was as
follows (in millions):
Nine Months Ended August 31,
----------------------------
Selling
Operating and admin- Operating
2004 Revenues expenses istrative income
- ---- -------- -------- --------- ------
Cruise $7,218 $3,933 $ 902 $1,800
Other 355 271 42 26
Intersegment elimination (88) (88)
------ ------ ------ ------
$7,485 $4,116 $ 944 $1,826
====== ====== ====== ======
2003
- ----
Cruise $4,674 $2,563 $ 622 $1,085
Other 303 238 28 24
Intersegment elimination (76) (76)
------ ------ ------ ------
$4,901 $2,725 $ 650 $1,109
====== ====== ====== ======
Three Months Ended August 31,
-----------------------------
Selling
Operating and admin- Operating
2004 Revenues expenses istrative income
- ---- -------- -------- --------- ------
Cruise $3,023 $1,429 $ 292 $1,098
Other 301 219 14 62
Intersegment elimination (79) (79)
------ ------ ------ ------
$3,245 $1,569 $ 306 $1,160
====== ====== ====== ======
2003
- ----
Cruise $2,330 $1,149 $ 249 $ 764
Other 257 192 12 45
Intersegment elimination (63) (63)
------ ------ ------ ------
$2,524 $1,278 $ 261 $ 809
====== ====== ====== ======
NOTE 8 - Earnings Per Share
Our basic and diluted earnings per share were computed as follows (in
millions, except per share data):
9
Nine Months Three Months
Ended August 31, Ended August 31,
---------------- ----------------
2004 2003(a) 2004 2003
---- ---- ---- ----
Net income $1,561 $ 989 $1,025 $ 734
Interest on dilutive zero-coupon
convertible notes 11 5 6 5
Interest on dilutive 2% convertible
notes 10 3
------ ------ ------ ------
Net income for diluted earnings
per share $1,582 $ 994 $1,034 $ 739
====== ====== ====== ======
Weighted-average common and
ordinary shares outstanding 802 691 803 797
Dilutive effect of zero-coupon
convertible notes 12 6 17 17
Dilutive effect of 2% convertible
notes 15 15
Dilutive effect of stock plans 4 2 5 4
------ ------ ------ ------
Diluted weighted-average shares
outstanding 833 699 840 818
====== ====== ====== ======
Basic earnings per share $ 1.95 $ 1.43 $ 1.28 $ 0.92
====== ====== ====== ======
Diluted earnings per share $ 1.90 $ 1.42 $ 1.23 $ 0.90
====== ====== ====== ======
(a) The weighted-average shares outstanding for the nine months ended August 31,
2003 included the pro rata Carnival plc shares since April 17, 2003.
Our diluted earnings per share computation did not include a maximum of
26.7 million shares (36.2 million shares in 2003) and 20.9 million shares (36.2
million shares in 2003) for the nine and three months ended August 31, 2004 and
2003, respectively, of Carnival Corporation common stock issuable upon
conversion of its contingently convertible debt.
In addition, employee and director stock options to purchase 3.8 million
shares (7.4 million shares in 2003) and 1.3 million shares (3.1 million shares
in 2003) for the nine and three months ended August 31, 2004 and 2003,
respectively, were excluded from our diluted earnings per share computation
since the effect of including them was anti-dilutive.
Carnival Corporation's common stock price was above the defined trigger
prices for its zero-coupon convertible notes and 2% convertible notes for a
defined duration of time during the three months ended August 31, 2004 and,
therefore, these notes are convertible into 17.4 million and 15.3 million shares
of Carnival Corporation common stock during our 2004 fourth quarter at a per
share conversion price of $31.87 and $39.14, respectively. Accordingly, they
will be included in our fourth quarter diluted earnings per share computation,
if dilutive. Carnival Corporation's common stock price did not reach the defined
trigger price for its 1.75% convertible notes during the three months ended
August 31, 2004 and, accordingly, these notes are not convertible in our 2004
third quarter. In accordance with current accounting practice, our 1.75%
convertible notes will not be included in our fourth quarter dilutive earnings
per share computation, unless Carnival Corporation's common stock price reaches
the defined trigger price of $63.73 in the fourth quarter, and its impact is
dilutive. See Note 9 "Recent Accounting Pronouncement" for a discussion of
changes that are expected to be made in the 2005 first quarter to our
computation of diluted earnings per share for our contingently convertible debt.
NOTE 9 - Recent Accounting Pronouncement
On September 30, 2004, the Emerging Issues Task Force (the "EITF") of the
Financial Accounting Standards Board ("FASB") reached a final consensus (subject
to FASB ratification) on EITF Statement 04-08, "Accounting Issues Related to
Certain Features of Contingently Convertible Debt and the Effect on Diluted
Earnings per Share." EITF 04-08 requires all shares that are issuable under our
outstanding convertible notes that have contingent conversion features to be
considered outstanding
10
for our diluted earnings per share computations, if dilutive, using the "if
converted" method of accounting from the date of issuance. For the nine and
three months ended August 31, 2004, these shares were only included in our
diluted earnings per share computation if Carnival Corporation's common stock
price had reached certain conversion trigger prices. If adopted by the FASB,
EITF 04-08 will be effective for us in our first quarter 2005 and will require
us to retroactively restate our prior periods diluted earnings per share. Upon
the adoption of the retroactive restatement provision, our currently reported
diluted earnings per share will be reduced by $0.02 ($0.03 in 2003) and $0.01
($0.02 in 2003) for the nine and three months ended August 31, 2004 and 2003,
respectively.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Cautionary Note Concerning Factors That May Affect Future Results
Some of the statements contained in this "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and elsewhere in this
joint Quarterly Report on Form 10-Q are "forward-looking statements" that
involve risks, uncertainties and assumptions with respect to us, including some
statements concerning future results, plans, outlook, goals and other events
which have not yet occurred. These statements are intended to qualify for the
safe harbors from liability provided by Section 27A of the Securities Act of
1933 and Section 21E of the Securities Exchange Act of 1934. You can find many,
but not all, of these statements by looking for words like "will," "may,"
"believes," "expects," "anticipates," "forecast," "future," "intends," "plans,"
and "estimates" and for similar expressions.
Because forward-looking statements involve risks and uncertainties, there
are many factors that could cause our actual results, performance or
achievements to differ materially from those expressed or implied in this joint
Quarterly Report on Form 10-Q. Forward-looking statements include those
statements which may impact the forecasting of our earnings per share, net
revenue yields, booking levels, pricing, occupancy, operating, financing and tax
costs, costs per available lower berth day ("ALBD"), estimates of ship
depreciable lives and residual values, outlook or business prospects. These
factors include, but are not limited to, the following:
- risks associated with the DLC structure, including the uncertainty
of its tax status;
- general economic and business conditions, which may impact levels of
disposable income of consumers and net revenue yields for our cruise
brands;
- conditions in the cruise and land-based vacation industries,
including competition from other cruise ship operators and providers
of other vacation alternatives and increases in capacity offered by
cruise ship and land-based vacation alternatives;
- risks associated with operating internationally;
- the international political and economic climate, armed conflicts,
terrorist attacks and threats thereof, availability of air service,
other world events and adverse publicity, and their impact on the
demand for cruises;
- accidents and other incidents affecting the health, safety, security
and vacation satisfaction of passengers;
- our ability to implement our shipbuilding programs and brand
strategies and to continue to expand our business worldwide;
- our ability to attract and retain qualified shipboard crew and
maintain good relations with employee unions;
- our ability to obtain financing on terms that are favorable or
consistent with our expectations;
- the impact of changes in operating and financing costs, including
changes in foreign currency and interest rates and fuel, food,
payroll, insurance and security costs;
- changes in the tax, environmental, health, safety, security and
other regulatory regimes under which we operate;
- continued availability of attractive port destinations;
- our ability to successfully implement cost improvement plans and to
integrate business acquisitions;
- continuing financial viability of our travel agent distribution
system and air service providers; and
11
- unusual weather patterns or natural disasters.
Forward-looking statements should not be relied upon as a prediction of
actual results. Subject to any continuing obligations under applicable law or
any relevant listing rules, we expressly disclaim any obligation to disseminate,
after the date of this joint Quarterly Report on Form 10-Q, any updates or
revisions to any such forward-looking statements to reflect any change in
expectations or events, conditions or circumstances on which any such statements
are based.
Key Performance Indicators, Pro Forma Information and Critical Accounting
Estimates
We use net cruise revenues per ALBD ("net revenue yields") and net cruise
costs per ALBD as significant non-GAAP financial measures of our cruise segment
financial performance. We believe that net revenue yields are commonly used in
the cruise industry to measure a company's cruise segment revenue performance.
This measure is also used for revenue management purposes. In calculating net
revenue yields, we use "net cruise revenues" rather than "gross cruise
revenues." We believe that net cruise revenues is a more meaningful measure in
determining revenue yield than gross cruise revenues because it reflects the
cruise revenues earned by us net of our most significant variable costs, which
are travel agent commissions, cost of air transportation and certain other
variable direct costs associated with onboard revenues. Substantially all of our
remaining cruise costs are largely fixed once our ship capacity levels have been
determined.
Net cruise costs per ALBD is the most significant measure we use to
monitor our ability to control our cruise segment costs rather than gross cruise
costs per ALBD. In calculating net cruise costs, we exclude the same variable
costs as described above, which are included in the calculation of net cruise
revenues. This is done to avoid duplicating these variable costs in these two
non-GAAP financial measures.
We have not provided estimates of future gross revenue yields or future
gross cruise costs per ALBD because the reconciliations of forecasted net cruise
revenues to forecasted gross cruise revenues or forecasted net cruise costs to
forecasted cruise operating expenses would require us to forecast, with
reasonable accuracy, the amount of air and other transportation costs that our
forecasted cruise passengers would elect to purchase from us (the "air/sea
mix"). Since the forecasting of future air/sea mix involves several significant
variables that are relatively difficult to forecast and the revenues from the
sale of air and other transportation approximate the costs of providing that
transportation, management focuses primarily on forecasts of net cruise revenues
and costs rather than gross cruise revenues and costs. This does not impact, in
any material respect, our ability to forecast our future results, as any
variation in the air/sea mix has no material impact on our forecasted net cruise
revenues or forecasted net cruise costs. As such, management does not believe
that this reconciling information would be meaningful.
In addition, because a significant portion of our operations utilize the
euro or sterling to measure their results and financial condition, the
translation of those operations to our U.S. dollar reporting currency results in
increases in reported U.S. dollar revenues and expenses if the U.S. dollar
weakens against these foreign currencies, and decreases in reported U.S. dollar
revenues and expenses if the U.S. dollar strengthens against these foreign
currencies. Accordingly, we also monitor our key indicators assuming the 2004
exchange rates have remained constant with the prior year's comparable rates, or
on a "constant dollar basis," in order to remove the impact of changes in
exchange rates on our non U.S. cruise operations. We believe that this is a
useful measure indicating the actual growth of our operations in a fluctuating
exchange rate environment.
Our 2003 reported results only included the results of P&O Princess since
April 17, 2003. Consequently, for the nine months ended August 31, 2004, we
believe that the most meaningful comparison of our nine month financial results
and revenue and cost metrics is to the comparable pro forma results and metrics
in 2003, which reflect the operations of both Carnival Corporation and P&O
Princess as if the companies had been consolidated throughout 2003. Accordingly,
we have disclosed pro forma information for the nine months ended August 31,
2003, as well as the required reported information, in
12
the discussion of our results of operations. Since the third quarter of 2003
includes operations that are comparable to 2004 no pro forma results are
disclosed.
The 2003 pro forma information was computed by adding the results of P&O
Princess' nine months operations, adjusted for acquisition adjustment reductions
of $12 million of depreciation expense and $3 million of interest expense, and
excluding $51 million of nonrecurring DLC transaction costs, to the 2003
Carnival Corporation reported results for the nine months ended August 31, 2003.
For a discussion of our critical accounting estimates, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations," which
is included in Carnival Corporation & plc's 2003 joint Annual Report on Form
10-K. On April 14, 2004, the FASB decided that the Property, Plant and Equipment
Draft Statement of Position ("PP&E SOP") should not be approved for issuance.
Accordingly, the disclosure of the possible impact from this PP&E SOP included
in our joint Annual Report on Form 10-K is no longer applicable, although it is
still possible that all or certain provisions of the PP&E SOP could be required
in the future under U.S. generally accepted accounting principles.
Outlook for Full Year and Fourth Quarter 2004
On September 17, 2004, we disclosed that we were on track to achieve a
record increase in revenue yields this year of approximately 9%, while absorbing
an unusually high 17% capacity increase.
We also disclosed that for the fourth quarter of 2004 advance booking
levels were higher versus prior year levels at that point in time on a capacity
adjusted basis, with pricing also ahead of last year. As a result, we disclosed
that we expect that net revenue yields for the fourth quarter of 2004 will
increase approximately 7% to 9% (5% to 7% on a constant dollar basis), compared
to last year's fourth quarter, despite the negative effect of Hurricane Frances.
Net cruise costs per ALBD in the fourth quarter of 2004 are expected to be up 6%
to 8% (4% to 6% on a constant dollar basis), compared to 2003 primarily due to
higher fuel costs, costs associated with the Cunard office relocation from
Miami, Florida to Princess Cruises' location in Santa Clarita, California and
costs related to Hurricane Frances. Based on these estimates, we disclosed that
we expected fourth quarter 2004 earnings per share to be in the range of $0.30
to $0.32. Our guidance included the estimated impact of Hurricane Frances of
between $0.03 to $0.04 per share, as well as the cost of the Cunard relocation
of between $0.01 to $0.02 per share, both of which will primarily impact the
2004 fourth quarter. On September 28, 2004, we announced that the negative
impact of Hurricane Jeanne on our fourth quarter earnings per share will be
approximately $0.02, thus reducing our fourth quarter earnings per share
guidance to a range of $0.28 to $0.30 per share. Substantially all the impact of
Hurricane Jeanne is attributable to lost revenues. This guidance includes all of
the estimated impacts of the last four hurricanes which effected our operations.
Our guidance was based on an exchange rate of $1.23 to the euro and $1.82 to
sterling.
Seasonality
Historically, demand for cruises has been greatest during our third fiscal
quarter, which includes the Northern Hemisphere summer months. The consolidation
of the P&O Princess brands has caused our quarterly results to be more seasonal
than we had previously experienced, as their business is more seasonal. This
higher demand during the third quarter results in higher net revenue yields and,
accordingly, the largest share of our net income is earned during this period.
Substantially all of Holland America Tours' and Princess Tours' revenues and net
income are generated from May through September in conjunction with the Alaska
cruise season.
13
Nine Months Ended August 31, 2004 ("2004") Compared to Pro Forma Nine Months
Ended August 31, 2003 ("pro forma 2003") and Reported Results for the Nine
Months Ended August 31, 2003 ("2003")
Our reported and pro forma results of operations and selected statistical
information were as follows:
Nine Months Ended August 31, Difference Between 2004 and
---------------------------- ---------------------------
Pro Forma Proforma
--------- --------
2004 2003 2003 2003 2003
---- ---- ---- ---- ----
(dollars in millions)
Revenues
Cruise
Passenger tickets $5,663 $4,364 $3,671 $1,299 $1,992
Onboard and other 1,555 1,183 1,003 372 552
Other 267 233 227 34 40
------ ------ ------ ------ ------
7,485 5,780 4,901 1,705 2,584
------ ------ ------ ------ ------
Costs and Expenses
Operating
Cruise
Commissions, transportation
and other 1,227 954 748 273 479
Onboard and other 270 205 155 65 115
Payroll and related 739 616 520 123 219
Food 412 328 276 84 136
Other ship operating 1,285 1,056 864 229 421
Other 183 170 162 13 21
------ ------ ------ ------ ------
Total 4,116 3,329 2,725 787 1,391
Selling and administrative 944 820 650 124 294
Depreciation and amortization 599 479 417 120 182
------ ------ ------ ------ ------
Operating Income 1,826 1,152 1,109 674 717
Nonoperating Expense, Net (209) (125) (100) (84) (109)
------ ------ ------ ------ ------
Income Before Income Taxes 1,617 1,027 1,009 590 608
Income Tax Expense, Net (56) (17) (20) (39) (36)
------ ------ ------ ------ ------
Net Income $1,561 $1,010 $ 989 $ 551 $ 572
====== ====== ====== ====== ======
Selected Statistical Information
Passengers carried
(in thousands) 4,762 4,056 3,671 706 1,091
====== ====== ====== ====== ======
Occupancy percentage 105.2% 103.1% 104.4% 2.1 pts. 0.8 pts.
====== ====== ====== ====== ======
The increases in our 2004 revenues and operating costs and expenses
compared to the 2003 results were primarily due to the inclusion of P&O Princess
results throughout 2004, but only since April 17, 2003 during 2003 (the date the
DLC transaction was completed). Also impacting the comparison of 2004 results to
2003 reported results, and discussed below in the comparison to pro forma 2003
results, were our capacity growth, higher net revenue yields and the weaker U.S.
dollar relative to the euro and sterling.
Revenues
We use net revenue yields to measure our cruise segment revenue
performance. Gross and net revenue yields were computed by dividing the gross or
net cruise revenues, without rounding, by ALBDs as follows:
14
Nine Months Ended August 31,
----------------------------
2004 Pro Forma 2003 2003
---- -------------- ----
(in millions, except ALBDs and yields)
Cruise revenues
Passenger tickets $ 5,663 $ 4,364 $ 3,671
Onboard and other 1,555 1,183 1,003
----------- ----------- -----------
Gross cruise revenues 7,218 5,547 4,674
Less cruise costs
Commissions, transportation
and other (1,227) (954) (748)
Onboard and other (270) (205) (155)
----------- ----------- -----------
Net cruise revenues $ 5,721 $ 4,388 $ 3,771
=========== =========== ===========
ALBDs 32,867,217 27,625,601 23,380,677
=========== =========== ===========
Gross revenue yields $ 219.61 $ 200.79 $ 199.92
=========== =========== ===========
Net revenue yields $ 174.05 $ 158.85 $ 161.32
=========== =========== ===========
Net revenue yields in 2004 increased 9.6% (9.4% gross) compared to pro
forma 2003 net revenue yields primarily due to a 9.3% increase in net passenger
ticket revenue yields and a 10.5% increase in net onboard and other revenue
yields, both of which include the effect of the weak U.S. dollar relative to the
euro and sterling. Net revenue yields as measured on a constant dollar basis
increased 6.6% when compared with the same period last year. Onboard and other
revenues included concession revenues of $193 million in 2004, $147 million in
pro forma 2003 and $137 million in 2003.
Net revenue yields in 2004 increased 7.9% (9.8% gross) compared to 2003
primarily due to the same reasons noted above. Gross revenue yields increased
more than net revenue yields primarily because of the higher proportion of
customers of the P&O Princess brands who purchased air transportation from us.
Costs and Expenses
We use net cruise costs per ALBD to monitor our ability to control our
cruise segment costs. Gross and net cruise costs per ALBD were computed by
dividing the gross or net cruise costs, without rounding, by ALBDs as follows:
Nine Months Ended August 31,
----------------------------
2004 Pro Forma 2003 2003
---- -------------- ----
(in millions, except ALBDs and costs per ALBD)
Cruise operating expenses $ 3,933 $ 3,159 $ 2,563
Cruise selling and
administrative expenses 902 783 622
----------- ----------- -----------
Gross cruise costs 4,835 3,942 3,185
Less cruise costs included in net
cruise revenues
Commissions, transportation
and other (1,227) (954) (748)
Onboard and other (270) (205) (155)
----------- ----------- -----------
Net cruise costs $ 3,338 $ 2,783 $ 2,282
=========== =========== ===========
ALBDs 32,867,217 27,625,601 23,380,677
=========== =========== ===========
Gross cruise costs per ALBD $ 147.12 $ 142.66 $ 136.22
=========== =========== ===========
Net cruise costs per ALBD $ 101.56 $ 100.72 $ 97.62
=========== =========== ===========
Net cruise costs per ALBD in 2004 increased slightly compared to pro forma
2003 net cruise costs. This was achieved despite the impact of the weak dollar,
which had the effect of significantly increasing cruise costs per ALBD. On a
constant dollar basis, net cruise costs per ALBD declined 2.2% from the pro
forma 2003 primarily due to the economies of scale associated with a 19.0%
capacity increase and synergy savings
15
from integration efforts following the DLC transaction. Gross cruise costs per
ALBD in 2004 increased 3.1% compared to pro forma 2003.
Net cruise costs per ALBD in 2004 increased 4.0% (8.0% gross) compared to
2003 primarily because of the impact of the weak U.S. dollar and higher
operating costs of the P&O Princess brands. Gross cruise costs per ALBD
increased more than net cruise costs per ALBD primarily because of the higher
proportion of the P&O Princess brands' customers who purchased air
transportation from us.
Depreciation and amortization expense increased by $120 million, or 25.1%,
to $599 million in 2004 from $479 million in pro forma 2003 largely due to the
19.0% expansion of the combined fleet and ship improvement expenditures, as well
as the impact of a weaker U.S. dollar. Depreciation and amortization increased
by $182 million, or 43.6%, to $599 million in 2004 from $417 million in 2003.
This increase was primarily due to the same factors as noted above and the
result of the consolidation of P&O Princess.
Nonoperating (Expense) Income
Interest expense, net of interest income and excluding capitalized
interest, increased to $221 million in 2004 from $147 million in 2003, or $74
million, which consisted primarily of a $89 million increase in interest expense
from our higher level of average borrowings, partially offset by a $15 million
decrease in interest expense due to lower average borrowing rates. The higher
average debt balances were primarily a result of our consolidation of the P&O
Princess debt and additional borrowings associated with new ship deliveries. Net
interest expense, excluding capitalized interest, increased by $35 million, or
18.8%, to $221 million in 2004 from $186 million in pro forma 2003. This
increase was primarily due to the increased level of average borrowings.
Income Taxes
Income tax expense increased $39 million from pro forma 2003 to $56
million in 2004 primarily because of the increase in Costa's Italian taxable
income and, commencing in 2004, certain elements of our cruise segment income
being subject to U.S. taxation.
Three Months Ended August 31, 2004 ("2004") Compared to the Three Months Ended
August 31, 2003 ("2003")
Revenues
Gross and net revenue yields were as follows:
Three Months Ended August 31,
-----------------------------
2004 2003
---- ----
(in millions, except ALBDs and yields)
Cruise revenues
Passenger tickets $ 2,444 $ 1,863
Onboard and other 579 467
----------- -----------
Gross cruise revenues 3,023 2,330
Less cruise costs
Commissions, transportation
and other (467) (361)
Onboard and other (92) (83)
----------- -----------
Net cruise revenues $ 2,464 $ 1,886
=========== ===========
ALBDs 11,684,117 9,915,347
=========== ===========
Gross revenue yields $ 258.75 $ 234.95
=========== ===========
Net revenue yields $ 210.87 $ 190.20
=========== ===========
Net and gross revenue yields in 2004 increased 10.9% and 10.1% compared to
2003, respectively, primarily due to an 11.7% increase in net passenger ticket
revenue yields
16
and a 7.5% increase in net onboard and other revenue yields, both of which
include the effect of the weak U.S. dollar relative to the euro and sterling.
Net revenue yields as measured on a constant dollar basis increased 8.3% when
compared to the same period last year. Onboard and other revenues included
concession revenues of $72 million in 2004 and $53 million in 2003.
Costs and Expenses
Gross and net cruise costs per ALBD were as follows:
Three Months Ended August 31,
-----------------------------
2004 2003
---- ----
(in millions, except ALBDs and costs per ALBD)
Cruise operating expenses $ 1,429 $ 1,149
Cruise selling and
administrative expenses 292 249
----------- -----------
Gross cruise costs 1,721 1,398
Less cruise costs included in net
cruise revenues
Commissions, transportation
and other (467) (361)
Onboard and other (92) (83)
----------- -----------
Net cruise costs $ 1,162 $ 954
=========== ===========
ALBDs 11,684,117 9,915,347
=========== ===========
Gross cruise costs per ALBD $ 147.25 $ 141.04
=========== ===========
Net cruise costs per ALBD $ 99.36 $ 96.28
=========== ===========
Net cruise costs per ALBD in 2004 increased 3.2% compared to 2003 net
cruise costs. This increase was primarily the result of higher fuel costs and
the impact of the weak U.S. dollar. On a constant dollar basis, net cruise costs
per ALBD increased 0.8% compared to 2003 largely due to an 11.2% increase in
fuel cost and $4 million of increased costs associated with Cunard's office
relocation, partially offset by economies of scale associated with a 17.8%
capacity increase and synergy savings from integration efforts following the DLC
transaction. Gross cruise costs per ALBD in 2004 increased 4.4% compared to
2003.
Depreciation and amortization expense increased by $34 million, or 19.3%,
to $210 million in 2004 from $176 million in 2003 largely due to the 17.8%
expansion of the combined fleet and ship improvement expenditures, as well as
the impact of a weaker U.S. dollar.
Income Taxes
Income tax expense increased $31 million from $29 million in 2003 to $60
million in 2004 primarily because of the increase in Costa's Italian taxable
income and, commencing in 2004, certain elements of our cruise segment income
being subject to U.S. taxation.
Nonoperating (Expense) Income
Interest expense, net of interest income and excluding capitalized
interest, increased to $77 million in 2004 from $67 million in 2003, or $10
million, which consisted primarily of a $9 million increase in interest expense
from our higher level of average borrowings. The higher average debt balances
were primarily a result of additional borrowings associated with new ship
deliveries.
17
Liquidity and Capital Resources
Sources and Uses of Cash
Our business provided $2.62 billion of net cash from operations during the
nine months ended August 31, 2004, an increase of $1.23 billion, or 88.0%,
compared to 2003, due primarily to the consolidation of the P&O Princess
operations and significantly higher cash flows from our operations. We continue
to generate substantial cash from operations and remain in a strong financial
position.
During the nine months ended August 31, 2004, our expenditures for capital
projects were $2.87 billion, of which $2.61 billion was spent for our ongoing
new shipbuilding program, including the final delivery payments for the Queen
Mary 2, Carnival Miracle, Diamond Princess, Westerdam, Caribbean Princess and
Sapphire Princess. The remaining capital expenditures consisted primarily of
$168 million for ship improvements and refurbishments, and $92 million for
Alaska tour assets, cruise port facility developments and information technology
assets.
During the nine months ended August 31, 2004, we borrowed $843 million,
which was used primarily to finance a portion of the Diamond Princess and
Sapphire Princess purchase prices. During the same nine month period, we made
$887 million of debt repayments, which included $330 million of debt repaid
prior to its maturity date in order to reduce our borrowing rates. We also paid
cash dividends of $300 million in the first nine months of fiscal 2004.
Future Commitments and Funding Sources
Our contractual cash obligations, with initial and remaining terms in
excess of one year, remained generally unchanged at August 31, 2004 compared to
November 30, 2003, except for changes to our debt as discussed in Note 4 in the
accompanying financial statements and changes to our ship construction
commitments as updated below.
In connection with our twelve cruise ships under contract for
construction, including those ship construction commitments entered into in
September 2004, we anticipate paying the remaining estimated total all-in costs
as follows (in millions):
Fiscal
------
2004 (remaining three months) $ 560
2005 1,350
2006 1,390
2007 1,400
2008 1,010
------
Total $5,710
======
The year over year percentage increase in Carnival Corporation & plc's
ALBD capacity for 2005, 2006, 2007 and 2008, resulting primarily from new ships
entering service, is currently expected to be 9.1%, 5.6%, 5.9% and 5.1%,
respectively.
As of August 31, 2004, we had liquidity of $3.05 billion, which consisted
of $596 million of cash, cash equivalents and short-term investments and $2.45
billion available for borrowing under our revolving credit facilities. Our
revolving credit facilities mature in May and June 2006, except for Carnival
plc's 600 million euro facility, which expires in March 2005 (see Note 4 in the
accompanying financial statements). A key to our access to liquidity is the
maintenance of our strong credit ratings.
We believe that our existing liquidity and cash flow from future
operations will be sufficient to fund our committed capital projects, debt
service requirements, dividend payments, working capital and other firm
commitments. However, our forecasted cash flow from future operations, as well
as our credit ratings, may be adversely affected by various factors, including,
but not limited to, those factors noted under "Cautionary Note Concerning
Factors That May Affect Future Results." To the extent that we are required, or
choose, to fund future cash requirements, including our future shipbuilding
commitments, from sources other than as discussed above, we believe that we will
be able to secure such financing from banks or through the offering of debt
and/or equity securities in the public or private markets. No assurance can be
given
18
that our future operating cash flow will be sufficient to fund future
obligations or that we will be able to obtain additional financing, if
necessary.
Off-Balance Sheet Arrangements
We are not a party to any off-balance sheet arrangements, including
guarantee contracts, retained or contingent interests, certain derivative
instruments and variable interest entities, that either have, or are reasonably
likely to have, a current or future material effect on our financial statements.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are designed to provide reasonable
assurance that information required to be disclosed by us in the reports that we
file or submit, is recorded, processed, summarized and reported, within the time
periods specified in the Securities and Exchange Commission's rules and forms.
Our Chief Executive Officer, Chief Operating Officer and Chief Financial
and Accounting Officer have evaluated our disclosure controls and procedures and
have concluded, as of August 31, 2004, that they are effective as described
above.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial
reporting during our quarter ended August 31, 2004 that have materially affected
or are reasonably likely to materially affect our internal control over
financial reporting.
It should be noted that any system of controls, however well designed and
operated, can provide only reasonable, and not absolute, assurance that the
objectives of the system will be met. In addition, the design of any control
system is based in part upon certain assumptions about the likelihood of future
events. Because of these and other inherent limitations of control systems,
there is only reasonable assurance that our controls will succeed in achieving
their goals under all potential future conditions.
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
An action referred to as the "Festival Action" was previously reported in
the Carnival Corporation and Carnival plc joint Annual Report on Form 10-K for
the fiscal year ended November 30, 2003. Carnival Corporation filed a Statement
in Intervention in support of the European Commission. A date for an oral
hearing will be set in due course, unless Festival withdraws its action.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
3.1 Third Amended and Restated Articles of Incorporation of Carnival
Corporation, incorporated by reference to Exhibit No. 3.1 to the
joint Current Report on Form 8-K of Carnival Corporation and
Carnival plc filed on April 17, 2003.
3.2 Amended and Restated By-laws of Carnival Corporation, incorporated
by
19
reference to Exhibit No. 3.2 to the joint Current Report on Form 8-K
of Carnival Corporation and Carnival plc filed on April 17, 2003.
3.3 Articles of Association of Carnival plc, incorporated by reference
to Exhibit No. 3.3 to the joint Current Report on Form 8-K of
Carnival Corporation and Carnival plc filed on April 17, 2003.
3.4 Memorandum of Association of Carnival plc, incorporated by reference
to Exhibit No. 3.4 to the joint Current Report on Form 8-K of
Carnival Corporation and Carnival plc filed on April 17, 2003.
10.1 Amendment No. 1 to Employment Agreement dated as of July 19, 2004 by
and between P&O Princess Cruises International, Ltd. and Peter
Ratcliffe.
12 Ratio of Earnings to Fixed Charges.
31.1 Certification of Chief Executive Officer of Carnival Corporation
pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Operating Officer of Carnival Corporation
pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.3 Certification of Executive Vice President and Chief Financial and
Accounting Officer of Carnival Corporation pursuant to Rule
13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
31.4 Certification of Chief Executive Officer of Carnival plc pursuant to
Rule 13a-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.5 Certification of Chief Operating Officer of Carnival plc pursuant to
Rule 13a-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.6 Certification of Executive Vice President and Chief Financial and
Accounting Officer of Carnival plc pursuant to Rule 13a-14(a), as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer of Carnival Corporation
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Operating Officer of Carnival Corporation
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
32.3 Certification of Executive Vice President and Chief Financial and
Accounting Officer of Carnival Corporation pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.4 Certification of Chief Executive Officer of Carnival plc pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.5 Certification of Chief Operating Officer of Carnival plc pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.6 Certification of Executive Vice President and Chief Financial and
Accounting Officer of Carnival plc pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
20
(b) Reports on Form 8-K
Carnival Corporation and Carnival plc filed a joint Current Report on Form
8-K on July 22, 2004 (Item 5).
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrants have duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CARNIVAL CORPORATION CARNIVAL plc
By: /s/ Micky Arison By: /s/ Micky Arison
---------------- ----------------
Micky Arison Micky Arison
Chairman of the Board of Directors Chairman of the Board of Directors
and Chief Executive Officer and Chief Executive Officer
By: /s/ Howard S. Frank By: /s/ Howard S. Frank
------------------- -------------------
Howard S. Frank Howard S. Frank
Vice Chairman of the Board of Vice Chairman of the Board of
Directors and Chief Operating Officer Directors and Chief Operating Officer
By: /s/ Gerald R. Cahill By: /s/ Gerald R. Cahill
-------------------- --------------------
Gerald R. Cahill Gerald R. Cahill
Executive Vice President Executive Vice President
and Chief Financial and and Chief Financial and
Accounting Officer Accounting Officer
Dated: October 7, 2004 Dated: October 7, 2004
21