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 February 28, 2005
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 98-0357772
(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 March 31, 2005 Carnival Corporation At March 31, 2005, Carnival plc had
had outstanding 634,905,663 shares of outstanding 212,262,926 Ordinary
Common Stock, $.01 par value. Shares $1.66 stated value, one
Special Voting Share, GBP 1.00 par
value and 634,905,663 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)
Three Months
Ended February 28/29,
---------------------
2005 2004
---- ----
Revenues
Cruise
Passenger tickets $ 1,841 $ 1,527
Onboard and other 546 446
Other 9 8
------- -------
2,396 1,981
------- -------
Costs and Expenses
Operating
Cruise
Commissions, transportation and other 431 384
Onboard and other 96 81
Payroll and related 274 237
Food 154 127
Other ship operating 457 378
Other 11 10
------- -------
Total 1,423 1,217
Selling and administrative 334 316
Depreciation and amortization 221 188
------- -------
1,978 1,721
------- -------
Operating Income 418 260
------- -------
Nonoperating (Expense) Income
Interest income 3 4
Interest expense, net of
capitalized interest (86) (65)
Other income, net 7
------- -------
(76) (61)
------- -------
Income Before Income Taxes 342 199
Income Tax Benefit, Net 3 4
------- -------
Net Income $ 345 $ 203
======= =======
Earnings Per Share
Basic $ 0.43 $ 0.25
======= =======
Diluted $ 0.42 $ 0.25
======= =======
Dividends Per Share $ 0.15 $ 0.125
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
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CARNIVAL CORPORATION & PLC
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in millions, except par/stated values)
February 28, November 30,
ASSETS 2005 2004
---- ----
Current Assets
Cash and cash equivalents $ 321 $ 643
Accounts receivable, net 332 409
Inventories 245 240
Prepaid expenses and other 458 436
-------- --------
Total current assets 1,356 1,728
-------- --------
Property and Equipment, Net 21,228 20,823
Goodwill 3,319 3,321
Trademarks 1,308 1,306
Other Assets 388 458
-------- --------
$ 27,599 $ 27,636
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Short-term borrowings $ 368 $ 381
Current portion of long-term debt 919 681
Convertible debt subject to current put option 600 600
Accounts payable 611 631
Accrued liabilities and other 806 868
Customer deposits 1,939 1,873
-------- --------
Total current liabilities 5,243 5,034
-------- --------
Long-Term Debt 5,879 6,291
Other Long-Term Liabilities and Deferred Income 460 551
Contingencies (Note 4)
Shareholders' Equity
Common stock of Carnival Corporation; $.01 par
value; 1,960 shares authorized; 635 shares at 2005
and 634 shares at 2004 issued and outstanding 6 6
Ordinary shares of Carnival plc; $1.66 stated value;
226 shares authorized; 212 shares at 2005 and
2004 issued 353 353
Additional paid-in capital 7,340 7,311
Retained earnings 8,847 8,623
Unearned stock compensation (20) (16)
Accumulated other comprehensive income 549 541
Treasury stock; 42 shares of Carnival plc at cost (1,058) (1,058)
-------- --------
Total shareholders' equity 16,017 15,760
-------- --------
$ 27,599 $ 27,636
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
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CARNIVAL CORPORATION & PLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in millions)
Three Months Ended February 28/29,
----------------------------------
2005 2004
---- ----
OPERATING ACTIVITIES
Net income $ 345 $ 203
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation and amortization 221 188
Accretion of original issue discount 5 5
Other 7 3
Changes in operating assets and liabilities
Increase in
Receivables (2) (53)
Inventories (4) (26)
Prepaid expenses and other (9) (8)
Increase (decrease) in
Accounts payable (29) 23
Accrued and other liabilities (57) 20
Customer deposits 66 187
------- -------
Net cash provided by operating activities 543 542
------- -------
INVESTING ACTIVITIES
Additions to property and equipment (556) (1,363)
Sales of short-term investments 27 541
Purchases of short-term investments (58) (227)
Proceeds from retirement of property and equipment 77
Other, net 1 (2)
------- -------
Net cash used in investing activities (586) (974)
------- -------
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt 457
Principal repayments of long-term debt (170) (204)
(Payments) proceeds from short-term borrowings, net (13) 7
Dividends paid (120) (100)
Proceeds from exercise of stock options 23 87
Other (2) (5)
------- -------
Net cash (used in) provided by financing
activities (282) 242
------- -------
Effect of exchange rate changes on cash and cash
equivalents 3 (4)
------- -------
Net decrease in cash and
cash equivalents (322) (194)
Cash and cash equivalents at beginning of period 643 610
------- -------
Cash and cash equivalents at end of period $ 321 $ 416
======= =======
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 incorporated in Panama, 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."
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") in 2003. The DLC transaction combined the
businesses of Carnival Corporation and Carnival plc through a number of
contracts and through 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 February 28, 2005 and the
consolidated statements of operations and cash flows for the three months ended
February 28/29, 2005 and 2004 are unaudited and, in the opinion of our
management, contain all adjustments, consisting of only normal recurring
adjustments, 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 2004 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, including reflecting the gross purchases and sales
of variable rate securities as investing activities in the Consolidated
Statements of Cash Flows rather than as a component of cash and cash equivalents
in fiscal 2004. We also changed the amount of our previously reported cash and
cash equivalents in our Consolidated Statement of Cash Flows at February 29,
2004 by $147 million to $416 million from $563 million.
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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 amounts):
Three Months
Ended February 28/29,
---------------------
2005 2004
---- ----
Net income, as reported $ 345 $ 203
Stock-based compensation
expense included in
net income, as reported 4 2
Total stock-based compensation
expense determined under
the fair value-based method
for all awards (18) (29)
----- -----
Adjusted net income for basic
earnings per share 331 176
Interest on dilutive convertible notes 12 4
----- -----
Adjusted net income for diluted
earnings per share $ 343 $ 180
===== =====
Earnings per share
Basic
As reported $0.43 $0.25
===== =====
Adjusted $0.41 $0.22
===== =====
Diluted
As reported $0.42 $0.25
===== =====
Adjusted $0.40 $0.22
===== =====
In December 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123 (revised 2004), "Share-Based Payment Statement 123(R)," which will
require us to recognize compensation costs in our financial statements in an
amount equal to the fair value of share-based payments granted to employees and
directors. This statement is effective for us in the fourth quarter of fiscal
2005. We have not yet determined which of the alternative transition methods we
will use upon adoption of this new statement. However, based on preliminary
estimates, if we were to elect to adopt this statement with retroactive effect
to December 1, 2004, our additional full year 2005 share-based compensation
expense would be approximately $60 million.
NOTE 3 - Debt
In January 2005, we paid the final installment of $110 million on our
capitalized lease obligations.
In February 2005, Carnival plc extended its 600 million euro ($795 million
U.S. dollars at the February 28, 2005 exchange rate) unsecured multi-currency
revolving credit facility for 364 days, and reduced this facility's commitment
fee on the undrawn portion from nine basis points ("BPS") to 7.5 BPS.
Accordingly, this facility now expires in March 2006.
In March 2005, Carnival plc entered into a five-year unsecured
multi-currency term loan facility, bearing interest at euribor/libor plus 32.5
BPS. Under this facility, we borrowed 368 million euro ($487 million U.S.
dollars at the February 28, 2005 exchange rate) to repay a 368 million euro
note, which bore interest at euribor plus 60 BPS, prior to its October 2008
maturity date. We also borrowed 165 million
5
sterling under this facility ($317 million U.S. dollars at the February 28, 2005
exchange rate), which we used to finance a portion of P&O Cruises' Arcadia
purchase price.
NOTE 4 - Contingencies
Litigation
On March 7, 2005, a lawsuit was filed against Carnival Corporation in the
U.S. District Court for the Southern District of Florida on behalf of some
current and former crew members alleging that Carnival Cruise Lines failed to
pay the plaintiffs for overtime. The suit seeks payment of (i) the overtime
wages alleged to be owed, (ii) penalty wages under U.S. law and (iii) interest.
We are not yet able to estimate the impact of this claim, and the ultimate
outcome of this matter cannot be determined at this time. However, we believe
that we have meritorious defenses and we intend to vigorously defend against
this action.
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 third party travel agencies. We do not advertise
directly to the traveling public through the use of facsimile transmission. The
ultimate outcomes of the Facsimile Complaints cannot be determined at this time.
However, we believe that we have meritorious defenses and 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 ships in Alaska. HAL-USA responded to the subpoena. The ultimate outcome of
this matter cannot be determined at this time.
In March 2004, Holland America Line notified the U.S. 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. Holland
America Line and three shipboard engineers have received grand jury subpoenas
from the Office of the U.S. Attorney in Tampa, Florida. If the government
investigations result in charges being filed, a judgment could include, among
other forms of relief, fines and debarment from federal contracting, which would
prohibit Holland America Line operations in Glacier Bay National Park and
Preserve ("Glacier Bay") during the period of debarment. The ultimate outcome of
this matter cannot be determined at this time. If Holland America Line were to
lose its Glacier Bay permits as a result of the Noordam investigations, 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 and
elsewhere that can be substituted for Glacier Bay.
Costa has instituted arbitration proceedings in Italy to confirm the
validity of its 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 in November
2000. Costa has also given notice of termination of the contract. In October
2004, the arbitration tribunal decided to increase the scope of work of the
technical expert by introducing new demands for reply in the expert's report. In
March 2005, the expert submitted his report to the tribunal. It is expected that
the arbitration tribunal's decision will be made in late 2005 at the earliest.
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
6
currently determinable. The ultimate outcome of this matter cannot be determined
at this time.
In April 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 have been granted leave to intervene in the Festival Action and filed a
Statement in Intervention with the court. Festival was declared bankrupt in May
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, and 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 our self-insurance retention levels. However, the ultimate
outcome of these claims and lawsuits cannot be determined at this time.
Contingent Obligations
At February 28, 2005, Carnival Corporation had contingent obligations
totaling $1.08 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 $295 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 $84 million, or
alternatively provide mortgages in the aggregate amount of $84 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
February 28, 2005, have to pay a total of $171 million in stipulated damages. As
of February 28, 2005, $179 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. Between 2017 and 2022, we have
the right to exercise options that would terminate these transactions at no cost
to us.
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
7
payments is probable.
NOTE 5 - Comprehensive Income
Comprehensive income was as follows (in millions):
Three Months
Ended February 28/29,
---------------------
2005 2004
---- ----
Net income $ 345 $ 203
Items included in accumulated
other comprehensive income:
Foreign currency translation adjustment (3) 209
Changes related to cash flow derivative hedges 11 (13)
----- -----
Total comprehensive income $ 353 $ 399
===== =====
NOTE 6 - Segment Information
Our cruise segment included all of our cruise brands, which have been
aggregated as a single reportable segment based on the similarity of their
economic and other characteristics, including products and services they
provide. Our other segment primarily represents the transportation, hotel and
tour operations of Holland America Tours and Princess Tours, and the business to
business travel agency operations of P&O Travel Ltd.
Selected segment information for our cruise and other segments was as
follows (in millions):
Three Months Ended February 28/29,
----------------------------------------------------------------
Selling Depreciation Operating
Operating and admin- and income
2005 Revenues expenses istrative amortization (loss)
-------- --------- ---------- ------------ ---------
Cruise $ 2,387 $ 1,412 $ 322 $ 213 $ 440
Other 12 14 12 8 (22)
Intersegment elimination (3) (3)
------- ------- ------- ------- -------
$ 2,396 $ 1,423 $ 334 $ 221 $ 418
======= ======= ======= ======= =======
2004
Cruise $ 1,973 $ 1,207 $ 302 $ 183 $ 281
Other 10 12 14 5 (21)
Intersegment elimination (2) (2)
------- ------- ------- ------- -------
$ 1,981 $ 1,217 $ 316 $ 188 $ 260
======= ======= ======= ======= =======
Note 7 - Merchant Navy Officers Pension Fund ("MNOPF")
P&O Cruises, Princess and Cunard participate in an industry-wide British
MNOPF, which is a defined benefit multiemployer pension plan that is available
to certain of their shipboard British officers. The MNOPF is divided into two
sections, the "New Section" and the "Old Section," each of which covers a
different group of participants, with the Old Section closed to further benefit
accrual and the New Section only closed to new membership.
As of March 31, 2003, the date of the most recent formal actuarial
valuation prepared by the MNOPF's actuary, the New Section of the MNOPF was
estimated to have a fund deficit of approximately 200 million sterling, or $380
million, assuming a 7.7% discount rate. At November 30, 2004, our external
actuary informally updated the March 31, 2003 valuation and estimated that the
New Section deficit was approximately 760 million sterling, or $1.44 billion,
assuming a 5.2% discount rate. The amount of the fund deficit could vary
considerably if different assumptions and/or estimates were used in its
calculation. Substantially all of any MNOPF fund deficit liability which we may
have relates to P&O Cruises and Princess obligations, which existed prior to the
DLC transaction.
8
Our share of any liability with respect to the fund's deficit was
uncertain and, accordingly, the MNOPF's participating employers sought guidance
from the court as to how to allocate the deficit to participating employers,
which ruling was issued on March 22, 2005. Notwithstanding the court's decision,
there are still a number of uncertainties remaining as to our portion of the
fund's ultimate deficit. Therefore, we will record as expense our portion of any
deficit as amounts are invoiced by the fund's trustee, which is currently
expected to be over a period of at least 10 years. In accordance with the court
ruling and other factors, and assuming all of the other participating employers
are able to pay their share of the MNOPF deficit, we believe our share of the
ultimate deficit could be in the range of $25 million to $90 million.
NOTE 8 - Earnings Per Share
Our basic and diluted earnings per share were computed as follows (in
millions, except per share data):
Three Months
Ended February 28/29,
---------------------
2005 2004
---- ----
Net income $ 345 $ 203
Interest on dilutive convertible notes 12 4
----- -----
Net income for diluted earnings per share $ 357 $ 207
===== =====
Weighted-average common and ordinary shares outstanding 805 800
Dilutive effect of convertible notes 44 15
Dilutive effect of stock plans 6 5
----- -----
Diluted weighted-average shares outstanding 855 820
===== =====
Basic earnings per share $0.43 $0.25
===== =====
Diluted earnings per share $0.42 $0.25
===== =====
Options to purchase 1.4 million and 5.0 million shares for the three
months ended February 28/29, 2005 and 2004, respectively, were excluded from our
diluted earnings per share computation since the effect of including them was
anti-dilutive.
9
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, outlook, plans, 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/or
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, including machinery and equipment
failures, which could cause the cancellation of a cruise or series of
cruises;
- - changing public and consumer tastes and preferences, which may, among
other things, adversely impact the demand for cruises;
- - 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
- - unusual weather patterns or natural disasters, such as hurricanes and
earthquakes.
On April 5, 2005, the U.S. State Department announced details of the
proposed "Western Hemisphere Travel Initiative." If the proposed rules are
enacted, U.S. citizens will be required to carry a passport for travel to or
from certain
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countries/areas that were previously exempt. The proposed implementation is as
follows:
- - On December 31, 2005, a passport would be required for all air and sea
travel to or from the Caribbean, Bermuda, Central and South America.
- - On December 31, 2006, a passport would be required for all air and sea
travel to or from Mexico and Canada.
- - On December 31, 2007, a passport would be required for all air, sea and
land border crossings.
We believe that it is unlikely that these proposed rules will have a
material adverse impact on our results of operations. However, the ultimate
effect cannot be determined at this time.
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 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 2005
exchange rates have remained constant with the prior year's comparable rates, or
on a "constant dollar basis," in order to remove the
11
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.
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 2004 joint Annual Report on Form
10-K.
Outlook for Remainder of Fiscal 2005
On March 21, 2005, we indicated that we expected diluted earnings per
share for the second quarter of 2005 would be in the range of $0.45 to $0.47 and
approximately $2.70 for the full year 2005.
On March 30, 2005, we announced that P&O Cruises Australia's Pacific Sky
experienced a technical problem that required dry-docking to complete the
repair. The ship is expected to be out of service for approximately two months
and will impact second quarter 2005 diluted earnings per share by approximately
$0.02. We also announced that a recent court decision on how to allocate a fund
deficit in the MNOPF is expected to reduce full year 2005 diluted earnings per
share by less than $0.01.
Other than the items discussed in the preceding paragraph, we have not
changed our March 21 second quarter and full year guidance, as we have not yet
updated our internal operating forecast. However, in our March 21 release, we
noted that we based our guidance for the last three quarters of 2005 on assumed
average fuel prices of $246 per ton (derived from the forward fuel curve) and
currency exchange rates of $1.30 to the euro and $1.88 to the sterling. The
current forward curve for fuel indicates average prices of approximately $257
per ton for the last three quarters of 2005, which is 29 percent higher than
average prices for last year's comparable period. If actual fuel prices for the
last three quarters of 2005 ultimately turn out to average $257 per ton, then
our diluted earnings per share would be reduced by $0.01 and $0.03 for the
second quarter 2005 and full year 2005, respectively.
The year-over-year percentage increase in our ALBD capacity, resulting
from new ships entering service, is 5.3%, 5.7% and 8.5% in the second, third and
fourth quarters of 2005, respectively, as compared to the same quarters in 2004.
Share-Based Compensation
Based on preliminary estimates, if we were to elect to adopt FASB
Share-Based Payment Statement 123(R) with retroactive effect to December 1,
2004, our additional full year 2005 share-based compensation expense would be
approximately $60 million, which has not been included in our above earnings per
share estimates.
Seasonality
Our revenue from the sale of passenger tickets is seasonal, with our third
quarter being the strongest. Historically, demand for cruises has been greatest
during our third fiscal quarter, which includes the Northern Hemisphere summer
months. 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.
12
Three Months Ended February 28, 2005 ("2005") Compared to the Three Months Ended
February 29, 2004 ("2004")
Selected statistical information was as follows:
Three Months Ended February 28/29,
----------------------------------
2005 2004
---- ----
Passengers carried (in thousands) 1,619 1,347
============ ============
Occupancy percentage 103.8% 102.0%
============ ============
Gross and net revenue yields were computed by dividing the gross or net
revenues, without rounding, by ALBDs as follows:
Three Months Ended February 28/29,
----------------------------------
2005 2004
---- ----
(in millions, except ALBDs and yields)
Cruise revenues
Passenger tickets $ 1,841 $ 1,527
Onboard and other 546 446
------------ ------------
Gross cruise revenues 2,387 1,973
Less cruise costs
Commissions, transportation and other (431) (384)
Onboard and other (96) (81)
------------ ------------
Net cruise revenues $ 1,860 $ 1,508
============ ============
ALBDs 11,586,444 10,062,655
============ ============
Gross revenue yields $ 206.07 $ 196.02
============ ============
Net revenue yields $ 160.59 $ 149.84
============ ============
Gross and net cruise costs per ALBD were computed by dividing the gross or
net cruise costs, without rounding, by ALBDs as follows:
Three Months Ended February 28/29,
----------------------------------
2005 2004
---- ----
(in millions, except ALBDs and costs per ALBD)
Cruise operating expenses $ 1,412 $ 1,207
Cruise selling and
administrative expenses 322 302
------------ ------------
Gross cruise costs 1,734 1,509
Less cruise costs included in net
cruise revenues
Commissions, transportation and other (431) (384)
Onboard and other (96) (81)
------------ ------------
Net cruise costs $ 1,207 $ 1,044
============ ============
ALBDs 11,586,444 10,062,655
============ ============
Gross cruise costs per ALBD $ 149.62 $ 149.91
============ ============
Net cruise costs per ALBD $ 104.13 $ 103.73
============ ============
13
Revenues
Net cruise revenues increased $352 million, or 23.3%, to $1.86 billion in
2005 from $1.51 billion in 2004. The 15.1% increase in ALBD's between 2004 and
2005 accounted for $228 million of the increase, and the remaining $124 million
was from increased net revenue yields, which increased 7.2% in 2005 compared to
2004 (gross revenue yields increased by 5.1%). Net revenue yields increased in
2005 primarily from higher cruise ticket prices, a 1.8% increase in occupancy,
higher onboard revenues and the weaker U.S. dollar relative to the euro and
sterling, partially offset by the impact of the cancellation of P&O Cruises
Aurora's 2005 world cruise. Net revenue yields as measured on a constant dollar
basis, where we recompute 2005 net revenue yields at the foreign currency
exchange rates in effect for 2004, increased 5.9% in 2005. Gross cruise revenues
increased $414 million, or 21.0%, in 2005 to $2.39 billion from $1.97 billion in
2004 primarily for the same reasons as net cruise revenues.
Onboard and other revenues included concession revenues of $69 million in
2005 and $56 million in 2004, which increased in 2005 compared to 2004 primarily
because of the 15.1% increase in capacity and passengers increasing willingness
to take advantage of the enhanced onboard spending opportunities on our ships.
Costs and Expenses
Net cruise costs increased $163 million, or 15.6%, to $1.21 billion in
2005 from $1.04 billion in 2004. The 15.1% increase in ALBD's between 2004 and
2005 accounted for $158 million of the increase, and the remaining $5 million
was from increased net cruise costs per ALBD, which increased 0.4% in 2005
compared to 2004 (gross cruise costs per ALBD decreased 0.2%). Net cruise costs
per ALBD increased primarily due to a 10.0% increase in 2005 fuel prices and the
weaker U.S. dollar relative to the euro and the sterling in 2005. This increase
was substantially offset by lower selling, general and administrative costs per
ALBD, partly due to a delay until later in the year of advertising expenditures,
higher promotional costs in 2004 related to the introduction of Cunard's Queen
Mary 2, reduced costs from the relocation of Cunard's shoreside operations and
economies of scale associated with the 15.1% capacity increase. Net cruise costs
per ALBD as measured on a constant dollar basis compared to 2004 decreased 1.0%
in 2005. Gross cruise costs increased $225 million, or 14.9%, in 2005 to $1.73
billion from $1.51 billion in 2004, which was a lower percentage increase than
net cruise costs primarily because of the lower proportion of passengers who
purchased air transportation from us in 2005.
Depreciation and amortization expense increased by $33 million, or 17.6%,
to $221 million in 2005 from $188 million in 2004 largely due to the 15.1%
increase in ALBD's through the addition of new ships and ship improvement
expenditures, as well as the impact of a weaker U.S. dollar.
Nonoperating (Expense) Income
Net interest expense excluding capitalized interest, increased to $88
million in 2005 from $71 million in 2004, or $17 million. The increase was
primarily due to a $13 million increase in interest expense from higher average
borrowing rates and a $4 million increase in interest expense due to higher
average borrowings associated with new ship deliveries.
Other income included $7 million from the settlement of litigation
associated with the DLC transaction in 2003.
Liquidity and Capital Resources
Sources and Uses of Cash
Our business provided $543 million of net cash from operations during the
three months ended February 28, 2005, which was flat compared to 2004. We
continue to
14
generate substantial cash from operations and remain in a strong financial
position.
During the first quarter of 2005, our net expenditures for capital
projects were $556 million, of which $449 million was spent for our ongoing new
shipbuilding program, including the final delivery payment for the Carnival
Valor. The remaining capital expenditures consisted primarily of $71 million for
ship improvements and refurbishments, and $36 million for Alaska tour assets,
cruise port facility developments and information technology assets.
During 2005, we took delivery of one new ship compared to three ships in
2004. One of the 2004 ship deliveries was paid for primarily from long-term debt
proceeds. Accordingly, the net cash used in investing activities in 2005 is less
than in 2004, and the net cash used in financing activities has increased in
2005 compared to 2004.
During the 2005 first quarter, we made $170 million of debt repayments,
which included the final payment on our capitalized lease obligations of $110
million. We also paid cash dividends of $120 million in the first quarter of
fiscal 2005.
Future Commitments and Funding Sources
Our contractual cash obligations remained generally unchanged at February
28, 2005 compared to November 30, 2004, except for changes to our debt as noted
above, and changes to our ship construction commitments as follows:
- We made the final contractual payments related to the Carnival Valor
delivery in December 2004.
- In January 2005, Costa entered into a new ship construction contract
with Fincantieri for a 3,000 passenger ship, which has an estimated
all-in cost of 475 million euros and is expected to enter service in
June 2007.
During 2004, the Board of Directors authorized the repurchase of up to $1
billion of Carnival Corporation and/or Carnival plc shares commencing in 2005
subject to certain repurchase restrictions on Carnival plc shares. Through April
7, 2005 no repurchases had been made.
At February 28, 2005, we had liquidity of $2.88 billion, which consisted
of $369 million of cash, cash equivalents and short-term investments and $2.51
billion available for borrowing under our revolving credit facilities. Our
revolving credit facilities mature in March 2006 through June 2006. A key to our
access to liquidity is the maintenance of our strong credit ratings.
Based primarily on our historical results, current financial condition and
future forecasts, we believe that our existing liquidity and cash flow from
future operations will be sufficient to fund most of our expected 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 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.
15
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 February 28, 2005, that they were 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 February 28, 2005 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.
On March 7, 2005, a lawsuit was filed against Carnival Corporation in the
United States District Court for the Southern District of Florida on behalf of
some current and former crew members alleging that Carnival Cruise Lines failed
to pay the plaintiffs for overtime. The suit seeks payment of (i) the overtime
wages alleged to be owed, (ii) penalty wages under U.S. law and (iii) interest.
We are not yet able to estimate the impact of this claim. We believe that we
have meritorious defenses and, we intend to vigorously defend against this
action.
Item 6. 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 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 to the Carnival Corporation "Fun Ship" Nonqualified
Savings Plan.
12 Ratio of Earnings to Fixed Charges.
31.1 Certification of Chief Executive Officer of Carnival Corporation
16
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.
17
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: April 7, 2005 Dated: April 7, 2005
18