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CUK > SEC Filings for CUK > Form 10-Q on 3-Apr-2013All Recent SEC Filings

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Form 10-Q for CARNIVAL PLC


3-Apr-2013

Quarterly Report


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, estimates or projections contained 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, outlooks, 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. We have tried, whenever possible, to identify these statements by using words like "will," "may," "could," "should," "would," "believe," "depends," "expect," "goal," "anticipate," "forecast," "future," "intend," "plan," "estimate," "target," "indicate" and similar expressions of future intent or the negative of such terms.

Forward-looking statements include those statements that may impact, among other things, the forecasting of our non-GAAP earnings per share ("EPS"); net revenue yields; booking levels; pricing; occupancy; operating, financing and tax costs, including fuel expenses; costs per available lower berth day ("ALBD"); estimates of ship depreciable lives and residual values; liquidity; goodwill and trademark fair values; and outlook. 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. These factors include, but are not limited to, the following:

general economic and business conditions;

increases in fuel prices;

incidents, the spread of contagious diseases and threats thereof, adverse weather conditions or other natural disasters and other incidents affecting the health, safety, security and satisfaction of guests and crew;

the international political climate, armed conflicts, terrorist and pirate attacks, vessel seizures, and threats thereof, and other world events affecting the safety and security of travel;

negative publicity concerning the cruise business in general or us in particular, including any adverse environmental impacts of cruising;

litigation, enforcement actions, fines or penalties;

economic, market and political factors that are beyond our control, which could increase our operating, financing and other costs;

changes in and compliance with laws and regulations relating to the protection of persons with disabilities, employment, environment, health, safety, security, tax and other regulations under which we operate;

our ability to implement our shipbuilding programs and ship repairs, maintenance and refurbishments on terms that are favorable or consistent with our expectations;

increases to our repairs and maintenance expenses and refurbishment costs as our fleet ages;

lack of continuing availability of attractive, convenient and safe port destinations;

continuing financial viability of our travel agent distribution system, air service providers and other key vendors in our supply chain and reductions in the availability of, and increases in the pricing for, the services and products provided by these vendors;

disruptions and other damages to our information technology and other networks and operations, and breaches in data security;

failure to keep pace with developments in technology;

competition from and overcapacity in the cruise ship or land-based vacation industry;

loss of key personnel or our ability to recruit or retain qualified personnel;

union disputes and other employee relation issues;

disruptions in the global financial markets or other events that may negatively affect the ability of our counterparties and others to perform their obligations to us;

the continued strength of our cruise brands and our ability to implement our brand strategies;

our international operations are subject to additional risks not generally applicable to our U.S. operations;

geographic regions in which we try to expand our business may be slow to develop and ultimately not develop how we expect;

our decisions to self-insure against various risks or our inability to obtain insurance for certain risks at reasonable rates;

fluctuations in foreign currency exchange rates;

whether our future operating cash flow will be sufficient to fund future obligations and whether we will be able to obtain financing, if necessary, in sufficient amounts and on terms that are favorable or consistent with our expectations;

risks associated with the dual listed company arrangement; and

uncertainties of foreign legal systems as Carnival Corporation and Carnival plc are not U.S. corporations.

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 stock exchange 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.


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Outlook

On March 15, 2013, we said that we expected our non-GAAP diluted EPS for the 2013 second quarter and full year would be in the ranges of $0.04 to $0.08 and $1.80 to $2.10, respectively (see "Key Performance Non-GAAP Financial Indicators"). Our 2013 second quarter and full year guidance was based on fuel prices of $688 per metric ton and $691 per metric ton, respectively. In addition, this 2013 second quarter and full year guidance was based on currency rates of $1.31 to the euro, $1.50 and $1.52 to the sterling and $1.03 to the Australian dollar. The fuel and currency assumptions used in our guidance change daily and, accordingly, our forecasts change daily based on the changes in these assumptions.

As previously announced, due to the recent voyage disruptions we are conducting a fleetwide comprehensive operational review to assess our needs to further enhance the level of onboard operating redundancies, as well as the scope of hotel services that can operate on emergency power. In addition, we are applying lessons learned to better enhance our fire prevention, detection and suppression systems. The first implementations stemming from this review are currently underway on Carnival Triumph and Carnival Sunshine because these ships are in dry-dock now. We are in the early stages of our review and, accordingly, we have not yet fully quantified the amounts and timing of the capital expenditures and operational expenses that we expect to incur over the next several years for these vessel enhancements. However, we have included a preliminary estimate for operational expenses of $0.05 per share in our 2013 full year guidance.

We believe it is more meaningful to evaluate our earnings performance by excluding the impact of unrealized gains and losses on fuel derivatives from non-GAAP diluted EPS. Therefore, we do not include any year-to-date impact or future estimates of unrealized gains and losses on fuel derivatives in our non-GAAP EPS guidance. However, we do forecast realized gains and losses on fuel derivatives by applying current Brent prices to the derivatives that settle in the forecast period. Based on this approach and current prices, we are not forecasting any realized gains or losses for 2013 under our current fuel derivatives portfolio.

The above forward-looking statements involve risks, uncertainties and assumptions with respect to us. There are many factors that could cause our actual results to differ materially from those expressed above including, but not limited to, general economic and business conditions, increases in fuel prices, incidents, spread of contagious diseases, adverse weather conditions, geo-political events, negative publicity and other factors that could adversely impact our revenues, costs and expenses. You should read the above forward-looking statement together with the discussion of these and other risks under "Cautionary Note Concerning Factors That May Affect Future Results."

Critical Accounting Estimates

For a discussion of our critical accounting estimates, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" that is included in Carnival Corporation & plc's 2012 joint Annual Report on Form 10-K ("2012 Form 10-K").

Seasonality

Our revenues from the sale of passenger tickets are seasonal. Historically, demand for cruises has been greatest during our third quarter, which includes the Northern Hemisphere summer months. This higher demand during the third quarter results in higher ticket prices and occupancy levels and, accordingly, the largest share of our operating income is earned during this period. The seasonality of our results also increases due to ships being taken out-of-service for maintenance, which we schedule during non-peak demand periods. In addition, substantially all of Holland America Princess Alaska Tours' revenue and net income is generated from May through September in conjunction with the Alaska cruise season.

Statistical Information




                                                          Three Months Ended
                                                           February 28/29,
                                                       2013               2012
  Passengers carried (in thousands)                        2,305              2,262
  Occupancy percentage (a)                                 104.0 %            105.3 %
  Fuel consumption in metric tons (in thousands)             827                837
  Fuel consumption in metric tons per ALBD                 0.046              0.048
  Fuel cost per metric ton consumed                $         677      $         707
  Currencies
  U.S. dollar to 1                                $        1.33      $        1.31
  U.S. dollar to 1                                $        1.58      $        1.56
  U.S. dollar to Australian dollar                 $        1.04      $        1.04

(a) In accordance with cruise business practice, occupancy is calculated using a denominator of two passengers per cabin even though some cabins can accommodate three or more passengers. Percentages in excess of 100% indicate that on average more than two passengers occupied some cabins.


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Three Months Ended February 28, 2013 ("2013") Compared to the Three Months Ended February 29, 2012 ("2012")

Revenues

Consolidated

Cruise passenger ticket revenues made up 76% of our 2013 total revenues. Cruise passenger ticket revenues decreased by $24 million to $2.7 billion in 2013 from $2.8 billion in 2012. This decrease was caused by a decrease in cruise ticket pricing, which accounted for $77 million, a 1.2 percentage point decrease in occupancy, which accounted for $32 million, and a decrease in air transportation revenues from guests who purchased their tickets from us. These decreases were partially offset by our 3.9% capacity increase in ALBDs, which accounted for $107 million (see "Key Performance Non-GAAP Financial Indicators").

The remaining 24% of 2013 total revenues were substantially all comprised of onboard and other cruise revenues, which increased by $35 million, or 4.4%, to $844 million in 2013 from $809 million in 2012. This increase was substantially all due to our 3.9% capacity increase in ALBDs, which accounted for $31 million. Onboard and other revenues included concession revenues of $249 million in 2013 and $238 million in 2012.

North America Brands

Cruise passenger ticket revenues made up 74% of our 2013 total revenues. Cruise passenger ticket revenues increased slightly to $1.6 billion in 2013 from $1.5 billion in 2012. This increase was caused by our 3.1% capacity increase in ALBDs, which accounted for $48 million, partially offset by a decrease in cruise ticket pricing, which accounted for $20 million.

The remaining 26% of 2013 total revenues were comprised of onboard and other cruise revenues, which increased by $25 million, or 4.8%, to $561 million in 2013 from $536 million in 2012. This increase was caused by our 3.1% capacity increase in ALBDs, which accounted for $17 million, and higher onboard spending by our guests, which accounted for $12 million. Onboard and other revenues included concession revenues of $163 million in 2013 and $156 million in 2012.

EAA Brands

Cruise passenger ticket revenues made up 82% of our 2013 total revenues. Cruise passenger ticket revenues decreased 3.3% and remained at $1.2 billion in both 2013 and 2012. This decrease was caused by a decrease in cruise ticket pricing, which accounted for $57 million, a 2.4 percentage point decrease in occupancy, which accounted for $29 million, and a decrease in air transportation revenues from guests who purchase their tickets from us, which also accounted for $29 million. These decreases were partially offset by our 5.1% capacity increase in ALBDs, which accounted for $62 million, and the weaker U.S. dollar against the euro and sterling (referred to as "Currency Impact"), which accounted for $14 million. Our cruise ticket pricing and occupancy was affected this year by the direct and indirect consequences of the 2012 Ship Incident and the challenging economic environment in Europe.

The remaining 18% of 2013 total revenues were comprised of onboard and other cruise revenues, which increased by $8 million, or 3.1%, to $255 million in 2013 from $247 million in 2012. This increase was caused by our 5.1% capacity increase in ALBDs, which accounted for $13 million. Onboard and other revenues included concession revenues of $86 million in 2013 and $82 million in 2012.

Costs and Expenses

Consolidated

Operating costs and expenses decreased $95 million, or 3.5%, to $2.6 billion in 2013 from $2.7 billion in 2012. This decrease was caused by decreases in commissions, transportation and other related expenses caused by lower cruise ticket pricing, the change in our UK brands' commission structure, and a decrease in air transportation costs related to guests who purchase their tickets from us, which together accounted for $66 million, the nonrecurrence in 2013 of both the 2012 Costa Allegra impairment charge and the 2012 Ship Incident related expenses not covered by insurance, which together accounted for $63 million, lower dry-dock costs, which accounted for $33 million, lower fuel consumption per ALBD, which accounted for $30 million, and lower fuel prices, which accounted for $25 million. These decreases were partially offset by our 3.9% capacity increase in ALBDs, which accounted for $104 million.

Selling and administrative expenses increased $39 million, or 9.1%, to $460 million in 2013 from $421 million in 2012.


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Depreciation and amortization expenses increased $13 million, or 3.7%, to $389 million in 2013 from $376 million in 2012.

During 2012, Ibero's goodwill and trademark were impaired and we recorded charges of $173 million.

Our total costs and expenses as a percentage of revenues decreased to 96% in 2013 from 102% in 2012. Our total costs and expenses as a percentage of revenues, excluding the nonrecurring 2012 Ibero goodwill and trademark impairment charges, decreased to 96% in 2013 from 98% in 2012.

North America Brands

Operating costs and expenses increased slightly and remained at $1.5 billion in both 2013 and 2012. This increase was caused by our 3.1% capacity increase in ALBDs, which accounted for $47 million, and additional costs for voyage disruptions and related expenses, which accounted for $13 million. These increases were partially offset by lower fuel consumption per ALBD, which accounted for $16 million, and a decrease in commissions, transportation and other related expenses caused by lower cruise ticket pricing and a decrease in air transportation costs related to guests who purchase their tickets from us.

Selling and administrative expenses increased $24 million, or 9.9%, to $261 million in 2013 from $237 million in 2012.

Our total costs and expenses as a percentage of revenues increased to 95% in 2013 from 94% in 2012.

EAA Brands

Operating costs and expenses decreased $101 million, or 8.8%, to $1.1 billion in 2013 from $1.2 billion in 2012. These decreases were principally due to a decrease in commissions, transportation and other related expenses caused by lower cruise ticket pricing, the change in our UK brands' commission structure, and a decrease in air transportation costs related to guests who purchase their tickets from us, which together accounted for $57 million, the nonrecurrence in 2013 of both the 2012 Costa Allegra impairment charge and the 2012 Ship Incident related expenses, which together accounted for $48 million, lower dry-dock expenses of $24 million, lower fuel prices, which accounted for $17 million, and lower fuel consumption per ALBD, which accounted for $14 million. These decreases were partially offset by our 5.1% capacity increase in ALBDs, which accounted for $58 million.

Selling and administrative expenses increased $10 million, or 6.3%, to $164 million in 2013 from $154 million in 2012.

In 2012, we recorded the Ibero goodwill and trademark impairment charges of $173 million.

Our total costs and expenses as a percentage of revenues decreased to 95% in 2013 from 110% in 2012. Our total costs and expenses as a percentage of revenues, excluding the nonrecurring 2012 Ibero goodwill and trademark impairment charges, decreased to 95% in 2013 from 98% in 2012.

Operating Income (Loss)

Our consolidated operating income increased $227 million to $145 million in 2013 from a consolidated operating loss of $82 million in 2012. Our North America brands' operating income decreased $9 million to $105 million in 2013 from $114 million in 2012, and our EAA brands' operating income increased $224 million to $72 million in 2013 from an operating loss of $152 million in 2012. These changes were primarily due to the reasons discussed above.

Nonoperating Expense

Net unrealized losses on fuel derivatives were $28 million in 2013 compared to $21 million of net unrealized gains in 2012. There were no realized gains or losses recognized in 2013 and 2012.

Key Performance Non-GAAP Financial Indicators

ALBDs is a standard measure of passenger capacity for the period, which we use to perform rate and capacity variance analyses to determine the main non-capacity driven factors that cause our cruise revenues and expenses to vary. ALBDs assume that each cabin we offer for sale accommodates two passengers and is computed by multiplying passenger capacity by revenue-producing ship operating days in the period.

We use net cruise revenues per ALBD ("net revenue yields"), net cruise costs per ALBD and net cruise costs excluding fuel per ALBD as significant non-GAAP financial measures of our cruise segment financial performance. These measures enable us to separate the impact of predictable capacity changes from the more unpredictable rate changes that affect our business. We believe these non-GAAP measures provide useful information to investors and expanded insight to measure our revenue and cost performance as a supplement to our U.S. generally accepted accounting principles ("U.S. GAAP") consolidated financial statements.


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Net revenue yields are commonly used in the cruise business to measure a company's cruise segment revenue performance and for revenue management purposes. We use "net cruise revenues" rather than "gross cruise revenues" to calculate net revenue yields. 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 net of our most significant variable costs, which are travel agent commissions, cost of air and other transportation, certain other costs that are directly associated with onboard and other revenues and credit card fees. Substantially all of our remaining cruise costs are largely fixed, except for the impact of changing prices and food expenses, once our ship capacity levels have been determined.

Net passenger ticket revenues reflect gross cruise revenues, net of (1) onboard and other revenues, (2) commissions, transportation and other costs and
(3) onboard and other cruise costs. Net onboard and other revenues reflect gross cruise revenues, net of (1) passenger ticket revenues, (2) commissions, transportation and other costs and (3) onboard and other cruise costs. Net passenger ticket revenue yields and net onboard and other revenue yields are computed by dividing net passenger ticket revenues and net onboard and other revenues by ALBDs.

Net cruise costs per ALBD and net cruise costs excluding fuel per ALBD are the most significant measures we use to monitor our ability to control our cruise segment costs rather than gross cruise costs per ALBD. We exclude the same variable costs that are included in the calculation of net cruise revenues to calculate net cruise costs with and without fuel to avoid duplicating these variable costs in our non-GAAP financial measures.

In addition, because our EAA cruise brands utilize the euro, sterling and Australian dollar to measure their results and financial condition, the translation of those operations to our U.S. dollar reporting currency results in decreases in reported U.S. dollar revenues and expenses if the U.S. dollar strengthens against these foreign currencies and increases in reported U.S. dollar revenues and expenses if the U.S. dollar weakens against these foreign currencies. Accordingly, we also monitor and report these non-GAAP financial measures assuming the 2013 period currency exchange rates have remained constant with the 2012 period rates, or on a "constant dollar basis," in order to remove the impact of changes in exchange rates on our non-U.S. dollar cruise operations. We believe that this is a useful measure since it facilitates a comparative view of the growth of our business in a fluctuating currency exchange rate environment.

We believe that the impairment charges recognized in 2012 related to Ibero's goodwill and trademarks are nonrecurring and, therefore, are not an indication of our future earnings performance. As such, we believe it is more meaningful for the impairment charges to be excluded from our net loss and loss per share and, accordingly, we present 2012 non-GAAP net income and non-GAAP EPS excluding these impairment charges.

Under U.S. GAAP, the realized and unrealized gains and losses on fuel derivatives not qualifying as fuel hedges are recognized currently in earnings. We believe that unrealized gains and losses on fuel derivatives are not an indication of our earnings performance since they relate to future periods and may not ultimately be realized in our future earnings. Therefore, we believe it is more meaningful for the unrealized gains and losses on fuel derivatives to be excluded from our net income and EPS and, accordingly, we present non-GAAP net income and non-GAAP EPS excluding these unrealized gains and losses. For the three months ended February 29, 2012, non-GAAP diluted weighted-average shares outstanding were 779 million, which includes the dilutive effect of equity plans.

We have not included in our earnings guidance the impact of unrealized gains and losses on fuel derivatives because these unrealized amounts involve a significant amount of uncertainty, and we do not believe they are an indication of our future earnings performance. Accordingly, our earnings guidance is presented on a non-GAAP basis only. As a result, we did not present a reconciliation between forecasted non-GAAP diluted EPS guidance and forecasted U.S. GAAP diluted EPS guidance, since we do not believe that the reconciliation information would be meaningful.

Our consolidated financial statements are prepared in accordance with U.S. GAAP. The presentation of our non-GAAP financial information is not intended to be considered in isolation or as substitute for, or superior to, the financial information prepared in accordance with U.S. GAAP. There are no specific rules for determining our non-GAAP current and constant dollar financial measures and, accordingly, they are susceptible to varying calculations, and it is possible that they may not be exactly comparable to the like-kind information presented by other companies, which is a potential risk associated with using these measures to compare us to other companies.


Table of Contents

Consolidated gross and net revenue yields were computed by dividing the gross and net cruise revenues, without rounding, by ALBDs as follows (dollars in millions, except yields):

                                                      Three Months Ended February 28/29,
                                                                     2013
                                                                   Constant
                                                2013                Dollar                2012
Passenger ticket revenues                   $       2,740        $       2,725        $       2,764
Onboard and other revenues                            844                  841                  809

Gross cruise revenues                               3,584                3,566                3,573

Less cruise costs
Commissions, transportation and other                (617 )               (613 )               (661 )
Onboard and other                                    (127 )               (126 )               (126 )

                                                     (744 )               (739 )               (787 )

Net passenger ticket revenues                       2,123                2,112                2,103
Net onboard and other revenues                        717                  715                  683

Net cruise revenues                         $       2,840        $       2,827        $       2,786

ALBDs                                          17,979,235           17,979,235           17,308,535

Gross revenue yields                        $      199.34        $      198.38        $      206.40
% decrease vs. 2012                                  (3.4 )%              (3.9 )%
Net revenue yields                          $      157.95        $      157.24        $      160.93
% decrease vs. 2012                                  (1.9 )%              (2.3 )%
Net passenger ticket revenue yields         $      118.07        $      117.50        $      121.47
% decrease vs. 2012                                  (2.8 )%              (3.3 )%
Net onboard and other revenue yields        $       39.88        $       39.75        $       39.46
% increase vs. 2012                                   1.1 %                0.7 %

Consolidated gross and net cruise costs and net cruise costs excluding fuel per ALBD were computed by dividing the gross and net cruise costs and net cruise costs excluding fuel, without rounding, by ALBDs as follows (dollars in . . .

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