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CUK > SEC Filings for CUK > Form 10-Q on 2-Jul-2013All Recent SEC Filings

Show all filings for CARNIVAL PLC

Form 10-Q for CARNIVAL PLC


2-Jul-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 June 25, 2013, we said that we expected our non-GAAP diluted EPS for the 2013 third quarter and full year would be in the ranges of $1.25 to $1.33 and $1.45 to $1.65, respectively (see "Key Performance Non-GAAP Financial Indicators"). Our 2013 third quarter and full year guidance were based on fuel prices of $671 per metric ton. In addition, our 2013 third quarter and full year guidance were based on currency rates of $1.33 and $1.32 to the euro, $0.95 and $0.99 to the Australian dollar, respectively, and $1.56 to the sterling. The fuel and currency assumptions used in our guidance change daily and, accordingly, our forecasts change daily based on the changes in these assumptions.

Our 2013 outlook was affected by the decline in cruise ticket pricing at some of our North America and EAA brands. This decline in cruise ticket pricing was driven by the promotional discounting at Carnival Cruise Lines and the challenging economic environment in Europe.

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 the 2012 Form 10-K.

Costa's 2012 Ship Incident and Carnival Cruise Lines' 2013 voyage disruptions ("2013 voyage disruptions"), including the associated negative publicity, have resulted in lower cruise ticket pricing from prior levels. However, we believe that these events will not have a material long-term impact on either brand and, accordingly, we believe it is more-likely-than-not that the fair values of these brands exceed their carrying values. At May 31, 2013, Costa's and Carnival Cruise Lines' goodwill balance was $511 million and $579 million, respectively. We will be performing our annual goodwill impairment tests as of July 31, 2013, which will include a quantitative test for Costa and Carnival Cruise Lines. See "Note 4 - Fair Value Measurements, Derivative Instruments and Hedging Activities" in the accompanying consolidated financial statements for additional goodwill discussions.

Given the continued weakness of the Spanish economy and its impact on Ibero's cruise ticket pricing, it is possible that a portion of the net carrying values of Ibero's three cruise ships and trademarks could become impaired. However, we believe that the Spanish economy will recover over the long-term and alternative guest source markets and ship deployments are available for Ibero's cruise ships to enable us to recover their carrying values. At May 31, 2013, the net carrying values of Ibero's three cruise ships and its trademarks were $226 million and $13 million, respectively.

The determination of our cruise brand, cruise ship and trademark fair values include numerous assumptions that are subject to various risks and uncertainties. We believe that we have made reasonable estimates and judgments in determining whether our goodwill, cruise ships and trademarks have been impaired. However, if there is a material change in assumptions used or if there is a material change in the conditions or circumstances influencing fair values, then we may need to recognize a material impairment charge.

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.


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Statistical Information




                                              Three Months Ended                       Six Months Ended
                                                    May 31,                                 May 31,
                                           2013                2012                2013                2012
ALBDs (in thousands) (a) (b)                  17,993              17,784              35,972              35,092
Passengers carried (in thousands)              2,364               2,334               4,669               4,596
Occupancy percentage (c)                       103.3 %             102.6 %             103.7 %             103.9 %
Fuel consumption in metric tons (in
thousands)                                       814                 852               1,640               1,689
Fuel consumption in metric tons per
ALBD                                           0.045               0.048               0.046               0.048
Fuel cost per metric ton consumed      $         683       $         756       $         680       $         732
Currencies
U.S. dollar to 1                      $        1.30       $        1.31       $        1.31       $        1.31
U.S. dollar to 1                      $        1.52       $        1.59       $        1.55       $        1.58
U.S. dollar to Australian dollar       $        1.02       $        1.03       $        1.03       $        1.04

(a) 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.

(b) For the three months ended May 31, 2013 compared to the three months ended May 31, 2012, we had a 1.2% capacity increase in ALBDs caused by a 4.6% capacity increase in our EAA brands, partially offset by a 1.0% capacity decrease in our North America brands. Our EAA brands' capacity increase was caused by the addition of two AIDA 2,194-passenger capacity ships and one Costa 2,984-passenger capacity ship, partially offset by the sale of one P&O Cruises (Australia) 1,462-passenger capacity ship. Our North America brands' capacity decrease was caused by more ship dry-dock days in 2013 compared to 2012, partially offset by the addition of one Carnival Cruise Lines 3,690-passenger capacity ship.

For the six months ended May 31, 2013 compared to the six months ended May 31, 2012, we had a 2.5% capacity increase in ALBDs caused by a 4.8% increase in our EAA brands and a 1.1% increase in our North America brands. Our EAA brands' capacity increase was principally due to the reasons discussed above for the three months ended May 31, 2013 and 2012 comparison, partially offset by the removal of two Costa ships. Our North America brands' capacity increase was caused by the addition of one Carnival Cruise Lines 3,690-passenger capacity ship.

(c) 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.

Three Months Ended May 31, 2013 ("2013") Compared to the Three Months Ended May 31, 2012 ("2012")

Revenues

Consolidated

Cruise passenger ticket revenues made up 75% of our 2013 total revenues. Cruise passenger ticket revenues decreased by $62 million, or 2.3%, to $2.6 billion in 2013 from $2.7 billion in 2012. This decrease was caused by:

$81 million - decrease in cruise ticket pricing;

$20 million - stronger U.S. dollar against the euro and sterling (referred to as "currency impact") and

$10 million - decrease in air transportation revenues from guests who purchased their tickets from us.

These decreases were partially offset by:

$31 million - 1.2% capacity increase in ALBDs and

$19 million - slight increase in occupancy.


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The remaining 25% of 2013 total revenues were substantially all comprised of onboard and other cruise revenues, which decreased slightly by $5 million to $839 million in 2013 from $844 million in 2012. Onboard and other revenues included concession revenues of $257 million in 2013 and $253 million in 2012.

North America Brands

Cruise passenger ticket revenues made up 74% of our 2013 total revenues. Cruise passenger ticket revenues decreased by $38 million, or 2.4%, to $1.5 billion in 2013 from $1.6 billion in 2012. This decrease was substantially due to a 1.3 percentage point decrease in occupancy, which accounted for $19 million, and our 1.0% capacity decrease in ALBDs, which accounted for $16 million.

The remaining 26% of 2013 total revenues were comprised of onboard and other cruise revenues, which decreased by $23 million, or 4.0%, to $553 million in 2013 from $576 million in 2012. The majority of the decrease was due to a 1.3 percentage point decrease in occupancy, which accounted for $7 million, and our 1.0% capacity decrease in ALBDs, which accounted for $6 million. Onboard and other revenues included concession revenues of $167 million in 2013 and $169 million in 2012.

EAA Brands

Cruise passenger ticket revenues made up 80% of our 2013 total revenues. Cruise passenger ticket revenues decreased by $24 million, or 2.2%, and remained at $1.1 billion in both 2013 and 2012. This decrease was caused by:

$80 million - decrease in cruise ticket pricing;

$20 million - currency impact and

$17 million - decrease in air transportation revenues from guests who purchased their tickets from us.

These decreases were partially offset by:

$50 million - 4.6% capacity increase in ALBDs and

$48 million - 4.2 percentage point increase in occupancy.

Our cruise ticket pricing decline, which was affected by the challenging economic environment in Europe, was driven by our Northern European brands, partially offset by increases at Costa and P&O Cruises (Australia).

The remaining 20% of 2013 total revenues were comprised of onboard and other cruise revenues, which increased by $13 million, or 5.2%, to $261 million in 2013 from $248 million in 2012. This increase was caused by our 4.6% capacity increase in ALBDs, which accounted for $11 million, and a 4.2 percentage point increase in occupancy, which also accounted for $11 million. These increases were partially offset by lower onboard spending by our guests. Onboard and other revenues included concession revenues of $89 million in 2013 and $84 million in 2012.

Costs and Expenses

Consolidated

Operating costs and expenses increased slightly by $9 million and remained at $2.5 billion in both 2013 and 2012. This increase was caused by:

$33 million - additional costs and expenses related to the 2013 Carnival Triumph voyage disruptions;

$29 million - 1.2% capacity increase in ALBDs;

$17 million - nonrecurrence in 2013 of hull and machinery insurance proceeds for the total loss of a ship in excess of its net book value resulting from the 2012 Ship Incident ("Costa's excess insurance proceeds");

$17 million - nonrecurrence in 2013 of a gain from Cunard's litigation settlement related to Queen Mary 2's propulsion pods ("Cunard's litigation settlement");

$13 million - higher dry-dock costs;

$12 million - higher insurance premiums and

$18 million - various other operating expenses, net.

These increases were partially offset by:

$60 million - lower fuel prices;

$37 million - lower fuel consumption per ALBD;

$18 million - decreases in commissions, transportation and other related expenses caused by lower cruise ticket pricing and a decrease in air transportation costs related to guests who purchased their tickets from us and

$15 million - gain in our Tour and Other segment from the sale of Holland America Line's former Noordam, which was on charter to an unaffiliated entity.


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Selling and administrative expenses increased $18 million, or 4.2%, to $449 million in 2013 from $431 million in 2012.

Depreciation and amortization expenses increased $15 million, or 4.0%, to $391 million in 2013 from $376 million in 2012.

Our total costs and expenses as a percentage of revenues increased to 95.6% in 2013 from 92.8% in 2012.

North America Brands

Operating costs and expenses decreased $36 million, or 2.4%, and remained at $1.5 billion in both 2013 and 2012. This decrease was caused by:

$39 million - intersegment transaction related to intersegment insurance reimbursements, which was fully offset in our Cruise Support segment;

$32 million - lower fuel prices;

$15 million - 1.0% capacity decrease in ALBDs and

$14 million - lower fuel consumption per ALBD.

These decreases were partially offset by:

$33 million - additional costs and expenses related to the 2013 Carnival Triumph voyage disruptions;

$9 million - increase in air transportation costs related to guests who purchased their tickets from us and

$23 million - various other operating expenses, net.

Our total costs and expenses as a percentage of revenues increased to 93.1% in 2013 from 91.1% in 2012.

EAA Brands

Operating costs and expenses increased slightly by $8 million and remained at $1.0 billion in both 2013 and 2012. This increase was caused by:

$44 million - 4.6% capacity increase in ALBDs;

$17 million - nonrecurrence in 2013 of Costa's excess insurance proceeds;

$17 million - nonrecurrence in 2013 of a gain from Cunard's litigation settlement;

$16 million - 4.2 percentage point increase in occupancy and

$13 million - higher dry-dock costs.

These increases were partially offset by:

$31 million - decreases in commissions, transportation and other related expenses caused by lower cruise ticket pricing and a decrease in air transportation costs related to guests who purchased their tickets from us;

$28 million - lower fuel prices;

$22 million - lower fuel consumption per ALBD and

$14 million - currency impact.

Our total costs and expenses as a percentage of revenues increased to 96.2% in 2013 from 93.6% in 2012.

Operating Income

Our consolidated operating income decreased $101 million to $152 million in 2013 from $253 million in 2012. Our North America brands' operating income decreased $49 million to $144 million in 2013 from $193 million in 2012, and our EAA brands' operating income decreased $34 million to $51 million in 2013 from $85 million in 2012. These changes were primarily due to the reasons discussed above.

Nonoperating Expense

Net unrealized losses on fuel derivatives were $31 million in 2013 compared to $145 million in 2012. There were no realized gains or losses recognized in 2013 and 2012.


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Key Performance Non-GAAP Financial Indicators

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.

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 periods currency exchange rates have remained constant with the 2012 periods 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 changes in our business in a fluctuating currency exchange rate environment.

We believe that the impairment charges recognized in the six months ended May 31, 2012 related to Ibero's goodwill and trademarks are special charges 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 six months ended May 31, 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 . . .

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