Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended August 31, 2016
OR
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☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
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Commission file number: 001-9610 | | Commission file number: 001-15136 |
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Carnival Corporation | Carnival plc |
(Exact name of registrant as specified in its charter) | (Exact name of registrant as specified in its charter) |
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Republic of Panama | England and Wales |
(State or other jurisdiction of incorporation or organization) | (State or other jurisdiction of incorporation or organization) |
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59-1562976 | 98-0357772 |
(I.R.S. Employer Identification No.) | (I.R.S. Employer Identification No.) |
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3655 N.W. 87th Avenue Miami, Florida 33178-2428 | Carnival House, 100 Harbour Parade, Southampton SO15 1ST, United Kingdom |
(Address of principal executive offices) (Zip Code) | (Address of principal executive offices) (Zip Code) |
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(305) 599-2600 | 011 44 23 8065 5000 |
(Registrant’s telephone number, including area code) | (Registrant’s telephone number, including area code) |
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None | None |
(Former name, former address and former fiscal year, if changed since last report) | (Former name, former address and former fiscal year, if 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 ☑ No ☐
Indicate by check mark whether the registrants have submitted electronically and posted on their corporate Web sites, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrants were required to submit and post such files). Yes ☑ No ☐
Indicate by check mark whether the registrants are large accelerated filers, accelerated filers, non-accelerated filers, or smaller reporting companies. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filers | ☑ | Accelerated filers | ☐ |
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Non-accelerated filers | ☐ | Smaller reporting companies | ☐ |
Indicate by check mark whether the registrants are shell companies (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
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At September 23, 2016, Carnival Corporation had outstanding 537,602,085 shares of Common Stock, $0.01 par value. | | At September 23, 2016, Carnival plc had outstanding 216,457,117 Ordinary Shares $1.66 par value, one Special Voting Share, GBP 1.00 par value and 537,602,085, Trust Shares of beneficial interest in the P&O Princess Special Voting Trust. |
CARNIVAL CORPORATION & PLC
TABLE OF CONTENTS
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Item 1. | | | | |
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Item 2. | | | | |
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Item 3. | | | | |
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Item 4. | | | | |
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Item 1A. | | | | |
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Item 2. | | | | |
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Item 6. | | | | |
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
CARNIVAL CORPORATION & PLC
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(in millions, except per share data)
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| | | | | | | | | | | | | | | |
| Three Months Ended August 31, | | Nine Months Ended August 31, |
| 2016 | | 2015 | | 2016 | | 2015 |
Revenues | | | | | | | |
Cruise | | | | | | | |
Passenger tickets | $ | 3,803 |
| | $ | 3,631 |
| | $ | 9,217 |
| | $ | 8,891 |
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Onboard and other | 1,146 |
| | 1,102 |
| | 3,047 |
| | 2,918 |
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Tour and other | 148 |
| | 150 |
| | 190 |
| | 194 |
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| 5,097 |
| | 4,883 |
| | 12,454 |
| | 12,003 |
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Operating Costs and Expenses | | | | | | | |
Cruise | | | | | | | |
Commissions, transportation and other | 646 |
| | 603 |
| | 1,723 |
| | 1,671 |
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Onboard and other | 171 |
| | 170 |
| | 411 |
| | 395 |
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Payroll and related | 494 |
| | 453 |
| | 1,488 |
| | 1,388 |
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Fuel | 265 |
| | 345 |
| | 648 |
| | 996 |
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Food | 260 |
| | 255 |
| | 755 |
| | 737 |
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Other ship operating | 643 |
| | 582 |
| | 1,914 |
| | 1,913 |
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Tour and other | 84 |
| | 82 |
| | 125 |
| | 129 |
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| 2,563 |
| | 2,490 |
| | 7,064 |
| | 7,229 |
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Selling and administrative | 529 |
| | 484 |
| | 1,613 |
| | 1,504 |
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Depreciation and amortization | 443 |
| | 399 |
| | 1,303 |
| | 1,206 |
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| 3,535 |
| | 3,373 |
| | 9,980 |
| | 9,939 |
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Operating Income | 1,562 |
| | 1,510 |
| | 2,474 |
| | 2,064 |
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Nonoperating (Expense) Income | | | | | | | |
Interest income | 2 |
| | 2 |
| | 5 |
| | 6 |
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Interest expense, net of capitalized interest | (61 | ) | | (53 | ) | | (168 | ) | | (167 | ) |
Losses on fuel derivatives, net | (36 | ) | | (197 | ) | | (102 | ) | | (378 | ) |
Other (expense) income, net | (2 | ) | | (12 | ) | | 6 |
| | 3 |
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| (97 | ) | | (260 | ) | | (259 | ) | | (536 | ) |
Income Before Income Taxes | 1,465 |
| | 1,250 |
| | 2,215 |
| | 1,528 |
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Income Tax Expense, Net | (41 | ) | | (34 | ) | | (44 | ) | | (41 | ) |
Net Income | $ | 1,424 |
| | $ | 1,216 |
| | $ | 2,171 |
| | $ | 1,487 |
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Earnings Per Share |
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Basic | $ | 1.93 |
| | $ | 1.56 |
| | $ | 2.89 |
| | $ | 1.91 |
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Diluted | $ | 1.93 |
| | $ | 1.56 |
| | $ | 2.88 |
| | $ | 1.91 |
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Dividends Declared Per Share | $ | 0.35 |
| | $ | 0.30 |
| | $ | 1.00 |
| | $ | 0.80 |
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The accompanying notes are an integral part of these consolidated financial statements.
CARNIVAL CORPORATION & PLC
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(in millions)
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| Three Months Ended August 31, | | Nine Months Ended August 31, |
| 2016 | | 2015 | | 2016 | | 2015 |
Net Income | $ | 1,424 |
| | $ | 1,216 |
| | $ | 2,171 |
| | $ | 1,487 |
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Items Included in Other Comprehensive (Loss) Income |
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Change in foreign currency translation adjustment | (366 | ) | | 80 |
| | (294 | ) | | (738 | ) |
Other | 2 |
| | 21 |
| | 23 |
| | (24 | ) |
Other Comprehensive (Loss) Income | (364 | ) | | 101 |
| | (271 | ) | | (762 | ) |
Total Comprehensive Income | $ | 1,060 |
| | $ | 1,317 |
| | $ | 1,900 |
| | $ | 725 |
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The accompanying notes are an integral part of these consolidated financial statements.
CARNIVAL CORPORATION & PLC
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in millions, except par values)
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| August 31, 2016 | | November 30, 2015 |
ASSETS | | | |
Current Assets | | | |
Cash and cash equivalents | $ | 462 |
| | $ | 1,395 |
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Trade and other receivables, net | 321 |
| | 303 |
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Insurance recoverables | 102 |
| | 109 |
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Inventories | 314 |
| | 330 |
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Prepaid expenses and other | 355 |
| | 314 |
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Total current assets | 1,554 |
| | 2,451 |
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Property and Equipment, Net | 32,864 |
| | 31,818 |
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Goodwill | 2,964 |
| | 3,010 |
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Other Intangibles | 1,290 |
| | 1,308 |
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Other Assets | 660 |
| | 650 |
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| $ | 39,332 |
| | $ | 39,237 |
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LIABILITIES AND SHAREHOLDERS’ EQUITY | | | |
Current Liabilities | | | |
Short-term borrowings | $ | 334 |
| | $ | 30 |
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Current portion of long-term debt | 739 |
| | 1,344 |
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Accounts payable | 704 |
| | 627 |
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Accrued liabilities and other | 1,738 |
| | 1,683 |
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Customer deposits | 3,585 |
| | 3,272 |
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Total current liabilities | 7,100 |
| | 6,956 |
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Long-Term Debt | 8,320 |
| | 7,413 |
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Other Long-Term Liabilities | 1,012 |
| | 1,097 |
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Contingencies |
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Shareholders’ Equity | | | |
Common stock of Carnival Corporation, $0.01 par value; 1,960 shares authorized; 654 shares at 2016 and 653 shares at 2015 issued | 7 |
| | 7 |
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Ordinary shares of Carnival plc, $1.66 par value; 216 shares at 2016 and 2015 issued | 358 |
| | 358 |
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Additional paid-in capital | 8,618 |
| | 8,562 |
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Retained earnings | 21,488 |
| | 20,060 |
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Accumulated other comprehensive loss | (2,012 | ) | | (1,741 | ) |
Treasury stock, 114 shares at 2016 and 70 shares at 2015 of Carnival Corporation and 26 shares at 2016 and 27 shares at 2015 of Carnival plc, at cost | (5,559 | ) | | (3,475 | ) |
Total shareholders’ equity | 22,900 |
| | 23,771 |
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| $ | 39,332 |
| | $ | 39,237 |
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The accompanying notes are an integral part of these consolidated financial statements.
CARNIVAL CORPORATION & PLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in millions)
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| Nine Months Ended August 31, |
| 2016 | | 2015 |
OPERATING ACTIVITIES | | | |
Net income | $ | 2,171 |
| | $ | 1,487 |
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Adjustments to reconcile net income to net cash provided by operating activities | | | |
Depreciation and amortization | 1,303 |
| | 1,206 |
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Losses on fuel derivatives | 102 |
| | 378 |
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Share-based compensation | 40 |
| | 38 |
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Other, net | 46 |
| | 19 |
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| 3,662 |
| | 3,128 |
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Changes in operating assets and liabilities | | | |
Receivables | (35 | ) | | (23 | ) |
Inventories | 15 |
| | 35 |
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Insurance recoverables, prepaid expenses and other | (10 | ) | | 94 |
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Accounts payable | 88 |
| | (23 | ) |
Accrued and other liabilities | (5 | ) | | (19 | ) |
Customer deposits | 395 |
| | 375 |
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Net cash provided by operating activities | 4,110 |
| | 3,567 |
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INVESTING ACTIVITIES | | | |
Additions to property and equipment | (2,416 | ) | | (1,704 | ) |
Proceeds from sales of ships | 19 |
| | 25 |
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Payments of fuel derivative settlements | (231 | ) | | (139 | ) |
Collateral proceeds (payments) for fuel derivatives | 22 |
| | (22 | ) |
Other, net | (16 | ) | | 35 |
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Net cash used in investing activities | (2,622 | ) | | (1,805 | ) |
FINANCING ACTIVITIES | | | |
Proceeds from (repayments of) short-term borrowings, net | 301 |
| | (625 | ) |
Principal repayments of long-term debt | (971 | ) | | (772 | ) |
Proceeds from issuance of long-term debt | 1,044 |
| | 472 |
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Dividends paid | (721 | ) | | (584 | ) |
Purchases of treasury stock | (2,110 | ) | | (166 | ) |
Sales of treasury stock | 40 |
| | 167 |
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Other, net | (9 | ) | | (1 | ) |
Net cash used in financing activities | (2,426 | ) | | (1,509 | ) |
Effect of exchange rate changes on cash and cash equivalents | 5 |
| | (45 | ) |
Net (decrease) increase in cash and cash equivalents | (933 | ) | | 208 |
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Cash and cash equivalents at beginning of period | 1,395 |
| | 331 |
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Cash and cash equivalents at end of period | $ | 462 |
| | $ | 539 |
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The accompanying notes are an integral part of these consolidated financial statements.
CARNIVAL CORPORATION & PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 – General
The consolidated financial statements include the accounts of Carnival Corporation and Carnival plc and their respective subsidiaries. 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.”
Basis of Presentation
The Consolidated Balance Sheet at August 31, 2016, the Consolidated Statements of Income and the Consolidated Statements of Comprehensive Income for the three and nine months ended August 31, 2016 and 2015 and the Consolidated Statements of Cash Flows for the nine months ended August 31, 2016 and 2015 are unaudited and, in the opinion of our management, contain all adjustments necessary for a fair statement. 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 2015 joint Annual Report on Form 10-K (“Form 10-K”) filed with the U.S. Securities and Exchange Commission on January 29, 2016. Our operations are seasonal and results for interim periods are not necessarily indicative of the results for the entire year.
Accounting Pronouncements
Amended guidance was issued by the Financial Accounting Standards Board (“FASB”) regarding the accounting for Service Concession Arrangements. The new guidance defines a service concession as an arrangement between a public-sector grantor, such as a port authority, and a company that will operate and maintain the grantor's infrastructure for a specified period of time. In exchange, the company may be given a right to charge the public, such as our cruise guests, for the use of the infrastructure. This guidance required us to record certain of the infrastructure we had constructed to be used by us pursuant to a service concession arrangement outside of property and equipment. On December 1, 2015, we adopted this guidance and, accordingly, reclassified $70 million from Property and Equipment, Net to Other Intangibles on our November 30, 2015 Consolidated Balance Sheet (see “Note 4 - Nonfinancial Instruments that are Measured at Fair Value on a Nonrecurring Basis”).
The FASB issued amended guidance regarding accounting for Interest - Imputation of Interest, which simplifies the presentation of debt issuance costs. The guidance requires that debt issuance costs related to a recognized debt liability be presented on the balance sheet as a direct deduction from the carrying amount of that debt liability. This guidance is required to be adopted by us in the first quarter of fiscal 2017, and will be applied on a retrospective basis. The adoption of this guidance is not expected to have a significant impact on our Consolidated Balance Sheets.
The FASB issued amended guidance regarding accounting for Intangibles - Goodwill and Other - Internal-Use Software, which clarifies the accounting for fees paid in a cloud computing arrangement. The amendments provide guidance to customers about whether a cloud computing arrangement includes a software license or if the arrangement should be accounted for as a service contract. The amendments will impact the accounting for software licenses but will not change a customer's accounting for service contracts. This guidance is required to be adopted by us in the first quarter of fiscal 2017 on either a prospective or retrospective basis. The adoption of this guidance is not expected to have a material impact to our consolidated financial statements.
The FASB issued amended guidance regarding accounting for Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. When effective, this standard will replace most existing revenue recognition guidance in U.S. generally accepted accounting principles (“U.S. GAAP”). The standard also requires more detailed disclosures and provides additional guidance for transactions that were not comprehensively addressed in U.S. GAAP. This guidance is required to be adopted by us in the first quarter of fiscal 2019 by either recasting all years presented in our financial statements or by recording the impact of adoption as an adjustment to retained earnings at the beginning of the year of adoption. We are currently evaluating the impact this guidance will have on our consolidated financial statements.
The FASB issued guidance regarding accounting for Leases, which requires an entity to recognize both assets and liabilities arising from financing and operating leases, along with additional qualitative and quantitative disclosures. This guidance is required to be adopted by us in the first quarter of fiscal 2020. We are currently evaluating the impact this guidance will have on our consolidated financial statements.
Other
Cruise passenger ticket revenues include fees, taxes and charges collected by us from our guests. The portion of these fees, taxes and charges included in passenger ticket revenues and commissions, transportation and other costs were $148 million and $141 million and $407 million and $398 million for the three and nine months ended August 31, 2016 and 2015, respectively.
NOTE 2 – Unsecured Debt
At August 31, 2016, our short-term borrowings consisted of euro- and U.S. dollar-denominated commercial paper of $246 million and $85 million, respectively, and euro-denominated bank loans of $3 million with an aggregate weighted-average floating interest rate of 0.2%.
In February 2016, we issued $555 million of euro-denominated, publicly-traded notes, which bear interest at 1.625% and are due in February 2021.
In April 2016, we borrowed $379 million under an export credit facility, the proceeds of which were used to pay for a portion of AIDA Cruises' (“AIDA”) AIDAprima purchase price. Of this facility, a portion bears fixed and a portion bears floating interest rates. The facility is due in semi-annual installments through August 2027.
In May 2016, we entered into four export credit facilities that will provide us with the ability to borrow up to an aggregate of $2.3 billion. Proceeds from these facilities will be used to pay for a portion of the purchase price of four cruise ships, which are expected to be delivered between February 2019 and September 2020. These borrowings will be due in semi-annual installments through September 2032.
In May 2016, we exercised our option to extend the termination date of our multi-currency revolving credit facility from June 2020 to June 2021. In addition, the total capacity of the revolving credit facility increased to $2.6 billion (comprised of $1.9 billion, €500 million and £169 million).
In July 2016, we borrowed $110 million under a euro-denominated, floating rate bank loan, due in July 2021.
In July 2016, we entered into a $168 million euro-denominated, fixed rate bank loan, which was drawn in September 2016 and is due in September 2020.
In July 2016, we entered into a $100 million, floating rate bank loan, which is expected to be drawn in November 2016, and is due in November 2021.
In August 2016, we canceled an export credit facility that provided us with the ability to borrow up to an aggregate of $201 million to pay for a portion of the purchase price of a Seabourn ship, which is expected to be delivered in November 2016.
In August 2016, we extended the termination date of a $100 million, floating rate bank loan, from October 2016 to October 2021.
We use the net proceeds from our borrowings for general corporate purposes and purchases of new ships.
NOTE 3 – Contingencies
Litigation
The UK Maritime & Coastguard Agency and the U.S. Department of Justice are investigating allegations that Caribbean Princess breached international pollution laws. We are cooperating with the investigations, including conducting our own internal investigation into the matter. The ultimate outcome of this matter cannot be determined at this time; however, we do not expect it to have a material impact on our results of operations.
In the normal course of our business, various claims and lawsuits have been filed or are pending against us. Most of these claims and lawsuits are covered by insurance and the maximum amount of our liability, net of any insurance recoverables, is typically limited to our self-insurance retention levels. We believe the ultimate outcome of these claims and lawsuits will not have a material impact on our consolidated financial statements.
Contingent Obligations – Lease Out and Lease Back Type (“LILO”) Transactions
At August 31, 2016, we had estimated contingent obligations totaling $364 million, excluding termination payments as discussed below, to participants in LILO transactions for two of our ships. At the inception of these leases, we paid the aggregate of the net present value of these obligations to a group of major financial institutions, who agreed to act as payment undertakers and directly pay these obligations. As a result, these contingent obligations are considered extinguished and neither the funds nor the contingent obligations have been included in our Consolidated Balance Sheets.
In the event that we were to default on our contingent obligations and assuming performance by all other participants, we estimate that we would, as of August 31, 2016, be responsible for a termination payment of $13 million. In January 2016, we elected to exercise our options to terminate, at no cost, the LILO transactions as of January 1, 2017 for one ship and as of January 1, 2018 for the second ship.
In advance of the termination dates, if the credit rating of one of the financial institutions who is directly paying the contingent obligations falls below AA-, or below A- for the other financial institution, then we will be required to replace the applicable financial institution with another financial institution whose credit rating is at least AA or meets other specified credit requirements. In such circumstances, we would incur additional costs, although we estimate that they would not be significant to our consolidated financial statements. The financial institution payment undertaker subject to the AA- credit rating threshold has a credit rating of AA, and the financial institution subject to the A- credit rating threshold has a credit rating of A+. If our credit rating, which is BBB+, falls below BBB, we will be required to provide a standby letter of credit for $27 million, or, alternatively, provide mortgages for this aggregate amount on these two ships.
Contingent Obligations – Indemnifications
Some of the debt contracts we enter into include indemnification provisions obligating us to make payments to the counterparty if certain events occur. These contingencies generally relate to changes in taxes or other changes in laws which increase our lender's 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 similar indemnification clauses in the past and we do not believe a request for material future indemnification payments is probable.
NOTE 4 – Fair Value Measurements, Derivative Instruments and Hedging Activities
Fair Value Measurements
U.S. accounting standards establish a fair value hierarchy prioritizing the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
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• | Level 1 measurements are based on unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access. Valuation of these items does not entail a significant amount of judgment. |
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• | Level 2 measurements are based on quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active or market data other than quoted prices that are observable for the assets or liabilities. |
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• | Level 3 measurements are based on unobservable data that are supported by little or no market activity and are significant to the fair value of the assets or liabilities. |
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between independent and knowledgeable market participants. When quoted prices are not readily available, our own assumptions are set to reflect those that we believe market participants would use in pricing the asset or liability.
The fair value measurement of a financial asset or financial liability reflects the nonperformance risk of both parties to the contract. Therefore, the fair value measurement of our financial instruments reflects the impact of our counterparty’s creditworthiness for asset positions and our creditworthiness for liability positions. Creditworthiness did not have a significant impact on the fair values of our financial instruments at August 31, 2016 and November 30, 2015. Considerable judgment may be required in interpreting market data used to develop the estimates of fair value. Accordingly, certain estimates of fair value presented herein are not necessarily indicative of the amounts that could be realized in a current or future market exchange.
Financial Instruments that are not Measured at Fair Value on a Recurring Basis
The carrying values and estimated fair values and basis of valuation of our financial instrument assets and liabilities not measured at fair value on a recurring basis were as follows (in millions):
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| August 31, 2016 | | November 30, 2015 |
| Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
| | Level 1 | | Level 2 | | Level 3 | | Level 1 | | Level 2 | | Level 3 |
Assets | | | | | | |
| | | | | | | |
|
Cash and cash equivalents (a) | $ | 242 |
| | $ | 242 |
| | $ | — |
| | $ | — |
| | $ | 647 |
| | $ | 647 |
| | $ | — |
| | $ | — |
|
Restricted cash (b) | 37 |
| | 37 |
| | — |
| | — |
| | 7 |
| | 7 |
| | — |
| | — |
|
Long-term other assets (c) | 108 |
| | 1 |
| | 73 |
| | 34 |
| | 119 |
| | 1 |
| | 87 |
| | 31 |
|
Total | $ | 387 |
| | $ | 280 |
| | $ | 73 |
| | $ | 34 |
| | $ | 773 |
| | $ | 655 |
| | $ | 87 |
| | $ | 31 |
|
Liabilities | | | | | | |
| | | | | | | |
|
Fixed rate debt (d) | $ | 5,274 |
| | $ | — |
| | $ | 5,631 |
| | $ | — |
| | $ | 5,193 |
| | $ | — |
| | $ | 5,450 |
| | $ | — |
|
Floating rate debt (d) | 4,119 |
| | — |
| | 4,054 |
| | — |
| | 3,594 |
| | — |
| | 3,589 |
| | — |
|
Total | $ | 9,393 |
| | $ | — |
| | $ | 9,685 |
| | $ | — |
| | $ | 8,787 |
| | $ | — |
| | $ | 9,039 |
| | $ | — |
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(a) | Cash and cash equivalents are comprised of cash on hand and at November 30, 2015 also included a money market deposit account and time deposits. Due to their short maturities, the carrying values approximate their fair values. |
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(b) | Restricted cash is comprised of a money market deposit account and at August 31, 2016 also included funds held in escrow. |
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(c) | Long-term other assets are substantially all comprised of notes and other receivables. The fair values of our Level 2 notes and other receivables were based on estimated future cash flows discounted at appropriate market interest rates. The fair values of our Level 3 notes receivable were estimated using risk-adjusted discount rates. |
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(d) | Debt does not include the impact of interest rate swaps. The fair values of our publicly-traded notes were based on their unadjusted quoted market prices in markets that are not sufficiently active to be Level 1 and, accordingly, are considered Level 2. The fair values of our other debt were estimated based on appropriate market interest rates being applied to this debt. |
Financial Instruments that are Measured at Fair Value on a Recurring Basis
The estimated fair value and basis of valuation of our financial instrument assets and liabilities measured at fair value on a recurring basis were as follows (in millions):
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| | | | | | | | | | | | | | | | | | | | | | | |
| August 31, 2016 | | November 30, 2015 |
| Level 1 | | Level 2 | | Level 3 | | Level 1 | | Level 2 | | Level 3 |
Assets | | | | | | | | | | | |
Cash equivalents (a) | $ | 220 |
| | $ | — |
| | $ | — |
| | $ | 748 |
| | $ | — |
| | $ | — |
|
Restricted cash (b) | 25 |
| | — |
| | — |
| | 22 |
| | — |
| | — |
|
Short-term investments (c) | — |
| | — |
| | 21 |
| | — |
| | — |
| | — |
|
Marketable securities held in rabbi trusts (d) | 96 |
| | 4 |
| | — |
| | 105 |
| | 8 |
| | — |
|
Derivative financial instruments (e) | — |
| | 10 |
| | — |
| | — |
| | 29 |
| | — |
|
Long-term other asset (c) | — |
| | — |
| | — |
| | — |
| | — |
| | 21 |
|
Total | $ | 341 |
| | $ | 14 |
| | $ | 21 |
| | $ | 875 |
| | $ | 37 |
| | $ | 21 |
|
Liabilities | | | | | | | | | | | |
Derivative financial instruments (e) | $ | — |
| | $ | 515 |
| | $ | — |
| | $ | — |
| | $ | 625 |
| | $ | — |
|
Total | $ | — |
| | $ | 515 |
| | $ | — |
| | $ | — |
| | $ | 625 |
| | $ | — |
|
| |
(a) | Cash equivalents are comprised of money market funds. |
| |
(b) | Restricted cash is primarily comprised of money market funds. |
| |
(c) | The fair value of auction rate security included in short-term investments and long-term other asset was based on a broker quote in an inactive market. During the nine months ended August 31, 2016, there were no purchases or sales pertaining to this auction rate security. |
| |
(d) | Marketable securities held in rabbi trusts are comprised of Level 1 bonds, frequently-priced mutual funds invested in common stocks and money market funds and Level 2 other investments. Their use is limited to funding certain deferred compensation and non-qualified U.S. pension plans. |
| |
(e) | See “Derivative Instruments and Hedging Activities” section below for detailed information regarding our derivative financial instruments. |
We measure our derivatives using valuations that are calibrated to the initial trade prices. Subsequent valuations are based on observable inputs and other variables included in the valuation models such as interest rate, yield and commodity price curves, forward currency exchange rates, credit spreads, maturity dates, volatilities and netting arrangements. We use the income approach to value derivatives for foreign currency options and forwards, interest rate swaps and fuel derivatives using observable market data for all significant inputs and standard valuation techniques to convert future amounts to a single present value amount, assuming that participants are motivated, but not compelled to transact.
Nonfinancial Instruments that are Measured at Fair Value on a Nonrecurring Basis
Sale of Ship
In March 2016, we entered into a bareboat charter/sale agreement under which the 1,546-passenger capacity Pacific Pearl will be chartered to an unrelated entity from April 2017 through April 2027. Under this agreement, ownership of Pacific Pearl will be transferred to the buyer in April 2027.
Valuation of Goodwill and Other Intangibles
The reconciliation of the changes in the carrying amounts of our goodwill was as follows (in millions):
|
| | | | | | | | | | | |
| North America Segment | | EAA (a) Segment | | Total |
Balance at November 30, 2015 | $ | 1,898 |
| | $ | 1,112 |
| | $ | 3,010 |
|
Foreign currency translation adjustment | — |
| | (46 | ) | | (46 | ) |
Balance at August 31, 2016 | $ | 1,898 |
| | $ | 1,066 |
| | $ | 2,964 |
|
(a) Europe, Australia & Asia (“EAA”)
At July 31, 2016, all of our cruise brands carried goodwill, except for Seabourn and Fathom. As of that date, we performed our annual goodwill impairment reviews, which included performing a qualitative assessment for AIDA, Carnival Cruise Line, Cunard, P&O Cruises (UK) and Princess. Qualitative factors such as industry and market conditions, macroeconomic conditions, changes to the weighted-average cost of capital (“WACC”), overall financial performance, changes in fuel prices and capital expenditures were considered in the qualitative assessment to determine how changes in these factors would affect each of these cruise brands’ estimated fair values. Based on our qualitative assessments, we determined it was more-likely-than-not that each of these cruise brands’ estimated fair values exceeded their carrying values and, therefore, we did not proceed to the two-step quantitative goodwill impairment reviews.
As of July 31, 2016, we also performed our annual goodwill impairment reviews for Costa Cruises' ("Costa"), Holland America Line's and P&O Cruises (Australia). We did not perform a qualitative assessment but instead proceeded directly to step one of the two-step quantitative goodwill impairment review and compared each of Costa's, Holland America Line's and P&O Cruises (Australia)’s estimated fair value to the carrying value of their allocated net assets. Their estimated cruise brand fair value was based on a discounted future cash flow analysis. The principal assumptions used in our cash flow analyses consisted of forecasted operating results, including net revenue yields and net cruise costs including fuel prices; capacity changes, including the expected rotation of vessels into, or out of, Costa, Holland America Line and P&O Cruises (Australia); WACC of market participants, adjusted for the risk attributable to the geographic regions in which Costa, Holland America Line and P&O Cruises (Australia) operate; capital expenditures; proceeds from forecasted dispositions of ships and terminal values, which are all considered Level 3 inputs. Based on the discounted cash flow analyses, we determined that each of Costa's, Holland America Line’s and P&O Cruises (Australia)’s estimated fair value significantly exceeded their carrying value and, therefore, we did not proceed to step two of the impairment reviews.
The reconciliation of the changes in the carrying amounts of our other intangible assets not subject to amortization, which represent trademarks, was as follows (in millions):
|
| | | | | | | | | | | |
| North America Segment | | EAA Segment | | Total |
Balance at November 30, 2015 | $ | 927 |
| | $ | 307 |
| | $ | 1,234 |
|
Foreign currency translation adjustment | — |
| | (15 | ) | | (15 | ) |
Balance at August 31, 2016 | $ | 927 |
| | $ | 292 |
| | $ | 1,219 |
|
At July 31, 2016, our cruise brands that have significant trademarks recorded include AIDA, P&O Cruises (Australia), P&O Cruises (UK) and Princess. As of that date, we performed our annual trademark impairment reviews for these cruise brands, which included performing a qualitative assessment for AIDA, P&O Cruises (UK) and Princess. Qualitative factors such as industry and market conditions, macroeconomic conditions, changes to the WACC, changes in royalty rates and overall financial performance were considered in the qualitative assessment to determine how changes in these factors would affect the estimated fair value for AIDA's, P&O Cruises (UK)'s and Princess' recorded trademarks. Based on our qualitative assessment, we determined it was more likely-than-not that the estimated fair value for AIDA's, P&O Cruises (UK)’s and Princess's recorded trademarks exceeded their carrying value and, therefore, none of these trademarks were impaired.
As of July 31, 2016, we did not perform a qualitative assessment for P&O Cruises (Australia)'s trademarks but instead proceeded directly to the quantitative trademark impairment reviews. Our quantitative assessment included estimating P&O Cruises (Australia)'s trademarks fair value based upon a discounted future cash flow analysis, which estimated the amount of royalties that we are relieved from having to pay for use of the associated trademarks, based upon forecasted cruise revenues and a market participant’s royalty rate. The royalty rate was estimated primarily using comparable royalty agreements for similar industries. Based on our quantitative assessment, we determined that the estimated fair values for P&O Cruises (Australia)’s trademarks significantly exceeded their carrying values and, therefore, none of these trademarks were impaired.
The determination of our reporting unit goodwill and trademark fair values includes numerous assumptions that are subject to various risks and uncertainties. We believe that we have made reasonable estimates and judgments. If there is a change in the conditions or circumstances influencing fair values in the future, then we may need to recognize an impairment charge.
The reconciliation of the changes in the net carrying amounts of our other intangible assets subject to amortization, which represent port usage rights, was as follows (in millions):
|
| | | | | | | | | | | |
| Cruise Support Segment | | EAA Segment | | Total |
Balance at November 30, 2015 (See “Note 1 - General”) | $ | 62 |
| | $ | 12 |
| | $ | 74 |
|
Amortization | (3 | ) | | — |
| | (3 | ) |
Foreign currency translation adjustment | (1 | ) | | 1 |
| | — |
|
Balance at August 31, 2016 | $ | 58 |
| | $ | 13 |
| | $ | 71 |
|
Port usage rights are stated at cost. Amortization is computed using the straight-line method over the shorter of the arrangement term or their expected useful lives.
Derivative Instruments and Hedging Activities
We utilize derivative and non-derivative financial instruments, such as foreign currency forwards, options and swaps, foreign currency debt obligations and foreign currency cash balances, to manage our exposure to fluctuations in certain foreign currency exchange rates. We use interest rate swaps to manage our interest rate exposure to achieve a desired proportion of fixed and floating rate debt. In addition, we utilize our fuel derivatives program to mitigate a portion of the risk to our future cash flows attributable to potential fuel price increases, which we define as our “economic risk.” Our policy is to not use any financial instruments for trading or other speculative purposes.
All derivatives are recorded at fair value. The changes in fair value are recognized currently in earnings if the derivatives do not qualify as effective hedges, or if we do not seek to qualify for hedge accounting treatment, such as for our fuel derivatives. If a derivative is designated as a fair value hedge, then changes in the fair value of the derivative are offset against the changes in the fair value of the underlying hedged item. If a derivative is designated as a cash flow hedge, then the effective portion of the changes in the fair value of the derivative is recognized as a component of accumulated other comprehensive income (“AOCI”) until the underlying hedged item is recognized in earnings or the forecasted transaction is no longer probable. If a derivative or a non-derivative financial instrument is designated as a hedge of our net investment in a foreign operation, then changes in the fair value of the financial instrument are recognized as a component of AOCI to offset a portion of the change in the translated value of the net investment being hedged, until the investment is sold or substantially liquidated. We formally document hedging relationships for all derivative and non-derivative hedges and the underlying hedged items, as well as our risk management objectives and strategies for undertaking the hedge transactions.
We classify the fair values of all our derivative contracts as either current or long-term, depending on the maturity date of the derivative contract. The cash flows from derivatives treated as hedges are classified in our Consolidated Statements of Cash Flows in the same category as the item being hedged. Our cash flows related to fuel derivatives are classified within investing activities.
The estimated fair values of our derivative financial instruments and their location in the Consolidated Balance Sheets were as follows (in millions):
|
| | | | | | | | | |
| Balance Sheet Location | | August 31, 2016 | | November 30, 2015 |
Derivative assets | | | | | |
Derivatives designated as hedging instruments | | | | | |
Net investment hedges (a) | Prepaid expenses and other | | $ | 10 |
| | $ | 14 |
|
| Other assets – long-term | | — |
| | 13 |
|
Interest rate swaps (b) | Prepaid expenses and other | | — |
| | 2 |
|
Total derivative assets | | | $ | 10 |
| | $ | 29 |
|
Derivative liabilities | | | | | |
Derivatives designated as hedging instruments | | | | | |
Net investment hedges (a) | Accrued liabilities and other | | $ | 2 |
| | $ | — |
|
| Other long-term liabilities | | 12 |
| | — |
|
Interest rate swaps (b) | Accrued liabilities and other | | 11 |
| | 11 |
|
| Other long-term liabilities | | 31 |
| | 27 |
|
Foreign currency zero cost collars (c) | Accrued liabilities and other | | 5 |
| | — |
|
| Other long-term liabilities | | — |
| | 26 |
|
| | | 61 |
| | 64 |
|
Derivatives not designated as hedging instruments | | | | | |
Fuel (d) | Accrued liabilities and other | | 234 |
| | 227 |
|
| Other long-term liabilities | | 220 |
| | 334 |
|
| | | 454 |
| | 561 |
|
Total derivative liabilities | | | $ | 515 |
| | $ | 625 |
|
| |
(a) | We had foreign currency forwards totaling $296 million at August 31, 2016 and $43 million at November 30, 2015 that are designated as hedges of our net investments in foreign operations, which have a euro-denominated functional currency. At August 31, 2016, these foreign currency forwards settle through July 2017. We also had foreign currency swaps totaling $409 million at August 31, 2016 and $387 million at November 30, 2015 that are designated as hedges of our net investments in foreign operations, which have a euro-denominated functional currency. At August 31, 2016, these foreign currency swaps settle through September 2019. |
| |
(b) | We have euro interest rate swaps designated as cash flow hedges whereby we receive floating interest rate payments in exchange for making fixed interest rate payments. These interest rate swap agreements effectively changed $551 million at August 31, 2016 and $568 million at November 30, 2015 of EURIBOR-based floating rate euro debt to fixed rate euro debt. At August 31, 2016, these interest rate swaps settle through March 2025. In addition, at November 30, 2015, we had U.S. dollar interest rate swaps designated as fair value hedges whereby we receive fixed interest rate payments in exchange for making floating interest rate payments. At November 30, 2015, these interest rate swap agreements effectively changed $500 million of fixed rate debt to U.S. dollar LIBOR-based floating rate debt. These interest rate swaps settled in February 2016. |
| |
(c) | At August 31, 2016 and November 30, 2015, we had foreign currency derivatives consisting of foreign currency zero cost collars that are designated as foreign currency cash flow hedges for a portion of our euro-denominated shipbuilding payments. See “Newbuild Currency Risks” below for additional information regarding these derivatives. |
| |
(d) | At August 31, 2016 and November 30, 2015, we had fuel derivatives consisting of zero cost collars on Brent crude oil (“Brent”) to cover a portion of our estimated fuel consumption through 2018. See “Fuel Price Risks” below for additional information regarding these derivatives. |
Our derivative contracts include rights of offset with our counterparties. We have elected to net certain of our derivative assets and liabilities within counterparties. The amounts recognized within assets and liabilities were as follows (in millions):
|
| | | | | | | | | | | | | | | | | | | | |
| | August 31, 2016 |
| | Gross Amounts | | Gross Amounts Offset in the Balance Sheet | | Total Net Amounts Presented in the Balance Sheet | | Gross Amounts not Offset in the Balance Sheet | | Net Amounts |
Assets | | $ | 13 |
| | $ | (3 | ) | | $ | 10 |
| | $ | (10 | ) | | $ | — |
|
Liabilities | | $ | 518 |
| | $ | (3 | ) | | $ | 515 |
| | $ | (10 | ) | | $ | 505 |
|
| | | | | | | | | | |
| | November 30, 2015 |
| | Gross Amounts | | Gross Amounts Offset in the Balance Sheet | | Total Net Amounts Presented in the Balance Sheet | | Gross Amounts not Offset in the Balance Sheet | | Net Amounts |
Assets | | $ | 73 |
| | $ | (44 | ) | | $ | 29 |
| | $ | (29 | ) | | $ | — |
|
Liabilities | | $ | 669 |
| | $ | (44 | ) | | $ | 625 |
| | $ | (29 | ) | | $ | 596 |
|
The effective gain (loss) portions of our derivatives qualifying and designated as hedging instruments recognized in other comprehensive income (loss) were as follows (in millions):
|
| | | | | | | | | | | | | | | |
| Three Months Ended August 31, | | Nine Months Ended August 31, |
| 2016 | | 2015 | | 2016 | | 2015 |
Net investment hedges | $ | — |
| | $ | (13 | ) | | $ | (17 | ) | | $ | 33 |
|
Foreign currency zero cost collars – cash flow hedges | $ | 2 |
| | $ | 9 |
| | $ | 21 |
| | $ | (39 | ) |
Interest rate swaps – cash flow hedges | $ | — |
| | $ | 5 |
| | $ | 3 |
| | $ | 8 |
|
There are no credit risk related contingent features in our derivative agreements, except for bilateral credit provisions within our fuel derivative counterparty agreements. These provisions require cash collateral to be posted or received to the extent the fuel derivative fair value payable to or receivable from an individual counterparty exceeds $100 million. At August 31, 2016 and November 30, 2015, we had $3 million and $25 million, respectively, of collateral posted to one of our fuel derivative counterparties. At August 31, 2016 and November 30, 2015, no collateral was required to be received from our fuel derivative counterparties.
The amount of estimated cash flow hedges’ unrealized gains and losses that are expected to be reclassified to earnings in the next twelve months is not significant. We have not provided additional disclosures of the impact that derivative instruments and hedging activities have on our consolidated financial statements as of August 31, 2016 and November 30, 2015 and for the three and nine months ended August 31, 2016 and 2015 where such impacts were not significant.
Fuel Price Risks
Substantially all of our exposure to market risk for changes in fuel prices relates to the consumption of fuel on our ships. We use our fuel derivatives program to mitigate a portion of our economic risk attributable to potential fuel price increases. We designed our fuel derivatives program to maximize operational flexibility by utilizing derivative markets with significant trading liquidity, and our program currently consists of zero cost collars on Brent.
All of our derivatives are based on Brent prices whereas the actual fuel used on our ships is marine fuel. Changes in the Brent prices may not show a high degree of correlation with changes in our underlying marine fuel prices. We will not realize any economic gain or loss upon the monthly maturities of our zero cost collars unless the average monthly price of Brent is above the ceiling price or below the floor price. We believe that these derivatives will act as economic hedges; however, hedge accounting is not applied. As part of our fuel derivatives program, we will continue to evaluate various derivative products and strategies.
Our unrealized and realized gains (losses), net on fuel derivatives were as follows (in millions): |
| | | | | | | | | | | | | | | |
| Three Months Ended August 31, | | Nine Months Ended August 31, |
| 2016 |
| 2015 | | 2016 | | 2015 |
Unrealized gains (losses) on fuel derivatives, net | $ | 25 |
|
| $ | (137 | ) | | $ | 121 |
| | $ | (215 | ) |
Realized losses on fuel derivatives | (61 | ) |
| (60 | ) | | (223 | ) | | (163 | ) |
Gains (losses) on fuel derivatives, net | $ | (36 | ) | | $ | (197 | ) | | $ | (102 | ) | | $ | (378 | ) |
At August 31, 2016, our outstanding fuel derivatives consisted of zero cost collars on Brent as follows:
|
| | | | | | | | | | | | |
Maturities (a) | Transaction Dates | | Barrels (in thousands) | | Weighted-Average Floor Prices | | Weighted-Average Ceiling Prices |
Fiscal 2016 (Q4) | | | | | | | |
| June 2012 | | 891 |
| | $ | 75 |
| | $ | 108 |
|
| February 2013 | | 540 |
| | $ | 80 |
| | $ | 120 |
|
| April 2013 | | 750 |
| | $ | 75 |
| | $ | 115 |
|
| | | 2,181 |
| | | | |
Fiscal 2017 | | | | | | | |
| February 2013 | | 3,276 |
| | $ | 80 |
| | $ | 115 |
|
| April 2013 | | 2,028 |
| | $ | 75 |
| | $ | 110 |
|
| January 2014 | | 1,800 |
| | $ | 75 |
| | $ | 114 |
|
| October 2014 | | 1,020 |
| | $ | 80 |
| | $ | 113 |
|
| | | 8,124 |
| | | | |
Fiscal 2018 | | | | | | | |
| January 2014 | | 2,700 |
| | $ | 75 |
| | $ | 110 |
|
| October 2014 | | 3,000 |
| | $ | 80 |
| | $ | 114 |
|
| | | 5,700 |
| | | | |
| |
(a) | Fuel derivatives mature evenly over each month within the above fiscal periods. |
Foreign Currency Exchange Rate Risks
Overall Strategy
We manage our exposure to fluctuations in foreign currency exchange rates through our normal operating and financing activities, including netting certain exposures to take advantage of any natural offsets and, when considered appropriate, through the use of derivative and non-derivative financial instruments. Our primary focus is to monitor our exposure to and manage the economic foreign currency exchange risks faced by our operations and realized if we exchange one currency for another. We currently only hedge certain of our ship commitments and net investments in foreign operations. The financial impacts of the hedging instruments we do employ generally offset the changes in the underlying exposures being hedged.
Operational Currency Risks
Our EAA segment operations generate significant revenues and incur significant expenses in their euro, sterling or Australian dollar functional currency, which subjects us to “foreign currency translational” risk related to these currencies. Accordingly, exchange rate fluctuations of the euro, sterling and Australian dollar against the U.S. dollar will affect our reported financial results since the reporting currency for our consolidated financial statements is the U.S. dollar. Any strengthening of the U.S. dollar against these foreign currencies has the financial statement effect of decreasing the U.S. dollar values reported for these segment's revenues and expenses. Any weakening of the U.S. dollar has the opposite effect.
Substantially all of our operations also have non-functional currency risk related to their international sales, which are principally denominated in euro, sterling and Australian, Canadian and U.S. dollars. In addition, we have a portion of our operating expenses denominated in non-functional currencies. Accordingly, we also have “foreign currency transactional” risks related to changes in the exchange rates for our revenues and expenses that are in a currency other than the functional currency. The revenues and expenses which occur in the same non-functional currencies create some degree of natural offset.
Investment Currency Risks
We consider our investments in foreign operations to be denominated in stable currencies. Our investments in foreign operations are of a long-term nature. We partially mitigate our net investment currency exposures by denominating a portion of our foreign currency intercompany payables in our foreign operations’ functional currencies, majority sterling. We have designated $3.5 billion as of August 31, 2016 and $2.6 billion as of November 30, 2015 of our foreign currency intercompany payables as non-derivative hedges of our net investments in foreign operations. Accordingly, we have included $821 million at August 31, 2016 and $509 million at November 30, 2015 of cumulative foreign currency transaction non-derivative gains in the cumulative translation adjustment component of AOCI. These amounts have offset a portion of the losses recorded in AOCI upon translating our foreign operations’ net assets into U.S. dollars. During the three and nine months ended August 31, 2016 and 2015, we recognized foreign currency non-derivative transaction (losses) gains of $243 million ($7 million in 2015) and $312 million ($97 million in 2015), respectively, in the cumulative translation adjustment component of AOCI.
Newbuild Currency Risks
Our shipbuilding contracts are typically denominated in euros. Our decision to hedge a non-functional currency ship commitment for our cruise brands is made on a case-by-case basis, considering the amount and duration of the exposure, market volatility, economic trends, our overall expected net cash flows by currency and other offsetting risks. We use foreign currency derivative contracts and have used non-derivative financial instruments to manage foreign currency exchange rate risk for some of our ship construction payments.
In January 2015, we entered into foreign currency zero cost collars that are designated as cash flow hedges for a portion of Majestic Princess' and Seabourn Encore's euro-denominated shipyard payments. The Majestic Princess' collars mature in March 2017 at a weighted-average ceiling of $590 million and a weighted-average floor of $504 million. The Seabourn Encore's collars mature in November 2016 at a weighted-average ceiling of $221 million and a weighted-average floor of $185 million. If the spot rate is between the weighted-average ceiling and floor rates on the date of maturity, then we would not owe or receive any payments under these collars.
At August 31, 2016, including the three ships ordered under the Memorandum of Agreement signed with Meyer Werft and Meyer Turku on September 5, 2016, our remaining newbuild currency exchange rate risk relates to euro-denominated newbuild contract payments, which represent a total unhedged commitment of $5.8 billion and relates to Carnival Cruise Line, Holland America Line, P&O Cruises (Australia), P&O Cruises (UK), Princess and Seabourn newbuilds scheduled to be delivered through 2022.
The cost of shipbuilding orders that we may place in the future that is denominated in a different currency than our cruise brands’ or the shipyards’ functional currency is expected to be affected by foreign currency exchange rate fluctuations. These foreign currency exchange rate fluctuations may affect our desire to order new cruise ships.
Interest Rate Risks
We manage our exposure to fluctuations in interest rates through our debt portfolio management and investment strategies. We evaluate our debt portfolio to determine whether to make periodic adjustments to the mix of fixed and floating rate debt through the use of interest rate swaps and the issuance of new debt or the early retirement of existing debt. At August 31, 2016, 62% and 38% (60% and 40% at November 30, 2015) of our debt bore fixed and floating interest rates, respectively, including the effect of interest rate swaps.
Concentrations of Credit Risk
As part of our ongoing control procedures, we monitor concentrations of credit risk associated with financial and other institutions with which we conduct significant business. We seek to minimize these credit risk exposures, including counterparty nonperformance primarily associated with our cash equivalents, investments, committed financing facilities, contingent obligations, derivative instruments, insurance contracts and new ship progress payment guarantees, by:
| |
• | conducting business with large, well-established financial institutions, insurance companies and export credit agencies, |
| |
• | diversifying our counterparties, |
| |
• | having guidelines regarding credit ratings and investment maturities that we follow to help safeguard liquidity and minimize risk, and |
| |
• | requiring collateral and/or guarantees to support notes receivable on significant asset sales, long-term ship charters and new ship progress payments to shipyards. |
We currently believe the risk of nonperformance by any of our significant counterparties is remote. At August 31, 2016, our exposures under foreign currency and fuel derivative contracts and interest rate swap agreements were not material.
We also monitor the creditworthiness of travel agencies and tour operators in Asia, Australia and Europe, which includes charter-hire agreements in Asia, and credit and debit card providers to which we extend credit in the normal course of our business prior to sailing. Our credit exposure also includes contingent obligations related to cash payments received directly by travel agents and tour operators for cash collected by them on cruise sales in Australia and most of Europe where we are obligated to honor our guests' cruise payments made by them to their travel agents and tour operators regardless of whether we have received these payments. Concentrations of credit risk associated with these trade receivables, charter-hire agreements and contingent obligations are not considered to be material, principally due to the large number of unrelated accounts, the nature of these contingent obligations and their short maturities. We have not experienced significant credit losses on our trade receivables, charter-hire agreements and contingent obligations. We do not normally require collateral or other security to support normal credit sales.
NOTE 5 – Segment Information
We have four reportable segments that are comprised of (1) North America, (2) EAA, (3) Cruise Support and (4) Tour and Other. Our segments are reported on the same basis as the internally reported information that is provided to our chief operating decision maker (“CODM”), who is the President and Chief Executive Officer of Carnival Corporation and Carnival plc. The CODM assesses performance and makes decisions to allocate resources for Carnival Corporation & plc based upon review of the results across all of our segments.
Our North America segment includes Carnival Cruise Line, Holland America Line, Princess and Seabourn. Our EAA segment includes AIDA, Costa, Cunard, P&O Cruises (Australia), P&O Cruises (UK) and ship operations of Fathom, our newest brand. The operations of these reporting units have been aggregated into two reportable segments based on the similarity of their economic and other characteristics, including types of customers, regulatory environment, maintenance requirements, supporting systems and processes and products and services they provide. Our Cruise Support segment represents certain of our port and related facilities and other services that are provided for the benefit of our cruise brands and Fathom's selling, general and administrative expenses.
Our Tour and Other segment represents the hotel and transportation operations of Holland America Princess Alaska Tours and three ships that we bareboat charter to unaffiliated entities.
Selected information for our segments was as follows (in millions):
|
| | | | | | | | | | | | | | | | | | | |
| Three Months Ended August 31, |
| Revenues | | Operating costs and expenses | | Selling and administrative | | Depreciation and amortization | | Operating income (loss) |
2016 | | | | | | | | | |
North America (a) | $ | 3,284 |
| | $ | 1,668 |
| | $ | 293 |
| | $ | 272 |
| | $ | 1,051 |
|
EAA | 1,738 |
| | 903 |
| | 161 |
| | 152 |
| | 522 |
|
Cruise Support | 31 |
| | 12 |
| | 73 |
| | 9 |
| | (63 | ) |
Tour and Other (a) | 148 |
| | 84 |
| | 2 |
| | 10 |
| | 52 |
|
Intersegment elimination (a) | (104 | ) | | (104 | ) | | — |
| | — |
| | — |
|
| $ | 5,097 |
| | $ | 2,563 |
| | $ | 529 |
| | $ | 443 |
| | $ | 1,562 |
|
2015 | | | | | | | | | |
North America (a) | $ | 3,111 |
| | $ | 1,647 |
| | $ | 271 |
| | $ | 242 |
| | $ | 951 |
|
EAA | 1,691 |
| | 852 |
| | 162 |
| | 140 |
| | 537 |
|
Cruise Support | 30 |
| | 8 |
| | 49 |
| | 6 |
| | (33 | ) |
Tour and Other (a) | 150 |
| | 82 |
| | 2 |
| | 11 |
| | 55 |
|
Intersegment elimination (a) | (99 | ) | | (99 | ) | | — |
| | — |
| | — |
|
| $ | 4,883 |
| | $ | 2,490 |
| | $ | 484 |
| | $ | 399 |
| | $ | 1,510 |
|
| | | | | | | | | |
| Nine Months Ended August 31, |
| Revenues | | Operating costs and expenses | | Selling and administrative | | Depreciation and amortization | | Operating income (loss) |
2016 | | | | | | | | | |
North America (a) | $ | 7,823 |
| | $ | 4,368 |
| | $ | 897 |
| | $ | 791 |
| | $ | 1,767 |
|
EAA | 4,466 |
| | 2,666 |
| | 513 |
| | 450 |
| | 837 |
|
Cruise Support | 93 |
| | 23 |
| | 196 |
| | 32 |
| | (158 | ) |
Tour and Other (a) | 190 |
| | 125 |
| | 7 |
| | 30 |
| | 28 |
|
Intersegment elimination (a) | (118 | ) | | (118 | ) | | — |
| | — |
| | — |
|
| $ | 12,454 |
| | $ | 7,064 |
| | $ | 1,613 |
| | $ | 1,303 |
| | $ | 2,474 |
|
2015 | | | | | | | | | |
North America (a) | $ | 7,570 |
| | $ | 4,558 |
| | $ | 830 |
| | $ | 738 |
| | $ | 1,444 |
|
EAA | 4,273 |
| | 2,644 |
| | 511 |
| | 417 |
| | 701 |
|
Cruise Support | 82 |
| | 14 |
| | 156 |
| | 18 |
| | (106 | ) |
Tour and Other (a) | 194 |
| | 129 |
| | 7 |
| | 33 |
| | 25 |
|
Intersegment elimination (a) | (116 | ) | | (116 | ) | | — |
| | — |
| | — |
|
| $ | 12,003 |
| | $ | 7,229 |
| | $ | 1,504 |
| | $ | 1,206 |
| | $ | 2,064 |
|
| |
(a) | A portion of the North America segment's revenues includes revenues for the tour portion of a cruise when a cruise and land tour package are sold together by Holland America Line and Princess. These intersegment tour revenues, which are also included in our Tour and Other segment, are eliminated by the North America segment's revenues and operating expenses in the line “Intersegment elimination.” |
NOTE 6 – Earnings Per Share
Our basic and diluted earnings per share were computed as follows (in millions, except per share data):
|
| | | | | | | | | | | | | | | |
| Three Months Ended August 31, | | Nine Months Ended August 31, |
| 2016 | | 2015 | | 2016 | | 2015 |
Net income for basic and diluted earnings per share | $ | 1,424 |
| | $ | 1,216 |
| | $ | 2,171 |
| | $ | 1,487 |
|
Weighted-average common and ordinary shares outstanding | 737 |
| | 778 |
| | 751 |
| | 778 |
|
Dilutive effect of equity plans | 2 |
| | 3 |
| | 3 |
| | 3 |
|
Diluted weighted-average shares outstanding | 739 |
| | 781 |
| | 754 |
| | 781 |
|
Basic earnings per share | $ | 1.93 |
| | $ | 1.56 |
| | $ | 2.89 |
| | $ | 1.91 |
|
Diluted earnings per share | $ | 1.93 |
| | $ | 1.56 |
| | $ | 2.88 |
| | $ | 1.91 |
|
NOTE 7 – Shareholders' Equity
During the nine months ended August 31, 2016, we repurchased 43.6 million shares of Carnival Corporation common stock for $2.1 billion under our general repurchase authorization program (“Repurchase Program”). On June 27, 2016, our Board of Directors increased the authorization under our Repurchase Program by $1.0 billion. From September 1, 2016 through September 23, 2016, we repurchased 2.3 million shares of Carnival Corporation common stock for $107 million under the Repurchase Program. Accordingly, at September 23, 2016, the remaining availability under the Repurchase Program was $531 million.
During the nine months ended August 31, 2016, Carnival Investments Limited (“CIL”), a subsidiary of Carnival Corporation, sold 891,000 of Carnival plc ordinary shares for net proceeds of $40 million. Substantially all of the net proceeds from these sales were used to purchase 891,000 shares of Carnival Corporation common stock. Pursuant to our Stock Swap Program, Carnival Corporation sold these Carnival plc ordinary shares owned by CIL only to the extent it was able to repurchase shares of Carnival Corporation common stock in the U.S. on at least an equivalent basis.
During the nine months ended August 31, 2016, our Board of Directors declared a 17% dividend increase to holders of Carnival Corporation common stock and Carnival plc ordinary shares from $0.30 per share to $0.35 per share.
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. All statements other than statements of historical facts are statements that could be deemed forward-looking. These statements are based on current expectations, estimates, forecasts and projections about our business and the industry in which we operate and the beliefs and assumptions of our management. We have tried, whenever possible, to identify these statements by using words like “will,” “may,” “could,” “should,” “would,” “believe,” “depends,” “expect,” “goal,” “anticipate,” “forecast,” “project,” “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 our outlook including, among other things, the forecasting of our net revenue yields; booking levels; pricing; occupancy; operating, financing and tax costs, including fuel expenses; currency exchange rates; net cruise costs excluding fuel per available lower berth day; estimates of ship depreciable lives and residual values; liquidity; goodwill, ship and trademark fair values and adjusted earnings per share. 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. This note contains important cautionary statements of the known factors that we consider could materially affect the accuracy of our forward-looking statements and adversely affect our business, results of operations and financial position. It is not possible to predict or identify all such risks. There may be additional risks that we consider immaterial or which are unknown. These factors include, but are not limited to, the following:
| |
• | Incidents, such as ship incidents, security incidents, the spread of contagious diseases and threats thereof, adverse weather conditions or other natural disasters and the related adverse publicity affecting our reputation and the health, safety, security and satisfaction of guests and crew; |
| |
• | Economic conditions and adverse world events affecting the safety and security of travel, such as civil unrest, armed conflicts and terrorist attacks; |
| |
• | Changes in and compliance with laws and regulations relating to environment, health, safety, security, tax and anti-corruption under which we operate; |
| |
• | Disruptions and other damages to our information technology and other networks and operations, and breaches in data security; |
| |
• | Ability to recruit, develop and retain qualified personnel; |
| |
• | Increases in fuel prices; |
| |
• | Fluctuations in foreign currency exchange rates; |
| |
• | Misallocation of capital among our ship, joint venture and other strategic investments; |
| |
• | Future operating cash flow may not be sufficient to fund future obligations and we may be unable to obtain financing; |
| |
• | Deterioration of our cruise brands' strengths and our inability to implement our strategies; |
| |
• | 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 prices for, the services and products provided by these vendors; |
| |
• | Inability to implement our shipbuilding programs and ship repairs, maintenance and refurbishments on terms that are favorable or consistent with our expectations and increases to our repairs and maintenance expenses and refurbishment costs as our fleet ages; |
| |
• | Failure to keep pace with developments in technology; |
| |
• | Geographic regions in which we try to expand our business may be slow to develop and ultimately not develop how we expect and our international operations are subject to additional risks not generally applicable to our U.S. operations; |
| |
• | Competition from and overcapacity in the cruise ship and land-based vacation industry; |
| |
• | Economic, market and political factors that are beyond our control, which could increase our operating, financing and other costs; |
| |
• | Changes in global consumer confidence and impacts to various foreign currency exchange rates as a result of the June 24, 2016 UK electorate vote to withdraw from the European Union (“EU”); |
| |
• | Friction in travel, changes to international tax treaties and changes to laws and regulations that could result from the exit of the UK from the EU; |
| |
• | Litigation, enforcement actions, fines or penalties; |
| |
• | Lack of continuing availability of attractive, convenient and safe port destinations on terms that are favorable or consistent with our expectations; |
| |
• | Union disputes and other employee relationship issues; |
| |
• | Decisions to self-insure against various risks or the inability to obtain insurance for certain risks at reasonable rates; |
| |
• | Reliance on third-party providers of various services integral to the operations of our business; |
| |
• | Business activities that involve our co-investment with third parties; |
| |
• | 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; |
| |
• | Our shareholders may be subject to the uncertainties of a foreign legal system since Carnival Corporation and Carnival plc are not U.S. corporations; |
| |
• | Small group of shareholders may be able to effectively control the outcome of shareholder voting; |
| |
• | Provisions in Carnival Corporation’s and Carnival plc’s constitutional documents may prevent or discourage takeovers and business combinations that our shareholders might consider to be in their best interests and |
| |
• | The DLC arrangement involves risks not associated with the more common ways of combining the operations of two companies. |
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.
Outlook
On September 26, 2016, we said that we expected our adjusted diluted earnings per share for the 2016 fourth quarter to be in the range of $0.55 to $0.59 and 2016 full year to be in the range of $3.33 to $3.37 (see “Key Performance Non-GAAP Financial Indicators”). Our guidance was based on the following assumptions:
|
| | | | |
| | 2016 Fourth Quarter | | 2016 Full Year |
Fuel cost per metric ton consumed | | $332 | | $285 |
Currencies | | | | |
U.S. dollar to euro | | $1.11 to €1 | | $1.11 to €1 |
U.S. dollar to sterling | | $1.30 to £1 | | $1.38 to £1 |
U.S. dollar to Australian dollar | | $0.76 to A$1 | | $0.74 to A$1 |
U.S. dollar to Canadian dollar | | $0.76 to C$1 | | $0.76 to C$1 |
The fuel and currency assumptions used in our guidance change daily and, accordingly, our forecasts change daily based on the changes in these assumptions. We do not provide guidance on a U.S. GAAP basis because it would be too difficult to prepare without unreasonable effort.
We benefited from lower than the annual average dry-dock days in 2016 and are planning for an increase in dry-dock days in 2017. With capital expenditure reinvestment in the existing vessels and other areas of our business to drive yield improvement, we expect depreciation expense to increase from 2016 to 2017 by a higher percentage than the increase in capacity. We are currently expecting depreciation expense for full year 2017 to be approximately $1.9 billion. Furthermore, using recent fuel prices and foreign currency exchange rates, we expect the 2017 versus 2016 impact on our earnings per share of fuel prices, including fuel derivatives, to be an unfavorable $0.24 per share and the impact of foreign currency exchange rate fluctuations to be an unfavorable $0.04 per share.
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. You should read the above forward-looking statements together with the discussion of the 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 2015 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 August 31, | | Nine Months Ended August 31, |
| 2016 | | 2015 | | 2016 | | 2015 |
Available Lower Berth Days ("ALBDs") (in thousands) (a) (b) | 20,572 |
| | 19,795 |
| | 59,555 |
| | 57,686 |
|
Occupancy percentage (c) | 111.4 | % | | 110.9 | % | | 106.6 | % | | 105.6 | % |
Passengers carried (in thousands) | 3,265 |
| | 3,068 |
| | 8,606 |
| | 8,138 |
|
Fuel consumption in metric tons (in thousands) | 793 |
| | 786 |
| | 2,417 |
| | 2,379 |
|
Fuel consumption in metric tons per thousand ALBDs | 38.6 |
| | 39.7 |
| | 40.6 |
| | 41.2 |
|
Fuel cost per metric ton consumed | $ | 335 |
| | $ | 439 |
| | $ | 268 |
| | $ | 418 |
|
Currencies | | | | | | | |
U.S. dollar to euro | $ | 1.12 |
| | $ | 1.11 |
| | $ | 1.11 |
| | $ | 1.13 |
|
U.S. dollar to sterling | $ | 1.34 |
| | $ | 1.56 |
| | $ | 1.41 |
| | $ | 1.54 |
|
U.S. dollar to Australian dollar | $ | 0.75 |
| | $ | 0.75 |
| | $ | 0.74 |
| | $ | 0.78 |
|
U.S. dollar to Canadian dollar | $ | 0.77 |
| | $ | 0.78 |
| | $ | 0.76 |
| | $ | 0.80 |
|
| |
(a) | ALBD is a standard measure of passenger capacity for the period that we use to approximate rate and capacity variances, based on consistently applied formulas that we use to perform 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 August 31, 2016 compared to the three months ended August 31, 2015, we had a 3.9% capacity increase in ALBDs comprised of a 6.4% capacity increase in our EAA segment and a 2.3% capacity increase in our North America segment. |
Our EAA segment's capacity increase was caused by:
| |
• | full quarter impact from one AIDA 3,286-passenger capacity ship delivered in 2016; |
| |
• | full quarter impact from the transfer of two Holland America Line 1,260-passenger capacity ships to P&O Cruises (Australia) in 2015. |
Our North America segment's capacity increase was caused by:
| |
• | full quarter impact from one Carnival Cruise Line 3,934-passenger capacity ship delivered in 2016; |
| |
• | full quarter impact from one Holland America Line 2,650-passenger capacity ship delivered in 2016, partially offset by |
| |
• | full quarter impact from the transfer of two Holland America Line 1,260-passenger capacity ships to P&O Cruises (Australia) in 2015. |
For the nine months ended August 31, 2016 compared to the nine months ended August 31, 2015, we had a 3.2% capacity increase in ALBDs comprised of a 7.9% capacity increase in our EAA segment and a slight capacity increase in our North America segment.
Our EAA segment's capacity increase was caused by:
| |
• | full period impact from the transfer of two Holland America Line 1,260-passenger capacity ships to P&O Cruises |
(Australia) in 2015;
| |
• | partial period impact from one AIDA 3,286-passenger capacity ship delivered in 2016; |
| |
• | partial period impact from one P&O Cruises (UK) 3,647-passenger capacity ship delivered in 2015 and |
| |
• | fewer ship dry-dock days in 2016 compared to 2015. |
Our North America segment's capacity increase was caused by:
| |
• | partial period impact from one Carnival Cruise Line 3,934-passenger capacity ship delivered in 2016; |
| |
• | partial period impact from one Holland America Line 2,650-passenger capacity ship delivered in 2016, partially offset by |
| |
• | full period impact from the transfer of two Holland America Line 1,260-passenger capacity ships to P&O Cruises (Australia) in 2015. |
| |
(c) | In accordance with cruise industry practice, occupancy is calculated using a denominator of ALBDs, which assumes 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 August 31, 2016 (“2016”) Compared to Three Months Ended August 31, 2015 (“2015”)
Revenues
Consolidated
Cruise passenger ticket revenues made up 75% of our 2016 total revenues. Cruise passenger ticket revenues increased by $172 million, or 4.8%, to $3.8 billion in 2016 from $3.6 billion in 2015.
This increase was caused by:
| |
• | $143 million - 3.9% capacity increase in ALBDs; |
| |
• | $38 million - an accounting reclassification in our EAA segment, which has no impact on our operating income as the increase in passenger ticket revenues is fully offset by an increase in operating expenses (“accounting reclassification”); |
| |
• | $28 million - increase in air transportation revenues from guests who purchased their tickets from us; |
| |
• | $17 million - increase in cruise ticket prices, driven primarily by improvements in our Caribbean and Alaskan programs for our North America segment and European programs for our EAA segment, partially offset by yield reductions in Asia and Australia deployments and unfavorable foreign currency transactional movements and |
| |
• | $16 million - a slight increase in occupancy. |
These increases were partially offset by foreign currency translational impact from a stronger U.S. dollar against the euro, sterling and the Australian dollar ("foreign currency translational impact"), which accounted for $62 million.
The remaining 25% of 2016 total revenues were substantially all comprised of onboard and other cruise revenues, which increased by $44 million, or 4.0%, and remained at $1.1 billion in both 2016 and 2015. This increase was driven by 3.9% capacity increase in ALBDs, which accounted for $43 million.
Onboard and other revenues included concession revenues that decreased to $321 million in 2016 from $334 million in 2015.
North America Segment
Cruise passenger ticket revenues made up 75% of our North America segment's 2016 total revenues. Cruise passenger ticket revenues increased by $133 million, or 5.9%, to $2.4 billion in 2016 compared to $2.2 billion in 2015.
The increase was caused by:
| |
• | $52 million - 2.3% capacity increase in ALBDs; |
| |
• | $39 million - increase in air transportation revenues from guests who purchased their tickets from us; |
| |
• | $30 million - increase in cruise ticket pricing, partially offset by unfavorable foreign currency transactional impacts and |
| |
• | $12 million - a slight increase in occupancy. |
The remaining 25% of our North America segment's 2016 total revenues were comprised of onboard and other cruise revenues, which increased by $36 million, or 4.7%, to $808 million in 2016 from $772 million in 2015.
This increase was driven by:
| |
• | $18 million - 2.3% capacity increase in ALBDs and |
| |
• | $13 million - higher onboard spending by our guests. |
Onboard and other revenues included concession revenues that decreased to $223 million in 2016 from $231 million in 2015.
EAA Segment
Cruise passenger ticket revenues made up 83% of our EAA segment's 2016 total revenues. Cruise passenger ticket revenues increased by $43 million, or 3.1% and remained at $1.4 billion in both 2016 and 2015.
This increase was caused by:
| |
• | $90 million - 6.4% capacity increase in ALBDs and |
| |
• | $38 million - the accounting reclassification. |
These increases were partially offset by:
| |
• | $62 million - foreign currency translational impact; |
| |
• | $19 million - decrease in cruise ticket pricing driven by unfavorable foreign currency transactional impacts and |
| |
• | $12 million - decrease in air transportation revenues from guests who purchased their tickets from us. |
The remaining 17% of our EAA segment's 2016 total revenues were comprised of onboard and other cruise revenues, which increased by $4 million, or 1.2%, to $300 million in 2016 from $296 million in 2015. The increase was caused by a 6.4% capacity increase in ALBDs, which accounted for $19 million, partially offset by foreign currency translational impact, which accounted for $12 million.
Onboard and other revenues included concession revenues that decreased to $98 million in 2016 from $103 million in 2015.
Costs and Expenses
Consolidated
Operating costs and expenses increased by $73 million, or 3.0%, to $2.6 billion in 2016 from $2.5 billion in 2015.
This increase was caused by:
| |
• | $95 million - 3.9% capacity increase in ALBDs; |
| |
• | $40 million - higher dry-dock expenses and other ship repair and maintenance expenses; |
| |
• | $38 million - the accounting reclassification and |
| |
• | $26 million - higher air costs. |
These increases were partially offset by:
| |
• | $83 million - lower fuel prices; |
| |
• | $33 million - foreign currency translational impact and |
| |
• | $11 million - lower fuel consumption. |
Selling and administrative expenses increased by $45 million, or 9.4% to $529 million in 2016 from $484 million in 2015.
This increase was caused by:
| |
• | $33 million - various selling and administrative initiatives and |
| |
• | $19 million - 3.9% capacity increase in ALBDs. |
Depreciation and amortization expenses increased by $44 million, or 10.8%, to $443 million in 2016 from $399 million in 2015. This increase was due to changes in capacity and improvements to existing ships and shoreside assets.
Total costs and expenses as a percentage of revenues remained at 69% in both 2016 and 2015.
North America Segment
Operating costs and expenses increased by $17 million, or 1.1%, to $1.6 billion in 2016 from $1.5 billion in 2015.
This increase was caused by:
| |
• | $36 million - 2.3% capacity increase in ALBDs; |
| |
• | $36 million - higher air costs and |
| |
• | $25 million - higher ship repair and maintenance expenses. |
These increases were partially offset by lower fuel prices, which accounted for $50 million, and quarterly timing of various other operating expenses, net, which accounted for $30 million.
Selling and administrative expenses increased by $22 million, or 8.0% to $293 million in 2016 from $271 million in 2015. This increase was driven by various selling and administrative initiatives.
Depreciation and amortization expenses increased by $30 million, or 12.3%, to $272 million in 2016 from $242 million in 2015. This increase was caused by changes in capacity and improvements to existing ships and shoreside assets.
Total costs and expenses as a percentage of revenues decreased to 67% in 2016 from 68% in 2015.
EAA Segment
Operating costs and expenses increased by $51 million, or 6.0%, to $903 million in 2016 from $852 million in 2015.
This increase was caused by:
| |
• | $55 million - 6.4% capacity increase in ALBDs; |
| |
• | $38 million - the accounting reclassification; |
| |
• | $24 million - higher dry-dock expenses and other ship repair and maintenance expenses and |
| |
• | $11 million - quarterly timing of various other operating expenses, net. |
These increases were partially offset by:
| |
• | $33 million - lower fuel prices; |
| |
• | $33 million - foreign currency translational impact and |
| |
• | $11 million - lower air costs. |
Depreciation and amortization expenses increased by $12 million, or 8.2%, to $152 million in 2016 from $140 million in 2015. This increase was due to changes in capacity and improvements to existing ships and shoreside assets.
Total costs and expenses as a percentage of revenues increased to 70% in 2016 from 68% in 2015.
Operating Income
Our consolidated operating income increased by $52 million, or 3.4%, to $1.6 billion in 2016 from $1.5 billion in 2015. Our North America segment's operating income increased by $100 million, or 11%, to $1.1 billion in 2016 from $951 million in 2015, and our EAA segment's operating income decreased by $15 million, or 2.7% to $522 million in 2016 from $537 million in 2015. These changes were primarily due to the reasons discussed above.
Nonoperating Expense
Losses on fuel derivatives, net were comprised of the following (in millions): |
| | | | | | | |
| Three Months Ended August 31, |
| 2016 | | 2015 |
Unrealized gains(losses) on fuel derivatives, net | $ | 25 |
| | $ | (137 | ) |
Realized losses on fuel derivatives | (61 | ) | | (60 | ) |
Losses on fuel derivatives, net | $ | (36 | ) | | $ | (197 | ) |
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 segments’ financial performance. These measures enable us to separate the impact of predictable capacity changes from the more unpredictable rate changes that affect our business; gains and losses on ship sales and ship impairments, net; and restructuring and other expenses that are not part of our core operating 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. GAAP consolidated financial statements.
Net revenue yields are commonly used in the cruise industry 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 and debit 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 passenger ticket revenues, net of commissions, transportation and other costs. Net onboard and other revenues reflect gross onboard and other revenues, net of 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 segments’ 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. We believe that gains and losses on ship sales and ship impairments, net and restructuring expenses and other expenses are not part of our core operating business and, therefore, are not an indication of our future earnings performance. As such, we exclude these items from our calculation of net cruise costs with and without fuel. We also believe it is more meaningful for gains and losses on ship sales and ship impairments, net and restructuring and other expenses to be excluded from our net income and earnings per share and, accordingly, we present adjusted net income and adjusted earnings per share excluding these items.
We have not provided a reconciliation of forecasted gross cruise revenues to forecasted net cruise revenues or forecasted gross cruise costs to forecasted net cruise costs because it would be too difficult to prepare reliable U.S. GAAP forecasts of gross cruise revenues and gross cruise costs without unreasonable effort.
In addition, our EAA segment and Cruise Support segment operations utilize the euro, sterling and Australian dollar as their functional currencies to measure their results and financial condition. This subjects us to foreign currency translational risk. Our North America, EAA and Cruise Support segment operations also have revenues and expenses that are in a currency other than their functional currency. This subjects us to foreign currency transactional risk.
We report non-GAAP financial measures on a “constant dollar” and “constant currency” basis assuming the 2016 periods' currency exchange rates have remained constant with the 2015 periods' rates. These metrics facilitate a comparative view for the changes in our business in an environment with fluctuating exchange rates.
Constant dollar reporting is a non-GAAP financial measure that removes only the impact of changes in exchange rates on the translation of our EAA segment and Cruise Support segment operations.
Constant currency reporting is a non-GAAP financial measure that removes the impact of changes in exchange rates on the translation of our EAA segment and Cruise Support segment operations (as in constant dollar) plus the transactional impact of changes in exchange rates from revenues and expenses that are denominated in a currency other than the functional currency for our North America, EAA and Cruise Support segments.
Examples:
| |
• | The translation of our EAA segment 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. |
| |
• | Our North America segment operations have a U.S. dollar functional currency but also have revenue and expense transactions in currencies other than the U.S. dollar. If the U.S. dollar strengthens against these other currencies, it reduces the U.S. dollar revenues and expenses. If the U.S. dollar weakens against these other currencies, it increases the U.S. dollar revenues and expenses. |
| |
• | Our EAA segment operations have euro, sterling and Australian dollar functional currencies but also have revenue and expense transactions in currencies other than their functional currency. If their functional currency strengthens against these other currencies, it reduces the functional currency revenues and expenses. If the functional currency weakens against these other currencies, it increases the functional currency revenues and expenses. |
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 earnings per share and, accordingly, we present adjusted net income and adjusted earnings per share excluding these unrealized gains and losses.
While we forecast realized gains and losses on fuel derivatives by applying current Brent prices to the derivatives that settle in the forecast period, we do not forecast the impact of unrealized gains and losses on fuel derivatives because we do not believe they are an indication of our future earnings performance. Accordingly, our earnings guidance is presented on an adjusted basis only.
Our consolidated financial statements are prepared in accordance with U.S. GAAP. We have not provided a reconciliation between forecasted adjusted earnings per share guidance and forecasted U.S. GAAP earnings per share guidance because it would be too difficult to prepare reliable U.S. GAAP guidance without unreasonable effort. We are unable to predict, without unreasonable effort, the future movement of foreign exchange rates or the future impact of gains or losses on ship sales, restructuring expenses or other non-core gains and charges. The presentation of our non-GAAP financial information is not intended to be considered in isolation from, as substitute for, or superior to the financial information prepared in accordance with U.S. GAAP. It is possible that our non-GAAP financial measures 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.
Consolidated gross and net revenue yields were computed by dividing the gross and net cruise revenues by ALBDs as follows (dollars in millions, except yields):
|
| | | | | | | | | | | | |
| Three Months Ended August 31, | |
| 2016 | | 2016 Constant Dollar | | 2015 | |
| | | | | | |
Passenger ticket revenues | $ | 3,803 |
| | $ | 3,866 |
| | $ | 3,631 |
| |
Onboard and other revenues | 1,146 |
| | 1,158 |
| | 1,102 |
| |
Gross cruise revenues | 4,949 |
| | 5,024 |
| | 4,733 |
| |
Less cruise costs | | | | | | |
Commissions, transportation and other | (646 | ) | | (654 | ) | | (603 | ) | |
Onboard and other | (171 | ) | | (173 | ) | | (170 | ) | |
| (817 | ) | | (827 | ) | | (773 | ) | |
Net passenger ticket revenues | 3,157 |
| | 3,212 |
| | 3,028 |
| |
Net onboard and other revenues | 975 |
| | 985 |
| | 932 |
| |
Net cruise revenues | $ | 4,132 |
| | $ | 4,197 |
| | $ | 3,960 |
| |
ALBDs | 20,572,112 |
| | 20,572,112 |
| | 19,794,882 |
| |
Gross revenue yields | $ | 240.60 |
| | $ | 244.22 |
| | $ | 239.10 |
| |
% increase vs. 2015 | 0.6 | % | | 2.1 | % | |
| |
Net revenue yields | $ | 200.87 |
| | $ | 204.03 |
| | $ | 200.04 |
| |
% increase vs. 2015 | 0.4 | % | | 2.0 | % | |
| |
Net passenger ticket revenue yields | $ | 153.47 |
| | $ | 156.14 |
| | $ | 152.96 |
| |
% increase vs. 2015 | 0.3 | % | | 2.1 | % | |
| |
Net onboard and other revenue yields | $ | 47.39 |
| | $ | 47.89 |
| | $ | 47.09 |
| |
% increase vs. 2015 | 0.7 | % | | 1.7 | % | |
| |
|
| | | | | | | | | | | | |
| Three Months Ended August 31, | |
| 2016 | | 2016 Constant Currency | | 2015 | |
Net passenger ticket revenues | $ | 3,157 |
| | $ | 3,246 |
| | $ | 3,028 |
| |
Net onboard and other revenues | 975 |
| | 981 |
| | 932 |
| |
Net cruise revenues | $ | 4,132 |
| | $ | 4,227 |
| | $ | 3,960 |
| |
ALBDs | 20,572,112 |
| | 20,572,112 |
| | 19,794,882 |
| |
| | | | | | |
Net revenue yields | $ | 200.87 |
| | $ | 205.46 |
| | $ | 200.04 |
| |
% increase vs. 2015 | 0.4 | % | | 2.7 | % | |
| |
Net passenger ticket revenue yields | $ | 153.47 |
| | $ | 157.76 |
| | $ | 152.96 |
| |
% increase vs. 2015 | 0.3 | % | | 3.1 | % | |
| |
Net onboard and other revenue yields | $ | 47.39 |
| | $ | 47.69 |
| | $ | 47.09 |
| |
% increase vs. 2015 | 0.7 | % | | 1.3 | % | |
| |
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 by ALBDs as follows (dollars in millions, except costs per ALBD):
|
| | | | | | | | | | | | |
| Three Months Ended August 31, | |
| 2016 | | 2016 Constant Dollar | | 2015 | |
| | | | | | |
Cruise operating expenses | $ | 2,479 |
| | $ | 2,513 |
| | $ | 2,408 |
| |
Cruise selling and administrative expenses | 527 |
| | 534 |
| | 482 |
| |
Gross cruise costs | 3,006 |
| | 3,047 |
| | 2,890 |
| |