Document

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 2017
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission file number: 001-9610
carnivalflaga01a01a02.jpg
Commission file number: 001-15136
 
 
Carnival Corporation
Carnival plc
(Exact name of registrant as
specified in its charter)
(Exact name of registrant as
specified in its charter)
 
 
 Republic of Panama
England and Wales
(State or other jurisdiction of
incorporation or organization)
(State or other jurisdiction of
incorporation or organization)
 
 
59-1562976
98-0357772
(I.R.S. Employer Identification No.)
(I.R.S. Employer Identification No.)
 
 
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)
 
 
(305) 599-2600
011 44 23 8065 5000
(Registrant’s telephone number,
including area code)
(Registrant’s telephone number,
including area code)
 
 
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, smaller reporting companies, or emerging growth companies. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 
Large accelerated filers
Accelerated filers
Non-accelerated filers
Smaller reporting companies

Emerging growth companies

If emerging growth companies, indicate by check mark if the registrants have elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    Yes  ☐    No  ☐ 
Indicate by check mark whether the registrants are shell companies (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  
At June 23, 2017, Carnival Corporation had outstanding 536,656,235 shares of Common Stock, $0.01 par value.
  
At June 23, 2017, Carnival plc had outstanding 213,388,487 Ordinary Shares $1.66 par value, one Special Voting Share, GBP 1.00 par value and 213,388,487 Trust Shares of beneficial interest in the P&O Princess Special Voting Trust.
 


Table of Contents

CARNIVAL CORPORATION & PLC
TABLE OF CONTENTS
 
 
 
Page
 
 
 
 
Item 1.
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
 
Item 3.
 
 
 
 
 
 
 
Item 4.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
Item 1A.
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
 
Item 6.
 
 
 
 
 
 
 
 
 

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Table of Contents

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

CARNIVAL CORPORATION & PLC
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(in millions, except per share data)
 
 
Three Months Ended
May 31,
 
Six Months Ended
May 31,
 
2017
 
2016
 
2017
 
2016
Revenues
 
 
 
 
 
 
 
Cruise
 
 
 
 
 
 
 
Passenger tickets
$
2,872

 
$
2,696

 
$
5,676

 
$
5,414

Onboard and other
1,036

 
978

 
2,014

 
1,901

Tour and other
37

 
31

 
46

 
42

 
3,945

 
3,705

 
7,736

 
7,357

Operating Costs and Expenses
 
 
 
 
 
 
 
Cruise
 
 
 
 
 
 
 
Commissions, transportation and other
513

 
495

 
1,082

 
1,077

Onboard and other
129

 
123

 
253

 
240

Payroll and related
513

 
502

 
1,032

 
994

Fuel
310

 
196

 
607

 
383

Food
253

 
248

 
504

 
495

Other ship operating
685

 
667

 
1,346

 
1,271

Tour and other
33

 
27

 
46

 
41

 
2,436

 
2,258

 
4,870

 
4,501

Selling and administrative
553

 
532

 
1,102

 
1,083

Depreciation and amortization
456

 
437

 
896

 
861

 
3,445

 
3,227

 
6,868

 
6,445

Operating Income
500

 
478

 
868

 
912

Nonoperating Income (Expense)
 
 
 
 
 
 
 
Interest income
2

 
2

 
4

 
3

Interest expense, net of capitalized interest
(50
)
 
(57
)
 
(101
)
 
(108
)
(Losses) gains on fuel derivatives, net
(53
)
 
171

 
(27
)
 
(65
)
Other (expense) income, net
(15
)
 
13

 
(7
)
 
8

 
(116
)
 
129

 
(131
)
 
(162
)
Income Before Income Taxes
384

 
607

 
737

 
750

Income Tax Expense, Net
(5
)
 
(2
)
 
(7
)
 
(3
)
Net Income
$
379

 
$
605

 
$
730

 
$
747

Earnings Per Share

 
 
 
 
 
 
Basic
$
0.52

 
$
0.81

 
$
1.01

 
$
0.99

Diluted
$
0.52

 
$
0.80

 
$
1.00

 
$
0.98

Dividends Declared Per Share
$
0.40

 
$
0.35

 
$
0.75

 
$
0.65

The accompanying notes are an integral part of these consolidated financial statements.


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Table of Contents

CARNIVAL CORPORATION & PLC
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(in millions)
 
 
Three Months Ended
May 31,
 
Six Months Ended
May 31,
 
2017
 
2016
 
2017
 
2016
Net Income
$
379

 
$
605

 
$
730

 
$
747

Items Included in Other Comprehensive Income

 

 
 
 
 
Change in foreign currency translation adjustment
257

 
280

 
257

 
72

Other
29

 
15

 
43

 
21

Other Comprehensive Income
286

 
295

 
300

 
93

Total Comprehensive Income
$
665

 
$
900

 
$
1,030

 
$
840

The accompanying notes are an integral part of these consolidated financial statements.


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Table of Contents

CARNIVAL CORPORATION & PLC
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in millions, except par values)
 
 
May 31,
2017
 
November 30,
2016
ASSETS
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
597

 
$
603

Trade and other receivables, net
319

 
298

Inventories
351

 
322

Prepaid expenses and other
507

 
466

Total current assets
1,774

 
1,689

Property and Equipment, Net
33,823

 
32,429

Goodwill
2,953

 
2,910

Other Intangibles
1,286

 
1,275

Other Assets
615

 
578

 
$
40,451

 
$
38,881

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current Liabilities
 
 
 
Short-term borrowings
$
675

 
$
457

Current portion of long-term debt
1,108

 
640

Accounts payable
690

 
713

Accrued liabilities and other
1,807

 
1,740

Customer deposits
4,778

 
3,522

Total current liabilities
9,058

 
7,072

Long-Term Debt
7,635

 
8,302

Other Long-Term Liabilities
794

 
910

Contingencies

 

Shareholders’ Equity
 
 
 
Common stock of Carnival Corporation, $0.01 par value; 1,960 shares authorized; 655 shares at 2017 and 654 shares at 2016 issued
7

 
7

Ordinary shares of Carnival plc, $1.66 par value; 217 shares at 2017 and 2016 issued
358

 
358

Additional paid-in capital
8,673

 
8,632

Retained earnings
22,026

 
21,843

Accumulated other comprehensive loss
(2,154
)
 
(2,454
)
Treasury stock, 118 shares at 2017 and 2016 of Carnival Corporation and 30 shares at 2017 and 27 shares at 2016 of Carnival plc, at cost
(5,946
)
 
(5,789
)
Total shareholders’ equity
22,964

 
22,597

 
$
40,451

 
$
38,881

The accompanying notes are an integral part of these consolidated financial statements.

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Table of Contents

CARNIVAL CORPORATION & PLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in millions)
 
 
Six Months Ended
May 31,
 
2017
 
2016
OPERATING ACTIVITIES
 
 
 
Net income
$
730

 
$
747

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
Depreciation and amortization
896

 
861

Losses on fuel derivatives, net
27

 
65

Share-based compensation
34

 
28

Other, net
36

 
22

 
1,723

 
1,723

Changes in operating assets and liabilities
 
 
 
Receivables
(8
)
 
(40
)
Inventories
(19
)
 
16

Prepaid expenses and other
(28
)
 
4

Accounts payable
(38
)
 
36

Accrued liabilities and other
(20
)
 
(84
)
Customer deposits
1,239

 
1,026

Net cash provided by operating activities
2,849

 
2,681

INVESTING ACTIVITIES
 
 
 
Additions to property and equipment
(1,859
)
 
(1,966
)
Proceeds from sales of ships

 
19

Payments of fuel derivative settlements
(99
)
 
(170
)
Collateral payments for fuel derivatives

 
(25
)
Other, net
24

 
(31
)
Net cash used in investing activities
(1,934
)
 
(2,173
)
FINANCING ACTIVITIES
 
 
 
Proceeds from short-term borrowings, net
182

 
379

Principal repayments of long-term debt
(907
)
 
(869
)
Proceeds from issuance of long-term debt
467

 
934

Dividends paid
(507
)
 
(459
)
Purchases of treasury stock
(152
)
 
(1,401
)
Sales of treasury stock

 
40

Other, net
(18
)
 
(5
)
Net cash used in financing activities
(935
)
 
(1,381
)
Effect of exchange rate changes on cash and cash equivalents
14

 
(3
)
Net decrease in cash and cash equivalents
(6
)
 
(876
)
Cash and cash equivalents at beginning of period
603

 
1,395

Cash and cash equivalents at end of period
$
597

 
$
519

The accompanying notes are an integral part of these consolidated financial statements.


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Table of Contents

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 Statements of Income and the Consolidated Statements of Comprehensive Income for the three and six months ended May 31, 2017 and 2016, the Consolidated Balance Sheet at May 31, 2017 and the Consolidated Statements of Cash Flows for the six months ended May 31, 2017 and 2016 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 2016 joint Annual Report on Form 10-K (“Form 10-K”) filed with the U.S. Securities and Exchange Commission on January 30, 2017. Our operations are seasonal and results for interim periods are not necessarily indicative of the results for the entire year.
 
Accounting Pronouncements

The Financial Accounting Standards Board (“FASB”) issued amended guidance regarding accounting for Interest - Imputation of Interest, which simplifies the presentation of debt issuance costs and which clarifies the presentation and subsequent measurement of debt issuance costs related to line-of-credit arrangements. 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. On December 1, 2016, we adopted this guidance using the retrospective approach and reclassified $55 million from Other Assets to Long-Term Debt on our November 30, 2016 Consolidated Balance Sheet.
 
The FASB issued amended guidance regarding Compensation - Stock Compensation - Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. On December 1, 2016, we early adopted this guidance using the modified retrospective transition method. The impact of adopting this guidance was primarily related to forfeitures and immaterial to our consolidated financial statements.

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 impact the accounting for software licenses but will not change a customer’s accounting for service contracts. On December 1, 2016, we adopted this guidance on a prospective basis, and it did not have a material impact to our consolidated financial statements.

The FASB issued amended guidance regarding accounting for Derivatives and Hedging - Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships, which clarifies that a change in the counterparty to a derivative instrument that has been designated as a hedging instrument does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. On March 1, 2017, we early adopted this guidance on a prospective basis, and it did not have a material impact to our consolidated financial statements.

The FASB issued amended guidance regarding accounting for Derivatives and Hedging - Contingent Put and Call Options in Debt Instruments, which clarifies the requirements for assessing whether contingent call and put options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts or whether the embedded call and put options should be bifurcated from the related debt instrument and accounted for separately as a derivative. This guidance is required to be adopted by us in the first quarter of 2018 and must be applied using a modified retrospective approach. Early adoption is permitted, including adoption in an interim period. We are currently evaluating the impact this guidance will have on our consolidated financial statements.


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Table of Contents

The FASB issued guidance regarding Presentation of Financial Statements - Going Concern, which requires management to evaluate, at each annual and interim reporting period, whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date the financial statements are issued and to provide related disclosures. This guidance is required to be adopted by us at November 30, 2017. Early adoption is permitted. 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 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 Business Combinations - Clarifying the Definition of a Business, which assists entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This guidance is required to be adopted by us in the first quarter of 2019 on a prospective basis. Early adoption is permitted, including adoption in an interim period. We are currently evaluating the impact this guidance will have on our consolidated financial statements.

The FASB issued amended guidance regarding Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments, which clarifies how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments are aimed at reducing the existing diversity in practice. The guidance is required to be adopted by us in the first quarter of 2019 and should be applied using a retrospective transition method for each period presented. Early adoption is permitted, including adoption in an interim period. We are currently evaluating the impact this guidance will have on our consolidated financial statements.

The FASB issued guidance regarding Statement of Cash Flows - Restricted Cash, which requires restricted cash to be presented with cash and cash equivalents in the statement of cash flows. This guidance is required to be adopted by us in the first quarter of 2019 and must be applied using a retrospective transition method to each period presented. Early adoption is permitted, including adoption in an interim period. The adoption of this guidance is not expected to have a material impact to our consolidated financial statements.
  
The FASB issued guidance regarding Compensation - Retirement Benefits - Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which requires the bifurcation of net benefit cost. This guidance is required to be adopted by us in the first quarter of 2019. Early adoption is permitted. The adoption of this guidance is not expected to have a material impact to 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 2020. We are currently evaluating the impact this guidance will have on our consolidated financial statements.

The FASB issued guidance regarding Intangibles - Goodwill and Other - Simplifying the Accounting for Goodwill Impairment, which simplifies the accounting for goodwill impairment by removing Step 2 of the goodwill impairment test requiring a hypothetical purchase price allocation. This guidance is required to be adopted by us in the first quarter of 2021 on a prospective basis. Early adoption is permitted for any impairment tests performed after January 1, 2017. 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 $136 million and $123 million and $279 million and $259 million for the three and six months ended May 31, 2017 and 2016, respectively.


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Table of Contents

NOTE 2 – Unsecured Debt

At May 31, 2017, our short-term borrowings included euro-denominated commercial paper of $670 million.

In January 2017, we borrowed $100 million under a floating rate bank loan, due in January 2022.

In January 2017, we entered into an approximately $800 million export credit facility, which may be drawn in euros or U.S. dollars in 2021 and will be due in semi-annual installments through 2033. The interest rate on this export credit facility can be fixed or floating, at our discretion.

In April 2017, we entered into two euro-denominated export credit facilities totaling $1.6 billion. The facilities are expected to be drawn in 2021 and 2022 and will be due in semi-annual installments through 2033 and 2034, respectively. The interest rate on these export credit facilities can be fixed or floating, at our discretion.

In May 2017, we repaid $620 million of export credit facilities prior to their 2025 and 2026 maturity dates.

In May 2017, we borrowed $367 million under an export credit facility. The facility is due in semi-annual installments through April 2028.

For the six months ended May 31, 2017, we had borrowings of $111 million and repayments of $364 million of commercial paper with original maturities greater than three months.

We use the net proceeds from our borrowings for general corporate purposes and purchases of new ships.

NOTE 3 – Contingencies
Litigation
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 Obligation – Lease Out and Lease Back Type Transaction
At May 31, 2017, we had an estimated contingent obligation of $122 million. At the inception of the lease, we paid the aggregate of the net present value of the obligation to a group of major financial institutions, who agreed to act as payment undertakers and directly pay this obligation. As a result, this contingent obligation is considered extinguished and neither the funds nor the contingent obligation have been included in our Consolidated Balance Sheets. In January 2016, we exercised our option to terminate, at no cost, this transaction as of January 2, 2018.
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 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 such indemnification clauses in the past and we do not believe a request for material future indemnification payments is probable.


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Table of Contents

NOTE 4 – Fair Value Measurements, Derivative Instruments and Hedging Activities
Fair Value Measurements
Fair value is defined as the amount that would be received for selling an asset or paid to transfer a liability in an orderly transaction between market participants and is measured using inputs in one of the following three categories:
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.
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.
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.
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, 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):
 
 
May 31, 2017
 
November 30, 2016
 
Carrying
Value
 
Fair Value
 
Carrying
Value
 
Fair Value
 
 
Level 1
 
Level 2
 
Level 3
 
Level 1
 
Level 2
 
Level 3
Assets
 
 
 
 
 
 

 
 
 
 
 
 
 

Long-term other assets (a)
$
139

 
$

 
$
54

 
$
81

 
$
99

 
$
1

 
$
68

 
$
31

Total
$
139

 
$

 
$
54

 
$
81

 
$
99

 
$
1

 
$
68

 
$
31

Liabilities
 
 
 
 
 
 

 
 
 
 
 
 
 

Fixed rate debt (b)
$
5,604

 
$

 
$
5,943

 
$

 
$
5,436

 
$

 
$
5,727

 
$

Floating rate debt (b)
3,870

 

 
3,900

 

 
4,018

 

 
4,048

 

Total
$
9,474

 
$

 
$
9,843

 
$

 
$
9,454

 
$

 
$
9,775

 
$

 
(a)
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.
(b)
The debt amounts above do not include the impact of interest rate swaps or debt issuance costs. 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.

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Table of Contents

Nonfinancial Instruments that are Measured at Fair Value on a Nonrecurring Basis
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, 2016
$
1,898

 
$
1,012

 
$
2,910

Foreign currency translation adjustment

 
43

 
43

Balance at May 31, 2017
$
1,898

 
$
1,055

 
$
2,953

 (a) Europe, Australia & Asia (“EAA”)

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, 2016
$
927

 
$
279

 
$
1,206

Foreign currency translation adjustment

 
9

 
9

Balance at May 31, 2017
$
927

 
$
288

 
$
1,215

At July 31, 2016, we performed our annual goodwill and trademark impairment reviews and there was no impairment.
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. A change in the conditions, circumstances or strategy, including decisions about the allocation of new ships amongst brands and the transfer of ships between brands (influencing fair values in the future), may result in a 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 and other amortizable intangibles, was as follows (in millions):
 
Cruise Support
Segment
 
EAA
 Segment
 
Tour and Other Segment
 
Total
Balance at November 30, 2016
$
57

 
$
12

 
$

 
$
69

Additions

 

 
4

 
4

Amortization
(2
)
 

 
(1
)
 
(3
)
Foreign currency translation adjustment

 
1

 

 
1

Balance at May 31, 2017
$
55

 
$
13

 
$
3

 
$
71



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Table of Contents

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):
 
 
May 31, 2017
 
November 30, 2016
 
Level 1
 
Level 2
 
Level 3
 
Level 1
 
Level 2
 
Level 3
Assets
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents (a)
$
597

 
$

 
$

 
$
603

 
$

 
$

Restricted cash
16

 

 

 
60

 

 

Short-term investments (b)

 

 

 

 

 
21

Marketable securities held in rabbi trusts (c)
92

 
4

 

 
93

 
4

 

Derivative financial instruments

 
10

 

 

 
15

 

Total
$
705

 
$
14

 
$

 
$
756

 
$
19

 
$
21

Liabilities
 
 
 
 
 
 
 
 
 
 
 
Derivative financial instruments
$

 
$
313

 
$

 
$

 
$
434

 
$

Total
$

 
$
313

 
$

 
$

 
$
434

 
$

 
(a)
Cash and cash equivalents are comprised of cash and marketable securities with maturities of less than 90 days.
(b)
The fair value of the auction rate security included in short-term investments, as of November 30, 2016, was based on a broker quote in an inactive market, which is considered a Level 3 input. This auction-rate security was sold in December 2016.
(c)
At May 31, 2017, marketable securities held in rabbi trusts were 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 restricted to funding certain deferred compensation and non-qualified U.S. pension plans.

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Derivative Instruments and Hedging 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
 
May 31,
2017
 
November 30,
2016
Derivative assets
 
 
 
 
 
Derivatives designated as hedging instruments
 
 
 
 
 
Net investment hedges (a)
Prepaid expenses and other
 
$
9

 
$
12

 
Other assets
 

 
3

Foreign currency zero cost collars (c)
Other assets
 
1

 

Total derivative assets
 
 
$
10

 
$
15

Derivative liabilities
 
 
 
 
 
Derivatives designated as hedging instruments
 
 
 
 
 
Net investment hedges (a)
Accrued liabilities and other
 
$

 
$
26

 
Other long-term liabilities
 
14

 

Interest rate swaps (b)
Accrued liabilities and other
 
10

 
10


Other long-term liabilities
 
20

 
23

Foreign currency zero cost collars (c)
Accrued liabilities and other
 

 
12

 
Other long-term liabilities
 

 
21

 
 
 
44

 
92

Derivatives not designated as hedging instruments
 
 
 
 
 
Fuel (d)
Accrued liabilities and other
 
184

 
198

 
Other long-term liabilities
 
85

 
144

 
 
 
269

 
342

Total derivative liabilities
 
 
$
313

 
$
434

 
(a)
We had foreign currency forwards totaling $11 million at May 31, 2017 and $456 million at November 30, 2016 that are designated as hedges of our net investments in foreign operations, which have a euro-denominated functional currency. At May 31, 2017, these foreign currency forwards settle through July 2017. We also had foreign currency swaps totaling $306 million at May 31, 2017 and $291 million at November 30, 2016 that are designated as hedges of our net investments in foreign operations, which have a euro-denominated functional currency. At May 31, 2017, these foreign currency swaps settle through 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 $489 million at May 31, 2017 and $500 million at November 30, 2016 of EURIBOR-based floating rate euro debt to fixed rate euro debt. At May 31, 2017, these interest rate swaps settle through 2025.
(c)
At May 31, 2017 and November 30, 2016, 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 May 31, 2017 and November 30, 2016, 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.


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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):
 
 
May 31, 2017
 
 
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
 
$
10

 
$

 
$
10

 
$
(9
)
 
$
1

Liabilities
 
$
313

 
$

 
$
313

 
$
(9
)
 
$
304

 
 
 
 
 
 
 
 
 
 
 
 
 
November 30, 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
 
$
15

 
$

 
$
15

 
$
(15
)
 
$

Liabilities
 
$
434

 
$

 
$
434

 
$
(15
)
 
$
419

The effective gain (loss) portions of our derivatives qualifying and designated as hedging instruments recognized in other comprehensive income were as follows (in millions):
 
 
Three Months Ended
May 31,
 
Six Months Ended
May 31,
 
2017
 
2016
 
2017
 
2016
Net investment hedges
$
(17
)
 
$
(4
)
 
$
(16
)
 
$
(17
)
Foreign currency zero cost collars – cash flow hedges
$
27

 
$
9

 
$
35

 
$
19

Interest rate swaps – cash flow hedges
$
3

 
$
6

 
$
4

 
$
3

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 May 31, 2017 and November 30, 2016, no collateral was required to be posted to or 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 May 31, 2017 and November 30, 2016 and for the three and six months ended May 31, 2017 and 2016 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 have Brent call options and Brent put options, collectively referred to as zero cost collars, that establish ceiling and floor prices and mitigate a portion of our economic risk attributable to potential fuel price increases. To maximize operational flexibility we utilized derivative markets with significant trading liquidity.
Our zero cost collars 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 zero cost collars will act as economic hedges; however, hedge accounting is not applied.
Our unrealized and realized (losses) gains, net on fuel derivatives were as follows (in millions):

Three Months Ended
May 31,
 
Six Months Ended
May 31,

2017

2016
 
2017
 
2016
Unrealized (losses) gains on fuel derivatives, net
$
(2
)

$
242

 
$
69

 
$
96

Realized losses on fuel derivatives, net
(51
)

(71
)
 
(96
)
 
(161
)
(Losses) gains on fuel derivatives, net
$
(53
)
 
$
171

 
$
(27
)
 
$
(65
)

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At May 31, 2017, 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 2017 (3Q - 4Q)
 
 
 
 
 
 
 
 
February 2013
 
1,638

 
$
80

 
$
115

 
April 2013
 
1,014

 
$
75

 
$
110

 
January 2014
 
900

 
$
75

 
$
114

 
October 2014
 
510

 
$
80

 
$
113

 
 
 
4,062

 
 
 
 
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 functional currencies, which subjects us to “foreign currency translational” risk related to these currencies. Accordingly, exchange rate fluctuations in their functional currencies 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 this 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. 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 have $5.8 billion and $251 million of euro- and sterling-denominated debt, respectively, including the effect of foreign currency swaps, which provides an economic offset for our operations with euro and sterling functional currency. We also partially mitigate our net investment currency exposures by denominating a portion of our foreign currency intercompany payables in our foreign operations’ functional currencies. 

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Table of Contents

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 to manage foreign currency exchange rate risk for some of our ship construction payments.

At May 31, 2017, we had foreign currency zero cost collars that are designated as cash flow hedges for a portion of euro-denominated shipyard payments for the following newbuilds:
 
Entered Into
 
Matures in
 
Weighted-Average Floor Rate
 
Weighted- Average Ceiling Rate
Carnival Horizon
2016
 
March 2018
 
$
1.02

 
$
1.25

Seabourn Ovation
2016
 
April 2018
 
$
1.02

 
$
1.25

Holland America Nieuw Statendam
2016
 
November 2018
 
$
1.05

 
$
1.25

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 May 31, 2017, our remaining newbuild currency exchange rate risk primarily relates to euro-denominated newbuild contract payments, which represent a total unhedged commitment of $5.9 billion and substantially relates to newbuilds to be delivered during 2019 through 2022 to non-euro functional currency brands.
The cost of shipbuilding orders that we may place in the future that is denominated in a different currency than our cruise brands’ will 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.

The composition of our debt, including the effect of foreign currency swaps and interest rate swaps, was as follows:
 
May 31, 2017
 
November 30, 2016
Fixed rate
29
%
 
28
%
Euro fixed rate
35
%
 
35
%
Floating rate
7
%
 
14
%
Euro floating rate
26
%
 
23
%
GBP floating rate
3
%
 
%

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Table of Contents

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
Generally 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 May 31, 2017, 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 Cruises and Seabourn. Our EAA segment includes AIDA Cruises, Costa Cruises, Cunard, P&O Cruises (Australia) and P&O Cruises (UK). 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. Our Tour and Other segment represents the hotel and transportation operations of Holland America Princess Alaska Tours and other operations.

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Table of Contents

Selected information for our segments and the reconciliation to the consolidated financial statement amounts was as follows (in millions):
 
 
Three Months Ended May 31,
 
Revenues
 
Operating costs and
expenses
 
Selling
and
administrative
 
Depreciation
and
amortization
 
Operating
income (loss)
2017
 
 
 
 
 
 
 
 
 
North America
$
2,581

 
$
1,534

 
$
319

 
$
285

 
$
443

EAA
1,309

 
874

 
172

 
150

 
113

Cruise Support
34

 
11

 
56

 
12

 
(45
)
Tour and Other
37

 
33

 
6

 
9

 
(11
)
Intersegment elimination
(16
)
 
(16
)
 

 

 

 
$
3,945

 
$
2,436

 
$
553

 
$
456

 
$
500

2016
 
 
 
 
 
 
 
 
 
North America
$
2,320

 
$
1,386

 
$
292

 
$
263

 
$
379

EAA
1,339

 
853

 
178

 
151

 
157

Cruise Support
29

 
6

 
60

 
13

 
(50
)
Tour and Other
31

 
27

 
2

 
10

 
(8
)
Intersegment elimination
(14
)
 
(14
)
 

 

 

 
$
3,705

 
$
2,258

 
$
532

 
$
437

 
$
478

 
 
 
 
 
 
 
 
 
 
 
Six Months Ended May 31,
 
Revenues
 
Operating costs and
expenses
 
Selling
and
administrative
 
Depreciation
and
amortization
 
Operating
income  (loss)
2017
 
 
 
 
 
 
 
 
 
North America
$
4,986

 
$
3,003

 
$
639

 
$
559

 
$
785

EAA
2,648

 
1,820

 
344

 
296

 
188

Cruise Support
72

 
17

 
111

 
23

 
(79
)
Tour and Other
46

 
46

 
8

 
18

 
(26
)
Intersegment elimination
(16
)
 
(16
)
 

 

 

 
$
7,736

 
$
4,870

 
$
1,102

 
$
896

 
$
868

2016
 
 
 
 
 
 
 
 
 
North America
$
4,538

 
$
2,700

 
$
603

 
$
519

 
$
716

EAA
2,728

 
1,763

 
352

 
299

 
314

Cruise Support
63

 
11

 
123

 
23

 
(94
)
Tour and Other
42

 
41

 
5

 
20

 
(24
)
Intersegment elimination
(14
)
 
(14
)
 

 

 

 
$
7,357

 
$
4,501

 
$
1,083

 
$
861

 
$
912


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 Cruises. 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.”


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Table of Contents

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
May 31,
 
Six Months Ended
May 31,
 
2017
 
2016
 
2017
 
2016
Net income for basic and diluted earnings per share
$
379

 
$
605

 
$
730

 
$
747

Weighted-average shares outstanding
724

 
751

 
724

 
758

Dilutive effect of equity plans
3

 
2

 
3

 
3

Diluted weighted-average shares outstanding
727

 
753

 
727

 
761

Basic earnings per share
$
0.52

 
$
0.81

 
$
1.01

 
$
0.99

Diluted earnings per share
$
0.52

 
$
0.80

 
$
1.00

 
$
0.98



NOTE 7 – Shareholders’ Equity
On April 6, 2017, the Boards of Directors approved a modification of the general authorization to repurchase Carnival Corporation common stock and/or Carnival plc ordinary shares (the “Repurchase Program”), which replenished the remaining authorized repurchases at the time of the approval to $1.0 billion. During the six months ended May 31, 2017, we repurchased 2.8 million shares of Carnival plc ordinary shares for $156 million under the Repurchase Program. At May 31, 2017, the remaining availability under the Repurchase Program was $989 million.
During the three months ended May 31, 2017, our Boards of Directors declared a dividend to holders of Carnival Corporation common stock and Carnival plc ordinary shares of $0.40 per share, which was an increase from the prior dividend of $0.35.

NOTE 8 – Property and Equipment

In April 2017, we transferred an EAA segment 1,550-passenger capacity ship under a bareboat charter agreement to an unrelated entity which was accounted for as a sale.



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Table of Contents

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 document 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,” “outlook” and similar expressions of future intent or the negative of such terms.

Forward-looking statements include those statements that relate to our outlook and financial position including, but not limited to, statements regarding:
    Net revenue yields
    Net cruise costs, excluding fuel per available lower berth day
    Booking levels
    Estimates of ship depreciable lives and residual values
    Pricing and occupancy
    Goodwill, ship and trademark fair values
    Interest, tax and fuel expenses
    Liquidity
    Currency exchange rates
    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 by our forward-looking statements. 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 the 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
Overcapacity in the cruise ship and land-based vacation industry
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 the cruise ship and land-based vacation industry
Economic, market and political factors that are beyond our control

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Table of Contents

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
The dual listed company arrangement involves risks not associated with the more common ways of combining the operations of two companies

The ordering of the risk factors set forth above is not intended to reflect our indication of priority or likelihood.
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 document, 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 June 22, 2017, we said in our earnings release that we expected our adjusted earnings per share for the 2017 third quarter to be in the range of $2.16 to $2.20 and 2017 full year to be in the range of $3.60 to $3.70 (see “Key Performance Non-GAAP Financial Indicators”). Our guidance was based on the following assumptions:

 
 
2017 Third Quarter
 
2017 Full Year
Fuel price per metric ton
 
$372
 
$367
Currencies
 
 
 
 
     U.S. dollar to euro
 
$1.12 to €1
 
$1.10 to €1
     U.S. dollar to sterling
 
$1.27 to £1
 
$1.26 to £1
     U.S. dollar to Australian dollar
 
$0.75 to A$1
 
$0.75 to A$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 have not provided a reconciliation of forecasted U.S. GAAP earnings per share to forecasted adjusted earnings per share because preparation of meaningful U.S. GAAP forecasts of earnings per share would require unreasonable effort. We are unable to predict, without unreasonable effort, the future movement of foreign exchange rates and fuel prices. 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. We are unable to determine the future impact of gains or losses on ships sales, restructuring expenses and other non-core gains and charges.

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 Form 10-K.

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Table of Contents


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
May 31,
 
Six Months Ended
May 31,
 
2017
 
2016
 
2017
 
2016
Available Lower Berth Days (“ALBDs”) (in thousands) (a) (b)
20,397

 
19,693

 
40,421

 
38,983

Occupancy percentage (c)
104.1
%
 
104.1
%
 
104.3
%
 
104.1
%
Passengers carried (in thousands)
2,906

 
2,781

 
5,675

 
5,340

Fuel consumption in metric tons (in thousands)
830

 
808

 
1,649

 
1,623

Fuel consumption in metric tons per thousand ALBDs
40.7

 
41.0

 
40.8

 
41.6

Fuel cost per metric ton consumed
$
374

 
$
243

 
$
368

 
$
236

Currencies
 
 
 
 
 
 
 
     U.S. dollar to euro
$
1.08

 
$
1.13

 
$
1.07

 
$
1.11

     U.S. dollar to sterling
$
1.26

 
$
1.44

 
$
1.25

 
$
1.44

     U.S. dollar to Australian dollar
$
0.75

 
$
0.75

 
$
0.75

 
$
0.73


(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 May 31, 2017 compared to the three months ended May 31, 2016, we had a 3.6% capacity increase in ALBDs comprised of a 5.6% capacity increase in our North America segment while capacity in our EAA segment increased slightly by 0.6%.

Our North America segment’s capacity increase was driven by:
Partial quarter impact from one Holland America Line 2,650-passenger capacity ship that entered into service in April 2016
Partial quarter impact from one Carnival Cruise Line 3,930-passenger capacity ship that entered into service in May 2016
Partial quarter impact from one Princess Cruises 3,560-passenger capacity ship that entered into service in April 2017

Our EAA segment’s capacity increase was driven by the partial quarter impact from one AIDA Cruises 3,290-passenger capacity ship that entered into service in April 2016, which was offset by the partial quarter impact from one P&O Cruises (Australia) 1,550-passenger capacity ship removed from service in April 2017.

For the six months ended May 31, 2017 compared to the six months ended May 31, 2016, we had a 3.7% capacity increase in ALBDs comprised of a 5.4% capacity increase in our North America segment and a 1.2% capacity increase in our EAA segment.


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Our North America segment’s capacity increase was driven by:
Partial period impact from one Holland America Line 2,650-passenger capacity ship that entered into service in April 2016
Partial period impact from one Carnival Cruise Line 3,930-passenger capacity ship that entered into service in May 2016
Partial period impact from one Princess Cruises 3,560-passenger capacity ship that entered into service in April 2017

Our EAA segment’s capacity increase was caused by the partial period impact from one AIDA Cruises 3,290-passenger capacity ship that entered into service in April 2016, which was offset by the partial period impact from one P&O Cruises (Australia) 1,550-passenger capacity ship removed from service in April 2017.

(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 May 31, 2017 (“2017”) Compared to Three Months Ended May 31, 2016 (“2016”)

Revenues

Consolidated

Cruise passenger ticket revenues made up 73% of our 2017 total revenues. Cruise passenger ticket revenues increased by $176 million, or 6.5%, to $2.9 billion in 2017 from $2.7 billion in 2016.

This increase was caused by:
$156 million - increase in cruise ticket revenue, driven primarily by price improvements in our Caribbean, European and Alaska programs for our North America segment and European and Caribbean programs for our EAA segment, partially offset by decreases in our China programs
$96 million - 3.6% capacity increase in ALBDs

These increases were partially offset by the foreign currency translational impact from a stronger U.S. dollar against the functional currencies of our foreign operations (“foreign currency translational impact”), which accounted for $72 million.

The remaining 27% of 2017 total revenues were substantially all comprised of onboard and other cruise revenues, which increased by $58 million, or 5.9%, to $1,036 million in 2017 from $978 million in 2016.

This increase was caused by:
$39 million - higher onboard spending by our guests
$35 million - 3.6% capacity increase in ALBDs

These increases were partially offset by the foreign currency translational impact, which accounted for $15 million.

Concession revenues, which are included in onboard and other revenues, increased by $5 million, or 2.3%, to $245 million in 2017 from $240 million in 2016.

North America Segment

Cruise passenger ticket revenues made up 71% of our North America segment’s 2017 total revenues. Cruise passenger ticket revenues increased by $198 million, or 12.2%, to $1.8 billion in 2017 compared to $1.6 billion in 2016

This increase was caused by:
$92 million - 5.6% capacity increase in ALBDs
$83 million - increase in cruise ticket revenue, driven primarily by price improvements in the Caribbean, European and Alaska programs
$23 million - 1.5 percentage point increase in occupancy

The remaining 29% of our North America segment’s 2017 total revenues were comprised of onboard and other cruise revenues, which increased by $61 million, or 9.0%, to $738 million in 2017 from $677 million in 2016.


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The increase was caused by:
$38 million - 5.6% capacity increase in ALBDs
$19 million - higher onboard spending by our guests
$10 million - 1.5 percentage point increase in occupancy

Concession revenues, which are included in onboard and other revenues, increased by $14 million, or 8.9%, to $176 million in 2017 from $162 million in 2016.

EAA Segment

Cruise passenger ticket revenues made up 80% of our EAA segment’s 2017 total revenues. Cruise passenger ticket revenues decreased by $29 million, or 2.7%, and was $1.1 billion in both 2017 and 2016.

This decrease was caused by:
$72 million - foreign currency translational impact
$27 million - 2.5 percentage point decrease in occupancy driven primarily by the China programs

These decreases were partially offset by a $59 million increase in cruise ticket revenue driven primarily by price improvements in the Caribbean and European programs, partially offset by decreases in the China programs.

The remaining 20% of our EAA segment’s 2017 total revenues were comprised of onboard and other cruise revenues, which slightly decreased by $1 million, and was $259 million in 2017 and $260 million in 2016.

Concession revenues, which are included in onboard and other revenues, decreased by $9 million, or 12%, to $69 million in 2017 from $78 million in 2016.

Costs and Expenses

Consolidated

Operating costs and expenses increased by $178 million, or 7.9%, to $2.4 billion in 2017 from $2.3 billion in 2016.

This increase was caused by:
$109 million - higher fuel prices
$80 million - 3.6% capacity increase in ALBDs
$14 million - higher commissions, transportation and other

These increases were partially offset by the foreign currency translational impact, which accounted for $49 million.

Selling and administrative expenses increased by $21 million, or 3.9%, to $553 million in 2017 from $532 million in 2016.

Depreciation and amortization expenses increased by $19 million, or 4.3%, to $456 million in 2017 from $437 million in 2016.

North America Segment

Operating costs and expenses increased by $148 million, or 10.7%, to $1.5 billion in 2017 from $1.4 billion in 2016.

This increase was driven by:
$77 million - 5.6% capacity increase in ALBDs
$70 million - higher fuel prices

Selling and administrative expenses increased by $27 million, or 9.2%, to $319 million in 2017 from $292 million in 2016.

Depreciation and amortization expenses increased by $22 million, or 8.4%, to $285 million in 2017 from $263 million in 2016.


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EAA Segment

Operating costs and expenses increased by $21 million, or 2.5%, to $874 million in 2017 from $853 million in 2016.

This increase was caused by:
$38 million - higher fuel prices
$35 million - increases in various other costs

These increases were partially offset by the foreign currency translational impact, which accounted for $49 million.

Selling and administrative expenses decreased by $6 million, or 3.4%, to $172 million in 2017 from $178 million in 2016.

Depreciation and amortization expenses decreased by $1 million to $150 million in 2017 from $151 million in 2016.

Operating Income

Our consolidated operating income increased by $22 million, or 4.6%, to $500 million in 2017 from $478 million in 2016. Our North America segment’s operating income increased by $64 million, or 17%, to $443 million in 2017 from $379 million in 2016, and our EAA segment’s operating income decreased by $44 million, or 28%, to $113 million in 2017 from $157 million in 2016. These changes were primarily due to the reasons discussed above.

Nonoperating Income (Expense)

(Losses) gains on fuel derivatives, net were comprised of the following (in millions):
 
Three Months Ended May 31,
 
2017
 
2016
Unrealized (losses) gains on fuel derivatives, net
$
(2
)
 
$
242

Realized (losses) on fuel derivatives, net
(51
)
 
(71
)
(Losses) gains on fuel derivatives, net
$
(53
)
 
$
171


Key Performance Non-GAAP Financial Indicators

Non-GAAP Financial Measures
We use net cruise revenues per ALBD (“net revenue yields”), net cruise costs excluding fuel per ALBD, adjusted net income and adjusted earnings per share as non-GAAP financial measures of our cruise segments’ and the company’s financial performance. These non-GAAP financial measures are provided along with U.S. GAAP gross cruise revenues per ALBD (“gross revenue yields”), gross cruise costs per ALBD and U.S. GAAP net income and U.S. GAAP earnings per share. 

We believe that gains and losses on ship sales and ship impairments and restructuring and certain 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 non-GAAP measures. Net revenue yields and net cruise costs excluding fuel per ALBD enable us to separate the impact of predictable capacity or ALBD changes from price and other changes that affect our business. We believe these non-GAAP measures provide useful information to investors and expanded insight to measure our revenue and cost performance as a supplement to our U.S. GAAP consolidated financial statements.

The presentation of our non-GAAP financial information is not intended to be considered in isolation from, as a 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.

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. 

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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 cruise costs excluding fuel per ALBD is the measure 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 as well as fuel expense to calculate net cruise costs without fuel to avoid duplicating these variable costs in our non-GAAP financial measures. Substantially all of our net cruise costs excluding fuel are largely fixed, except for the impact of changing prices, once the number of ALBDs has been determined.

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 without fuel or forecasted U.S. GAAP net income to forecasted adjusted net income or forecasted U.S. GAAP earnings per share to forecasted adjusted earnings per share because preparation of meaningful U.S. GAAP forecasts of gross cruise revenues, gross cruise costs, net income and earnings per share would require unreasonable effort. We are unable to predict, without unreasonable effort, the future movement of foreign exchange rates and fuel prices. 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. We are unable to determine the future impact of gains or losses on ships sales, restructuring expenses and other non-core gains and charges.
Constant Dollar and Constant Currency
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 net revenue yields, net passenger revenue yields, net onboard and other revenue yields and net cruise costs excluding fuel per ALBD on a “constant dollar” and “constant currency” basis assuming the 2017 periods’ currency exchange rates have remained constant with the 2016 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 American 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

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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.
  
We believe that gains and losses on ship sales and ship impairments and restructuring and other expenses are not part of our core operating business and are not an indication of our future earnings performance. Therefore, we believe it is more meaningful for gains and losses on ship sales and ship impairments and restructuring and other non-core gains and charges 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.
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 May 31,
 
 
2017
 
2017
Constant
Dollar
 
2016
 
 
 
 
 
 
 
 
Passenger ticket revenues
$
2,872

 
$
2,944

 
$
2,696

 
Onboard and other revenues
1,036

 
1,051

 
978

 
Gross cruise revenues
3,908

 
3,995

 
3,674

 
Less cruise costs
 
 
 
 
 
 
Commissions, transportation and other
(513
)
 
(526
)
 
(495
)
 
Onboard and other
(129
)
 
(131
)
 
(123
)
 

(642
)
 
(657
)
 
(618
)
 
Net passenger ticket revenues
2,359

 
2,418

 
2,201

 
Net onboard and other revenues
907

 
920

 
855

 
Net cruise revenues
$
3,266

 
$
3,338

 
$
3,056

 
ALBDs
20,396,773

 
20,396,773

 
19,693,362

 
 
 
 
 
 
 
 
Gross revenue yields
$
191.59

 
$
195.89

 
$
186.55

 
% increase vs. 2016
2.7
%
 
5.0
%
 

 
 Net revenue yields
$
160.15

 
$
163.67

 
$
155.21

 
 % increase vs. 2016
3.2
%
 
5.5
%
 

 
Net passenger ticket revenue yields
$
115.66

 
$
118.55

 
$
111.78

 
     % increase vs. 2016
3.5
%
 
6.1
%
 

 
Net onboard and other revenue yields
$
44.49

 
$
45.12

 
$
43.43

 
     % increase vs. 2016
2.4
%
 
3.9
%
 

 

 
Three Months Ended May 31,
 
 
2017
 
2017
Constant
Currency
 
2016
 
Net passenger ticket revenues
$
2,359

 
$
2,409

 
$
2,201

 
Net onboard and other revenues
907

 
917

 
855

 
Net cruise revenues
$
3,266

 
$
3,326

 
$
3,056

 
ALBDs
20,396,773

 
20,396,773

 
19,693,362

 
 
 
 
 
 
 
 
 Net revenue yields
$
160.15

 
$
163.05

 
$
155.21

 
 % increase vs. 2016
3.2
%
 
5.1
%
 

 
Net passenger ticket revenue yields
$
115.66

 
$
118.10

 
$
111.78

 
% increase vs. 2016
3.5
%
 
5.7
%
 

 
Net onboard and other revenue yields
$
44.49

 
$
44.94

 
$
43.43

 
% increase vs. 2016
2.4
%
 
3.5
%
 

 


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Table of Contents

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 May 31,
 
 
2017
 
2017
Constant
Dollar
 
2016
 
 
 
 
 
 
 
 
Cruise operating expenses
$
2,403

 
$
2,451

 
$
2,231

 
Cruise selling and administrative expenses
548

 
559

 
530

 
Gross cruise costs
2,951

 
3,010

 
2,761

 
Less cruise costs included above
 
 
 
 
 
 
Commissions, transportation and other
(513
)
 
(526
)
 
(495
)
 
     Onboard and other
(129
)
 
(131
)
 
(123
)
 
     Gain on ship sale
4

 
4

 

 
     Restructuring expenses

 

 
(2
)
 
     Other
(1
)
 
(1
)
 
(5
)
 
Net cruise costs
2,312

 
2,356

 
2,136

 
Less fuel
(310
)
 
(310
)
 
(196
)
 
Net cruise costs excluding fuel
$
2,002

 
$
2,046

 
$
1,940

 
ALBDs
20,396,773

 
20,396,773

 
19,693,362

 
 
 
 
 
 
 
 
Gross cruise costs per ALBD
$
144.63

 
$
147.58

 
$
140.18

 
% increase vs. 2016
3.2
 %
 
5.3
%