Exhibit 13
CARNIVAL CORPORATION & PLC
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share data)
Years Ended November 30,
------------------------------
2004 2003 2002
---- ---- ----
Revenues
Cruise
Passenger tickets $ 7,357 $ 5,039 $ 3,346
Onboard and other 2,070 1,420 898
Other 300 259 139
------- ------- -------
9,727 6,718 4,383
------- ------- -------
Costs and Expenses
Operating
Cruise
Commissions, transportation and other 1,572 1,021 658
Onboard and other 359 229 116
Payroll and related 1,003 744 458
Food 550 393 256
Other ship operating 1,763 1,237 734
Other 210 190 108
------- ------- -------
Total 5,457 3,814 2,330
Selling and administrative 1,285 936 609
Depreciation and amortization 812 585 382
Impairment charge 20
------- ------- -------
7,554 5,335 3,341
------- ------- -------
Operating Income 2,173 1,383 1,042
------- ------- -------
Nonoperating (Expense) Income
Interest income 17 27 32
Interest expense, net of
capitalized interest (284) (195) (111)
Other (expense) income, net (5) 8 (4)
------- ------- -------
(272) (160) (83)
------- ------- -------
Income Before Income Taxes 1,901 1,223 959
Income Tax (Expense) Benefit, Net (47) (29) 57
------- ------- -------
Net Income $ 1,854 $ 1,194 $ 1,016
======= ======= =======
Earnings Per Share
Basic $ 2.31 $ 1.66 $ 1.73
======= ======= =======
Diluted $ 2.24 $ 1.63 $ 1.69
======= ======= =======
Dividends Per Share $ 0.525 $ 0.440 $ 0.420
======= ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
CARNIVAL CORPORATION & PLC
CONSOLIDATED BALANCE SHEETS
(in millions, except par/stated values)
November 30,
------------------
ASSETS 2004 2003
- ------ ---- ----
Current Assets
Cash and cash equivalents $ 643 $ 610
Short-term investments 17 461
Accounts receivable, net 409 403
Inventories 240 171
Prepaid expenses and other 266 212
Fair value of derivative contracts 153 275
-------- --------
Total current assets 1,728 2,132
-------- --------
Property and Equipment, Net 20,823 17,522
Goodwill 3,321 3,031
Trademarks 1,306 1,324
Other Assets 458 482
-------- --------
$ 27,636 $ 24,491
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Short-term borrowings $ 381 $ 94
Current portion of long-term debt 681 392
Convertible debt subject to current put option 600 --
Accounts payable 631 634
Accrued liabilities and other 721 568
Customer deposits 1,873 1,358
Fair value of hedged firm commitments 147 264
-------- --------
Total current liabilities 5,034 3,310
-------- --------
Long-Term Debt 6,291 6,918
Other Long-Term Liabilities and Deferred Income 551 470
Commitments and Contingencies (Notes 7, 8 and 13)
Shareholders' Equity
Common stock of Carnival Corporation; $.01 par
value; 1,960 shares authorized; 634 shares at 2004
and 630 shares at 2003 issued and outstanding 6 6
Ordinary shares of Carnival plc; $1.66 stated value;
226 shares authorized; 212 shares at 2004 and
210 at 2003 issued 353 349
Additional paid-in capital 7,311 7,163
Retained earnings 8,623 7,191
Unearned stock compensation (16) (18)
Accumulated other comprehensive income 541 160
Treasury stock; 42 shares of Carnival plc at cost (1,058) (1,058)
-------- --------
Total shareholders' equity 15,760 13,793
-------- --------
$ 27,636 $ 24,491
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
CARNIVAL CORPORATION & PLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
Years Ended November 30,
--------------------------
2004 2003 2002
---- ---- ----
OPERATING ACTIVITIES
Net income $ 1,854 $ 1,194 $ 1,016
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation and amortization 812 585 382
Impairment charge 20
Accretion of original issue discount 21 20 19
Other 16 8 14
Changes in operating assets and liabilities,
excluding business acquired
Decrease (increase) in
Receivables 11 (91) (5)
Inventories (73) (17) 2
Prepaid expenses and other (54) 82 (81)
(Decrease) increase in
Accounts payable (28) 43 (12)
Accrued and other liabilities 178 (16) (28)
Customer deposits 479 125 142
------- ------- -------
Net cash provided by operating activities 3,216 1,933 1,469
------- ------- -------
INVESTING ACTIVITIES
Additions to property and equipment (3,586) (2,516) (1,986)
Sales of short-term investments 1,216 3,745 4,598
Purchases of short-term investments (772) (3,803) (4,637)
Cash acquired from (expended for) the acquisition
of P&O Princess, net 140 (30)
Proceeds from retirement of property and equipment 77 51 4
Other, net (24) (50) (10)
------- ------- -------
Net cash used in investing activities (3,089) (2,433) (2,061)
------- ------- -------
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt 843 2,123 232
Principal repayments of long-term debt (932) (1,137) (190)
Dividends paid (400) (292) (246)
Proceeds from short-term borrowings, net 272 94
Proceeds from exercise of stock options 142 53 7
Other (4) (15) (1)
------- ------- -------
Net cash (used in) provided by
financing activities (79) 826 (198)
------- ------- -------
Effect of exchange rate changes on cash and
cash equivalents (15) (23) (5)
------- ------- -------
Net increase (decrease) in cash and
cash equivalents 33 303 (795)
Cash and cash equivalents at beginning of year 610 307 1,102
------- ------- -------
Cash and cash equivalents at end of year $ 643 $ 610 $ 307
======= ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
CARNIVAL CORPORATION & PLC
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in millions)
Unearned Accumulated Total
Compre- Additional stock other share-
hensive Common Ordinary paid-in Retained compen- comprehensive Treasury holders'
income stock shares capital earnings sation income (loss) stock equity
------ ----- ------ ------- -------- ------ ------------- ----- ------
Balances at November 30, 2001 $ 6 $1,805 $5,556 $(12) $ (37) $ (727) $ 6,591
Comprehensive income
Net income $1,016 1,016 1,016
Foreign currency
translation adjustment 51 51 51
Minimum pension liability
adjustment (9) (9) (9)
Unrealized gains on
marketable securities, net 3 3 3
------
Total comprehensive income $1,061
======
Cash dividends declared (246) (246)
Issuance of stock under stock
plans 11 (4) 7
Retirement of treasury stock (727) 727
Amortization of unearned stock
compensation 5 5
--- ---- ------ ------ ----- ------ ----- ------
Balances at November 30, 2002 6 1,089 6,326 (11) 8 7,418
Comprehensive income
Net income $1,194 1,194 1,194
Foreign currency
translation adjustment 162 162 162
Unrealized losses on
marketable securities, net (1) (1) (1)
Changes related to cash flow
derivative hedges, net (9) (9) (9)
------
Total comprehensive income $1,346
======
Cash dividends declared (329) (329)
Acquisition of Carnival plc $346 6,010 (1,058) 5,298
Issuance of stock under stock
plans 3 64 (14) 53
Amortization of unearned stock
compensation 7 7
--- ---- ------ ------ ----- ------ ------- -------
Balances at November 30, 2003 6 349 7,163 7,191 (18) 160 (1,058) 13,793
Comprehensive income
Net income $1,854 1,854 1,854
Foreign currency
translation adjustment 398 398 398
Unrealized loss on
marketable securities (1) (1) (1)
Minimum pension liability
adjustments (3) (3) (3)
Changes related to cash flow
derivative hedges, net (13) (13) (13)
------
Total comprehensive income $2,235
======
Cash dividends declared (422) (422)
Issuance of stock under stock
plans 4 148 (7) 145
Amortization of unearned stock
compensation 9 9
--- ---- ------ ------ ----- ------ ------- -------
Balances at November 30, 2004 $ 6 $353 $7,311 $8,623 $ (16) $ 541 $(1,058) $15,760
=== ==== ====== ====== ===== ====== ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
CARNIVAL CORPORATION & PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - General
Description of Business
Carnival Corporation is incorporated in Panama, and Carnival plc is
incorporated in England and Wales. Together with their consolidated subsidiaries
they are referred to collectively in these consolidated financial statements and
elsewhere in this 2004 Annual Report as "Carnival Corporation & plc," "our,"
"us," and "we." Our consolidated financial statements only include the results
of operations of the former P&O Princess Cruises plc since April 17, 2003.
On April 17, 2003, Carnival Corporation and Carnival plc (formerly known
as P&O Princess Cruises plc or "P&O Princess") completed a dual listed company
("DLC") transaction (the "DLC transaction"), which implemented Carnival
Corporation & plc's DLC structure. The DLC transaction combined the businesses
of Carnival Corporation and Carnival plc through a number of contracts and
through amendments to Carnival Corporation's articles of incorporation and
by-laws and to Carnival plc's memorandum of association and articles of
association. The two companies have retained their separate legal identities,
however, they operate as if they were a single economic enterprise. Each
company's shares continue to be publicly traded on the New York Stock Exchange
("NYSE") for Carnival Corporation and the London Stock Exchange for Carnival
plc. In addition, Carnival plc American Depository Shares ("ADSs") are traded on
the NYSE. See Note 3.
We are the largest cruise company and one of the largest vacation
companies in the world. As of February 7, 2005, a summary of the number of
cruise ships we operate, by brand, their passenger capacity and the primary
areas in which they are marketed is as follows:
Cruise Number Passenger Primary
Brands of Cruise Ships Capacity (a) Market
------ --------------- ------------ ------
Carnival Cruise
Lines 20 44,866 North America
Princess Cruises
("Princess") 14 28,332 North America
Costa Cruises ("Costa") 11 18,272 Europe
Holland America Line 12 16,930 North America
P&O Cruises 4 7,724 United Kingdom
AIDA Cruises ("AIDA") 4 5,378 Germany
Cunard Line ("Cunard") 2 4,410 North America and United Kingdom
P&O Cruises Australia 2 2,686 Australia and New Zealand
Ocean Village 1 1,578 United Kingdom
Swan Hellenic 1 678 United Kingdom
Seabourn Cruise Line
("Seabourn") 3 624 North America
Windstar Cruises 3 604 North America
-- -------
77 132,082
== =======
(a) In accordance with cruise industry practice, passenger capacity is
calculated based on two passengers per cabin even though some cabins can
accommodate three or more passengers.
Preparation of Financial Statements
The preparation of our consolidated financial statements in accordance
with accounting principles generally accepted in the United States of America
requires us to make estimates and assumptions that affect the amounts reported
and disclosed in our financial statements. Actual results could differ from
these estimates. Intercompany balances and transactions are eliminated in
consolidation.
NOTE 2 - Summary of Significant Accounting Policies
Basis of Presentation
We consolidate entities over which we have control (see Note 3), as
typically evidenced by a direct ownership interest of greater than 50%. For
affiliates where significant influence over financial and operating policies
exists, as typically evidenced by a direct ownership interest from 20% to 50%,
the investment is accounted for using the equity method.
Cash and Cash Equivalents and Short-Term Investments
Cash and cash equivalents include investments with original maturities of
three months or less, which are stated at cost. At November 30, 2004 and 2003,
cash and cash equivalents included $495 million and $477 million of investments,
respectively, primarily comprised of investment grade asset-backed debt
obligations, commercial paper and money market funds.
Substantially all our short-term investments are comprised of investment
grade variable rate debt obligations, which are asset-backed and categorized as
available-for-sale. Accordingly, our investments in these securities are
recorded at cost, which approximates fair value due to their variable interest
rates, which typically reset every 28 days. Despite the long-term nature of
their stated contractual maturities, we have the ability to quickly liquidate
these securities. As a result of the resetting variable rates, we had no
cumulative gross unrealized or realized holding gains or losses from these
investments. All income generated from these investments was recorded as
interest income.
Inventories
Inventories consist primarily of provisions, gift shop and art merchandise
held for resale, fuel and supplies carried at the lower of cost or market. Cost
is determined using the weighted-average or first-in, first-out methods.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization
were computed using the straight-line method over our estimates of average
useful lives and residual values, as a percentage of original cost, as follows:
Residual
Values Years
------ -----
Ships 15% 30
Ship improvements 0% or 15% 2 to remaining
life of ship
Buildings and improvements 0-10% 5-40
Transportation equipment and other 0-25% 2-20
Leasehold improvements, including port facilities Shorter of lease term
or related asset life
We review our long-lived assets for impairment whenever events or changes
in circumstances indicate that the carrying amount of these assets may not be
fully recoverable. The assessment of possible impairment is based on our ability
to recover the carrying value of our asset based on our estimate of its
undiscounted future cash flows. If these estimated undiscounted future cash
flows are less than the carrying value of the asset, an impairment charge is
recognized for the excess, if any, of the asset's carrying value over its
estimated fair value (see Note 4).
Dry-dock costs primarily represent planned major maintenance activities
that are incurred when a ship is taken out of service for scheduled maintenance.
These costs are included in prepaid expenses and are amortized to other ship
operating expenses using the straight-line method generally over one year.
Ship improvement costs that we believe add value to our ships are
capitalized to the ships, and depreciated over the improvements' estimated
useful lives, while costs of repairs and maintenance are charged to expense as
incurred. Upon replacement or refurbishment of previously capitalized ship
components, these assets' estimated cost and accumulated depreciation are
written off.
We capitalize interest on ships and other capital projects during their
construction period.
Goodwill
We review our goodwill for impairment annually, or, when events or
circumstances dictate, more frequently. All of our goodwill has been allocated
to our cruise reporting
units. In April 2003, we recorded $2.25 billion of goodwill as a result of our
acquisition of Carnival plc (see Note 3). There were no other significant
changes to our goodwill carrying amounts since November 30, 2002, other than the
changes resulting from using different foreign currency translation rates at
each balance sheet date, except as noted below.
During 2004, we increased the fair values of the P&O Princess publicly
traded debt, and correspondingly, goodwill, by $61 million to take into account
the extension of Carnival Corporation's guarantee to cover this debt as of the
acquisition date. In addition, we reduced the fair value of P&O Princess'
trademarks and, correspondingly increased goodwill by $54 million to properly
value our acquired trademarks as of the acquisition date. The impact of these
changes on our current and prior period financial statements was immaterial.
Our goodwill impairment reviews consist of a two-step process of first
determining the fair value of the reporting unit and comparing it to the
carrying value of the net assets allocated to the reporting unit. Fair values of
our reporting units were determined based on our estimates of comparable market
price or discounted future cash flows. If this fair value exceeds the carrying
value, which was the case for our reporting units, no further analysis or
goodwill write-down is required. If the fair value of the reporting unit is less
than the carrying value of the net assets, the implied fair value of the
reporting unit is allocated to all the underlying assets and liabilities,
including both recognized and unrecognized tangible and intangible assets, based
on their fair value. If necessary, goodwill is then written-down to its implied
fair value.
Trademarks
The cost of developing and maintaining our trademarks have been expensed
as incurred. However, pursuant to Statement of Financial Accounting Standards
("SFAS") No. 141, "Business Combinations," commencing for acquisitions made
after June 2001, we have allocated a portion of the purchase price to the
acquiree's identified trademarks. The trademarks that Carnival Corporation
recorded as part of the DLC transaction, which are estimated to have an
indefinite useful life and, therefore, are not amortizable, are reviewed for
impairment annually, or more frequently when events or circumstances indicate
that the trademark may be impaired. Our trademarks would be considered impaired
if their carrying value exceeds their fair value. See Note 3.
Derivative Instruments and Hedging Activities
We utilize derivative and nonderivative financial instruments, such as
foreign currency swaps and foreign currency obligations to limit our exposure to
fluctuations in foreign currency exchange rates and interest rate swaps to
manage our interest rate exposure and to achieve a desired proportion of
variable and fixed rate debt (see Notes 6 and 11).
All derivatives are recorded at fair value, and the changes in fair value
must be immediately included in earnings if the derivatives do not qualify as
effective hedges. If a derivative is 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 firm commitment. If a derivative is a cash flow hedge,
then changes in the fair value of the derivative are recognized as a component
of accumulated other comprehensive income ("AOCI") until the underlying hedged
item is recognized in earnings. If a derivative or a nonderivative financial
instrument is designated as a hedge of a 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 the change in the translated value of the net
investment being hedged, until the investment is liquidated. We formally
document all relationships between hedging instruments and hedged items, as well
as our risk management objectives and strategies for undertaking our hedge
transactions.
We classify the fair value of our derivative contracts and the fair value
of our offsetting hedged firm commitments as either current or long-term assets
and liabilities depending on whether the maturity date of the derivative
contract is within or beyond one year from our balance sheet dates. The cash
flows from derivatives treated as hedges are classified in our statements of
cash flows in the same category as the item being hedged.
During fiscal 2004, 2003 and 2002, all net changes in the fair value of
both our fair
value hedges and the offsetting hedged firm commitments and our cash flow hedges
were immaterial, as were any ineffective portions of these hedges. No fair value
hedges or cash flow hedges were derecognized or discontinued in fiscal 2004,
2003 or 2002, and the amount of estimated cash flow hedges unrealized net losses
which are expected to be reclassified to earnings in the next twelve months is
approximately $24 million.
Finally, if any shipyard with which we have contracts to build our ships
is unable to perform, we would be required to perform under our foreign currency
swaps related to these shipbuilding contracts. Accordingly, based upon the
circumstances, we may have to discontinue the accounting for those currency
swaps as hedges, if the shipyard cannot perform. However, we believe that the
risk of shipyard nonperformance is remote.
Revenue and Expense Recognition
Guest cruise deposits represent unearned revenues and are initially
recorded as customer deposit liabilities when received. Customer deposits are
subsequently recognized as cruise revenues, together with revenues from onboard
and other activities and all associated direct costs of a voyage, generally upon
completion of voyages with durations of ten nights or less and on a pro rata
basis for voyages in excess of ten nights. Future travel discount vouchers
issued to guests are typically recorded as a reduction of revenues when such
vouchers are utilized. Revenues and expenses from our tour and travel services
are recognized at the time the services are performed or expenses are incurred.
Insurance/Self-Insurance
We use a combination of insurance and self-insurance for a number of risks
including claims related to crew and passengers, hull and machinery, workers'
compensation and general liability. Liabilities associated with these risks,
including estimates for crew and passenger claims, are estimated based on, among
other things, historical claims experience, severity factors and other actuarial
assumptions. Our expected loss accruals are based on estimates, and while we
believe the amounts accrued are adequate, the ultimate loss may differ from the
amounts provided.
Advertising Costs
Substantially all our advertising costs are charged to expense as incurred
except costs which result in tangible assets, such as brochures, which are
recorded as prepaid expenses and charged to expense as consumed. Media
production costs are also recorded as prepaid expenses and charged to expense
upon the first airing of the advertisement. Advertising expenses totaled $425
million, $334 million and $208 million in fiscal 2004, 2003 and 2002,
respectively. At November 30, 2004 and 2003, the amount of advertising costs
included in prepaid expenses was not material.
Foreign Currency Translations and Transactions
For our foreign subsidiaries and affiliates using the local currency as
their functional currency, assets and liabilities are translated at exchange
rates in effect at the balance sheet dates. Revenues and expenses of these
foreign subsidiaries and affiliates are translated at weighted-average exchange
rates for the period. Equity is translated at historical rates and the resulting
cumulative foreign currency translation adjustments resulting from this process
are included as a component of AOCI. Therefore, the U.S. dollar value of these
items in our financial statements fluctuates from period to period, depending on
the value of the dollar against these functional currencies.
Exchange gains and losses arising from the remeasurement of transactions
and monetary assets and liabilities denominated in a currency other than the
functional currency of the entity involved are immediately included in our
earnings, unless such liabilities have been designated to act as a hedge of a
net investment in a foreign operation.
Earnings Per Share
Basic earnings per share is computed by dividing net income by the
weighted-average number of shares of common stock and ordinary shares
outstanding during each period. Diluted earnings per share is computed by
dividing adjusted net income by the weighted-average number
of shares of common stock and ordinary shares, common stock equivalents and
other potentially dilutive securities outstanding during each period.
During the fourth quarter of 2004, we elected to early adopt Emerging
Issues Task Force ("EITF") No. 04-08, "Accounting Issues Related to Certain
Features of Contingently Convertible Debt and the Effect on Diluted Earnings Per
Share." This statement requires all shares that are issuable under our
outstanding convertible notes that have contingent share conversion features to
be considered outstanding for our diluted earnings per share computations, if
dilutive, using the "if converted" method of accounting from the date of
issuance. In prior periods, these shares were only included in our diluted
earnings per share computations if Carnival Corporation's common stock price had
reached certain conversion trigger prices. As required by EITF No. 04-08, we
have retroactively restated our 2003 and 2002 diluted earnings per share
amounts. Our previously reported diluted earnings per share for 2003 and 2002
were $1.66 and $1.73, respectively.
Stock-Based Compensation
Pursuant to SFAS No. 123, "Accounting for Stock-Based Compensation," as
amended, we elected to use the intrinsic value method of accounting for our
employee and director stock-based compensation awards instead of the fair value
method. Accordingly, we have not recognized compensation expense for our
noncompensatory employee and director stock option awards. Our adjusted net
income and adjusted earnings per share, had we elected to adopt the fair value
approach of SFAS No. 123, which charges earnings for the estimated fair value of
stock options, would have been as follows (in millions, except per share
amounts):
Years ended November 30,
2004 2003 2002
---- ---- ----
Net income, as reported $1,854 $1,194 1,016
Stock-based compensation
expense included in
net income, as reported 11 7 5
Total stock-based compensation
expense determined under
the fair value-based
method for all awards (66)(a) (36) (30)
------ ------ ------
Adjusted net income for basic
earnings per share 1,799 1,165 991
Interest on dilutive convertible notes 49 43 35
------ ------ ------
Adjusted net income for diluted
earnings per share $1,848 $1,208 $1,026
====== ====== ======
Earnings per share
Basic
As reported $ 2.31 $ 1.66 $ 1.73
====== ====== ======
Adjusted $ 2.24 $ 1.62 $ 1.69
====== ====== ======
Diluted(b)
As reported $ 2.24 $ 1.63 $ 1.69
====== ====== ======
Adjusted $ 2.18 $ 1.60 $ 1.66
====== ====== ======
(a) During fiscal 2004, we completed a corporate reorganization. As a result
of that reorganization, 1.6 million unvested options held by employees
vested immediately and their termination dates were accelerated to 2004.
This vesting occurred either in accordance with the terms of the option
plan or to avoid having these employees and Carnival Corporation incur
unduly burdensome taxes upon the exercise of such options at a later date.
As a result of this accelerated vesting, we included an additional $19
million of stock-based compensation expense determined under the fair
value based method in the adjusted 2004 net income.
(b) The 2003 and 2002 diluted earnings per share amounts have been restated as
a result of early adoption of EITF No. 04-08 and we have reduced
previously reported diluted earnings per share amounts by $0.03 and $0.04,
respectively.
As recommended by SFAS No. 123, the fair value of options were estimated
using the
Black-Scholes option-pricing model. The Black-Scholes weighted-average
assumptions were as follows:
Years ended November 30,
------------------------------
2004 2003 2002
---- ---- ----
Fair value of options at the
dates of grant $15.87 $13.33 $12.16
====== ====== ======
Risk free interest rates 3.4% 3.5% 4.3%
====== ====== ======
Dividend yields 1.36% 1.30% 1.23%
====== ====== ======
Expected volatility 35.0% 48.7% 48.0%
====== ====== ======
Expected option life (in years) 5.75 6 6
====== ====== ======
The Black-Scholes option-pricing model was developed for use in estimating
the fair value of traded options that have no vesting or trading restrictions
and are fully transferable. In addition, option-pricing models require the input
of subjective assumptions, including expected stock price volatility. Because
our options have characteristics different from those of traded options, the
existing models do not necessarily provide a reliable single measure of the fair
value of our options.
In December 2004, the Financial Accounting Standards Board issued SFAS No.
123 (revised 2004), "Share-Based Payment Statement 123(R)," which will require
us to recognize compensation costs in our financial statements in an amount
equal to the fair value of share-based payments granted to employees and
directors. This statement is effective for us in the fourth quarter of fiscal
2005. We have not yet determined which of the alternative transition methods we
will use upon adoption of this new statement. However, based on preliminary
estimates, if we were to elect to adopt this statement with retroactive effect
to December 1, 2004, our additional 2005 share-based compensation expense would
be approximately $60 million.
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. Credit risk, including counterparty nonperformance
under derivative instruments, contingent obligations and new ship progress
payment guarantees, is considered minimal, as we primarily conduct business with
large, well-established financial institutions who have long-term credit ratings
of A or above and we seek to diversify our counterparties. In addition, we have
established guidelines regarding credit ratings and investment maturities that
we follow to maintain safety and liquidity. We do not anticipate nonperformance
by any of our significant counterparties.
We also monitor the creditworthiness of our customers to which we grant
credit terms in the normal course of our business. Concentrations of credit risk
associated with these receivables are considered minimal primarily due to their
short maturities and large number of accounts within our customer base. We have
experienced only minimal credit losses on our trade receivables. We do not
normally require collateral or other security to support normal credit sales.
However, we do normally require collateral and/or guarantees to support notes
receivable on significant asset sales and new ship progress payments to
shipyards.
Reclassifications
Reclassifications have been made to prior year amounts to conform to the
current year presentation, including reclassifying $460 million of variable rate
debt obligations from their previously reported classification as cash
equivalents to short-term investments at November 30, 2003. We have also made
corresponding adjustments to our Consolidated Statements of Cash Flows for
fiscal 2003 and 2002, to reflect the gross purchases and sales of these variable
rate securities as investing activities rather than as a component of cash and
cash equivalents. We reclassified our previously reported cash and cash
equivalents at November 30, 2002 and 2001 by $360 million and $319 million,
respectively. These changes in classification do not affect previously reported
cash flows from operations or financing activities in our Consolidated
Statements of Cash Flows.
NOTE 3 - DLC Transaction
The contracts governing the DLC structure provide that Carnival
Corporation and Carnival plc each continue to have separate boards of directors,
but the boards and senior executive management of both companies are identical.
The amendments to the constituent documents of each of the companies also
provide that, on most matters, the holders of the common equity of both
companies effectively vote as a single body. On specified matters where the
interests of Carnival Corporation's shareholders may differ from the interests
of Carnival plc's shareholders (a "class rights action"), each shareholder body
will vote separately as a
class, such as transactions primarily designed to amend or unwind the DLC
structure. Generally, no class rights action will be implemented unless approved
by both shareholder bodies.
Upon the closing of the DLC transaction, Carnival Corporation and Carnival
plc also executed the Equalization and Governance Agreement, which provides for
the equalization of dividends and liquidation distributions based on an
equalization ratio and contains provisions relating to the governance of the DLC
structure. Because the current equalization ratio is 1 to 1, one Carnival plc
ordinary share is entitled to the same distributions, subject to the terms of
the Equalization and Governance Agreement, as one share of Carnival Corporation
common stock. In a liquidation of either company or both companies, if the
hypothetical potential per share liquidation distributions to each company's
shareholders are not equivalent, taking into account the relative value of the
two companies' assets and the indebtedness of each company, to the extent that
one company has greater net assets so that any liquidation distribution to its
shareholders would not be equivalent on a per share basis, the company with the
ability to make a higher net distribution is required to make a payment to the
other company to equalize the possible net distribution to shareholders, subject
to certain exceptions.
At the closing of the DLC transaction, Carnival Corporation and Carnival
plc also executed deeds of guarantee. Under the terms of Carnival Corporation's
deed of guarantee, Carnival Corporation has agreed to guarantee all indebtedness
and certain other monetary obligations of Carnival plc that are incurred under
agreements entered into on or after the closing date of the DLC transaction. The
terms of Carnival plc's deed of guarantee are identical to those of Carnival
Corporation's. In addition, Carnival Corporation and Carnival plc have each
extended their respective deeds of guarantee to the other's pre-DLC indebtedness
and other monetary obligations, thus effectively cross guaranteeing all Carnival
Corporation and Carnival plc indebtedness and other monetary obligations. Each
deed of guarantee provides that the creditors to whom the obligations are owed
are intended third party beneficiaries of such deed of guarantee.
The deeds of guarantee are governed and construed in accordance with the
laws of the Isle of Man. Subject to the terms of the guarantees, the holders of
indebtedness and other obligations that are subject to the guarantees will have
recourse to both Carnival plc and Carnival Corporation though a Carnival plc
creditor must first make written demand on Carnival plc and a Carnival
Corporation creditor on Carnival Corporation. Once the written demand is made by
letter or other form of notice, the holders of indebtedness or other obligations
may immediately commence an action against the relevant guarantor. There is no
requirement under the deeds of guarantee to obtain a judgment, take other
enforcement actions or wait any period of time prior to taking steps against the
relevant guarantor. All actions or proceedings arising out of or in connection
with the deeds of guarantee must be exclusively brought in courts in England.
Under the terms of the DLC transaction documents, Carnival Corporation and
Carnival plc are permitted to transfer assets between the companies, make loans
or investments in each other and otherwise enter into intercompany transactions.
The companies have entered into some of these types of transactions and expect
to enter into additional transactions in the future to take advantage of the
flexibility provided by the DLC structure and to operate both companies as a
single unified economic enterprise in the most effective manner. In addition,
under the terms of the Equalization and Governance Agreement and the deeds of
guarantee, the cash flow and assets of one company are required to be used to
pay the obligations of the other company, if necessary.
Given the DLC structure as described above, we believe that providing
separate financial statements for each of Carnival Corporation and Carnival plc
would not present a true and fair view of the economic realities of their
operations. Accordingly, separate financial statements for both Carnival
Corporation and Carnival plc have not been presented.
Simultaneously with the completion of the DLC transaction, a partial share
offer ("PSO") for 20% of Carnival plc's shares was made and accepted, which
enabled 20% of Carnival plc shares to be exchanged for 41.7 million Carnival
Corporation shares. The 41.7 million shares of Carnival plc held by Carnival
Corporation as a result of the PSO, which cost $1.05 billion, are being
accounted for as treasury stock in the accompanying balance sheets. The holders
of Carnival Corporation shares, including the new shareholders who exchanged
their
Carnival plc shares for Carnival Corporation shares under the PSO, now own an
economic interest equal to approximately 79%, and holders of Carnival plc shares
now own an economic interest equal to approximately 21%, of Carnival Corporation
& plc.
The management of Carnival Corporation and Carnival plc ultimately agreed
to enter into the DLC transaction because, among other things, the creation of
Carnival Corporation & plc would result in a company with complementary
well-known brands operating globally with enhanced growth opportunities,
benefits of sharing best practices and generating cost savings, increased
financial flexibility and access to capital markets and a DLC structure, which
allows for continued participation in an investment in the global cruise
industry by Carnival plc's shareholders who wish to continue to hold shares in a
UK-listed company.
Carnival plc was the third largest cruise company in the world and
operated many well-known global brands with leading positions in the U.S., UK,
Germany and Australia. The combination of Carnival Corporation with Carnival plc
under the DLC structure has been accounted for under U.S. generally accepted
accounting principles ("GAAP") as an acquisition of Carnival plc by Carnival
Corporation pursuant to SFAS No. 141. The purchase price of $25.31 per share was
based upon the average of the quoted closing market price of Carnival
Corporation's shares beginning two days before and ending two days after January
8, 2003, the date the Carnival plc board agreed to enter into the DLC
transaction. The number of additional shares effectively issued in the combined
entity for purchase accounting purposes was 209.6 million. In addition, Carnival
Corporation incurred $60 million of direct acquisition costs, which have been
included in the purchase price. The aggregate purchase price of $5.36 billion,
computed as described above, was allocated to the assets and liabilities of
Carnival plc as follows (in millions):
Ships $4,669
Ships under construction 233
Other tangible assets 866
Goodwill 2,387
Trademarks(a) 1,237
Debt (2,939)
Other liabilities (1,095)
------
$5,358
======
(a) Trademarks are non-amortizable and represent the Princess, P&O Cruises,
P&O Cruises Australia and AIDA trademarks' estimated fair values.
The information presented below gives pro forma effect to the DLC
transaction between Carnival Corporation and Carnival plc. Management has
prepared the pro forma information based upon the companies' reported financial
information and, accordingly, the pro forma information should be read in
conjunction with the companies' financial statements.
As noted above, the DLC transaction has been accounted for as an
acquisition of Carnival plc by Carnival Corporation, using the purchase method
of accounting. Carnival plc's accounting policies have been conformed to
Carnival Corporation's policies. Carnival plc's reporting period has been
changed to Carnival Corporation's reporting period, and the pro forma
information presented below covers the same periods of time for both companies.
The following pro forma information has been prepared assuming the DLC
transaction had occurred on December 1, 2002 and 2001, respectively, rather than
April 17, 2003, and has not been adjusted to reflect any net transaction
benefits. In addition, the pro forma information does not purport to represent
what the results of operations actually could have been if the DLC transaction
had occurred on December 1, 2002 and 2001 or what those results will be for any
future periods (in millions, except earnings per share).
Years ended November 30,
-----------------------
2003 2002
---- ----
Pro forma revenues $7,596 $6,768
====== ======
Pro forma net income (a)-(d) $1,159 $1,271
====== ======
Pro forma earnings per share
Basic $1.46 $1.60
===== =====
Diluted(e) $1.43 $1.57
===== =====
Pro forma weighted-average
shares outstanding
Basic 797 795
===== =====
Diluted(e) 840 833
===== =====
(a) In accordance with SFAS No. 141, pro forma net income was reduced by $51
million in 2003 and $103 million in 2002 for Carnival plc's nonrecurring
costs related to its terminated Royal Caribbean International Ltd.
transaction and the completion of the DLC transaction with Carnival
Corporation, which were expensed by Carnival plc prior to April 17, 2003.
(b) As a result of the reduction in depreciation expense due to the
revaluation of Carnival plc's ships carrying values, pro forma net income
has been increased by $16 million in 2003 and $14 million in 2002.
(c) The 2003 pro forma net income included a $13 million nonrecurring expense
related to a DLC litigation matter and $19 million of income related to
the receipt of nonrecurring net insurance proceeds.
(d) The 2002 pro forma net income included a $51 million nonrecurring income
tax benefit related to an Italian incentive tax law, which allowed Costa
to receive an income tax benefit for contractual expenditures during 2002
incurred on the construction of a new ship.
(e) The 2003 and 2002 diluted earnings per share and outstanding diluted
shares have been restated, and we have reduced previously reported diluted
earnings per share amounts by $0.02 each year as a result of the early
adoption of EITF No. 04-08.
NOTE 4 - Property and Equipment
Property and equipment consisted of the following (in millions):
November 30,
--------------------
2004 2003
---- ----
Ships $22,572 $18,134
Ships under construction 429 886
------- -------
23,001 19,020
Land, buildings and improvements,
and port facilities 555 504
Transportation equipment and other 628 549
------- -------
Total property and equipment 24,184 20,073
Less accumulated depreciation and amortization (3,361) (2,551)
------- -------
$20,823 $17,522
======= =======
Capitalized interest, primarily on our ships under construction, amounted
to $26 million, $49 million and $39 million in fiscal 2004, 2003 and 2002,
respectively. Amounts related to ships under construction include progress
payments for the construction of the ship, as well as design and engineering
fees, capitalized interest, construction oversight costs and various owner
supplied items. At November 30, 2004, nine ships with an aggregate net book
value of $2.92 billion were pledged as collateral pursuant to mortgages related
to $1.68 billion of debt and a $476 million contingent obligation (see Notes 6
and 7).
Maintenance and repair expenses and dry-dock amortization were $353
million, $256 million and $178 million in fiscal 2004, 2003 and 2002,
respectively.
In fiscal 2002 we reduced the carrying value of one of our ships by
recording an impairment charge of $20 million based on negotiations with
unrelated third parties and other available evidence.
NOTE 5 - Variable Interest Entity
In accordance with Financial Accounting Standards Board Interpretation
("FIN") No. 46, "Consolidation of Variable Interest Entities," we have
determined that we are carrying a loan, initially made in April 2001, to a ship
repair facility that is a variable interest
entity ("VIE"). Although we use this facility for some of our ship repair work,
we are not a "primary beneficiary" and, accordingly, this entity is not
consolidated in our financial statements. At November 30, 2004 and 2003, our
loan to this VIE, which is also our maximum exposure to loss, was $41 million.
NOTE 6 - Debt
Short-Term Borrowings
Short-term borrowings consisted of U.S. dollar and euro variable rate,
unsecured notes due to banks, bearing a weighted-average interest rate of 2.4%
and 1.3% at November 30, 2004 and 2003, respectively.
Long-Term Debt
Long-term debt consisted of the following (in millions):
November 30,
--------------------
2004(a) 2003(a)
---- ----
Secured
Floating rate notes, collateralized by four ships,
bearing interest from libor plus 1.13% to libor
plus 1.29% (3.0% to 3.6% at November 30, 2004) and
libor plus 1.25% to libor plus 1.29% (2.24% and 2.33%
at November 30, 2003), due through 2015 (b) $ 904 $ 631
Euro floating rate note, collateralized by one ship,
bearing interest at euribor plus 0.5% (2.75%
at November 30, 2004 and 2003), due through 2008 101 115
Fixed rate notes, collateralized by two ships, bearing
interest at 5.4% and 5.5%, due through 2016 (b) 381
Euro fixed rate note, collateralized by one ship,
bearing interest at 4.74%, due through 2012 183 182
Capitalized lease obligations, collateralized by
two ships, implicit interest at 3.66%, due
through 2005 110 115
Other 3 3
----- -----
Total Secured 1,682 1,046
----- -----
Unsecured
Fixed rate notes, bearing interest at 3.75% to 7.2%
and 3.75% to 7.7% at November 30, 2004 and 2003,
respectively, due through 2028 2,039 2,123
Euro floating rate notes, bearing interest at
euribor plus 0.25% to euribor plus 1.29%
(2.4% to 3.5% and 2.4% to 3.9% at November 30,
2004 and 2003, respectively), due through 2008 1,265 1,129
Euro revolving credit facilities, bearing interest
at euribor plus 0.50% and eurolibor plus 0.98%
(2.6% and 3.2% at November 30, 2003)(c) 300
Sterling fixed rate notes, bearing interest at 5.63%,
due in 2012 415 355
Euro fixed rate notes, bearing interest at 5.57%,
due in 2006 399 353
Floating rate note, bearing interest at libor plus
1.33% (2.45% at November 30, 2003)(d) 244
Other 36 44
Convertible notes, bearing interest at 2%, due in
2021, with first put option in 2005 600 600
Zero-coupon convertible notes, net of discount,
with a face value of $1.05 billion, due in 2021,
with first put option in 2006 561 541
Convertible notes, bearing interest at 1.75%, net of
discount, with a face value of $889 million, due in
2033, with first put option in 2008 575 575
------ ------
Total Unsecured 5,890 6,264
------ ------
7,572 7,310
Less portion due within one year (1,281) (392)
------ ------
$6,291 $6,918
====== ======
(a) All borrowings are in U.S. dollars unless otherwise noted. Euro and
sterling denominated notes have been translated to U.S. dollars at the
period-end exchange rates. At November 30, 2004 and 2003, 59%, 31% and 10%
of our debt was U.S. dollar, euro and sterling denominated, respectively,
including the effect of foreign currency swaps. In addition, at November
30, 2004, 68% of the interest cost on our long-term debt was fixed (60% at
November 30, 2003) and 32% was variable (40% at November 30, 2003),
including the effect of our interest rate swaps. The deeds of guarantee
between Carnival Corporation and Carnival plc, or alternatively standalone
guarantees in lieu of utilization of these deeds of guarantee, effectively
provide for the cross guaranteeing of all Carnival Corporation and
Carnival plc indebtedness and other monetary obligations (see Note 3).
(b) In February and May 2004, we borrowed an aggregate of $739 million to
finance a portion of the Diamond Princess and Sapphire Princess purchase
prices, pursuant to committed financing arrangements. These loans have
both a fixed and variable interest rate component, mature through May
2016, and had a weighted-average interest rate of 4.4% at November 30,
2004.
(c) In March 2004, Carnival plc repaid, prior to its maturity date, the
outstanding amounts under one of its subsidiary's $710 million revolving
credit facilities, which facilities were then terminated prior to their
September 2005 maturity dates.
(d) In March 2004, we extinguished $237 million of unsecured debt before its
July 2008 maturity date.
Convertible Notes
Carnival Corporation's 2% convertible notes ("2% Notes"), its zero-coupon
convertible notes ("Zero-Coupon Notes") and its 1.75% convertible notes ("1.75%
Notes") are convertible into 15.3 million shares, 17.4 million shares and a
maximum of 20.9 million shares (10.8 million shares during fiscal 2004),
respectively, of Carnival Corporation common stock.
The 2% Notes are convertible at a conversion price of $39.14 per share,
subject to adjustment, during any fiscal quarter for which the closing price of
the Carnival Corporation common stock is greater than $43.05 per share for a
defined duration of time in the preceding fiscal quarter. The conditions for
conversion of the 2% Notes were satisfied throughout fiscal 2004 and,
accordingly, the 2% Notes were convertible into Carnival Corporation common
stock commencing with the second quarter of fiscal 2004. A nominal amount of 2%
Notes were converted in fiscal 2004.
At November 30, 2004, the 2% Notes were classified as a current liability,
since we may be required to redeem the notes at the option of the holders on
April 15, 2005 at their face value plus any unpaid accrued interest. If the
noteholders do not exercise this option, then we will change the classification
of the 2% Notes to long-term debt, as the next optional redemption date does not
occur until April 15, 2008. We do not currently expect these noteholders to
exercise their put options, as the current market value of the 2% Notes is
greater than the redemption price.
The Zero-Coupon Notes have a 3.75% yield to maturity and are convertible
during any fiscal quarter for which the closing price of the Carnival
Corporation common stock is greater than a specified trigger price for a defined
duration of time in the preceding fiscal quarter. The trigger price commenced at
a low of $31.94 per share for the first quarter of fiscal 2002 and increases at
an annual rate of 3.75% thereafter, until maturity. Since the third quarter of
2003, the Zero-Coupon Notes have been convertible into Carnival Corporation
common stock for the quarter following that quarter in which it was convertible
as a result of Carnival Corporation's common stock achieving its target
conversion trigger price per share, which ranged from $33.77 for the 2003 third
quarter to $35.38 for the 2004 fourth quarter, for the requisite periods of
time. No Zero Coupon Notes were converted in fiscal 2003 or 2004.
The 1.75% Notes, which were issued in April 2003, are convertible at a
conversion price of $53.11 per share, subject to adjustment, during any fiscal
quarter for which the closing
price of the Carnival Corporation common stock is greater than a specified
trigger price for a defined duration of time in the preceding fiscal quarter.
During the fiscal quarters ending from August 31, 2003 through April 29, 2008,
the trigger price will be $63.73 per share. Thereafter, this conversion trigger
price increases each quarter based on an annual rate of 1.75%, until maturity.
In addition, holders may also surrender the 1.75% Notes for conversion if they
have been called for redemption or for other specified occurrences, including
the credit rating assigned to the 1.75% Notes being Baa3 or lower by Moody's
Investors Service and BBB- or lower by Standard & Poor's Rating Services, as
well as certain corporate transactions. The conditions for conversion of the
1.75% Notes have not been met since their issuance. The 1.75% Notes interest is
payable in cash semi-annually in arrears, commencing October 29, 2003 through
April 29, 2008. Effective April 30, 2008, the 1.75% Notes no longer require a
cash interest payment, but interest will accrete at a 1.75% yield to maturity.
Subsequent to April 29, 2008 and October 23, 2008, we may redeem all or a
portion of the 1.75% Notes and Zero-Coupon Notes, respectively, at their
accreted values and subsequent to April 14, 2008, we may redeem all or a portion
of our 2% Notes at their face value plus any unpaid accrued interest, subject to
the noteholders' right to convert.
In addition, on April 29 of 2008, 2013, 2018, 2023 and 2028 the 1.75%
noteholders, on April 15 of 2005, 2008 and 2011 the 2% noteholders and on
October 24 of 2006, 2008, 2011 and 2016 the Zero-Coupon noteholders may require
us to repurchase all or a portion of the outstanding 1.75% Notes and Zero-Coupon
Notes at their accreted values and the 2% Notes at their face value plus any
unpaid accrued interest.
Upon conversion, redemption or repurchase of the 1.75% Notes, the 2% Notes
and the Zero-Coupon Notes, we may choose to deliver Carnival Corporation common
stock, cash or a combination of cash and common stock with a total value equal
to the value of the consideration otherwise deliverable.
Revolving Credit Facilities
Costa has a 257.5 million euro ($342 million U.S. dollars at the November
30, 2004 exchange rate) unsecured euro revolving credit facility, which expires
in May 2006. At November 30, 2004, this entire facility was available.
In March 2004, Carnival plc entered into a 600 million euro ($798 million
U.S. dollar at the November 30, 2004 exchange rate) unsecured 364-day
multi-currency revolving credit facility, which currently bears interest at
eurolibor plus 30 basis points ("BPS"). This interest rate spread over the base
rate will vary based on changes to Carnival plc's senior unsecured credit
rating. This facility also has a nine BPS commitment fee on the undrawn portion
and expires in March 2005, but provides Carnival plc with the option to extend
the repayment date of the then existing outstanding borrowings to June 2006. At
November 30, 2004, this entire facility was available. In 2004, Carnival plc
established U.S. dollar and multi-currency commercial paper programs, which are
supported by this 600 million euro revolving credit facility and, accordingly,
any amounts outstanding under these commercial paper programs, none at November
30, 2004, will reduce the aggregate amount available under the facility.
Carnival Corporation's $1.4 billion unsecured multi-currency revolving
credit facility matures in June 2006. This facility currently bears interest at
USD Libor plus 20 BPS, which interest rate spread over the base rate will vary
based on changes to Carnival Corporation's senior unsecured debt ratings, and
provides for an undrawn facility fee of ten BPS. Carnival Corporation's U.S.
dollar commercial paper program is supported by this revolving credit facility
and, accordingly, any amounts outstanding under its commercial paper program,
none at November 30, 2004 and 2003, effectively reduce the aggregate amount
available under this facility. At November 30, 2004, the entire facility was
available.
These $1.4 billion and 600 million euro facilities and other of our loan
and derivative agreements, contain covenants that require us, among other
things, to maintain a minimum debt service coverage, minimum shareholders'
equity and limits our debt to capital and debt to equity ratios, and the amounts
of our secured assets and secured indebtedness. In addition, if our business
suffers a material adverse change or if other events of default under our loan
agreements are triggered, then pursuant to cross default acceleration clauses,
substantially all of our outstanding debt and derivative contract payables could
become due and the underlying facilities could be terminated. At November 30,
2004, we were in compliance with all of our debt covenants.
At November 30, 2004, the scheduled annual maturities of our long-term
debt was as follows (in millions):
Fiscal
------
2005 $1,281 (a)
2006 1,686 (a)
2007 1,058
2008 1,435 (a)
2009 141
Thereafter 1,971
------
$7,572
======
(a) Includes $600 million of Carnival Corporation's 2% Notes in 2005, $561
million of its Zero-Coupon Notes in 2006, and $575 million of its 1.75%
Notes in 2008, based in each case on the date of the noteholders' first
put option.
Debt issuance costs are generally amortized to interest expense using the
straight-line method, which approximates the effective interest method, over the
term of the notes or the noteholders first put option date, whichever is
earlier. In addition, all loan issue discounts are amortized to interest expense
using the effective interest rate method over the term of the notes.
NOTE 7 - Commitments
Ship Commitments
A description of our ships under contract for construction at November 30,
2004 was as follows (in millions, except passenger capacity):
Expected
Service Passenger Estimated Total Cost(b)
Brand and Ship Date(a) Capacity Euros Sterling USD
- -------------- ---- -------- ---------------------------------
USD Commitments
Carnival Cruise Lines
Carnival Valor(c) 12/04 2,974 $ 520
Carnival Liberty 7/05 2,974 460
Carnival Freedom 3/07 2,974 500
------ ------
Total Carnival Cruise Lines 8,922 1,480
------ ------
Princess
Crown Princess 6/06 3,110 500
Newbuild 4/07 3,100 525
------ ------
Total Princess 6,210 1,025
------ ------
Holland America Line
Noordam(c) 2/06 1,848 405
------ ------
Total USD Commitments 16,980 2,910
------ ------
Euro Commitments
AIDA
Newbuild(d) 5/07 2,030 (euro)315
Newbuild(d) 5/09 2,030 315
------ ------
Total AIDA 4,060 630
------ ------
Costa
Costa Concordia(d) 7/06 3,004 450
------ ------
Cunard
Queen Victoria(c) 12/07 1,982 340 95
------ ----- ------
Unassigned Contracts
Newbuild(e) 4/08 3,100 490
Newbuild(e) 6/08 3,000 485
------ ------
Total Unassigned Contracts 6,100 975
------ ------
Total Euro Commitments 15,146 (euro)2,395
------ ===========
Total Euro Commitments converted to USD(f) 3,190
Sterling Commitment
P&O Cruises
Arcadia(c) 4/05 1,968 (pound)238
------ ----------
Total Sterling Commitment 1,968 (pound)238
------ ==========
Total Sterling Commitment converted to USD(f) 455
------
Grand Total 34,094
======
Grand Total in USD $6,650
======
(a) The expected service date is the month in which the ship is currently
expected to begin its first revenue generating cruise.
(b) Estimated total cost of the completed ship includes the contract price
with the shipyard, design and engineering fees, capitalized interest,
construction oversight costs and various owner supplied items. All of our
ship construction contracts are with the Fincantieri shipyards in Italy,
except for AIDA's which are with the Meyer Werft shipyard in Germany.
(c) These construction contracts are denominated in euros, except for $95
million of the Queen Victoria costs, which are denominated in USD. The
euro denominated amounts, except for the Queen Victoria, have been fixed
into U.S. dollars or sterling by utilizing foreign currency swaps.
(d) These construction contracts are denominated in euros, which is the
functional currency of the cruise line which will operate the ship and,
therefore, we have not entered into foreign currency swaps to hedge these
commitments.
(e) We have not yet determined which of our North American or European brands
will be assigned these contracts. The brand assignments are expected to be
made by September 30, 2005.
(f) The estimated total costs of all contracts denominated in euros and
sterling have been translated into U.S. dollars using the November 30,
2004 exchange rate.
In connection with our cruise ships under contract for construction, we
have paid $429 million through November 30, 2004 and anticipate paying the
remaining estimated total costs as follows: $1.54 billion, $1.40 billion, $1.33
billion, $1.60 billion and $357 million in fiscal 2005 through 2009,
respectively.
Subsequent to November 30, 2004, Costa entered into a ship construction
contract with Fincantieri for a 3,000 passenger ship, which has an estimated
all-in cost of 475 million euros, and is expected to enter service in June 2007.
Operating Leases
Rent expense under our operating leases, primarily for office and
warehouse space, was $50 million, $48 million and $15 million in fiscal 2004,
2003 and 2002, respectively. At November 30, 2004, minimum annual rentals for
our operating leases, with initial or remaining terms in excess of one year,
were as follows (in millions): $51, $37, $25, $21, $18 and $79 in fiscal 2005
through 2009 and thereafter, respectively.
Port Facilities and Other
At November 30, 2004, we had commitments through 2052, with initial or
remaining terms in excess of one year, to pay minimum amounts for our annual
usage of port facilities and other contractual commitments as follows (in
millions): $135, $92, $73, $72, $66 and $368 in fiscal 2005 through 2009 and
thereafter, respectively.
NOTE 8 - Contingencies
Litigation
In 2002, two actions (collectively, the "Facsimile Complaints") were filed
against Carnival Corporation on behalf of purported classes of persons who
received unsolicited advertisements via facsimile, alleging that Carnival
Corporation and other defendants distributed unsolicited advertisements via
facsimile in contravention of the U.S. Telephone Consumer Protection Act. The
plaintiffs seek to enjoin the sending of unsolicited facsimile advertisements
and statutory damages. The advertisements referred to in the Facsimile
Complaints that reference a Carnival Cruise Line product were not sent by
Carnival Corporation, but rather were distributed by a professional faxing
company at the behest of travel agencies. We do not advertise directly to the
traveling public through the use of facsimile transmission. The ultimate
outcomes of the Facsimile Complaints cannot be determined at this time. We
believe that we have meritorious defenses to these claims and, accordingly, we
intend to vigorously defend against these actions.
In February 2001, Holland America Line-USA, Inc. ("HAL-USA"), our
wholly-owned subsidiary, received a grand jury subpoena requesting that it
produce documents and records relating to the air emissions from Holland America
Line ships in Alaska. HAL-USA responded to the subpoena. The ultimate outcome of
this matter cannot be determined at this time.
In August 2002, Holland America Line's Ryndam discharged wastewater from
the ship while in Juneau, Alaska. In December 2004, a plea agreement between HAL
Maritime Ltd. ("HAL Maritime"), a wholly-owned subsidiary, and the U.S.
government was entered in which HAL Maritime pled guilty to a single
misdemeanor. Pursuant to the plea agreement, HAL Maritime paid a $0.2 million
criminal fine, a $0.5 million community service payment, and agreed to expend
$1.3 million toward the implementation of a Focused Environmental Compliance
Plan. The agreement also provides for a three-year probationary term, with the
ability to request early termination of probation after two years. HAL Maritime
also paid a civil fine of $65,000 to the State of Alaska as a result of the same
event.
In March 2004, Holland America Line notified the United States and
Netherlands governmental authorities that one of its chief engineers had
admitted to improperly processing bilge water on the Noordam. A subsequent
internal investigation has determined that the improper operation may have begun
in January 2004 and may have continued sporadically through March 4, 2004.
Holland America Line and three shipboard engineers have received grand jury
subpoenas from the Office of the U.S. Attorney in Tampa, Florida. If the
government investigations result in charges being filed, a judgment could
include, among other forms of relief, fines and debarment from federal
contracting, which would prohibit operations in Glacier Bay National Park and
Preserve ("Glacier Bay") during the period of debarment. The ultimate outcome of
this matter cannot be determined at this time.
In August 2004, Holland America Line was notified by the National Park
Service ("NPS") that the Volendam and Statendam may have violated opacity
standards while operating in Glacier Bay. In November 2004, NPS notified Holland
America Line in separate letters that a Violation of Record would be entered in
the permanent park files for each ship. Holland America Line intends to
vigorously oppose the decision in each case. The ultimate outcome of these
matters cannot be determined at this time. However, if the Violations of Record
are not reversed and either ship receives a second such violation within three
years, that ship may be barred from entry into Glacier Bay.
If Holland America Line were to lose its Glacier Bay permits as a result
of the Ryndam plea or the Noordam investigations, or if the Statendam or
Volendam were prohibited from entering Glacier Bay, we would not expect the
impact on our financial statements to be
material to us since we believe there are additional attractive alternative
destinations in Alaska and elsewhere that can be substituted for Glacier Bay.
Costa has instituted arbitration proceedings in Italy to confirm the
validity of its decision not to deliver its ship, the Costa Classica, to the
shipyard of Cammell Laird Holdings PLC ("Cammell Laird") under a 79 million euro
denominated contract for the conversion and lengthening of the ship in November
2000. Costa has also given notice of termination of the contract. In October
2004 the arbitration tribunal decided to increase the scope of work of the
technical experts by introducing new demands for reply in the experts' report.
It is expected that the arbitration tribunal's decision will be made in the
second half of 2005 at the earliest. In the event that an award is given in
favor of Cammell Laird, the amount of damages, which Costa would have to pay, if
any, is not currently determinable. The ultimate outcome of this matter cannot
be determined at this time.
In April 2003, Festival Crociere S.p.A. ("Festival") commenced an action
against the European Commission (the "Commission") in the Court of First
Instance of the European Communities in Luxembourg seeking to annul the
Commission's antitrust approval of the DLC transaction (the "Festival Action").
We have been granted leave to intervene in the Festival Action and filed a
Statement in Intervention with the court. Festival was declared bankrupt in May
2004 and Festival did not submit observations on our Statement in Intervention.
A date for an oral hearing will be set in due course, unless Festival withdraws
its action. A successful third party challenge of an unconditional Commission
clearance decision would be unprecedented, and based on a review of the law and
the factual circumstances of the DLC transaction, as well as the Commission's
approval decision in relation to the DLC transaction, we believe that the
Festival Action will not have a material adverse effect on the companies or the
DLC transaction. However, the ultimate outcome of this matter cannot be
determined at this time.
In the normal course of our business, various other claims and lawsuits
have been filed or are pending against us. Most of these claims and lawsuits are
covered by insurance and, accordingly, the maximum amount of our liability is
typically limited to our self-insurance retention levels. However, the ultimate
outcome of these claims and lawsuits which are not covered by insurance cannot
be determined at this time.
Contingent Obligations
At November 30, 2004, Carnival Corporation had contingent obligations
totaling $1.08 billion to participants in lease out and lease back type
transactions for three of its ships. At the inception of the leases, the entire
amount of the contingent obligations was paid by Carnival Corporation to major
financial institutions to enable them to directly pay these obligations.
Accordingly, these obligations were considered extinguished, and neither the
funds paid to the financial institutions nor the contingent obligations have
been included on our balance sheets. Carnival Corporation would only be required
to make any payments under these contingent obligations in the remote event of
nonperformance by these financial institutions, all of which have long-term
credit ratings of AAA or AA. In addition, Carnival Corporation obtained a direct
guarantee from another AAA rated financial institution for $294 million of the
above noted contingent obligations, thereby further reducing the already remote
exposure to this portion of the contingent obligations. If the major financial
institutions' credit ratings fall below AA-, Carnival Corporation would be
required to move a majority of the funds from these financial institutions to
other highly-rated financial institutions. If Carnival Corporation's credit
rating falls below BBB, it would be required to provide a standby letter of
credit for $88 million, or alternatively provide mortgages in the aggregate
amount of $88 million on two of its ships.
In the unlikely event that Carnival Corporation were to terminate the
three lease agreements early or default on our obligations, it would, as of
November 30, 2004, have to pay a total of $177 million in stipulated damages. As
of November 30, 2004, $186 million of standby letters of credit have been issued
by a major financial institution in order to provide further security for the
payment of these contingent stipulated damages. In addition, in 2004 Carnival
Corporation entered into a five year $170 million unsecured revolving credit
facility, guaranteed by Carnival plc, which is being used to support these
standby letters of credit through the issuance of a back-up letter of credit. In
the event we were to default under covenants in our loan agreements, any amounts
outstanding under the $170 million unsecured revolving credit facility would be
due and payable, and we would be required to
post cash collateral to support the stipulated damages standby letters of credit
in excess of $170 million. Between 2017 and 2022, we have the right to exercise
options that would terminate these transactions at no cost to us. As a result of
these three transactions, we have $39 million and $42 million of deferred income
recorded on our balance sheets as of November 30, 2004 and 2003, respectively,
which is being amortized to nonoperating income through 2022.
Some of the debt agreements that we enter into include indemnification
provisions that obligate us to make payments to the counterparty if certain
events occur. These contingencies generally relate to changes in taxes, changes
in laws that increase lender capital costs and other similar costs. The
indemnification clauses are often standard contractual terms and were entered
into in the normal course of business. There are no stated or notional amounts
included in the indemnification clauses and we are not able to estimate the
maximum potential amount of future payments, if any, under these indemnification
clauses. We have not been required to make any material payments under such
indemnification clauses in the past and, under current circumstances, we do not
believe a request for material future indemnification is probable.
NOTE 9 - Income and Other Taxes
We believe that substantially all of our income in fiscal 2004, 2003 and
2002, with the exception of our U.S. source income principally from the
transportation, hotel and tour businesses of Holland America Tours and Princess
Tours, is exempt from U.S. federal income taxes. If we were found not to qualify
for exemption pursuant to applicable income tax treaties or under the Internal
Revenue Code or if the income tax treaties or Internal Revenue Code were to be
changed in a manner adverse to us, a portion of our income would become subject
to taxation by the U.S. at higher than normal corporate tax rates.
In August 2003, final regulations under Section 883 of the Internal
Revenue Code were published in the Federal Register. Section 883 is the primary
provision upon which we rely to exempt certain of our international ship
operation earnings from U.S. income taxes. The final regulations list elements
of income that are not considered to be incidental to ship operations and, to
the extent earned within the U.S., are subject to U.S. income tax. Among the
items identified in the final regulations are income from the sale of air
transportation, shore excursions and pre-and post cruise land packages. These
rules will first be effective for us in fiscal 2005.
AIDA, through October 2004, Cunard, Ocean Village, P&O Cruises, P&O
Cruises Australia and Swan Hellenic are all strategically and commercially
managed in the UK and have elected to enter the UK tonnage tax regime.
Accordingly, these operations pay UK corporation tax on shipping profits
calculated by reference to the net tonnage of qualifying vessels. Income not
considered to be shipping profits is taxable under the normal UK income tax
rules. We believe that substantially all of the income attributable to these
brands constitutes shipping profits and, accordingly, UK income tax expense from
these operations has been and is expected to be minimal.
Some of our subsidiaries, including AIDA, a subsidiary of Costa commencing
in November 2004, Costa, Holland America Tours, Princess Tours and other of our
non-shipping activities, are subject to foreign and/or U.S. federal and state
income taxes. In fiscal 2004 and 2003, we recognized a net $47 million and $29
million income tax expense, primarily related to these operations. In 2002, we
recognized a net $57 million income tax benefit primarily due to an Italian
investment incentive law, which allowed Costa to receive a $51 million income
tax benefit based on contractual expenditures during 2002 on the construction of
a new ship. At November 30, 2004, Costa had a remaining net deferred tax asset
of approximately $13 million relating primarily to the tax benefit of the net
operating loss carryforwards arising from this incentive law, which expire in
2007.
We do not expect to incur income taxes on future distributions of
undistributed earnings of foreign subsidiaries and, accordingly, no deferred
income taxes have been provided for the distribution of these earnings.
In addition to or in place of income taxes, virtually all jurisdictions
where our ships call, impose taxes based on passenger counts, ship tonnage or
some other measure. These taxes, other than those directly charged to and/or
collected from passengers by us, are
recorded as operating expenses in the accompanying statements of operations.
NOTE 10 - Shareholders' Equity
Carnival Corporation's articles of incorporation authorize its Board of
Directors, at its discretion, to issue up to 40 million shares of its preferred
stock and Carnival plc has 100,000 authorized preference shares. At November 30,
2004 and 2003, no Carnival Corporation preferred stock had been issued and only
a nominal amount of Carnival plc preferred shares had been issued.
In October 2004, the Board of Directors authorized the repurchase of
either Carnival Corporation common stock and/or Carnival plc ordinary shares up
to an aggregate of $1 billion commencing in 2005, subject to certain repurchase
restrictions on Carnival plc shares.
At November 30, 2004, there were 88.4 million shares of Carnival
Corporation common stock reserved for issuance pursuant to its convertible notes
and its employee benefit and dividend reinvestment plans. In addition, Carnival
plc shareholders have authorized 3.2 million ordinary shares for future issuance
under its employee benefit plans.
At November 30, 2004 and 2003 accumulated other comprehensive income was
as follows (in millions):
2004 2003
---- ----
Cumulative foreign currency translation adjustments, net $588 $190
Unrealized gain on marketable securities 1
Minimum pension liability adjustments (17) (14)
Unrealized losses on cash flow derivative hedges, net (30) (17)
---- ----
$541 $160
==== ====
NOTE 11 - Financial Instruments
We estimated the fair value of our financial instruments through the use
of public market prices, quotes from financial institutions and other available
information. Considerable judgment is required in interpreting data to develop
estimates of fair value and, accordingly, amounts are not necessarily indicative
of the amounts that we could realize in a current market exchange. Our financial
instruments are not held for trading or other speculative purposes.
Cash and Cash Equivalents and Short-Term Investments
The carrying amounts of our cash and cash equivalents approximate their
fair values due to their short maturities or variable interest rates.
Other Assets
At November 30, 2004 and 2003, long-term other assets included marketable
securities held in rabbi trusts for certain of our nonqualified benefit plans
and notes and other receivables. These assets had carrying and fair values of
$240 million and $227 million at November 30, 2004, respectively, and carrying
and fair values of $200 million at November 30, 2003. Fair values were based on
public market prices, estimated discounted future cash flows or estimated fair
value of collateral.
Debt
The fair values of our non-convertible debt and convertible notes were
$6.32 billion and $2.53 billion, respectively, at November 30, 2004 and $5.83
billion and $1.92 billion at November 30, 2003. These fair values were greater
than the related carrying values by $100 million and $790 million, respectively,
at November 30, 2004 and by $140 million and $205 million at November 30, 2003.
The net difference between the fair value of our debt and its carrying value was
due primarily to our issuance of debt obligations at fixed interest rates that
are above market interest rates in existence at the measurement dates. The net
difference between the fair value of our convertible notes is largely due to the
impact of changes in the Carnival Corporation common stock value on the value of
our convertible notes
on those dates. The fair values of our unsecured fixed rate public notes,
convertible notes, sterling bonds and unsecured 5.57% euro notes were based on
their public market prices. The fair values of our other debt were estimated
based on appropriate market interest rates being applied to this debt.
Foreign Currency Swaps and Other Hedging Instruments
We have foreign currency swaps that are designated as foreign currency
fair value hedges for three of our euro denominated shipbuilding contracts (see
Note 7). At November 30, 2004 and 2003, the fair value of the foreign currency
swaps related to our shipbuilding commitments was an unrealized gain of $219
million and $363 million, respectively. These foreign currency swaps mature
through 2006.
We have foreign currency swaps totaling $887 million that are effectively
designated as hedges of our net investments in foreign subsidiaries, which have
euro and sterling denominated functional currencies. These foreign currency
swaps were entered into to effectively convert $251 million and $466 million of
U.S. dollar denominated debt into sterling debt and euro debt, respectively, and
$170 million of euro denominated debt into sterling debt. At November 30, 2004,
the fair value of these foreign currency swaps was an unrealized loss of $137
million, which is included in the cumulative translation adjustment component of
AOCI. These currency swaps mature through 2012.
The fair values of these foreign currency swaps were estimated based on
prices quoted by financial institutions for these instruments.
Finally, we have designated $1.1 billion of our outstanding euro and
sterling debt and other obligations, which are nonderivatives and mature through
2012, as hedges of our net investments in foreign operations and, accordingly,
have included $194 million of foreign currency transaction losses in the
cumulative translation adjustment component of AOCI at November 30, 2004.
Interest Rate Swaps
We have interest rate swap agreements designated as fair value hedges
whereby we receive fixed interest rate payments in exchange for making variable
interest rate payments. At November 30, 2004 and 2003, these interest rate swap
agreements effectively changed $929 million and $1.19 billion of fixed rate debt
to Libor-based floating rate debt.
In addition, we also have interest rate swap agreements designated as cash
flow hedges whereby we receive variable interest rate payments in exchange for
making fixed interest rate payments. At November 30, 2004 and 2003, these
interest rate swap agreements effectively changed $828 million and $760 million,
respectively, of euribor floating rate debt to fixed rate debt.
These interest rate swap agreements mature through 2008. At November 30,
2004 and 2003, the fair value of our interest rate swaps designated as cash flow
hedges was an unrealized loss of $22 million and $6 million, respectively. The
fair values of our interest rate swap agreements were estimated based on prices
quoted by financial institutions for these instruments.
NOTE 12 - Segment Information
Our cruise segment included all of our cruise brands, which have been
aggregated as a single reportable segment based on the similarity of their
economic and other characteristics, including the products and services they
provide. Our other segment primarily represents the transportation, hotel and
tour operations of Holland America Tours and Princess Tours, and the business to
business travel agency operations of P&O Travel Ltd., the latter two since
completion of the DLC transaction on April 17, 2003. The significant accounting
policies of our segments are the same as those described in Note 2 -"Summary of
Significant Accounting Policies." Information for our cruise and other segments
as of and for the years ended November 30, was as follows (in millions):
Selling
and Depreciation Operating Capital
Operating adminis- and income expend- Total
Revenues(a) expenses trative amortization (loss) itures assets
----------- -------- ------- ------------ ------ ------ ------
2004
Cruise $ 9,427 $ 5,247 $1,231 $ 791 $ 2,158 $ 3,512 $27,136
Other 398 308 54 21 15 74 500(b)
Intersegment
elimination (98) (98)
------- ------- ------ ------ ------- ------- -------
$ 9,727 $ 5,457 $1,285 $ 812 $ 2,173 $ 3,586 $27,636
======= ======= ====== ====== ======= ======= =======
2003
Cruise $ 6,459 $ 3,624 $ 896 $ 568 $ 1,371 $ 2,454 $24,090
Other 345 276(c) 40(c) 17 12 62 401(b)
Intersegment
elimination (86) (86)
------- ------- ------ ------ ------- ------- -------
$ 6,718 $ 3,814 $ 936 $ 585 $ 1,383 $ 2,516 $24,491
======= ======= ====== ====== ======= ======= =======
2002
Cruise $ 4,244 $ 2,222 $ 577 $ 371 $ 1,055(d) $ 1,949 $12,120
Other 176 145 32 11 (13) 37 215(b)
Intersegment
elimination (37) (37)
------- ------- ------ ------ ------- ------- -------
$ 4,383 $ 2,330 $ 609 $ 382 $ 1,042 $ 1,986 $12,335
======= ======= ====== ====== ======= ======= =======
(a) Other segment revenues primarily included revenues for the cruise portion
of a tour, when a cruise is sold along with a land tour package by Holland
America Tours or Princess Tours, and shore excursion and port hospitality
services provided to cruise passengers by these tour companies. These
intersegment revenues, which are included in full in the cruise segment,
are eliminated from the other segment revenues in the line "Intersegment
elimination."
(b) Other segment assets primarily included hotels and lodges in Alaska and
the Canadian Yukon, luxury dayboats offering tours to a glacier in Alaska
and on the Yukon River, motorcoaches used for sightseeing and charters in
the States of Washington and Alaska, British Columbia, Canada and the
Canadian Yukon and private, domed rail cars, which run on the Alaska
Railroad between Anchorage and Fairbanks.
(c) Operating and selling expenses in 2003 have been reclassified to conform
to the 2004 presentation.
(d) Cruise operating income included an impairment charge of $20 million in
2002.
Foreign revenues for our cruise brands represent sales generated from
outside the U.S. primarily by foreign tour operators and foreign travel
agencies. Substantially all of these foreign revenues are from the UK, Germany,
Italy, Canada, France, Australia, Spain, Switzerland and Brazil. Substantially
all of our long-lived assets are located outside of the U.S. and consist
principally of our ships and ships under construction.
Revenue information by geographic area for fiscal 2004, 2003 and 2002 was
as follows (in millions):
2004 2003 2002
---- ---- ----
U.S. $5,788 $4,513 $3,304
Continental Europe 1,570 971 545
UK 1,341 724 158
Canada 562 231 167
Others 466 279 209
------ ------ ------
$9,727 $6,718 $4,383
====== ====== ======
NOTE 13 - Benefit Plans
Stock Option Plans
We have stock option plans primarily for supervisory and management level
employees and members of our Board of Directors. The Carnival Corporation and
Carnival plc plans are
administered by a committee of four of our independent directors (the
"Committee"), that determines who is eligible to participate, the number of
shares for which options are to be granted and the amounts that may be exercised
within a specified term. The Carnival Corporation and Carnival plc option
exercise price is generally set by the Committee at 100% of the fair market
value of the common stock/ordinary shares on the date the option is granted.
Substantially all Carnival Corporation options granted during fiscal 2004, 2003
and 2002 and Carnival plc options granted in 2004 and 2003 were granted at an
exercise price per share equal to the fair market value of the Carnival
Corporation common stock and Carnival plc ordinary shares on the date of grant.
Carnival Corporation employee options generally vest evenly over five years and
have a ten-year term. Carnival plc employee options generally vest at the end of
three years and have a ten-year term. Carnival Corporation director options
granted subsequent to fiscal 2000 vest evenly over five years and have a
ten-year term. At November 30, 2004, Carnival Corporation had 31.7 million
shares and Carnival plc had 3.2 million shares, which were available for future
grants under the option plans.
A combined summary of the activity and status of the Carnival Corporation
and Carnival plc stock option plans was as follows:
Weighted-
Average Exercise Price Number of Options
Per Share Years Ended November 30,
---------------------------- -----------------------------------------------
2004 2003 2002 2004 2003 2002
---- ---- ---- ---- ---- ----
Outstanding options-
beginning of year $28.79 $29.26 $28.95 19,297,979 11,828,958 12,774,293
Carnival plc
outstanding options
at April 17, 2003(a) $19.64 5,523,013
Options granted $47.52 $30.88 $26.54 5,306,802(c) 5,464,109 33,000
Options exercised(b) $25.23 $17.35 $14.35 (5,686,484)(c,d) (2,919,554) (404,615)
Options canceled $30.17 $28.64 $32.80 (714,355) (598,547) (573,720)
----------- ----------- -----------
Outstanding options-
end of year $35.61 $28.79 $29.26 18,203,942(e) 19,297,979(e) 11,828,958
=========== =========== ===========
Options exercisable-
end of year $32.05 $27.68 $28.71 5,920,890(f) 7,848,335(f) 4,775,894
=========== =========== ===========
(a) All Carnival plc unvested options outstanding on the date the DLC
transaction was completed vested fully on such date, except for 1.3
million options, which were granted on April 15, 2003.
(b) Included 2.0 million and 1.8 million Carnival plc options in 2004 and
2003, of which 0.8 million and 1.0 million had a sterling denominated
exercise price, respectively.
(c) During 2004, as a result of Costa being transferred to the Carnival plc
side of the DLC structure, options to purchase 973,000 shares of Carnival
Corporation vested immediately and their termination dates were
accelerated to 2004. These vested options, along with all of Costa
employees' already exercisable options, were exercised in 2004 to avoid
unduly burdensome taxes. In 2004, Carnival plc granted 1.1 million options
at an exercise price equal to the fair market value of Carnival plc
ordinary shares on the grant date, to replace Costa options, whose
termination was accelerated to 2004. See Note 2.
(d) On December 1, 2003, as a result of the Princess cruise operations being
transferred to the Carnival Corporation side of the DLC structure, options
to purchase 657,000 shares of Carnival plc vested immediately, and the
termination dates on all Princess employees' Carnival plc exercisable
options were accelerated to 2004. All such changes have been made pursuant
to the original terms of the Carnival plc plan. In January 2005, Carnival
Corporation granted 1.4 million options at an exercise price per share
equal to the fair market value of Carnival Corporation common stock on the
grant date, to replace those Princess options which terminated in 2004
prior to their original termination dates.
(e) Included 3.3 million and 3.6 million of Carnival plc options at a
weighted-average exercise price of $38.42 and $20.89 per share, based on
the November 30, 2004 and 2003 U.S. dollar to sterling exchange rate,
respectively.
(f) Included 0.9 million and 2.2 million of Carnival plc options at a
weighted-average exercise price of $22.15 and $18.06 per share, based on
the November 30, 2004 and 2003 U.S. dollar to sterling exchange rate,
respectively.
Combined information with respect to outstanding and exercisable Carnival
Corporation and Carnival plc stock options at November 30, 2004 was as follows:
Options Outstanding Options Exercisable
-------------------------------------- ----------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Remaining Exercise Exercise
Price Range Shares Life (Years) Price Shares Price
- ----------- -------------------------------------- ----------------------
$ 1.94-$ 2.25 30,980 (a) $ 2.07 30,980 $ 2.07
$10.59-$15.00 46,071 4.0 $13.11 46,071 $13.11
$16.28-$23.03 2,512,830 6.4 $21.48 1,358,328 $20.85
$24.36-$27.88 3,388,674 7.3 $26.98 1,246,686 $26.22
$28.21-$34.88 4,840,230 7.6 $31.95 1,117,990 $30.69
$36.72-$41.34 102,000 3.8 $38.08 102,000 $38.09
$43.56-$48.56 3,393,814 6.1 $44.58 2,018,835 $44.51
$48.69-$54.46 3,889,343 9.7 $49.46
---------- --- ------ --------- -------
Total 18,203,942 7.5 $35.61 5,920,890 $32.05
========== === ====== ========= ======
(a) These stock options do not have an expiration date.
Carnival Corporation Nonvested Stock
Carnival Corporation has issued nonvested stock to a few officers. These
shares have the same rights as Carnival Corporation common stock, except for
transfer restrictions and forfeiture provisions. During fiscal 2004, 2003 and
2002, 160,000 shares, 455,000 shares and 150,000 shares, respectively, of
Carnival Corporation common stock were issued, which were valued at $7 million,
$14 million and $4 million, respectively. Unearned stock compensation was
recorded within shareholders' equity at the date of award based on the quoted
market price of the Carnival Corporation common stock on the date of grant and
is amortized to expense using the straight-line method from the grant date
through the earlier of the vesting date or the officers' estimated retirement
date. These shares either have three or five-year cliff vesting or vest evenly
over five years after the grant date. As of November 30, 2004 and 2003 there
were 1,065,000 shares and 1,055,000 shares, respectively, issued under the plan,
which remained to be vested.
Defined Benefit Pension Plans
We have several defined benefit pension plans, which cover some of our
shipboard and shoreside employees. The U.S. and UK shoreside employee plans are
closed to new membership and are funded at or above the level required by U.S.
or UK regulations. The remaining defined benefit plans are primarily unfunded.
In determining our plans' benefit obligations at November 30, 2004, we used
assumed weighted-average discount rates of 5.5% and 5.2% for our U.S. and
foreign plans, respectively. The net liabilities related to the obligations
under these single employer defined benefit pension plans are not material.
A minimum pension liability adjustment is required when the actuarial
present value of accumulated benefits exceeds plan assets and accrued pension
liabilities. At November 30, 2004 and 2003, our single employer plans had
aggregated additional minimum pension liability adjustments, less allowable
intangible assets, of $17 million and $14 million, respectively, which are
included in AOCI.
In addition, P&O Cruises participated in a Merchant Navy Ratings Pension
Fund ("MNRPF"), which is a defined benefit multiemployer pension plan that was
available to their shipboard non-officers. This plan has a significant funding
deficit and has been closed to further benefit accrual since prior to the
completion of the DLC transaction. P&O Cruises, along with other unrelated
employers, are making payments into this plan under a non-binding Memorandum of
Understanding to reduce the deficit. Accordingly, at November 30, 2004 and 2003,
we had recorded a long-term pension liability of $22 million and $19 million,
which represented our estimate of the present value of the entire liability due
by us under this plan.
P&O Cruises, Princess and Cunard also participate in an industry-wide
British Merchant
Navy Officers Pension Fund ("MNOPF"), which also is a defined benefit
multiemployer pension plan that is available to certain of their shipboard
British officers. The MNOPF is divided into two sections, the "New Section" and
the "Old Section," each of which covers a different group of participants, with
the Old Section closed to further benefit accrual and the New Section only
closed to new membership. Holland America Line also participates in a Dutch
shipboard officers defined benefit multiemployer pension plan. Our multiemployer
yearly pension fund plan expenses are based on the amount of contributions we
are required to make annually into the plans.
As of March 31, 2003, the date of the most recent formal actuarial
valuation prepared by the MNOPF's actuary, the New Section of the MNOPF was
estimated to have a fund deficit of approximately 200 million sterling, or $380
million, assuming a 7.8% discount rate. At November 30, 2004, our external
actuary informally updated the March 31, 2003 valuation and estimated that the
New Section deficit was approximately 760 million sterling, or $1.44 billion,
assuming a 5.2% discount rate. The amount of the fund deficit could vary
considerably if different assumptions and/or estimates were used in its
calculation. Our share of any liability with respect to the fund's deficit is
uncertain, and the MNOPF's participating employers are seeking guidance from the
court, which is expected to be given during the second quarter of 2005.
Substantially all of any MNOPF fund deficit liability which we may have
relates to P&O Cruises and Princess liabilities, which existed prior to the DLC
transaction. However, since the MNOPF is a multiemployer plan and it is not
probable that we will withdraw from the plan nor is our share of the liability
certain, we are required to record our MNOPF plan expenses, including any
contributions to fund the deficit, as they are contributed, instead of as a
Carnival plc acquisition liability that existed at the DLC transaction date. It
is currently expected that deficit funding contributions, if any, will be
required to be paid over at least ten years. Finally, if it is determined that
we are responsible for a portion of the MNOPF deficit, we expect that we will
have to record an expense in the amount of our estimated future contributions in
the period that such amount can be reasonably estimated. We have recently
received indicative calculations from the MNOPF setting out our share of the
fund's deficit based on different possible court outcomes. These indicative
calculations, which could vary depending on the court's final determination and
also other factors, such as the ability of other employers to settle their
liabilities, show that our share of the deficit would be between $26 million and
$113 million, based on the estimated deficit of $1.44 billion.
Total expense for all of our defined benefit pension plans, including our
multiemployer plans, was $18 million, $17 million and $11 million in fiscal
2004, 2003 and 2002, respectively.
Defined Contribution Plans
We have several defined contribution plans available to most of our
employees. We contribute to these plans based on employee contributions, salary
levels and length of service. Total expense relating to these plans was $12
million in each of fiscal 2004 and 2003 and $8 million in fiscal 2002.
NOTE 14 - Earnings Per Share
Our basic and diluted earnings per share were computed as follows (in
millions, except per share data):
Years Ended November 30,
--------------------------------
2004 2003 2002
---- ---- ----
Net income $1,854 $1,194 $1,016
Interest on dilutive convertible notes 49 43 35
------ ------ ------
Net income for diluted earnings
per share $1,903 $1,237 $1,051
====== ====== ======
Weighted-average common and ordinary
shares outstanding 802 718 587
Dilutive effect of convertible notes 44 39 33
Dilutive effect of stock plans 5 2 1
------ ------ ------
Diluted weighted-average shares
outstanding 851 759 621
====== ====== =======
Basic earnings per share $2.31 $1.66 $1.73
===== ===== =====
Diluted earnings per share $2.24 $1.63 $1.69
===== ===== ======
The weighted-average shares outstanding for the year ended November 30,
2003 includes the pro rata Carnival plc shares since April 17, 2003.
Options to purchase 6.0 million, 8.4 million and 6.0 million shares for
fiscal 2004, 2003 and 2002, respectively, were excluded from our diluted
earnings per share computation since the effect of including them was
anti-dilutive.
NOTE 15 - Supplemental Cash Flow Information
Total cash paid for interest was $250 million, $156 million and $110
million in fiscal 2004, 2003 and 2002, respectively. In addition, cash paid for
income taxes was $8 million in fiscal 2004 and $20 million in fiscal 2003.
Finally, we received a $60 million note on the sale of Holland America Line's
Nieuw Amsterdam in fiscal 2002, which represented a noncash investing activity.
Report of Independent Registered Certified Public Accounting Firm To the Boards
of Directors and Shareholders of Carnival Corporation and Carnival plc:
We have completed an integrated audit of Carnival Corporation & plc's November
30, 2004 consolidated financial statements and of its internal control over
financial reporting as of November 30, 2004 and audits of its 2003 and 2002
consolidated financial statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Our opinions, based on our
audits, are presented below.
Consolidated financial statements
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, cash flows and shareholders' equity
present fairly, in all material respects, the financial position of Carnival
Corporation & plc (comprising Carnival Corporation and Carnival plc and their
respective subsidiaries, the "Company") at November 30, 2004 and November 30,
2003, and the results of their operations and their cash flows for each of the
three years in the period ended November 30, 2004 in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with the
standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit of financial statements includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
Internal control over financial reporting
Also, in our opinion, management's assessment, included in the accompanying
Management's Report on Internal Control Over Financial Reporting appearing under
Item 9A, that the Company maintained effective internal control over financial
reporting as of November 30, 2004 based on criteria established in Internal
Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission ("COSO"), is fairly stated, in all
material respects, based on those criteria. Furthermore, in our opinion, the
Company maintained, in all material respects, effective internal control over
financial reporting as of November 30, 2004, based on criteria established in
Internal Control - Integrated Framework issued by the COSO. The Company's
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express opinions on
management's assessment and on the effectiveness of the Company's internal
control over financial reporting based on our audit. We conducted our audit of
internal control over financial reporting in accordance with the standards of
the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in
all material respects. An audit of internal control over financial reporting
includes obtaining an understanding of internal control over financial
reporting, evaluating management's assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing such other
procedures as we consider necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company's assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Miami, Florida
February 11, 2005
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Cautionary Note Concerning Factors That May Affect Future Results
Some of the statements contained in this 2004 Annual Report are
"forward-looking statements" that involve risks, uncertainties and assumptions
with respect to us, including some statements concerning future results,
outlook, plans, goals and other events which have not yet occurred. These
statements are intended to qualify for the safe harbors from liability provided
by Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. You can find many, but not all, of these statements by
looking for words like "will," "may," "believes," "expects," "anticipates,"
"forecast," "future," "intends," "plans," and "estimates" and for similar
expressions.
Because forward-looking statements involve risks and uncertainties, there
are many factors that could cause our actual results, performance or
achievements to differ materially from those expressed or implied in this 2004
Annual Report. Forward-looking statements include those statements which may
impact the forecasting of our earnings per share, net revenue yields, booking
levels, pricing, occupancy, operating, financing and/or tax costs, costs per
available lower berth day ("ALBD"), estimates of ship depreciable lives and
residual values, outlook or business prospects. These factors include, but are
not limited to, the following:
- risks associated with the DLC structure, including the uncertainty of its
tax status;
- general economic and business conditions, which may impact levels of
disposable income of consumers and net revenue yields for our cruise brands;
- conditions in the cruise and land-based vacation industries, including
competition from other cruise ship operators and providers of other vacation
alternatives and increases in capacity offered by cruise ship and land-based
vacation alternatives;
- risks associated with operating internationally;
- the international political and economic climate, armed conflicts, terrorist
attacks and threats thereof, availability of air service, other world events
and adverse publicity, and their impact on the demand for cruises;
- accidents and other incidents affecting the health, safety, security and
vacation satisfaction of passengers, including machinery and equipment
failures, which could cause the cancellation of a cruise or a series of
cruises;
- our ability to implement our shipbuilding programs and brand strategies and
to continue to expand our business worldwide;
- our ability to attract and retain qualified shipboard crew and maintain good
relations with employee unions;
- our ability to obtain financing on terms that are favorable or consistent
with our expectations;
- the impact of changes in operating and financing costs, including changes in
foreign currency and interest rates and fuel, food, payroll, insurance and
security costs;
- changes in the tax, environmental, health, safety, security and other
regulatory regimes under which we operate;
- continued availability of attractive port destinations;
- our ability to successfully implement cost improvement plans and to
integrate business acquisitions;
- continuing financial viability of our travel agent distribution system and
air service providers; and
- unusual weather patterns or natural disasters.
Forward-looking statements should not be relied upon as a prediction of
actual results. Subject to any continuing obligations under applicable law or
any relevant listing rules, we expressly disclaim any obligation to disseminate,
after the date of this 2004 Annual Report, 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.
Executive Overview
The post-September 11, 2001 travel environment was a challenging period for
the travel and leisure industry. In 2002, demand for travel was weakened due to
the September 11th attacks followed by the conflict in Afghanistan. In 2003, the
cruise industry was challenged
by, among other things, a weaker economy and unstable geopolitical environment,
the emergence of Severe Acute Respiratory Syndrome ("SARS") in Asia and the
threat and eventual outbreak of war in Iraq. These events had a negative effect
on the public's willingness to travel, and consequently, negatively impacted our
net revenue yields (see "Key Performance Indicators" below).
In 2004, the effects of those factors on the cruise industry were reduced,
and we experienced a substantial improvement in our net revenue yields. We
believe this improvement was primarily the result of stronger consumer demand
for travel, which resulted in higher passenger ticket prices and onboard
revenues and, to a lesser extent, a weaker U.S. dollar relative to the euro and
sterling. The increase in pricing was achieved despite a 17.2% increase in
proforma passenger capacity relating to the introduction of seven new ships in
fiscal 2004. In addition, from 2002 through 2004, the cruise industry was
impacted by substantial increases in fuel prices. It is possible that these high
fuel prices will continue in 2005 and future years.
Throughout this period we generated significant cash flows and remained in
a strong financial position, which is a high priority and we believe provides us
with a competitive advantage in the capital intensive cruise industry. However,
our operations are subject to many risks, as briefly noted above and under the
caption "Cautionary Note Concerning Factors That May Affect Future Results,"
which could adversely impact our future results.
During 2004, we ordered eight new ships for our North American and
European brands, which are expected to be delivered between 2007 and 2009. These
new ships are expected to continue to help us maintain our leadership position
within the cruise industry. The year-over-year percentage increases in Carnival
Corporation & plc's ALBD capacity, resulting from new ships entering service, is
8.7%, 6.1%, 7.5%, 6.6% and 2.4% for fiscal 2005, 2006, 2007, 2008 and 2009,
respectively, based on ships currently on order.
We believe that given a stable geopolitical environment and the continuing
strong demand for travel, our net revenue yields will increase in 2005.
Outlook For Fiscal 2005 ("2005")
As of December 16, 2004 we said that we were comfortable with earnings per
share estimates of $2.70 for 2005. We also said that we expected our first
quarter 2005 earnings per share to be in the range of $0.38 to $0.40. Our
guidance was based on flat fuel pricing compared to 2004, which was in line with
the forward curve for bunker fuel at that time, and an exchange rate of $1.30 to
the euro and $1.86 to the sterling.
On January 20, 2005, we announced that the 1,870-passenger ship Aurora,
operated by P&O Cruises, experienced a technical problem with its propulsion
system that forced the cancellation of its 103-day, 2005 world cruise. We
expected that the vessel would be repaired and would return to service prior to
the date it was to end its world cruise and anticipated scheduling revised short
replacement cruises. The cancellation of the world cruise, net of estimated
earnings from anticipated replacement cruises, was expected to reduce 2005 full
year earnings per share by approximately $0.05, of which approximately $0.03 per
share was expected to impact the first quarter and the remainder in the second
quarter. We now expect the Aurora to be out of service for a longer duration and
anticipate scheduling fewer replacement cruises. Consequently, we expect the
full year 2005 impact to be approximately $0.06 per share, of which
approximately $0.04 per share will effect the first quarter of 2005.
We also expect that there will be $0.01 per share gain from the settlement
of litigation recorded in the first quarter of 2005.
Since our December guidance, fuel prices have risen. Our current forecast
uses fuel prices that are 10% higher than the prior year, which was determined
based upon the current forward curve for bunker fuel, which equates to
approximately $0.06 per share on an annual basis.
Since early January 2005, the cruise industry has entered the "wave
season," a period of higher booking levels than during the rest of the year.
During the 2005 wave season, company wide booking levels, on an absolute basis,
have been running slightly higher than during the same period last year.
However, pricing during wave season has been significantly higher than
during the same period last year. As of the end of January 2005, we have 10%
less inventory remaining to sell for 2005 than at the same time last year, even
with a 9% capacity increase in 2005. We believe our lower inventory availability
provides us with the opportunity to execute our pricing strategies to maximize
revenue yields in 2005.
Based upon the stronger booking trends experienced during the month of
January, we remain comfortable with our previous guidance of $2.70 per share for
the full year 2005 and a range of $0.38 to $0.40 per share for the first quarter
of 2005, including the aforementioned impact of the Aurora, the litigation
settlement and higher fuel prices. Our current guidance is based upon an
exchange rate of $1.31 to the euro and $1.87 to the sterling.
Net revenue yields for 2005 are now forecasted to increase 4 to 6 percent
(3 to 5 percent on a constant dollar basis) compared to last year. The increase
in expected net revenue yields compared with our previous guidance is largely
due to higher prices achieved during the initial month of wave season partially
offset by the impact of the cancellation of the Aurora world cruise. Net cruise
costs per ALBD are now forecast to be up 1 to 3 percent (flat to up 2 percent on
a constant dollar basis) compared to last year. This increase from our prior
guidance is primarily because of assumed higher fuel prices and costs associated
with the cancellation of Aurora's world cruise.
We continue to expect that first quarter 2005 net revenue yields will
increase approximately 5 to 7 percent (4 to 6 percent on a constant dollar
basis), compared to last year. Our first quarter guidance for net revenue yields
remains the same as our previous guidance given in December because the
approximate 1 percent reduction in net revenue yields due to the cancellation
of Aurora's world cruise offset the stronger pricing achieved during the initial
month of wave season. We continue to expect net cruise costs per ALBD to be flat
to up 2 percent (down 1 to up 1 percent on a constant dollar basis), compared to
last year. First quarter net cruise costs per ALBD remained the same as our
prior guidance because the impact of the cancellation of the world cruise was
offset by the delay in timing of advertising costs.
Share-Based Compensation
In December 2004, the Financial Accounting Standards Board issued
Share-Based Payment Statement 123(R), which will require us to recognize
compensation costs in our financial statements in an amount equal to the fair
value of share-based payments granted to employees and directors. This statement
is effective for us in the fourth quarter of fiscal 2005. We have not yet
determined which of the alternative transition methods we will use upon adoption
of this statement. However, based on preliminary estimates, if we were to elect
to adopt this statement with retroactive effect to December 1, 2004, our
additional 2005 share-based compensation expense would be approximately $60
million, which has not been included in the Outlook for 2005.
Key Performance Indicators and Pro Forma Information
We use net cruise revenues per ALBD ("net revenue yields") and net cruise
costs per ALBD as significant non-GAAP financial measures of our cruise segment
financial performance. We believe that net revenue yields are commonly used in
the cruise industry to measure a company's cruise segment revenue performance.
This measure is also used for revenue management purposes. In calculating net
revenue yields, we use "net cruise revenues" rather than "gross cruise
revenues." We believe that net cruise revenues is a more meaningful measure in
determining revenue yield than gross cruise revenues because it reflects the
cruise revenues earned by us net of our most significant variable costs, which
are travel agent commissions, cost of air transportation and certain other
variable direct costs associated with onboard revenues. Substantially all of our
remaining cruise costs are largely fixed once our ship capacity levels have been
determined.
Net cruise costs per ALBD is the most significant measure we use to
monitor our ability to control our cruise segment costs rather than gross cruise
costs per ALBD. In calculating net cruise costs, we exclude the same variable
costs as described above, which are included in the calculation of net cruise
revenues. This is done to avoid duplicating these variable costs in these two
non-GAAP financial measures.
We have not provided estimates of future gross revenue yields or future
gross cruise costs per ALBD because the reconciliations of forecasted net cruise
revenues to forecasted gross cruise revenues or forecasted net cruise costs to
forecasted cruise operating expenses would require us to forecast, with
reasonable accuracy, the amount of air and other transportation costs that our
forecasted cruise passengers would elect to purchase from us (the "air/sea
mix"). Since the forecasting of future air/sea mix involves several significant
variables that are relatively difficult to forecast and the revenues from the
sale of air and other transportation approximate the costs of providing that
transportation, management focuses primarily on forecasts of net cruise revenues
and costs rather than gross cruise revenues and costs. This does not impact, in
any material respect, our ability to forecast our future results, as any
variation in the air/sea mix has no material impact on our forecasted net cruise
revenues or forecasted net cruise costs. As such, management does not believe
that this reconciling information would be meaningful.
In addition, because a significant portion of our operations utilize the
euro or sterling to measure their results and financial condition, the
translation of those operations to our U.S. dollar reporting currency results in
increases in reported U.S. dollar revenues and expenses if the U.S. dollar
weakens against these foreign currencies, and decreases in reported U.S. dollar
revenues and expenses if the U.S. dollar strengthens against these foreign
currencies. Accordingly, we also monitor our key indicators assuming the 2004
exchange rates have remained constant with the prior year's comparable rates, or
on a "constant dollar basis," in order to remove the impact of changes in
exchange rates on our non U.S. cruise operations. We believe that this is a
useful measure indicating the actual growth of our operations in a fluctuating
exchange rate environment.
Our 2003 reported results only included the results of P&O Princess since
April 17, 2003. Consequently, for the years ended November 30, 2004 and 2003, we
believe that the most meaningful comparison of our annual operating income and
revenue and cost metrics is to the comparable pro forma results and metrics in
2003 and 2002, which reflect the operations of both Carnival Corporation and P&O
Princess as if the companies had been consolidated throughout 2003 and 2002.
Accordingly, we have disclosed pro forma information for the year ended November
30, 2003 and 2002, as well as the required reported information, in the
discussion of our results of operations.
The 2003 and 2002 pro forma information were computed by adding the
results of P&O Princess' annual operations, and acquisition adjustments of $16
million and $14 million of depreciation expense and $3 million and $7 million of
interest expense, and excluding $51 million and $103 million of nonrecurring DLC
transaction costs, respectively, to the 2003 and 2002 Carnival Corporation
reported results for the year ended November 30, 2003 and 2002, respectively.
Critical Accounting Estimates
Our critical accounting estimates are those which we believe require our
most significant judgments about the effect of matters that are inherently
uncertain. A discussion of our critical accounting estimates, the underlying
judgments and uncertainties used to make them and the likelihood that materially
different estimates would be reported under different conditions or using
different assumptions, is set forth below.
Ship Accounting
Our most significant assets are our ships and ships under construction,
which represent 83% of our total assets. We make several critical accounting
estimates dealing with our ship accounting. First, we compute our ships'
depreciation expense, which represents 11.6% of our cruise operating expenses in
fiscal 2004, which requires us to estimate the average useful life of each of
our ships, as well as their residual values. Secondly, we account for ship
improvement costs by capitalizing those costs, which we believe will add value
to our ships and depreciate those improvements over their estimated useful
lives. Finally, we account for the replacement or refurbishment of our ship
components based upon their estimated net book value.
We determine the average useful life of our ships based primarily on our
estimates of the weighted-average useful lives and residual values of the ships'
major component systems, such as cabins, main diesels, main electric,
superstructure and hull. In addition, we
consider, among other things, the impact of anticipated technological changes,
long-term vacation market conditions and competition and historical useful lives
of similarly-built ships. We have estimated our new ships' average useful lives
at 30 years and their average residual values at 15% of our original ship cost.
Given the very large and complex nature of our ships, ship accounting
estimates require considerable judgment and are inherently uncertain. We do not
have cost segregation studies performed to specifically componetize our ship
systems. However, we have estimated the useful lives of our ships to be 30 years
based upon our estimate of the relative costs of the major components of a
cruise ship. In addition, since we do not separately componetize our ships, we
do not identify and track depreciation of specific component systems. Therefore,
we have to estimate the net book value of components that are replaced or
refurbished, based primarily upon their replacement or refurbishment cost and
the age of the ship.
If materially different conditions existed, or if we materially changed
our assumptions of ship lives and residual values, our depreciation expense or
loss on replacement or refurbishment of ship assets and net book value of our
ships would be materially different. In addition, if we change our assumptions
in making our determinations as to whether improvements to a ship add value, the
amounts we expense each year as repair and maintenance costs could increase,
partially offset by a decrease in depreciation expense, as less costs would have
been initially capitalized to our ships. Our fiscal 2004 ship depreciation
expense would have increased by approximately $21 million for every year we
reduced our estimated average 30 year ship useful life. In addition, if our
ships were estimated to have no residual value, our fiscal 2004 depreciation
expense would have increased by approximately $100 million.
We believe that the estimates we made for ship accounting purposes are
reasonable and our methods are consistently applied and, accordingly, result in
depreciation expense that is based on a rational and systematic method to
equitably allocate the costs of our ships to the periods during which services
are obtained from their use. In addition, we believe that the estimates we made
are reasonable and our methods consistently applied (1) in determining the
average useful life and average residual values of our ships; (2) in determining
which ship improvement costs add value to our ships; and (3) in determining the
net book value of ship component assets being replaced or refurbished. Finally,
we believe our critical ship accounting estimates are generally comparable with
those of other major cruise companies.
Asset Impairment
The impairment reviews of our ship and trademark assets and of our
goodwill, which has been allocated to our cruise line reporting units, require
us to make significant estimates to determine the fair values of these assets or
reporting units.
The determination of fair value includes numerous uncertainties, unless a
viable actively traded market exists for the asset or for a comparable reporting
unit, which is usually not the case for cruise ships, cruise lines and
trademarks. For example, in determining fair values of ships and cruise lines
utilizing discounted forecasted cash flows, significant judgments are made
concerning, among other things, future net revenue yields, net cruise costs per
ALBD, interest and discount rates, cruise itineraries, ship additions and
retirements, technological changes, consumer demand, governmental regulations
and the effects of competition. In addition, third party appraisers are
sometimes used to determine fair values and some of their valuation
methodologies are also subject to similar types of uncertainties. Also, the
determination of fair values of reporting units using a price earnings multiple
approach also requires significant judgments, such as determining reasonably
comparable multiples. Finally, determining trademark fair values also requires
significant judgments in determining both the estimated trademark cash flows,
and the appropriate royalty rates to be applied to those cash flows to determine
their fair value. We believe that we have made reasonable estimates and
judgments in determining whether our ships, goodwill and trademarks have been
impaired. However, if there is a material change in the assumptions used in our
determination of fair value or if there is a material change in the conditions
or circumstances influencing fair value, we could be required to recognize a
material impairment charge.
Contingencies
We periodically assess the potential liabilities related to any lawsuits
or claims brought against us, as well as for other known unasserted claims,
including environmental, legal, passenger and crew, and tax matters. While it is
typically very difficult to determine the timing and ultimate outcome of these
matters, we use our best judgment to determine if it is probable that we will
incur an expense related to the settlement or final adjudication of such matters
and whether a reasonable estimation of such probable loss, if any, can be made.
In assessing probable losses, we make estimates of the amount of insurance
recoveries, if any. We accrue a liability when we believe a loss is probable and
the amount of the loss can be reasonably estimated, in accordance with the
provisions of SFAS No. 5, "Accounting for Contingencies," as amended. Such
accruals are typically based on developments to date, management's estimates of
the outcomes of these matters, our experience in contesting, litigating and
settling other similar matters, historical claims experience and actuarially
determined assumptions of liabilities, and any related insurance coverage. See
Notes 8 and 13 in the accompanying financial statements for additional
information concerning our contingencies.
Given the inherent uncertainty related to the eventual outcome of these
matters and potential insurance recoveries, it is possible that all or some of
these matters may be resolved for amounts materially different from any
provisions or disclosures that we may have made with respect to their
resolution. In addition, as new information becomes available, we may need to
reassess the amount of probable liability that needs to be accrued related to
our contingencies. All such revisions in our estimates could materially impact
our results of operations and financial position.
Results of Operations
We earn our cruise revenues primarily from the following:
- sales of passenger cruise tickets and, in some cases, the sale of air
and other transportation to and from our ships. The cruise ticket price
includes accommodations, meals, some non-alcoholic beverages,
entertainment and many onboard activities, and
- the sale of goods and/or services primarily on board our ships, which
include bar and some beverage sales, casino gaming, shore excursions,
gift shop and spa sales, photo and art sales and pre-and post cruise
land packages. These activities are either performed directly by us or
by independent concessionaires, from which we receive a percentage of
their revenues.
We incur cruise operating costs and expenses for the following:
- the costs of passenger cruise tickets which represent costs that vary
directly with passenger cruise ticket revenues, and include travel
agent commissions, air and other travel related costs and credit card
fees,
- onboard and other cruise costs which represent costs that vary directly
with onboard and other revenues, and include the costs of liquor and
some beverages, costs of tangible goods sold by us from our gift, photo
and art auction activities, pre- and post cruise land packages and
credit card fees. Concession revenues do not have any significant
amount of costs associated with them, as the costs and services
incurred for these activities are provided by our concessionaires,
- payroll and related costs which represent costs for all our shipboard
personnel, including deck and engine officers and crew and hotel and
administrative employees,
- food costs, which include both our passenger and crew food costs, and
- other ship operating costs which include fuel, repairs and maintenance,
port charges, insurance, entertainment and all other shipboard
operating costs and expenses.
For segment information related to our revenues, expenses, operating
income and other financial information see Note 12 in the accompanying financial
statements.
Summary
Our reported and pro forma results of operations and selected statistical
information were as follows:
Years Ended November 30,
-----------------------------------------------------
Pro Forma Reported Pro Forma
--------- -------- --------- Reported
2004 2003 2003 2002 2002
---- ---- ---- ---- ----
(dollars in millions, except statistical information)
Revenues
Cruise
Passenger tickets $ 7,357 $ 5,732 $ 5,039 $ 5,128 $ 3,346
Onboard and other 2,070 1,600 1,420 1,356 898
Other 300 264 259 284 139
------- ------- ------- ------- -------
9,727 7,596 6,718 6,768 4,383
------- ------- ------- ------- -------
Costs and Expenses
Operating
Cruise
Commissions, transportation
and other 1,572 1,227 1,021 1,121 658
Onboard and other 359 279 229 240 116
Payroll and related 1,003 841 744 676 458
Food 550 447 393 381 256
Other ship operating 1,763 1,428 1,237 1,149 734
Other 210 198 190 211 108
------- ------- ------- ------- -------
Total 5,457 4,420 3,814 3,778 2,330
Selling and administrative 1,285 1,103 936 960 609
Depreciation and amortization 812 653 585 534 382
Impairment charge 20 20
------- ------- ------- ------- -------
Operating Income 2,173 1,420 1,383 1,476 1,042
Nonoperating Expense, Net (272) (185) (160) (148) (83)
------- ------- ------- ------- -------
Income Before Income Taxes 1,901 1,235 1,223 1,328 959
Income Tax (Expense) Benefit,
Net (47) (25) (29) 46 57
------- ------- ------- ------- -------
Net Income $ 1,854 $ 1,210 $ 1,194 $ 1,374 $ 1,016
======= ======= ======= ======= =======
Selected Statistical Information
Passengers carried
(in thousands) 6,306 5,422 5,038 4,725 3,549
======= ======= ======= ======= =======
Occupancy percentage 104.5% 102.6% 103.4% 103.5% 105.2%
======= ======= ======= ======= =======
Gross and net revenue yields were computed by dividing the gross or net
revenues, without rounding, by ALBDs as follows:
Years Ended November 30,
---------------------------------------------------------------------
Pro Forma Reported Pro Forma Reported
--------- -------- --------- --------
2004 2003 2003 2002 2002
---- ---- ---- ---- ----
(in millions, except ALBDs and yields)
Cruise revenues
Passenger tickets $ 7,357 $ 5,732 $ 5,039 $ 5,128 $ 3,346
Onboard and other 2,070 1,600 1,420 1,356 898
------------ ------------ ------------ ------------ ------------
Gross cruise revenues 9,427 7,332 6,459 6,484 4,244
Less cruise costs
Commissions, transportation
and other (1,572) (1,227) (1,021) (1,121) (658)
Onboard and other (359) (279) (229) (240) (116)
------------ ------------ ------------ ------------ ------------
Net cruise revenues $ 7,496 $ 5,826 $ 5,209 $ 5,123 $ 3,470
============ ============ ============ ============ ============
ALBDs 44,009,061 37,554,709 33,309,785 31,962,000 21,435,828
============ ============ ============ ============ ============
Gross revenue yields $ 214.21 $ 195.23 $ 193.91 $ 202.85 $ 198.01
============ ============ ============ ============ ============
Net revenue yields $ 170.32 $ 155.11 $ 156.38 $ 160.25 $ 161.91
============ ============ ============ ============ ============
Gross and net cruise costs per ALBD were computed by dividing the gross or net
cruise costs, without rounding, by ALBDs as follows:
Years Ended November 30,
----------------------------------------------------------------------
Pro Forma Reported Pro Forma Reported
--------- -------- --------- --------
2004 2003 2003 2002 2002
---- ---- ---- ---- ----
(in millions, except ALBDs and costs per ALBD)
Cruise operating expenses $ 5,247 $ 4,222 $ 3,624 $ 3,567 $ 2,222
Cruise selling and
administrative expenses 1,231 1,054 896 912 577
------------ ------------ ------------ ------------ ------------
Gross cruise costs 6,478 5,276 4,520 4,479 2,799
Less cruise costs included in net
cruise revenues
Commissions, transportation
and other (1,572) (1,227) (1,021) (1,121) (658)
Onboard and other (359) (279) (229) (240) (116)
------------ ------------ ------------ ------------ ------------
Net cruise costs $ 4,547 $ 3,770 $ 3,270 $ 3,118 $ 2,025
============ ============ ============ ============ ============
ALBDs 44,009,061 37,554,709 33,309,785 31,962,000 21,435,828
============ ============ ============ ============ ============
Gross cruise costs per ALBD $ 147.20 $ 140.50 $ 135.69 $ 140.15 $ 130.54
============ ============ ============ ============ ============
Net cruise costs per ALBD $ 103.31 $ 100.38 $ 98.16 $ 97.55 $ 94.43
============ ============ ============ ============ ============
Fiscal 2004 ("2004") Compared to Pro Forma 2003 ("pro forma 2003") and Reported
Results 2003 ("reported 2003")
Revenues
Net cruise revenues increased $1.67 billion, or 29%, to $7.50 billion in
2004 from $5.83 billion in pro forma 2003. The 17.2% increase in ALBD's between
pro forma 2003 and 2004 accounted for $1.0 billion of the increase, and the
remaining $670 million was from increased net revenue yields, which increased
9.8% in 2004 compared to pro forma 2003 (gross revenue yields increased by
9.7%). Net revenue yields increased in 2004 primarily from higher cruise ticket
prices, a 1.9% increase in occupancy, higher onboard revenues and the weaker
U.S. dollar relative to the euro and sterling. Net revenue yields as measured on
a constant dollar basis, where we recompute 2004 net revenue yields at the
foreign currency exchange rates in effect for pro forma 2003, increased 6.6% in
2004. Gross cruise revenues increased $2.10 billion, or 29%, in 2004 to $9.43
billion from $7.33 billion in pro forma 2003 primarily for the same reasons as
net cruise revenues.
Net cruise revenues increased $2.29 billion, or 44%, to $7.50 billion in
2004 from $5.21 billion in reported 2003. The 32.1% increase in ALBD's between
reported 2003 and 2004, which included P&O Princess for a full year in 2004, but
only since April 17, 2003 during 2003, accounted for $1.67 billion of the
increase, and the remaining $615 million was from increased net revenue yields,
which increased 8.9% in 2004 compared to 2003 (gross revenue yields increased by
10.5%). Net revenue yields increased primarily for the same reasons as noted
above. Gross cruise revenues increased $2.97 billion, or 46%, in 2004 to $9.43
billion from $6.46 billion for primarily the same reasons as net cruise
revenues.
Onboard and other revenues included concession revenues of $261 million in
2004, $201 million in pro forma 2003 and $192 million in reported 2003, which
increased in 2004 compared to both pro forma 2003 and reported 2003 primarily
because of the same reasons noted above for net cruise revenues.
Other non-cruise revenues increased $48 million, or 13.7%, to $398 million
in 2004 from $350 million in proforma 2003 (an increase of $53 million, or 15.4%
from $345 million in reported 2003) primarily due to the increase in the number
of cruise/tours sold, as well as price increases.
Costs and Expenses
Net cruise costs increased $777 million, or 21%, to $4.55 billion in 2004
from $3.77 billion in pro forma 2003. The 17.2% increase in ALBD's between pro
forma 2003 and 2004 accounted for $650 million of the increase, and the
remaining $127 million was from increased net cruise costs per ALBD, which
increased 2.9% in 2004 compared to pro forma 2003 (gross cruise costs per ALBD
increased 4.8%). Net cruise costs per ALBD increased primarily due to a 7.8%
increase in 2004 fuel prices and the weaker U.S. dollar relative to the euro and
the sterling in 2004. In addition, net cruise costs increased as a result of the
2004 Atlantic hurricane season and Cunard's $10 million of relocation costs,
resulting from combining the Cunard back-office operations into Princess'
operations. Net cruise costs per ALBD as measured on a constant dollar basis
compared to pro forma 2003 declined 0.5% in 2004. The decrease in constant
dollar net cruise costs was primarily the result of the economies of scale
associated with the pro forma 17.2% ALBD increase and synergy savings from the
integration efforts following the DLC transaction. Gross cruise costs increased
$1.20 billion, or 23%, in 2004 to $6.48 billion from $5.23 billion in pro forma
2003 primarily for the same reasons as net cruise costs.
Net cruise costs increased $1.28 billion, or 39%, to $4.55 billion in 2004
from $3.27 billion in reported 2003. The increase in ALBD's between reported
2003 and 2004 accounted for $1.05 billion of the increase, and the remaining
$230 million was from increased net cruise costs per ALBD, which increased 5.2%
in 2004 compared to reported 2003 (gross cruise costs per ALBD increased 8.5%).
Net cruise costs per ALBD increased primarily for the same reasons as noted
above. Gross cruise costs increased $1.96 billion, or 43%, in 2004 to $6.48
billion from $4.52 billion in reported 2003 primarily for the same reasons as
net cruise costs and a higher proportion of P&O Princess brands' customers who
purchased air from us.
Other non-cruise operating expense increased $24 million, or 8.5%, to $308
million in 2004 from $284 million in pro forma 2003 (an increase of $32 million,
or 11.6%, from $276 million in reported 2003) primarily due to the increased
volume of cruise/tours sold in 2004.
Depreciation and amortization expense increased by $159 million, or 24.3%,
to $812 million in 2004 from $653 million in pro forma 2003 largely due to the
pro forma 17.2% expansion of the combined fleet and ship improvement
expenditures, as well as the impact of a weaker U.S. dollar. Depreciation and
amortization increased by $227 million, or 38.8%, to $812 million in 2004 from
$585 million in reported 2003. This increase was primarily due to the same
factors as noted above and the result of the consolidation of P&O Princess.
Nonoperating (Expense) Income
Net interest expense, excluding capitalized interest, increased to $292
million in 2004 from $217 million in reported 2003, or $75 million, which
increase consisted primarily of a $102 million increase in interest expense from
our increased level of average borrowings and a weaker U.S. dollar, partially
offset by a $27 million decrease in interest expense due to lower average
borrowing rates. The higher average debt balances were primarily a result of our
consolidation of the former P&O Princess debt and new ship deliveries.
Income Taxes
Income tax expense increased $18 million from reported 2003 to $47 million
in 2004 primarily because of the increase in Costa's Italian taxable income and
other taxes relating to our operations.
Pro Forma 2003 ("pro forma 2003") Compared to Pro Forma 2002 ("pro forma 2002")
and Reported Results 2003 ("reported 2003") Compared to Reported Results 2002
("reported 2002")
Revenues
Net cruise revenues increased $703 million, or 14%, to $5.83 billion in
pro forma 2003
from $5.12 billion in pro forma 2002. The 17.5% increase in pro forma ALBD's
accounted for $895 million of the increase, which was partially offset by a $192
million reduction from lower net revenue yields, which declined 3.2% in pro
forma 2003 compared to pro forma 2002 (gross revenue yields decreased 3.8%). Net
revenue yields decreased largely because of lower cruise ticket prices, and to a
lesser extent, lower occupancy levels. Our revenue yields in 2003 were adversely
affected by consumer concerns about travel during the period leading up to the
war with Iraq and its eventual outbreak, the uncertain world economy and the
increase in cruise industry capacity. This was partially offset by the weaker
U.S. dollar. Gross cruise revenues increased $848 million, or 13%, in pro forma
2003 to $7.33 billion from $6.48 billion in pro forma 2002 primarily for the
same reasons as net cruise revenues.
Net cruise revenues increased $1.74 billion, or 50%, to $5.21 billion in
reported 2003 from $3.47 billion in reported 2002. The 55.4% increase in
reported ALBD's, which only included P&O Princess since April 17, 2003,
accounted for $1.92 billion of the increase, which was partially offset by $185
million from lower net revenue yields, which declined 3.4% in reported 2003
compared to reported 2002 (gross revenue yields decreased 2.1%). Net revenue
yields decreased primarily for the same reasons as noted above. Gross cruise
revenues increased $2.22 billion, or 52%, in reported 2003 to $6.46 billion from
$4.24 billion in reported 2002 primarily for the same reasons as net cruise
revenues.
Onboard and other revenues included concession revenues of $201 million in
pro forma 2003, $156 million in pro forma 2002, $192 million in reported 2003
and $147 million in reported 2002.
Other non-cruise revenues increased $169 million, or 96%, to $345 million
in reported 2003 from $176 million in reported 2002 due to the consolidation of
Princess Tours and P&O Travel Ltd.
Costs and Expenses
Net cruise costs increased $652 million, or 21%, to $3.77 billion in pro
forma 2003 from $3.12 billion in pro forma 2002. The 17.5% increase in pro forma
ALBD's accounted for $546 million of the increase, and the remaining $106
million was from increased net cruise costs per ALBD, which increased 2.9% in
pro forma 2003 compared to pro forma 2002 (gross cruise cost per ALBD increased
0.2%). Net cruise costs per ALBD increased primarily due to a 20% increase in
fuel prices and the weak U.S. dollar relative to the euro and the sterling,
partially offset by the economies of scale associated with the 17.5% pro forma
ALBD increase. Gross cruise costs increased $797 million, or 18%, in pro forma
2003 to $5.28 billion from $4.45 billion in pro forma 2002 primarily for the
same reasons as net cruise costs.
Net cruise costs increased $1.25 billion, or 61%, to $3.27 billion in
reported 2003 from $2.03 billion in reported 2002. The increase in reported
ALBD's accounted for $1.12 billion of the increase and the remaining $130
million was from increased net cruise costs per ALBD, which increased 3.9% in
reported 2003 compared to reported 2002 (gross cruise cost per ALBD increased
3.9%). Gross cruise costs increased $1.72 billion, or 61%, in reported 2003 to
$4.52 billion from $2.80 billion in reported 2002 primarily for the same reasons
as net cruise costs and a higher proportion of P&O Princess brands' customers
who purchased air from us.
Other non-cruise operating expense increased $131 million, or 90.3%, to
$276 million in reported 2003 from $145 million in reported 2002 due to the
consolidation of Princess Tours and P&O Travel.
Depreciation and amortization expense increased by $119 million, or 22.3%,
to $653 million in pro forma 2003 from $534 million in pro forma 2002 largely
due to the expansion of the combined fleet and ship improvement expenditures, as
well as the impact of a weaker U.S. dollar. Depreciation and amortization
increased by $203 million, or 53.1%, to $585 million in reported 2003 from $382
million in reported 2002. Approximately $126 million of this increase was from
the consolidation of the former P&O Princess acquired operations. The majority
of the remaining increase was a result of the expansion of the Carnival
Corporation fleet and ship improvement expenditures.
Nonoperating (Expense) Income
Net interest expense, excluding capitalized interest, increased to $217
million in reported 2003 from $118 million in reported 2002, or $99 million,
which increase consisted primarily of a $125 million increase in interest
expense from our increased level of average borrowings and a weaker U.S. dollar,
partially offset by a $31 million decrease in interest expense due to lower
average borrowing rates. The higher average debt balances were primarily a
result of our consolidation of the former P&O Princess debt and new ship
deliveries.
Income Taxes
The income tax expense of $29 million in reported 2003 was primarily due
to the consolidation of Carnival plc's U.S. based Princess Tours and Costa's
Italian taxable income.
Liquidity and Capital Resources
Sources and Uses of Cash
Our business provided $3.22 billion of net cash from operations during
fiscal 2004, an increase of $1.28 billion, or 66.4%, compared to fiscal 2003,
due primarily to a full year in 2004 of the P&O Princess operations and
significantly higher cash flows from operations. We continue to generate
substantial cash from operations and remain in a strong financial position.
During fiscal 2004, our net expenditures for capital projects were $3.59
billion, of which $3.22 billion was spent for our ongoing new shipbuilding
program, including the final delivery payments for seven new ships. The
remaining capital expenditures consisted primarily of $219 million for ship
improvements and refurbishments, and $151 million for Alaska tour assets, cruise
port facility developments and information technology assets.
During fiscal 2004, we borrowed $843 million, which were used primarily to
finance a portion of the Diamond Princess and Sapphire Princess purchase prices.
During fiscal 2004, we made $932 million of debt repayments, which included $330
million of debt repaid prior to its maturity date in order to reduce our
borrowing rates. Finally, we borrowed $272 million of net short-term bank
borrowings primarily to make a portion of the final ship delivery payment for
the Costa Magica. We also paid cash dividends of $400 million in fiscal 2004.
Future Commitments and Funding Sources
At November 30, 2004, our contractual cash obligations, and the effects
such obligations are expected to have on our liquidity and cash flow in future
periods were as follows (in millions):
Payments Due by Fiscal Year
---------------------------------------------------
Contractual Cash
Obligations Total 2005 2006 2007 2008 2009 Thereafter
- --------------- ----- ---- ---- ---- ---- ---- ----------
Long-term debt(a) $ 7,572 $1,281 $1,686 $1,058 $1,435 $ 141 $1,971
Short-term borrowings(a) 381 381
Fixed-rate interest
payments(a) 1,675 211 162 146 210 103 843
Shipbuilding(a) 6,227 1,540 1,400 1,330 1,600 357
Port facilities and
other(a) 806 135 92 73 72 66 368
Operating leases(a) 231 51 37 25 21 18 79
Purchase obligations(b) 465 438 14 9 4
Other long-term
liabilities reflected
on the balance
sheet(c) 284 29 18 18 20 19 180
------- ------ ------ ------ ------ ------ ------
Total contractual
cash obligations(d) $17,641 $4,066 $3,409 $2,659 $3,362 $ 704 $3,441
======= ====== ====== ====== ====== ====== ======
(a) See Notes 6 and 7 in the accompanying financial statements for additional
information regarding these contractual cash obligations. Fixed-rate
interest payments represent
cash outflows for fixed interest payments, including interest swapped from
a variable- rate to a fixed-rate, but does not include interest payments
on variable-rate debt or interest swapped from a fixed-rate to a
variable-rate, because these amounts cannot be reasonably estimated.
(b) Represents legally-binding commitments to purchase inventory and other
goods and services made in the normal course of business to meet
operational requirements. Many of our contracts contain clauses that allow
us to terminate the contract with notice, and with or without a
termination penalty. Termination penalties are generally an amount less
than the original obligation. Historically, we have not had any
significant defaults of our contractual obligations or incurred
significant penalties for termination of our contractual obligations.
(c) Represents cash outflows for certain of our long-term liabilities that
could be reasonably estimated. The primary outflows are for estimates of
our employee benefit plan obligations, certain deferred income taxes and
other long-term liabilities. Other long-term liabilities, such as deferred
income, derivative contracts payable, which convert fixed rate debt to
variable rate debt, fair value of hedged commitments and certain deferred
income taxes, have been excluded from the table as they do not require
cash settlement in the future or the timing of the cash outflow cannot be
reasonably estimated.
(d) Foreign currency payments are based on the November 30, 2004 exchange
rates.
During 2004, the Board of Directors authorized the repurchase of up to $1
billion of Carnival Corporation or Carnival plc shares commencing in 2005,
subject to certain repurchase restrictions on Carnival plc shares.
At November 30, 2004, we had liquidity of $3.20 billion, which consisted
of $660 million of cash and cash equivalents and short-term investments and
$2.54 billion available for borrowing under our revolving credit facilities. Our
revolving credit facilities mature in May and June 2006, except for Carnival
plc's 600 million euro facility, which expires in March 2005, and is currently
expected to be renewed for an additional year. No assurance can be given that we
will be successful in extending this facility. A key to our access to liquidity
is the maintenance of our strong credit ratings.
Based primarily on our historical results, current financial condition and
future forecasts, we believe that our existing liquidity and cash flow from
future operations will be sufficient to fund most of our expected capital
projects, debt service requirements, dividend payments, working capital and
other firm commitments. In addition, based on our future forecasted operating
results and cash flows for fiscal 2005, we expect to be in compliance with our
debt covenants during 2005. However, our forecasted cash flow from future
operations, as well as our credit ratings, may be adversely affected by various
factors, including, but not limited to, those factors noted under "Cautionary
Note Concerning Factors That May Affect Future Results." To the extent that we
are required, or choose, to fund future cash requirements, including our future
shipbuilding commitments, from sources other than as discussed above, we believe
that we will be able to secure such financing from banks or through the offering
of debt and/or equity securities in the public or private markets. No assurance
can be given that our future operating cash flow will be sufficient to fund
future obligations or that we will be able to obtain additional financing, if
necessary.
Off-Balance Sheet Arrangements
We are not a party to any off-balance sheet arrangements, including
guarantee contracts, retained or contingent interests, certain derivative
instruments and variable interest entities, that either have, or are reasonably
likely to have, a current or future material effect on our financial statements.
Foreign Currency Exchange Rate Risks
In 2003, we broadened our global presence through Carnival plc's foreign
operations, in addition to the foreign currency denominated operations of our
Costa subsidiary. Specifically, our expanded international business operations
through P&O Cruises, Ocean Village and Swan Hellenic in the UK and AIDA in
Germany subject us to an increasing level of foreign currency exchange risk
related to the sterling and euro because these operations have either the
sterling or the euro as their functional currency. Accordingly, exchange rate
fluctuations of the sterling and the euro against the dollar will effect our
reported financial results since the reporting currency for our consolidated
financial statements is the U.S. dollar and the functional currency for our
international operations is generally the local currency. Any weakening of the
U.S. dollar against these local functional currencies has the financial
statement effect of increasing the U.S. dollar values reported for cruise
revenues and cruise expenses in our consolidated financial statements.
Strengthening of the U.S. dollar has the opposite effect.
We seek to minimize the impact of 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 financial instruments. The
financial impacts of these hedging instruments are generally offset by
corresponding changes in the underlying exposures being hedged. Our policy is to
not use any financial instruments for trading or other speculative purposes.
One of our primary foreign currency exchange rate risks is related to our
outstanding commitments under ship construction contracts denominated in a
currency other than the functional currency of the cruise brand that is expected
to be operating the ship. These currency commitments are affected by
fluctuations in the value of the functional currency as compared to the currency
in which the shipbuilding contract is denominated. We generally use foreign
currency swaps to manage foreign currency exchange rate risk from ship
construction contracts (see Notes 2, 7 and 11 in the accompanying financial
statements). Accordingly, increases and decreases in the fair value of these
foreign currency swaps offset changes in the fair value of the foreign currency
denominated ship construction commitments, thus resulting in the elimination of
such risk.
Specifically, we have foreign currency swaps for three of our euro
denominated shipbuilding contracts. At November 30, 2004, the fair value of
these foreign currency swaps was an unrealized gain of $219 million which is
recorded, along with an offsetting $219 million fair value liability related to
our shipbuilding firm commitments, on our accompanying 2004 balance sheet. Based
upon a 10% strengthening or weakening of the U.S. dollar compared to the euro as
of November 30, 2004, assuming no changes in comparative interest rates, the
estimated fair value of these foreign currency swaps would decrease or increase
by $105 million, which would be offset by a decrease or increase of $105 million
in the U.S. dollar value of the related foreign currency ship construction
commitments resulting in no net dollar impact to us.
However, at November 30, 2004, we also have three shipbuilding contracts
denominated in euros, one of which has been assigned to a sterling functional
currency company and two, which are still unassigned, for which we have not
entered into any foreign currency swaps. At current exchange rates, it is most
likely that these two contracts will be assigned to one of our cruise brands
whose functional currency is the euro or sterling.
The cost of shipbuilding orders that we may place in the future for our
cruise lines who generate their cash flows in a currency that is different than
the shipyard's operating currency, generally the euro, is expected to be
affected by foreign currency exchange rate fluctuations. Given the decline in
the U.S. dollar relative to the euro, the U.S. dollar cost to order new cruise
ships at current exchange rates has increased significantly. If the U.S. dollar
remains at current levels or declines further, this may affect our ability to
order future new cruise ships for U.S. dollar functional currency brands.
Finally, we consider our investments in foreign subsidiaries to be
denominated in relatively stable currencies and of a long-term nature. We
partially address these exposures by denominating a portion of our debt or
entering into foreign currency swaps in our subsidiaries' functional currencies
(generally euros or sterling). Specifically, we have debt of $2.2 billion in
euros and $415 million in sterling and have $887 million of foreign currency
swaps, whereby we have converted $251 million of U.S. dollar debt into sterling
debt, $466 million of U.S. dollar debt into euro debt and $170 million of euro
debt into sterling debt, thus partially offsetting this foreign currency
exchange rate risk. At November 30, 2004, the fair value of these foreign
currency swaps was an unrealized loss of $137 million, which is recorded in AOCI
and offsets a portion of the gains recorded in AOCI upon translating these
foreign subsidiaries net assets into U.S. dollars. Based upon a 10% hypothetical
increase or decrease in the November 30, 2004 foreign currency exchange rate, we
estimate that these contracts fair values would increase or decrease by $89
million, which
would be offset by a decrease or increase of $89 million in the U.S. dollar
value of our net investments.
Interest Rate Risks
We seek to minimize the impact of fluctuations in interest rates through
our long-term investment and debt portfolio strategies, which include entering
into a substantial amount of fixed rate debt instruments. We continuously
evaluate our debt portfolio, and make periodic adjustments to the mix of
floating rate and fixed rate debt based on our view of interest rate movements
through the use of interest rate swaps. Accordingly in 2003 and 2001, we entered
into fixed to variable interest rate swaps, which lowered our fiscal 2004, 2003
and 2002 interest costs, and are also expected to lower our fiscal 2005 interest
costs. At November 30, 2004, 68% of the interest cost on our long-term debt was
effectively fixed and 32% was variable, including the effect of our interest
rate swaps.
Specifically, we have interest rate swaps at November 30, 2004, which
effectively changed $929 million of fixed rate debt to Libor-based floating rate
debt. In addition, we have interest rate swaps at November 30, 2004, which
effectively changed $828 million of euribor floating rate debt to fixed rate
debt. The fair value of our long-term debt and interest rate swaps at November
30, 2004 was $8.46 billion. Based upon a hypothetical 10% decrease or increase
in the November 30, 2004 market interest rates, the fair value of our long-term
debt and interest rate swaps would increase or decrease by approximately $100
million and interest expense on our variable rate debt, including the effect of
our interest rate swaps, would increase or decrease by approximately $8 million.
In addition, based upon a hypothetical 10% decrease or increase in
Carnival Corporation's November 30, 2004 common stock price, the fair value of
our convertible notes would increase or decrease by approximately $230 million.
These hypothetical amounts are determined by considering the impact of the
hypothetical interest rates and common stock price on our existing long-term
debt and interest rate swaps. This analysis does not consider the effects of the
changes in the level of overall economic activity that could exist in such
environments or any relationships which may exist between interest rate and
stock price movements. Furthermore, since substantially all of our fixed rate
long-term debt cannot currently be called or prepaid and $828 million of our
variable rate long-term debt is subject to interest rate swaps which effectively
fix the interest rate, it is unlikely we would be able to take any significant
steps in the short-term to mitigate our exposure in the unlikely event of a
significant decrease in market interest rates.
Bunker Fuel Price Risks
We have typically not used financial instruments to hedge our exposure to
the bunker fuel price market risk. Based upon a 10% hypothetical increase or
decrease in our fiscal 2004 average bunker fuel price of $194 per ton, we
estimate that our fiscal 2005 bunker fuel cost would increase or decrease by
approximately $55 million.
Selected Financial Data
The selected consolidated financial data presented below for fiscal 2000
through 2004 and as of the end of each such year, are derived from our audited
financial statements and should be read in conjunction with those financial
statements and the related notes.
Years Ended November 30,
-------------------------------------------------------------------
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
(in millions, except per share and other operating data)
Statement of Operations
and Cash Flow Data(a)(b)
Revenues $ 9,727 $ 6,718 $ 4,383 $ 4,549 $ 3,791
Operating income $ 2,173 $ 1,383 $ 1,042 $ 892 $ 983
Net income(c) $ 1,854 $ 1,194 $ 1,016(d) $ 926(d) $ 965
Earnings per share(c)
Basic $ 2.31 $ 1.66 $ 1.73 $ 1.58 $ 1.61
Diluted(e) $ 2.24 $ 1.63 $ 1.69 $ 1.57 $ 1.60
Dividends declared
per share $ 0.525 $ 0.440 $ 0.420 $ 0.420 $ 0.420
Cash from operations $ 3,216 $ 1,933 $ 1,469 $ 1,239 $ 1,280
Capital expenditures $ 3,586 $ 2,516 $ 1,986 $ 827 $ 1,003
Other Operating Data(a)(b)
Available lower berth days(f) 44,009,061 33,309,785 21,435,828 20,685,123 15,888,404
Passengers carried 6,306,168 5,037,553 3,549,019 3,385,280 2,669,153
Occupancy percentages(g) 104.5% 103.4% 105.2% 104.7% 105.4%
As of November 30,
-----------------------------------------------
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
(in millions, except percentages)
Balance Sheet and Other
Data (a)(b)
Total assets $27,636 $24,491 $12,335 $11,564 $9,831
Long-term debt, excluding
current portion $ 6,291 $ 6,918 $ 3,014 $ 2,955 $2,099
Total shareholders' equity $15,760 $13,793 $ 7,418 $ 6,591 $5,871
Debt to capital(h) 33.5% 34.9% 29.9% 31.1% 28.6%
(a) Includes the results of Carnival plc since April 17, 2003. Accordingly,
the information for 2004 and 2003 is not comparable to the prior periods.
Our results for the three years prior to fiscal 2004, were negatively
affected by a number of factors affecting consumers' vacation demands
including, among other things, armed conflicts in the Middle East and
elsewhere, terrorist attacks in the U.S. and elsewhere, the uncertain
worldwide economy and adverse publicity surrounding these and other
events.
(b) From June 1997 through September 28, 2000, we owned 50% of Costa. On
September 29, 2000, we completed the acquisition of the remaining 50%
interest in Costa. We accounted for this transaction using the purchase
accounting method. In fiscal 2000, we accounted for our 50% interest in
Costa using the equity method. Commencing in fiscal 2001, Costa's results
of operations have been consolidated. Our November 30, 2000 and subsequent
consolidated balance sheets include Costa's balance sheet. The statistical
information for 2000 does not include Costa.
(c) Effective December 1, 2001, we adopted SFAS No. 142, which required us to
stop amortizing goodwill as of December 1, 2001. If amortization of
goodwill had not been recorded for fiscal 2001 and 2000, our adjusted net
income and adjusted basic and diluted earnings per share would have been
as follows (in millions, except per share data):
Years Ended November 30,
------------------------
2001 2000
---- ----
Net income $ 926 $ 965
Goodwill amortization 26 23
----- -----
Adjusted net income $ 952 $ 988
===== =====
Adjusted earnings per share
Basic $1.63 $1.65
===== =====
Diluted $1.61 $1.64
===== =====
As required by EITF No. 04-08, we have retroactively restated our 2001
diluted earnings per share amount and reduced it from the previously
reported amount by $0.01.
(d) Our net income for fiscal 2002 and 2001 includes an impairment charge of
$20 million and $140 million, respectively, and fiscal 2001 includes a
nonoperating net gain of $101 million from the sale of our investment in
Airtours plc. In addition, fiscal 2002 includes a $51 million income tax
benefit as a result of an Italian investment incentive.
(e) During the fourth quarter of 2004, we elected to early adopt EITF No.
04-08. As required by EITF No. 04-08, we have retroactively restated our
2003, 2002 and 2001 diluted
earnings per share amounts and reduced them from the previously reported
amounts by $0.03, $0.04, and $0.01, respectively.
(f) Total annual passenger capacity for the period, assuming two passengers
per cabin, that we offered for sale, which is computed by multiplying
passenger capacity by revenue- producing ship operating days in the
period.
(g) In accordance with cruise industry practice, occupancy percentage is
calculated using a denominator of two passengers per cabin even though
some cabins can accommodate three or more passengers. The percentages in
excess of 100% indicate that more than two passengers occupied some
cabins.
(h) Percentage of total debt to the sum of total debt and shareholders'
equity.
Market Price for Common Stock and Ordinary Shares
Carnival Corporation's common stock, together with paired trust shares of
beneficial interest in the P&O Princess Special Voting Trust (which holds a
Special Voting Share of Carnival plc), is traded on the NYSE under the symbol
"CCL". Effective April 22, 2003, Carnival plc's ordinary shares trade on the
London Stock Exchange under the symbol "CCL" (formerly traded under "POC").
Effective April 21, 2003, Carnival plc's ADSs, each one of which represents one
Carnival plc ordinary share, are traded on the NYSE under the symbol "CUK"
(formerly traded under "POC"). The depository for the ADSs is JPMorgan Chase
Bank. The high and low stock sales price for the periods indicated were as
follows:
Carnival Corporation
High Low
---- ---
Fiscal 2004
Fourth Quarter $53.65 $45.29
Third Quarter $48.05 $41.55
Second Quarter $46.50 $40.05
First Quarter $46.30 $34.95
Fiscal 2003
Fourth Quarter $35.99 $32.76
Third Quarter $36.04 $30.50
Second Quarter $30.74 $20.34
First Quarter $28.15 $21.86
Carnival plc
Price per Ordinary
Share (GBP) Price per ADS (USD)
----------- -------------------
High Low High Low
---- --- ---- ---
Fiscal 2004
Fourth Quarter (pound)30.89 (pound)26.22 $57.15 $47.43
Third Quarter (pound)27.30 (pound)23.65 $50.03 $43.85
Second Quarter (pound)26.72 (pound)22.98 $48.05 $41.20
First Quarter (pound)26.12 (pound)20.30 $49.21 $35.13
Fiscal 2003(a)
Fourth Quarter (pound)21.80 (pound)18.72 $35.71 $31.21
Third Quarter (pound)21.80 (pound)16.50 $33.98 $27.92
Second Quarter (pound)17.41 (pound)11.24 $28.50 $18.54
First Quarter (pound)16.82 (pound)11.97 $26.22 $19.97
(a) Per share price prior to the DLC transaction on April 17, 2003 has been
adjusted for the effect of the consolidation of each 3.3289 existing
shares into one share effected in connection with the DLC transaction.
As of February 7, 2005, there were approximately 3,965 holders of record
of Carnival Corporation common stock and 58,404 holders of record of Carnival
plc ordinary shares and 72 holders of record of Carnival plc ADSs. The past
performance of our stock prices cannot be relied on as a guide to their future
performance.
Since the completion of the DLC transaction, Carnival plc dividends per
share are the same as Carnival Corporation's per share dividends and are
declared in U.S. dollars. Carnival plc UK ordinary shareholders can elect to
receive these dividends either in U.S. dollars or sterling, based upon a current
U.S. dollar to sterling exchange rate announced prior to the dividend payment
date.
Selected Quarterly Financial Data (Unaudited)
Our revenue from the sale of passenger tickets is seasonal, with our third
quarter being the strongest. Historically, demand for cruises has been greatest
during our third fiscal quarter, which includes the Northern Hemisphere summer
months. The consolidation of P&O Princess brands has caused our quarterly
results to be more seasonal than we had previously experienced, as their
business is more seasonal. This higher demand during the third quarter results
in higher net revenue yields and, accordingly, the largest share of our net
income is earned during this period. Substantially all of Holland America Tours'
and Princess Tours' revenues and net income are generated from May through
September in conjunction with the Alaska cruise season.
Quarterly financial results for fiscal 2004 were as follows:
Quarters Ended
----------------------------------------------------
February 29 May 31 August 31 November 30
----------- ------ --------- -----------
(in millions, except per share data)
Revenues $1,981 $2,257 $3,246 $2,243
Operating income $ 260 $ 406 $1,160 $ 347
Net income $ 203 $ 332 $1,025 $ 294
Earnings per share
Basic $ 0.25 $ 0.41 $ 1.28 $ 0.37
Diluted $ 0.25 $ 0.40(a) $ 1.22(a) $ 0.36
Dividends declared
per share $0.125 $0.125 $0.125 $ 0.15
Quarterly financial results for fiscal 2003 were as follows:
Quarters Ended
----------------------------------------------------
February 28 May 31 August 31 November 30
----------- ------ --------- -----------
(in millions, except per share data)
Revenues $1,035 $1,342 $2,524 $1,817
Operating income $ 132 $ 168 $ 809 $ 274
Net income $ 127(b) $ 128(c) $ 734 $ 205
Earnings per share
Basic $ 0.22 $ 0.19 $ 0.92 $ 0.26
Diluted $ 0.22 $ 0.19 $ 0.88(a) $ 0.26
Dividends declared
per share $0.105 $0.105 $0.105 $0.125
(a) Diluted earnings per share prior to the fourth quarter of 2004 have been
restated for the early adoption of EITF No. 04-08 and reduced from the
previously reported amounts by $0.01, $0.01 and $0.02 for the quarters
ended May 31 and August 31 of 2004 and August 31, 2003, respectively.
(b) Included $19 million of income from net insurance proceeds.
(c) Included $16 million of expenses related to litigation and other charges
associated with the DLC transaction.
Glossary of Terms
The attached financial statements include certain U.S. accounting terminology,
which may not be familiar to a UK reader. This glossary of terms is provided to
assist in interpreting these financial statements.
UK Terms U.S. Terms
Acquisition accounting Purchase method of accounting
Associate/Joint venture Equity investment
Called up share capital Common stock at par value
Creditors Payables
Debtors Receivables
Finance lease Capital lease
Financial year Fiscal year
Gearing Debt/Capital (debt plus equity)
Interest payable Interest expense
Interest receivable Interest income
Profit Income
Profit and loss account Statement of operations
Profit and loss account reserves Retained earnings
Profit for the financial year Net income
Provisions Liabilities or reserves
Share premium Additional paid-in capital
Shareholders' funds Shareholders' equity
Stocks Inventories
Tangible fixed assets Property, plant and equipment
Turnover Revenue