UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 2006
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ________________
Commission file number: 1-9610 Commission file number: 1-15136
Carnival Corporation Carnival plc
--------------------------- ---------------------------
(Exact name of registrant as (Exact name of registrant as
specified in its charter) specified in its charter)
Republic of Panama England and Wales
------------------------------ ------------------------------
(State or other jurisdiction of (State or other jurisdiction of
incorporation or organization) incorporation or organization)
59-1562976 98-0357772
----------------- -----------------
(I.R.S. Employer (I.R.S. Employer
Identification No.) Identification No.)
3655 N.W. 87th Avenue Carnival House, 5 Gainsford Street,
Miami, Florida 33178-2428 London SE1 2NE, United Kingdom
- -------------------------- ------------------------------
(Address of principal (Address of principal
executive offices) executive offices)
(Zip Code) (Zip Code)
(305) 599-2600 011 44 20 7940 5381
----------------------------- -----------------------------
(Registrant's telephone number, (Registrant's telephone number,
including area code) including area code)
None None
--------------------------- ---------------------------
(Former name, former address (Former name, former address
and former fiscal year, if and former fiscal year, if
changed since last report) changed since last report)
Indicate by check mark whether the registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrants are large accelerated
filers, accelerated filers, or non-accelerated filers. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act. Large Accelerated filers |X| Accelerated filers |_| Non-Accelerated
filers |_|
Indicate by check mark whether the registrants are shell companies (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
At June 26, 2006 Carnival At June 26, 2006, Carnival plc had
Corporation had outstanding outstanding 212,698,642 Ordinary Shares
626,743,467 shares of Common $1.66 par value, one Special Voting
Stock, $.01 par value. Share, GBP 1.00 par value and 626,743,467
Trust Shares of beneficial interest in
the P&O Princess Special Voting Trust.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
CARNIVAL CORPORATION & PLC
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in millions, except per share data)
Six Months Three Months
Ended May 31, Ended May 31,
----------------- -----------------
2006 2005 2006 2005
------- ------- ------- -------
(Notes 1 & 2) (Notes
1 & 2)
Revenues
Cruise
Passenger tickets $ 3,930 $ 3,746 $ 2,020 $ 1,903
Onboard and other 1,139 1,110 600 566
Other 56 58 42 47
------- ------- ------- -------
5,125 4,914 2,662 2,516
------- ------- ------- -------
Costs and Expenses
Operating
Cruise
Commissions, transportation and other 813 803 405 380
Onboard and other 198 193 101 96
Payroll and related 560 547 288 278
Food 311 304 159 151
Fuel 461 302 247 169
Other ship operating 740 704 383 374
Other 53 53 37 40
------- ------- ------- -------
Total 3,136 2,906 1,620 1,488
Selling and administrative 720 678 354 342
Depreciation and amortization 472 446 240 224
------- ------- ------- -------
4,328 4,030 2,214 2,054
------- ------- ------- -------
Operating Income 797 884 448 462
------- ------- ------- -------
Nonoperating (Expense) Income
Interest income 12 9 5 6
Interest expense, net of
capitalized interest (151) (168) (75) (82)
Other (expense) income, net (16) 8 (1) 2
------- ------- ------- -------
(155) (151) (71) (74)
------- ------- ------- -------
Income Before Income Taxes 642 733 377 388
Income Tax (Expense) Benefit, Net (11) 3 3
------- ------- ------- -------
Net Income $ 631 $ 736 $ 380 $ 388
======= ======= ======= =======
Earnings Per Share
Basic $ 0.78 $ 0.92 $ 0.47 $ 0.48
======= ======= ======= =======
Diluted $ 0.77 $ 0.89 $ 0.46 $ 0.47
======= ======= ======= =======
Dividends Per Share $ 0.50 $ 0.35 $ 0.25 $ 0.20
======= ======= ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
2
CARNIVAL CORPORATION & PLC
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in millions, except par values)
May 31, November 30,
ASSETS 2006 2005
-------- ------------
(Notes
1 & 2)
Current Assets
Cash and cash equivalents $ 570 $ 1,178
Short-term investments 13 9
Trade and other receivables, net 405 430
Inventories 278 250
Prepaid expenses and other 240 254
-------- ------------
Total current assets 1,506 2,121
-------- ------------
Property and Equipment, Net 22,772 21,312
Goodwill 3,290 3,206
Trademarks 1,308 1,282
Other Assets 428 428
-------- ------------
$ 29,304 $ 28,349
======== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Short-term borrowings $ 767 $ 300
Current portion of long-term debt 217 1,042
Convertible debt subject to current put option 218 283
Accounts payable 411 477
Accrued liabilities and other 946 1,032
Customer deposits 2,953 2,051
-------- ------------
Total current liabilities 5,512 5,185
-------- ------------
Long-Term Debt 6,045 5,727
Other Long-Term Liabilities and Deferred Income 652 554
Contingencies (Note 5)
Shareholders' Equity
Common stock of Carnival Corporation; $.01 par
value; 1,960 shares authorized; 640 shares at 2006
and 639 shares at 2005 issued 6 6
Ordinary shares of Carnival plc; $1.66 par value;
226 shares authorized; 213 shares at 2006 and
212 shares at 2005 issued 353 353
Additional paid-in capital 7,418 7,381
Retained earnings 10,369 10,141
Unearned stock compensation (13)
Accumulated other comprehensive income 473 159
Treasury stock; 10 at 2006 and 2 shares at 2005
of Carnival Corporation and 42 shares
of Carnival plc at 2006 and 2005, at cost (1,524) (1,144)
-------- ------------
Total shareholders' equity 17,095 16,883
-------- ------------
$ 29,304 $ 28,349
======== ============
The accompanying notes are an integral part of these consolidated financial
statements.
3
CARNIVAL CORPORATION & PLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in millions)
Six Months Ended May 31,
------------------------
2006 2005
---------- ---------
(Notes
1 & 2)
OPERATING ACTIVITIES
Net income $ 631 $ 736
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation and amortization 472 446
Share-based compensation 34 7
Non-cruise investment write-down 10
Accretion of original issue discount 5 11
Other (1) 3
Changes in operating assets and liabilities
Receivables 38 (97)
Inventories (22) (15)
Prepaid expenses and other (8) (60)
Accounts payable (75) (21)
Accrued and other liabilities (64) 21
Customer deposits 865 730
---------- ---------
Net cash provided by operating activities 1,885 1,761
---------- ---------
INVESTING ACTIVITIES
Additions to property and equipment (1,483) (1,109)
Purchases of short-term investments (4) (556)
Sales of short-term investments 270
Other, net 3 2
---------- ---------
Net cash used in investing activities (1,484) (1,393)
---------- ---------
FINANCING ACTIVITIES
Principal repayments of long-term debt (959) (786)
Purchases of treasury stock (473) (30)
Proceeds from (repayments of) short-term
borrowings, net 431 (89)
Dividends paid (404) (241)
Proceeds from issuance of long-term debt 352 823
Proceeds from exercise of stock options 36 37
Other (1) (1)
---------- ---------
Net cash used in financing activities (1,018) (287)
---------- ---------
Effect of exchange rate changes on cash and cash
equivalents 9 (3)
---------- ---------
Net (decrease) increase in cash and cash
equivalents (608) 78
Cash and cash equivalents at beginning of period 1,178 643
---------- ---------
Cash and cash equivalents at end of period $ 570 $ 721
========== =========
The accompanying notes are an integral part of these consolidated financial
statements.
4
CARNIVAL CORPORATION & PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - Basis of Presentation
Carnival Corporation is incorporated in Panama, and Carnival plc is
incorporated in England and Wales. Carnival Corporation and Carnival plc operate
as a dual listed company ("DLC"), whereby the businesses of Carnival Corporation
and Carnival plc are combined through a number of contracts and through
provisions in Carnival Corporation's articles of incorporation and by-laws and
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.
The accompanying consolidated financial statements include the accounts of
Carnival Corporation and Carnival plc and their respective subsidiaries.
Together with their consolidated subsidiaries they are referred to collectively
in these consolidated financial statements and elsewhere in this joint Quarterly
Report on Form 10-Q as "Carnival Corporation & plc," "our," "us," and "we."
The accompanying consolidated balance sheet at May 31, 2006, the
consolidated statements of operations for the six and three months ended May 31,
2006 and 2005 and the consolidated statements of cash flows for the six months
ended May 31, 2006 and 2005 are unaudited and, in the opinion of our management,
contain all adjustments, consisting of only normal recurring adjustments,
necessary for a fair presentation. Our interim consolidated financial statements
should be read in conjunction with the audited consolidated financial statements
and the related notes included in the Carnival Corporation & plc 2005 joint
Annual Report on Form 10-K. Our operations are seasonal and results for interim
periods are not necessarily indicative of the results for the entire year.
Our sale to passengers of air and other transportation to and from our
ships and the related cost of purchasing this service is recorded as cruise
passenger ticket revenues and cruise transportation costs, respectively, in the
accompanying Consolidated Statements of Operations. The proceeds that we collect
on behalf of independently owned shore excursion operators and other onboard
concessionaires, net of the amounts remitted to them, are recorded as concession
revenues, on a net basis, in onboard and other cruise revenues. Transportation
and shore excursion revenues and costs are recognized upon completion for
voyages with durations of ten nights or less, and on a pro rata basis for
voyages in excess of ten nights.
We have reclassified certain statements of operations, cash flows and
balance sheet prior period amounts to conform them to the current period
presentation primarily as a result of our adopting a new chart of accounts in
conjunction with our initial implementation in the 2006 second quarter of a new
worldwide accounting system. During the implementation of our global chart of
accounts we identified certain classification differences among our operating
subsidiaries. Accordingly, we have recorded appropriate reclassifications in the
prior periods to improve comparability.
NOTE 2 - Dry-docking
During the second quarter of 2006 we elected to change our method of
accounting for dry-dock costs from the deferral method, under which we amortized
our deferred dry-dock costs over the estimated period of benefit between
dry-docks, to the direct expense method, under which we expense all dry-dock
costs as incurred. We believe the direct method is preferable as it eliminates
the significant amount of time and subjectivity that is needed in determining
which costs and activities related to dry-docking should be deferred. In
connection with adopting this change in accounting policy, we elected to early
adopt Statement of Financial Accounting Standards ("SFAS") No. 154, "Accounting
Changes and Error Corrections", which requires that we report changes in
accounting policy by retrospectively applying new policies to all prior periods
presented, unless it is impractical to determine the prior period impacts.
Accordingly, we have adjusted our previously reported financial information for
all periods presented for this change in dry-dock policy. The effects of this
change in accounting policy were as follows (in millions, except for earnings
per share):
5
Consolidated Statement of Operations
Six Months Ended May 31,
2006 2005
----------------------------------- -------------------------------
Deferral Direct Effect Deferral Direct Effect
Method(a) (b) Method of Change Method(a) Method of Change
------------- ------- --------- --------- ------- ---------
Other ship operating expenses $ 691 $ 740 $ 49 $ 687 $ 704 $ 17
Net income $ 680 $ 631 $ (49) $ 753 $ 736 $ (17)
Earnings per share
Basic $ 0.84 $ 0.78 $ (0.06) $ 0.94 $ 0.92 $ (0.02)
============= ======= ========= ========= ======= =========
Diluted $ 0.83 $ 0.77 $ (0.06) $ 0.91 $ 0.89 $ (0.02)
============= ======= ========= ========= ======= =========
Three Months Ended May 31,
2006 2005
---------------------------------- -------------------------------
Deferral Direct Effect Deferral Direct Effect
Method(b) Method of Change Method(a) Method of Change
------------- ------- --------- --------- ------- ---------
Other ship operating expenses $ 363 $ 383 $ 20 $ 354 $ 374 $ 20
Net income $ 400 $ 380 $ (20) $ 408 $ 388 $ (20)
Earnings per share
Basic $ 0.50 $ 0.47 $ (0.03) $ 0.51 $ 0.48 $ (0.03)
============= ======= ========= ========= ======= =========
Diluted $ 0.48 $ 0.46 $ (0.02) $ 0.49 $ 0.47 $ (0.02)
============= ======= ========= ========= ======= =========
Consolidated Balance Sheets
May 31, 2006 November 30, 2005
---------------------------------- -------------------------------
Deferral Direct Effect Deferral Direct Effect
Method(b) Method of Change Method(a) Method of Change
------------- ------- --------- --------- ------- ---------
Prepaid expenses and other $ 343 $ 254 $ (89)
Other assets $ 569 $ 428 $ (141)
Retained earnings $ 10,510 $10,369 $ (141) $ 10,233 $10,141 $ (92)
(a) In order to simplify comparisons, the amounts shown under the previously
reported deferral method have been adjusted to include the
reclassifications that were made as a result of our adopting a new chart
of accounts (see Note 1).
(b) The amounts disclosed under the deferral method for the six and three
month periods ended May 31, 2006 and at May 31, 2006 are based on the
estimated effect of not changing our dry-dock accounting method to the
direct expense method for these current periods. Accordingly, these
estimated current period amounts have not been previously reported, but
are being disclosed in accordance with the requirements of SFAS No. 154.
In addition, retained earnings at November 30, 2004 decreased by $88
million to $8.54 billion from $8.62 billion, as a result of this change in
accounting method.
NOTE 3 - Share-Based Compensation
Effective December 1, 2005, we adopted the provisions of SFAS No.
123(revised 2004), "Share-Based Payment" ("SFAS No. 123(R)") using the modified
prospective application transition method. Under this method, the share-based
compensation cost recognized beginning December 1, 2005 includes compensation
cost for (i) all share-based payments granted prior to, but not vested as of,
December 1, 2005, based on the grant date fair value originally estimated in
accordance with the provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"), and (ii) all share-based payments granted
subsequent to November 30, 2005, based on the grant date fair value estimated in
accordance with the provisions of SFAS No. 123(R). Compensation cost under SFAS
No. 123(R) is recognized ratably using the straight-line attribution method over
the expected vesting period or to the
6
retirement eligibility date, if less than the vesting period, when vesting is
not contingent upon any future performance. In addition, pursuant to SFAS No.
123(R), we are required to estimate the amount of expected forfeitures, which we
estimate based on historical pre-vesting forfeiture experience, when calculating
compensation cost, instead of accounting for forfeitures as incurred, which was
our previous method. As of December 1, 2005, the cumulative effect of adopting
the estimated forfeiture method was not significant. The effect of adopting SFAS
123(R) has been to reduce our net income by approximately $27 million and $11
million and our basic and diluted earnings per share by $0.03 and $0.01 for the
six and three months ended May 31, 2006, respectively. Prior periods are not
restated under this transition method.
Prior to December 1, 2005, we accounted for share-based compensation in
accordance with the provisions of APB Opinion No. 25, "Accounting for Stock
Issued to Employees," as permitted by SFAS No. 123. We elected to use the
intrinsic value method of accounting for employee and director share-based
compensation expense for our noncompensatory employee and director stock option
awards and did not recognize compensation expense for the issuance of options
with an exercise price equal to or greater than the market price of the
underlying common stock/ ordinary shares at the date of grant. Had we elected to
adopt the fair value approach as prescribed by SFAS No. 123, which charges
earnings for the estimated fair value of stock options, our pro forma net income
and pro forma earnings per share for 2005 would have been as follows (in
millions, except per share amounts):
Six Months Ended Three Months Ended
May 31, 2005 May 31, 2005
---------------- ------------------
Net income, as reported $ 736 $ 388
Share-based compensation expense included in
net income, as reported 6 3
Total share-based compensation expense determined
under the fair value-based method for all awards (35) (18)
---------- -----------
Pro forma net income for basic earnings per share 707 373
Interest on dilutive convertible notes 25 12
---------- -----------
Pro forma net income for diluted earnings per share $ 732 $ 385
========== ===========
Earnings per share
Basic
As reported $ 0.92 $ 0.48
========== ===========
Pro forma $ 0.88 $ 0.46
========== ===========
Diluted
As reported $ 0.89 $ 0.47
========== ===========
Pro forma $ 0.86 $ 0.45
========== ===========
Stock Incentive Plans
We issue our share-based compensation awards under Carnival Corporation
and Carnival plc stock plans, which have an aggregate of 40.7 million shares
available for future grant at May 31, 2006. These plans allow us to issue stock
options, restricted stock units and nonvested stock awards (collectively
"incentive awards"). Incentive awards are primarily granted to management level
employees and members of our Board of Directors. The plans are administered by a
committee of our independent directors (the "Committee"), that determines who is
eligible to participate, the number of shares for which incentive awards are to
be granted and the amounts that may be exercised within a specified term. These
plans allow us to fulfill our incentive award obligations using shares purchased
in the open market, or with unissued or treasury shares. The total share-based
compensation expense was $34 million and $14 million for the six and three
months ended May 31, 2006, of which $29 million and $11 million has been
included in the Consolidated Statements of Operations as selling, general and
administrative expenses and $5 million and $3 million as cruise payroll
expenses, respectively.
Stock Option Plans
The stock option exercise price is generally set by the Committee at 100%
or more of the fair market value of the underlying common stock/ordinary shares
on the date the option is granted. All stock options granted during the six and
three months ended May 31, 2006 and
7
2005 were granted at an exercise price per share equal to or greater than the
fair market value of the Carnival Corporation common stock and Carnival plc
ordinary shares on the date of grant. Generally employee options either vest
evenly over five years or at the end of three years. Our employee options
granted prior to October 2005 have a ten-year term and those options granted
thereafter have a seven-year term. Carnival Corporation director options granted
subsequent to fiscal 2000 vest evenly over five years and have a ten-year term.
As permitted by SFAS No. 123 and SFAS No. 123(R), the fair values of
options were estimated using the Black-Scholes option-pricing model. The
Black-Scholes weighted-average values and assumptions were as follows:
Six Months ended May 31, Three Months ended May 31,
------------------------ --------------------------
2006 2005 2006 2005
---------- ----------- ----------- ------------
Fair value of options at the
dates of grant $ 12.62 $ 14.17 $ 11.21 $ 14.12
========== =========== =========== ============
Risk free interest rate(a) 4.24% 3.89% 4.85% 4.43%
========== =========== =========== ============
Expected dividend yield 2.20% 1.55% 2.57% 1.85%
========== =========== =========== ============
Expected volatility(b) 26.5% 27.0% 26.5% 27.0%
========== =========== =========== ============
Expected option life (in years)(c) 4.75 4.69 4.75 5.08
========== =========== =========== ============
(a) The risk-free interest rate is based on U.S. Treasury zero-coupon issues
with a remaining term equal to the expected option life assumed at the
date of grant.
(b) In addition to the historical volatility we also consider the implied
volatilities derived from our exchange traded options and convertible
notes in determining our expected volatility assumption since we believe
these implied market volatilities should be considered in estimating our
expected future volatilities.
(c) The average expected life was based on the contractual term of the option
and expected employee exercise behavior.
A combined summary of Carnival Corporation and Carnival plc stock option
activity during the six months ended May 31, 2006 was as follows:
Weighted- Weighted-Average Aggregate
Average Remaining Intrinsic
Shares Exercise Price Contractual Term Value(a)
----------- -------------- ---------------- -------------
(in years) (in millions)
Outstanding at
November 30, 2005 20,058,252 $39.15
Granted 676,512 $58.45
Exercised (1,277,106) $29.36
Forfeited or expired (462,532) $40.57
-----------
Outstanding at
May 31, 2006 18,995,126 $40.96 6.4 $91
===========
Exercisable at
May 31, 2006 9,482,012 $37.09 $67
(a) The aggregate intrinsic value represents the amount by which the fair
value of underlying stock exceeds the option exercise price as of May 31,
2006.
As of the dates of exercise, the total intrinsic value of options
exercised were $31 million ($26 million in 2005) and $4 million ($9 million in
2005) for the six and three months ended May 31, 2006, respectively. As of May
31, 2006, there was $93 million of total unrecognized compensation cost related
to unvested stock options. This cost is expected to be recognized over a
weighted-average period of 1.9 years.
Nonvested Stock and Restricted Stock Units
Nonvested stock generally has the same rights as Carnival Corporation
common stock, except for transfer restrictions and forfeiture provisions. In
prior periods, 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. Upon adoption of SFAS No. 123(R),
the $13 million of unearned stock compensation as of November 30, 2005 was
8
required to be charged against additional paid-in capital. Nonvested stock is
amortized to expense using the straight-line method from the grant date through
the earlier of the vesting date or the estimated retirement eligibility date.
These shares have been granted to certain officers and non-executive board
members and either have three or five-year cliff vesting or vest evenly over
five years after the grant date.
In addition, Carnival Corporation and Carnival plc grant restricted stock
units ("RSUs"), which do not have an exercise price, and either vest evenly over
five years or at the end of three or five years after the grant date. The
share-based compensation expense associated with the RSUs is based on the quoted
market price of the Carnival Corporation or Carnival plc shares on the date of
grant, and is expensed using the straight-line method from the grant date
through the earlier of the vesting date or the employees' estimated retirement
eligibility date.
During the six months ended May 31, 2006 the nonvested stock and RSUs
activity was as follows:
Nonvested Stock Restricted Stock Units
--------------------------- ----------------------------
Weighted- Weighted-
Average Average
Grant Date Grant Date
Shares Fair Value Shares Fair Value
-------- -------------- ------- ----------------
Outstanding at
November 30, 2005 966,417 $36.28 159,117 $44.56
Granted 110,000 $53.71 274,022 $52.21
Vested (203,667) $30.84 (47,319) $30.07
Forfeited (4,874) $51.80
-------- -------
Outstanding at
May 31, 2006 872,750 $39.74 380,946 $51.89
======== =======
As of May 31, 2006, there was $25 million of total unrecognized
compensation cost related to nonvested stock and RSUs. This cost is expected to
be recognized over a weighted-average period of 1.8 years.
NOTE 4 - Debt
During the six months ended May 31, 2006 $69 million of our zero-coupon
convertible notes were converted into 2.1 million shares of Carnival Corporation
common stock, of which 1.9 million shares were issued from treasury stock.
The Carnival Corporation common stock trigger price of $43.05, which is
required to be met in order to allow the conversion of the Carnival Corporation
2% convertible notes, was not met for the defined duration of time in the second
quarter of fiscal 2006 and, accordingly, these notes are not convertible during
the third quarter of fiscal 2006.
In May 2006, we borrowed $352 million under an unsecured term loan
facility, which proceeds were used to pay a portion of the Crown Princess
purchase price. This facility bears interest at 4.51% and is repayable in
semi-annual installments through May 2018.
NOTE 5 - Contingencies
Litigation
As of May 31, 2006, five separate actions had been filed against either
Carnival Corporation or Princess Cruise Lines, Ltd. in the U.S. on behalf of
some current and former crew members alleging that Carnival Cruise Lines and
Princess Cruises failed to timely pay the plaintiffs for overtime and other
wages due (the "Wage Actions"). These actions generally seek payment of (i)
damages for breach of contract or restitution for back wages, (ii) damages under
the Seaman's Wage Act and (iii) interest. In May 2006, we entered into a
settlement agreement for the two cases pending against Carnival Corporation,
which is subject to final court approval. There can be no assurance that such
approval will be obtained. However, the court has granted preliminary approval
of the settlement. The settlement agreement requires
9
us to establish a settlement fund, the ultimate net amount of which was
estimated and recorded as an expense in the first quarter of 2006. The ultimate
outcomes of the remaining actions cannot be determined at this time. However, we
believe that we have meritorious defenses to these remaining claims and we
intend to vigorously defend these actions.
In January 2006, an action was filed against Carnival Corporation and its
subsidiaries and affiliates, and other non-affiliated cruise lines in New York
on behalf of James Jacobs and a purported class of owners of intellectual
property rights to musical plays and other works performed in the U.S. The
plaintiffs claim infringement of copyrights to Broadway, off Broadway and other
plays. The action seeks payment of (i) damages, (ii) disgorgement of alleged
profits and (iii) an injunction against future infringement. In the event that
an award is given in favor of the plaintiffs, the amount of damages, if any,
which Carnival Corporation and its subsidiaries and affiliates would have to pay
is not currently determinable. The ultimate outcome of this matter cannot be
determined at this time.
In 2002 and 2004, 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 advertisement referred to in the 2002
Facsimile Complaint that referenced a Carnival Cruise Line product was not sent
by Carnival Corporation, but rather was distributed by a professional faxing
company at the behest of a third party travel agency. The faxes involved in the
2004 case were sent to a travel agency with whom we had conducted business. 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. However, we believe that we have meritorious defenses
and we will continue to vigorously defend these actions.
Costa Cruises ("Costa") instituted arbitration proceedings in Italy in
2000 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 also gave notice of termination of the contract in
January 2001. It is expected that the arbitration tribunal's decision will be
made by February 2007 at the latest. In the event that an award is given in
favor of Cammell Laird, the amount of damages, if any, which Costa would have to
pay, is not currently determinable. 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, net
of any insurance recoverables, 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 May 31, 2006, Carnival Corporation had contingent obligations totaling
approximately $1.1 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 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 AA or higher. In
addition, Carnival Corporation obtained a direct guarantee from a AA rated
financial institution for $278 million of the above noted contingent
obligations, thereby further reducing the already remote exposure to this
portion of the contingent obligations. In certain cases, if the credit ratings
of the major financial institutions who are directly paying the contingent
obligations fall below AA-, then Carnival Corporation will be required to move
the funds being held by those institutions to other financial institutions whose
credit ratings are AA- or above. If Carnival Corporation's credit rating, which
is A-, falls below BBB, it would be required to provide a standby letter
10
of credit for $78 million, or alternatively provide mortgages in the aggregate
amount of $78 million on two of its ships.
In the unlikely event that Carnival Corporation were to terminate the
three lease agreements early or default on its obligations, it would, as of May
31, 2006, have to pay a total of $171 million in stipulated damages. As of May
31, 2006, $180 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. Between 2017 and 2022, we have the right to
exercise options that would terminate these three lease transactions at no cost
to us.
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 payments is probable.
War Risk Insurance
During the first quarter of fiscal 2006 we obtained additional war risk
insurance, subject to coverage limits, deductibles and exclusions for claims
such as those arising from chemical and biological attacks, to cover damage or
loss to all of our 36 previously uninsured ships, including terrorist risks.
Under the terms of our war risk insurance coverage, which is typical for war
risk policies in the marine industry, underwriters can give seven days notice to
the insured that the policies will be cancelled.
NOTE 6 - Comprehensive Income
Comprehensive income was as follows (in millions):
Six Months Three Months
Ended May 31, Ended May 31,
------------- -------------
2006 2005 2006 2005
----- ----- ----- -----
Net income $ 631 $ 736 $ 380 $ 388
Items included in accumulated other comprehensive income
Foreign currency translation adjustment 299 (177) 290 (174)
Changes related to cash flow derivative hedges 15 (6) 11 (17)
----- ----- ----- -----
Total comprehensive income $ 945 $ 553 $ 681 $ 197
===== ===== ===== =====
NOTE 7 - Segment Information
Our cruise segment includes 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 products and services they
provide. Our other segment primarily represents the hotel, tour and
transportation operations of Holland America Tours and Princess Tours.
Selected segment information for our cruise and other segments was as
follows (in millions):
11
Six Months Ended May 31,
------------------------------------------------------------
Selling Depreciation Operating
Operating and admin- and income
Revenues expenses istrative amortization (loss)
-------- --------- ---------- ------------ ---------
2006
Cruise $ 5,069 $ 3,083 $ 698 $ 456 $ 832
Other 70 67 22 16 (35)
Intersegment elimination (14) (14)
-------- --------- ------ ------ -----
$ 5,125 $ 3,136 $ 720 $ 472 $ 797
======== ========= ====== ====== =====
2005
Cruise $ 4,856 $ 2,853 $ 654 $ 432 $ 917
Other 72 67 24 14 (33)
Intersegment elimination (14) (14)
-------- --------- ------ ------ -----
$ 4,914 $ 2,906 $ 678 $ 446 $ 884
======== ========= ====== ====== =====
Three Months Ended May 31,
------------------------------------------------------------
Selling Depreciation Operating
Operating and admin- and income
Revenues expenses istrative amortization (loss)
-------- --------- ---------- ------------ ---------
2006
Cruise $ 2,620 $ 1,583 $ 343 $ 232 $ 462
Other 54 49 11 8 (14)
Intersegment elimination (12) (12)
-------- --------- ------ ------ -----
$ 2,662 $ 1,620 $ 354 $ 240 $ 448
======== ========= ====== ====== =====
2005
Cruise $ 2,469 $ 1,448 $ 327 $ 217 $ 477
Other 60 53 15 7 (15)
Intersegment elimination (13) (13)
-------- --------- ------ ------ -----
$ 2,516 $ 1,488 $ 342 $ 224 $ 462
======== ========= ====== ====== =====
NOTE 8 - Earnings Per Share
Our basic and diluted earnings per share were computed as follows (in
millions, except per share data):
Six Months Three Months
Ended May 31, Ended May 31,
--------------- ---------------
2006 2005 2006 2005
------ ------ ------ ------
Net income $ 631 $ 736 $ 380 $ 388
Interest on dilutive convertible notes 18 25 9 12
------ ------ ------ ------
Net income for diluted earnings per share $ 649 $ 761 $ 389 $ 400
====== ====== ====== ======
Weighted-average common and ordinary
shares outstanding 807 805 805 805
Dilutive effect of convertible notes 33 44 33 44
Dilutive effect of stock plans 3 6 2 5
------ ------ ------ ------
Diluted weighted-average shares
outstanding 843 855 840 854
====== ====== ====== ======
Basic earnings per share $ 0.78 $ 0.92 $ 0.47 $ 0.48
====== ====== ====== ======
Diluted earnings per share $ 0.77 $ 0.89 $ 0.46 $ 0.47
====== ====== ====== ======
Options to purchase 3.5 million (2.2 million in 2005) and 5.5 million (2.2
million in 2005) shares for the six and three months ended May 31, 2006,
respectively, were excluded from our diluted earnings per share computation
since the effect of including them was anti-dilutive.
12
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Cautionary Note Concerning Factors That May Affect Future Results
Some of the statements contained in this "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and elsewhere in this
joint Quarterly Report on Form 10-Q are "forward-looking statements" that
involve risks, uncertainties and assumptions with respect to us, including some
statements concerning future results, 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 joint
Quarterly Report on Form 10-Q. 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, fuel 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, unusual weather conditions or natural disasters, such as
hurricanes and earthquakes and other incidents (including machinery and
equipment failures, which could cause the alteration of itineraries or
cancellation of a cruise or series of cruises and the impact of the spread
of contagious diseases), affecting the health, safety, security and
vacation satisfaction of passengers;
- changing consumer preferences, which may, among other things, adversely
impact the demand for cruises;
- our ability to implement our shipbuilding programs and brand strategies
and to continue to expand our business worldwide;
- our future operating cash flow may not be sufficient to fund future
obligations and we may not be able to obtain financing, if necessary, on
terms that are favorable or consistent with our expectations;
- our ability to attract and retain qualified shipboard crew and maintain
good relations with employee unions;
- the impact of changes in operating and financing costs, including changes
in foreign currency exchange rates and interest rates and fuel, food,
payroll, insurance and security costs;
- the impact of pending or threatened litigation;
- changes in the environmental, health, safety, security, tax and other
regulatory regimes under which we operate, including the implementation of
U.S. regulations requiring U.S. citizens to obtain passports for travel to
or from additional foreign destinations;
- continued availability of attractive port destinations;
- our ability to successfully implement cost reduction plans; and
- continuing financial viability of our travel agent distribution system and
air service providers.
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 joint Quarterly
13
Report on Form 10-Q, any updates or revisions to any such forward-looking
statements to reflect any change in expectations or events, conditions or
circumstances on which any such statements are based.
Key Performance Indicators and Critical Accounting Estimates
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, except for the impact of changing prices.
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 that 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.
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 two non-GAAP financial measures
assuming the current period currency exchange rates have remained constant with
the prior year's comparable period 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.
On a constant dollar basis, net cruise revenues and net cruise costs would
be $4.12 billion and $2.82 billion for the six months ended May 31, 2006 and
$2.14 billion and $1.44 billion for the three months ended May 31, 2006,
respectively. On a constant dollar basis, gross cruise revenues and gross cruise
costs would be $5.16 billion and $3.86 billion for the six months ended May 31,
2006 and $2.65 billion and $1.95 billion for the three months ended May 31,
2006, respectively. In addition to our two non-GAAP financial measures discussed
above, our non-U.S. cruise operations' depreciation and net interest expense
were impacted by the changes in exchange rates for the six and three months
ended May 31, 2006 compared to the prior periods' rates.
All the prior periods financial information presented herein have been
adjusted to reflect the retrospective application of the change in our method of
accounting for dry-dock costs and for certain reclassifications, as more fully
discussed in Notes 1 and 2 in the accompanying financial statements.
For a discussion of our critical accounting estimates, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations," which
is included in Carnival Corporation & plc's 2005 joint Annual Report on Form
10-K.
Outlook for the Remainder of 2006
As of June 16, 2006 we said that we expected our diluted earnings per
share for the third quarter of 2006 would be approximately $1.45 to $1.47 and
approximately $2.65 to $2.75 for the 2006 full year. Our guidance was based on
the then current forward fuel price curve of $364 per metric ton for the third
quarter of 2006 and $366 per metric ton for the last half of fiscal 2006. In
addition, this guidance was also based on currency exchange rates of $1.29 to
the euro and $1.88 to sterling.
14
The year-over-year percentage increase in our ALBD capacity, resulting
from new ships entering service, is expected to be 5.1%, 5.8% and 4.6% for the
third and fourth quarters and full year of 2006, respectively, based on ships
currently on order.
Seasonality
Our revenue from the sale of passenger tickets is seasonal. Historically,
demand for cruises has been greatest during our third quarter, which includes
the Northern Hemisphere summer months. This higher demand during the third
quarter results in higher net revenue yields and, accordingly, the largest share
of our net income is earned during this period. The seasonality of our results
is increased due to ships being taken out of service for dry-docking, which we
typically schedule during non-peak demand periods. 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.
15
Selected Information and Non-GAAP Financial Measures
Selected information was as follows:
Six Months Ended May 31, Three Months Ended May 31,
---------------------------- ----------------------------
2006(a) 2005 2006 2005
------------ ------------ ------------ ------------
Passengers carried (in thousands) 3,225 3,306 1,708 1,687
============ ============ ============ ============
Occupancy percentage 104.8% 104.3% 105.4% 104.8%
============ ============ ============ ============
Fuel cost per metric ton $ 336 $ 222 $ 354 $ 248
============ ============ ============ ============
(a) Passengers carried in 2006 are lower than 2005 because 2006 does not
include any passengers for the three ships chartered to the Military
Sealift Command ("MSC") in the 2006 first quarter in connection with the
Hurricane Katrina relief efforts. Occupancy percentage includes the three
ships chartered to the MSC at 100% occupancy.
Gross and net revenue yields were computed by dividing the gross or net
revenues, without rounding, by ALBDs as follows:
Six Months Ended May 31, Three Months Ended May 31,
---------------------------- ----------------------------
2006 2005 2006 2005
------------ ------------ ------------ ------------
(in millions, except ALBDs and yields)
Cruise revenues
Passenger tickets $ 3,930 $ 3,746 $ 2,020 $ 1,903
Onboard and other 1,139 1,110 600 566
------------ ------------ ------------ ------------
Gross cruise revenues 5,069 4,856 2,620 2,469
Less cruise costs
Commissions, transportation and other (813) (803) (405) (380)
Onboard and other (198) (193) (101) (96)
------------ ------------ ------------ ------------
Net cruise revenues $ 4,058 $ 3,860 $ 2,114 $ 1,993
============ ============ ============ ============
ALBDs 24,179,420 23,298,274 12,242,982 11,711,830
============ ============ ============ ============
Gross revenue yields $ 209.63 $ 208.45 $ 214.00 $ 210.79
============ ============ ============ ============
Net revenue yields $ 167.78 $ 165.68 $ 172.63 $ 170.11
============ ============ ============ ============
Gross and net cruise costs per ALBD were computed by dividing the gross or
net cruise costs, without rounding, by ALBDs as follows:
Six Months Ended May 31, Three Months Ended May 31,
---------------------------- ----------------------------
2006 2005 2006 2005
------------ ------------ ------------ ------------
(in millions, except ALBDs and costs per ALBD)
Cruise operating expenses $ 3,083 $ 2,853 $ 1,583 $ 1,448
Cruise selling and administrative expenses 698 654 343 327
------------ ------------ ------------ ------------
Gross cruise costs 3,781 3,507 1,926 1,775
Less cruise costs included in net cruise
revenues
Commissions, transportation and other (813) (803) (405) (380)
Onboard and other (198) (193) (101) (96)
------------ ------------ ------------ ------------
Net cruise costs $ 2,770 $ 2,511 $ 1,420 $ 1,299
============ ============ ============ ============
ALBDs 24,179,420 23,298,274 12,242,982 11,711,830
============ ============ ============ ============
Gross cruise costs per ALBD $ 156.40 $ 150.50 $ 157.35 $ 151.56
============ ============ ============ ============
Net cruise costs per ALBD $ 114.54 $ 107.73 $ 115.98 $ 110.87
============ ============ ============ ============
16
Six Months Ended May 31, 2006 ("2006") Compared to the Six Months Ended May 31,
2005 ("2005")
Revenues
Net cruise revenues increased $198 million, or 5.1%, to $4.06 billion in
2006 from $3.86 billion in 2005. The 3.8% increase in ALBDs between 2005 and
2006 accounted for $146 million of the increase, and the remaining $52 million
was from increased net revenue yields, which increased 1.3% in 2006 compared to
2005 (gross revenue yields increased by 0.6%). Net revenue yields increased in
2006 primarily from higher cruise ticket prices and a 0.5% increase in
occupancy, partially offset by the stronger U.S. dollar relative to the euro and
sterling. In addition, net revenue yield in 2005 was reduced in part by the
cancellation of the higher yielding P&O Cruises Aurora world cruise. The
strengthening of the U.S. dollar against the euro and sterling had an impact on
our net revenue yields in 2006 because a portion of our business is transacted
in those currencies. Net revenue yields as measured on a constant dollar basis
increased 2.9% in 2006. Gross cruise revenues increased $213 million, or 4.4%,
in 2006 to $5.07 billion from $4.86 billion in 2005 for largely the same reasons
as net cruise revenues.
The charter of three ships to the MSC in the first quarter of 2006
resulted in lower onboard revenues and higher cruise ticket revenues because the
charters did not generate onboard revenues as the entire charter price was
recorded in passenger ticket revenues. Onboard and other revenues included
concession revenues of $140 million in 2006 and $139 million in 2005.
Costs and Expenses
Net cruise costs increased $259 million, or 10.3%, to $2.77 billion in
2006 from $2.51 billion in 2005. The 3.8% increase in ALBDs between 2005 and
2006 accounted for $97 million of the increase, and the balance of $162 million
was from increased net cruise costs per ALBD, which increased 6.3% in 2006
compared to 2005 (gross cruise costs per ALBD increased 3.9%). Net cruise costs
per ALBD increased primarily due to a $114 increase in fuel cost per metric ton,
or 51.5%, to $336 per metric ton in 2006, which resulted in an additional $157
million of expense, and a $27 million increase in share-based compensation
expense, which was substantially all a result of the adoption of SFAS No. 123(R)
(see Note 3 in the accompanying financial statements). This increase was
partially offset by a stronger U.S. dollar relative to the euro and sterling in
2006. Net cruise costs per ALBD as measured on a constant dollar basis compared
to 2005 increased 8.2% in 2006. On a constant dollar basis, net cruise costs per
ALBD excluding increased fuel prices increased 2.3% compared to 2005 in large
part because of the adoption of the new share-based compensation accounting
standard, and increases in Mexican port costs caused by hurricane damages to our
port facility in Cozumel. Gross cruise costs increased $274 million, or 7.8%, in
2006 to $3.78 billion from $3.51 billion in 2005 for largely the same reasons as
net cruise costs.
Depreciation and amortization expense increased by $26 million, or 5.8%,
to $472 million in 2006 from $446 million in 2005 largely due to the 3.8%
increase in ALBDs through the addition of new ships and ship improvement
expenditures, partially offset by the impact of a stronger U.S. dollar.
Nonoperating (Expense) Income
Net interest expense, excluding capitalized interest, decreased $13
million to $156 million in 2006 from $169 million in 2005. This decrease was
primarily due to lower average borrowings, partially offset by the impact of
higher interest rates. Capitalized interest increased $7 million during 2006
compared to 2005 due primarily to higher average levels of investment in ship
construction projects.
Other expense in 2006 included a $10 million expense for the write-down of
a non-cruise investment and a $5 million provision for a litigation reserve.
Other income in 2005 included $7 million from the settlement of litigation
associated with the DLC transaction.
17
Income Taxes
Income tax expense increased by $14 million from 2005 to $11 million in
2006 from a $3 million benefit in 2005 primarily because we recorded U.S.
federal and state income taxes related to the MSC charter, which ended in early
March 2006.
Three Months Ended May 31, 2006 ("2006") Compared to the Three Months Ended May
31, 2005 ("2005")
Revenues
Net cruise revenues increased $121 million, or 6.1%, to $2.11 billion in
2006 from $1.99 billion in 2005. The 4.5% increase in ALBDs between 2005 and
2006 accounted for $90 million of the increase, and the remaining $31 million
was from increased net revenue yields, which increased 1.5% in 2006 compared to
2005 due to higher cruise ticket prices and onboard spending and a 0.6% increase
in occupancy, partially offset by the stronger U.S. dollar relative to the euro
and sterling. Net revenue yields as measured on a constant dollar basis,
increased 2.6% in 2006. Gross cruise revenues increased $151 million, or 6.1%,
in 2006 to $2.62 billion from $2.47 billion in 2005 for largely the same reasons
as net cruise revenues. Onboard and other revenues included concession revenues
of $74 million in 2006 and $70 million in 2005.
Costs and Expenses
Net cruise costs increased $121 million, or 9.3%, to $1.42 billion in 2006
from $1.30 billion in 2005. The 4.5% increase in ALBDs between 2005 and 2006
accounted for $60 million of the increase, and the balance of $61 million was
from increased net cruise costs per ALBD, which increased 4.6% in 2006 compared
to 2005 (gross cruise costs per ALBD increased 3.8%). Net cruise costs per ALBD
increased primarily due to a $106 increase in fuel cost per metric ton, or
42.7%, to $354 per metric ton in 2006, which resulted in an additional $74
million of expense, and an $11 million increase in share-based compensation
expense, which was substantially all a result of the adoption of SFAS No.
123(R). This increase was partially offset by a stronger U.S. dollar relative to
the euro and sterling in 2006. Net cruise costs per ALBD as measured on a
constant dollar basis compared to 2005 increased 5.9% in 2006. On a constant
dollar basis, net cruise costs per ALBD excluding increased fuel prices
increased 0.5% compared to 2005 in large part because of the adoption of the new
share-based compensation accounting standard, and increases in Mexican port
costs caused by hurricane damages to our port facility in Cozumel. Gross cruise
costs increased $151 million, or 8.5%, in 2006 to $1.93 billion from $1.78
billion in 2005 for largely the same reasons as net cruise costs.
Depreciation and amortization expense increased by $16 million, or 7.1%,
to $240 million in 2006 from $224 million in 2005 largely due to the 4.5%
increase in ALBDs through the addition of new ships and ship improvement
expenditures, partially offset by the impact of a stronger U.S. dollar.
Nonoperating (Expense) Income
Net interest expense, excluding capitalized interest, decreased $2 million
to $79 million in 2006 from $81 million in 2005. This decrease was primarily due
to lower average borrowings, partially offset by the impact of higher interest
rates. Capitalized interest increased $4 million during 2006 compared to 2005
due primarily to higher average levels of investment in ship construction
projects.
Liquidity and Capital Resources
Sources and Uses of Cash
Our business provided $1.89 billion of net cash from operations during the
six months ended May 31, 2006, an increase of $124 million, or 7.0%, compared to
fiscal 2005. We continue to generate substantial cash from operations and remain
in a strong financial position, thus
18
providing us with substantial financial flexibility in meeting operating,
investing and financing needs.
During the six months ended May 31, 2006, our net expenditures for capital
projects were $1.48 billion, of which $1.23 billion was spent for our ongoing
new shipbuilding program, including $327 million and $410 million for the final
delivery payments for Holland America Line's Noordam and Princess Cruises' Crown
Princess, respectively. The remaining capital expenditures consisted primarily
of $159 million for ship improvements and refurbishments, and $98 million for
Alaska tour assets, cruise port facility developments and information technology
assets.
During the six months ended May 31, 2006, we borrowed $352 million to pay
part of the Crown Princess purchase price, and we repaid $959 million of
long-term debt, which included $873 million of Costa's indebtedness. We also
paid cash dividends of $404 million during the first six months of fiscal 2006
and purchased $473 million of Carnival Corporation common stock in open market
transactions.
Future Commitments and Funding Sources
Our contractual cash obligations remained generally unchanged at May 31,
2006 compared to November 30, 2005, including ship construction contracts
entered into in December 2005, except for changes in our debt and the Noordam
and Crown Princess delivery payments as noted above. As of November 30, 2005, we
had contractual cash obligations on our variable-rate debt, including interest
swapped from a fixed-rate to a variable rate, using the forward interest rate
curve for the terms of the loans, as follows (in millions): $86, $73, $37, $29,
$21 and $37 in fiscal 2006 through 2010 and thereafter, respectively.
Subsequent to May 31, 2006, Costa Cruises entered into a new ship
construction contract with Fincantieri for a 2,260 passenger ship, which has an
estimated all-in cost of 420 million euros and is expected to enter service in
spring 2009. In addition, in June 2006, AIDA Cruises entered into a new ship
construction contract with Meyer Werft for a 2,050 passenger ship, which has an
estimated all-in cost of 330 million euros and is expected to enter service in
spring 2010. Finally, on June 30, 2006 we made our final delivery payment of 344
million euro for the Costa Concordia.
At May 31, 2006, we had liquidity of $3.64 billion, which consisted of
$583 million of cash, cash equivalents and short-term investments, $1.72 billion
available for borrowing under our revolving credit facility and $1.34 billion
under committed ship financing facilities. Our revolving credit facility matures
in 2010. 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 2006, we expect to be in compliance with our
debt covenants during the remainder of fiscal 2006. 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. However, we cannot be certain 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.
19
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are designed to provide reasonable
assurance that information required to be disclosed by us in the reports that we
file or submit, is recorded, processed, summarized and reported, within the time
periods specified in the U.S. Securities and Exchange Commission's rules and
forms.
Our Chief Executive Officer, Chief Operating Officer and Chief Financial
and Accounting Officer have evaluated our disclosure controls and procedures and
have concluded, as of May 31, 2006, that they were effective as described above.
Changes in Internal Control over Financial Reporting
During the three months ended May 31, 2006, we initiated our
implementation of a new worldwide accounting system. We expect to substantially
complete this implementation across all our existing reporting units over the
next twelve months.
There have been no other changes in our internal control over financial
reporting during the quarter ended May 31, 2006 that have materially affected or
are reasonably likely to materially affect our internal control over financial
reporting.
It should be noted that any system of controls, however well designed and
operated, can provide only reasonable, and not absolute, assurance that the
objectives of the system will be met. In addition, the design of any control
system is based in part upon certain assumptions about the likelihood of future
events. Because of these and other inherent limitations of control systems,
there is only reasonable assurance that our controls will succeed in achieving
their goals under all potential future conditions.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
A group of actions referred to as the Wage Actions was previously reported
in our 2006 first quarter joint Quarterly Report on Form 10-Q. A settlement
agreement was entered into for two of the Wage Actions pending against Carnival
Corporation in the U.S. District Court for the Southern District of Florida,
which is subject to final court approval. There can be no assurance that such
approval will be obtained. However, the court has granted preliminary approval
of the settlement. The settlement agreement requires us to establish a
settlement fund.
An action referred to as the Festival Action was previously reported in
our 2006 first quarter joint Quarterly Report on Form 10-Q. As previously
reported, Festival was declared bankrupt in May 2004. In March 2OO6, the Court
of First Instance of the European Communities in Luxemburg ruled that it was not
necessary to issue a judgment due to the bankruptcy of Festival and terminated
the case.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
During the quarter ended May 31, 2006, purchases by Carnival Corporation
of Carnival Corporation's equity securities that are registered by it pursuant
to Section 12 of the Exchange Act were as follows:
20
Maximum
Dollar Value of
Shares that
Total May Yet Be
Number of Purchased
Shares Average Under the
Purchased in Price Paid Plans or
Period Second Quarter per Share Programs(a)
- --------------------- -------------- ---------- ---------------
(in millions)
March 1, 2006 through
March 31, 2006 2,710,600 $ 49.06 $ 481
April 1, 2006 through
April 30, 2006 5,883,400 $ 47.50 $ 202
May 1, 2006 through
May 31, 2006 1,450,000 $ 41.75 $ 141
--------------
Total 10,044,000 $ 47.09
==============
(a) During 2004 the Boards of Directors authorized the repurchase of up to an
aggregate of $1 billion of Carnival Corporation common stock and/or
Carnival plc ordinary shares commencing in 2005 subject to certain
repurchase restrictions on Carnival plc shares. We completed this $1
billion repurchase program in June 2006. All shares repurchased through
May 31, 2006 were repurchased pursuant to the 2004 publicly announced
program. A second $1 billion authorization was approved by the Boards of
Directors in June 2006 subject to certain restrictions. This program does
not have an expiration date and may be discontinued by our Boards of
Directors at any time. At June 28, 2006, the remaining availability
pursuant to our 2006 share repurchase program was $989 million.
During the six months ended May 31, 2006 $69 million of our zero-coupon
convertible notes were converted into 2.1 million shares of Carnival Corporation
common stock, of which 1.9 million shares were issued from treasury stock. The
issuance was exempt from registration under Section 3(a)(9) of the Securities
Act of 1933, as amended.
Each share of Carnival Corporation common stock issued is paired with a
trust share of beneficial interest in the P&O Princess Special Voting Trust,
which holds a Special Voting Share issued by Carnival plc in connection with the
DLC transaction.
Item 4. Submission of Matters to a Vote of Security Holders.
The annual meetings of shareholders of Carnival Corporation and Carnival
plc were held on April 20, 2006 (the "Annual Meetings"). On all matters which
came before the Annual Meetings, holders of Carnival Corporation common stock
and Carnival plc ordinary shares were entitled to one vote for each share held.
Proxies for 702,417,464 shares entitled to vote were received in connection with
the Annual Meetings.
The matters which were submitted to Carnival Corporation's and Carnival
plc's shareholders for approval at the Annual Meetings and the tabulation of the
votes with respect to each such matter were as follows:
Director Elections
Against/
Resolution/Proposal For Withheld(a) Abstained
To re-elect Micky Arison
as a director of
Carnival Corporation
and Carnival plc 683,677,818 17,220,746 1,518,899
21
Against/
Resolution/Proposal For Withheld(a) Abstained
To re-elect Ambassador
Richard G. Capen, Jr.
as a director of
Carnival Corporation
and Carnival plc 688,437,648 10,153,934 3,825,881
To re-elect Robert H.
Dickinson as a director
of Carnival Corporation
and Carnival plc 683,286,990 17,535,791 1,594,682
To re-elect Arnold W.
Donald as a director of
Carnival Corporation
and Carnival plc 688,416,088 9,859,547 4,141,828
To re-elect Pier Luigi
Foschi as a director of
Carnival Corporation
and Carnival plc 691,252,413 9,474,009 1,691,042
To re-elect Howard S.
Frank as a director of
Carnival Corporation
and Carnival plc 692,413,784 8,593,484 1,410,195
To re-elect Richard J. Glasier
as a director of
Carnival Corporation
and Carnival plc 689,943,345 8,464,189 4,009,929
To re-elect Baroness Hogg
as a director of
Carnival Corporation
and Carnival plc 697,941,763 4,428,903 46,797
To re-elect A. Kirk Lanterman
as a director of
Carnival Corporation
and Carnival plc 678,315,785 15,354,268 8,747,411
To re-elect Modesto A.
Maidique as a director
of Carnival Corporation
and Carnival plc 686,522,978 12,017,358 3,877,127
To re-elect Sir John Parker
as a director of
Carnival Corporation
and Carnival plc 697,870,251 4,524,117 23,095
To re-elect Peter G. Ratcliffe
as a director of
Carnival Corporation
and Carnival plc 695,886,405 4,844,178 1,686,880
22
Against/
Resolution/Proposal For Withheld(a) Abstained
To re-elect Stuart Subotnick
as a director of
Carnival Corporation
and Carnival plc 686,352,943 12,117,589 3,946,932
To re-elect Uzi Zucker
as a director of
Carnival Corporation
and Carnival plc 689,837,118 9,456,893 3,123,453
(a) A vote "Withheld" by a shareholder of Carnival Corporation is deemed to be
a vote against the resolutions re-electing directors.
Other Matters Abstained/ Broker
Resolution/Proposal For Against Withheld(b) Non-Votes
To re-appoint the UK firm of
PricewaterhouseCoopers LLP
as independent auditors for
Carnival plc and to
ratify the selection of
the U.S. firm of
PricewaterhouseCoopers LLP as
the independent registered
certified public accounting
firm for Carnival Corporation 697,014,000 3,362,566 2,040,896 0
To authorize the audit
committee of the board
of directors of Carnival
plc to agree the remuneration
of the independent auditors 699,435,655 884,971 2,096,835 0
To receive the UK accounts of
Carnival plc and the
reports of the directors
and the auditors of Carnival
plc for the financial year
ended November 30, 2005 688,618,720 5,467,626 8,331,114 0
To approve directors'
remuneration report of
Carnival plc for the financial
year ended November 30, 2005 687,376,821 12,071,331 2,968,259 0
To approve limits
on the authority to allot
shares by Carnival plc 695,266,744 4,951,645 2,198,521 0
To approve the disapplication
of pre-emption rights for
Carnival plc shares 691,550,709 8,606,272 2,259,430 0
To approve a general authority
for Carnival plc to buy back
Carnival plc ordinary shares
in the open market 697,926,819 2,277,493 2,213,149 0
(b) An "Abstained" vote by a shareholder of Carnival Corporation means
"Withheld" for this purpose (a vote neither for nor against the
resolution).
23
Item 6. Exhibits.
3.1 Third Amended and Restated Articles of Incorporation of Carnival
Corporation, incorporated by reference to Exhibit No. 3.1 to the
joint Current Report on Form 8-K of Carnival Corporation and
Carnival plc filed on April 17, 2003.
3.2 Amended and Restated By-laws of Carnival Corporation, incorporated
by reference to Exhibit No. 3.2 to the joint Current Report on Form
8-K of Carnival Corporation and Carnival plc filed on April 17,
2003.
3.3 Articles of Association of Carnival plc, incorporated by reference
to Exhibit No. 3.3 to the joint Current Report on Form 8-K of
Carnival Corporation and Carnival plc filed on April 17, 2003.
3.4 Memorandum of Association of Carnival plc, incorporated by reference
to Exhibit No. 3.4 to the joint Current Report on Form 8-K of
Carnival Corporation and Carnival plc filed on April 17, 2003.
12 Ratio of Earnings to Fixed Charges.
18 Preferability letter for change in dry-dock accounting principle
from PricewaterhouseCoopers LLP, dated June 29, 2006.
31.1 Certification of Chief Executive Officer of Carnival Corporation
pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Operating Officer of Carnival Corporation
pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.3 Certification of Executive Vice President and Chief Financial and
Accounting Officer of Carnival Corporation pursuant to Rule
13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
31.4 Certification of Chief Executive Officer of Carnival plc pursuant to
Rule 13a-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.5 Certification of Chief Operating Officer of Carnival plc pursuant to
Rule 13a-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.6 Certification of Executive Vice President and Chief Financial and
Accounting Officer of Carnival plc pursuant to Rule 13a-14(a), as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer of Carnival Corporation
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Operating Officer of Carnival Corporation
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
32.3 Certification of Executive Vice President and Chief Financial and
Accounting Officer of Carnival Corporation pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
24
32.4 Certification of Chief Executive Officer of Carnival plc pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.5 Certification of Chief Operating Officer of Carnival plc pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.6 Certification of Executive Vice President and Chief Financial and
Accounting Officer of Carnival plc pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrants have duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CARNIVAL CORPORATION CARNIVAL PLC
By: /s/ Micky Arison By: /s/ Micky Arison
---------------- ----------------
Micky Arison Micky Arison
Chairman of the Board of Directors Chairman of the Board of Directors
and Chief Executive Officer and Chief Executive Officer
By: /s/ Howard S. Frank By: /s/ Howard S. Frank
-------------------- -------------------
Howard S. Frank Howard S. Frank
Vice Chairman of the Board of Vice Chairman of the Board of
Directors and Chief Operating Officer Directors and Chief Operating Officer
By: /s/ Gerald R. Cahill By: /s/ Gerald R. Cahill
-------------------- --------------------
Gerald R. Cahill Gerald R. Cahill
Executive Vice President Executive Vice President
and Chief Financial and and Chief Financial and
Accounting Officer Accounting Officer
Dated: June 30, 2006 Dated: June 30, 2006
26