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 August 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 September 25, 2006 Carnival At September 25, 2006, Carnival plc had
Corporation had outstanding outstanding 212,929,868 Ordinary Shares
622,435,526 shares of Common $1.66 par value, one Special Voting
Stock, $.01 par value. Share, GBP 1.00 par value and 622,435,526
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)
Nine Months Three Months
Ended August 31, Ended August 31,
---------------- ----------------
2006 2005 2006 2005
---- ---- ---- ----
(Notes (Notes
1 & 2) 1 & 2)
Revenues
Cruise
Passenger tickets $6,825 $6,446 $2,894 $2,700
Onboard and other 1,847 1,766 709 656
Other 357 309 302 251
------ ------ ------ ------
9,029 8,521 3,905 3,607
------ ------ ------ ------
Costs and Expenses
Operating
Cruise
Commissions, transportation and other 1,351 1,278 538 475
Onboard and other 326 311 128 118
Payroll and related 854 844 294 297
Fuel 707 491 243 189
Food 479 464 168 160
Other ship operating 1,135 1,063 398 359
Other 259 215 206 162
------ ------ ------ ------
Total 5,111 4,666 1,975 1,760
Selling and administrative 1,054 978 335 300
Depreciation and amortization 727 672 255 226
------ ------ ------ ------
6,892 6,316 2,565 2,286
------ ------ ------ ------
Operating Income 2,137 2,205 1,340 1,321
------ ------ ------ ------
Nonoperating (Expense) Income
Interest income 17 19 5 10
Interest expense, net of
capitalized interest (232) (250) (81) (82)
Other expense, net (17) (15) (1) (23)
------ ------ ------ ------
(232) (246) (77) (95)
------ ------ ------ ------
Income Before Income Taxes 1,905 1,959 1,263 1,226
Income Tax Expense, Net (42) (42) (31) (45)
------ ------ ------ ------
Net Income $1,863 $1,917 $1,232 $1,181
====== ====== ====== ======
Earnings Per Share
Basic $ 2.32 $ 2.38 $ 1.55 $ 1.46
====== ====== ====== ======
Diluted $ 2.25 $ 2.29 $ 1.49 $ 1.40
====== ====== ====== ======
Dividends Per Share $ 0.75 $ 0.55 $ 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)
August 31, November 30,
ASSETS 2006 2005
---- ----
(Notes
1 & 2)
Current Assets
Cash and cash equivalents $ 594 $ 1,178
Trade and other receivables, net 396 430
Inventories 278 250
Prepaid expenses and other 283 263
------- -------
Total current assets 1,551 2,121
------- -------
Property and Equipment, Net 23,263 21,312
Goodwill 3,281 3,206
Trademarks 1,311 1,282
Other Assets 460 428
------- -------
$29,866 $28,349
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Short-term borrowings $ 567 $ 300
Current portion of long-term debt 215 1,042
Convertible debt subject to current put option 220 283
Accounts payable 498 477
Accrued liabilities and other 984 1,032
Customer deposits 2,326 2,051
------- -------
Total current liabilities 4,810 5,185
------- -------
Long-Term Debt 6,556 5,727
Other Long-Term Liabilities and Deferred Income 621 554
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 354 353
Additional paid-in capital 7,438 7,381
Retained earnings 11,402 10,141
Unearned stock compensation (13)
Accumulated other comprehensive income 522 159
Treasury stock; 17 shares at 2006 and 2 shares at 2005
of Carnival Corporation and 42 shares at 2006 and
2005 of Carnival plc, at cost (1,843) (1,144)
------- -------
Total shareholders' equity 17,879 16,883
------- -------
$29,866 $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)
Nine Months Ended August 31,
----------------------------
2006 2005
---- ----
(Notes
1 & 2)
OPERATING ACTIVITIES
Net income $1,863 $1,917
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation and amortization 727 672
Share-based compensation 50 10
Non-cruise investment write-down 10 22
Accretion of original issue discount 7 16
Other 1 1
Changes in operating assets and liabilities
Receivables 26 (117)
Inventories (21) (16)
Prepaid expenses and other (23) (84)
Accounts payable 11 37
Accrued and other liabilities (54) 80
Customer deposits 231 254
------ ------
Net cash provided by operating activities 2,828 2,792
------ ------
INVESTING ACTIVITIES
Additions to property and equipment (2,182) (1,632)
Purchases of short-term investments (12) (865)
Sales of short-term investments 648
Other, net 1 5
------ ------
Net cash used in investing activities (2,193) (1,844)
------ ------
FINANCING ACTIVITIES
Principal repayments of long-term debt (1,030) (1,068)
Proceeds from (repayments of) short-term
borrowings, net 791 (133)
Purchases of treasury stock (793) (30)
Dividends paid (605) (402)
Proceeds from issuance of long-term debt 352 1,151
Proceeds from exercise of stock options 42 52
Other 4 (7)
------ ------
Net cash used in financing activities (1,239) (437)
------ ------
Effect of exchange rate changes on cash and cash
equivalents 20 (15)
------ ------
Net (decrease) increase in cash and cash equivalents (584) 496
Cash and cash equivalents at beginning of period 1,178 643
------ ------
Cash and cash equivalents at end of period $ 594 $1,139
====== ======
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 August 31, 2006, the
consolidated statements of operations for the nine and three months ended August
31, 2006 and 2005 and the consolidated statements of cash flows for the nine
months ended August 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
from the sale of third party shore excursions and on behalf of 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 on voyage 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 statement of operations, cash flow 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 of a new worldwide accounting system
in the 2006 second quarter. During this implementation we identified certain
classification differences among our operating subsidiaries and, accordingly, we
have recorded the 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 to determine
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 the 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 Statements of Operations
Nine Months Ended August 31,
2006 2005
------------------------------ -----------------------------
Deferral Direct Effect Deferral Direct Effect
Method(a) Method of Change Method(b) Method of Change
------ ------ --------- ------ ------ ---------
Other ship operating expenses $ 1,092 $ 1,135 $ 43 $ 1,076 $ 1,063 $ (13)
Net income $ 1,906 $ 1,863 $ (43) $ 1,904 $ 1,917 $ 13
Earnings per share
Basic $ 2.37 $ 2.32 $(0.05) $ 2.36 $ 2.38 $ 0.02
======= ======= ====== ======= ======= ======
Diluted $ 2.30 $ 2.25 $(0.05) $ 2.27 $ 2.29 $ 0.02
======= ======= ====== ======= ======= ======
Three Months Ended August 31,
2006 2005
------------------------------ -----------------------------
Deferral Direct Effect Deferral Direct Effect
Method(a) Method of Change Method(b) Method of Change
------ ------ --------- ------ ------ ---------
Other ship operating expenses $ 404 $ 398 $ (6) $ 389 $ 359 $ (30)
Net income $ 1,226 $ 1,232 $ 6 $ 1,151 $ 1,181 $ 30
Earnings per share
Basic $ 1.54 $ 1.55 $ 0.01 $ 1.43 $ 1.46 $ 0.03
======= ======= ====== ======= ======= ======
Diluted $ 1.48 $ 1.49 $ 0.01 $ 1.36 $ 1.40 $ 0.04
======= ======= ====== ======= ======= ======
Consolidated Balance Sheets
August 31, 2006 November 30, 2005
------------------------------ -----------------------------
Deferral Direct Effect Deferral Direct Effect
Method(a) Method of Change Method(b) Method of Change
------ ------ --------- ------ ------ ---------
Prepaid expenses and other $ 283 $ 283 $ 352 $ 263 $ (89)
Other assets $ 595 $ 460 $ (135) $ 428 $ 428
Retained earnings $11,537 $11,402 $ (135) $10,233 $10,141 $ (92)
(a) The amounts disclosed under the deferral method for the nine and three month
periods ended August 31, 2006 and at August 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.
(b) 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).
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 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 forfeiture
experience, when calculating compensation cost, instead of accounting for
forfeitures as
6
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 $41 million and $13 million and our basic and diluted earnings per
share by $0.05 and $0.02 for the nine and three months ended August 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):
Nine Months Ended Three Months Ended
August 31, 2005 August 31, 2005
--------------- ---------------
Net income, as reported $1,917 $1,181
Share-based compensation expense included in
net income, as reported 8 3
Total share-based compensation expense determined
under the fair value-based method for all awards (57) (20)
------ ------
Pro forma net income for basic earnings per share 1,868 1,164
Interest on dilutive convertible notes 37 12
------ ------
Pro forma net income for diluted earnings per share $1,905 $1,176
====== ======
Earnings per share
Basic
As reported $2.38 $1.46
===== =====
Pro forma $2.32 $1.44
===== =====
Diluted
As reported $2.29 $1.40
===== =====
Pro forma $2.24 $1.38
===== =====
Stock Incentive Plans
We issue our share-based compensation awards under the Carnival
Corporation and Carnival plc stock plans, which have an aggregate of 40.6
million shares available for future grant at August 31, 2006. These plans allow
us to issue stock options, restricted stock awards and restricted stock units
(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 $50 million and
$16 million for the nine and three months ended August 31, 2006, respectively,
of which $44 million and $14 million has been included in the Consolidated
Statements of Operations as selling, general and administrative expenses and $6
million and $2 million as cruise payroll expenses, respectively.
Stock Option Plans
The Committee generally sets stock option exercise prices 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 nine and three
months ended August 31, 2006 and 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
7
granted thereafter have a seven-year term. Since fiscal 2001, Carnival
Corporation director options 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:
Nine Months ended August 31, Three Months ended August 31,
--------------------------- ----------------------------
2006 2005 2006 2005
---- ---- ---- ----
Fair value of options at the
dates of grant $12.25 $14.14 $ 9.18 $13.15
====== ====== ====== ======
Risk free interest rate(a) 4.29% 3.89% 4.72% 4.17%
====== ====== ====== ======
Expected dividend yield 2.31% 1.58% 3.25% 2.47%
====== ====== ====== ======
Expected volatility(b) 26.8% 27.0% 29.5% 27.0%
====== ====== ====== ======
Expected option life (in years)(c) 4.75 4.69 4.75 5.75
====== ====== ====== ======
(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) The expected volatility is based on a weighting of the historical volatility
of our common stock and the implied volatilities derived from our exchange
traded options and convertible notes.
(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 nine months ended August 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 756,512 $ 56.34
Exercised (1,484,153) $ 28.94
Forfeited or expired (545,989) $ 41.41
----------
Outstanding at
August 31, 2006 18,784,622 $ 41.21 6.1 $ 79
========== ======= =======
Exercisable at
August 31, 2006 9,302,207 $ 37.37 $ 57
========== =======
(a) The aggregate intrinsic value represents the amount by which the fair
value of underlying stock exceeds the option exercise price as of August
31, 2006.
As of the dates of exercise, the total intrinsic value of options
exercised were $33 million ($37 million in 2005) and $3 million ($11 million in
2005) for the nine and three months ended August 31, 2006, respectively. As of
August 31, 2006, there was $82 million of total unrecognized compensation cost
related to unvested stock options. This cost is expected to be recognized over a
weighted-average period of 1.8 years.
Restricted Stock Awards and Restricted Stock Units
Restricted stock awards ("RSAs") generally have 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 required to be charged against additional paid-in
capital. RSAs 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
8
after the grant date. The share-based compensation expense associated with RSAs
and RSUs is based on the quoted market price of the Carnival Corporation or
Carnival plc shares 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 estimated retirement eligibility date.
During the nine months ended August 31, 2006 RSA and RSU activity was as
follows:
Restricted Stock Awards 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 150,000 $49.64 274,022 $52.38
Vested (243,667) $31.20 (47,319) $30.07
Forfeited (6,736) $51.76
------- -------
Outstanding at
August 31, 2006 872,750 $39.99 379,084 $51.89
======= =======
As of August 31, 2006, there was $22 million of total unrecognized
compensation cost related to RSAs and RSUs. This cost is expected to be
recognized over a weighted-average period of 1.8 years.
NOTE 4 - Debt
At August 31, 2006, our short-term borrowings consisted of commercial
paper obligations of $245 million and bank loans of 139 million euros ($177
million U.S. dollars at the August 31, 2006 exchange rate) and $145 million with
an aggregate weighted-average interest rate of 4.7%.
During the nine months ended August 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 third
quarter of fiscal 2006 and, accordingly, these notes are not convertible during
the fourth 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.
It is our current intention to refinance 441 million euros ($566 million U.S.
dollars at the August 31, 2006 exchange rate) of our outstanding euro commercial
paper obligations. Since we have the current ability to use our long-term
revolving credit facility to refinance this amount on a long-term basis, it has
been classified as long-term debt in the accompanying August 31, 2006 balance
sheet. Our decision to refinance this debt was made subsequent to August 31,
2006 and, accordingly, the net cash proceeds received under this euro commercial
paper program through August 31, 2006 have been classified as proceeds from
short-term borrowings in the accompanying statements of cash flows.
NOTE 5 - Contingencies
Litigation
On September 21, 2006, a class action complaint was filed by J. B. Miller
on behalf of a purported class of past passengers against Holland America Line
("HAL") in the U.S. The complaint alleges that HAL (i) failed to disclose that
shore excursion vendors paid HAL to promote their services as required by an
Alaska statute, and (ii) collected and retained payment from passengers for
Passenger Vessel Services Act ("PSVA") violations in certain
9
instances when HAL did not actually incur the fines. The complaint seeks (i)
certification as a class action, (ii) statutory damages under Alaska's consumer
protection statutes, (iii) damages for each PSVA fine collected and additional
damages for each PSVA fine collected where no fine was imposed, (iv) injunctive
relief and (v) attorneys' fees, costs and interest. The ultimate outcome of this
action cannot be determined at this time. However, we believe that we have
meritorious defenses to these claims and intend to vigorously defend this
matter.
As of August 31, 2006, three separate actions had been filed against each
of Carnival Corporation and Princess Cruise Lines, Ltd. ("Princess") 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 six 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 two of the three 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 third action against Carnival Corporation is
currently stayed pending final approval of the settlement agreement reached in
May 2006. Once final approval is granted this third action against Carnival
Corporation will be dismissed by the plaintiff. The settlement agreement
required 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. In September
2006, we entered into a settlement agreement for one of the three cases pending
against Princess, which is subject to final court approval. There can be no
assurance that such approval will be obtained. The settlement agreement requires
us to establish a settlement fund, the ultimate net amount of which was
estimated and recorded as an expense in the third quarter of 2006. Summary
judgment was granted in favor of Princess in one of its three actions and an
appeal by the plaintiff is expected. The ultimate outcome of the remaining
Princess action cannot be determined at this time. However, we believe that we
have meritorious defenses and we intend to vigorously defend this Princess
action.
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 2002 case has been settled pending
execution of the settlement agreement. The ultimate outcome of the remaining
Facsimile Complaint cannot be determined at this time. However, we believe that
we have meritorious defenses and we will continue to vigorously defend this
action.
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
10
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 August 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 an AA rated
financial institution for $281 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
those 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
of credit for $79 million, or alternatively provide mortgages in the aggregate
amount of $79 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
August 31, 2006, have to pay a total of $171 million in stipulated damages. As
of August 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.
11
NOTE 6 - Comprehensive Income
Comprehensive income was as follows (in millions):
Nine Months Three Months
Ended August 31, Ended August 31,
--------------- ---------------
2006 2005 2006 2005
---- ---- ---- ----
Net income $1,863 $1,917 $1,232 $1,181
Items included in accumulated other comprehensive
income
Foreign currency translation adjustment 351 (273) 42 (96)
Changes related to cash flow derivative hedges 12 2 (2) 8
------ ------ ------ ------
Total comprehensive income $2,226 $1,646 $1,272 $1,093
====== ====== ====== ======
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):
Nine Months Ended August 31,
------------------------------------------------------------
Selling Depreciation
Operating and admin- and Operating
Revenues expenses istrative amortization income
-------- -------- --------- ------------ ------
2006
- ----
Cruise $8,672 $4,852 $1,023 $702 $2,095
Other 449 351 31 25 42
Intersegment elimination (92) (92)
------ ------ ------ ---- ------
$9,029 $5,111 $1,054 $727 $2,137
====== ====== ====== ==== ======
2005
- ----
Cruise $8,212 $4,451 $ 943 $651 $2,167
Other 401 307 35 21 38
Intersegment elimination (92) (92)
------ ------ ------ ---- ------
$8,521 $4,666 $ 978 $672 $2,205
====== ====== ====== ==== ======
Three Months Ended August 31,
------------------------------------------------------------
Selling Depreciation
Operating and admin- and Operating
Revenues expenses istrative amortization income
-------- -------- --------- ------------ ------
2006
- ----
Cruise $3,603 $1,769 $ 324 $246 $1,264
Other 380 284 11 9 76
Intersegment elimination (78) (78)
------ ------ ------ ---- ------
$3,905 $1,975 $ 335 $255 $1,340
====== ====== ====== ==== ======
2005
- ----
Cruise $3,356 $1,598 $ 289 $219 $1,250
Other 329 240 11 7 71
Intersegment elimination (78) (78)
------ ------ ------ ---- ------
$3,607 $1,760 $ 300 $226 $1,321
====== ====== ====== ==== ======
12
NOTE 8 - Earnings Per Share
Our basic and diluted earnings per share were computed as follows (in
millions, except per share data):
Nine Months Three Months
Ended August 31, Ended August 31,
--------------- ---------------
2006 2005 2006 2005
---- ---- ---- ----
Net income $1,863 $1,917 $1,232 $1,181
Interest on dilutive convertible notes 27 37 9 12
------ ------ ------ ------
Net income for diluted earnings per share $1,890 $1,954 $1,241 $1,193
====== ====== ====== ======
Weighted-average common and ordinary
shares outstanding 804 805 797 806
Dilutive effect of convertible notes 33 43 32 43
Dilutive effect of stock plans 2 6 2 5
----- ----- ----- -----
Diluted weighted-average shares
outstanding 839 854 831 854
===== ===== ===== =====
Basic earnings per share $2.32 $2.38 $1.55 $1.46
===== ===== ===== =====
Diluted earnings per share $2.25 $2.29 $1.49 $1.40
===== ===== ===== =====
Options to purchase 5.7 million (2.2 million in 2005) and 11.3 million
(2.2 million in 2005) shares for the nine and three months ended August 31,
2006, respectively, were excluded from our diluted earnings per share
computation since the effect of including them was anti-dilutive.
NOTE 9 - Recent Accounting Pronouncement
In June, 2006 the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" ("FIN
48"). FIN 48 clarifies, among other things, the accounting for uncertain income
tax positions by prescribing a minimum probability threshold that a tax position
must meet before a financial statement income tax benefit is recognized. The
minimum threshold is defined as a tax position, that based solely on its
technical merits is more likely than not to be sustained upon examination by the
relevant taxing authority. The tax benefit to be recognized is measured as the
largest amount of benefit that is greater than fifty percent likely of being
realized upon ultimate settlement. FIN 48 must be applied to all existing tax
positions upon adoption. The cumulative effect of applying FIN 48 at adoption is
required to be reported separately as an adjustment to the opening balance of
retained earnings in the year of adoption. FIN 48 is required to be implemented
at the beginning of a fiscal year and is effective for Carnival Corporation &
plc for fiscal 2008, although early adoption is permitted. We have not yet
determined the impact of adopting FIN 48 on our financial statements.
13
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 ("Act"). 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 thereby impact the 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 or improper operation thereof), 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 and compliance with 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.
14
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 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 and other 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 $7.03 billion and $4.23 billion for the nine months ended August 31, 2006 and
$2.90 billion and $1.41 billion for the three months ended August 31, 2006,
respectively. On a constant dollar basis, gross cruise revenues and gross cruise
costs would be $8.72 billion and $5.93 billion for the nine months ended August
31, 2006 and $3.56 billion and $2.07 billion for the three months ended August
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 nine and three
months ended August 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.
Forward Outlook
As of September 21, 2006 we said that we expected our diluted earnings per
share for the fourth quarter of 2006 would be approximately $0.46 to $0.48. Our
guidance was based on the
15
then current forward fuel price curve of $323 per metric ton for the fourth
quarter of 2006, which is in line with the average price for the 2005 fourth
quarter. In addition, this guidance was also based on currency exchange rates of
$1.27 to the euro and $1.87 to sterling.
Looking into early 2007, overall booking levels on a capacity adjusted
basis, for the first quarter of 2007 are modestly down compared to the same
period last year. The sluggish demand for the Caribbean is continuing into the
first quarter of 2007 causing North American booking levels to be behind last
year, while business for our European brands for that period is running ahead of
last year's pace. For the first quarter of 2007 we are expecting overall net
revenue yields will be flat to down slightly on a constant-dollar basis due to
the continued softness in demand for Caribbean cruises, partially offset by
stronger yields from the European brands.
Excluding any future ship orders, the year-over-year percentage increase
in our ALBD capacity for the 2006 fourth quarter and the full years 2007, 2008,
2009 and 2010, resulting substantially all from new ships entering service, is
currently expected to be 5.5%, 8.5%, 7.9%, 7.2% and 6.2%, respectively.
Seasonality
Our revenues and significant variable costs from the sale of passenger
tickets are seasonal. Historically, demand for cruises has been greatest during
our third quarter, which includes the Northern Hemisphere summer months. This
higher demand during the third quarter results in higher 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.
16
Selected Information and Non-GAAP Financial Measures
Selected information was as follows:
Nine Months Ended August 31, Three Months Ended August 31,
---------------------------- -----------------------------
2006 2005 2006 2005
---- ---- ---- ----
Passengers carried (in thousands) 5,237(a) 5,260 2,012 1,953
===== ===== ===== =====
Occupancy percentage 107.0%(a) 106.6% 111.0% 110.9%
===== ===== ===== =====
Fuel cost per metric ton $ 341 $ 239 $ 350 $ 271
===== ===== ===== =====
(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:
Nine Months Ended August 31, Three Months Ended August 31,
---------------------------- -----------------------------
2006 2005 2006 2005
---- ---- ---- ----
(in millions, except ALBDs and yields)
Cruise revenues
Passenger tickets $6,825 $6,446 $2,894 $2,700
Onboard and other 1,847 1,766 709 656
------ ------ ------ ------
Gross cruise revenues 8,672 8,212 3,603 3,356
Less cruise costs
Commissions, transportation
and other (1,351) (1,278) (538) (475)
Onboard and other (326) (311) (128) (118)
------ ------ ------ -------
Net cruise revenues $6,995 $6,623 $2,937 $2,763
====== ====== ====== ======
ALBDs 37,116,575 35,595,494 12,937,155 12,297,220
========== ========== ========== ==========
Gross revenue yields $233.64 $230.72 $278.50 $272.90
======= ======= ======= =======
Net revenue yields $188.44 $186.07 $227.06 $224.72
======= ======= ======= =======
Gross and net cruise costs per ALBD were computed by dividing the gross or
net cruise costs, without rounding, by ALBDs as follows:
Nine Months Ended August 31, Three Months Ended August 31,
2006 2005 2006 2005
---- ---- ---- ----
(in millions, except ALBDs and costs per ALBD)
Cruise operating expenses $4,852 $4,451 $1,769 $1,598
Cruise selling and administrative
expenses 1,023 943 324 289
------ ------ ------ ------
Gross cruise costs 5,875 5,394 2,093 1,887
Less cruise costs included in net
cruise revenues
Commissions, transportation
and other (1,351) (1,278) (538) (475)
Onboard and other (326) (311) (128) (118)
------ ------ ------ ------
Net cruise costs $4,198 $3,805 $1,427 $1,294
====== ====== ====== ======
ALBDs 37,116,575 35,595,494 12,937,155 12,297,220
========== ========== ========== ==========
Gross cruise costs per ALBD $158.29 $151.54 $161.83 $153.49
======= ======= ======= =======
Net cruise costs per ALBD $113.09 $106.89 $110.38 $105.31
======= ======= ======= =======
17
Nine Months Ended August 31, 2006 ("2006") Compared to the Nine Months Ended
August 31, 2005 ("2005")
Revenues
Net cruise revenues increased $372 million, or 5.6%, to $7.00 billion in
2006 from $6.62 billion in 2005. The 4.3% increase in ALBDs between 2005 and
2006 accounted for $283 million of the increase, and the remaining $89 million
was from increased net revenue yields, which increased 1.3% in 2006 compared to
2005 (gross revenue yields also increased by 1.3%). Net revenue yields increased
in 2006 primarily from higher cruise ticket prices and, to a lesser extent, a
0.4% increase in occupancy. In addition, net revenue yields in 2005 were reduced
in part by the cancellation of the higher yielding P&O Cruises Aurora world
cruise. Currency exchange rates also had a negative impact on our net revenue
yields in 2006 because a portion of our business is transacted in foreign
currencies. Net revenue yields as measured on a constant dollar basis increased
1.7% in 2006 compared to 2005. Gross cruise revenues increased $460 million, or
5.6%, in 2006 to $8.67 billion from $8.21 billion in 2005 for largely the same
reasons as net cruise revenues.
The MSC charter 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 $521
million in 2006 and $484 million in 2005.
Other non-cruise revenues increased $48 million, or 12.0%, to $449 million
in 2006 from $401 million in 2005 primarily due to the increase in the number of
cruise/tours sold.
Costs and Expenses
Net cruise costs increased $393 million, or 10.3%, to $4.20 billion in
2006 from $3.81 billion in 2005. The 4.3% increase in ALBDs between 2005 and
2006 accounted for $163 million of the increase whereas $230 million was from
increased net cruise costs per ALBD, which increased 5.8% in 2006 compared to
2005 (gross cruise costs per ALBD increased 4.5%). Net cruise costs per ALBD
increased primarily due to a $102 increase in fuel cost per metric ton, or 43%,
to $341 per metric ton in 2006, which resulted in an additional $211 million of
expense, and a $41 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
the non-recurrence in 2006 of a $23 million Merchant Navy Officers Pension Fund
("MNOPF") contribution and the impact of currency exchange rates. Net cruise
costs per ALBD as measured on a constant dollar basis increased 6.7% in 2006
compared to 2005. On a constant dollar basis, net cruise costs per ALBD,
excluding increased fuel prices, increased 1.4% compared to 2005. Gross cruise
costs increased $481 million, or 8.9%, in 2006 to $5.88 billion from $5.39
billion in 2005 for largely the same reasons as net cruise costs.
Other non-cruise operating expense increased $44 million, or 14.3%, to
$351 million in 2006 from $307 million in 2005 primarily due to the increase in
the number of cruise/tours sold.
Depreciation and amortization expense increased by $55 million, or 8.2%,
to $727 million in 2006 from $672 million in 2005 largely due to the 4.3%
increase in ALBDs through the addition of new ships, and additional ship
improvement expenditures.
Nonoperating (Expense) Income
Net interest expense, excluding capitalized interest, decreased $3 million
to $242 million in 2006 from $245 million in 2005. This decrease was primarily
due to lower average borrowings, partially offset by the impact of higher
average interest rates on borrowings. Capitalized interest increased $13 million
during 2006 compared to 2005 primarily due to higher average levels of
investment in ship construction projects and higher average interest rates on
borrowings.
Other expense in 2006 included a $10 million expense for the write-down of
a non-cruise investment, partially offset by a $4 million gain on the subsequent
sale of this investment,
18
and a $6 million provision for litigation reserves. Other expense in 2005
included a $22 million expense for the write-down of a non-cruise investment,
which was recorded in the 2005 third quarter, partially offset by $7 million in
income from the settlement of litigation associated with the DLC transaction.
Three Months Ended August 31, 2006 ("2006") Compared to the Three Months Ended
August 31, 2005 ("2005")
Revenues
Net cruise revenues increased $174 million, or 6.3%, to $2.94 billion in
2006 from $2.76 billion in 2005. The 5.2% increase in ALBDs between 2005 and
2006 accounted for $144 million of the increase, and the remaining $30 million
was from increased net revenue yields, which increased 1.0% in 2006 compared to
2005 primarily due to the weaker U.S. dollar relative to the euro and sterling
and slightly higher onboard spending. This increase was partially offset by a
$13 million reduction in the MSC charter cruise revenues (see income taxes
discussion below).
Our 2006 cruise ticket prices for Caribbean itineraries were less than
2005, which was offset by price increases we achieved primarily from our Alaska
and European cruises. We believe that this reduction in Caribbean pricing was
the result of weaker consumer demand caused primarily from the lingering effects
of the unusually strong 2005 hurricane season and higher fuel and other costs
adverse impacts on our customers' discretionary income. Net revenue yields as
measured on a constant dollar basis were flat in 2006 compared to 2005. Gross
cruise revenues increased $247 million, or 7.4%, in 2006 to $3.60 billion from
$3.36 billion in 2005 for largely the same reasons as net cruise revenues.
Onboard and other revenues included concession revenues of $224 million in 2006
and $201 million in 2005.
Other non-cruise revenues increased $51 million, or 15.5%, to $380 million
in 2006 from $329 million in 2005 primarily due to the increase in the number of
cruise/tours sold.
Costs and Expenses
Net cruise costs increased $133 million, or 10.3%, to $1.43 billion in
2006 from $1.29 billion in 2005. The 5.2% increase in ALBDs between 2005 and
2006 accounted for $67 million of the increase, and the balance of $66 million
was from increased net cruise costs per ALBD, which increased 4.8% in 2006
compared to 2005 (gross cruise costs per ALBD increased 5.4%). Net cruise costs
per ALBD increased primarily due to a $79 increase in fuel cost per metric ton,
or 29%, to $350 per metric ton in 2006, which resulted in an additional $55
million of expense, a weaker U.S. dollar relative to the euro and sterling in
2006, and a $13 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 the non-recurrence in 2006 of the $23 million MNOPF
contribution. Net cruise costs per ALBD as measured on a constant dollar basis
increased 3.8% in 2006 compared to 2005. On a constant dollar basis, net cruise
costs per ALBD excluding increased fuel prices were flat. Gross cruise costs
increased $206 million, or 10.9%, in 2006 to $2.09 billion from $1.89 billion in
2005 for largely the same reasons as net cruise costs.
Other non-cruise operating expense increased $44 million, or 18.3%, to
$284 million in 2006 from $240 million in 2005 primarily due to the increase in
the number of cruise/tours sold.
Depreciation and amortization expense increased by $29 million, or 12.8%,
to $255 million in 2006 from $226 million in 2005 largely due to the 5.2%
increase in ALBDs through the addition of new ships, and additional ship
improvement expenditures.
Nonoperating (Expense) Income
Net interest expense, excluding capitalized interest, increased $9 million
to $85 million in 2006 from $76 million in 2005. This increase was primarily due
to lower average invested cash balances and higher average interest rates on
borrowings. Capitalized interest increased $5 million during 2006 compared to
2005 primarily due to higher average levels of investment in ship construction
projects and higher average interest rates on borrowings.
19
Income Taxes
Income tax expense decreased by $14 million to $31 million in 2006 from
$45 million in 2005 as a result of a $13 million tax adjustment related to the
MSC charter. This reduction in income taxes was offset by a reduction in cruise
revenues, and, accordingly, had no impact on our 2006 third quarter net income.
Liquidity and Capital Resources
Sources and Uses of Cash
Our business provided $2.83 billion of net cash from operations during the
nine months ended August 31, 2006, an increase of $36 million, or 1.3%, compared
to fiscal 2005. We continue to generate substantial cash from operations and
remain in a strong financial position, thus providing us with substantial
financial flexibility in meeting operating, investing and financing needs.
During the nine months ended August 31, 2006, our net expenditures for
capital projects were $2.18 billion, of which $1.82 billion was spent for our
ongoing new shipbuilding program, including $1.22 billion for the final delivery
payments for Holland America Line's Noordam, Princess Cruises' Crown Princess
and the Costa Concordia. The remaining capital expenditures consisted primarily
of $220 million for ship improvements and refurbishments, and $143 million for
Alaska tour assets, cruise port facility developments and information technology
assets.
During the nine months ended August 31, 2006, we borrowed $352 million to
pay part of the Crown Princess purchase price, and we repaid $1.03 billion of
long-term debt, which included $888 million of Costa's indebtedness. We also had
net short-term borrowings of $791 million under our commercial paper programs
and short-term bank loans during the nine months ended August 31, 2006. Finally,
during the first nine months of fiscal 2006 we purchased $793 million of
Carnival Corporation common stock and Carnival plc ordinary shares in open
market transactions and paid cash dividends of $605 million.
Future Commitments and Funding Sources
Our contractual cash obligations remained generally unchanged at August
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,
Crown Princess and Costa Concordia delivery payments as noted above and the two
new ship construction contracts that we entered into in June 2006 as follows:
- Costa Cruises entered into a 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.
- AIDA Cruises entered into a 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.
As of November 30, 2005, we had contractual cash obligations to pay
interest 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.
At August 31, 2006, we had liquidity of $3.24 billion, which consisted of
$615 million of cash, cash equivalents and short-term investments, $1.28 billion
available for borrowing under our revolving credit facility and $1.34 billion
under committed ship financing facilities. Our revolving credit facility matures
in 2011. 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
20
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, which either have, or are reasonably
likely to have, a current or future material effect on our financial statements.
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. Disclosure controls and procedures include, without limitation, controls
and procedures designed to ensure that information required to be disclosed by
us in our reports that we file or submit under the Act is accumulated and
communicated to our management, including our principal executive and principal
financial officers, or persons performing similar functions, as appropriate to
allow timely decisions regarding required disclosure.
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 August 31, 2006, that they were effective as described
above.
Changes in Internal Control over Financial Reporting
During the three months ended August 31, 2006, we continued with our
implementation of a new worldwide accounting system. We expect to substantially
complete this implementation across all our existing reporting units during the
first half of fiscal 2007.
There have been changes in our internal control over financial reporting
as described above during the quarter ended August 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.
21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
On September 21, 2006, a class action complaint was filed by J. B. Miller
on behalf of a purported class of past passengers against HAL in the U.S.
District Court for the Western District of Washington. The complaint alleges
that HAL (i) failed to disclose that shore excursion vendors paid HAL to promote
their services as required by an Alaska statute, and (ii) collected and retained
payment from passengers for PSVA violations in certain instances when HAL did
not actually incur the fines. The complaint seeks (i) certification as a class
action, (ii) statutory damages under Alaska's consumer protection statutes,
(iii) damages for each PSVA fine collected and additional damages for each PSVA
fine collected where no fine was imposed, (iv) injunctive relief and (v)
attorneys' fees, costs and interest. We believe that we have meritorious
defenses to these claims and intend to vigorously defend this matter.
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. A third action against Carnival
Corporation, pending in California, will be dismissed once final approval of the
Florida cases is granted. 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. In
September 2006, a settlement agreement was entered into for one of the Wage
Actions pending against Princess in the U.S. District Court for the Southern
District of Florida, which is subject to court approval. There can be no
assurance that such approval will be obtained. The settlement agreement requires
Princess to establish a settlement fund. Summary judgment was granted in favor
of Princess in another of its three actions and an appeal by the plaintiff is
expected.
Two actions referred to as the Facsimile Complaints were previously
reported in our 2005 Annual Report on Form 10-K. The 2002 Facsimile Complaint
has been settled pending execution of the settlement agreement.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
During the quarter ended August 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:
Total Number of
Shares Average Maximum Dollar Value of Shares
Purchased in Price Paid That May Yet Be Purchased
Period Third Quarter per Share Under the Plans or Programs(a)
------ ------------- --------- ---------------------------
(in millions)
June 1, 2006 through
June 30, 2006 3,800,000 $39.17 $993
July 1, 2006 through
July 31, 2006 1,377,400 $41.06 $911(b)
August 1, 2006 through
August 31, 2006 2,300,000 $38.69 $822
----------
Total 7,477,400 $39.37
==========
(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 subject to certain repurchase restrictions on Carnival
plc shares. We completed this $1 billion repurchase program on June 29,
2006. All shares repurchased through June 29, 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 September 27, 2006,
the remaining availability pursuant to our 2006 share repurchase program was
$773 million.
(b) In July, 2006 we also purchased 650,000 ordinary shares of Carnival plc,
which are not registered under Section 12 of the Exchange Act, at an average
price of $38.65. Carnival plc ordinary shares are listed on the London Stock
Exchange.
22
During the nine months ended August 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 5. Other Information
On September 27, 2006, the termination date of our $1.2 billion, (euro)400
million and (pound)200 million Facilities Agreement, dated October 21, 2005, by
and among Carnival Corporation, Carnival plc, The Royal Bank of Scotland plc, as
Facilities Agent, and each of the other banks or other institutions party
thereto (the "Facilities Agreement"), was extended from October 21, 2010 to
October 21, 2011 pursuant to the extension request procedures set forth in the
Facilities Agreement.
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.
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.
23
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.
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.
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, each
of the registrants has 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: September 29, 2006 Dated: September 29, 2006
25