Carnival Corp Ltd. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations . Cautionary Note Concerning Factors That May Affect Future Results Some of the statements, estimates or projections contained in this document are “forward-looking statements” that involve risks, uncertainties and assumptions with respect to us, including some statements concerning future results, operations, outlooks, plans, goals, reputation, cash flows, liquidity and other events which have not yet occurred. These statements are intended to qualify for the safe harbors from liability provided by Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements other than statements of historical facts are statements that could be deemed forward-looking. These statements are based on current expectations, estimates, forecasts and projections about our business and the industry in which we operate and the beliefs and assumptions of our management. We have tried, whenever possible, to identify these statements by using words like “will,” “may,” “could,” “should,” “would,” “believe,” “depends,” “expect,” “goal,” “anticipate,” “forecast,” “project,” “future,” “intend,” “plan,” “estimate,” “target,” “indicate,” “outlook,” and similar expressions of future intent or the negative of such terms. Forward-looking statements include those statements that relate to our outlook and financial position including, but not limited to, statements regarding: • Pricing • Estimates of ship depreciable lives and residual values • Booking levels • Goodwill, ship and trademark fair values • Occupancy • Liquidity and credit ratings • Interest, tax and fuel expenses • Adjusted earnings per share • Currency exchange rates • Impact of the COVID-19 coronavirus global pandemic on our financial condition and results of operations Because forward-looking statements involve risks and uncertainties, there are many factors that could cause our actual results, performance or achievements to differ materially from those expressed or implied by our forward-looking statements. This note contains important cautionary statements of the known factors that we consider could materially affect the accuracy of our forward-looking statements and adversely affect our business, results of operations and financial position. Additionally, many of these risks and uncertainties are currently amplified by and will continue to be amplified by, or in the future may be amplified by, the COVID-19 outbreak. It is not possible to predict or identify all such risks. There may be additional risks that we consider immaterial or which are unknown. These factors include, but are not limited to, the following: • COVID-19 has had, and is expected to continue to have, a significant impact on our financial condition and operations, which impacts our ability to obtain acceptable financing to fund resulting reductions in cash from operations. The current, and uncertain future, impact of the COVID-19 outbreak, including its effect on the ability or desire of people to travel (including on cruises), is expected to continue to impact our results, operations, outlooks, plans, goals, reputation, litigation, cash flows, liquidity, and stock price. • As a result of the COVID-19 outbreak, we may be out of compliance with one or more maintenance covenants in certain of our debt facilities, with the next testing date of November 30, 2022. • World events impacting the ability or desire of people to travel have and may continue to lead to a decline in demand for cruises. • Incidents concerning our ships, guests or the cruise vacation industry as well as adverse weather conditions and other natural disasters have in the past and may, in the future, impact the satisfaction of our guests and crew and lead to reputational damage. • Changes in and non-compliance with laws and regulations under which we operate, such as those relating to health, environment, safety and security, data privacy and protection, anti-corruption, economic sanctions, trade protection and tax have in the past and may, in the future, lead to litigation, enforcement actions, fines, penalties and reputational damage. • Breaches in data security and lapses in data privacy as well as disruptions and other damages to our principal offices, information technology operations and system networks, including the recent ransomware incidents, and failure to keep pace with developments in technology may adversely impact our business operations, the satisfaction of our guests and crew and may lead to reputational damage. • Ability to recruit, develop and retain qualified shipboard personnel who live away from home for extended periods of time may adversely impact our business operations, guest services and satisfaction. • Increases in fuel prices, changes in the types of fuel consumed and availability of fuel supply may adversely impact our scheduled itineraries and costs. • Fluctuations in foreign currency exchange rates may adversely impact our financial results. 21 Table of C ontents • Overcapacity and competition in the cruise and land-based vacation industry may lead to a decline in our cruise sales, pricing and destination options. • Inability to implement our shipbuilding programs and ship repairs, maintenance and refurbishments may adversely impact our business operations and the satisfaction of our guests. The ordering of the risk factors set forth above is not intended to reflect our indication of priority or likelihood. Forward-looking statements should not be relied upon as a prediction of actual results. Subject to any continuing obligations under applicable law or any relevant stock exchange rules, we expressly disclaim any obligation to disseminate, after the date of this document, any updates or revisions to any such forward-looking statements to reflect any change in expectations or events, conditions or circumstances on which any such statements are based. Recent Developments Resumption of Guest Operations The company is uniquely positioned for a phased resumption in cruise travel given its multiple brands which can each be restarted independently and tailored to the environment of their respective source market. AIDA Cruises (“AIDA”) resumed guest cruise operations in late March sailing in the Canary Islands. Costa Cruises (“Costa”) expects to resume operations in May sailing to Italian ports. P&O Cruises (UK), Cunard and Princess Cruises will each offer a series of cruises this summer sailing around UK coastal waters with P&O Cruises (UK) kicking off the season in June followed by Cunard and Princess Cruises in July. Seabourn also expects to resume guest cruise operations this summer sailing from Greece. In addition, this summer Holland America Line and Princess Cruises expect to offer land-based vacation options for travelers to experience Alaska through a combination of tours, lodging and sightseeing. Health and Safety Protocols Initial cruises are taking place with adjusted passenger capacity and enhanced health protocols developed with government and health authorities, and guidance from the company's roster of medical and scientific experts. The company has been working with a number of world-leading public health, epidemiological and policy experts to support its ongoing efforts with enhanced health and safety protocols to help protect against and mitigate the impact of COVID-19 during cruise vacations. The company's brands have a comprehensive set of health and hygiene protocols that facilitate a safe and healthy return to cruise vacations. These enhanced protocols are modeled after shoreside health and mitigation guidelines as provided by each brand's respective country, and approved by all relevant regulatory authorities. Protocols will be updated based on evolving scientific and medical knowledge related to mitigation strategies. In addition to the jurisdictions associated with the restart plans noted above, the company continues to work closely with governments and health authorities in other parts of the world to ensure that its health and safety protocols will also comply with the requirements of each location. Update on Liquidity Refer to “Liquidity, Financial Condition and Capital Resources.” Refer to “Risk Factors” - “ COVID-19 has had, and is expected to continue to have, a significant impact on our financial condition and operations, which impacts our ability to obtain acceptable financing to fund resulting reductions in cash from operations. The current, and uncertain future, impact of the COVID-19 outbreak, including its effect on the ability or desire of people to travel (including on cruises), is expected to continue to impact our results, operations, outlooks, plans, goals, reputation, litigation, cash flows, liquidity, and stock price. ” New Accounting Pronouncements Refer to Note 1 - “ General, Accounting Pronouncements ” of the consolidated financial statements for additional discussion regarding accounting pronouncements. Critical Accounting Estimates For a discussion of our critical accounting estimates, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” that is included in the Form 10-K. 22 Table of C ontents Seasonality Our passenger ticket revenues are seasonal. Historically, demand for cruises has been greatest during our third quarter, which includes the Northern Hemisphere summer months, although 2021 will continue to be adversely impacted by COVID-19. This higher demand during the third quarter results in higher ticket prices and occupancy levels and, accordingly, the largest share of our operating income is earned during this period. This historical trend has been disrupted by the pause in global cruise operations. In addition, substantially all of Holland America Princess Alaska Tours’ revenue and net income (loss) is generated from May through September in conjunction with Alaska's cruise season. During 2021, the Alaska cruise season will continue to be adversely impacted by the effects of COVID-19. Statistical Information Three Months Ended February 28/29, 2021 2020 Fuel consumption in metric tons (in thousands) 262 831 Fuel cost per metric ton consumed $ 392 $ 477 Currencies (USD to 1) AUD $ 0.77 $ 0.68 CAD $ 0.78 $ 0.76 EUR $ 1.21 $ 1.10 GBP $ 1.36 $ 1.31 RMB $ 0.15 $ 0.14 We paused our guest cruise operations in mid-March 2020 and have been in a pause for a majority of 2020 and the first quarter of 2021. The pause in guest cruise operations is continuing to have material negative impacts on all aspects of our business, including the above statistical information. 23 Table of C ontents Results of Operations Consolidated Three Months Ended February 28/29, % increase (decrease) (in millions) 2021 2020 Change Revenues Passenger ticket $ 3 $ 3,234 $ (3,231) (100) % Onboard and other 23 1,556 (1,533) (99) % 26 4,789 (4,764) (99) % Operating Costs and Expenses Commissions, transportation and other 15 766 (752) (98) % Onboard and other 7 471 (464) (99) % Payroll and related 218 610 (392) (64) % Fuel 103 396 (294) (74) % Food 11 277 (266) (96) % Ship and other impairments — 330 (330) (100) % Other operating 181 671 (490) (73) % 535 3,523 (2,988) (85) % Selling and administrative 462 678 (216) (32) % Depreciation and amortization 552 570 (18) (3) % Goodwill impairment — 731 (731) (100) % 1,549 5,502 (3,953) (72) % Operating Income (Loss) $ (1,524) $ (713) $ (810) 114 % NAA Three Months Ended February 28/29, % increase (decrease) (in millions) 2021 2020 Change Revenues Passenger ticket $ — $ 2,052 $ (2,053) (100) % Onboard and other 11 1,088 (1,078) (99) % 10 3,140 (3,130) (100) % Operating Costs and Expenses 316 2,274 (1,958) (86) % Selling and administrative 220 400 (180) (45) % Depreciation and amortization 334 364 (30) (8) % Goodwill impairment — 300 (300) (100) % 870 3,337 (2,468) (74) % Operating Income (Loss) $ (859) $ (197) $ (663) 337 % 24 Table of C ontents EA Three Months Ended February 28/29, % increase (decrease) (in millions) 2021 2020 Change Revenues Passenger ticket $ 3 $ 1,213 $ (1,210) (100) % Onboard and other 5 339 (334) (99) % 8 1,552 (1,544) (99) % Operating Costs and Expenses 198 1,317 (1,119) (85) % Selling and administrative 108 207 (99) (48) % Depreciation and amortization 184 166 18 11 % Goodwill impairment — 431 (431) (100) % 490 2,121 (1,631) (77) % Operating Income (Loss) $ (482) $ (569) $ 87 (15) % We paused our guest cruise operations in mid-March 2020. We resumed limited guest cruise operations in September 2020 as part of our phased return to service. As of February 28, 2021, none of our ships were operating with guests onboard. The pause in guest cruise operations is continuing to have material negative impacts on all aspects of our business. The longer the pause in guest operations continues, the greater the impact on our liquidity and financial position. As a result of the pause in our guest cruise operations, we have experienced essentially no revenue for the three months ended February 28, 2021. This has resulted in an operating loss for the current period . The pause in guest cruise operations continues to have a material negative impact on all aspects of our business, including our liquidity, financial position and results of operations. We continue to expect a net loss on both a U.S. GAAP and adjusted basis for the second quarter of 2021 and the full year ending November 30, 2021 . While maintaining compliance, environmental protection and safety, we significantly reduced ship operating expenses, including cruise payroll and related expenses, food, fuel, insurance and port charges by transitioning ships into paused status, either at anchor or in port and staffed at a safe manning level. We continue to identify and implement actions to optimize our ongoing ship operating expenses. As we continue to resume guest cruise operations, we expect to incur incremental spend relating to bringing our ships out of pause status, returning crew members to our ships and implementing the enhanced health and safety protocols. There were no goodwill or ship impairment charges for the three months ended February 28, 2021. As a result of the effects of COVID-19 on our expected future operating cash flows, we recognized goodwill impairment charges of $731 million and ship impairment charges of $330 million for the three months ended February 29, 2020. Nonoperating Income (Expense) Interest expense, net of capitalized interest, increased by $343 million to $398 million in 2021 from $55 million in 2020. The increase was caused by additional debt borrowings with higher interest rates since the pause in guest cruise operations. 25 Table of C ontents Key Performance Non-GAAP Financial Indicators The table below reconciles Adjusted net income (loss) and Adjusted EBITDA to Net income (loss) and Adjusted earnings per share to Earnings per share for the periods presented: Three Months Ended February 28/29, (in millions, except per share data) 2021 2020 Net income (loss) U.S. GAAP net income (loss) $ (1,973) $ (781) (Gains) losses on ship sales and impairments 3 928 Restructuring expenses — — Other 15 3 Adjusted net income (loss) $ (1,954) $ 150 Interest expense, net of capitalized interest 398 55 Interest income (3) (5) Income tax expense, net (6) 11 Depreciation and amortization 552 570 Adjusted EBITDA $ (1,014) $ 782 Weighted-average shares outstanding 1,095 684 Earnings per share U.S. GAAP diluted earnings per share $ (1.80) $ (1.14) (Gains) losses on ship sales and impairments — 1.36 Restructuring expenses — — Other 0.01 0.01 Adjusted earnings per share $ (1.79) $ 0.22 Explanations of Non-GAAP Financial Measures We use adjusted net income (loss) and adjusted earnings per share as non-GAAP financial measures of our cruise segments’ and the company’s financial performance. These non-GAAP financial measures are provided along with U.S. GAAP net income (loss) and U.S. GAAP diluted earnings per share. We believe that gains and losses on ship sales, impairment charges, restructuring costs and other gains and losses are not part of our core operating business and are not an indication of our future earnings performance. Therefore, we believe it is more meaningful for these items to be excluded from our net income (loss) and earnings per share and, accordingly, we present adjusted net income (loss) and adjusted earnings per share excluding these items. Adjusted EBITDA is a non-GAAP measure, and we believe that the presentation of Adjusted EBITDA provides additional information to investors about our operating profitability adjusted for certain non-cash items and other gains and expenses that we believe are not part of our core operating business and are not an indication of our future earnings performance. Further, we believe that the presentation of Adjusted EBITDA provides additional information to investors about our ability to operate our business in compliance with the restrictions set forth in our debt agreements. We define Adjusted EBITDA as adjusted net income (loss) adjusted for (i) interest, (ii) taxes and (iii) depreciation and amortization. There are material limitations to using Adjusted EBITDA. Adjusted EBITDA does not take into account certain significant items that directly affect our net income (loss). These limitations are best addressed by considering the economic effects of the excluded items independently, and by considering Adjusted EBITDA in conjunction with net income (loss) as calculated in accordance with U.S. GAAP. The presentation of our non-GAAP financial information is not intended to be considered in isolation from, as substitute for, or superior to the financial information prepared in accordance with U.S. GAAP. It is possible that our non-GAAP financial measures may not be exactly comparable to the like-kind information presented by other companies, which is a potential risk associated with using these measures to compare us to other companies. 26 Table of C ontents Liquidity, Financial Condition and Capital Resources We have taken, and continue to take, significant actions to preserve cash and obtain additional financing to increase our liquidity. S ince the start of the pause in guest cruise operations in March 2020, we have raised $23.6 billion through a series of transactions . S ince December 2020, we have raised $6.0 billion including completing the following: • In December 2020, we borrowed $1.5 billion under export credit facilities due in semi-annual installments through 2033. • In February 2021, we issued an aggregate principal amount of $3.5 billion under the 2027 Senior Unsecured Notes that mature on March 1, 2027. The 2027 Senior Unsecured Notes bear interest at a rate of 5.8% per year. • In February 2021, we completed a public offering of 40.5 million shares of Carnival Corporation’s common stock at a price per share of $25.10, resulting in net proceeds of $996 million. • During the first quarter of 2021, we obtained waivers of compliance with the Interest Coverage Covenant and Debt to Capital Covenant in our export credit facilities through August 31, 2022 (with the next testing date of November 30, 2022) or November 30, 2022 (with the next testing date of February 28, 2023) for our funded export credit facilities with aggregate indebtedness of $8.9 billion as of February 28, 2021 and unfunded export credit facilities with an aggregate principal amount of $6.5 billion as of February 28, 2021. • During the first quarter of 2021 we entered into supplemental agreements with respect to our Revolving Credit Facility and many of our bank loans. Under our Revolving Credit Facility and many of our bank loans, we are now required to maintain the Interest Coverage Covenant from February 28, 2023, at a ratio of not less than 2.0 to 1.0 for the February 28, 2023 and May 31, 2023 testing dates, 2.5 to 1.0 for the August 31, 2023 and November 30, 2023 testing dates, and 3.0 to 1.0 from the February 28, 2024 testing date onwards, or through their respective maturity dates, and the Debt to Capital Covenant at the end of each fiscal quarter before the November 30, 2021 testing date at a percentage not to exceed 65%. From the November 30, 2021 testing date until the May 31, 2023 testing date the Debt to Capital Covenant is not to exceed 75%, following which it will be tested at levels which decline ratably to 65% from the May 31, 2024 testing date onwards. As of February 28, 2021, we had $11.5 billion of cash and short-term investments. During the remainder of fiscal 2021, the company expects to refinance debt at lower interest rates and extend maturities. Our access to and cost of financing depend on, among other things, global economic conditions, conditions in the global financing markets, the availability of sufficient amounts of financing, our prospects and our credit ratings. In addition, certain of our debt instruments contain provisions that may limit our ability to incur or guarantee additional indebtedness. Our monthly average cash burn rate for the first quarter of 2021 was $500 million, which was better than expected primarily due to the timing of capital expenditures. We expect our monthly average cash burn rate for the first half of 2021 to be approximately $550 million, which is better than previously expected. This is a result of our efforts to optimize our monthly spend despite higher restart related spend. This monthly average cash burn rate includes ongoing ship operating and administrative expenses, estimated restart spend, working capital changes (excluding changes in customer deposits), interest expense and capital expenditures (net of export credit facilities), and excludes scheduled debt maturities as well as other cash collateral to be provided (which may increase in the future). As we continue to resume guest cruise operations, we expect to incur incremental spend relating to bringing our ships out of pause status, returning crew members to our ships and implementing the enhanced health and safety protocols. We have identified and implemented actions to optimize our monthly cash burn rate and we will continue to do so. We had working capital of $3.8 billion as of February 28, 2021 compared to working capital of $1.9 billion as of November 30, 2020. The increase in working capital was caused by an increase in cash and short-term investments. Historically, during our normal operations, we operate with a substantial working capital deficit. This deficit is mainly attributable to the fact that, under our business model, substantially all of our passenger ticket receipts are collected in advance of the applicable sailing date. These advance passenger receipts generally remain a current liability until the sailing date. The cash generated from these advance receipts is used interchangeably with cash on hand from other sources, such as our borrowings and other cash from operations. The cash received as advanced receipts can be used to fund operating expenses, pay down our debt, make long-term investments or any other use of cash. Included within our working capital are $1.8 billion and $1.9 billion of customer deposits as of February 28, 2021 and November 30, 2020, respectively. We have paid and expect to continue to pay cash refunds of customer deposits with respect to a portion of cancelled cruises. The amount of cash refunds to be paid may depend on the level of guest acceptance of FCCs and future cruise cancellations. We record a liability for FCCs only to the extent we have received cash from guests with bookings on cancelled sailings. In addition, we have a relatively low-level of accounts receivable and limited investment in inventories. We expect that we will have working capital deficits in the future once we return to normal guest cruise operations. 27 Table of C ontents Refer to Note 1 - “General, Liquidity and Management's Plans ” of the consolidated financial statements for additional discussion regarding our liquidity. Sources and Uses of Cash Operating Activities Our business used $1.5 billion of net cash flows in operating activities during the three months ended February 28, 2021, a decrease of $2.4 billion, compared to $916 million of net cash provided for the same period in 2020. Investing Activities During the three months ended February 28, 2021, net cash used in investing activities was $3.6 billion. This was driven by the following: • Capital expenditures of $1.7 billion for our ongoing new shipbuilding program • Capital expenditures of $81 million for ship improvements and replacements, information technology and buildings and improvements • Purchases of short-term investments of $1.8 billion During the three months ended February 29, 2020, net cash used in investing activities was $1.2 billion. This was substantially due to the following: • Capital expenditures of $861 million for our ongoing new shipbuilding program • Capital expenditures of $399 million for ship improvements and replacements, information technology and buildings and improvements • Proceeds from sales of ships of $226 million • Purchase of minority interest of $81 million Financing Activities During the three months ended February 28, 2021, net cash provided by financing activities of $5.2 billion was caused by the following: • Repayments of $668 million of long-term debt • Issuances of $5.0 billion of long-term debt, including net proceeds of $3.4 billion from the issuance of the 2027 Senior Unsecured Notes • Net proceeds of $996 million from our public equity offering of Carnival Corporation common stock During the three months ended February 29, 2020, net cash provided by financing activities of $1.1 billion was caused by the following: • Net proceeds from short-term borrowings of $779 million in connection with our availability of, and needs for, cash at various times throughout the period • Repayments of $132 million of long-term debt • Issuances of $823 million of long-term debt • Payments of cash dividends of $344 million • Purchases of $12 million of Carnival plc ordinary shares in open market transactions under our Repurchase Program 28 Table of C ontents Funding Sources As of February 28, 2021, we had $11.5 billion of cash and short-term investments. In addition, we had $6.5 billion of export credit facilities to fund ship deliveries planned through 2024. (in billions) 2021 2022 2023 2024 Future export credit facilities at February 28, 2021 (a) $ 0.5 $ 3.4 $ 1.9 $ 0.6 (a) Under the terms of these export credit facilities, we are required to comply with the Interest Coverage Covenant and the Debt to Capital Covenant, among others. We entered into supplemental agreements to waive compliance with the Interest Coverage Covenant and the Debt to Capital Covenant for our unfunded export credit facilities through August 31, 2022 or November 30, 2022, as applicable. We will be required to comply beginning with the next testing date of November 30, 2022 or February 28, 2023, as applicable. Many of our debt agreements contain various other financial covenants, including those described in Note 3 - “Debt” and in Note 5 - “Debt” in the annual consolidated financial statements, which are included within our Form 10-K. At February 28, 2021, we were in compliance with the applicable covenants under our debt agreements. 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 consolidated financial statements.