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, as amended. 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,” “aspiration,” “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 • Goodwill, ship and trademark fair values • Booking levels • Liquidity and credit ratings • Occupancy • Adjusted earnings per share • Interest, tax and fuel expenses • Return to guest cruise operations • Currency exchange rates • Impact of the COVID-19 coronavirus global pandemic on our financial condition and results of operations • Estimates of ship depreciable lives and residual values 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, COVID-19. 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. The current, and uncertain future, impact of COVID-19, 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. • Events and conditions around the world, including war and other military actions, such as the current invasion of Ukraine, and other general concerns impacting the ability or desire of people to travel have and may lead to a decline in demand for cruises. • Incidents concerning our ships, guests or the cruise vacation industry 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. • Factors associated with climate change, including evolving and increasing regulations, increasing global concern about climate change and the shift in climate conscious consumerism and stakeholder scrutiny, and increasing frequency and/or severity of adverse weather conditions could adversely affect our business. • Inability to meet or achieve our sustainability related goals, aspirations, initiatives, and our public statements and disclosures regarding them, may expose us to risks that may adversely impact our business. • 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 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. • The loss of key employees, our inability to recruit or retain qualified shoreside and shipboard employees and increased labor costs could have an adverse effect on our business and results of operations. • Increases in fuel prices, changes in the types of fuel consumed and availability of fuel supply may adversely impact our scheduled itineraries and costs. 22 • We rely on supply chain vendors who are integral to the operations of our businesses. These vendors and service providers are also affected by COVID-19 and may be unable to deliver on their commitments which could impact our business. • Fluctuations in foreign currency exchange rates may adversely impact our financial results. • 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. Forward-looking and other statements in this document may also address our sustainability progress, plans, and goals (including climate change and environmental-related matters). In addition, historical, current, and forward-looking sustainability-related statements may be based on standards for measuring progress that are still developing, internal controls and processes that continue to evolve, and assumptions that are subject to change in the future. 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. 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. 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 typically earned during this period. This historical trend was disrupted in 2020 by the pause and in 2021 by the ongoing resumption of guest 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. Known Trends and Uncertainties We believe the increasing cost of fuel, liquefied natural gas (LNG) and other related costs are reasonably likely to impact our profitability in both the short and long-ter m. This effect is increased in the shorter term by the current invasion of Ukraine, including its effect on the price of fuel. In addition, the increasing global focus on climate change, including the reduction of carbon emissions and new and evolving regulatory requirements, is reasonably likely to materially impact our future costs, capital expenditures and revenues and/or the relationship between them, if enacted. The full impact of climate change to our business is not yet known. 23 Statistical Information Three Months Ended February 28, 2022 2021 Passenger Cruise Days (“PCDs”) (in thousands) (a) 7,229 27 Available Lower Berth Days (“ALBDs”) (in thousands) (b) 13,322 173 Occupancy percentage (c) 54 % 16 % Passengers carried (in thousands) 1,011 5 Fuel consumption in metric tons (in thousands) 566 262 Fuel cost per metric ton consumed $ 648 $ 392 Currencies (USD to 1) AUD $ 0.72 $ 0.77 CAD $ 0.79 $ 0.78 EUR $ 1.13 $ 1.21 GBP $ 1.35 $ 1.36 The ongoing resumption of guest cruise operations is continuing to have a material impact on all aspects of our business, including the above statistical information. Notes to Statistical Information (a) PCD represents the number of cruise passengers on a voyage multiplied by the number of revenue-producing ship operating days for that voyage. (b) ALBD is a standard measure of passenger capacity for the period that we use to approximate rate and capacity variances, based on consistently applied formulas that we use to perform analyses to determine the main non-capacity driven factors that cause our cruise revenues and expenses to vary. ALBDs assume that each cabin we offer for sale accommodates two passengers and is computed by multiplying passenger capacity by revenue-producing ship operating days in the period. (c) Occupancy, in accordance with cruise industry practice, is calculated using a numerator of PCDs and denominator of ALBDs, which assumes two passengers per cabin even though some cabins can accommodate three or more passengers. Percentages in excess of 100% indicate that on average more than two passengers occupied some cabins. 24 Results of Operations Consolidated Three Months Ended February 28, % increase (decrease) (in millions) 2022 2021 Change Revenues Passenger ticket $ 873 $ 3 $ 870 31,952 % Onboard and other 750 23 727 3,193 % 1,623 26 1,598 6,263 % Operating Costs and Expenses Commissions, transportation and other 251 15 236 1,596 % Onboard and other 209 7 202 2,884 % Payroll and related 506 218 287 132 % Fuel 365 103 262 256 % Food 136 11 124 1,090 % Ship and other impairments 8 — 8 100 % Other operating 557 181 376 208 % 2,030 535 1,495 280 % Selling and administrative 530 462 68 15 % Depreciation and amortization 554 552 2 — % 3,114 1,549 1,565 101 % Operating Income (Loss) (1,491) (1,524) 32 (2) % Nonoperating Income (Expense) Interest income 3 3 — 1 % Interest expense, net of capitalized interest (368) (398) 30 (7) % Gains (losses) on debt extinguishment, net — 2 (2) (100) % Other income (expense), net (32) (62) 30 (49) % (397) (455) 58 (13) % Income (Loss) Before Income Taxes $ (1,888) $ (1,979) $ 91 (5) % NAA Three Months Ended February 28, % increase (decrease) (in millions) 2022 2021 Change Revenues Passenger ticket $ 586 $ — $ 586 100 % Onboard and other 540 11 529 4,894 % 1,126 10 1,115 10,747 % Operating Costs and Expenses 1,288 316 972 308 % Selling and administrative 344 220 124 56 % Depreciation and amortization 334 334 — — % 1,966 870 1,096 126 % Operating Income (Loss) $ (840) $ (859) $ 19 (2) % 25 EA Three Months Ended February 28, % increase (decrease) (in millions) 2022 2021 Change Revenues Passenger ticket $ 341 $ 3 $ 338 10,721 % Onboard and other 116 5 111 2,237 % 457 8 449 5,542 % Operating Costs and Expenses 698 198 500 253 % Selling and administrative 176 108 68 63 % Depreciation and amortization 181 184 (3) (2) % 1,055 490 565 115 % Operating Income (Loss) $ (598) $ (482) $ (116) 24 % We paused our guest cruise operations in March 2020. As of February 28, 2022 , eight of our nine brands had resumed guest cruise operations as part of our ongoing return to service. The ongoing resumption of guest cruise operations and the increased uncertainty given the current invasion of Ukraine, including its effect on the price of fuel, are collectively having a material negative impact on all aspects of our business, including our liquidity, financial position and results of operations. The full extent of the impact will be determined by our ongoing return to service and the length of time COVID-19 influences travel decisions. As of February 28, 2022 , 71% of our capacity had resumed guest cruise operations and ALBDs increased to 13 million compared to February 28, 2021 when we had no ships operating with guests onboard. Revenues for the three months ended February 28, 2022 increased by $1.6 billion from the three months ended February 28, 2021, due to the resumption of guest cruise operations and the significant increase of ships returning to service. Occupancy for the three months ended February 28, 2022 was 54%. Operating costs and expenses increased by $1.5 billion to $2.0 billion in 2022 from $0.5 billion in 2021. This was driven by our ongoing resumption of cruise operations and restart related expenses, including the cost of returning ships to guest cruise operations and returning crew members to our ships, higher number of dry-dock days, the cost of maintaining enhanced health and safety protocols and inflation. We anticipate that many of these costs and expenses will end in 2022 and will not reoccur in 2023. Fuel costs increased by $262 million to $365 million in 2022 from $103 million in 2021. The increase was caused by higher fuel consumption of 304 thousand metric tons, due to the resumption of guest cruise operations, and an increase in fuel prices of $256 per metric ton consumed in 2022 compared to 2021. We recognized ship impairment charges of $8 million for the three months ended February 28, 2022. There were no ship impairment charges for the three months ended February 28, 2021. We continue to expect a net loss for the second quarter of 2022. However, we expect a profit for the third quarter of 2022. For the full year 2022, we expect a net loss. Nonoperating Income (Expense) Interest expense, net of capitalized interest, decreased by $30 million to $368 million in 2022 from $398 million in 2021. The decrease was caused by a lower average interest rate for the three months ended February 28, 2022 compared to the three months ended February 28, 2021 as a result of completed refinancing efforts. Liquidity, Financial Condition and Capital Resources As of February 28, 2022, we had $7.2 billion of liquidity including cash, short-term investments and borrowings available under our Revolving Facility. During 2022, we will continue to be focused on pursuing refinancing opportunities to reduce interest rates and extend maturities as well as entering into supplemental agreements to align our covenant compliance requirements. 26 We had a working capital deficit of $2.9 billion as of February 28, 2022 compared to working capital deficit of $0.3 billion as of November 30, 2021. The increase in working capital deficit was substantially all due to a decrease in cash. 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 $3.4 billion and $3.1 billion of customer deposits as of February 28, 2022 and November 30, 2021, respectively. We have paid refunds of customer deposits with respect to a portion of cancelled cruises. The amount of any future cash refunds may depend on future cruise cancellations and guest rebookings. We have agreements with a number of credit card processors that transact customer deposits related to our cruise vacations. Certain of these agreements allow the credit card processors to request, under certain circumstances, that we provide a reserve fund in cash. 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. 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 $1.2 billion of net cash flows in operating activities during the three months ended February 28, 2022, a decrease of $0.3 billion, compared to $1.5 billion of net cash flows used for the same period in 2021. Investing Activities During the three months ended February 28, 2022, net cash used in investing activities was $3.0 billion. This was driven by the following: • Capital expenditures of $2.5 billion for our ongoing new shipbuilding program • Capital expenditures of $221 million for ship improvements and replacements, information technology and buildings and improvements • Proceeds from sale of ships and other of $18 million • Purchases of short-term investments of $315 million 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 Financing Activities During the three months ended February 28, 2022, net cash provided by financing activities of $1.7 billion was caused by the following: • Issuances of $2.3 billion of long-term debt • Repayments of $0.5 billion of long-term debt • Payments of $85 million related to debt issuance costs • Net repayments of short-term borrowings of $48 million • Purchases of $23 million of Carnival plc ordinary shares and issuances of $27 million of Carnival Corporation common stock under our Stock Swap Program 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 offering of Carnival Corporation common stock 27 Funding Sources As of February 28, 2022, we had $7.2 billion of liquidity including cash, short-term investments and borrowings available under our revolving facility. In addition, we had $3.3 billion of undrawn export credit facilities to fund ship deliveries planned through 2024. We plan to use future cash flows from operations to fund our cash requirements including capital expenditures not funded by our export credit facilities. (in billions) 2022 2023 2024 Future export credit facilities at February 28, 2022 $ 0.9 $ 1.8 $ 0.6 Our export credit facilities contain various financial covenants as described in Note 3 - “Debt”. At February 28, 2022 , 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.