Item 2. Management’s Discussion and Analysis
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
• Adjusted net income (loss)
• Booking levels
• Adjusted EBITDA
• Occupancy
• Adjusted earnings per share
• Interest, tax and fuel expenses
• Adjusted free cash flow
• Currency exchange rates
• Net per diems
• Goodwill, ship and trademark fair values
• Net yields
• Liquidity and credit ratings
• Adjusted cruise costs per ALBD
• Investment grade leverage metrics
• Adjusted cruise costs excluding fuel per ALBD
• Estimates of ship depreciable lives and residual values
• Adjusted return on invested capital
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, and in the future may continue to be, amplified by our substantial debt balance as a result of the pause of our guest cruise operations. There may be additional risks that we consider immaterial or which are unknown. These factors include, but are not limited to, the following:
• Events and conditions around the world, including war and other military actions, such as the war in Ukraine, inflation, higher fuel prices, higher taxes, higher interest rates and other general concerns impacting the ability or desire of people to travel have led, and may in the future lead, to a decline in demand for cruises as well as negative impacts to our operating costs and profitability.
• Pandemics have in the past and may in the future have a significant negative impact on our financial condition and operations.
• Incidents concerning our ships, guests or the cruise industry have in the past and may, in the future, negatively 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, labor and employment, 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 team members, our inability to recruit or retain qualified shoreside and shipboard team members and increased labor costs could have an adverse effect on our business and results of operations.
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• Increases in fuel prices, changes in the types of fuel consumed and availability of fuel supply may adversely impact our scheduled itineraries and costs.
• We rely on supply chain vendors who are integral to the operations of our businesses. These vendors and service providers may be unable to deliver on their commitments, which could negatively 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 negatively impact 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.
• Failure to successfully implement our business strategy following our resumption of guest cruise operations would negatively impact the occupancy levels and pricing of our cruises and could have a material adverse effect on our business. We require a significant amount of cash to service our debt and sustain our operations. Our ability to generate cash depends on many factors, including those beyond our control, and we may not be able to generate cash required to service our debt and sustain our operations.
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- and climate-related statements may be based on standards and tools for measuring progress that are still developing, internal controls and processes that continue to evolve, and assumptions and predictions that are subject to change in the future and may not be generally shared.
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. 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. Our results are also impacted by ships being taken out-of-service for planned maintenance, which we schedule during non-peak seasons. 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 cost of fuel and increases in other related costs are reasonably likely to continue to impact our profitability in both the short and long-ter m.
• We believe inflation and interest rates are reasonably likely to continue to impact our profitability.
• We believe a potential global minimum tax as well as any other changes in domestic and international tax rules and regulations could have a material impact on our effective tax rate.
• We believe the increasing global focus on climate change, including the reduction of carbon emissions and new and evolving regulatory requirements, is reasonably likely to have a material negative impact on our future financial results. The full impact of climate change to our business is not yet known.
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Statistical Information
Three Months Ended
August 31, Nine Months Ended
August 31,
2023 2022 2023 2022
Passenger Cruise Days (“PCDs”) (in millions) (a)
25.8 17.7 67.8 36.4
Available Lower Berth Days (“ALBDs”) (in millions) (b)
23.7 21.0 68.1 51.0
Occupancy percentage (c) 109 % 84 % 100 % 71 %
Passengers carried (in millions)
3.6 2.6 9.3 5.2
Fuel consumption in metric tons (in millions)
0.7 0.7 2.2 1.9
Fuel consumption in metric tons per thousand ALBDs 31.1 33.4 32.3 37.2
Fuel cost per metric ton consumed $ 636 $ 958 $ 681 $ 836
Currencies (USD to 1)
AUD $ 0.66 $ 0.70 $ 0.67 $ 0.71
CAD $ 0.75 $ 0.78 $ 0.74 $ 0.78
EUR $ 1.09 $ 1.03 $ 1.08 $ 1.08
GBP $ 1.27 $ 1.21 $ 1.24 $ 1.28
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 a 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.
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Results of Operations
Consolidated
Three Months Ended
August 31, Nine Months Ended
August 31,
(in millions) 2023 2022 Change 2023 2022 Change
Revenues
Passenger ticket $ 4,546 $ 2,595 $ 1,951 $ 10,557 $ 4,753 $ 5,804
Onboard and other 2,308 1,711 597 5,640 3,577 2,063
6,854 4,305 2,548 16,197 8,329 7,868
Operating Costs and Expenses
Commissions, transportation and other 823 565 258 2,097 1,141 956
Onboard and other 752 537 215 1,785 1,060 725
Payroll and related 585 563 22 1,768 1,601 167
Fuel 468 668 (199) 1,492 1,577 (86)
Food 364 259 105 1,000 586 414
Ship and other impairments — — — — 8 (8)
Other operating 928 787 141 2,546 2,118 428
Cruise and tour operating expenses 3,921 3,379 542 10,688 8,092 2,596
Selling and administrative 713 625 89 2,162 1,774 388
Depreciation and amortization 596 581 15 1,774 1,707 67
5,230 4,585 645 14,624 11,573 3,052
Operating Income (Loss) 1,624 (279) 1,903 1,572 (3,244) 4,816
Nonoperating Income (Expense)
Interest income 59 24 35 183 34 150
Interest expense, net of capitalized interest (518) (422) (96) (1,600) (1,161) (439)
Debt extinguishment and modification costs (81) — (81) (112) — (112)
Other income (expense), net (19) (81) 62 (67) (108) 41
(559) (479) (80) (1,595) (1,235) (360)
Income (Loss) Before Income Taxes $ 1,065 $ (759) $ 1,823 $ (23) $ (4,478) $ 4,456
NAA
Three Months Ended
August 31, Nine Months Ended
August 31,
(in millions) 2023 2022 Change 2023 2022 Change
Revenues
Passenger ticket $ 2,963 $ 1,716 $ 1,247 $ 6,896 $ 3,163 $ 3,733
Onboard and other 1,603 1,164 439 4,104 2,509 1,595
4,566 2,880 1,686 11,000 5,672 5,328
Operating Costs and Expenses 2,661 2,280 381 7,132 5,335 1,797
Selling and administrative 420 368 52 1,295 1,078 217
Depreciation and amortization 377 358 19 1,115 1,046 69
3,459 3,007 452 9,542 7,460 2,083
Operating Income (Loss) $ 1,107 $ (126) $ 1,233 $ 1,458 $ (1,787) $ 3,245
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Europe
Three Months Ended
August 31, Nine Months Ended
August 31,
(in millions) 2023 2022 Change 2023 2022 Change
Revenues
Passenger ticket $ 1,595 $ 972 $ 623 $ 3,699 $ 1,804 $ 1,895
Onboard and other 465 294 171 1,120 585 535
2,060 1,266 794 4,819 2,389 2,430
Operating Costs and Expenses 1,124 983 141 3,303 2,529 774
Selling and administrative 199 173 26 634 524 110
Depreciation and amortization 168 172 (4) 506 531 (25)
1,491 1,328 163 4,443 3,585 859
Operating Income (Loss) $ 569 $ (62) $ 631 $ 376 $ (1,196) $ 1,572
As a result of the pause in our guest cruise operations, we have a substantial debt balance and require a significant amount of cash to service our debt. Our ability to generate cash will be affected by general macroeconomic, financial, geopolitical, competitive, regulatory and other factors beyond our control. The full extent of these impacts is uncertain and may be amplified by our substantial debt balance.
Three Months Ended August 31, 2023 (“2023”) Compared to Three Months Ended August 31, 2022 (“2022”)
Revenues
Consolidated
Cruise passenger ticket revenues made up 66% of our total revenues in 2023 while onboard and other revenues made up 34%. Revenues in 2023 increased by $2.5 billion to $6.9 billion from $4.3 billion in 2022 due to the increase of ships in service and considerably higher occupancy levels in 2023 as compared to 2022. Our full fleet was serving guests as of August 31, 2023 , compared to 93% as of August 31, 2022 . ALBDs increased to 23.7 million in 2023 as compared to 21.0 million in 2022. Occupancy for 2023 was 109% compared to 84% in 2022.
NAA Segment
Cruise passenger ticket revenues made up 65% of our NAA segment’s total revenues in 2023 while onboard and other cruise revenues made up 35%. NAA segment revenues in 2023 increased by $1.7 billion to $4.6 billion from $2.9 billion in 2022 due to the increase of ships in service and considerably higher occupancy levels in 2023 as compared to 2022. Our NAA segment’s full fleet was serving guests as of August 31, 2023, compared to 95% as of August 31, 2022 . ALBDs increased to 14.6 million in 2023 as compared to 12.6 million in 2022. Occupancy for 2023 was 111% compared to 92% in 2022.
Europe Segment
Cruise passenger ticket revenues made up 77% of our Europe segment’s total revenues in 2023 while onboard and other cruise revenues made up 23%. Europe segment revenues in 2023 increased by $0.8 billion to $2.1 billion from $1.3 billion in 2022 due to the increase of ships in service and considerably higher occupancy levels in 2023 as compared to 2022. Our Europe segment’s full fleet was serving guests as of August 31, 2023 , compared to 92% as of August 31, 2022 . ALBDs increased to 9.1 million in 2023 as compared to 8.5 million in 2022. Occupancy for 2023 was 106% compared to 73% in 2022.
Operating Cost and Expenses
Consolidated
Operating costs and expenses increased by $0.5 billion to $3.9 billion in 2023 from $3.4 billion in 2022. These increases were driven by our resumption of guest cruise operations, an increase in ships in service and considerably higher occupancy.
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Fuel costs decreased by $199 million to $468 million in 2023 from $668 million in 2022. $238 million of this decrease was caused by lower fuel prices and changes in fuel mix of $322 per metric ton consumed in 2023 compared to 2022, partially offset by higher fuel consumption due to the resumption of guest cruise operations.
Selling and administrative expenses increased by $89 million to $713 million in 2023 from $625 million in 2022. The increase was principally driven by increases in administrative expenses incurred as part of our resumption of guest cruise operations, which includes an increase in incentive compensation reflecting expected improvements in the company’s current and long-term performance.
The drivers in changes in costs and expenses for our NAA and Europe segments are the same as those described for our consolidated results.
Nonoperating Income (Expense)
Interest expense, net of capitalized interest, increased by $96 million to $518 million in 2023 from $422 million in 2022. The increase was caused by a higher average interest rate in 2023 compared to 2022.
Debt extinguishment and modification costs were $81 million in 2023 as a result of debt transactions during the quarter, where there were none in 2022.
Nine Months Ended August 31, 2023 (“2023”) Compared to Nine Months Ended August 31, 2022 (“2022”)
Revenues
Consolidated
Cruise passenger ticket revenues made up 65% of our total revenues in 2023 while onboard and other revenues made up 35%. Revenues in 2023 increased by $7.9 billion to $16.2 billion from $8.3 billion in 2022 due to the significant increase of ships in service and considerably higher occupancy levels in 2023 as compared to 2022. Our full fleet was serving guests as of August 31, 2023 , compared to 93% as of August 31, 2022 . ALBDs increased to 68.1 million in 2023 as compared to 51.0 million in 2022. Occupancy for 2023 was 100% compared to 71% in 2022.
NAA Segment
Cruise passenger ticket revenues made up 63% of our NAA segment’s total revenues in 2023 while onboard and other cruise revenues made up 37%. NAA segment revenues in 2023 increased by $5.3 billion to $11.0 billion from $5.7 billion in 2022 due to the significant increase of ships in service and considerably higher occupancy levels in 2023 as compared to 2022. Our NAA segment’s full fleet was serving guests as of August 31, 2023, compared to 95% as of August 31, 2022 . ALBDs increased to 42.2 million in 2023 as compared to 31.4 million in 2022. Occupancy for 2023 was 104% compared to 78% in 2022.
Europe Segment
Cruise passenger ticket revenues made up 77% of our Europe segment’s total revenues in 2023 while onboard and other cruise revenues made up 23%. Europe segment revenues in 2023 increased by $2.4 billion to $4.8 billion from $2.4 billion in 2022 due to the significant increase of ships in service and considerably higher occupancy levels in 2023 as compared to 2022. Our Europe segment’s full fleet was serving guests as of August 31, 2023 , compared to 92% as of August 31, 2022 . ALBDs increased to 25.9 million in 2023 as compared to 19.6 million in 2022. Occupancy for 2023 was 93% compared to 60% in 2022.
Operating Cost and Expenses
Consolidated
Operating costs and expenses increased by $2.6 billion to $10.7 billion in 2023 from $8.1 billion in 2022. These increases were driven by our resumption of guest cruise operations, an increase in ships in service and considerably higher occupancy.
Selling and administrative expenses increased by $0.4 billion to $2.2 billion in 2023 from $1.8 billion in 2022. The increase was caused by increases in advertising costs and administrative expenses incurred as part of our resumption of guest cruise operations, which includes an increase in incentive compensation reflecting expected improvements in the company’s current and long-term performance.
The drivers in changes in costs and expenses for our NAA and Europe segments are the same as those described for our
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consolidated results.
Nonoperating Income (Expense)
Interest expense, net of capitalized interest, increased by $0.4 billion to $1.6 billion in 2023 from $1.2 billion in 2022. The increase was caused by a higher average interest rate in 2023 compared to 2022.
Debt extinguishment and modification costs were $112 million in 2023 as a result of debt transactions during the period, where there were none in 2022.
Liquidity, Financial Condition and Capital Resources
As of August 31, 2023, we had $5.7 billion of liquidity including cash and cash equivalents and borrowings available under our Revolving Facility. We will continue to pursue various opportunities to refinance future debt maturities to reduce interest expense and/or to extend the maturity dates associated with our existing indebtedness and obtain relevant financial covenant amendments or waivers, if needed.
We had a working capital deficit of $6.3 billion as of August 31, 2023 compared to a working capital deficit of $3.1 billion as of November 30, 2022. The increase in working capital deficit was caused by a decrease in cash and cash equivalents and restricted cash and an increase in customer deposits, partially offset by an increase in prepaid expenses and a decrease in short-term borrowings as well as the current portion of long-term debt. 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 on our balance sheet 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 $6.0 billion and $4.9 billion of customer deposits as of August 31, 2023 and November 30, 2022, respectively. 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.
Refer to Note 1 - “General, ” of the consolidated financial statements for additional discussion regarding our liquidity.
Sources and Uses of Cash
Operating Activities
Our business provided $3.4 billion of net cash flows from operating activities during the nine months ended August 31, 2023, an increase of $4.9 billion, compared to $1.6 billion used for the same period in 2022. This was driven by a decrease in the net loss compared to the same period in 2022 and other working capital changes.
Investing Activities
During the nine months ended August 31, 2023, net cash used in investing activities was $2.3 billion. This was driven by:
• Capital expenditures of $1.6 billion for our ongoing new shipbuilding program
• Capital expenditures of $991 million for ship improvements and replacements, information technology and buildings and improvements
• Proceeds from sales of ships of $260 million
During the nine months ended August 31, 2022, net cash used in investing activities was $3.5 billion. This was driven by:
• Capital expenditures of $3.0 billion for our ongoing new shipbuilding program
• Capital expenditures of $776 million for ship improvements and replacements, information technology and buildings and improvements
• Proceeds from sale of ships and other of $55 million
• Purchases of short-term investments of $315 million
• Proceeds from maturity of short-term investments of $515 million
Financing Activities
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During the nine months ended August 31, 2023, net cash used in financing activities of $4.2 billion was driven by:
• Repayments of $200 million of short term-borrowings
• Repayments of $6.8 billion of long-term debt
• Debt issuance costs of $116 million
• Debt extinguishment costs of $67 million
• Issuances of $3.0 billion of long-term debt
• Proceeds from issuance of $22 million of Carnival Corporation common stock and purchases of $20 million of Carnival plc ordinary shares under our Stock Swap Program
During the nine months ended August 31, 2022, net cash provided by financing activities of $3.2 billion was caused by:
• Net repayments of short-term borrowings of $114 million
• Repayments of $1.1 billion of long-term debt
• Debt issuance costs of $116 million
• Issuances of $3.3 billion of long-term debt
• Net proceeds of $1.2 billion from the public offering of Carnival Corporation common stock
• Proceeds from issuance of $89 million of Carnival Corporation common stock and purchases of $82 million of Carnival plc ordinary shares under our Stock Swap Program
Funding Sources
As of August 31, 2023, we had $5.7 billion of liquidity including $2.8 billion of cash and cash equivalents and $2.9 billion of borrowings available under our Revolving Facility, which matures in August 2024. In February 2023, Carnival Holdings II entered into the New Revolving Facility, which may be utilized beginning in August 2024, at which date it will replace our Revolving Facility. Refer to Note 3 - “Debt” of the consolidated financial statements for additional discussion. In addition, we had $3.0 billion of undrawn export credit facilities to fund ship deliveries planned through 2025. We plan to use existing liquidity and future cash flows from operations to fund our cash requirements including capital expenditures not funded by our export credit facilities. We seek to manage our credit risk exposures, including counterparty nonperformance associated with our cash and cash equivalents, and future financing facilities by conducting business with well-established financial institutions, and export credit agencies and diversifying our counterparties.
(in billions) 2023 2024 2025
Future export credit facilities at August 31, 2023
$ — $ 2.2 $ 0.7
Our export credit facilities contain various financial covenants as described in Note 3 - “Debt”. At August 31, 2023 , 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.