Interim Management Statement
April 2, 2009
RELEASE OF CARNIVAL CORPORATION & PLC QUARTERLY REPORT ON FORM 10-Q AND
CARNIVAL PLC INTERIM MANAGEMENT STATEMENT
FOR THE FIRST QUARTER OF 2009
-----------------------------
Carnival Corporation & plc announced its first quarter results of operations in its
earnings release issued on March 24, 2009. Carnival Corporation & plc is hereby announcing
that today it has filed a joint Quarterly Report on Form 10-Q with the U.S. Securities and
Exchange Commission ("SEC") containing the Carnival Corporation & plc 2009 first quarter
financial statements, which results remain unchanged from those previously announced on
March 24, 2009. However, Carnival Corporation & plc has provided additional information on its
outlook for the remainder of fiscal 2009, which is included in Schedule A.
The information included in the attached Schedules A and B is extracted from the Form 10-Q
and has been prepared in accordance with SEC rules and regulations. Schedules A and B contain
the unaudited consolidated financial statements for Carnival Corporation & plc as of and for
the three months ended February 28, 2009, together with management's discussion and analysis of
financial condition and results of operations related thereto. These Carnival Corporation &
plc consolidated financial statements have been prepared in accordance with generally accepted
accounting principles in the United States of America ("U.S. GAAP"). Within the Carnival
Corporation and Carnival plc dual listed company structure the directors consider the most
appropriate presentation of Carnival plc's results and financial position is by reference to
the U.S. GAAP financial statements of Carnival Corporation & plc. Accordingly, Schedules A and
B are presented as Carnival plc's first quarter interim management statement, in accordance
with the requirements of the UK Disclosure and Transparency Rules.
MEDIA CONTACTS INVESTOR RELATIONS CONTACT
US US/UK
Carnival Corporation & plc Carnival Corporation & plc
Tim Gallagher Beth Roberts
+1 305 599 2600, ext. 16000 +1 305 406 4832
The joint Quarterly Report on Form 10-Q (including the portion extracted for this
announcement) is available for viewing on the SEC website at www.sec.gov under Carnival
Corporation or Carnival plc or the Carnival Corporation & plc website at www.carnivalcorp.com
or www.carnivalplc.com. A copy of the joint Quarterly Report on Form 10-Q will be available
shortly at the UKLA Document Viewing Facility of the Financial Services Authority at 25 The
North Colonnade, London E14 5HS, United Kingdom.
Carnival Corporation & plc is the largest cruise vacation group in the world, with a
portfolio of cruise brands in North America, Europe and Australia, comprised of Carnival Cruise
Lines, Holland America Line, Princess Cruises, The Yachts of Seabourn, AIDA Cruises, Costa
Cruises, Cunard Line, Ibero Cruises, Ocean Village, P&O Cruises and P&O Cruises Australia.
Together, these brands operate 89 ships totaling more than 171,000 lower berths with 16
new ships scheduled to be delivered between April 2009 and June 2012. Carnival Corporation &
plc also operates Holland America Tours and Princess Tours, the leading tour companies in
Alaska and the Canadian Yukon. Traded on both the New York and London Stock Exchanges,
Carnival Corporation & plc is the only group in the world to be included in both the S&P 500
and the FTSE 100 indices.
Additional information can be obtained via Carnival Corporation & plc's website at
www.carnivalcorp.com or www.carnivalplc.com or by writing to Carnival plc at Carnival House,
5 Gainsford Street, London SE1 2NE, United Kingdom.
SCHEDULE A
CARNIVAL CORPORATION & PLC - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS UNDER U.S. GAAP
Cautionary Note Concerning Factors That May Affect Future Results
Some of the statements, estimates or projections 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,
outlooks, 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. We have tried,
whenever possible, to identify these statements by using words like "will," "may," "could,"
"should," "would," "believe," "expect," "anticipate," "forecast," "future," "intend," "plan,"
"estimate" and similar expressions of future intent or the negative of such terms.
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
expenses, costs per available lower berth day ("ALBD"), estimates of ship depreciable lives and
residual values, liquidity, goodwill and trademark fair values, outlook or business prospects.
These factors include, but are not limited to, the following:
- general economic and business conditions, including fuel price increases and declines in
the securities, real estate and other markets, and perceptions of these conditions
may adversely impact the levels of our potential vacationers' discretionary income and net
worth and this group's confidence in their country's economy;
- fluctuations in foreign currency exchange rates, particularly the strengthening of the
U.S. dollar against the euro and sterling;
- the international political climate, armed conflicts, terrorist and pirate attacks and
threats thereof, and other world events affecting the safety and security of travel;
- conditions in the cruise and land-based vacation industries, including competition from
other cruise ship operators and providers of other vacation alternatives and overcapacity
offered by cruise ship and land-based vacation alternatives;
- accidents, adverse 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 injury or death or the alteration of itineraries or
cancellation of a cruise or series of cruises or tours, and the impact of the spread of
contagious diseases;
- adverse publicity concerning the cruise industry in general, or us in particular;
- lack of acceptance of new itineraries, products and services by our guests;
- changing consumer preferences;
- changes in and compliance with laws and regulations relating to employment, environmental,
health, safety, security, tax and other regulatory regimes under which we operate;
- increases in global fuel demand and pricing, fuel supply disruptions and/or other events on
our fuel and other expenses, liquidity and credit ratings;
- increases in our future fuel expenses of implementing recently approved International
Maritime Organization regulations, which require the use of higher priced low sulfur fuels
in certain cruising areas;
- changes in operating and financing costs, including changes in interest rates, food,
insurance, payroll and security costs;
- our ability to implement our shipbuilding programs and ship refurbishments and repairs,
including ordering additional ships for our cruise brands from European shipyards on terms
that are favorable or consistent with our expectations;
- our ability to implement our brand strategies and to continue to operate and expand our
business internationally;
- whether our future operating cash flow will be sufficient to fund future obligations and
whether we will be able to obtain financing, if necessary, in sufficient amounts and 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;
- continuing financial viability of our travel agent distribution system, air service
providers and cruise shipyards;
- availability and pricing of air travel services, especially as a result of significant
increases in air travel costs;
- changes in the global credit markets on our counterparty risks, including those associated
with our cash equivalents, committed financing facilities, contingent obligations,
derivative instruments, insurance contracts and new ship progress payment guarantees;
- our decisions to self-insure against various risks or our inability to obtain insurance for
certain risks at reasonable rates;
- disruptions and other damages to our information technology networks;
- lack of continued availability of attractive port destinations; and
- risks associated with the DLC structure, including the uncertainty of its tax status.
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.
Outlook for the Remainder of Fiscal 2009
As of March 24, 2009, we said that we expected our earnings per share for the second
quarter and full year of 2009 would be in the range of $0.30 to $0.32 and $2.10 to $2.30,
respectively. Our guidance was based on the assumptions in the table below.
As of March 31, 2009, updated only for the current assumptions in the table below, our
earnings per share for the second quarter and full year of 2009 would decrease by $0.01 and
$0.06, respectively.
Second Quarter 2009 Full Year 2009
--------------------- -------------------
March 24 March 31 March 24 March 31
-------- -------- -------- --------
Fuel cost per metric ton $ 285 $ 294 $ 279 $ 287
----- ----- ----- -----
Currency
U.S. dollar to Euro1 $1.36 $1.33 $1.35 $1.33
----- ----- ----- -----
U.S. dollar to £1 $1.44 $1.43 $1.45 $1.44
----- ----- ----- -----
The above forward-looking statements involve risks and uncertainties. Various factors
could cause our actual results to differ materially from those expressed above including, but
not limited to, economic conditions, foreign currency exchange rates, fuel expenses, weather,
regulatory changes, geopolitical and other factors that could impact consumer demand or costs
and expenses. You should read the above forward-looking statement together with the discussion
of these and other risks under "Cautionary Note Concerning Factors That May Affect Future
Results."
Critical Accounting Estimates
The impairment reviews of our ships and goodwill and trademarks, which have been allocated
to our cruise line reporting units, require us to make significant estimates to determine the
fair values of these assets or reporting units. The determination of these fair values includes
numerous uncertainties.
Since early November 2008, our stock market capitalization has generally been lower than
our shareholders' equity or book value. However, our brands have continued to generate
substantial cash flow from their operations, and we expect that they will continue to do so in
2009 and in future years. Furthermore, given the relatively small difference between our stock
price and our book value per share, we believe that a reasonable potential buyer would offer a
control premium for our business franchise that would adequately cover the difference between
our trading prices and our book value. Accordingly, we do not believe there have been any
events or circumstances that would require us to perform interim goodwill and/or trademark
impairment reviews.
However, due to the ongoing uncertainty in market conditions, which may negatively impact
the performance of our reporting units, we will continue to monitor and evaluate the carrying
values of our goodwill and trademarks. If market and economic conditions or our units'
business performance deteriorates significantly then we would perform interim impairment
reviews. Any such impairment reviews could result in recognition of a goodwill and/or
trademark impairment charge in 2009 or thereafter.
For a further 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 2008 joint Annual Report on Form 10-K.
Seasonality and Expected Capacity Growth
Our revenues from the sale of passenger tickets are seasonal. Historically, demand for
cruises has been greatest during our third fiscal 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
maintenance, which we typically schedule during non-peak demand periods. In addition,
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.
The year-over-year percentage increase in our ALBD capacity for the second, third and
fourth quarters of 2009 is currently expected to be 5.6%, 5.6% and 7.6%, respectively. Our
annual ALBD capacity increase for fiscal 2009, 2010, 2011 and 2012 is currently expected to be
5.3%, 8.0%, 5.8% and 3.7%, respectively. The above percentage increases result primarily from
new ships entering service and exclude any other future ship orders, acquisitions, retirements
or sales.
Selected Cruise and Other Information
Selected cruise and other information was as follows:
Three Months
Ended February 28/29,
--------------------
2009 2008
---- ----
Passengers carried (in thousands) 1,869 1,910
----- -----
Occupancy percentage (a) 103.9% 104.3%
----- -----
Fuel consumption (metric tons in thousands) 752 785
--- ---
Fuel cost per metric ton (b) $ 276 $ 499
----- -----
Currency
U.S. dollar to Euro1 $1.32 $1.47
----- -----
U.S. dollar to £1 $1.46 $1.98
----- -----
(a) In accordance with cruise industry practice, occupancy is calculated using a
denominator of 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.
(b) Fuel cost per metric ton is calculated by dividing the cost of our fuel by the number
of metric tons consumed.
Three Months Ended February 28, 2009 ("2009") Compared to the Three Months Ended February 29,
2008 ("2008")
Revenues
Our total revenues decreased $288 million, or 9.1%, from $3.2 billion in 2008 to $2.9
billion in 2009. This was driven by a $360 million revenue decrease that was primarily due to
the impact of a stronger U.S. dollar against the euro and sterling compared to 2008, as well as
the adverse impact of the economic downturn on our cruise ticket pricing and onboard and other
revenues. This revenue decrease was partially offset by our 2.3% capacity increase in ALBDs
(see "Key Performance Non-GAAP Financial Indicators"). Our capacity increased 1.9% for our
North American cruise brands and 6.2% for our European cruise brands in 2009 compared to 2008,
as we continue to implement our strategy of expanding in the European cruise marketplace.
Onboard and other revenues included concessionaire revenues of $176 million in 2009 and
$186 million in 2008. Onboard and other revenues decreased $68 million in 2009 compared to
2008, primarily because there was lower onboard spending for most of the major activities, as
well as the impact of the stronger U.S. dollar against the euro and sterling compared to 2008,
partially offset by our 2.3% increase in ALBDs.
Costs and Expenses
Operating costs decreased $264 million, or 12.5%, from $2.1 billion in 2008 to $1.9 billion
in 2009. This decrease was primarily due to $167 million of lower fuel prices, in addition to
the impact of the stronger U.S. dollar against the euro and sterling compared to 2008. This
decrease was partially offset as a result of increased capacity driven by our 2.3% increase in
ALBDs and a $26 million increase in dry-dock expenses.
Selling and administration expenses decreased $33 million, or 7.8%, from $425 million in
2008 to $392 million in 2009. The decrease was primarily currency driven, and was partially
offset by our 2.3% increase in ALBDs.
Depreciation and amortization expense increased $10 million, or 3.3%, from $301 million in
2008 to $311 million in 2009, primarily due to the 2.3% increase in ALBDs through the addition
of new ships and additional ship improvement expenditures.
Our total costs and expenses as a percentage of revenues declined from 90.1% in 2008 to
89.1% in 2009.
Operating Income
Our operating income was flat as the decreased revenues resulting primarily from both the
stronger U.S. dollar against the euro and sterling compared to 2008 and the adverse impact of
the economic downturn were offset by lower costs and expenses resulting primarily from both
lower fuel prices and the stronger U.S. dollar against the euro and sterling compared to 2008.
Nonoperating (Expense) Income
Net interest expense, excluding capitalized interest, increased $1 million to $102 million
in 2009 from $101 million in 2008. On a constant dollar basis, this increase was due to a $12
million increase in interest expense from a higher level of average borrowings and $6 million of
lower interest income due to a lower average level of invested cash and lower average interest
rates on invested balances, partially offset by a $13 million decrease from lower average
interest rates on average borrowings. In addition, interest expense decreased by $4 million as a
result of the stronger U.S. dollar against the euro and sterling compared to 2008.
Other income, net increased $17 million to $19 million in 2009 from $2 million in 2008,
primarily because of the $15 million gain recognized upon the unwinding of one of our LILO
transactions.
Income Taxes
Income tax benefit increased $12 million to $22 million in 2009 from $10 million in 2008,
primarily because of the reversal of uncertain income tax position liabilities, which were no
longer required. During both the first quarters of 2009 and 2008, we have recorded tax benefits
generated by the seasonal losses of our Alaska tour operation.
Key Performance Non-GAAP Financial Indicators
ALBDs is a standard measure of passenger capacity for the period, which we use to perform
rate and capacity variance 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.
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. These
measures enable us to separate the impact of predictable capacity changes from the more
unpredictable rate changes that affect our business. We believe these non-GAAP measures provide
a better gauge to measure our revenue and cost performance instead of the standard U.S. GAAP-
based financial measures. There are no specific rules for determining our non-GAAP financial
measures and, accordingly, it is possible that they may not be exactly comparable to the like-
kind information presented by other cruise companies, which is a potential risk associated with
using them to compare us to other cruise companies.
Net revenue yields are commonly used in the cruise industry to measure a company's cruise
segment revenue performance and for revenue management purposes. We use "net cruise revenues"
rather than "gross cruise revenues" to calculate net revenue yields. 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 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, except for the impact of changing prices, once our ship capacity levels have been
determined.
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. We exclude the same
variable costs that are included in the calculation of net cruise revenues to calculate net
cruise costs 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 decreases in reported U.S. dollar revenues and
expenses if the U.S. dollar strengthens against these foreign currencies, and increases in
reported U.S. dollar revenues and expenses if the U.S. dollar weakens against these foreign
currencies. Accordingly, we also monitor and report 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. dollar cruise operations. We believe that this is a
useful measure since it facilitates a comparative view of the growth of our business in a
fluctuating currency exchange rate environment.
Gross and net revenue yields were computed by dividing the gross or net revenues, without
rounding, by ALBDs as follows:
Three Months Ended February 28/29,
-----------------------------------
2009
Constant
2009 Dollar 2008
---- ------ ----
(in millions, except ALBDs and yields)
Cruise revenues
Passenger tickets $2,219 $2,400 $2,438
Onboard and other 634 667 702
------ ------ ------
Gross cruise revenues 2,853 3,067 3,140
Less cruise costs
Commissions, transportation and other (514) (574) (558)
Onboard and other (104) (110) (125)
------ ------ ------
Net cruise revenues $2,235 $2,383 $2,457
------ ------ ------
ALBDs 14,492,250 14,492,250 14,161,289
---------- ---------- ----------
Gross revenue yields $196.84 $211.60 $221.71
------- ------- -------
Net revenue yields $154.25 $164.42 $173.45
------- ------- -------
Gross and net cruise costs per ALBD were computed by dividing the gross or net cruise
costs, without rounding, by ALBDs as follows:
Three Months Ended February 28/29,
-----------------------------------
2009
Constant
2009 Dollar 2008
---- ------ ----
(in millions, except ALBDs and costs per ALBD)
Cruise operating expenses $1,834 $1,973 $2,096
Cruise selling and administrative expenses 384 411 417
------ ------ ------
Gross cruise costs 2,218 2,384 2,513
Less cruise costs included in net cruise
revenues
Commissions, transportation and other (514) (574) (558)
Onboard and other (104) (110) (125)
------ ------ ------
Net cruise costs $1,600 $1,700 $1,830
------ ------ ------
ALBDs 14,492,250 14,492,250 14,161,289
---------- ---------- ----------
Gross cruise costs per ALBD $153.02 $164.51 $177.48
------- ------- -------
Net cruise costs per ALBD $110.43 $117.32 $129.22
------- ------- -------
Net cruise revenues decreased $222 million, or 9.0%, to $2.2 billion in 2009 from $2.5
billion in 2008. This was driven by a $279 million, or 11.1%, decrease in net revenue yields in
2009 compared to 2008 (gross revenue yields decreased by 11.2%). This decrease was partially
offset by a 2.3% increase in ALBDs between 2009 and 2008 that accounted for $57 million. The
net revenue yield decrease in 2009 was primarily due to the impact of a stronger U.S. dollar
against the euro and sterling compared to 2008, as well as the adverse impact of the economic
downturn on our cruise ticket pricing and onboard and other revenues. Net revenue yields as
measured on a constant dollar basis decreased 5.2% in 2009 compared to 2008, which was comprised
of a 5.0% decrease in passenger ticket yields and a 5.8% decrease in onboard and other revenue
yields. Gross cruise revenues decreased $287 million, or 9.1%, to $2.9 billion in 2009 from
$3.1 billion in 2008 for largely the same reasons as discussed above for net cruise revenues.
Net cruise costs decreased $230 million, or 12.6%, to $1.6 billion in 2009 from $1.8
billion in 2008. This was driven by a $273 million decrease in net cruise costs per ALBD, which
decreased 14.5% in 2009 compared to 2008 (gross cruise costs per ALBD decreased 13.8%). This
decrease was partially offset by the 2.3% increase in ALBDs between 2009 and 2008 that accounted
for $43 million. The 14.5% decrease in net cruise costs per ALBD was primarily the result of a
44.6% decrease in fuel price to $276 per metric ton in 2009, which resulted in a decrease in
fuel expense of $167 million compared to 2008 and the stronger U.S. dollar against the euro and
sterling compared to 2008. Net cruise costs per ALBD as measured on a constant dollar basis
decreased 9.2% in 2009 compared to 2008. On a constant dollar basis, net cruise costs per ALBD
excluding fuel increased 1.4% compared to 2008 primarily due to the increase in dry-docking
expenses. Gross cruise costs decreased $295 million, or 11.7%, in 2009 to $2.2 billion from
$2.5 billion in 2008 for largely the same reasons as discussed above for net cruise costs.
Liquidity and Capital Resources
As discussed under Management's Discussion and Analysis of Financial Condition and Results
of Operations in our 2008 joint Annual Report on Form 10-K, we believe preserving cash and
liquidity at this time is a prudent step which will further strengthen our balance sheet and
enhance our financial flexibility. Accordingly in October 2008, the Board of Directors voted to
suspend our quarterly dividend beginning March 2009. We intend to maintain the dividend
suspension throughout 2009. Our cash from operations and committed financing facilities for
2009 along with our available cash and cash equivalent balances are forecasted to be sufficient
to fund our expected 2009 cash requirements. Therefore, we believe we will not be required to
obtain new debt during 2009; however, we may do so opportunistically to enhance our liquidity.
Our immediate objective is to ensure we have sufficient liquidity available with a high degree
of certainty throughout 2009 despite current market conditions.
Our overall strategy is to maintain an acceptable level of liquidity with our available
cash and cash equivalents and committed credit facilities for immediate and future liquidity
needs and a reasonable debt maturity profile that is spread out over a number of years. To
date, although our costs of borrowing have increased in certain cases and the availability of
funding is not as widespread as it has been in the past, we continue to opportunistically put in
place committed credit facilities. Given the decision by our Board of Directors to suspend the
quarterly dividend and our current financial position, we do not expect the current highly
volatile state of the financial markets will have a significant adverse impact on our ability to
maintain an acceptable level of liquidity during the remainder of 2009.
Sources and Uses of Cash
Our business provided $305 million of net cash from operations during the three months
ended February 28, 2009, a decrease of $68 million, or 18.2%, compared to fiscal 2008. This
decrease was primarily driven by a $221 million quarter-over-quarter decrease in the change in
our customer deposit balances between the year-end and the end of the first quarter, partially
offset by changes in other working capital expenditures. The decrease in customer deposits
resulted primarily from guests booking cruises and paying their deposits closer to the sailing
dates and cruises being purchased for lower ticket prices compared to the comparable prior
period when guests booked their cruises and paid their deposits further in advance of the
sailing dates and cruises were purchased for higher ticket prices.
At February 28/29, 2009 and 2008, we had working capital deficits of $3.8 billion and $5.4
billion, respectively. Our February 28, 2009 deficit included $2.3 billion of customer
deposits, which represent the passenger revenues we collect in advance of sailing dates and,
accordingly, is substantially more of a deferred revenue item rather than an actual current cash
liability. We use our long-term ship assets to realize a portion of this deferred revenue in
addition to consuming current assets. In addition, our February 28, 2009 working capital
deficit included $1.8 billion of current debt obligations, which included $835 million
outstanding under one of our revolving credit facilities. This facility, substantially all of
which matures in 2012, is available to provide long-term rollover financing of our current debt.
After excluding customer deposits and current debt obligations from our February 28, 2009
working capital deficit balance, our non-GAAP adjusted working capital is $324 million. As
explained above, our business model allows us to operate with a significant working capital
deficit and, accordingly, we believe we will continue to have a working capital deficit for the
foreseeable future.
During the three months ended February 28, 2009, our net expenditures for capital projects
were $306 million, of which $137 million was spent for our ongoing new shipbuilding program. In
addition to our new shipbuilding program, we had capital expenditures of $127 million for ship
improvements and replacements and $42 million for Alaska tour assets, cruise port facility
developments and information technology and other assets.
During the three months ended February 28, 2009 we borrowed and repaid $1.0 billion and
$858 million, respectively, under one of our revolving credit facilities in connection with our
needs for cash at various times throughout the period. In addition during the three months
ended February 28, 2009, we borrowed $200 million of new long-term debt, and we repaid
$91 million of long-term debt primarily for scheduled payments under our export credit
facilities. We also repaid $115 million during the three months ended February 28, 2009 under
our short-term borrowing facilities. Finally, we paid cash dividends of $314 million and
received $113 million upon the settlement of foreign currency swaps.
Commitments and Funding Sources
Our contractual cash obligations as of February 28, 2009 have changed compared to November
30, 2008, primarily as a result of our debt and ship progress payments as noted above. We still
have $273 million of convertible debt outstanding, which has a put option in October 2009 and,
accordingly, is classified as a current liability at February 28, 2009.
In October 2008, the Board of Directors voted to suspend our quarterly dividend beginning
March 2009. We intend to maintain the dividend suspension throughout 2009, but will reevaluate
our dividend policy based on circumstances prevailing during the remainder of the year.
At February 28, 2009, we had liquidity of $3.7 billion. Our liquidity consisted of $356
million of cash and cash equivalents, excluding cash on hand of $251 million used for current
operations, $1.4 billion available for borrowing under our revolving credit facilities and $1.9
billion under committed ship financing facilities. Of this $1.9 billion of committed ship
facilities, $816 million is expected to be funded in 2009 and the balance of $1.1 billion is
expected to be funded in 2010, 2011 and 2012. Substantially all of our revolving credit
facilities mature in 2012. We rely on, and have banking relationships with, numerous banks that
have credit ratings of A or above, which we believe would assist us in attempting to access
multiple sources of funding in the event that some lenders are unwilling or unable to lend to
us. However, we believe that our revolving credit facilities and committed ship financings will
be honored as required pursuant to their contractual terms.
Substantially all of our debt agreements contain one or more financial covenants as
described in Note 5 to the financial statements in our 2008 joint Annual Report on Form 10-K.
Generally, if an event of default under any debt agreement occurs, then pursuant to cross
default acceleration clauses, substantially all of our outstanding debt and derivative contract
payables could become due, and all debt and derivative contracts could be terminated.
As of February 28, 2009, we believe we had met all of our debt covenants. In addition,
based on our forecasted operating results, financial condition and cash flows for fiscal 2009,
we expect to be in compliance with our debt covenants during fiscal 2009. However, our
forecasted cash flow from operations and access to the capital markets can be adversely impacted
by numerous factors outside our control including, but not limited to, those noted under
"Cautionary Note Concerning Factors That May Affect Future Results."
We continue to generate substantial cash from operations and have strong investment grade
credit ratings of A3/BBB+, which provide us with flexibility in most financial credit market
environments to refinance our current debt, if necessary. Our Standard & Poor's Rating Services
("S&P") A- credit rating was downgraded to BBB+ and assigned a negative outlook on March 26,
2009, which reflects their continuing concerns that the weakened state of the economy and the
pullback in consumer spending will pressure our ability to sustain our BBB+ credit rating. This
recent downgrade by S&P will result in a slight increase in our future borrowing costs. In
addition, a further downgrade by S&P to BBB would result in a further increase in our borrowing
costs on a prospective basis, but we do not believe it would have a material adverse impact on
our financial results, our ability to obtain committed credit facilities or issue debt, or our
ability to refinance our current debt or secure additional debt for future cash requirements.
Based primarily on our historical results, current financial condition and forecasts, we
believe that our existing liquidity and cash flow from future operations will be sufficient to
fund the majority of our expected capital projects (including shipbuilding commitments), debt
service requirements, convertible debt redemptions, working capital and other firm commitments
over the next several years. In addition, we believe that in most financial credit market
environments we will be able to secure the necessary financings from financial institutions or
through the offering of debt and/or equity securities in the public or private markets or take
other actions to fund these remaining future cash requirements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
During the three months ended February 28, 2009, we entered into a foreign currency forward
that is designated as a fair value hedge of the remaining Seabourn Odyssey euro-denominated
shipyard payment at a rate of $1.27 to the euro, or $194 million.
We previously had designated foreign currency cash flow swaps that effectively converted
$398 million of U.S. dollar fixed interest rate debt into sterling fixed interest rate debt.
The changes in fair value are included as a component of AOCI. In December 2008, we settled
these foreign currency swaps and thus re-aligned the debt with the parent company's U.S. dollar
functional currency.
At February 28, 2009, 68%, 29% and 3% (62%, 30% and 8% at November 30, 2008) of our debt
was U.S. dollar, euro and sterling-denominated, respectively, including the effect of foreign
currency swaps.
Off-Balance Sheet Arrangements
We are not a party to any off-balance sheet arrangements, including guarantee contracts,
retained or contingent interests, certain derivative instruments and variable interest entities,
that either have, or are reasonably likely to have, a current or future material effect on our
financial statements.
SCHEDULE B
CARNIVAL CORPORATION & PLC - U.S. GAAP CONSOLIDATED FINANCIAL STATEMENTS
CARNIVAL CORPORATION & PLC
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in millions, except per share data)
Three Months
Ended February 28/29,
--------------------
2009 2008
---- ----
Revenues
Cruise
Passenger tickets $2,219 $2,438
Onboard and other 634 702
Other 11 12
------ ------
2,864 3,152
------ ------
Costs and Expenses
Operating
Cruise
Commissions, transportation and other 514 558
Onboard and other 104 125
Payroll and related 352 360
Fuel 208 392
Food 198 207
Other ship operating 458 454
Other 16 18
------ ------
Total 1,850 2,114
Selling and administrative 392 425
Depreciation and amortization 311 301
------ ------
2,553 2,840
------ ------
Operating Income 311 312
------ ------
Nonoperating (Expense) Income
Interest income 4 10
Interest expense, net of capitalized interest (96) (98)
Other income, net 19 2
------ ------
(73) (86)
------ ------
Income Before Income Taxes 238 226
Income Tax Benefit, Net 22 10
------ ------
Net Income $ 260 $ 236
------ ------
Earnings Per Share
Basic $ 0.33 $ 0.30
------ ------
Diluted $ 0.33 $ 0.30
------ ------
Dividends Declared Per Share $ 0.40
------
The accompanying notes are an integral part of these consolidated financial statements.
CARNIVAL CORPORATION & PLC
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in millions, except par values)
February 28, November 30, February 29,
2009 2008 2008
---- ---- ----
ASSETS
Current Assets
Cash and cash equivalents $ 607 $ 650 $ 966
Trade and other receivables, net 402 418 434
Inventories 305 315 331
Prepaid expenses and other 245 267 292
------- ------- ------
Total current assets 1,559 1,650 2,023
------- ------- ------
Property and Equipment, Net 26,225 26,457 26,542
Goodwill 3,225 3,266 3,593
Trademarks 1,281 1,294 1,389
Other Assets 546 733 598
------- ------- -------
$32,836 $33,400 $34,145
------- ------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Short-term borrowings $ 283 $ 256 $ 188
Current portion of long-term debt 1,269 1,081 1,333
Convertible debt subject to current put options 273 271 1,398
Accounts payable 496 512 477
Accrued liabilities and other 739 1,142 1,203
Customer deposits 2,280 2,519 2,794
------- ------- -------
Total current liabilities 5,340 5,781 7,393
------- ------- -------
Long-Term Debt 7,690 7,735 6,271
Other Long-Term Liabilities and Deferred Income 652 786 741
Contingencies (Note 3)
Shareholders' Equity
Common stock of Carnival Corporation; $0.01 par
value; 1,960 shares authorized; 644 shares
at 2009 and 643 shares at November and
February 2008 issued 6 6 6
Ordinary shares of Carnival plc; $1.66 par value;
226 shares authorized; 213 shares at 2009 and
2008 issued 354 354 354
Additional paid-in capital 7,687 7,677 7,626
Retained earnings 14,240 13,980 12,832
Accumulated other comprehensive (loss) income (847) (623) 1,219
Treasury stock; 18 shares at 2009 and 19 shares
at November and February 2008 of Carnival
Corporation and 52 shares at 2009 and
November 2008 and 51 shares at February 2008
of Carnival plc, at cost (2,286) (2,296) (2,297)
------- ------- -------
Total shareholders' equity 19,154 19,098 19,740
------- ------- -------
$32,836 $33,400 $34,145
------- ------- -------
The accompanying notes are an integral part of these consolidated financial statements.
CARNIVAL CORPORATION & PLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in millions)
Three Months
Ended February 28/29,
--------------------
2009 2008
---- ----
OPERATING ACTIVITIES
Net income $ 260 $ 236
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation and amortization 311 301
Share-based compensation 19 19
Other (9) 5
Changes in operating assets and liabilities
Receivables 6 (1)
Inventories 8 1
Prepaid expenses and other 12 (47)
Accounts payable (13) (84)
Accrued and other liabilities (74) (63)
Customer deposits (215) 6
------ ------
Net cash provided by operating activities 305 373
------ ------
INVESTING ACTIVITIES
Additions to property and equipment (306) (258)
Other, net (7) (3)
------ ------
Net cash used in investing activities (313) (261)
------ ------
FINANCING ACTIVITIES
Proceeds from revolving credit facility 1,048 1,650
Principal repayments of revolving credit facility (858) (1,226)
Proceeds from issuance of other long-term debt 200
Principal repayments of other long-term debt (91) (197)
(Repayments of) proceeds from short-term borrowings, net (115) 70
Dividends paid (314) (316)
Purchases of treasury stock (9) (84)
Proceeds from settlement of foreign currency swaps 113
Other, net 6 7
------ ------
Net cash used in financing activities (20) (96)
------ ------
Effect of exchange rate changes on cash and cash equivalents (15) 7
------ ------
Net (decrease) increase in cash and cash equivalents (43) 23
Cash and cash equivalents at beginning of period 650 943
------ ------
Cash and cash equivalents at end of period $ 607 $ 966
------ ------
The accompanying notes are an integral part of these consolidated financial statements.
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 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
operate as if they are a single economic enterprise, but each has retained its separate legal
identity.
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 sheets at February 28/29, 2009 and 2008 and the
consolidated statements of operations and cash flows for the three months ended February 28/29,
2009 and 2008 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 2008 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.
NOTE 2 - Debt
At February 28, 2009, unsecured short-term borrowings consisted of euro and U.S. dollar-
denominated bank loans of $281 million and $2 million, respectively, with an aggregate weighted-
average interest rate of 2.1%.
In February 2009, we entered into a $200 million unsecured term loan, which bears interest
at 4.5% and matures in February 2012.
NOTE 3 - Contingencies
Litigation
In January 2006, a lawsuit was filed against Carnival Corporation and its subsidiaries and
affiliates, and other non-affiliated cruise lines in New York on behalf of 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
suit seeks payment of (i) damages, (ii) disgorgement of alleged profits and (iii) an injunction
against future infringement. On March 25, 2009, the court dismissed without prejudice the
claims against Carnival Corporation and its subsidiaries and affiliates, because of the
plaintiffs' failure to state their claims with the required specificity. The plaintiffs may
file an amended complaint within 30 days of the dismissal. The ultimate outcome of this matter
cannot be determined at this time.
The Office of the Attorney General of Florida ("Attorney General") is conducting an
investigation to determine whether there is or has been a violation of Florida antitrust laws in
connection with the setting by us and other unaffiliated cruise lines of our respective fuel
supplements. We are providing our full cooperation to the Attorney General's office.
In the normal course of our business, various other claims and lawsuits have been filed or
are pending against us. Most of these claims and lawsuits are covered by insurance and,
accordingly, the maximum amount of our liability, net of any insurance recoverables, is
typically limited to our self-insurance retention levels. However, the ultimate outcome of
these claims and lawsuits which are not covered by insurance cannot be determined at this time.
Contingent Obligations - Lease Out and Lease Back Type ("LILO") Transactions
At February 28, 2009, Carnival Corporation had estimated contingent obligations totaling
$569 million, excluding termination payments as discussed below, to participants in LILO
transactions for two of its ships. At the inception of these leases, the aggregate of the net
present value of these obligations was paid by Carnival Corporation to a group of major
financial institutions, one of which includes American International Group Inc. ("AIG"), who
agreed to act as payment undertakers and directly pay these obligations. Accordingly, these
contingent obligations are considered extinguished, and neither the funds nor the contingent
obligations have been included on our balance sheets.
In the event that Carnival Corporation were to default on its obligations and assuming
performance by all other participants, we estimate that we would, as of February 28, 2009, be
responsible for a termination payment of approximately $90 million. In 2017 we have the right
to exercise options that would terminate these two LILO transactions at no cost to us.
In certain cases, if the credit ratings of the financial institutions who are directly
paying the contingent obligations fall below AA-, then Carnival Corporation will be required to
replace these financial institutions with other financial institutions whose credit ratings are
at least AA or meet other specified credit requirements. In such circumstances we will incur
additional costs, although we estimate that they will be immaterial to our financial statements.
All of the financial institution payment undertakers with this AA- credit rating threshold have
credit ratings of AAA. If Carnival Corporation's credit rating, which is BBB+, falls below BBB,
it will be required to provide a standby letter of credit for $64 million, or alternatively
provide mortgages for this aggregate amount on these two ships.
In September 2008, the credit ratings of AIG and its subsidiaries involved in one of the
above LILO transactions were downgraded from AA- to A-. As a result of this downgrade, AIG
pledged collateral to support its continuing payment undertaker obligations as required under
the terms of this LILO transaction.
Carnival Corporation and AIG were also parties to a third LILO transaction. In September
2008, we replaced AIG as the payment undertaker under this third LILO transaction by purchasing
$80 million of U.S. Treasury strip securities with funds substantially all provided by AIG. In
February 2009, Carnival and the remaining participants voluntarily unwound this LILO
transaction. Accordingly, the $80 million of long-term U.S. Treasury strip securities that we
held as collateral for our recorded LILO obligation was released to extinguish this obligation.
As a result of the unwinding of this third LILO transaction, we recorded a $15 million
nonoperating gain in February 2009, which had originally been deferred at the inception of the
LILO transaction and was being amortized over the term of the LILO.
Contingent Obligations - Indemnifications
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 and 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.
NOTE 4 - Comprehensive Income
Comprehensive income was as follows (in millions):
Three Months Ended
February 28/29,
--------------------
2009 2008
---- ----
Net income $ 260 $ 236
Items included in other comprehensive income ("OCI")
Foreign currency translation adjustment (221) (77)
Changes related to cash flow derivative hedges, net 5
Unrealized loss on marketable security (3) (5)
----- -----
Other comprehensive loss (224) (77)
----- -----
Total comprehensive income $ 36 $ 159
----- -----
NOTE 5 - Segment Information
Our cruise segment includes all our cruise brands, which have been aggregated as a single
reportable segment based on the similarity of their economic and other characteristics,
including the products and services they provide. Substantially all of our other segment
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):
Three Months Ended February 28/29,
-----------------------------------------------------------
Selling Depreciation Operating
Operating and admin- and income
Revenues expenses istrative amortization (loss)
-------- -------- --------- ------------ ------
2009
----
Cruise $2,853 $1,834 $384 $302 $333
Other 13 18 8 9 (22)
Intersegment elimination (2) (2)
------ ------ ---- ---- ----
$2,864 $1,850 $392 $311 $311
------ ------ ---- ---- ----
2008
----
Cruise $3,140 $2,096 $417 $292 $335
Other 14 20 8 9 (23)
Intersegment elimination (2) (2)
------ ------ ---- ---- ----
$3,152 $2,114 $425 $301 $312
------ ------ ---- ---- ----
NOTE 6 - Earnings Per Share
Our basic and diluted earnings per share were computed as follows (in millions, except per
share data):
Three Months
Ended February 28/29,
--------------------
2009 2008
---- ----
Net income $ 260 $ 236
Interest on dilutive convertible notes 3 6
----- -----
Net income for diluted earnings per share $ 263 $ 242
----- -----
Weighted-average common and ordinary shares
outstanding 787 786
Dilutive effect of convertible notes 15 26
Dilutive effect of stock plans 1 2
----- -----
Diluted weighted-average shares outstanding 803 814
----- -----
Basic earnings per share $0.33 $0.30
----- -----
Diluted earnings per share $0.33 $0.30
----- -----
Options to purchase 15.6 million and 12.2 million shares for the three months ended
February 28/29, 2009 and 2008, respectively, were excluded from our diluted earnings per share
computations since the effect of including them was anti-dilutive. In addition, 5.1 million and
6.3 million shares of Carnival Corporation that are contingently issuable under the features of
its 1.75% convertible notes and zero-coupon notes are also excluded from our 2009 and 2008 first
quarter diluted earnings per share computations, respectively, since the effect of including
them was also anti-dilutive.
NOTE 7 - Fair Value Measurements, Derivative Instruments and Hedging Activities
Fair Value Measurements
The estimated fair value and basis of valuation of our financial assets and financial
liabilities that are required to be measured at fair value on a recurring basis were as follows
(in millions):
Fair Value Measurements on a Recurring Basis
-----------------------------------------------
February 28, 2009 November 30, 2008
-------------------- --------------------
Financial Instruments Level 1(a) Level 2(b) Level 1(a) Level 2(b)
--------------------- ------- ------- ------- -------
Cash equivalents(c) $340 $ 305
Marketable securities held
in rabbi trusts(d) $ 87 $ 19 $ 92 $ 21
Derivatives:
Ship foreign currency
forwards and options(e) $(21) $ (20)
Net investment hedges(f) $ 9 $ 13
Debt related currency swaps(g) $ 104
Interest rate swaps(h) $ 5 $ 5
(a) Level 1 measurements are based on inputs from quoted prices for identical assets in
active markets.
(b) Level 2 measurements are based on inputs from quoted prices for similar assets and
liabilities in active markets, quoted prices for identical or similar assets or
liabilities in markets that are not active and inputs other than quoted prices that
are observable for the asset or liability.
(c) Cash equivalents are comprised of money market funds.
(d) Marketable securities held in rabbi trusts are comprised primarily of mutual funds
invested in common stocks, bonds and other investments.
(e) At February 28, 2009 and November 30, 2008, we have foreign currency forwards and
options totaling $987 million that are designated as foreign currency cash flow hedges
for two of our euro-denominated shipbuilding contracts. In addition, at February 28,
2009 we have a foreign currency forward for $194 million that is designated as a
foreign currency fair value hedge of another euro shipbuilding contract. These
foreign currency forwards mature in 2009 and the options mature through 2010.
(f) At February 28, 2009 and November 30, 2008, we have foreign currency forwards totaling
$285 million and $284 million, respectively, that are designated as hedges of our net
investments in foreign subsidiaries, which have a euro-denominated functional
currency. These foreign currency forwards mature through 2017 and were entered into
to effectively convert U.S. dollar-denominated debt into euro debt.
(g) At November 30, 2008, we also had designated foreign currency cash flow swaps that
effectively converted $398 million of U.S. dollar fixed interest rate debt into
sterling fixed interest rate debt. The changes in fair value are included as a
component of accumulated other comprehensive income ("AOCI"). In December 2008, we
settled these foreign currency swaps and thus re-aligned the debt with the parent
company's U.S. dollar functional currency.
(h) We have an interest rate swap designated as a fair value hedge whereby we receive
fixed interest rate payments in exchange for making variable interest rate payments.
At February 28, 2009 and November 30, 2008, this interest rate swap agreement
effectively changed $96 million of fixed rate debt to LIBOR-based floating rate debt.
This interest rate swap matures through 2010.
In February 2008, the Financial Accounting Standards Board ("FASB") issued FASB Staff
Position FAS 157-2, "Effective date of FASB Statement No. 157." This statement provided a one
year deferral of Statement of Financial Accounting Standards ("SFAS") No. 157, "Fair Value
Measurements" ("SFAS No. 157") effective date for nonfinancial assets and liabilities.
Accordingly, for nonfinancial assets and liabilities SFAS No. 157 became effective for us as of
December 1, 2008, and may impact the determination of our goodwill, trademarks and other long-
lived assets' fair values, when or if we have to perform impairment reviews.
Derivative Instruments and Hedging Activities
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and
Hedging Activities, an amendment of FASB Statement No. 133" ("SFAS No. 161"). SFAS No. 161
requires entities to provide greater transparency in interim and annual financial statements
about how and why the entity uses derivative instruments, how the instruments and related
hedged items are accounted for under SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" ("SFAS No. 133"), and how the instruments and related hedged items affect
the financial position, results of operations, and cash flows of the entity. We adopted SFAS
No. 161 effective December 1, 2008.
We utilize derivative and nonderivative financial instruments, such as foreign currency
forwards, options and swaps, foreign currency debt obligations and foreign currency cash
balances, to manage our exposure to fluctuations in foreign currency exchange rates, and
interest rate swaps to manage our interest rate exposure to achieve a desired proportion of
variable and fixed rate debt. Our policy is to not use any financial instruments for trading
or other speculative purposes.
All derivatives are recorded at fair value, and the changes in fair value are immediately
included in earnings if the derivatives do not qualify as effective hedges. If a derivative is
designated as a fair value hedge, then changes in the fair value of the derivative are offset
against the changes in the fair value of the underlying hedged item. If a derivative is
designated as a cash flow hedge, then the effective portion of the changes in the fair value of
the derivative are recognized as a component of AOCI until the underlying hedged item is
recognized in earnings or the forecasted transaction is no longer probable of occurring. If a
derivative or a nonderivative financial instrument is designated as a hedge of our net
investment in a foreign subsidiary, then changes in the fair value of the financial instrument
are recognized as a component of AOCI to offset a portion of the change in the translated value
of the net investment being hedged, until the investment is sold or liquidated. We formally
document all hedging relationships for all derivative and nonderivative hedges and the
underlying hedged items, as well as our risk management objectives and strategies for
undertaking the hedge transactions.
We classify the fair value of all our derivative contracts and the fair value of our
hedged firm commitments as either current or long-term, which are included in prepaid expenses
and other assets and accrued and other liabilities, depending on whether the maturity date of
the derivative contract is within or beyond one year from the balance sheet date. The cash
flows from derivatives treated as hedges are classified in our Consolidated Statements of Cash
Flows in the same category as the item being hedged.
SFAS No. 161 requires tabular disclosures of the impact that derivatives instruments and
hedging activities have on our financial statements. We have not provided these disclosures
because the amounts as of and for the three months ended February 28, 2009 are not significant.
In addition, there are no amounts excluded from the assessment of hedge effectiveness and there
are no credit risk related contingent features in our derivative agreements. Finally, the
amount of estimated cash flow hedges' unrealized net gains or losses which are expected to be
reclassified to earnings in the next twelve months is not significant.
Foreign Currency Exchange Rate Risk
Operational and Investment Currency Risk
We manage our exposure to fluctuations in foreign currency exchange rates through our
normal operating and financing activities, including netting certain exposures to take
advantage of any natural offsets and, when considered appropriate, through the use of
derivative and nonderivative financial instruments. Our focus is to manage the economic risks
faced by our operations, which are the real foreign currency exchange risks that will
ultimately be realized by us when we exchange one currency for another, and not the accounting
risks. The financial impacts of these hedging instruments are generally offset by
corresponding changes in the underlying exposures being hedged.
We consider our investments in foreign subsidiaries to be denominated in relatively stable
currencies and of a long-term nature. We partially address our net investment currency
exposures by denominating a portion of our debt, including the effect of foreign currency
swaps, in our subsidiaries' functional currencies (generally the euro or sterling). As of
February 28, 2009 and November 30, 2008, we have designated $1.4 billion and $1.6 billion of
our euro debt and $318 million and $343 million of our sterling debt and other obligations,
respectively, which mature through 2019, as nonderivative hedges of our net investments in
foreign subsidiaries. Accordingly, we have included $367 million and $319 million of
cumulative foreign currency transaction gains in the cumulative translation adjustment
component of AOCI at February 28, 2009 and November 30, 2008, respectively.
Newbuild Currency Risk
The majority of our newbuild capacity on order is for our European brands for which we do
not have significant currency risk because all our ships are contracted for in euros, which is
these brands' functional currency. However, our U.S. dollar and sterling functional currency
brands have foreign currency exchange rate risks related to our outstanding or possible future
commitments under ship construction contracts denominated in euros. These foreign currency
commitments are affected by fluctuations in the value of the functional currency as compared to
the currency in which the shipbuilding contract is denominated. We use foreign currency
contracts and have used nonderivative financial instruments to manage foreign currency exchange
rate risk for some of our ship construction contracts.
Our decisions regarding whether or not to hedge a given ship commitment for our North
American and UK brands are made on a case-by-case basis, taking into consideration the amount
and duration of the exposure, market volatility, exchange rate correlation, economic trends and
other offsetting risks.
Interest Rate Risks
We manage our exposure to fluctuations in interest rates through our investment and debt
portfolio management strategies. These strategies include purchasing high quality short-term
investments with variable interest rates, and evaluating our debt portfolio to make periodic
adjustments to the mix of variable and fixed rate debt through the use of interest rate swaps
and the issuance of new debt.
Note 8 - Shareholders' Equity
In February 2009, we issued 450,000 shares of Carnival Corporation common stock for $10
million of net proceeds, substantially all of which was used to fund the repurchase of 450,000
shares of Carnival plc ordinary shares. In this offering, we have issued Carnival Corporation
common stock in the U.S., only to the extent we could purchase shares of Carnival plc in the UK
on at least an equivalent basis, with the remaining proceeds used for general corporate
purposes.
NOTE 9 - Recent Accounting Pronouncement
In May 2008, the FASB issued Financial Accounting Standards Board Staff Position Accounting
Principles Board 14-1 "Accounting for Convertible Debt Instruments That May Be Settled in Cash
upon Conversion (Including Partial Cash Settlement)" ("APB 14-1"). APB 14-1 requires the issuer
of certain convertible debt instruments that may be settled in cash, or other assets, on
conversion to separately account for the debt and equity components in a manner that reflects
the issuer's non-convertible debt borrowing rate. APB 14-1 will be adopted by us in the first
quarter of fiscal 2010 on a retrospective basis. We believe that the impact of adopting APB 14-
1 will not have a material effect on previously reported diluted earnings per share, however,
our net income will be reduced. We are still in the process of determining the amount of such
reductions.
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