15th Feb 2005 07:00
FEBRUARY 14, 2005 RELEASE OF CARNIVAL CORPORATION & PLC ANNUAL REPORT ON FORM 10-K AND PRELIMINARY ANNOUNCEMENT OF CARNIVAL PLC FINANCIAL INFORMATION FOR THE TWELVE MONTHS ENDED NOVEMBER 30, 2004 ----------------- Carnival Corporation & plc announced its fourth quarter and annual results of operations in its earnings release issued on December 16, 2004. Carnival Corporation & plc is hereby announcing that it has filed with the U.S. Securities and Exchange Commission ("SEC") a joint Annual Report on Form 10-K today containing the Carnival Corporation & plc 2004 annual financial statements, which results remain unchanged from those previously announced on December 16, 2004. However, Carnival Corporation & plc has updated its fiscal 2005 outlook, which update is included in Schedule A. The information included in the attached Schedules A and B is extracted from the Form 10-K and has been prepared in accordance with SEC rules and regulations. Schedules A and B contain the audited annual consolidated financial statements for Carnival Corporation & plc as of and for the twelve months ended November 30, 2004, together with management's discussion and analysis of financial condition and results of operations. 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"), and include the consolidated results of Carnival Corporation and Carnival plc for the entire year ended November 30, 2004. However, the prior year's reported comparative information only included the consolidated results of Carnival plc from April 17, 2003, the date the dual listed company ("DLC") transaction between Carnival Corporation and Carnival plc was completed, to November 30, 2003. The directors consider that within the DLC arrangement, 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. In addition, in accordance with the requirements of the UK Listing Authority ("UKLA"), the directors are today presenting in the attached Schedule C the preliminary announcement of final results for Carnival plc standalone as of and for the year ended November 30, 2004. The Carnival plc group standalone financial information excludes the results of Carnival Corporation and is prepared under generally accepted accounting principles in the UK ("UK GAAP"). The financial information set out within Schedule C does not constitute Carnival plc's statutory accounts for the periods ended November 30, 2004 and 2003. Statutory accounts for 2003 have been delivered to the registrar of companies, whereas those for 2004 will be delivered following Carnival plc's annual general meeting. The auditors have reported on those accounts; their reports were unqualified and did not contain statements under section 237(2) or (3) of the Companies Act 1985. MEDIA CONTACTS INVESTOR RELATIONS CONTACT US US/UK Carnival Corporation & plc Carnival Corporation & plc Tim Gallagher Beth Roberts 001 305 599 2600, ext. 16000 001 305 406 4832 UK Brunswick Sophie Fitton/Sarah Tovey 020 7404 5959 The full joint Annual Report on Form 10-K (including the portion extracted for this announcement) is available for viewing on the SEC web site at www.sec.gov under Carnival Corporation or Carnival plc or the Carnival Corporation & plc web site at www.carnivalcorp.com or www.carnivalplc.com. A copy of the joint Annual Report on Form 10-K 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 Carnival Corporation & plc is the largest cruise vacation group in the world, with a portfolio of 12 cruise brands in North America, Europe and Australia, comprised of Carnival Cruise Lines, Holland America Line, Princess Cruises, Seabourn Cruise Line, Windstar Cruises, AIDA Cruises, Costa Cruises, Cunard Line, Ocean Village, P&O Cruises, Swan Hellenic, and P&O Cruises Australia. Together, these brands operate 77 ships totaling more than 132,000 lower berths with 13 new ships scheduled for delivery between March 2005 and April 2009. Carnival Corporation & plc also operates the leading tour companies in Alaska and the Canadian Yukon, Holland America Tours and Princess Tours. 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 web site 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 ACARNIVAL CORPORATION & PLC - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS UNDER U.S. GAAPCautionary Note Concerning Factors That May Affect Future Results Some of the statements contained in this 2004 Annual Report are "forward-looking statements" that involve risks, uncertainties and assumptions with respect to us, including some statements concerning future results, outlook, plans, goals and other events which have not yet occurred. These statements are intended to qualify for the safe harbors from liability provided by Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. You can find many, but not all, of these statements by looking for words like "will," "may," "believes," "expects," "anticipates," "forecast," "future," "intends," "plans," and "estimates" and for similar expressions. Because forward-looking statements involve risks and uncertainties, there are many factors that could cause our actual results, performance or achievements to differ materially from those expressed or implied in this 2004 Annual Report. 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, costs per available lower berth day ("ALBD"), estimates of ship depreciable lives and residual values, outlook or business prospects. These factors include, but are not limited to, the following: - risks associated with the DLC structure, including the uncertainty of its tax status; - general economic and business conditions, which may impact levels of disposable income of consumers and net revenue yields for our cruise brands; - conditions in the cruise and land-based vacation industries, including competition from other cruise ship operators and providers of other vacation alternatives and increases in capacity offered by cruise ship and land-based vacation alternatives; - risks associated with operating internationally; - the international political and economic climate, armed conflicts, terrorist attacks and threats thereof, availability of air service, other world events and adverse publicity, and their impact on the demand for cruises; - accidents and other incidents affecting the health, safety, security and vacation satisfaction of passengers, including machinery and equipment failures, which could cause the cancellation of a cruise or a series of cruises; - our ability to implement our shipbuilding programs and brand strategies and to continue to expand our business worldwide; - our ability to attract and retain qualified shipboard crew and maintain good relations with employee unions; - our ability to obtain financing on terms that are favorable or consistent with our expectations; - the impact of changes in operating and financing costs, including changes in foreign currency and interest rates and fuel, food, payroll, insurance and security costs; - changes in the tax, environmental, health, safety, security and other regulatory regimes under which we operate; - continued availability of attractive port destinations; - our ability to successfully implement cost improvement plans and to integrate business acquisitions; - continuing financial viability of our travel agent distribution system and air service providers; and - unusual weather patterns or natural disasters. 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 2004 Annual Report, 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.Executive Overview The post-September 11, 2001 travel environment was a challenging period for the travel and leisure industry. In 2002, demand for travel was weakened due to the September 11th attacks followed by the conflict in Afghanistan. In 2003, the cruise industry was challenged by, among other things, a weaker economy and unstable geopolitical environment, the emergence of Severe Acute Respiratory Syndrome ("SARS") in Asia and the threat and eventual outbreak of war in Iraq. These events had a negative effect on the public's willingness to travel, and consequently, negatively impacted our net revenue yields (see "Key Performance Indicators" below). In 2004, the effects of those factors on the cruise industry were reduced, and we experienced a substantial improvement in our net revenue yields. We believe this improvement was primarily the result of stronger consumer demand for travel, which resulted in higher passenger ticket prices and onboard revenues and, to a lesser extent, a weaker U.S. dollar relative to the euro and sterling. The increase in pricing was achieved despite a 17.2% increase in proforma passenger capacity relating to the introduction of seven new ships in fiscal 2004. In addition, from 2002 through 2004, the cruise industry was impacted by substantial increases in fuel prices. It is possible that fuel prices may continue to increase in 2005 and future years. Throughout this period we generated significant cash flows and remained in a strong financial position, which is a high priority and we believe provides us with a competitive advantage in the capital intensive cruise industry. However, our operations are subject to many risks, as briefly noted above and under the caption "Cautionary Note Concerning Factors That May Affect Future Results," which could adversely impact our future results. During 2004, we ordered eight new ships for our North American and European brands, which are expected to be delivered between 2007 and 2009. These new ships are expected to continue to help us maintain our leadership position within the cruise industry. The year-over-year percentage increases in Carnival Corporation & plc's ALBD capacity, resulting from new ships entering service, is 8.7%, 6.1%, 7.5%, 6.6% and 2.4% for fiscal 2005, 2006, 2007, 2008 and 2009, respectively, based on ships currently on order. We believe that given a stable geopolitical environment and the continuing strong demand for travel, our net revenue yields will increase in 2005. Outlook For Fiscal 2005 ("2005") As of December 16, 2004 we said that we were comfortable with earnings per share estimates of $2.70 for 2005. We also said that we expected our first quarter 2005 earnings per share to be in the range of $0.38 to $0.40. Our guidance was based on flat fuel pricing compared to 2004, which was in line with the forward curve for bunker fuel at that time, and an exchange rate of $1.30 to the euro and $1.86 to the sterling. On January 20, 2005, we announced that the 1,870-passenger ship Aurora, operated by P&O Cruises, experienced a technical problem with its propulsion system that forced the cancellation of its 103-day, 2005 world cruise. We expected that the vessel would be repaired and would return to service prior to the date it was to end its world cruise and anticipated scheduling revised short replacement cruises. The cancellation of the world cruise, net of estimated earnings from anticipated replacement cruises, was expected to reduce 2005 full year earnings per share by approximately $0.05, of which approximately $0.03 per share was expected to impact the first quarter and the remainder in the second quarter. We now expect the Aurora to be out of service for a longer duration and anticipate scheduling fewer replacement cruises. Consequently, we expect the full year 2005 impact to be approximately $0.06 per share, of which approximately $0.04 per share will effect the first quarter of 2005. We also expect that there will be $0.01 per share gain from the settlement of litigation recorded in the first quarter of 2005. Since our December guidance, fuel prices have risen. Our current forecast uses fuel prices that are 10% higher than the prior year, which was determined based upon the current forward curve for bunker fuel, which equates to approximately $0.06 per share on an annual basis. Since early January 2005, the cruise industry has entered the "wave season," a period of higher booking levels than during the rest of the year. During the 2005 wave season, company wide booking levels, on an absolute basis, have been running slightly higher than during the same period last year. However, pricing during wave season has been significantly higher than during the same period last year. As of the end of January 2005, we have 10% less inventory remaining to sell for 2005 than at the same time last year, even with a 9% capacity increase in 2005. We believe our lower inventory availability provides us with the opportunity to execute our pricing strategies to maximize revenue yields in 2005. Based upon the stronger booking trends experienced during the month of January, we remain comfortable with our previous guidance of $2.70 per share for the full year 2005 and a range of $0.38 to $0.40 per share for the first quarter of 2005, including the aforementioned impact of the Aurora, the litigation settlement and higher fuel prices. Our current guidance is based upon an exchange rate of $1.31 to the euro and $1.87 to the sterling. Net revenue yields for 2005 are now forecasted to increase 4 to 6 percent (3 to 5 percent on a constant dollar basis), compared to last year. The increase in expected net revenue yields compared with our previous guidance is largely due to higher prices achieved during the initial month of wave season partially offset by the impact of the cancellation of the Aurora world cruise. Net cruise costs per ALBD are now forecast to be up 1 to 3 percent (flat to up 2 percent on a constant dollar basis) compared to last year. This increase from our prior guidance is primarily because of assumed higher fuel prices and costs associated with the cancellation of Aurora's world cruise. We continue to expect that first quarter 2005 net revenue yields will increase approximately 5 to 7 percent (4 to 6 percent on a constant dollar basis), compared to last year. Our first quarter guidance for net revenue yields remains the same as our previous guidance given in December because the approximate 1 percent reduction in net revenue yields due to the cancellation of Aurora's world cruise offset the stronger pricing achieved during the initial month of wave season. We continue to expect net cruise costs per ALBD to be flat to up 2 percent (down 1 to up 1 percent on a constant dollar basis), compared to last year. First quarter net cruise costs per ALBD remained the same as our prior guidance because the impact of the cancellation of the world cruise was offset by the delay in timing of advertising costs. Share-Based Compensation In December 2004, the Financial Accounting Standards Board issued Share-Based Payment Statement 123(R), which will require us to recognize compensation costs in our financial statements in an amount equal to the fair value of share-based payments granted to employees and directors. This statement is effective for us in the fourth quarter of fiscal 2005. We have not yet determined which of the alternative transition methods we will use upon adoption of this statement. However, based on preliminary estimates, if we were to elect to adopt this statement with retroactive effect to December 1, 2004, our additional 2005 share-based compensation expense would be approximately $60 million, which has not been included in the Outlook for 2005. Key Performance Indicators and Pro Forma Information We use net cruise revenues per ALBD ("net revenue yields") and net cruise costs per ALBD as significant non-GAAP financial measures of our cruise segment financial performance. We believe that net revenue yields are commonly used in the cruise industry to measure a company's cruise segment revenue performance. This measure is also used for revenue management purposes. In calculating net revenue yields, we use "net cruise revenues" rather than "gross cruise revenues." We believe that net cruise revenues is a more meaningful measure in determining revenue yield than gross cruise revenues because it reflects the cruise revenues earned by us net of our most significant variable costs, which are travel agent commissions, cost of air transportation and certain other variable direct costs associated with onboard revenues. Substantially all of our remaining cruise costs are largely fixed 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. In calculating net cruise costs, we exclude the same variable costs as described above, which are included in the calculation of net cruise revenues. This is done to avoid duplicating these variable costs in these two non-GAAP financial measures. We have not provided estimates of future gross revenue yields or future gross cruise costs per ALBD because the reconciliations of forecasted net cruise revenues to forecasted gross cruise revenues or forecasted net cruise costs to forecasted cruise operating expenses would require us to forecast, with reasonable accuracy, the amount of air and other transportation costs that our forecasted cruise passengers would elect to purchase from us (the "air/sea mix"). Since the forecasting of future air/sea mix involves several significant variables that are relatively difficult to forecast and the revenues from the sale of air and other transportation approximate the costs of providing that transportation, management focuses primarily on forecasts of net cruise revenues and costs rather than gross cruise revenues and costs. This does not impact, in any material respect, our ability to forecast our future results, as any variation in the air/sea mix has no material impact on our forecasted net cruise revenues or forecasted net cruise costs. As such, management does not believe that this reconciling information would be meaningful. In addition, because a significant portion of our operations utilize the euro or sterling to measure their results and financial condition, the translation of those operations to our U.S. dollar reporting currency results in increases in reported U.S. dollar revenues and expenses if the U.S. dollar weakens against these foreign currencies, and decreases in reported U.S. dollar revenues and expenses if the U.S. dollar strengthens against these foreign currencies. Accordingly, we also monitor our key indicators assuming the 2004 exchange rates have remained constant with the prior year's comparable rates, or on a "constant dollar basis," in order to remove the impact of changes in exchange rates on our non U.S. cruise operations. We believe that this is a useful measure indicating the actual growth of our operations in a fluctuating exchange rate environment. Our 2003 reported results only included the results of P&O Princess since April 17, 2003. Consequently, for the years ended November 30, 2004 and 2003, we believe that the most meaningful comparison of our annual operating income and revenue and cost metrics is to the comparable pro forma results and metrics in 2003 and 2002, which reflect the operations of both Carnival Corporation and P&O Princess as if the companies had been consolidated throughout 2003 and 2002. Accordingly, we have disclosed pro forma information for the year ended November 30, 2003 and 2002, as well as the required reported information, in the discussion of our results of operations. The 2003 and 2002 pro forma information were computed by adding the results of P&O Princess' annual operations, and acquisition adjustments of $16 million and $14 million of depreciation expense and $3 million and $7 million of interest expense, and excluding $51 million and $103 million of nonrecurring DLC transaction costs, respectively, to the 2003 and 2002 Carnival Corporation reported results for the year ended November 30, 2003 and 2002, respectively.Critical Accounting Estimates Our critical accounting estimates are those which we believe require our most significant judgments about the effect of matters that are inherently uncertain. A discussion of our critical accounting estimates, the underlying judgments and uncertainties used to make them and the likelihood that materially different estimates would be reported under different conditions or using different assumptions, is set forth below. Ship Accounting Our most significant assets are our ships and ships under construction, which represent 83% of our total assets. We make several critical accounting estimates dealing with our ship accounting. First, we compute our ships' depreciation expense, which represents 11.6% of our cruise operating expenses in fiscal 2004, which requires us to estimate the average useful life of each of our ships, as well as their residual values. Secondly, we account for ship improvement costs by capitalizing those costs, which we believe will add value to our ships and depreciate those improvements over their estimated useful lives. Finally, we account for the replacement or refurbishment of our ship components based upon their estimated net book value. We determine the average useful life of our ships based primarily on our estimates of the weighted-average useful lives and residual values of the ships' major component systems, such as cabins, main diesels, main electric, superstructure and hull. In addition, we consider, among other things, the impact of anticipated technological changes, long-term vacation market conditions and competition and historical useful lives of similarly-built ships. We have estimated our new ships' average useful lives at 30 years and their average residual values at 15% of our original ship cost. Given the very large and complex nature of our ships, ship accounting estimates require considerable judgment and are inherently uncertain. We do not have cost segregation studies performed to specifically componetize our ship systems. However, we have estimated the useful lives of our ships to be 30 years based upon our estimates of the relative costs of the major components of a cruise ship. In addition, since we do not separately componetize our ships, we do not identify and track depreciation of specific component systems. Therefore, we have to estimate the net book value of components that are replaced or refurbished, based primarily upon their replacement or refurbishment cost and the age of the ship. If materially different conditions existed, or if we materially changed our assumptions of ship lives and residual values, our depreciation expense or loss on replacement or refurbishment of ship assets and net book value of our ships would be materially different. In addition, if we change our assumptions in making our determinations as to whether improvements to a ship add value, the amounts we expense each year as repair and maintenance costs could increase, partially offset by a decrease in depreciation expense, as less costs would have been initially capitalized to our ships. Our fiscal 2004 ship depreciation expense would have increased by approximately $21 million for every year we reduced our estimated average 30 year ship useful life. In addition, if our ships were estimated to have no residual value, our fiscal 2004 depreciation expense would have increased by approximately $100 million. We believe that the estimates we made for ship accounting purposes are reasonable and our methods are consistently applied and, accordingly, result in depreciation expense that is based on a rational and systematic method to equitably allocate the costs of our ships to the periods during which services are obtained from their use. In addition, we believe that the estimates we made are reasonable and our methods consistently applied (1) in determining the average useful life and average residual values of our ships; (2) in determining which ship improvement costs add value to our ships; and (3) in determining the net book value of ship component assets being replaced or refurbished. Finally, we believe our critical ship accounting estimates are generally comparable with those of other major cruise companies. Asset Impairment The impairment reviews of our ship and trademark assets and of our goodwill, which has 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 fair value includes numerous uncertainties, unless a viable actively traded market exists for the asset or for a comparable reporting unit, which is usually not the case for cruise ships, cruise lines and trademarks. For example, in determining fair values of ships and cruise lines utilizing discounted forecasted cash flows, significant judgments are made concerning, among other things, future net revenue yields, net cruise costs per ALBD, interest and discount rates, cruise itineraries, ship additions and retirements, technological changes, consumer demand, governmental regulations and the effects of competition. In addition, third party appraisers are sometimes used to determine fair values and some of their valuation methodologies are also subject to similar types of uncertainties. Also, the determination of fair values of reporting units using a price earnings multiple approach also requires significant judgments, such as determining reasonably comparable multiples. Finally, determining trademark fair values also requires significant judgments in determining both the estimated trademark cash flows, and the appropriate royalty rates to be applied to those cash flows to determine their fair value. We believe that we have made reasonable estimates and judgments in determining whether our ships, goodwill and trademarks have been impaired. However, if there is a material change in the assumptions used in our determination of fair value or if there is a material change in the conditions or circumstances influencing fair value, we could be required to recognize a material impairment charge. Contingencies We periodically assess the potential liabilities related to any lawsuits or claims brought against us, as well as for other known unasserted claims, including environmental, legal, passenger and crew, and tax matters. While it is typically very difficult to determine the timing and ultimate outcome of these matters, we use our best judgment to determine if it is probable that we will incur an expense related to the settlement or final adjudication of such matters and whether a reasonable estimation of such probable loss, if any, can be made. In assessing probable losses, we make estimates of the amount of insurance recoveries, if any. We accrue a liability when we believe a loss is probable and the amount of the loss can be reasonably estimated, in accordance with the provisions of SFAS No. 5, "Accounting for Contingencies," as amended. Such accruals are typically based on developments to date, management's estimates of the outcomes of these matters, our experience in contesting, litigating and settling other similar matters, historical claims experience and actuarially determined assumptions of liabilities, and any related insurance coverage. See Notes 8 and 13 in the accompanying financial statements for additional information concerning our contingencies. Given the inherent uncertainty related to the eventual outcome of these matters and potential insurance recoveries, it is possible that all or some of these matters may be resolved for amounts materially different from any provisions or disclosures that we may have made with respect to their resolution. In addition, as new information becomes available, we may need to reassess the amount of probable liability that needs to be accrued related to our contingencies. All such revisions in our estimates could materially impact our results of operations and financial position.Results of Operations We earn our cruise revenues primarily from the following: - sales of passenger cruise tickets and, in some cases, the sale of air and other transportation to and from our ships. The cruise ticket price includes accommodations, meals, some non-alcoholic beverages, entertainment and many onboard activities, and - the sale of goods and/or services primarily on board our ships, which include bar and some beverage sales, casino gaming, shore excursions, gift shop and spa sales, photo and art sales and pre-and post cruise land packages. These activities are either performed directly by us or by independent concessionaires, from which we receive a percentage of their revenues. We incur cruise operating costs and expenses for the following: - the costs of passenger cruise tickets which represent costs that vary directly with passenger cruise ticket revenues, and include travel agent commissions, air and other travel related costs and credit card fees, - onboard and other cruise costs which represent costs that vary directly with onboard and other revenues, and include the costs of liquor and some beverages, costs of tangible goods sold by us from our gift, photo and art auction activities, pre- and post cruise land packages and credit card fees. Concession revenues do not have any significant amount of costs associated with them, as the costs and services incurred for these activities are provided by our concessionaires, - payroll and related costs which represent costs for all our shipboard personnel, including deck and engine officers and crew and hotel and administrative employees, - food costs, which include both our passenger and crew food costs, and - other ship operating costs which include fuel, repairs and maintenance, port charges, insurance, entertainment and all other shipboard operating costs and expenses. For segment information related to our revenues, expenses, operating income and other financial information see Note 12 in the accompanying financial statements. Summary Our reported and pro forma results of operations and selected statistical information were as follows: Years Ended November 30, Pro Forma Reported Pro Forma Reported 2004 2003 2003 2002 2002 (dollars in millions, except statistical information)Revenues Cruise Passenger tickets $7,357 $5,732 $5,039 $5,128 $3,346 Onboard and other 2,070 1,600 1,420 1,356 898 Other 300 264 259 284 139 ------ ------ ------ ------ ------ 9,727 7,596 6,718 6,768 4,383 ------ ------ ------ ------ ------Costs and Expenses Operating Cruise Commissions, transportation and other 1,572 1,227 1,021 1,121 658 Onboard and other 359 279 229 240 116 Payroll and related 1,003 841 744 676 458 Food 550 447 393 381 256 Other ship operating 1,763 1,428 1,237 1,149 734 Other 210 198 190 211 108 ------ ------ ------ ------ ------ Total 5,457 4,420 3,814 3,778 2,330 Selling and administrative 1,285 1,103 936 960 609 Depreciation and amortization 812 653 585 534 382 Impairment charge 20 20 ------ ------ ------ ------ ------Operating Income 2,173 1,420 1,383 1,476 1,042 Nonoperating Expense, Net (272) (185) (160) (148) (83) ------ ------ ------ ------ ------Income Before Income Taxes 1,901 1,235 1,223 1,328 959 Income Tax (Expense) Benefit, Net (47) (25) (29) 46 57 ------ ------ ------ ------ ------Net Income $1,854 $1,210 $1,194 $1,374 $1,016 ------ ------ ------ ------ ------Selected Statistical Information Passengers carried (in thousands) 6,306 5,422 5,038 4,725 3,549 ------ ------ ------ ------ ------ Occupancy percentage 104.5% 102.6% 103.4% 103.5% 105.2% ----- ----- ----- ----- ----- Gross and net revenue yields were computed by dividing the gross or net revenues, without rounding, by ALBDs as follows: Years Ended November 30, Pro Forma Reported Pro Forma Reported 2004 2003 2003 2002 2002 (in millions, except ALBDs and yields)Cruise revenues Passenger tickets $7,357 $5,732 $5,039 $5,128 $3,346 Onboard and other 2,070 1,600 1,420 1,356 898 ------ ------ ------ ------ ------Gross cruise revenues 9,427 7,332 6,459 6,484 4,244 Less cruise costs Commissions, transportation and other (1,572) (1,227) (1,021) (1,121) (658) Onboard and other (359) (279) (229) (240) (116) ------ ------ ------ ------ ------Net cruise revenues $7,496 $5,826 $5,209 $5,123 $3,470 ------ ------ ------ ------ ------ALBDs 44,009,061 37,554,709 33,309,785 31,962,000 21,435,828 ---------- ---------- --------- ---------- ----------Gross revenue yields $214.21 $195.23 $193.91 $202.85 $198.01 ------- ------- ------- ------- -------Net revenue yields $170.32 $155.11 $156.38 $160.25 $161.91 ------- ------- ------- ------- ------- Gross and net cruise costs per ALBD were computed by dividing the gross or net cruise costs, without rounding, by ALBDs as follows: Years Ended November 30, Pro Forma Reported Pro Forma Reported 2004 2003 2003 2002 2002 (in millions, except ALBDs and costs per ALBD)Cruise operating expenses $5,247 $4,222 $3,624 $3,567 $2,222 Cruise selling and administrative expenses 1,231 1,054 896 912 577 ------ ------ ------ ------ ------Gross cruise costs 6,478 5,276 4,520 4,479 2,799Less cruise costs included in net cruise revenues Commissions, transportation and other (1,572) (1,227) (1,021) (1,121) (658) Onboard and other (359) (279) (229) (240) (116) ------ ------ ------ ------ ------Net cruise costs $4,547 $3,770 $3,270 $3,118 $2,025 ------ ------ ------ ------ ------ALBDs 44,009,061 37,554,709 33,309,785 31,962,000 21,435,828 ---------- ---------- --------- ---------- ----------Gross cruise costs per ALBD $147.20 $140.50 $135.69 $140.15 $130.54 ------- ------- ------- ------- -------Net cruise costs per ALBD $103.31 $100.38 $ 98.16 $ 97.55 $ 94.43 ------- ------- ------- ------- -------Fiscal 2004 ("2004") Compared to Pro Forma 2003 ("pro forma 2003") and Reported Results 2003 ("reported 2003") Revenues Net cruise revenues increased $1.67 billion, or 29%, to $7.50 billion in 2004 from $5.83 billion in pro forma 2003. The 17.2% increase in ALBD's between pro forma 2003 and 2004 accounted for $1.0 billion of the increase, and the remaining $670 million was from increased net revenue yields, which increased 9.8% in 2004 compared to pro forma 2003 (gross revenue yields increased by 9.7%). Net revenue yields increased in 2004 primarily from higher cruise ticket prices, a 1.9% increase in occupancy, higher onboard revenues and the weaker U.S. dollar relative to the euro and sterling. Net revenue yields as measured on a constant dollar basis, where we recompute 2004 net revenue yields at the foreign currency exchange rates in effect for pro forma 2003, increased 6.6% in 2004. Gross cruise revenues increased $2.10 billion, or 29%, in 2004 to $9.43 billion from $7.33 billion in pro forma 2003 primarily for the same reasons as net cruise revenues. Net cruise revenues increased $2.29 billion, or 44%, to $7.50 billion in 2004 from $5.21 billion in reported 2003. The 32.1% increase in ALBD's between reported 2003 and 2004, which included P&O Princess for a full year in 2004, but only since April 17, 2003 during 2003, accounted for $1.67 billion of the increase, and the remaining $615 million was from increased net revenue yields, which increased 8.9% in 2004 compared to 2003 (gross revenue yields increased by 10.5%). Net revenue yields increased primarily for the same reasons as noted above. Gross cruise revenues increased $2.97 billion, or 46%, in 2004 to $9.43 billion from $6.46 billion for primarily the same reasons as net cruise revenues. Onboard and other revenues included concession revenues of $261 million in 2004, $201 million in pro forma 2003 and $192 million in reported 2003, which increased in 2004 compared to both pro forma 2003 and reported 2003 primarily because of the same reasons noted above for net cruise revenues. Other non-cruise revenues increased $48 million, or 13.7%, to $398 million in 2004 from $350 million in proforma 2003 (an increase of $53 million, or 15.4% from $345 million in reported 2003) primarily due to the increase in the number of cruise/tours sold, as well as price increases. Costs and Expenses Net cruise costs increased $777 million, or 21%, to $4.55 billion in 2004 from $3.77 billion in pro forma 2003. The 17.2% increase in ALBD's between pro forma 2003 and 2004 accounted for $650 million of the increase, and the remaining $127 million was from increased net cruise costs per ALBD, which increased 2.9% in 2004 compared to pro forma 2003 (gross cruise costs per ALBD increased 4.8%). Net cruise costs per ALBD increased primarily due to a 7.8% increase in 2004 fuel prices and the weaker U.S. dollar relative to the euro and the sterling in 2004. In addition, net cruise costs increased as a result of the 2004 Atlantic hurricane season and Cunard's $10 million of relocation costs, resulting from combining the Cunard back-office operations into Princess' operations. Net cruise costs per ALBD as measured on a constant dollar basis compared to pro forma 2003 declined 0.5% in 2004. The decrease in constant dollar net cruise costs was primarily the result of the economies of scale associated with the pro forma 17.2% ALBD increase and synergy savings from the integration efforts following the DLC transaction. Gross cruise costs increased $1.20 billion, or 23%, in 2004 to $6.48 billion from $5.23 billion in pro forma 2003 primarily for the same reasons as net cruise costs. Net cruise costs increased $1.28 billion, or 39%, to $4.55 billion in 2004 from $3.27 billion in reported 2003. The increase in ALBD's between reported 2003 and 2004 accounted for $1.05 billion of the increase, and the remaining $230 million was from increased net cruise costs per ALBD, which increased 5.2% in 2004 compared to reported 2003 (gross cruise costs per ALBD increased 8.5%). Net cruise costs per ALBD increased primarily for the same reasons as noted above. Gross cruise costs increased $1.96 billion, or 43%, in 2004 to $6.48 billion from $4.52 billion in reported 2003 primarily for the same reasons as net cruise costs and a higher proportion of P&O Princess brands' customers who purchased air from us. Other non-cruise operating expense increased $24 million, or 8.5%, to $308 million in 2004 from $284 million in pro forma 2003 (an increase of $32 million, or 11.6%, from $276 million in reported 2003) primarily due to the increased volume of cruise/tours sold in 2004. Depreciation and amortization expense increased by $159 million, or 24.3%, to $812 million in 2004 from $653 million in pro forma 2003 largely due to the pro forma 17.2% expansion of the combined fleet and ship improvement expenditures, as well as the impact of a weaker U.S. dollar. Depreciation and amortization increased by $227 million, or 38.8%, to $812 million in 2004 from $585 million in reported 2003. This increase was primarily due to the same factors as noted above and the result of the consolidation of P&O Princess. Nonoperating (Expense) Income Net interest expense, excluding capitalized interest, increased to $292 million in 2004 from $217 million in reported 2003, or $75 million, which increase consisted primarily of a $102 million increase in interest expense from our increased level of average borrowings and a weaker U.S. dollar, partially offset by a $27 million decrease in interest expense due to lower average borrowing rates. The higher average debt balances were primarily a result of our consolidation of the former P&O Princess debt and new ship deliveries. Income Taxes Income tax expense increased $18 million from reported 2003 to $47 million in 2004 primarily because of the increase in Costa's Italian taxable income and other taxes relating to our operations.Pro Forma 2003 ("pro forma 2003") Compared to Pro Forma 2002 ("pro forma 2002") and Reported Results 2003 ("reported 2003") Compared to Reported Results 2002 ("reported 2002") Revenues Net cruise revenues increased $703 million, or 14%, to $5.83 billion in pro forma 2003 from $5.12 billion in pro forma 2002. The 17.5% increase in pro forma ALBD's accounted for $895 million of the increase, which was partially offset by a $192 million reduction from lower net revenue yields, which declined 3.2% in pro forma 2003 compared to pro forma 2002 (gross revenue yields decreased 3.8%). Net revenue yields decreased largely because of lower cruise ticket prices, and to a lesser extent, lower occupancy levels. Our revenue yields in 2003 were adversely affected by consumer concerns about travel during the period leading up to the war with Iraq and its eventual outbreak, the uncertain world economy and the increase in cruise industry capacity. This was partially offset by the weaker U.S. dollar. Gross cruise revenues increased $848 million, or 13%, in pro forma 2003 to $7.33 billion from $6.48 billion in pro forma 2002 primarily for the same reasons as net cruise revenues. Net cruise revenues increased $1.74 billion, or 50%, to $5.21 billion in reported 2003 from $3.47 billion in reported 2002. The 55.4% increase in reported ALBD's, which only included P&O Princess since April 17, 2003, accounted for $1.92 billion of the increase, which was partially offset by $185 million from lower net revenue yields, which declined 3.4% in reported 2003 compared to reported 2002 (gross revenue yields decreased 2.1%). Net revenue yields decreased primarily for the same reasons as noted above. Gross cruise revenues increased $2.22 billion, or 52%, in reported 2003 to $6.46 billion from $4.24 billion in reported 2002 primarily for the same reasons as net cruise revenues. Onboard and other revenues included concession revenues of $201 million in pro forma 2003, $156 million in pro forma 2002, $192 million in reported 2003 and $147 million in reported 2002. Other non-cruise revenues increased $169 million, or 96%, to $345 million in reported 2003 from $176 million in reported 2002 due to the consolidation of Princess Tours and P&O Travel Ltd. Costs and Expenses Net cruise costs increased $652 million, or 21%, to $3.77 billion in pro forma 2003 from $3.12 billion in pro forma 2002. The 17.5% increase in pro forma ALBD's accounted for $546 million of the increase, and the remaining $106 million was from increased net cruise costs per ALBD, which increased 2.9% in pro forma 2003 compared to pro forma 2002 (gross cruise cost per ALBD increased 0.2%). Net cruise costs per ALBD increased primarily due to a 20% increase in fuel prices and the weak U.S. dollar relative to the euro and the sterling, partially offset by the economies of scale associated with the 17.5% pro forma ALBD increase. Gross cruise costs increased $797 million, or 18%, in pro forma 2003 to $5.28 billion from $4.45 billion in pro forma 2002 primarily for the same reasons as net cruise costs. Net cruise costs increased $1.25 billion, or 61%, to $3.27 billion in reported 2003 from $2.03 billion in reported 2002. The increase in reported ALBD's accounted for $1.12 billion of the increase and the remaining $130 million was from increased net cruise costs per ALBD, which increased 3.9% in reported 2003 compared to reported 2002 (gross cruise cost per ALBD increased 3.9%). Gross cruise costs increased $1.72 billion, or 61%, in reported 2003 to $4.52 billion from $2.80 billion in reported 2002 primarily for the same reasons as net cruise costs and a higher proportion of P&O Princess brands' customers who purchased air from us. Other non-cruise operating expense increased $131 million, or 90.3%, to $276 million in reported 2003 from $145 million in reported 2002 due to the consolidation of Princess Tours and P&O Travel. Depreciation and amortization expense increased by $119 million, or 22.3%, to $653 million in pro forma 2003 from $534 million in pro forma 2002 largely due to the expansion of the combined fleet and ship improvement expenditures, as well as the impact of a weaker U.S. dollar. Depreciation and amortization increased by $203 million, or 53.1%, to $585 million in reported 2003 from $382 million in reported 2002. Approximately $126 million of this increase was from the consolidation of the former P&O Princess acquired operations. The majority of the remaining increase was a result of the expansion of the Carnival Corporation fleet and ship improvement expenditures. Nonoperating (Expense) Income Net interest expense, excluding capitalized interest, increased to $217 million in reported 2003 from $118 million in reported 2002, or $99 million, which increase consisted primarily of a $125 million increase in interest expense from our increased level of average borrowings and a weaker U.S. dollar, partially offset by a $31 million decrease in interest expense due to lower average borrowing rates. The higher average debt balances were primarily a result of our consolidation of the former P&O Princess debt and new ship deliveries. Income Taxes The income tax expense of $29 million in reported 2003 was primarily due to the consolidation of Carnival plc's U.S. based Princess Tours and Costa's Italian taxable income.Liquidity and Capital Resources Sources and Uses of Cash Our business provided $3.22 billion of net cash from operations during fiscal 2004, an increase of $1.28 billion, or 66.4%, compared to fiscal 2003, due primarily to a full year in 2004 of the P&O Princess operations and significantly higher cash flows from operations. We continue to generate substantial cash from operations and remain in a strong financial position. During fiscal 2004, our net expenditures for capital projects were $3.59 billion, of which $3.22 billion was spent for our ongoing new shipbuilding program, including the final delivery payments for seven new ships. The remaining capital expenditures consisted primarily of $219 million for ship improvements and refurbishments, and $151 million for Alaska tour assets, cruise port facility developments and information technology assets. During fiscal 2004, we borrowed $843 million, which were used primarily to finance a portion of the Diamond Princess and Sapphire Princess purchase prices. During fiscal 2004, we made $932 million of debt repayments, which included $330 million of debt repaid prior to its maturity date in order to reduce our borrowing rates. Finally, we borrowed $272 million of net short-term bank borrowings primarily to make a portion of the final ship delivery payment for the Costa Magica. We also paid cash dividends of $400 million in fiscal 2004. Future Commitments and Funding Sources At November 30, 2004, our contractual cash obligations, and the effects such obligations are expected to have on our liquidity and cash flow in future periods were as follows (in millions): Payments Due by Fiscal YearContractual Cash Obligations Total 2005 2006 2007 2008 2009 ThereafterLong-term debt(a) $7,572 $1,281 $1,686 $1,058 $1,435 $ 141 $1,971Short-term borrowings(a) 381 381Fixed-rate interest payments(a) 1,675 211 162 146 210 103 843Shipbuilding(a) 6,227 1,540 1,400 1,330 1,600 357 Port facilities and other(a) 806 135 92 73 72 66 368 Operating leases(a) 231 51 37 25 21 18 79 Purchase obligations(b) 465 438 14 9 4 Other long-term liabilities reflected on the balance sheet(c) 284 29 18 18 20 19 180 ------- ------ ------ ------ ------ ------ ------Total contractual cash obligations(d) $17,641 $4,066 $3,409 $2,659 $3,362 $ 704 $3,441 ------- ------ ------ ------ ------ ------ ------(a) See Notes 6 and 7 in the accompanying financial statements for additional information regarding these contractual cash obligations. Fixed-rate interest payments represent cash outflows for fixed interest payments, including interest swapped from a variable- rate to a fixed-rate, but does not include interest payments on variable-rate debt or interest swapped from a fixed-rate to a variable-rate, because these amounts cannot be reasonably estimated. (b) Represents legally-binding commitments to purchase inventory and other goods and services made in the normal course of business to meet operational requirements. Many of our contracts contain clauses that allow us to terminate the contract with notice, and with or without a termination penalty. Termination penalties are generally an amount less than the original obligation. Historically, we have not had any significant defaults of our contractual obligations or incurred significant penalties for termination of our contractual obligations.(c) Represents cash outflows for certain of our long-term liabilities that could be reasonably estimated. The primary outflows are for estimates of our employee benefit plan obligations, certain deferred income taxes and other long-term liabilities. Other long-term liabilities, such as deferred income, derivative contracts payable, which convert fixed rate debt to variable rate debt, fair value of hedged commitments and certain deferred income taxes, have been excluded from the table as they do not require cash settlement in the future or the timing of the cash outflow cannot be reasonably estimated.(d) Foreign currency payments are based on the November 30, 2004 exchange rates. During 2004, the Board of Directors authorized the repurchase of up to $1 billion of Carnival Corporation or Carnival plc shares commencing in 2005, subject to certain repurchase restrictions on Carnival plc shares. At November 30, 2004, we had liquidity of $3.20 billion, which consisted of $660 million of cash and cash equivalents and short-term investments and $2.54 billion available for borrowing under our revolving credit facilities. Our revolving credit facilities mature in May and June 2006, except for Carnival plc's 600 million euro facility, which expires in March 2005, and is currently expected to be renewed for an additional year. No assurance can be given that we will be successful in extending this facility. A key to our access to liquidity is the maintenance of our strong credit ratings. Based primarily on our historical results, current financial condition and future forecasts, we believe that our existing liquidity and cash flow from future operations will be sufficient to fund most of our expected capital projects, debt service requirements, dividend payments, working capital and other firm commitments. In addition, based on our future forecasted operating results and cash flows for fiscal 2005, we expect to be in compliance with our debt covenants during 2005. However, our forecasted cash flow from future operations, as well as our credit ratings, may be adversely affected by various factors, including, but not limited to, those factors noted under "Cautionary Note Concerning Factors That May Affect Future Results." To the extent that we are required, or choose, to fund future cash requirements, including our future shipbuilding commitments, from sources other than as discussed above, we believe that we will be able to secure such financing from banks or through the offering of debt and/or equity securities in the public or private markets. No assurance can be given that our future operating cash flow will be sufficient to fund future obligations or that we will be able to obtain additional financing, if necessary.Off-Balance Sheet Arrangements We are not a party to any off-balance sheet arrangements, including guarantee contracts, retained or contingent interests, certain derivative instruments and variable interest entities, that either have, or are reasonably likely to have, a current or future material effect on our financial statements.Foreign Currency Exchange Rate Risks In 2003, we broadened our global presence through Carnival plc's foreign operations, in addition to the foreign currency denominated operations of our Costa subsidiary. Specifically, our expanded international business operations through P&O Cruises, Ocean Village and Swan Hellenic in the UK and AIDA in Germany subject us to an increasing level of foreign currency exchange risk related to the sterling and euro because these operations have either the sterling or the euro as their functional currency. Accordingly, exchange rate fluctuations of the sterling and the euro against the dollar will affect our reported financial results since the reporting currency for our consolidated financial statements is the U.S. dollar and the functional currency for our international operations is generally the local currency. Any weakening of the U.S. dollar against these local functional currencies has the financial statement effect of increasing the U.S. dollar values reported for cruise revenues and cruise expenses in our consolidated financial statements. Strengthening of the U.S. dollar has the opposite effect. We seek to minimize the impact of 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 financial instruments. The financial impacts of these hedging instruments are generally offset by corresponding changes in the underlying exposures being hedged. Our policy is to not use any financial instruments for trading or other speculative purposes. One of our primary foreign currency exchange rate risks is related to our outstanding commitments under ship construction contracts denominated in a currency other than the functional currency of the cruise brand that is expected to be operating the ship. These 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 generally use foreign currency swaps to manage foreign currency exchange rate risk from ship construction contracts (see Notes 2, 7 and 11 in the accompanying financial statements). Accordingly, increases and decreases in the fair value of these foreign currency swaps offset changes in the fair value of the foreign currency denominated ship construction commitments, thus resulting in the elimination of such risk. Specifically, we have foreign currency swaps for three of our euro denominated shipbuilding contracts. At November 30, 2004, the fair value of these foreign currency swaps was an unrealized gain of $219 million which is recorded, along with an offsetting $219 million fair value liability related to our shipbuilding firm commitments, on our accompanying 2004 balance sheet. Based upon a 10% strengthening or weakening of the U.S. dollar compared to the euro as of November 30, 2004, assuming no changes in comparative interest rates, the estimated fair value of these foreign currency swaps would decrease or increase by $105 million, which would be offset by a decrease or increase of $105 million in the U.S. dollar value of the related foreign currency ship construction commitments resulting in no net dollar impact to us. However, at November 30, 2004, we also have three shipbuilding contracts denominated in euros, one of which has been assigned to a sterling functional currency company and two, which are still unassigned, for which we have not entered into any foreign currency swaps. At current exchange rates, it is most likely that these two contracts will be assigned to one of our cruise brands whose functional currency is the euro or sterling. The cost of shipbuilding orders that we may place in the future for our cruise lines who generate their cash flows in a currency that is different than the shipyard's operating currency, generally the euro, is expected to be affected by foreign currency exchange rate fluctuations. Given the decline in the U.S. dollar relative to the euro, the U.S. dollar cost to order new cruise ships at current exchange rates has increased significantly. If the U.S. dollar remains at current levels or declines further, this may affect our ability to order future new cruise ships for U.S. dollar functional currency brands. Finally, we consider our investments in foreign subsidiaries to be denominated in relatively stable currencies and of a long-term nature. We partially address these exposures by denominating a portion of our debt or entering into foreign currency swaps in our subsidiaries' functional currencies (generally euros or sterling). Specifically, we have debt of $2.2 billion in euros and $415 million in sterling and have $887 million of foreign currency swaps, whereby we have converted $251 million of U.S. dollar debt into sterling debt, $466 million of U.S. dollar debt into euro debt and $170 million of euro debt into sterling debt, thus partially offsetting this foreign currency exchange rate risk. At November 30, 2004, the fair value of these foreign currency swaps was an unrealized loss of $137 million, which is recorded in AOCI and offsets a portion of the gains recorded in AOCI upon translating these foreign subsidiaries net assets into U.S. dollars. Based upon a 10% hypothetical increase or decrease in the November 30, 2004 foreign currency exchange rate, we estimate that these contracts fair values would increase or decrease by $89 million, which would be offset by a decrease or increase of $89 million in the U.S. dollar value of our net investments. Interest Rate Risks We seek to minimize the impact of fluctuations in interest rates through our long-term investment and debt portfolio strategies, which include entering into a substantial amount of fixed rate debt instruments. We continuously evaluate our debt portfolio, and make periodic adjustments to the mix of floating rate and fixed rate debt based on our view of interest rate movements through the use of interest rate swaps. Accordingly in 2003 and 2001, we entered into fixed to variable interest rate swaps, which lowered our fiscal 2004, 2003 and 2002 intRelated Shares:
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