Annual Report on Form 10-K
JANUARY 29, 2009
RELEASE OF CARNIVAL CORPORATION & PLC ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED NOVEMBER 30, 2008
------------------------------------
Carnival Corporation & plc announced its fourth quarter and annual results of operations in
its earnings release issued on December 18, 2008. 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 2008 annual financial
statements, which reported results remain unchanged from those previously announced on
December 18, 2008. However, Carnival Corporation & plc has provided additional information in
its "Outlook for Fiscal 2009," which 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 year ended November 30, 2008, 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"). 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.
The Directors intend to approve the Carnival plc group standalone 2008 IFRS Financial
Statements on February 17, 2009, and these statements will be submitted to the UK Listing
Authority's Document Viewing Facility shortly after that date. The Carnival plc group standalone
financial information will exclude the results of Carnival Corporation and will be prepared under
international accounting standards as adopted in the European Union.
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
UK
Brunswick
Richard Jacques/Deborah Spencer
+44 (0)20 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 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 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 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 88 ships totaling more than 169,000 lower berths with 17 new
ships scheduled to be delivered between March 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
Some of the statements, estimates or projections contained in this 2008 Annual Report
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 2008 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,
fuel costs, costs per available lower berth day ("ALBD"), estimates of ship depreciable lives
and residual values, liquidity, 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 and real estate 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 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 and air service
providers;
• 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 2008 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
Consistent with our strategy to continue to increase our penetration of markets with
high growth potential, during 2008 we had a 21% increase in our European passenger capacity,
whereas our North American capacity grew by only 3.6%, resulting in a worldwide capacity
increase of 8.9%. In the face of a difficult economic environment, including the
deterioration in consumer confidence and reduction in their discretionary spending, which
significantly intensified towards the later part of 2008, we managed to increase our North
American net revenue yields. This was driven in part by the lower North American capacity
growth, which allowed us to capture higher ticket pricing from increased demand, partially
offset by lower onboard spending. We believe our European brands also performed relatively
well in 2008, even though their ticket pricing and onboard spending, on a constant dollar
basis, were weaker than in 2007. This is especially true after considering the significant
2008 European capacity increase and the difficult economic environment. In summary, for 2008
we posted solid earnings in an extremely challenging year. We were able to offset the
majority of the impacts from significant fuel price increases and softer onboard yields we
experienced throughout 2008 with increased ticket pricing, due in part to fuel supplement
revenues, and capacity growth. Our capacity growth allowed us to achieve cost savings from
economies of scale, and we also benefited from tight cost controls. In addition, we
benefited from higher U.S. dollar earnings from our European operations as a result of the
weaker U.S. dollar relative to the euro.
From 2003 through 2008, the cruise industry has been adversely impacted by substantial
increases in fuel prices. In 2003 our fuel cost per metric ton was $179, whereas in 2008 our
fuel cost per metric ton was $558, an increase of 212%. The increase in fuel price since
2003 has negatively impacted our 2008 fuel expense by $1.2 billion. In addition, we believe
higher fuel prices have caused a reduction in consumer spending and have also driven
considerable inflationary cost pressures on a number of our other operating expenses.
Although fuel prices have recently receded from record high levels, we continue to face
a very challenging economic environment, including weaker consumer spending resulting in
softer cruise pricing and a stronger U.S. dollar, which is having an unfavorable impact on
our European brands' U.S. dollar earnings. We believe we are well positioned to weather the
current economic environment as a result of our strong balance sheet and our cost efficient
operations. We are working diligently to maintain our cost efficient culture. There are a
variety of actions that we are taking that are expected to improve our cost structure in
2009. For example, we have committees from our operating companies investigating fuel
consumption initiatives, sharing best practices, finding ways to drive economies of scale and
evaluating a variety of other initiatives.
Maintenance of a strong balance sheet has always been and continues to be the primary
objective of our capital structure policy. In light of the current uncertainties in the
global economy, the highly volatile state of the financial markets, continuing concerns about
financial institution liquidity and the unusually high cost of obtaining new debt, we believe
preserving cash and liquidity at this point in 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, but will reevaluate our
dividend policy based on the circumstances prevailing during the year. On an annualized
basis this will preserve approximately $1.3 billion of our cash. 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 operations are subject to many risks,
as noted under the caption "Cautionary Note Concerning Factors That May Affect Future
Results," which could adversely impact our future results and liquidity.
We believe the cruise industry is characterized by relatively low market penetration
levels, among other things, and, accordingly, it has significant growth potential. In order
to capture some of this growth, as of January 28, 2009 we had contracts with three shipyards
providing for the construction of 17 additional cruise ships, the majority of which have been
designated for our European brands (see Note 6 in the accompanying financial statements).
These new ships should help us maintain our leadership position in the world-wide cruise
industry. The year-over-year percentage increase in our ALBD capacity for fiscal 2009, 2010,
2011 and 2012, resulting primarily from new ships entering service is currently expected to
be 5.5%, 7.8%, 5.8% and 3.7%, respectively. The above percentages exclude any other future
ship orders, acquisitions, retirements or sales.
Outlook For Fiscal 2009
As of December 18, 2008, we said that we expected our 2009 full year earnings per share
will be in the range of $2.25 to $2.75. We also said that we expected our first quarter 2009
earnings per share to be in the range of $0.20 to $0.22. Our guidance, which we are not
updating at this time, was based on the then current spot prices for fuel of $295 per metric
ton and currency exchange rates of $1.38 to the euro and $1.53 to sterling.
As of January 21, 2008, the current spot prices for fuel have remained at $295 per
metric ton. However, as of this date, the U.S. dollar currency exchange rates to the euro
and sterling have strengthened to $1.29 to the euro and $1.38 to sterling. Based on these
currency exchange rates our earnings per share for the 2009 full year would decrease by
$0.12.
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 costs, weather,
regulatory changes, geopolitical and other factors that could impact consumer demand or
costs. You should read the above forward-looking statements together with the discussion of
these and other risks under "Cautionary Note Concerning Factors That May Affect Future
Results."
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 as follows:
Ship Accounting
Our most significant assets are our ships and ships under construction, which represent
76% of our total assets. We make several critical accounting estimates dealing with our ship
accounting. First, we compute our ships' depreciation expense, which represented
approximately 10% of our cruise costs and expenses in fiscal 2008 and 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, while expensing repairs and maintenance and minor improvement costs as they are
incurred. Finally, when we record the retirement of a ship component that is included within
the ship's cost basis, we may have to estimate its net book value.
We determine the average useful life of our ships and their residual values based
primarily on our estimates of the weighted-average useful lives and residual values of the
ships' major component systems, such as cabins, engines and hull. In addition, we consider,
among other things, long-term vacation market conditions, 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 componentize our ships. In addition, since we do not separately
componentize our ships, we do not identify and track depreciation of specific original ship
components. Therefore, we have to estimate the net book value of components that are
replaced, based primarily upon their replacement cost and their age.
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 of ship
components 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, which
would be partially offset by a decrease in depreciation expense, resulting from a reduction
in capitalized costs. Our fiscal 2008 ship depreciation expense would have increased by
approximately $30 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 2008
depreciation expense would have increased by approximately $150 million.
We believe that the estimates we made for ship accounting purposes are reasonable and
our methods are consistently applied in all material respects 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 in all material respects (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. 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 ships and goodwill and trademarks, 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 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, technological changes,
consumer demand, governmental regulations and the effects of competition. In addition, third
party appraisers are sometimes used to help determine fair values of ships and cruise lines
and some of their valuation methodologies are also subject to similar types of uncertainties.
Also, the determination of fair values of cruise line reporting units using a price earnings
multiple approach requires significant judgments, such as determining reasonable multiples.
Finally, determining trademark fair values also requires significant judgments in determining
both the estimated trademark cash flows, and the appropriate discount and 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.
Our goodwill and trademarks have been assigned at an individual cruise brand level for
our goodwill and trademark impairment reviews, as each of our significant brands are
considered an operating segment. As of July 31 of each year, we review our goodwill and
trademarks for possible impairment. As of July 31, 2008, we determined that these intangible
assets were not impaired.
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, this could result in our performance
of interim impairment reviews prior to or after our July 31, 2009 annual impairment reviews.
Any such impairment reviews could result in recognition of a goodwill and/or trademark
impairment charge in 2009 or thereafter.
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, guest 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, or more likely than not ("MLTN") for income tax matters, that we will incur an
expense related to the settlement or final adjudication of such matters and whether a
reasonable estimation of such probable or MLTN loss, if any, can be made. In assessing
probable losses, we make estimates of the amount of probable insurance recoveries, if any,
which are recorded as assets. We accrue a liability when we believe a loss is probable or
MLTN for income tax matters, and the amount of the loss can be reasonably estimated, in
accordance with the provisions of SFAS No. 5, "Accounting for Contingencies," as amended, or
FIN 48, as appropriate. 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 non-income tax similar matters, historical claims experience
and actuarially determined assumptions of liabilities, and any related insurance coverage.
See Notes 7 and 8 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 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 trans-
portation to and from our ships. The cruise ticket price includes accommodations, most
meals, some non-alcoholic beverages, entertainment and many onboard activities, and
• sales of goods and/or services primarily onboard our ships (which include, among other
things, bar and some beverage sales, shore excursions, casino gaming, and gift shop,
spa, photo, and art sales) and pre and post-cruise land packages. These goods and
services are provided either directly by us or by independent concessionaires, from
which we receive a percentage of their revenues or a fee.
We incur cruise operating costs and expenses for the following:
• the costs of passenger cruise bookings, which represent costs that vary directly with
passenger cruise ticket revenues, and include travel agent commissions, air and other
transportation 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, costs of pre
and post-cruise land packages and credit card fees. Concession revenues do not have
significant associated expenses because the costs and services incurred for concession
revenues are borne 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,
• fuel costs, which include fuel delivery costs,
• food costs, which include both our guest and crew food costs, and
• other ship operating costs, which include repairs and maintenance, including minor
improvements and dry-dock expenses, port costs, entertainment, insurance, and all other
shipboard operating costs and expenses.
For segment information related to our revenues, expenses, operating income and other
financial information see Note 11 in the accompanying financial statements.
Selected Cruise and Other Information
Selected cruise and other information was as follows:
Years Ended November 30,
----------------------------------
2008 2007 2006
---- ---- ----
Passengers carried (in thousands) 8,183 7,672 7,008
----- ----- -----
Occupancy percentage (a) 105.7% 105.6% 106.0%
----- ----- -----
Fuel consumption (metric tons in thousands) 3,179 3,033 2,783
----- ----- -----
Fuel cost per metric ton (b) $ 558 $ 361 $ 334
----- ----- -----
Currency
U.S. dollar to €1 $1.49 $1.36 $1.25
----- ----- -----
U.S. dollar to £1 $1.90 $2.00 $1.83
----- ----- -----
(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.
Fiscal 2008 ("2008") Compared to Fiscal 2007 ("2007")
Revenues
Our total revenues increased $1.6 billion, or 12.4%, from $13.0 billion in 2007 to $14.6
billion in 2008. Of this increase, $1.1 billion was capacity driven by our 8.9% increase in
ALBDs (see "Key Performance Non-GAAP Financial Indicators") and the remaining increase of $490
million was primarily due to increases in cruise ticket pricing, including the implementation
of our fuel supplements, and the impact of the weaker U.S. dollar against the euro compared to
2007. Our capacity increased 3.6% for our North American cruise brands and 21.0% for our
European cruise brands in 2008 compared to 2007, as we continue to implement our planned
strategy of expanding in the European cruise marketplace.
Onboard and other revenues included concessionaire revenues of $924 million in 2008 and
$830 million in 2007. Onboard and other revenues increased in 2008 compared to 2007, because
of the 8.9% increase in ALBDs.
Costs and Expenses
Operating costs increased $1.4 billion, or 18.5%, from $7.6 billion in 2007 to $9.0
billion in 2008. Of this increase, $651 million was capacity driven by our 8.9% increase in
ALBDs and the balance of the increase of $760 million was primarily due to increased fuel
expenses, increased travel agent commissions on higher ticket revenues and the weaker U.S.
dollar against the euro compared to 2007.
Selling and administration expenses increased $50 million, or 3.2%. Of this increase,
$137 million was driven by our 8.9% increase in ALBDs, partially offset by a $26 million gain
from our hurricane insurance settlement for damages to our Cozumel, Mexico port facility in
2005 and by savings achieved through economies of scale and tight cost controls.
Depreciation and amortization expense increased $148 million, or 13.4%, from $1.1 billion
in 2007 to $1.2 billion in 2008, largely due to the 8.9% increase in ALBDs through the
addition of new ships, the weaker U.S. dollar compared to the euro and additional ship
improvement expenditures.
Our total costs and expenses as a percentage of total revenues rose from 79.1% in 2007 to
81.4% in 2008.
Operating Income
Our operating income increased $4 million primarily due to increased fleet capacity and
the effect of increased cruise ticket pricing, partially offset by increased fuel expenses.
Nonoperating (Expense) Income
Net interest expense, excluding capitalized interest, increased $86 million to $430
million in 2008 from $344 million in 2007. This increase was primarily due to a $53 million
increase in interest expense from a higher level of average borrowings, a $24 million decrease
in interest income due to a lower average level of invested cash and an $8 million decrease
from lower average interest rates on invested balances. Capitalized interest increased $8
million during 2008 compared to 2007 primarily due to higher average levels of investment in
ship construction projects.
Income Taxes
Income tax expense increased $31 million to $47 million in 2008 from $16 million in 2007
primarily because 2008 included a Mexican deferred income tax expense related to our hurricane
insurance settlement and 2007 included the reversal of previously recorded deferred tax
valuation allowances and uncertain income tax position liabilities, which were no longer
required.
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 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 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:
Years Ended November 30,
-------------------------------------------------------
2008 2008 2007 2007 2006
---- ---- ---- ---- ----
Constant Constant
Dollar Dollar
(in millions, except ALBDs and yields)
Cruise revenues
Passenger tickets $11,210 $11,064 $ 9,792 $ 9,487 $ 8,903
Onboard and other 3,044 3,016 2,846 2,786 2,514
------- ------- ------- ------- -------
Gross cruise revenues 14,254 14,080 12,638 12,273 11,417
Less cruise costs
Commissions, transportation
and other (2,232) (2,201) (1,941) (1,872) (1,749)
Onboard and other (501) (498) (495) (485) (453)
------- ------- ------- ------- -------
Net cruise revenues $11,521 $11,381 $10,202 $ 9,916 $ 9,215
------- ------- ------- ------- -------
ALBDs 58,942,864 58,942,864 54,132,927 54,132,927 49,945,184
---------- ---------- ---------- ---------- ----------
Gross revenue yields $241.83 $238.88 $233.47 $ 226.72 $228.58
------- ------- ------- -------- -------
Net revenue yields $195.46 $193.08 $188.48 $ 183.18 $184.50
------- ------- ------- -------- -------
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,
-------------------------------------------------------
2008 2008 2007 2007 2006
---- ---- ---- ---- ----
Constant Constant
Dollar Dollar
(in millions, except ALBDs and costs per ALBD)
Cruise operating expenses $ 8,746 $ 8,667 $ 7,332 $ 7,116 $ 6,477
Cruise selling and
administrative expenses 1,594 1,576 1,547 1,500 1,405
------- ------- ------- ------- -------
Gross cruise costs 10,340 10,243 8,879 8,616 7,882
Less cruise costs included in
net cruise revenues
Commissions, transportation
and other (2,232) (2,201) (1,941) (1,872) (1,749)
Onboard and other (501) (498) (495) (485) (453)
------- ------- ------- ------- -------
Net cruise costs $ 7,607 $ 7,544 $ 6,443 $ 6,259 $ 5,680
------- ------- ------- ------- -------
ALBDs 58,942,864 58,942,864 54,132,927 54,132,927 49,945,184
---------- ---------- ---------- ---------- ----------
Gross cruise costs per ALBD $175.43 $173.78 $164.02 $159.17 $157.81
------- ------- ------- -------- -------
Net cruise costs per ALBD $129.06 $127.98 $119.03 $115.63 $113.73
------- ------- ------- -------- -------
Net cruise revenues increased $1.3 billion, or 12.9%, to $11.5 billion in 2008 from $10.2
billion in 2007. The 8.9% increase in ALBDs between 2008 and 2007 accounted for $907 million
of the increase, and the remaining $412 million was from increased net revenue yields, which
increased 3.7% in 2008 compared to 2007 (gross revenue yields increased by 3.6%). Net revenue
yields increased in 2008 primarily due to higher North American ticket prices and the weaker
U.S. dollar relative to the euro, partially offset by lower ticket pricing in Europe. Net
revenue yields as measured on a constant dollar basis increased 2.4% in 2008 compared to 2007,
which was comprised of a 3.7% increase in passenger ticket yields, partially offset by a 1.6%
decrease in onboard and other revenue yields. The decrease in onboard and other revenue
yields was the result of the significant increase in our European brands' capacity, as they
typically have lower onboard and other revenue yields, and lower onboard spending by our
guests. Gross cruise revenues increased $1.6 billion, or 12.8%, to $14.3 billion in 2008 from
$12.6 billion in 2007 for largely the same reasons as discussed above for net cruise revenues.
Net cruise costs increased $1.2 million, or 18.1%, to $7.6 billion in 2008 from $6.4
billion in 2007. The 8.9% increase in ALBDs between 2008 and 2007 accounted for $573 million
of the increase. The balance of $591 million was from increased net cruise costs per ALBD,
which increased 8.4% in 2008 compared to 2007 (gross cruise costs per ALBD increased 7.0%).
This 8.4% increase was driven by a 54.6% per metric ton increase in fuel cost to $558 per
metric ton in 2008, which resulted in an increase in fuel expense of $626 million compared to
2007. This increase was partially offset by a $31 million gain from Cunard's sale of the
Queen Elizabeth 2 ("QE2"), a $26 million gain from a hurricane insurance settlement for
damages to our Cozumel, Mexico port facilities in 2005 and lower selling and administrative
expenses achieved primarily through economies of scale and tight cost controls. Net cruise
costs per ALBD as measured on a constant dollar basis increased 7.5% in 2008 compared to
2007. On a constant dollar basis, net cruise costs per ALBD excluding fuel were flat. Gross
cruise costs increased $1.5 billion, or 16.5%, in 2008 to $10.3 billion from $8.9 billion in
2007 for largely the same reasons as discussed above for net cruise costs.
Fiscal 2007 ("2007") Compared to Fiscal 2006 ("2006")
Revenues
Our total revenues increased $1.2 billion, or 10.1%, from $11.8 billion in 2006 to $13.0
billion in 2007. Of this increase, $957 million was capacity driven by our 8.4% increase in
ALBDs and the remaining increase of $237 million was primarily due to the weaker U.S. dollar
relative to the euro and sterling and higher onboard guest spending, partially offset by
slightly lower occupancy. Our capacity increased 7.0% for our North American cruise brands
and 12.4% for our European cruise brands in 2007 compared to 2006.
Onboard and other revenues included concessionaire revenues of $830 million in 2007 and
$694 million in 2006. Onboard and other revenues increased in 2007 compared to 2006,
primarily because of the 8.4% increase in ALBDs and increased spending on our ships.
Costs and Expenses
Operating costs increased $837 million, or 12.3%, from $6.8 billion in 2006 to $7.6
billion in 2007. Of this increase, $543 million was capacity driven by our 8.4% increase in
ALBDs and the balance of the increase of $293 million was primarily due to a weaker U.S.
dollar relative to the euro and sterling, higher fuel expenses, a $20 million Merchant Navy
Officers Pension Fund expense and higher repair costs from ship incidents. These increases
were partially offset by $21 million of lower dry-dock costs as fewer ships went into dry-dock
in 2007 compared to 2006.
Selling and administration expenses increased $132 million, or 9.1%, from $1.4 billion in
2006 to $1.6 billion in 2007. Of this increase, $118 million was capacity driven by our 8.4%
increase in ALBDs.
Depreciation and amortization expense increased $113 million, or 11.4%, from $988 million
in 2006 to $1.1 billion in 2007, largely due to the 8.4% increase in ALBDs through the
addition of new ships, the weaker U.S. dollar compared to the euro and sterling and additional
ship improvement expenditures.
Our total costs and expenses as a percentage of total revenues rose from 77.9% in 2006 to
79.1% in 2007.
Operating Income
Our operating income increased $112 million, or 4.3%, primarily due to our increased
fleet capacity and weaker U.S. dollar against the euro and sterling, partially offset by our
increased fuel expenses.
Nonoperating (Expense) Income
Net interest expense, excluding capitalized interest, increased $21 million to $344
million in 2007 from $323 million in 2006. This increase was due to a $57 million increase in
interest expense from a higher level of average borrowings and a $6 million increase from
higher average interest rates on average borrowings, partially offset by $33 million of
higher interest income due to a higher average level of invested cash and $9 million due to
higher average interest rates on invested balances. Capitalized interest increased $7
million during 2007 compared to 2006 primarily due to higher average levels of investment in
ship construction projects.
Other expenses in 2006 included a $10 million expense for the write-down of a non-cruise
investment, partially offset by a $4 million gain on the subsequent sale of this investment.
Income Taxes
Income tax expense decreased by $23 million to $16 million in 2007 from $39 million in
2006 primarily because 2006 included $11 million of income tax expense for the Military
Sealift Command charters and the reversal in 2007 of some uncertain income tax position
liabilities, partially offset by higher state income taxes in Alaska.
Key Performance Non-GAAP Financial Indicators
Net cruise revenues increased $987 million, or 10.7%, to $10.2 billion in 2007 from $9.2
billion in 2006. The 8.4% increase in ALBDs between 2007 and 2006 accounted for $772 million
of the increase, and the remaining $215 million was from increased net revenue yields, which
increased 2.2% in 2007 compared to 2006 (gross revenue yields increased by 2.1%). Net revenue
yields increased in 2007 primarily due to the weaker U.S. dollar relative to the euro and
sterling and higher onboard guest spending, partially offset by slightly lower occupancy. Net
revenue yields as measured on a constant dollar basis decreased 0.7% in 2007 compared to 2006,
which was comprised of a 1.8% decrease in passenger ticket yields partially offset by a 3.0%
increase in onboard and other yields. This decrease in constant dollar net revenue yields was
primarily driven by the softer cruise ticket pricing from North American-sourced contemporary
Caribbean cruises especially in the first half of 2007. We believe this decrease in yields
was primarily the result of a weaker U.S. economy, including the impact of higher fuel costs
and interest rates which impacted demand and the lingering effects of the 2005 hurricane
season, which was partially offset by the higher prices we achieved from our European brands,
also mostly in the first half of 2007. Gross cruise revenues increased $1.2 billion, or
10.7%, to $12.6 billion in 2007 from $11.4 billion in 2006 for largely the same reasons as
discussed above for net cruise revenues.
Net cruise costs increased $763 million, or 13.4%, to $6.4 billion in 2007 from $5.7
billion in 2006. The 8.4% increase in ALBDs between 2007 and 2006 accounted for $476 million
of the increase. The balance of $287 million was from increased net cruise costs per ALBD,
which increased 4.7% in 2007 compared to 2006 (gross cruise costs per ALBD increased 3.9%).
Net cruise costs per ALBD increased in 2007 primarily due to a weaker U.S. dollar relative to
the euro and sterling, a $27 per metric ton increase in fuel cost to $361 per metric ton in
2007, which resulted in an increase in fuel expense of $82 million compared to 2006, a $20
million Merchant Navy Officers Pension Fund expense and higher repair costs from ship
incidents. These increases were partially offset by $21 million of lower dry-dock costs as
fewer ships went into dry-dock in 2007 compared to 2006. Net cruise costs per ALBD as
measured on a constant dollar basis increased 1.7% in 2007 compared to 2006. On a constant
dollar basis, net cruise costs per ALBD, excluding fuel increased 1.0%. Gross cruise costs
increased $997 million, or 12.6%, in 2007 to $8.9 billion from $7.9 billion in 2006 for
largely the same reasons as discussed above for net cruise costs.
Liquidity and Capital Resources
As discussed in our Executive Overview, we believe preserving cash and liquidity at this
point in 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 cash and cash
equivalents and with 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 2009.
Sources and Uses of Cash
Our business provided $3.4 billion of net cash from operations during fiscal 2008, a
decrease of $678 million, or 16.7%, compared to fiscal 2007. The majority of this decrease
resulted from a $506 million year-over-year decrease in cash received from customers'
deposits. This decrease 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 November 30, 2008 and 2007, we had working capital deficits of $4.1 billion and $5.3
billion, respectively. Our November 30, 2008 deficit included $2.5 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 November 30, 2008 working
capital deficit included $1.6 billion of current debt obligations, which included $649
million outstanding under our Facility. Our 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 working capital deficit
balance, our non-GAAP adjusted working capital deficit was only $4 million.
We continue to generate substantial cash from operations and have strong investment
grade credit ratings of A-/A3, which provide us with flexibility in most financial credit
market environments to refinance our current debt, if necessary. Accordingly, we believe we
have the ability to maintain a substantial working capital deficit and still meet our
operating, investing and financing needs over the next 12 months. 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.
Our Standard & Poor's Rating Services A- credit rating recently was assigned a negative
outlook, which reflects their concern that the weakened state of the economy and the pull
back in consumer spending will pressure our ability to sustain our A- credit rating. If we
were to be downgraded by S&P to BBB+, although this would result in a slight increase in our
borrowing costs on a prospective basis, we do not believe it would have a material adverse
impact on our financial results or our ability to obtain committed credit facilities or issue
debt.
During fiscal 2008, our net expenditures for capital projects were $3.4 billion, of
which $2.7 billion was spent for our ongoing new shipbuilding program, including $2.1 billion
for the final delivery payments for Ventura, AIDAbella, Eurodam, Carnival Splendor and Ruby
Princess. In addition to our new shipbuilding program, we had capital expenditures of $391
million for ship improvements and replacements and $231 million for Alaska tour assets,
cruise port facility developments and information technology and other assets. Also during
fiscal 2008, we received an aggregate of $141 million from the sale of the QE2 and the final
payment on the 2003 sale of Holland America Line's Nieuw Amsterdam.
During fiscal 2008, under our Facility we borrowed and repaid $4.1 billion and $4.2
billion, respectively, in connection with our needs for cash at various times throughout the
year. In addition, during fiscal 2008 we borrowed $2.2 billion of other long-term debt,
principally under ship financing and related facilities compared to $2.7 billion in 2007, or
a decrease of $500 million. We repaid $1.2 billion of other long-term debt, which was
primarily comprised of $302 million of our 1.75% Notes, $233 million of our Zero-Coupon
Notes, $308 million upon maturity of our 4.4% and 6.15% fixed rate notes and $206 million of
our semi-annual export credit facility payments. Finally, we paid cash dividends of $1.3
billion in 2008 and purchased $83 million, net, of Carnival Corporation common stock and
Carnival plc ordinary shares in open market transactions.
Future Commitments and Funding Sources
At November 30, 2008, our contractual cash obligations were as follows (in millions):
Payments Due by Fiscal Year
-----------------------------------------------------------------
Contractual Cash
Obligations Total 2009 2010 2011 2012 2013 Thereafter
----------- ----- ---- ---- ---- ---- ---- ----------
Recorded Contractual
Obligations
-----------
Short-term borrowings(a) $ 256 $ 256
Facility(a) 791 649 $ 142
Convertible notes(a) 866 271 $ 595
Other long-term notes(a) 7,430 432 $1,001 432 934 $1,357 $3,274
Other long-term liabil-
ities reflected on
the balance sheet(b) 696 64 111 84 68 32 337
Unrecorded Contractual
Obligations
-----------
Shipbuilding(c) 8,342 2,647 2,827 1,887 981
Operating leases(c) 274 41 34 31 30 26 112
Port facilities and
other(c) 974 143 104 77 69 68 513
Purchase obligations(d) 434 358 43 16 8 5 4
Fixed-rate interest
payments(e) 2,265 322 301 284 267 225 866
Variable-rate interest
payments(e) 224 67 45 37 31 17 27
------- ------- ------- ------- ------ ------ ------
Total contractual
cash obligations(f) $22,552 $5,250 $4,466 $3,443 $2,530 $1,730 $5,133
------- ------ ------ ------ ------ ------ ------
(a) Our 2009 cash obligations include $649 million of debt outstanding under our long-
term Facility, and as such these obligations can be rolled-over on a long-term basis
under this Facility, if we so desire. Also included in 2009 and 2011 is $271 million and
$595 million of our convertible notes, respectively, since the noteholders have put
options in October 2009 and April 2011, respectively. If these notes are put to us, at
our election we can settle these obligations through the issuance of common stock, cash,
or a combination thereof. Based on the Carnival Corporation current common stock price,
we expect that the $271 million will be put to us in October 2009, and we currently
anticipate that we will repay this obligation in cash. Our debt, excluding short-term
borrowings, has a weighted-average maturity of five years. See Note 5 in the accompanying
financial statements for additional information regarding these contractual cash
obligations.
(b) 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, crew and guest claims, lease out and lease back obligations, uncertain
income tax position liabilities, certain deferred income taxes, derivative contracts
payable and other long-term liabilities. Deferred income and certain deferred income
taxes have been excluded from the table because they do not require a cash settlement in
the future or the timing of the cash flows cannot be reasonably estimated.
(c) Our shipbuilding commitments are contractual commitments and, accordingly, cannot be
cancelled by us or the shipyards without the incurrence of significant contractual
liquidating damage payments. See Note 6 in the accompanying financial statements for
additional information regarding these contractual cash obligations.
(d) 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.
(e) Fixed-rate interest payments represent cash outflows for fixed interest payments,
including interest swapped from a variable-rate to a fixed-rate. Variable-rate interest
payments represent forecasted cash outflows for interest payments on variable-rate debt,
including interest swapped from a fixed-rate to a variable-rate, using the November 30,
2008 interest rates for the remaining terms of the loans.
(f) Amounts payable in foreign currencies, which are usually euro and sterling, are based
on the November 30, 2008 exchange rates.
In June 2006, the Boards of Directors authorized the repurchase of up to an aggregate of
$1 billion of Carnival Corporation common stock and/or Carnival plc ordinary shares subject
to certain restrictions. On September 19, 2007, the Boards of Directors increased the
remaining $578 million authorization back to $1 billion. During fiscal 2008, we purchased
1.3 million Carnival plc ordinary shares at an average price of $43.77, and 0.6 million
shares of Carnival Corporation common stock at an average price of $44.63. At January 28,
2009, the remaining availability pursuant to our repurchase program was $787 million. It is
not our present intention to repurchase Carnival Corporation common stock and/or Carnival plc
ordinary shares under our authorized share repurchase program, except for repurchases
resulting from our stock swap program as discussed below. No expiration date has been
specified for this authorization; however, the Carnival plc share repurchase authorization
requires annual shareholder approval.
In October 2008, we filed a prospectus supplement with the SEC to issue up to 19.2
million Carnival Corporation shares of common stock in the U.S. market. The Carnival
Corporation common stock has been and will be sold at market prices and the sale proceeds
have been and will be used to repurchase ordinary shares of Carnival plc in the UK market on
at least an equivalent basis, with the remaining net proceeds, if any, used for general
corporate purposes, including repurchases under our authorized share repurchase program.
Under this "stock swap program", we expect to issue Carnival Corporation common
stock in the U.S. market only to the extent we can complete the purchase of the
Carnival plc ordinary shares in open market transactions with a resulting economic benefit,
which is derived from the fact that Carnival plc ordinary shares sometimes trade at a
discount to Carnival Corporation common stock.
As previously discussed, 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 year.
At November 30, 2008, as adjusted for the termination of our $470 million short-term
revolver and including the long-term revolving credit facility and ship financing commitments
we entered into subsequent to our year-end, we had liquidity of $3.6 billion. Our liquidity
consisted of $370 million of cash and cash equivalents, excluding cash on hand of $280
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, $813 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 Facility matures 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 for funding just in case 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 in the accompanying financial statements. 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 and for the year ended November 30, 2008, 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."
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 banks 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.
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
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. Our policy is to not use any
financial instruments for trading or other speculative purposes.
Our growing international business operations, conducted primarily through AIDA in
Germany, Costa in southern Europe and China, Ibero in Spain, P&O Cruises, Cunard, and Ocean
Village in the UK and P&O Cruises Australia in Australia, subject us to an increasing level
of foreign currency exchange risk related to the euro, sterling and Australian dollar because
these operations have either the euro, sterling or Australian dollar as their functional
currency. Accordingly, exchange rate fluctuations of the euro, sterling or Australian dollar
against the U.S. 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 strengthening
of the U.S. dollar against these local functional currencies has the financial statement
effect of decreasing the U.S. dollar values reported for cruise revenues and cruise expenses
in our Consolidated Statements of Operations. Weakening of the U.S. dollar has the opposite
effect.
Most of our brands have non-functional currency risk related to their international
sales operations, which has become an increasingly larger part of most of their businesses
over time, and includes the same currencies noted above, as well as the U.S. and Canadian
dollars. In addition, all of our brands have non-functional currency expenses for a portion
of their operating expenses. Accordingly, a weakening of the U.S. dollar against these
currencies results in both increased revenues and increased expenses, resulting in some
degree of natural offset due to currency exchange movements within our Consolidated
Statements of Operations for these transactional currency gains and losses. Therefore, we do
not seek to hedge these risks with financial instruments but rather manage them as described
above. The strengthening of the U.S. dollar against these currencies has the opposite
effect.
We consider our investments in foreign subsidiaries to be denominated in relatively
stable currencies and of a long-term nature. In addition to the net investment hedging
strategy discussed below under "Newbuild Currency Risk", we also partially address these 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). Specifically, we have debt of $1.6 billion in euros and $320 million in sterling
and have $284 million of foreign currency forwards, whereby we have converted $284 million of
U.S. dollar debt into euro debt, thus partially offsetting these foreign currency exchange
rate risks. At November 30, 2008, the fair value of these foreign currency forwards was an
unrealized gain of $13 million, which is recorded in AOCI, which offsets a portion of the
losses recorded in AOCI upon translating our foreign subsidiaries' net assets into U.S.
dollars. The forwards mature through 2017. Based upon a 10% hypothetical change in the
November 30, 2008 foreign currency exchange rates, assuming no changes in comparative
interest rates, we estimate that these foreign currency contracts' fair values would change
by $28 million, which would be offset by a corresponding change of $28 million in the U.S.
dollar value of our net investments.
Finally, at November 30, 2008 we have three foreign currency swaps that were designated
as cash flow hedges and effectively converted $398 million of U.S. dollar fixed interest rate
debt into sterling fixed interest rate debt. Sterling is the functional currency of our
operation that has the obligation to repay this debt. At November 30, 2008, the fair value
of these foreign currency swaps was an unrealized gain of $104 million. Subsequent to
November 30, 2008, we closed out of these foreign currency swaps and thus re-aligned the debt
with the parent company's U.S. dollar functional currency.
Newbuild Currency Risk
The majority of our newbuild capacity on order is for our Costa and AIDA 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 functional currency brands, comprised of Carnival Cruise Lines, Princess, Holland
America Line and Seabourn, and our sterling functional currency brands, comprised of P&O
Cruises and Cunard, 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 (see Notes 2,
6 and 10 in the accompanying financial statements). Accordingly, increases and decreases in
the fair value of these foreign currency contracts offset changes in the fair value of the
foreign currency denominated ship construction commitments, thus resulting in the elimination
of such risk.
During 2008, we entered into foreign currency forwards and options that are designated
as cash flow hedges for the remaining euro-denominated shipyard payments for Carnival Dream
in order to effectively lock in a maximum exchange rate of $1.584 to the euro. Accordingly,
we will have a maximum payment of $723 million, inclusive of the option premium for Carnival
Dream's remaining shipyard payments. However, unlike foreign currency forwards as a result
of the currency options, which are for 50% of these remaining shipyard payments, we will
benefit if the dollar exchange rate is below $1.584 to the euro. At November 30, 2008, the
fair value of these foreign currency options and forwards, which mature through September
2009, was a realized and unrealized net loss of $66 million which is recorded, along with an
offsetting $66 million amount recognized in AOCI, on our accompanying 2008 balance sheet.
Based upon a 10% hypothetical weakening or strengthening of the U.S. dollar compared to the
euro as of November 30, 2008, assuming no changes in comparative interest rates, the
estimated aggregated fair value of these foreign currency forwards and options would increase
by $46 million or decrease by $35 million, respectively, which would be offset by a decrease
of $46 million or increase of $35 million, respectively, in the U.S. dollar value of the
related foreign currency ship construction contract and result in no net dollar impact to us
Also, during 2008 we entered into a call option and a put option that were designed as a
zero cost collar, and are collectively designated as a cash flow hedge of Nieuw Amsterdam's
final shipyard payment. Under this zero cost collar the minimum exchange rate we would be
required to pay is $1.28 to the euro and the maximum exchange rate we would be required to
pay is $1.45 to the euro. If the spot rate is in between these two amounts on the date of
delivery, then we would not owe or receive any payments under this zero cost collar. At
November 30, 2008, the fair value of this zero cost collar was an unrealized net loss of $20
million, which was recorded in AOCI and it matures in June 2010. Based upon a 10%
hypothetical change of the U.S. dollar compared to the euro as of November 30, 2008, assuming
no changes in comparative interest rates, the estimated fair value of this foreign currency
zero cost collar would change by $35 million, which would be offset by a corresponding change
of $35 million in the U.S. dollar value of the related foreign currency ship construction
contract and result in no net dollar impact to us.
At November 30, 2008, we have four euro-denominated shipbuilding commitments scheduled
for delivery between June 2009 and May 2011 and aggregating $1.5 billion assigned to two of
our U.S. dollar functional currency brands for which we have not entered into any foreign
currency forwards or options. Therefore, the U.S. dollar cost of these ships will increase
or decrease based upon changes in the exchange rate until the payments are made under the
shipbuilding contracts or we enter into foreign currency hedges. A portion of our net
investment in euro-denominated cruise operations effectively acts as an economic hedge
against a portion of these euro commitments. Accordingly, a portion of any increase or
decrease in our ship costs resulting from changes in the exchange rates will be offset by a
corresponding change in the net assets of our euro-denominated cruise operations. Based upon
a 10% hypothetical change in the U.S. dollar compared to the euro as of November 30, 2008,
assuming no changes in comparative interest rates, the unpaid cost of these ships would have
a corresponding change of $142 million.
At November 30, 2008, we have two euro-denominated shipbuilding commitments scheduled
for delivery in March and September 2010 and aggregating $1.3 billion assigned to two of our
sterling functional currency brands for which we have not entered into any foreign currency
contracts. Therefore, the sterling cost of these ships will increase or decrease based upon
changes in the exchange rate until the payments are made under the shipbuilding contracts or
we enter into foreign currency hedges. Based upon a 10% hypothetical change in the November
30, 2008 sterling to euro foreign currency exchange rate, assuming no changes in comparative
interest rates and assuming the U.S. dollar exchange rate to the sterling remains constant,
the unpaid cost of these ships would have a corresponding change of $122 million.
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.
The cost of shipbuilding orders that we may place in the future for our cruise lines
that 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 movement in the U.S. dollar and sterling relative to the euro over
the past several years, the U.S. dollar and sterling cost to order new cruise ships has been
volatile. If the U.S. dollar or sterling declines against the euro, this may affect our
ability to order future new cruise ships for U.S. dollar or sterling functional currency
brands.
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. At November 30, 2008 and 2007, 74% and 69% of the interest
cost on our debt was fixed and 26% and 31% was variable, including the effect of our interest
rate swaps, respectively.
Specifically, we have an interest rate swap at November 30, 2008, which effectively
changed $96 million of fixed rate debt to LIBOR-based floating rate debt. The fair value of
our debt and interest rate swaps at November 30, 2008 was $7.4 billion. Based upon a
hypothetical 10% change in the November 30, 2008 market interest rates, assuming no change in
currency exchange rates, the fair value of our debt and interest rate swap would change by
approximately $118 million. In addition, based upon a hypothetical 10% change in the
November 30, 2008 interest rates, our annual interest expense on variable rate debt,
including the effect of our interest rate swaps, would change by approximately $7 million.
In addition, based upon a hypothetical 10% change in Carnival Corporation's November 30,
2008 common stock price, the fair value of our convertible notes would have a corresponding
change of approximately $6 million.
These hypothetical amounts are determined by considering the impact of the hypothetical
interest rates and common stock price on our existing debt and interest rate swaps. This
analysis does not consider the effects of the changes in the level of overall economic
activity that could exist in such environments or any relationships which may exist between
interest rate and stock price movements. Furthermore, substantially all of our fixed rate
debt can only be called or prepaid by incurring significant break fees, therefore it is
unlikely we will be able to take any significant steps in the short-term to mitigate our
exposure in the event of a significant decrease in market interest rates.
Bunker Fuel Price Risks
We do not use financial instruments to hedge our exposure to the bunker fuel price
market risk. We estimate that our fiscal 2009 fuel expense would change by approximately
$3.3 million for each $1 per metric ton corresponding change in our average bunker fuel
price.
Selected Financial Data
The selected consolidated financial data presented below for fiscal 2004 through 2008
and as of the end of each such year, except for the other operating data, are derived from
our audited financial statements and should be read in conjunction with those financial
statements and the related notes.
Years Ended November 30,
-----------------------------------------------------
2008 2007 2006 2005 2004
---- ---- ---- ---- ----
(in millions, except per share data)
Statement of Operations
and Cash Flow Data(a)
Revenues $14,646 $13,033 $11,839 $11,094 $ 9,727
Operating income $ 2,729 $ 2,725 $ 2,613 $ 2,639 $ 2,128
Net income $ 2,330 $ 2,408 $ 2,279 $ 2,253 $ 1,809
Earnings per share
Basic $ 2.96 $ 3.04 $ 2.85 $ 2.80 $ 2.25
Diluted $ 2.90 $ 2.95 $ 2.77 $ 2.70 $ 2.18
Dividends declared
per share $ 1.60 $ 1.375 $ 1.025 $ 0.80 $ 0.525
Cash from operations $ 3,391 $ 4,069 $ 3,633 $ 3,410 $ 3,216
Cash used in investing activities $ 3,255 $ 3,746 $ 2,443 $ 1,970 $ 3,089
Capital expenditures $ 3,353 $ 3,312 $ 2,480 $ 1,977 $ 3,586
Cash used in financing activities $ 315 $ 604 $ 1,212 $ 892 $ 79
Dividends paid $ 1,261 $ 990 $ 803 $ 566 $ 400
As of November 30,
-----------------------------------------------------
2008 2007 2006 2005 2004
---- ---- ---- ---- ----
(in millions, except percentages)
Balance Sheet and Other Data
Total assets $33,400 $34,181 $30,552 $28,349 $27,548
Total debt $ 9,343 $ 8,852 $ 7,847 $ 7,352 $ 7,953
Total shareholders' equity $19,098 $19,963 $18,210 $16,883 $15,672
Total debt to capital(b) 32.9% 30.7% 30.1% 30.3% 33.7%
Years Ended November 30,
-----------------------------------------------------
2008 2007 2006 2005 2004
---- ---- ---- ---- ----
Other Operating Data
ALBDs (in thousands) 58,943 54,133 49,945 47,755 44,009
Passengers carried (in thousands) 8,183 7,672 7,008 6,848 6,306
Occupancy percentage 105.7% 105.6% 106.0% 105.6% 104.5%
Fuel consumption (metric tons
in thousands) 3,179 3,033 2,783 2,728 2,535
Fuel cost per metric ton $ 558 $ 361 $ 334 $ 259 $ 194
Currency
U.S. dollar to €1 $ 1.49 $ 1.36 $ 1.25 $ 1.25 $ 1.23
U.S. dollar to £1 $ 1.90 $ 2.00 $ 1.83 $ 1.83 $ 1.82
(a) The 2006 net income was reduced by $57 million of share-based compensation expense
related to the expensing of stock options and RSUs as a result of our adoption of SFAS
No. 123(R) in 2006 (see Note 2).
(b) Percentage of total debt to the sum of total debt and shareholders' equity.
Market Price for Common Stock and Ordinary Shares
Carnival Corporation's common stock, together with paired trust shares of beneficial
interest in the P&O Princess Special Voting Trust (which holds a Special Voting Share of
Carnival plc) is traded on the NYSE under the symbol "CCL." Carnival plc's ordinary shares
trade on the London Stock Exchange under the symbol "CCL." Carnival plc's American
Depository Shares ("ADSs"), each one of which represents one Carnival plc ordinary share, are
traded on the NYSE under the symbol "CUK." The depository for the ADSs is JPMorgan Chase
Bank. The daily high and low stock sales price for the periods indicated on their primary
exchange was as follows:
Carnival Corporation Carnival plc
-------------------- -----------------------------------------
Price per Ordinary
Share (GBP) Price per ADS (USD)
------------------ -------------------
High Low High Low High Low
---- --- ---- --- ---- ---
Fiscal 2008
-----------
Fourth Quarter $42.24 $14.86 ₤21.53 ₤10.55 $38.90 $15.25
Third Quarter $41.47 $29.22 ₤20.20 ₤14.06 $39.60 $28.36
Second Quarter $43.54 $36.10 ₤21.63 ₤17.66 $43.00 $35.77
First Quarter $46.20 $37.64 ₤22.76 ₤17.39 $45.21 $37.19
Fiscal 2007
-----------
Fourth Quarter $52.10 $42.06 ₤25.00 ₤19.83 $50.65 $40.92
Third Quarter $51.85 $41.70 ₤26.51 ₤20.32 $52.68 $40.73
Second Quarter $50.77 $44.39 ₤26.74 ₤23.53 $52.16 $45.66
First Quarter $52.73 $45.75 ₤28.40 ₤23.50 $55.45 $47.20
As of January 22, 2009, there were 3,670 holders of record of Carnival Corporation
common stock and 41,282 holders of record of Carnival plc ordinary shares and 99 holders of
record of Carnival plc ADSs. The past performance of our stock prices cannot be relied on as
a guide to their future performance.
All dividends for both Carnival Corporation and Carnival plc are declared in U.S.
dollars. If declared, holders of Carnival Corporation common stock and Carnival plc ADSs
receive a dividend payable in U.S. dollars. The dividends payable for Carnival plc ordinary
shares are payable in sterling, unless the shareholders elect to receive the dividends in
U.S. dollars. Dividends payable in sterling will be converted from U.S. dollars into
sterling at the U.S. dollar to sterling exchange rate quoted by the Bank of England in London
at 12:00 p.m. on the next combined U.S. and UK business day that follows the quarter end. In
October 2008, our 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 the circumstances prevailing during the year.
SCHEDULE B
CARNIVAL CORPORATION & PLC - U.S. GAAP CONSOLIDATED FINANCIAL STATEMENTS
CARNIVAL CORPORATION & PLC
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share data)
Years Ended November 30,
----------------------------
2008 2007 2006
---- ---- ----
Revenues
Cruise
Passenger tickets $11,210 $ 9,792 $ 8,903
Onboard and other 3,044 2,846 2,514
Other 392 395 422
------- ------- -------
14,646 13,033 11,839
------- ------- -------
Costs and Expenses
Operating
Cruise
Commissions, transportation and other 2,232 1,941 1,749
Onboard and other 501 495 453
Fuel 1,774 1,096 935
Payroll and related 1,470 1,336 1,158
Food 856 747 644
Other ship operating 1,913 1,717 1,538
Other 293 296 314
------- ------- -------
Total 9,039 7,628 6,791
Selling and administrative 1,629 1,579 1,447
Depreciation and amortization 1,249 1,101 988
------- ------- -------
11,917 10,308 9,226
------- ------- -------
Operating Income 2,729 2,725 2,613
------- ------- -------
Nonoperating (Expense) Income
Interest income 35 67 25
Interest expense, net of capitalized interest (414) (367) (312)
Other income (expense), net 27 (1) (8)
------- ------- -------
(352) (301) (295)
------- ------- -------
Income Before Income Taxes 2,377 2,424 2,318
Income Tax Expense, Net (47) (16) (39)
------- ------- -------
Net Income $ 2,330 $ 2,408 $ 2,279
------- ------- -------
Earnings Per Share
Basic $ 2.96 $ 3.04 $ 2.85
------- ------- -------
Diluted $ 2.90 $ 2.95 $ 2.77
------- ------- -------
Dividends Per Share $ 1.60 $ 1.375 $ 1.025
------- ------- -------
The accompanying notes are an integral part of these consolidated financial statements.
CARNIVAL CORPORATION & PLC
CONSOLIDATED BALANCE SHEETS
(in millions, except par values)
November 30,
---------------------
2008 2007
---- ----
ASSETS
Current Assets
Cash and cash equivalents $ 650 $ 943
Trade and other receivables, net 418 436
Inventories 315 331
Prepaid expenses and other 267 266
------- -------
Total current assets 1,650 1,976
------- -------
Property and Equipment, Net 26,457 26,639
Goodwill 3,266 3,610
Trademarks 1,294 1,393
Other Assets 733 563
------- -------
$33,400 $34,181
------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Short-term borrowings $ 256 $ 115
Current portion of long-term debt 1,081 1,028
Convertible debt subject to current put options 271 1,396
Accounts payable 512 561
Accrued liabilities and other 1,142 1,353
Customer deposits 2,519 2,807
------- -------
Total current liabilities 5,781 7,260
------- -------
Long-Term Debt 7,735 6,313
Other Long-Term Liabilities and Deferred Income 786 645
Commitments and Contingencies (Notes 6 and 7)
Shareholders' Equity
Common stock of Carnival Corporation; $.01 par
value; 1,960 shares authorized; 643 shares at
2008 and 2007 issued 6 6
Ordinary shares of Carnival plc; $1.66 par value;
226 shares authorized; 213 shares at 2008 and
2007 issued 354 354
Additional paid-in capital 7,677 7,599
Retained earnings 13,980 12,921
Accumulated other comprehensive (loss) income (623) 1,296
Treasury stock; 19 shares at 2008 and 2007 of
Carnival Corporation and 52 shares at 2008 and
50 shares at 2007 of Carnival plc, at cost (2,296) (2,213)
------- -------
Total shareholders' equity 19,098 19,963
------- -------
$33,400 $34,181
------- -------
The accompanying notes are an integral part of these consolidated financial statements.
CARNIVAL CORPORATION & PLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
Years Ended November 30,
------------------------
2008 2007 2006
---- ---- ----
OPERATING ACTIVITIES
Net income $2,330 $2,408 $2,279
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation and amortization 1,249 1,101 988
Share-based compensation 50 64 68
Other (37) 26 19
Changes in operating assets and liabilities, excluding
businesses acquired and sold
Receivables (70) (119) 118
Inventories (8) (57) (5)
Prepaid expenses and other (18) (56) 6
Accounts payable (66) 109 (53)
Accrued and other liabilities 37 163 (11)
Customer deposits (76) 430 224
------ ------ ------
Net cash provided by operating activities 3,391 4,069 3,633
------ ------ ------
INVESTING ACTIVITIES
Additions to property and equipment (3,353) (3,312) (2,480)
Purchases of short-term investments (4) (2,098) (18)
Sales of short-term investments 11 2,078 6
Acquisition of business, net of cash acquired and sales
of businesses (339)
Other, net 91 (75) 49
------ ------ ------
Net cash used in investing activities (3,255) (3,746) (2,443)
------ ------ ------
FINANCING ACTIVITIES
Principal repayments of Facility (4,237) (135) (324)
Proceeds from Facility 4,109 1,086 326
Proceeds from issuance of other long-term debt 2,243 2,654 2,241
Principal repayments of other long-term debt (1,211) (1,656) (2,537)
Proceeds from (repayments of) short-term borrowings, net 138 (1,281) 659
Dividends paid (1,261) (990) (803)
Purchases of treasury stock, net (83) (326) (841)
Other, net (13) 44 67
------ ------ ------
Net cash used in financing activities (315) (604) (1,212)
------ ------ ------
Effect of exchange rate changes on cash and cash
equivalents (114) 61 7
------ ------ ------
Net decrease in cash and cash equivalents (293) (220) (15)
Cash and cash equivalents at beginning of year 943 1,163 1,178
------ ------ ------
Cash and cash equivalents at end of year $ 650 $ 943 $1,163
------ ------ ------
The accompanying notes are an integral part of these consolidated financial statements.
CARNIVAL CORPORATION & PLC
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in millions)
Unearned Accumulated Total
Additional stock other share-
Common Ordinary paid-in Retained compen- comprehensive Treasury holders'
stock shares capital earnings sation (loss) income stock equity
----- ------ ------- -------- ------ ------------- ----- ------
Balances at November 30, 2005 $6 $353 $7,381 $10,141 $(13) $ 159 $(1,144) $16,883
Adoption of SFAS No. 123(R)
(Note 12) (13) 13
Comprehensive income:
Net income 2,279 2,279
Foreign currency
translation adjustment 496 496
Minimum pension liability
adjustments 2 2
Changes related to cash flow
derivative hedges, net 4 4
-------
Total comprehensive income 2,781
Cash dividends declared (820) (820)
Purchases of treasury stock (837) (837)
Other 1 111 91 203
-- ---- ------ ------- ---- ------ ------- -------
Balances at November 30, 2006 6 354 7,479 11,600 661 (1,890) 18,210
Comprehensive income:
Net income 2,408 2,408
Foreign currency
translation adjustment 649 649
Unrealized loss on
marketable security (5) (5)
Minimum pension liability
adjustments (8) (8)
Changes related to cash flow
derivative hedges, net 6 6
-------
Total comprehensive income 3,050
Cash dividends declared (1,087) (1,087)
Purchases of treasury stock (326) (326)
Other 120 3 123
Adoption of SFAS No. 158
(Note 12) (7) (7)
-- ---- ------ ------- ---- ------ ------- -------
Balances at November 30, 2007 6 354 7,599 12,921 1,296 (2,213) 19,963
Adoption of FIN 48 (Note 8) (11) (11)
Comprehensive income:
Net income 2,330 2,330
Foreign currency
translation adjustment (1,816) (1,816)
Unrealized loss on
marketable security (15) (15)
Pension liability
adjustments (3) (3)
Changes related to cash flow
derivative hedges, net (85) (85)
-------
Total comprehensive income 411
Cash dividends declared (1,260) (1,260)
Purchases of treasury stock, net (83) (83)
Other 78 78
-- ---- ------ ------- ---- ------ ------- -------
Balances at November 30, 2008 $6 $354 $7,677 $13,980 $ $ (623) $(2,296) $19,098
-- ---- ------ ------- ---- ------ ------- -------
The accompanying notes are an integral part of these consolidated financial statements.
CARNIVAL CORPORATION & PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - General
Description of Business
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. Each company's shares are publicly traded; on the
New York Stock Exchange ("NYSE") for Carnival Corporation and the London Stock Exchange for
Carnival plc. In addition, Carnival plc American Depository Shares are traded on the NYSE.
See Note 3.
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 2008 Annual Report as "Carnival Corporation & plc," "our,"
"us," and "we."
We are the largest cruise company and one of the largest vacation companies in the
world. As of November 30, 2008, a summary by brand of our passenger capacity, the number of
cruise ships we operate, and the primary areas in which they are marketed is as follows:
Passenger Number of Primary
Cruise Brand Capacity(a) Cruise Ships Market
------------ -------- ------------ ------
Carnival Cruise Lines 52,286 22 North America
Princess Cruises ("Princess") 37,532 17 North America
Costa Cruises ("Costa") 23,196 12 Europe
Holland America Line 21,088 14 North America
P&O Cruises 11,998 6 United Kingdom
AIDA Cruises ("AIDA") 7,812 5 Germany
Cunard Line ("Cunard") 4,572 2 United Kingdom and North America
Ibero Cruises ("Ibero") 3,570 3 Spain and Brazil
Ocean Village(b) 3,286 2 United Kingdom
P&O Cruises Australia 3,076 2 Australia and New Zealand
The Yachts of Seabourn ("Seabourn") 624 3 North America
------- --
169,040 88
------- --
(a) In accordance with cruise industry practice, passenger capacity is calculated based
on two passengers per cabin even though some cabins can accommodate three or more
passengers.
(b) The Ocean Village brand will be phased-out with the transfer of its ships to P&O
Cruises Australia in November 2009 and November 2010.
Preparation of Financial Statements
The preparation of our consolidated financial statements in accordance with accounting
principles generally accepted in the United States of America requires us to make estimates
and assumptions that affect the amounts reported and disclosed in our financial statements.
Actual results could differ from these estimates. All significant intercompany balances and
transactions are eliminated in consolidation.
NOTE 2 - Summary of Significant Accounting Policies
Basis of Presentation
We consolidate entities over which we have control (see Notes 3 and 15), as typically
evidenced by a direct ownership interest of greater than 50%. For affiliates where
significant influence over financial and operating policies exists, as typically evidenced by
a direct ownership interest from 20% to 50%, the investment is accounted for using the equity
method.
Cash and Cash Equivalents
Cash and cash equivalents include investments with maturities of three months or less at
acquisition, which are stated at cost. At November 30, 2008 and 2007, cash and cash
equivalents are comprised of cash on hand, money market funds and time deposits.
Marketable Securities
We account for our marketable security investments as trading, available-for-sale or
held-to-maturity securities. As of November 30, 2008 and 2007, our marketable security
investments were not significant and we had $20 million and $5 million of unrealized holding
losses at such dates, respectively. All income generated from these investments is recorded
as interest income.
Purchases and sales of short-term investments included in our 2007 Consolidated
Statement of Cash Flows consisted of investments with original maturities greater than three
months with variable interest rates, which typically reset every 28 days. Despite the long-
term nature of their stated contractual maturities, prior to November 30, 2007 we had the
ability to quickly liquidate these securities so they were considered short-term investments.
Inventories
Inventories consist primarily of food and beverage provisions, hotel supplies, fuel and
gift shop and art merchandise held for resale, which are all carried at the lower of cost or
market. Cost is determined using the weighted-average or first-in, first-out methods.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization were computed
using the straight-line method over our estimates of average useful lives and residual
values, as a percentage of original cost, as follows:
Residual
Values Years
-------- -----
Ships 15% 30
Ship improvements 0% or 15% 3-28
Buildings and improvements 0-10% 5-35
Computer hardware and software 0-10% 3-7
Transportation equipment and other 0-15% 2-20
Leasehold improvements, including port facilities Shorter of lease term
or related asset life
Ship improvement costs that we believe add value to our ships are capitalized to the
ships, and depreciated over the improvements' estimated useful lives, while costs of repairs
and maintenance, including minor improvement costs, are charged to expense as incurred. We
capitalize interest as part of acquiring ships and other capital projects during their
construction period. The specifically identified or estimated cost and accumulated
depreciation of previously capitalized ship components are written off upon replacement.
Dry-dock costs primarily represent planned major maintenance activities that are
incurred when a ship is taken out of service for scheduled maintenance. These costs are
expensed as incurred.
We review our long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of these assets may not be fully recoverable.
The assessment of possible impairment is based on our ability to recover the carrying value
of our asset based on our estimate of its undiscounted future cash flows. If these estimated
undiscounted future cash flows are less than the carrying value of the asset, an impairment
charge is recognized for the excess, if any, of the asset's carrying value over its estimated
fair value.
Goodwill and Trademarks
We review our goodwill for impairment annually, and, when events or circumstances
dictate, more frequently. All of our goodwill has been allocated to our cruise reporting
units. The significant changes to our goodwill carrying amounts since November 30, 2006 were
the changes resulting from using different foreign currency translation rates at each balance
sheet date, the addition of $161 million of Ibero goodwill in fiscal 2007 (see Note 15), and
the $20 million reduction to goodwill in fiscal 2006 resulting from the favorable resolution
of certain P&O Princess Cruises plc's ("P&O Princess") tax contingency liabilities that
existed at the time of the DLC transaction.
Our goodwill impairment reviews consist of a two-step process. The first step is to
determine the fair value of the reporting unit and compare it to the carrying value of the
net assets allocated to the reporting unit. Fair values of our reporting units were
determined based on our estimates of market values. If this fair value exceeds the carrying
value no further analysis or goodwill write-down is required. The second step is required if
the fair value of the reporting unit is less than the carrying value of the net assets. In
this step the implied fair value of the reporting unit is allocated to all the underlying
assets and liabilities, including both recognized and unrecognized tangible and intangible
assets, based on their fair values. If necessary, goodwill is then written-down to its
implied fair value.
The costs of developing and maintaining our trademarks are expensed as incurred. For
certain of our acquisitions we have allocated a portion of the purchase prices to the
acquiree's identified trademarks. Trademarks are estimated to have an indefinite useful life
and, therefore, are not amortizable, but are reviewed for impairment annually, and, when
events or circumstances dictate, more frequently. Our trademarks would be considered impaired
if their carrying value exceeds their estimated fair value.
Our annual goodwill and trademark impairment reviews are performed as of July 31st of
each year. We determined that we had no goodwill or trademark impairments as of July 31,
2008, 2007 and 2006. Subsequent to July 31, 2008, we do not believe there have been any
events or circumstances that would require us to perform interim goodwill or trademark
impairment reviews.
Derivative Instruments and Hedging Activities
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 (see Notes 5 and 10).
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 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 a
cash flow hedge, then the effective portion of the changes in the fair value of the
derivative are recognized as a component of accumulated other comprehensive income ("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 our derivative contracts and the fair value of our
offsetting 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.
During fiscal 2008, 2007 and 2006, the ineffective portions of our hedges were
immaterial. No fair value hedges or cash flow hedges were derecognized or discontinued in
fiscal 2008, 2007 or 2006. In addition, the amount of realized net losses or gains from cash
flow hedges that were reclassified into earnings during fiscal 2008, 2007 and 2006 were not
significant. 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 also not
significant.
If the shipyard with which we have contracts to build our ships is unable to perform, we
would be required to perform under our foreign currency forwards and options related to these
shipbuilding contracts. Accordingly, if the shipyard is unable to perform we may have to
discontinue the accounting for these currency forwards and options as hedges. However, we
believe that the risk of shipyard nonperformance is remote.
Revenue and Expense Recognition
Guest cruise deposits represent unearned revenues and are initially recorded as customer
deposit liabilities when received. Customer deposits are subsequently recognized as cruise
revenues, together with revenues from onboard and other activities (which include
transportation and shore excursion revenues), and all associated direct costs of a voyage are
recognized as cruise expenses, upon completion of voyages with durations of ten nights or
less and on a pro rata basis for voyages in excess of ten nights. Future travel discount
vouchers issued to guests are typically recorded as a reduction of cruise passenger ticket
revenues when such vouchers are utilized. Cancellation fees are recognized in cruise
passenger ticket revenues at the time of the cancellation.
Our sale to guests of air and other transportation to and from our ships and the related
cost of purchasing this service is recorded as cruise passenger ticket revenues and cruise
transportation costs, respectively. The proceeds that we collect from the sale of third
party shore excursions and on behalf of onboard concessionaires, net of the amounts remitted
to them, are recorded as concession revenues, on a net basis, in onboard and other cruise
revenues.
Revenues and expenses from our tour and travel services are recognized at the time the
services are performed or expenses are incurred.
Port and other taxes assessed on a per guest basis by a government or quasi-governmental
entity are excluded from expenses as they are presented on a net basis against the
corresponding amounts collected from our guests, which are excluded from revenues.
Insurance/Self-Insurance
We use a combination of insurance and self-insurance for a number of risks including
claims related to crew and guests, hull and machinery, war risk, workers' compensation,
shoreside employee health, property damage and general liability. Liabilities associated
with certain of these risks, including crew and guest claims, are estimated actuarially based
on historical claims experience, loss development factors and other assumptions. While we
believe the estimated loss amounts accrued are adequate, the ultimate loss may differ from
the amounts provided.
Selling and Administrative Expenses
Selling expenses include a broad range of advertising, such as marketing and promotional
expenses. Advertising is charged to expense as incurred, except for brochures and media
production costs. The brochures and media production costs are recorded as prepaid expenses
and charged to expense as consumed or upon the first airing of the advertisement,
respectively. Advertising expenses totaled $524 million, $508 million and $464 million in
fiscal 2008, 2007 and 2006, respectively. At November 30, 2008 and 2007, the amount of
advertising costs included in prepaid expenses was not significant. Administrative expenses
represent the costs of our shoreside ship support, reservations and other administrative
functions, and include items such as salaries and related benefits, professional fees and
occupancy costs, which are typically expensed as incurred.
Foreign Currency Translations and Transactions
We translate the assets and liabilities of our foreign subsidiaries that have functional
currencies other than the U.S. dollar at exchange rates in effect at the balance sheet date.
Revenues and expenses of these foreign subsidiaries are translated at weighted-average
exchange rates for the reporting period. Equity is translated at historical rates and the
resulting cumulative foreign currency translation adjustments are included as a component of
AOCI. Therefore, the U.S. dollar value of these non-equity translated items in our financial
statements will fluctuate from period to period, depending on the changing value of the
dollar against these non-U.S. dollar functional currencies.
Exchange gains and losses arising from the remeasurement of monetary assets and
liabilities and foreign currency transactions denominated in a currency other than the
functional currency of the entity involved are immediately included in nonoperating earnings,
unless such assets and liabilities have been designated to act as hedges of ship commitments
or net investments in our foreign subsidiaries, respectively. In addition, the unrealized
exchange gains or losses on our long-term intercompany receivables denominated in a non-
functional currency, which are not expected to be repaid in the foreseeable future and are
therefore considered to form part of our net investments, are recorded as a foreign currency
translation adjustment, which is included as a component of AOCI. Net foreign currency
transaction exchange gains or losses recorded in our earnings were insignificant in fiscal
2008, 2007 and 2006.
Earnings Per Share
Basic earnings per share is computed by dividing net income by the weighted-average
number of shares of common stock and ordinary shares outstanding during each period. Diluted
earnings per share is computed by dividing adjusted net income by the weighted-average number
of shares of common stock and ordinary shares, common stock equivalents and other potentially
dilutive securities outstanding during each period. For earnings per share purposes,
Carnival Corporation common stock and Carnival plc ordinary shares are considered a single
class of shares since they have equivalent rights (see Note 3). All shares that are issuable
under our outstanding convertible notes that have contingent share conversion features have
been considered outstanding for our diluted earnings per share computations, if dilutive,
using the "if converted" method of accounting from the date of issuance.
Share-Based Compensation
Effective December 1, 2005, we adopted the provisions of Statement of Financial
Accounting Standard ("SFAS") No. 123(revised 2004), "Share-Based Payment" ("SFAS No.
123(R)"), which requires us to measure and recognize compensation expense for all share-based
compensation awards. We adopted SFAS No. 123(R) using the modified prospective application
transition method. Under this method, the share-based compensation cost recognized beginning
December 1, 2005 includes compensation cost for (i) all share-based payments granted prior
to, but not vested as of, December 1, 2005, based on the grant date fair value originally
estimated in accordance with the provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123") and (ii) all share-based payments granted subsequent to
November 30, 2005, based on the grant date fair value estimated in accordance with the
provisions of SFAS No. 123(R).
Compensation cost under SFAS No. 123(R) is recognized ratably using the straight-line
attribution method over the expected vesting period or to the retirement eligibility date, if
less than the vesting period, when vesting is not contingent upon any future performance. In
addition, pursuant to SFAS No. 123(R) we are required to estimate the amount of expected
forfeitures, which we estimate based on historical forfeiture experience, when calculating
compensation cost. If the actual forfeitures that occur are different from the estimate,
then we revise our estimates.
Concentrations of Credit Risk
As part of our ongoing control procedures, we monitor concentrations of credit risk
associated with financial and other institutions with which we conduct significant business.
We seek to minimize credit risk, including counterparty nonperformance primarily associated
with our cash equivalents, committed financing facilities, contingent obligations, derivative
instruments, insurance contracts and new ship progress payment guarantees by primarily
conducting business with large, well-established financial institutions who have long-term
credit ratings of A or above, and by diversifying our counterparties. In addition, we have
established guidelines regarding credit ratings and investment maturities that we follow to
help maintain safety and liquidity. We do not currently anticipate nonperformance by any of
our significant counterparties.
We also monitor the creditworthiness of foreign travel agencies and tour operators to
which we grant credit terms in the normal course of our business. Concentrations of credit
risk associated with these receivables are considered minimal primarily due to their short
maturities and the large number of accounts within our customer base. We have experienced
only minimal credit losses on our trade receivables. We do not normally require collateral
or other security to support normal credit sales. However, we normally do require collateral
and/or guarantees to support notes receivable on significant asset sales and new ship
progress payments to shipyards.
NOTE 3 - DLC Structure
In 2003, Carnival Corporation and Carnival plc (formerly known as P&O Princess)
completed a DLC transaction, which implemented Carnival Corporation & plc's DLC structure.
The contracts governing the DLC structure provide that Carnival Corporation and Carnival plc
each continue to have separate boards of directors, but the boards and senior executive
management of both companies are identical. The amendments to the constituent documents of
each of the companies also provide that, on most matters, the holders of the common equity of
both companies effectively vote as a single body. On specified matters where the interests
of Carnival Corporation's shareholders may differ from the interests of Carnival plc's
shareholders (a "class rights action"), each shareholder body will vote separately as a
class, such as transactions primarily designed to amend or unwind the DLC structure.
Generally, no class rights action will be implemented unless approved by both shareholder
bodies.
Upon the closing of the DLC transaction, Carnival Corporation and Carnival plc also
executed the Equalization and Governance Agreement, which provides for the equalization of
dividends and liquidation distributions based on an equalization ratio and contains
provisions relating to the governance of the DLC structure. Because the current equalization
ratio is 1 to 1, one Carnival plc ordinary share is entitled to the same distributions,
subject to the terms of the Equalization and Governance Agreement, as one share of Carnival
Corporation common stock. In a liquidation of either company or both companies, if the
hypothetical potential per share liquidation distributions to each company's shareholders are
not equivalent, taking into account the relative value of the two companies' assets and the
indebtedness of each company, to the extent that one company has greater net assets so that
any liquidation distribution to its shareholders would not be equivalent on a per share
basis, the company with the ability to make a higher net distribution is required to make a
payment to the other company to equalize the possible net distribution to shareholders,
subject to certain exceptions.
At the closing of the DLC transaction, Carnival Corporation and Carnival plc also
executed deeds of guarantee. Under the terms of Carnival Corporation's deed of guarantee,
Carnival Corporation has agreed to guarantee all indebtedness and certain other monetary
obligations of Carnival plc that are incurred under agreements entered into on or after the
closing date of the DLC transaction. The terms of Carnival plc's deed of guarantee are
identical to those of Carnival Corporation's. In addition, Carnival Corporation and Carnival
plc have each extended their respective deeds of guarantee to the other's pre-DLC
indebtedness and certain other monetary obligations, or alternatively have provided
standalone guarantees in lieu of utilization of these deeds of guarantee, thus effectively
cross guaranteeing all Carnival Corporation and Carnival plc indebtedness and certain other
monetary obligations. Each deed of guarantee provides that the creditors to whom the
obligations are owed are intended third party beneficiaries of such deed of guarantee.
The deeds of guarantee are governed and construed in accordance with the laws of the
Isle of Man. Subject to the terms of the deeds of guarantee, the holders of indebtedness and
other obligations that are subject to the deeds of guarantee will have recourse to both
Carnival plc and Carnival Corporation though a Carnival plc creditor must first make written
demand on Carnival plc and a Carnival Corporation creditor on Carnival Corporation. Once the
written demand is made by letter or other form of notice, the holders of indebtedness or
other obligations may immediately commence an action against the relevant guarantor.
Accordingly, there is no requirement under the deeds of guarantee to obtain a judgment, take
other enforcement actions or wait any period of time prior to taking steps against the
relevant guarantor. All actions or proceedings arising out of or in connection with the
deeds of guarantee must be exclusively brought in courts in England.
Under the terms of the DLC transaction documents, Carnival Corporation and Carnival plc
are permitted to transfer assets between the companies, make loans to or investments in each
other and otherwise enter into intercompany transactions. The companies have entered into
some of these types of transactions and may enter into additional transactions in the future
to take advantage of the flexibility provided by the DLC structure and to operate both
companies as a single unified economic enterprise in the most effective manner. In addition,
under the terms of the Equalization and Governance Agreement and the deeds of guarantee, the
cash flow and assets of one company are required to be used to pay the obligations of the
other company, if necessary.
Given the DLC structure as described above, we believe that providing separate financial
statements for each of Carnival Corporation and Carnival plc would not present a true and
fair view of the economic realities of their operations. Accordingly, separate financial
statements for both Carnival Corporation and Carnival plc have not been presented.
Simultaneously with the completion of the DLC transaction, a partial share offer ("PSO")
for 20% of Carnival plc's shares was made and accepted, which enabled 20% of Carnival plc
shares to be exchanged for 41.7 million Carnival Corporation shares. The 41.7 million shares
of Carnival plc held by Carnival Corporation as a result of the PSO, which cost $1.05
billion, are being accounted for as treasury stock in the accompanying balance sheets.
NOTE 4 - Property and Equipment
Property and equipment consisted of the following (in millions):
November 30,
--------------------
2008 2007
---- ----
Ships $30,557 $29,324
Ships under construction 707 1,655
------- -------
31,264 30,979
Land, buildings and improvements, including
leasehold improvements and port facilities 762 717
Computer hardware and software,
transportation equipment and other 847 844
------- -------
Total property and equipment 32,873 32,540
Less accumulated depreciation and amortization (6,416) (5,901)
------- -------
$26,457 $26,639
------- -------
Capitalized interest, primarily on our ships under construction, amounted to $52
million, $44 million and $37 million in fiscal 2008, 2007 and 2006, respectively. Ships under
construction include progress payments for the construction of these ships, as well as design
and engineering fees, capitalized interest, construction oversight costs and various owner
supplied items. At November 30, 2008, five ships with an aggregate net book value of $1.9
billion were pledged as collateral pursuant to mortgages related to $817 million of debt and
a $423 million contingent obligation (see Notes 5 and 6).
Repairs and maintenance expenses, including minor improvement costs and dry-dock
expenses, were $661 million, $583 million and $542 million in fiscal 2008, 2007 and 2006,
respectively.
NOTE 5 - Debt
Long-term debt and short-term borrowings consisted of the following (in millions):
November 30,
-----------------
2008(a) 2007(a)
---- ----
SECURED LONG-TERM DEBT
Floating rate export credit facilities, collateralized by four
ships, bearing interest from LIBOR plus 1.1% to LIBOR plus
1.3% (3.7% to 4.5%), due through 2015(b) $ 441 $ 556
Fixed rate export credit facilities, collateralized by two ships,
bearing interest at 5.4% and 5.5%, due through 2016(b) 376 378
Other 2 18
------ ------
Total Secured Long-term Debt 819 952
------ ------
UNSECURED LONG-TERM DEBT
Export Credit Facilities
Fixed rate export credit facilities, bearing interest at 4.2%
to 5.0%, due through 2020(c)(d) 2,867 1,724
Euro floating rate export credit facility, bearing interest at
EURIBOR plus 0.2% or 5.4%, due through 2019 261 333
Bank Loans
Fixed rate bank loan, bearing interest at 4.4%, due in 2015(d)(e) 500
Euro floating rate bank loans, bearing interest at EURIBOR plus
0.2% to 0.3% (3.8% to 4.2%), due through 2010(g) 607 546
Euro fixed rate bank loan, bearing interest at 4.7%, due through 2012 82 122
Revolving Credit Facility (f)(g)
Loans, bearing interest at LIBOR plus 0.175% or 1.6% 583 240
Euro loans, bearing interest at EURIBOR plus 0.175% or 1.6% 208 779
Private Placement Notes
Fixed rate notes, bearing interest at 4.9% to 6.0%, due through 2016 229 338
Euro fixed rate notes, bearing interest at 6.7% to 7.3%, due through
2018(d) 236
Publicly-Traded Notes
Fixed rate notes, bearing interest at 6.7% to 7.2%, due through 2028 530 731
Euro fixed rate notes, bearing interest at 4.3%, due through 2013 949 1,108
Sterling fixed rate notes, bearing interest at 5.6%, due in 2012 320 437
Publicly-Traded Convertible Notes
Notes, bearing interest at 2%, due in 2021, with next put option in
2011 595 595
Notes, bearing interest at 4.6%, net of discount, with a 2008 face value
of $422 million, due in 2033, with next put option in 2009 271 575
Zero-coupon notes, net of discount 226
Other 30 31
------ ------
Total Unsecured Long-term Debt 8,268 7,785
------ ------
UNSECURED SHORT-TERM BORROWINGS
Euro bank loans, with weighted-average interest rates of 4.3%, due
through January 2009 244 100
Bank loans, with weighted-average interest rates of 5.3%, repaid
in December 2008 12 15
------ ------
Total Unsecured Short-term Borrowings 256 115
------ ------
Total Unsecured Debt 8,524 7,900
------ ------
Total Debt 9,343 8,852
------ ------
Less short-term borrowings (256) (115)
Less current portion of long-term debt (1,081) (1,028)
Less convertible debt subject to current put options (271) (1,396)
------ ------
Total Long-term Debt $7,735 $6,313
------ ------
(a) All interest rates are as of November 30, 2008. At November 30, 2008, 62%, 30% and 8%
(53%, 37% and 10% at November 30, 2007) of our debt was U.S. dollar, euro and sterling-
denominated, respectively, including the effect of foreign currency swaps. At November
30, 2008, 74% and 26% (69% and 31% at November 30, 2007) of our debt bore fixed and
variable interest rates, including the effect of interest rate swaps, respectively.
Substantially all of our debt agreements contain one or more of the following financial
covenants that require us, among other things, to maintain minimum debt service coverage
and minimum shareholders' equity and to limit our debt to capital and debt to equity
ratios and the amounts of our secured assets and secured and other indebtedness.
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 (see Note 10) could become due, and all debt and derivative contracts
could be terminated. At November 30, 2008, we believe we were in compliance with all of
our debt covenants.
(b) A portion of two Princess ships has been financed with export credit facilities having
both fixed and variable interest rate components.
(c) In 2008, we borrowed $523 million, $443 million and $353 million under three export
credit facilities, which proceeds were used to pay a portion of Ventura, Carnival
Splendor and Ruby Princess purchase prices, respectively. These facilities bear an
aggregate weighted-average interest rate of 4.3% at November 30, 2008, and are repayable
in semi-annual installments through 2020.
(d) Includes an aggregate $3.1 billion of debt whose interest rate will increase upon a
reduction in the senior unsecured credit ratings of Carnival Corporation or Carnival plc
from A-/A3 to BBB/Baa2 and will increase further upon additional credit rating
reductions, exclusive of the amount shown in Note(g).
(e) In June 2008, we borrowed $500 million, of which a portion of the proceeds were
effectively used to pay a portion of Eurodam's purchase price. The loan principal is due
in seven years and interest is paid semi-annually. The lenders have a one-time option on
the third anniversary of the loan to elect to switch the interest rate to a floating rate
of LIBOR plus 55 basis points ("bps").
(f) Carnival Corporation, Carnival plc and certain of Carnival plc's subsidiaries are parties
to an unsecured multi-currency revolving credit facility for $2.0 billion (comprised of
$1.2 billion, €400 million and £200 million) (the "Facility"). Under the Facility we can
draw loans in U.S. dollars, euros and sterling.
(g) Includes an aggregate $1.4 billion of debt whose interest rate and, in the case of the
Facility, its commitment fees, will increase upon a reduction in the senior unsecured
credit ratings of Carnival Corporation or Carnival plc from A-/A3 to BBB+/Baa1 and will
increase further upon additional credit rating reductions.
At November 30, 2008, the scheduled annual maturities of our debt was as follows (in
millions):
There-
2009 2010 2011 2012 2013 after
---- ---- ---- ---- ---- -----
Short-term borrowings $ 256
Facility 649 $ 142
Convertible notes 271 $ 595
Other long-term notes 432 $1,001 432 934 $1,357 $3,274
------ ------ ------ ------ ------ ------
Total $1,608 $1,001 $1,027 $1,076 $1,357 $3,274
------ ------ ------ ------ ------ ------
Debt issuance costs are generally amortized to interest expense using the straight-line
method, which approximates the effective interest method, over the term of the notes or the
noteholders first put option date, whichever is earlier. In addition, all debt issue
discounts are amortized to interest expense using the effective interest rate method over the
term of the notes.
Revolving Credit Facilities
We are required to pay a commitment fee of 30% of the margin per annum on the undrawn
portion of the Facility. If more than 50% of the Facility is drawn, we will incur an
additional 5 bps utilization fee on the total amount outstanding. All of the Facility
matures in October 2012, except for $39 million which matures in October 2011. At November
30, 2008, $1.2 billion was available under the Facility, using the November 30, 2008 exchange
rates.
At November 30, 2008, we also had $660 million available under two other revolving
credit facilities. The first facility of $470 million was to mature on December 31, 2008,
but was terminated earlier in December 2008. The second euro-denominated facility is for
$190 million (€150 million based on the November 30, 2008 exchange rate), and matures in
November 2011.
In December 2008, we entered into a $100 million unsecured revolving credit facility,
which matures in January 2012.
Convertible Notes
At November 30, 2008, Carnival Corporation's 2% convertible notes ("2% Notes") and 1.75%
convertible notes ("1.75% Notes") are convertible into 15.2 million shares and 5.1 million
shares (a maximum of 9.9 million shares if certain Carnival Corporation share prices are
achieved) of Carnival Corporation common stock, respectively.
The 2% Notes are convertible at a conversion price of $39.14 per share, subject to
adjustment, during any fiscal quarter for which the closing price of the Carnival Corporation
common stock is greater than $43.05 per share for a defined duration of time in the preceding
fiscal quarter. The conditions for conversion of the 2% Notes were not satisfied during
2008, however they were satisfied throughout 2007, and during the first and last quarters of
fiscal 2006. Since their issuance in 2000, only a nominal amount of our 2% Notes have been
converted.
The 1.75% Notes are convertible at a conversion price of $53.65 per share, subject to
adjustment, during any fiscal quarter for which the closing price of the Carnival Corporation
common stock is greater than a specified trigger price for a defined duration of time in the
preceding fiscal quarter. During the fiscal quarters ending from August 31, 2003 through
April 29, 2008, the trigger price was $63.73 per share. Since April 29, 2008, this
conversion trigger price has been increasing each quarter based on an annual rate of 1.75%,
until maturity. The conditions for conversion of the 1.75% Notes have not yet been
satisfied. In addition, holders may also surrender the 1.75% Notes for conversion if the
1.75% Notes credit rating is Baa3 or lower by Moody's Investors Service and BBB- or lower by
Standard & Poor's Rating Services. Since April 30, 2008, the 1.75% Notes have no longer
required a 1.75% cash interest payment, but interest has begun to accrete at a 1.75% yield to
maturity.
In April 2008, we amended the terms of the 1.75% Notes to give the holders another put
option, which, if exercised, requires us to repurchase all or a portion of the outstanding
1.75% Notes on October 29, 2009 at their accreted value, and suspended our right to redeem
the 1.75% Notes until that date. The $8 million estimated fair value of this new put option
is being amortized to interest expense over its eighteen-month term using the straight-line
method, which approximates the effective interest rate method. The terms of the 1.75% Notes
were also amended to include an additional semi-annual cash interest payment of 0.5% per
annum through October 29, 2009 and certain other covenants and agreements were changed for
the benefit of the holders of this debt. On April 30, 2008, as a result of certain holders
exercising their April 29, 2008 put option, we repurchased $302 million of the outstanding
1.75% Notes at their accreted value, plus accrued interest, leaving $271 million of the 1.75%
Notes outstanding at their accreted value.
At November 30, 2008, the 1.75% Notes have a 4.6% yield through October 29, 2009. At
November 30, 2008, these 1.75% Notes were classified as current liabilities, since we may be
required to repurchase all or a portion of these notes at the option of the noteholders on
October 29, 2009. If the 1.75% noteholders do not exercise their options, then we will
change the classification of the 1.75% Notes to long-term, as the next holders' optional
redemption date does not occur until April 29, 2013.
On October 24, 2008, we repurchased substantially all the then outstanding Zero-coupon
convertible notes ("Zero-Coupon Notes") at their accreted value, leaving a nominal amount
outstanding. In addition, during fiscal 2007 and 2006, $4 million and $69 million of Zero-
Coupon Notes were converted at their accreted value into 0.1 million and 2.1 million shares
of Carnival Corporation common stock, respectively, of which a nominal amount and 1.9 million
shares were issued from treasury stock, respectively.
On October 29, 2009 and April 29 of 2013, 2018, 2023 and 2028 the 1.75% noteholders and
on April 15, 2011 the 2% noteholders may require us to repurchase all or a portion of the
outstanding 1.75% Notes at their accreted values and the 2% Notes at their face values plus
any unpaid accrued interest.
Subsequent to October 29, 2009, we may redeem all or a portion of the 1.75% Notes at
their accreted values, subject to the noteholders' right to convert. We currently may redeem
all or a portion of our 2% Notes at their face values plus any unpaid accrued interest,
subject to the noteholders' right to convert.
Upon conversion, redemption or repurchase of the 1.75% Notes and the 2% Notes, we may
choose to deliver Carnival Corporation common stock, cash or a combination of cash and common
stock with a total value equal to the value of the consideration otherwise deliverable.
Committed Ship Financing Facilities
We have unsecured long-term export credit facilities for which we have the option to
borrow a portion of certain ships' purchase prices. These euro-denominated facilities are
repayable semi-annually over a 12 year period and we have the option to terminate each
facility up until 60 days prior to the underlying ship's delivery date. Details of the
facilities, with U.S. dollar amounts based on the November 30, 2008 exchange rate, are as
follows:
Date Scheduled for
Ship Committed Funding Amount
---- --------- ------- ------
(in millions)
AIDAluna 6/05 3/09 $ 298
Carnival Dream 8/07 9/09 515
AIDAblu 10/08 2/10 333
AIDA Newbuild 12/08 4/11 366
AIDA Newbuild 12/08 5/12 371
------
Total $1,883
------
NOTE 6 - Commitments
Ship Commitments
As of November 30, 2008, we had 17 ships under contract for construction with an
aggregate passenger capacity of 38,056. The estimated total cost of these ships is
approximately $9.1 billion, which includes the contract price with the shipyard, design and
engineering fees, capitalized interest, construction oversight costs and various owner
supplied items. We have paid $719 million through November 30, 2008 and anticipate paying the
remaining estimated total costs as follows: $2.6 billion, $2.8 billion, $1.9 billion and $1.0
billion in fiscal 2009, 2010, 2011 and 2012, respectively.
Operating Leases, Port Facilities and Other Commitments
Rent expense under our operating leases, primarily for office and warehouse space, was
$52 million, $46 million and $47 million in fiscal 2008, 2007 and 2006, respectively. At
November 30, 2008, minimum amounts payable for our operating leases, with initial or
remaining terms in excess of one year, and for the annual usage of port facilities and other
contractual commitments with remaining terms in excess of one year, were as follows (in
millions):
Operating Port Facilities
Fiscal Leases and Other
------ ---------
2009 $ 41 $143
2010 34 104
2011 31 77
2012 30 69
2013 26 68
Thereafter 112 513
---- ----
Total $274 $974
---- ----
NOTE 7 - Contingencies
Litigation
In January 2006, a lawsuit was filed against Carnival Corporation and its subsidiaries
and affiliates, and other unaffiliated 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. In the event that an award is given in favor of
the plaintiffs, the amount of damages, if any, which Carnival Corporation and its
subsidiaries and affiliates would have to pay is not currently determinable. The ultimate
outcome of this matter cannot be determined at this time. However, we intend to vigorously
defend this matter.
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 certain 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 Transactions
At November 30, 2008, Carnival Corporation had estimated contingent obligations totaling
$1.1 billion and recorded long-term obligations of $80 million, excluding termination payments
as discussed below, to participants in lease out and lease back type transactions for three of
its ships. At the inception of these leases, the aggregate of the net present value of all
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, the $1.0 billion of 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 November 30, 2008, be
responsible for a termination payment of approximately $175 million. Between 2017 and 2022,
we have the right to exercise options that would terminate these three lease 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 these financial institutions have credit ratings of AAA. If Carnival
Corporation's credit rating, which is A-, falls below BBB, it will be required to provide a
standby letter of credit for $72 million, or alternatively provide mortgages for this
aggregate amount on two of these ships.
In September 2008, the credit ratings of AIG and its subsidiaries involved in two of
these 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 one of the transactions. Under the other transaction in which AIG was also a payment
undertaker, we replaced them by purchasing $80 million of long-term U.S. Treasury strip
securities (the "Treasury Strips"), which are pledged as our collateral for the repayment of
the $80 million long-term recorded obligation noted above. In November 2008, AIG remitted $77
million to reimburse us. At November 30, 2008, the Treasury Strips are restricted, are
recorded in long-term other assets and are accounted for as marketable securities held-to-
maturity.
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 8 - Income and Other Taxes
We are foreign corporations primarily engaged in the international operation of
vessels. Generally, income from the international operation of vessels is subject to
preferential tax regimes in the countries where the vessel owning and operating companies are
incorporated, and generally exempt from income tax in other countries where the vessels call
due to the application of income tax treaties or domestic law which, in the U.S., is Section
883 of the Internal Revenue Code. Income that we earn which is not associated with the
international operation of ships or earned in countries without preferential tax regimes is
subject to income tax in the countries where such income is earned.
AIDA, Costa, Cunard, Ibero, Ocean Village, P&O Cruises and P&O Cruises Australia are
subject to income tax under the tonnage tax regimes of either Italy or the United Kingdom.
Under both tonnage tax regimes, shipping profits, as defined under the applicable law, are
subject to corporation tax by reference to the net tonnage of qualifying vessels. Income not
considered to be shipping profits under tonnage tax rules is taxable under either the Italian
tax regime applicable to Italian registered ships or the normal UK income tax rules. We
believe that the majority of the ordinary income attributable to these brands constitutes
shipping profits and, accordingly, Italian and UK income tax expenses for these operations
have been minimal under the existing tax regimes.
Carnival Cruise Lines, Princess, Holland America Line and Seabourn are primarily subject
to the income tax laws of Panama, the Netherlands Antilles and Bermuda, respectively. As a
general matter, the laws of Panama and the Netherlands Antilles exempt earnings derived from
international ship operations and Bermuda does not have an income tax. With respect to the
U.S. domestic law exemption, Section 883 regulations limit the types of income deemed to be
derived from the international operation of a ship that are exempt from income tax.
Accordingly, our provision for U.S. federal and state income taxes includes taxes on a
portion of our ship operations, in addition to the transportation, hotel and tour businesses
of Holland America Tours and Princess Tours.
We do not expect to incur income taxes on future distributions of undistributed earnings
of foreign subsidiaries and, accordingly, no deferred income taxes have been provided for the
distribution of these earnings. All interest expense related to income tax liabilities are
classified as income tax expenses. In addition to or in place of income taxes, virtually all
jurisdictions where our ships call impose taxes and/or fees based on guest counts, ship
tonnage, ship capacity or some other measure.
On December 1, 2007, we adopted Financial Accounting Standards Board ("FASB")
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" ("FIN 48"). FIN 48
clarifies, among other things, the accounting for uncertain income tax positions by
prescribing a minimum probability threshold that a tax position must meet before a financial
statement income tax benefit is recognized. The minimum threshold is defined as a tax
position that, based solely on its technical merits, is more likely than not to be sustained
upon examination by the relevant taxing authority. The tax benefit to be recognized is
measured as the largest amount of benefit that is greater than 50% likely of being realized
upon ultimate resolution. FIN 48 was applied to all existing tax positions upon adoption.
Our adoption of FIN 48 resulted in an $11 million reduction to our opening fiscal 2008
retained earnings. In addition, based on all known facts and circumstances and current tax
law, we believe that the total amount of our uncertain income tax position liabilities and
related accrued interest are not material to our November 30, 2008 financial position.
NOTE 9 - Shareholders' Equity
Carnival Corporation's articles of incorporation authorize its Board of Directors, at
its discretion, to issue up to 40 million shares of preferred stock, and Carnival plc has
100,000 authorized preference shares. At November 30, 2008 and 2007, no Carnival Corporation
preferred stock had been issued and only a nominal amount of Carnival plc preference shares
had been issued.
In June 2006, the Boards of Directors authorized the repurchase of up to an aggregate of
$1 billion of Carnival Corporation Common Stock and/or Carnival plc ordinary shares subject
to certain restrictions. On September 19, 2007, the Boards of Directors increased the
remaining $578 million authorization back to $1 billion. During fiscal 2008, 2007 and 2006,
we purchased 0.6 million, 0.2 million and 18.7 million shares of Carnival Corporation common
stock, respectively. During fiscal 2008, 2007 and 2006, we purchased 1.3 million, 7.3
million and 0.6 million shares of Carnival plc ordinary shares, respectively. At January 28,
2009, the remaining availability pursuant to our repurchase program was $787 million. No
expiration date has been specified for this authorization; however, the Carnival plc share
repurchase authorization requires annual shareholder approval.
In November 2008, we issued 633,000 shares of Carnival Corporation common stock for $15
million of net proceeds, substantially all of which was used to fund the repurchase of
633,000 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 repurchase shares of
Carnival plc in the UK on at least an equivalent basis, with the remaining net proceeds used
for general corporate purposes.
At November 30, 2008, there were 53.5 million shares of Carnival Corporation common
stock reserved for issuance pursuant to its convertible notes and its employee benefit and
dividend reinvestment plans. In addition, Carnival plc shareholders have authorized 12.8
million ordinary shares for future issuance under its employee benefit plans.
At November 30, 2008 and 2007, accumulated other comprehensive (loss) income was as
follows (in millions):
November 30,
-----------------
2008 2007
---- ----
Cumulative foreign currency translation adjustments, net $(478) $1,338
Unrecognized pension expenses (35) (32)
Unrealized loss on marketable security (20) (5)
Unrealized losses on cash flow derivative hedges, net (90) (5)
----- ------
$(623) $1,296
----- ------
NOTE 10 - Fair Value Measurements
Whenever possible, quoted prices in active markets are used to determine the fair value
of our financial instruments. Our financial instruments are not held for trading or other
speculative purposes. At November 30, 2008 and 2007, the estimated carrying and fair value
of our financial instruments that are not measured at fair value on a recurring basis was as
follows (in millions):
2008 2007
--------------------- --------------------
Carrying Carrying
Value Fair Value Value Fair Value
-------- ---------- -------- ----------
Financial Instruments
Cash equivalents(a) $ 65 $ 65 $ 360 $ 360
Long-term other assets(b) $ 507 $ 491 $ 385 $ 378
Debt-non-convertible(c) $8,477 $6,591 $7,456 $7,407
Debt-convertible(d) $ 866 $ 754 $1,396 $1,601
(a) Cash equivalents are comprised of certificates of deposit and due to their short
maturities the carrying amounts approximate their fair values.
(b) At November 30, 2008 and 2007, long-term other assets includes Treasury Strips, and
notes and other receivables. The fair values of Treasury Strips were based on public
market prices. The fair values of notes and other receivables were based on estimated
discounted future cash flows.
(c) The net difference between the fair value of our non-convertible debt and its carrying
value was due primarily to the market interest rates in existence at the respective
measurement dates being higher or lower than the rates on our debt obligations. The fair
values of our publicly-traded notes were based on their market prices. The fair values
of our other debt were estimated based on appropriate market interest rates being applied
to this debt.
(d) The net difference between the fair value of our publicly-traded convertible notes and
their carrying value is largely due to the impact of lower interest rates in 2008 and
changes in the Carnival Corporation common stock price on the value of our convertible
notes in 2007. The fair values of our publicly-traded convertible notes were based on
their market prices.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS No.
157"). SFAS No. 157 defines fair value as the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between market participants at the
measurement date. In addition, the standard outlines a valuation framework and creates a
fair value hierarchy in order to increase the consistency and comparability of fair value
measurements and the related disclosures. The adoption of SFAS No. 157 did not materially
impact our financial statements.
At November 30, 2008, the 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
--------------------
Financial Instruments Level 1(a) Level 2(b)
--------------------- ------- -------
Cash equivalents(c) $ 305
Marketable securities held in rabbi trusts(d) $ 92 $ 21
Derivatives(e):
Ship foreign currency forwards and options(f) $ (20)
Net investment hedges(g) $ 13
Debt related currency swaps(h) $ 104
Interest rate swaps(i) $ 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 of mutual funds invested in
common stocks, bonds and other investments.
(e) Derivatives are included in prepaid expenses and other, long-term other assets, other
current liabilities and long-term other liabilities and marketable securities are
included in long-term other assets.
(f) At November 30, 2008, we have foreign currency forwards and options that are designated
as foreign currency cash flow hedges for two of our euro-denominated shipbuilding
contracts. These foreign currency forwards mature in 2009 and the options mature through
2010.
(g) At November 30, 2008 and 2007, we have foreign currency forwards totaling $284 million
and $378 million that are designated as hedges of our net investments in foreign
subsidiaries, which have a euro-denominated functional currency. These foreign currency
forwards were entered into to effectively convert U.S. dollar-denominated debt into euro
debt and mature through 2017. In addition to these derivative hedges, as of November 30,
2008 and 2007 we have designated $1.6 billion and $1.9 billion of our euro debt and $343
million and $457 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 $319 million and $372 million of cumulative
foreign currency transaction gains and losses, respectively, in the cumulative
translation adjustment component of AOCI at November 30, 2008 and 2007, respectively.
(h) At November 30, 2008 and 2007, we also have designated foreign currency cash flow swaps
that effectively converted $398 million and $438 million, respectively, of U.S. dollar
fixed interest rate debt into sterling fixed interest rate debt. The fair value of these
foreign currency swaps is included in the cumulative translation adjustment component of
AOCI. These currency swaps mature through 2019.
(i) We have interest rate swaps designated as fair value hedges whereby we receive fixed
interest rate payments in exchange for making variable interest rate payments. At
November 30, 2008 and 2007, these interest rate swap agreements effectively changed $96
million and $204 million, respectively, of fixed rate debt to EURIBOR or LIBOR-based
floating rate debt. These interest rate swaps mature through 2010.
The implementation of SFAS No. 157 did not result in material changes to the models or
processes used to value our financial assets and financial liabilities that are recorded at
fair value on a recurring basis. We value our derivatives using valuations that are
calibrated to the initial trade prices. Subsequent valuations are based on observable inputs
to the valuation model including interest rates, currency exchange rates, credit spreads,
volatilities and netting arrangements. We have elected to use the income approach to value
the derivatives, using observable market data for all significant inputs and standard
valuation techniques to convert future amounts to a single present value amount, assuming
that participants are motivated, but not compelled to transact. SFAS No. 157 states that the
fair value measurement of a financial asset or financial liability must reflect the
nonperformance risk of the entity and the counterparty. Therefore, the impact of our
counterparty's creditworthiness was considered when in an asset position and our
creditworthiness was considered when we are in a liability position in the fair value
measurement of our derivative instruments. Creditworthiness did not have a material impact
on the fair value of our derivative instruments. Both the counterparty and we are expected
to continue to perform under the contractual terms of the instruments.
In February 2008, the FASB issued FASB Staff Position FAS 157-2, "Effective date of FASB
Statement No. 157." This statement provides a one year deferral of SFAS No. 157's effective
date for nonfinancial assets and liabilities. Accordingly, for nonfinancial assets and
liabilities SFAS No. 157 will become 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.
At November 30, 2007, we had foreign currency forwards that were designated as foreign
currency fair value hedges for one of our euro-denominated shipbuilding contracts and a
portion of another shipbuilding contract. In addition, at November 30, 2007 we had $439
million of euro cash equivalents that were designated as a fair value hedge for a portion of
a shipbuilding contract.
NOTE 11 - Segment Information
Our cruise segment includes all of 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. The significant accounting policies of our segments are the same as
those described in Note 2 - "Summary of Significant Accounting Policies." Information for our
cruise and other segments as of and for the years ended November 30 was as follows (in
millions):
Selling
and Depreciation Capital
Operating adminis- and Operating expend- Total
Revenues(a) expenses trative amortization income itures assets
-------- -------- ------- ------------ ------ ------ ------
2008
----
Cruise $14,254 $8,746 $1,594 $1,213 $2,701 $3,321 $32,833
Other 561 462 35 36 28 32 567(b)
Intersegment
elimination (169) (169)
------- ------- ------ ------ ------ ------ -------
$14,646 $9,039 $1,629 $1,249 $2,729 $3,353 $33,400
------- ------ ------ ------ ------ ------ -------
2007
----
Cruise $12,638 $7,332 $1,547 $1,065 $2,694 $3,265 $33,602
Other 553 454 32 36 31 47 579(b)
Intersegment
elimination (158) (158)
------- ------ ------ ------ ------ ------ -------
$13,033 $7,628 $1,579 $1,101 $2,725 $3,312 $34,181
------- ------ ------ ------ ------ ------ -------
2006
----
Cruise $11,417 $6,477 $1,405 $954 $2,581 $2,395 $29,968
Other 533 425 42 34 32 85 584(b)
Intersegment
elimination (111) (111)
------- ------ ------ ------ ------ ------ -------
$11,839 $6,791 $1,447 $ 988 $2,613 $2,480 $30,552
------- ------ ------ ------ ------ ------ -------
(a) A portion of other segment revenues include revenues for the cruise portion of a tour,
when a cruise is sold along with a land tour package by Holland America Tours or Princess
Tours, and shore excursion and port hospitality services provided to cruise guests by
these tour companies. These intersegment revenues, which are included in full in the
cruise segment, are eliminated directly against the other segment revenues and
operating expenses in the line "Intersegment elimination."
(b) Other segment assets primarily included hotels and lodges in the state of Alaska and the
Canadian Yukon Territory, motorcoaches used for sightseeing and charters and domed rail
cars, which run on the Alaska Railroad.
Foreign revenues for our cruise brands represent sales generated from outside the U.S.
primarily by foreign tour operators and foreign travel agencies. Substantially all of our
long-lived assets are located outside of the U.S. and consist principally of our ships and
ships under construction.
Revenues by geographic area, which is based on where the guest is from, were as follows
(in millions):
Years Ended November 30,
-------------------------
2008 2007 2006
---- ---- ----
North America $ 8,090 $ 7,803 $ 7,679
Europe 5,443 4,355 3,473
Others 1,113 875 687
------- ------- -------
$14,646 $13,033 $11,839
------- ------- -------
NOTE 12 - Benefit Plans
Stock Incentive Plans
We issue our share-based compensation awards under the Carnival Corporation and Carnival
plc stock plans, which have an aggregate of 38.3 million shares available for future grant at
November 30, 2008. These plans allow us to issue stock options, restricted stock awards and
restricted stock units (collectively "incentive awards"). Incentive awards are primarily
granted to management level employees and members of our Board of Directors. The plans are
administered by a committee of our independent directors (the "Committee") that determines
which employees are eligible to participate, the monetary value or number of shares for which
incentive awards are to be granted and the amounts that may be exercised or sold within a
specified term. These plans allow us to fulfill our incentive award obligations using shares
purchased in the open market, or with unissued or treasury shares. Certain incentive awards
provide for accelerated vesting if we have a change in control, as defined.
Effective December 1, 2005 we adopted the provisions of SFAS No. 123(R), which required
us to measure and recognize compensation expense for all share-based compensation awards.
The total share-based compensation expense was $50 million, $64 million and $68 million for
fiscal 2008, 2007 and 2006, of which $44 million, $57 million and $60 million has been
included in the Consolidated Statements of Operations as selling, general and administrative
expenses and $6 million, $7 million and $8 million as cruise payroll expenses, respectively.
As permitted by SFAS No. 123(R), the fair values of options were estimated using the
Black-Scholes option-pricing model. The Black-Scholes weighted-average values and
assumptions were as follows:
Years ended November 30,
-----------------------
2007 2006
---- ----
Fair value of options at the
dates of grant $11.76 $12.25
------ ------
Risk-free interest rate (a) 4.9% 4.5%
------ ------
Expected dividend yield 3.3% 2.6%
------ ------
Expected volatility (b) 29.3% 29.2%
------ ------
Expected option life (in years)(c) 5.00 4.75
------ ------
(a) The risk-free interest rate was based on U.S. Treasury zero-coupon issues with a
remaining term equal to the expected option life assumed at the date of grant.
(b) The expected volatility was based on a weighting of the implied volatilities derived
from our exchange traded options and convertible notes and the historical volatility of
our common stock.
(c) The average expected life was based on the contractual term of the option and expected
employee exercise behavior. Based on our assessment of employee groupings and
observable behaviors, we determined that a single grouping was appropriate.
Stock Option Plans
The Committee generally set stock option exercise prices at 100% or more of the fair
market value of the underlying common stock/ordinary shares on the date the option was
granted. All stock options granted during fiscal 2007 and 2006 were granted at an exercise
price per share equal to or greater than the fair market value of the Carnival Corporation
common stock and Carnival plc ordinary shares on the date of grant. Generally employee
options either vest evenly over five years or at the end of three years. Our employee
options granted prior to October 2005 have a ten-year term and those options granted
thereafter have a seven-year term. In the fourth quarter of fiscal 2007, the Committee
decided to cease granting employee stock options, and to grant restricted stock units
("RSUs") or restricted stock awards ("RSAs") to our employee groups who were previously
granted options. This change from options to RSUs/RSAs will enable us to have a more uniform
method of granting incentive awards to our employees. Since fiscal 2001, Carnival
Corporation Board of Director options vest evenly over five years and have a ten-year term.
In 2008, the Committee decided to also cease granting stock options to non-executive board
members, and will only grant them RSAs and/or RSUs.
A combined summary of Carnival Corporation and Carnival plc stock option activity during
the year ended November 30, 2008 was as follows:
Weighted- Weighted-Average Aggregate
Average Remaining Intrinsic
Shares Exercise Price Contractual Term Value (a)
------ -------------- ---------------- -----
(in years) (in millions)
Outstanding at
November 30, 2007 17,716,892 $44.22
Exercised (510,434) $29.38
Forfeited or expired (518,306) $44.82
----------
Outstanding at
November 30, 2008 16,688,152 $42.03 4.2 $1
---------- --- --
Exercisable at
November 30, 2008 13,771,397 $40.38 3.8 $1
---------- --- --
(a) The aggregate intrinsic value represents the amount by which the fair value of underlying
stock exceeds the option exercise price at November 30, 2008.
As of the dates of exercise, the total intrinsic value of options exercised in fiscal
2008, 2007 and 2006 was $5 million, $31 million and $48 million, respectively. As of
November 30, 2008, there was $23 million of total unrecognized compensation cost related to
unvested stock options. This cost is expected to be recognized over a weighted-average
period of 1.9 years.
Restricted Stock Awards and Restricted Stock Units
RSAs generally have the same rights as Carnival Corporation common stock, except for
transfer restrictions and forfeiture provisions. Prior to fiscal 2006, unearned stock
compensation was recorded within shareholders' equity at the date of award based on the
quoted market price of the Carnival Corporation common stock on the date of grant. In fiscal
2006 upon adoption of SFAS No. 123(R), the $13 million of unearned stock compensation as of
November 30, 2005 was required to be charged against additional paid-in capital. RSAs have
been granted to certain officers and non-executive board members and either have three or
five-year cliff vesting or vest evenly over five years after the grant date. In addition,
Carnival Corporation and Carnival plc grant RSUs that vest evenly over five years or at the
end of three or five years after the grant date and accrue dividend equivalents on each
outstanding RSU, in the form of additional RSUs, based on dividends declared. The share-
based compensation expense associated with RSAs and RSUs is based on the quoted market price
of the Carnival Corporation or Carnival plc shares on the date of grant, and is amortized to
expense using the straight-line method from the grant date through the earlier of the vesting
date or the estimated retirement eligibility date.
During the year ended November 30, 2008, RSA and RSU activity was as follows:
Restricted Stock Awards Restricted Stock Units
----------------------- ----------------------
Weighted- Weighted-
Average Average
Grant Date Grant Date
Shares Fair Value Shares Fair Value
------ ---------- ------ ----------
Outstanding at
November 30, 2007 918,307 $45.39 737,439 $51.10
Granted 261,879 $41.58 806,800 $41.43
Vested (224,991) $31.41 (73,032) $52.22
Forfeited (37,417) $48.09
-------- ---------
Outstanding at
November 30, 2008 955,195 $47.63 1,433,790 $45.68
-------- ---------
The total grant date fair value of RSAs and RSUs vested was $11 million during fiscal
2008 and $9 million in each of 2007 and 2006. As of November 30, 2008, there was $33 million
of total unrecognized compensation cost related to RSAs and RSUs. This cost is expected to be
recognized over a weighted-average period of 1.8 years.
Defined Benefit Pension Plans
We have several single-employer defined benefit pension plans, which cover some of our
shipboard and shoreside employees. The U.S. and UK shoreside employee plans are closed to
new membership and are funded at or above the level required by U.S. or UK regulations. The
remaining defined benefit plans are primarily unfunded. In determining all of our plans'
benefit obligations at November 30, 2008, we assumed a weighted-average discount rate of
7.1%. The net assets or liabilities related to the obligations under these single-employer
defined benefit pension plans are not material.
In addition, P&O Cruises, Princess and Cunard participate in an industry-wide British
Merchant Navy Officers Pension Fund ("MNOPF"), a defined benefit multiemployer pension plan
available to certain of their British shipboard officers. The MNOPF is divided into two
sections, the "New Section" and the "Old Section," each of which covers a different group of
participants, with the Old Section closed to further benefit accrual and the New Section only
closed to new membership. At November 30, 2008, both the New Section and the Old Section
were estimated to have funding deficits.
Substantially all of any MNOPF New Section deficit liability which we may have relates
to the obligations of P&O Cruises and Princess, which existed prior to the combination in
2003 of Carnival Corporation's and Carnival plc's businesses into a DLC. However, since the
MNOPF New Section is a multiemployer plan and it was not probable that we would withdraw from
the plan nor was our share of the liability certain, we could not record our estimated share
of the ultimate deficit as a Carnival plc acquisition liability that existed at the DLC
transaction date. The amount of our share of the fund's ultimate deficit could vary
considerably if different pension assumptions and/or estimates were used. Therefore, we
expense our portion of any deficit as amounts are invoiced by, and become due and payable to,
the fund's trustee. In 2007, we received a special assessment invoice from the fund for what
the trustee calculated to be our additional share of the entire MNOPF New Section liability,
based on their most recent actuarial valuation. Accordingly, we recorded the full invoiced
liability of $20 million in cruise payroll and related expense in 2007. It is still possible
that the fund's trustee may invoice us for additional amounts in the future for various
reasons, including if they believe the fund requires further contributions.
As of the DLC formation date in April 2003 and through November 30, 2007, the MNOPF's
Old Section had a funding surplus and, accordingly, no expenses had been recorded for this
section of the plan in our financial statements. However, as noted above, the Old Section is
currently estimated to have a deficit, which could result in the fund's trustee invoicing us
for amounts in the future, if they believe the fund requires further contributions. Our
share of the Old Section deficit, if any, which covers predecessor employers' officers prior
to 1978, is not currently known and, accordingly, the amount of any such contribution is not
currently determinable.
Total expense for all defined benefit pension plans, including multiemployer plans, was
$42 million, $55 million and $28 million in fiscal 2008, 2007 and 2006, respectively.
On November 30, 2007, we adopted SFAS No. 158, "Employers' Accounting for Defined
Benefit Pension and Other Postretirement Plans - an amendment to FASB Statements No. 87, 88,
106 and 132(R)" ("SFAS No. 158"). SFAS No. 158 required us upon adoption to recognize the
funded status of our defined benefit single employer pension plans. Accordingly, as of
November 30, 2007, we recorded an increase in our pension plan assets and liabilities of $17
million and $24 million, respectively, and a reduction to AOCI of $7 million. The adoption
of SFAS No. 158 had no effect on our Consolidated Statement of Operations for fiscal 2007, or
for any prior period presented, and it will not effect our results of operations in future
periods.
Defined Contribution Plans
We have several defined contribution plans available to most of our employees. We
contribute to these plans based on employee contributions, salary levels and length of
service. Total expense for these plans was $22 million, $18 million and $17 million in
fiscal 2008, 2007 and 2006, respectively.
NOTE 13 - Earnings Per Share
Our basic and diluted earnings per share were computed as follows (in millions, except
per share data):
Years Ended November 30,
------------------------------
2008 2007 2006
---- ---- ----
Net income $2,330 $2,408 $2,279
Interest on dilutive convertible notes 34 34 36
------ ------ ------
Net income for diluted earnings per share $2,364 $2,442 $2,315
------ ------ ------
Weighted-average common and ordinary shares outstanding 786 793 801
Dilutive effect of convertible notes 28 33 33
Dilutive effect of stock plans 2 2 2
------ ------ ------
Diluted weighted-average shares outstanding 816 828 836
------ ------ ------
Basic earnings per share $ 2.96 $ 3.04 $ 2.85
------ ------ ------
Diluted earnings per share $ 2.90 $ 2.95 $ 2.77
------ ------ ------
Options to purchase 11.9 million, 8.3 million and 8.5 million shares for fiscal 2008,
2007 and 2006, respectively, were excluded from our diluted earnings per share computation
since the effect of including them was anti-dilutive.
NOTE 14 - Supplemental Cash Flow Information
Total cash paid for interest was $449 million, $414 million and $363 million in fiscal
2008, 2007 and 2006, respectively. In addition, cash paid for income taxes was $23 million,
$14 million and $47 million in fiscal 2008, 2007 and 2006, respectively. Finally, in 2007
and 2006, $8 million and $69 million of our convertible notes were converted through a
combination of the issuance of Carnival Corporation treasury stock and newly issued Carnival
Corporation common stock, which represented a noncash financing activity.
NOTE 15 - Acquisition
In September 2007, we entered into an agreement with Orizonia Corporation, Spain's
largest travel company to operate Ibero, a Spanish cruise line, for an investment of $403
million, which we funded with $146 million of cash and $257 million in proceeds that Ibero
borrowed under a portion of our Facility. Orizonia contributed $49 million of assets,
principally trademarks and goodwill, for their 25% interest in the venture. Ibero operated
two contemporary Spanish cruise ships in September 2007, the 834-passenger capacity Grand
Voyager, and the 1,244-passenger capacity Grand Mistral, which were built in 2000 and 1999,
respectively. For reporting purposes, we have included Ibero's results of operations within
our consolidated financial results since September 1, 2007. The pro forma impact of including
Ibero in our results as if the acquisition took place on December 1, 2005 and December 1,
2006 has not been presented due to its immaterial effect.
The acquisition was accounted for as a business purchase combination using the purchase
method of accounting under the provisions of SFAS No. 141, "Business Combinations". The
purchase price was allocated to tangible and identifiable intangible assets acquired based on
their estimated fair values at the acquisition date. The $451 million purchase price was
allocated as follows: $254 million to ships, $161 million to goodwill, $35 million to
trademarks and $1 million to other.
NOTE 16 - 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 net
income reductions.
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