Carnival Regulatory News (CCL)

September 27, 2018

 

RELEASE OF CARNIVAL CORPORATION & PLC QUARTERLY REPORT ON FORM 10-Q FOR THE THIRD QUARTER OF 2018

 

Carnival Corporation & plc is hereby announcing that today it has released its three and nine months results of operations in its earnings release and filed its joint Quarterly Report on Form 10-Q ("Form 10-Q") with the U.S. Securities and Exchange Commission ("SEC") containing the Carnival Corporation & plc 2018 three and nine months unaudited consolidated financial statements.

 

The information included in the attached Schedules A, B and C is extracted from the Form 10-Q and has been prepared in accordance with SEC rules and regulations. The Carnival Corporation & plc unaudited consolidated financial statements contained in the Form 10-Q have been prepared in accordance with generally accepted accounting principles in the United States of America ("U.S. GAAP").

 

• Schedule A contains the Carnival Corporation & plc unaudited consolidated financial statements as of and for the three and nine months ended August 31, 2018

• Schedule B contains management's discussion and analysis ("MD&A") of financial conditions and results of operations

• Schedule C contains information on Carnival Corporation and Carnival plc's sales and purchases of their equity securities and use of proceeds from such sales

 

The Directors consider that within the Carnival Corporation and Carnival plc dual listed company arrangement, the most appropriate presentation of Carnival plc's results and financial position is by reference to the Carnival Corporation & plc U.S. GAAP unaudited consolidated financial statements.

 

MEDIA CONTACT INVESTOR RELATIONS CONTACT

Roger Frizzell Beth Roberts

001 305 406 7862 001 305 406 4832

 

The Form 10-Q, including the portions 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 Form 10-Q has been submitted to the National Storage Mechanism and will shortly be available for inspection at www.morningstar.co.uk/uk/nsm. Additional information can be obtained via Carnival Corporation & plc's website listed above or by writing to Carnival plc at Carnival House, 100 Harbour Parade, Southampton, SO15 1ST, United Kingdom.

 

Carnival Corporation & plc is the world's largest leisure travel company and among the most profitable and financially strong in the cruise and vacation industries, with a portfolio of 10 dynamic brands that include nine of the world's leading cruise lines. With operations in North America, Australia, Europe and Asia, its portfolio features Carnival Cruise Line, Princess Cruises, Holland America Line, Seabourn, P&O Cruises (Australia), Costa Cruises, AIDA Cruises, P&O Cruises (UK) and Cunard, as well as Fathom, the corporation's immersion and enrichment experience brand.

Together, the corporation's cruise lines operate 103 ships with 234,000 lower berths visiting over 700 ports around the world, with 22 new ships scheduled to be delivered between 2018 and 2025. Carnival Corporation & plc also operates Holland America Princess Alaska Tours, the leading tour company 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.

 

In 2017, Fast Company recognized Carnival Corporation as being among the "Top 10 Most Innovative Companies" in both the design and travel categories. Fast Company specifically recognized Carnival Corporation for its work in developing Ocean Medallion™, a high-tech wearable device that enables the world's first interactive guest experience platform capable of transforming vacation travel into a highly personalized and elevated level of customized service.

 

Additional information can be found on www.carnival.com, www.princess.com, www.hollandamerica.com, www.seabourn.com, www.pocruises.com.au, www.costacruise.com, www.aida.de, www.pocruises.com, www.cunard.com, and www.fathom.org.

 

SCHEDULE A

 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

CARNIVAL CORPORATION & PLC

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

(in millions, except per share data)

 

	Three Months EndedAugust 31,								Nine Months EndedAugust 31,
	2018				2017				2018				2017
Revenues
Cruise
Passenger ticket	$	4,353			$	4,138			$	10,694			$	9,814
Onboard and other	1,316				1,223				3,509				3,237
Tour and other	167				154				222				200
	5,836				5,515				14,425				13,251
Operating Costs and Expenses
Cruise
Commissions, transportation and other	760				699				2,000				1,781
Onboard and other	207				184				485				438
Payroll and related	537				520				1,638				1,552
Fuel	434				307				1,166				914
Food	275				270				804				774
Other ship operating	655				947				2,115				2,293
Tour and other	90				86				140				132
	2,958				3,013				8,348				7,884
Selling and administrative	573				547				1,794				1,649
Depreciation and amortization	511				473				1,510				1,368
Goodwill and trademark impairment	-				89				-				89
	4,042				4,122				11,653				10,990
Operating Income	1,794				1,393				2,772				2,261
Nonoperating Income (Expense)
Interest income	5				3				10				7
Interest expense, net of capitalized interest	(49		)		(49		)		(147		)		(150		)
Gains (losses) on fuel derivatives, net	4				7				61				(19		)
Other (expense) income, net	(9		)		14				2				7
	(50		)		(25		)		(74		)		(155		)
Income Before Income Taxes	1,744				1,368				2,699				2,106
Income Tax Expense, Net	(37		)		(39		)		(40		)		(46		)
Net Income	$	1,707			$	1,329			$	2,659			$	2,060
Earnings Per Share
Basic	$	2.42			$	1.84			$	3.73			$	2.85
Diluted	$	2.41			$	1.83			$	3.72			$	2.84
Dividends Declared Per Share	$	0.50			$	0.40			$	1.45			$	1.15

The accompanying notes are an integral part of these consolidated financial statements.

 

CARNIVAL CORPORATION & PLC

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

(in millions)

 

	Three Months EndedAugust 31,								Nine Months EndedAugust 31,
	2018				2017				2018				2017
Net Income	$	1,707			$	1,329			$	2,659			$	2,060
Items Included in Other Comprehensive Income (Loss)
Change in foreign currency translation adjustment	15				285				(50		)		543
Other	-				24				(9		)		66
Other Comprehensive Income (Loss)	14				309				(59		)		609
Total Comprehensive Income	$	1,722			$	1,638			$	2,600			$	2,669

The accompanying notes are an integral part of these consolidated financial statements.

 

CARNIVAL CORPORATION & PLC

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(in millions, except par values)

 

	August 31, 2018				November 30, 2017
ASSETS
Current Assets
Cash and cash equivalents	$	526			$	395
Trade and other receivables, net	366				312
Inventories	405				387
Prepaid expenses and other	458				502
Total current assets	1,755				1,596
Property and Equipment, Net	35,178				34,430
Goodwill	2,949				2,967
Other Intangibles	1,182				1,200
Other Assets	689				585
	$	41,753			$	40,778
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Short-term borrowings	$	632			$	485
Current portion of long-term debt	688				1,717
Accounts payable	666				762
Accrued liabilities and other	1,616				1,877
Customer deposits	4,418				3,958
Total current liabilities	8,020				8,800
Long-Term Debt	8,297				6,993
Other Long-Term Liabilities	783				769
Contingencies
Shareholders' Equity
Common stock of Carnival Corporation, $0.01 par value; 1,960 shares authorized; 656 shares at 2018 and 655 shares at 2017 issued	7				7
Ordinary shares of Carnival plc, $1.66 par value; 217 shares at 2018 and 2017 issued	358				358
Additional paid-in capital	8,741				8,690
Retained earnings	24,921				23,292
Accumulated other comprehensive loss	(1,840		)		(1,782		)
Treasury stock, 129 shares at 2018 and 122 shares at 2017 of Carnival Corporation and 44 shares at 2018 and 32 shares at 2017 of Carnival plc, at cost	(7,533		)		(6,349		)
Total shareholders' equity	24,654				24,216
	$	41,753			$	40,778

The accompanying notes are an integral part of these consolidated financial statements.

 

CARNIVAL CORPORATION & PLC

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(in millions)

 

	Nine Months Ended August 31,
	2018				2017
OPERATING ACTIVITIES
Net income	$	2,659			$	2,060
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization	1,510				1,368
Impairments	16				392
(Gains) losses on fuel derivatives, net	(61		)		19
Share-based compensation	49				48
Other, net	(22		)		52
	4,151				3,939
Changes in operating assets and liabilities
Receivables	(61		)		(1		)
Inventories	(19		)		(18		)
Prepaid expenses and other	76				(1		)
Accounts payable	(94		)		(101		)
Accrued liabilities and other	(166		)		25
Customer deposits	549				455
Net cash provided by operating activities	4,436				4,298
INVESTING ACTIVITIES
Purchases of property and equipment	(2,784		)		(2,296		)
Proceeds from sales of ships	282				-
Payments of fuel derivative settlements	(37		)		(157		)
Other, net	(67		)		34
Net cash used in investing activities	(2,606		)		(2,419		)
FINANCING ACTIVITIES
Proceeds from (repayments of) short-term borrowings, net	182				(335		)
Principal repayments of long-term debt	(1,271		)		(1,012		)
Proceeds from issuance of long-term debt	1,618				467
Dividends paid	(1,003		)		(797		)
Purchases of treasury stock	(1,205		)		(305		)
Other, net	(28		)		(22		)
Net cash used in financing activities	(1,707		)		(2,004		)
Effect of exchange rate changes on cash and cash equivalents	7				11
Net increase (decrease) in cash and cash equivalents	131				(114		)
Cash and cash equivalents at beginning of period	395				603
Cash and cash equivalents at end of period	$	526			$	489

The accompanying notes are an integral part of these consolidated financial statements.

 

CARNIVAL CORPORATION & PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 1 - General

 

The consolidated financial statements include the accounts of Carnival Corporation and Carnival plc and their respective subsidiaries. Together with their consolidated subsidiaries, they are referred to collectively in these consolidated financial statements and elsewhere in this joint Quarterly Report on Form 10-Q as "Carnival Corporation & plc," "our," "us" and "we."

 

Basis of Presentation

The Consolidated Statements of Income and the Consolidated Statements of Comprehensive Income for the three and nine months ended August 31, 2018 and 2017, the Consolidated Balance Sheet at August 31, 2018 and the Consolidated Statements of Cash Flows for the nine months ended August 31, 2018 and 2017 are unaudited and, in the opinion of our management, contain all adjustments, consisting of only normal recurring adjustments, necessary for a fair statement. Our interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the related notes included in the Carnival Corporation & plc 2017 joint Annual Report on Form 10-K ("Form 10-K") filed with the U.S. Securities and Exchange Commission on January 29, 2018. Our operations are seasonal and results for interim periods are not necessarily indicative of the results for the entire year.

 

Accounting Pronouncements

 

The Financial Accounting Standards Board (the "FASB") issued amended guidance, Compensation - Retirement Benefits - Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which requires the bifurcation of service costs and other components of net benefit cost. The presentation of the other components of net benefit cost have been recorded in other income. On December 1, 2017, we adopted this guidance using the retrospective transition method for the presentation of the service cost component and other components of net benefit cost. The impact of adopting this guidance was immaterial to our consolidated financial statements, and as such, prior period information was not revised.

 

The FASB issued guidance, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. When effective, this standard will replace most existing revenue recognition guidance in U.S. generally accepted accounting principles ("U.S. GAAP"). The standard also requires more detailed disclosures and provides additional guidance for transactions that were not comprehensively addressed in U.S. GAAP. This guidance is required to be adopted by us in the first quarter of 2019. We have elected the modified retrospective adoption method which requires entities to apply the new revenue standard only to the current period consolidated financial statements and record a cumulative-effect adjustment to the December 1, 2018 opening balance of retained earnings, if any. We are substantially complete with our evaluation of changes to our revenues using the model supported by the new revenue standard. The adoption of this guidance will result in the gross presentation of prepaid travel agent commissions, shore excursions and other onboard revenues and costs, all of which were historically presented net, and will require additional disclosures. It is not expected to have a material impact to the timing of our recognition of revenues.

 

The FASB issued amended guidance, Business Combinations - Clarifying the Definition of a Business, which assists entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This guidance is required to be adopted by us in the first quarter of 2019 on a prospective basis. Early adoption is permitted, including adoption in an interim period. The adoption of this guidance is not expected to have a material impact on our consolidated financial statements.

 

The FASB issued amended guidance, Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments, which clarifies how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments are aimed at reducing the existing diversity in practice. This guidance is required to be adopted by us in the first quarter of 2019 and must be applied using a retrospective approach for each period presented. Early adoption is permitted, including adoption in an interim period. The adoption of this guidance is not expected to have a material impact on our consolidated financial statements.

 

The FASB issued amended guidance, Statement of Cash Flows - Restricted Cash, which requires restricted cash to be presented with cash and cash equivalents in the statement of cash flows. This guidance is required to be adopted by us in the first quarter of 2019 and must be applied using a retrospective approach to each period presented. Early adoption is permitted, including adoption in an interim period. The adoption of this guidance is not expected to have a material impact on our consolidated financial statements.

 

The FASB issued amended guidance, Service Concession Arrangements, which clarifies that the grantor in a service arrangement should be considered the customer of the operating entity in all cases. This guidance is required to be adopted by us in the first quarter of 2019 and can be applied using either a retrospective or a modified retrospective approach. The adoption of this guidance is not expected to have a material impact on our consolidated financial statements.

 

The FASB issued guidance, Leases, which requires an entity to recognize both assets and liabilities arising from financing and operating leases, along with additional qualitative and quantitative disclosures. This guidance is required to be adopted by us in the first quarter of 2020 and must be applied using a modified retrospective approach which allows entities to either apply the new lease standard to the beginning of the earliest period presented or only to the current period consolidated financial statements. Early adoption is permitted. The initial adoption of this guidance is expected to increase both our total assets and total liabilities, reflecting the lease rights and obligations arising from our lease arrangements, and will require additional disclosures. We are currently evaluating if this guidance will have any other impact on our consolidated financial statements.

 

The FASB issued guidance, Derivatives and Hedging, which targeted improvements to accounting for hedging activities such as hedging strategies, effectiveness assessments, and recognition of derivative gains or losses. This guidance is required to be adopted by us in the first quarter of 2020 and must be applied using a modified retrospective approach. Early adoption is permitted. We are currently evaluating the impact this guidance will have on our consolidated financial statements.

 

Other

 

Cruise passenger ticket revenues include fees, taxes and charges collected by us from our guests. The portion of these fees, taxes and charges included in passenger ticket revenues and commissions, transportation and other costs were $174 million and $161 million and $465 million and $440 million for the three and nine months ended August 31, 2018 and 2017, respectively.

 

NOTE 2 - Unsecured Debt

 

At August 31, 2018, our short-term borrowings consisted of euro- denominated commercial paper of $398 million and a euro-denominated bank loan of $234 million due in 2019. For the nine months ended August 31, 2018 and 2017, we had borrowings of $2 million and $111 million and repayments of $2 million and $364 million of commercial paper with original maturities greater than three months.

 

In December 2017, we repaid a $500 million bond and borrowed $469 million under a sterling-denominated floating rate bank loan due in 2022.

 

In January 2018, we repaid $365 million of euro-denominated floating rate bank loans prior to their 2018 and 2021 maturity dates.

 

In March 2018, we borrowed $370 million under a euro-denominated floating rate bank loan due in 2020 and borrowed $567 million under an export credit facility due in semi-annual installments through 2030.

 

In April 2018, we borrowed $229 million under an export credit facility due in semi-annual installments through 2030.

 

In June 2018, we entered into a $914 million export credit facility, which may be drawn in euro or U.S. dollars in 2022 and will be due in semi-annual installments through 2034. The interest rate on this export credit facility can be fixed or floating, at our discretion.

 

NOTE 3 - Contingencies

Litigation

In the normal course of our business, various claims and lawsuits have been filed or are pending against us. Most of these claims and lawsuits are covered by insurance and the maximum amount of our liability, net of any insurance recoverables, is typically limited to our self-insurance retention levels. We believe the ultimate outcome of these claims and lawsuits will not have a material impact on our consolidated financial statements.

Contingent Obligations - Indemnifications

Some of the debt contracts we enter into include indemnification provisions obligating us to make payments to the counterparty if certain events occur. These contingencies generally relate to changes in taxes or changes in laws which increase our lender's costs. 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.

 

NOTE 4 - Fair Value Measurements, Derivative Instruments and Hedging Activities and Financial Risks

Fair Value Measurements

Fair value is defined as the amount that would be received for selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date and is measured using inputs in one of the following three categories:

• Level 1 measurements are based on unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access. Valuation of these items does not entail a significant amount of judgment.

• Level 2 measurements are based on quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active or market data other than quoted prices that are observable for the assets or liabilities.

• Level 3 measurements are based on unobservable data that are supported by little or no market activity and are significant to the fair value of the assets or liabilities.

Considerable judgment may be required in interpreting market data used to develop the estimates of fair value. Accordingly, certain estimates of fair value presented herein are not necessarily indicative of the amounts that could be realized in a current or future market exchange. 

 

Financial Instruments that are not Measured at Fair Value on a Recurring Basis

	August 31, 2018																November 30, 2017
	CarryingValue				Fair Value												CarryingValue				Fair Value
(in millions)					Level 1				Level 2				Level 3								Level 1				Level 2				Level 3
Assets
Long-term other assets (a)	$	136			$	-			$	37			$	98			$	126			$	-			$	49			$	75
Total	$	136			$	-			$	37			$	98			$	126			$	-			$	49			$	75
Liabilities
Fixed rate debt (b)	$	5,308			$	-			$	5,463			$	-			$	5,588			$	-			$	5,892			$	-
Floating rate debt (b)	4,372				-				4,409				-				3,658				-				3,697				-
Total	$	9,680			$	-			$	9,872			$	-			$	9,246			$	-			$	9,589			$	-

 

(a) Long-term other assets are comprised of notes receivable. The fair values of our Level 2 notes receivable were based on estimated future cash flows discounted at appropriate market interest rates. The fair values of our Level 3 notes receivable were estimated using risk-adjusted discount rates.

(b) The debt amounts above do not include the impact of interest rate swaps or debt issuance costs. The fair values of our publicly-traded notes were based on their unadjusted quoted market prices in markets that are not sufficiently active to be Level 1 and, accordingly, are considered Level 2. The fair values of our other debt were estimated based on current market interest rates being applied to this debt.

 

Financial Instruments that are Measured at Fair Value on a Recurring Basis

	August 31, 2018												November 30, 2017
(in millions)	Level 1				Level 2				Level 3				Level 1				Level 2				Level 3
Assets
Cash and cash equivalents	$	526			$	-			$	-			$	395			$	-			$	-
Restricted cash	15				-				-				26				-				-
Marketable securities held in rabbi trusts (a)	6				-				-				97				-				-
Derivative financial instruments	-				5				-				-				15				-
Total	$	547			$	5			$	-			$	518			$	15			$	-
Liabilities
Derivative financial instruments	$	-			$	40			$	-			$	-			$	161			$	-
Total	$	-			$	40			$	-			$	-			$	161			$	-

 

(a) The use of marketable securities held in rabbi trusts is restricted to funding certain deferred compensation and non-qualified U.S. pension plans.

 

Nonfinancial Instruments that are Measured at Fair Value on a Nonrecurring Basis

Valuation of Goodwill and Trademarks

	Goodwill
(in millions)	NAA (a)Segment				EA (b)Segment				Total
At November 30, 2017	$	1,898			$	1,069			$	2,967
Foreign currency translation adjustment	-				(18		)		(18		)
At August 31, 2018	$	1,898			$	1,050			$	2,949

(a) North America & Australia ("NAA")

(b) Europe & Asia ("EA")

	Trademarks
(in millions)	NAASegment				EASegment				Total
At November 30, 2017	$	927			$	252			$	1,179
Foreign currency translation adjustment	-				(5		)		(5		)
At August 31, 2018	$	927			$	247			$	1,174

 

The determination of our reporting unit goodwill and trademark fair values includes numerous assumptions that are subject to various risks and uncertainties. We believe that we have made reasonable estimates and judgments. A change in the conditions, circumstances or strategy, may result in a need to recognize an impairment charge.

 

Derivative Instruments and Hedging Activities

(in millions)	Balance Sheet Location		August 31, 2018				November 30, 2017
Derivative assets
Derivatives designated as hedging instruments
Net investment hedges (a)	Prepaid expenses and other		$	5			$	3
Foreign currency zero cost collars (b)	Prepaid expenses and other		-				12
Total derivative assets			$	5			$	15
Derivative liabilities
Derivatives designated as hedging instruments
Net investment hedges (a)	Accrued liabilities and other		$	-			$	13
	Other long-term liabilities		13				17
Interest rate swaps (c)	Accrued liabilities and other		8				10
	Other long-term liabilities		13				17
			35				57
Derivatives not designated as hedging instruments
Fuel (d)	Accrued liabilities and other		6				95
	Other long-term liabilities		-				9
			6				104
Total derivative liabilities			$	40			$	161

 

(a) At August 31, 2018 and November 30, 2017, we had foreign currency swaps totaling $160 million and $324 million, respectively, that are designated as hedges of our net investments in foreign operations with a euro-denominated functional currency. At August 31, 2018, this foreign currency swap settles in September 2019.

(b) At August 31, 2018 and November 30, 2017, we had foreign currency derivatives consisting of foreign currency zero cost collars that are designated as foreign currency cash flow hedges for a portion of our euro-denominated shipbuilding payments. See "Newbuild Currency Risks" below for additional information regarding these derivatives.

(c) We have euro interest rate swaps designated as cash flow hedges whereby we receive floating interest rate payments in exchange for making fixed interest rate payments. These interest rate swap agreements effectively changed $422 million at August 31, 2018 and $479 million at November 30, 2017 of EURIBOR-based floating rate euro debt to fixed rate euro debt. At August 31, 2018, these interest rate swaps settle through March 2025.

(d) At August 31, 2018 and November 30, 2017, we had fuel derivatives consisting of zero cost collars on Brent crude oil ("Brent") to cover a portion of our estimated fuel consumption through 2018. See "Fuel Price Risks" below for additional information regarding these derivatives.

 

Our derivative contracts include rights of offset with our counterparties. We have elected to net certain of our derivative assets and liabilities within counterparties.

		August 31, 2018
(in millions)		Gross Amounts				Gross Amounts Offset in the Balance Sheet				Total Net Amounts Presented in the Balance Sheet				Gross Amounts not Offset in the Balance Sheet				Net Amounts
Assets		$	5			$	-			$	5			$	(5	)		$	-
Liabilities		$	40			$	-			$	40			$	(5	)		$	36
		November 30, 2017
(in millions)		Gross Amounts				Gross Amounts Offset in the Balance Sheet				Total Net Amounts Presented in the Balance Sheet				Gross Amounts not Offset in the Balance Sheet				Net Amounts
Assets		$	15			$	-			$	15			$	(8	)		$	7
Liabilities		$	161			$	-			$	161			$	(8	)		$	153

 

The effective gain (loss) portions of our derivatives qualifying and designated as hedging instruments recognized in other comprehensive income were as follows:

	Three Months EndedAugust 31,								Nine Months EndedAugust 31,
(in millions)	2018				2017				2018				2017
Net investment hedges	$	3			$	(17	)		$	13			$	(33	)
Foreign currency zero cost collars - cash flow hedges	$	(1	)		$	17			$	(11	)		$	52
Interest rate swaps - cash flow hedges	$	1			$	1			$	5			$	5

There are no credit risk related contingent features in our derivative agreements, except for bilateral credit provisions within our fuel derivative counterparty agreements. These provisions require cash collateral to be posted or received to the extent the fuel derivative fair value payable to or receivable from an individual counterparty exceeds $100 million. At August 31, 2018 and November 30, 2017, no collateral was required to be posted to or received from our fuel derivative counterparties.

The amount of estimated cash flow hedges' unrealized gains and losses that are expected to be reclassified to earnings in the next twelve months is not significant.

Financial Risks

Fuel Price Risks

Substantially all of our exposure to market risk for changes in fuel prices relates to the consumption of fuel on our ships. We manage fuel consumption through ship maintenance practices, modifying our itineraries and implementing innovative technologies. We are also adding new, more fuel efficient ships to our fleet and are strategically disposing of less fuel efficient ships. We have Brent call options and Brent put options, collectively referred to as zero cost collars, that establish ceiling and floor prices and mitigate a portion of our economic risk attributable to potential fuel price increases through the end of 2018.

	Three Months EndedAugust 31,								Nine Months EndedAugust 31,
(in millions)	2018				2017				2018				2017
Unrealized gains on fuel derivatives, net	$	8			$	65			$	90			$	134
Realized losses on fuel derivatives, net	(4		)		(57		)		(29		)		(153		)
Gains (losses) on fuel derivatives, net	$	4			$	7			$	61			$	(19	)

 

Foreign Currency Exchange Rate Risks

Overall Strategy

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 non-derivative financial instruments. Our primary focus is to monitor our exposure to, and manage, the economic foreign currency exchange risks faced by our operations and realized if we exchange one currency for another. We currently only hedge certain of our ship commitments and net investments in foreign operations. The financial impacts of the hedging instruments we do employ generally offset the changes in the underlying exposures being hedged.

Operational Currency Risks

Our operations primarily utilize the U.S. dollar, Australian dollar, euro or sterling as their functional currencies. Our operations also have revenue and expenses denominated in non-functional currencies. Movements in foreign currency exchange rates will affect our financial statements.

Investment Currency Risks

We consider our investments in foreign operations to be denominated in stable currencies. Our investments in foreign operations are of a long-term nature. We have $5.5 billion and $861 million of euro- and sterling-denominated debt, respectively, including the effect of foreign currency swaps, which provides an economic offset for our operations with euro and sterling functional currency. We also partially mitigate our net investment currency exposures by denominating a portion of our foreign currency intercompany payables in our foreign operations' functional currencies. 

Newbuild Currency Risks

 

Our shipbuilding contracts are typically denominated in euros. Our decision to hedge a non-functional currency ship commitment for our cruise brands is made on a case-by-case basis, considering the amount and duration of the exposure, market volatility, economic trends, our overall expected net cash flows by currency and other offsetting risks. We use foreign currency derivative contracts to manage foreign currency exchange rate risk for some of our ship construction payments. At August 31, 2018, for the following newbuild, we had foreign currency zero cost collars for a portion of euro-denominated shipyard payments. These collars are designated as cash flow hedges.

	Entered Into		Matures in		Weighted-Average Floor Rate				Weighted- Average Ceiling Rate
Nieuw Statendam	2016		November 2018		$	1.05			$	1.25

If the spot rate is between the ceiling and floor rates on the date of maturity, then we would not owe or receive any payments under these collars.

At August 31, 2018, our remaining newbuild currency exchange rate risk primarily relates to euro-denominated newbuild contract payments to non-euro functional currency brands, which represent a total unhedged commitment of $10.5 billion and relates to newbuilds scheduled to be delivered in 2019 through 2025.

The cost of shipbuilding orders that we may place in the future that is denominated in a different currency than our cruise brands' will be affected by foreign currency exchange rate fluctuations. These foreign currency exchange rate fluctuations may affect our decision to order new cruise ships.

Interest Rate Risks

We manage our exposure to fluctuations in interest rates through our debt portfolio management and investment strategies. We evaluate our debt portfolio to determine whether to make periodic adjustments to the mix of fixed and floating rate debt through the use of interest rate swaps, issuance of new debt, amendment of existing debt or early retirement of existing debt.

 

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 these credit risk exposures, including counterparty nonperformance primarily associated with our cash equivalents, investments, committed financing facilities, contingent obligations, derivative instruments, insurance contracts and new ship progress payment guarantees, by:

 

• Conducting business with large, well-established financial institutions, insurance companies and export credit agencies

• Diversifying our counterparties 

• Having guidelines regarding credit ratings and investment maturities that we follow to help safeguard liquidity and minimize risk

• Generally requiring collateral and/or guarantees to support notes receivable on significant asset sales, long-term ship charters and new ship progress payments to shipyards 

 

We currently believe the risk of nonperformance by any of our significant counterparties is remote. At August 31, 2018, our exposures under foreign currency and fuel derivative contracts and interest rate swap agreements were not material. We also monitor the creditworthiness of travel agencies and tour operators in Asia, Australia and Europe, which includes charter-hire agreements in Asia and credit and debit card providers to which we extend credit in the normal course of our business. Our credit exposure also includes contingent obligations related to cash payments received directly by travel agents and tour operators for cash collected by them on cruise sales in Australia and most of Europe where we are obligated to honor our guests' cruise payments made by them to their travel agents and tour operators regardless of whether we have received these payments. Concentrations of credit risk associated with these trade receivables, charter-hire agreements and contingent obligations are not considered to be material, principally due to the large number of unrelated accounts, the nature of these contingent obligations and their short maturities. We have not experienced significant credit losses on our trade receivables, charter-hire agreements and contingent obligations. We do not normally require collateral or other security to support normal credit sales.

 

NOTE 5 - Segment Information

Beginning in the first quarter of 2018, we revised our operating segments due to changes in our internal reporting as a result of the recent strategic realignment of our business in Australia. The presentation of prior period segment information has been revised to reflect this change. Our operating segments are reported on the same basis as the internally reported information that is provided to our chief operating decision maker ("CODM"), who is the President and Chief Executive Officer of Carnival Corporation and Carnival plc. The CODM assesses performance and makes decisions to allocate resources for Carnival Corporation & plc based upon review of the results across all of our segments. Our four reportable segments are comprised of (1) NAA cruise operations, (2) EA cruise operations, (3) Cruise Support and (4) Tour and Other.

 

The operating segments within each of our NAA and EA reportable segments have been aggregated based on the similarity of their economic and other characteristics. Our Cruise Support segment represents our portfolio of leading port destinations and other services, all of which are operated for the benefit of our cruise brands. Our Tour and Other segment represents the hotel and transportation operations of Holland America Princess Alaska Tours and other operations.

	Three Months Ended August 31,
(in millions)	Revenues				Operating costs andexpenses				Sellingandadministrative				Depreciationandamortization				Operatingincome (loss)
2018
NAA	$	3,805			$	1,981			$	333			$	323			$	1,168
EA	1,832				891				172				150				621
Cruise Support	31				(4		)		64				28				(57		)
Tour and Other	167				90				4				10				62
	$	5,836			$	2,958			$	573			$	511			$	1,794
2017
NAA	$	3,565			$	1,920			$	320			$	303			$	933		(a)
EA	1,767				1,007				158				147				455
Cruise Support	28				-				65				13				(50		)
Tour and Other	155				86				4				10				55
	$	5,515			$	3,013			$	547			$	473			$	1,393

 

 

	Nine Months Ended August 31,
(in millions)	Revenues				Operating costs andexpenses				Sellingandadministrative				Depreciationandamortization				Operatingincome (loss)
2018
NAA	$	9,325			$	5,385			$	1,039			$	940			$	1,961
EA	4,784				2,783				551				466				984
Cruise Support	94				40				183				76				(204		)
Tour and Other	222				140				22				29				31
	$	14,425			$	8,348			$	1,794			$	1,510			$	2,772
2017
NAA	$	8,744			$	5,073			$	982			$	893			$	1,708		(a)
EA	4,206				2,661				475				411				658
Cruise Support	101				18				180				36				(133		)
Tour and Other	200				132				12				28				28
	$	13,251			$	7,884			$	1,649			$	1,368			$	2,261

 

(a) Includes $89 million of impairment charges related to NAA's goodwill and trademarks.

 

 NOTE 6 - Earnings Per Share

	Three Months EndedAugust 31,								Nine Months EndedAugust 31,
(in millions, except per share data)	2018				2017				2018				2017
Net income for basic and diluted earnings per share	$	1,707			$	1,329			$	2,659			$	2,060
Weighted-average shares outstanding	706				723				712				724
Dilutive effect of equity plans	2				3				2				3
Diluted weighted-average shares outstanding	707				726				714				727
Basic earnings per share	$	2.42			$	1.84			$	3.73			$	2.85
Diluted earnings per share	$	2.41			$	1.83			$	3.72			$	2.84

 

NOTE 7 - Shareholders' Equity

Effective August 27, 2018, the company approved a modification of the general authorization to repurchase Carnival Corporation common stock and/or Carnival plc ordinary shares (the "Repurchase Program"), which replenished the remaining authorized repurchases at the time of the approval to $1.0 billion. During the nine months ended August 31, 2018, we repurchased 11.8 million shares of Carnival plc ordinary shares and 7.8 million shares of Carnival Corporation common stock for $726 million and $475 million, respectively, under the Repurchase Program. At August 31, 2018, the remaining availability under the Repurchase Program was $987 million.

During the three months ended August 31, 2018, our Boards of Directors declared a dividend to holders of Carnival Corporation common stock and Carnival plc ordinary shares of $0.50 per share.

 

NOTE 8 - Property and Equipment

 

In March 2018, we sold and transferred an EA segment 700-passenger capacity ship.

 

In April 2018, we sold and transferred an EA segment 1,300-passenger capacity ship.

 

In June 2018, we sold an NAA segment 840-passenger capacity ship. The ship will be transferred to the buyer in July 2019.

 

In June 2018, we sold an EA segment 1,880-passenger capacity ship. The ship will be transferred to the buyer in August 2019.

 

In August 2018, we sold an NAA segment 1,680-passenger capacity ship. The ship will be transferred to the buyer in March 2019.

 

NOTE 9 - Other Assets

 

In July 2018, we acquired a minority interest in the White Pass & Yukon Route ("White Pass") division of TWC Enterprises Ltd. that includes White Pass' port, railroad and retail operations in Skagway, Alaska.

 

 

SCHEDULE B

 

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 

Cautionary Note Concerning Factors That May Affect Future Results

 

Some of the statements, estimates or projections contained in this document are "forward-looking statements" that involve risks, uncertainties and assumptions with respect to us, including some statements concerning future results, 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. All statements other than statements of historical facts are statements that could be deemed forward-looking. These statements are based on current expectations, estimates, forecasts and projections about our business and the industry in which we operate and the beliefs and assumptions of our management. We have tried, whenever possible, to identify these statements by using words like "will," "may," "could," "should," "would," "believe," "depends," "expect," "goal," "anticipate," "forecast," "project," "future," "intend," "plan," "estimate," "target," "indicate," "outlook," and similar expressions of future intent or the negative of such terms.

 

Forward-looking statements include those statements that relate to our outlook and financial position including, but not limited to, statements regarding:

• Net revenue yields	• Net cruise costs, excluding fuel per available lower berth day
• Booking levels	• Estimates of ship depreciable lives and residual values
• Pricing and occupancy	• Goodwill, ship and trademark fair values
• Interest, tax and fuel expenses	• Liquidity
• Currency exchange rates	• Adjusted earnings per share

Because forward-looking statements involve risks and uncertainties, there are many factors that could cause our actual results, performance or achievements to differ materially from those expressed or implied by our forward-looking statements. This note contains important cautionary statements of the known factors that we consider could materially affect the accuracy of our forward-looking statements and adversely affect our business, results of operations and financial position. It is not possible to predict or identify all such risks. There may be additional risks that we consider immaterial or which are unknown. These factors include, but are not limited to, the following:

• The demand for cruises may decline due to adverse world events impacting the ability or desire of people to travel, including conditions affecting the safety and security of travel, government regulations and requirements, and decline in consumer confidence

• Incidents, such as ship incidents, security incidents, the spread of contagious diseases and threats thereof, adverse weather conditions or other natural disasters and the related adverse publicity affecting our reputation and the health, safety, security and satisfaction of guests and crew

• Changes in and compliance with laws and regulations relating to environment, health, safety, security, data privacy and protection, tax and anti-corruption under which we operate may lead to litigations, enforcement actions, fines, or penalties

• Disruptions and other damages to our information technology and other networks and operations, breaches in data security, lapses in data privacy, and failure to keep pace with developments in technology

• Ability to recruit, develop and retain qualified shipboard personnel who live on ships away from home for extended periods of time

• Increases in fuel prices and availability of fuel supply

• Fluctuations in foreign currency exchange rates

• Overcapacity and competition in the cruise ship and land-based vacation industry

• Continuing financial viability of our travel agent distribution system, air service providers and other key vendors in our supply chain, as well as reductions in the availability of, and increases in the prices for, the services and products provided by these vendors

• Inability to implement our shipbuilding programs and ship repairs, maintenance and refurbishments on terms that are favorable or consistent with our expectations, as well as increases to our repairs and maintenance expenses and refurbishment costs as our fleet ages

• Geographic regions in which we try to expand our business may be slow to develop and ultimately not develop how we expect

 

The ordering of the risk factors set forth above is not intended to reflect our indication of priority or likelihood.

Forward-looking statements should not be relied upon as a prediction of actual results. Subject to any continuing obligations under applicable law or any relevant stock exchange rules, we expressly disclaim any obligation to disseminate, after the date of this document, any updates or revisions to any such forward-looking statements to reflect any change in expectations or events, conditions or circumstances on which any such statements are based.

 

New Accounting Pronouncements

 

Refer to our consolidated financial statements for further information on Accounting Pronouncements.

 

Critical Accounting Estimates

 

For a discussion of our critical accounting estimates, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" that is included in the Form 10-K.

 

Seasonality

 

Our revenues from the sale of passenger tickets are seasonal. Historically, demand for cruises has been greatest during our third quarter, which includes the Northern Hemisphere summer months. This higher demand during the third quarter results in higher ticket prices and occupancy levels and, accordingly, the largest share of our operating income is earned during this period. The seasonality of our results also increases due to ships being taken out-of-service for maintenance, which we schedule during non-peak demand periods. In addition, substantially all of Holland America Princess Alaska Tours' revenue and net income is generated from May through September in conjunction with the Alaska cruise season.

 

Statistical Information

	Three Months EndedAugust 31,								Nine Months EndedAugust 31,
	2018				2017				2018				2017
Available Lower Berth Days ("ALBDs") (in thousands) (a) (b)	21,475				21,120				62,626				61,541
Occupancy percentage (c)	112.6		%		111.3		%		107.8		%		106.7		%
Passengers carried (in thousands)	3,562				3,441				9,393				9,116
Fuel consumption in metric tons (in thousands)	818				814				2,458				2,463
Fuel consumption in metric tons per thousand ALBDs	38.1				38.5				39.3				40.0
Fuel cost per metric ton consumed	$	531			$	378			$	474			$	371
Currencies (USD to 1)
AUD	$	0.74			$	0.78			$	0.76			$	0.76
CAD	$	0.76			$	0.78			$	0.78			$	0.76
EUR	$	1.16			$	1.15			$	1.20			$	1.11
GBP	$	1.31			$	1.29			$	1.36			$	1.27
RMB	$	0.15			$	0.15			$	0.15			$	0.15

 

(a) ALBD is a standard measure of passenger capacity for the period that we use to approximate rate and capacity variances, based on consistently applied formulas that we use to perform analyses to determine the main non-capacity driven factors that cause our cruise revenues and expenses to vary. ALBDs assume that each cabin we offer for sale accommodates two passengers and is computed by multiplying passenger capacity by revenue-producing ship operating days in the period.

 

(b) For the three months ended August 31, 2018 compared to the three months ended August 31, 2017, we had a 1.7% capacity increase in ALBDs comprised of a 3.1% capacity increase in our NAA segment and a 0.8% capacity decrease in our EA segment.

 

Our NAA segment's capacity increase was caused by:

• Full quarter impact from one Carnival Cruise Line 3,970-passenger capacity ship that entered into service in April 2018

• Full quarter impact from one Seabourn 600-passenger capacity ship that entered into service in May 2018

 

Our EA segment's capacity decrease was caused by:

• Full quarter impact from one P&O Cruises (UK) 700-passenger capacity ship removed from service in March 2018

• Full quarter impact from one Costa Cruises 1,300-passenger capacity ship removed from service in April 2018

 

For the nine months ended August 31, 2018 compared to the nine months ended August 31, 2017, we had a 1.8% capacity increase in ALBDs comprised of a 2.2% capacity increase in our NAA segment and a 1.0% capacity increase in our EA segment.

 

Our NAA segment's capacity increase was caused by:

• Partial period impact from one Princess Cruises 3,560-passenger capacity ship that entered into service in April 2017

• Partial period impact from one Carnival Cruise Line 3,970-passenger capacity ship that entered into service in April 2018

• Partial period impact from one Seabourn 600-passenger capacity ship that entered into service in May 2018

 

These increases were partially offset by the partial period impact from one P&O Cruises (Australia) 1,550-passenger capacity ship removed from service in April 2017.

 

Our EA segment's capacity increase was caused by:

• Partial period impact from one AIDA Cruises 3,290-passenger capacity ship that entered into service in June 2017

This increase was partially offset by:

• Partial period impact from one P&O Cruises (UK) 700-passenger capacity ship removed from service in March 2018

• Partial period impact from one Costa Cruises 1,300-passenger capacity ship removed from service in April 2018

 

(c) In accordance with cruise industry practice, occupancy is calculated using a denominator of ALBDs, which assumes two passengers per cabin even though some cabins can accommodate three or more passengers. Percentages in excess of 100% indicate that on average more than two passengers occupied some cabins.

 

Three Months Ended August 31, 2018 ("2018") Compared to Three Months Ended August 31, 2017 ("2017")

 

Revenues

 

Consolidated

 

Cruise passenger ticket revenues made up 75% of our 2018 total revenues. Cruise passenger ticket revenues increased by $215 million, or 5.2%, to $4.4 billion in 2018 from $4.1 billion in 2017.

 

This increase was driven by:

• $70 million - 1.7% capacity increase in ALBDs

• $50 million - increase in cruise ticket revenues, driven primarily by price improvements in our European and China programs, partially offset by decrease in our Caribbean program

• $48 million - increase in occupancy

• $30 million - increase in air transportation revenues

• $11 million - foreign currency translational impact from a weaker U.S. dollar against the functional currencies of our foreign operations ("foreign currency translational impact")

 

The remaining 25% of 2018 total revenues were substantially all comprised of onboard and other cruise revenues, which increased by $93 million, or 7.6%, to $1.3 billion in 2018 from $1.2 billion in 2017.

 

This increase was caused by:

• $36 million - higher onboard spending by our guests

• $22 million - increase in other revenues

• $21 million - 1.7% capacity increase in ALBDs

• $14 million - increase in occupancy

 

Concession revenues, which are included in onboard and other revenues, increased by $20 million, or 6.0%, to $350 million in 2018 from $331 million in 2017.

 

NAA Segment

 

Cruise passenger ticket revenues made up 75% of our NAA segment's 2018 total revenues. Cruise passenger ticket revenues increased by $168 million, or 6.3%, to $2.8 billion in 2018 compared to $2.7 billion in 2017.

 

This increase was caused by:

• $84 million - 3.1% capacity increase in ALBDs

• $35 million - increase in cruise ticket revenues, driven primarily by price improvements in the European program, partially offset by the Caribbean program

• $30 million - increase in air transportation revenues

• $20 million - increase in occupancy

 

The remaining 25% of our NAA segment's 2018 total revenues were comprised of onboard and other cruise revenues, which increased by $73 million, or 8.1%, to $969 million in 2018 from $897 million in 2017.

 

This increase was driven by:

• $28 million - 3.1% capacity increase in ALBDs

• $22 million - higher onboard spending by our guests

• $18 million - increase in other revenues

 

Concession revenues, which are included in onboard and other revenues, increased by $17 million, or 7.5%, to $251 million in 2018 from $233 million in 2017.

 

EA Segment

 

Cruise passenger ticket revenues made up 83% of our EA segment's 2018 total revenues. Cruise passenger ticket revenues increased by $53 million, or 3.6%, to $1.5 billion in 2018 compared to $1.5 billion in 2017.

 

This increase was caused by:

• $26 million - increase in occupancy

• $19 million - increase in cruise ticket revenues, driven primarily by price improvements in the European and China programs

• $15 million - foreign currency translational impact

 

These increases were partially offset by a 0.8% capacity decrease in ALBDs, which accounted for $12 million.

 

The remaining 17% of our EA segment's 2018 total revenues were comprised of onboard and other cruise revenues, which increased by $12 million, or 4.1%, to $305 million in 2018 from $292 million in 2017.

 

Concession revenues, which are included in onboard and other revenues, increased by $2 million, or 2.2%, to $100 million in 2018 from $97 million in 2017.

 

Costs and Expenses

 

Consolidated

 

Operating costs and expenses decreased by $55 million, or 1.8%, to $3.0 billion in 2018 from $3.0 billion in 2017.

 

This decrease was caused by:

• $304 million - ship impairments in 2017

• $26 million - gains on ship sales in 2018

 

This decrease was partially offset by:

• $126 million - higher fuel prices

• $49 million - 1.7% capacity increase in ALBD

• $39 million - higher commissions, transportation and other expenses

• $17 million - higher onboard and other expenses

• $14 million - higher dry-dock expenses and repair and maintenance expenses

• $13 million - increase in occupancy

 

Selling and administrative expenses increased by $26 million, or 4.8%, to $573 million in 2018 from $547 million in 2017.

 

Depreciation and amortization expenses increased by $38 million, or 7.9%, to $511 million in 2018 from $473 million in 2017.

 

Goodwill and trademark impairment charges of $89 million include a goodwill impairment charge of $38 million and a trademark impairment charge of $50 million during 2017.

 

NAA Segment

 

Operating costs and expenses increased by $61 million, or 3.2%, to $2.0 billion in 2018 from $1.9 billion in 2017.

 

This increase was caused by:

• $84 million - higher fuel prices

• $60 million - 3.1% capacity increase in ALBDs

• $40 million - higher commissions, transportation and other expenses

• $15 million - higher onboard and other expenses

• $13 million - higher dry-dock expenses and repair and maintenance expenses

• $12 million - higher cruise payroll and related expenses

 

These increases were partially offset by:

• $162 million - ship impairments in 2017

 

Selling and administrative expenses increased by $13 million, or 4.1%, to $333 million in 2018 from $320 million in 2017.

 

Depreciation and amortization expenses increased by $20 million, or 6.8%, to $323 million in 2018 from $303 million in 2017.

 

Goodwill and trademark impairment charges of $89 million include a goodwill impairment charge of $38 million and a trademark impairment charge of $50 million during 2017.

 

EA Segment

 

Operating costs and expenses decreased by $116 million, or 12%, to $0.9 billion in 2018 from $1.0 billion in 2017.

 

This decrease was caused by:

• $141 million - ship impairments in 2017

• $10 million - lower dry-dock expenses and repair and maintenance expenses

 

These decreases were partially offset by:

• $40 million - higher fuel prices

 

Selling and administrative expenses increased by $14 million, or 8.7%, to $172 million in 2018 from $158 million in 2017.

 

Depreciation and amortization expenses increased by $3 million, or 1.8%, to $150 million in 2018 from $147 million in 2017.

 

Operating Income

 

Our consolidated operating income increased by $401 million, or 29%, to $1.8 billion in 2018 from $1.4 billion in 2017. Our NAA segment's operating income increased by $235 million, or 25%, to $1.2 billion in 2018 from $0.9 billion in 2017, and our EA segment's operating income increased by $166 million, or 36%, to $621 million in 2018 from $455 million in 2017. These changes were primarily due to the reasons discussed above.

 

Nonoperating Income (Expense)

	Three Months Ended August 31,
(in millions)	2018				2017
Unrealized gains on fuel derivatives, net	$	8			$	65
Realized losses on fuel derivatives, net	(4		)		(57		)
Gains on fuel derivatives, net	$	4			$	7

 

Explanations of Non-GAAP Financial Measures

 

Non-GAAP Financial Measures

 

We use net cruise revenues per ALBD ("net revenue yields"), net cruise costs excluding fuel per ALBD, adjusted net income and adjusted earnings per share as non-GAAP financial measures of our cruise segments' and the company's financial performance. These non-GAAP financial measures are provided along with U.S. GAAP gross cruise revenues per ALBD ("gross revenue yields"), gross cruise costs per ALBD and U.S. GAAP net income and U.S. GAAP earnings per share. 

 

Net revenue yields and net cruise costs excluding fuel per ALBD enable us to separate the impact of predictable capacity or ALBD changes from price and other changes that affect our business. We believe these non-GAAP measures provide useful information to investors and expanded insight to measure our revenue and cost performance as a supplement to our U.S. GAAP consolidated financial statements.

 

Under U.S. GAAP, the realized and unrealized gains and losses on fuel derivatives not qualifying as fuel hedges are recognized currently in earnings. We believe that unrealized gains and losses on fuel derivatives are not an indication of our earnings performance since they relate to future periods and may not ultimately be realized in our future earnings. Therefore, we believe it is more meaningful for the unrealized gains and losses on fuel derivatives to be excluded from our net income and earnings per share and, accordingly, we present adjusted net income and adjusted earnings per share excluding these unrealized gains and losses.

 

We believe that gains and losses on ship sales, impairment charges, restructuring and other expenses are not part of our core operating business and are not an indication of our future earnings performance. Therefore, we believe it is more meaningful for gains and losses on ship sales, impairment charges, and restructuring and other non-core gains and charges to be excluded from our net income and earnings per share and, accordingly, we present adjusted net income and adjusted earnings per share excluding these items.

 

The presentation of our non-GAAP financial information is not intended to be considered in isolation from, as substitute for, or superior to the financial information prepared in accordance with U.S. GAAP. It is possible that our non-GAAP financial measures may not be exactly comparable to the like-kind information presented by other companies, which is a potential risk associated with using these measures to compare us to other 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 and other transportation, certain other costs that are directly associated with onboard and other revenues and credit and debit card fees. 

 

Net passenger ticket revenues reflect gross passenger ticket revenues, net of commissions, transportation and other costs.

 

Net onboard and other revenues reflect gross onboard and other revenues, net of onboard and other cruise costs.

 

Net cruise costs excluding fuel per ALBD is the measure we use to monitor our ability to control our cruise segments' costs rather than gross cruise costs per ALBD. We exclude the same variable costs that are included in the calculation of net cruise revenues as well as fuel expense to calculate net cruise costs without fuel to avoid duplicating these variable costs in our non-GAAP financial measures. Substantially all of our net cruise costs excluding fuel are largely fixed, except for the impact of changing prices, once the number of ALBDs has been determined.

 

Reconciliation of Forecasted Data

 

We have not provided a reconciliation of forecasted gross cruise revenues to forecasted net cruise revenues or forecasted gross cruise costs to forecasted net cruise costs without fuel or forecasted U.S. GAAP net income to forecasted adjusted net income or forecasted U.S. GAAP earnings per share to forecasted adjusted earnings per share because preparation of meaningful U.S. GAAP forecasts of gross cruise revenues, gross cruise costs, net income and earnings per share would require unreasonable effort. We are unable to predict, without unreasonable effort, the future movement of foreign exchange rates and fuel prices. While we forecast realized gains and losses on fuel derivatives by applying current Brent prices to the derivatives that settle in the forecast period, we do not forecast the impact of unrealized gains and losses on fuel derivatives because we do not believe they are an indication of our future earnings performance. We are unable to determine the future impact of gains or losses on ships sales, restructuring expenses and other non-core gains and charges.

Constant Dollar and Constant Currency

 

Our operations primarily utilize the U.S. dollar, Australian dollar, euro and sterling as functional currencies to measure results and financial condition. Functional currencies other than the U.S. dollar subject us to foreign currency translational risk. Our operations also have revenues and expenses that are in currencies other than their functional currency, which subject us to foreign currency transactional risk.

 

We report net revenue yields, net passenger revenue yields, net onboard and other revenue yields and net cruise costs excluding fuel per ALBD on a "constant dollar" and "constant currency" basis assuming the 2018 periods' currency exchange rates have remained constant with the 2017 periods' rates. These metrics facilitate a comparative view for the changes in our business in an environment with fluctuating exchange rates.

 

Constant dollar reporting removes only the impact of changes in exchange rates on the translation of our operations.

 

Constant currency reporting removes the impact of changes in exchange rates on the translation of our operations (as in constant dollar) plus the transactional impact of changes in exchange rates from revenues and expenses that are denominated in a currency other than the functional currency.

 

Examples:

 

• The translation of our operations with functional currencies other than U.S. dollar to our U.S. dollar reporting currency results in decreases in reported U.S. dollar revenues and expenses if the U.S. dollar strengthens against these foreign currencies and increases in reported U.S. dollar revenues and expenses if the U.S. dollar weakens against these foreign currencies.

 

• Our operations have revenue and expense transactions in currencies other than their functional currency. If their functional currency strengthens against these other currencies, it reduces the functional currency revenues and expenses. If the functional currency weakens against these other currencies, it increases the functional currency revenues and expenses.

Consolidated gross and net revenue yields were computed by dividing the gross and net cruise revenues by ALBDs as follows:

	Three Months Ended August 31,
(dollars in millions, except yields)	2018				2018ConstantDollar				2017
Passenger ticket revenues	$	4,353			$	4,342			$	4,138
Onboard and other revenues	1,316				1,315				1,223
Gross cruise revenues	5,669				5,657				5,361
Less cruise costs
Commissions, transportation and other	(760		)		(758		)		(699		)
Onboard and other	(207		)		(207		)		(184		)
	(967		)		(965		)		(883		)
Net passenger ticket revenues	3,593				3,584				3,439
Net onboard and other revenues	1,109				1,108				1,039
Net cruise revenues	$	4,702			$	4,692			$	4,478
ALBDs	21,475,014				21,475,014				21,120,155
Gross revenue yields	$	263.98			$	263.40			$	253.82
% increase	4.0		%		3.8		%
Net revenue yields	$	218.96			$	218.48			$	211.99
% increase	3.3		%		3.1		%
Net passenger ticket revenue yields	$	167.31			$	166.89			$	162.82
% increase	2.8		%		2.5		%
Net onboard and other revenue yields	$	51.65			$	51.60			$	49.17
% increase	5.0		%		4.9		%

 

	Three Months Ended August 31,
(dollars in millions, except yields)	2018				2018ConstantCurrency				2017
Net passenger ticket revenues	$	3,593			$	3,573			$	3,439
Net onboard and other revenues	1,109				1,110				1,039
Net cruise revenues	$	4,702			$	4,683			$	4,478
ALBDs	21,475,014				21,475,014				21,120,155
Net revenue yields	$	218.96			$	218.06			$	211.99
% increase	3.3		%		2.9		%
Net passenger ticket revenue yields	$	167.31			$	166.38			$	162.82
% increase	2.8		%		2.2		%
Net onboard and other revenue yields	$	51.65			$	51.68			$	49.17
% increase	5.0		%		5.1		%

 

Consolidated gross and net cruise costs and net cruise costs excluding fuel per ALBD were computed by dividing the gross and net cruise costs and net cruise costs excluding fuel by ALBDs as follows:

	Three Months Ended August 31,
(dollars in millions, except costs per ALBD)	2018				2018ConstantDollar				2017
Cruise operating expenses	$	2,867			$	2,864			$	2,927
Cruise selling and administrative expenses	569				567				543
Gross cruise costs	3,436				3,431				3,470
Less cruise costs included above
Commissions, transportation and other	(760		)		(758		)		(699		)
Onboard and other	(207		)		(207		)		(184		)
Gains (losses) on ship sales and impairments	27				26				(304		)
Restructuring expenses	-				-				(3		)
Other	-				-				-
Net cruise costs	2,496				2,492				2,280
Less fuel	(434		)		(434		)		(307		)
Net cruise costs excluding fuel	$	2,062			$	2,058			$	1,973
ALBDs	21,475,014				21,475,014				21,120,155
Gross cruise costs per ALBD	$	160.02			$	159.76			$	164.32
% (decrease)	(2.6		)%		(2.8		)%
Net cruise costs excluding fuel per ALBD	$	96.03			$	95.85			$	93.39
% increase	2.8		%		2.6		%

 

	Three Months Ended August 31,
(dollars in millions, except costs per ALBD)	2018				2018ConstantCurrency				2017
Net cruise costs excluding fuel	$	2,062			$	2,060			$	1,973
ALBDs	21,475,014				21,475,014				21,120,155
Net cruise costs excluding fuel per ALBD	$	96.03			$	95.92			$	93.39
% increase	2.8		%		2.7		%

 

Adjusted fully diluted earnings per share was computed as follows:

	Three Months Ended
	August 31,
(in millions, except per share data)	2018				2017
Net income
U.S. GAAP net income	$	1,707			$	1,329
Unrealized (gains) losses on fuel derivatives, net	(8		)		(65		)
(Gains losses on ship sales and impairments)	(27		)		392
Restructuring expenses	-				3
Other	-				-
Adjusted net income	$	1,673			$	1,659
Weighted-average shares outstanding	707				726
Earnings per share
U.S. GAAP earnings per share	$	2.41			$	1.83
Unrealized (gains) losses on fuel derivatives, net	(0.01		)		(0.09		)
(Gains) losses on ship sales and impairments	(0.04		)		0.55
Restructuring expenses	-				-
Other	-				-
Adjusted earnings per share	$	2.36			$	2.29

Net cruise revenues increased by $225 million, or 5.0%, to $4.7 billion in 2018 from $4.5 billion in 2017.

The increase was driven by:

• $130 million - 2.9% increase in constant currency net revenue yields

• $75 million - 1.7% capacity increase in ALBDs

• $19 million - foreign currency impacts (including both the foreign currency translational and transactional impacts)

The 2.9% increase in net revenue yields on a constant currency basis was due to a 2.2% increase in net passenger ticket revenue yields and a 5.1% increase in net onboard and other revenue yields.

The 2.2% increase in net passenger ticket revenue yields was driven primarily by price improvements in our European and China programs, partially offset by decrease in our Caribbean program. This 2.2% increase in net passenger ticket revenue yields was comprised of a 1.1% increase from our NAA segment and a 4.3% increase from our EA segment.

The 5.1% increase in net onboard and other revenue yields was caused by similar increases in our NAA and EA segments.

Net cruise costs excluding fuel increased by $90 million, or 4.5%, to $2.1 billion in 2018 from $2.0 billion in 2017.

The increase was driven by:

• $54 million - 2.7% increase in constant currency net cruise costs excluding fuel

• $33 million - 1.7% capacity increase in ALBDs

Fuel costs increased by $127 million, or 41%, to $434 million in 2018 from $307 million in 2017. This increase was caused by higher fuel prices, which accounted for $128 million.