Carnival plc(CUK) - 2020 Q2 - Quarterly Report

PART I Financial Statements Carnival Corporation & plc reported significant net losses and negative operating cash flow due to COVID-19, marked by substantial impairments and increased debt Consolidated Statements of Income (Loss) Highlights (in millions) | Metric | Three Months Ended May 31, 2020 | Three Months Ended May 31, 2019 | Six Months Ended May 31, 2020 | Six Months Ended May 31, 2019 | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $740 | $4,838 | $5,529 | $9,511 | | Operating Loss | $(4,177) | $515 (Income) | $(4,891) | $902 (Income) | | Goodwill Impairment | $1,364 | $0 | $2,096 | $0 | | Ship and other impairments | $589 | $0 | $919 | $0 | | Net Loss | $(4,374) | $451 (Income) | $(5,155) | $787 (Income) | | Diluted EPS | $(6.07) | $0.65 | $(7.34) | $1.13 | Consolidated Balance Sheets Highlights (in millions) | Metric | May 31, 2020 | November 30, 2019 | | :--- | :--- | :--- | | Cash and cash equivalents | $6,881 | $518 | | Total Assets | $49,817 | $45,058 | | Total Debt (Short & Long-Term) | $20,805 | $11,502 | | Customer deposits | $2,618 | $4,735 | | Total Shareholders' Equity | $20,840 | $25,365 | Consolidated Statements of Cash Flows Highlights (Six Months Ended May 31, in millions) | Metric | 2020 | 2019 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $(1,804) | $3,169 | | Net cash used in investing activities | $(1,256) | $(2,918) | | Net cash provided by (used in) financing activities | $9,425 | $(26) | Note 1: General The company addresses COVID-19's severe impact, outlining liquidity actions and confirming sufficient funds for the next twelve months - The effects of COVID-19 are expected to continue to have a material negative impact on financial results and liquidity, and the company anticipates a net loss for the second half of 2020[36][37] - Management has taken actions to improve liquidity, including capital and operating expense reductions, suspending dividends and share repurchases, and pursuing financing transactions[37] - Based on actions taken, management concluded the company has sufficient liquidity to satisfy its obligations for at least the next twelve months[38] Note 3: Debt The company significantly increased debt through various issuances and secured waivers for debt covenants in response to the COVID-19 crisis - In April 2020, the company issued $4.0 billion of 11.5% first-priority senior secured notes due 2023, secured by vessels and intellectual property with a net book value of $28.3 billion[56] - In April 2020, the company also issued $2.0 billion of 5.75% convertible senior notes due 2023, with an initial conversion price of $10 per share[61][62] - The company obtained waivers for its debt service coverage covenant for its export credit facilities and certain bank loans, pushing compliance testing dates into 2021 and 2022[75] - Subsequent to the quarter end, in June 2020, the company borrowed an additional $2.8 billion under a new Secured Term Loan Facility maturing in 2025[77] Note 4: Contingencies The company faces numerous legal proceedings and governmental investigations, including class-action lawsuits and inquiries, stemming from COVID-19 incidents - As a result of COVID-19, the company is facing numerous litigation claims, enforcement actions, and investigations related to personal injury and loss of life[79] - Multiple class-action lawsuits have been filed against the company and its subsidiaries (Costa, Princess) by former guests related to COVID-19 exposure on various ships[86][87][89] - A securities class action was filed alleging misrepresentations and omissions related to the company's COVID-19 knowledge and response[88] - Federal, state, and non-U.S. governmental agencies are investigating COVID-19 incidents, including inquiries from the U.S. House and Senate committees[100][102] Note 5: Fair Value Measurements, Derivatives, and Financial Risks The company recognized significant non-cash impairment charges for goodwill and ships due to COVID-19, and detailed financial risks including unhedged newbuild commitments Goodwill Impairment Charges (Six Months Ended May 31, 2020, in millions) | Segment | Impairment Charge | | :--- | :--- | | NAA | $(1,319) | | EA | $(777) | | Total | $(2,096) | Ship Impairment Charges (Six Months Ended May 31, 2020, in millions) | Segment | Impairment Charge | | :--- | :--- | | NAA | $520 | | EA | $308 | | Total | $828 | - The company has an unhedged commitment of $7.3 billion for euro-denominated newbuilds scheduled for delivery from 2020 through 2025, exposing it to foreign currency risk[131] Note 7: Segment Information Both North America & Australia and Europe & Asia segments reported massive operating losses for the six months ended May 31, 2020, primarily due to the operational pause Segment Operating Income (Loss) (Six Months Ended May 31, in millions) | Segment | 2020 | 2019 | | :--- | :--- | :--- | | NAA | $(3,056) | $833 | | EA | $(1,743) | $270 | | Cruise Support | $(91) | $(180) | | Tour and Other | $0 | $(22) | Segment Revenues (Six Months Ended May 31, in millions) | Segment | 2020 | 2019 | | :--- | :--- | :--- | | NAA | $3,597 | $6,239 | | EA | $1,790 | $3,087 | | Total Cruise (NAA+EA) | $5,387 | $9,326 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management details COVID-19's severe impact, outlining liquidity enhancements, fleet optimization, and expectations for a net loss in the second half of 2020 - The company is accelerating the removal of 13 ships, representing a nearly 9% reduction in current capacity, as part of a capacity optimization strategy[173] - As of June 21, 2020, cumulative advanced bookings for 2021 are within historical ranges but at prices down in the low to mid-single digits range[177] - The company estimates its ongoing monthly cash burn rate for the second half of 2020 to be approximately $650 million[213][214] - As of May 31, 2020, the company had $7.6 billion of available liquidity, with an additional $8.8 billion of committed export credit facilities for future ship deliveries[212] - The company expects a net loss on both a U.S. GAAP and adjusted basis for the second half of 2020[198] Quantitative and Qualitative Disclosures About Market Risk This section updates the company's market risk exposure, primarily interest rate risk, detailing the debt portfolio's fixed and floating rate composition Debt Composition by Interest Rate Type (as of May 31, 2020) | Rate Type | Percentage of Total Debt | | :--- | :--- | | Fixed rate | 49% | | EUR fixed rate | 13% | | Floating rate | 22% | | EUR floating rate | 12% | | GBP floating rate | 4% | Controls and Procedures Management concluded that disclosure controls and procedures were effective as of May 31, 2020, with no material changes to internal control over financial reporting during the quarter - The President and CEO, and the CFO and Chief Accounting Officer concluded that disclosure controls and procedures were effective as of May 31, 2020[228] - There were no changes in internal control over financial reporting during the quarter that materially affected, or are reasonably likely to materially affect, internal controls[229] PART II - OTHER INFORMATION Legal Proceedings This section incorporates COVID-19 related legal actions from Note 4 and discloses a new dispute with a former vendor, DeCurtis LLC - The extensive legal proceedings related to COVID-19, as described in Note 4, are incorporated into this section[232] - In April 2020, a legal dispute began with former vendor DeCurtis LLC, involving cross-complaints of patent infringement, monopolization claims, and trade secrets violations related to the OCEAN Medallion systems[233] Risk Factors The company outlines severe and heightened risks, dominated by the COVID-19 pandemic, including prolonged operational suspension, increased debt load, and potential covenant non-compliance - The COVID-19 pandemic is having, and is expected to continue to have, a material negative impact on all aspects of the business, including operations, financial condition, liquidity, reputation, and stock price[235] - The company's substantial debt load could require dedicating a large portion of cash flow to service debt, increase vulnerability to adverse economic conditions, and limit operational flexibility[252][254] - If the company is unable to recommence normal operations in the near-term, it may be out of compliance with a minimum debt service coverage covenant in certain debt facilities as of May 31, 2021, which could lead to an event of default[269][271] - Recent credit rating downgrades have prevented the company from issuing additional commercial paper (except for government-backed programs) and could negatively impact the cost and availability of future financing[245] Unregistered Sales of Equity Securities and Use of Proceeds No shares were repurchased during the quarter, and the company terminated its share Repurchase Program to enhance liquidity and comply with financing restrictions - No shares of Carnival Corporation common stock or Carnival plc ordinary shares were repurchased during the three months ended May 31, 2020[278] - On June 15, 2020, the Boards of Directors terminated the share Repurchase Program to enhance liquidity and comply with restrictions in recent financing transactions[278] Exhibits This section lists exhibits filed with the Form 10-Q, including new material contracts related to recent financing activities and required CEO/CFO certifications - Filed the Indenture for the 5.75% Convertible Senior Notes due 2023, dated April 6, 2020[285] - Filed the Indenture for the 11.500% First-Priority Senior Secured Notes due 2023, dated April 8, 2020[286] - Filed the Term Loan Agreement dated June 30, 2020[284]