3. Internal Control and Risk Assessment.
Item 1A. Risk Factors.
You should carefully consider the specific riskfollowing discussion of significant factors, set forth belowevents and uncertainties that make an investment in the otherCompany’s securities risky and provide important information contained or incorporated by referencefor the understanding of the “forward-looking” statements discussed in this Form 10-K as these are important factors that could cause our actual results, performance or achievements to differ materially from our expected or historical results. The ordering and lettering of theelsewhere. These risk factors set forth below isshould be read in conjunction with other information in this Form 10-K.
The events and consequences discussed in these risk factors could have a material adverse effect on the Company’s business, financial condition, operating results and stock price. These risk factors do not intendedidentify all risks that the Company faces; operations could also be affected by factors, events, or uncertainties that are not presently known to reflect anythe Company indicationor that the Company currently does not consider to present significant risks to its operations. In addition, the current global economic climate amplifies many of priority or likelihood.these risks. Some of the statements in this item and elsewhere in this Form 10-Kdocument are “forward-looking statements.” For a discussion of those statements and of other factors to consider see the “Cautionary Note Concerning Factors That May Affect Future Results” section below.
The ordering and lettering of the risk factors set forth below is not intended to reflect any Company indication of priority or likelihood.
a. Incidents,World events impacting the ability or desire of people to travel may lead to a decline in demand for cruises
We may be impacted by the public’s concerns regarding the health, safety and security of travel, including government travel advisories and travel restrictions, political instability and civil unrest, and other general concerns. Additionally, we may be impacted by heightened regulations around customs and border control, travel bans to and from certain geographical areas, government policies increasing the difficulty of travel and limitations on issuing international travel visas. We may also be impacted by adverse changes in the perceived or actual economic climate, such as ship incidents, security incidents,global or regional recessions, higher unemployment and underemployment rates and declines in income levels. Furthermore, uncertainties resulting from the spread of contagious diseases and threats thereof,UK’s expected exit from the European Union may impact our business.
b. Incidents concerning our ships, guests or the cruise vacation industry as well as adverse weather conditions orand other natural disasters andmay impact the related adverse publicity affecting our reputation and the health, safety, security and satisfaction of our guests and crew could have an adverse effect on our sales and profitability. lead to reputational damage
The operation of cruise ships, hotels, land tours, port and related commercial facilities and shore excursionsOur operations involve the risk of incidents including those caused byand media coverage thereof. Such incidents include, but are not limited to, the improper operation or maintenance of ships, motorcoaches and trains; guest and crew illnesses, such as from the spread of contagious diseases;illnesses; mechanical failures, fires and collisionscollisions; repair delays, groundings and the resulting costs incurred on emergency ship repairs; repair delays; groundings; navigational errors; oil spills and other maritime and environmental mishaps; missing passengers andissues as well as other incidents at sea or while in port or on land which may cause injury and death, guest and crew discomfort, alteration of itinerariesinjury, or cancellation of a cruise or series of cruises or tours.death. Although our uncompromising commitment to the safety and comfort of our guests and crew is paramount to the success of our business, our ships have been involved in accidents and other incidents in the past. Wepast and we may experience similar or other incidents in the future. These types of incidents may bring into question guest and crew health, safety, security and satisfaction and may adversely affect our brands’ reputations and the demand for our brands and cruising in general, which may affect our sales and profitability, may result in additional costs to our business, and may result in litigation against us and increasing government or other regulatory oversight.
Our ability to effectivelyattract and efficiently operate shipboard and shoreside activities may be impacted by widespread public health issues/illnesses or health warnings resulting in, among other things, reduced demand for cruises and cruise and ship charter cancellations and employee absenteeism that could have an adverse effect on our sales and profitability. For example, a severe outbreak of the influenza virus or some other pandemic could, among other things, disrupt our ability to embark/disembark passengersretain guests and crew, require changes to cruise itinerary, disrupt airdepends in part, upon the perception and ground travel to and from ports, increase costs for prevention and treatment and adversely affect our supply chain and distribution systems. This could also adversely impact cruise demand in areas unaffected by such an outbreak.
In addition, as mentioned above, our ships are subject to the risks of mechanical failures and accidents, for which we have had to incur repair and equipment replacement expenditures. If these occur in the future, we may be unable to procure spare parts or new equipment when needed or make repairs without incurring significant expenditures or suspension of service. A significant performance deficiency or problem on any one or morereputation of our ships could have an adverse effect on our financial condition and results of operations.company.
Our cruise ships, hotels, land tours, port and related commercial facilities and shore excursions and other service providers may be impacted by adverse weather patterns or other natural disasters, such as hurricanes, earthquakes, floods, fires, tornados,tornadoes, tsunamis, typhoons and volcanic eruptions. These events could result in, among other things, increased port related and other costs. It is possible that we could be forced to alter itineraries or cancel a cruise or a series of cruises or tours due to these or other factors, which would have antypes of disruptions. Changes in climate may increase the frequency and intensity of adverse effect onweather patterns, make certain destinations less desirable or impact our sales and profitability.
The frequency of extreme weather events such as hurricanes, floods and typhoons may not only cause disruption, alteration, or cancellation of cruises but may also adversely impact commercial airline flights,business in other transport and shore excursion activities or prevent our guests from electing to cruise altogether. Such extreme weather events may also disrupt the supply of provisions, fuel and shore power, and may limit our ability to safely embark and disembark our guests.ways. In addition, these extreme weather conditions could result in increased wave and wind activity, which would make it more challenging to sail and dock our ships and could cause sea/motion sickness among guests and crew. Theseany other events could have an adverse impact on the safety and satisfaction of cruising and could have an adverse impact on our sales and profitability. Additionally, these extreme weather conditions could cause property damage to our ships, port and related commercial and business facilities and other assets and impact our ability to provide our cruise products and services as well as to obtain insurance coverage for operations in such areas at reasonable rates.
Incidents involving cruise ships, in particular our cruise ships, and media coverage thereof, as well as adverse media publicity concerning the cruise vacation industry in general, or unusual weather patterns or other natural disasters or disruptions, such as hurricanes and earthquakes, could impact demand for our cruises. In addition, any incidents which impact the travel industry more generally may negatively impact our guests’ or crew’s ability or desire to travel to or from our ships and/or interrupt our ability to obtain servicesthe supply of critical goods and goods from key vendorsservices.
c. Changes in our supply chain. Any of the foregoing could have an adverse impact on our sales and profitability.
Maintaining a good reputation is critical to our business. Reportsnon-compliance with laws and media coverage of ship incidents at sea or while in port, including missing guests, improper conduct by our employees, guests or agents, crimes, dissatisfied guests, crew and guest illnesses,regulations under which we operate, such as incidents of stomach flu and other contagious diseases, security breaches, terrorist threats and attacks and other adverse events can result in negative publicity, which could leadthose relating to a negative perception regarding the safety of our ships and the satisfaction of our guests. In addition, negative publicity regarding adverse environmental impacts of cruising, such as climate change and oil spills, could diminish our reputation. The considerable expansion in the use of social media over recent years has increased the ways in which our reputation can be impacted, and the speed with which it can occur. Anything that damages our reputation, whether or not justified, could have an adverse impact on demand, which could lead to price reductions and a reduction in our sales and profitability.
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b. | Economic conditions and adverse world events affecting the safety and security of travel, such as civil unrest, armed conflicts and terrorist attacks, may adversely impact the demand for cruises and, consequently, reduce our cruise brands’ net revenue yields and profitability.
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Demand for cruises is in part dependent on the underlying perceived or actual economic condition of the countries from which cruise companies source their guests. Adverse changes in the perceived or actual economic climate, such as global or regional recessions, higher unemployment and underemployment rates; declines in income levels; securities, real estate and other market declines and volatility; increasing taxation; higher fuel prices and healthcare costs; more restrictive credit markets; higher interest rates and changes in governmental regulations, could reduce our potential vacationers’ discretionary incomes, net worth or their consumer confidence. Consequently, this may negatively affect demand for vacations, including cruise vacations, which are a discretionary purchase. Decreases in demand could lead to price reductions which, in turn, could reduce the profitability of our business.
Demand for cruises and other vacation options has been and is expected to continue to be affected by the public’s attitude towards thehealth, environment, safety and security, of travel. Factors including, but not limited to, past acts of terrorism, threats of additional terrorist attacks, drug-related violence in Mexico, pirate attacksdata privacy and vessel seizures off the eastprotection, anti-corruption, economic sanctions, trade protection and west coasts of Africa, national government travel advisories, political instability and civil unrest in North Africa, the Middle East, the Balkans and elsewhere, geopolitical issues between China and Japan and general concerns over the safety and security aspects of traveling have had a significant adverse impact on demand and pricing in the travel and vacation industry in the past and may have an adverse impact in the future. Decreases in demandtax may lead to price reductions, which in turn would reduce our profitability, especially in regions with popular ports-of-call.litigation, enforcement actions, fines, penalties, and reputational damage
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c. | Changes in and compliance with laws and regulations relating to environment, health, safety, security, tax and anti-corruption under which we operate could adversely impact our profitability.
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We are subject to numerous international, national, state and local laws, regulations, treaties and treaties covering many areas, including social issues,other legal requirements that govern health, environmental, safety and security. Failuresecurity matters in relation to our guests, crew and ships. These requirements change regularly, sometimes on a daily basis, depending on the itineraries of our ships and the ports and countries visited. If we violate or fail to comply with any of these laws, regulations, treaties and agreementsother requirements we could be, and have previously been, fined or otherwise sanctioned by regulators. In addition, there is increased global focus on climate change, which may lead to enforcement actions, fines, civil or criminal penalties or the assertion of litigation claims and damages. These issues
additional regulatory requirements. We are and we believe will continuesubject to be, an area of focusa court-ordered environmental compliance plan supervised by the relevant authorities throughoutU.S. District Court for the world. Accordingly, new legislation, regulations or treaties, or changes thereto, could impactSouthern District of Florida, which is operative until at least April 2022 and subjects our operations to additional review and would likely subject usother obligations. Failure to increasedcomply with the requirements of this environmental compliance costsplan or other special conditions of probation could result in fines, which the court has imposed in the future. In addition, trainingpast, and restrictions on our operations.
We are subject to laws and requirements related to the treatment and protection of crew may become more time consuming and may increase our operating costs due to increasing regulatory and other requirements.sensitive data in the jurisdictions where we operate. Various governments, agencies and regulatory organizations have enacted or are considering new regulations or policies, such as stricter emission limits to reduce GHG effects, which could adversely impact the cruise industry.
The IMO has amended the MARPOL regulations to reduce emissions from ships. As described in “Maritime Environmental Regulations” as referenced below, these changes will result in reductions in ship SOx emissions by requiring progressive reductions in the sulfur content in fuel or the use of abatement technologies. These limits will be further reduced in designated ECAs, including ECAs that have been or could be proposed in other significant cruising areas, such as around Japan, the Mediterranean Searules and Mexico. As a result of these amendments, we have elected to install EGCSs on certain of our ships, which enable our SOx emissions to meet the ECA requirements and the 2020 global standard without the use of low sulfur fuel,
in all material respects. However, if this type of technology is not widely used within the shipping industry it is possible that there could be limited availability of high sulfur fuels because of low demand and the cost of such fuel may increase. The increase in fuel prices caused by these regulations may impact our other expenses including, but not limited to, freight and commodity prices and may have an adverse impact on our profitability.
Initiatives to limit GHG emissions are being introduced around the world with more frequency. For example, numerous bills related to climate change have been introduced in the U.S. Congress, and active discussions on GHG reduction are taking place in the EU and IMO. Legislation limiting or otherwise taxing GHG emissions could adversely impact our business. While not all are likely to become law, there are indications that additional climate change related mandates could be forthcoming, and they may significantly impact our operational costs, including, among other things, increase in fuel prices, new taxes on bunker fuel and establishment of costly emissions trading schemes.
Environmental laws and regulations or liabilities arising from past or future releases of, or exposure to, hazardous substances or vessel discharges, including ballast water and waste disposal, could materially increase our cost of compliance or otherwise adversely affect our business, results of operations and financial condition. Some environmental groups have lobbied for more stringent regulation of cruise ships. Some groups have also generated negative publicity about the cruise business and its environmental impact. See Part I, Item 1. Business. C. “Our Global Cruise Business - Governmental Regulations - Maritime Regulations” for additional information regarding these regulations.
We are also subject to compliance with income tax laws and regulations and income tax treaties in the jurisdictions where we operate. We believe that substantially all of the income earned by Carnival Corporation, Carnival plc and their ship owning or operating subsidiaries qualifies for taxation based on ship tonnage, is exempt from taxation or is otherwise subject to minimal taxes in the jurisdictions where the entities are incorporated or do business.
We believe that Panama and the jurisdictions where the ship owning and operating subsidiaries of Carnival Corporation are formed are equivalent exemption jurisdictions for purposes of Section 883 of the Internal Revenue Code. The laws of Panama and the other jurisdictions where our ships are owned or operated are subject to change and, in the future, may no longer qualify as equivalent exemption jurisdictions. Moreover, changes could occur in the future with respect to the trading volume or trading frequency of Carnival Corporation shares, affecting Carnival Corporation’s status as a publicly-traded corporation for purposes of Section 883.
The IRS interpretation of Section 883 could also differ materially from ours. In addition, provisions of the Internal Revenue Code, including Section 883, are subject to legislative change at any time. Accordingly, it is possible that Carnival Corporation and its ship-owning or operating subsidiaries whose tax exemption is based on Section 883 could lose this exemption.
There is no authority that directly addresses the effect, if any, of a DLC arrangement on the availability of benefits under treaties and, accordingly, their application to our operations is not free from doubt. The applicable treaties may be revoked by either applicable country, replaced or modified with new agreements that treat income from international operation of ships differently than the agreements currently in force or may be interpreted by one of its countries differently from us.
If we did not qualify for tonnage tax, exemption, treaties or minimal taxes, or if the laws that provide for these tax systems were changed, we would have significantly higher income tax expense. In many jurisdictions, the benefit of tonnage tax or preferential tax regimes would be replaced with taxation at normal statutory rates. In the absencecourse of Section 883 or an applicable income tax treaty in the U.S.,doing business, we would be subject to the net incomecollect guest, employee, company and branch profits tax regimes of Section 882other third-party data, including personally identifiable information and Section 884 of the Internal Revenue Code. In combination, these provisions would result in the taxation of our U.S. source shipping income, net of applicable deductions, at a current federal corporate income tax rate of up to 35%, state income tax rates would vary and our net after-tax income would be potentially subject to a further branch profits tax of 30%, unless a lower treaty rate applies.other sensitive data.
We are subject to the examination of our income tax returns by tax authorities in the jurisdictions where we operate. There can be no assurance that the outcome from these examinations will not adversely affect our net income.
As budgetary constraints continue to adversely impact the jurisdictions in which we operate, increases in income or other taxes affecting our operations may be imposed. Some social activist groups have lobbied for more taxation on income generated by cruise companies. Certain groups have also generated negative publicity for us. In recent years, certain members of the U.S. Congress have proposed various forms of legislation that would result in higher taxation on income generated by cruise companies.
Our global operations subject us to potential liability under anti-corruption economic sanctions, and other laws and regulations. The Foreign Corrupt Practices Act, the UK Bribery Act and other anti-corruption laws and regulations (“Anti-Corruption Laws”) prohibit corrupt payments by our employees, vendors, or agents. While we devote substantial resources to our global compliance programs and have implemented policies, training, and internal controls designed to reduce the risk of corrupt payments, our employees, vendors, or agents may violate our policies. Our failure to comply with Anti-Corruption Laws could result in significant fines and penalties, criminal sanctions against us, our officers, or our employees, prohibitions or limitations on the conduct of our business, and damage to our reputation. Operations outside the U.S.We may also be affected by changes in economic sanctions, trade protection laws, policies and measures, and other regulatory requirements affecting trade and investment.
We may beare subject to legal liabilitycompliance with tax laws, regulations and reputational damage iftreaties in the jurisdictions in which we improperly sell goodsare incorporated or in areasoperate. These tax laws, regulations and treaties are subject to economic sanctions such as Crimea, Iran, North Korea, Cuba, Sudan,change at any time, which may result in substantially higher tax liabilities. Additionally, the relevant authorities’ interpretation of tax laws, regulations and Syria or if we improperly engage in business transactions with persons subject to economic sanctions.treaties could differ materially from ours.
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d. | DisruptionsBreaches in data security and lapses in data privacy as well as disruptions and other damages to our principal offices, information technology operations and othersystem networks and failure to keep pace with developments in technology may adversely impact our business operations, the satisfaction of our guests and breaches in data security could result in decreases in our net income.crew and lead to reputational damage
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We may be impacted by breaches in data security and lapses in data privacy, which occur from time to time. These can vary in scope and intent from economically driven attacks to malicious attacks targeting our key operating systems with the intent to disrupt or compromise our shoreside and shipboard operations. Like many companies, we have been and continue to be subject to unauthorized access or use of digital systems and networks through human error or for purposes of misappropriating assets or obtaining sensitive financial, medical or other personal or business information.
Our ability to increase revenuesprincipal offices, information technology operations and control costs, as well assystem networks may be impacted by actual or threatened natural disasters (for example, hurricanes, earthquakes, floods, fires, tornadoes, tsunamis, typhoons and volcanic eruptions) or other disruptive events. Our maritime and/or shoreside operations, including our ability to serve guests most effectively depends in part on the reliability of our sophisticated technologies and system networks. We use communication applications, information technology and other systems to manage our inventory of cabins held for sale and set pricing, in order to maximizecontrol costs, and serve our revenue yields and to optimizeguests, depends on the effectiveness and efficiencyreliability of our shoresideinformation technology operations and shipboard operations. Possible system outages and the resulting downtime could have adverse consequences onnetworks as well as our ability to runrefine and manage our business. In addition, gaining unauthorized accessupdate to digitalmore advanced systems and networks for purposes of misappropriating assets or sensitive financial, medical or other personal or business information, corrupting data, causing shoreside or shipboard operational disruptions and other cyber-attack risks could adversely impact our reputation, guest services and satisfaction, employee relationships, business plans, ship safety and costs. Global companies are repeatedly being targeted to gain access to critical company, guest and other information. Because the techniques and sophistication used to conduct cyber-attacks and breaches of information technology systems, as well as the sources and targets of these attacks, change frequently and are often not recognized until such attacks are launched or have been in place for a period of time, we may be unable to anticipate these techniques or implement adequate preventative measures. In addition, the operation and maintenance of our systems is in some cases dependent on third-party technologies, systems and service providers for which there is no certainty of uninterrupted availability or through which hackers could gain access to sensitive information. These potential disruptions and cyber-attacks could negatively affect our reputation, customer demand, costs, system availability and pricing for our cruises. Significant capital investments and other expenditures could be required to remedy cyber-attacks and breaches of information technology, including costs associated with additional security technologies, personnel, experts and credit monitoring services for those whose data has been breached. technologies.
In addition, as the use of the internet expands, regulators are working on addressing the risks related to these new technologies, globalization and cybersecurity with enhanced regulations. We have initiated a global program to meet the compliance requirements for the General Data Protection Regulation. For example, the European Union's General Data Protection Regulation promotes an increased level of protection of personal data and will provide for enhanced regulatory requirements supervision. If we or our vendors experience significant data security breaches or fail to detect and appropriately respond to significant data security breaches, we could be exposed to government enforcement actions and private litigation.
Our principal offices are located in Australia, Germany, Italy, the UK and the U.S. Although we have developed disaster recovery and similar business contingency plans, actual or threatened natural disasters (for example, hurricanes, earthquakes, floods, fires, tornados, tsunamis, typhoons and volcanic eruptions) or similar events in these locations may have a material impact on our business continuity, reputation and results of operations.
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e. | Ability to recruit, develop and retain qualified shipboard personnel couldwho live away from home for extended periods of time may adversely affectimpact our results of operations.business operations, guest services and satisfaction |
Our success is dependent upon our personnel and our ability to recruit and train high quality employees. We hire a significant number of new crewqualified shipboard personnel each year and, thus, our ability to adequately recruit, develop and retain themthese individuals is critical to our cruise business. We also rely upon the ability, expertise, judgment, discretion, integrity and good faith of our senior management team. We must continue to recruit, develop, retain and motivate management and other employees to enable us to maintain our current business and support our projected growth.
We believe that incidentssuccess. Incidents involving cruise ships and the related adverse media publicity, adverse economic conditions that negatively affect our profitability and overcapacity inincreasing demand as a result of our and the vacation regionindustry’s projected growth could alsonegatively impact our ability to recruit, develop and retain sufficient qualified shipboard personnel.
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f. | Increases in fuel prices, changes in the types of fuel consumed and availability of fuel supply may adversely affectimpact our operations, financial conditionscheduled itineraries and liquidity.costs |
Economic,We may be impacted, and have been impacted in the past, by economic, market and political conditions around the world, such as fuel demand, regulatory requirements, supply disruptions and related infrastructure needs, which make it difficult to predict the future price and availability of fuel. Future increases in the global price of fuel would increase the cost of our cruise ship operations as well as some of our other expenses, such as crew travel, freight and commodity prices. Furthermore, volatilityIncreases in airfares, which could result from increases in the price of fuel, prices could havewould increase our guests’ overall vacation costs as many of our guests depend on airlines to transport them to or from the airports near the ports where our cruises embark and disembark.
As a material adverse effect on our operations, financial condition and liquidity. We may be unableresult of changes in regulations, we expect to implement additionalconsume a larger percentage of low sulfur fuel conservation initiatives,in 2020, which will likely increase ticket prices or collect fuel supplements to help fully or partially offset these fuel price increases. See risks relating to environmental laws and regulations, continuing financial viability of air service providers and failures to keep pace with technology below for additional information regarding our fuel risks.
We have Brent crude oil (“Brent”) call options and Brent put options, collectively referred to as zero cost collars, that establish ceiling and floor prices. These zero cost collars are based on Brent prices whereas the actual fuel used oncosts. Additionally, certain of our ships is marine fuel. Changes in the Brent prices may not show a high degree of correlation with changes in our underlying marine fuel prices. In addition, there can be no assurance that these zero cost collars will provide a sufficient level of protection against increases in fuel prices or that our counterparties will be able to perform, such as in the case of a counterparty bankruptcy. Assuming the Brent prices remain below the floors of our zero cost collars in 2017 and 2018, realized losses on these zero cost collars will reduce the benefit we would have obtained from lower fuel prices. Also, the zero cost collar contracts may create significant volatility in our U.S. GAAP earnings due to volatility in fuel prices over the contracts’ terms.
Certain of our newbuilds entering service in 2018 and thereafter are designed to use LNG as atheir primary fuel source. At this time, there is not a spot market for LNG like there is for bunker orthe marine gas oil and purchasing LNG is usually made through long-term contracts. Further, the LNG distribution infrastructure is in the early stages of development and there arewith a limited number of suppliers. In addition, we may be subject to new regulations covering the use and storage of LNG onboard our ships and we may experience difficulties in operating and maintaining new LNG-based engine technology.
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g. | Fluctuations in foreign currency exchange rates couldmay adversely affectimpact our financial results. results |
We earn revenues, pay expenses, purchase and own assets and incur liabilities in currencies other than the U.S. dollar, resultingdollar. Additionally, our shipbuilding contracts are typically denominated in translational and transactionaleuros. Movements in foreign currency risks ("currency risk").
We report currency transactions in the functional currencies of our reporting units. Because our consolidated financial statements are presented in U.S. dollars, we translate revenues and expenses, as well as assets and liabilities, into U.S. dollars at exchange rates in effect during or at the end of each reporting period, which subjects us to "foreign currency translational" risk. The strengthening of the U.S. dollar against the functional currencies of our foreign operations will adversely affect our U.S. dollar financial results.
Substantially all of our operations also have non-functional currency risk related to their international sales. In addition, we have a portion of our operating expenses denominated in non-functional currencies. Accordingly, we have "foreign currency transactional" risk related to changes in the exchange rates for our revenues and expenses that are in a currency other than the entity's functional currency. The strengthening of the functional currency against other currencies will reduce the functional currency revenues and expenses and will generally adversely affect our financial results.
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h. | Misallocation of capital amongOvercapacity and competition in the cruise and land-based vacation industry may lead to a decline in our ship, joint venturecruise sales, pricing and other strategic investments could adversely affect our financial results.destination options
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We believe that having the right number and type of cruise ships for our brands is critical to our success in existing and developing regions. In the event that we build too many ships or build or refurbish ships that are not accepted by our guests, our pricing, profitability and liquidity may be negatively impacted. Furthermore,impacted by increases in capacity in the cruise and land-based vacation industry, which may result in capacity growth beyond demand, either globally or for a region, or for a particular itinerary. We face competition from other cruise brands on the basis of overall experience, destinations, types and sizes of ships and cabins, travel agent preferences and value. In addition, we have madecompete with land-based vacation alternatives throughout the world on the basis of overall experience, destinations and may continue to make joint venture and other strategic investments that may not develop as we expect, which could also adversely affect our profitability and liquidity.value.
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i. | Future operating cash flow may not be sufficient to fund future obligations and we may be unable to obtain acceptable financing to enable us to continue to be a viable company.
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Our forecasted cash flows from future operations may be adversely affected by various factors, including, but not limited to, incidents, a weakening economy, adverse changes in laws and regulations, and other factors noted under these “Risk Factors.” To the extent that we are required, or choose, to fund future cash requirements, including current and future shipbuilding
commitments and debt repayments, from sources other than cash flow from operations, available cash and committed external sources of liquidity, including committed ship and other financings, we will have to secure such financing from export credit agencies or banks or through the offering of debt and equity securities in the public or private markets. There is no guarantee that such financings will be available in the future to fund our future obligations, or that they will be available on terms consistent with our expectations.
Our access to and the cost of financing will depend on, among other things, conditions in the global financing markets, the availability of sufficient amounts of financing and our long-term senior unsecured credit ratings. If our investment grade long-term senior unsecured credit ratings were to be downgraded or assigned a negative outlook, or general market conditions ascribe higher risk to our rating levels, our industry, or us, our access to and cost of debt financing may be negatively impacted. Further, the terms of future debt agreements could include more restrictive covenants, or require that our debt be secured by our ship assets, which may restrict our business operations.
Our ability to maintain our credit facilities may also be impacted by material changes in our ownership. More specifically, we may be required to prepay our debt facilities if a person or group of persons acting in concert gain control of Carnival Corporation & plc, other than the Arison family, including Micky Arison, our Chairman of the Boards of Directors.
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j. | Overcapacity in the cruise ship and land-based vacation industry could have a negative impact on our net revenue yields and increase operating costs. |
Although cruising capacity in most of the established regions has grown at a slower pace in recent years, we expect it to continue to increase in both the established and emerging regions. Since the cruise industry relies on long-lived ships, we face the risk that our industry’s capacity will grow beyond its demand. The wider vacation industry may also face increases in land-based vacation capacity, which may impact us as well. We typically aim to fill our new capacity at favorable revenue yields despite the new competing cruise and land-based capacity growth. Also, to the extent that we or our competitors deploy ships to a particular itinerary and the resulting capacity in that region exceeds the demand, we may lower pricing and profitability may be lower than initially anticipated. Furthermore, the used cruise ship market is small and as new cruise ships enter the industry, older ships become less competitive. Accordingly, if we need to dispose of a ship, we cannot be assured of finding a viable buyer to purchase it at a price that meets our expectations, which could result in ship impairment charges and losses on ship disposals.
Should net revenue yields be negatively impacted, our results of operations and financial condition could be adversely affected. In addition, increased cruise capacity could impact our ability to recruit, develop and retain qualified crew, including officers, at competitive rates and, therefore, increase our shipboard employee costs.
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k. | Deterioration of our cruise brands' strengths and our inability to implement our strategies could adversely impact our business and profitability. |
If we are not successful in implementing our strategies and exceeding guests' expectations, our results of operations and financial condition could be adversely affected. We believe that our cruise branding has contributed significantly to the success of our business and enhancing and maintaining our branding is critical to expanding our brands’ customer bases. The ability of our brands to successfully target different segments of the vacation source areas in which they operate enables us to strengthen our business.
We believe that our ability to effectively use our scale and extend best practices and technologies across our brands is critical for implementing our strategic initiatives, such as maximizing our revenue management processes, improving our overall fleet management and optimizing our cost structure and, therefore, achieving our vision and reaching our primary financial goals.
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l. | Continuing financial viability of our travel agent distribution system, air service providers and other key vendors in our supply chain is essential to allowing us to profitably operate our business. In addition, reductions in the availability of, and increases in the prices for, the services and products provided by these vendors can adversely impact our net income. |
Our guests primarily book their cruises through independent travel agents and tour operators. These parties generally sell and market our cruises on a nonexclusive basis. Our competitors may offer higher commissions and incentives and thus adversely impact our business. Significant disruptions, contractions or consolidations to our travel agent distribution system, such as those caused by a reduction in travel and related commission income as a result of an economic slowdown could have an adverse effect on our sales and profitability. In addition, we currently extend credit to and/or enter into large group contracts
with some of our European travel agents and tour operators and Chinese travel distributors and, accordingly, if such agents and operators cannot repay their debts to us, it will adversely impact our cash flows and operations.
Many of our guests and substantially all our crew depend on scheduled or chartered commercial airline services to transport them to or from the airports near the ports where our cruises embark and disembark. Changes or disruptions in commercial or chartered airline services as a result of strikes, labor unrest, financial instability or viability, adverse weather conditions, airport delays, consolidation of carriers, or other events or the lack of availability due to schedule changes or a high level of airline bookings could adversely affect our ability to deliver guests and crew to or from our cruise ships and increase our costs which would, in turn, have an adverse effect on our results of operations. In addition, increases in the prices of airfares due to, among other things, rising fuel prices and airline consolidations would increase the overall vacation price to our guests and may adversely affect demand for our cruises, as well as increase our airfare for our crew.
Travel agents may face increased pressure from our competitors to sell and market these competitor cruises exclusively. If such exclusive arrangements were introduced, there can be no assurance that we will be able to find alternative distribution channels to ensure our customer base would not be affected.
Economic downturns may impact the financial viability of other key vendors in our supply chain and the interruption in the services or goods we purchase from them could adversely impact our operations and profitability.
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m. | Inability to implement our shipbuilding programs and ship repairs, maintenance and refurbishments on terms that are favorable or consistent with our expectations could reduce our profitability. In addition, we expect increases to our repairs and maintenance expenses and refurbishment costs as our fleet ages. |
The construction, repair, maintenance and refurbishment of cruise ships are complex processes and involve risks similar to those encountered in other large and sophisticated construction, repair, maintenance and refurbishment projects. We could experience delays and cost overruns in completing such work. As our fleet ages, our repair and maintenance expenses will increase. In addition, other events, such as work stoppages, other labor actions, insolvencies, “force majeure” events or other financial difficulties experienced at the shipyards and their subcontractors and suppliers who build, repair, maintain or refurbish our ships could also delay or prevent the delivery of our ships under construction and prevent or delay the completion of the refurbishment, repair and maintenance of existing ships in our fleet. These events could adversely affect our profitability, including delays or cancellations of cruises or unscheduled dry-docks and repairs. In addition, the consolidation of the control of certain cruise shipyards or cruise shipyard voluntary capacity reductions or insolvencies could result in less shipyard availability thus reducing competition and increasing prices. Furthermore, the lack of qualified shipyard repair facilities could result in the inability to repair and maintain our ships on a timely basis, which could also result in reduced profitability.
As of January 19, 2017, we had entered into foreign currency zero cost collars for four of our euro-denominated shipbuilding contracts. However, if the shipyard with which we have contracted is unable to perform under the related contracts, the foreign currency zero cost collars related to the shipyard’s shipbuilding contract payments would still have to be honored. This might require us to realize a loss on existing foreign currency zero cost collars without an offsetting gain on our foreign currency denominated shipbuilding contract payments, thus resulting in an adverse effect on our financial results.
The cost of shipbuilding orders that we may place in the future that is denominated in a different currency than our cruise brands’ or the shipyards’ functional currency is expected to be affected by foreign currency exchange rate fluctuations. These foreign currency exchange rate fluctuations may affect our decisions to order new cruise ships. In addition, the prices of various commodities that are used in the construction of ships, such as steel, can be subject to volatile price changes and, accordingly, the cost of future newbuilds may increase, which could have an adverse impact on our profitability.
In connection with our shipbuilding contracts, we do not anticipate any contractual breakage or cancellations on our part. However, if any were to occur, it could result in, among other things, the forfeiture of our payments and the imposition of contractual liquidated damages.
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n. | Failure to keep pace with developments in technology could impair our operations or competitive position. |
Our business continues to demand the use of sophisticated systems and technology. These systems and technologies may require refinement, updating and replacement with more advanced systems. If we are unable to do so on a timely basis or within reasonable cost parameters, our business could suffer. We also may not achieve the benefits that we anticipate from any new system or technology, and a failure to do so could result in materially higher than anticipated costs and could materially impair our operating results.
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o. | Geographic regions in which we try to expand our business may be slow to develop andor ultimately not develop how we expect and our international operations are subject to additional risks not generally applicable to our U.S. operations, thus resulting in the slower growth, increased costs and adversely affecting our profitability. |
As we continue to expand our global presence, it requires, among other things, significant levels of management resources, capital and other investments. For example, we may be required to localize our cruise products and services to conform to local cultures, standards, policies and regulations. As a result, it may be more difficult for us to replicate our successful North American, European and Australiancore business models and we may not be able to recover our investments in these markets. In addition, we cannot be certain that these markets, such as China, will ultimately develop as we expect, which could also adversely impact the growth and profitability of our business.expect.
Furthermore, our international operations are subject to additional risks including adverse changes in foreign countries’ political systems, social unrest, restrictions and taxes on the withdrawal of foreign investments and earnings and other payments by subsidiaries, adverse changes in foreign currency exchange restrictions, government policies against the vacation or maritime industries, limitations on issuing international travel visas, local cabotage requirements, investment restrictions or requirements, changes in or application of our foreign taxation structures, including duties and value added taxes, diminished ability to legally enforce our intellectual property and contractual rights in foreign countries and commercial instability caused by corruption.
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p.j. | Competition from the cruiseInability to implement our shipbuilding programs and ship repairs, maintenance and land-based vacation industry could result in a loss ofrefurbishments may adversely impact our business and adversely affect our operations and financial condition.the satisfaction of our guests |
We face significant competition frommay be impacted by unforeseen events, such as work stoppages, insolvencies, “force majeure” events or other cruise brands onfinancial difficulties experienced by shipyards, their subcontractors and our suppliers. This may result in less shipyard availability resulting in delays or preventing the basisdelivery of cruise pricing, travel agent preference andour ships under construction and/or the types and sizescompletion of the repair, maintenance, or refurbishment of our existing ships. This may lead to potential delays or cancellations of cruises. In addition, the prices of various commodities that are used in the construction of ships and cabins, servicesfor repair, maintenance and destinations being offered by them to cruise guests. In addition, new cruise competitors withrefurbishment of existing brand appeal may choose to enter the cruise industry or there may be other new cruise competitors that may choose to enter the established or emerging regions. We try to differentiate ourselves from our cruise competitors by offering a wide variety of brands, itineraries, products and services to our guests, but the acceptance of each offering is not certain and consumers’ preferences are always subject to change. It is possible that our programs to motivate previous guests to cruise with us again may not be successful and they may elect not to cruise with us again.
In addition, we operate in the wider vacation industry and cruising is only one of many alternatives for people choosing a vacation. We therefore risk losing business not only to other cruise lines, but also to land-based vacation operators. In the event that we do not compete effectively with other cruise companies and other vacation alternatives, our results of operations and financial condition could be adversely affected.
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q. | Economic, market and political factors that are beyond our control, which could increase our operating, financing and other costs and could harm sales and profitability. |
Some of our operating costs including, but not limited to, food, payroll, port costs, repairs and maintenance, security and other commodity-based itemsships, such as steel, are subject to increases because of market forces, economic or political instability or other circumstances beyond our control. In addition, interest rates, currency exchange rate fluctuations and our ability to obtain debt or equity financing are dependent on many economic, market and political factors. Increases in operating or financing costs could adversely affect our results because we may not be able to recover these increased costs through price increases charged to our guests and such increases may adversely impact our liquidity and credit ratings.volatility.
It is possible that jurisdictions or ports-of-call that we regularly visit may also decide to assess new, or change existing, taxes, fees and other charges specifically targeted to the cruise industry, its employees and guests, including, but not limited to, value added taxes on cruise tickets and onboard revenues, which could increase our operating costs and could decrease the demand for cruises and ultimately decrease our net revenue yields and net income.
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r. | Litigation, enforcement actions, fines or penalties could adversely impact our financial condition or results of operations and damage our reputation. |
Our business is subject to various international laws and regulations that could lead to enforcement actions, fines, civil or criminal penalties or the assertion of litigation claims and damages. In addition, improper conduct by our employees or agents could damage our reputation and lead to litigation or legal proceedings that could result in significant awards or settlements to plaintiffs and civil or criminal penalties, including substantial monetary fines. Such events could lead to an adverse impact on our financial condition or results of operations, even if the monetary damage is mitigated by our insurance coverage.
As a result of our ship or other incidents, litigation claims, enforcement actions and regulatory actions and investigations, including, but not limited to, those arising from personal injury, loss of life, loss of or damage to personal property, business interruption losses or environmental damage to any affected coastal waters and the surrounding areas, may be asserted or brought against various parties including us. The time and attention of our management may also be diverted in defending such claims, actions and investigations. We may also incur costs both in defending against any claims, actions and investigations and for any judgments, fines, civil or criminal penalties if such claims, actions or investigations are adversely determined and not covered by our insurance policies.
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s. | Lack of continuing availability of attractive, convenient and safe port destinations on terms that are favorable or consistent with our expectations could adversely affect our net revenue yields and net income. |
We believe that attractive, convenient and safe port destinations, including ports that are not overly congested with tourists, are major reasons why our guests choose a cruise versus an alternative vacation option. The continuing availability of these types of ports on terms that are favorable or consistent with our expectations, including the port facilities where our guests embark and disembark, is affected by a number of factors including, but not limited to, existing capacity constraints (particularly during the Caribbean winter months and Mediterranean summer months), security, safety and environmental concerns, adverse weather conditions and other natural disasters, financial and other limitations on port development in established or emerging markets, political instability, exclusivity arrangements that ports may have with our competitors, port operator consolidation, local governmental regulations and local community concerns about both port development and other adverse impacts on their communities from additional tourists. The inability to continue to utilize, maintain, rebuild, if necessary, and increase the number of ports that our ships call on could adversely affect our net revenue yields and net income.
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t. | Union disputes and other employee relationship issues could adversely affect our financial results. |
A large number of our employees are represented by labor unions in a number of countries under various collective bargaining agreements with varying durations and expiration dates. We may not be able to satisfactorily renegotiate these collective bargaining agreements when they expire. In addition, existing collective bargaining agreements may not prevent a strike or work stoppage on our ships. We may also be subject to or affected by work stoppages unrelated to our business or collective bargaining agreements. Any such work stoppages or potential work stoppages could have a material adverse effect on our financial results.
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u. | Decisions to self-insure against various risks or the inability to obtain insurance for certain risks at reasonable rates could result in higher expenses or lower revenues. |
We seek to maintain comprehensive insurance coverage at commercially reasonable rates. We believe that our current coverage is adequate to protect us against most of the significant risks involved in the conduct of our business, although we do elect to self-insure or use substantial deductibles for the insurable risks we face in order to minimize the cost of our insurance policies. Accordingly, we are not protected against all risks, such as loss of use of a ship or a cyber-security breach, both ofwhich could result in an unexpected decrease in our revenue in the event of an incident. Further, significant incidents could result in higher insurance premiums commencing on the policy renewal dates or the inability to obtain coverage.
We may also be subject to additional premium costs based not only on our own claims record but also on the claims records of all other members of the P&I associations that provide us with indemnity coverage for third-party liability. We are also subject to additional P&I premium assessments for various reasons including, but not limited to, investment or underwriting shortfalls experienced by our P&I clubs. In addition, if we or other ship-owners sustain significant losses, our ability to obtain future insurance coverage at commercially reasonable rates could be materially adversely affected.
Finally, we cannot be certain that affordable and viable direct insurance and reinsurance markets will be available to us in the future.
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v. | Reliance on third-party providers of various services integral to the operations of our business. These third parties may act in ways that could harm our business. |
In order to achieve cost and operational efficiencies, we outsource to third-party vendors certain services that are integral to the operations of our global business, such as our onboard concessionaires. We are subject to the risk that certain decisions are subject to the control of our third-party service providers and that these decisions may adversely affect our activities. A failure to adequately monitor a third-party service provider’s compliance with a service level agreement or regulatory or legal
requirements could result in significant economic and reputational harm to us. There is also a risk the confidentiality, privacy and/or security of data held by third parties or communicated over third-party networks or platforms could become compromised.
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w. | Business activities that involve our co-investment with third parties may subject us to additional risks that could adversely impact our operations. |
Partnerships, joint ventures and other business structures involving our co-investment with third parties generally include some form of shared control over the operations of the business and create additional risks, including the possibility that other investors in such ventures could become bankrupt or otherwise lack the financial resources to meet their obligations, or could have or develop business interests, policies or objectives that are inconsistent with ours. In addition, actions by another investor may present additional risks of operational difficulties or reputational or legal concerns. These or other issues related to our co-investment with third parties could adversely impact our operations.
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x. | Disruptions in the global financial markets or other events may negatively affect the ability of our counterparties and others to perform their obligations to us and thus, adversely affect our financial position and results of operations. |
The ability of our counterparties to perform, primarily with respect to our cash and cash equivalents, investments, committed financing facilities, contingent obligations, derivative instruments, insurance contracts, new ship progress payment guarantees and ship charter agreements may adversely impact us if any of their financial positions weaken materially or they suffer other financial disruptions.
For example, the last severe economic downturn, including failures of banks and financial service companies and the related liquidity crisis, disrupted the capital and credit markets. Additional economic concerns from some countries continue to strain the financial markets both in the U.S. and internationally. A recurrence of these or other disruptions could cause our counterparties and others to breach their obligations to us under our contracts with them, which may have a negative impact on our cash flows, including our ability to meet our obligations, results of operations and financial condition.
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y. | Our shareholders may be subject to the uncertainties of a foreign legal system in protecting their interests since Carnival Corporation and Carnival plc are not U.S. corporations. |
Carnival Corporation’s corporate affairs are governed by its Third Amended and Restated Articles of Incorporation (“Articles”) and Third Amended and Restated By-Laws (“By-Laws”) and by the laws of Panama. Carnival plc is governed by its Articles of Association and by the laws of England and Wales. The contracts that control the relationship between Carnival Corporation and Carnival plc under the DLC arrangement are governed by the laws of Panama, the Isle of Man and the Cayman Islands. The laws of Panama, England and Wales, the Isle of Man and the Cayman Islands may differ in some respects from the laws in the U.S. Thus, our public shareholders may have more difficulty in protecting their interest with respect to actions by management, directors and controlling shareholders than would otherwise be the case for a U.S. shareholder in a U.S. Corporation or a UK shareholder in a UK Corporation.
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z. | Small group of shareholders owns a significant portion of the total combined voting power of our outstanding shares and may be able to effectively control the outcome of shareholder voting. |
As of January 19, 2017, a small group of shareholders consisting of some members of the Arison family, including Micky Arison, the Chairman of the Board of Directors, beneficially owned approximately 18% of the total combined voting power of Carnival Corporation & plc. Depending upon the nature and extent of the shareholder vote, this group of shareholders may have the power to effectively control, or at least significantly influence, the outcome of certain shareholder votes and, therefore, the corporate actions requiring such votes.
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aa. | Provisions in Carnival Corporation’s and Carnival plc’s constitutional documents may prevent or discourage takeovers and business combinations that our shareholders might consider to be in their best interests. |
Carnival Corporation’s Articles and By-Laws and Carnival plc’s Articles of Association contain provisions that may delay, defer, prevent or render more difficult a takeover attempt that our shareholders consider to be in their best interests. As a result, these provisions may prevent our shareholders from receiving a premium to the market price of our shares offered by a bidder in a takeover context. Even in the absence of a takeover attempt, the existence of these provisions may adversely affect the prevailing market price of our shares if they are viewed as discouraging takeover attempts in the future.
Specifically, Carnival Corporation’s Articles contain provisions that prevent third parties, other than the Arison family and trusts established for their benefit, from acquiring beneficial ownership of more than 4.9% of outstanding Carnival Corporation shares without the consent of its Board of Directors and provide for the lapse of rights, and sale, of any shares acquired in excess of that limit. The effect of these provisions may preclude third parties from seeking to acquire a controlling interest in us in transactions that shareholders might consider to be in their best interests and may prevent them from receiving a premium above market price for their shares.
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ab. | The DLC arrangement involves risks not associated with the more common ways of combining the operations of two companies and these risks may have an adverse effect on the economic performance of the companies and their respective share prices. |
The DLC arrangement is a relatively uncommon way of combining the management and operations of two companies and it involves different issues and risks from those associated with the other more common ways of forming a business combination, such as a merger or exchange offer to create a wholly-owned subsidiary. In our DLC arrangement, the combination is effected primarily by means of contracts between Carnival Corporation and Carnival plc and not by operation of a statute or court order. The legal effect of these contractual rights may be different from the legal effect of a merger or amalgamation under statute or court order, and there may be difficulties in enforcing these contractual rights. Shareholders and creditors of either company might challenge the validity of the contracts or their lack of standing to enforce rights under these contracts, and courts may interpret or enforce these contracts in a manner inconsistent with the express provisions and intentions we included in such contracts. In addition, shareholders and creditors of other companies might successfully challenge other DLC arrangements and establish legal precedents that could increase the risk of a successful challenge to our DLC arrangement.
Cautionary Note Concerning Factors That May Affect Future Results
Some of the statements, estimates or projections contained in this Form 10-Kdocument 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”“indicate,” “outlook,” and similar expressions of future intent or the negative of such terms.
Forward-looking statements include those statements that may impactrelate to our outlook and financial position including, but not limited to, the forecasting of our:statements regarding:
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• 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 |
Certain of the risks we are exposed to are identified in this Item 1A. “Risk Factors.” This item contains important cautionary statements and a discussion 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.
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 Form 10-K,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.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
As of January 19, 2017,November 30, 2019, the Carnival Corporation and Carnival plc headquarters and our larger shoreside locations are as follows:
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Location | | Square Footage (in thousands) | | Own/Lease | | Principal Operations |
Miami, FL, U.S.A. | | 463,000/62,000463/61 | | Own/Lease | | Carnival Corporation and Carnival Cruise Line |
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Genoa, Italy | | 246,000/66,000246/66 | | Own/Lease | | Costa Group (a) |
| | | | | | and AIDA |
Santa Clarita, CA, U.S.A. | | 311,000311 | | Lease | | Princess Cruises, Holland America Group (b) |
| | | | | | Line and Seabourn |
Almere, Netherlands | | 253,000/22,000253 | | Own/LeaseOwn | | Arison Maritime Center |
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Rostock, Germany | | 224,000224 | | Own | | Costa Group (a) |
| | | | | | and AIDA |
Seattle, WA, U.S.A. | | 175,000175 | | Lease | | Princess Cruises, Holland America Group (b) |
| | | | | | Line and Seabourn |
Southampton, England | | 150,000150 | | Lease | | Carnival plc, P&O Cruises (UK) and Carnival UK (c) |
| | | | | | Cunard |
Hamburg, Germany | | 137,000150 | | Lease | | Costa Group (b) |
| | | | | | and AIDA |
Sydney, NSW, Australia | | 58,00037 | | Lease | | Princess Cruises and P&O Cruises (Australia) |
Shanghai, China | |
(a) | Costa Group includes AIDA and 32 | | Lease | | Costa |
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(b) | Holland America Group includes Holland America Line, Princess, Seabourn and Holland America Princess Alaska Tours |
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(c) | Carnival UK includes P&O Cruises (UK) and Cunard |
Information about our cruise ships, including the number each of our cruise brands operate, as well as information regarding our cruise ships under construction may be found under Part I. Item 1. Business. C. “Our Global Cruise Business.” In addition, we own, lease or have controlling interests in port destinations, and private islands.
Our cruise ships in operation, headquarters, port destinations and private islands, hotels, and other shoreside facilities are all well maintained and in good condition. We evaluate our needs periodically and obtain additional facilities when deemed necessary. We believe that our facilities are adequate for our current needs.lodges.
Item 3. Legal Proceedings.
As part of the previously disclosed settlement approved by the U.S. District Court of the Southern District of Florida in 2013June 2019, Carnival Corporation paid a financial penalty, and is subject to ongoing oversight, environmental goals and certain reporting requirements, as well as a restructuring of its compliance function, relating to the violation of probation conditions for a plea agreement entered into by Princess Cruises and the U.S. Department of Justice in 2016. We may be subject to further conditions and penalties in the event of future environmental incidents.
As previously disclosed, on May 15, 2018, the Marseilles, France Public Prosecutor alleged that Carnival plc and the UKcaptain of P&O Cruises’ Azura breached the French Environmental Code governing the sulfur content of fuel used during the vessel’s passage through French territorial waters. On November 26, 2018, the Tribunal de Grande Instance imposed a fine, costs and damages against Carnival plc and the captain for an aggregate of €118,000. On November 12, 2019, in response to our application to the court of appeal, a verdict overturning the original conviction was handed down. The prosecution has appealed to the French Supreme Court. We continue to believe that we have a meritorious defense to this claim and that the ultimate outcome of the proceedings will not have a material impact on our consolidated financial statements.
As previously disclosed, on August 28, 2018, P&O Cruises (Australia) notified the Maritime & Coast Guard Agency commencedAccident Investigation Branch and the Australian Maritime Safety Authority of an inadvertent discharge of liquid food waste mixed into grey water off of Pacific Explorer while it was inside the Great Barrier Reef Marine Park on August 26, 2018. We believe the ultimate outcome of any investigation and any penalty will not have a material impact on our consolidated financial statements.
On October 23, 2019, a complaint was filed by a purported shareholder of Carnival plc in the New York Supreme Court, New York County, purporting to allege derivative claims on Carnival plc’s behalf for breach of fiduciary duty and corporate waste against the members of the Carnival plc Board of Directors (the “Board”). The allegations that Caribbean Princess breached international pollution laws. On December 1, 2016, Princess entered into a plea agreement withrelate to the criminal proceedings by the U.S. Department of Justice with respect to violations of federal laws by the Caribbeanagainst Princess. As part of the plea agreement, Cruise Lines, Ltd., which is under review by the United States District Court for the Southern District of Florida, Princess will pay a $40 million penalty, plead guilty to charges related to illegal discharges of oily bilge water, and Princess and Carnival Corporation will adopt a five-year court-supervised environmental compliance program. The plea agreement also will resolve any enforcement issues with the UK Maritime & Coast Guard Agency.
Aswe previously disclosed, in 2014 the Egyptian Environmental Affairs Agency began an investigation into allegationsdisclosed. Plaintiff seeks declaratory judgment that the Costa neoClassicaBoard breached Egyptian environmental laws.their duties to Carnival plc, monetary damages and restitution to Carnival plc, punitive damages from the Board to Carnival plc, and an award of Plaintiff’s attorney’s fees and costs. The Safaga (Egypt) Court of Misdemeanors issued a ruling quantifying the alleged damages causeddefendants have not yet responded to the environment in an amount not material to our consolidated financial statements.complaint.
As previously disclosed, in 2015, the Alaska Department of Environmental Conservation issued Notices of Violations to all of the major cruise lines who had operated in the state of Alaska, including Carnival Cruise Line, Holland America Line and Princess Cruises, for alleged violations of the Alaska Marine Vessel Visible Emission Standards that occurred over the last several years. We are cooperating with the state of Alaska and conducting our own internal investigation into these matters. However, we do not believe the ultimate outcome will have a significant impact on our results of operations. On August 6, 2016, Carnival Cruise Line entered into a Settlement Agreement with the Alaska Department of Environmental Conservation to pay an amount not material to our consolidated financial statements as settlement of all claims related to Carnival Cruise Line.
Item 4. Mine Safety Disclosures.
None.
Executive Officers of the RegistrantsItem 4. Mine Safety Disclosures.
The table below sets forth the name, age, years of service and title of each of our executive officers. Titles listed relate to positions within Carnival Corporation and Carnival plc unless otherwise noted.None.
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Age | | Years of Service (a) | | Title |
Micky Arison | 67 | | 45 | | Chairman of the Boards of Directors |
David Bernstein | 59 | | 18 | | Chief Financial Officer and Chief Accounting Officer |
Alan B. Buckelew | 68 | | 39 | | Chief Information Officer |
Arnold W. Donald | 62 | | 16 | | President and Chief Executive Officer and Director |
Stein Kruse | 58 | | 17 | | Chief Executive Officer of Holland America Group |
David Noyes | 54 | | 5 | | Chief Executive Officer of Carnival UK |
Arnaldo Perez | 56 | | 24 | | General Counsel and Secretary |
Michael Thamm | 53 | | 23 | | Group Chief Executive Officer of Costa Group and Carnival Asia |
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(a) | Years of service with us or Carnival plc predecessor companies. |
Business Experience of Executive Officers
Micky Arison has been Chairman of the Boards of Directors since 1990 and a Director since 1987. He was Chief Executive Officer from 1979 to 2013.
David Bernstein has been Chief Financial Officer since 2007 and Chief Accounting Officer since 2016. From 2003 to 2007, he was Treasurer. From 1998 to 2003, he was Chief Financial Officer of Cunard and Seabourn.
Alan B. Buckelew has been Chief Information Officer since December 2016. From 2013 to December 2016, he was Chief Operations Officer. From 2007 to 2013, he was Chief Executive Officer of Princess. He was President of Princess from 2004 to 2013. From 2004 to 2007, he was also Chief Operating Officer of Cunard.
Arnold W. Donald has been President and Chief Executive Officer since 2013. He has been a Director since 2001. He is also a Principal of AWDPLC LLC, a private investment company. From 2010 to 2012, he was President and Chief Executive Officer of The Executive Leadership Counsel, a professional network of African-American executives of major U.S. companies.
Stein Kruse has been the Chief Executive Officer of Holland America Group since 2013. In this capacity, he is responsible for Holland America Line, Princess, Seabourn and Holland America Princess Alaska Tours. From 2004 to 2013, he was President and Chief Executive Officer of Holland America Line.
David Noyes has been Chief Executive Officer of Carnival UK since October 2014. In this capacity, he is responsible for P&O Cruises (UK) and Cunard. From 2011 to September 2014, he was Executive Vice President of Operations for Carnival UK.
Arnaldo Perez has been General Counsel and Secretary since 1995.
Michael Thamm has been Group Chief Executive Officer of Costa Group since 2012 and of Carnival Asia since December 2016. In this capacity, he is responsible for Costa and AIDA and management oversight of all Asia operations. From 2004 to 2012, he was President of AIDA.
PART II
Item 5. Market for Registrants’ Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
A. Market Information
The information required by Item 201(a) of Regulation S-K, Market Information, is shown in Exhibit 13 and is incorporated by reference into this Form 10-K.
B. Holders
The information required by Item 201(b) of Regulation S-K, Holders, is shown in Exhibit 13 and is incorporated by reference into this Form 10-K.
C. Dividends
Carnival Corporation and Carnival plc declared quarterly cash dividends on all of their common stock and ordinary shares as follows:
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| Quarters Ended |
| February 29/28 | | May 31 | | August 31 | | November 30 |
2016 | $0.30 | | $0.35 | | $0.35 | | $0.35 |
2015 | $0.25 | | $0.25 | | $0.30 | | $0.30 |
2014 | $0.25 | | $0.25 | | $0.25 | | $0.25 |
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 American Depository Shares 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.
The payment and amount of any future dividend is within the discretion of the Boards of Directors. Our dividends were and will be based on a number of factors, including our earnings, liquidity position, financial condition, tone of business, capital requirements, credit ratings and the availability and cost of obtaining new debt. We cannot be certain that Carnival Corporation and Carnival plc will continue their dividend in the future, and if so, the amount and timing of such future dividends are not determinable and may be different than the levels and have a different timing than are disclosed above.
D. Securities Authorized for Issuance under Equity Compensation Plans
The information required by Item 201(d) of Regulation S-K is incorporated by reference to Part III. Item 12 of this Form 10-K.
E. Performance Graph
The information required by Item 201(e) of Regulation S-K, Performance Graph, is shown in Exhibit 13 and is incorporated by reference into this Form 10-K.
F. Issuer Purchases of Equity Securities; Use of Proceeds from Registered Securities
I. Repurchase Authorizations
Our Boards of Directors have authorized, subject to certain restrictions, the repurchase of up to an aggregate of $1.0 billion of Carnival Corporation common stock and/or Carnival plc ordinary shares (the “Repurchase Program”). On January 28, 2016 and on June 27, 2016, the Boards of Directors approved modifications of the Repurchase Program authorization that increased the remaining authorized repurchases at the time of each approval by $1.0 billion. The Repurchase Program does not have an expiration date and may be discontinued by our Boards of Directors at any time.
During the three months ended November 30, 2016, purchases of Carnival Corporation common stock pursuant to the Repurchase Program were as follows:
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Period | | Total Number of Shares of Carnival Corporation Common Stock Purchased (a) | | Average Price Paid per Share of Carnival Corporation Common Stock | | Maximum Dollar Value of Shares That May Yet Be Purchased Under the Repurchase Program (b) |
| | (in millions) | | | | (in millions) |
September 1, 2016 through September 30, 2016 | | 2.5 |
| | $45.94 | | $514 |
October 1, 2016 through October 31, 2016 | | 1.7 |
| | $47.06 | | $432 |
November 1, 2016 through November 30, 2016 | | — |
| | — | | $399 |
Total | | 4.2 |
| | $46.39 | | |
(a) No shares of Carnival Corporation common stock were purchased outside of publicly announced plans or programs.
(b) During the fourth quarter of 2016, we repurchased 0.7 million ordinary shares of Carnival plc at an average price of $48.87 under the Repurchase Program. Carnival plc ordinary shares are listed on the London Stock Exchange.
During 2016 and 2015, our repurchases under the Repurchase Program were as follows (in millions):
|
| | | | | | | | | | |
| Carnival Corporation | | Carnival plc |
| Total Number of Shares Repurchased | | Dollar Amount Paid for Shares Repurchased | | Total Number of Shares Repurchased | | Dollar Amount Paid for Shares Repurchased |
2016 | 47.8 |
| | $2,264 | | 0.7 |
| | $35 |
2015 | 5.3 |
| | $276 | | — |
| | — |
|
From December 1, 2016 through January 19, 2017, we repurchased 0.2 million shares of Carnival plc ordinary shares for approximately $10 million under the Repurchase Program. At January 19, 2017, the remaining availability under the Repurchase Program was $389 million.
In addition to the Repurchase Program, the Boards of Directors authorized, in January 2017, the repurchase of up to 22.0 million Carnival plc ordinary shares and, in February 2016, the repurchase of up to 26.9 million shares of Carnival Corporation common stock under the Stock Swap programs described below. At January 19, 2017, the remaining availability under the Stock Swap programs was 22.0 million Carnival plc ordinary shares and 26.0 million shares of Carnival Corporation common stock.
Carnival plc ordinary share repurchases under both the Repurchase Program and the Stock Swap programs require annual shareholder approval. The existing shareholder approval is limited to a maximum of 21.5 million ordinary shares and is valid until the earlier of the conclusion of the Carnival plc 2017 annual general meeting or July 13, 2017. At January 19, 2017, the remaining Carnival plc availability under the Repurchase Program was 20.6 million ordinary shares.
II. Stock Swap Programs
We use the Stock Swap programs in situations where we can obtain an economic benefit because either Carnival Corporation common stock or Carnival plc ordinary shares are trading at a price that is at a premium or discount to the price of Carnival plc ordinary shares or Carnival Corporation common stock, as the case may be. Any realized economic benefit under the Stock Swap programs is used for general corporate purposes, which could include repurchasing additional stock under the Repurchase Program.
In the event Carnival Corporation common stock trades at a premium to Carnival plc ordinary shares, we may elect to issue and sell shares of Carnival Corporation common stock through a sales agent, from time to time at prevailing market prices in ordinary brokers’ transactions, and use the sale proceeds to repurchase Carnival plc ordinary shares in the UK market on at least an equivalent basis. Based on an authorization provided by the Board of Directors in January 2017, Carnival Corporation was authorized to issue and sell up to 22.0 million shares of its common stock in the U.S. market and had 22.0 million shares remaining at January 19, 2017. Any sales of Carnival Corporation shares have been or will be registered under the Securities Act.
In the event Carnival Corporation common stock trades at a discount to Carnival plc ordinary shares, we may elect to sell existing ordinary shares of Carnival plc, with such sales made by Carnival Corporation or Carnival Investments Limited
through its sales agent from time to time at prevailing market prices in ordinary brokers’ transactions, and use the sale proceeds to repurchase shares of Carnival Corporation common stock in the U.S. market on at least an equivalent basis. Based on an authorization provided by the Board of Directors in February 2016, Carnival Corporation or Carnival Investments Limited was authorized to sell up to 26.9 million Carnival plc ordinary shares in the UK market and had 26.0 million shares remaining at January 19, 2017. Any sales of Carnival plc ordinary shares have been or will be registered under the Securities Act.
During 2016 and 2015 respectively, under the Stock Swap programs, Carnival Investments Limited sold 0.9 million and 5.1 million Carnival plc ordinary shares through its sales agents, Merrill Lynch International ("MLI") in 2016 and Goldman Sachs International ("Goldman") in 2015, for total gross proceeds of $40 million and $266 million and paid commission fees to MLI and Goldman of $260 thousand and $1.9 million and other governmental and regulatory transaction fees of $46 thousand and $0.4 million resulting in total net proceeds of $40 million and $264 million. Substantially all of the net proceeds from these sales were used to purchase 0.9 million shares in 2016 and 5.1 million shares in 2015 of Carnival Corporation common stock. During 2016, no Carnival Corporation common stock was sold or Carnival plc ordinary shares were repurchased under the “Stock Swap” program. During the three months ended November 30, 2016, there were no repurchases of Carnival Corporation Common Stock pursuant to the Stock Swap program.
Item 6. Selected Financial Data.
The information required by Item 6. Selected Financial Data, is shown in Exhibit 13 and is incorporated by reference into this Form 10-K.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The information required by Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, is shown in Exhibit 13 and is incorporated by reference into this Form 10-K.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The information required by Item 7A. Quantitative and Qualitative Disclosures About Market Risk, is shown in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Exhibit 13 and is incorporated by reference into this Form 10-K.
Item 8. Financial Statements and Supplementary Data.
The financial statements, together with the report thereon of PricewaterhouseCoopers LLP, dated January 30, 2017,28, 2020, and the Selected Quarterly Financial Data (Unaudited) are shown in Exhibit 13 and are incorporated by reference into this Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
A. Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, is recorded, processed, summarized and reported, within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in our reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.
Our President and Chief Executive Officer and our Chief Financial Officer and Chief Accounting Officer have evaluated our disclosure controls and procedures and have concluded, as of November 30, 2016,2019, that they are effective as described above.
B. Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in the Securities Exchange Act of 1934 Rule 13a-15(f). Under the supervision andOur management, with the participation of our management, including our President and Chief Executive Officer and our Chief Financial Officer and Chief Accounting Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the 2013 Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“(the
“COSO Framework”). Based on ourthis evaluation under the COSO Framework, our management concluded that our internal control over financial reporting was effective as of November 30, 2016.2019.
PricewaterhouseCoopers LLP, the independent registered certified public accounting firm that audited our consolidated financial statements incorporated in this Form 10-K, has also audited the effectiveness of our internal control over financial reporting as of November 30, 20162019 as stated in their report, which is shown in Exhibit 13 and is incorporated by reference into this Form 10-K.
C. Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting during the quarter ended November 30, 20162019 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
Item 9B. Other Information.
On January 27, 2020, Debra Kelly-Ennis resigned from her position as a Director of Carnival Corporation and Carnival plc, including her role as a member of our HESS Committees effective that same day. Her resignation was not the result of any disagreement between her and the company.
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
We have adopted a code of ethics that applies toDirectors
Information regarding our President and Chief Executive Officer and senior financial officers, including the Chief Financial Officer and Chief Accounting Officer and other persons performing similar functions. Our code of ethics applies to all our other employeesdirectors, as well. This code of ethics is posted on our website, which is located at www.carnivalcorp.com and www.carnivalplc.com. We intend to satisfy the disclosure requirement under Item 10 of Form 8-K regarding any amendments to, or waivers from, any provisions of this code of ethics by posting such information on our website, at the addresses specified above.
The additional information required by Item 10, is incorporated herein by reference tofrom the Carnival Corporation and Carnival plc joint definitive Proxy Statement to be filed with the U.S. Securities and Exchange Commission not later than 120 days after the close of the 20162019 fiscal year, except thatyear.
Information About Our Executive Officers
The table below sets forth the information concerning thename, age, years of service and title of each of our executive officers. Titles listed relate to positions within Carnival Corporation and Carnival plc executiveunless otherwise noted.
|
| | | | | |
|
Age | | Years of Service (a) | | Title |
Micky Arison | 70 | | 48 | | Chairman of the Boards of Directors |
David Bernstein | 62 | | 21 | | Chief Financial Officer and Chief Accounting Officer |
Arnold W. Donald | 65 | | 19 | | President and Chief Executive Officer and Director |
Stein Kruse | 61 | | 20 | | Group Chief Executive Officer of Holland America Group and Carnival UK |
Arnaldo Perez | 59 | | 27 | | General Counsel and Secretary |
Michael Thamm | 56 | | 26 | | Group Chief Executive Officer of Costa Group and Carnival Asia |
| |
(a) | Years of service with us or Carnival plc predecessor companies. |
Business Experience of Executive Officers
Micky Arison has been Chairman of the Boards of Directors since 1990 and a Director since 1987. He was Chief Executive Officer from 1979 to 2013.
David Bernstein has been Chief Financial Officer since 2007 and Chief Accounting Officer since 2016.
Arnold W. Donald has been President and Chief Executive Officer since 2013. He has been a Director since 2001.
Stein Kruse has been the Group Chief Executive Officer of Holland America Group and Carnival UK since 2017. He was Chief Executive Officer of Holland America Group from 2013 to 2017.
Arnaldo Perez has been General Counsel and Secretary since 1995.
Michael Thamm has been Group Chief Executive Officer of Costa Group since 2012 and of Carnival Asia since 2017.
Corporate Governance
We have adopted a Code of Business Conduct and Ethics that applies to our President and Chief Executive Officer and senior financial officers, called for byincluding the Chief Financial Officer and Chief Accounting Officer and other persons performing similar functions. Our Code of Business Conduct and Ethics applies to all our other employees and to our directors as well. This Code of Business Conduct and Ethics is posted on our website, which is located at www.carnivalcorp.com and www.carnivalplc.com. We intend to satisfy the disclosure requirement under Item 401(b)5.05 of Regulation S-K is included in Part Ithe Form 8-K regarding any amendments to, or waivers from, provisions of this Form 10-K.Code of Business Conduct and Ethics by posting such information on our website, at the addresses specified above.
Item 11. Executive Compensation.
The additional information required by Item 1110 is incorporated herein by reference tofrom the Carnival Corporation and Carnival plc joint definitive Proxy Statement to be filed with the U.S. Securities and Exchange Commission not later than 120 days after the close of the 20162019 fiscal year.
Item 11. Executive Compensation.
The information required by Item 11 is incorporated herein by reference from the Carnival Corporation and Carnival plc joint definitive Proxy Statement to be filed with the U.S. Securities and Exchange Commission not later than 120 days after the close of the 2019 fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
A.Securities Authorized for Issuance under Equity Compensation Plans
I. Carnival Corporation
Set forth below is a table that summarizes compensation plans (including individual compensation arrangements) under which Carnival Corporation equity securities are authorized for issuance as of November 30, 2016.
2019.
| | Plan category | | Number of securities to be issued upon exercise of warrants and rights (in millions) | | Weighted-average exercise price of outstanding warrants and rights | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (1)) (in millions) | | | Number of securities to be issued upon exercise of warrants and rights (in millions) | | Weighted-average exercise price of outstanding warrants and rights | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (1)) (in millions) | |
| | (1) | | | (1) | | | |
Equity compensation plans approved by security holders | | 2.2 | (a) | - | | 11.3 | (b) | | 2.3 |
| (a) | - | | 7.1 |
| (b) |
Equity compensation plans not approved by security holders | |
- | |
- | |
- | | | — |
| |
- | | — |
| |
| | 2.2 | | - | | 11.3 | | | 2.3 |
| | - | | 7.1 |
| |
Set forth below is a table that summarizes compensation plans (including individual compensation arrangements) under which Carnival plc equity securities are authorized for issuance as of November 30, 2016.2019.