EXHIBIT 13
CARNIVAL CORPORATION & PLC
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share data)
Years Ended November 30,
-------------------------------
2006 2005 2004
-------- -------- -------
(Note 2)
Revenues
Cruise
Passenger tickets $ 8,903 $ 8,399 $ 7,357
Onboard and other 2,514 2,338 2,070
Other 422 357 300
-------- -------- -------
11,839 11,094 9,727
-------- -------- -------
Costs and Expenses
Operating
Cruise
Commissions, transportation and other 1,749 1,645 1,572
Onboard and other 453 412 359
Payroll and related 1,158 1,122 1,003
Fuel 935 707 493
Food 644 613 550
Other ship operating 1,538 1,465 1,315
Other 314 254 210
-------- -------- -------
Total 6,791 6,218 5,502
Selling and administrative 1,447 1,335 1,285
Depreciation and amortization 988 902 812
-------- -------- -------
9,226 8,455 7,599
-------- -------- -------
Operating Income 2,613 2,639 2,128
-------- -------- -------
Nonoperating (Expense) Income
Interest income 25 29 17
Interest expense, net of capitalized interest (312) (330) (284)
Other expense, net (8) (13) (5)
-------- -------- -------
(295) (314) (272)
-------- -------- -------
Income Before Income Taxes 2,318 2,325 1,856
Income Tax Expense, Net (39) (72) (47)
-------- -------- -------
Net Income $ 2,279 $ 2,253 $ 1,809
======== ======== =======
Earnings Per Share
Basic $ 2.85 $ 2.80 $ 2.25
======== ======== =======
Diluted $ 2.77 $ 2.70 $ 2.18
======== ======== =======
Dividends Per Share $ 1.025 $ 0.80 $ 0.525
======== ======== =======
The accompanying notes are an integral part of these consolidated financial
statements.
F-1
CARNIVAL CORPORATION & PLC
CONSOLIDATED BALANCE SHEETS
(in millions, except par value)
November 30,
--------------------
2006 2005
-------- --------
(Note 2)
ASSETS
Current Assets
Cash and cash equivalents $ 1,163 $ 1,178
Trade and other receivables, net 280 430
Inventories 263 250
Prepaid expenses and other 289 263
-------- --------
Total current assets 1,995 2,121
-------- --------
Property and Equipment, Net 23,458 21,312
Goodwill 3,313 3,206
Trademarks 1,321 1,282
Other Assets 465 428
-------- --------
$ 30,552 $ 28,349
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Short-term borrowings $ 438 $ 300
Current portion of long-term debt 1,054 1,042
Convertible debt subject to current put option 283
Accounts payable 438 477
Accrued liabilities and other 1,149 1,032
Customer deposits 2,336 2,051
-------- --------
Total current liabilities 5,415 5,185
-------- --------
Long-Term Debt 6,355 5,727
Other Long-Term Liabilities and Deferred Income 572 554
Commitments and Contingencies (Notes 6 and 7)
Shareholders' Equity
Common stock of Carnival Corporation; $.01 par
value; 1,960 shares authorized; 641 shares at
2006 and 639 shares at 2005 issued 6 6
Ordinary shares of Carnival plc; $1.66 par value;
226 shares authorized; 213 shares at 2006 and
212 shares at 2005 issued 354 353
Additional paid-in capital 7,479 7,381
Retained earnings 11,600 10,141
Unearned stock compensation (13)
Accumulated other comprehensive income 661 159
Treasury stock; 18 at 2006 and 2 shares at 2005
of Carnival Corporation and 42 shares at 2006
and 2005 of Carnival plc, at cost (1,890) (1,144)
-------- --------
Total shareholders' equity 18,210 16,883
-------- --------
$ 30,552 $ 28,349
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
CARNIVAL CORPORATION & PLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
Years Ended November 30,
-----------------------------
2006 2005 2004
------- ------- -------
(Note 2)
OPERATING ACTIVITIES
Net income $ 2,279 $ 2,253 $ 1,809
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation and amortization 988 902 812
Share-based compensation 68 12 11
Non-cruise investment write-down 10 22
Accretion of original issue discount 9 20 21
Other 3 5
Changes in operating assets and liabilities
Receivables 118 (71) 11
Inventories (5) (15) (73)
Prepaid expenses and other 6 (136) (9)
Accounts payable (53) 53 (28)
Accrued and other liabilities (11) 155 178
Customer deposits 224 212 479
------- ------- -------
Net cash provided by operating activities 3,633 3,410 3,216
------- ------- -------
INVESTING ACTIVITIES
Additions to property and equipment (2,480) (1,977) (3,586)
Sales of short-term investments 6 943 1,216
Purchases of short-term investments (18) (935) (772)
Proceeds from sales of property and equipment 46 77
Other, net 3 (1) (24)
------- ------- -------
Net cash used in investing activities (2,443) (1,970) (3,089)
------- ------- -------
FINANCING ACTIVITIES
Principal repayments of long-term debt (2,537) (1,096) (932)
Proceeds from issuance of long-term debt 2,241 1,152 843
Purchase of treasury stock (841) (386)
Dividends paid (803) (566) (400)
Proceeds from (repayments of) short-term borrowings, net 661 (58) 272
Proceeds from exercise of stock options 66 63 142
Other 1 (1) (4)
------- ------- -------
Net cash used in financing activities (1,212) (892) (79)
------- ------- -------
Effect of exchange rate changes on cash and cash
equivalents 7 (13) (15)
------- ------- -------
Net (decrease) increase in cash and cash
equivalents (15) 535 33
Cash and cash equivalents at beginning of year 1,178 643 610
------- ------- -------
Cash and cash equivalents at end of year $ 1,163 $ 1,178 $ 643
======= ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
CARNIVAL CORPORATION & PLC
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in millions)
(Note 2)
Unearned Accumulated Total
Compre- Additional stock other share-
hensive Common Ordinary paid-in Retained compen- comprehensive Treasury holders'
income stock shares capital earnings sation income stock equity
------- ------ -------- ---------- -------- -------- ------------- -------- --------
Balances at November 30, 2003 $ 6 $ 349 $ 7,163 $ 7,148 $ (18) $ 162 $ (1,058) $ 13,752
Comprehensive income
Net income $ 1,809 1,809 1,809
Foreign currency
translation adjustment 396 396 396
Unrealized loss on
marketable securities (1) (1) (1)
Minimum pension liability
adjustments (3) (3) (3)
Changes related to cash flow
derivative hedges, net (13) (13) (13)
-------
Total comprehensive income $ 2,188
=======
Cash dividends declared (422) (422)
Issuance of stock under stock
plans 4 148 (7) 145
Amortization of unearned stock
compensation 9 9
------ -------- ---------- -------- -------- ------------- -------- --------
Balances at November 30, 2004 6 353 7,311 8,535 (16) 541 (1,058) 15,672
Comprehensive income
Net income $ 2,253 2,253 2,253
Foreign currency
translation adjustment (395) (395) (395)
Minimum pension liability
adjustments (2) (2) (2)
Changes related to cash flow
derivative hedges, net 15 15 15
-------
Total comprehensive income $ 1,871
=======
Cash dividends declared (647) (647)
Issuance of stock under stock
plans 73 (9) 64
Amortization of unearned stock
compensation 12 12
Purchase of treasury stock (386) (386)
Issuance of common stock upon
conversion of convertible debt (3) 300 297
------ -------- ---------- -------- -------- ------------- -------- --------
Balances at November 30, 2005 6 353 7,381 10,141 (13) 159 (1,144) 16,883
Adoption of SFAS No. 123(R) (13) 13
Comprehensive income
Net income $ 2,279 2,279 2,279
Foreign currency
translation adjustment 496 496 496
Minimum pension liability
adjustments 2 2 2
Changes related to cash flow
derivative hedges, net 4 4 4
-------
Total comprehensive income $ 2,781
=======
Cash dividends declared (820) (820)
Issuance of stock under stock
plans 1 133 134
Purchase of treasury stock (841) (841)
Issuance of common stock upon
conversion of convertible debt (22) 95 73
------ -------- ---------- -------- -------- ------------- -------- --------
Balances at November 30, 2006 $ 6 $ 354 $ 7,479 $ 11,600 $ $ 661 $ (1,890) $ 18,210
====== ======== ========== ======== ======== ============= ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
CARNIVAL CORPORATION & PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - General
Description of Business
Carnival Corporation is incorporated in Panama, and Carnival plc is
incorporated in England and Wales. Carnival Corporation and Carnival plc operate
a dual listed company ("DLC"), whereby the businesses of Carnival Corporation
and Carnival plc are combined through a number of contracts and through
provisions in Carnival Corporation's articles of incorporation and by-laws and
Carnival plc's memorandum of association and articles of association. Although
the two companies have retained their separate legal identities they operate as
if they were a single economic enterprise. Each company's shares continue to be
publicly traded; on the New York Stock Exchange ("NYSE") for Carnival
Corporation and the London Stock Exchange for Carnival plc. In addition,
Carnival plc American Depository Shares ("ADSs") are traded on the NYSE. See
Note 3.
The accompanying consolidated financial statements include the accounts of
Carnival Corporation and Carnival plc and their respective subsidiaries.
Together with their consolidated subsidiaries they are referred to collectively
in these consolidated financial statements and elsewhere in this 2006 Annual
Report as "Carnival Corporation & plc," "our," "us," and "we."
We are the largest cruise company and one of the largest vacation
companies in the world. As of November 30, 2006, a summary of the number of
cruise ships we operate, by brand, their passenger capacity and the primary
areas in which they are marketed is as follows:
Number of Passenger Primary
Cruise Brands Cruise Ships Capacity (a) Market
------------- ------------ ------------- -------
Carnival Cruise Lines 21 47,818 North America
Princess Cruises ("Princess") 15 32,232 North America
Costa Cruises ("Costa") 11 20,218 Europe
Holland America Line 13 18,848 North America
P&O Cruises 5 8,840 United Kingdom
AIDA Cruises ("AIDA") 4 5,378 Germany
Cunard Line ("Cunard") 2 4,380 North America and United Kingdom
P&O Cruises Australia 2 2,474 Australia and New Zealand
Ocean Village 1 1,578 United Kingdom
Swan Hellenic 1 678 United Kingdom
Seabourn Cruise Line ("Seabourn") 3 624 North America
Windstar Cruises 3 608 North America
------------ -------------
81 143,676
============ =============
(a) In accordance with cruise industry practice, passenger capacity is
calculated based on two passengers per cabin even though some cabins can
accommodate three or more passengers.
Preparation of Financial Statements
The preparation of our consolidated financial statements in accordance
with accounting principles generally accepted in the United States of America
requires us to make estimates and assumptions that affect the amounts reported
and disclosed in our financial statements. Actual results could differ from
these estimates. All significant intercompany balances and transactions are
eliminated in consolidation.
F-5
NOTE 2 - Summary of Significant Accounting Policies
Basis of Presentation
We consolidate entities over which we have control (see Note 3), as
typically evidenced by a direct ownership interest of greater than 50%. For
affiliates where significant influence over financial and operating policies
exists, as typically evidenced by a direct ownership interest from 20% to 50%,
the investment is accounted for using the equity method.
Cash and Cash Equivalents and Short-Term Investments
Cash and cash equivalents include investments with maturities of three
months or less at acquisition, which are stated at cost. At November 30, 2006
and 2005, cash and cash equivalents included $936 million and $980 million of
investments, respectively, primarily comprised of money market funds, time
deposits and commercial paper.
As of November 30, 2006 and 2005, our short-term investments were not
significant. Purchases and sales of short-term investments included in our
Consolidated Statements of Cash Flows consisted of investments with original
maturities greater than three months with variable interest rates, which
typically reset every 28 days. Despite the long-term nature of their stated
contractual maturities, we have the ability to quickly liquidate these
securities. All income generated from these investments was recorded as interest
income.
Inventories
Inventories consist of provisions, gift shop and art merchandise held for
resale, fuel and supplies carried at the lower of cost or market. Cost is
determined using the weighted-average or first-in, first-out methods.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization
were computed using the straight-line method over our estimates of average
useful lives and residual values, as a percentage of original cost, as follows:
Residual
Values Years
--------- -----
Ships 15% 30
Ship improvements 0% or 15% 3 to remaining
life of ship
Buildings and improvements 0-10% 5-35
Transportation equipment and other 0-15% 2-20
Leasehold improvements, including port facilities Shorter of lease term
or related asset life
Ship improvement costs that we believe add value to our ships are
capitalized to the ships, and depreciated over the improvements' estimated
useful lives, while costs of repairs and maintenance and minor replacement costs
are charged to expense as incurred. Upon replacement or refurbishment of
previously capitalized ship components, these assets' estimated cost and
accumulated depreciation are written off. We capitalize interest on ships and
other capital projects during their construction period.
We review our long-lived assets for impairment whenever events or changes
in circumstances indicate that the carrying amount of these assets may not be
fully recoverable. The assessment of possible impairment is based on our ability
to recover the carrying value of our asset based on our estimate of its
undiscounted future cash flows. If these estimated undiscounted future cash
flows are less than the carrying value of the asset, an impairment charge is
recognized for the excess, if any, of the asset's carrying value over its
estimated fair value.
F-6
Dry-dock Costs
Dry-dock costs primarily represent planned major maintenance activities
that are incurred when a ship is taken out of service for scheduled maintenance.
During 2006 we elected to change our method of accounting for dry-dock costs
from the deferral method, under which we amortized our deferred dry-dock costs
over the estimated period of benefit between dry-docks, to the direct expense
method, under which we expense all dry-dock costs as incurred. We believe the
direct method is preferable as it eliminates the significant amount of time and
subjectivity that is needed to determine which costs and activities related to
dry-docking should be deferred. In connection with adopting this change in
accounting policy, we elected to early adopt Statement of Financial Accounting
Standards ("SFAS") No. 154, "Accounting Changes and Error Corrections", which
requires that we report changes in accounting policy by retrospectively applying
the new policies to all prior periods presented, unless it is impractical to
determine the prior period impacts. Accordingly, we have previously adjusted our
financial statements for all periods presented for this change in dry-dock
policy. The effects of this change in accounting policy for the years ended and
at November 30 were as follows (in millions, except earnings per share):
Consolidated Statements of Operations
2006 2005 2004
---------------------------------- --------------------------------- ---------------------------------
Deferral Direct Effect Deferral Direct Effect Deferral Direct Effect
Method(a) Method of Change Method Method of Change Method Method of Change
--------- -------- --------- -------- -------- --------- -------- -------- ---------
Other ship
operating
expenses $ 1,484 $ 1,538 $ 54 $ 1,461 $ 1,465 $ 4 $ 1,270 $ 1,315 $ 45
Net income $ 2,333 $ 2,279 $ (54) $ 2,257 $ 2,253 $ (4) $ 1,854 $ 1,809 $ (45)
Earnings
per share
Basic $ 2.92 $ 2.85 $ (0.07) $ 2.80 $ 2.80 $ 0.00 $ 2.31 $ 2.25 $ (0.06)
========= ======== ========= ======== ======== ========= ======== ======== =========
Diluted $ 2.83 $ 2.77 $ (0.06) $ 2.70 $ 2.70 $ 0.00 $ 2.24 $ 2.18 $ (0.06)
========= ======== ========= ======== ======== ========= ======== ======== =========
Consolidated Balance Sheets
2006 2005
---------------------------------- ---------------------------------
Deferral Direct Effect Deferral Direct Effect
Method(a) Method of Change Method Method of Change
--------- -------- --------- -------- -------- ---------
Prepaid expenses and other $ 434 $ 289 $ (145) $ 352 $ 263 $ (89)
Retained earnings $ 11,746 $ 11,600 $ (146) $ 10,233 $ 10,141 $ (92)
Accumulated other
comprehensive income $ 660 $ 661 $ 1 $ 156 $ 159 $ 3
(a) The amounts disclosed under the deferral method for the year ended and at
November 30, 2006 are based on the estimated effect of not changing our
dry-dock accounting method to the direct expense method for this current
period. Accordingly, these estimated current period amounts have not been
previously reported, but are being disclosed in accordance with the
requirements of SFAS No. 154.
In addition, as a result of this change in accounting method retained
earnings at November 30, 2003 decreased by $43 million to $7.15 billion from
$7.19 billion.
Goodwill
We review our goodwill for impairment annually, or, when events or
circumstances dictate, more frequently. All of our goodwill has been allocated
to our cruise reporting units. There were no significant changes to our goodwill
carrying amounts since November 30, 2004, other than the changes resulting from
using different foreign currency translation rates at each balance sheet date
and a $20 million reduction to goodwill in fiscal 2006 resulting from the
resolution of certain P&O Princess Cruises plc's ("P&O Princess") tax
contingency liabilities that existed at the time of the DLC transaction.
F-7
Our goodwill impairment reviews consist of a two-step process of first
determining the fair value of the reporting unit and comparing it to the
carrying value of the net assets allocated to the reporting unit. Fair values of
our reporting units were determined based on our estimates of comparable market
prices or discounted future cash flows. If this fair value exceeds the carrying
value, which was the case for our reporting units, no further analysis or
goodwill write-down is required. If the fair value of the reporting unit is less
than the carrying value of the net assets, the implied fair value of the
reporting unit is allocated to all the underlying assets and liabilities,
including both recognized and unrecognized tangible and intangible assets, based
on their fair value. If necessary, goodwill is then written-down to its implied
fair value.
Trademarks
The costs of developing and maintaining our trademarks are expensed as
incurred. However, for acquisitions made after June 2001 we have allocated a
portion of the purchase price to the acquiree's identified trademarks. The
trademarks that Carnival Corporation recorded as part of its acquisition of P&O
Princess, which are estimated to have an indefinite useful life and, therefore,
are not amortizable, are reviewed for impairment annually, or, when events or
circumstances dictate, more frequently. Our trademarks would be considered
impaired if their carrying value exceeds their estimated fair value.
Derivative Instruments and Hedging Activities
We utilize derivative and nonderivative financial instruments, such as
foreign currency swaps and foreign currency debt obligations to limit our
exposure to fluctuations in foreign currency exchange rates, and interest rate
swaps to manage our interest rate exposure and to achieve a desired proportion
of variable and fixed rate debt (see Notes 5 and 10).
All derivatives are recorded at fair value, and the changes in fair value
are immediately included in earnings if the derivatives do not qualify as being
effective hedges. If a derivative is a fair value hedge, then changes in the
fair value of the derivative are offset against the changes in the fair value of
the underlying hedged item. If a derivative is a cash flow hedge, then changes
in the fair value of the derivative are recognized as a component of accumulated
other comprehensive income ("AOCI") until the underlying hedged item is
recognized in earnings. If a derivative or a nonderivative financial instrument
is designated as a hedge of our net investment in a foreign subsidiary, then
changes in the fair value of the financial instrument are recognized as a
component of AOCI to offset a portion of the change in the translated value of
the net investment being hedged, until the investment is liquidated. We formally
document all hedging relationships for all derivative and nonderivative hedges
and the underlying hedged items, as well as our risk management objectives and
strategies for undertaking the hedge transactions.
We classify the fair value of our derivative contracts and the fair value
of our offsetting hedged firm commitments as either current or long-term, which
are included in prepaid and other assets and accrued and other liabilities,
depending on whether the maturity date of the derivative contract is within or
beyond one year from our balance sheet dates. The cash flows from derivatives
treated as hedges are classified in our Consolidated Statements of Cash Flows in
the same category as the item being hedged.
During fiscal 2006, 2005 and 2004, all net changes in the fair value of
both our fair value hedges and the offsetting hedged firm commitments and our
cash flow hedges were immaterial, as were any ineffective portions of these
hedges. No fair value hedges or cash flow hedges were derecognized or
discontinued in fiscal 2006, 2005 or 2004. In addition, the amount of realized
net losses or gains from cash flow hedges that were reclassified into earnings
during fiscal 2006, 2005 and 2004 were not significant. The amount of estimated
cash flow hedges unrealized net losses which are expected to be reclassified to
earnings in the next twelve months is not significant.
Finally, if any shipyard with which we have contracts to build our ships
is unable to perform, we would be required to perform under our foreign currency
swaps related to these shipbuilding contracts. Accordingly, based upon the
circumstances, we may have to discontinue the accounting for those currency
swaps as hedges, if the shipyard cannot perform. However, we believe that the
risk of shipyard nonperformance is remote.
F-8
Revenue and Expense Recognition
Guest cruise deposits represent unearned revenues and are initially
recorded as customer deposit liabilities when received. Customer deposits are
subsequently recognized as cruise revenues, together with revenues from onboard
and other activities, which include transportation and shore excursion revenues
and all associated direct costs of a voyage, upon completion of voyages with
durations of ten nights or less and on a pro rata basis for voyages in excess of
ten nights. Future travel discount vouchers issued to guests are typically
recorded as a reduction of revenues when such vouchers are utilized.
Cancellation fees are recognized in revenues at the time of the cancellation.
Revenues and expenses from our tour and travel services are recognized at the
time the services are performed or expenses are incurred.
Our sale to passengers of air and other transportation to and from our
ships and the related cost of purchasing this service is recorded as cruise
passenger ticket revenues and cruise transportation costs, respectively, in the
accompanying Consolidated Statements of Operations. The proceeds that we collect
from the sale of third party shore excursions and on behalf of onboard
concessionaires, net of the amounts remitted to them, are recorded as concession
revenues, on a net basis, in onboard and other cruise revenues.
Insurance/Self-Insurance
We use a combination of insurance and self-insurance for a number of risks
including claims related to crew and passengers, hull and machinery, war risk,
workers' compensation, property damage and general liability. Liabilities
associated with certain of these risks, including crew and passenger claims, are
estimated based on, among other things, historical claims experience, severity
factors and other actuarial assumptions. Our expected loss accruals are based on
estimates, and while we believe the amounts accrued are adequate the ultimate
loss may differ from the amounts provided.
Selling and Administrative Expenses
Selling expenses include items such as advertising, marketing, promotional
and related costs. Advertising costs are charged to expense as incurred except
for brochures and media production costs. The brochures and media production
costs are recorded as prepaid expenses and charged to expense as consumed or
upon the first airing of the advertisement, respectively. Advertising expenses
totaled $464 million, $455 million and $464 million in fiscal 2006, 2005 and
2004, respectively. At November 30, 2006 and 2005, the amount of advertising
costs included in prepaid expenses was not significant. Administrative expenses
represent the costs of our shoreside ship support, reservation and other
administrative functions and include items such as salaries and related
benefits, professional fees and occupancy costs, which are typically expensed as
incurred.
Foreign Currency Translations and Transactions
Our foreign subsidiaries and affiliates that have functional currencies
other than the U.S. dollar translate their assets and liabilities at exchange
rates in effect at the balance sheet dates. Revenues and expenses of these
foreign subsidiaries and affiliates are translated at weighted-average exchange
rates for the period. Equity is translated at historical rates, and the
resulting cumulative foreign currency translation adjustments are included as a
component of AOCI. Therefore, the U.S. dollar value of these non-equity
translated items in our financial statements will fluctuate from period to
period, depending on the changing value of the dollar against these local
functional currencies.
Exchange gains and losses arising from the remeasurement of monetary
assets and liabilities, and foreign currency transactions denominated in a
currency other than the functional currency of the entity involved are
immediately included in nonoperating earnings, unless such net liabilities have
been designated to act as hedges of a net investment in our foreign
subsidiaries. In addition, the unrealized exchange gains or losses on our
long-term intercompany receivables denominated in a non-functional currency,
which are not expected to be repaid in the foreseeable future and are therefore
considered to form part of our net investment, are recorded as a foreign
currency translation adjustment, which is included as a component of AOCI.
Finally, net foreign currency transaction gains or losses recorded in our
earnings were not significant in fiscal 2006, 2005 and 2004.
F-9
Earnings Per Share
Basic earnings per share is computed by dividing net income by the
weighted-average number of shares of common stock and ordinary shares
outstanding during each period. Diluted earnings per share is computed by
dividing adjusted net income by the weighted-average number of shares of common
stock and ordinary shares, common stock equivalents and other potentially
dilutive securities outstanding during each period. All shares that are issuable
under our outstanding convertible notes that have contingent share conversion
features have been considered outstanding for our diluted earnings per share
computations, if dilutive, using the "if converted" method of accounting from
the date of issuance.
Share-Based Compensation
Effective December 1, 2005, we adopted the provisions of SFAS No.
123(revised 2004), "Share-Based Payment" ("SFAS No. 123(R)"), which requires us
to measure and recognize compensation expense for all share-based compensation
awards. We adopted SFAS No. 123(R) using the modified prospective application
transition method. Under this method, the share-based compensation cost
recognized beginning December 1, 2005 includes compensation cost for (i) all
share-based payments granted prior to, but not vested as of, December 1, 2005,
based on the grant date fair value originally estimated in accordance with the
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS No.
123"), and (ii) all share-based payments granted subsequent to November 30,
2005, based on the grant date fair value estimated in accordance with the
provisions of SFAS No. 123(R). Prior to December 1, 2005, as allowed under the
then outstanding accounting principles, we did not recognize compensation
expense for the issuance of stock options with an exercise price equal to or
greater than the market price of the underlying shares at the date of grant.
Compensation cost under SFAS No. 123(R) is recognized ratably using the
straight-line attribution method over the expected vesting period or to the
retirement eligibility date, if less than the vesting period, when vesting is
not contingent upon any future performance. In addition, pursuant to SFAS No.
123(R) we are required to estimate the amount of expected forfeitures, which we
estimate based on historical forfeiture experience, when calculating
compensation cost. If the actual forfeitures that occur are different than the
estimate, then we will revise our estimates. The effect of adopting SFAS No.
123(R) has been to reduce our net income by $57 million and our basic and
diluted earnings per share by $0.07 for the year ended November 30, 2006. Prior
periods are not restated under this transition method.
Concentrations of Credit Risk
As part of our ongoing control procedures, we monitor concentrations of
credit risk associated with financial and other institutions with which we
conduct significant business. Credit risk, including counterparty nonperformance
under derivative instruments, contingent obligations and new ship progress
payment guarantees, is considered minimal, as we primarily conduct business with
large, well-established financial institutions who have long-term credit ratings
of A or above and we seek to diversify our counterparties. In addition, we have
established guidelines regarding credit ratings and investment maturities that
we follow to maintain safety and liquidity. We do not anticipate nonperformance
by any of our significant counterparties.
We also monitor the creditworthiness of foreign travel agencies and tour
operators to which we grant credit terms in the normal course of our business.
Concentrations of credit risk associated with these receivables are considered
minimal primarily due to their short maturities and the large number of accounts
within our customer base. We have experienced only minimal credit losses on our
trade receivables. We do not normally require collateral or other security to
support normal credit sales. However, we do normally require collateral and/or
guarantees to support notes receivable on significant asset sales and new ship
progress payments to shipyards.
Reclassifications
We have reclassified certain prior period amounts to conform them to the
current period presentation primarily as a result of our adopting a new chart of
accounts in conjunction with our initial implementation of a new worldwide
accounting system in the second quarter of
F-10
2006. During this implementation, we identified certain differences among our
operating subsidiaries and, accordingly, we have recorded the appropriate
reclassifications in the prior periods to improve comparability.
NOTE 3 - DLC Structure
On April 17, 2003, Carnival Corporation and Carnival plc (formerly known
as P&O Princess) completed a DLC transaction, which implemented Carnival
Corporation & plc's DLC structure. The contracts governing the DLC structure
provide that Carnival Corporation and Carnival plc each continue to have
separate boards of directors, but the boards and senior executive management of
both companies are identical. The amendments to the constituent documents of
each of the companies also provide that, on most matters, the holders of the
common equity of both companies effectively vote as a single body. On specified
matters where the interests of Carnival Corporation's shareholders may differ
from the interests of Carnival plc's shareholders (a "class rights action"),
each shareholder body will vote separately as a class, such as transactions
primarily designed to amend or unwind the DLC structure. Generally, no class
rights action will be implemented unless approved by both shareholder bodies.
Upon the closing of the DLC transaction, Carnival Corporation and Carnival
plc also executed the Equalization and Governance Agreement, which provides for
the equalization of dividends and liquidation distributions based on an
equalization ratio and contains provisions relating to the governance of the DLC
structure. Because the current equalization ratio is 1 to 1, one Carnival plc
ordinary share is entitled to the same distributions, subject to the terms of
the Equalization and Governance Agreement, as one share of Carnival Corporation
common stock. In a liquidation of either company or both companies, if the
hypothetical potential per share liquidation distributions to each company's
shareholders are not equivalent, taking into account the relative value of the
two companies' assets and the indebtedness of each company, to the extent that
one company has greater net assets so that any liquidation distribution to its
shareholders would not be equivalent on a per share basis, the company with the
ability to make a higher net distribution is required to make a payment to the
other company to equalize the possible net distribution to shareholders, subject
to certain exceptions.
At the closing of the DLC transaction, Carnival Corporation and Carnival
plc also executed deeds of guarantee. Under the terms of Carnival Corporation's
deed of guarantee, Carnival Corporation has agreed to guarantee all indebtedness
and certain other monetary obligations of Carnival plc that are incurred under
agreements entered into on or after the closing date of the DLC transaction. The
terms of Carnival plc's deed of guarantee are identical to those of Carnival
Corporation's. In addition, Carnival Corporation and Carnival plc have each
extended their respective deeds of guarantee to the other's pre-DLC indebtedness
and certain other monetary obligations, or alternatively have provided
standalone guarantees in lieu of utilization of these deeds of guarantee, thus
effectively cross guaranteeing all Carnival Corporation and Carnival plc
indebtedness and certain other monetary obligations. Each deed of guarantee
provides that the creditors to whom the obligations are owed are intended third
party beneficiaries of such deed of guarantee.
The deeds of guarantee are governed and construed in accordance with the
laws of the Isle of Man. Subject to the terms of the guarantees, the holders of
indebtedness and other obligations that are subject to the guarantees will have
recourse to both Carnival plc and Carnival Corporation though a Carnival plc
creditor must first make written demand on Carnival plc and a Carnival
Corporation creditor on Carnival Corporation. Once the written demand is made by
letter or other form of notice, the holders of indebtedness or other obligations
may immediately commence an action against the relevant guarantor. Accordingly,
there is no requirement under the deeds of guarantee to obtain a judgment, take
other enforcement actions or wait any period of time prior to taking steps
against the relevant guarantor. All actions or proceedings arising out of or in
connection with the deeds of guarantee must be exclusively brought in courts in
England.
Under the terms of the DLC transaction documents, Carnival Corporation and
Carnival plc are permitted to transfer assets between the companies, make loans
or investments in each other and otherwise enter into intercompany transactions.
The companies have entered into some of these types of transactions and expect
to enter into additional transactions in the
F-11
future to take advantage of the flexibility provided by the DLC structure and to
operate both companies as a single unified economic enterprise in the most
effective manner. In addition, under the terms of the Equalization and
Governance Agreement and the deeds of guarantee, the cash flow and assets of one
company are required to be used to pay the obligations of the other company, if
necessary.
Given the DLC structure as described above, we believe that providing
separate financial statements for each of Carnival Corporation and Carnival plc
would not present a true and fair view of the economic realities of their
operations. Accordingly, separate financial statements for both Carnival
Corporation and Carnival plc have not been presented.
Simultaneously with the completion of the DLC transaction, a partial share
offer ("PSO") for 20% of Carnival plc's shares was made and accepted, which
enabled 20% of Carnival plc shares to be exchanged for 41.7 million Carnival
Corporation shares. The 41.7 million shares of Carnival plc held by Carnival
Corporation as a result of the PSO, which cost $1.05 billion, are being
accounted for as treasury stock in the accompanying balance sheets.
NOTE 4 - Property and Equipment
Property and equipment consisted of the following (in millions):
November 30,
-------------------
2006 2005
-------- --------
Ships $ 26,054 $ 23,506
Ships under construction 922 540
-------- --------
26,976 24,046
Land, buildings and improvements,
and port facilities 675 593
Transportation equipment and other 762 692
-------- --------
Total property and equipment 28,413 25,331
Less accumulated depreciation and amortization (4,955) (4,019)
-------- --------
$ 23,458 $ 21,312
======== ========
Capitalized interest, primarily on our ships under construction, amounted
to $37 million, $21 million and $26 million in fiscal 2006, 2005 and 2004,
respectively. Amounts related to ships under construction include progress
payments for the construction of the ship, as well as design and engineering
fees, capitalized interest, construction oversight costs and various owner
supplied items. At November 30, 2006, seven ships with an aggregate net book
value of $2.62 billion were pledged as collateral pursuant to mortgages related
to $1.23 billion of debt and a $485 million contingent obligation (see Notes 5
and 6).
Repairs and maintenance and minor replacement expenses, including dry-dock
expenses were $518 million, $554 million and $419 million in fiscal 2006, 2005
and 2004, respectively.
NOTE 5 - Debt
Short-Term Borrowings
At November 30, 2006 and 2005, unsecured short-term borrowings consisted
of U.S. bank loans and U.S. commercial paper of $381 million and $113 million,
respectively, and Euro bank loans and Euro commercial paper of $57 million and
$187 million, respectively. These short-term borrowings had weighted-average
interest rates of 5.2% and 3.1% at November 30, 2006 and 2005, respectively.
F-12
Long-Term Debt
Long-term debt consisted of the following (in millions):
November 30,
-----------------
2006(a) 2005(a)
------- -------
Secured
Floating rate notes, collateralized by four ships,
bearing interest from libor plus 1.13% to libor
plus 1.29% (6.5% to 6.8% at 2006 and 4.9% to 5.7% at
2005), due through 2015(b) $ 672 $ 788
Fixed rate notes, collateralized by two ships, bearing
interest at 5.4% and 5.5%, due through 2016(b) 379 380
Euro floating rate note, collateralized by one ship,
bearing interest at euribor plus 0.5% (4.0% at 2006
and 2.75% at 2005), due through 2008 43 64
Euro fixed rate note, collateralized by one ship,
bearing interest at 4.74%, due through 2012 134 142
Other 1 2
------- -------
Total Secured 1,229 1,376
------- -------
Unsecured
Fixed rate notes, bearing interest at 3.75% to 7.2%, due
through 2028(c) 2,542 2,239
Euro fixed rate notes, bearing interest at 4.4% in 2006
and 5.57% in 2005, due in 2013(d)(e) 985 355
Euro floating rate notes, bearing interest at euribor plus
0.25% to euribor plus 0.47% (3.83% at 2006 and 2.4% to
2.6% at 2005), due through 2010(e) 486 933
Sterling fixed rate notes, bearing interest at 5.63%, due
in 2012 415 372
Sterling floating rate note, bearing interest at GBP libor
plus 0.33% (5.52% at 2006 and 4.91% at 2005), due in 2010 322 285
Other 34 34
Convertible notes, bearing interest at 2%, due in 2021,
with next put option in 2008 599 600
Convertible notes, bearing interest at 1.75%, net of
discount, with a face value of $889 million, due in 2033,
with first put option in 2008 575 575
Zero-coupon convertible notes, net of discount, with a face
value of $386 million at 2006 and $510 million at 2005,
due in 2021, with next put option in 2008 222 283
------- -------
Total Unsecured 6,180 5,676
------- -------
7,409 7,052
Less portion due within one year (1,054) (1,325)
------- -------
$ 6,355 $ 5,727
======= =======
(a) All interest rates are as of year ends. At November 30, 2006 and 2005,
56%, 30% and 14% of our long-term debt was U.S. dollar, euro and sterling
denominated, respectively, including the effect of foreign currency swaps.
(b) A portion of two Princess ships has been financed with borrowings having
both fixed and variable interest rate components.
(c) In May 2006, we borrowed $352 million under an unsecured term loan
facility to pay a portion of the Crown Princess purchase price. This
facility bears interest at 4.51% and is repayable in semi-annual
installments through May 2018.
(d) In November 2006, we issued E750 million of bonds ($985 million U.S.
dollars at the November 30, 2006 exchange rate), which have an effective
interest rate of 4.4% and are due in 2013. The net proceeds of the bonds
were primarily used to repay outstanding euro commercial paper and the
balance will be used to repay other current obligations subsequent to
November 30, 2006.
(e) During 2006, we repaid $361 million of Costa's fixed rate euro notes and
$527 million of their floating rate euro notes.
F-13
At November 30, 2006, the scheduled annual maturities of our long-term
debt was as follows (in millions): $1,054, $1,930, $202, $1,108, $202 and $2,913
in fiscal 2007 through 2011 and thereafter, respectively. The fiscal 2008
maturities include $1.40 billion of Carnival Corporation's Zero-Coupon Notes, 2%
Notes and 1.75% Notes based on the date of the noteholders' next put option.
Debt issuance costs are generally amortized to interest expense using the
straight-line method, which amount approximates the effective interest method,
over the term of the notes or the noteholders first put option date, whichever
is earlier. In addition, all loan issue discounts are amortized to interest
expense using the effective interest rate method over the term of the notes.
Convertible Notes
Carnival Corporation's 2% convertible notes ("2% Notes"), 1.75%
convertible notes ("1.75% Notes") and zero-coupon convertible notes
("Zero-Coupon Notes") are convertible into 15.3 million shares, a maximum of
20.9 million shares (10.8 million shares during fiscal 2006) and 6.4 million
shares, respectively, of Carnival Corporation common stock.
The 2% Notes are convertible at a conversion price of $39.14 per share,
subject to adjustment, during any fiscal quarter for which the closing price of
the Carnival Corporation common stock is greater than $43.05 per share for a
defined duration of time in the preceding fiscal quarter. The conditions for
conversion of the 2% Notes were satisfied throughout 2005 and during the first
and last quarters of fiscal 2006. A nominal amount of 2% Notes were converted in
fiscal 2006, 2005 and 2004.
The 1.75% Notes are convertible at a conversion price of $53.11 per share,
subject to adjustment, during any fiscal quarter for which the closing price of
the Carnival Corporation common stock is greater than a specified trigger price
for a defined duration of time in the preceding fiscal quarter. During the
fiscal quarters ending from August 31, 2003 through April 29, 2008, the trigger
price is $63.73 per share. Thereafter, this conversion trigger price increases
each quarter based on an annual rate of 1.75%, until maturity. In addition,
holders may also surrender the 1.75% Notes for conversion if they have been
called for redemption or for other specified occurrences, including the credit
rating assigned to the 1.75% Notes being Baa3 or lower by Moody's Investors
Service and BBB- or lower by Standard & Poor's Rating Services, as well as
certain corporate transactions. The 1.75% Notes interest is payable in cash
semi-annually in arrears through April 29, 2008. Effective April 30, 2008, the
1.75% Notes no longer require a cash interest payment, but interest will accrete
at a 1.75% yield to maturity.
The Zero-Coupon Notes have a 3.75% yield to maturity and are convertible
during any fiscal quarter for which the closing price of the Carnival
Corporation common stock is greater than a specified trigger price for a defined
duration of time in the preceding fiscal quarter. The trigger price increases at
an annual rate of 3.75% until maturity. The trigger price was $38.11 for the
2006 fourth quarter, and the conversion price was $34.64. During fiscal 2006 and
2005, $69 million and $297 million of our Zero-Coupon Notes were converted at
their accreted value into 2.1 million and 9.0 million shares of Carnival
Corporation common stock, of which 1.9 million and 6.2 million shares were
issued from treasury stock, respectively. No Zero-Coupon Notes were converted
prior to fiscal 2005.
At November 30, 2005, the Zero-Coupon Notes were classified as a current
liability, since the noteholders had the right to require us to repurchase them
on October 24, 2006. At November 30, 2006, we have again classified our
Zero-Coupon Notes as long-term debt, since the next date that the noteholders
can require us to repurchase them is on October 24, 2008.
Subsequent to April 28, 2008 and October 23, 2008, we may redeem all or a
portion of the 1.75% Notes and Zero-Coupon Notes, respectively, at their
accreted values and subsequent to April 14, 2008, we may redeem all or a portion
of our 2% Notes at their face value plus any unpaid accrued interest, subject to
the noteholders' right to convert.
In addition, on April 29 of 2008, 2013, 2018, 2023 and 2028 the 1.75%
noteholders, on April 15 of 2008 and 2011 the 2% noteholders and on October 24
of 2008, 2011 and 2016 the Zero-Coupon noteholders may require us to repurchase
all or a portion of the outstanding
F-14
1.75% Notes and Zero-Coupon Notes at their accreted values and the 2% Notes at
their face value plus any unpaid accrued interest.
Upon conversion, redemption or repurchase of the 1.75% Notes, the 2% Notes
and the Zero-Coupon Notes, we may choose to deliver Carnival Corporation common
stock, cash or a combination of cash and common stock with a total value equal
to the value of the consideration otherwise deliverable.
Revolving Credit and Committed Financing Facilities
Carnival Corporation, Carnival plc and certain of Carnival plc's
subsidiaries are parties to an unsecured multi-currency revolving credit
facility for $1.2 billion, E400 million and L200 million (aggregating
$2.12 billion U.S. dollars at the November 30, 2006 exchange rates) (the
"Facility"). The Facility currently bears interest at libor/euribor plus a
margin of 17.5 basis points ("BPS"). In addition, we are required to pay a
commitment fee of 30% of the margin per annum. Both the margin and the
commitment fee will vary based on changes to Carnival Corporation's senior
unsecured credit ratings. In September 2006, this Facility's expiration date was
extended from October 2010 to October 2011.
Our multi-currency commercial paper programs are supported by this
Facility and, accordingly, any amounts outstanding under our commercial paper
programs effectively reduce the aggregate amount available under this Facility.
At November 30, 2006, we had borrowed $160 million under our commercial paper
program, which is classified as a short-term borrowing since we do not expect to
refinance it using proceeds from our long-term Facility. This Facility also
supports L46 million ($91 million U.S. dollars at the November 30, 2006 exchange
rate) of bonds issued by the Facility lenders on behalf of Carnival Corporation
& plc. At November 30, 2006, $1.87 billion was available under the Facility,
based on the November 30, 2006 exchange rates.
At November 30, 2006, we had a total of seven separate unsecured long-term
ship loan financing facilities under which we have the option to borrow up to an
aggregate of $2.55 billion to finance a portion of the purchase price of seven
new ships currently under contract. These ships are expected to be delivered
through 2009. These facilities are repayable semi-annually over a 12 year
period. However, we have the option to terminate each facility up until 60 days
prior to the underlying ship's delivery date.
The Facility and our other loan and derivative agreements contain
covenants that require us, among other things, to maintain minimum debt service
coverage and minimum shareholders' equity, and to limit our debt to capital and
debt to equity ratios, and the amounts of our secured assets and secured
indebtedness. Generally, if an event of default under any loan agreement is
triggered, then pursuant to cross default acceleration clauses, substantially
all of our outstanding debt and derivative contract payables could become due
and the underlying facilities could be terminated. At November 30, 2006, we were
in compliance with all of our debt covenants.
F-15
NOTE 6 - Commitments
Ship Commitments
A description of our ships under contract for construction at November 30,
2006, as adjusted for our new ship orders through January 2007, was as follows:
Expected
Service Passenger Estimated Total Cost(b)
Brand and Ship Date(a) Capacity Euros Sterling USD
- -------------- -------- --------- ---------------------------------
(in millions)
Carnival Cruise Lines
Carnival Freedom 3/07 2,974 $ 505
Carnival Splendor 7/08 3,000 (euro) 485
Carnival Dream 10/09 3,652 565
Carnival Magic(c) 6/11 3,652 565
--------- ------------ --------
Total Carnival Cruise Lines 13,278 1,615 505
--------- ------------ --------
Princess
Emerald Princess 4/07 3,100 540
Newbuild 11/08 3,100 580
--------- --------
Total Princess 6,200 1,120
--------- --------
Holland America Line
Eurodam 7/08 2,044 465
Costa(d)
Costa Serena 6/07 3,000 475
Newbuild 5/09 2,260 420
Newbuild 6/09 3,000 485
Newbuild(c) 4/10 2,260 420
--------- ------------
Total Costa 10,520 1,800
--------- ------------
AIDA(d)
AIDAdiva 4/07 2,050 315
Newbuild 4/08 2,050 315
Newbuild 4/09 2,050 315
Newbuild 4/10 2,050 335
--------- ------------
Total AIDA 8,200 1,280
--------- ------------
Seabourn
Newbuild 6/09 450 200
Newbuild 6/10 450 200
--------- ------------
Total Seabourn 900 400
--------- ------------
P&O Cruises
Ventura(e) 4/08 3,076 (pound) 360
Newbuild(c) 6/10 3,076 535
--------- ------------
Total P&O Cruises 6,152
---------
Cunard
Queen Victoria(e) 12/07 2,014 305
--------- --------
Total Euro Commitments (euro) 5,630
------------
Total Euro Commitments converted to USD(f) 7,430
--------
Total Sterling Commitments (pound) 665
-----------
Total Sterling Commitments converted to USD(f) 1,300
--------
Grand Total 49,308
=========
Grand Total in USD $ 10,820
========
(a) The expected service date is the month in which the ship is currently
expected to begin its first revenue generating cruise.
F-16
(b) Estimated total cost of the completed ship includes the contract price
with the shipyard, design and engineering fees, capitalized interest,
construction oversight costs and various owner supplied items. All of our
ship construction contracts are with the Fincantieri shipyards in Italy,
except for AIDA's and Seabourn's which are with the Meyer Werft shipyard
in Germany and T. Mariotti shipyard in Italy, respectively. In addition,
the estimated total cost reflects the currency denomination that we are
committed to expend, including the effect of foreign currency swaps.
(c) These construction contracts aggregating E1.52 billion were entered into
after November 30, 2006.
(d) These construction contracts are denominated in euros, which is the
functional currency of the cruise brand which will operate the ship.
(e) These construction contracts are denominated in euros, except for $45
million of the Queen Victoria costs, which are denominated in USD. The
euro and USD denominated contract amounts have been fixed into sterling,
which is the cruise ship's functional currency, by utilizing foreign
currency swaps.
(f) The estimated total costs of these contracts denominated in euros and
sterling have been translated into U.S. dollars using the November 30,
2006 exchange rates.
In connection with our cruise ships under contract for construction listed
above, we have paid $922 million through November 30, 2006 and anticipate paying
the remaining estimated total costs as follows: $2.65 billion, $2.51 billion,
$2.43 billion, $1.69 billion and $617 million in fiscal 2007, 2008, 2009, 2010
and 2011, respectively.
Operating Leases
Rent expense under our operating leases, primarily for office and
warehouse space, was $47 million in fiscal 2006 and $50 million in each of
fiscal 2005 and 2004. At November 30, 2006, minimum annual rentals for our
operating leases, with initial or remaining terms in excess of one year, were as
follows (in millions): $40, $36, $34, $31 and $29 and $180 in fiscal 2007
through 2011 and thereafter, respectively.
Port Facilities and Other
At November 30, 2006, we had commitments through 2052, with initial or
remaining terms in excess of one year, to pay minimum amounts for our annual
usage of port facilities and other contractual commitments as follows (in
millions): $107, $97, $83, $74, $61, and $217 in fiscal 2007 through 2011 and
thereafter, respectively.
NOTE 7 - Contingencies
Litigation
On September 21, 2006, a class action complaint was filed on behalf of a
purported class of past passengers against Holland America Line ("HAL") in the
U.S. The complaint alleges that HAL (a) failed to disclose that shore excursion
vendors paid HAL to promote their services as required by an Alaska statute, and
(b) collected and retained payment from passengers for Passenger Vessel Service
Act ("PSVA") violations in certain instances when HAL did not actually incur the
fines. The complaint seeks (i) certification as a class action, (ii) statutory
damages under Alaska's consumer protection statutes, (iii) damages for each PSVA
fine collected and additional damages for each PSVA fine collected where no fine
was imposed, (iv) injunctive relief and (v) attorneys' fees, costs and interest.
The ultimate outcome of this action cannot be determined at this time. However,
we believe that we have meritorious defenses to these claims and intend to
vigorously defend this matter.
In January 2006, a lawsuit was filed against Carnival Corporation and its
subsidiaries and affiliates, and other non-affiliated cruise lines in New York
on behalf of a purported class of owners of intellectual property rights to
musical plays and other works performed in the U.S. The plaintiffs claim
infringement of copyrights to Broadway, off Broadway and other plays. The suit
seeks payment of (i) damages, (ii) disgorgement of alleged profits and (iii) an
injunction against future infringement. In the event that an award is given in
favor of the plaintiffs, the amount of damages, if any, which Carnival
Corporation and its subsidiaries and affiliates would have to pay is not
currently determinable. The ultimate outcome of this matter cannot be determined
at this time. However, we intend to vigorously defend this matter.
F-17
In the normal course of our business, various other claims and lawsuits
have been filed or are pending against us. Most of these claims and lawsuits are
covered by insurance and, accordingly, the maximum amount of our liability, net
of any insurance recoverables, is typically limited to our self-insurance
retention levels. However, the ultimate outcome of these claims and lawsuits
which are not covered by insurance cannot be determined at this time.
Contingent Obligations
At November 30, 2006, Carnival Corporation had contingent obligations
totaling approximately $1.07 billion to participants in lease out and lease back
type transactions for three of its ships. At the inception of the leases, the
entire amount of the contingent obligations was paid by Carnival Corporation to
major financial institutions to enable them to directly pay these obligations.
Accordingly, these obligations were considered extinguished, and neither the
funds nor the contingent obligations have been included on our balance sheets.
Carnival Corporation would only be required to make any payments under these
contingent obligations in the remote event of nonperformance by these financial
institutions, all of which have long-term credit ratings of AA or higher. In
addition, Carnival Corporation obtained a direct guarantee from AA or higher
rated financial institutions for $284 million of the above noted contingent
obligations, thereby further reducing the already remote exposure to this
portion of the contingent obligations. In certain cases, if the credit ratings
of the major financial institutions who are directly paying the contingent
obligations fall below AA-, then Carnival Corporation will be required to move
those funds being held by those institutions to other financial institutions
whose credit ratings are AA- or above. If Carnival Corporation's credit rating,
which is A-, falls below BBB, it would be required to provide a standby letter
of credit for $80 million, or alternatively provide mortgages in the aggregate
amount of $80 million on two of its ships.
In the unlikely event that Carnival Corporation was to terminate the three
lease agreements early or default on its obligations, it would, as of November
30, 2006, have to pay a total of $176 million in stipulated damages. As of
November 30, 2006, $180 million of standby letters of credit have been issued by
a major financial institution in order to provide further security for the
payment of these contingent stipulated damages. In addition, in 2004 a $170
million back-up letter of credit was issued in support of these standby letters
of credit. Between 2017 and 2022, we have the right to exercise options that
would terminate these three lease transactions at no cost to us. As a result of
these three transactions, we have $37 million and $40 million of deferred income
recorded on our balance sheets as of November 30, 2006 and 2005, respectively,
which is being amortized to nonoperating other income through 2022.
Some of the debt agreements that we enter into include indemnification
provisions that obligate us to make payments to the counterparty if certain
events occur. These contingencies generally relate to changes in taxes, changes
in laws that increase lender capital costs and other similar costs. The
indemnification clauses are often standard contractual terms and were entered
into in the normal course of business. There are no stated or notional amounts
included in the indemnification clauses and we are not able to estimate the
maximum potential amount of future payments, if any, under these indemnification
clauses. We have not been required to make any material payments under such
indemnification clauses in the past and, under current circumstances, we do not
believe a request for material future indemnification payments is probable.
War Risk Insurance
We maintain war risk insurance, subject to coverage limits, deductibles
and exclusions for claims such as those arising from chemical, nuclear and
biological attacks, on all of our ships covering our legal liability to crew,
passengers and other third parties as well as loss or damage to our vessels
arising from war or war-like actions, including terrorist risks. Under the terms
of our war risk insurance coverage, which is typical for war risk policies in
the marine industry, underwriters can give seven days notice to the insured that
the policies will be cancelled.
F-18
NOTE 8 - Income and Other Taxes
We are foreign corporations primarily engaged in the international
operation of vessels. Generally, income from the international operation of
vessels is subject to preferential tax regimes in the countries where the vessel
owning companies are incorporated and exempt from income tax in other countries
where the vessels call due to the application of income tax treaties or, in the
case of the U.S., Section 883 of the Internal Revenue Code. Income we earn that
is not associated with the international operation of ships, primarily the
transportation, hotel and tour businesses of Holland America Tours and Princess
Tours, is subject to income tax in the countries where such income is earned.
For fiscal 2004, we believe that substantially all of our income, with the
exception of our U.S. source income principally from the transportation, hotel
and tour businesses of Holland America Tours and Princess Tours, was derived
from, or incidental to, the international operation of ships, and is therefore
exempt from U.S. federal income taxes. For fiscal 2005, regulations under
Section 883 of the Internal Revenue Code limiting the types of income considered
to be derived from the international operation of a ship first became effective.
Section 883 is the primary provision upon which we rely to exempt most of our
international ship operation earnings from U.S. income taxes. Accordingly, the
2006 and 2005 provisions for U.S. federal income taxes include taxes on a
portion of our ship operating income that is in addition to the U.S. source
transportation, hotel and tour income on which U.S. taxes have historically been
provided. In addition, during the fourth quarter of 2005 and first quarter of
2006 we chartered three ships to the Military Sealift Command in connection with
the Hurricane Katrina relief effort. Income from these charters is not
considered to be income from the international operation of our ships and,
accordingly, approximately $11 million and $18 million of income taxes were
provided on the net earnings of these charters in fiscal 2006 and 2005,
respectively, at an effective tax rate of approximately 57%.
If we were found not to qualify for exemption pursuant to applicable
income tax treaties or under the Internal Revenue Code or if the income tax
treaties or Internal Revenue Code were to be changed in a manner adverse to us,
a portion of our income would become subject to taxation by the U.S. at higher
than normal corporate tax rates.
P&O Cruises, Cunard, Ocean Village, P&O Cruises Australia, Swan Hellenic,
AIDA and Costa, since the beginning of fiscal 2005, are subject to income tax
under the tonnage tax regimes of either the United Kingdom or Italy. Under both
tonnage tax regimes, shipping profits, as defined under the applicable law, are
subject to corporation tax by reference to the net tonnage of qualifying
vessels. Income not considered to be shipping profits under tonnage tax rules is
taxable under either the normal UK income tax rules or the Italian tax regime
applicable to Italian-registered ships. We believe that substantially all of the
ordinary income attributable to these brands constitutes shipping profits and,
accordingly, Italian and UK income tax expenses for these operations have been
and are expected to be minimal under the current tax regimes.
We do not expect to incur income taxes on future distributions of
undistributed earnings of foreign subsidiaries and, accordingly, no deferred
income taxes have been provided for the distribution of these earnings.
In addition to or in place of income taxes, virtually all jurisdictions
where our ships call impose taxes based on passenger counts, ship tonnage or
some other measure. These taxes, other than those directly charged to and/or
collected from passengers by us on a per passenger headcount basis, are recorded
as operating expenses in the accompanying Consolidated Statements of Operations.
NOTE 9 - Shareholders' Equity
Carnival Corporation's articles of incorporation authorize its Board of
Directors, at its discretion, to issue up to 40 million shares of preferred
stock, and Carnival plc has 100,000 authorized preference shares. At November
30, 2006 and 2005, no Carnival Corporation preferred stock had been issued and
only a nominal amount of Carnival plc preference shares had been issued.
F-19
During 2004 the Boards of Directors authorized the repurchase of up to an
aggregate of $1 billion of Carnival Corporation common stock and/or Carnival plc
ordinary shares. We completed this $1 billion repurchase program on June 29,
2006. An additional $1 billion repurchase authorization was approved by the
Boards of Directors in June 2006 subject to certain restrictions. During fiscal
2006 and 2005, we purchased 18.7 million and 8.0 million shares of Carnival
Corporation common stock, respectively, and 0.6 million shares of Carnival plc
ordinary shares in fiscal 2006. At February 9, 2007, the remaining availability
pursuant to our 2006 share repurchase program was $773 million. No expiration
date has been specified for this authorization.
At November 30, 2006, there were 71.7 million shares of Carnival
Corporation common stock reserved for issuance pursuant to its convertible notes
and its employee benefit and dividend reinvestment plans. In addition, Carnival
plc shareholders have authorized 12.9 million ordinary shares for future
issuance under its employee benefit plans.
At November 30, 2006 and 2005 accumulated other comprehensive income was
as follows (in millions):
2006 2005
------ ------
Cumulative foreign currency translation adjustments,
net $ 689 $ 193
Minimum pension liability adjustments (17) (19)
Unrealized losses on cash flow derivative
hedges, net (11) (15)
------ ------
$ 661 $ 159
====== ======
NOTE 10 - Financial Instruments
Whenever possible, quoted prices in active markets are used to determine
the fair value of financial instruments. However, considerable judgment is
required in interpreting data to develop estimates for fair values for which
there is no active market and, accordingly, amounts are not necessarily
indicative of the amounts that we could realize in an active market exchange.
Our financial instruments are not held for trading or other speculative
purposes.
Cash and Cash Equivalents and Short-Term Investments
The carrying amounts of our cash and cash equivalents and short-term
investments approximate their fair values due to their short maturities or
variable interest rates.
Other Assets
At November 30, 2006 and 2005, long-term other assets included notes and
other receivables and marketable securities held in rabbi trusts for certain of
our nonqualified benefit plans. These assets had carrying and fair values of
$440 million and $445 million at November 30, 2006, respectively, and carrying
and fair values of $406 million and $405 million at November 30, 2005. Fair
values were based on public market prices, estimated discounted future cash
flows or estimated fair value of collateral.
Debt
The fair values of our non-convertible debt and convertible notes were
$6.06 billion and $1.73 billion, respectively, at November 30, 2006 and $5.98
billion and $2.03 billion at November 30, 2005. These fair values were greater
than the related carrying values by $50 million and $338 million, respectively,
at November 30, 2006 and by $86 million and $572 million at November 30, 2005.
The net difference between the fair value of our non-convertible debt and its
carrying value was due primarily to our issuance of debt obligations at fixed
interest rates that are above market interest rates in existence at the
measurement dates. The net difference between the fair value of our convertible
notes and their carrying value is largely due to the impact of changes in the
Carnival Corporation common stock price on the value of our convertible notes on
those measurement dates. The fair values of our unsecured fixed rate public
notes, convertible notes, sterling bonds and unsecured 5.57% euro notes were
based on their public market prices. The fair values of our other debt were
estimated based on appropriate market interest rates being applied to this debt.
F-20
Foreign Currency Swaps and Other Hedging Instruments
At November 30, 2006, we have foreign currency swaps that are designated
as foreign currency fair value hedges for two of our euro denominated
shipbuilding contracts (see Note 6). At November 30, 2006 and 2005, the fair
value of the foreign currency swaps related to our shipbuilding commitments was
an unrealized loss of $26 million and a net unrealized gain of $29 million,
respectively. These foreign currency swaps mature through 2008.
At November 30, 2006, we have foreign currency swaps totaling $1.25
billion that are designated as hedges of our net investments in foreign
subsidiaries, which have euro and sterling denominated functional currencies.
These foreign currency swaps were entered into to effectively convert $267
million and $842 million of U.S. dollar denominated debt into sterling debt and
euro debt ($237 million and $736 million at November 30, 2005), respectively. In
addition, $143 million and $138 million of euro denominated debt was effectively
converted into sterling debt at November 30, 2006 and 2005, respectively. At
November 30, 2006 and 2005, the fair value of these foreign currency swaps was
an unrealized loss of $169 million and $58 million, respectively, which is
included in the cumulative translation adjustment component of AOCI. These
currency swaps mature through 2017.
The fair values of these foreign currency swaps were estimated based on
prices quoted by financial institutions for these instruments based on active
market prices for these instruments.
Finally, as of November 30, 2006 we have designated $1.02 billion and $431
million of our outstanding euro and sterling debt and other obligations, which
mature through 2013, as nonderivative hedges of our net investments in foreign
subsidiaries and, accordingly, we have included $209 million and $68 million
of foreign currency transaction losses in the cumulative translation adjustment
component of AOCI at November 30, 2006 and 2005, respectively.
Interest Rate Swaps
We have interest rate swap agreements designated as fair value hedges
whereby we receive fixed interest rate payments in exchange for making variable
interest rate payments. At November 30, 2006 and 2005, these interest rate swap
agreements effectively changed $932 million and $926 million, respectively, of
fixed rate debt to libor-based floating rate debt. These interest rate swap
agreements mature through 2010. At November 30, 2006 and 2005, the fair value of
our interest rate swaps designated as fair value hedges was a net unrealized
loss of $4 million and $7 million, respectively.
We also have interest rate swap agreements designated as cash flow hedges
whereby we receive variable interest rate payments in exchange for making fixed
interest rate payments. At November 30, 2006 and 2005, these interest rate swap
agreements effectively changed $365 million and $1.25 billion, respectively, of
libor-based floating rate debt to fixed rate debt. These interest rate swap
agreements mature through 2010. At November 30, 2006 and 2005, the fair value of
our interest rate swaps designated as cash flow hedges was an unrealized gain of
$2 million and an unrealized loss of $6 million, respectively.
The estimated fair values of our interest rate swap agreements were
obtained from valuations performed by financial institutions based on active
market prices for these instruments.
NOTE 11 - Segment Information
Our cruise segment includes all of our cruise brands, which have been
aggregated as a single reportable segment based on the similarity of their
economic and other characteristics, including products and services they
provide. Substantially all of our other segment represents the hotel, tour and
transportation operations of Holland America Tours and Princess Tours. The
significant accounting policies of our segments are the same as those described
in Note 2 - "Summary of Significant Accounting Policies." Information for our
cruise and other segments as of and for the years ended November 30 was as
follows (in millions):
F-21
Selling
and Depreciation Capital
Operating adminis- and Operating expend- Total
Revenues(a) expenses trative amortization income itures assets
----------- --------- -------- ------------ --------- ------- --------
2006
Cruise $ 11,417 $ 6,477 $ 1,405 $ 954 $ 2,581 $ 2,395 $ 29,968
Other 533 425 42 34 32 85 584(b)
Intersegment
elimination (111) (111)
----------- --------- -------- ------------ --------- ------- --------
$ 11,839 $ 6,791 $ 1,447 $ 988 $ 2,613 $ 2,480 $ 30,552
=========== ========= ======== ============ ========= ======= ========
2005
Cruise $ 10,737 $ 5,964 $ 1,289 $ 873 $ 2,611 $ 1,892 $ 27,782
Other 461 358 46 29 28 85 567(b)
Intersegment
elimination (104) (104)
----------- --------- -------- ------------ --------- ------- --------
$ 11,094 $ 6,218 $ 1,335 $ 902 $ 2,639 $ 1,977 $ 28,349
=========== ========= ======== ============ ========= ======= ========
2004
Cruise $ 9,427 $ 5,292 $ 1,231 $ 791 $ 2,113 $ 3,512 $ 27,048
Other 398 308 54 21 15 74 500(b)
Intersegment
elimination (98) (98)
----------- --------- -------- ------------ --------- ------- --------
$ 9,727 $ 5,502 $ 1,285 $ 812 $ 2,128 $ 3,586 $ 27,548
=========== ========= ======== ============ ========= ======= ========
(a) A portion of other segment revenues include revenues for the cruise
portion of a tour, when a cruise is sold along with a land tour package by
Holland America Tours or Princess Tours, and shore excursion and port
hospitality services provided to cruise passengers by these tour
companies. These intersegment revenues, which are included in full in the
cruise segment, are eliminated from the other segment revenues in the line
"Intersegment elimination."
(b) Other segment assets primarily included hotels and lodges in Alaska and
the Canadian Yukon, motorcoaches used for sightseeing and charters and
private, domed rail cars, which run on the Alaska Railroad.
Foreign revenues for our cruise brands represent sales generated from
outside the U.S. primarily by foreign tour operators and foreign travel
agencies. Substantially all of our long-lived assets are located outside of the
U.S. and consist principally of our ships and ships under construction and
exclude goodwill and trademarks.
Revenue information by geographic area for fiscal 2006, 2005 and 2004 was
as follows (in millions):
2006 2005 2004
-------- -------- --------
North America $ 7,679 $ 7,283 $ 6,421
Europe 3,473 3,231 2,902
Others 687 580 404
-------- -------- --------
$ 11,839 $ 11,094 $ 9,727
======== ======== ========
NOTE 12 - Benefit Plans
Stock Incentive Plans
We issue our share-based compensation awards under the Carnival
Corporation and Carnival plc stock plans, which have an aggregate of 39.1
million shares available for future grant at November 30, 2006. These plans
allow us to issue stock options, restricted stock awards and restricted stock
units (collectively "incentive awards"). Incentive awards are primarily granted
to management level employees and members of our Board of Directors. The plans
are administered by a committee of our independent directors (the "Committee"),
that determines
F-22
who is eligible to participate, the number of shares for which incentive awards
are to be granted and the amounts that may be exercised within a specified term.
These plans allow us to fulfill our incentive award obligations using shares
purchased in the open market, or with unissued or treasury shares. Certain
incentive awards provide for accelerated vesting if we have a change in control,
as defined.
Effective December 1, 2005 we adopted the provisions of SFAS No. 123(R),
which required us to measure and recognize compensation expense for all
share-based compensation awards. The total share-based compensation expense was
$68 million for fiscal 2006, of which $60 million has been included in the
Consolidated Statements of Operations as selling, general and administrative
expenses and $8 million as cruise payroll expenses.
Prior to December 1, 2005, we did not recognize compensation expense for
the issuance of stock options with an exercise price equal to or greater than
the market price of the underlying shares at the date of grant. Had we elected
to charge earnings for the estimated fair value of stock options in prior years,
our pro forma net income and pro forma earnings per share would have been as
follows (in millions, except per share amounts):
Years ended November 30,
------------------------
2005 2004
-------- --------
Net income, as reported $ 2,253 $ 1,809
Share-based compensation expense included in
net income, as reported 12 11
Total share-based compensation expense determined
under the fair value-based method for all awards(a) (86) (66)
-------- --------
Pro forma net income for basic earnings per share 2,179 1,754
Interest on dilutive convertible notes 47 49
-------- --------
Pro forma net income for diluted earnings per share $ 2,226 $ 1,803
======== ========
Earnings per share
Basic
As reported $ 2.80 $ 2.25
======== ========
Pro forma $ 2.70 $ 2.19
======== ========
Diluted
As reported $ 2.70 $ 2.18
======== ========
Pro forma $ 2.62 $ 2.13
======== ========
(a) These amounts include the expensing of stock options made to
retirement-eligible employees over the expected vesting period of the
option and accounting for the impact of forfeitures as they occur.
As permitted by SFAS No. 123 and SFAS No. 123(R), the fair values of
options were estimated using the Black-Scholes option-pricing model. The
Black-Scholes weighted-average values and assumptions were as follows:
Years ended November 30,
-------------------------------
2006 2005 2004
------- ------- -------
Fair value of options at the
dates of grant $ 12.25 $ 12.99 $ 15.87
======= ======= =======
Risk free interest rate(a) 4.5% 4.1% 3.4%
======= ======= =======
Expected dividend yield 2.6% 1.90% 1.36%
======= ======= =======
Expected volatility(b) 29.2% 27.0% 35.0%
======= ======= =======
Expected option life (in years)(c) 4.75 4.74 5.75
======= ======= =======
(a) The risk-free interest rate is based on U.S. Treasury zero-coupon issues
with a remaining term equal to the expected option life assumed at the
date of grant.
(b) The expected volatility is based on a weighting of the implied
volatilities derived from our exchange traded options and convertible
notes and the historical volatility of our common stock.
(c) The average expected life was based on the contractual term of the option
and expected employee exercise behavior. Based on our assessment of
employee groupings and observable behaviors, we determined that a single
grouping is appropriate.
F-23
Stock Option Plans
The Committee generally sets stock option exercise prices at 100% or more
of the fair market value of the underlying common stock/ordinary shares on the
date the option is granted. All stock options granted during the years ended
November 30, 2006 and 2005 were granted at an exercise price per share equal to
or greater than the fair market value of the Carnival Corporation common stock
and Carnival plc ordinary shares on the date of grant. Generally employee
options either vest evenly over five years or at the end of three years. Our
employee options granted prior to October 2005 have a ten-year term and those
options granted thereafter have a seven-year term. Since fiscal 2001, Carnival
Corporation director options vest evenly over five years and have a ten-year
term.
A combined summary of Carnival Corporation and Carnival plc stock option
activity during the year ended November 30, 2006 was as follows:
Weighted- Weighted-Average Aggregate
Average Remaining Intrinsic
Shares Exercise Price Contractual Term Value(a)
---------- -------------- ---------------- -------------
(in years) (in millions)
Outstanding at
November 30, 2005 20,058,252 $ 39.15
Granted 2,401,712 $ 50.51
Exercised (2,309,850) $ 28.78
Forfeited or expired (628,115) $ 41.29
----------
Outstanding at
November 30, 2006 19,521,999 $ 42.55 6.0 $ 156
========== ================ =============
Exercisable at
November 30, 2006 9,999,345 $ 38.18 5.1 $ 117
========== ================ =============
(a) The aggregate intrinsic value represents the amount by which the fair
value of underlying stock exceeds the option exercise price at November
30, 2006.
As of the dates of exercise, the total intrinsic value of options
exercised in fiscal 2006, 2005 and 2004 was $48 million, $37 million and $77
million, respectively. As of November 30, 2006, there was $86 million of total
unrecognized compensation cost related to unvested stock options. This cost is
expected to be recognized over a weighted-average period of 1.9 years.
Restricted Stock Awards and Restricted Stock Units
Restricted stock awards ("RSAs") generally have the same rights as
Carnival Corporation common stock, except for transfer restrictions and
forfeiture provisions. In prior periods, unearned stock compensation was
recorded within shareholders' equity at the date of award based on the quoted
market price of the Carnival Corporation common stock on the date of grant. In
fiscal 2006 upon adoption of SFAS No. 123(R), the $13 million of unearned stock
compensation as of November 30, 2005 was required to be charged against
additional paid-in capital. RSAs have been granted to certain officers and
non-executive board members and either have three or five-year cliff vesting or
vest evenly over five years after the grant date. In addition, Carnival
Corporation and Carnival plc grant restricted stock units ("RSUs"), which do not
have an exercise price, and either vest evenly over five years or at the end of
three or five years after the grant date and accrue dividend equivalents on each
outstanding RSU, in the form of additional RSUs, based on dividends declared.
The share-based compensation expense associated with RSAs and RSUs is based on
the quoted market price of the Carnival Corporation or Carnival plc shares on
the date of grant, and is amortized to expense using the straight-line method
from the grant date through the earlier of the vesting date or the estimated
retirement eligibility date.
F-24
During the year ended November 30, 2006 RSA and RSU activity was as
follows:
Restricted Stock Awards Restricted Stock Units
----------------------- ----------------------
Weighted- Weighted-
Average Average
Grant Date Grant Date
Shares Fair Value Shares Fair Value
-------- ---------- ------- ----------
Outstanding at
November 30, 2005 966,417 $36.28 159,117 $44.56
Granted 169,711 $49.69 275,272 $52.37
Vested (245,417) $31.32 (47,319) $30.07
Forfeited (8,222) $51.87
-------- -------
Outstanding at
November 30, 2006 890,711 $40.20 378,848 $51.88
======== =======
The total grant date fair value of RSAs and RSUs vested during fiscal
2006, 2005 and 2004 was $9 million, $8 million and $10 million, respectively. As
of November 30, 2006, there was $19 million of total unrecognized compensation
cost related to RSAs and RSUs. This cost is expected to be recognized over a
weighted-average period of 1.7 years.
Defined Benefit Pension Plans
We have several defined benefit pension plans, which cover some of our
shipboard and shoreside employees. The U.S. and UK shoreside employee plans are
closed to new membership and are funded at or above the level required by U.S.
or UK regulations. The remaining defined benefit plans are primarily unfunded.
In determining our plans' benefit obligations at November 30, 2006, we assumed
weighted-average discount rates of 5.5% and 4.9% for our U.S. and foreign plans,
respectively. The net liabilities related to the obligations under these single
employer defined benefit pension plans are not material.
In addition, P&O Cruises, Princess and Cunard participate in an
industry-wide British Merchant Navy Officers Pension Fund ("MNOPF"), which is a
defined benefit multiemployer pension plan that is available to certain of their
British shipboard officers. The MNOPF is divided into two sections, the "New
Section" and the "Old Section," each of which covers a different group of
participants, with the Old Section closed to further benefit accrual and the New
Section only closed to new membership. At November 30, 2006, the New Section was
estimated to have a funding deficit and the Old Section was estimated to have a
funding surplus.
Substantially all of any MNOPF New Section deficit liability which we may
have relates to P&O Cruises and Princess obligations, which existed prior to the
DLC transaction. However, since the MNOPF is a multiemployer plan and it was not
probable that we would withdraw from the plan nor was our share of the liability
certain, we could not record our estimated share of the ultimate deficit as a
Carnival plc acquisition liability that existed at the DLC transaction date. The
amount of our share of the fund's ultimate deficit could vary considerably if
different pension assumptions and/or estimates were used. Therefore, we expense
our portion of any deficit as amounts are invoiced by, and became due and
payable to, the fund's trustee. In August 2005, we received an invoice from the
fund for what the trustee calculated to be our share of the entire MNOPF
liability based on their March 31, 2003 actuarial study. Accordingly, we
recorded the full invoiced liability of $23 million in payroll and related
expense in 2005. However, based on the MNOPF's March 31, 2006 preliminary
valuation of the deficit liability as at that date, we expect to receive a
second MNOPF invoice in mid-2007 of between approximately $15 million and $35
million, which represents our estimate of our additional share of the entire
MNOPF liability. It is still possible that the fund's trustee may invoice us for
additional amounts after this second invoice for various reasons, including if
they believe the fund requires further funding.
Total expense for all defined benefit pension plans, including
multiemployer plans, was $28 million, $45 million and $18 million in fiscal
2006, 2005 and 2004, respectively.
F-25
Defined Contribution Plans
We have several defined contribution plans available to most of our
employees. We contribute to these plans based on employee contributions, salary
levels and length of service. Total expense relating to these plans was $17
million, $14 million and $13 million in fiscal 2006, 2005 and 2004,
respectively.
NOTE 13 - Earnings Per Share
Our basic and diluted earnings per share were computed as follows (in
millions, except per share data):
Years Ended November 30,
------------------------
2006 2005 2004
------ ------ ------
Net income $2,279 $2,253 $1,809
Interest on dilutive convertible notes 36 47 49
------ ------ ------
Net income for diluted earnings per share $2,315 $2,300 $1,858
====== ====== ======
Weighted-average common and ordinary
shares outstanding 801 806 802
Dilutive effect of convertible notes 33 42 44
Dilutive effect of stock plans 2 5 5
------ ------ ------
Diluted weighted-average shares outstanding 836 853 851
====== ====== ======
Basic earnings per share $ 2.85 $ 2.80 $ 2.25
====== ====== ======
Diluted earnings per share $ 2.77 $ 2.70 $ 2.18
====== ====== ======
Options to purchase 8.5 million, 2.1 million and 6.0 million shares for
fiscal 2006, 2005 and 2004, respectively, were excluded from our diluted
earnings per share computation since the effect of including them was
anti-dilutive.
NOTE 14 - Supplemental Cash Flow Information
Total cash paid for interest was $363 million, $314 million and $250
million in fiscal 2006, 2005 and 2004, respectively. In addition, cash paid for
income taxes was $47 million, $15 million and $8 million in fiscal 2006, 2005
and 2004, respectively. Finally, in 2006 and 2005, $69 million and $297 million
of our Zero-Coupon Notes were converted through a combination of the issuance of
Carnival Corporation treasury stock and newly issued Carnival Corporation common
stock, which represented a noncash financing activity.
NOTE 15 - Recent Accounting Pronouncements
In June, 2006 the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" ("FIN
48"). FIN 48 clarifies, among other things, the accounting for uncertain income
tax positions by prescribing a minimum probability threshold that a tax position
must meet before a financial statement income tax benefit is recognized. The
minimum threshold is defined as a tax position, that based solely on its
technical merits is more likely than not to be sustained upon examination by the
relevant taxing authority. The tax benefit to be recognized is measured as the
largest amount of benefit that is greater than fifty percent likely of being
realized upon ultimate settlement. FIN 48 must be applied to all existing tax
positions upon adoption. The cumulative effect of applying FIN 48 at adoption is
required to be reported separately as an adjustment to the opening balance of
retained earnings in the year of adoption. FIN 48 is required to be implemented
at the beginning of a fiscal year and is effective for Carnival Corporation &
plc for fiscal 2008. We have not yet determined the impact of adopting FIN 48 on
our financial statements.
In September, 2006 the FASB issued SFAS No.158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans--an amendment of FASB
Statements No. 87, 88, 106, and 132(R)," ("SFAS No. 158"), which requires an
employer to recognize the overfunded or underfunded status of a defined benefit
postretirement plan (other than a multiemployer plan) as an asset or liability
on its balance sheet and to recognize changes in that funded status
F-26
in the year in which the changes occur through comprehensive income. SFAS No.
158 requires an employer to measure the funded status of a plan as of its
year-end date and is first effective for Carnival Corporation & plc on November
30, 2007 with certain requirements allowing for later implementation. We have
not yet determined the impact of adopting SFAS No. 158 on our financial
statements, although based on the underfunded status of our plans at November
30, 2006, we do not believe the November 30, 2007 adoption will have a material
impact on our financial position.
F-27
Report of Independent Registered Certified Public Accounting Firm
To the Boards of Directors and Shareholders of Carnival Corporation and Carnival
plc:
We have completed integrated audits of Carnival Corporation & plc's consolidated
financial statements and of its internal control over financial reporting as of
November 30, 2006 in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Our opinions, based on our audits,
are presented below.
Consolidated financial statements
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, cash flows and shareholders' equity
present fairly, in all material respects, the financial position of Carnival
Corporation & plc (comprising Carnival Corporation and Carnival plc and their
respective subsidiaries, the "Company") at November 30, 2006 and November 30,
2005, and the results of their operations and their cash flows for each of the
three years in the period ended November 30, 2006 in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with the
standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit of financial statements includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 2 to the consolidated financial statements, effective
December 1, 2005 the Company adopted Statement of Financial Accounting Standards
No. 123(revised 2004), "Share-Based Payment".
In addition, as discussed in Note 2 to the consolidated financial statements,
effective March 1, 2006 the Company elected to change its method of accounting
for costs incurred in connection with its dry-dock activities.
Internal control over financial reporting
Also, in our opinion, management's assessment, included in Management's Report
on Internal Control Over Financial Reporting appearing under Item 9A of the 2006
Annual Report on Form 10-K, that the Company maintained effective internal
control over financial reporting as of November 30, 2006 based on criteria
established in Internal Control - Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission ("COSO"), is fairly
stated, in all material respects, based on those criteria. Furthermore, in our
opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of November 30, 2006, based on criteria
established in Internal Control - Integrated Framework issued by the COSO. The
Company's management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express opinions on
management's assessment and on the effectiveness of the Company's internal
control over financial reporting based on our audit. We conducted our audit of
internal control over financial reporting in accordance with the standards of
the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in
all material respects. An audit of internal control over financial reporting
includes obtaining an understanding of internal control over financial
reporting, evaluating management's assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing such other
procedures as we consider necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of
F-28
financial statements for external purposes in accordance with generally accepted
accounting principles. A company's internal control over financial reporting
includes those policies and procedures that (i) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Miami, Florida
February 12, 2007
F-29
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Cautionary Note Concerning Factors That May Affect Future Results
Some of the statements contained in this 2006 Annual Report are
"forward-looking statements" that involve risks, uncertainties and assumptions
with respect to us, including some statements concerning future results,
outlook, plans, goals and other events which have not yet occurred. These
statements are intended to qualify for the safe harbors from liability provided
by Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. We have tried, wherever possible, to identify these
statements by using words like "will," "may," "believes," "expects,"
"anticipates," "forecast," "future," "intends," "plans," and "estimates" and
similar expressions.
Because forward-looking statements involve risks and uncertainties, there
are many factors that could cause our actual results, performance or
achievements to differ materially from those expressed or implied in this 2006
Annual Report. Forward-looking statements include those statements which may
impact the forecasting of our earnings per share, net revenue yields, booking
levels, pricing, occupancy, operating, financing and/or tax costs, fuel costs,
costs per available lower berth day ("ALBD"), estimates of ship depreciable
lives and residual values, outlook or business prospects. These factors include,
but are not limited to, the following:
- general economic and business conditions, which may adversely impact the
levels of our potential vacationers' discretionary income and this group's
consumer confidence in the U.S. economy, and thereby reduce the net
revenue yields for our cruise brands;
- the international political and economic climate, armed conflicts,
terrorist attacks and threats thereof, availability of air service and
other world events, and their impact on the demand for cruises;
- accidents, unusual weather conditions or natural disasters, such as
hurricanes and earthquakes and other incidents (including machinery and
equipment failures or improper operation thereof) which could cause the
alteration of itineraries or cancellation of a cruise or series of
cruises, and the impact of the spread of contagious diseases, affecting
the health, safety, security and vacation satisfaction of passengers;
- adverse publicity concerning the cruise industry in general, or us in
particular, could impact the demand for our cruises;
- conditions in the cruise and land-based vacation industries, including
competition from other cruise ship operators and providers of other
vacation alternatives and increases in capacity offered by cruise ship and
land-based vacation alternatives;
- changing consumer preferences, which may, among other things, adversely
impact the demand for cruises;
- changes in and compliance with the environmental, health, safety,
security, tax and other regulatory regimes under which we operate,
including the implementation of U.S. regulations requiring U.S. citizens
to obtain passports for sea travel to or from additional foreign
destinations;
- the impact of changes in operating and financing costs, including changes
in foreign currency exchange rates and interest rates and fuel, food,
insurance, payroll and security costs;
- our ability to implement our shipbuilding programs and brand strategies
and to continue to expand our business worldwide;
- our future operating cash flow may not be sufficient to fund future
obligations and we may not be able to obtain financing, if necessary, on
terms that are favorable or consistent with our expectations;
- lack of acceptance of new itineraries, products and services by our
guests;
- our ability to attract and retain qualified shipboard crew and maintain
good relations with employee unions;
- continuing financial viability of our travel agent distribution system and
air service providers;
- our decisions to self-insure against various risks or inability to obtain
insurance for certain risks;
- disruptions to our software and other information technology systems;
- continued availability of attractive port destinations;
- risks associated with the DLC structure, including the uncertainty of its
tax status;
- risks associated with operating internationally;
F-30
- the impact of pending or threatened litigation; and
- our ability to successfully implement cost reduction plans.
Forward-looking statements should not be relied upon as a prediction of
actual results. Subject to any continuing obligations under applicable law or
any relevant listing rules, we expressly disclaim any obligation to disseminate,
after the date of this 2006 Annual Report, any updates or revisions to any such
forward-looking statements to reflect any change in expectations or events,
conditions or circumstances on which any such statements are based.
Executive Overview
Since the beginning of 2004 and continuing through 2005, we experienced a
substantial improvement in our net cruise revenue yields per ALBD ("net revenue
yields"). The improvement in net revenue yields was primarily the result of
higher passenger ticket prices, onboard revenues and occupancy and, to a lesser
extent, a weaker U.S. dollar relative to the euro and sterling. Towards the
spring of 2006, the impact of the severe 2005 hurricane season and higher fuel
costs and interest rates on vacationers' discretionary income, we believe caused
a softening in demand, principally for cruises in the Caribbean. The weaker
Caribbean demand was offset by strong demand and pricing for our European brands
and for our North American brands when sailing outside of the Caribbean.
Consequently, in 2006, we continued to increase our net revenue yields, however,
by a much smaller percentage than 2005 and 2004.
From 2003 through 2006, the cruise industry was adversely impacted by
substantial increases in fuel prices, which reduced earnings per share for the
2006 fiscal year by $0.25 compared to fiscal 2005. Towards the end of 2006, fuel
prices decreased slightly and were below the prior year comparable amount. It is
possible that fuel prices may once again begin to increase in 2007 and
thereafter.
Throughout this period we generated significant cash flows and remained in
a strong financial position, which is a high priority for us and we believe
provides us with a competitive advantage in the capital intensive cruise
industry. We continue to distribute excess cash to shareholders in an
opportunistic manner either through dividends or through our share buy-back
programs. However, our operations are subject to many risks, as briefly noted
under the caption "Cautionary Note Concerning Factors That May Affect Future
Results," which could adversely impact our future results.
Since June 2006, we ordered seven additional ships, which are expected to
be delivered between 2009 and 2011. As of February 12, 2007, we had signed
agreements with three shipyards providing for the construction of 20 additional
cruise ships, the majority of which have been designated for our European brands
(see Note 6 in the accompanying financial statements). These new ships are
expected to continue to help us maintain our leadership position within the
cruise industry. Excluding any future ship orders, acquisitions or retirements,
the year-over-year percentage increase in our ALBD capacity for fiscal 2007,
2008, 2009, 2010 and 2011, resulting substantially all from new ships entering
service, is currently expected to be 8.4%, 7.9%, 7.5%, 6.7% and 3.9%,
respectively.
Outlook For Fiscal 2007 ("2007")
As of December 21, 2006 we said that we expected our 2007 full year
earnings per share will be in the range of $2.90 to $3.10. We also said that we
expected our first quarter 2007 earnings per share to be in the range of $0.33
to $0.35. Our guidance was based on the then current forward fuel price for all
of 2007 of $339 per metric ton for the full year. In addition, this guidance was
also based on currency exchange rates of $1.33 to the euro and $1.98 to
sterling.
Since the date of our December earnings release, the cruise industry has
begun a period of heavy bookings generally referred to as "wave season", which
begins in early January. Bookings since the beginning of January are up compared
to the same period in 2006, however, the increase is less than our 2007 capacity
increase. Pricing on bookings taken in 2007 was less than in the comparable
period last year, primarily because of the continuing price pressure on
Caribbean sailings. As of February 4, 2007, occupancy on cumulative advance
bookings taken for the full year 2007 is approximately the same as the
comparable date last year. Pricing on those advance bookings is also
approximately equal to last year (down 1% in constant dollars).
Based on bookings taken to date, we now expect our net revenue yields to
be flat to up slightly for the full year 2007 (down 1% to 2% in constant
dollars), which is a little less than our previous guidance. Largely offsetting
this, our estimate of forward prices for fuel for the year 2007 has decreased to
$315 per metric ton compared to the $339 per metric ton we used in our December
guidance. Our earnings per share for the first quarter of 2007 is now expected
to come in at the high end of the range of our December guidance of $0.33 to
$0.35 per share because of lower fuel costs. Our earnings guidance for the full
year 2007 remains $2.90 to $3.10 per share.
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Key Performance Indicators
We use net cruise revenues per ALBD and net cruise costs per ALBD as
significant non-GAAP financial measures of our cruise segment financial
performance. We believe that net revenue yields are commonly used in the cruise
industry to measure a company's cruise segment revenue performance. This measure
is also used for revenue management purposes. In calculating net revenue yields,
we use "net cruise revenues" rather than "gross cruise revenues." We believe
that net cruise revenues is a more meaningful measure in determining revenue
yield than gross cruise revenues because it reflects the cruise revenues earned
by us net of our most significant variable costs, which are travel agent
commissions, cost of air transportation and certain other variable direct costs
associated with onboard and other revenues. Substantially all of our remaining
cruise costs are largely fixed once our ship capacity levels have been
determined, except for the impact of changing prices.
Net cruise costs per ALBD is the most significant measure we use to
monitor our cruise segment costs rather than gross cruise costs per ALBD. In
calculating net cruise costs, we exclude the same variable costs that are
included in the calculation of net cruise revenues. This is done to avoid
duplicating these variable costs in these two non-GAAP financial measures.
We have not provided estimates of future gross revenue yields because the
reconciliations of forecasted net cruise revenues to forecasted gross cruise
revenues would require us to forecast, with reasonable accuracy, the amount of
air and other transportation costs that our forecasted cruise passengers would
elect to purchase from us (the "air/sea mix"). Since the forecasting of future
air/sea mix involves several significant variables that are relatively difficult
to forecast and the revenues from the sale of air and other transportation
approximate the costs of providing that transportation, management focuses
primarily on forecasts of net cruise revenues rather than gross cruise revenues.
This does not impact, in any material respect, our ability to forecast our
future results, as any variation in the air/sea mix has no material impact on
our forecasted net cruise revenues or forecasted net cruise costs. As such,
management does not believe that this reconciling information would be
meaningful.
In addition, because a significant portion of our operations utilize the
euro or sterling to measure their results and financial condition, the
translation of those operations to our U.S. dollar reporting currency results in
increases in reported U.S. dollar revenues and expenses if the U.S. dollar
weakens against these foreign currencies, and decreases in reported U.S. dollar
revenues and expenses if the U.S. dollar strengthens against these foreign
currencies. Accordingly, we also monitor our two non-GAAP financial measures
assuming the current period currency exchange rates have remained constant with
the prior year's rates, or on a "constant dollar basis," in order to remove the
impact of changes in exchange rates on our non-U.S. cruise operations. We
believe that this is a useful measure indicating the actual growth of our
operations in a fluctuating currency exchange rate environment.
On a constant dollar basis, net cruise revenues and net cruise costs would
be $9.21 billion and $5.69 billion for fiscal 2006, respectively. On a constant
dollar basis, gross cruise revenues and gross cruise costs would be $11.42
billion and $7.91 billion for fiscal 2006, respectively. In addition, our
non-U.S. cruise operations' depreciation and net interest expense were impacted
by the changes in exchange rates for fiscal 2006 compared to 2005.
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All the prior periods financial information presented herein have been
adjusted to reflect the retrospective application of the change in our method of
accounting for dry-dock costs, as more fully discussed in Note 2 in the
accompanying financial statements.
Critical Accounting Estimates
Our critical accounting estimates are those which we believe require our
most significant judgments about the effect of matters that are inherently
uncertain. A discussion of our critical accounting estimates, the underlying
judgments and uncertainties used to make them and the likelihood that materially
different estimates would be reported under different conditions or using
different assumptions is as follows:
Ship Accounting
Our most significant assets are our ships and ships under construction,
which represent 88% of our total assets. We make several critical accounting
estimates dealing with our ship accounting. First, we compute our ships'
depreciation expense, which represented approximately 10% of our cruise costs
and expenses in fiscal 2006, which requires us to estimate the average useful
life of each of our ships, as well as their residual values. Secondly, we
account for ship improvement costs by capitalizing those costs which we believe
will add value to our ships and depreciate those improvements over their
estimated useful lives, while expensing repairs and maintenance and minor
replacement costs as they are incurred. Finally, when we record the retirement
of a ship component that is included within the ship's cost basis, we estimate
its net book value to determine the amount of ship component retired.
We determine the average useful life of our ships and their residual
values based primarily on our estimates of the weighted-average useful lives and
residual values of the ships' major component systems, such as cabins, main
diesels, main electric, superstructure and hull. In addition, we consider, among
other things, long-term vacation market conditions and competition and
historical useful lives of similarly-built ships. We have estimated our new
ships' average useful lives at 30 years and their average residual values at 15%
of our original ship cost.
Given the very large and complex nature of our ships, ship accounting
estimates require considerable judgment and are inherently uncertain. We do not
have cost segregation studies performed to specifically componentize our ship
systems. In addition, since we do not separately componentize our ships, we do
not identify and track depreciation of specific component systems. Therefore, we
have to estimate the net book value of components that are replaced or
refurbished, based primarily upon their replacement or refurbishment cost and
their age.
If materially different conditions existed, or if we materially changed
our assumptions of ship lives and residual values, our depreciation expense or
loss on replacement or refurbishment of ship assets and net book value of our
ships would be materially different. In addition, if we change our assumptions
in making our determinations as to whether improvements to a ship add value, the
amounts we expense each year as repair and maintenance costs could increase,
partially offset by a decrease in depreciation expense, as less costs would have
been initially capitalized to our ships. Our fiscal 2006 ship depreciation
expense would have increased by approximately $25 million for every year we
reduced our estimated average 30 year ship useful life. In addition, if our
ships were estimated to have no residual value, our fiscal 2006 depreciation
expense would have increased by approximately $125 million.
We believe that the estimates we made for ship accounting purposes are
reasonable and our methods are consistently applied and, accordingly, result in
depreciation expense that is based on a rational and systematic method to
equitably allocate the costs of our ships to the periods during which services
are obtained from their use. In addition, we believe that the estimates we made
are reasonable and our methods consistently applied (1) in determining the
average useful life and average residual values of our ships; (2) in determining
which ship improvement costs add value to our ships; and (3) in determining the
net book value of ship component assets being replaced or refurbished. Finally,
we believe our critical ship accounting estimates are generally comparable with
those of other major cruise companies.
F-33
Asset Impairment
The impairment reviews of our ships, trademarks and goodwill, which has
been allocated to our cruise line reporting units, require us to make
significant estimates to determine the fair values of these assets or reporting
units.
The determination of fair value includes numerous uncertainties, unless a
viable actively traded market exists for the asset or for a comparable reporting
unit, which is usually not the case for cruise ships, cruise lines and
trademarks. For example, in determining fair values of ships and cruise lines
utilizing discounted forecasted cash flows, significant judgments are made
concerning, among other things, future net revenue yields, net cruise costs per
ALBD, interest and discount rates, cruise itineraries, ship additions and
retirements, technological changes, consumer demand, governmental regulations
and the effects of competition. In addition, third party appraisers are
sometimes used to determine fair values and some of their valuation
methodologies are also subject to similar types of uncertainties. Also, the
determination of fair values of reporting units using a price earnings multiple
approach also requires significant judgments, such as determining reasonably
comparable multiples. Finally, determining trademark fair values also requires
significant judgments in determining both the estimated trademark cash flows,
and the appropriate royalty rates to be applied to those cash flows to determine
their fair value. We believe that we have made reasonable estimates and
judgments in determining whether our ships, goodwill and trademarks have been
impaired. However, if there is a material change in the assumptions used in our
determination of fair value or if there is a material change in the conditions
or circumstances influencing fair value, we could be required to recognize a
material impairment charge.
Contingencies
We periodically assess the potential liabilities related to any lawsuits
or claims brought against us, as well as for other known unasserted claims,
including environmental, legal, passenger and crew, and tax matters. While it is
typically very difficult to determine the timing and ultimate outcome of these
matters, we use our best judgment to determine if it is probable that we will
incur an expense related to the settlement or final adjudication of such matters
and whether a reasonable estimation of such probable loss, if any, can be made.
In assessing probable losses, we make estimates of the amount of probable
insurance recoveries, if any, which are recorded as assets. We accrue a
liability when we believe a loss is probable and the amount of the loss can be
reasonably estimated, in accordance with the provisions of SFAS No. 5,
"Accounting for Contingencies," as amended. Such accruals are typically based on
developments to date, management's estimates of the outcomes of these matters,
our experience in contesting, litigating and settling other similar matters,
historical claims experience and actuarially determined assumptions of
liabilities, and any related insurance coverage. See Note 7 in the accompanying
financial statements for additional information concerning our contingencies.
Given the inherent uncertainty related to the eventual outcome of these
matters and potential insurance recoveries, it is possible that all or some of
these matters may be resolved for amounts materially different from any
provisions or disclosures that we may have made with respect to their
resolution. In addition, as new information becomes available, we may need to
reassess the amount of probable liability that needs to be accrued related to
our contingencies. All such revisions in our estimates could materially impact
our results of operations and financial position.
Results of Operations
We earn our cruise revenues primarily from the following:
- sales of passenger cruise tickets and, in some cases, the sale of
air and other transportation to and from our ships. The cruise
ticket price includes accommodations, most meals, some non-alcoholic
beverages, entertainment and many onboard activities, and
- the sale of goods and/or services primarily on board our ships,
which include bar and some beverage sales, casino gaming, shore
excursions, gift shop and spa sales,
F-34
photo and art sales, and pre- and post cruise land packages. These
goods and services are either provided directly by us or by
independent concessionaires, from which we receive a percentage of
their revenues or a fee.
We incur cruise operating costs and expenses for the following:
- the costs of passenger cruise tickets, which represent costs that
vary directly with passenger cruise ticket revenues, and include
travel agent commissions, air and other travel related costs,
- onboard and other cruise costs, which represent costs that vary
directly with onboard and other revenues, and include the costs of
liquor and some beverages, costs of tangible goods sold by us from
our gift, photo and art auction activities, pre- and post cruise
land packages and credit card fees. Concession revenues do not have
any significant amount of costs associated with them, as the costs
and services incurred for these activities are provided by our
concessionaires,
- payroll and related costs, which represent costs for all our
shipboard personnel, including deck and engine officers and crew and
hotel and administrative employees,
- food costs, which include both our passenger and crew food costs,
- fuel costs, which include fuel delivery costs, and
- other ship operating costs, which include repairs and maintenance,
including minor replacements and dry-dock expenses, port charges,
insurance, entertainment and all other shipboard operating costs and
expenses.
For segment information related to our revenues, expenses, operating
income and other financial information see Note 11 in the accompanying financial
statements.
F-35
Selected Information and Non-GAAP Financial Measures
Selected information was as follows:
Years Ended November 30,
----------------------------------------------
2006 2005 2004
------------ ------------ ------------
Passengers carried (in thousands) 7,008 6,848 6,306
============ ============ ============
Occupancy percentage 106.0%(a) 105.6%(a) 104.5%
============ ============ ============
Fuel cost per metric ton (b) $ 334 $ 259 $ 194
============ ============ ============
(a) Occupancy percentage includes the three ships chartered to the Military
Sealift Command ("MSC") in connection with our Hurricane Katrina relief
efforts in the first quarter of 2006 and the fourth quarter of 2005 at
100%.
(b) Fuel cost per metric ton is calculated by dividing the cost of our fuel by
the number of metric tons consumed.
Gross and net revenue yields were computed by dividing the gross or net
revenues, without rounding, by ALBDs as follows:
Years Ended November 30,
----------------------------------------------
2006 2005 2004
------------ ------------ ------------
(in millions, except ALBDs and yields)
Cruise revenues
Passenger tickets $ 8,903 $ 8,399 $ 7,357
Onboard and other 2,514 2,338 2,070
------------ ------------ ------------
Gross cruise revenues 11,417 10,737 9,427
Less cruise costs
Commissions, transportation and other (1,749) (1,645) (1,572)
Onboard and other (453) (412) (359)
------------ ------------ ------------
Net cruise revenues $ 9,215 $ 8,680 $ 7,496
============ ============ ============
ALBDs(a) 49,945,184 47,754,627 44,009,061
============ ============ ============
Gross revenue yields $ 228.58 $ 224.84 $ 214.21
============ ============ ============
Net revenue yields $ 184.50 $ 181.77 $ 170.32
============ ============ ============
Gross and net cruise costs per ALBD were computed by dividing the gross or
net cruise costs, without rounding, by ALBDs as follows:
Years Ended November 30,
----------------------------------------------
2006 2005 2004
------------ ------------ ------------
(in millions, except ALBDs and costs per ALBD)
Cruise operating expenses $ 6,477 $ 5,964 $ 5,292
Cruise selling and administrative expenses 1,405 1,289 1,231
------------ ------------ ------------
Gross cruise costs 7,882 7,253 6,523
Less cruise costs included in net cruise
revenues
Commissions, transportation and other (1,749) (1,645) (1,572)
Onboard and other (453) (412) (359)
------------ ------------ ------------
Net cruise costs $ 5,680 $ 5,196 $ 4,592
============ ============ ============
ALBDs(a) 49,945,184 47,754,627 44,009,061
============ ============ ============
Gross cruise costs per ALBD $ 157.81 $ 151.89 $ 148.24
============ ============ ============
Net cruise costs per ALBD $ 113.73 $ 108.81 $ 104.34
============ ============ ============
(a) Available lower berth days is a standard measure of passenger capacity for
the period. It assumes that each cabin we offer for sale accommodates two
passengers. ALBDs are computed by multiplying passenger capacity by
revenue producing ship operating days in the period.
F-36
Fiscal 2006 ("2006") Compared to Fiscal 2005 ("2005")
Revenues
Net cruise revenues increased $535 million, or 6.2%, to $9.22 billion in
2006 from $8.68 billion in 2005. The 4.6% increase in ALBDs between 2006 and
2005 accounted for $398 million of the increase, and the remaining $137 million
was from increased net revenue yields, which increased 1.5% on both a current
and constant dollar basis in 2006 compared to 2005 (gross revenue yields
increased by 1.7% in current dollars). Net revenue yields increased in 2006
primarily from higher cruise ticket prices, higher onboard revenues and, to a
lesser extent, a 0.4% increase in occupancy. Gross cruise revenues increased
$680 million, or 6.3%, in 2006 to $11.42 billion from $10.74 billion in 2005 for
largely the same reasons as net cruise revenues.
Our 2006 cruise ticket prices for Caribbean itineraries were less than
2005, which was offset by price increases we achieved primarily from our Alaska
and European cruises. We believe that this reduction in Caribbean pricing was
the result of weaker consumer demand caused primarily from the lingering effects
of the unusually strong 2005 hurricane season and higher fuel and other costs'
adverse impacts on our customers' discretionary income.
Onboard and other revenues included concession revenues of $694 million in
2006 and $638 million in 2005. Onboard and other revenues increased in 2006
compared to 2005, primarily because of the 4.6% increased ALBDs and increased
passenger spending on our ships.
Other non-cruise revenues increased $72 million, or 15.6%, to $533 million
in 2006 from $461 million in 2005 primarily due to the increase in the number of
cruise/tours sold in Alaska.
Costs and Expenses
Net cruise costs increased $484 million, or 9.3%, to $5.68 billion in 2006
from $5.20 billion in 2005. The 4.6% increase in ALBDs between 2005 and 2006
accounted for $238 million of the increase whereas $246 million was from
increased net cruise costs per ALBD, which increased 4.5% in 2006 compared to
2005 (gross cruise costs per ALBD increased 3.9%). Net cruise costs per ALBD
increased primarily due to a $75 increase in fuel cost per metric ton, or 29.0%,
to $334 per metric ton in 2006, which resulted in an additional $209 million of
expense, and a $57 million increase in share-based compensation expense, which
was as the result of our adoption of SFAS No. 123(R) (see Notes 2 and 12 in the
accompanying financial statements). This increase was partially offset by the
non-recurrence in 2006 of a $23 million MNOPF contribution. Net cruise costs per
ALBD as measured on a constant dollar basis increased 4.8% in 2006 compared to
2005. On a constant dollar basis, net cruise costs per ALBD, excluding increased
fuel prices and incremental share-based compensation expenses were flat,
compared to 2005. Gross cruise costs increased $629 million, or 8.7%, in 2006 to
$7.88 billion from $7.25 billion in 2005 for largely the same reasons as net
cruise costs.
Other non-cruise operating expenses increased $67 million, or 18.7%, to
$425 million in 2006 from $358 million in 2005 primarily due to the increase in
the number of cruise/tours sold in Alaska.
Depreciation and amortization expense increased by $86 million, or 9.5%,
to $988 million in 2006 from $902 million in 2005 largely due to the 4.6%
increase in ALBDs through the addition of new ships, and additional ship
improvement expenditures.
Nonoperating (Expense) Income
Net interest expense, excluding capitalized interest, was $323 million in
both 2006 and 2005. This flat interest expense was primarily due to lower
average borrowings offsetting the impact of higher average interest rates on
borrowings. Capitalized interest increased $16 million during 2006 compared to
2005 primarily due to higher average levels of investment in ship construction
projects and higher average interest rates on borrowings.
Other expense in 2006 included a $10 million expense for the write-down of
a non-cruise investment.
F-37
Income Taxes
Income tax expense decreased by $33 million to $39 million in 2006 from
$72 million in 2005 primarily as a result of lower U.S. income taxes related to
the MSC charter in 2006 compared to 2005, and the reversal in 2006 of previously
recorded tax liabilities and deferred tax valuation allowances, which were no
longer required based upon the results of tax authority audits and other
factors.
Fiscal 2005 ("2005") Compared to Fiscal 2004 ("2004")
Revenues
Net cruise revenues increased $1.18 billion, or 15.8%, to $8.68 billion in
2005 from $7.50 billion in 2004. The 8.5% increase in ALBDs between 2005 and
2004 accounted for $638 million of the increase, and the remaining $546 million
was from increased net revenue yields, which increased 6.7% in 2005 compared to
2004 (gross revenue yields increased by 5.0%). Net revenue yields increased in
2005 primarily from higher cruise ticket prices, a 1.1% increase in occupancy
and higher onboard revenues. Net revenue yields as measured on a constant dollar
basis increased 6.4% in 2005. Gross cruise revenues increased $1.31 billion, or
13.9%, in 2005 to $10.74 billion from $9.43 billion in 2004 for largely the same
reasons as net cruise revenues.
Onboard and other revenues included concession revenues of $638 million in
2005 and $561 million in 2004. Onboard and other revenues increased in 2005
compared to 2004, primarily because of the 8.5% increase in ALBDs and increased
passenger spending on our ships.
Other non-cruise revenues increased $63 million, or 15.8%, to $461 million
in 2005 from $398 million in 2004 primarily due to the increase in the number of
cruise/tours sold in Alaska.
Costs and Expenses
Net cruise costs increased $604 million, or 13.2%, to $5.20 billion in
2005 from $4.59 billion in 2004. The 8.5% increase in ALBDs between 2004 and
2005 accounted for $391 million of the increase, and the remaining $213 million
was from increased net cruise costs per ALBD, which increased 4.3% in 2005
compared to 2004 (gross cruise costs per ALBD increased 2.5%). Net cruise costs
per ALBD increased primarily due to a $65 increase in fuel cost per metric ton,
or 33.5%, to $259 per metric ton in 2005 and a $23 million MNOPF contribution
(see Note 12 in the accompanying financial statements). Net cruise costs per
ALBD as measured on a constant dollar basis compared to 2004 increased 3.9% in
2005 and were flat excluding increased fuel prices and the MNOPF contribution,
compared to 2004. Gross cruise costs increased $730 million, or 11.2%, in 2005
to $7.25 billion from $6.52 billion in 2004, which was a lower percentage
increase than net cruise costs primarily because of the lower proportion of
passengers who purchased air transportation from us in 2005.
Other non-cruise operating expense increased $50 million, or 16.2%, to
$358 million in 2005 from $308 million in 2004 primarily due to the increase in
the number of cruise/tours sold in Alaska.
Depreciation and amortization expense increased by $90 million, or 11.1%,
to $902 million in 2005 from $812 million in 2004 largely due to the 8.5%
increase in ALBDs through the addition of new ships, and additional ship
improvement expenditures.
Nonoperating (Expense) Income
Net interest expense, excluding capitalized interest, increased $31
million in 2005 to $323 million in 2005 from $292 million in 2004. This increase
was primarily due to a $36 million increase in interest expense from higher
average interest rates on borrowings and a weaker U.S. dollar, partially offset
by a $5 million increase in interest income due to higher average invested fund
balances.
Other expense in 2005 included a $22 million expense for the write-down of
a non-cruise investment, partially offset by $7 million income from the
settlement of litigation associated with the DLC transaction.
F-38
Income Taxes
Income tax expense increased by $25 million from 2004 to $72 million in
2005 from $47 million in 2004 primarily because we recorded approximately $18
million for U.S. income taxes related to the MSC charter. Commencing in
September 2005, these three ships were chartered for six months, and pursuant to
our agreement with the MSC, the net earnings from the charter will be equal to
the amount of net earnings we would have earned on these ships if we had not
entered into this charter.
Liquidity and Capital Resources
Sources and Uses of Cash
Our business provided $3.63 billion of net cash from operations during
fiscal 2006, an increase of $223 million, or 6.5%, compared to fiscal 2005. We
continue to generate substantial cash from operations and remain in a strong
financial position, thus providing us with substantial financial flexibility in
meeting operating, investing and financing needs.
During fiscal 2006, our net expenditures for capital projects were $2.48
billion, of which $1.97 billion was spent for our ongoing new shipbuilding
program, including $1.23 billion for the final delivery payments for Holland
America Line's Noordam, Princess Cruises' Crown Princess and the Costa
Concordia. In addition to our new shipbuilding program, we had capital
expenditures of $335 million for ship improvements and refurbishments, and $176
million for Alaska tour assets, cruise port facility developments and
information technology assets.
Our fiscal 2006 long-term debt borrowings were $2.24 billion, consisting
of $904 million of euro denominated long-term commercial paper, the issuance of
a E750 million bond ($985 million U.S. dollars at the November 30, 2006 exchange
rate) and $352 million under the Crown Princess debt financing facility. Our
fiscal 2006 long-term debt repayments were $2.54 billion, consisting of $1.46
billion of long-term euro commercial paper, $888 million of Costa's indebtedness
and $190 million of other long-term debt amounts. We also received proceeds from
short-term borrowings of $661 million under our short-term commercial paper
programs and short-term bank loans during fiscal 2006. Finally, during 2006, we
purchased $841 million of Carnival Corporation common stock and Carnival plc
ordinary shares in open market transactions and paid cash dividends of $803
million.
Future Commitments and Funding Sources
At November 30, 2006, our contractual cash obligations, including ship
construction contracts entered into through January 2007, and the effects such
obligations are expected to have on our liquidity and cash flow in future
periods were as follows (in millions):
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Payments Due by Fiscal Year
------------------------------------------------------
Contractual Cash
Obligations Total 2007 2008 2009 2010 2011 Thereafter
- ---------------- ----- ---- ---- ---- ---- ---- ----------
Recorded Contractual
Obligations
Long-term debt(a) $ 7,409 $1,054 $1,930 $ 202 $1,108 $ 202 $ 2,913
Short-term borrowings(a) 438 438
Other long-term
liabilities reflected
on the balance sheet(b) 495 29 79 62 47 40 238
Unrecorded Contractual
Obligations
Shipbuilding(a) 9,898 2,653 2,514 2,426 1,688 617
Port facilities and
other(a) 639 107 97 83 74 61 217
Purchase obligations(c) 643 571 43 24 3 1 1
Operating leases(a) 350 40 36 34 31 29 180
Fixed-rate interest
payments(d) 1,700 217 192 169 165 158 799
Variable rate interest
payments(d) 330 123 73 65 33 13 23
------- ------ ------ ------ ------ ------ ----------
Total contractual
cash obligations(e) $21,902 $5,232 $4,964 $3,065 $3,149 $1,121 $ 4,371
======= ====== ====== ====== ====== ====== ==========
(a) See Notes 5 and 6 in the accompanying financial statements for additional
information regarding these contractual cash obligations.
(b) Represents cash outflows for certain of our long-term liabilities that
could be reasonably estimated. The primary outflows are for estimates of
our employee benefit plan obligations, crew and passenger claims, certain
deferred income taxes, derivative contracts payable, and other long-term
liabilities. Other long-term liabilities, such as deferred income, fair
value of hedged commitments and certain deferred income taxes, have been
excluded from the table as they do not require cash settlement in the
future or the timing of the cash outflow cannot be reasonably estimated.
(c) Represents legally-binding commitments to purchase inventory and other
goods and services made in the normal course of business to meet
operational requirements. Many of our contracts contain clauses that allow
us to terminate the contract with notice, and with or without a
termination penalty. Termination penalties are generally an amount less
than the original obligation. Historically, we have not had any
significant defaults of our contractual obligations or incurred
significant penalties for termination of our contractual obligations.
(d) Fixed-rate interest payments represent cash outflows for fixed interest
payments, including interest swapped from a variable-rate to a fixed-rate.
Variable-rate interest payments represent forecasted cash outflows for
interest payments on variable-rate debt, including interest swapped from a
fixed-rate to a variable-rate, using the November 30, 2006 forward
interest rate curve for the terms of the loans.
(e) Foreign currency payments are based on the November 30, 2006 exchange
rates.
In June 2006, a $1 billion stock repurchase authorization was approved by
the Boards of Directors in June 2006 subject to certain restrictions ("2006
Purchase Program"). This 2006 Purchase Program does not have an expiration date
and may be discontinued by our Boards of Directors at any time. At February 9,
2007 the remaining availability pursuant to our 2006 Purchase Program was $773
million.
At November 30, 2006, we had liquidity of $5.60 billion, which consisted
of $1.18 billion of cash, cash equivalents and short-term investments, $1.87
billion available for borrowing under our revolving credit facility and $2.55
billion under committed ship financing facilities. Our revolving credit facility
matures in 2011. A key to our access to liquidity is the maintenance of our
strong credit ratings.
Based primarily on our historical results, current financial condition and
future forecasts, we believe that our existing liquidity and cash flow from
future operations will be sufficient to fund most of our expected capital
projects, debt service requirements,
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dividend payments, working capital and other firm commitments. In addition,
based on our future forecasted operating results and cash flows for fiscal 2007,
we expect to be in compliance with our debt covenants during 2007. However, our
forecasted cash flow from future operations, as well as our credit ratings, may
be adversely affected by various factors including, but not limited to, those
factors noted under "Cautionary Note Concerning Factors That May Affect Future
Results." To the extent that we are required, or choose, to fund future cash
requirements, including our future shipbuilding commitments, from sources other
than as discussed above, we believe that we will be able to secure such
financing from banks or through the offering of debt and/or equity securities in
the public or private markets. However, we cannot be certain that our future
operating cash flow will be sufficient to fund future obligations or that we
will be able to obtain additional financing, if necessary.
Off-Balance Sheet Arrangements
We are not a party to any off-balance sheet arrangements, including
guarantee contracts, retained or contingent interests, certain derivative
instruments and variable interest entities, that either have, or are reasonably
likely to have, a current or future material effect on our financial statements.
Foreign Currency Exchange Rate Risks
Our growing international business operations are conducted primarily
through AIDA in Germany, Costa in Southern Europe and China, P&O Cruises and
Ocean Village in the UK and P&O Cruises Australia in Australia, which subject us
to an increasing level of foreign currency exchange risk related to the euro,
sterling and Australian dollar because these operations have either the euro,
sterling or Australian dollar as their functional currency. Accordingly,
exchange rate fluctuations of the euro, sterling or Australian dollar against
the U.S. dollar will affect our reported financial results since the reporting
currency for our consolidated financial statements is the U.S. dollar and the
functional currency for our international operations is generally the local
currency. Any weakening of the U.S. dollar against these local functional
currencies has the financial statement effect of increasing the U.S. dollar
values reported for cruise revenues and cruise expenses in our Consolidated
Statements of Operations. Strengthening of the U.S. dollar has the opposite
effect.
We seek to minimize the impact of fluctuations in foreign currency
exchange rates through our normal operating and financing activities, including
netting certain exposures to take advantage of any natural offsets and, when
considered appropriate, through the use of derivative financial instruments. The
financial impacts of these hedging instruments are generally offset by
corresponding changes in the underlying exposures being hedged. Our policy is to
not use any financial instruments for trading or other speculative purposes.
One of our primary foreign currency exchange rate risks is related to our
outstanding commitments under ship construction contracts denominated in a
currency other than the functional currency of the cruise brand that is expected
to be operating the ship. These currency commitments are affected by
fluctuations in the value of the functional currency as compared to the currency
in which the shipbuilding contract is denominated. We use foreign currency swaps
to manage foreign currency exchange rate risk from some of our ship construction
contracts (see Notes 2, 6 and 10 in the accompanying financial statements).
Accordingly, increases and decreases in the fair value of these foreign currency
swaps offset changes in the fair value of the foreign currency denominated ship
construction commitments, thus resulting in the elimination of such risk.
Specifically, we have foreign currency swaps for two of our euro
denominated shipbuilding contracts. At November 30, 2006, the fair value of
these foreign currency swaps was an unrealized loss of $26 million which is
recorded, along with an offsetting $26 million fair value asset related to our
shipbuilding firm commitments, on our accompanying 2006 balance sheet. Based
upon a 10% strengthening or weakening of the sterling compared to the euro as of
November 30, 2006, assuming no changes in comparative interest rates, the
estimated fair value of these foreign currency swaps would decrease or increase
by $96 million, which would be offset by a decrease or increase of $96 million
in the U.S. dollar value of the related foreign currency ship construction
commitments resulting in no net dollar impact to us.
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However, at November 30, 2006, as adjusted for our ship orders through
January 2007, we have six euro denominated shipbuilding commitments aggregating
E2.55 billion assigned to certain of our U.S. dollar or sterling functional
currency operations, for which we have not entered into any foreign currency
swaps. Therefore, the U.S. dollar cost of these ships will increase or decrease
based upon changes in the exchange rates until the payments are made under the
shipbuilding contracts or we enter into foreign currency swaps. These euro
commitments effectively act as an economic hedge against a portion of our net
investment in euro and sterling-denominated cruise operations. Accordingly, any
increase or decrease in our ship costs resulting from changes in the exchange
rates will be offset by a corresponding change in the net assets of our euro and
sterling-denominated cruise operations. Based upon a 10% hypothetical increase
or decrease in the November 30, 2006 U.S. dollar and sterling to the euro
foreign currency exchange rates, the cost of these ships would increase or
decrease by $336 million. Decisions regarding whether or not to hedge a given
ship commitment are made on a case-by-case basis, taking into consideration the
amount and duration of the exposure, market volatility, and economic trends.
The cost of shipbuilding orders that we may place in the future for our
cruise lines who generate their cash flows in a currency that is different than
the shipyard's operating currency, generally the euro, is expected to be
affected by foreign currency exchange rate fluctuations. Given the decline in
the U.S. dollar relative to the euro over the past several years, the U.S.
dollar cost to order new cruise ships at current exchange rates has increased
significantly. If the U.S. dollar remains at current levels or declines further,
this may affect our ability to order future new cruise ships for U.S. dollar
functional currency brands.
Finally, we consider our investments in foreign subsidiaries to be
denominated in relatively stable currencies and of a long-term nature. In
addition to the strategy discussed above, we also partially address these
exposures by denominating a portion of our debt, or entering into foreign
currency swaps, in our subsidiaries' functional currencies (generally euros or
sterling). Specifically, we have debt of $1.02 billion in euros and $419 million
in sterling and have $1.25 billion of foreign currency swaps, whereby we have
converted $267 million of U.S. dollar debt into sterling debt, $842 million of
U.S. dollar debt into euro debt and $143 million of euro debt into sterling
debt, thus partially offsetting this foreign currency exchange rate risk. At
November 30, 2006, the fair value of these foreign currency swaps was an
unrealized loss of $169 million, which is recorded in AOCI and offsets a portion
of the gains recorded in AOCI upon translating these foreign subsidiaries net
assets into U.S. dollars. Based upon a 10% hypothetical increase or decrease in
the November 30, 2006 foreign currency exchange rates, we estimate that these
derivative contracts' fair values would increase or decrease by $125 million,
which would be offset by a decrease or increase of $125 million in the U.S.
dollar value of our net investments.
Interest Rate Risks
We seek to minimize the impact of fluctuations in interest rates through
our long-term investment and debt portfolio strategies, which include entering
into a substantial amount of fixed rate debt instruments. We continuously
evaluate our debt portfolio, and make periodic adjustments to the mix of
floating rate and fixed rate debt based on our view of interest rate movements
through the use of interest rate swaps. At both November 30, 2006 and 2005, 72%
of the interest cost on our long-term debt was effectively fixed and 28% was
variable, including the effect of our interest rate swaps.
Specifically, we have interest rate swaps at November 30, 2006, which
effectively changed $932 million of fixed rate debt to libor-based floating rate
debt. In addition, we have interest rate swaps at November 30, 2006 which
effectively changed $365 million of libor-based floating rate debt to fixed rate
debt. The fair value of our long-term debt and interest rate swaps at November
30, 2006 was $7.79 billion. Based upon a hypothetical 10% decrease or increase
in the November 30, 2006 market interest rates, the fair value of our long-term
debt and interest rate swaps would increase or decrease by approximately $120
million and annual interest expense on our variable rate debt, including the
effect of our interest rate swaps, would increase or decrease by approximately
$12 million.
In addition, based upon a hypothetical 10% decrease or increase in
Carnival Corporation's November 30, 2006 common stock price, the fair value of
our convertible notes would increase or decrease by approximately $145 million.
F-42
These hypothetical amounts are determined by considering the impact of the
hypothetical interest rates and common stock price on our existing long-term
debt and interest rate swaps. This analysis does not consider the effects of the
changes in the level of overall economic activity that could exist in such
environments or any relationships which may exist between interest rate and
stock price movements. Furthermore, since substantially all of our fixed rate
long-term debt cannot currently be called or prepaid and $365 million of our
variable rate long-term debt is subject to interest rate swaps which effectively
fix the interest rate, it is unlikely we would be able to take any significant
steps in the short-term to mitigate our exposure in the event of a significant
decrease in market interest rates.
Bunker Fuel Price Risks
We have typically not used financial instruments to hedge our exposure to
the bunker fuel price market risk. We estimate that our fiscal 2007 fuel cost
would increase or decrease by approximately $3 million for each $1 per metric
ton increase or decrease in our average bunker fuel price.
Selected Financial Data
The selected consolidated financial data presented below for fiscal 2002
through 2006 and as of the end of each such year, are derived from our audited
financial statements and should be read in conjunction with those financial
statements and the related notes.
Years Ended November 30,
-----------------------------------------------------------------------
2006 2005 2004 2003 2002
----------- ----------- ----------- ----------- -----------
(in millions, except per share and other operating data)
Statement of Operations
and Cash Flow Data(a)
Revenues $ 11,839 $ 11,094 $ 9,727 $ 6,718 $ 4,383
Operating income $ 2,613 $ 2,639 $ 2,128 $ 1,376 $ 1,037
Net income $ 2,279 $ 2,253 $ 1,809 $ 1,187 $ 1,011
Earnings per share
Basic $ 2.85 $ 2.80 $ 2.25 $ 1.65 $ 1.72
Diluted $ 2.77 $ 2.70 $ 2.18 $ 1.62 $ 1.68
Dividends declared
per share $ 1.025 $ 0.800 $ 0.525 $ 0.440 $ 0.420
Cash from operations $ 3,633 $ 3,410 $ 3,216 $ 1,933 $ 1,469
Capital expenditures $ 2,480 $ 1,977 $ 3,586 $ 2,516 $ 1,986
Other Operating Data(a)
Available lower berth days 49,945,184 47,754,627 44,009,061 33,309,785 21,435,828
Passengers carried (in thousands) 7,008 6,848 6,306 5,038 3,549
Occupancy percentages(b) 106.0% 105.6% 104.5% 103.4% 105.2%
As of November 30,
-----------------------------------------------------------------------
2006 2005 2004 2003 2002
----------- ----------- ----------- ----------- -----------
(in millions, except percentages)
Balance Sheet and Other
Data(a)
Total assets $ 30,552 $ 28,349 $ 27,548 $ 24,450 $ 12,302
Long-term debt, excluding
current portion $ 6,355 $ 5,727 $ 6,291 $ 6,918 $ 3,014
Total shareholders' equity $ 18,210 $ 16,883 $ 15,672 $ 13,752 $ 7,385
Debt to capital(c) 30.1% 30.3% 33.7% 35.0% 30.0%
(a) Includes the results of Carnival plc since April 17, 2003. Accordingly,
the information from 2003 and thereafter is not comparable to the prior
period. Certain of these amounts have been retroactively adjusted to
reflect the impact of changing our method of accounting for dry-dock costs
from the deferral method to the direct expense method. In addition, the
2006 net income was reduced by $57 million of share-based compensation
expense related to our adoption of SFAS No. 123(R) in 2006. (See Note 2).
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(b) In accordance with cruise industry practice, occupancy percentage is
calculated using a denominator of two passengers per cabin even though
some cabins can accommodate three or more passengers. The percentages in
excess of 100% indicate that more than two passengers occupied some
cabins.
(c) Percentage of total debt to the sum of total debt and shareholders'
equity.
Market Price for Common Stock and Ordinary Shares
Carnival Corporation's common stock, together with paired trust shares
of beneficial interest in the P&O Princess Special Voting Trust (which holds a
Special Voting Share of Carnival plc) is traded on the NYSE under the symbol
"CCL." Carnival plc's ordinary shares trade on the London Stock Exchange under
the symbol "CCL." Carnival plc's ADSs, each one of which represents one
Carnival plc ordinary share, are traded on the NYSE under the symbol "CUK."
The depository for the ADSs is JPMorgan Chase Bank. The high and low stock
sales price for the periods indicated was as follows:
Carnival Corporation Carnival plc
-------------------- ----------------------------------------------------
Price per Ordinary
Share (GBP) Price per ADS (USD)
------------------------------ -------------------
High Low High Low High Low
------ ------ ------------ ------------ ------ ------
Fiscal 2006
Fourth Quarter $50.99 $41.63 (pound)26.68 (pound)22.21 $50.78 $42.65
Third Quarter $42.14 $36.40 (pound)23.34 (pound)19.62 $43.49 $37.00
Second Quarter $52.16 $39.36 (pound)31.57 (pound)21.02 $55.64 $40.01
First Quarter $56.14 $50.81 (pound)34.16 (pound)30.85 $59.47 $54.40
Fiscal 2005
Fourth Quarter $54.98 $45.78 (pound)33.19 (pound)26.60 $56.48 $47.32
Third Quarter $55.75 $48.76 (pound)33.40 (pound)28.31 $58.10 $51.46
Second Quarter $55.96 $46.76 (pound)31.45 (pound)25.90 $59.21 $50.02
First Quarter $58.98 $48.90 (pound)32.69 (pound)29.13 $62.17 $56.50
As of February 5, 2007, there were 3,769 holders of record of Carnival
Corporation common stock and 43,702 holders of record of Carnival plc ordinary
shares and 90 holders of record of Carnival plc ADSs. The past performance of
our stock prices cannot be relied on as a guide to their future performance.
All dividends for both Carnival Corporation and Carnival plc are
declared in U.S. dollars. Holders of Carnival Corporation common stock or
Carnival plc ADS's 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 based upon a
current U.S. dollar to sterling exchange rate announced prior to the dividend
payment date.
Selected Quarterly Financial Data (Unaudited)
Our revenues from the sale of passenger tickets are seasonal.
Historically, demand for cruises has been the greatest during our third
quarter, which includes the Northern Hemisphere summer months. This higher
demand during the third quarter results in higher net revenue yields and,
accordingly, the largest share of our net income is earned during this period.
The seasonality of our results is increased due to ships being taken out of
service for maintenance, which we typically schedule during non-peak demand
periods. Substantially all of Holland America Tours' and Princess Tours'
revenues and net income are generated from May through September in
conjunction with the Alaska cruise season.
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Quarterly financial results for fiscal 2006 were as follows:
Quarters Ended
---------------------------------------------------
February 28 May 31 August 31 November 30
----------- ------ --------- -----------
(in millions, except per share data)
Revenues $2,463 $2,662 $3,905 $ 2,809
Operating income $ 349 $ 448 $1,340 $ 476
Net income(a) $ 251 $ 380 $1,232 $ 416
Earnings per share
Basic $ 0.31 $ 0.47 $ 1.55 $ 0.53
Diluted $ 0.31 $ 0.46 $ 1.49 $ 0.51
Dividends declared
per share $ 0.25 $ 0.25 $ 0.25 $ 0.275
(a) Net income includes incremental share-based compensation expense as a
result of our adoption of SFAS No. 123(R) of $17 million, $11 million,
$13 million and $16 million for the quarters ended February 28, May 31,
August 31 and November 30, 2006, respectively.
Quarterly financial results for fiscal 2005 were as follows:
Quarters Ended
---------------------------------------------------
February 28 May 31 August 31 November 30
----------- ------ --------- -----------
(in millions, except per share data)
Revenues $2,398 $2,516 $3,607 $ 2,573
Operating income $ 422 $ 462 $1,321 $ 434
Net income(a) $ 348 $ 388 $1,181(b) $ 336
Earnings per share
Basic $ 0.43 $ 0.48 $ 1.46 $ 0.42
Diluted $ 0.42 $ 0.47 $ 1.40 $ 0.41
Dividends declared
per share $ 0.15 $ 0.20 $ 0.20 $ 0.25
(a) Net income was increased (decreased) by $3 million, $(20) million, $30
million and $(17) million for the quarters ended February 28, May 31,
August 31 and November 30, 2006, respectively, as a result of our change
in our method of accounting for dry-dock costs from the deferral method
to the direct expense method.
(b) Includes a $23 million expense related to the MNOPF contribution and a
$22 million expense for a non-cruise investment write-down.
F-45