REG - Carnival PLC - Final Results <Origin Href="QuoteRef">CCL.L</Origin> - Part 3
30/01/2017 14:40
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fluctuations in foreign currency exchange rates through our normal operating and financing
activities, including netting certain exposures to take advantage of any natural offsets and, when considered appropriate,
through the use of derivative and non-derivative financial instruments. Our primary focus is to monitor our exposure to and
manage the economic foreign currency exchange risks faced by our operations and realized if we exchange one currency for
another. We currently only hedge certain of our ship commitments and net investments in foreign operations. The financial
impacts of the hedging instruments we do employ generally offset the changes in the underlying exposures being hedged.
Operational Currency Risks
Our EAA segment operations generate significant revenues and incur significant expenses in their functional currencies,
which subjects us to "foreign currency translational" risk related to these currencies. Accordingly, exchange rate
fluctuations in their functional currencies 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. Any strengthening of the U.S. dollar
against these foreign currencies has the financial statement effect of decreasing the U.S. dollar values reported for these
segment's revenues and expenses. Any weakening of the U.S. dollar has the opposite effect.
Substantially all of our operations also have non-functional currency risk related to their international sales. In
addition, we have a portion of our operating expenses denominated in non-functional currencies. Accordingly, we also have
"foreign currency transactional" risks related to changes in the exchange rates for our revenues and expenses that are in a
currency other than the functional currency. The revenues and expenses which occur in the same non-functional currencies
create some degree of natural offset.
Investment Currency Risks
We consider our investments in foreign operations to be denominated in stable currencies. Our investments in foreign
operations are of a long-term nature. We have $5.5 billion of euro-denominated debt, including the effect of foreign
currency swaps, which provides an economic offset for our operations with euro functional currency. We also partially
mitigate our net investment currency exposures by denominating a portion of our foreign currency intercompany payables in
our foreign operations' functional currencies.
Newbuild Currency Risks
Our shipbuilding contracts are typically denominated in euros. Our decision to hedge a non-functional currency ship
commitment for our cruise brands is made on a case-by-case basis, considering the amount and duration of the exposure,
market volatility, economic trends, our overall expected net cash flows by currency and other offsetting risks. We use
foreign currency derivative contracts and have used non-derivative financial instruments to manage foreign currency
exchange rate risk for some of our ship construction payments.
At November 30, 2016, we had foreign currency zero cost collars that are designated as cash flow hedges for a portion of
euro-denominated shipyard payments for the following newbuilds:
Entered Into Matures in Weighted-Average Floor Rate Weighted- Average Ceiling Rate
Majestic Princess 2015 March 2017 $ 1.07 $ 1.25
Carnival Horizon 2016 March 2018 $ 1.02 $ 1.25
Seabourn Ovation 2016 April 2018 $ 1.02 $ 1.25
Holland America Nieuw Statendam 2016 November 2018 $ 1.05 $ 1.25
If the spot rate is between the weighted-average ceiling and floor rates on the date of maturity, then we would not owe or
receive any payments under these collars.
In November 2016, we settled our foreign currency zero cost collars that were designated as cash flow hedges for the final
euro-denominated shipyard payments of Seabourn Encore, which didn't result in any gain or loss in other comprehensive
income.
At January 19, 2017, our remaining newbuild currency exchange rate risk primarily relates to euro-denominated newbuild
contract payments, which represent a total unhedged commitment of $5.7 billion and substantially relates to newbuilds
scheduled to be delivered 2019 through 2022 to non-euro functional currency brands.
The cost of shipbuilding orders that we may place in the future that is denominated in a different currency than our cruise
brands' or the shipyards' functional currency is expected to be affected by foreign currency exchange rate fluctuations.
These foreign currency exchange rate fluctuations may affect our desire to order new cruise ships.
Interest Rate Risks
We manage our exposure to fluctuations in interest rates through our debt portfolio management and investment strategies.
We evaluate our debt portfolio to determine whether to make periodic adjustments to the mix of fixed and floating rate debt
through the use of interest rate swaps and the issuance of new debt or the early retirement of existing debt.
The composition of our debt, including the effect of foreign currency swaps and interest rate swaps, was as follows:
November 30,
2016 2015
Fixed rate 28 % 32 %
Euro fixed rate 35 % 28 %
Floating rate 14 % 18 %
Euro floating rate 23 % 22 %
Concentrations of Credit Risk
As part of our ongoing control procedures, we monitor concentrations of credit risk associated with financial and other
institutions with which we conduct significant business. We seek to minimize these credit risk exposures, including
counterparty nonperformance primarily associated with our cash equivalents, investments, committed financing facilities,
contingent obligations, derivative instruments, insurance contracts and new ship progress payment guarantees, by:
• Conducting business with large, well-established financial institutions, insurance companies and export credit
agencies
• Diversifying our counterparties
• Having guidelines regarding credit ratings and investment maturities that we follow to help safeguard liquidity and
minimize risk
• Generally requiring collateral and/or guarantees to support notes receivable on significant asset sales, long-term
ship charters and new ship progress payments to shipyards
We currently believe the risk of nonperformance by any of our significant counterparties is remote. At November 30, 2016,
our exposures under foreign currency and fuel derivative contracts and interest rate swap agreements were not material.
We also monitor the creditworthiness of travel agencies and tour operators in Asia, Australia and Europe, which includes
charter-hire agreements in Asia, and credit and debit card providers to which we extend credit in the normal course of our
business prior to sailing. Our credit exposure also includes contingent obligations related to cash payments received
directly by travel agents and tour operators for cash collected by them on cruise sales in Australia and most of Europe
where we are obligated to honor our guests' cruise payments made by them to their travel agents and tour operators
regardless of whether we have received these payments. Concentrations of credit risk associated with these trade
receivables, charter-hire agreements and contingent obligations are not considered to be material, principally due to the
large number of unrelated accounts, the nature of these contingent obligations and their short maturities. We have not
experienced significant credit losses on our trade receivables, charter-hire agreements and contingent obligations. We do
not normally require collateral or other security to support normal credit sales.
NOTE 12 - Segment Information
We have four reportable segments that are comprised of (1) North America, (2) EAA (3) Cruise Support and (4) Tour and
Other. Our segments are reported on the same basis as the internally reported information that is provided to our chief
operating decision maker ("CODM"), who is the President and Chief Executive Officer of Carnival Corporation and Carnival
plc. The CODM assesses performance and makes decisions to allocate resources for Carnival Corporation & plc based upon
review of the results across all of our segments.
Our North America segment includes Carnival Cruise Line, Holland America Line, Princess and Seabourn. Our EAA segment
includes AIDA, Costa, Cunard, P&O Cruises (Australia), P&O Cruises (UK). The operations of these reporting units have been
aggregated into two reportable segments based on the similarity of their economic and other characteristics, including
types of customers, regulatory environment, maintenance requirements, supporting systems and processes and products and
services they provide. Our Cruise Support segment represents certain of our port and related facilities and other services
that are provided for the benefit of our cruise brands.
Our Tour and Other segment represents the hotel and transportation operations of Holland America Princess Alaska Tours and
ships that we bareboat charter to unaffiliated entities.
Selected information for our segments as of and for the years ended November 30 was as follows (in millions):
Revenues Operating costs and Selling Depreciation Operating Capital Total
expenses and and income (loss) expenditures assets
administrative amortization
2016
North America (a) $ 10,267 $ 5,786 $ 1,220 $ 1,056 $ 2,205 $ 2,069 $ 23,454
EAA 5,906 3,524 691 599 1,092 667 13,456
Cruise Support 131 67 278 42 (256 ) 310 1,568
Tour and Other (a) 231 152 8 41 30 16 458 (b)
Intersegment elimination (a) (146 ) (146 ) - - - - -
$ 16,389 $ 9,383 $ 2,197 $ 1,738 $ 3,071 $ 3,062 $ 38,936
2015
North America (a) $ 9,866 $ 5,925 $ 1,140 $ 994 $ 1,807 $ 854 $ 22,420
EAA 5,636 3,442 695 561 938 1,265 14,076
Cruise Support 119 58 223 27 (189 ) 162 2,248
Tour and Other (a) 226 155 9 44 18 13 493 (b)
Intersegment elimination (a) (133 ) (133 ) - - - - -
$ 15,714 $ 9,447 $ 2,067 $ 1,626 $ 2,574 $ 2,294 $ 39,237
2014
North America (a) $ 9,559 $ 6,436 $ 1,121 $ 961 $ 1,041 $ 1,315 $ 22,681
EAA 6,148 3,914 725 616 893 1,054 15,228
Cruise Support 90 39 200 25 (174 ) 156 1,023
Tour and Other (a) 215 160 8 35 12 58 516 (b)
Intersegment elimination (a) (128 ) (128 ) - - - - -
$ 15,884 $ 10,421 $ 2,054 $ 1,637 $ 1,772 $ 2,583 $ 39,448
(a) A portion of the North America segment's revenues includes revenues for the tour portion of a cruise when a
land tour package is sold along with a cruise by either Holland America Line or Princess. These intersegment tour revenues,
which are included in our Tour and Other segment, are eliminated directly against the North America segment's revenues and
operating expenses in the line "Intersegment elimination."
(b) Tour and Other segment assets primarily include hotels and lodges in the state of Alaska and the Canadian
Yukon, motorcoaches used for sightseeing and charters, glass-domed railcars, which run on the Alaska Railroad, and our
owned ships that we leased out under long-term charters to unaffiliated entities.
Our non-U.S. revenues represent sales generated from outside the U.S. principally by non-U.S. travel agents and tour
operators. Substantially all of our long-lived assets are located outside of the U.S. and consist of our ships and ships
under construction.
Revenues by geographic areas, which are based on where our guests are sourced, were as follows (in millions):
Years Ended November 30,
2016 2015 2014
North America $ 8,327 $ 8,015 $ 7,762
Europe 5,254 5,133 5,676
Australia and Asia 2,506 2,256 2,097
Other 302 310 349
$ 16,389 $ 15,714 $ 15,884
NOTE 13 - Compensation Plans
Equity Plans
We issue our share-based compensation awards, which at November 30, 2016 included time-based share awards (restricted stock
awards and restricted stock units), performance-based share awards and market-based share awards (collectively "equity
awards"), under the Carnival Corporation and Carnival plc stock plans. Equity awards are principally granted to management
level employees and members of our Boards of Directors. The plans are administered by a committee of our independent
directors (the "Committee") that determines which employees are eligible to participate, the monetary value or number of
shares for which equity awards are to be granted and the amounts that may be exercised or sold within a specified term. We
had an aggregate of 17.3 million shares available for future grant at November 30, 2016. We fulfill our equity award
obligations using shares purchased in the open market or with unissued shares or treasury shares. Our equity awards
generally vest over a three-year period, subject to earlier vesting under certain conditions.
During the years ended November 30, 2014, 2015 and 2016, the equity award activity was as follows:
Equity Awards
Shares Weighted-Average
Grant Date Fair
Value
Outstanding at November 30, 2013 3,630,997 $ 37.11
Granted 1,589,368 $ 44.61
Vested (893,930 ) $ 45.52
Forfeited (273,378 ) $ 40.81
Outstanding at November 30, 2014 4,053,057 $ 37.94
Granted 1,253,050 $ 45.70
Vested (1,298,318 ) $ 31.35
Forfeited (398,394 ) $ 39.48
Outstanding at November 30, 2015 3,609,395 $ 42.84
Granted 1,451,917 $ 53.98
Vested (1,454,381 ) $ 38.18
Forfeited (193,806 ) $ 47.76
Outstanding at November 30, 2016 3,413,125 $ 48.03
As of November 30, 2016, there was $50 million of total unrecognized compensation cost related to equity awards, which is
expected to be recognized over a weighted-average period of 1.4 years.
Defined Benefit Pension Plans
We have several single-employer defined benefit pension plans, which cover some of our shipboard and shoreside employees.
The U.S. and UK shoreside employee plans are closed to new membership and are funded at or above the level required by U.S.
or UK regulations. The remaining defined benefit plans are primarily unfunded. In determining all of our plans' benefit
obligations at November 30, 2016 and 2015, we assumed a weighted-average discount rate of 2.9% for 2016 and 3.5% for 2015.
The net of our benefit obligations and plan assets under these single-employer defined benefit pension plans is a liability
of $88 million.
In addition, we participate in two multiemployer defined benefit pension plans in the UK, the British Merchant Navy
Officers Pension Fund (registration number 10005645) ("MNOPF"), which is divided into two sections, the "New Section" and
the "Old Section" and the British Merchant Navy Ratings Pension Fund (registration number 10005646) ("MNRPF"), which are
referred to as "the multiemployer plans." The multiemployer plans are maintained for the benefit of the employees of the
participating employers who make contributions to the plans. However, contributions made by employers, including us, may be
used to provide benefits to employees of other participating employers, and if any of the participating employers withdraw
from the multiemployer plans or fail to make their required contributions, any unfunded obligations would be the
responsibility of the remaining participating employers. We are contractually obligated to make all required contributions
as determined by the plans' trustees. All of our multiemployer plans are closed to new membership. The MNOPF Old Section is
also closed to further benefit accrual and is fully funded. The MNOPF New Section was closed to further benefit accrual at
March 31, 2016.
We expense our portion of the MNOPF New Section deficit as amounts are invoiced by, and become due and payable to, the
trustees. We accrue and expense our portion of the MNRPF deficit based on our estimated probable obligation from the most
recent actuarial review. Total expense for all defined benefit pension plans, including the multiemployer plans, was $27
million in 2016, $47 million in 2015 and $69 million in 2014. Based on the most recent valuation at March 31, 2015 of the
MNOPF New Section and at March 31, 2014 of the MNRPF, it was determined that these plans were 90% and 67% funded,
respectively. In 2016, 2015 and 2014, our contributions to the MNOPF New Section and in 2016, our contributions to the
MNRPF did not exceed 5% of total contributions to the fund. In 2015 and 2014, our contributions to the MNRPF exceeded 5% of
total contributions to the fund. These contributions were not material to us. It is possible that we will be required to
fund and expense additional amounts for the multiemployer plans in the future, however, such amounts are not expected to be
material to our consolidated financial statements.
Defined Contribution Plans
We have several defined contribution plans available to most of our employees. We contribute to these plans based on
employee contributions, salary levels and length of service. Total expense for these plans was $30 million in 2016 and 2015
and $25 million in 2014.
NOTE 14 - Earnings Per Share
Our basic and diluted earnings per share were computed as follows (in millions, except per share data):
Years Ended November 30,
2016 2015 2014
Net income for basic and diluted earnings per share $ 2,779 $ 1,757 $ 1,216
Weighted-average common and ordinary shares outstanding 745 777 776
Dilutive effect of equity plans 2 2 2
Diluted weighted-average shares outstanding 747 779 778
Basic earnings per share $ 3.73 $ 2.26 $ 1.57
Diluted earnings per share $ 3.72 $ 2.26 $ 1.56
Anti-dilutive equity awards excluded from diluted earnings per share computations - - 1
NOTE 15 - Supplemental Cash Flow Information
Cash paid for interest, net of capitalized interest, was $211 million in 2016, $216 million in 2015 and $297 million in
2014. In addition, cash paid for income taxes, net of recoveries, was $48 million in 2016, $40 million in 2015 and $5
million in 2014.
SCHEDULE B
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary Note Concerning Factors That May Affect Future Results
Some of the statements, estimates or projections contained in this 2016 Annual Report are "forward-looking statements" that
involve risks, uncertainties and assumptions with respect to us, including some statements concerning future results,
outlooks, plans, goals and other events which have not yet occurred. These statements are intended to qualify for the safe
harbors from liability provided by Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. All statements other than statements of historical facts are statements that could be deemed forward-looking.
These statements are based on current expectations, estimates, forecasts and projections about our business and the
industry in which we operate and the beliefs and assumptions of our management. We have tried, whenever possible, to
identify these statements by using words like "will," "may," "could," "should," "would," "believe," "depends," "expect,"
"goal," "anticipate," "forecast," "project," "future," "intend," "plan," "estimate," "target," "indicate" and similar
expressions of future intent or the negative of such terms.
Forward-looking statements include those statements that may impact our outlook including, but not limited to, the
forecasting of our:
• Net revenue yields • Net cruise costs, excluding fuel per available lower berth day
• Booking levels • Estimates of ship depreciable lives and residual values
• Pricing and occupancy • Goodwill, ship and trademark fair values
• Interest, tax and fuel expenses • Liquidity
• Currency exchange rates • Adjusted earnings per share
Because forward-looking statements involve risks and uncertainties, there are many factors that could cause our actual
results, performance or achievements to differ materially from those expressed or implied in this 2016 Annual Report. This
note contains important cautionary statements of the known factors that we consider could materially affect the accuracy of
our forward-looking statements and adversely affect our business, results of operations and financial position. It is not
possible to predict or identify all such risks. There may be additional risks that we consider immaterial or which are
unknown. These factors include, but are not limited to, the following:
• Incidents, such as ship incidents, security incidents, the spread of contagious diseases and threats thereof,
adverse weather conditions or other natural disasters and the related adverse publicity affecting our reputation and the
health, safety, security and satisfaction of guests and crew
• Economic conditions and adverse world events affecting the safety and security of travel, such as civil unrest,
armed conflicts and terrorist attacks
• Changes in and compliance with laws and regulations relating to environment, health, safety, security, tax and
anti-corruption under which we operate
• Disruptions and other damages to our information technology and other networks and operations, and breaches in data
security
• Ability to recruit, develop and retain qualified personnel
• Increases in fuel prices
• Fluctuations in foreign currency exchange rates
• Misallocation of capital among our ship, joint venture and other strategic investments
• Future operating cash flow may not be sufficient to fund future obligations and we may be unable to obtain
financing;
• Overcapacity in the cruise ship and land-based vacation industry
• Deterioration of our cruise brands' strengths and our inability to implement our strategies
• Continuing financial viability of our travel agent distribution system, air service providers and other key vendors
in our supply chain and reductions in the availability of, and increases in the prices for, the services and products
provided by these vendors
• Inability to implement our shipbuilding programs and ship repairs, maintenance and refurbishments on terms that are
favorable or consistent with our expectations and increases to our repairs and maintenance expenses and refurbishment costs
as our fleet ages
• Failure to keep pace with developments in technology
• Geographic regions in which we try to expand our business may be slow to develop and ultimately not develop how we
expect and our international operations are subject to additional risks not generally applicable to our U.S. operations
• Competition from the cruise ship and land-based vacation industry
• Economic, market and political factors that are beyond our control, which could increase our operating, financing
and other costs
• Litigation, enforcement actions, fines or penalties
• Lack of continuing availability of attractive, convenient and safe port destinations on terms that are favorable or
consistent with our expectations
• Union disputes and other employee relationship issues
• Decisions to self-insure against various risks or the inability to obtain insurance for certain risks at reasonable
rates
• Reliance on third-party providers of various services integral to the operations of our business
• Business activities that involve our co-investment with third parties
• Disruptions in the global financial markets or other events that may negatively affect the ability of our
counterparties and others to perform their obligations to us
• Our shareholders may be subject to the uncertainties of a foreign legal system since Carnival Corporation and
Carnival plc are not U.S. corporations
• Small group of shareholders may be able to effectively control the outcome of shareholder voting
• Provisions in Carnival Corporation's and Carnival plc's constitutional documents may prevent or discourage
takeovers and business combinations that our shareholders might consider to be in their best interests
• The DLC arrangement involves risks not associated with the more common ways of combining the operations of two
companies.
The ordering of the risk factors set forth above is not intended to reflect any Company indication of priority or
likelihood.
Forward-looking statements should not be relied upon as a prediction of actual results. Subject to any continuing
obligations under applicable law or any relevant stock exchange rules, we expressly disclaim any obligation to disseminate,
after the date of this 2016 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.
2016 Executive Overview
Overall, 2016 was a great year for us as we achieved the highest full-year earnings in our company's history. Our results
were driven primarily by strong operational improvements combined with accretion from our share repurchase program. We are
well on our way to reaching our objective of double digit ROIC.
Key information for 2016 compared to the prior year (see "Key Performance Non-GAAP Financial Indicators"):
• Net income for 2016 increased 58% to $2.8 billion from $1.8 billion for 2015 and diluted earnings per share
increased to $3.72 in 2016 from $2.26 in 2015.
• Adjusted net income increased 23% to $2.6 billion from $2.1 billion in 2015 and adjusted diluted earnings per share
increased to $3.45 from $2.70 in 2015. Adjusted net income excludes unrealized gains and losses on fuel derivatives and
other items totaling $199 million in gains for the full year 2016 and $349 million of losses for the full year 2015.
• Gross revenue yields (revenue per available lower berth day or "ALBD") increased 0.8%. In constant currency, net
revenue yields increased 3.9%, comprised of a 4.5% increase in net passenger ticket revenue yields and a 2.3% increase in
net onboard and other revenue yields.
• Gross cruise costs including fuel per ALBD decreased 2.8%. Net cruise costs excluding fuel per ALBD ("available
lower berth day") in constant currency increased 1.6%.
• Changes in fuel prices (including realized fuel derivative losses) and currency exchange rates increased earnings
by $0.06 per share versus the prior year.
Our results and growth in revenue yields are a credit to the commitment and the passion of our team members and the support
of our valued travel agent partners. Our brands' teams continue to be successful in increasing demand in excess of measured
capacity growth through ongoing efforts to consistently exceed our guests' expectations while providing a wide variety of
exceptional vacation experiences. Our ongoing public relations efforts and advertising are also contributing to our demand
growth.
Our multi-brand marketing initiatives continue to drive increased consideration to purchase a cruise vacation with us. We
recently created original TV programs that are airing on major networks, reaching viewers during the large family-oriented
programming blocks. These programs are designed to educate, entertain and engage viewers by showcasing exciting adventures,
exotic cultures and popular global destinations. With at least 80 original episodes, the new experiential series use
compelling and authentic storytelling to share the powerful way travel by sea connects people, places and cultures around
the world. Each of our brands is featured during the inaugural season. We have more opportunities already in the pipeline
for next year to keep cruising in the forefront of vacationers' minds including "The New Celebrity Apprentice" show airing
on NBC in February during our peak booking period. All of these efforts promote consideration around the globe by
prominently featuring amazing cruise experiences on our world leading cruise lines.
We continue to also focus our efforts on helping our guests choose the cruise brands that will meet their unique needs and
desires, improving their overall vacation experiences and building state-of-the-art ships with innovative onboard offerings
and unequaled guest services. In 2016, we took delivery of four new ships: 3,286-passenger capacity ship AIDAPrima,
3,900-passenger Carnival Vista, 2,650-passenger ms Koningsdam and 600-passenger capacity Seabourn Encore. In addition, we
have a total of 19 cruise ships scheduled to be delivered between 2017 and 2022. Some of these ships will replace existing
capacity as less efficient ships exit our fleet. Since 2006, we have removed 18 ships from our fleet, and our newbuild
program has been designed to consider an expected acceleration in our fleet replacement cycle over time. We also continue
to invest in our existing fleet to further enhance guest experiences, including the recent remastering of Cunard's Queen
Mary 2 and the continued roll-out of Fun Ship® 2.0 enhancements to now over 60% of the Carnival Cruise Line fleet.
At the forefront of innovation and our continuous efforts to enhance our cruise products and services, we recently unveiled
an interactive guest experience platform developed to enable elevated service levels through enhanced guest interactions
before, during and after cruise vacations. The Ocean MedallionTM and its ecosystem will enable personalized and customized
guest experience on a level not previously considered possible by interacting with thousands of sensors, kiosks,
interactive surfaces and smart devices. With this innovation, from the moment our guests first engage with us, their
experiences will seamlessly be powered by their preferences. The new guest experience platform will debut on Regal
Princess in November 2017, followed by Royal Princess and Caribbean Princess in early 2018.
We continue to identify and implement new strategies and tactics to strengthen our cruise ticket revenue management
processes and systems across our portfolio of brands, such as optimizing our pricing methodologies and improving our
pricing models. We are currently rolling-out our state-of-the-art revenue management system across six brands and expect
the roll-out to be completed by early 2018. We also continue to implement initiatives to better coordinate and optimize
our brands' global deployment strategies to maximize guest satisfaction and profits.
We believe there are large addressable markets with low penetration all over the world, including in established markets
such as North America and emerging markets such as Asia, where economic growth has raised discretionary income levels
resulting in increased demand for vacations. We are focused on fostering demand for cruising in these markets. We believe
that we have significant opportunities to continue to profitably grow our presence in China due to its large and growing
middle-class population, expansion of its international tourism and the government's plan to support the cruise industry.
Including the introduction of a Princess Cruises ship built specifically for Chinese guests in 2017, 6% of our total
capacity will be deployed in China.
Furthermore, we continue to accelerate progress on our cost containment efforts. With over 100 ships and more than 11.5
million guests in 2016, we have the scale to optimize our structure by utilizing our combined purchasing volumes and common
technologies as well as implementing cross-brand initiatives aimed at cost containment.
We consider health, environment, safety, security and sustainability matters to be our core guiding principles. Our
uncompromising commitment to the safety and comfort of our guests and crew is paramount to the success of our business. We
are committed to operating a safe and reliable fleet and protecting the health, safety and security of our guests,
employees and all others working on our behalf. We continue to focus on further enhancing the safety measures onboard all
of our ships. As a result of the environmental issues found on certain Princess ships, our entire fleet has re-focused and
increased efforts to protect the environment in which our vessels sail and the communities in which we operate. We are
dedicated to fully complying with, or exceeding, all legal and statutory requirements related to health, environment,
safety, security and sustainability throughout our business.
In an effort to extend our commitment to sustainability and to play a leading role in matters of environmental protection
in the cruise industry, we are expanding our investment in the use of low carbon fuels, in particular, the environmentally
friendly liquefied natural gas ("LNG"). This year AIDAprima became the first cruise ship in the world to be powered by LNG.
In addition, we introduced industry-leading shoreside technology to monitor real-time navigational performance and energy
use across our fleet and opened a significantly expanded Arison Maritime Center in the Netherlands delivering state of the
art maritime training through cutting edge bridge and engine room simulators and curriculum.
We remain committed to our goal of profitably growing our cruise business and increasing our ROIC, while maintaining our
strong investment grade credit ratings. Our ability to generate significant operating cash flow allows us to internally
fund our capital investments and to manage our debt level in a manner consistent with maintaining our strong credit
metrics. In 2016, we generated over $5.1 billion of cash from operations, 13% higher than last year, and investing
activities, including our capital expenditures, were $3.3 billion, leaving us with $1.8 billion of free cash flow.
We are also committed to returning free cash flow (cash flow from operations less investing activities) and more to our
shareholders in the form of dividends and/or share repurchases. During 2016, we returned $3.3 billion to our shareholders
through our regular quarterly dividends and share repurchases. In 2016, we increased our quarterly dividend by 17% to $0.35
per share from $0.30 per share and repurchased approximately 48.5 million shares for $2.3 billion.
Outlook for the 2017 First Quarter and Full Year
On December 20, 2016, we said that we expected our adjusted diluted earnings per share for the 2017 first quarter to be in
the range of $0.31 to $0.35 and 2017 full year to be in the range of $3.30 to $3.60 (see "Key Performance Non-GAAP
Financial Indicators"). Our guidance was based on the assumptions in the table below.
2017 Assumptions atDecember 20, 2016
First quarter fuel cost per metric ton consumed $356
Full year fuel cost per metric ton consumed $374
First quarter currencies
U.S. dollar to euro $1.04
U.S. dollar to sterling $1.24
U.S. dollar to Australian dollar $0.73
Full year currencies
U.S. dollar to euro $1.04
U.S. dollar to sterling $1.24
U.S. dollar to Australian dollar $0.73
The fuel and currency assumptions used in our guidance change daily and, accordingly, our forecasts change daily based on
the changes in these assumptions. We have not provided a reconciliation of forecasted U.S. GAAP earnings per share to
forecasted adjusted earnings per share because preparation of meaningful U.S. GAAP forecasts of earnings per share would
require unreasonable effort. We are unable to predict, without unreasonable effort, the future movement of foreign exchange
rates and fuel prices. While we forecast realized gains and losses on fuel derivatives by applying current Brent prices to
the derivatives that settle in the forecast period, we do not forecast the impact of unrealized gains and losses on fuel
derivatives because we do not believe they are an indication of our future earnings performance. We are unable to determine
the future impact of gains or losses on ships sales, restructuring expenses and other non-core gains and charges.
The above forward-looking statements involve risks, uncertainties and assumptions with respect to us. There are many
factors that could cause our actual results to differ materially from those expressed above. You should read the above
forward-looking statements together with the discussion of the risks under "Cautionary Note Concerning Factors That May
Affect Future Results."
Critical Accounting Estimates
Our critical accounting estimates are those 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, including ship improvements and ships under construction, which represent 80% of
our total assets at November 30, 2016. We make several critical accounting estimates with respect to our ship accounting.
First, in order to compute our ships' depreciation expense, which represented 12% of our cruise costs and expenses in 2016,
we have to estimate the useful life of each of our ships as well as their residual values. Secondly, we account for ship
improvement costs by capitalizing those costs we believe add value to our ships and have a useful life greater than one
year and depreciate those improvements over its estimated remaining useful life. The costs of repairs and maintenance,
including minor improvement costs and dry-dock expenses, are charged to expense as incurred. When we record the retirement
of a ship component included within the ship's cost basis, we may have to estimate the net book value of the asset being
retired in order to remove it from the ship's cost basis.
We determine the useful life of our ships and ship improvements based on our estimates of the period over which the assets
will be of economic benefit to us, including the impact of long-term vacation market conditions, marketing and technical
obsolescence, competition, physical deterioration, historical useful lives of similarly-built ships, regulatory constraints
and maintenance requirements. In addition, we consider estimates of the weighted-average useful lives of the ships' major
component systems, such as the hull, cabins, main electric, superstructure and engines. Taking all of this into
consideration, we have estimated our new ships' useful lives at 30 years.
We determine the residual value of our ships based on our long-term estimates of their resale value at the end of their
useful life to us but before the end of their physical and economic lives to others, historical resale values of our and
other cruise ships and viability of the secondary cruise ship market. We have estimated our residual values at 15% of our
original ship cost.
Given the large size and complexity of our ships, ship accounting estimates require considerable judgment and are
inherently uncertain. We do not have cost segregation studies performed to specifically componentize our ships. In
addition, since we do not separately componentize our ships, we do not identify and track depreciation of original ship
components. Therefore, we typically have to estimate the net book value of components that are retired, based primarily
upon their replacement cost, their age and their original estimated useful lives.
If materially different conditions existed, or if we materially changed our assumptions of ship useful lives and residual
values, our depreciation expense, loss on retirement of ship components and net book value of our ships would be materially
different. In addition, if we change our assumptions in making our determinations as to whether improvements to a ship add
value, the amounts we expense each year as repair and maintenance expense could increase, which would be partially offset
by a decrease in depreciation expense, resulting from a reduction in capitalized costs. Our 2016 ship depreciation expense
would have increased by approximately $43 million assuming we had reduced our estimated 30-year ship useful life estimate
by one year at the time we took delivery or acquired each of our ships. In addition, our 2016 ship depreciation expense
would have increased by approximately $219 million assuming we had estimated our ships to have no residual value at the
time of their delivery or acquisition.
We believe that the estimates we made for ship accounting purposes are reasonable and our methods are consistently applied
in all material respects and 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 we use them. In addition, we believe that the estimates we made
are reasonable. We applied our methods consistently in determining (1) the useful life and residual values of our ships,
including ship improvements; (2) which improvement costs add value to our ships and (3) the net book value of ship
component assets being retired. Finally, we believe our critical ship accounting estimates are generally comparable with
those of other major cruise companies.
Asset Impairments
Impairment reviews of our cruise ships, goodwill and trademarks require us to make significant estimates to determine the
fair values of these assets and cruise brands.
For our cruise ships, we perform our impairment reviews, if required, at the individual cruise ship level, which is the
lowest level for which we have identifiable cash flows independent of the cash flows of other assets and liabilities. See
Note 11 - "Fair Value Measurements, Derivative Instruments and Hedging Activities" in the consolidated financial statements
for a discussion of ship impairment charges recorded in 2014.
We believe it is more-likely-than-not ("MLTN") the estimated fair value of each of our cruise brands with goodwill at
November 30, 2016 exceeded their carrying value. We also believe that it is MLTN that the estimated fair value of each of
our cruise brands' trademarks recorded at November 30, 2016 exceeded their carrying values. See Note 11 - "Fair Value
Measurements, Derivative Instruments and Hedging Activities" in the consolidated financial statements for additional
discussion of our goodwill and trademark impairment reviews.
The determination of fair value includes numerous assumptions that are subject to various risks and uncertainties, unless a
comparable, viable actively-traded market exists, which is usually not the case for cruise ships, cruise brands and
trademarks. Our ships' fair values are typically estimated based either on ship sales price negotiations or discounted
future cash flows. The principal assumptions used to calculate our discounted future cash flows include forecasted future
operating results over the expected period. We believe the ships, including their estimated residual values, will have
economic benefit to us.
In performing qualitative assessments of our cruise brands' goodwill, factors considered include industry and market
conditions, macroeconomic conditions, changes to WACC, overall financial performance, changes in fuel prices and capital
expenditures. In determining the estimated fair values of cruise brands utilizing discounted future cash flow analysis for
our quantitative goodwill impairment tests, significant judgments are made related to forecasted operating results,
including net revenue yields and net cruise costs including fuel prices; capacity changes, including the expected rotation
of vessels into, or out of, the cruise brand; WACC of market participants, adjusted for the risk attributable to the
geographic regions in which the cruise brand operates; capital expenditures; proceeds from forecasted dispositions of ships
and terminal values.
In performing our qualitative assessments of our cruise brands' significant trademarks, factors considered include industry
and market conditions, macroeconomic conditions, changes to WACC, changes in royalty rates and overall financial
performance. In determining our trademark estimated fair values for our quantitative impairment tests, we also use
discounted future cash flow analysis, which requires some of the same significant judgments discussed above. Determining
the estimated amount of royalties we do not incur because we own our trademarks is based upon forecasted cruise revenues
and a market participant's royalty rate. The royalty rates are estimated primarily using comparable royalty agreements for
similar industries.
We believe that we have made reasonable estimates and judgments in determining whether our cruise ships, goodwill and
trademarks have been impaired. However, if there is a change in assumptions used or if there is a change in the conditions
or circumstances influencing fair values in the future, then we may need to recognize an 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, regulatory, guest and crew and tax matters. In addition, we
periodically assess the recoverability of our trade and other receivables and our charter-hire and other counterparty
credit exposures, such as potential contractual nonperformance by our Asian ship charter tour operators and by financial
and other institutions with which we conduct significant business. Our credit exposure also includes contingent obligations
related to our guests' cash payments received directly by travel agents and tour operators in Australia and Europe. In most
of Europe, we are obligated to honor our guests' cruise payments made to their travel agents and tour operators regardless
of whether we have received these payments. While it is typically very difficult to determine the timing and ultimate
outcome of these matters, we use our best judgment to determine if it is probable, or MLTN for income tax matters, that we
will incur an expense related to the settlement or final adjudication of such matters and whether a reasonable estimation
of such probable or MLTN loss, if any, can be made. In assessing probable losses, we make estimates of the amount of
probable insurance recoveries, if any, which are recorded as assets where appropriate. We accrue a liability and establish
a reserve when we believe a loss is probable or MLTN for income tax matters, and the amount of the loss can be reasonably
estimated in accordance with U.S. GAAP. Such accruals and reserves 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 non-income tax matters, historical claims experience, actuarially determined estimates of liabilities and any
related insurance coverages. See Note 8 - "Contingencies," Note 9 - "Taxation" and Note 11 - "Fair Value Measurements,
Derivative Instruments and Hedging Activities" in the consolidated 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. In addition, as new information becomes available, we may need to reassess the amount of
asset or 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 substantially all of our cruise revenues from the following:
• Sales of passenger cruise tickets and, in some cases, the sale of air and other transportation to and from airports
near our ships' home ports and cancellation fees. We also collect fees, taxes and other charges from our guests. The cruise
ticket price typically includes the following:
▪ Accommodations
▪ Most meals, including snacks at numerous venues
▪ Access to amenities such as swimming pools, water slides, water parks, whirlpools, a health club and sun decks
▪ Child care and supervised youth programs
▪ Entertainment, such as theatrical and comedy shows, live music and nightclubs
▪ Access to exclusive private islands and destinations
• Sales of goods and services not included in the cruise ticket price are generally the following:
▪ Substantially all liquor and some non-alcoholic beverage sales
▪ Casino gaming
▪ Shore excursions
▪ Gift shop items
▪ Photo packages
▪ Internet and communication services
▪ Full service spas
▪ Specialty restaurants
▪ Art sales
▪ Laundry and dry cleaning services
These goods and services are provided either directly by us or by independent concessionaires, from which we receive either
a percentage of their revenues or a fee.
We incur cruise operating costs and expenses for the following:
• The costs of passenger cruise bookings, which represent costs that are directly associated with passenger cruise ticket
revenues, and include travel agent commissions, cost of air and other transportation and credit and debit card fees
• Onboard and other cruise costs, which represent costs that are directly associated with onboard and other revenues, and
include the costs of liquor and some non-alcoholic beverages, costs of tangible goods sold by us in our gift shops and from
our photo packages, communication costs, costs of cruise vacation protection programs, costs of pre- and post-cruise land
packages and credit and debit card fees
• Fuel costs, which include fuel delivery costs
• Payroll and related costs, which represent all costs related to our shipboard personnel, including deck and engine
officers and crew and hotel and administrative employees, while costs associated with our shoreside personnel are included
in selling and administrative expenses
• Food costs, which include both our guest and crew food costs
• Other ship operating expenses, which include port costs that do not vary with guest head counts; repairs and
maintenance, including minor improvements and dry-dock expenses; hotel costs; entertainment; gains and losses on ship
sales; ship impairments; freight and logistics; insurance premiums and all other ship operating expenses
Concession revenues do not have significant associated expenses because the costs and services incurred for concession
revenues are borne by our concessionaires.
For segment information related to our North America and EAA cruise brands' revenues, expenses, operating income and other
financial information, see Note 12 - "Segment Information" in the consolidated financial statements.
Statistical Information
Years Ended November 30,
2016 2015 2014
ALBDs (in thousands) (a) (b) 80,002 77,307 76,000
Occupancy percentage (c) 105.9 % 104.8 % 104.1 %
Passengers carried (in thousands) 11,522 10,837 10,566
Fuel consumption in metric tons (in thousands) 3,233 3,181 3,194
Fuel consumption in metric tons per thousand ALBDs 40.4 41.2 42.0
Fuel cost per metric ton consumed $ 283 $ 393 $ 636
Currencies
U.S. dollar to euro $ 1.11 $ 1.12 $ 1.34
U.S. dollar to sterling $ 1.37 $ 1.54 $ 1.66
U.S. dollar to Australian dollar $ 0.74 $ 0.76 $ 0.91
(a) ALBD is a standard measure of passenger capacity for the period that we use to approximate rate and capacity
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