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Author: kitkatklub Big gold star, 5000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Feste Award Winner! Old School Fool Global Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 46821  
Subject: CCL-Financial Statement Date: 12/27/2003 11:47 PM
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Income Statement
          
Years Ended November 30,
2002 2001 2000


Revenues $4,368,269 $4,535,751 $3,778,542

Costs and Expenses
Operating 2,311,919 2,468,730 2,058,342
Selling and administrative 611,948 618,664 487,403
Depreciation and amortization 382,343 372,224 287,667
Impairment charge 20,000 140,378
Loss (income) from affiliated
operations, net 44,024 (37,828)
3,326,210 3,644,020 2,795,584

Operating Income 1,042,059 891,731 982,958

Nonoperating (Expense) Income
Interest income 32,140 34,255 16,506
Interest expense, net of
capitalized interest (110,740) (120,692) (41,372)
Other (expense) income, net (4,080) 108,649 8,460
(82,680) 22,212 (16,406)

Income Before Income Taxes 959,379 913,943 966,552

Income Tax Benefit (Expense), Net 56,562 12,257 (1,094)

Net Income $1,015,941 $ 926,200 $ 965,458

Earnings Per Share
Basic $1.73 $1.58 $1.61
Diluted $1.73 $1.58 $1.60


2002 2001 2000 1999 1998

Gross Profit 47% 46% 46% 47% 46%
Operating Margin 33% 32% 33% 34% 34%
Net Margin 23% 20% 26% 29% 28%
Growth in Revenue -4% 20% 8% 16%
Growth in Net Income 10% -4% -6% 23%
Growth in COGS -6% 20% 11% 15%
Change in Marketing Costs -0.01 0.27 0.09 0.21

**CCL has very good margins. The net margin only decreases to 22% if the $56M tax benefit is eliminated. Still very impressive margins.
**Growth in revenue is a disappointment for 2002.
**Costs appear to stay in line.
**Perhaps they should be spending more on marketing to improve occupancy?

**Impairment Charge
This is from the 10K. It was undertaken due to a review of assets required by GAAP and it decreases revenue in 2002 and 2001. If you were looking at CCLs sustainable earnings base, you would add these charges back as one time events and not count them as a failing of the business.

In fiscal 2002 we reduced the carrying value of one of our ships by recording an impairment charge of $20 million. In fiscal 2001, we recorded an
impairment charge of $140 million, which consisted principally of a $71 million reduction in the carrying value of ships, a $36 million write-off of Seabourn
goodwill, a $15 million write-down of a Holland America note receivable and a $11 million loss on the sale of the Seabourn Goddess I and II.


**Income Taxes
You should notice the in 2002 and 2001, they have large tax credits that contributed to net income. This should be deducted if examining the true earnings of the company that should exclude one time events either positive or negative. If $56.6M is subtracted from the 2002 income, CCl had a net income of $959.4M.
An income tax benefit of $12 million was recognized in 2001 compared to
a $1 million expense in 2000. Approximately $9 million of the net increase in the income tax benefit was from Costa, primarily due to changes in Italian tax laws.


In fiscal 2002, we recognized a net $57 million income tax benefit primarily due to a new Italian investment incentive law, which allowed Costa to receive a $51 million income tax benefit based on contractual expenditures during 2002 on the construction of new ships. At November 30, 2002, Costa had a
remaining net deferred tax asset of approximately $45 million relating to the tax benefit of the net operating loss carryforwards arising from this incentive law, which expire in 2007. We do not expect to incur income taxes on future distributions of undistributed earnings of foreign subsidiaries.


These benefits of tax law cannot be counted on to boost income in future years. In fact, CCL has no provision for deferred taxes in the 10K.

**Revenues decreased $167 million(not counting the income tax benefit), or
3.7%, in 2002 compared to 2001.

**Cruise revenues decreased $129 million, or 3.0%, to $4.23 billion in 2002
from $4.36 billion in 2001.Cruise revenue change resulted from a 7.0%
decrease in gross revenue per passenger cruise day, partially offset by a 3.6% increase in passenger capacity and a 0.5% increase in occupancy rate. This decrease in gross revenue per passenger cruise day was primarily caused by a significant decline in the number of guests purchasing air transportation from CCL in 2002 compared to 2001. Also adding to the reduction in gross revenue per passenger cruise day was the adverse impact of the September 11, 2001 events, which resulted in lower cruise ticket prices.

**Tour revenues decreased $54 million, or 23.4%, to $176 million in 2002
from $229 million in 2001 principally due to a lower number of Alaska and
Canadian Yukon cruise/tours sold. This revenue decrease was primarily as a
result of one less ship offering land tours.In addition, three isolated cancellations of Holland America Alaska cruises occurred in 2002 resulting primarily from mechanical malfunctions also contributed to this decrease in revenues.

**The tour segment's operating income decreased from $10 million in 1999
to an operating loss of $13 million in 2002. This decrease was primarily the result of increased competition. Although our tour segment is not material to our consolidated results,

**Operating expenses decreased $157 million, or 6.4%, in 2002 compared to
2001. Cruise operating costs decreased by $130 million, or 5.6%, to $2.20
billion in 2002 from $2.33 billion in 2001. Approximately $116 million of this decrease was due to reduced air travel and related costs primarily due to fewer guests purchasing air transportation.This is to be expected since revenue from loss of air transport was also down. You would have to be worried if costs
increased on decreased revenues.

**Tour operating expenses decreased $42 million, or 22.3%, to $145 million in 2002 from $187 million in 2001 principally due to the reduction in the number of cruise/tours sold.

**Selling and administrative expenses decreased $7 million, or 1.1%, to
$612 million in 2002 from $619 million in 2001. Selling and administrative
expenses decreased in 2002 primarily because of our 3.9% decrease in selling
and administrative costs per available berth day.


Balance Sheet
 
November 30,
ASSETS 2002 2001

Current Assets
Cash and cash equivalents $ 666,700 $ 1,421,300
Short-term investments 39,005 36,784
Accounts receivable, net 108,327 90,763
Inventories 91,310 91,996

Property and Equipment, Net 10,115,404 8,390,230

Goodwill 681,056 651,814

$12,334,848 $11,563,552

LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current portion of long-term debt $ 148,642 $ 21,764
Accounts payable 268,687 269,467

Dividends payable 61,612 61,548

Total current liabilities 1,619,806 1,480,240

Long-Term Debt 3,011,969 2,954,854

Additional paid-in capital 1,089,125 1,805,248
Retained earnings 6,325,850 5,556,296

Treasury stock; 33,848 shares at cost (727,637)
Total shareholders' equity 7,417,903 6,590,777
$12,334,848 $11,563,552


2002 2001 2000 1999 1998

Current ratio 0.70 1.32 0.32 0.56 0.33
Quick Ratio 0.41 0.96 0.11 0.37 0.12

Accounts receivable growth 19.27% -4.82% 51.67% 3.45%
DSO 9.05 80.65 138.01 336.02 36.74
Days Inventory on hand 14.41 13.60 17.82 16.46 16.99
Day Payable Outstanding 42.42 39.85 59.00 38.39 37.98
ROA 8.24% 8.01% 9.82% 12.40%
ROE 13.70% 14.05% 16.45% 17.32% 19.51%
ROIC 6.53% 7.31% 7.48% 8.76% 5.50%
Fixed asset turnover 0.43 0.54 0.47 0.55
Debt to equity 42.61% 45.16% 39.98% 18.10% 38.05%
Debt to capitalization 29.88% 31.11% 28.56% 15.33% 27.56%
Book value 12.64 11.24 10.04 9.61 7.20
Cash per share 1.14 2.42 0.32 0.85 0.23
Working capital -487.6 478.8 -1165.8 -613.4 -764.8
Non Cash Working Capital -1005.7 -920.7 -1106.9 -928.9 -834.5
Cash Conversion Cycle -18.96 54.40 96.84 314.09 15.75

**Assets to liabilities are on the low side. This is also reflected in the working capital figures. This is good use of assets, but the ROA is still slightly low. The bad news is that working capital is decreasing and that is not sustainable in a DCF model. Continually decreasing levels of working capital increase free cash flow, but it is not something that can be done in perpetuity. They also would be considered illiquid by those who put faith in the quick ratio and current ratio.The bulk of their assets(long-term) are in the very expensive ships.

**They do a masterful job managing money outflow and inflow. DSO is very low and inventory is turned rapidly(parts?)Payables are out longer than receivables and the cash conversion cycle is an amazing -18.

**They have high but not crushing levels of debt
**They have increasing cash per share
**Returns on assets equity and capital are on the low side. They decreased in 2002 due to decreasing revenues.

**During fiscal 2002,CCL borrowed $232 million, which included $150 million under Costa's euro denominated revolving credit facility and $50 million under the US revolving credit facility. In addition, in fiscal 2002, CCL made $190 million of principal repayments, primarily on Costa's revolving credit facility and Costa's collateralized debt.
**CCL paid cash dividends of $246 million in fiscal 2002.

**They 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 the financial statements.



Cash Flow Statement(abbreviated)

Years Ended November 30,
2002 2001 2000

OPERATING ACTIVITIES
Net income 1,015,941 926,200 965,458
Depreciation and amortization 382,343 372,224 287,667

Net cash operating activities 1,469,032 1,238,936 1,279,535

INVESTING ACTIVITIES
Additions to property and equipment (1,986,482) (826,568) (1,003,348)

FINANCING ACTIVITIES
issuance of long-term debt 231,940 2,574,281 1,020,091

Repayments of long-term debt (189,678)(1,971,026) (388,429)
Dividends paid (246,323) (245,844) (254,333)



2002 2001 2000 1999 1998

Total shares 586.8 586.2 584.5 617 595.4
Growth in Capex 130.99% -37.99% 49.50% -33.42%
Capex/operating cash flow 135.23% 69.42% 108.39% 69.77% 127.61%
Free cash flow -517.5 378.9 -107 402 -480
Free cash flow per share -0.88 0.65 -0.18 0.65 -0.81
Operating cash/Revenue 0.34 0.27 0.34 0.38 0.36

Growth in Cash Flow 236.58% 452.79% 126.72% 83.75%


**No purchase of treasury stock since 2000($705,137,000)

Debt repayment schedule

As of November 30, 2002, the scheduled annual maturities of long-term
debt was as follows (in thousands):
 

Fiscal

2003 $ 148,642
2004 127,985
2005 907,648(a)
2006 1,387,209(a)
2007 22,833
Thereafter 566,294
$3,160,611





**Business provided $1.47 billion of net cash from operations during fiscal 2002, an increase of $230 million, or 18.6%, compared to fiscal 2001, due primarily to an increase in customers' advance ticket deposits. This does not cover capex. It certainly won't cover the debt payment schedule and capex. However, they seem to be managing repayment to date.

**During fiscal 2002, net expenditures for capital projects were $1.99 billion, of which $1.76 billion was spent for ongoing shipbuilding program(ships are very expensive). The $230 million of nonshipbuilding capital expenditures consisted primarily of ship refurbishments, information technology assets, Tour assets and cruise port facility developments. This is a business that is capital intensive and they need to be able to continue to pay for it. Any consistent pattern of decline in capex spending would be cause for concern. They cannot afford to preserve capital at the expense of investments in future cash flows.Growth in capex was high for 2002.

During fiscal 2002, CCL borrowed $232 million, which included $150 million under Costa's euro denominated revolving credit facility and $50 million under our revolving credit facility. In addition, in fiscal 2002, CCL made $190 million of principal repayments, primarily on Costa's revolving credit


Options


Weighted
Average Exercise Price Number of Options
Per Share Years Ended November 30,
2002 2001 2000 2002 2001 2000

Outstanding options-
$28.95 $26.80 $22.70 12,774,293 8,840,793 6,517,168
Options granted
$26.54 $26.44 $35.92 33,000 6,580,250 2,910,575
Options exercised
$14.35 $11.70 $13.43 (404,615) (2,218,075) 244,850)
Options canceled
$32.80 $35.15 $35.91 (573,720) ( 428,675) (342,100)
Outstanding options-
end of year
$29.26 $28.95 $26.80 11,828,958 12,774,293 8,840,793
Options exercisable-
end of year
28.71 $25.96 $15.82 4,775,894 2,972,498 4,042,452

As of 2002: 11,828,958 options outstanding @ $29.26
Dilution is 2.01% which is reasonable
Total value is $346.09M
value per share is $0.59

The company is not in financial difficulty. They have declining earnings in 2002 which is a trend that needs to be watched. At current levels of debt and capex spending, the revenue stream need to increase. They have cash reserves on hand, but they are only $66.7M and debt due for 2003 is $148.6M. The balance sheet is fairly strong. They do a better than average job of collecting accounts receivable and turning inventory. The accounting seems to be in order. The 10K is straightforward and relatively simple. There are no off balance sheet accounts to figure. They do have a series of non-recurring charges, tax credits and sales of assets that must be considered when calculating actual sustainable earnings. In general, these items do not appear to significantly impact performance or margins.In conclusion, they appear to be a reasonably well run company that has very good margins and is not in immediate danger of financial upheaval.

The 2003 10K should be out soon. I can update this if there is interest.

>^..^<
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Author: madmarv Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 26878 of 46821
Subject: Re: CCL-Financial Statement Date: 12/28/2003 1:53 AM
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These benefits of tax law cannot be counted on to boost income in future years. In fact, CCL has no provision for deferred taxes in the 10K.

It doesn't matter that much, CCL doesn't pay federal income tax. I've got their annual numbers punched into my spreadsheet from '94 and they haven't shown more than a 3 - 4 percentage points difference between operating and net margins and the gap has closed to within 1% in the last few years.

From the '02 10-K

We are a foreign corporation engaged in a trade or business in the
U.S., and our ship-owning subsidiaries are foreign corporations that, in
many cases, depending upon the itineraries of their ships, receive income
from sources within the U.S. To the best of our knowledge, we believe
that, under Section 883 of the Code and applicable income tax treaties,
income and the income of our ship-owning subsidiaries, in each case derived from or incidental to the international operation of a ship or ships, is currently exempt from U.S. federal income tax. We believe that
substantially all of our income, and the income of our ship-owning
subsidiaries, with the exception of the U.S. source income from the
transportation, hotel and tour business of Tours, is derived from or
incidental to the international operation of a ship or ships within the
meaning of Section 883 and applicable income tax treaties.


I first looked at CCL over a year ago. Their numbers are fairly decent, I'm estimating ROIC in the low to mid teens, but that is using a 0% - 1% tax rate. If they were to lose their tax exempt status, the return on capital isn't attractive at all. CCL's leverage is a bit higher than I'd like but that is a reflection on the industry more than the company. Cruise ships are capital intensive and there's not much that can be done to mitigate that. As you noted their working capital management is better than the average company.

BTW, I haven't been following this FC project, did anyone address the Arison family interest in CCL (approximately 47% according to the '02 10-K)?
I just noticed it when I was looking up the income tax exemption. There's some unusual provisions regarding ownership outside of the Arison family. Looks like a poison pill but its dressed up as a device to protect their tax and publicly traded status. My problem with it is that it seems to only protect the Arison family.

Marv

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Author: admiraltroll Big gold star, 5000 posts Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 26879 of 46821
Subject: Re: CCL-Financial Statement Date: 12/28/2003 2:57 AM
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These benefits of tax law cannot be counted on to boost income in future years. In fact, CCL has no provision for deferred taxes in the 10K.

Hi mskk,

Great review as usual but I wonder about the above statement. Most shipping companies receive considerable tax breaks in terms of where they build their ships and from where they flag their vessels.

In fact it used to be that a company would build another ship to get the tax breaks and thereby increase net income!

They have just gone through a building cycle which might account for the 2001 and 2002 breaks. I would not be surprised to see them re-appear in 2005-6

Having said that I haven't checked CCL to see if this is so

Regards
Philip


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Author: ivangrowth Big gold star, 5000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 26880 of 46821
Subject: Re: CCL-Financial Statement Date: 12/28/2003 7:23 AM
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In fact it used to be that a company would build another ship to get the tax breaks and thereby increase net income!


Philip, We had a Liberian family over last evening. That reminded me of all the ship registries I see as Liberian and Panamanian. He and I discussed that. A couple of questions came out of our discussions that remained 'on the table':

1) Do shipping firms/cruise line go for those registries because of tax considerations?

2) Do those registries then "afford" more lax provisions on matters beyond taxes; ie safety, pollution abatement, etc?

Finally, the Liberian gentleman said that Japan may have replaced Liberia as the number one country of registry. Sound correct to you? If so, why Japan? I have read their shipyards are massive, modern, and efficient but would the ships inherently then be registered in Japan? Where does Korean ship building fit into this mix?

Just curious, Ivan

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Author: admiraltroll Big gold star, 5000 posts Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 26888 of 46821
Subject: Re: CCL-Financial Statement Date: 12/28/2003 1:20 PM
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Hi Ivan,

1) Do shipping firms/cruise line go for those registries because of tax considerations?

Yes. However many traditionally "expensive" countries are setting up secondary "offshore" registries which give similar tax breaks & without the requirement to employ nationals. However the biggie on registration is crewing. Many governments will insist on crewing, at least the officers, from that country. Same has been done for shipbuilding subsidies. When P&O Princess bought Sitmar lines they got their first Italian officers and had to employ them a minimum 5 years on each newbuild from shipyards in Italy. Manning (number of crew) may also be a consideration.

2) Do those registries then "afford" more lax provisions on matters beyond taxes; ie safety, pollution abatement, etc?

Sometimes this is so but for ships trading in US/Canada/Western Europe/Australia etc this would be of no avail as there is a little thing called "Port State Control" which is sanctioned by the IMO (International Maritime Organization) which brings all vessels in our ports under our direct control and they have to comply with international and national regulations as though they were our own registered vessels.

US pollution & drug enforcement goes way beyond any international convention in their penalties yet it doesn't matter where the ship's were registered. Here in Vancouver some of my best friends are in marine enforcement of Port State Control and they check just about every "suspicious" vessel + others and this is one busy port!

Don't get me wrong the so called "flags of convenience" countries are all signatories to the same international conventions but it is in the enforcement of those conventions where the difference lies.

Finally, the Liberian gentleman said that Japan may have replaced Liberia as the number one country of registry. Sound correct to you? If so, why Japan? I have read their shipyards are massive, modern, and efficient but would the ships inherently then be registered in Japan? Where does Korean ship building fit into this mix?

Shipping is a low margin business. In the 60's and 70's Japan creamed the European shipbuilding business and became the market leader. In the 80's and 90's Korea creamed Japan and now in the new millenium China is creaming Korea. Labour costs are just about the only issue here as the technology is easily transferrable. It is only at the high end in passenger ships and large ferries that Europe has retained the lead and this is mostly due to the outfitting required rather than hull & machinery. Finland & Italy build most of the passenger ships but are heavily subsidized by their governments to do so.

So if Japan has now got more ships registered (which really surprises me BTW) then it would be through a secondary registry

Regards
Philip



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Author: kitkatklub Big gold star, 5000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Feste Award Winner! Old School Fool Global Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 26893 of 46821
Subject: Re: CCL-Financial Statement Date: 12/28/2003 4:32 PM
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Hi MAarv and Philip and Ivan

Always enjoy the feedback and this is no exception.

I looked at the taxes reported on the income statement not realizing the majority of CCL's income is exempt. In the footnotes, they discussed the credits from an Italianbusiness venture. What interests me about taxes is the potential to add to income. It is a valid source of income if the company expects to keep using deferred income years in advance. If you are looking at the real earnings, devoid of one time events, it seems to be OK to count on tax credits if you can establish the company has deferred tax assets and that by their valuation allowance, there is a fair chance they will be able to use it. When CCL remarked they had no deferred taxes to draw upon in the future, I felt like the current two years of tax benefits should be discounted.

However, if it is common for tthis industry to make money by getting tax credits yearly, then this is probably a valid source of income.

This is from the 10K:
Some of our subsidiaries, including Costa and Tours, are subject to
foreign and/or U.S. income taxes. In fiscal 2002, we recognized a net $57
million income tax benefit primarily due to a new Italian investment
incentive law, which allowed Costa to receive a $51 million income tax
benefit based on contractual expenditures during 2002 on the construction
of new ships. At November 30, 2002, Costa had a remaining net deferred tax
asset of approximately $45 million relating to the tax benefit of the net
operating loss carryforwards arising from this incentive law, which expire
in 2007. In fiscal 2001, we recognized a $9 million income tax benefit
from Costa primarily due to changes in Italian tax law.

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.


Maybe I should switch my business to Liberian registry. What a huge advantage for CCL!

>^..^<



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Author: ivangrowth Big gold star, 5000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 26894 of 46821
Subject: Re: CCL-Financial Statement Date: 12/28/2003 4:32 PM
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So if Japan has now got more ships registered (which really surprises me BTW) then it would be through a secondary registry.

Thanks Philip.

Going OT from cruise line but will continue with shipping issues, if you don't mind:

The total tonnage registered in 2002 in six major open registry countries such as Panama, Liberia, Bahamas, Malta, Cyprus and Bermuda decreased during 2002 but

Greece (3,103 vessels, 149,860,803 dwt), Japan (2,910 vessels, 104,396,439 dwt) and Norway (872 vessels, 58,097,607 dwt) continued to occupy the first three positions (in that order) in 2002 . . .

http://www.thehindubusinessline.com/2003/12/29/stories/2003122900390600.htm

So what am I missing? Why the distinction between 'open registrants' vs. Greece's, Japan's, and Norge's? How can the first six differ from the top 3?

Ivan

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