Carnival Cruises 2003 Annual Report Download - page 34

31Carnival Corporation & plc
U.S. dollar (our current guidance is based on an exchange
rate of $1.27 to the euro and $1.84 to the sterling), and
to a lesser extent, strengthening booking levels noted
during wave season. Net cruise costs per ALBD is fore-
cast to increase 2% to 3% versus to our earlier guid-
ance of flat compared to 2003 pro forma costs. The
increase in expected net cruise costs per ALBD is due
to the weaker U.S. dollar.
Carnival Corporation’s 2% Notes become convertible
if the share price of its common stock closes above
$43.05 for 20 days out of the last 30 trading days of
the quarter. If the 2% Notes become convertible, earn-
ings per share for the full year 2004 will be reduced by
$0.02 per share. Assuming this dilution occurs, we are
comfortable with the current consensus 2004 earnings
estimates of $2.02 per share, assuming no geopolitical
or economic shocks.
Income Taxes
The new U.S. income tax regulations under Section
883 of the Internal Revenue Code have become effec-
tive for us in 2004. Although we are still in the process
of analyzing the impact of these new rules on our oper-
ations, based upon our preliminary analysis, we currently
estimate that their application will reduce our 2004
earnings per share by approximately $0.02 to $0.03.
Key Performance Indicators
We use net cruise revenues per ALBD (“net revenue
yields”) 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 revenue performance and pricing
power. This measure is also used for revenue manage-
ment purposes. In calculating net revenue yields, we
use net cruise revenues rather than gross cruise rev-
enues. 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 its most significant variable
costs (travel agent commissions, cost of air transporta-
tion and certain other variable direct costs associated
with onboard revenues). Substantially all of our remain-
ing cruise costs are largely fixed once our ship capacity
levels have been determined.
Net cruise costs per ALBD is the most significant
measure we use to monitor our ability to control costs.
In calculating this measure, we exclude the same vari-
able costs as described above, which are included in
the calculation of net cruise revenues. This is done to
avoid duplicating these variable costs in the two non-
GAAP financial measures described above.
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 esti-
mates would be reported under different conditions or
using different assumptions, is set forth below.
Ship Accounting
Our most significant assets are our ships and ships
under construction, which represent 78% of our total
assets. We make several critical accounting estimates
dealing with our ship accounting. First, we compute our
ships’ depreciation expense, which represents 11.9%
of our cruise operating expenses in fiscal 2003, 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. Finally, we account for the replacement or
refurbishment of our ship components and recognize
the resulting loss in our results of operations.
We determine the average useful lives of our ships
based primarily on our estimates of the average useful
lives of the ships’ major component systems, such as
cabins, main diesels, main electric, superstructure and
hull. In addition, we consider, among other things, the
impact of anticipated technological changes, long-term
vacation market conditions and competition and histori-
cal useful lives of similarly-built ships. We have esti-
mated our new ships’ average useful lives at 30 years
and their 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
componetize our ship systems; therefore, our overall
estimates of the relative costs of these component
systems are based principally on general and technical
information known about major ship component sys-
tem lives and our knowledge of the cruise industry. In
addition, we do not identify and track the depreciation
of specific component systems, but instead utilize
estimates when determining the net cost basis of
assets being replaced or refurbished. 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 refur-
bishment of ship assets and net book value of our
ships would be materially different. In addition, if we