Carnival Cruises 2013 Annual Report Download - page 95

Table of Contents
As of January 22, 2014, we currently have eight cruise ships scheduled to enter service between May 2014 and June 2016, some of which will replace existing
capacity from the possible sales of older, smaller or less efficient ships (see Note 6 – “Commitments” in the accompanying consolidated financial statements).
We strategically time the introduction of additional ships into our brands to allow ample time for those lines to further grow their guest base and absorb the new
capacity. Our rate of growth has slowed in the more established regions of North America and Western Europe. We are committed to a measured pace of
newbuilds to achieve an optimal balance of supply and demand to maximize our profitability in these established regions. In addition, we believe that we have
significant opportunities to grow our presence in the emerging Asian cruise region and will continue to redeploy some of our existing ships to that region.
Outlook for the 2014 First Quarter and Full Year
On December 19, 2013, we said that we expected our non-GAAP diluted (loss) earnings per share for the 2014 first quarter and full year would be in the
ranges of $(0.07) to $(0.11) and $1.40 to $1.80, respectively (see “Key Performance Non-GAAP Financial Indicators”). Our guidance was based on fuel
prices of $643 per metric ton and $650 per metric ton for the 2014 first quarter and full year, respectively. In addition, our guidance was based on 2014 first
quarter and full year currency rates of $1.37 to the euro, $1.64 to sterling and $0.91 to the Australian dollar. 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 believe it is more meaningful to evaluate our earnings performance by excluding, among other things, the impact of unrealized gains and losses on fuel
derivatives from non-GAAP diluted earnings per share. Therefore, we do not include any future estimates of unrealized gains and losses on fuel derivatives in
our non-GAAP earnings per share guidance. However, we do forecast realized gains and losses on fuel derivatives by applying current Brent prices to the
derivatives that settle in the forecast period.
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 including, but not limited to, general economic and business conditions, increases in fuel prices,
incidents, spread of contagious diseases, adverse weather conditions, geo-political events, negative publicity and other factors that could adversely impact our
revenues, costs and expenses. You should read the above forward-looking statement together with the discussion of these and other risks under “Cautionary
Note Concerning Factors That May Affect Future Results.”
Critical Accounting Estimates
Our critical accounting estimates are those that 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 79% of our total assets at
November 30, 2013. We make several critical accounting estimates with respect to our ship accounting. First, in order to compute our ships’ depreciation
expense, which represented 10% of our cruise costs and expenses in 2013, we have 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 that we believe add value to our ships and have a useful life
greater than one year, and depreciate those improvements over their or the ships’ estimated remaining useful life, whichever is shorter, while the costs of
repairs and maintenance, including minor improvement costs and dry-dock expenses, are charged to expense as incurred. Finally, when we record the
retirement of a ship component that is 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 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, superstructure, main electric, engines and hull. In addition, we consider, among other things,
long-term vacation market conditions, competition and historical useful lives of similarly-built ships. We have estimated our new ships’ weighted-average
useful lives at 30 years and their average residual values at 15% of our original ship cost. Further, we determine the useful life of ship improvements based on
estimates of the period over which the assets will be of economic benefit to us. In determining such lives, we also consider factors, including but not limited to,
physical deterioration, obsolescence, regulatory constraints and maintenance requirements.
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 specific 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.
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