Norwegian Cruise Line Holdings Ltd. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022; comparisons are with the same 2021 periods. Dollar amounts below are USD. The business operates Norwegian Cruise Line, Oceania Cruises and Regent Seven Seas Cruises. Its full 28-ship fleet was operating with guests by early May 2022, following the phased restart of sailings.
Financial performance and position
- Revenue: Q2 revenue was $1.187 billion, versus $4.4 million in Q2 2021; first-half revenue was $1.709 billion, versus $7.5 million. The sharp increase reflects resumed sailings after voyages were largely suspended in 2021.
- Profitability: Q2 operating loss was $396.8 million and net loss was $509.3 million ($1.22 per share), improving from losses of $605.1 million and $717.8 million ($1.94 per share), respectively. First-half net loss was $1.492 billion ($3.57 per share), versus $2.088 billion ($5.97 per share). Q2 Adjusted EBITDA, a non-GAAP measure, was negative $184.5 million, compared with negative $407.5 million.
- Margins and costs: Q2 GAAP gross margin was negative $56.9 million, versus negative $408.9 million. Adjusted Gross Margin was $834.8 million, versus negative $3.5 million. These comparisons are strongly affected by the resumption of operations. Q2 cruise operating expense was $1.073 billion; fuel expense was $181.2 million. Management cited higher operating costs from the returning fleet, inflation, fuel and logistics, and COVID-related measures.
- Interest and unusual items: Q2 net interest expense was $144.4 million, compared with $137.3 million. First-half net interest expense was $472.1 million, down from $961.7 million, reflecting lower debt-extinguishment and modification losses: $188.4 million in 2022 versus $653.7 million in 2021. Q2 other income of $31.0 million primarily reflected foreign-currency remeasurement gains.
- Cash flow: First-half cash used in operations was $108.8 million, compared with $1.482 billion used in 2021. Cash used in investing was $81.1 million, chiefly for newbuilds and ship improvements, net of investment maturities. Financing provided $586.5 million, including debt-issuance proceeds partly offset by repayments and redemption premiums. Cash increased by $396.6 million to $1.903 billion.
- Balance sheet and liquidity: At June 30, cash and equivalents were $1.903 billion; current assets were $3.132 billion and current liabilities $5.033 billion. Debt was $13.245 billion on the balance sheet ($1.005 billion current and $12.239 billion long-term). Total liabilities were $18.211 billion and shareholders’ equity $901.8 million. Advance ticket sales were $2.5 billion, including about $0.4 billion of future cruise credits. Management reported $1.9 billion cash plus a $1 billion undrawn financing commitment, net of fees, and concluded liquidity was sufficient for at least 12 months.
- Operating indicators: Q2 occupancy was 64.6%; first-half occupancy was 58.1%. The company carried 393,943 passengers in Q2 and 585,093 in the first half.
Material changes versus the prior comparable period
- Revenue and operating costs rose sharply as the fleet returned to service; 2021 comparisons reflect suspended voyages and are not representative of normal operations.
- Operating and net losses narrowed year over year, while the company continued to report substantial losses and negative Adjusted EBITDA.
- First-half operating cash use fell substantially, supported in part by a $755.2 million increase in advance ticket sales.
- Debt-financing transactions in February raised $2.1 billion gross, used or intended to redeem the 2024 and 2026 senior secured notes and make scheduled 2022 principal payments. Debt balances remained high.
- Cash collateral held by credit-card processors was approximately $1.0 billion at quarter-end, including $455.4 million recorded in accounts receivable and $508.2 million in other long-term assets. These balances constrain accessible liquidity.
Outlook, risks and contingencies
- Bookings and earnings: Second-half 2022 cumulative bookings remained below the comparable 2019 period, but at higher prices, including despite disruption to some premium Baltic and Eastern Mediterranean itineraries. 2023 booked position was described as in line with record 2019 levels, inclusive of a 20% capacity increase, with pricing above 2019. Management cautioned that bookings may not predict revenue and occupancy recovery timing remains uncertain. It expected a net loss in Q3 2022; the filing provides no numerical full-year earnings guidance.
- Demand and operating risks: COVID-19 resurgences, health protocols, travel restrictions, port access, staffing and consumer spending could affect occupancy and operations. Russia’s invasion of Ukraine led to cancellation or modification of about 60 2022 sailings and removal of Russian port calls from 2023 and 2024 itineraries; management also cited fuel-price and demand impacts. Inflation and higher fuel and interest rates increase costs.
- Debt and liquidity: The company was in compliance with debt covenants at June 30, but covenant relief was generally in effect through December 31, 2022. A default could trigger cross-default or acceleration provisions. Management stated further financing may be needed if sailings are suspended or occupancy stays depressed for a prolonged period; future financing is not assured. The $1 billion commitment was extended through March 31, 2023 and remained undrawn as of August 9, 2022.
- Capital commitments: Nine ships, including Norwegian Prima, had combined contract prices of about $8.1 billion; export-credit financing was expected to cover approximately 80%, subject to conditions. Expected ship-construction expenditures were $1.5 billion for the remainder of 2022, $2.5 billion in 2023 and $1.3 billion in 2024. Delivery delays are possible. Norwegian Prima was delivered in July 2022 and financed with a $1.1 billion fixed-rate term loan at 2.68%, maturing in 2034.
- Contingencies: In the Havana Docks Helms-Burton case, the court granted the plaintiff summary judgment on liability; a damages trial was scheduled for November 2022 after delay. The company said it could not reasonably estimate a loss and intends to defend the case. Florida and other government investigations into pandemic-era marketing were ongoing, with outcomes uncertain. Credit-card processors may require additional reserves or collateral, further reducing liquidity.
- Other exposures: As of June 30, 73% of debt was fixed-rate and 27% variable-rate; a one-percentage-point rise in annual LIBOR was estimated to add about $36.5 million to annual interest expense. A 10% euro move was estimated to change the dollar value of unhedged ship payments by $0.5 billion. A 10% fuel-price increase was estimated to add $48.2 million to 2022 fuel expense before a $32.7 million increase in fuel-swap fair value. The company also warned that evolving climate rules may raise costs and capital needs.
Important facts for investors to verify
- Whether bookings convert into cash receipts and the fleet reaches historical occupancy levels, given cancellation and future-cruise-credit policies.
- Accessible liquidity after credit-card processor reserves, collateral requirements, near-term debt service and shipbuilding payments.
- Compliance with amended debt covenants and the availability, cost and potential dilution of additional financing.
- Fuel, interest-rate and euro exposures, and the effectiveness and accounting effects of related hedges.
- Developments in the Havana Docks damages case and other investigations, including any estimable financial exposure.
- Ship delivery schedules, construction funding and the effect of newbuild commitments on cash needs and depreciation.