Business context and reporting period
Norwegian Cruise Line Holdings Ltd. (NCLH) operates Norwegian Cruise Line, Oceania Cruises and Regent Seven Seas Cruises. This Form 10-K covers the fiscal year ended December 31, 2017; selected quarterly data also compare fourth-quarter 2017 with fourth-quarter 2016. At year-end, the company operated 25 ships with approximately 50,400 berths.
The company reported one consolidated reportable segment. Norwegian Joy was delivered in April 2017. NCLH listed its ordinary shares on the NYSE beginning December 19, 2017, after previously trading on Nasdaq.
Financial performance and liquidity
| Metric | 2017 | 2016 |
|---|---|---|
| Total revenue | $5.396 billion | $4.874 billion |
| Operating income | $1.049 billion | $925.5 million |
| Net income | $759.9 million | $633.1 million |
| Diluted EPS | $3.31 | $2.78 |
| Net cash from operating activities | $1.586 billion | $1.240 billion |
| Net cash used in investing activities | $1.405 billion | $1.129 billion |
| Long-term debt, including current portion | $6.308 billion | $6.399 billion |
Operating margin was 19.4%, up from 18.9%; net margin was 14.1%, up from 13.0%. Net Revenue, a non-GAAP measure, rose 11.2% to $4.182 billion; Net Yield increased 4.9%, while Capacity Days grew 6.0%. Occupancy was 106.7%, compared with 107.4% in 2016. Adjusted EBITDA was $1.657 billion versus $1.444 billion, and Adjusted Net Income was $907.7 million versus $776.3 million. These adjusted measures exclude specified items and are not GAAP results.
For Q4 2017, revenue was $1.250 billion, operating income $177.2 million, net income $98.8 million and diluted EPS $0.43; Q4 2016 figures were $1.125 billion, $153.6 million, $72.2 million and $0.32, respectively.
Year-end cash and cash equivalents were $176.2 million. Reported liquidity was $973.2 million, including $797.0 million available under the new revolving facility. Working capital was negative $2.0 billion, including $1.3 billion of advance ticket sales, which management describes as cash collected before voyages rather than equivalent to ordinary current cash obligations. Debt was approximately 54% fixed-rate and 46% variable-rate, including swaps. A one-percentage-point LIBOR increase was estimated to add about $29.4 million to annual interest expense, excluding capitalized interest.
Material changes versus the prior comparable period
- Revenue growth reflected higher capacity, including Norwegian Joy, and improved pricing; Net Yield increased 4.9% and Gross Yield 4.4%.
- Operating income increased 13.3% and net income increased 20.0% year over year. Cruise operating expenses rose 7.5%; depreciation and amortization increased with ship deliveries and improvement projects, and marketing and administrative expense rose, primarily due to performance incentives.
- Net Cruise Cost per Capacity Day increased 2.9%. Adjusted Net Cruise Cost Excluding Fuel per Capacity Day also increased 2.9% (2.8% on a constant-currency basis).
- Operating cash flow increased from $1.240 billion to $1.586 billion; investing outflows rose mainly from ship delivery, construction and improvement spending.
- In October 2017, NCLH repriced and increased its revolving facility from $750 million to $875 million, repriced its Term A facility, added a $375 million Term B loan due 2021, and redeemed all 4.625% senior notes due 2020. Year-end debt was modestly lower than in 2016.
Outlook, commentary, risks and unusual items
The filing does not provide a specific earnings or revenue forecast. NCLH said cash on hand, expected operating cash flows and available borrowings should be sufficient for operations, debt service, capital expenditures and covenant compliance over the next 12 months, while cautioning that future cash flows and financing are not assured.
Fleet expansion is a significant commitment: seven ships were on order, with combined contract prices of approximately €5.5 billion (about $6.6 billion at the year-end exchange rate). Export-credit financing is expected to cover approximately 80% of contract prices for ships through 2025, subject to conditions. Anticipated capital expenditures were $1.5 billion in 2018, $1.3 billion in 2019 and $0.8 billion in 2020. The ships are expected to expand capacity to about 72,300 berths, excluding options for two further ships.
Key risks include discretionary consumer demand and seasonality; safety incidents, severe weather, geopolitical events and disease outbreaks; fuel costs and foreign-exchange movements; cyber and information-technology disruption; competition and potential industry overcapacity; shipyard delays; port access; substantial debt, collateral pledges and restrictive covenants; and evolving environmental requirements. The global 0.5% sulfur fuel limit is scheduled for 2020, and compliance costs are not determinable. NCLH’s Section 883 U.S. shipping-income tax exemption depends on eligibility and ownership/trading tests; loss of eligibility could increase tax exposure.
Ship construction commitments totaled approximately $6.138 billion at year-end. Debt covenants require liquidity and financial-ratio compliance and restrict dividends; the company reported compliance at December 31, 2017. Litigation was ongoing, but management did not expect reasonably possible losses in aggregate to be material; it could not estimate additional potential losses beyond accrued amounts. The filing also records a provisional $7.4 million tax benefit from the U.S. tax-rate reduction; accounting for tax-law changes was incomplete and subject to adjustment.
As a subsequent event, CFO Wendy Beck announced her departure, with an expected transition through September 30, 2018 or an earlier company-determined date. The disclosed transition and consulting arrangements include salary-based severance, a $4 million service/tenure payment, up to 36 months of continued health coverage, equity and bonus provisions, and $2 million for consulting services, subject to the agreement’s terms.
NCLH paid no dividends. The company reported effective disclosure controls and internal control over financial reporting; its auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Reconcile GAAP earnings with Adjusted Net Income, Adjusted EPS and Adjusted EBITDA, including the $147.8 million of 2017 adjustments.
- Review liquidity and debt maturities, covenants, collateral and the funding plan for the ship pipeline; assess sensitivity to rates, fuel prices and the euro.
- Test whether pricing and yields can continue to offset rising per-capacity costs as new ships add capacity.
- Confirm the conditions and timing for export-credit financing, ship deliveries and planned capital expenditures.
- Track environmental-compliance costs, Section 883 tax qualification, open legal matters and the financial and operational impact of the CFO transition.