Norwegian Cruise Line Holdings Ltd. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013; comparisons are with the corresponding 2012 periods. Unaudited figures; dollar amounts below are U.S. dollars. The company notes that cruise demand is seasonal and interim results may not indicate full-year performance.
Business context and key financial metrics
Norwegian operates cruise ships. Norwegian Breakaway entered service in April 2013, expanding capacity. The January 2013 IPO and related corporate reorganization changed the share count and tax status; in August, existing shareholders sold 23 million shares in a secondary offering, from which the company received no proceeds.
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Total revenue | $797.9m | $674.4m | $1,969.9m | $1,773.1m |
| Operating income | $208.1m | $174.1m | $334.5m | $307.6m |
| Operating margin | 26.1% | 25.8% | 17.0% | 17.3% |
| Net income attributable to NCLH | $170.9m | $128.2m | $65.6m | $167.5m |
| Diluted EPS | $0.82 | $0.72 | $0.32 | $0.94 |
| Adjusted EBITDA | $271.0m | $223.6m | $523.1m | $452.2m |
| Adjusted net income / adjusted EPS | $182.2m / $0.86 | $128.2m / $0.72 | $255.3m / $1.22 | $167.5m / $0.94 |
Q3 net revenue rose 19.6%, reflecting 14.9% more Capacity Days and 4.1% higher Net Yield; reported Net Yield was $214.43 versus $206.07. Occupancy was 114.0% versus 112.8%. For the first nine months, revenue increased 11.1% and Net Yield increased 4.4%, while Capacity Days rose 7.1%.
- Cash flow: Nine-month operating cash flow was $398.3m versus $376.5m. Investing cash use was $835.8m versus $229.9m, primarily for ship construction and delivery. Financing provided $448.9m versus $136.9m used in the prior-year period. Cash increased $11.5m during the 2013 period to $57.0m; it was $68.7m at September 30, 2012.
- Liquidity: Management reported $565.0m of liquidity: $57.0m cash and $508.0m available under the revolving facility. Working capital was negative $890.7m, including $434.5m of advance ticket sales, which management characterizes as deferred revenue rather than an ordinary cash liability.
- Debt: Balance-sheet current and long-term debt totaled approximately $3.113bn at September 30, 2013, compared with $2.985bn at December 31, 2012. The company refinanced debt, issued $300m of 5% notes due 2018, and had drawn $117m of a new $625m revolving facility. It also redeemed its $450m 11.75% secured notes and remaining $227.5m of 9.5% unsecured notes. The filing reports nine-month net interest expense of $258.0m versus $142.3m, including substantial debt-prepayment and refinancing costs.
- Margins and costs: Q3 cruise operating expenses rose 15.7%, below revenue growth; other operating expenses rose 25.9%. Nine-month Net Cruise Cost per Capacity Day increased 5.2%; adjusted Net Cruise Cost Excluding Fuel per Capacity Day rose 2.5%. Nine-month average fuel price increased 4.9% to $685 per metric ton.
Material changes, outlook, risks and unusual items
- Q3 GAAP net income attributable to NCLH rose to $170.9m from $128.2m; nine-month GAAP net income fell to $65.6m from $167.5m. The filing attributes the nine-month decline chiefly to $160.6m of debt-prepayment expenses used as an adjustment in its non-GAAP reconciliation. Q3 adjusted results also exclude $4.1m of non-cash compensation and $5.2m of corporate-structure and secondary-offering expenses. Non-GAAP measures are company-defined and are not substitutes for GAAP results.
- Income tax expense was $11.2m for the nine months, versus $0.5m in 2012. The filing cites the change to corporate tax status and a $4.2m one-time tax expense, partly offset by a $6.6m tax-expense reduction associated with implementing a global tax platform.
- No specific earnings or revenue guidance is provided. Management said available cash, expected operating cash flows and borrowing capacity should fund operations, debt service and capital expenditures and support covenant compliance over the next 12 months; it cautioned that future cash flows and financing are not assured. The company reported compliance with debt covenants at September 30.
- Ship commitments are substantial: Norwegian Getaway was scheduled for delivery in January 2014, with approximately $849m contract cost and financing for 90% of the price. Norwegian Escape and Norwegian Bliss were ordered for 2015 and 2017 delivery, with combined cost approximately $1.9bn and financing for 80%. Contractual obligations totaled $6.436bn, including $2.538bn of ship construction contracts.
- Market exposures include variable-rate debt (61% of debt, including swaps); a 1 percentage-point LIBOR increase was estimated to add $18.9m to annual interest expense. Remaining unhedged euro-denominated ship payments were about €1.601bn; a 10% euro move was estimated to change their U.S. dollar value by $216.6m. Fuel hedges covered approximately 93%, 64%, 51% and 15% of projected 2013–2016 fuel purchases, respectively.
- Contingencies include crew wage-related lawsuits. One case’s class certification denial and trial verdict were affirmed on appeal in October 2013; another action remained stayed. The company said it could not estimate the impact of the proceedings. Shipyard contract breach or cancellation could result in forfeited payments, claims or impairment losses, though management did not anticipate such events.
- The filing includes an indirect-investment disclosure concerning Apollo-affiliated funds and CEVA, which reported small Iran-related freight transactions and an ongoing review with OFAC. NCLH stated that the activities were CEVA’s, not NCLH’s, and that it had not independently verified the disclosure.
Important facts for investors to verify
- Whether operating gains and higher yields persist as new ship capacity is added, and how per-Capacity-Day costs develop.
- Debt balances, refinancing terms, required repayments, covenant headroom and actual availability under the revolving facility.
- Cash generation relative to shipbuilding commitments and other capital spending, including delivery timing and financing for Getaway, Escape and Bliss.
- The composition and recurrence of debt-prepayment, IPO-related, share-based compensation and tax adjustments in reported non-GAAP results.
- Actual fuel, interest-rate and euro exposures versus hedge coverage, and any changes to the company’s stated sensitivity estimates.
- Developments in the crew litigation and the CEVA/OFAC matter, along with any resulting financial, regulatory or reputational effects.