Norwegian Cruise Line Holdings Ltd. — Q1 2022 10-Q
Reporting period: Three months ended March 31, 2022; comparisons are with Q1 2021. The company operates Norwegian Cruise Line, Oceania Cruises and Regent Seven Seas Cruises. Voyages resumed in phases beginning in July 2021 after the pandemic suspension; 28 ships were operating with guests by May 7, 2022. Q1 2021 had virtually no passenger activity, so year-over-year comparisons reflect a very low base.
Financial results and liquidity
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Revenue | $521.9 million | $3.1 million |
| Operating loss | $688.8 million | $571.3 million |
| Net loss | $982.7 million | $1.370 billion |
| Diluted loss per share | $2.35 | $4.16 |
| Adjusted EBITDA | $(476.2) million | $(373.4) million |
| Net cash used in operating activities | $371.0 million | $852.0 million |
- Passenger ticket revenue was $342.5 million and onboard and other revenue was $179.5 million. Occupancy was 48.0% across 1.43 million passenger cruise days.
- GAAP gross margin was negative $380.1 million; non-GAAP Adjusted Gross Margin was $401.4 million. Adjusted Net Loss was $760.5 million, or $1.82 per share.
- Cash and cash equivalents were $2.14 billion at quarter-end. Reported available liquidity was $3.1 billion, including a $1 billion undrawn commitment available through August 15, 2022. Current liabilities exceeded current assets by approximately $962 million.
- Long-term debt was $12.56 billion, with a further $1.01 billion current portion. Total liabilities were $17.75 billion and shareholders’ equity was $1.51 billion.
- Q1 financing cash flow was positive $921.5 million, principally reflecting approximately $2.1 billion of gross proceeds from debt offerings, offset in part by debt repayments, redemption premiums and financing fees. Investing cash flow was positive $79.7 million, including $240 million of investment maturities; capital additions to property and equipment were $165.3 million.
Material changes and unusual items
- Revenue rebounded with the return to service, but operating loss widened as ships resumed operations and payroll, fuel, repairs, marketing and other costs rose. Management also cited inflation-related increases in food, fuel and logistics costs.
- Net loss improved versus Q1 2021, largely because interest expense fell to $327.7 million from $824.4 million. The prior-year period included $674.0 million of debt extinguishment and modification losses; Q1 2022 included $188.4 million of extinguishment losses. Adjusted EBITDA nevertheless deteriorated.
- February financing included $1.0 billion of 5.875% secured notes due 2027, $600 million of 7.750% unsecured notes due 2029, and approximately $473 million of 2.5% exchangeable notes due 2027. Proceeds were intended to refinance secured notes and meet scheduled 2022 debt payments.
- Operating cash use improved from the prior-year quarter, while advance ticket sales increased $417.9 million. At March 31, advance ticket sales were $2.2 billion, including approximately $600 million of future cruise credits.
Outlook, management commentary and risks
- Management expected a net loss but positive net cash from operating activities in Q2 2022. It gave no clear full-year earnings or cash-flow guidance in the supplied filing text.
- Bookings recovered after Omicron and an initial post-invasion cancellation increase. Management said second-half 2022 bookings were below the comparable 2019 position but at meaningfully higher pricing; Q4 2022 was in line with 2019 at higher prices. 2023 booked position and pricing were described as record levels versus comparable booking periods.
- Management reported average monthly cash burn of approximately $375 million in Q1, below its prior estimate of $390 million. Debt amortization payments deferred during the pandemic resumed in April. Management considered liquidity sufficient for at least 12 months, subject to assumptions and risks.
- Credit-card processors governed approximately $1.7 billion of advance ticket sales and held approximately $1.1 billion in cash reserves/collateral, including $426.2 million recorded in receivables and $665.3 million in other long-term assets. Additional collateral or reserves could reduce liquidity.
- Debt covenant waivers and modifications were in place; the company reported compliance at March 31. A covenant breach could trigger acceleration or termination of substantial debt and derivatives. Most ships are pledged as collateral.
- Key uncertainties include COVID-19 resurgence, occupancy and staffing, port access, inflation and fuel prices, Russia’s invasion of Ukraine, shipbuilding delays, refinancing access and customer cancellations. The conflict led to cancellation or modification of about 60 2022 sailings and removal of Russian port calls from 2023 itineraries.
- The Havana Docks court granted the plaintiff summary judgment on liability in March 2022; a damages trial was scheduled for September 2022 and the company’s interlocutory appeal remained pending. The company said it could not reasonably estimate potential losses and warned an adverse final outcome could materially affect results, financial condition or cash flows. Related investigations into pandemic marketing were also ongoing.
- Fuel hedges covered approximately 41% of projected remaining 2022 fuel purchases and 24% of 2023 purchases. Management estimated a 10% fuel-price increase would raise anticipated 2022 fuel expense by $62.7 million, partly offset by an estimated $37.7 million increase in fuel-swap fair value.
Important facts for investors to verify
- Whether occupancy, booking conversion and operating cash flow improved as expected after Q1, and whether Q2 operating cash flow turned positive.
- Availability and duration of the $1 billion undrawn commitment, processor reserve requirements, and the amount of advance ticket sales that may be refundable.
- Debt maturities, covenant compliance and refinancing needs, including the resumption of amortization payments and any further financing.
- Fuel, inflation, foreign-exchange and shipbuilding-cost exposure, including delivery timing and financing for nine ships on order.
- Developments in the Havana Docks litigation, government investigations and the potential financial effect of any adverse outcomes.