Norwegian Cruise Line Holdings Ltd. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017; comparisons are with the corresponding 2016 periods. The company operates Norwegian Cruise Line, Oceania Cruises and Regent Seven Seas Cruises. It had 25 ships and approximately 50,400 berths at quarter-end. Norwegian Joy was delivered in April 2017.
Financial performance
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Total revenue | $1,344.1m | $1,186.8m | $2,494.9m | $2,264.5m |
| Operating income | $275.1m | $227.0m | $394.8m | $358.3m |
| Net income | $198.5m | $145.2m | $260.4m | $218.5m |
| Diluted EPS | $0.87 | $0.64 | $1.14 | $0.96 |
| Operating margin | 20.5% | 19.1% | 15.8% | 15.8% |
| Net margin | 14.8% | 12.2% | 10.4% | 9.6% |
| Adjusted EBITDA | $424.9m | $351.1m | $685.5m | $603.9m |
Q2 revenue rose 13.3% and net income rose about 36%; first-half revenue rose 10.2% and net income about 19%. Management attributed revenue growth primarily to increased capacity, higher ticket pricing and onboard revenue. Q2 Net Yield increased 7.3% (8.1% on a constant-currency basis); occupancy was 107.8%, versus 106.6%. First-half Net Yield increased 6.3% (7.0% constant currency).
Q2 cruise operating expenses increased 6.6%, while marketing, general and administrative expense increased 29.7%, partly reflecting higher advertising and share-based compensation. Adjusted Net Cruise Cost Excluding Fuel per Capacity Day increased 2.6% in Q2 and 4.2% for the first half. These are non-GAAP measures; the company cautions they should not be viewed as substitutes for GAAP results.
Cash flow, liquidity and debt
- First-half operating cash flow was $919.7m, up from $748.0m. Investing cash outflow was $1,100.5m, chiefly for Norwegian Joy, ship improvements and shoreside projects. Financing provided $271.8m; cash increased $91.0m to $219.3m.
- At June 30, cash was $219.3m and the full $750.0m revolving facility was available, for stated liquidity of $969.3m. The working-capital deficit was approximately $2.1bn, including $1.5bn of advance ticket sales, which the company describes as largely deferred revenue rather than ordinary cash liabilities.
- Current and long-term debt totaled approximately $6.684bn, compared with $6.399bn at December 31, 2016. Total liabilities were $8.954bn and shareholders’ equity was $4.992bn.
- The company reported $919.7m of first-half operating cash flow against $1.065bn of property and equipment additions. Management said liquidity sources should be sufficient for operations, debt service, capital expenditure and covenant compliance over the next 12 months, while noting future financing availability is not assured.
Material changes, outlook and risks
- Management cited higher capacity as a key revenue driver: fewer dry-docks and the addition of Seven Seas Explorer and Sirena contributed to capacity growth; Norwegian Joy was delivered during Q2. Higher marketing, payroll and depreciation costs partly offset operating leverage.
- Interest expense declined year over year in the reported periods, partly because 2016 included an $11.4m deferred-financing-fee write-off. In 2017, management cited higher average debt and LIBOR rates as cost pressures.
- No specific earnings or revenue guidance is provided in the supplied filing text. Planned fleet expansion includes seven ships with a combined contract price of approximately €5.5bn ($6.3bn at the June 30 exchange rate); export-credit financing is in place for 80% of each ship’s contract price. Anticipated capital expenditures were $0.3bn for the remainder of 2017, $1.4bn in 2018 and $1.2bn in 2019.
- Debt covenants require minimum liquidity and impose leverage and other restrictions; substantially all ships and other property and equipment are pledged as collateral. The company reported compliance at quarter-end. A 1 percentage-point rise in LIBOR was estimated to increase annual interest expense by about $26.3m.
- Ship-construction payments not hedged totaled €3.5bn ($4.0bn); management estimated a 10% euro move would change their U.S.-dollar value by $0.4bn. Fuel hedges covered approximately 76%, 65%, 48% and 26% of projected remaining 2017, 2018, 2019 and 2020 purchases, respectively. A 10% fuel-price increase was estimated to raise 2017 fuel expense by $15.5m, partly offset by a $9.0m increase in fuel-swap fair value.
- Cash-flow hedge gains contributed materially to other comprehensive income; $44.4m of accumulated hedge losses was expected to be reclassified into earnings over the next 12 months. Q2 other expense included $8.1m of foreign-exchange losses, partly offset by insurance-claim gains.
- Ship-contract breach or cancellation could lead to forfeited payments, claims or impairment losses. The company disclosed routine litigation, largely insured, and said reasonably possible losses were not expected to be material based on current knowledge; some potential losses could not be estimated. The business is also exposed to demand, fuel, currency, interest-rate, shipbuilding, geopolitical, regulatory and other risks.
- Management concluded disclosure controls were effective as of June 30, 2017 and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether revenue and yield growth persists as new ships add capacity, and whether occupancy and ticket pricing remain strong.
- Debt levels, covenant headroom, revolver availability and the ability to fund the substantial shipbuilding and capital-expenditure program.
- Actual interest-rate, euro and fuel exposure relative to the disclosed hedges and sensitivities.
- How much of reported earnings and adjusted performance reflects recurring operations versus share-based compensation, legal-settlement costs and other non-GAAP adjustments.
- Any developments in ship delivery schedules, contract pricing, litigation or other contingencies that could change cash requirements or reported results.