Norwegian Cruise Line Holdings Ltd. — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014. Financial statements are unaudited. Amounts below are in U.S. dollars; figures are rounded to millions unless stated otherwise.
Business context
The company operates cruise brands and reported growth in capacity following the January 2014 delivery of Norwegian Getaway; Norwegian Breakaway had entered service in April 2013. Results are seasonal, with historically stronger cruise demand in summer. On September 2, 2014, NCLH agreed to acquire Prestige Cruises International; the merger was expected to close in Q4 2014 and had not closed as of the reporting date.
Key financial results
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total revenue | $907.0 | $797.9 | $2,337.0 | $1,969.9 |
| Operating income | $234.8 | $208.1 | $456.5 | $334.5 |
| Net income attributable to NCLH | $201.1 | $170.9 | $364.0 | $65.6 |
| Diluted EPS | $0.97 | $0.82 | $1.75 | $0.32 |
| Adjusted EBITDA (non-GAAP) | $326.7 | $271.0 | $685.4 | $523.1 |
| Adjusted net income (non-GAAP) | $232.2 | $182.2 | $402.9 | $255.3 |
| Adjusted diluted EPS (non-GAAP) | $1.11 | $0.86 | $1.92 | $1.22 |
Q3 revenue increased 13.7% year over year; management attributed the 16.5% increase in Net Revenue to 13.1% more Capacity Days and a 3.0% higher Net Yield. Constant-currency Net Yield rose 2.6%. Occupancy was 114.8%, compared with 114.0%. Q3 operating margin was 25.9%, versus 26.1%; net income attributable to NCLH was 22.2% of revenue, versus 21.4%.
For the first nine months, revenue grew 18.6%, reflecting 18.4% more Capacity Days and 2.9% higher Net Yield; constant-currency Net Yield increased 2.7%. Operating margin was 19.5%, versus 17.0%. The sharp increase in reported nine-month net income partly reflects unusually high prior-year debt-prepayment costs and a lower 2014 tax expense; the comparison is not solely an indication of underlying operating growth.
Q3 cruise operating costs rose 12.1%; other operating expenses rose 20.3%, including merger transaction costs and higher depreciation following the Getaway delivery. Q3 Net Cruise Cost per Capacity Day increased 5.5%, while Adjusted Net Cruise Cost Excluding Fuel per Capacity Day rose 2.6%. The average fuel price declined 7.8% to $641 per metric ton. Nine-month Net Cruise Cost per Capacity Day was unchanged; average fuel price declined 7.2% to $636 per metric ton.
Cash flow, debt and liquidity
- Operating cash flow: $700.7 million for the first nine months, compared with $398.3 million in 2013.
- Investing cash flow: $864.8 million used, mainly for Getaway, future ships and other improvements. Financing cash flow: $163.5 million provided. Cash ended the period at $55.9 million, down slightly from $56.5 million at year-end 2013.
- Debt: Balance-sheet current and long-term debt totaled approximately $3.464 billion at September 30, 2014, versus $3.128 billion at December 31, 2013. The filing reports $3.464 billion of contractual long-term debt obligations, including the current portion, before scheduled interest payments.
- Liquidity: Management reported $651.9 million of liquidity: $55.9 million cash and $596.0 million available under its $625 million revolving facility. Working capital was negative $1.112 billion, including $504.1 million of advance ticket sales, which management characterized as deferred revenue associated with future sailings.
- The company reported compliance with debt covenants and said available cash, expected operating inflows and borrowing capacity should fund operations, debt service and capital spending over the next 12 months; it cautioned that future cash flows and financing are not assured.
Material changes, outlook and risks
- Interest expense for Q3 rose to $32.3 million from $26.6 million, mainly from higher average debt and interest rates. Nine-month interest expense fell to $95.3 million from $258.0 million, principally because 2013 included $160.6 million of debt-prepayment expenses and the company benefited from refinancing and lower rates.
- Nine-month 2014 tax benefit was $3.8 million, including an $11.1 million benefit from a tax-method change; $5.3 million of that benefit was excluded from adjusted earnings. The filing gives no formal earnings or operating guidance.
- Adjusted measures are non-GAAP and include exclusions such as merger costs. Q3 merger transaction expenses were $20.3 million. Reconcile these measures to GAAP results and consider that similar costs may recur.
- Four Breakaway Plus ships were contracted for delivery from fall 2015 through fall 2019 at a combined stated cost of about $3.8 billion; export-credit financing covers 80% of contract prices. The filing lists $3.713 billion of ship-construction contractual obligations and substantial future capital spending. Shipyard delays, cancellation or breach could cause deposit losses, claims or impairment.
- Merger-related risks include integration costs, additional or assumed debt and liabilities, management distraction, employee and guest uncertainty, and failure to realize expected benefits. Other stated risks include substantial indebtedness, fuel and foreign-exchange volatility, consumer demand and competition, operational incidents, ship delivery and maintenance, regulation, litigation, cybersecurity, and labor and port availability.
- Fuel hedges covered approximately 91%, 59%, 50% and 10% of projected remaining 2014, 2015, 2016 and 2017 fuel purchases, respectively. A 10% euro move was estimated to change the dollar value of unhedged ship payments by $334.8 million. A 1 percentage-point increase in LIBOR was estimated to raise annual interest expense by $16.6 million, before capitalized interest.
- The company reported a $42.3 million nine-month other comprehensive loss, primarily related to cash-flow hedges. About $14.6 million of accumulated cash-flow hedge losses were expected to be reclassified into earnings within 12 months.
- Two crew-member wage-related class actions remain disclosed; the company said it could not estimate their impact. It also reported other claims, with probable estimable losses accrued where required, but could not estimate reasonably possible losses beyond those accruals.
Important facts for investors to verify
- Whether the Prestige acquisition closed as expected, its final financing and assumed liabilities, and integration costs and benefits.
- Actual performance against capacity, yield and cost trends, especially the rise in Q3 adjusted cost per Capacity Day and ongoing guest-experience investment.
- Debt maturities, covenant headroom, revolving-facility availability and the funding plan for ship commitments and other capital expenditures.
- How fuel, interest-rate and euro exposures evolve as hedges mature and ship payments come due.
- Reconciliation and assumptions behind non-GAAP adjusted earnings, including the treatment of merger costs and tax benefits.
- Updates to litigation, shipbuilding commitments and any material changes in the risk factors disclosed in this filing.