Business context and reporting period
Norwegian Cruise Line Holdings Ltd. operates Norwegian Cruise Line, Oceania Cruises and Regent Seven Seas Cruises. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2020, compared with the corresponding 2019 periods. COVID-19 led the company to suspend voyages across all brands; guests had disembarked its 28 ships by March 28. The suspension was extended through October 31, 2020.
Financial performance and position
Amounts below are U.S. dollars. Financial statement amounts are in millions unless otherwise noted.
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $16.9 | $1,664.3 | $1,263.8 | $3,067.9 |
| Operating income (loss) | $(595.4) | $308.7 | $(2,419.5) | $467.0 |
| Net income (loss) | $(715.2) | $240.2 | $(2,596.2) | $358.3 |
| Diluted EPS | $(2.99) | $1.11 | $(11.46) | $1.65 |
| Adjusted EBITDA, non-GAAP | $(393.1) | $497.2 | $(377.7) | $857.8 |
- Q2 revenue fell 99.0%; the company reported negative net revenue of $20.9 million, versus $1.26 billion in Q2 2019. No capacity days were recorded in Q2 2020, so yield-per-capacity-day comparisons were not presented.
- Six-month revenue decreased 58.8%, with capacity days down 55.9%. Adjusted net loss was $877.7 million for the six months, compared with adjusted net income of $463.9 million a year earlier.
- Q2 interest expense was $114.5 million, up from $66.0 million, primarily reflecting additional borrowings, partly offset by lower LIBOR. Six-month interest expense was $183.4 million versus $139.5 million.
- Six-month operating cash flow was negative $1.33 billion, compared with positive $1.04 billion in 2019. Investing cash outflow was $751.6 million; financing cash inflow was $4.09 billion. Cash ended June at $2.26 billion, versus $252.9 million at year-end 2019.
- At June 30, current assets were $2.75 billion and current liabilities $2.58 billion. Reported current and long-term debt totaled approximately $10.35 billion, compared with approximately $6.80 billion at December 31, 2019. The filing separately lists $10.69 billion of scheduled principal repayments, including finance lease obligations.
Material changes and unusual items
- The suspension sharply curtailed revenue while fixed and suspension-related costs continued, including crew, repatriation, protected commissions, fuel and ship expenses. Cost containment reduced operating and administrative costs but did not offset the revenue collapse.
- The company recorded $1.61 billion of goodwill and tradename impairment losses in the first half: $1.29 billion of goodwill and $317.0 million of tradenames. Goodwill remaining at June 30 was $98.1 million. Management said further impairment could result if expected cash flows decline.
- Through June 30, debt financings and an equity offering generated approximately $2.4 billion of gross proceeds; the equity offering issued 41.8 million shares for $460 million gross proceeds. Debt payment deferrals and refinancing actions provided approximately $1.6 billion of deferrals. Long-term debt and interest costs increased, and some new debt carries high coupon rates.
- After quarter-end, July financing generated a further approximately $1.5 billion gross proceeds, including an equity offering; approximately $675 million was used to repay and terminate the Epic Credit Facility. The July public share offering produced $277.4 million net proceeds before other fees and expenses.
- Shares outstanding increased: the balance sheet reported 256.3 million ordinary shares outstanding at June 30, versus 213.1 million at December 31. Exchangeable notes could create further dilution if exchanged.
Outlook, liquidity and risks
- Management expected a GAAP and adjusted net loss for full-year 2020 and said the full impact of the pandemic could not be quantified. The company reported that 2021 cumulative booked position and pricing were within historical ranges, including future cruise credits; 2020 bookings were materially below the prior year and at lower prices. Management cautioned that bookings may not predict actual revenue.
- Management estimated targeted cash burn at approximately $160 million per month during the suspension. This estimate excludes customer cash refunds, restart costs and certain other unforeseen expenses, and assumes deferral of newbuild spending and debt amortization through March 31, 2021. Refunds were estimated, based on behavior to date, at approximately 60% of advance ticket sales during the suspension; the proportion could change.
- The company said its available resources and actions alleviated previously disclosed substantial doubt about its ability to continue as a going concern and were sufficient for obligations over the next 12 months and required minimum liquidity. This assessment depends on assumptions about suspension duration, cash burn, refunds, financing and deferrals.
- Approximately $0.8 billion of future cruise credits was included in $1.2 billion of advance ticket sales. Credit card processors governed approximately $0.9 billion of advance ticket sales and could require additional reserves or collateral under specified circumstances. The company had agreed to a $70 million cash reserve and preliminarily agreed to second-priority liens on ships with approximately $700 million of appraised equity value.
- The company reported covenant compliance at June 30, with certain financial covenant waivers during deferral periods. A future default could trigger cross-default provisions; further covenant amendments are not assured. Credit ratings were downgraded or placed under negative review, potentially raising financing costs or limiting access to capital.
- Nine ships were on order, with combined contract prices of approximately $8.0 billion; delivery timing could be delayed. The company anticipated $263.5 million of capital expenditures for the remainder of 2020 and continued to negotiate deferrals or financing of some newbuild payments.
- Other risks include uncertain restart timing, public-health requirements, weak consumer demand, fuel and currency fluctuations, additional asset impairments, and legal proceedings. Shareholder class actions and governmental investigations concern COVID-19-related marketing statements; Helms-Burton Act litigation also remains unresolved. The company said potential losses for these matters could not be reasonably estimated.
Investor verification priorities
- Track voyage restart dates, applicable health and safety approvals, booking trends, pricing and the conversion of future cruise credits into sailings or cash refunds.
- Compare actual cash burn, refunds, collateral requirements and liquidity with management’s $160 million monthly estimate and 12-month liquidity assessment.
- Review updated debt maturities, interest costs, covenant compliance, collateral pledges and the terms and use of proceeds of post-quarter financing.
- Assess potential dilution from equity issuance and exchangeable notes, as well as any further goodwill, tradename or ship-asset impairments.
- Follow shipbuilding delays and cash commitments, credit-rating developments, and outcomes of the COVID-19 investigations and litigation.