Norwegian Cruise Line Holdings Ltd. annual report, FY2018

Business context and reporting period

Norwegian Cruise Line Holdings Ltd. (NCLH) filed this Form 10-K for the fiscal year ended December 31, 2018. It operates Norwegian Cruise Line, Oceania Cruises and Regent Seven Seas Cruises. At year-end, the company had 26 ships and approximately 54,400 berths. The filing also provides unaudited fourth-quarter comparisons.

Key financial metrics

At December 31, 2018, cash and cash equivalents were $163.9 million and available capacity under the revolving facility was $745.0 million, for reported liquidity of $908.9 million. Working capital was negative $2.6 billion, including $1.6 billion in advance ticket sales, which management describes as substantially more like deferred revenue than current cash liabilities. Total assets were $15.206 billion and shareholders’ equity was $5.963 billion.

FY 2018 total revenue included $4.260 billion of passenger ticket revenue and $1.795 billion of onboard and other revenue. Net Revenue, a non-GAAP measure, was $4.708 billion; Net Yield was $249.85, up 3.7%. Occupancy was 107.6%. The filing reports fuel expense of $392.7 million and net interest expense of $270.4 million. Non-GAAP measures are supplemental and should not be treated as substitutes for GAAP results or cash flow.

Material changes versus the prior comparable period

• Revenue rose 12.2%; operating income rose 16.2%; net income rose 25.7%; and diluted EPS increased from $3.31 to $4.25.
• Net Revenue increased 12.6%, reflecting 8.5% more Capacity Days and 3.7% higher Net Yield. Norwegian Bliss joined the fleet in April 2018.
• Operating margin increased to 20.1% from 19.4%, while total cruise operating expense increased 10.2%. Adjusted Net Cruise Cost Excluding Fuel per Capacity Day rose 2.9% (2.6% on a constant-currency basis).
• Operating cash flow increased to $2.075 billion, partly reflecting higher earnings and a $262.6 million increase in advance ticket sales. Investing outflows increased to $1.503 billion, mainly for Norwegian Bliss, ships under construction and improvements.
• Debt increased by approximately $184 million. In April, NCLH redeemed $135 million principal amount of 4.75% notes due 2021; the redemption generated $6.3 million of charges including premium and fee write-offs.

Fourth-quarter 2018 revenue was $1.381 billion versus $1.250 billion in Q4 2017; operating income was $209.6 million versus $177.2 million; net income was $154.6 million versus $98.8 million; and diluted EPS was $0.70 versus $0.43.

Outlook, management commentary, risks and unusual items

• Management expects cash on hand, operating inflows, revolving-credit availability and potential capital-market access to be sufficient for operations, debt service, capital spending and covenant compliance over the next 12 months; this is not a guarantee of future financing availability.
• Anticipated capital expenditures were $1.6 billion in 2019, $1.2 billion in 2020 and $0.7 billion in 2021. The 11 ships then planned through 2027 had combined contract prices of approximately €7.9 billion ($9.1 billion at year-end exchange rates); export-credit financing was expected to cover about 80% of each ship’s contract price, subject to conditions.
• In January 2019, the company reduced pricing and extended the maturities of its revolving facility and Term Loan A to 2024, and used an increased Term Loan A to repay Term Loan B. These are subsequent events, not year-end 2018 balances.
• Key exposures include fuel prices and the IMO 2020 sulfur limit, foreign exchange, interest rates, high leverage and secured assets, shipbuilding and delivery execution, industry capacity growth, economic and geopolitical conditions, safety incidents, cybersecurity and privacy, environmental regulation, and tax qualification under Section 883. A 1-percentage-point increase in LIBOR was estimated to add about $18.4 million to annual interest expense; a 10% euro move was estimated to change the dollar value of unhedged ship payments by $0.3 billion.
• The company had hedged approximately 57%, 53% and 33% of projected fuel purchases for 2019, 2020 and 2021, respectively. A 10% increase in weighted-average fuel prices was estimated to raise 2019 fuel expense by $40.5 million, partially offset by an estimated $20.1 million increase in fuel-swap fair value.
• A purported class action filed in September 2018 concerns marketing and sales of the Booksafe Travel Protection Plan. The company says it has meritorious defenses and does not expect a material financial-statement impact. It reported that other reasonably possible litigation losses were not expected to be material, while noting that some potential losses could not yet be estimated.
• In October 2018, NCLH identified limited unauthorized access to certain employee email communications containing some proprietary and personal information. The company implemented additional safeguards and reported no material losses from the incident to date.
• The company reported effective disclosure controls and internal control over financial reporting; PwC issued unqualified opinions on the financial statements and internal control. No material control changes were reported for the fourth quarter.

Most important facts for investors to verify

• Whether revenue and yield improvement persists as capacity expands, and whether cost growth per Capacity Day remains contained.
• Liquidity and refinancing progress against debt maturities, covenant requirements, pledged collateral and substantial contracted shipbuilding commitments.
• Actual funding, delivery timing and returns for the planned fleet additions, including the conditions attached to export-credit financing and approvals.
• Fuel-hedge coverage, realized fuel costs and compliance spending for new environmental rules, alongside foreign-exchange and variable-rate debt exposures.
• Developments in the Booksafe litigation, the cybersecurity incident and the company’s continued eligibility for the Section 883 tax exemption.