Norwegian Cruise Line Holdings Ltd. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017; comparisons are with the same 2016 periods. The company operated 25 ships with approximately 50,400 berths. Results are unaudited, and cruise operations are seasonal.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue | $1,651.7m | $1,484.7m | $4,146.6m | $3,749.2m |
| Operating income | $476.8m | $413.6m | $871.6m | $771.9m |
| Net income | $400.7m | $342.4m | $661.1m | $560.9m |
| Diluted GAAP EPS | $1.74 | $1.50 | $2.88 | $2.46 |
| Adjusted EBITDA | $635.1m | $547.4m | $1,320.7m | $1,151.3m |
| Adjusted EPS | $1.86 | $1.62 | $3.28 | $2.85 |
| Operating margin | 28.9% | 27.9% | 21.0% | 20.6% |
| Net margin | 24.3% | 23.1% | 15.9% | 15.0% |
Revenue growth reflected higher capacity and yields, including the April 2017 delivery of Norwegian Joy. Q3 capacity days rose 9.1%; net yield increased 3.1% (3.0% on a constant-currency basis). Nine-month capacity days rose 5.2% and net yield 5.3% (5.7% constant currency). Occupancy was 110.5% in Q3 versus 111.0%, and 107.9% for the nine months versus 108.4%.
Q3 operating income increased 15.3% and net income 17.0%. Nine-month operating income increased 12.9% and net income 17.9%. Costs also rose: Q3 gross cruise cost increased 8.4%; nine-month gross cruise cost increased 9.0%. Adjusted net cruise cost excluding fuel per capacity day increased 2.9% for the nine months.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $1,359.6m, compared with $1,088.8m in 2016. Investing cash outflow was $1,164.8m, largely for Norwegian Joy, ship improvements and shoreside projects; financing provided $199.7m. Cash ended the period at $522.9m, up from $128.3m at year-end 2016.
- At September 30, 2017, current and long-term debt carrying amounts totaled approximately $6,608.7m. Cash plus availability under the then-existing $750m revolving facility gave reported liquidity of approximately $1.3bn. Working capital was negative $1.7bn, including $1.3bn of advance ticket sales, which the company describes as deferred-revenue-like.
- Capital spending on property and equipment was $1,129.5m for the first nine months. Expected capital expenditures were $0.3bn for the remainder of 2017, $1.4bn in 2018 and $1.2bn in 2019.
Material developments, outlook and risks
- On October 10, 2017, the company amended its credit facility: the revolving commitment increased from $750m to $875m, existing term A debt was repriced, and a $375m term B loan due 2021 was added. NCLC redeemed all 4.625% senior notes due 2020. These were subsequent events, not September 30 balances.
- Seven ships were on order, with a combined stated contract price of approximately $6.5bn. Export-credit financing was in place for 80% of each ship’s contract price. The company expects fleet expansion to raise capacity to approximately 72,300 berths; no specific financial earnings guidance is provided in this filing.
- Fuel swaps covered approximately 75%, 65%, 48% and 26% of projected remaining fuel purchases for 2017, 2018, 2019 and 2020, respectively. A 10% fuel-price increase was estimated to raise anticipated 2017 fuel expense by $8.7m before a projected $5.2m increase in fuel-swap fair value. A 1 percentage-point increase in LIBOR was estimated to add approximately $25.9m to annual interest expense.
- Foreign-currency forward contracts hedged a portion of euro-denominated ship payments; unhedged remaining payments were approximately €3.5bn. A 10% euro movement was estimated to change their U.S.-dollar value by $0.4bn.
- Unusual items included a $2.9m impairment on Hawaii land-based operations held for sale; the sale closed October 31, 2017 for a promissory note of approximately $9.7m. Nine-month tax expense included an $11.6m benefit from reversal of prior-year tax contingency reserves. Adjusted measures exclude selected items and are non-GAAP.
- Management cited risks including fuel and currency volatility, substantial debt and collateral pledges, consumer demand and economic conditions, shipbuilding delays, regulatory and environmental changes, cyber and security incidents, and litigation. It reported compliance with debt covenants and stated liquidity was expected to cover operations, debt service and capital needs over the next 12 months, while cautioning that future cash flows and financing are not assured. Pending and threatened litigation was not expected to be material based on information then available, though some losses could not be estimated.
Important facts for investors to verify
- How ticket pricing, onboard revenue, occupancy and added capacity develop as new ships enter service.
- Whether operating-cost growth, especially payroll, marketing and depreciation, remains ahead of revenue growth; review both GAAP and adjusted measures and their exclusions.
- Funding and timing for the approximately $6.5bn newbuild program, including financing availability, euro exposure and ship-delivery obligations.
- Debt levels, refinancing terms, interest-rate sensitivity, covenant headroom and the effect of the October 2017 refinancing and note redemption.
- Fuel-hedge coverage and actual fuel costs, as well as the completion and proceeds of the Hawaii operations sale.