Norwegian Cruise Line Holdings Ltd. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparisons are with Q1 2016 unless otherwise stated. Amounts are in U.S. dollars. The company operates Norwegian Cruise Line, Oceania Cruises and Regent Seven Seas Cruises. At quarter-end it had 24 ships and approximately 46,500 berths. Results are seasonal and interim performance may not indicate full-year results.
Key financial results
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Total revenue | $1,150.8 million | $1,077.6 million | +6.8% |
| Operating income | $119.7 million | $131.3 million | -8.8% |
| Operating margin | 10.4% | 12.1% | -1.7 percentage points |
| Net income | $61.9 million | $73.2 million | -15.5% |
| Diluted EPS | $0.27 | $0.32 | Lower |
| Adjusted EBITDA (non-GAAP) | $260.6 million | $252.8 million | +3.1% |
| Adjusted net income / adjusted EPS (non-GAAP) | $91.2 million / $0.40 | $86.7 million / $0.38 | Higher |
Passenger ticket revenue was $786.7 million and onboard and other revenue was $364.1 million. Net Revenue, a company-defined non-GAAP measure, rose 6.0% to $888.2 million; Net Yield increased 4.9% to $220.37 per capacity day (5.6% on a constant-currency basis). Occupancy declined to 105.0% from 107.4%; passengers carried fell to 528,354 from 551,475, while capacity days increased 1.0%.
Total cruise operating expenses rose 8.3%. Net Cruise Cost per capacity day increased 6.1%; adjusted net cruise cost excluding fuel per capacity day rose 5.8%. Depreciation and amortization increased to $119.2 million from $101.3 million, contributing to lower operating income and margins. Net interest expense fell to $53.0 million from $59.8 million, partly offsetting operating pressure. Other expense was $2.8 million versus $2.8 million of other income in 2016.
Cash flow, debt and liquidity
- Operating cash flow was $434.9 million, up from $330.1 million. Advance ticket sales contributed a $222.9 million cash-flow increase, compared with $148.6 million in Q1 2016.
- Investing cash outflow was $117.8 million, mainly for ship improvements, construction and shoreside projects. Financing cash outflow was $225.7 million, primarily reflecting net debt repayments.
- Cash and cash equivalents were $219.8 million at March 31, versus $128.3 million at year-end. Long-term debt, including its current portion, totaled approximately $6.18 billion, down from approximately $6.40 billion at December 31, 2016.
- Reported liquidity was $969.8 million: $219.8 million cash plus $750.0 million available under the revolving facility. Working capital was negative $2.0 billion, including $1.4 billion of advance ticket sales, which the company characterizes as substantially more like deferred revenue than current cash liabilities.
- Contractual obligations totaled $11.06 billion, including debt, interest, shipbuilding contracts, leases and port facilities. This excludes a further $3.41 billion of Project Leonardo ship contracts, subject to conditions.
Material changes, outlook and risks
Management attributed revenue and yield growth primarily to higher passenger ticket pricing and onboard revenue. Capacity growth reflected ships added in 2016, partly offset by dry-docks. Cost increases were linked to crew payroll, maintenance and dry-dock expense, ship additions, and higher share-based compensation. The filing provides no specific full-year earnings or revenue guidance.
The company planned eight additional ships through 2025, with options for two more in 2026 and 2027. Norwegian Joy was delivered in April 2017, after quarter-end. The four Project Leonardo ships were expected to expand fleet capacity; the company reported export-credit financing arrangements covering 80% of their contract prices, subject to conditions. Management said available cash, expected operating inflows, revolving credit and potential capital-market access should be sufficient for the next 12 months, but cautioned that future operating cash and financing are not assured.
Key exposures include substantial indebtedness, interest rates, fuel prices, euro exchange rates, consumer demand, shipbuilding execution, and seasonal occupancy and fares. A one-percentage-point increase in LIBOR was estimated to raise annual interest expense by approximately $27.4 million. A 10% fuel-price increase was estimated to add $22.3 million to 2017 fuel expense, partly offset by an estimated $13.4 million increase in fuel-swap fair value. Unhedged ship-construction payments were €188.5 million; a 10% euro move was estimated to change their dollar value by $20.1 million. The company reported compliance with debt covenants at quarter-end; substantially all ships and other property and equipment are pledged as collateral.
Pending claims and lawsuits are described as ordinary-course matters, mostly insured. The company accrued estimable probable losses but could not estimate additional potential losses; it did not expect reasonably possible losses, based on current knowledge, to be material. It reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether higher ticket pricing and yield persist, and whether occupancy and passenger volumes recover.
- Whether operating-cost growth—especially payroll, maintenance, dry-docks and depreciation—continues to outpace revenue growth.
- Liquidity and covenant headroom, debt repayment needs, and the assumptions behind management’s 12-month funding assessment.
- Shipbuilding schedules, total committed capital spending, financing availability and exposure to euro movements.
- The effect of fuel and interest-rate changes after hedges, including hedge coverage, maturities and possible changes in forecast purchases.
- Performance of adjusted, non-GAAP measures alongside GAAP results; adjustments include share-based compensation, severance and other items and may not be comparable across companies.