Norwegian Cruise Line Holdings Ltd. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016; comparisons are with the same periods in 2015. Amounts below are U.S. dollars. The company operates Norwegian Cruise Line, Oceania Cruises and Regent Seven Seas Cruises. Its fleet included 24 ships and approximately 46,500 berths; four additional ships were on order for delivery through 2020.
Financial performance and position
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $1,484.7 million | $1,284.9 million | $3,749.2 million | $3,308.5 million |
| Operating income | $413.6 million | $306.8 million | $771.9 million | $584.6 million |
| Net income | $342.4 million | $251.8 million | $560.9 million | $388.8 million |
| Diluted EPS | $1.50 | $1.09 | $2.46 | $1.69 |
| Adjusted EBITDA | $547.4 million | $447.8 million | $1,151.3 million | $958.4 million |
| Adjusted EPS | $1.62 | $1.35 | $2.85 | $2.37 |
| Operating margin | 27.9% | 23.9% | 20.6% | 17.7% |
| Net margin | 23.1% | 19.6% | 15.0% | 11.8% |
Revenue and operating trends: Q3 revenue rose 15.6%; management attributed growth to 13.9% more Capacity Days and improved pricing. Net Yield increased 3.1% as reported, or 3.7% on a constant-currency basis. For the nine months, revenue rose 13.3%, Net Revenue increased 15.6%, and reported Net Yield grew 3.4% (4.1% constant currency). Added capacity came mainly from Norwegian Escape, Sirena and Seven Seas Explorer. Occupancy was 111.0% in Q3 versus 113.9% a year earlier, and 108.4% for nine months versus 109.5%.
Costs and margins: Q3 cruise operating costs increased 9.3%, mainly with added capacity; marketing, general and administrative expense also increased, including $16.0 million of additional marketing expense. Lower fuel prices helped: average fuel price was $500 per metric ton in Q3, down 11.5%, and $468 for nine months, down 14.9%. Adjusted Net Cruise Cost Excluding Fuel per Capacity Day increased 1.7% in Q3 and 2.2% for nine months. Nine-month results also reflect higher dry-dock and marketing costs, increased share-based compensation, and a $43.4 million contingent-consideration benefit recorded in 2015 but not 2016.
Cash flow and liquidity: Nine-month operating cash flow was $1,088.8 million, versus $973.4 million; investing cash outflow was $950.2 million, versus $330.5 million, primarily reflecting ship delivery, construction and improvements; financing cash outflow was $99.0 million, versus $497.6 million. Cash was $155.4 million at September 30, 2016, up from $115.9 million at year-end 2015. Reported liquidity was $905.4 million, consisting of cash and $750.0 million available under the revolving facility. Working capital was negative $1.9 billion, including $1.2 billion of advance ticket sales, which the company says largely represent deferred revenue rather than ordinary current cash liabilities.
Debt and capital: Balance-sheet debt was approximately $6.38 billion, comprising $566.9 million current and $5,815.2 million long-term. In June 2016, the company refinanced and expanded its senior secured facilities, increasing the revolving commitment from $625 million to $750 million and the term loan facility from $1.16 billion to $1.51 billion, with stated maturity in June 2021 subject to springing-maturity conditions tied to 2019 and 2020 notes. It also financed Seven Seas Explorer with a $373.6 million loan at 3.43%, maturing in 2028. Debt covenants include liquidity and leverage requirements and dividend restrictions; the company reported compliance. Most ships and other property and equipment are pledged as collateral.
Material changes, outlook and risks
- Property and equipment, net increased $595.4 million in the first nine months, primarily from Seven Seas Explorer and ship refurbishments. The company reported no goodwill impairment after an interim test of Oceania Cruises.
- Anticipated capital expenditures were $157.5 million for the remainder of 2016 and $1.3 billion in each of 2017 and 2018. Export credit financing covered 80% of ship contract prices. Three Breakaway Plus ships and one Explorer Class ship were on order; the company warned that a construction contract breach or cancellation could cause forfeited payments, claims or impairment losses.
- No specific earnings or revenue guidance is provided in the supplied filing text. Management stated that cash on hand, expected operating cash flow, revolving availability and potential access to debt or equity markets should be sufficient for the next 12 months, while noting future financing is not assured.
- Interest expense rose to $60.7 million in Q3 from $49.8 million and to $188.8 million for nine months from $153.2 million, reflecting higher average debt, higher LIBOR and, for the nine-month period, an $11.5 million write-off of deferred financing fees.
- Market exposures include fuel prices, foreign exchange and interest rates. At quarter-end, 56% of debt was fixed-rate and 44% variable-rate; a one-percentage-point increase in annual LIBOR was estimated to add $28.9 million to annual interest expense. Approximately 90%, 79%, 57%, 48% and 5% of projected fuel purchases were hedged for the remainder of 2016 and for 2017 through 2020, respectively. Unhedged shipbuilding payments were €506.4 million; a 10% euro move was estimated to change their U.S.-dollar value by $56.9 million.
- Risks include consumer demand and economic conditions, fuel and operating costs, substantial indebtedness, shipbuilding and repair delays, safety or security incidents, international operating and regulatory exposure, currency movements, and possible goodwill or tradename impairment. The filing highlights uncertainty following the U.K. vote to leave the EU. Litigation is ongoing; most claims are insured, and management did not expect aggregate reasonably possible losses to be material, but could not estimate other potential losses beyond accruals.
- Share repurchases totaled $50.0 million in the first nine months, with no repurchases in Q3; $263.5 million remained under the program at September 30. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether pricing and yield gains persist as capacity expands, and how occupancy and bookings develop.
- Whether operating costs excluding fuel can be controlled, particularly marketing, labor, dry-dock and other costs.
- Funding, financing terms and delivery timing for the substantial shipbuilding program, alongside scheduled debt repayments and springing-maturity provisions.
- Cash generation and liquidity under weaker demand, higher fuel prices, adverse currency movements or rising interest rates.
- The effect of the company’s non-GAAP adjustments when assessing performance; Adjusted EBITDA, Adjusted EPS and yield measures supplement, and are not substitutes for, GAAP results.
- Potential changes in international regulatory and tax conditions, litigation exposure, and future impairment-test assumptions for goodwill and tradenames.