Norwegian Cruise Line Holdings Ltd. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; unaudited. Comparisons are with Q1 2013 unless otherwise noted. Financial figures are U.S. dollars; millions unless stated.
Business context and results
Capacity expanded following delivery of Norwegian Breakaway in April 2013 and Norwegian Getaway in January 2014. Cruise operations are seasonal, with demand historically strongest in summer; interim results are not necessarily indicative of the full year.
| Metric | Q1 2014 | Q1 2013 | Change / context |
|---|---|---|---|
| Total revenue | $664.0 | $527.6 | +25.9% |
| Net Revenue (non-GAAP) | $499.3 | $390.7 | +27.8% |
| Operating income | $73.1 | $31.0 | Operating margin 11.0%, versus 5.9% |
| Net income (loss) attributable to NCLH | $51.3 | $(96.4) | GAAP diluted EPS $0.24, versus $(0.49) |
| Adjusted EBITDA (non-GAAP) | $139.3 | $99.8 | +39.6% |
| Adjusted Net Income / Adjusted EPS (non-GAAP) | $49.6 / $0.23 | $12.9 / $0.06 | Excludes specified adjustments; see unusual items below |
Revenue, costs and operating metrics
- Passenger ticket revenue was $458.5 million and onboard and other revenue was $205.5 million. Net Yield increased 3.8% to $172.41 per Capacity Day (3.9% on a constant-currency basis), driven by ticket pricing and onboard revenue.
- Capacity Days rose 23.2% to 2.90 million. Passengers carried increased to 507,272 from 368,010; occupancy was 106.2%, versus 107.5%.
- Total cruise operating expense increased 22.9% to $445.9 million, primarily with higher capacity. Fuel expense was $79.0 million; average fuel price declined 4.5% to $643 per metric ton from $673.
- Net Cruise Cost per Capacity Day fell 4.8% to $125.89. Adjusted Net Cruise Cost Excluding Fuel per Capacity Day rose 3.7% to $97.02, reflecting higher costs, including Getaway launch costs and Norwegian Spirit dry-dock costs.
- Interest expense, net declined to $31.2 million from $127.7 million. Management attributed the decrease mainly to lower-rate debt after redemptions and refinancing; Q1 2013 included $90.5 million of debt-prepayment expenses.
Cash flow, liquidity and debt
- Operating cash flow was $228.1 million, compared with $82.1 million. Advance ticket sales contributed $118.3 million to operating cash flow, reflecting the timing of customer bookings and sailings.
- Investing cash outflow was $746.3 million, mainly for Norwegian Getaway delivery and other ship and shoreside projects. Financing cash inflow was $526.5 million, primarily from the Breakaway Two Credit Facility. Cash increased $8.3 million to $64.8 million.
- Reported liquidity was $569.8 million: $64.8 million cash plus $505.0 million available under the revolving facility. Working capital deficit was $1,069.7 million, including $531.9 million of advance ticket sales, which management described as substantially more like deferred revenue than current cash liabilities.
- Balance-sheet debt was $3,654.2 million, including $363.7 million current and $3,290.5 million long-term. Total liabilities were $4,648.9 million. Debt obligations including scheduled interest totaled $3,654.2 million in the contractual-obligations table; ship construction commitments were listed separately.
- Management said the company was in compliance with debt covenants at March 31 and believed available cash, expected operating cash flow, facility borrowings and potential financing would cover operations, debt service and capital expenditures for the next 12 months. It cautioned that future operating cash and financing are not assured.
Material changes, outlook and risks
- Q1 2014 income tax benefit was $9.4 million, versus tax expense of $2.2 million a year earlier. A change in the tax method produced an $11.1 million benefit; management excluded a $6.7 million non-recurring portion from Adjusted Net Income and Adjusted EPS.
- Norwegian Getaway was delivered in January. Two further ships, Norwegian Escape and Norwegian Bliss, were contracted for delivery in Q4 2015 and Q1 2017. Their combined contract cost was approximately $1.9 billion, with export credit financing arranged for 80% of contract prices.
- The filing provides no specific full-year earnings or revenue guidance. Management said it regularly considers additional ships, ship sales, acquisitions and alliances; these possibilities are not commitments.
- Key disclosed exposures include substantial indebtedness, variable interest rates, fuel-price volatility, foreign exchange, consumer demand and competition, shipyard delivery and cost risks, safety and operational disruptions, regulation, and litigation. At quarter-end, 69% of debt was variable-rate, including swaps; a one-percentage-point LIBOR increase was estimated to raise annual interest expense by about $18.3 million. Fuel hedges covered approximately 66% of remaining 2014, 53% of 2015 and 26% of 2016 projected purchases.
- Ship construction contracts carry potential deposit forfeiture, claims or impairment risks in the event of breach or cancellation. Crew wage-related litigation remained pending; the company said it could not estimate the impact of the proceedings or other reasonably possible losses beyond accrued amounts.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The filing reports no material changes to the risk factors in the 2013 Form 10-K.
Most important facts for investors to verify
- Whether higher capacity and yield persist, and how occupancy and per-capacity-day costs develop as the new ships enter service.
- Whether operating cash generation can fund substantial shipbuilding and other capital expenditures while meeting debt service and covenant requirements.
- The terms, availability and covenants of credit facilities, the debt maturity and interest-rate profile, and sensitivity to higher LIBOR.
- Fuel-price and hedge coverage assumptions, including the estimated effect of a fuel-price increase and the value and effectiveness of derivatives.
- The sustainability of reported earnings given the tax benefit and the adjustments in non-GAAP measures; assess those measures alongside GAAP results.
- Ship delivery schedules, construction financing, and developments in crew litigation and other contingencies.
Adjusted EBITDA, Adjusted Net Income, Adjusted EPS, Net Revenue, Net Yield and cost-per-capacity-day measures are non-GAAP measures; the company cautions they should not be viewed in isolation or as substitutes for GAAP measures.