Norwegian Cruise Line Holdings Ltd. — Q2 2014 Form 10-Q
Business context and period: Unaudited results for the three and six months ended June 30, 2014, compared with the same periods in 2013. The company operates cruise lines; growth in available capacity reflected Norwegian Breakaway, delivered in April 2013, and Norwegian Getaway, delivered in January 2014. Results are seasonal, with historically stronger demand in summer.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Total revenue | $765.9m | $644.4m | $1,430.0m | $1,172.1m |
| Operating income | $148.6m | $95.4m | $221.7m | $126.4m |
| Net income (loss) attributable to NCLH | $111.6m | $(8.8)m | $162.9m | $(105.2)m |
| Diluted EPS | $0.54 | $(0.04) | $0.78 | $(0.52) |
| Adjusted EBITDA | $219.4m | $152.3m | $358.7m | $252.1m |
| Operating margin | 19.4% | 14.8% | 15.5% | 10.8% |
- Q2 passenger ticket revenue was $538.1m and onboard and other revenue was $227.9m. Net Revenue, a company-defined non-GAAP measure, rose 23.6% to $595.7m; Net Yield increased 3.3% (3.0% on a constant-currency basis).
- Q2 capacity days increased 19.6%; occupancy was 110.4%, versus 107.5%. Higher capacity and yield were cited as drivers of revenue growth.
- Q2 cruise operating expenses rose 11.8%, less than revenue growth. Net Cruise Cost per Capacity Day fell 3.7%; lower fuel prices and lower scheduled dry-dock costs contributed. Average fuel price decreased 9.3% to $622 per metric ton.
- Q2 net interest expense fell to $31.9m from $103.7m, reflecting lower debt and rates after refinancing and redemption of higher-rate debt; the 2013 comparison included $70.1m of debt-prepayment expenses. For the six-month period, 2013 included $160.6m of such expenses.
- Six-month operating cash flow was $519.1m, versus $252.8m. Investing cash outflow, principally ship construction and improvements, was $787.6m, versus $759.0m. Financing provided $275.5m; cash increased $7.0m to $63.5m.
Balance sheet, liquidity and capital commitments
- At June 30, 2014, cash was $63.5m and available revolving credit was $542.0m, for reported liquidity of $605.5m. Working capital deficit was $1,169.7m, including $610.6m of advance ticket sales, which management describes as substantially like deferred revenue rather than ordinary cash liabilities.
- Debt carrying value was approximately $3.50bn: $372.9m current and $3.13bn long-term. Total liabilities were $4.60bn and shareholders’ equity $2.71bn. Debt fair value, including current portion, was $3.63bn.
- Six-month property and equipment additions were $787.6m. Two Breakaway Plus ships were on order for delivery in fall 2015 and spring 2017, at a combined contract cost of approximately $1.9bn; export-credit financing was arranged for 80% of contract prices.
- After quarter-end, the company contracted for two additional Breakaway Plus ships, for delivery in spring 2018 and fall 2019, at a combined stated cost of approximately $2.2bn, also with 80% export-credit financing.
- The board authorized a three-year repurchase program of up to $500m. During Q2, 2.4m shares were repurchased for $79.2m, at an average $33.02 per share.
Outlook, commentary and risks
- No specific forward earnings or revenue guidance is provided in the supplied filing text. Management believed cash, expected operating cash flows, available borrowing and potential capital-market access would fund operations, debt service and capital expenditures and support covenant compliance for the next 12 months; it cautioned that future cash flows and financing are not assured.
- Management reported compliance with debt covenants at June 30, 2014. Debt agreements require minimum liquidity and impose leverage and other restrictions; ships and substantially all other property and equipment are pledged as collateral.
- Market exposures include interest rates, foreign exchange and fuel. A one-percentage-point rise in LIBOR was estimated to increase annual interest expense by approximately $17.3m. A 10% euro move was estimated to change the dollar value of unhedged ship payments by $183.9m. A 10% fuel-price rise was estimated to increase 2014 fuel expense by $14.6m, partly offset by estimated hedge-value gains of $7.5m.
- Fuel hedges covered approximately 76% of remaining 2014, 59% of 2015 and 37% of 2016 projected purchases. The company also identified substantial indebtedness, shipyard delivery and cost risks, consumer demand, competition, operating costs, safety incidents, regulation, weather, litigation and access to credit as risks.
- A tax-method change produced an $11.1m tax benefit during the first half, including a $6.2m non-recurring benefit excluded from Adjusted Net Income and Adjusted EPS. Q2 Adjusted Net Income was $121.1m and Adjusted EPS $0.58, compared with GAAP attributable income of $111.6m and diluted EPS of $0.54. These are non-GAAP measures and should not be viewed as substitutes for GAAP results.
- Two crew wage-related class actions remain disclosed; one earlier case resulted in approximately $100,000 in awards to six individuals, and Supreme Court review was denied in March 2014. The company says it cannot currently estimate the impact of the proceedings. Other claims are also pending, with additional reasonably possible losses not estimable from available information.
Most important facts for investors to verify
- Whether passenger demand, occupancy and Net Yield gains persist as new capacity is added.
- Funding, delivery schedules and total cash commitments for the four Breakaway Plus ships, alongside planned enhancements and other capital spending.
- Debt maturity and covenant requirements, refinancing needs, and the sustainability of management’s liquidity assessment given the working capital deficit.
- Sensitivity of earnings and cash flows to fuel prices, interest rates and euro movements, including hedge coverage and effectiveness.
- How much reported earnings improvement reflects operating performance versus the 2013 debt-prepayment costs and the 2014 tax benefit and other adjustments.
- Developments in crew litigation and other contingencies, for which potential additional losses are not clearly quantified in the filing.