Norwegian Cruise Line Holdings Ltd. — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. This is an annual report, not a standalone Q4 filing; unaudited quarterly figures are also presented. The 2013 results include the IPO and corporate reorganization, while comparative periods largely reflect NCL Corporation Ltd.
Business context and financial performance
The company operates Norwegian Cruise Line, a global cruise business built around its “Freestyle Cruising” offering. Norwegian Breakaway entered service in 2013, increasing capacity; Norwegian Getaway was delivered in January 2014. Onboard and other revenue represented 29.4% of 2013 revenue.
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Total revenue | $2,570.3 million | $2,276.2 million |
| Operating income | $395.9 million | $357.1 million |
| Operating margin | 15.4% | 15.7% |
| Net income attributable to NCLH | $101.7 million | $168.6 million |
| Diluted EPS | $0.49 | $0.94 |
| Adjusted EBITDA (non-GAAP) | $647.2 million | $555.6 million |
| Net cash from operating activities | $475.3 million | $398.6 million |
| Capital expenditures and other investing outflows | $894.9 million | $303.8 million |
| Total debt at year-end | $3,127.8 million | $2,985.4 million |
Q4 2013: Revenue was $600.3 million versus $503.2 million in Q4 2012; operating income was $61.4 million versus $49.5 million; and net income attributable to NCLH was $36.1 million versus $1.1 million. Q4 figures are unaudited.
Changes versus prior comparable period
- Full-year revenue rose 12.9%; Net Revenue, a non-GAAP measure, rose 13.4%, reflecting 8.8% more Capacity Days and a 4.3% increase in Net Yield. The capacity increase primarily reflected Norwegian Breakaway.
- Operating income increased 10.9%, but operating margin edged down from 15.7% to 15.4%. Net Yield rose to $183.70 per Capacity Day from $176.18.
- GAAP net income fell despite higher operating income. Net interest expense increased to $282.6 million from $189.9 million, primarily due to $160.6 million of debt-prepayment-related expense; income tax expense also rose to $11.8 million from $0.7 million.
- Adjusted EBITDA increased 16.5%. Management reported 2013 Adjusted Net Income of $295.8 million and Adjusted EPS of $1.41, after excluding specified debt-prepayment, compensation, reorganization and offering-related charges. These are non-GAAP measures and are not substitutes for GAAP results.
- Occupancy was 109.1%, compared with 107.6%; occupancy above 100% reflects some cabins carrying more than double occupancy.
Cash, debt, liquidity and commitments
- Year-end cash was $56.5 million, with $394.0 million available on the revolving facility, for stated liquidity of $450.5 million. The company reported a working-capital deficit of $892.6 million, including $411.8 million of advance ticket sales, which management characterizes as deferred revenue collected before sailing.
- Operating cash flow was $475.3 million; investing activities used $894.9 million, mainly for ship construction and delivery and other improvements; financing activities provided $430.5 million. Cash ended the year at $56.5 million.
- Total debt was $3.13 billion, up from $2.99 billion. Debt agreements are secured by ships and substantially all other property and equipment and include liquidity, leverage and other covenants. The company stated it was in compliance at year-end.
- At year-end, 62% of debt was variable-rate after swaps. A 1 percentage-point rise in LIBOR was estimated to increase annual interest expense by approximately $19.4 million, excluding capitalized interest.
- Contractual obligations totaled $6.48 billion, including $2.59 billion of ship-construction contracts and $378.5 million of scheduled interest. Planned 2014–2016 business-enhancement capital expenditures were $98 million, $81 million and $92 million, respectively, with scrubber spending additional.
Management outlook, risks and unusual items
- Management said cash on hand, expected operating cash flows, available revolving borrowings and potential financing were expected to fund operations, debt service and capital expenditures over the following 12 months. No specific earnings or revenue guidance is provided in the filing.
- Two further ships, Norwegian Escape and Norwegian Bliss, were scheduled for delivery in Q4 2015 and Q1 2017. Their combined contract price was approximately $1.9 billion, with export-credit financing stated to cover 80% of the price. Norwegian Getaway was delivered in January 2014, with financing for 90% of its contract price.
- Fuel expense was $303.4 million in 2013; the average fuel price increased 1.7% to $675 per metric ton. The company had hedged approximately 65% of projected 2014 fuel purchases, 53% of 2015 and 15% of 2016.
- Principal risks include substantial debt and covenant constraints; demand, pricing and occupancy sensitivity to economic conditions and industry capacity; fuel and interest-rate volatility; shipbuilding delays and high capital needs; safety incidents, negative publicity and insurance exposure; regulatory and environmental costs; and the possibility of losing the Section 883 U.S. tax exemption if ownership tests are not met.
- Two crew-member wage-related class actions remained unresolved; the filing states the potential impact could not be estimated. In one case, an appellate court affirmed denial of class certification and an approximately $100,000 award to six individual plaintiffs; a petition for Supreme Court review was pending.
- The company does not currently intend to pay ordinary-share dividends. Sponsors held 62.7% of shares at year-end, and the company used NASDAQ controlled-company governance exemptions.
Important facts for investors to verify
- Reconcile the $160.6 million debt-prepayment expense and other adjustments behind the large gap between GAAP and adjusted earnings; review the company’s non-GAAP definitions and reconciliations.
- Assess whether operating cash generation can support debt service and the substantial shipbuilding and enhancement commitments, particularly given low cash on hand and the working-capital deficit.
- Review debt maturities, variable-rate exposure, revolving-facility availability and covenant headroom; confirm continued compliance and financing access.
- Track bookings, ticket pricing, occupancy and onboard spending against the capacity added by new ships and the company’s 2014–2017 delivery schedule.
- Evaluate fuel, foreign-exchange and tax exposures, including hedge coverage and the assumptions required to preserve the Section 883 exemption; review the status of litigation and other contingencies.