Business context and reporting period
Norwegian Cruise Line Holdings Ltd. operates Norwegian Cruise Line, Oceania Cruises and Regent Seven Seas Cruises. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2018; comparisons are with the corresponding 2017 periods. The company operated 26 ships with approximately 54,400 berths. Results are seasonal and interim performance may not indicate full-year results.
Key financial metrics
Amounts below are in U.S. dollars; income-statement and cash-flow figures are rounded to millions.
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $1,858m | $1,652m | $4,674m | $4,147m |
| Operating income | $550m | $477m | $1,009m | $872m |
| Net income | $470m | $401m | $800m | $661m |
| Diluted EPS | $2.11 | $1.74 | $3.55 | $2.88 |
| Operating margin | 29.6% | 28.9% | 21.6% | 21.0% |
| Net margin | 25.3% | 24.3% | 17.1% | 15.9% |
| Adjusted EBITDA (non-GAAP) | $723m | $635m | $1,515m | $1,321m |
- Revenue and operating drivers: Q3 revenue rose 12.5%; passenger ticket revenue was $1,334m and onboard and other revenue was $524m. Capacity days increased 7.6%, primarily with Norwegian Bliss entering service; occupancy was 111.2%, versus 110.5%. Net yield increased 3.9% (4.0% constant currency). For nine months, revenue grew 12.7% and net yield rose 3.5% (3.1% constant currency).
- Costs and margins: Q3 cruise operating expense rose 10.8%; marketing, general and administrative expense increased to $235m from $202m, primarily due to higher incentive compensation. Adjusted net cruise cost excluding fuel per capacity day increased 2.1% in Q3 and 2.8% for nine months.
- Cash flow: Nine-month operating cash flow was $1,720m, compared with $1,360m. Investing cash outflow was $1,296m, including $1,362m of net additions to property and equipment. Financing cash outflow was $314m, including $464m of share repurchases. Cash increased $110m to $286m. Operating cash flow less property and equipment additions was approximately $358m, versus $230m in 2017.
- Debt and liquidity: At September 30, cash was $286m and $875m was available under the revolving facility, for stated liquidity of approximately $1.2bn. Balance-sheet debt was approximately $6.56bn, including $680m current and $5,875m long-term, up from approximately $6.31bn at December 31, 2017. Working capital was negative $2.3bn, including $1.65bn of advance ticket sales. Management said the business model and revolving facility support operations despite this deficit. The company reported covenant compliance.
Material changes versus prior comparable periods
- Q3 net income increased 17% and diluted EPS rose to $2.11 from $1.74; nine-month net income increased to $800m from $661m. Adjusted EBITDA increased 13.9% in Q3.
- Capacity growth, higher ticket pricing and occupancy supported revenue and yield. Norwegian Bliss was delivered in April 2018, adding approximately 8% fleet capacity.
- Debt and interest expense increased, reflecting new ship financing, Project Leonardo financing and higher LIBOR, partly offset by prior and current-period note redemptions. The company redeemed $135m of 4.75% notes due 2021 and recorded $6.3m of debt-extinguishment costs for the nine-month period.
- Share repurchases totaled $463.5m during the nine months. A three-year, $1bn repurchase program was approved in April; no repurchases occurred in Q3, and approximately $800m remained available at quarter-end.
Outlook, risks and unusual items
- The filing provides no specific near-term earnings or yield guidance. Planned fleet additions include Norwegian Encore in fall 2019, Seven Seas Splendor in winter 2020, and six Project Leonardo ships expected from 2022 through 2027. The eight ships have a combined stated contract price of approximately $8.4bn; export-credit financing is expected to fund about 80% for six ships, subject to conditions. Financing arrangements remain a condition for two later Leonardo orders.
- Anticipated capital expenditures were $0.3bn for the remainder of 2018, $1.4bn for 2019 and $0.9bn for 2020. Management stated that cash, expected operating inflows, revolving-facility availability and potential capital-market access should be sufficient for expected needs over the next 12 months, while cautioning that future cash flows and financing are not assured.
- Key exposures include fuel prices, foreign exchange, interest rates, consumer demand, shipbuilding delays, high indebtedness, collateral and debt covenants, and seasonal demand. A 1 percentage-point LIBOR increase was estimated to add about $18.4m to annual interest expense. A 10% euro move was estimated to change the dollar value of remaining foreign-currency ship payments by $0.3bn. Fuel hedges covered approximately 64% of remaining 2018, 48% of 2019 and 38% of 2020 projected purchases.
- The filing identifies a purported class action concerning marketing and sales of the Booksafe Travel Protection Plan; management believes it has meritorious defenses and does not expect a material impact. Other litigation outcomes are uncertain, though management did not expect aggregate reasonably possible losses to be material.
- In October 2018, the company discovered limited unauthorized access to certain employee email communications, some containing proprietary and personally identifiable information. It implemented additional safeguards and reported no believed material losses from the incident, but disclosed potential future operational, reputational and regulatory consequences of data breaches.
- Adoption of Topic 606 did not affect reported revenue or earnings, though it changed balance-sheet presentation. The company had not finalized its accounting for the U.S. tax-law changes; provisional estimates could change. Adoption of lease accounting was expected to increase both assets and liabilities.
Important facts for investors to verify
- Whether yield and occupancy gains persist as new capacity enters service, and how pricing develops across the three brands.
- Whether operating-cost growth per capacity day, fuel expense and interest expense remain controlled as the fleet and debt grow.
- How planned ship spending will be funded, including financing conditions for later Project Leonardo ships, and the effect on leverage and liquidity.
- The quality and seasonality of operating cash flow, including the contribution from advance ticket sales and the large working-capital deficit.
- Developments in the Booksafe litigation and the October 2018 email-access incident, including any subsequent claims, costs or regulatory action.
- Non-GAAP reconciliations and adjustments when assessing reported adjusted earnings; these measures are supplemental and are not substitutes for GAAP results or cash flow.