Norwegian Cruise Line Holdings Ltd. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015; compared with the corresponding 2014 periods. Amounts below are in U.S. dollars. The November 2014 Prestige acquisition materially expanded the company, so year-over-year comparisons include additional capacity and are not fully like-for-like.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total revenue | $1,085.4 million | $765.9 million | $2,023.6 million | $1,430.0 million |
| Operating income | $217.4 million | $148.6 million | $277.7 million | $221.7 million |
| Net income attributable to NCLH | $158.5 million | $111.6 million | $137.0 million | $162.9 million |
| Diluted EPS | $0.69 | $0.54 | $0.60 | $0.78 |
| Adjusted EBITDA (non-GAAP) | $313.4 million | $219.4 million | $510.7 million | $358.7 million |
| Adjusted net income / diluted EPS (non-GAAP) | $171.6 million / $0.75 | $121.1 million / $0.58 | $234.2 million / $1.02 | $170.7 million / $0.81 |
- Q2 revenue grew 41.7%; management attributed the increase in net revenue to 18.2% more Capacity Days, primarily from Prestige, and 17.2% higher Net Yield. Higher ticket pricing and onboard revenue supported yields.
- Q2 operating margin was 20.0%, versus 19.4%; net margin was 14.6%, versus 14.8%. For the six-month period, operating margin was 13.7%, versus 15.5%, and net margin was 6.8%, versus 11.5%.
- Six-month revenue rose 41.5%, but attributable net income fell to $137.0 million from $162.9 million. Higher interest expense, other expenses including derivative items, and the prior-year tax benefit contributed to the decline. 2014’s six-month tax benefit included a non-recurring $6.7 million benefit.
- Q2 Net Yield increased 17.2% as reported, or 19.2% on a constant-currency basis. Q2 occupancy was 108.7%, versus 110.4%; Capacity Days rose 18.2%.
Cash flow, debt and liquidity
- Six-month operating cash flow was $692.1 million, up from $519.1 million. The increase included $412.6 million from advance ticket sales, compared with $194.9 million in 2014; net income was lower.
- Investing cash outflow was $186.5 million, versus $787.6 million, reflecting different timing of ship deliveries and related spending. Financing cash outflow was $417.5 million, versus $275.5 million of inflow in 2014, primarily due to debt repayments.
- Cash was $173.0 million at June 30, up from $84.8 million at year-end 2014. The company reported $798.0 million of liquidity, including the full $625.0 million revolving facility.
- Long-term debt, including its current portion, had a carrying value of approximately $5.764 billion. Current and long-term debt were $585.9 million and $5.178 billion, respectively. The working-capital deficit was $2.1 billion, including $1.2 billion of advance ticket sales, which management characterized as substantially more like deferred revenue than current cash liabilities.
- Management stated that cash, expected operating inflows, available credit and access to financing should be sufficient for the next 12 months; it cautioned that future cash flows and financing are not assured. The company said it complied with debt covenants at June 30. Ships and substantially all property and equipment secure debt.
Material changes, outlook and risks
- Prestige acquisition and unusual items: Q2 results included a $43.4 million six-month fair-value reduction of acquisition contingent consideration, recorded as a benefit in marketing, general and administrative expense. The liability was reduced to zero because management did not expect the revenue target to be met. Adjusted results exclude or adjust for this and other acquisition-related items, including amortization of acquired intangibles and deferred-revenue fair-value adjustments.
- Q2 interest expense rose to $52.4 million from $31.9 million, primarily due to higher average debt following the acquisition. Six-month interest expense was $103.4 million, versus $63.0 million.
- Following the CEO’s January 2015 resignation and appointment of Frank Del Rio, the company recorded $13.4 million of severance expense, including $8.2 million from accelerated equity vesting. Prestige integration restructuring expense was $11.2 million for the six months; the June 30 restructuring accrual was $7.2 million.
- Capital commitments: Four Breakaway Plus ships were on order, with a combined contract price of approximately $3.5 billion, plus the Seven Seas Explorer at approximately $382.3 million. Export-credit financing was in place for 80% of contract prices. Anticipated capital expenditures were $1.0 billion for the remainder of 2015, $0.9 billion in 2016 and $1.1 billion in 2017; some ship-related financing was arranged.
- Market exposures: A 1 percentage-point rise in LIBOR was estimated to increase annual interest expense by about $26.0 million. A 10% euro move was estimated to change the dollar value of unhedged remaining euro payments by $223.4 million. Fuel hedges covered approximately 48%, 54%, 44% and 17% of projected 2015–2018 fuel purchases, respectively; a 10% increase in weighted-average fuel prices was estimated to add $15.9 million to remaining 2015 fuel expense before a projected $4.7 million hedge fair-value offset.
- Risks include fuel and foreign-exchange volatility, substantial indebtedness and covenant restrictions, shipbuilding delays or contract breaches, acquisition integration, seasonality, travel disruptions, and litigation or regulatory matters. The company was cooperating with Alaska authorities regarding alleged visible-emission violations and did not expect a material impact. Other litigation outcomes and potential losses beyond accrued amounts could not be estimated.
- No specific earnings or revenue guidance was provided in the supplied filing text. The company noted that cruise demand is seasonal and interim results are not necessarily indicative of full-year results.
- The 2014 cash-flow statement will be revised to reduce both capital expenditures and debt proceeds by $82.0 million for a non-cash ship-financing transaction; management said the revision was not material. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- How much of Q2’s yield improvement reflects pricing and sustainable demand versus acquisition mix, capacity changes and foreign exchange.
- Whether post-acquisition cost growth, including the increase in adjusted net cruise cost excluding fuel per Capacity Day, moderates as integration proceeds.
- Debt maturities, interest-rate exposure, covenant headroom and the availability of financing for the substantial shipbuilding program.
- The assumptions behind acquisition-related adjustments and non-GAAP measures, particularly the contingent-consideration reversal, deferred revenue and acquired-intangible amortization.
- Actual capital spending, ship delivery schedules, hedge coverage and outcomes of the Alaska notices and other legal or regulatory matters.