Norwegian Cruise Line Holdings Ltd. quarterly report, Q3 FY2015

Norwegian Cruise Line Holdings Ltd. — Q3 2015 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2015; comparisons are with the corresponding 2014 periods. The company operates cruise brands including Norwegian, Oceania and Regent. Results include Prestige, acquired in November 2014, so year-over-year comparisons reflect the enlarged fleet and business. The filing notes cruise demand is seasonal, historically strongest in summer.

Financial performance

Metric	Q3 2015	Q3 2014	Nine months 2015	Nine months 2014
Total revenue	$1,284.9 million	$907.0 million	$3,308.5 million	$2,337.0 million
Operating income	$306.8 million	$234.8 million	$584.6 million	$456.5 million
Net income attributable to NCLH	$251.8 million	$201.1 million	$388.8 million	$364.0 million
Diluted EPS	$1.09	$0.97	$1.69	$1.75
Adjusted EBITDA (non-GAAP)	$447.8 million	$326.7 million	$958.4 million	$685.4 million
Adjusted EPS (non-GAAP)	$1.35	$1.11	$2.37	$1.92

Q3 revenue rose 41.7%; management attributed the increase to 17.6% more Capacity Days, primarily from Prestige, and a 19.4% increase in Net Yield. On a constant-currency basis, Net Yield rose 22.3%.
Q3 operating margin was 23.9%, versus 25.9% a year earlier; net margin was 19.6%, versus 22.4%. Operating income increased, but expenses grew rapidly, including depreciation and amortization and marketing, general and administrative costs.
For the first nine months, revenue increased 41.6% and operating income 28.0%. Net income attributable to NCLH rose 6.8%, while diluted EPS declined from $1.75 to $1.69. The 2014 comparison included a $5.3 million non-recurring tax benefit and a lower weighted-average share count.
Nine-month passenger ticket revenue was $2,406.5 million and onboard and other revenue was $902.0 million. Average fuel price fell 13.5% to $550 per metric ton from $636.

Cash flow, balance sheet and liquidity

Nine-month operating cash flow was $973.5 million, compared with $700.7 million in 2014. Advance ticket sales contributed a $308.7 million cash-flow increase, versus $85.6 million in the prior period; timing of receipts and payments affected the comparison.
Investing cash outflow was $331.6 million, mainly for newbuild ships and improvements. Financing cash outflow was $496.6 million, primarily reflecting debt repayments. Cash increased by $145.4 million to $230.2 million.
At September 30, 2015, reported debt was approximately $5.684 billion, including $587.5 million current and $5.096 billion long term. Total liabilities were $7.828 billion and shareholders’ equity was $3.919 billion.
Liquidity was $855.2 million: $230.2 million cash plus the full $625.0 million available under the revolving facility. Working capital deficit was $2.0 billion, including $1.104 billion of advance ticket sales, which the company characterizes as deferred revenue rather than ordinary current cash obligations.
The company said it was in compliance with debt covenants and believed cash, operating inflows and available borrowing capacity would cover operations, debt service and capital expenditures for the next 12 months. Its ships and substantially all other property and equipment secure substantially all debt.

Material changes and notable items

Prestige acquisition-related capacity drove much of the growth, alongside Norwegian Getaway operating for all nine months. Acquisition-related depreciation, intangible amortization, integration and restructuring costs also increased expenses.
Q3 Net Cruise Cost per Capacity Day increased 20.0%; Adjusted Net Cruise Cost Excluding Fuel per Capacity Day rose 30.5%. For nine months, those measures increased 17.7% and 26.8%, respectively. These are non-GAAP operating measures.
Net interest expense increased to $49.8 million in Q3 from $32.3 million, and to $153.2 million for nine months from $95.3 million, primarily due to higher average debt following the Prestige acquisition.
Nine-month other expense was $35.6 million, compared with $3.3 million of other income in 2014, primarily reflecting fuel-hedge dedesignation and ineffectiveness and a foreign-currency collar fair-value loss.
The company reduced the Prestige contingent-consideration liability by $43.4 million to zero, recognizing the adjustment in marketing, general and administrative expense. It said it did not believe the 2015 revenue milestone would be met.
Q3 Adjusted Net Income of $311.1 million and Adjusted EPS of $1.35 exclude various items, including share-based compensation, severance, acquisition costs, deferred-revenue and intangible-amortization adjustments, derivative expense and contract-termination costs. These non-GAAP measures should not be viewed as substitutes for GAAP results.
CEO Kevin Sheehan resigned in January 2015; Frank Del Rio became CEO. Sheehan’s separation resulted in $13.4 million of severance expense, including $8.2 million from accelerated equity awards. Prestige-related restructuring expense was $11.6 million for the nine months, with $3.1 million accrued at quarter end.

Outlook, commitments and risks

The filing provides no specific earnings or revenue guidance. Management estimated capital expenditures of $0.9 billion for the remainder of 2015, $1.0 billion in 2016 and $1.1 billion in 2017; export-credit financing was in place for specified portions of ship-construction spending.
Norwegian Escape was delivered in October 2015. Three further Breakaway Plus ships were scheduled for delivery in 2017–2019, and Seven Seas Explorer was expected in summer 2016. The contractual-obligations table reported $3.821 billion of ship-construction commitments.
Key exposures include substantial indebtedness and debt-service needs, variable interest rates, euro-denominated ship payments, fuel-price volatility, integration of Prestige, seasonality, shipbuilding and operating disruptions, travel-security and health events, and litigation and regulatory matters. A 1 percentage-point rise in LIBOR was estimated to increase annual interest expense by about $24.1 million; a 10% euro move was estimated to change the U.S.-dollar value of remaining unhedged foreign-currency payments by $238.8 million.
Fuel swaps covered approximately 59% of projected 2015 and 2016 fuel purchases, declining to 8% for 2019. The company cautioned that hedges may not fully protect against rising fuel costs and could limit benefits from falling prices. Accumulated cash-flow-hedge losses included approximately $110.6 million expected to be reclassified into earnings over the next 12 months.
The Alaska Department of Environmental Conservation issued notices alleging past violations of visible-emission standards. The company was cooperating and did not expect a material financial impact. Other claims and lawsuits remained pending; the company could not estimate potential losses beyond amounts accrued where required.
The company disclosed cash-flow statement classification revisions for Q1 and Q2 2015: operating cash flow and investing outflow each require a $14.6 million and $18.5 million reclassification, respectively. It said these revisions were not material. A separate $82.0 million non-cash ship-financing presentation correction for 2014 was also planned and described as not material.
Management concluded disclosure controls were effective as of September 30, 2015 and reported no material change in internal control over financial reporting during the quarter.

Most important facts for investors to verify

Whether growth in ticket pricing and Net Yield persists after separating Prestige-related capacity additions, acquisition accounting adjustments and currency effects.
Whether operating-cost growth—especially per-Capacity-Day costs, marketing and administrative expense, and depreciation—continues to pressure margins.
Debt maturities, covenant headroom, access to the revolving facility and funding for the substantial shipbuilding program.
The timing and earnings effects of derivative losses and hedge reclassifications, together with exposure to fuel prices, LIBOR and euro movements.
The status and final presentation of the cash-flow statement revisions, and the assumptions behind management’s non-GAAP adjustments and outlook statements.