Norwegian Cruise Line Holdings Ltd. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; comparisons are with Q1 2014 unless noted. The company operates Norwegian Cruise Line, Oceania Cruises and Regent Seven Seas. Results include Prestige Cruises Holdings, acquired in November 2014, so year-over-year comparisons reflect a larger business. Amounts below are U.S. dollars.
Financial performance and position
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Total revenue | $938.2 million | $664.0 million |
| Operating income | $60.3 million | $73.1 million |
| Operating margin | 6.4% | 11.0% |
| Net income (loss) attributable to NCLH | $(21.5) million | $51.3 million |
| Diluted EPS | $(0.10) | $0.24 |
| Adjusted EBITDA (non-GAAP) | $197.3 million | $139.3 million |
| Adjusted Net Income / Adjusted EPS (non-GAAP) | $62.6 million / $0.27 | $49.6 million / $0.23 |
Revenue rose 41.3%. Management attributed higher Net Revenue to 22.8% more Capacity Days, principally from the Prestige acquisition and Norwegian Getaway operating for the full quarter, and a 15.4% increase in Net Yield. Occupancy was 106.0%, versus 106.2%. Fuel expense fell to $87.4 million from $79.0 million in absolute terms, but the average fuel price declined 18.2% to $526 per metric ton; fuel was 9.3% of revenue versus 11.9%.
Operating income fell despite revenue growth: cruise operating costs rose 39.9%, while other operating expenses increased 75.2%, including acquisition-related costs, restructuring and severance, intangible amortization, and depreciation on Prestige ships. Net Cruise Cost per Capacity Day increased 22.3%. Net interest expense rose to $51.0 million from $31.2 million, primarily due to greater average debt following the acquisition. Other expense was $30.1 million, mainly from a foreign-exchange collar that did not qualify for hedge accounting. Adjusted results exclude specified items; the company’s reconciliation includes a $21.2 million deferred-revenue adjustment, $18.1 million intangible amortization, $29.0 million derivative adjustment, severance, share-based compensation and other adjustments.
Cash flow: Operating activities provided $299.2 million, compared with $228.1 million. The increase included $255.6 million from advance ticket sales. Investing activities used $58.6 million, versus $746.3 million, mainly reflecting lower ship-construction and delivery payments than the prior-year quarter. Financing activities used $204.1 million, compared with $526.5 million provided in Q1 2014; 2015 included $477.2 million of debt repayments and $224.0 million of new debt proceeds. Cash increased $36.6 million to $121.4 million.
Liquidity and debt: Reported liquidity was $685.4 million: $121.4 million cash and $564.0 million available under the $625 million revolving facility. Working capital deficit was $2.0 billion, including $1.1 billion in advance ticket sales, which management characterized as deferred revenue-like. Long-term debt, including its current portion, was approximately $6.0 billion; total liabilities were $8.1 billion. Management said the company was in compliance with debt covenants and believed cash, operating inflows and available financing would cover obligations and capital needs for the next 12 months. Ships and substantially all property and equipment secure debt.
Material changes and unusual items
- The Prestige acquisition materially increased capacity, debt, depreciation and amortization, and integration and restructuring costs. A contingent consideration liability fell from $43.4 million to $34.3 million after a $9.1 million fair-value adjustment recorded in expense.
- Net loss included $13.4 million of severance expense related to former CEO Kevin Sheehan’s departure, including $8.2 million from accelerated equity vesting. Frank J. Del Rio became CEO on January 8, 2015.
- Other comprehensive loss was $81.8 million, primarily reflecting a $103.8 million unrealized loss on cash-flow hedges, partly offset by amounts reclassified into earnings. This reduced accumulated other comprehensive equity to a loss of $324.4 million.
- The 2014 tax benefit included a $6.7 million non-recurring benefit; Q1 2015 recorded $0.7 million tax expense.
- Selling shareholders sold 12.5 million shares in a secondary offering; NCLH received no proceeds. No shares were repurchased in the quarter; $418.0 million remained under the repurchase authorization.
Outlook, commitments and risks
No specific earnings or revenue guidance was provided. Management cited anticipated capital expenditures of $1.1 billion for the remainder of 2015, $0.9 billion in 2016 and $1.0 billion in 2017; export-credit financing was in place for specified ship-construction amounts of $0.7 billion, $0.5 billion and $0.6 billion, respectively. Ship-construction commitments totaled approximately $3.7 billion, including four Breakaway Plus ships and the Seven Seas Explorer; financing was arranged for 80% of the stated contract prices. The filing cautions that a shipbuilding breach or cancellation could cause forfeited payments, claims or impairment losses.
Key exposures include substantial indebtedness and collateral/covenant restrictions; fuel-price, foreign-exchange and interest-rate volatility; acquisition integration and anticipated benefits; seasonal demand; shipbuilding and operational disruptions; travel-security incidents and outbreaks; litigation; and tax and environmental regulation. At quarter-end, 46% of debt was variable-rate; a one-percentage-point rise in LIBOR was estimated to increase annual interest expense by $27.5 million. A 10% euro move was estimated to change the dollar value of unhedged remaining ship payments by $224.6 million. Fuel hedges covered approximately 74% of projected 2015 purchases; a 10% fuel-price increase was estimated to raise 2015 fuel expense by $19.4 million, partly offset by an estimated $11.8 million increase in fuel-swap fair value. The company reported no material changes to the risk factors in its 2014 Form 10-K. It also reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- How much of the reported growth and Adjusted EBITDA improvement reflects acquired capacity, and whether the acquired business delivers expected benefits.
- The drivers and persistence of higher operating costs, Net Cruise Cost per Capacity Day, and the gap between GAAP loss and non-GAAP adjusted profit.
- Debt maturities, covenant headroom, refinancing needs, and the funding plan for substantial shipbuilding and other capital commitments.
- The assumptions and potential earnings or cash-flow effects of fuel, foreign-currency and interest-rate hedges, including the large hedge-related accumulated loss.
- The actual resolution and financial exposure from litigation, acquisition-related liabilities, restructuring and other contingencies.