Business context and reporting period
Norwegian Cruise Line Holdings Ltd. (NCLH) filed this Form 10-K for the fiscal year ended December 31, 2015. It operates Norwegian, Oceania Cruises and Regent Seven Seas Cruises. The company reported 22 ships, about 45,000 berths and itineraries to more than 510 destinations. The 2015 comparison with 2014 is affected by the November 2014 acquisition of Prestige: 2014 includes Prestige only from November 19, while 2015 includes a full year.
Financial results and key metrics
| Metric | 2015 | 2014 |
|---|---|---|
| Total revenue | $4.345 billion | $3.126 billion |
| Operating income | $702.5 million | $502.9 million |
| Net income attributable to NCLH | $427.1 million | $338.4 million |
| Diluted EPS | $1.86 | $1.62 |
| Net cash provided by operating activities | $1.041 billion | $635.6 million |
| Total debt, including current portion | $6.398 billion | $6.080 billion |
- Revenue increased 39.0%; operating income increased 39.7%. Operating margin was 16.2%, compared with 16.1%; net margin was 9.8%, compared with 10.9%.
- Net Revenue, a non-GAAP measure, rose 37.9% to $3.307 billion. Capacity Days increased 17.5% and Net Yield increased 17.4% as reported (19.4% on a constant-currency basis). Occupancy was 109.0%, essentially unchanged.
- Adjusted EBITDA was $1.227 billion, up 39.8%; Adjusted Net Income was $662.7 million and Adjusted EPS was $2.88. Adjusted Net Income included $235.5 million of adjustments, including acquisition-related, noncash compensation and other items.
- Total cruise operating expense rose 36.4%. Fuel expense was $358.7 million; average fuel price fell 13.8% to $539 per metric ton. Fuel represented 13.5% of cruise operating expense, down from 16.8%.
- Cash and cash equivalents were $115.9 million, with $550 million available on the revolving facility. Working capital deficit was $2.0 billion, including $1.0 billion of advance ticket sales.
- Cash used in investing activities was $1.206 billion, mainly for ship construction, Norwegian Escape and improvements. Financing activities provided $196.2 million. The company repurchased $107.3 million of shares during 2015.
Fourth-quarter results
In Q4 2015, revenue was $1.037 billion versus $788.9 million in Q4 2014; operating income was $117.9 million versus $46.4 million; and net income attributable to NCLH was $38.3 million versus a $25.6 million loss. Diluted EPS was $0.17 versus a loss of $0.12.
Material changes versus the prior comparable period
- Growth reflects both a full year of Prestige results and additional capacity, including Norwegian Escape, delivered in October 2015, and a full year of Norwegian Getaway. Thus, reported annual growth is not a like-for-like measure of organic performance.
- Higher ticket pricing and onboard revenue supported yield growth. Onboard and other revenue was 28% of total revenue, compared with 30% in 2014.
- Costs increased with capacity and integration. Net Cruise Cost per Capacity Day rose 14.0%; Adjusted Net Cruise Cost Excluding Fuel per Capacity Day rose 24.0%, primarily reflecting higher overhead, acquisition-related, restructuring and crew costs.
- Net interest expense increased to $221.9 million from $151.8 million, mainly due to higher average debt following the Prestige acquisition. Other expense increased to $46.7 million, including fuel-hedge accounting effects and a $26.2 million foreign-exchange collar fair-value loss.
- The company recognized a $43.4 million reduction in contingent consideration expense after determining that Prestige’s 2015 revenue milestone was not met. Acquisition accounting also affected revenue and amortization; management’s adjusted measures exclude various such items.
Outlook, management commentary, risks and unusual items
- Management stated that cash on hand, expected operating cash flow and available borrowing capacity should fund operations, debt service and planned capital expenditures and maintain covenant compliance over the next 12 months; it cautioned that future financing and cash flows are not assured.
- Anticipated capital expenditures were $1.0 billion in 2016, $1.1 billion in 2017 and $1.2 billion in 2018. Export-credit financing was in place for approximately $0.5 billion, $0.6 billion and $0.7 billion, respectively, of ship-construction expenditures.
- Fleet plans included Seven Seas Explorer for summer 2016, Sirena entering service in spring 2016 after refurbishment, and three Breakaway Plus ships scheduled for 2017, 2018 and 2019. NCLH also described a $400 million Norwegian Edge guest-experience program and a $125 million Regent fleet renovation program.
- Principal risks include substantial secured debt and restrictive covenants, large newbuild commitments, fuel and interest-rate volatility, foreign-exchange exposure, seasonality, economic and geopolitical disruptions, ship incidents, cyber and health risks, regulatory and environmental costs, and reliance on travel-agent and third-party channels.
- At year-end, 56% of debt was fixed-rate and 44% variable-rate, including swaps; a one-percentage-point increase in LIBOR was estimated to raise annual interest expense by about $28.2 million. A 10% euro move was estimated to change the dollar value of unhedged construction payments by $146.1 million. Fuel hedges covered approximately 60% of projected 2016 fuel purchases.
- The Alaska Department of Environmental Conservation issued notices alleging violations of visible-emission standards. NCLH said it was cooperating and did not expect a material financial impact. Other litigation exposure beyond accrued probable losses could not be estimated from the information then available.
- NCLH’s U.S. shipping-income tax position depends on continued qualification for the Section 883 exemption. The filing also disclosed $11.2 million of unrecognized tax benefits. The company reported effective disclosure controls and internal control over financial reporting; its auditor issued unqualified opinions.
Most important facts for investors to verify
- Separate acquisition-driven growth from underlying performance; review Prestige’s full-year pro forma comparisons and constant-currency yield and cost measures.
- Assess the quality and repeatability of operating cash flow, including the $218.3 million increase in advance ticket sales, against heavy investment and scheduled debt payments.
- Review debt maturities, collateral and covenant headroom alongside roughly $3.0 billion of ship-construction commitments and planned capital spending.
- Examine the $235.5 million of 2015 Adjusted Net Income adjustments and the treatment of acquisition accounting, restructuring, compensation and derivative items.
- Monitor fuel, foreign-exchange and interest-rate hedges, the Alaska emissions matter, and the company’s continuing eligibility for the Section 883 tax exemption.