Norwegian Cruise Line Holdings Ltd. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Unaudited results; U.S. dollars. The company operates Norwegian Cruise Line, Oceania Cruises and Regent Seven Seas Cruises, with 26 ships at period-end. Norwegian Bliss was delivered in April.
Financial performance
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Revenue | $1.522bn | $1.344bn | $2.816bn | $2.495bn |
| Operating income | $292.2m | $275.1m | $459.2m | $394.8m |
| Net income | $226.7m | $198.5m | $329.8m | $260.4m |
| Diluted EPS | $1.01 | $0.87 | $1.45 | $1.14 |
| Adjusted EBITDA | $465.2m | $424.9m | $791.6m | $685.5m |
| Adjusted EPS | $1.21 | $1.02 | $1.81 | $1.42 |
Q2 revenue rose 13.2%; operating margin was 19.2% versus 20.5%, while net margin was 14.9% versus 14.8%. For the first half, revenue increased 12.9%; operating margin was 16.3% versus 15.8%, and net margin was 11.7% versus 10.4%. Q2 net yield increased 4.7% (4.0% constant currency); capacity days increased 8.6%, and occupancy was 109.0% versus 107.8%. First-half net yield rose 3.4% (2.6% constant currency) on 9.7% more capacity days.
Q2 cost pressures included higher maintenance, repairs and dry-dock expense and increased marketing and administrative costs, including incentive compensation. Net cruise cost per capacity day rose 7.6% (6.7% constant currency) in Q2; adjusted net cruise cost excluding fuel per capacity day rose 8.4% (7.4% constant currency). First-half increases were 2.8% and 3.1%, respectively. Interest expense increased to $73.0m in Q2 and $132.7m for the half, reflecting new ship/project debt and higher LIBOR, partly offset by debt redemptions.
Cash flow, liquidity and debt
First-half operating cash flow was $1.254bn, up from $919.7m, with advance ticket sales contributing a $612.3m increase in operating cash flow. Investing cash outflow was $1.186bn, mainly for ship deliveries, construction and improvements. Financing cash outflow was $38.8m and included $463.5m of share repurchases. Cash ended June at $205.0m, versus $176.2m at year-end 2017.
At June 30, liquidity was $891.0m, including $686.0m available on the revolving facility. The $2.6bn working capital deficit included $2.0bn of advance ticket sales, which management characterizes as substantially similar to deferred revenue. Current and long-term debt totaled approximately $6.829bn; total liabilities were $9.643bn. The company reported compliance with debt covenants. About 70% of debt was fixed-rate and 30% variable-rate, including swaps; a one-percentage-point LIBOR increase was estimated to add $20.9m to annual interest expense.
Material developments, outlook and risks
- Norwegian Bliss added capacity in Q2. The company expected $0.3bn of capital expenditures for the remainder of 2018, $1.3bn in 2019 and $0.9bn in 2020. Eight ships on order had an aggregate contract price of about $8.4bn; export-credit financing was expected to cover about 80% of the price for six ships, subject to conditions. Two additional Leonardo ship orders for 2026 and 2027 were confirmed after quarter-end, contingent on committed financing.
- The company did not provide specific earnings or revenue guidance in the supplied filing text. It stated that cash on hand, expected operating cash flows and available borrowing capacity should be sufficient for operations, debt service and planned capital needs over the next 12 months, while cautioning that future cash flows and financing are not assured.
- In April, the company issued an $850m fixed-rate term loan at 3.92%, maturing in 2030, to finance Norwegian Bliss. It also redeemed $135m of 4.750% notes due 2021, recording a $6.3m debt-extinguishment charge. A $1.0bn, three-year share repurchase program was approved in April; $200m remained available under the program at June 30.
- Fuel hedges covered approximately 64% of projected remaining 2018 purchases, 49% for 2019 and 26% for 2020. A 10% rise in weighted-average fuel prices was estimated to increase 2018 fuel expense by $22.3m, partly offset by a projected $11.4m increase in fuel-swap fair value. Unhedged euro-denominated ship payments were about €3.0bn; a 10% euro move was estimated to change their U.S.-dollar value by $0.3bn.
- Risks highlighted include consumer demand and economic conditions, fuel and currency volatility, indebtedness and collateral/covenant restrictions, shipbuilding delays or cancellation costs, international operations, safety and security incidents, and evolving data-privacy rules including GDPR. Litigation was described as ordinary-course; management did not expect reasonably possible aggregate losses to be material, but could not estimate potential losses beyond accrued amounts.
- Topic 606 was adopted January 1, 2018 using the modified retrospective method. Management reported no effect on revenue or earnings; it changed balance-sheet presentation of contract costs and advance ticket sales. Interim results are seasonal and may not indicate full-year results.
Key facts for investors to verify
- Progress, delivery timing and financing conditions for the substantial newbuild program, and the extent to which ship financing covers future commitments.
- Whether operating cash flow remains supported by advance bookings, and how advance ticket liabilities and working capital evolve across seasonal periods.
- Cost trends per capacity day, especially maintenance/dry-dock, marketing and incentive compensation, alongside yield and occupancy growth.
- Debt levels, floating-rate exposure, covenant headroom and the impact of refinancing and ship-delivery funding on interest costs.
- Fuel and euro hedge coverage, effectiveness and cash-flow sensitivity, as well as compliance costs and exposure under data-privacy regulations.