Norwegian Cruise Line Holdings Ltd. quarterly report, Q1 FY2016

Business context and reporting period

Norwegian Cruise Line Holdings Ltd. operates Norwegian Cruise Line, Oceania Cruises and Regent Seven Seas Cruises. This unaudited Form 10-Q covers the three months ended March 31, 2016, compared with the same quarter of 2015. Results are seasonal and interim performance is not necessarily indicative of full-year results.

Financial and operating performance

Amounts are in U.S. dollars; financial amounts are in millions unless stated otherwise.

• Capacity Days increased 12.2%, primarily due to Norwegian Escape entering service in October 2015. Net Yield rose 5.5% to $210.03; on a constant-currency basis it rose 6.7%. Occupancy was 107.4%, compared with 106.0%.
• Passenger ticket revenue was $740.1 million and onboard and other revenue was $337.5 million. Fuel expense fell to $81.7 million from $87.4 million, as average fuel price declined 16.7% to $438 per metric ton. Marketing, general and administrative expense rose to $180.6 million from $154.2 million.
• Interest expense increased to $59.8 million from $51.0 million, reflecting higher LIBOR rates and higher average debt, partly associated with Norwegian Escape. Other income was $2.8 million, versus expense of $30.1 million, principally reflecting derivative valuation effects.
• Net cash used in investing was $133.2 million, mainly for ship construction, improvements and shoreside projects. Net cash used in financing was $158.0 million, including debt repayments and $50.0 million of share repurchases. Cash increased $38.9 million during the quarter.

Debt, liquidity and capital commitments

• Balance-sheet debt was approximately $6.30 billion, including $630.0 million current and $5.67 billion long-term. Quarter-end liquidity was $691.9 million: $154.9 million cash and $537.0 million available under the revolving facility.
• Working capital deficit was $2.1 billion, including $1.2 billion of advance ticket sales, which the company describes as substantially more like deferred revenue than current cash liabilities. Management said cash, expected operating inflows, available revolver capacity and potential capital-market access should be sufficient for operations, debt service, capital expenditure and covenant compliance over the next 12 months; it cautioned future financing and cash flows are not assured.
• Contractual obligations totaled $11.58 billion, including $6.40 billion of long-term debt obligations, $3.69 billion of ship construction contracts and $895.9 million of interest. Anticipated capital expenditures were $0.9 billion for the remainder of 2016 and $1.3 billion in each of 2017 and 2018; export credit financing was in place for specified portions of shipbuilding costs.
• The company reported compliance with debt covenants at March 31, 2016. Ships and substantially all other property and equipment are pledged as debt collateral. The revolving credit facility was $625 million and matured May 24, 2018.

Material changes, outlook and risks

• Management attributed revenue growth to increased capacity and higher ticket pricing and onboard revenue. Net Cruise Cost per Capacity Day decreased 1.4%, but Adjusted Net Cruise Cost Excluding Fuel per Capacity Day increased 1.1%, reflecting higher costs including marketing and administrative expense.
• The company had 23 ships and approximately 45,800 berths, including Sirena, which joined the Oceania fleet in April 2016. Five additional ships were on order for delivery through 2020, expected to raise capacity to approximately 59,300 berths. No specific full-year earnings or revenue guidance is provided in the supplied filing text.
• Newbuild commitments include three Breakaway Plus ships with a combined contract price of approximately $3.0 billion and two Explorer Class ships with an original combined contract price of approximately $870.6 million. Export credit financing was arranged for 80% of these contract prices. A separate facility provides up to $498.2 million for 80% of the second Explorer ship contract and related export-credit premium.
• Key disclosed exposures include substantial indebtedness, interest-rate and fuel-price movements, euro exchange rates, consumer demand, shipbuilding delays, safety and security events, epidemics, litigation, and regulatory and environmental changes. A one-percentage-point increase in LIBOR was estimated to increase annual interest expense by approximately $30.6 million. A 10% euro move was estimated to change the dollar value of unhedged remaining payments by $70.6 million.
• Fuel derivatives covered approximately 92%, 82%, 55% and 50% of projected fuel purchases for 2016–2019, respectively. A 10% increase in weighted-average fuel price was estimated to add $16 million to anticipated 2016 fuel expense, partly offset by an estimated $10 million increase in fuel-swap fair value. Foreign-currency payments not hedged totaled approximately €620.1 million.
• Pending claims and lawsuits are described as arising in the normal course of business; most are insured. The company could not estimate potential losses beyond amounts accrued for probable, estimable losses. It had a $2.5 million restructuring accrual at quarter-end.
• The 2015 comparative cash-flow statement was revised for classification of property-and-equipment payments between operating and investing activities; management deemed the revision immaterial. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported for the quarter.

Most important facts for investors to verify

• Whether capacity additions and higher ticket pricing sustain yield growth, and whether cost increases—especially marketing and non-fuel costs—moderate.
• Liquidity and covenant headroom in light of the working-capital deficit, substantial debt, pledged assets and large shipbuilding commitments.
• Actual ship delivery timing, remaining project funding needs and the availability and terms of export-credit financing.
• Derivative effects on reported earnings and comprehensive income, hedge coverage, and sensitivity to fuel, foreign-exchange and interest-rate changes.
• Whether litigation, contractual contingencies or the disclosed cash-flow classification revision result in material developments.