Business context and reporting period
Norwegian Cruise Line Holdings Ltd. (NCLH) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2020. The company operates Norwegian Cruise Line, Oceania Cruises and Regent Seven Seas Cruises. Due to COVID-19, its global voyages were suspended; all guests had disembarked by March 28, 2020. The suspension was extended through December 31, 2020, with additional brand- and ship-specific cancellations extending into 2021.
Unless noted otherwise, financial figures below are in millions of U.S. dollars. The company had 28 ships and approximately 59,150 berths at quarter-end.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $6.5 | $1,913.9 | $1,270.3 | $4,981.8 |
| Operating income (loss) | $(517.8) | $511.7 | $(2,937.3) | $978.7 |
| Net income (loss) | $(677.4) | $450.6 | $(3,273.6) | $808.9 |
| Diluted EPS | $(2.50) | $2.09 | $(13.55) | $3.73 |
| Adjusted EBITDA (non-GAAP) | $(313.8) | $693.9 | $(691.5) | $1,551.7 |
| Net cash from (used in) operating activities | Not separately presented for Q3 | $(1,918.6) | $1,447.0 |
For the nine-month period, impairment expense was $1,607.8, primarily from goodwill and trade-name write-downs; the company also recorded a $25.5 impairment of unfinished projects within depreciation and amortization. Interest expense rose to $323.1 from $199.7 for the nine months, reflecting additional debt at higher rates, partly offset by lower LIBOR. Cash capital expenditures, net, were $873.1 for the period.
At September 30, 2020, cash and cash equivalents were $2,356.2, versus $252.9 at December 31, 2019. Current assets were $2,652.5 and current liabilities $2,334.3. Current and long-term debt totaled approximately $10,937.5, compared with approximately $6,801.7 at year-end 2019; shareholders’ equity was $4,087.8, down from $6,515.6.
Material changes and financing
- Nine-month revenue fell 74.5% year over year; Q3 revenue fell 99.7%, reflecting cancelled sailings. Capacity days for the nine months declined 71.0%.
- Operating cash use was driven in part by an $834.6 decrease in advance ticket sales, compared with a $262.9 increase in the prior-year period. Financing cash flows provided $4,926.8, including $5,225.1 of debt proceeds and $719.1 of net equity proceeds.
- May and July debt and equity transactions generated approximately $3.9 billion in gross proceeds through September 30. Equity offerings issued 60,984,848 shares for $747.5 million gross proceeds, increasing dilution. The July financing included 10.25% secured notes due 2026; May included 12.25% secured notes due 2024 and exchangeable notes.
- The company deferred approximately $1.6 billion of debt payments and reported approximately $156 million of incremental liquidity from certain debt amendments. It repaid and terminated the $675 million Epic Credit Facility using part of the July financing proceeds.
- Advance ticket sales, including the long-term portion, were approximately $1.2 billion, including about $850 million of future cruise credits. Some cash deposits were withheld by credit-card processors; the company reported $40 million withheld and a $70 million cash reserve.
Outlook, risks and unusual items
- Management expected a gradual, phased return to service at reduced occupancy, subject to public-health requirements, port access, travel restrictions, crew staffing and demand. The CDC’s October 30, 2020 Conditional Sailing Order introduced phased requirements; implementation, timing and costs remained uncertain.
- Management stated that NCLH would report a GAAP and adjusted net loss for full-year 2020. It reported future bookings for the first half of 2021 below historical ranges and the second half in line with historical ranges; 2021 pricing was described as in line with pre-pandemic levels, including the effect of future cruise credits.
- Management estimated average monthly cash burn of about $150 million in Q3, about $175 million in Q4 and about $160 million on average in the second half of 2020. These estimates exclude customer cash refunds and certain other cash flows and costs; management expected burn to rise as ships prepare to return to service. Management stated liquidity was sufficient for obligations over the next 12 months and that previously disclosed substantial doubt about going concern had been alleviated. This assessment depends on assumptions about fleet redeployment, future cash collections and liquidity needs.
- Debt covenants were reported in compliance at September 30, with certain financial covenant relief during deferral periods. Defaults could trigger cross-defaults or acceleration. Credit ratings had been downgraded, and future financing availability and terms were uncertain.
- Key risks include prolonged suspension or weak post-restart demand, refunds or additional collateral requirements, costs of health and safety protocols, ship-delivery delays, fuel and foreign-exchange movements, and possible further impairment. Nine ships were on order with a combined contract price of approximately $8.3 billion; export-credit financing was expected to cover about 80%, subject to conditions.
- Material contingencies include shareholder litigation and government investigations related to COVID-19 marketing, and Helms-Burton Act claims concerning Cuban ports. The company said it could not reasonably estimate potential losses for the Helms-Burton matters. The filing also disclosed continuing discussions with card processors over collateral and withheld deposits.
Most important facts for investors to verify
- Actual restart timing, CDC compliance requirements, operating capacity and the cost of returning vessels to service.
- Cash burn versus estimates, cash refunds, future-cruise-credit use, processor reserves and any additional collateral demands.
- Debt maturities, interest burden, covenant headroom, deferral expirations and the availability and cost of further financing.
- Whether future bookings convert to sailed revenue at expected pricing, particularly for 2021, and whether demand returns to historical levels.
- Potential additional impairment charges, shipbuilding delays and the ultimate outcomes or exposure from litigation and investigations.