Norwegian Cruise Line Holdings Ltd. quarterly report, Q1 FY2020

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, 2020, compared with the same period in 2019. The company relied on SEC filing-delay relief, citing COVID-19 disruption and additional time needed for impairment analysis.

In March, the company suspended voyages across all three brands; the suspension was extended through June 30, 2020. The CDC No Sail Order was then scheduled to remain effective until the earliest of specified public-health milestones or July 24, 2020.

Financial performance and position

• Net revenue fell 23.3% to $839.5 million; net yield declined 12.3% and capacity days fell 12.6%. Gross yield increased 1.6%, primarily from higher onboard spending.
• The $1.608 billion impairment charge included $1.291 billion of goodwill and $317 million of tradenames. Goodwill ended the quarter at $98.1 million and tradenames at $500.5 million. The filing also reports a $25.4 million impairment of projects that would not be completed, included in depreciation and amortization expense.
• Cash from operating activities was $(52.7) million, versus $527.5 million provided in Q1 2019. Investing cash outflow was $637.9 million, including $610.2 million of property and equipment additions; financing cash inflow was $1.802 billion. Quarter-end cash was $1.360 billion, up from $252.9 million at year-end 2019.
• Balance-sheet long-term debt was $8.432 billion and current debt was $173.8 million at March 31; total liabilities were $12.088 billion. The company borrowed the full $1.55 billion available under two revolving facilities during March. Quarter-end current assets were $1.696 billion and current liabilities $2.960 billion.
• Advance ticket sales were $1.8 billion, including approximately $340 million of future cruise credits. Credit-card processor agreements covered about $1.3 billion of advance ticket sales and could require the company to post reserves or collateral under specified conditions.

Changes versus the prior period

• Revenue decreased 11.2%, while cruise operating expenses rose 20.3%. Management attributed higher expenses to suspension-related costs, including protected commissions, IMO 2020 fuel costs and additional ships in the fleet.
• Adjusted net loss was $211.3 million, or $(0.99) per share, compared with adjusted net income of $181.8 million, or $0.83 per share. The 2020 adjustment reconciliation principally added back impairment losses.
• Occupancy was 103.8%, down from 105.5%; passengers carried declined to 499,729 from 645,052.
• Debt and derivative market exposure shifted: fixed-rate debt was 60% of total debt at quarter-end, versus 78% at December 31, 2019. A one-percentage-point increase in LIBOR was estimated to increase annual interest expense by approximately $35.2 million.

Outlook, financing and key risks

• Management expected a net loss for full-year 2020 on both GAAP and adjusted bases and stated it did not expect revenue in Q2 2020. It warned COVID-19’s financial effects could continue through 2020 and 2021; it provided no earnings guidance.
• After debt deferrals and cost-reduction measures, estimated cash needs during suspended operations were $110 million–$150 million per month. Management said available resources were sufficient for obligations and required minimum liquidity over the next 12 months, while noting ongoing uncertainty.
• Subsequent to quarter-end, the company reported approximately $1.95 billion in proceeds after underwriting fees from debt and equity transactions and expected another $400 million from the L Catterton transaction, subject to closing conditions. May transactions included a public share offering with $443.9 million net proceeds, $675 million of 12.25% senior secured notes and $862.5 million of 6.00% exchangeable notes. These financings and debt amendments increased liquidity but added debt, interest costs and potential dilution.
• Debt amortization deferrals included a 12-month Hermes debt holiday for specified facilities; additional deferrals and maturity extensions were also completed. The company reported compliance with debt covenants at March 31 and later obtained covenant waivers for the Hermes deferral period. Failure to maintain covenant compliance could lead to defaults and cross-acceleration of debt.
• Key uncertainties include the duration of the suspension and travel restrictions, consumer demand and refund elections, port access, possible processor collateral demands, future financing access and cost, and potential further impairments. About half of guests who had contacted the company about cancelled voyages had requested cash refunds as of April 24.
• Risks and contingencies include shareholder class actions and government investigations concerning COVID-19 marketing, and Helms-Burton Act litigation relating to Cuban ports. The company said potential losses for certain matters could not be reasonably estimated. It also warned that shipyard delays could affect nine newbuilds on order, with stated contract prices of approximately $7.8 billion.

Important facts for investors to verify

• Whether operations resumed on schedule and what health protocols, port access and booking demand allowed after the suspension.
• Actual monthly cash burn, cash refunds versus future cruise credits, and whether credit-card processors required reserves or collateral.
• Completion and terms of the L Catterton financing, the proceeds and costs of other financings, and resulting dilution and interest burden.
• Progress on debt deferrals, covenant compliance, required minimum liquidity and the availability of further financing.
• Whether weaker operating assumptions trigger additional goodwill, tradename or other asset impairments, and how litigation and investigations develop.