Norwegian Cruise Line Holdings Ltd. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Unaudited results; amounts below are U.S. dollars. The company operates Norwegian Cruise Line, Oceania Cruises and Regent Seven Seas Cruises. At quarter-end it operated 26 ships and had 11 additional ships on order.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $1.914B | $1.858B | $4.982B | $4.674B |
| Operating income | $511.7M | $550.3M | $978.7M | $1.009B |
| Net income | $450.6M | $470.4M | $808.9M | $800.2M |
| Diluted EPS | $2.09 | $2.11 | $3.73 | $3.55 |
| Adjusted EBITDA | $693.9M | $723.5M | $1.552B | $1.515B |
- Q3 revenue rose 3.0%, but operating income and net income fell; operating margin declined to 26.7% from 29.6%. Adjusted EPS was $2.23 versus $2.27.
- Nine-month revenue increased 6.6% and net income increased about 1.1%, while operating income decreased about 3.0%. Operating margin was 19.6% versus 21.6%; diluted EPS increased to $3.73 from $3.55. Adjusted EPS was $4.36 versus $4.06.
- Q3 Net Yield increased 3.3% (3.9% constant currency); nine-month Net Yield increased 3.5% (4.2% constant currency). Occupancy was 111.0% for Q3 and 108.3% for the nine-month period.
- Cost pressure was evident: Q3 Adjusted Net Cruise Cost Excluding Fuel per Capacity Day increased 10.2%; the nine-month measure increased 6.2%.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $1.481B, compared with $1.720B in 2018. Capital expenditures, net, were $616.0M versus $1.362B. Cash increased to $407.3M from $163.9M at year-end 2018.
- Cash and the undrawn revolving facility provided reported liquidity of approximately $1.3B, including $875M available under the revolving facility. Working capital was negative $2.6B, including $1.9B of advance ticket sales.
- Debt carrying value was approximately $6.278B: $605.1M current and $5.673B long-term. The company reported $592.4M of net cash used in financing activities and repurchased $349.9M of shares during the first nine months.
- The January credit agreement refinancing extended the revolving facility and term loan A maturities to 2024, subject to conditions. Management reported compliance with debt covenants at quarter-end.
Changes, outlook and key risks
- Management attributed revenue and yield gains mainly to higher ticket pricing and onboard spending. Q3 capacity days decreased 1.8%, partly because of dry-docks and hurricane relief efforts. Nine-month capacity days increased 1.7%, primarily reflecting a full period of Norwegian Bliss operations.
- The company stopped Cuba sailings effective June 5, 2019 after U.S. travel restrictions changed. Management estimated a negative impact of about $0.22 per diluted and adjusted EPS for Q3 and expected a negative effect through the remainder of 2019 and into 2020.
- There is no specific full-year earnings guidance in the supplied filing text. Management said cash on hand, expected operating cash flows, revolving credit availability and potential capital-market access should fund the next 12 months, while noting there is no assurance of future cash flows or financing availability.
- Anticipated capital expenditures were $1.0B for the remainder of 2019, $1.2B for 2020 and $0.8B for 2021. The 11 ships on order had combined contract prices of approximately $9.0B; export-credit financing was expected to fund about 80%, subject to conditions. Norwegian Encore was delivered in October 2019, with an associated $882.9M term loan.
- Two Helms-Burton Act lawsuits relating to Cuban port facilities seek statutory damages, including treble damages. The company intends to defend them but said it could not reasonably estimate potential losses. Other principal risks include fuel and currency volatility, interest rates, port access, shipbuilding execution, high indebtedness, consumer demand and regulatory or tax changes.
- Q3 other comprehensive loss was $209.9M, primarily reflecting a $209.5M unrealized cash-flow-hedge loss; accumulated other comprehensive loss was $389.6M at quarter-end. The nine-month tax benefit included a $35.7M release of a valuation allowance on Prestige tax-loss carryforwards.
Most important facts for investors to verify
- Whether yield and pricing improvements can offset rising unit costs and the effects of ending Cuba itineraries.
- Liquidity needs against substantial debt service, shipbuilding commitments and planned capital expenditures; confirm the terms and availability of expected export-credit financing.
- Developments and potential exposure in the two Helms-Burton lawsuits, for which losses were not estimable at filing.
- The impact of fuel, foreign-exchange and interest-rate movements, including hedge coverage and the large unrealized hedge loss recorded in other comprehensive income.
- Whether adjusted performance measures and management’s next-12-month liquidity expectations reconcile with GAAP results and subsequent filings.