Norwegian Cruise Line Holdings Ltd. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing is an annual report, not a standalone fourth-quarter filing; unaudited fourth-quarter results are also summarized below. Unless noted, amounts are U.S. dollars.
Business context and reporting period
NCLH operates Norwegian Cruise Line, Oceania Cruises and Regent Seven Seas Cruises. At year-end it operated 27 ships with approximately 58,400 berths and had 10 ships on order through 2027, subject to conditions. Norwegian Encore was delivered in October 2019; Seven Seas Splendor was delivered in January 2020.
Financial and operating performance
| Metric | FY 2019 | FY 2018 | Change or context |
|---|---|---|---|
| Total revenue | $6.462 billion | $6.055 billion | Up 6.7% |
| Operating income | $1.178 billion | $1.219 billion | Down 3.4%; operating margin 18.2% versus 20.1% |
| Net income | $930.2 million | $954.8 million | Down 2.6%; net margin 14.4% versus 15.8% |
| Diluted EPS | $4.30 | $4.25 | Up from $4.25 |
| Adjusted EBITDA | $1.935 billion | $1.898 billion | Up approximately 2.0%; non-GAAP measure |
| Adjusted net income / Adjusted EPS | $1.101 billion / $5.09 | $1.105 billion / $4.92 | Adjusted net income was approximately flat; non-GAAP measures |
| Net revenue / Net yield | $4.947 billion / $257.20 | $4.708 billion / $249.85 | Net revenue up 5.1%; Net yield up 2.9% reported, 3.6% constant currency |
| Operating cash flow | $1.823 billion | $2.075 billion | Down $252.6 million |
| Capital expenditures and investing cash flow | $1.680 billion used | $1.503 billion used | Primarily ships, ship improvements and related projects |
Capacity Days rose 2.1% and occupancy was 107.3%, compared with 107.6% in 2018. Passenger ticket revenue was 69.9% of revenue and onboard and other revenue was 30.1%. The filing attributes revenue growth mainly to capacity additions and improved ticket pricing and onboard spending. Cruise operating expense increased 8.5%; Adjusted Net Cruise Cost Excluding Fuel per Capacity Day rose 5.5% (6.2% constant currency).
Fourth quarter: Revenue was $1.481 billion versus $1.381 billion in Q4 2018; operating income was $199.4 million versus $209.6 million; net income was $121.3 million versus $154.6 million; diluted EPS was $0.56 versus $0.70.
Debt, liquidity and capital commitments
- Total debt, including current maturities, was $6.802 billion at year-end, versus $6.492 billion in 2018. Cash and cash equivalents were $252.9 million; the $875 million revolving facility was undrawn. The company reported total liquidity of approximately $1.1 billion.
- Working capital deficit was $2.9 billion, including $2.0 billion of advance ticket sales. Management describes advance sales as substantially deferred revenue rather than ordinary current cash liabilities. The company said it was in compliance with debt covenants at year-end.
- Operating cash flow was lower despite net income and a $347.4 million increase in advance ticket sales. Financing cash used was $53.4 million, including $349.9 million of share repurchases.
- In January 2019, the company refinanced and extended its revolving facility and Term Loan A maturities to 2024, subject to conditions. In December, it replaced $565 million of 4.75% notes due 2021 with 3.625% notes due 2024.
- Contractual obligations totaled $17.261 billion, including $6.927 billion of debt and $5.588 billion of ship construction contracts. Scheduled debt principal payments include $2.260 billion in 2024.
- Anticipated capital expenditures were $1.4 billion in 2020, $1.2 billion in 2021 and $2.6 billion in 2022. Export-credit financing was expected to cover approximately 80% of each ship’s contract price, subject to conditions.
Material changes, outlook and risks
- Norwegian Encore’s delivery increased capacity, while Norwegian Joy’s revitalization and redeployment, dry-docks and repairs affected capacity and costs. Higher marketing expense and depreciation also weighed on operating income.
- Restrictions on U.S. travel to Cuba ended the company’s Cuba sailings effective June 5, 2019. Management estimated an approximately $0.45 negative impact to both diluted and Adjusted EPS for 2019 and expected a continued negative impact in 2020.
- The filing provides no quantified earnings guidance. It describes continued fleet expansion, with six Project Leonardo ships expected from 2022 through 2027, alongside Oceania and Regent newbuilds. The company cautions that expansion, financing, construction timing and demand are subject to conditions and risks.
- COVID-19 began affecting operations in late January 2020, after the reporting year. The company reported costs and lost revenue from itinerary changes, travel restrictions, port unavailability, cancellations and redeployments, and said the full impact could not be quantified.
- Key exposures include discretionary consumer demand, disease outbreaks, ship incidents, fuel prices and emissions rules, foreign exchange and interest rates, port access, cyber and data-security events, and substantial debt and secured assets. At year-end, 78% of debt was fixed-rate; management estimated a one-percentage-point increase in LIBOR would add approximately $20.9 million to annual interest expense. A 10% fuel-price increase was estimated to raise anticipated 2020 fuel expense by $50 million before a partial hedge-value offset.
- Two Helms-Burton Act lawsuits sought statutory damages relating to Cuban port properties. One claim was dismissed in January 2020; the other remained pending. The company said potential loss could not be reasonably estimated. It also disclosed an appeal in the Booksafe travel-protection litigation and other ordinary-course claims.
- The company recorded a $35.7 million tax benefit from reversing substantially all of a valuation allowance on Prestige tax-loss carryforwards. Other notable items included $16.7 million of debt-extinguishment and modification losses and $30.6 million of Adjusted Net Income adjustments related to Norwegian Joy’s redeployment.
Investor facts to verify
- Subsequent quarterly filings and disclosures for COVID-19’s effects on bookings, cancellations, cash, operations and liquidity.
- Debt maturities, covenant headroom, borrowing availability and funding for the substantial shipbuilding and capital-expenditure program.
- Whether forecast capacity growth produces sufficient pricing, occupancy and onboard spending to offset higher operating and depreciation costs.
- Developments in the remaining Helms-Burton litigation and any appeal of the dismissed claim.
- Actual effects of Cuba itinerary changes, fuel and currency hedges, and environmental compliance costs.
Audit and controls: PwC issued an unqualified opinion on the financial statements and concluded internal control over financial reporting was effective at December 31, 2019. The audit highlighted ship-improvement capitalization and Oceania goodwill valuation as critical audit matters; no goodwill or tradename impairment was recorded.