Business context and reporting period
Norwegian Cruise Line Holdings Ltd. (NCLH) filed this unaudited Form 10-Q for the quarter ended March 31, 2019. The company operates Norwegian Cruise Line, Oceania Cruises and Regent Seven Seas Cruises. At quarter-end, it operated 26 ships with approximately 54,400 berths and had 11 ships on order. Cruise demand is seasonal, and first-quarter results are not necessarily indicative of full-year performance.
Key financial results
Amounts are in U.S. dollars; income and cash-flow figures are for the three months ended March 31. Balance-sheet figures compare March 31, 2019 with December 31, 2018.
| Metric | Q1 2019 | Q1 2018 / prior date |
|---|---|---|
| Total revenue | $1,403.6 million | $1,293.4 million; up 8.5% |
| Operating income / margin | $158.3 million / 11.3% | $167.1 million / 12.9% |
| Net income / diluted EPS | $118.2 million / $0.54 | $103.2 million / $0.45 |
| Adjusted net income / Adjusted EPS | $181.8 million / $0.83 | $137.8 million / $0.60 |
| Adjusted EBITDA | $360.6 million | $326.4 million; up 10.5% |
| Net cash from operating activities | $535.4 million | $610.8 million |
| Cash and cash equivalents | $304.7 million | $163.9 million |
| Long-term debt, including current portion | $6,542.5 million | $6,492.1 million |
| Total current assets / current liabilities | $768.4 million / $3,429.4 million | $550.3 million / $3,150.5 million |
Passenger-ticket revenue was $973.3 million and onboard and other revenue was $430.4 million. Net Revenue, a company-defined non-GAAP measure, was $1,095.0 million, up 9.0%. Net Yield increased 3.2% as reported and 4.1% on a constant-currency basis. Capacity Days rose 5.6%, largely reflecting Norwegian Bliss entering the fleet in 2018. Occupancy was 105.5%, compared with 105.8%.
Operating cash flow less additions to property and equipment was approximately $320.8 million, versus $466.9 million a year earlier. Investing cash outflow was $221.9 million, mainly for ship construction and improvements. Financing cash outflow was $172.6 million and included $200.0 million of share repurchases. Cash increased by $140.9 million during the quarter.
Material changes versus the prior comparable period
- Revenue grew 8.5%, while operating income fell 5.2%; operating margin declined 1.6 percentage points. Cruise operating costs rose 7.6%, and depreciation and amortization increased to $169.7 million from $131.2 million, principally due to fleet additions and ship improvements.
- Interest expense increased to $73.5 million from $59.7 million, reflecting debt associated with Norwegian Bliss and ship financing, higher LIBOR, and debt refinancing and modification costs.
- Net income increased despite lower operating income, principally because the quarter included a $33.8 million income-tax benefit. A $35.7 million benefit followed the reversal of substantially all of a valuation allowance on Prestige net operating loss carryforwards. This is an unusual item and should not be assumed to recur.
- Operating cash flow declined by $75.4 million. Advance ticket sales generated a $439.4 million cash-flow increase, compared with $375.6 million in Q1 2018; timing changes in other working-capital items also affected cash flow.
- The company repurchased $200.0 million of shares in Q1, versus $263.5 million in Q1 2018. Period-end outstanding shares were 215.4 million, down from 217.7 million at year-end 2018.
Liquidity, debt and outlook
Management reported liquidity of approximately $1.2 billion at March 31, comprising $304.7 million of cash and $875.0 million available under its revolving facility. The reported working-capital deficit was $2.7 billion, including $2.0 billion of advance ticket sales, which management characterizes as substantially more like deferred revenue than an ordinary cash liability. Management stated it expected cash, operating inflows and available borrowing capacity to fund operations, debt service and planned capital spending over the next 12 months, while cautioning that future cash flows and financing are not assured.
In January, the company refinanced term debt, increased its term loan A facility to approximately $1.6 billion, reduced pricing on that facility and its $875 million revolving facility, and extended their maturities to 2024, subject to conditions. It also entered into a $230 million term loan maturing in 2021, with a possible one-year extension. The refinancing produced a $2.9 million debt-extinguishment loss; adjusted-earnings reconciliations include $6.1 million of debt-extinguishment and modification costs.
Anticipated capital expenditures were $1.4 billion for the remainder of 2019, $1.2 billion in 2020 and $0.7 billion in 2021. Export-credit financing was in place for portions of ship-construction spending. The 11 ships on order had combined contract prices of approximately €7.9 billion, or $8.9 billion at the period-end exchange rate; expected export-credit financing was approximately 80% of each ship’s contract price, subject to conditions. New ships are expected to increase depreciation and amortization.
Management commentary, risks and unusual items
- Management attributed higher yields primarily to increased passenger-ticket pricing. Adjusted Net Cruise Cost Excluding Fuel per Capacity Day increased 3.0% (3.6% on a constant-currency basis), with higher marketing and general and administrative expenses among the cited drivers.
- The fleet plan included Norwegian Encore for fall 2019 and additional ships through 2027. Delivery schedules and financing remain subject to conditions. A breach or cancellation could result in forfeited deposits, claims or impairment losses.
- Material exposures include fuel-price, foreign-exchange and interest-rate movements. The company hedged approximately 70% of projected remaining 2019 fuel needs, 54% of 2020 needs and 36% of 2021 needs. It estimated that a 10% increase in weighted-average fuel prices would raise anticipated 2019 fuel expense by $34.2 million, partly offset by an estimated $20.2 million increase in fuel-derivative fair value. A one-percentage-point LIBOR increase was estimated to add approximately $16.9 million to annual interest expense, excluding capitalized interest.
- Newly disclosed risks included possible restrictions on Cuba itineraries and litigation exposure under Title III of the Helms-Burton Act. The U.S. Government announced that the suspension of the right to bring certain Title III claims would end effective May 2, 2019. The filing also discusses port availability, litigation and tax-regime risks.
- The company disclosed a Booksafe Travel Protection Plan class-action lawsuit, with unspecified damages, and other ordinary-course claims. Management said it believed these matters would not materially affect consolidated results, financial condition or cash flows; outcomes and additional potential losses were not fully estimable.
- Adoption of the new lease standard resulted in $235.0 million of operating lease right-of-use assets and $243.8 million of operating lease liabilities at adoption. The filing also describes approximately $806.7 million of undiscounted minimum annual-guarantee passenger fees for port facilities whose leases had not yet commenced.
- Adjusted Net Income, Adjusted EPS and Adjusted EBITDA are non-GAAP measures. Q1 2019 adjusted results include adjustments such as non-cash compensation, debt costs, intangible amortization and Norwegian Joy redeployment costs; these measures should not be treated as substitutes for GAAP results or cash flow.
Important facts for investors to verify
- How much of the increase in reported net income reflects the non-recurring tax benefit, and how do GAAP results compare with management’s non-GAAP adjustments?
- Whether higher yields and pricing can continue to offset cost growth, particularly depreciation, interest, marketing and operating expenses.
- Whether operating cash generation can support the substantial shipbuilding and other capital commitments while maintaining liquidity and debt-covenant compliance.
- Ship delivery timing, contract financing availability, and the extent of euro, fuel-price and interest-rate exposure after hedging.
- Potential effects of Cuba travel restrictions, Helms-Burton claims, port availability and other legal or regulatory developments.