Norwegian Cruise Line Holdings Ltd. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparisons are with Q1 2017 unless noted. Amounts below are in U.S. dollars.
Business context
The company operates Norwegian Cruise Line, Oceania Cruises and Regent Seven Seas Cruises. At quarter-end it had 25 ships and approximately 50,400 berths. Norwegian Bliss was delivered on April 19, 2018, after the reporting period; the company reported that the ship adds approximately 4,000 berths, or 8% of fleet capacity.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Total revenue | $1,293.4 million | $1,150.8 million |
| Operating income | $167.1 million | $119.7 million |
| Operating margin | 12.9% | 10.4% |
| Net income | $103.2 million | $61.9 million |
| Net margin | 8.0% | 5.4% |
| Diluted EPS | $0.45 | $0.27 |
| Adjusted EBITDA (non-GAAP) | $326.4 million | $260.6 million |
| Adjusted net income / Adjusted EPS (non-GAAP) | $137.8 million / $0.60 | $91.2 million / $0.40 |
- Revenue rose 12.4%; passenger ticket revenue was $889.9 million and onboard and other revenue was $403.5 million. Management attributed growth to 10.8% more Capacity Days, primarily from Norwegian Joy, and higher ticket pricing.
- Net Revenue, a non-GAAP measure, increased 13.1% to $1,004.4 million. Net Yield increased 2.0% reported and 1.0% on a constant-currency basis; occupancy was 105.8%, versus 105.0%.
- Total operating expenses increased, but cruise operating expense grew more slowly than revenue. Net Cruise Cost per Capacity Day decreased 1.9%; Adjusted Net Cruise Cost Excluding Fuel per Capacity Day decreased 2.1%. Marketing, general and administrative expense increased, primarily due to incentive compensation; depreciation and amortization rose with fleet additions and ship improvements.
- Interest expense increased to $59.7 million from $53.0 million, reflecting debt related to Norwegian Joy and newbuild financing, and higher LIBOR, partly offset by a prior-year debt redemption.
- Operating cash flow was $610.8 million, compared with $434.9 million. Advance ticket sales increased $375.6 million and were a major contributor; cash flow also reflects working-capital timing. Investing cash outflow was $143.6 million and financing cash outflow was $341.6 million. Cash increased to $301.7 million from $176.2 million.
- At March 31, cash was $301.7 million and the company had $875.0 million available on its revolving facility, for reported liquidity of approximately $1.2 billion. Working capital was negative $2.3 billion, including $1.7 billion of advance ticket sales, which management characterizes as largely deferred revenue rather than an ordinary cash liability.
- Current and long-term debt totaled approximately $6.35 billion at March 31, 2018, versus approximately $6.31 billion at December 31, 2017. Total contractual obligations were $15.6 billion, including ship construction contracts of $6.3 billion and scheduled debt obligations and interest.
Material changes and notable items
- Q1 2018 net income increased 66% and diluted EPS rose from $0.27 to $0.45. Adjusted EBITDA increased 25.3%, according to the company.
- In March, the company repurchased 4.72 million shares for approximately $263.5 million, at an average $55.80 per share, in connection with a secondary offering by existing shareholders. Treasury shares increased accordingly.
- Effective January 1, 2018, the company adopted Topic 606 using the modified retrospective method. It said adoption did not affect the income statement or operating cash flow, but reclassified deferred contract costs on the balance sheet. It also adopted guidance on intra-entity asset transfers, recording a $19.1 million cumulative adjustment to retained earnings.
- Other comprehensive income included a $48.6 million unrealized gain on cash-flow hedges, primarily reflecting foreign-currency hedges. This is distinct from reported net income.
- Norwegian Bliss was delivered April 19 and was financed with an $850 million, 3.92% term loan maturing in 2030. On April 4, the company redeemed $135 million of its 4.750% Senior Notes due 2021, paying a $5.2 million premium and $1.9 million accrued interest.
- On April 17, the board approved a new three-year share repurchase program authorizing up to $1.0 billion of repurchases. This is a post-quarter authorization, not a Q1 cash use.
Outlook, risks and contingencies
- Management said cash on hand, expected operating cash flows, available revolving borrowings and potential access to debt or equity markets should be sufficient for operations, debt service, capital expenditures and covenant compliance over the next 12 months; it cautioned that future cash flows and financing availability are not assured.
- Anticipated capital expenditures were $1.4 billion for the remainder of 2018, $1.3 billion in 2019 and $0.9 billion in 2020. Export-credit financing was in place for specified shipbuilding expenditures, expected to fund approximately 80% of ship contract prices through 2025, subject to conditions. Delivery of new ships is expected to increase depreciation and amortization.
- Key risks include fuel-price and interest-rate movements, foreign-currency exposure on euro-denominated shipbuilding contracts, consumer demand and economic conditions, shipbuilding delays, operational incidents, cybersecurity, regulation, and substantial indebtedness and collateral pledges. A 1 percentage-point increase in LIBOR was estimated to raise annual interest expense by approximately $28.2 million. A 10% euro movement was estimated to change the dollar value of remaining unhedged ship payments by approximately $0.4 billion. A 10% fuel-price increase was estimated to raise 2018 fuel expense by $31.6 million, partly offset by a $15.9 million increase in fuel-swap fair value.
- Fuel hedges covered approximately 64% of projected remaining 2018 purchases, 48% for 2019 and 26% for 2020. Foreign-currency derivatives hedged only a portion of ship payments; unhedged payments were approximately €3.3 billion at quarter-end exchange rates.
- The company reported routine litigation, with most claims insured, and stated that it did not expect reasonably possible losses to be material based on current knowledge. It could not estimate losses beyond amounts accrued. Management reported no material changes to risk factors from its 2017 Form 10-K and stated disclosure controls were effective.
- The filing provides no specific numerical operating or earnings guidance for future quarters. Results are seasonal and interim results are not necessarily indicative of the full year.
Important facts for investors to verify
- Whether revenue, ticket pricing, occupancy and yield trends persist as added capacity enters service; distinguish reported from constant-currency and non-GAAP measures.
- How much operating cash flow depends on the timing and growth of advance ticket sales, and the liquidity implications of the working-capital deficit.
- Debt maturities, interest-rate exposure, covenant headroom and financing availability for the large shipbuilding program; verify that expected export-credit financing remains available on its stated terms.
- Execution, delivery and cost risks for Norwegian Encore and the other ships on order, as well as the expected returns from the planned capital spending.
- The effect of fuel and euro movements after hedges, and the assumptions underlying the company’s sensitivity estimates.
- The scale and timing of repurchases under the newly approved $1.0 billion program relative to capital commitments and debt reduction priorities.