Business context and reporting period
Norwegian Cruise Line Holdings Ltd. (NCLH) operates Norwegian, Oceania and Regent cruise brands across contemporary, upper-premium and luxury segments. This Form 10-K covers the fiscal year ended December 31, 2014; it also reports fourth-quarter results. NCLH acquired Prestige Cruises International on November 19, 2014, so reported 2014 results include Prestige only from that date and are not fully comparable with 2013.
Key financial metrics
Amounts below are in U.S. dollars; annual figures are for the year ended December 31 unless otherwise stated.
| Metric | 2014 | 2013 |
|---|---|---|
| Total revenue | $3,125.9 million | $2,570.3 million |
| Operating income | $502.9 million; 16.1% margin | $395.9 million; 15.4% margin |
| Net income attributable to NCLH | $338.4 million; diluted EPS $1.62 | $101.7 million; diluted EPS $0.49 |
| Adjusted net income and adjusted EPS | $480.6 million; $2.27 | $295.8 million; $1.41 |
| Adjusted EBITDA | $877.9 million | $647.2 million |
| Net revenue / net yield | $2,398.2 million / $191.66 | $1,919.0 million / $183.70 |
| Operating cash flow | $635.6 million | $475.3 million |
| Cash and cash equivalents at year-end | $84.8 million | $56.5 million |
| Total debt, including current portion | $6,184.1 million | $3,127.8 million |
2014 cash used in investing activities was $1,878.7 million, including $826.7 million for the Prestige acquisition; cash provided by financing activities was $1,271.4 million. Year-end liquidity was $509.8 million, comprising cash of $84.8 million and $425.0 million available on the revolving facility. Working capital was negative $1.8 billion, including $817.2 million of advance ticket sales, which management describes as deferred revenue generated by the business model. Occupancy was 109.0% versus 109.1% in 2013.
Material changes versus the prior comparable period
- Total revenue increased 21.6%; net revenue rose 25.0%, reflecting 19.8% more capacity days and a 4.3% increase in reported net yield. New capacity included Norwegian Breakaway and Norwegian Getaway; Prestige contributed only a short period.
- Operating income increased 27.0%. Adjusted EBITDA increased 35.6% as reported by management. Higher capacity and fares supported results, while acquisition-related costs and other expense increases affected comparisons.
- Net income attributable to NCLH rose to $338.4 million from $101.7 million. The prior-year result included $160.6 million of debt-prepayment expenses; 2014 included $138.0 million of adjustments, primarily acquisition and financing expenses, non-cash compensation, deferred-revenue fair-value adjustments and acquired-intangible amortization.
- Fuel expense was 16.8% of cruise operating expense, compared with 18.3% in 2013. Net cruise cost per capacity day increased 3.6%; adjusted net cruise cost excluding fuel per capacity day increased 3.5% on a reported basis.
- Year-end debt nearly doubled, largely reflecting Prestige-related borrowing and assumed debt. The acquisition increased goodwill by $985.1 million and intangible assets by $800.0 million.
- Fourth-quarter revenue was $788.9 million versus $600.3 million; operating income was $46.4 million versus $61.4 million. NCLH reported a $25.6 million attributable net loss, compared with $36.1 million of income in Q4 2013; the 2014 quarter included substantial acquisition-related and other adjustment items.
Outlook, management commentary, risks and unusual items
Management said it expected the Prestige combination to broaden the portfolio, create revenue and cost synergies, and improve cash generation and deleveraging capacity; it cautioned that integration benefits may be delayed or may not materialize. The filing does not provide clear quantitative earnings or revenue guidance. Planned fleet investment included four Breakaway Plus ships and Regent’s Seven Seas Explorer, with deliveries scheduled from 2015 through 2019. Shipbuilding commitments totaled $3.9 billion at year-end, with export-credit financing expected to cover about 80% of contracted ship prices.
- Acquisition and integration: Prestige was acquired for stated total consideration of $3.025 billion including assumed debt. The filing reports $1.1 billion cash consideration, NCLH shares valued at $834.1 million, contingent consideration initially valued at $43.4 million, and approximately $1.6 billion of assumed debt. Additional cash consideration of up to $50 million depends on 2015 revenue milestones. Integration costs, assumed liabilities and execution risk are material considerations.
- Debt, liquidity and investment commitments: Debt agreements impose financial and operating covenants, and ships and substantially all property and equipment are pledged as collateral. Management believed available liquidity, operating cash flows and financing access would cover obligations over the next 12 months, but noted there is no assurance of future cash flows or financing availability. Contractual obligations totaled $11.4 billion, including debt, shipbuilding, interest and port commitments.
- Market sensitivities: 47% of debt was variable-rate after swaps; a 1 percentage-point rise in LIBOR was estimated to increase annual interest expense by $28.9 million. Unhedged euro-denominated ship payments were approximately €2.6 billion; a 10% euro move was estimated to change their U.S.-dollar value by $316.3 million. Fuel hedges covered about 68% of projected 2015 fuel purchases.
- Unusual items: The December 2014 incident aboard Oceania’s Insignia led to voyage cancellations; repairs were scheduled for completion in March 2015 and reduced 2014 diluted EPS by $0.02. In January 2015, CEO Kevin Sheehan resigned; related severance expense was $13.4 million, including $8.2 million from accelerated equity vesting, recorded in 2015. Frank Del Rio became CEO.
- Other principal risks: Cruise demand is discretionary and seasonal; fuel, foreign exchange, interest rates, shipyard delivery or repair delays, safety incidents, illness outbreaks, cyber events, labor negotiations, port access, regulation and environmental compliance could affect results. NCLH also relies on Section 883 U.S. tax treatment for much international shipping income and cannot assure continued qualification.
Important facts for investors to verify
- Review the final purchase-price allocation, acquired Prestige results and subsequent progress toward the anticipated integration benefits and 2015 revenue milestones.
- Reconcile reported GAAP earnings with adjusted net income, adjusted EPS and adjusted EBITDA, including which acquisition and other costs may recur.
- Assess debt maturities, covenant headroom, collateral, refinancing needs and the funding plan for the substantial shipbuilding and other capital commitments.
- Check actual fuel, euro and interest-rate exposures against hedge coverage and the filing’s stated sensitivity estimates.
- Monitor the Insignia’s return to service, any further financial effects, and developments in the CEO transition and related 2015 severance.
- Consider that Prestige was excluded from management’s and the auditor’s 2014 internal-control assessment following its November acquisition; the filing states controls were effective for the assessed business.