NORWEGIAN CRUISE LINE HOLDINGS LTD. Cautionary Statement Concerning Forward-Looking Statements
Some of the statements, estimates or projections contained in this report are "forward-looking statements" within the meaning of theU.S. federal securities laws intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical facts contained, or incorporated by reference, in this report, including, without limitation, those regarding our business strategy, financial position, results of operations, plans, prospects, actions taken or strategies being considered with respect to our liquidity position, valuation and appraisals of our assets and objectives of management for future operations (including those regarding expected fleet additions, our voluntary suspension, our ability to weather the impacts of the COVID-19 pandemic, operational position, demand for voyages, financing opportunities and extensions, and future cost mitigation and cash conservation efforts and efforts to reduce operating expenses and capital expenditures) are forward-looking statements. Many, but not all, of these statements can be found by looking for words like "expect," "anticipate," "goal," "project," "plan," "believe," "seek," "will," "may," "forecast," "estimate," "intend," "future" and similar words. Forward-looking statements do not guarantee future performance and may involve risks, uncertainties and other factors which could cause our actual results, performance or achievements to differ materially from the future results, performance or achievements expressed or implied in those forward-looking statements. Examples of these risks, uncertainties and other factors include, but are not limited to the impact of:
the spread of epidemics, pandemics and viral outbreaks and specifically, the
COVID-19 outbreak, including its effect on the ability or desire of people to
? travel (including on cruises), which are expected to continue to adversely
impact our results, operations, outlook, plans, goals, growth, reputation, cash
flows, liquidity, demand for voyages and share price;
our ability to develop strategies to enhance our health and safety protocols to
? adapt to the current pandemic environment's unique challenges once operations
resume and to otherwise safely resume our operations when conditions allow;
coordination and cooperation with the
? public health authorities to take precautions to protect the health, safety and
security of guests, crew and the communities visited and the implementation of
any such precautions;
? the accuracy of any appraisals of our assets as a result of the impact of
COVID-19 or otherwise;
? our success in reducing operating expenses and capital expenditures and the
impact of any such reductions;
? our guests' election to take cash refunds in lieu of future cruise credits or
the continuation of any trends relating to such election;
? trends in, or changes to, future bookings and our ability to take future
reservations and receive deposits related thereto;
? the unavailability of ports of call;
? future increases in the price of, or major changes or reduction in, commercial
airline services;
our ability to work with lenders and others or otherwise pursue options to
defer or refinance our existing debt profile, near-term debt amortization,
? newbuild related payments and other obligations and to work with credit card
processors to satisfy current or potential future demands for collateral on
cash advanced from customers relating to future cruises;
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? adverse events impacting the security of travel, such as terrorist acts, armed
conflict and threats thereof, acts of piracy, and other international events;
? adverse incidents involving cruise ships;
adverse general economic and related factors, such as fluctuating or increasing
levels of unemployment, underemployment and the volatility of fuel prices,
? declines in the securities and real estate markets, and perceptions of these
conditions that decrease the level of disposable income of consumers or
consumer confidence;
? our potential future need for additional financing, which may not be available
on favorable terms, or at all, and may be dilutive to existing shareholders;
? any further impairment of our trademarks, trade names or goodwill;
breaches in data security or other disturbances to our information technology
? and other networks or our actual or perceived failure to comply with
requirements regarding data privacy and protection;
? changes in fuel prices and the type of fuel we are permitted to use and/or
other cruise operating costs;
mechanical malfunctions and repairs, delays in our shipbuilding program,
? maintenance and refurbishments and the consolidation of qualified shipyard
facilities; ? the risks and increased costs associated with operating internationally;
? fluctuations in foreign currency exchange rates;
? overcapacity in key markets or globally;
? our expansion into and investments in new markets;
? our inability to obtain adequate insurance coverage;
our indebtedness and restrictions in the agreements governing our indebtedness
? that require us to maintain minimum levels of liquidity and otherwise limit our
flexibility in operating our business, including the significant portion of
assets that are collateral under these agreements;
? pending or threatened litigation, investigations and enforcement actions;
volatility and disruptions in the global credit and financial markets, which
may adversely affect our ability to borrow and could increase our counterparty
? credit risks, including those under our credit facilities, derivatives,
contingent obligations, insurance contracts and new ship progress payment
guarantees;
? our inability to recruit or retain qualified personnel or the loss of key
personnel or employee relations issues;
? our reliance on third parties to provide hotel management services for certain
ships and certain other services;
? our inability to keep pace with developments in technology;
? changes involving the tax and environmental regulatory regimes in which we
operate; and
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other factors set forth under "Risk Factors" herein and in our Annual Report on
? Form 10-K for the year ended
27, 2020, as updated by our Current Report on Form 8-K filed on
("Annual Report on Form 10-K").
Additionally, many of these risks and uncertainties are currently amplified by and will continue to be amplified by, or in the future may be amplified by, the COVID-19 outbreak. It is not possible to predict or identify all such risks. There may be additional risks that we consider immaterial or which are unknown. The above examples are not exhaustive and new risks emerge from time to time. Such forward-looking statements are based on our current beliefs, assumptions, expectations, estimates and projections regarding our present and future business strategies and the environment in which we expect to operate in the future. These forward-looking statements speak only as of the date made. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statement to reflect any change in our expectations with regard thereto or any change of events, conditions or circumstances on which any such statement was based, except as required by law.
Terminology
This report includes certain non-GAAP financial measures, such as Net Revenue, Net Yield,Net Cruise Cost , Adjusted Net Cruise Cost Excluding Fuel, Adjusted EBITDA, Adjusted Net Income and Adjusted EPS. Definitions of these non- GAAP financial measures are included below. For further information about our non-GAAP financial measures including detailed adjustments made in calculation our non-GAAP financial measures and a reconciliation to the most directly comparable GAAP financial measure, we refer you to "Results of Operations" below.
Unless otherwise indicated in this report, the following terms have the meanings set forth below:
Acquisition of Prestige. In
? stock transaction for total consideration of
assumption of debt.
? Adjusted EBITDA. EBITDA adjusted for other income (expense), net and other
supplemental adjustments.
? Adjusted EPS. Adjusted Net Income (Loss) divided by the number of diluted
weighted-average shares outstanding.
? Adjusted Net Cruise Cost Excluding Fuel. Net Cruise Cost Excluding Fuel
adjusted for supplemental adjustments.
? Adjusted Net Income (Loss). Net income (loss) adjusted for supplemental
adjustments.
? Allura Class Ships.
? Berths. Double occupancy capacity per cabin (single occupancy per studio cabin)
even though many cabins can accommodate three or more passengers.
? Breakaway Plus Class Ships. Norwegian Escape, Norwegian Joy, Norwegian Bliss
and Norwegian Encore.
? Capacity Days. Available Berths multiplied by the number of cruise days for the
period.
Constant Currency. A calculation whereby foreign currency-denominated revenue
? and expenses in a period are converted at the
comparable period to eliminate the effects of foreign exchange fluctuations.
Dry-dock. A process whereby a ship is positioned in a large basin where all of
? the fresh/sea water is pumped out in order to carry out cleaning and repairs of
those parts of a ship which are below the water line.
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? EBITDA. Earnings before interest, taxes, and depreciation and amortization.
? EPS. Earnings (loss) per share.
? Explorer Class Ships. Regent's Seven Seas Explorer, Seven Seas Splendor, and an
additional ship on order.
? GAAP. Generally accepted accounting principles in the
? Gross Cruise Cost. The sum of total cruise operating expense and marketing,
general and administrative expense.
? Gross Tons. A unit of enclosed passenger space on a cruise ship, such that one
gross ton equals 100 cubic feet or 2.831 cubic meters.
? Gross Yield. Total revenue per Capacity Day.
?
expense and onboard and other expense.
? Net Cruise Cost Excluding Fuel.
? Net Revenue. Total revenue less commissions, transportation and other expense
and onboard and other expense.
? Net Yield. Net Revenue per Capacity Day.
Occupancy Percentage. The ratio of Passenger Cruise Days to Capacity Days. A
? percentage greater than 100% indicates that three or more passengers occupied
some cabins.
? Passenger Cruise Days. The number of passengers carried for the period,
multiplied by the number of days in their respective cruises.
? Project Leonardo. The next generation of ships for our Norwegian brand.
? Revolving Loan Facility.
facility.
?
Secondary Equity Offering(s). Secondary public offering(s) of NCLH's ordinary
? shares in
Shipboard Retirement Plan. An unfunded defined benefit pension plan for certain
? crew members which computes benefits based on years of service, subject to
certain requirements. Non-GAAP Financial Measures We use certain non-GAAP financial measures, such as Net Revenue, Net Yield,Net Cruise Cost , Adjusted Net Cruise Cost Excluding Fuel, Adjusted EBITDA, Adjusted Net Income and Adjusted EPS, to enable us to analyze our performance. See "Terminology" for the definitions of these and other non-GAAP financial measures. We utilize Net Revenue and Net Yield to manage our business on a day-to-day basis and believe that they are the most relevant measures of our revenue performance because they reflect the revenue earned by us net of significant variable costs. In 27
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measuring our ability to control costs in a manner that positively impacts net
income, we believe changes in
As our business includes the sourcing of passengers and deployment of vessels outside of theU.S. , a portion of our revenue and expenses are denominated in foreign currencies, particularly British pound, Canadian dollar, Euro and Australian dollar which are subject to fluctuations in currency exchange rates versus our reporting currency, theU.S. dollar. In order to monitor results excluding these fluctuations, we calculate certain non-GAAP measures on a Constant Currency basis, whereby current period revenue and expenses denominated in foreign currencies are converted toU.S. dollars using currency exchange rates of the comparable period. We believe that presenting these non-GAAP measures on both a reported and Constant Currency basis is useful in providing a more comprehensive view of trends in our business. We believe that Adjusted EBITDA is appropriate as a supplemental financial measure as it is used by management to assess operating performance. We also believe that Adjusted EBITDA is a useful measure in determining our performance as it reflects certain operating drivers of our business, such as sales growth, operating costs, marketing, general and administrative expense and other operating income and expense. Adjusted EBITDA is not a defined term under GAAP nor is it intended to be a measure of liquidity or cash flows from operations or a measure comparable to net income, as it does not take into account certain requirements such as capital expenditures and related depreciation, principal and interest payments and tax payments and it includes other supplemental adjustments. In addition, Adjusted Net Income and Adjusted EPS are non-GAAP financial measures that exclude certain amounts and are used to supplement GAAP net income and EPS. We use Adjusted Net Income and Adjusted EPS as key performance measures of our earnings performance. We believe that both management and investors benefit from referring to these non-GAAP financial measures in assessing our performance and when planning, forecasting and analyzing future periods. These non-GAAP financial measures also facilitate management's internal comparison to our historical performance. In addition, management uses Adjusted EPS as a performance measure for our incentive compensation. The amounts excluded in the presentation of these non-GAAP financial measures may vary from period to period; accordingly, our presentation of Adjusted Net Income and Adjusted EPS may not be indicative of future adjustments or results. For example, for the three months endedMarch 31, 2019 , we incurred$25.0 million related to the redeployment of Norwegian Joy fromAsia to theU.S. We included this as an adjustment in the reconciliation of Adjusted Net Income since the expenses are not representative of our day-to-day operations; however, this adjustment did not occur and is not included in the comparative period presented within this Form 10-Q. You are encouraged to evaluate each adjustment used in calculating our non-GAAP financial measures and the reasons we consider our non-GAAP financial measures appropriate for supplemental analysis. In evaluating our non-GAAP financial measures, you should be aware that in the future we may incur expenses similar to the adjustments in our presentation. Our non-GAAP financial measures have limitations as analytical tools, and you should not consider these measures in isolation or as a substitute for analysis of our results as reported under GAAP. Our presentation of our non-GAAP financial measures should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. Our non-GAAP financial measures may not be comparable to other companies. Please see a historical reconciliation of these measures to the most comparable GAAP measure presented in our consolidated financial statements below in the "Results of Operations" section.
Financial Presentation
We categorize revenue from our cruise and cruise-related activities as either
"passenger ticket" revenue or "onboard and other" revenue. Passenger ticket
revenue and onboard and other revenue vary according to product offering, the
size of the ship in operation, the length of cruises operated and the markets in
which the ship operates. Our revenue is seasonal based on demand for cruises,
which has historically been strongest during the Northern Hemisphere's summer
months. Passenger ticket revenue primarily consists of revenue for
accommodations, meals in certain restaurants on the ship, certain onboard
entertainment, and includes revenue for service charges and air and land
transportation to and from the ship to the extent guests purchase these items
from us. Onboard and other revenue primarily consists of revenue from gaming,
beverage sales, shore excursions, specialty dining, retail sales, spa services
and photo services. Our onboard
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revenue is derived from onboard activities we perform directly or that are performed by independent concessionaires, from which we receive a share of their revenue.
Our cruise operating expense is classified as follows:
Commissions, transportation and other primarily consists of direct costs
associated with passenger ticket revenue. These costs include travel agent
? commissions, air and land transportation expenses, related credit card fees,
certain port expenses and the costs associated with shore excursions and hotel
accommodations included as part of the overall cruise purchase price.
Onboard and other primarily consists of direct costs incurred in connection
? with onboard and other revenue, including casino, beverage sales and shore
excursions.
Payroll and related consists of the cost of wages and benefits for shipboard
? employees and costs of certain inventory items, including food, for a third
party that provides crew and other hotel services for certain ships.
? Fuel includes fuel costs, the impact of certain fuel hedges and fuel delivery
costs.
? Food consists of food costs for passengers and crew on certain ships.
? Other consists of repairs and maintenance (including Dry-dock costs), ship
insurance and other ship expenses.
Critical Accounting Policies
For a discussion of our critical accounting policies and estimates, see "Critical Accounting Policies" included in our Annual Report on Form 10-K for the year endedDecember 31, 2019 under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations." We have updated our critical accounting policies and estimates from those described in our Annual Report on Form 10-K for the year endedDecember 31, 2019 as follows:
Asset Impairment
We review our long-lived assets, principally ships, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Assets are grouped and evaluated at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other groups of assets. We consider historical performance and future estimated results in our evaluation of potential impairment and then compare the carrying amount of the asset to the estimated future cash flows expected to result from the use of the asset. If the carrying amount of the asset exceeds the estimated expected undiscounted future cash flows, we measure the amount of the impairment by comparing the carrying amount of the asset to its fair value. We estimate fair value based on the best information available utilizing estimates, judgments and projections as necessary. Our estimate of fair value is generally measured by discounting expected future cash flows at discount rates commensurate with the associated risk. We evaluate goodwill and tradenames for impairment annually or more frequently when an event occurs or circumstances change that indicates the carrying value of a reporting unit may not be recoverable. For our evaluation of goodwill, we use the Step 0 Test which allows us to first assess qualitative factors to determine whether it is more likely than not (i.e., more than 50%) that the fair value of a reporting unit is less than its carrying value. For tradenames we also provide a qualitative assessment to determine if there is any indication of impairment.
In order to make this evaluation, we consider whether any of the following factors or conditions exist:
Changes in general macroeconomic conditions such as a deterioration in general
? economic conditions; limitations on accessing capital; fluctuations in foreign
exchange rates; or other developments in equity and credit markets;
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Changes in industry and market conditions such as a deterioration in theenvironment in which an entity operates; an increased competitive environment;
? a decline in market-dependent multiples or metrics (in both absolute terms and
relative to peers); a change in the market for an entity's products or
services; or a regulatory or political development;
? Changes in cost factors that have a negative effect on earnings and cash flows;
? Decline in overall financial performance (for both actual and expected
performance);
Entity and reporting unit specific negative events such as changes in
? management, key personnel, strategy, or customers; litigation; or a change in
the composition or carrying amount of net assets; and
? Decline in share price (in both absolute terms and relative to peers).
We also may conduct a quantitative assessment comparing the fair value of each reporting unit to its carrying value, including goodwill. This is called the Step 1 Test which uses discounted future cash flows and other market data to determine the fair value of the reporting units. Our discounted cash flow valuation reflects our principal assumptions of 1) forecasted future operating results and growth rates, which have been prepared under multiple scenarios and are probability weighted, 2) forecasted capital expenditures for fleet growth and ship improvements and 3) a weighted average cost of capital of market participants. Historically, our Step 1 Test consisted of a combined approach using discounted future cash flows and market multiples to determine the fair value of the reporting units. However, for theMarch 31, 2020 Step 1 Test, the market multiples were used solely as a corroboratory approach given the impact of COVID-19 on the current year's results, as of the valuation date, as well as prospective results including the lack of any guidance provided, which were not available for our peers. We believe that this approach is the most representative method to assess fair value as it utilizes expectations of long-term growth as well as current market conditions. For the tradenames, we use the relief from royalty method, which uses the same forecasts and discount rates from the discounted cash flow valuation in the goodwill assessment along with a tradename royalty rate assumption. We have concluded that our business has three reporting units. Each brand,Oceania Cruises ,Regent Seven Seas Cruises and Norwegian, constitutes a business for which discrete financial information is available and management regularly reviews the operating results and, therefore, each brand is considered an operating segment. During the three months endedMarch 31, 2020 , we recognized a goodwill impairment loss of$1.3 billion . See Note 4 - "Intangible Assets" for additional information. As ofMarch 31, 2020 , there was$98.1 million of goodwill for theRegent Seven Seas Cruises reporting unit after impairment. We also recognized an impairment loss for ourOceania Cruises andRegent Seven Seas Cruises tradenames during the three months in an aggregate amount of$317.0 million , with$500.5 million remaining as ofMarch 31, 2020 . We believe that we have made reasonable estimates and judgments. However, a change in our estimated future operating cash flows may result in a decline in fair value in future periods, which may result in a need to recognize additional impairment charges.
Quarterly Overview
Three months ended
? Total revenue decreased 11.2% to
? Net Revenue decreased 23.3% to
? Net income (loss) and diluted EPS were
respectively, compared to
? Operating loss was
million.
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Adjusted Net Loss and Adjusted EPS were
respectively, in 2020, which included
consisting of expenses related to impairment losses, non-cash compensation and
? amortization of intangible assets. Adjusted Net Income and Adjusted EPS were
of adjustments primarily consisting of expenses related to non-cash
compensation and amortization of intangible assets.
? Adjusted EBITDA decreased 95.7% to
In
the COVID-19 pandemic. This suspension has been extended through
? As a result, we do not expect to have revenue for the three months ended June
30, 2020. COVID-19, including the temporary suspension of cruise voyages and
the impairment of our goodwill and tradenames, has had a negative impact on
earnings and we expect the negative impact to continue through 2020 and 2021.
In
raise approximately
? the full exercise of options to purchase additional ordinary shares and
exchangeable notes, the total amount of gross proceeds increased to
approximately
We refer you to our "Results of Operations" below for a calculation of Net Revenue, Adjusted Net Income, Adjusted EPS and Adjusted EBITDA.
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Results of Operations
The following table sets forth operating data as a percentage of total revenue:
Three Months Ended
March 31,
2020 2019
Revenue
Passenger ticket 67.4 % 69.3 %
Onboard and other 32.6 % 30.7 %
Total revenue 100.0 % 100.0 %
Cruise operating expense
Commissions, transportation and other 26.7 % 16.3 %
Onboard and other 6.0 % 5.7 %
Payroll and related 19.8 % 15.9 %
Fuel 10.0 % 7.0 %
Food 3.9 % 3.9 %
Other 13.3 % 10.1 %
Total cruise operating expense 79.7 % 58.9 %
Other operating expense Marketing, general and administrative 21.7 % 17.7 % Depreciation and amortization
15.9 % 12.1 %
Impairment loss 129.0 % - %
Total other operating expense 166.6 % 29.8 %
Operating income (loss) (146.3) % 11.3 %
Non-operating income (expense)
Interest expense, net (5.5) % (5.3) %
Other income (expense), net 0.4 % - %
Total non-operating income (expense) (5.1) % (5.3) % Net income (loss) before income taxes (151.4) % 6.0 % Income tax benefit
0.5 % 2.4 %
Net income (loss) (150.9) % 8.4 %
The following table sets forth selected statistical information:
Three Months Ended
March 31,
2020 2019
Passengers carried 499,729 645,052
Passenger Cruise Days 4,278,602 4,975,440
Capacity Days 4,123,858 4,716,929
Occupancy Percentage 103.8 % 105.5 %
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Net Revenue, Gross Yield and Net Yield were calculated as follows (in thousands, except Capacity Days and Yield data):
Three Months Ended
March 31,
2020
Constant
2020 Currency 2019
Passenger ticket revenue $ 840,791 $ 842,590 $ 973,273
Onboard and other revenue 406,091 406,091 430,357
Total revenue 1,246,882 1,248,681 1,403,630
Less:
Commissions, transportation and other expense 332,368 333,769 229,264
Onboard and other expense 74,973 74,973 79,413
Net Revenue $ 839,541 $ 839,939 $ 1,094,953
Capacity Days 4,123,858 4,123,858 4,716,929
Gross Yield $ 302.36 $ 302.79 $ 297.57
Net Yield $ 203.58 $ 203.68 $ 232.13
Gross Cruise Cost, Net Cruise Cost , Net Cruise Cost Excluding Fuel and Adjusted
Net Cruise Cost Excluding Fuel were calculated as follows (in thousands, except
Capacity Days and per Capacity Day data):
Three Months Ended
March 31,
2020
Constant
2020 Currency 2019
Total cruise operating expense $ 994,260 $ 997,292 $ 826,651
Marketing, general and administrative expense 270,689 271,330 248,942
Gross Cruise Cost 1,264,949 1,268,622 1,075,593
Less:
Commissions, transportation and other expense 332,368 333,769 229,264
Onboard and other expense 74,973 74,973 79,413
Net Cruise Cost 857,608 859,880 766,916
Less: Fuel expense 125,024 125,024 98,253
Net Cruise Cost Excluding Fuel 732,584 734,856 668,663
Less Non-GAAP Adjustments:
Non-cash deferred compensation (1) 666 666 534
Non-cash share-based compensation (2) 32,758 32,758 26,999
Redeployment of Norwegian Joy (3) - - 5,016
Adjusted Net Cruise Cost Excluding Fuel $ 699,160 $ 701,432 $ 636,114
Capacity Days 4,123,858 4,123,858 4,716,929
Gross Cruise Cost per Capacity Day $ 306.74 $ 307.63 $ 228.03
Net Cruise Cost per Capacity Day $ 207.96 $ 208.51 $ 162.59
Net Cruise Cost Excluding Fuel per Capacity Day $ 177.65 $ 178.20 $ 141.76
Adjusted Net Cruise Cost Excluding Fuel per
Capacity Day $ 169.54 $
170.09
(1) Non-cash deferred compensation expenses related to the crew pension plan and
other crew expenses, which are included in payroll and related expense.
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Non-cash share-based compensation expenses related to equity awards, which (2) are included in marketing, general and administrative expense and payroll and
related expense.
Expenses related to the redeployment of Norwegian Joy from
operating expense and marketing, general and administrative expense.
Adjusted Net Income (Loss) and Adjusted EPS were calculated as follows (in thousands, except share and per share data):
Three Months Ended
March 31,
2020 2019
Net income (loss) $ (1,880,972) $ 118,157
Non-GAAP Adjustments:Non-cash deferred compensation (1) 991
879
Non-cash share-based compensation (2) 32,758
26,999
Extinguishment and modification of debt (3) -
6,093
Amortization of intangible assets (4) 2,774
4,603
Redeployment of Norwegian Joy (5) -
25,028
Impairment loss (6) 1,633,162 -
Adjusted Net Income (Loss) $ (211,287) $ 181,759
Diluted weighted-average shares outstanding - Net
income (loss) and Adjusted Net Income (Loss) 213,630,798 218,873,272
Diluted earnings (loss) per share$ (8.80)
$ 0.54 Adjusted EPS$ (0.99) $ 0.83
Non-cash deferred compensation expenses related to the crew pension plan and (1) other crew expenses, which are included in payroll and related expense and
other income, net.
Non-cash share-based compensation expenses related to equity awards, which (2) are included in marketing, general and administrative expense and payroll and
related expense.
(3) Losses on extinguishment of debt and modification of debt are included in
interest expense, net.
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(4) Amortization of intangible assets related to the Acquisition of Prestige,
which are included in depreciation and amortization expense.
Expenses related to the redeployment of Norwegian Joy from
operating expense, marketing, general and administrative expense and
depreciation and amortization expense.
Impairment loss consists of goodwill, tradename and property and equipment (6) impairments. The impairments of goodwill and tradenames are included in
impairment loss and the impairment of property and equipment is included in
depreciation and amortization expense.
EBITDA and Adjusted EBITDA were calculated as follows (in thousands):
Three Months Ended
March 31,
2020 2019
Net income (loss) $ (1,880,972) $ 118,157
Interest expense, net 68,907 73,503
Income tax benefit (6,173) (33,798)Depreciation and amortization expense 198,197 169,741 EBITDA
(1,620,041) 327,603
Other (income) expense, net (1) (5,823) 434
Non-GAAP Adjustments:
Non-cash deferred compensation (2) 666 534
Non-cash share-based compensation (3) 32,758 26,999
Redeployment of Norwegian Joy (4) - 5,016
Impairment loss (5) 1,607,797 -
Adjusted EBITDA $ 15,357 $ 360,586 (1) Primarily consists of gains and losses, net for proceeds from insurance, a
litigation settlement and foreign currency exchanges.
(2) Non-cash deferred compensation expenses related to the crew pension plan and
other crew expenses, which are included in payroll and related expense.
Non-cash share-based compensation expenses related to equity awards, which (3) are included in marketing, general and administrative expense and payroll and
related expense.
Expenses related to the redeployment of Norwegian Joy from
operating expense and marketing, general and administrative expense.
(5) Impairment loss consists of goodwill and tradename impairments.
Three months ended
Revenue
Total revenue decreased 11.2% to$1.2 billion in 2020 compared to$1.4 billion in 2019. Gross Yield increased 1.6%. Net Revenue decreased 23.3% to$0.8 billion in 2020 from$1.1 billion in 2019 due to a decrease in Net Yield of 12.3% and a decrease in Capacity Days of 12.6%. The increase in Gross Yield was primarily due to an increase in onboard spending. The decrease in Net Yield was primarily due to an increase in protected commissions and credit card fees recognized in earnings as a result of cancelled sailings. The decrease in Capacity Days was primarily due to the cancellation of sailings in 2020, partially offset by the addition of Norwegian Encore and Seven Seas Splendor to the fleet. On a Constant Currency basis, Net Yield decreased 12.3%.
Expense
Total cruise operating expense increased 20.3% in 2020 compared to 2019 primarily due to costs associated with the suspension of cruise voyages, including the cost of the related protected commissions, a 27.2% increase in fuel expense associated with the IMO 2020 regulations and the addition of Norwegian Encore and Seven Seas Splendor to the fleet.
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Gross Cruise Cost increased 17.6% in 2020 compared to 2019 primarily due to the cost described above in addition to an increase in marketing, general and administrative expenses primarily from various costs related to COVID-19. Total other operating expense increased 396.0% in 2020 compared to 2019 primarily due to the impairment of goodwill and tradenames triggered by the COVID-19 pandemic. Depreciation and amortization expense increased primarily due to the delivery of Norwegian Encore and Seven Seas Splendor and ship improvement projects. On a Capacity Day basis,Net Cruise Cost increased 27.9% (28.2% on a Constant Currency basis) primarily due to the increases in costs described above in addition to the 12.6% reduction in Capacity Days. AdjustedNet Cruise Cost Excluding Fuel per Capacity Day increased 25.7% (26.1% on a Constant Currency basis). Interest expense, net was$68.9 million in 2020 compared to$73.5 million in 2019. The change in interest expense reflects additional debt in connection with the delivery of Norwegian Encore and Seven Seas Splendor, partially offset by lower margins associated with recent refinancings prior to the draw on our revolving credit facilities and lower LIBOR. Included in 2019 were losses on extinguishment of debt and debt modification costs of$6.1 million .
Other income (expense), net was income of
In 2020, we had an income tax benefit of$6.2 million compared to$33.8 million in 2019. In 2020, the tax benefit is due to operating losses and the reversal of a valuation allowance. During 2018, we implemented certain tax restructuring strategies that created our ability to utilize the net operating loss carryforwards of Prestige, for which we had previously provided a full valuation allowance. As a result, we recorded a tax benefit of$35.7 million in connection with the reversal of substantially all of the valuation allowance in 2019.
Liquidity and Capital Resources
General
As of
Due to the continued spread of COVID-19, growing travel restrictions and limited access to ports around the world, inMarch 2020 , the Company implemented a voluntary suspension of all cruise voyages across its three brands, which has subsequently been extended throughJune 30, 2020 . OnMarch 14, 2020 , concurrent with our and the broader cruise industry's suspension, theU.S. Centers for Disease Control and Prevention ("CDC") issued a No Sail Order throughApril 13, 2020 . OnApril 9, 2020 , theCDC modified its existing No Sail Order to extend it until the earliest of (a) the expiration of the Secretary ofHealth and Human Services' declaration that COVID-19 constitutes a public health emergency, (b) the date the Director of theCDC rescinds or modifies the No Sail Order or (c) 100 days after the order appears on theFederal Register , which would beJuly 24, 2020 . In addition, the duration of any voluntary suspensions we have implemented and resumption of operations outside ofthe United States will be dependent, in part, on various travel restrictions and travel bans issued by various countries around the world, as well as the availability of ports around the world. Significant events affecting travel, including COVID-19, typically have an impact on the demand for cruise vacations, with the full extent of the impact generally determined by the length of time the event influences travel decisions. We believe the ongoing effects of COVID-19 on our operations and global bookings have had, and will continue to have, a significant impact on our financial results and liquidity, and such negative impact may continue well beyond the containment of such an outbreak. InMarch 2020 , NCLC borrowed the full amount of$1.55 billion under its$875 million Revolving Credit Facility and its$675 million revolving credit facility, dated as ofMarch 5, 2020 . Subsequent toMarch 31, 2020 , we have taken steps to improve our liquidity through securing deferrals of existing debt amortization, including through available export credit agencies and related governments, as discussed more fully under Note 8 - "Long-Term Debt". The Company has received additional financing through debt and equity transactions totaling$1.95 billion in proceeds after underwriting fees. The Company expects to receive another$400.0 million from the transaction with L Catterton upon the satisfaction of certain customary closing conditions. Refer to Note 15 - "Subsequent Events" for further information on the equity financing. The Company has also undertaken several proactive measures to mitigate the financial and operational 36 Table of Contents impacts of COVID-19, through the reduction of capital expenditures and operating expenses. After giving effect to the debt deferrals and cash conservation measures implemented, including the potential deferral of near-term newbuild related payments, the Company now estimates its liquidity requirements to be on average in the range of approximately$110 million to$150 million per month during the suspension of operations or approximately$3.9 million to$5.4 million of cash expenditures per month per ship. This includes ongoing ship operating expenses, administrative operating costs, interest expense (based upon originally scheduled amortization as ofMarch 31, 2020 ) and expected necessary capital expenditures. The deferrals of debt and new financing transactions will result in additional cash interest expense of approximately$12 million per month over the next 12 months. Based on the liquidity needs described above and our current resources, the Company has sufficient liquidity to satisfy our obligations over the next twelve months and maintain minimum levels of liquidity as required by certain of our debt agreements. AtMarch 31, 2020 , we were in compliance with all of our debt covenants. Subsequent toMarch 31, 2020 , as part of the Hermes debt holiday we have obtained lender consents to waive financial covenants for the Deferral Period. If we do not continue to remain in compliance with our covenants, we would have to seek to amend the covenants. However, no assurances can be made that such amendments would be approved by our lenders. Generally, if an event of default under any debt agreement occurs, then pursuant to cross default and/or cross acceleration clauses, substantially all of our outstanding debt and derivative contract payables could become due, and all debt and derivative contracts could be terminated, which could have a material adverse impact to our operations
and liquidity.
InMarch 2020 , Moody's downgraded the long-term issuer and senior unsecured debt ratings of NCLC to Ba2 from Ba1, including its corporate family rating and senior secured bank facility, and to B1 from Ba2 on its senior unsecured rating. InApril 2020 , S&P Global downgraded the issuer credit rating of NCLC to BB- from BB+. We believe the credit ratings assigned to NCLC's unsecured debt securities by S&P may be downgraded from BB- to B+ in connection with our recent debt offering. If our credit ratings were to be further downgraded, our access to, and cost of, debt financing may be further negatively impacted. As ofMarch 31, 2020 , the company has advanced ticket sales of$1.8 billion , including the long-term portion, which includes approximately$340 million of future cruise credits. The Company also has agreements with its credit card processors that govern approximately$1.3 billion atMarch 31, 2020 in advance ticket sales that have been received by the Company relating to future voyages. These agreements allow the credit card processors to require under certain circumstances, including the existence of a material adverse change, excessive chargebacks and other triggering events, that the Company maintain a reserve which could be satisfied by posting collateral. The Company is in discussions regarding the nature of collateral, if any, relating to these agreements.
Sources and Uses of Cash
In this section, references to "2020" refer to the three months ended
Net cash used in operating activities was$0.1 billion in 2020 as compared to net cash provided by operating activities of$0.5 billion in 2019. The net cash used in operating activities included timing differences in cash receipts and payments relating to operating assets and liabilities. Advance ticket sales decreased by$288.5 million in 2020 compared to an increase of$439.4 million in 2019.
Net cash used in investing activities was
Net cash provided by financing activities was$1.8 billion in 2020 primarily due to the proceeds of$2.0 billion from our revolving credit facilities and newbuild loans partially offset by debt repayments. Net cash used in financing activities was$172.6 million in 2019 primarily due to the repurchase of$200 million of our ordinary shares, net repayments of our Revolving Loan Facility and the net refinancing of term loans offset by the issuance of new debt. 37 Table of Contents Future Capital Commitments Future capital commitments consist of contracted commitments, including ship construction contracts, and future expected capital expenditures necessary for operations as well as our ship refurbishment projects. As ofMarch 31, 2020 , our anticipated capital expenditures were$0.4 billion for the remainder of 2020, of which we have$0.1 billion of export credit financing in place related to ship construction contracts. Additionally, the Company is finalizing the documentation to defer another approximately$0.1 billion of the payments related to ship construction contracts. These future expected capital expenditures will increase our depreciation and amortization expense. Project Leonardo will introduce an additional six ships, each approximately 140,000 Gross Tons with approximately 3,300 Berths, with expected delivery dates from 2022 through 2027, subject to certain conditions. For the Regent brand, we have an order for one Explorer Class Ship to be delivered in 2023, which will be approximately 55,000 Gross Tons and 750 Berths. For the Oceania Cruises brand, we have orders for two Allura Class Ships to be delivered in 2022 and 2025. Each of the Allura Class Ships will be approximately 67,000 Gross Tons and 1,200 Berths. We expect that the effects of COVID-19 on the shipyards where our ships are under construction (or will be constructed) will result in delays in ship deliveries and such delays may be prolonged. The combined contract prices of the nine ships on order for delivery was approximately €7.1 billion, or$7.8 billion based on the euro/U.S. dollar exchange rate as ofMarch 31, 2020 . We have obtained export credit financing which is expected to fund approximately 80% of the contract price of each ship, subject to certain conditions. We do not anticipate any contractual breaches or cancellations to occur. However, if any such events were to occur, it could result in, among other things, the forfeiture of prior deposits or payments made by us and potential claims and impairment losses which may materially impact our business, financial condition and results of operations.
Capitalized interest for the three months ended
Off-Balance Sheet Arrangements
None.
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Contractual Obligations
As ofMarch 31, 2020 our contractual obligations (prior to giving effect to the debt deferrals discussed more fully in Note 8 - "Long-Term Debt") with initial or remaining terms in excess of one year, including interest payments on long-term debt obligations, included the following (in thousands): Less than More than Total 1 year 1-3 years 3-5 years 5 years Long-term debt (1)$ 8,752,027 $ 1,610,755 $ 1,406,887 $ 3,738,060 $ 1,996,325 Operating leases (2) 263,644 32,255 63,320 63,687 104,382 Ship construction contracts (3) 5,212,107 180,692 1,873,911 2,328,619 828,885 Port facilities (4) 2,103,074 66,019 142,784 150,311 1,743,960 Interest (5) 1,121,069 243,045 406,609 265,803 205,612 Other (6) 1,366,155 306,839 491,312 415,073 152,931 Total (7)$ 18,818,076 $ 2,439,605 $ 4,384,823 $ 6,961,553 $ 5,032,095
Long-term debt includes premiums aggregating
Long-term debt excludes deferred financing fees which are a direct deduction
from the carrying value of the related debt liability in the consolidated (1) balance sheets. After giving effect to the debt deferrals discussed more
fully in Note 8 - "Long-Term Debt", which were finalized after
2020, our obligations for the payment of long-term debt are as follows (in
thousands):
Less than More than
Total 1 year 1-3 years 3-5 years 5 years
Long-term debt $ 8,752,027 $ 173,797 $ 2,615,306 $ 3,966,599 $ 1,996,325 (2) Operating leases are primarily for offices, motor vehicles and office
equipment.
Ship construction contracts are for our newbuild ships based on the euro/
dollar exchange rate as of
place from syndicates of banks. Approximately
construction contracts due in less than one year are financed under export (3) credit financing, and the Company is finalizing the documentation to defer
the remainder of the ship construction contracts that are due in less than
one year to increase its near-term liquidity. The amount does not include the
two Project Leonardo ships and one
to certain Italian government approvals as of
Port facilities represent our usage of certain port facilities. Our port
facilities agreements include force majeure provisions that may alleviate an
unspecified amount of obligations under minimum guarantees during the
(4) COVID-19 pandemic. In
that such provisions were being enacted. Customary practice is to prorate
these obligations for the annual period impacted. A portion of our port fees
may be waived as a result of these provisions, including those ports that are
presented within operating leases in the table above.
Interest includes fixed and variable rates with LIBOR held constant as of
(5)
more fully discussed in Note 8 - "Long-Term Debt", interest obligations for
debt outstanding as of March 31, 2020 are as follows (in thousands):
Less than More than
Total 1 year 1-3 years 3-5 years 5 years
Interest $ 1,191,262 $ 253,837 $ 458,736 $ 273,077 $ 205,612 Other includes future commitments for service, maintenance and other business
enhancement capital expenditures contracts. Certain contracts contain
provisions which provide for reduced obligations in the case of a ship(s) (6) removed from operations. As a result, we may only be required to cover
reasonable costs during the time period whereby our operations have
temporarily been suspended. These reasonable costs are currently being
negotiated.
timing of future tax settlements cannot be reasonably determined.
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Other
Certain service providers may require collateral in the normal course of our business. The amount of collateral may change based on certain terms and conditions.
As a routine part of our business, depending on market conditions, exchange rates, pricing and our strategy for growth, we regularly consider opportunities to enter into contracts for the building of additional ships. We may also consider the sale of ships, potential acquisitions and strategic alliances. If any of these were to occur, they may be financed through the incurrence of additional permitted indebtedness, through cash flows from operations, or through the issuance of debt, equity or equity-related securities.
Funding Sources
Certain of our debt agreements contain covenants that, among other things, require us to maintain a minimum level of liquidity, as well as limit our net funded debt-to-capital ratio, and maintain certain other ratios and restrict our ability to pay dividends. Substantially all of our ships and other property and equipment are pledged as collateral for certain of our debt. We believe we were in compliance with these covenants as ofMarch 31, 2020 . In addition, our existing debt agreements restrict, and any of our future debt arrangements may restrict, among other things, the ability of our subsidiaries, including NCLC, to make distributions and/or pay dividends to NCLH and NCLH's ability to pay cash dividends to its shareholders. NCLH is a holding company and depends upon its subsidiaries for their ability to pay distributions to it to finance any dividend or pay any other obligations of NCLH. However, we do not believe that these restrictions have had or are expected to have an impact on our ability to meet any cash obligations.
The impact of changes in world economies and especially the global credit markets can create a challenging environment and may reduce future consumer demand for cruises and adversely affect our counterparty credit risks. In the event this environment deteriorates, our business, financial condition and results of operations could be adversely impacted.
We believe our cash on hand, expected future operating cash inflows and our ability to issue debt securities or additional equity securities, will be sufficient to fund operations, debt payment requirements, capital expenditures and maintain compliance with covenants under our debt agreements over the next 12-month period. There is no assurance that cash flows from operations and additional financings will be available in the future to fund our future obligations.
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