Orient-Express Hotels Ltd. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
1. Basis of financial statement presentation
In this report Orient-Express Hotels Ltd. is referred to as the “Company”, and the Company and its subsidiaries are referred to collectively as “OEH”.
(a) Accounting policies
The accompanying condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission for reporting on Form 10-Q. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of the management of the Company, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of financial position, operating results and cash flows have been included in the statements. Interim results are not necessarily indicative of results that may be expected for the year ended December 31, 2007. These financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Company’s periodic filings with the Commission, including the Company’s Annual Report on Form 10-K for the year ended December 31, 2006. See Note 1 to the consolidated financial statements in the 2006 Form 10-K for additional information regarding significant accounting policies.
The accounting policies used in preparing these financial statements are the same as those applied in the prior year, except that the Company adopted Financial Accounting Standards Board (FASB) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”, as of January 1, 2007, which is discussed in Note 9.
(b) Net losses per share
The number of shares used in computing basic and diluted losses per share was as follows (in thousands):
Three months ended March 31, | | 2007 | | 2006 | |
| | | | | |
Basic | | 42,256 | | 39,413 | |
Effect of dilution | | — | | — | |
Diluted | | 42,256 | | 39,413 | |
For the three months ended March 31, 2007 and 2006, the anti-dilutive effect of stock options on 278,604 and 401,970 class A common shares, respectively, was excluded from the computation of diluted losses per share.
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(c) Dividends
On January 5, 2007, the Company declared a dividend of $0.025 per common share payable February 5, 2007 to shareholders of record January 19, 2007.
(d) Earnings from unconsolidated companies
Earnings from unconsolidated companies include OEH’s share of the net earnings of its equity investments as well as interest income related to loans and advances to the equity investees amounting to $2,794,000 and $2,342,000 for the three months ended March 31, 2007 and 2006, respectively.
(e) Restatement
As reported in the 2006 Form 10-K, subsequent to the issuance of the Company’s March 31, 2006 financial statements on Form 10-Q, the Company’s management determined that certain deferred tax liabilities, arising principally on the fair value adjustments made on the acquisition of subsidiaries between 1976 and 2002 as well as on other temporary differences in respect of land and buildings, were not recorded. As a result, the benefit from income taxes for the three months ended March 31, 2006 was understated by $210,000, arising from the release of the deferred tax provision as the properties are depreciated. The restatement adjustment did not impact OEH’s statement of condensed consolidated cash flows, except for reducing the net loss and increasing the change in deferred tax by $210,000. Also $778,000 of finance costs were reclassified from depreciation to interest expense.
The following table presents the impact of the restatement adjustment on OEH’s statement of condensed consolidated operations for the period ended March 31, 2006 (dollars in thousands, except per share amounts):
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| | As
previously
reported | |
Adjustments
| |
Restated
| |
| | | | | | | |
Revenue | | $ | 79,251 | | $ | — | | $ | 79,251 | |
| | | | | | | |
Expenses | | | | | | | |
Depreciation and amortization | | 9,384 | | (778 | ) | 8,606 | |
Operating | | 40,729 | | — | | 40,729 | |
Selling, general and administrative | | 32,229 | | — | | 32,229 | |
Total expenses | | 82,342 | | (778 | ) | 81,564 | |
| | | | | | | |
Losses from operations before net finance costs | | (3,091 | ) | 778 | | (2,313 | ) |
| | | | | | | |
Interest expense, net | | (8,992 | ) | (778 | ) | (9,770 | ) |
Foreign currency, net | | 682 | | — | | 682 | |
Net finance costs | | (8,310 | ) | (778 | ) | (9,088 | ) |
Losses before income taxes and earnings from unconsolidated companies | | (11,401 | ) | — | | (11,401 | ) |
| | | | | | | |
Benefit from income taxes | | 1,964 | | 210 | | 2,174 | |
| | | | | | | |
Losses before earnings from unconsolidated companies | | (9,437 | ) | — | | (9,437 | ) |
| | | | | | | |
Earnings from unconsolidated companies, net of tax | | 1,826 | | — | | 1,826 | |
| | | | | | | |
Net losses | | $ | (7,611 | ) | $ | 210 | | $ | (7,401 | ) |
| | | | | | | |
Net losses per share: | | | | | | | |
Basic | | $ | (0.19 | ) | $ | 0.00 | | $ | (0.19 | ) |
Diluted | | $ | (0.19 | ) | $ | 0.00 | | $ | (0.19 | ) |
2. Acquisitions
La Résidence Phou Vao minority interests acquisition
Effective March 10, 2007, OEH purchased an additional 18% interest in La Résidence Phou Vao in Luang Prabang, Laos for a cash consideration of $376,000 bringing its interest to 69%. A deferred tax liability of $83,000 has been recorded on the acquisition arising mainly on the fair value adjustment to assets of $236,000. Goodwill has been reduced by $52,000 due to elimination of minority interest losses brought forward recorded in the goodwill on the original acquisition of the Pansea hotels group in Asia.
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Final retention payment relating to Grand Hotel Europe acquisition
In March 2007, a final retention payment of $2,850,000 plus accrued interest of $218,000 has been made in accordance with the original agreement for the acquisition of Grand Hotel Europe in St. Petersburg completed in February 2005.
3. Investments
Summarized financial data for OEH’s unconsolidated companies for the periods during which the investments were held by OEH are as follows (dollars in thousands):
| | March 31,
2007 | | December 31,
2006 | |
| | | | | |
Current assets | | $ | 46,876 | | $ | 50,782 | |
Property, plant and equipment, net | | 346,937 | | 347,772 | |
Other assets | | 46,302 | | 46,022 | |
Total assets | | $ | 440,115 | | $ | 444,576 | |
| | | | | |
Current liabilities | | $ | 45,407 | | $ | 59,621 | |
Long-term debt | | 236,550 | | 224,477 | |
Other liabilities | | 88,764 | | 86,637 | |
Total shareholders’ equity | | 69,394 | | 70,841 | |
Total liabilities and shareholders’ equity | | $ | 440,115 | | $ | 444,576 | |
Three months ended March 31, | | 2007 | | 2006 | |
| | | | | |
Revenue | | $ | 41,837 | | $ | 37,058 | |
Earnings from operations before net finance costs | | $ | 6,725 | | $ | 3,928 | |
Net losses | | $ | (514 | ) | $ | (3,138 | ) |
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4. Property, plant and equipment
The major classes of property, plant and equipment are as follows (dollars in thousands):
| | March 31,
2007 | | December 31,
2006 | |
| | | | | |
Land and buildings | | $ | 1,016,631 | | $ | 998,227 | |
Machinery and equipment | | 197,689 | | 191,050 | |
Fixtures, fittings and office equipment | | 189,016 | | 186,075 | |
River cruiseship and canalboats | | 19,188 | | 19,184 | |
| | 1,422,524 | | 1,394,536 | |
Less: accumulated depreciation | | (218,167 | ) | (211,136 | ) |
| | $ | 1,204,357 | | $ | 1,183,400 | |
The major classes of assets under capital leases included above are as follows (dollars in thousands):
| | March 31,
2007 | | December 31,
2006 | |
| | | | | |
Freehold and leased land and buildings | | $ | 16,084 | | $ | 16,006 | |
Machinery and equipment | | 2,560 | | 2,205 | |
Fixtures, fittings and office equipment | | 1,350 | | 1,678 | |
| | 19,994 | | 19,889 | |
Less: accumulated depreciation | | (2,333 | ) | (2,241 | ) |
| | $ | 17,661 | | $ | 17,648 | |
5. Goodwill
OEH’s goodwill consists of $1,383,000 related to the trains and cruises reporting segment and $120,760,000 related to the hotels and restaurants reporting segment.
6. Other intangible assets
Other intangible assets consist of the value of the Grand Hotel Europe tradename of $7,100,000, the purchase price allocation of $260,000 for the Casa de Sierra Nevada tradename, and the favorable lease intangible assets acquired as part of the acquisition of the Pansea hotels group of $13,030,000. Amortization expense relating to a favorable Pansea lease was approximately $92,000 for the three months to March 31, 2007 (2006 - $nil).
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7. Long-term debt and obligations under capital lease
Long-term debt consists of the following (dollars in thousands):
| | March 31,
2007 | | December 31,
2006 | |
| | | | | |
Loans from banks collateralized by property, plant and equipment payable over periods of 1 to 8 years, with a weighted average interest rate of 5.71% and 5.80%, respectively, primarily based on LIBOR | | $ | 648,549 | | $ | 649,513 | |
Loan secured by river cruiseship, payable over 3 years, with a weighted interest rate of 5.48% and 5.65% respectively, based on LIBOR | | 3,000 | | 3,500 | |
Obligations under capital lease | | 16,340 | | 16,684 | |
| | 667,889 | | 669,697 | |
Less: current portion | | 82,028 | | 83,397 | |
| | $ | 585,861 | | $ | 586,300 | |
The carrying value of the debt is equal to its fair value.
Certain credit agreements of OEH have restrictive covenants. At March 31, 2007, OEH was in compliance with these covenants, including a minimum consolidated net worth test and a minimum consolidated interest coverage test as defined under a bank-syndicated $241,000,000 loan facility. OEH does not currently have any covenants in its loan agreements which limit the payment of dividends.
The following is a summary of the aggregate maturities of long-term debt, including obligations under capital lease, at March 31, 2007 (dollars in thousands):
Year ending December 31, | | |
| | |
2008 | | $ | 72,244 |
2009 | | 27,090 |
2010 | | 47,109 |
2011 | | 362,962 |
2012 and thereafter | | 76,456 |
| | $ | 585,861 |
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8. Other liabilities
Other liabilities consist of $2,330,000 of deferred consideration arising on the Casa de Sierra Nevada acquisition.
9. Income taxes
The Company is incorporated in Bermuda, which does not impose an income tax. OEH’s effective tax rate is entirely due to the income taxes imposed by jurisdictions in which OEH conducts business other than Bermuda.
OEH recorded a tax benefit for the three months ended March 31, 2007 of $2,728,000, compared to a benefit of $2,174,000 for the corresponding period in 2006. OEH’s current tax cost for the three months ended March 31, 2007 is $2,479,000, compared to a cost of $2,270,000 in 2006.
The Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48) on January 1, 2007, and recognized a $28,820,000 provision in respect of its uncertain tax positions which was accounted for as a decrease to the January 1, 2007 retained earnings. OEH recognizes accrued interest and penalties related to uncertain tax positions in income tax expense. The opening FIN 48 provision included an amount of $1,828,000 in respect of potential interest liabilities and a further $9,947,000 of potential fines and penalties.
OEH’s tax benefit of $2,728,000 for the three months ended March 31, 2007 includes a tax charge of $232,000 in respect of the FIN 48 provision, including a charge of $116,000 that relates to the potential interest and penalties costs associated with the uncertain tax positions.
At March 31, 2007, OEH recognized a $29,301,000 provision in respect of its uncertain tax positions. OEH believes that it is reasonably possible that within the next 12 months the FIN 48 provision will decrease by between $6,000,000 to $8,000,000 as a result of the resolution of tax positions in certain jurisdictions in which OEH operates.
Earnings from unconsolidated subsidiaries are reported net of tax in the statements of condensed consolidated operations. The tax provision applicable to these unconsolidated subsidiaries in the three months ended March 31, 2007 is $1,186,000, compared to a provision of $414,000 in the corresponding period in 2006.
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10. Pensions
Components of net periodic pension benefit cost were as follows (dollars in thousands):
Three months ended March 31, | | 2007 | | 2006 | |
| | | | | |
Service cost | | $ | — | | $ | 263 | |
Interest cost | | 284 | | 213 | |
Expected return on plan assets | | (262 | ) | (198 | ) |
Amortization of net loss | | 137 | | 115 | |
Net periodic benefit cost | | $ | 159 | | $ | 393 | |
As reported in Note 10 to the financial statements in the Company’s 2006 Form 10-K annual report, OEH expected to contribute $940,000 to its defined benefit pension plan in 2007. As of March 31, 2007, $144,000 of contributions had been made. OEH anticipates contributing an additional $796,000 to fund its pension plans in 2007 for a total of $940,000.
11. Supplemental cash flow information
(Dollars in thousands):
Three months ended March 31, | | 2007 | | 2006 | |
| | | | | |
Cash paid for: | | | | | |
Interest | | $ | 10,695 | | $ | 10,111 | |
Income taxes | | $ | 2,479 | | $ | 1,319 | |
In conjunction with acquisitions (see Note 2) liabilities were assumed as follows (dollars in thousands):
Three months ended March 31, | | 2007 | | 2006 | |
| | | | | |
Fair value of assets acquired | | $ | 459 | | $ | 15,233 | |
Cash paid | | (376 | ) | (14,070 | ) |
Liabilities assumed | | $ | 83 | | $ | 1,163 | |
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12. Accumulated other comprehensive loss
The accumulated balances for each component of other comprehensive loss are as follows (dollars in thousands):
| | March 31,
2007 | | December 31,
2006 | |
Foreign currency translation adjustments | | $ | 3,604 | | $ | 3,545 | |
Derivative financial instruments | | 493 | | — | |
Additional minimum pension liability, net of tax | | (8,518 | ) | (8,518 | ) |
| | $ | (4,421 | ) | $ | (4,973 | ) |
The components of comprehensive loss are as follows (dollars in thousands):
Three months ended March 31, | | 2007 | | 2006
(restated) | |
| | | | | |
Net losses on common shares | | $ | (3,681 | ) | $ | (7,401 | ) |
Foreign currency translation adjustments | | 59 | | 1,071 | |
Change in fair value of derivatives | | 493 | | 35 | |
Comprehensive loss | | $ | (3,129 | ) | $ | (6,295 | ) |
13. Commitments
Outstanding contracts to purchase fixed assets were approximately $48,868,000 at March 31, 2007 (December 31, 2006 -$21,839,000).
14. Information concerning financial reporting for segments and operations in different geographical areas
As reported in the Company’s 2006 Form 10-K annual report, OEH has three reporting segments, (i) hotels and restaurants, (ii) tourist trains and cruises, and (iii) real estate and property development. Segment performance is evaluated based upon segment net earnings before interest, tax (including tax on earnings from unconsolidated companies), depreciation and amortization (“segment EBITDA”). Financial information regarding these business segments is as follows, with net finance costs appearing net of capitalized interest and interest and related income (dollars in thousands):
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Three months ended March 31, | | 2007 | | 2006
(restated) | |
Revenue: | | | | | |
Hotels and restaurants | | | | | |
Owned hotels | – Europe | | $ | 21,115 | | $ | 12,385 | |
| – North America | | 23,138 | | 20,709 | |
| – Rest of world | | 34,645 | | 29,828 | |
Hotel management/part ownership interests | | 2,374 | | 1,985 | |
Restaurants | | 5,295 | | 5,319 | |
| | 86,567 | | 70,226 | |
Tourist trains and cruises | | 9,359 | | 6,829 | |
Real estate | | — | | 2,196 | |
| | $ | 95,926 | | $ | 79,251 | |
| | | | | |
Depreciation and amortization: | | | | | |
Hotels and restaurants | | | | | |
Owned hotels | – Europe | | $ | 3,719 | | $ | 3,530 | |
| – North America | | 1,743 | | 1,772 | |
| – Rest of world | | 2,562 | | 2,184 | |
Restaurants | | 229 | | 223 | |
| | 8,253 | | 7,709 | |
Tourist trains and cruises | | 815 | | 897 | |
| | $ | 9,068 | | $ | 8,606 | |
| | | | | |
Segment EBITDA: | | | | | |
Owned hotels | – Europe | | $ | (3,555 | ) | $ | (7,167 | ) |
| – North America | | 6,120 | | 5,302 | |
| – Rest of world | | 11,215 | | 9,577 | |
Hotel management/part ownership interests | | 4,647 | | 3,370 | |
Restaurants | | 868 | | 1,098 | |
Tourist trains and cruises | | 1,148 | | 166 | |
Real estate | | (458 | ) | 719 | |
Central overheads | | (5,681 | ) | (4,532 | ) |
| | $ | 14,304 | | $ | 8,533 | |
| | | | | |
Segment EBITDA/net losses reconciliation: | | | | | |
Segment EBITDA | | $ | 14,304 | | $ | 8,533 | |
Less: | | | | | |
Depreciation and amortization | | 9,068 | | 8,606 | |
Interest expense, net | | 10,561 | | 9,770 | |
Foreign currency, net | | (102 | ) | (682 | ) |
Benefit from income taxes | | (2,728 | ) | (2,174 | ) |
Share of provision for income taxes of unconsolidated companies | | 1,186 | | 414 | |
Net losses | | $ | (3,681 | ) | $ | (7,401 | ) |
| | | | | |
Earnings from unconsolidated companies, net of tax: | | | | | |
Hotels and restaurants | | | | | |
Hotel management/part ownership interests | | $ | 1,500 | | $ | 971 | |
Restaurants | | — | | 69 | |
| | 1,500 | | 1,040 | |
Tourist trains and cruises | | 803 | | 786 | |
| | $ | 2,303 | | $ | 1,826 | |
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Three months ended March 31, | | 2007 | | 2006 | |
| | | | | |
Capital expenditure: | | | | | |
Owned hotels | – Europe | | $ | 10,815 | | $ | 13,561 | |
| – North America | | 9,133 | | 2,968 | |
| – Rest of world | | 4,049 | | 2,802 | |
Hotel management/part ownership interests | | — | | — | |
Restaurants | | 152 | | 62 | |
Tourist trains and cruises | | 1,011 | | 1,915 | |
Real estate | | 1,993 | | — | |
| | $ | 27,153 | | $ | 21,308 | |
Financial information regarding geographic areas based on the location of properties is as follows (dollars in thousands):
Three months ended March 31, | | 2007 | | 2006 | |
| | | | | |
Revenue: | | | | | |
Europe | | $ | 27,838 | | $ | 17,154 | |
North America | | 29,388 | | 28,751 | |
Rest of world | | 38,700 | | 33,346 | |
| | $ | 95,926 | | $ | 79,251 | |
15. Derivative financial instruments
OEH is exposed to interest rate risk on its floating rate debt, and in September 2006 it entered into interest rate swap agreements for the notional amounts of €75,000,000 ($95,000,000) and €24,700,000 ($31,000,000) that limit the exposure to a fixed rate level. Although the interest rate swap for €24,700,000 economically hedges the interest rate risk, it has not qualified as a cash flow hedge and, therefore, changes in the fair value of this swap were recorded to interest expense in earnings. The interest rate swap for €75,000,000 has been designated and has qualified as a cash flow hedge of the floating rate debt effective December 31, 2006. This swap is expected to be and has been highly effective and, therefore, only $49,000 ineffectiveness gain has been recognized in earnings with the rest of the movement in the fair value being recorded in comprehensive loss.
Of the existing gains at March 31, 2007, approximately $48,000 will be reclassified into earnings during the next 12 months, assuming no further changes in fair value of the contract.
At March 31, 2007 and December 31, 2006, the fair values of the outstanding interest rate swaps were accounted for as other non-current assets at $1,447,000 and $687,000, respectively.
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16. Related party transactions
OEH guarantees a $3,000,000 bank loan to Eastern and Oriental Express Ltd. in which OEH has a minority shareholder interest. This guarantee was in place before December 31, 2002.
OEH manages under a long-term contract the Charleston Place Hotel (accounted for under the equity method) and has made loans to the hotel-owning company. For the three months ended March 31, 2007, OEH earned $1,351,000 (2006 - $1,074,000) in management fees which are recorded in revenue, and $2,794,000 (2006 - $2,342,000) in interest income on partnership and other loans, which are recorded in earnings from unconsolidated companies.
OEH manages under long-term contracts the Hotel Monasterio and the Machu Picchu Sanctuary Lodge owned by its 50/50 joint venture with local Peruvian interests, as well as the 50/50-owned PeruRail operation, and provides loans, guarantees and other credit accommodation to these joint ventures. In the three months ended March 31, 2007, OEH earned management and guarantee fees of $1,329,000 (2006 - $1,065,000) and loan interest of $16,000 (2006 - $32,000) which are recorded in revenue. At March 31, 2007, OEH had a $750,000 subordinated loan to the PeruRail operation with an indefinite maturity date and interest also at a spread over LIBOR. All of the guarantees relating to the Company’s investments in Peru were in place prior to December 31, 2002.
OEH manages under a long-term contract the Hotel Ritz in Madrid, Spain, in which OEH owns a 50% interest and is accounted for under the equity method. For the three months ended March 31, 2007, OEH earned $233,000 (2006 - $246,000) in management fees, which are included in revenue.
OEH has granted to James Sherwood, Chairman and a director of the Company, a right of first refusal to purchase the Hotel Cipriani in Venice, Italy in the event OEH proposes to sell it. The purchase price would be the offered sale price in the case of a cash sale or the fair market value of the hotel, as determined by an independent valuer, in the case of a non-cash sale. Mr. Sherwood has also been granted an option to purchase the hotel at fair market value if a change in control of the Company occurs.
17. Subsequent events
On April 12, 2007, OEH acquired the remaining 50% of Luxury Waterway Cruises (Afloat in France) for a cash consideration of $2,700,000, and on April 25, 2007, OEH acquired the remaining 50% of GSWR Holdings Limited (Royal Scotsman) for a cash consideration of £1,375,000 ($2,680,000) plus assumption of the debts in the amount of approximately £1,000,000 ($1,950,000).
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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Restatement of prior quarter’s financial statements
As disclosed in the 2006 Form 10-K, OEH has restated its condensed consolidated quarterly financial statements. As more fully discussed in Note 1 to the financial statements in this report, OEH restated its statements of condensed consolidated operations and its statements of condensed consolidated cash flows for the three month period ended March 31, 2006. The restatement corrects for errors made in the application of U.S. generally accepted accounting principles for deferred tax accounting and a reclassification of financing costs. All comparisons in this Item 2 reflect restatements of OEH’s quarterly financial results for 2006.
Results of Operations
OEH’s operating results for the three months ended March 31, 2007 and 2006, expressed as a percentage of revenue, were as follows:
| | Three months
ended March 31 | |
| | 2007 | | 2006 | |
| | % | | % | |
Revenue: | | | | | |
Hotels and restaurants | | 90 | | 91 | |
Tourist trains and cruises | | 10 | | 9 | |
Real estate | | 0 | | 0 | |
| | 100 | | 100 | |
Expenses: | | | | | |
Depreciation and amortization | | 10 | | 11 | |
Operating | | 51 | | 51 | |
Selling, general and administrative | | 37 | | 41 | |
Net finance costs | | 11 | | 11 | |
Losses before income taxes | | (9 | ) | (14 | ) |
Benefit from income taxes | | 3 | | 3 | |
Earnings from unconsolidated companies | | 2 | | 2 | |
Net losses as a percentage of total revenue | | (4 | ) | (9 | ) |
Segment net earnings before interest, tax (including tax on unconsolidated companies), depreciation and amortization (“segment EBITDA”) of OEH’s operations for the three months ended March 31, 2007 and 2006 are analyzed as follows (dollars in millions):
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| | Three months
ended March 31 | |
| | 2007 | | 2006 | |
Segment EBITDA: | | | | | |
Owned hotels: | | | | | |
Europe | | $ | (3.6 | ) | $ | (7.2 | ) |
North America | | 6.1 | | 5.3 | |
Rest of the world | | 11.2 | | 9.5 | |
Hotel management interests | | 4.6 | | 3.4 | |
Restaurants | | 0.9 | | 1.1 | |
Tourist trains and cruises | | 1.1 | | 0.2 | |
Real estate | | (0.4 | ) | 0.7 | |
Central overheads | | (5.6 | ) | (4.5 | ) |
Total segment EBITDA | | $ | 14.3 | | $ | 8.5 | |
The foregoing segment EBITDA reconciles to net losses as follows (dollars in millions):
| | Three months ended
March 31 | |
| | 2007 | | 2006 | |
Net losses | | $ | (3.7 | ) | $ | (7.4 | ) |
Add: Depreciation and amortization | | 9.1 | | 8.6 | |
Net finance costs | | 10.5 | | 9.1 | |
Benefit from income taxes | | (2.7 | ) | (2.2 | ) |
Share of provision for income taxes of unconsolidated companies | | 1.1 | | 0.4 | |
Segment EBITDA | | $ | 14.3 | | $ | 8.5 | |
Management evaluates the operating performance of OEH’s segments on the basis of segment EBITDA and believes that segment EBITDA is a useful measure of operating performance because segment EBITDA is not affected by non-operating factors such as leverage and the historic cost of assets. EBITDA is a financial measure commonly used in OEH’s industry. OEH’s segment EBITDA, however, may not be comparable in all instances to EBITDA as disclosed by other companies. Segment EBITDA should not be considered as an alternative to earnings from operations or net earnings (as determined in accordance with U.S. generally accepted accounting principles) as a measure of OEH’s operating performance, or as an alternative to net cash provided by operating, investing and financing activities (as determined in accordance with U.S. generally accepted accounting principles) as a measure of OEH’s ability to meet cash needs.
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Operating information for OEH’s owned hotels for the three months ended March 31, 2007 and 2006 is as follows:
| | Three months
ended March 31 | |
| | 2007 | | 2006 | |
| | | | | |
Average Daily Rate (in dollars) | | | | | |
Europe | | 398 | | 314 | |
North America | | 438 | | 347 | |
Rest of the world | | 284 | | 310 | |
Worldwide | | 346 | | 323 | |
| | | | | |
Rooms Available (in thousands) | | | | | |
Europe | | 63 | | 47 | |
North America | | 55 | | 49 | |
Rest of the world | | 110 | | 86 | |
Worldwide | | 228 | | 182 | |
| | | | | |
Rooms Sold (in thousands) | | | | | |
Europe | | 26 | | 16 | |
North America | | 36 | | 38 | |
Rest of the world | | 74 | | 58 | |
Worldwide | | 136 | | 112 | |
| | | | | |
RevPAR (in dollars) | | | | | |
Europe | | 157 | | 108 | |
North America | | 280 | | 266 | |
Rest of the world | | 189 | | 210 | |
Worldwide | | 202 | | 199 | |
| | | | | | Change % | |
| | | | | | Dollars | | Local
Currency | |
Same Store RevPAR (in dollars) | | | | | | | | | |
Europe | | 108 | | 103 | | 4 | % | 0 | % |
North America | | 395 | | 369 | | 7 | % | 7 | % |
Rest of the world | | 207 | | 210 | | -1 | % | 7 | % |
Worldwide | | 229 | | 227 | | 1 | % | 7 | % |
Average daily rate is the average amount achieved for the rooms sold. RevPAR is revenue per available room, that is the rooms revenue divided by the number of available rooms for each night of operation. Same store RevPAR is a comparison based on the operations of the same units in each period, such as by excluding the effect of any acquisitions or major refurbishments.
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Three Months Ended March 31, 2007 Compared To Three Months Ended March 31, 2006
Overview
The net loss for the period was $3.7 million ($0.09 per common share) on revenue of $95.9 million, compared with a net loss of $7.4 million ($0.19 per common share) on revenue of $79.3 million in the prior year first quarter. The first quarter is a traditional loss-making period because a number of OEH’s properties are closed for the winter, the Venice Simplon-Orient-Express train does not operate and tourist arrivals are low in locations with poor winter weather.
Revenue
Total revenue increased by $16.6 million, or 21%, from $79.3 million in the three months ended March 31, 2007 to $95.9 million in the three months ended March 31, 2006. Hotels and restaurants revenue increased by $16.4 million, or 23%, from $70.2 million in the three months ended March 31, 2006 to $86.6 million in the three months ended March 31, 2007, and tourist trains and cruises increased by $2.6 million, or 38%, from $6.8 million for the three months ended March 31, 2006 to $9.4 million for the three months ended March 31, 2007. There were no real estate revenues for the three months ended March 31, 2007, compared with $2.2 million for the three months ended March 31, 2006.
The increase in total revenue was due primarily to the addition of the Asian hotels portfolio, which reported revenues of $4.2 million, and to trains and cruises. All elements of the trains and cruises portfolio showed growth. This, coupled with revenues for Reids Palace Hotel, Madeira (closed in the three months ended March 31, 2006) saw revenues 21% ahead of the three months ended March 31, 2006.
The revenue from restaurants was flat at $5.3 million in the three months ended March 31, 2007 with growth at the ‘21’ Club in New York offset by the impact of the sale of Harry’s Bar in June 2006.
For owned hotels overall, same store RevPAR in U.S. dollars increased by 1% in the three months ended March 31, 2007 compared to the three months ended March 31, 2006. Measured in local currencies this increase was 7%, due to higher achieved daily rate.
The change in revenue at owned hotels is analyzed on a regional basis as follows:
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Europe. Revenue increased by $8.7 million, or 70%, from $12.4 million for the three months ended March 31, 2006 to $21.1 million for the three months ended March 31, 2007. Revenue at Reids Palace Hotel, Madeira, which was closed in the three months ended 2006 grew by $4.1 million. The Grand Hotel Europe revenues grew by $1.2 million to $6.2 million, driven by average rate improvements, and revenues at Le Manoir aux Quat’Saisons grew by $1.1 million to $4.5 million, the growth underpinned by food and beverage growth.
On a same store basis, excluding the above, RevPAR in local currency was flat, but in U.S. dollars this translated into an increase of 4%.
North America. Revenue increased by $2.4 million, or 12%, from $20.7 million in the three months ended March 31, 2006 to $23.1 million in the three months ended March 31, 2007.
On a same store basis, RevPAR increased by 7% which was driven entirely by rate.
Rest of the World. Revenue increased by $4.8 million, or 16%, from $29.8 million in the three months ended March 31, 2006 to $34.6 million in the three months ended March 31, 2007. The impact of the acquisition of the Asian hotels (former Pansea group) saw revenues increased by $4.2 million. Southern Africa revenues were flat at $10.6 million in the three months ended March 31, 2007. South America revenues increased by $0.6 million, or 5%, from $12.0 million in the three months ended March 31, 2006 to $12.6 million in the three months ended March 31, 2007.
The RevPAR on a same store basis for the Rest of the World region increased by 7% in local currencies in the three months ended March 31, 2007 compared to the three months ended March 31, 2005. Approximately 1% of this increase was due to increased occupancies at the hotels with 6% due to a higher achieved average daily rate. This RevPAR increase in local currencies translated to a 1% decrease when expressed in U.S. dollars.
Hotel Management and Part-Ownership Interests. Revenue increased by $0.4 million, or 20%, from $2.0 million in the three months ended March 31, 2006 to $2.4 million in the three months ended March 31, 2007, due to increased revenues at Charleston Place and the hotels in Peru.
Trains and Cruises. Revenue increased by $2.6 million, or 38%, from $6.8 million in the three months ended March 31, 2006 to $9.4 million in the three months ended March 31, 2007, due
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primarily to the performance of Venice Simplon-Orient-Express.
Real Estate: Revenue decreased by $2.2 million from $2.2 million in the three months ended 31 March 2006 to $0.0 million in the three months to March 31, 2007, due to no sales being recorded at Keswick Hall in that period.
Depreciation and amortization
Depreciation and amortization increased by $0.5 million, or 6%, from $8.6 million in the three months ended March 31, 2006 to $9.1 million in the three months ended March 31, 2007, primarily due to the effect of acquisitions of the Asian hotels (formerly Pansea group) and capital expenditures during 2006, including the refurbishment of the Copacabana Palace Hotel and Reids Palace Hotel, Madeira.
Operating expenses
Operating expenses increased by $8.7 million, or 21%, from $40.7 million in the three months ended March 31, 2006 to $49.4 million in the three months ended March 31, 2007. The increase was in line with revenue increases, with operating expenses remaining at 51% of revenue for the three months ended March 31, 2007, the same level as for the three months ended March 31, 2006.
Selling, general and administrative expenses
Selling, general and administrative expenses increased by $3.5 million, or 11%, from $32.2 million in the three months ended March 31, 2006 to $35.7 million in the three months ended March 31, 2007. This increase was due to revenue increases driven by acquisitions. As a percentage of revenue, selling, general and administrative expenses decreased by 4% to 37% in the three months ended March 31, 2007.
Margins
Segment EBITDA margins (calculated as segment EBITDA as a percentage of revenue) for the three months ended March 31, 2007 for OEH increased by 4%, from 10% for the three months ended March 31, 2006. The increase was primarily due to the performance of the Rest of World properties, which increased margins from 32% in the three months to March 31, 2006 to 46% in the three months March 31, 2007. Margins in Europe increased from negative 58% in the three months March 31, 2006 to negative 17% for the three months March 31, 2007. Margins in the United States were flat at 26%.
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Earnings (losses) from operations before net finance costs
Earnings from operations increased by $4.0 million from losses of $2.3 million in the three months ended March 31, 2006 to a profit of $1.7 million in the three months ended March 31, 2007, due to the factors described in the Overview above.
Net finance costs
Net finance costs increased by $1.4 million, or 15%, from $9.1 million for the three months ended March 31, 2006 to $10.5 million for the three months ended March 31, 2007. The three months ended March 31, 2006 included a foreign exchange gain of $0.6 million compared to $0.1 million in the three months ended March 31, 2007. Excluding this gain, net finance costs increased by $0.8 million, or 8%, from $9.8 million for the three months ended March 31, 2006 to $10.6 million for the three months ended March 31, 2007, due to the impact of financing of new investments and increases in U.S. interest rates.
Benefit from income taxes
The benefit from income taxes increased by $0.5 million, from a benefit of $2.2 million in the three months ended March 31, 2006 to a benefit of $2.7 million in the three months ended March 31, 2007.
The Company recognized a provision of $28.8 million in respect of its uncertain tax positions upon the adoption of FASB interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48) on January 1, 2007. The benefit from income taxes of $2.7 million for the three months ended March 31, 2007 included a tax provision of $0.2 million in respect of the FIN 48 liability.
Earnings from unconsolidated companies
Earnings from unconsolidated companies increased by $0.5 million, or 28%, from $1.8 million in the three months ended March 31, 2006 to $2.3 million in the three months ended March 31, 2007. This was mainly due to increased earnings from OEH’s investments in Peru and Charleston.
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Liquidity and Capital Resources
Working Capital
OEH had cash and cash equivalents of $59.5 million at March 31, 2007, $19.8 million less than the $79.3 million at December 31, 2006. At March 31, 2007, there were undrawn amounts available to OEH under committed short-term lines of credit of $24.0 million and undrawn amounts available to OEH under secured revolving credit facilities of $94.8 million, bringing total cash availability at March 31, 2007 to $178.3 million.
Current assets less current liabilities, including the current portion of long-term debt, resulted in a working capital deficit of $14.0 million at March 31, 2007, a decrease in the working capital of $29.8 million from a balance of $15.8 million surplus at December 31, 2006. Changes in the following balances made the most contribution to the decrease in the working capital:
· Cash and cash equivalents have decreased by $19.8 million due to various activities described under “Cash Flow” below;
· Working capital facilities borrowings have increased by $20.0 million;
· Deferred revenue has increased by $10.7 million due to a higher volume of orders for the following quarter.
These have been offset by increases in prepaid expenses of $6.4 million, inventory of $3.2 million, real estate assets of $3.9 million and other working capital movements due to the higher activities in the hotel and real estate business anticipated later in the year.
OEH’s business does not require the maintenance of significant inventories or receivables and, therefore, working capital is not regarded as the most appropriate measure of liquidity.
Cash Flow
Operating Activities. Net cash used in operating activities increased by $1.3 million from $1.3 million for the three months ended March 31, 2006 to $2.6 million for the three months ended March 31, 2007. This was due to various movements in the working capital balances.
Investing Activities. Cash used in investing activities increased by $0.4 million to $31.2 million for the three months
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ended March 31, 2007, compared to $30.8 million for the three months ended March 31, 2006.
The higher capital expenditure (increase of $5.8 million) was offset by lower acquisitions and by proceeds from sale of fixed assets (a total cash inflow of $5.4 million). Capital expenditure of $27.2 million included $3.9 million for refurbishment of the Grand Hotel Europe, $2.3 million El Encanto construction costs, $2.1 million Casa de Sierra Nevada refurbishments, $2.0 million construction of assets at Cupecoy Village in St. Martin, $4.5 million capital expenditure at the Italian hotels and $1.9 million of Asian hotels capital costs.
Current quarter acquisitions of $4.7 million included the acquisition of 18% of the Laos hotel interest and repayment of final cash from the escrow account relating to the Grand Hotel Europe acquisition. The 2006 first quarter acquisitions included 75% of Casa de Sierra Nevada and 25% of Maroma interests.
Financing Activities. Cash provided by financing activities for the three months ended March 31, 2007 was $13.9 million compared to $32.8 million for the three months ended March 31, 2006, a decrease of $18.9 million. In the three months ended March 31, 2007, OEH had proceeds from borrowings under long-term debt of $0.1 million, compared to proceeds of $42.3 million for the three months ended March 31, 2006 which included $41.3 million of the Italian hotels facility drawdown. Proceeds from working capital borrowings have increased by $10.9 million and cash used in long-term debt repayments has decreased by $10.9 million due to the changes in repayment terms following the refinancing projects completed in 2006.
Capital Commitments. There were $48.9 million of capital commitments outstanding as of March 31, 2007 mainly on investments in owned hotels.
Indebtedness
At March 31, 2007, OEH had $667.9 million of long-term debt secured by assets ($608.4 million net of cash), including the current portion, which is repayable over periods of 1 to 8 years with a weighted average interest rate of 5.71%. See Note 7 to the financial statements regarding the maturity of long-term debt.
Approximately 48% of the outstanding principal was drawn in European euros and the balance primarily in U.S. dollars. At March 31, 2007, 77% of borrowings of OEH were in floating interest rates.
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Liquidity
OEH expects to have available cash from operations and appropriate debt finance sufficient to fund its working capital requirements, capital expenditures, acquisitions and debt service for the foreseeable future.
Recent Accounting Pronouncements
As of March 31, 2007, the Company’s significant accounting policies and estimates, which are described in Note 1 to the financial statements in the Company’s 2006 Form 10-K annual report, have not changed from December 31, 2006, except for the adoption of FIN 48 on January 1, 2007 as described in Note 9.
SFAS 159
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115” (“SFAS 159”). This standard permits an entity to choose to measure many financial instruments and certain other items at fair value. Most of the provisions in SFAS 159 are elective; however, the amendment to SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities”, applies to all entities with available-for-sale and trading securities. The fair value option established by SFAS 159 permits all entities to choose to measure eligible items at fair value at specified election dates. A business entity will report unrealized gains and losses on items for which the fair value option has been elected in earnings (or another performance indicator if the business entity does not report earnings) at each subsequent reporting date. The fair value option (a) may be applied instrument by instrument, with a few exceptions, such as investments otherwise accounted for by the equity method, (b) is irrevocable (unless a new election date occurs) and (c) is applied only to entire instruments and not to portions of instruments. SFAS 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The adoption of SFAS 159 is not expected to have any impact on OEH’s consolidated financial statements.
Critical Accounting Policies
For a discussion of these, see under the heading “Critical Accounting Policies” in Item 7 – Management’s Discussion and Analysis in the Company’s 2006 Form 10-K annual report.
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ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
OEH is exposed to market risk from changes in interest rates and foreign currency exchange rates. These exposures are monitored and managed as part of OEH’s overall risk management program, which recognizes the unpredictability of financial markets and seeks to mitigate material adverse effects on consolidated earnings and cash flows. OEH does not hold market rate sensitive financial instruments for trading purposes.
The market risk relating to interest rates arises mainly from the financing activities of OEH. Earnings are affected by changes in interest rates on borrowings, principally based on U.S. dollar LIBOR and EURIBOR, and on short-term cash investments. If interest rates increased by 10%, with all other variables held constant, annual net finance costs of OEH would have increased by approximately $3,200,000 on an annual basis based on borrowings at March 31, 2007. The interest rates on substantially all of OEH’s long-term debt are adjusted regularly to reflect current market rates. Accordingly, the carrying amounts approximate fair value.
The market risk relating to foreign currencies and its effects have not changed materially during the first three months of 2007 from those described in the Company’s 2006 Form 10-K annual report.
ITEM 4. Controls and Procedures
The Company’s chief executive and financial officers have evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in SEC Rule 13a-15(e)) as of March 31, 2007 and, based on that evaluation, believe those disclosure controls and procedures are effective as of that date. There have been no changes in the Company’s internal control over financial reporting (as defined in SEC Rule 13a-15(f)) during the first quarter of 2007 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met such as prevention and detection of mis-statement. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate, for example. Because of these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
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PART II - OTHER INFORMATION
ITEM 6. Exhibits
The index to exhibits appears below, on the page immediately following the signature page to this report.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | ORIENT-EXPRESS HOTELS LTD. |
| | |
| | |
| | By: | /s/ P. M. White | |
| | | Paul M. White | |
| | | Vice President - Finance | |
| | | and Chief Financial Officer | |
| | | (Principal Accounting Officer) | |
Dated: May 10, 2007
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EXHIBIT INDEX
3.1 – Memorandum of Association and Certificate of Incorporation of the Company, filed as Exhibit 3.1 to Amendment No. 2 to the Company’s Registration Statement on Form S-1 (Registration No. 333-12030) and incorporated herein by reference.
3.2 – Bye-Laws of the Company, filed as Exhibit 3 to the Company’s Form 8-K Current Report on July 6, 2006 and incorporated herein by reference.
3.3 – Rights Agreement dated as of June 1, 2000, and amended and restated as of April 12, 2007, between the Company and Computershare Trust Company, N.A., as rights agent, filed as Exhibit 1 to Amendment No. 1 to the Company’s Registration Statement on Form 8-A dated April 23, 2007, for the Company’s preferred share purchase rights, and incorporated herein by reference.
31 – Rule 13a-14(a)/15d-14(a) Certifications.
32 – Section 1350 Certification.
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