Item 1. Financial Statements
Norwegian Cruise Line Holdings Ltd.
Consolidated Statements of Operations
(Unaudited)
(in thousands, except share and per share
data)
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Passenger
ticket
|
|
$
|
1,071,815
|
|
|
$
|
948,059
|
|
|
$
|
2,630,405
|
|
|
$
|
2,406,533
|
|
Onboard
and other
|
|
|
412,921
|
|
|
|
336,851
|
|
|
|
1,118,798
|
|
|
|
901,992
|
|
Total
revenue
|
|
|
1,484,736
|
|
|
|
1,284,910
|
|
|
|
3,749,203
|
|
|
|
3,308,525
|
|
Cruise
operating expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions,
transportation and other
|
|
|
249,519
|
|
|
|
225,586
|
|
|
|
618,492
|
|
|
|
589,851
|
|
Onboard
and other
|
|
|
90,661
|
|
|
|
84,171
|
|
|
|
230,416
|
|
|
|
210,701
|
|
Payroll
and related
|
|
|
193,122
|
|
|
|
170,694
|
|
|
|
554,741
|
|
|
|
490,253
|
|
Fuel
|
|
|
86,250
|
|
|
|
88,829
|
|
|
|
248,529
|
|
|
|
267,784
|
|
Food
|
|
|
50,902
|
|
|
|
46,419
|
|
|
|
151,674
|
|
|
|
131,969
|
|
Other
|
|
|
114,280
|
|
|
|
102,023
|
|
|
|
351,263
|
|
|
|
307,143
|
|
Total
cruise operating expense
|
|
|
784,734
|
|
|
|
717,722
|
|
|
|
2,155,115
|
|
|
|
1,997,701
|
|
Other
operating expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing,
general and administrative
|
|
|
174,813
|
|
|
|
150,558
|
|
|
|
504,694
|
|
|
|
411,879
|
|
Depreciation
and amortization
|
|
|
111,575
|
|
|
|
109,798
|
|
|
|
317,480
|
|
|
|
314,381
|
|
Total
other operating expense
|
|
|
286,388
|
|
|
|
260,356
|
|
|
|
822,174
|
|
|
|
726,260
|
|
Operating
income
|
|
|
413,614
|
|
|
|
306,832
|
|
|
|
771,914
|
|
|
|
584,564
|
|
Non-operating
income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense, net
|
|
|
(60,662
|
)
|
|
|
(49,784
|
)
|
|
|
(188,836
|
)
|
|
|
(153,219
|
)
|
Other
expense
|
|
|
(5,333
|
)
|
|
|
(1,733
|
)
|
|
|
(13,281
|
)
|
|
|
(35,589
|
)
|
Total
non-operating income (expense)
|
|
|
(65,995
|
)
|
|
|
(51,517
|
)
|
|
|
(202,117
|
)
|
|
|
(188,808
|
)
|
Net
income before income taxes
|
|
|
347,619
|
|
|
|
255,315
|
|
|
|
569,797
|
|
|
|
395,756
|
|
Income
tax expense
|
|
|
(5,241
|
)
|
|
|
(3,528
|
)
|
|
|
(8,944
|
)
|
|
|
(6,931
|
)
|
Net
income
|
|
$
|
342,378
|
|
|
$
|
251,787
|
|
|
$
|
560,853
|
|
|
$
|
388,825
|
|
Weighted-average
shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
227,096,142
|
|
|
|
227,384,616
|
|
|
|
227,102,560
|
|
|
|
225,805,901
|
|
Diluted
|
|
|
227,598,607
|
|
|
|
230,274,756
|
|
|
|
227,859,617
|
|
|
|
229,860,900
|
|
Earnings
per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.51
|
|
|
$
|
1.11
|
|
|
$
|
2.47
|
|
|
$
|
1.72
|
|
Diluted
|
|
$
|
1.50
|
|
|
$
|
1.09
|
|
|
$
|
2.46
|
|
|
$
|
1.69
|
|
The accompanying notes are an integral part
of these consolidated financial statements.
Norwegian Cruise Line Holdings Ltd.
Consolidated Statements of Comprehensive
Income
(Unaudited)
(in thousands)
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Net
income
|
|
$
|
342,378
|
|
|
$
|
251,787
|
|
|
$
|
560,853
|
|
|
$
|
388,825
|
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shipboard
Retirement Plan
|
|
|
107
|
|
|
|
119
|
|
|
|
323
|
|
|
|
358
|
|
Cash flow
hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized
income (loss)
|
|
|
37,051
|
|
|
|
(105,227
|
)
|
|
|
112,508
|
|
|
|
(138,501
|
)
|
Amount
realized and reclassified into earnings
|
|
|
18,327
|
|
|
|
13,132
|
|
|
|
76,658
|
|
|
|
61,582
|
|
Total
other comprehensive income (loss)
|
|
|
55,485
|
|
|
|
(91,976
|
)
|
|
|
189,489
|
|
|
|
(76,561
|
)
|
Total
comprehensive income
|
|
$
|
397,863
|
|
|
$
|
159,811
|
|
|
$
|
750,342
|
|
|
$
|
312,264
|
|
The accompanying notes are an integral part
of these consolidated financial statements.
Norwegian Cruise Line Holdings Ltd.
Consolidated Balance Sheets
(Unaudited)
(in thousands, except share data)
|
|
September 30,
2016
|
|
|
December 31,
2015
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
155,431
|
|
|
$
|
115,937
|
|
Accounts
receivable, net
|
|
|
55,838
|
|
|
|
44,996
|
|
Inventories
|
|
|
65,983
|
|
|
|
58,173
|
|
Prepaid
expenses and other assets
|
|
|
159,447
|
|
|
|
121,305
|
|
Total
current assets
|
|
|
436,699
|
|
|
|
340,411
|
|
Property and equipment, net
|
|
|
10,054,220
|
|
|
|
9,458,805
|
|
Goodwill
|
|
|
1,388,931
|
|
|
|
1,388,931
|
|
Tradenames
|
|
|
817,525
|
|
|
|
817,525
|
|
Other long-term assets
|
|
|
245,965
|
|
|
|
259,085
|
|
Total
assets
|
|
$
|
12,943,340
|
|
|
$
|
12,264,757
|
|
Liabilities and Shareholders’
Equity
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Current
portion of long-term debt
|
|
$
|
566,911
|
|
|
$
|
629,840
|
|
Accounts
payable
|
|
|
51,494
|
|
|
|
51,369
|
|
Accrued
expenses and other liabilities
|
|
|
520,079
|
|
|
|
640,568
|
|
Due to
Affiliate
|
|
|
—
|
|
|
|
20,769
|
|
Advance
ticket sales
|
|
|
1,210,505
|
|
|
|
1,023,973
|
|
Total
current liabilities
|
|
|
2,348,989
|
|
|
|
2,366,519
|
|
Long-term debt
|
|
|
5,815,248
|
|
|
|
5,767,697
|
|
Other long-term liabilities
|
|
|
242,376
|
|
|
|
349,661
|
|
Total
liabilities
|
|
|
8,406,613
|
|
|
|
8,483,877
|
|
Commitments and contingencies (Note 9)
|
|
|
|
|
|
|
|
|
Shareholders’ equity:
|
|
|
|
|
|
|
|
|
Ordinary shares, $.001
par value; 490,000,000 shares authorized; 232,467,409 shares issued and 227,155,448 shares outstanding at September 30, 2016
and 232,179,786 shares issued and 227,815,301 shares outstanding at December 31, 2015
|
|
|
232
|
|
|
|
232
|
|
Additional
paid-in capital
|
|
|
3,870,040
|
|
|
|
3,814,536
|
|
Accumulated
other comprehensive income (loss)
|
|
|
(223,161
|
)
|
|
|
(412,650
|
)
|
Retained
earnings
|
|
|
1,128,871
|
|
|
|
568,018
|
|
Treasury
shares (5,311,961 and 4,364,485 ordinary shares at September 30, 2016 and December 31, 2015, respectively, at cost)
|
|
|
(239,255
|
)
|
|
|
(189,256
|
)
|
Total
shareholders’ equity
|
|
|
4,536,727
|
|
|
|
3,780,880
|
|
Total
liabilities and shareholders’ equity
|
|
$
|
12,943,340
|
|
|
$
|
12,264,757
|
|
The accompanying notes are an integral part
of these consolidated financial statements.
Norwegian Cruise Line Holdings Ltd.
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
|
|
Nine
Months Ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
560,853
|
|
|
$
|
388,825
|
|
Adjustments to reconcile net income to net cash
provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization expense
|
|
|
327,366
|
|
|
|
327,861
|
|
Loss
on derivatives
|
|
|
1,007
|
|
|
|
21,893
|
|
Deferred
income taxes, net
|
|
|
707
|
|
|
|
858
|
|
Gain
on contingent consideration
|
|
|
—
|
|
|
|
(43,400
|
)
|
Write-off
of deferred financing fees
|
|
|
11,537
|
|
|
|
195
|
|
Provision
for bad debts and inventory
|
|
|
1,767
|
|
|
|
—
|
|
Share-based
compensation expense
|
|
|
48,289
|
|
|
|
27,857
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable, net
|
|
|
(11,286
|
)
|
|
|
(9,563
|
)
|
Inventories
|
|
|
(9,133
|
)
|
|
|
1,609
|
|
Prepaid
expenses and other assets
|
|
|
(16,197
|
)
|
|
|
(599
|
)
|
Accounts
payable
|
|
|
2,551
|
|
|
|
(57,837
|
)
|
Accrued
expenses and other liabilities
|
|
|
(9,149
|
)
|
|
|
6,996
|
|
Advance
ticket sales
|
|
|
180,447
|
|
|
|
308,691
|
|
Net
cash provided by operating activities
|
|
|
1,088,759
|
|
|
|
973,386
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Additions to property and equipment, net
|
|
|
(915,936
|
)
|
|
|
(330,808
|
)
|
Settlement of derivatives
|
|
|
(34,300
|
)
|
|
|
1,090
|
|
Investment in trademark
|
|
|
—
|
|
|
|
(750
|
)
|
Net
cash used in investing activities
|
|
|
(950,236
|
)
|
|
|
(330,468
|
)
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Repayments of long-term debt
|
|
|
(2,687,621
|
)
|
|
|
(908,677
|
)
|
Repayments to Affiliate
|
|
|
(18,522
|
)
|
|
|
(18,521
|
)
|
Proceeds from long-term debt
|
|
|
2,687,355
|
|
|
|
375,751
|
|
Proceeds from the exercise of share options
|
|
|
4,784
|
|
|
|
66,527
|
|
Proceeds from employee share purchase plan
|
|
|
2,431
|
|
|
|
858
|
|
Purchases of treasury shares
|
|
|
(49,999
|
)
|
|
|
(7,425
|
)
|
Deferred financing fees and
other
|
|
|
(37,457
|
)
|
|
|
(6,075
|
)
|
Net
cash used in financing activities
|
|
|
(99,029
|
)
|
|
|
(497,562
|
)
|
Net increase
in cash and cash equivalents
|
|
|
39,494
|
|
|
|
145,356
|
|
Cash and cash equivalents
at beginning of period
|
|
|
115,937
|
|
|
|
84,824
|
|
Cash and cash equivalents
at end of period
|
|
$
|
155,431
|
|
|
$
|
230,180
|
|
The accompanying notes are an integral part
of these consolidated financial statements.
Norwegian Cruise Line Holdings Ltd.
Consolidated Statements
of Changes in Shareholders’ Equity
(Unaudited)
(in thousands)
|
|
Ordinary
Shares
|
|
|
Additional
Paid-in
Capital
|
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
|
|
Retained
Earnings
|
|
|
Treasury
Shares
|
|
|
Total
Shareholders’
Equity
|
|
Balance, December 31, 2014
|
|
$
|
230
|
|
|
$
|
3,702,344
|
|
|
$
|
(242,642
|
)
|
|
$
|
140,881
|
|
|
$
|
(82,000
|
)
|
|
$
|
3,518,813
|
|
Share-based compensation
|
|
|
—
|
|
|
|
27,857
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
27,857
|
|
Proceeds from the exercise of share options
|
|
|
2
|
|
|
|
66,525
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
66,527
|
|
Proceeds from employee share purchase plan
|
|
|
—
|
|
|
|
858
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
858
|
|
Purchases of treasury shares
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(7,425
|
)
|
|
|
(7,425
|
)
|
Other comprehensive loss, net
|
|
|
—
|
|
|
|
—
|
|
|
|
(76,561
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(76,561
|
)
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
388,825
|
|
|
|
—
|
|
|
|
388,825
|
|
Balance, September 30, 2015
|
|
$
|
232
|
|
|
$
|
3,797,584
|
|
|
$
|
(319,203
|
)
|
|
$
|
529,706
|
|
|
$
|
(89,425
|
)
|
|
$
|
3,918,894
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2015
|
|
$
|
232
|
|
|
$
|
3,814,536
|
|
|
$
|
(412,650
|
)
|
|
$
|
568,018
|
|
|
$
|
(189,256
|
)
|
|
$
|
3,780,880
|
|
Share-based compensation
|
|
|
—
|
|
|
|
48,289
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
48,289
|
|
Proceeds from the exercise of share options
|
|
|
—
|
|
|
|
4,784
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,784
|
|
Proceeds from employee share purchase plan
|
|
|
—
|
|
|
|
2,431
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,431
|
|
Purchases of treasury shares
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(49,999
|
)
|
|
|
(49,999
|
)
|
Other comprehensive income, net
|
|
|
—
|
|
|
|
—
|
|
|
|
189,489
|
|
|
|
—
|
|
|
|
—
|
|
|
|
189,489
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
560,853
|
|
|
|
—
|
|
|
|
560,853
|
|
Balance, September 30, 2016
|
|
$
|
232
|
|
|
$
|
3,870,040
|
|
|
$
|
(223,161
|
)
|
|
$
|
1,128,871
|
|
|
$
|
(239,255
|
)
|
|
$
|
4,536,727
|
|
The accompanying notes are an integral part
of these consolidated financial statements.
Norwegian Cruise Line Holdings Ltd.
Notes to Consolidated Financial Statements
(Unaudited)
Unless otherwise indicated or the context otherwise requires,
references in this report to (i) the “Company,” “we,” “our” and “us” refer to NCLH
(as defined below) and its subsidiaries (including Prestige (as defined below), except for periods prior to the consummation of
the Acquisition of Prestige (as defined below)), (ii) “NCLC” refers to NCL Corporation Ltd., (iii) “NCLH”
refers to Norwegian Cruise Line Holdings Ltd., (iv) “Norwegian” refers to the Norwegian Cruise Line brand and its predecessors,
(v) “Prestige” refers to Prestige Cruises International, Inc., together with its consolidated subsidiaries, (vi) “PCH”
refers to Prestige Cruise Holdings, Inc., Prestige’s direct wholly owned subsidiary, which in turn is the parent of Oceania
Cruises, Inc. (“Oceania Cruises”) and Seven Seas Cruises S. DE R.L. (“Regent”) (Oceania Cruises also refers
to the brand by the same name and Regent also refers to the brand Regent Seven Seas Cruises) and (vii) “Affiliate”
refers to Genting Hong Kong Limited and/or its affiliates (formerly Star Cruises Limited and/or its affiliates). References to
the “U.S.” are to the United States of America, “dollars” or “$” are to U.S. dollars, the “U.K.”
are to the United Kingdom and “euros” or “€” are to the official currency of the Eurozone.
|
1.
|
Description of Business
and Organization
|
NCLH is a leading global cruise company which operates the Norwegian
Cruise Line, Oceania Cruises and Regent Seven Seas Cruises brands. We have 24 ships with approximately 46,500 Berths including
Sirena, previously under a Bareboat Charter, which joined our Oceania Cruises’ fleet in April 2016 and Seven Seas Explorer
which was delivered in June 2016. We will introduce four additional ships to our fleet through 2020. Norwegian Joy, Norwegian Bliss
and one additional Breakaway Plus Class Ship is on order for delivery in the spring of 2017, the spring of 2018 and the fall of
2019, respectively. An Explorer Class Ship is on order for delivery in the winter of 2020. These additions to our fleet will increase
our total Berths to approximately 59,000.
|
2.
|
Summary of Significant
Accounting Policies
|
Basis of Presentation
The accompanying consolidated financial statements are unaudited
and, in our opinion, contain all normal recurring adjustments necessary for a fair statement of the results for the periods presented.
Our operations are seasonal and results for interim periods
are not necessarily indicative of the results for the entire fiscal year. Historically, demand for cruises has been strongest during
the Northern Hemisphere’s summer months. The interim consolidated financial statements should be read in conjunction with
the audited consolidated financial statements for the year ended December 31, 2015, which are included in our most recently
filed Annual Report on Form 10-K.
Reclassification
Certain amounts in prior periods have been reclassified to conform
to the current period presentation.
Earnings Per Share
A reconciliation between basic and diluted earnings per share
was as follows (in thousands, except share and per share data):
|
|
Three
Months Ended
September 30,
|
|
|
Nine
Months Ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Net income
|
|
$
|
342,378
|
|
|
$
|
251,787
|
|
|
$
|
560,853
|
|
|
$
|
388,825
|
|
Basic weighted-average shares outstanding
|
|
|
227,096,142
|
|
|
|
227,384,616
|
|
|
|
227,102,560
|
|
|
|
225,805,901
|
|
Dilutive effect of share awards
|
|
|
502,465
|
|
|
|
2,890,140
|
|
|
|
757,057
|
|
|
|
4,054,999
|
|
Diluted weighted-average shares outstanding
|
|
|
227,598,607
|
|
|
|
230,274,756
|
|
|
|
227,859,617
|
|
|
|
229,860,900
|
|
Basic earnings per share
|
|
$
|
1.51
|
|
|
$
|
1.11
|
|
|
$
|
2.47
|
|
|
$
|
1.72
|
|
Diluted earnings per share
|
|
$
|
1.50
|
|
|
$
|
1.09
|
|
|
$
|
2.46
|
|
|
$
|
1.69
|
|
Revenue and Expense Recognition
Deposits received from guests for future voyages are recorded
as advance ticket sales and are subsequently recognized as passenger ticket revenue along with onboard and other revenue, and all
associated direct costs of a voyage are recognized as cruise operating expenses on a pro-rata basis over the period of the voyage.
Guest cancellation fees are recognized in passenger ticket revenue in the month of the cancellation. Certain of our product offerings
are accounted for under the guidance included within multi-element arrangements and result in an allocation of the fair value between
passenger ticket revenue and onboard and other revenue.
Revenue and expenses include port fees and taxes. The amounts
included on a gross basis are $80.3 million and $70.1 million for the three months ended September 30, 2016 and 2015, respectively,
and $214.3 million and $184.4 million for the nine months ended September 30, 2016 and 2015, respectively.
Foreign Currency
The majority of our transactions are settled in U.S. dollars.
We translate assets and liabilities of our foreign subsidiaries at exchange rates in effect at the balance sheet date. Gains or
losses resulting from transactions denominated in other currencies are recognized in our consolidated statements of operations
within other expense. We recognized losses of $1.5 million and gains of $3.1 million for the three months ended September 30, 2016
and 2015, respectively, and losses of $1.9 million and gains of $8.8 million for the nine months ended September 30, 2016 and 2015,
respectively.
Depreciation and Amortization Expense
The amortization of deferred financing fees is included in depreciation
and amortization expense in the consolidated statements of cash flows; however, for purposes of the consolidated statements of
operations it is included in interest expense, net.
Goodwill
We evaluate goodwill 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. Based
on the recent performance of the Oceania Cruises’ reporting unit, we performed an interim Step 1 Test which consists of
a combined approach using the expected future cash flows and market multiples to determine the fair value of the reporting unit.
We determined that there was no impairment of goodwill as the Step 1 Test supports the carrying value of the reporting unit.
Recently Issued Accounting Pronouncements
In August 2016, the Financial Accounting Standards Board (“FASB”)
issued Accounting Standards Update (“ASU”) No. 2016-15 which amends Topic 230 (Statement of Cash Flows) to eliminate
discrepancies in reporting certain items in the statement of cash flows. The guidance is effective for annual periods beginning
after December 15, 2017 and interim periods within those annual periods with early adoption permitted. The transition should be
made using a retrospective approach. We do not believe that the adoption of this guidance will be material to our consolidated
statements of cash flows.
In May 2016, the FASB issued ASU No. 2016-12 which addresses
improvements to the guidance on revenue from contracts from customers regarding collectibility, noncash consideration, and completed
contracts at transition. Additionally, it provides a practical expedient for contract modifications at transition and an accounting
policy election related to the presentation of sales taxes and other similar taxes collected from customers. The effective date
of this guidance is upon adoption of ASU No. 2014-09 which is presented below. We are currently evaluating the impact of the adoption
of this guidance to our consolidated financial statements.
In May 2016, the FASB issued ASU No. 2016-11 which is a rescission
of Securities and Exchange Commission guidance related to the issuance of ASU No. 2014-09 which is presented below. The effective
date of this guidance is upon adoption of ASU No. 2014-09. We are currently evaluating the impact of the adoption of this guidance
to our consolidated financial statements.
In April 2016, the FASB issued ASU No. 2016-10 which does not
change the core principle of the guidance in ASU No. 2014-09 but clarifies two aspects: identifying performance obligations and
the licensing implementation guidance, while retaining the related principles for those areas. The effective date of this guidance
is upon adoption of ASU No. 2014-09. We are currently evaluating the impact of the adoption of this guidance to our consolidated
financial statements.
In March 2016, the FASB issued ASU No. 2016-09 to improve multiple
aspects of the accounting for share-based payment transactions, including income tax consequences, classification of awards as
either equity or liabilities and classification on the statement of cash flows. The guidance is effective for annual periods beginning
after December 15, 2016 and interim periods within those annual periods with early adoption permitted. We do not believe that the
adoption of this guidance will be material to our consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02 which sets
out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e.
lessees and lessors). The ASU requires lessees to recognize assets and liabilities on the balance sheet for the rights and
obligations created by all leases with terms of more than 12 months. The ASU further modifies lessors’ classification
criteria for leases and the accounting for sales-type and direct financing leases. The ASU will also require qualitative and
quantitative disclosures designed to give financial statement users additional information on the amount, timing, and uncertainty
of cash flows arising from leases. The ASU is effective for annual reporting periods, and interim periods within those annual
periods, beginning after December 15, 2018 with early adoption permitted. The ASU is to be applied using a modified retrospective
approach. We are currently evaluating the impact of the adoption of this guidance to our consolidated financial statements.
In July 2015, the FASB issued ASU No. 2015-11 to simplify the
measurement of inventory for all entities. This applies to all inventory that is measured using either the first-in, first-out
or average cost method. The guidance requires an entity to measure inventory at the lower of cost and net realizable value. The
guidance must be applied prospectively and will be effective for our interim and annual reporting periods beginning after December
15, 2016. Early adoption is permitted as of the beginning of an interim or annual reporting period. We are currently evaluating
the impact of the adoption of this guidance to our consolidated financial statements.
In April 2015, the FASB issued ASU No. 2015-05 to clarify
a customer’s accounting for fees paid in a cloud computing arrangement. The amendments provide guidance to customers
about whether a cloud computing arrangement includes a software license or if the arrangement should be accounted for as a
service contract. This guidance will impact the accounting of software licenses but will not change a customer’s
accounting for service contracts. The guidance will be effective for annual periods, including interim periods within those
annual periods, beginning after December 15, 2015. We have adopted this guidance and there has not been an impact to our
consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09 which requires
entities to recognize revenue through the application of a five-step model, including identification of the contract, identification
of the performance obligations, determination of the transaction price, allocation of the transaction price to the performance
obligation and recognition of revenue as the entity satisfies the performance obligations. Entities have the option of using either
a full retrospective or a modified approach to adopt the guidance. In August 2015, the FASB issued ASU No. 2015-14 deferring the
effective date for one year. We can elect to adopt the provisions of ASU No. 2014-09 for annual periods beginning after December
15, 2017 including interim periods within that reporting period or we can elect to early adopt the guidance as of the original
effective date. We have initiated an assessment of our systems, data and processes related to the implementation of this guidance.
This assessment is expected to be completed during 2017. Additionally, we are currently evaluating the potential impact on our
consolidated financial statements.
The gross carrying amounts of intangible assets included within
other long-term assets, the related accumulated amortization, the net carrying amounts and the weighted-average amortization periods
of the Company’s intangible assets are listed in the following table (in thousands, except amortization period):
|
|
September
30, 2016
|
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
|
Weighted-
Average
Amortization
Period (Years)
|
|
Customer relationships
|
|
$
|
120,000
|
|
|
$
|
(31,326
|
)
|
|
$
|
88,674
|
|
|
|
6.0
|
|
Licenses
|
|
|
3,368
|
|
|
|
(631
|
)
|
|
|
2,737
|
|
|
|
5.6
|
|
Non-compete agreements
|
|
|
660
|
|
|
|
(330
|
)
|
|
|
330
|
|
|
|
1.0
|
|
Total intangible assets subject to amortization
|
|
$
|
124,028
|
|
|
$
|
(32,287
|
)
|
|
$
|
91,741
|
|
|
|
|
|
License (Indefinite-lived)
|
|
$
|
4,427
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
December
31, 2015
|
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
|
Weighted-
Average
Amortization
Period (Years)
|
|
Customer relationships
|
|
$
|
120,000
|
|
|
$
|
(15,527
|
)
|
|
$
|
104,473
|
|
|
|
6.0
|
|
Backlog
|
|
|
70,000
|
|
|
|
(70,000
|
)
|
|
|
—
|
|
|
|
1.0
|
|
Licenses
|
|
|
3,368
|
|
|
|
(208
|
)
|
|
|
3,160
|
|
|
|
5.6
|
|
Total intangible assets subject to amortization
|
|
$
|
193,368
|
|
|
$
|
(85,735
|
)
|
|
$
|
107,633
|
|
|
|
|
|
License (Indefinite-lived)
|
|
$
|
4,427
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
The aggregate amortization expense is as follows (in thousands):
|
|
Three
Months Ended
September 30,
|
|
|
Nine
Months Ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Amortization expense
|
|
$
|
5,601
|
|
|
$
|
20,951
|
|
|
$
|
16,552
|
|
|
$
|
60,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth the Company’s estimated
aggregate amortization expense for each of the five years below (in thousands):
Year ended December 31,
|
|
Amortization
Expense
|
|
2017
|
|
$
|
31,067
|
|
2018
|
|
|
26,163
|
|
2019
|
|
|
18,489
|
|
2020
|
|
|
9,906
|
|
2021
|
|
|
75
|
|
|
4.
|
Accumulated Other Comprehensive
Income (Loss)
|
Accumulated other comprehensive income (loss) for the nine months
ended September 30, 2016 was as follows (in thousands):
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
|
|
Change
Related to
Cash Flow
Hedges
|
|
|
Change
Related to
Shipboard
Retirement
Plan
|
|
Accumulated other comprehensive income (loss) at beginning of period
|
|
$
|
(412,650
|
)
|
|
$
|
(405,298
|
)
|
|
$
|
(7,352
|
)
|
Current period other comprehensive income before reclassifications
|
|
|
112,508
|
|
|
|
112,508
|
|
|
|
—
|
|
Amounts realized and reclassified into earnings
|
|
|
76,981
|
|
|
|
76,658
|
(1)
|
|
|
323
|
(2)
|
Accumulated other comprehensive income (loss) at end of period
|
|
$
|
(223,161
|
)
|
|
$
|
(216,132
|
)(3)
|
|
$
|
(7,029
|
)
|
(1)
|
We refer you to Note 7— “Fair Value Measurements and Derivatives” for the affected line items in the consolidated statements of operations.
|
(2)
|
Amortization of prior-service cost and actuarial loss reclassified to payroll and related expense.
|
(3)
|
Includes $67.2 million of loss expected to be reclassified into earnings in the next 12 months.
|
Accumulated other comprehensive income (loss) for the nine months
ended September 30, 2015 was as follows (in thousands):
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
|
|
Change
Related to
Cash Flow
Hedges
|
|
|
Change
Related to
Shipboard
Retirement
Plan
|
|
Accumulated other comprehensive income (loss) at beginning of period
|
|
$
|
(242,642
|
)
|
|
$
|
(234,188
|
)
|
|
$
|
(8,454
|
)
|
Current period other comprehensive loss before reclassifications
|
|
|
(138,501
|
)
|
|
|
(138,501
|
)
|
|
|
—
|
|
Amounts realized and reclassified into earnings
|
|
|
61,940
|
|
|
|
61,582
|
(1)
|
|
|
358
|
(2)
|
Accumulated other comprehensive income (loss) at end of period
|
|
$
|
(319,203
|
)
|
|
$
|
(311,107
|
)
|
|
$
|
(8,096
|
)
|
(1)
|
We refer you to Note 7— “Fair Value Measurements and Derivatives” for the affected line items in the consolidated statements of operations.
|
(2)
|
Amortization of prior-service cost and actuarial loss reclassified to payroll and related expense.
|
|
5.
|
Property and Equipment,
net
|
Property and equipment, net increased $595.4 million for the
nine months ended September 30, 2016 primarily due to the delivery of Seven Seas Explorer and the refurbishment of several ships.
In June 2016, NCLC and Voyager Vessel Company, LLC, indirect
subsidiaries of NCLH, entered into a Second Amended and Restated Credit Agreement (the “Amended Senior Secured Credit Facility”)
with a syndicate of banks which restates the Amended and Restated Credit Agreement, dated as of October 31, 2014 (the “Existing
Senior Secured Credit Facility”). The Amended Senior Secured Credit Facility amends the Existing Senior Secured Credit Facility
to, among other things, (i) (a) increase the aggregate amount of commitments under the Revolving Loan Facility from $625.0 million
to $750.0 million (the “New Revolving Loan Facility”) and (b) increase the aggregate principal amount outstanding under
the $1.38 billion term loan facility from $1.16 billion to $1.51 billion (the “New Term Loan A Facility”) and (ii)
extend the maturity of the New Term Loan A Facility and the New Revolving Loan Facility to June 2021 (the “Extended Maturity
Date”). The agreement incorporates a springing maturity date for the New Term Loan A Facility and the New Revolving Loan
Facility such that both mature on (A) the earlier date that is 91 days prior to the final maturity date of NCLC’s $680.0
million aggregate principal amount of 5.25% senior unsecured notes due 2019 (the “5.25% Notes”) if on such date (x)
the 5.25% Notes have not been repaid (or refinanced with indebtedness maturing after the Extended Maturity Date) by such date and
(y) free liquidity does not exceed the aggregate principal amount of outstanding 5.25% Notes by at least $50.0 million and (B)
the earlier date that is 91 days prior to the final maturity date of NCLC’s $600.0 million aggregate principal amount of
4.625% senior unsecured notes due 2020 (the “4.625% Notes”) if on such date (x) the 4.625% Notes have not been repaid
(or refinanced with indebtedness maturing after the Extended Maturity Date) by such date and (y) free liquidity does not exceed
the aggregate principal amount of outstanding 4.625% Notes by at least $50.0 million. NCLC used proceeds of approximately $1.59
billion from the New Term Loan A Facility and the New Revolving Loan Facility to prepay the entire outstanding principal amount
of the Revolving Loan Facility, the $1.38 billion term loan facility and a $350.0 million term loan facility.
The New Term Loan A Facility and New Revolving Loan Facility
bear interest at a rate per annum of (a) an adjusted LIBOR rate or (b) a base rate determined by reference to the greatest of (i)
the federal funds rate plus 0.50%, (ii) the prime rate in effect on such day and (iii) the adjusted LIBOR rate plus 1%, in each
case plus an applicable margin that is determined by reference to a total leverage ratio, with an applicable margin of between
2.25% and 1.50% with respect to Eurocurrency loans and between 1.25% and 0.50% with respect to base rate loans. The initial applicable
margin for borrowings is 2.25% with respect to Eurocurrency borrowings and 1.25% with respect to base rate borrowings.
The New Term Loan A Facility is required to be repaid in quarterly
installments that commenced in September 2016, in a principal amount equal to (a) in the case of installments payable on or prior
to June 6, 2018, 1.25% of the loans outstanding immediately after the closing date under the New Term Loan A Facility and (b) in
the case of installments payable after June 6, 2018, 2.50% of the loans outstanding immediately after the closing date under the
New Term Loan A Facility, with the remaining unpaid principal amount of loans under the New Term Loan A Facility due and payable
in full at maturity on June 6, 2021. Principal amounts outstanding under the New Revolving Loan Facility are due and payable in
full at maturity on June 6, 2021, subject to earlier repayment pursuant to the springing maturity date described above.
In addition to paying interest on outstanding principal under
the borrowings, we are obligated to pay a quarterly commitment fee at a rate determined by reference to a total leverage ratio,
with a maximum commitment fee of 40% of the applicable margin for Eurocurrency loans.
In June 2016, we took delivery of Seven Seas Explorer. To finance
the payment due upon delivery, we had export financing in place for 80% of the contract price. The associated $373.6 million term
loan bears interest at 3.43% with a maturity date of June 30, 2028. Principal and interest payments are payable semiannually.
NCLC, a subsidiary of NCLH, entered into
a Supplemental Agreement, dated July 26, 2016, by and among NCLC, as guarantor, Breakaway Four, Ltd. (the “Borrower”),
as borrower, NCL International Ltd., as shareholder, and KfW IPEX-Bank GmbH (“KfW”), as facility agent and lender (the
“Credit Agreement Amendment”), which amends the Credit Agreement, dated as of October 12, 2012, by and among NCLC,
as parent, the Borrower and KfW, as facility agent and lender (the “Existing Credit Agreement”). The Credit Agreement
Amendment amends the Existing Credit Agreement to, among other things, increase the aggregate principal amount of commitments under
the multi-draw term loan credit facility from €590.5 million to €729.9 million. Except as provided in the Credit Agreement
Amendment, all other provisions of the Existing Credit Agreement remain in full force.
|
7.
|
Fair Value Measurements
and Derivatives
|
Fair value is defined as the price at which an orderly transaction
to sell an asset or to transfer a liability would take place between market participants at the measurement date under current
market conditions (that is, an exit price at the measurement date from the perspective of a market participant that holds the asset
or owes the liability).
Fair Value Hierarchy
The following hierarchy for inputs used in measuring fair value
should maximize the use of observable inputs and minimize the use of unobservable inputs by requiring that the most observable
inputs be used when available:
Level 1
|
Quoted prices in active markets for identical assets or liabilities that are accessible at the measurement dates.
|
|
|
Level 2
|
Significant other observable inputs that are used by market participants in pricing the asset or liability based on market data obtained from independent sources.
|
|
|
Level 3
|
Significant unobservable inputs we believe market participants would use in pricing the asset or liability based on the best information available.
|
Derivatives
We are exposed to market risk attributable to changes in interest
rates, foreign currency exchange rates and fuel prices. We attempt to minimize these risks through a combination of our normal
operating and financing activities and through the use of derivatives. We assess whether derivatives used in hedging transactions
are “highly effective” in offsetting changes in the cash flow of our hedged forecasted transactions. We use regression
analysis for this hedge relationship and high effectiveness is achieved when a statistically valid relationship reflects a high
degree of offset and correlation between the fair values of the derivative and the hedged forecasted transaction. Cash flows from
the derivatives are classified in the same category as the cash flows from the underlying hedged transaction. The determination
of ineffectiveness is based on the amount of dollar offset between the cumulative change in fair value of the derivative and the
cumulative change in fair value of the hedged transaction at the end of the reporting period. If it is determined that a derivative
is not highly effective as a hedge, or if the hedged forecasted transaction is no longer probable of occurring, then the amount
recognized in accumulated other comprehensive income (loss) is released to earnings. In addition, the ineffective portion of our
highly effective hedges is recognized in earnings immediately and reported in other income (expense) in our consolidated statements
of operations. There are no amounts excluded from the assessment of hedge effectiveness and there are no credit-risk-related contingent
features in our derivative agreements.
We monitor concentrations of credit risk associated with financial
and other institutions with which we conduct significant business. Credit risk, including but not limited to counterparty non-performance
under derivatives and our New Revolving Loan Facility, is not considered significant, as we primarily conduct business with large,
well-established financial institutions that we have established relationships with and that have credit risks acceptable to us
or the credit risk is spread out among a large number of creditors. We do not anticipate non-performance by any of our significant
counterparties. The following table sets forth our derivatives measured at fair value and discloses the balance sheet location
(in thousands):
|
|
|
|
Asset
|
|
|
Liability
|
|
|
|
Balance
Sheet location
|
|
September
30,
2016
|
|
|
December 31,
2015
|
|
|
September
30,
2016
|
|
|
December 31,
2015
|
|
Fuel swaps designated as hedging
instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses and other assets
|
|
$
|
13,740
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
Other long-term assets
|
|
|
3,462
|
|
|
|
—
|
|
|
|
145
|
|
|
|
—
|
|
|
|
Accrued expenses and other liabilities
|
|
|
—
|
|
|
|
—
|
|
|
|
73,923
|
|
|
|
128,740
|
|
|
|
Other long-term liabilities
|
|
|
7,167
|
|
|
|
—
|
|
|
|
65,529
|
|
|
|
132,494
|
|
Foreign currency forward contracts designated
as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses and other assets
|
|
|
10,153
|
|
|
|
—
|
|
|
|
1,381
|
|
|
|
—
|
|
|
|
Other long-term assets
|
|
|
14,980
|
|
|
|
3,446
|
|
|
|
2,363
|
|
|
|
1,370
|
|
|
|
Accrued expenses and other liabilities
|
|
|
1,065
|
|
|
|
—
|
|
|
|
8,930
|
|
|
|
8,737
|
|
|
|
Other long-term liabilities
|
|
|
1,567
|
|
|
|
551
|
|
|
|
4,943
|
|
|
|
24,181
|
|
Foreign currency collar not designated
as a hedging instrument
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued expenses and other liabilities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
42,993
|
|
Interest rate swaps designated as hedging
instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued expenses and other liabilities
|
|
|
—
|
|
|
|
—
|
|
|
|
3,858
|
|
|
|
4,079
|
|
|
|
Other long-term liabilities
|
|
|
—
|
|
|
|
—
|
|
|
|
2,594
|
|
|
|
3,395
|
|
The fair values of swap and forward contracts are determined
based on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets. The
Company determines the value of options and collars utilizing an option pricing model based on inputs that are either readily available
in public markets or can be derived from information available in publicly quoted markets. The option pricing model used by the
Company is an industry standard model for valuing options and is used by the broker/dealer community. The inputs to this option
pricing model are the option strike price, underlying price, risk-free rate of interest, time to expiration, and volatility. The
fair value of option contracts considers both the intrinsic value and any remaining time value associated with those derivatives
that have not yet settled. The Company also considers counterparty credit risk and its own credit risk in its determination of
all estimated fair values. Our derivatives and financial instruments were categorized as Level 2 in the fair value hierarchy, and
we had no derivatives or financial instruments categorized as Level 1 or Level 3.
Our derivative contracts include rights of offset with our counterparties.
We have elected to net certain assets and liabilities within counterparties when the rights of offset exist. We are not required
to post cash collateral related to our derivative instruments.
The following table discloses the gross and net amounts recognized
within assets and liabilities (in thousands):
September 30, 2016
|
|
Gross Amounts
|
|
|
Gross
Amounts
Offset
|
|
|
Total Net
Amounts
|
|
|
Gross
Amounts Not
Offset
|
|
|
Net Amounts
|
|
Assets
|
|
$
|
42,335
|
|
|
$
|
(3,889
|
)
|
|
$
|
38,446
|
|
|
$
|
(11,179
|
)
|
|
$
|
27,267
|
|
Liabilities
|
|
|
159,777
|
|
|
|
(9,799
|
)
|
|
|
149,978
|
|
|
|
(10,802
|
)
|
|
|
139,176
|
|
December 31, 2015
|
|
Gross Amounts
|
|
|
Gross
Amounts
Offset
|
|
|
Total Net
Amounts
|
|
|
Gross
Amounts Not
Offset
|
|
|
Net Amounts
|
|
Assets
|
|
$
|
3,446
|
|
|
$
|
(1,370
|
)
|
|
$
|
2,076
|
|
|
$
|
(2,043
|
)
|
|
$
|
33
|
|
Liabilities
|
|
|
344,619
|
|
|
|
(551
|
)
|
|
|
344,068
|
|
|
|
(336,645
|
)
|
|
|
7,423
|
|
Fuel Swaps
As of September 30, 2016, we had fuel swaps maturing through
December 31, 2020 which are used to mitigate the financial impact of volatility in fuel prices pertaining to approximately
1.7 million metric tons of our projected fuel purchases.
The effects on the consolidated financial statements of the
fuel swaps which were designated as cash flow hedges were as follows (in thousands):
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Gain (loss) recognized in other comprehensive income (loss) – effective portion
|
|
$
|
(157
|
)
|
|
$
|
(101,056
|
)
|
|
$
|
76,145
|
|
|
$
|
(69,724
|
)
|
Loss recognized in other expense – ineffective portion
|
|
|
(2,602
|
)
|
|
|
(1,580
|
)
|
|
|
(11,353
|
)
|
|
|
(10,825
|
)
|
Amount reclassified from accumulated other comprehensive income (loss) into fuel expense
|
|
|
16,427
|
|
|
|
11,670
|
|
|
|
68,004
|
|
|
|
47,503
|
|
We had fuel swaps that matured which were not designated as
cash flow hedges. These fuel swaps were previously designated as cash flow hedges and were dedesignated due to a change in our
expected future fuel purchases mix.
The effects on the consolidated financial statements of the
fuel swaps which were dedesignated and recognized into earnings were as follows (in thousands):
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Loss recognized in other expense
|
|
$
|
(179
|
)
|
|
$
|
(4,716
|
)
|
|
$
|
(271
|
)
|
|
$
|
(4,716
|
)
|
Amount reclassified from accumulated other comprehensive income (loss) into other expense
|
|
|
—
|
|
|
|
—
|
|
|
|
2,994
|
|
|
|
10,000
|
|
Fuel Collars
We had fuel collars that matured and were used to mitigate the
financial impact of volatility in fuel prices of our fuel purchases.
The effects on the consolidated financial statements of the
fuel collars which were designated as cash flow hedges were as follows (in thousands):
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Amount reclassified from accumulated other comprehensive income (loss) into fuel expense
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Options
We had foreign currency options that matured which consisted
of call options with deferred premiums. These options were used to mitigate the financial impact of volatility in foreign currency
exchange rates related to our ship construction contracts denominated in euros. If the spot rate at the date the ships were delivered
was less than the strike price under these option contracts, we would have paid the deferred premium and would not exercise the
foreign currency options.
The effects on the consolidated financial statements of the
foreign currency options which were designated as cash flow hedges were as follows (in thousands):
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Amount reclassified from accumulated other comprehensive income (loss) into depreciation and amortization expense
|
|
$
|
330
|
|
|
$
|
330
|
|
|
$
|
990
|
|
|
$
|
990
|
|
Foreign Currency Forward Contracts
As of September 30, 2016, we had foreign currency forward contracts
which are used to mitigate the financial impact of volatility in foreign currency exchange rates related to our ship construction
contracts denominated in euros. The notional amount of our foreign currency forward contracts was €2.3 billion, or $2.6 billion
based on the euro/U.S. dollar exchange rate as of September 30, 2016.
The effects on the consolidated financial statements of the
foreign currency forward contracts which were designated as cash flow hedges were as follows (in thousands):
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Gain (loss) recognized in other comprehensive income (loss) – effective portion
|
|
$
|
36,390
|
|
|
$
|
(1,519
|
)
|
|
$
|
39,001
|
|
|
$
|
(61,966
|
)
|
Loss recognized in other expense – ineffective portion
|
|
|
(190
|
)
|
|
|
(3
|
)
|
|
|
(181
|
)
|
|
|
(10
|
)
|
Amount reclassified from accumulated other comprehensive income (loss) into depreciation and amortization expense
|
|
|
665
|
|
|
|
(64
|
)
|
|
|
1,966
|
|
|
|
(191
|
)
|
We had foreign currency forward contracts that matured and were
used to mitigate the volatility of foreign currency exchange rates related to financial instruments denominated in foreign currencies.
The effects on the consolidated financial statements of foreign
currency forward contracts which were not designated as cash flow hedges were as follows (in thousands):
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Gain (loss) recognized in other expense
|
|
$
|
—
|
|
|
$
|
585
|
|
|
$
|
(6,133
|
)
|
|
$
|
684
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Collars
We had foreign currency collars that matured and were used to
mitigate the volatility of foreign currency exchange rates related to our ship construction contracts denominated in euros.
The effects on the consolidated financial statements of the
foreign currency collar which was designated as a cash flow hedge was as follows (in thousands):
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Amount reclassified from accumulated other comprehensive income (loss) into depreciation and amortization expense
|
|
$
|
(91
|
)
|
|
$
|
(91
|
)
|
|
$
|
(273
|
)
|
|
$
|
(273
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The effect on the consolidated financial statements of the foreign
currency collar which was not designated as a cash flow hedge was as follows (in thousands):
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Gain (loss) recognized in other expense
|
|
$
|
—
|
|
|
$
|
955
|
|
|
$
|
10,312
|
|
|
$
|
(18,648
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps
As of September 30, 2016, we had interest rate swap agreements
to hedge our exposure to interest rate movements and to manage our interest expense. The notional amount of outstanding debt associated
with the interest rate swap agreements was $339.8 million as of September 30, 2016.
The effects on the consolidated financial statements of the
interest rate swaps which were designated as cash flow hedges were as follows (in thousands):
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Gain (loss) recognized in other comprehensive income (loss)– effective portion
|
|
$
|
818
|
|
|
$
|
(2,652
|
)
|
|
$
|
(2,638
|
)
|
|
$
|
(6,811
|
)
|
Gain (loss) recognized in other expense – ineffective portion
|
|
|
—
|
|
|
|
(9
|
)
|
|
|
3
|
|
|
|
(21
|
)
|
Amount reclassified from accumulated other comprehensive income (loss) into interest expense, net
|
|
|
996
|
|
|
|
1,287
|
|
|
|
2,977
|
|
|
|
3,305
|
|
We had an interest rate swap that matured which was used to
mitigate our exposure to interest rate movements and to manage our interest expense.
The effect on the consolidated financial statements of the interest
rate swap contract which was not designated as a hedging instrument was as follows (in thousands):
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Loss recognized in other expense
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term Debt
As of September 30, 2016 and December 31, 2015, the fair value
of our long-term debt, including the current portion, was $6.5 billion which was $16.4 million higher and $6.6 million lower, respectively,
than the carrying values. The difference between the fair value and carrying value of our long-term debt is due to our fixed and
variable rate debt obligations carrying interest rates that are above or below market rates at the measurement dates. The fair
value of our long-term debt was calculated based on estimated rates for the same or similar instruments with similar terms and
remaining maturities resulting in Level 2 inputs in the fair value hierarchy. Market risk associated with our long-term variable
rate debt is the potential increase in interest expense from an increase in interest rates. The calculation of the fair value of
our long-term debt is considered a Level 2 input.
Other
The carrying amounts reported in the consolidated balance sheets
of all other financial assets and liabilities approximate fair value.
|
8.
|
Employee Benefits and
Compensation Plans
|
Share Option Awards
On March 1, 2016, we granted 1.0 million share option awards
to our employees at an exercise price of $50.31 with a contractual term of ten years. The share options vest equally over three
years.
The following is a summary of option activity under our share
option plan for the nine months ended September 30, 2016 (excludes the impact of 364,584 previously awarded performance-based options
as no grant date has been established):
|
|
Number of Share Option
Awards
|
|
|
Weighted-Average Exercise
Price Per Share
|
|
|
Weighted-
Average
Contractual Term
|
|
|
Aggregate
Intrinsic Value
|
|
|
|
Time-
Based
Awards
|
|
|
Performance-
Based
Awards
|
|
|
Market-
Based
Awards
|
|
|
Time-
Based
Awards
|
|
|
Performance-
Based
Awards
|
|
|
Market-
Based
Awards
|
|
|
(years)
|
|
|
(in thousands)
|
|
Outstanding as of December
31, 2015
|
|
|
7,702,071
|
|
|
|
432,752
|
|
|
|
208,333
|
|
|
$
|
47.35
|
|
|
$
|
19.00
|
|
|
$
|
59.43
|
|
|
|
8.59
|
|
|
$
|
104,864
|
|
Granted
|
|
|
1,095,000
|
|
|
|
52,083
|
|
|
|
—
|
|
|
|
49.88
|
|
|
|
59.43
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(169,527
|
)
|
|
|
(51,857
|
)
|
|
|
—
|
|
|
|
27.64
|
|
|
|
19.00
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Forfeited and cancelled
|
|
|
(583,492
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
49.46
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Outstanding as of
September 30, 2016
|
|
|
8,044,052
|
|
|
|
432,978
|
|
|
|
208,333
|
|
|
$
|
47.96
|
|
|
$
|
23.86
|
|
|
$
|
59.43
|
|
|
|
8.07
|
|
|
$
|
24,633
|
|
Restricted Ordinary Share Awards
The following is a summary of restricted ordinary share activity
for the nine months ended September 30, 2016:
|
|
Number of
Time-Based
Awards
|
|
|
Weighted-
Average Grant
Date Fair
Value Per Share
|
|
Non-vested as of January 1, 2016
|
|
|
43,653
|
|
|
$
|
5.87
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
Vested
|
|
|
(26,118
|
)
|
|
|
4.81
|
|
Forfeited or expired
|
|
|
(352
|
)
|
|
|
2.50
|
|
Non-vested and expected to vest as of September 30, 2016
|
|
|
17,183
|
|
|
$
|
7.55
|
|
Restricted Share Unit Awards
On March 1, 2016, we granted 1.2
million restricted share unit awards to our employees which vest equally over three years.
The following is a summary of restricted share unit activity
for the nine months ended September 30, 2016 (excludes the impact of 87,500 previously awarded performance-based restricted share
units as no grant date was established):
|
|
Number of
Time-Based
Awards
|
|
|
Weighted-
Average Grant
Date Fair
Value Per Share
|
|
|
Number of
Performance-
Based
Awards
|
|
|
Weighted-
Average Grant
Date Fair
Value Per Share
|
|
|
Number of
Market-
Based
Awards
|
|
|
Weighted-
Average Grant
Date Fair
Value Per Share
|
|
Non-vested as of January 1, 2016
|
|
|
150,000
|
|
|
$
|
59.43
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
50,000
|
|
|
$
|
59.43
|
|
Granted
|
|
|
1,328,490
|
|
|
|
49.62
|
|
|
|
12,500
|
|
|
|
50.00
|
|
|
|
—
|
|
|
|
—
|
|
Vested
|
|
|
(37,500
|
)
|
|
|
59.43
|
|
|
|
(12,500
|
)
|
|
|
50.00
|
|
|
|
—
|
|
|
|
—
|
|
Forfeited or expired
|
|
|
(83,655
|
)
|
|
|
50.51
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Non-vested and expected to vest as of September 30, 2016
|
|
|
1,357,335
|
|
|
$
|
50.38
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
50,000
|
|
|
$
|
59.43
|
|
The share-based compensation expense for the three months ended
September 30, 2016 was $16.8 million of which $15.0 million was recorded in marketing, general and administrative expense and $1.8
million was recorded in payroll and related expense. The nine months ended September 30, 2016 was $48.3 million of which $42.7
million was recorded in marketing, general and administrative expense and $5.6 million was recorded in payroll and related expense.
|
9.
|
Commitments and Contingencies
|
Ship Construction Contracts
We have Norwegian Joy, Norwegian Bliss and one additional Breakaway
Plus Class Ship on order with Meyer Werft shipyard for delivery in the spring of 2017, spring of 2018 and the fall of 2019, respectively.
These ships will be amongst the largest in our fleet, reaching approximately 164,600 Gross Tons. The combined contract price of
these three ships is approximately €2.6 billion, or $2.9 billion based on the euro/U.S. dollar exchange rate
as of September 30, 2016. We have export credit financing in place that provides financing for 80% of their contract prices. We
have an Explorer Class Ship on order with Fincantieri shipyard with an original contract price of approximately €422.0 million,
or approximately $474.1 million based on the euro/U.S. dollar exchange rate as of September 30, 2016. We have export credit
financing in place that provides financing for 80% of the contract price. The Explorer Class Ship is expected to be delivered
in the winter of 2020.
In connection with the contracts to build these ships, we do
not anticipate any contractual breaches or cancellations to occur. However, if any would occur, it could result in, among other
things, the forfeiture of prior deposits or payments made by us, subject to certain refund guarantees, and potential claims and
impairment losses which may materially impact our business, financial condition and results of operations.
Litigation
In the normal course of our business, various claims and lawsuits
have been filed or are pending against us. Most of these claims and lawsuits are covered by insurance and, accordingly, the maximum
amount of our liability is typically limited to our deductible amount.
Nonetheless, the ultimate outcome of these claims and lawsuits
that are not covered by insurance cannot be determined at this time. We have evaluated our overall exposure with respect to all
of our threatened and pending litigation and, to the extent required, we have accrued amounts for all estimable probable losses
associated with our deemed exposure. We are currently unable to estimate any other potential contingent losses beyond those accrued,
as discovery is not complete nor is adequate information available to estimate such range of loss or potential recovery. However,
based on our current knowledge, we do not believe that the aggregate amount or range of reasonably possible losses with respect
to these matters will be material to our consolidated results of operations, financial condition or cash flows. We intend to vigorously
defend our legal position on all claims and, to the extent necessary, seek recovery.
Due to the Acquisition of Prestige, a number of employee positions
were consolidated. As of September 30, 2016, we had no accrual balance for restructuring costs for severance and
other employee-related costs. The expense of $0.1 million for the nine months ended September 30, 2016 is included in marketing,
general and administrative expense.
The following table summarizes changes in the accrual for restructuring
costs (in thousands):
|
|
Restructuring costs
|
|
Accrued expense balance as of December 31, 2015
|
|
$
|
(4,144
|
)
|
Amounts paid
|
|
|
4,254
|
|
Additional accrued expense
|
|
|
(110
|
)
|
Accrued expense balance as of September 30, 2016
|
|
$
|
—
|
|
|
11.
|
Supplemental Cash Flow
Information
|
For the nine months ended September 30, 2016, we had non-cash
investing activities in connection with property and equipment of $22.3 million and for the nine months ended September
30, 2015, we had non-cash investing activities in connection with capital leases of $28.5 million and capital expenditures of
$6.5 million.
Item 2. Management’s Discussion and Analysis
of Financial Condition and Results of Operations
Cautionary Statement Concerning Forward-Looking Statements
Certain statements in this report constitute forward-looking
statements within the meaning of the U.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 and objectives of management for future operations (including development plans and objectives
relating to our activities), 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:
|
•
|
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;
|
|
•
|
the risks and increased costs associated with operating internationally;
|
|
•
|
an impairment of our tradenames or goodwill which could adversely affect our financial condition and operating results;
|
|
•
|
our efforts to expand our business into new markets;
|
|
•
|
adverse events impacting the security of travel, such as terrorist acts, acts of piracy, armed conflict and threats thereof and other international events;
|
|
•
|
breaches in data security or other disturbances to our information technology and other networks;
|
|
•
|
the spread of epidemics and viral outbreaks;
|
|
•
|
adverse incidents involving cruise ships;
|
|
•
|
changes in fuel prices and/or other cruise operating costs;
|
|
•
|
our hedging strategies;
|
|
•
|
our inability to obtain adequate insurance coverage;
|
|
•
|
our substantial indebtedness, including the ability to raise additional capital to fund our operations, and to generate the necessary amount of cash to service our existing debt;
|
|
•
|
restrictions in the agreements governing our indebtedness that limit our flexibility in operating our business;
|
|
•
|
the significant portion of our assets pledged as collateral under our existing debt agreements and the ability of our creditors to accelerate the repayment of our indebtedness;
|
|
•
|
our ability to incur significantly more debt despite our substantial existing indebtedness;
|
|
•
|
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;
|
|
•
|
fluctuations in foreign currency exchange rates;
|
|
•
|
our inability to recruit or retain qualified personnel or the loss of key personnel;
|
|
•
|
future changes relating to how external distribution channels sell and market our cruises;
|
|
•
|
our reliance on third parties to provide hotel management services to certain ships and certain other services;
|
|
•
|
delays in our shipbuilding program and ship repairs, maintenance and refurbishments;
|
|
•
|
future increases in the price of, or major changes or reduction in, commercial airline services;
|
|
•
|
seasonal variations in passenger fare rates and occupancy levels at different times of the year;
|
|
•
|
our ability to keep pace with developments in technology;
|
|
•
|
amendments to our collective bargaining agreements for crew members and other employee relation issues;
|
|
•
|
the continued availability of attractive port destinations;
|
|
•
|
pending or threatened litigation, investigations and enforcement actions;
|
|
•
|
changes involving the tax and environmental regulatory regimes in which we operate; and
|
|
•
|
other factors set forth under “Risk Factors” in our most recently filed Annual Report on Form 10-K and “Item 1A. Risk Factors” in this report.
|
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 will 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 Revenue, Adjusted Net Yield, 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 calculating 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 November 2014, pursuant
to the Merger Agreement, we acquired Prestige in a cash and stock transaction for total consideration of $3.025 billion,
including the assumption of debt.
•
Adjusted EBITDA.
EBITDA adjusted for other income
(expense) and other supplemental adjustments.
•
Adjusted EPS.
Adjusted Net Income 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.
Net income adjusted for supplemental
adjustments.
•
Adjusted Net Revenue.
Net Revenue adjusted for
supplemental adjustments.
•
Adjusted Net Yield.
Net Yield adjusted for supplemental
adjustments.
•
Bareboat Charter.
The hire of a ship for a specified
period of time whereby no crew or provisions are provided by the Company.
•
Berths.
Double occupancy capacity per cabin (single
occupancy per studio cabin) even though many cabins can accommodate three or more passengers.
•
Breakaway Class Ships.
Norwegian Breakaway and
Norwegian Getaway.
• Breakaway Plus Class Ships.
The next generation
of ships which are similar in design and innovation to Breakaway Class Ships.
•
Business Enhancement Capital Expenditures
. Capital
expenditures other than those related to new ship construction and ROI Capital Expenditures.
•
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 U.S. dollar exchange rate of a comparable period in
order 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.
•
EBITDA.
Earnings before interest, taxes, and depreciation
and amortization.
•
EPS.
Earnings per share.
•
Explorer Class Ships.
Regent’s Seven Seas
Explorer and a second ship on order.
•
GAAP.
Generally accepted accounting principles
in the U.S.
•
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 = 100 cubic feet or 2.831 cubic meters.
•
Gross Yield.
Total revenue per Capacity Day.
•
Management NCL Corporation Units.
NCLC’s
previously outstanding profits interests issued to management (or former management) of NCLC which were converted into units in
NCLC. All Management NCL Corporation Units were exchanged for NCLH ordinary shares and restricted shares in the fourth quarter
of 2014.
•
Merger Agreement.
Agreement and Plan of Merger,
dated as of September 2, 2014, by and among Prestige, NCLH, Portland Merger Sub, Inc. and Apollo Management, L.P., as amended,
for the Acquisition of Prestige.
•
Net Cruise Cost.
Gross Cruise Cost less commissions,
transportation and other expense and onboard and other expense.
•
Net Cruise Cost Excluding Fuel.
Net Cruise Cost
less fuel expense.
•
Net Revenue.
Total revenue less commissions, transportation
and other expense and onboard and other expense.
•
Net Yield.
Net Revenue per Capacity Day.
•
New Revolving Loan Facility
. $750.0 million senior
secured revolving credit facility maturing on June 6, 2021, subject to an earlier springing maturity date as described in Note
6— “Long-Term Debt” in our consolidated financial statements included herein. The New Revolving Loan Facility
amended and restated the Revolving Loan Facility.
•
Occupancy Percentage
. The ratio of Passenger Cruise
Days to Capacity Days. A percentage in excess of 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.
•
Revolving Loan Facility
. $625.0 million senior
secured revolving credit facility which was to mature on May 24, 2018 and was amended and restated in June 2016 (such amendment
and restatement is referred to herein as the New Revolving Loan Facility).
•
ROI Capital Expenditures.
Comprised of project-based
capital expenditures which have a quantified return on investment.
•
Secondary Equity Offering(s).
Secondary public
offering(s) of NCLH’s ordinary shares in December 2015, August 2015, May 2015, March 2015, March 2014, December 2013 and
August 2013.
•
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,
Adjusted Net Revenue, Net Yield, Adjusted 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 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 measuring our ability to control costs in a manner that positively impacts net income, we believe changes in
Net Cruise Cost and Adjusted Net Cruise Cost Excluding Fuel to be the most relevant indicators of our performance.
As our business includes the sourcing of passengers and deployment
of vessels outside of the U.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, the U.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 to U.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 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. Adjusted EBITDA is not 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 Revenue and Adjusted Net Yield,
which exclude certain business combination accounting entries, are non-GAAP financial measures that we believe are useful as
supplemental measures in evaluating the performance of our operating business and provide greater transparency into our
results of operations. 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 Revenue, Adjusted
Net Yield, Adjusted Net Income and Adjusted EPS may not be indicative of future adjustments or results. For example, for the
nine months ended September 30, 2016, we incurred an $11.2 million write-off, primarily due to deferred financing fees
due to the refinancing of certain credit facilities. We included the deferred financing fees as an adjustment in the
reconciliation of Adjusted Net Income since these amounts are not representative of our day-to-day operations and we have
included other write-offs of deferred financing fees as adjustments in prior periods.
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
Revenue from our cruise and cruise-related activities are categorized
by us as “passenger ticket revenue” and “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, photo services as well
as certain Bareboat Charter revenue. We record onboard revenue 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, costs associated with service charges, 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 that are incurred in connection with onboard and other revenue. These include costs incurred in connection with gaming, 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
We evaluate goodwill 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. Based on the recent performance of the Oceania Cruises’ reporting unit, we performed an interim goodwill impairment
evaluation. Based on that evaluation, we determined that there was no impairment of goodwill because its fair value exceeded its
carrying value. However, if the fair value of that reporting unit declines in future periods, its goodwill may become impaired
at that time. As of September 30, 2016, there was $523.0 million of goodwill for the Oceania Cruises’ reporting unit.
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 ended December 31,
2015 under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
We have made no significant changes to our critical accounting policies and estimates from those described in our Annual Report
on Form 10-K for the year ended December 31, 2015.
Quarterly Overview
Three months ended September 30, 2016 (“2016”)
compared to the three months ended September 30, 2015 (“2015”)
Total revenue increased 15.6% to $1.5 billion in 2016 compared
to $1.3 billion in 2015 primarily due to an increase in Capacity Days and improved pricing. Gross Yield increased 1.5%. Net Revenue
in 2016 increased 17.4% to $1.1 billion from $975.2 million in 2015 due to an increase in Capacity Days of 13.9% and an increase
in Net Yield of 3.1%. The increase in Capacity Days was primarily due to the delivery of Norwegian Escape in October 2015, Sirena
joining our fleet in April 2016 and the delivery of Seven Seas Explorer in June 2016. The increase in Net Yield was primarily due
to improved pricing.
We had net income and diluted EPS of $342.4 million in 2016
and $1.50, respectively. Operating income was $413.6 million in 2016 compared to $306.8 million in 2015. We had Adjusted Net Income
and Adjusted EPS of $369.3 million and $1.62, respectively, in 2016, which includes $26.9 million of adjustments primarily consisting
of expenses related to non-cash compensation, severance and other fees and certain other adjustments. Adjusted EBITDA improved
22.3% in 2016 compared to 2015. We refer you to our “Results of Operations” below for a calculation of Net Revenue,
Gross Yield, Net Yield, Adjusted Net Income and Adjusted EBITDA.
Results of Operations
The following table sets forth operating data as a percentage
of total revenue:
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Passenger ticket
|
|
|
72.2
|
%
|
|
|
73.8
|
%
|
|
|
70.2
|
%
|
|
|
72.7
|
%
|
Onboard and other
|
|
|
27.8
|
%
|
|
|
26.2
|
%
|
|
|
29.8
|
%
|
|
|
27.3
|
%
|
Total revenue
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cruise operating expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions, transportation and other
|
|
|
16.8
|
%
|
|
|
17.6
|
%
|
|
|
16.5
|
%
|
|
|
17.8
|
%
|
Onboard and other
|
|
|
6.1
|
%
|
|
|
6.6
|
%
|
|
|
6.1
|
%
|
|
|
6.4
|
%
|
Payroll and related
|
|
|
13.0
|
%
|
|
|
13.3
|
%
|
|
|
14.8
|
%
|
|
|
14.8
|
%
|
Fuel
|
|
|
5.8
|
%
|
|
|
6.9
|
%
|
|
|
6.6
|
%
|
|
|
8.1
|
%
|
Food
|
|
|
3.4
|
%
|
|
|
3.6
|
%
|
|
|
4.0
|
%
|
|
|
4.0
|
%
|
Other
|
|
|
7.7
|
%
|
|
|
7.9
|
%
|
|
|
9.4
|
%
|
|
|
9.3
|
%
|
Total cruise operating expense
|
|
|
52.8
|
%
|
|
|
55.9
|
%
|
|
|
57.4
|
%
|
|
|
60.4
|
%
|
Other operating expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing, general and administrative
|
|
|
11.8
|
%
|
|
|
11.7
|
%
|
|
|
13.5
|
%
|
|
|
12.4
|
%
|
Depreciation and amortization
|
|
|
7.5
|
%
|
|
|
8.5
|
%
|
|
|
8.5
|
%
|
|
|
9.5
|
%
|
Total other operating expense
|
|
|
19.3
|
%
|
|
|
20.2
|
%
|
|
|
22.0
|
%
|
|
|
21.9
|
%
|
Operating income
|
|
|
27.9
|
%
|
|
|
23.9
|
%
|
|
|
20.6
|
%
|
|
|
17.7
|
%
|
Non-operating income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
(4.1
|
)%
|
|
|
(3.9
|
)%
|
|
|
(5.0
|
)%
|
|
|
(4.6
|
)%
|
Other expense
|
|
|
(0.4
|
)%
|
|
|
(0.1
|
)%
|
|
|
(0.4
|
)%
|
|
|
(1.1
|
)%
|
Total non-operating income (expense)
|
|
|
(4.5
|
)%
|
|
|
(4.0
|
)%
|
|
|
(5.4
|
)%
|
|
|
(5.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before income taxes
|
|
|
23.4
|
%
|
|
|
19.9
|
%
|
|
|
15.2
|
%
|
|
|
12.0
|
%
|
Income tax expense
|
|
|
(0.3
|
)%
|
|
|
(0.3
|
)%
|
|
|
(0.2
|
)%
|
|
|
(0.2
|
)%
|
Net income
|
|
|
23.1
|
%
|
|
|
19.6
|
%
|
|
|
15.0
|
%
|
|
|
11.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth selected statistical information:
|
|
Three
Months Ended
September 30,
|
|
|
Nine
Months Ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Passengers carried
|
|
|
635,654
|
|
|
|
574,011
|
|
|
|
1,761,967
|
|
|
|
1,615,213
|
|
Passenger Cruise Days
|
|
|
4,674,286
|
|
|
|
4,208,605
|
|
|
|
13,196,600
|
|
|
|
11,925,493
|
|
Capacity Days
|
|
|
4,209,562
|
|
|
|
3,696,549
|
|
|
|
12,175,012
|
|
|
|
10,887,160
|
|
Occupancy Percentage
|
|
|
111.0
|
%
|
|
|
113.9
|
%
|
|
|
108.4
|
%
|
|
|
109.5
|
%
|
Net Revenue, Adjusted Net Revenue, Gross Yield, Net Yield and
Adjusted Net Yield were calculated as follows (in thousands, except Capacity Days and Yield data):
|
|
Three
Months Ended
September 30,
|
|
|
Nine
Months Ended
September 30,
|
|
|
|
2016
|
|
|
2016
Constant
Currency
|
|
|
2015
|
|
|
2016
|
|
|
2016
Constant
Currency
|
|
|
2015
|
|
Passenger ticket revenue
|
|
$
|
1,071,815
|
|
|
$
|
1,080,784
|
|
|
$
|
948,059
|
|
|
$
|
2,630,405
|
|
|
$
|
2,655,815
|
|
|
$
|
2,406,533
|
|
Onboard and other revenue
|
|
|
412,921
|
|
|
|
412,921
|
|
|
|
336,851
|
|
|
|
1,118,798
|
|
|
|
1,118,798
|
|
|
|
901,992
|
|
Total revenue
|
|
|
1,484,736
|
|
|
|
1,493,705
|
|
|
|
1,284,910
|
|
|
|
3,749,203
|
|
|
|
3,774,613
|
|
|
|
3,308,525
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions, transportation and other expense
|
|
|
249,519
|
|
|
|
251,488
|
|
|
|
225,586
|
|
|
|
618,492
|
|
|
|
624,775
|
|
|
|
589,851
|
|
Onboard and other expense
|
|
|
90,661
|
|
|
|
90,661
|
|
|
|
84,171
|
|
|
|
230,416
|
|
|
|
230,416
|
|
|
|
210,701
|
|
Net Revenue
|
|
|
1,144,556
|
|
|
|
1,151,556
|
|
|
|
975,153
|
|
|
|
2,900,295
|
|
|
|
2,919,422
|
|
|
|
2,507,973
|
|
Non-GAAP Adjustment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue (1)
|
|
|
300
|
|
|
|
300
|
|
|
|
3,026
|
|
|
|
1,057
|
|
|
|
1,057
|
|
|
|
31,514
|
|
Adjusted Net Revenue
|
|
$
|
1,144,856
|
|
|
$
|
1,151,856
|
|
|
$
|
978,179
|
|
|
$
|
2,901,352
|
|
|
$
|
2,920,479
|
|
|
$
|
2,539,487
|
|
Capacity Days
|
|
|
4,209,562
|
|
|
|
4,209,562
|
|
|
|
3,696,549
|
|
|
|
12,175,012
|
|
|
|
12,175,012
|
|
|
|
10,887,160
|
|
Gross Yield
|
|
$
|
352.71
|
|
|
$
|
354.84
|
|
|
$
|
347.60
|
|
|
$
|
307.94
|
|
|
$
|
310.03
|
|
|
$
|
303.89
|
|
Net Yield
|
|
$
|
271.89
|
|
|
$
|
273.56
|
|
|
$
|
263.80
|
|
|
$
|
238.22
|
|
|
$
|
239.79
|
|
|
$
|
230.36
|
|
Adjusted Net Yield
|
|
$
|
271.97
|
|
|
$
|
273.63
|
|
|
$
|
264.62
|
|
|
$
|
238.30
|
|
|
$
|
239.87
|
|
|
$
|
233.26
|
|
|
(1)
|
Reflects deferred revenue
fair value adjustments related to the Acquisition of Prestige that were made pursuant to business combination accounting rules.
|
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
September 30,
|
|
|
Nine
Months Ended
September 30,
|
|
|
|
2016
|
|
|
2016
Constant
Currency
|
|
|
2015
|
|
|
2016
|
|
|
2016
Constant
Currency
|
|
|
2015
|
|
Total cruise operating expense
|
|
$
|
784,734
|
|
|
$
|
786,209
|
|
|
$
|
717,722
|
|
|
$
|
2,155,115
|
|
|
$
|
2,162,546
|
|
|
$
|
1,997,701
|
|
Marketing, general and administrative expense
|
|
|
174,813
|
|
|
|
175,353
|
|
|
|
150,558
|
|
|
|
504,694
|
|
|
|
505,957
|
|
|
|
411,879
|
|
Gross Cruise Cost
|
|
|
959,547
|
|
|
|
961,562
|
|
|
|
868,280
|
|
|
|
2,659,809
|
|
|
|
2,668,503
|
|
|
|
2,409,580
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions, transportation and other expense
|
|
|
249,519
|
|
|
|
251,488
|
|
|
|
225,586
|
|
|
|
618,492
|
|
|
|
624,775
|
|
|
|
589,851
|
|
Onboard and other expense
|
|
|
90,661
|
|
|
|
90,661
|
|
|
|
84,171
|
|
|
|
230,416
|
|
|
|
230,416
|
|
|
|
210,701
|
|
Net Cruise Cost
|
|
|
619,367
|
|
|
|
619,413
|
|
|
|
558,523
|
|
|
|
1,810,901
|
|
|
|
1,813,312
|
|
|
|
1,609,028
|
|
Less: Fuel expense
|
|
|
86,250
|
|
|
|
86,250
|
|
|
|
88,829
|
|
|
|
248,529
|
|
|
|
248,529
|
|
|
|
267,784
|
|
Net Cruise Cost Excluding Fuel
|
|
|
533,117
|
|
|
|
533,163
|
|
|
|
469,694
|
|
|
|
1,562,372
|
|
|
|
1,564,783
|
|
|
|
1,341,244
|
|
Less Non-GAAP Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash deferred compensation (1)
|
|
|
792
|
|
|
|
792
|
|
|
|
3,277
|
|
|
|
2,375
|
|
|
|
2,375
|
|
|
|
5,759
|
|
Non-cash share-based compensation (2)
|
|
|
16,840
|
|
|
|
16,840
|
|
|
|
13,691
|
|
|
|
48,289
|
|
|
|
48,289
|
|
|
|
27,857
|
|
Secondary Equity Offerings’ expenses (3)
|
|
|
—
|
|
|
|
—
|
|
|
|
362
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,384
|
|
Severance payments and other fees (4)
|
|
|
2,587
|
|
|
|
2,587
|
|
|
|
1,369
|
|
|
|
5,486
|
|
|
|
5,486
|
|
|
|
15,045
|
|
Management NCL Corporation Units exchange expenses (5)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
624
|
|
Acquisition of Prestige expenses (6)
|
|
|
1,696
|
|
|
|
1,696
|
|
|
|
6,098
|
|
|
|
4,710
|
|
|
|
4,710
|
|
|
|
17,389
|
|
Contingent consideration adjustment (7)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(43,400
|
)
|
Contract termination expenses (8)
|
|
|
—
|
|
|
|
—
|
|
|
|
3,319
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,319
|
|
Adjusted Net Cruise Cost Excluding Fuel
|
|
$
|
511,202
|
|
|
$
|
511,248
|
|
|
$
|
441,578
|
|
|
$
|
1,501,512
|
|
|
$
|
1,503,923
|
|
|
$
|
1,313,267
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capacity Days
|
|
|
4,209,562
|
|
|
|
4,209,562
|
|
|
|
3,696,549
|
|
|
|
12,175,012
|
|
|
|
12,175,012
|
|
|
|
10,887,160
|
|
Gross Cruise Cost per Capacity Day
|
|
$
|
227.94
|
|
|
$
|
228.42
|
|
|
$
|
234.89
|
|
|
$
|
218.46
|
|
|
$
|
219.18
|
|
|
$
|
221.32
|
|
Net Cruise Cost per Capacity Day
|
|
$
|
147.13
|
|
|
$
|
147.14
|
|
|
$
|
151.09
|
|
|
$
|
148.74
|
|
|
$
|
148.94
|
|
|
$
|
147.79
|
|
Net Cruise Cost Excluding Fuel per Capacity Day
|
|
$
|
126.64
|
|
|
$
|
126.66
|
|
|
$
|
127.06
|
|
|
$
|
128.33
|
|
|
$
|
128.52
|
|
|
$
|
123.20
|
|
Adjusted Net Cruise Cost Excluding Fuel per Capacity Day
|
|
$
|
121.44
|
|
|
$
|
121.45
|
|
|
$
|
119.46
|
|
|
$
|
123.33
|
|
|
$
|
123.53
|
|
|
$
|
120.63
|
|
|
(1)
|
Non-cash deferred compensation expenses related to the crew pension plan and other crew expenses, which are included in payroll and related expense.
|
|
(2)
|
Non-cash share-based compensation expenses related to equity awards, which are included in marketing, general and administrative expense and payroll and related expense.
|
|
(3)
|
Expenses related to the Secondary Equity Offerings, which are included in marketing, general and administrative expense.
|
|
(4)
|
Severance payments and other expenses related to restructuring costs and other severance arrangements, which are included in marketing, general and administrative expense.
|
|
(5)
|
Expenses related to the exchange of Management NCL Corporation Units for ordinary shares, which are included in marketing, general and administrative expense.
|
|
(6)
|
Expenses related to the Acquisition of Prestige, which are included in marketing, general and administrative expense.
|
|
(7)
|
Contingent consideration fair value adjustment related to the Acquisition of Prestige, which is included in marketing, general and administrative expense.
|
|
(8)
|
Contract termination expenses related to the Acquisition of Prestige, which are included in other cruise operating expense.
|
Adjusted Net Income and Adjusted EPS were calculated as follows
(in thousands, except share and per share data):
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Net income
|
|
|
342,378
|
|
|
|
251,787
|
|
|
|
560,853
|
|
|
|
388,825
|
|
Non-GAAP Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash deferred compensation (1)
|
|
|
792
|
|
|
|
3,277
|
|
|
|
2,375
|
|
|
|
5,759
|
|
Non-cash share-based compensation (2)
|
|
|
16,840
|
|
|
|
13,691
|
|
|
|
48,289
|
|
|
|
28,030
|
|
Secondary Equity Offerings’ expenses (3)
|
|
|
—
|
|
|
|
362
|
|
|
|
—
|
|
|
|
1,384
|
|
Severance payments and other fees (4)
|
|
|
2,587
|
|
|
|
1,369
|
|
|
|
5,486
|
|
|
|
15,045
|
|
Management NCL Corporation Units exchange expenses (5)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
624
|
|
Acquisition of Prestige expenses (6)
|
|
|
1,696
|
|
|
|
6,098
|
|
|
|
4,710
|
|
|
|
17,389
|
|
Deferred revenue (7)
|
|
|
300
|
|
|
|
3,026
|
|
|
|
1,057
|
|
|
|
31,514
|
|
Amortization of intangible assets (8)
|
|
|
5,267
|
|
|
|
20,914
|
|
|
|
15,802
|
|
|
|
59,973
|
|
Contingent consideration adjustment (9)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(43,400
|
)
|
Derivative adjustment (10)
|
|
|
—
|
|
|
|
3,767
|
|
|
|
(1,185
|
)
|
|
|
33,370
|
|
Contract termination expenses (11)
|
|
|
—
|
|
|
|
6,848
|
|
|
|
—
|
|
|
|
6,848
|
|
Deferred financing fees and other (12)
|
|
|
(558
|
)
|
|
|
—
|
|
|
|
11,156
|
|
|
|
—
|
|
Adjusted Net Income
|
|
$
|
369,302
|
|
|
$
|
311,139
|
|
|
$
|
648,543
|
|
|
$
|
545,361
|
|
Diluted weighted–average shares outstanding
|
|
|
227,598,607
|
|
|
|
230,274,756
|
|
|
|
227,859,617
|
|
|
|
229,860,900
|
|
Diluted earnings per share
|
|
$
|
1.50
|
|
|
$
|
1.09
|
|
|
$
|
2.46
|
|
|
$
|
1.69
|
|
Adjusted EPS
|
|
$
|
1.62
|
|
|
$
|
1.35
|
|
|
$
|
2.85
|
|
|
$
|
2.37
|
|
|
(1)
|
Non-cash deferred compensation expenses related to the crew pension plan and other crew expenses, which are included in payroll and related expense.
|
|
(2)
|
Non-cash share-based compensation expenses related to equity awards, which are included in marketing, general and administrative expense and payroll and related expense.
|
|
(3)
|
Expenses related to the Secondary Equity Offerings, which are included in marketing, general and administrative expense.
|
|
(4)
|
Severance payments and other expenses related to restructuring costs and other severance arrangements, which are included in marketing, general and administrative expense.
|
|
(5)
|
Expenses related to the exchange of Management NCL Corporation Units for ordinary shares, which are included in marketing, general and administrative expense.
|
|
(6)
|
Expenses related to the Acquisition of Prestige, which are included in marketing, general and administrative expense.
|
|
(7)
|
Deferred revenue fair value adjustments related to the Acquisition of Prestige that were made pursuant to business combination accounting rules, which are primarily included in Net Revenue.
|
|
(8)
|
Amortization of intangible assets related to the Acquisition of Prestige, which are included in depreciation and amortization expense.
|
|
(9)
|
Contingent consideration fair value adjustment related to the Acquisition of Prestige, which is included in marketing, general and administrative expense.
|
|
(10)
|
Losses and net gains for the fair value adjustment of a foreign exchange collar which did not receive hedge accounting and losses due to the dedesignation of certain fuels swaps. These adjustments are included in other expense.
|
|
(11)
|
Contract termination expenses related to the Acquisition of Prestige, which are included in other cruise operating expense and depreciation and amortization expense.
|
|
(12)
|
For the nine months ended September 30, 2016, primarily reflects the write-off of deferred financing fees related to the refinancing of certain credit facilities, which is included in interest expense, net. For the three months ended September 30, 2016, reflects a tax benefit adjustment.
|
EBITDA and Adjusted EBITDA were calculated as follows (in thousands):
|
|
Three
Months Ended
September 30,
|
|
|
Nine
Months Ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Net income
|
|
$
|
342,378
|
|
|
$
|
251,787
|
|
|
$
|
560,853
|
|
|
$
|
388,825
|
|
Interest expense, net
|
|
|
60,662
|
|
|
|
49,784
|
|
|
|
188,836
|
|
|
|
153,219
|
|
Income tax expense
|
|
|
5,241
|
|
|
|
3,528
|
|
|
|
8,944
|
|
|
|
6,931
|
|
Depreciation and amortization expense
|
|
|
111,575
|
|
|
|
109,798
|
|
|
|
317,480
|
|
|
|
314,381
|
|
EBITDA
|
|
|
519,856
|
|
|
|
414,897
|
|
|
|
1,076,113
|
|
|
|
863,356
|
|
Other expense (1)
|
|
|
5,333
|
|
|
|
1,733
|
|
|
|
13,281
|
|
|
|
35,589
|
|
Non-GAAP Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash deferred compensation (2)
|
|
|
792
|
|
|
|
3,277
|
|
|
|
2,375
|
|
|
|
5,759
|
|
Non-cash share-based compensation (3)
|
|
|
16,840
|
|
|
|
13,691
|
|
|
|
48,289
|
|
|
|
27,857
|
|
Secondary Equity Offerings’ expenses (4)
|
|
|
—
|
|
|
|
362
|
|
|
|
—
|
|
|
|
1,384
|
|
Severance payments and other fees (5)
|
|
|
2,587
|
|
|
|
1,369
|
|
|
|
5,486
|
|
|
|
15,045
|
|
Management NCL Corporation Units exchange expenses (6)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
624
|
|
Acquisition of Prestige expenses (7)
|
|
|
1,696
|
|
|
|
6,098
|
|
|
|
4,710
|
|
|
|
17,389
|
|
Deferred revenue (8)
|
|
|
300
|
|
|
|
3,026
|
|
|
|
1,057
|
|
|
|
31,514
|
|
Contingent consideration adjustment (9)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(43,400
|
)
|
Contract termination expenses (10)
|
|
|
—
|
|
|
|
3,319
|
|
|
|
—
|
|
|
|
3,319
|
|
Adjusted EBITDA
|
|
$
|
547,404
|
|
|
$
|
447,772
|
|
|
$
|
1,151,311
|
|
|
$
|
958,436
|
|
(1)
|
Primarily consists of gains and losses, net for derivative contracts and forward 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.
|
(3)
|
Non-cash share-based compensation expenses related to equity awards, which are included in marketing, general and administrative expense and payroll and related expense.
|
(4)
|
Expenses related to the Secondary Equity Offerings, which are included in marketing, general and administrative expense.
|
(5)
|
Severance payments and other expenses related to restructuring costs and other severance arrangements, which are included in marketing, general and administrative expense.
|
(6)
|
Expenses related to the exchange of Management NCL Corporation Units for ordinary shares, which are included in marketing, general and administrative expense.
|
(7)
|
Expenses related to the Acquisition of Prestige, which are included in marketing, general and administrative expense.
|
(8)
|
Deferred revenue fair value adjustments related to the Acquisition of Prestige that were made pursuant to business combination accounting rules, which are primarily included in Net Revenue.
|
(9)
|
Contingent consideration fair value adjustment related to the Acquisition of Prestige, which is included in marketing, general and administrative expense.
|
(10)
|
Contract termination expenses related to the Acquisition of Prestige, which are included in other cruise operating expense.
|
Three months ended September 30, 2016 (“2016”)
compared to three months ended September 30, 2015 (“2015”)
Revenue
Total revenue increased 15.6% to $1.5 billion in 2016 compared
to $1.3 billion in 2015 primarily due to an increase in Capacity Days and improved pricing. Gross Yield increased 1.5%. Net Revenue
in 2016 increased 17.4% to $1.1 billion from $975.2 million in 2015 due to an increase in Capacity Days of 13.9% and an increase
in Net Yield of 3.1%.The increase in Capacity Days was primarily due to the delivery of Norwegian Escape in October 2015, Sirena
joining our fleet in April 2016 and the delivery of Seven Seas Explorer in June 2016. The increase in Net Yield was primarily due
to improved pricing. Adjusted Net Revenue includes a deferred revenue fair value adjustment of $3.0 million in 2015 related to
the Acquisition of Prestige. On a Constant Currency basis, Net Yield and Adjusted Net Yield increased 3.7% and 3.4%, respectively,
in 2016 compared to 2015. We refer you to the “Results of Operations” above for a reconciliation of Gross Yield to
Adjusted Net Yield.
Expense
Gross Cruise Cost increased 10.5% in 2016 compared to 2015 due
to an increase in total cruise operating expense and marketing, general and administrative expense. Total cruise operating expense
increased 9.3% in 2016 compared to 2015 primarily due to the increase in Capacity Days as discussed above. Total other operating
expense increased 10.0% in 2016 compared to 2015 primarily due to an increase in marketing, general and administrative expenses,
which included an increase in marketing expenses of $16.0 million. Depreciation and amortization expense was relatively unchanged
as the increase due to the addition of Norwegian Escape and ship improvement projects in 2016 was offset by the recognition in
2015 of an incremental $15.6 million of amortization of intangible assets due to the Acquisition of Prestige. On a Capacity Day
basis, Net Cruise Cost decreased 2.6% on an actual and a Constant Currency basis as the increases in expenses discussed above were
primarily offset by the decrease in fuel expense. The average fuel price decreased 11.5% to $500 per metric ton in 2016 from $565
per metric ton in 2015. Adjusted Net Cruise Cost Excluding Fuel per Capacity Day increased 1.7% on an actual and a Constant Currency
basis primarily due to the increase in marketing, general and administrative expenses discussed above. We refer you to the “Results
of Operations” above for a reconciliation of Gross Cruise Cost to Adjusted Net Cruise Cost Excluding Fuel.
Interest expense, net increased to $60.7 million in 2016 from
$49.8 million in 2015 primarily due to an increase in average debt balances outstanding primarily associated with the delivery
of Norwegian Escape in October 2015 and Seven Seas Explorer in June 2016 as well as slightly higher interest rates due to an increase
in LIBOR rates.
Other expense was $5.3 million in 2016 compared to $1.7 million
in 2015. In 2016, the expense was primarily related to unrealized and realized losses on fuel swap derivative hedge contracts and
foreign exchange derivative hedge contracts and foreign currency transaction losses. In 2015, the expense was primarily related
to the dedesignation of certain fuel swap derivative hedge contracts and the ineffectiveness of settled fuel swaps in 2015. The
expense in 2015 was partially offset by income related to the fair value adjustment for a foreign exchange collar which did not
receive hedge accounting treatment and foreign currency transaction gains.
In 2016, we had an income tax expense of $5.2 million compared
to $3.5 million in 2015.
Nine months ended September 30, 2016 (“2016”)
compared to nine months ended September 30, 2015 (“2015”)
Revenue
Total revenue increased 13.3% to $3.7 billion in 2016 compared
to $3.3 billion in 2015 primarily due to an increase in Capacity Days and improved pricing. Gross Yield increased 1.3%. Net Revenue
in 2016 increased 15.6% to $2.9 billion from $2.5 billion in 2015 due to an increase in Capacity Days of 11.8% and an increase
in Net Yield of 3.4%. The increase in Capacity Days was primarily due to the delivery of Norwegian Escape in October 2015, Sirena
joining our fleet in April 2016 and the delivery of Seven Seas Explorer in June 2016, slightly offset by the scheduled Dry-docks
in 2016. The increase in Net Yield was primarily due to improved pricing. Adjusted Net Revenue includes a deferred revenue fair
value adjustment of $31.5 million in 2015 related to the Acquisition of Prestige. On a Constant Currency basis, Net Yield and Adjusted
Net Yield increased 4.1% and 2.8%, respectively, in 2016 compared to 2015. We refer you to the “Results of Operations”
above for a reconciliation of Gross Yield to Adjusted Net Yield.
Expense
Gross Cruise Cost increased 10.4% in 2016 compared to 2015 due
to an increase in total cruise operating expense and marketing, general and administrative expense. Total cruise operating expense
increased 7.9% in 2016 compared to 2015 primarily due to the increase in Capacity Days as discussed above and an increase in Dry-dock
expenses. Total other operating expense increased 13.2% in 2016 compared to 2015 primarily due to an increase in marketing, general
and administrative expenses which included an increase in marketing expenses of $28.5 million and share-based compensation of $20.5
million. The increase was also due to recognition of a $43.4 million contingent consideration adjustment related to the Acquisition
of Prestige which resulted in a reduction to expense in 2015 but not in 2016. Depreciation and amortization expense was relatively
unchanged as the increase due to the addition of Norwegian Escape and ship improvement projects in 2016 was offset by the recognition
in 2015 of an incremental $44.2 million of amortization of intangible assets due to the Acquisition of Prestige. On a Capacity
Day basis, Net Cruise Cost remained relatively unchanged on an actual and a Constant Currency basis, due to the increases in expenses
discussed above which were primarily offset by a decrease in fuel expense. The average fuel price decreased 14.9% to $468 per metric
ton in 2016 from $550 per metric ton in 2015. Adjusted Net Cruise Cost Excluding Fuel per Capacity Day increased 2.2% primarily
due to the expenses discussed above (2.4% on a Constant Currency basis). We refer you to the “Results of Operations”
above for a reconciliation of Gross Cruise Cost to Adjusted Net Cruise Cost Excluding Fuel.
Interest expense, net increased to $188.8 million in 2016 from
$153.2 million in 2015 primarily due to an increase in average debt balances outstanding primarily associated with the delivery
of Norwegian Escape in October 2015 and Seven Seas Explorer in June 2016 as well as higher interest rates due to an increase in
LIBOR rates. The increase in interest expense, net also includes a write-off of $11.5 million of deferred financing fees related
to the refinancing of certain of our credit facilities.
Other expense was $13.3 million in 2016 compared to $35.6 million
in 2015. In 2016, the expense was primarily related to unrealized and realized losses on fuel swap derivative hedge contracts and
losses on foreign exchange partially offset by gains on foreign exchange derivative hedge contracts. In 2015, the expense was primarily
related to the dedesignation of certain fuel swap derivative hedge contracts and the ineffectiveness of settled fuel swaps in 2015.
Also included in 2015 was the expense related to the fair value adjustment for a foreign exchange collar which did not receive
hedge accounting treatment.
In 2016, we had an income tax expense of $8.9 million compared
to $6.9 million in 2015.
Liquidity and Capital Resources
General
As of September 30, 2016, our liquidity was $905.4 million consisting
of $155.4 million in cash and cash equivalents and $750.0 million under our New Revolving Loan Facility. Our primary ongoing liquidity
requirements are to finance working capital, capital expenditures and debt service.
As of September 30, 2016, we had a working capital deficit of
$1.9 billion. This deficit included $1.2 billion of advance ticket sales, which represents the revenue we collect in advance of
sailing dates, and accordingly, are substantially more like deferred revenue balances rather than actual current cash liabilities.
Our business model, along with our New Revolving Loan Facility, allows us to operate with a working capital deficit and still meet
our operating, investing and financing needs.
We evaluate potential sources of additional liquidity, including
the capital markets, in the ordinary course of business. We believe that prevailing market conditions, particularly in the debt
capital markets, are generally favorable. We will continue to evaluate opportunities to increase our liquidity in the near term,
taking into consideration our current and expected requirements, our assessment of prevailing market conditions and expectations
regarding future conditions, and the contractual and other restrictions to which we are subject.
Sources and Uses of Cash
In this section, references to “2016” refer
to the nine months ended September 30, 2016 and references to “2015” refer to the nine months ended September 30, 2015.
Net cash provided by operating activities was $1.1 billion in
2016 as compared to $973.4 million in 2015. The change in net cash provided by operating activities reflects net income in 2016
of $560.9 million compared to a net income in 2015 of $388.8 million. The net cash provided by operating activities included timing
differences in cash receipts and payments relating to operating assets and liabilities.
Net cash used in investing activities was $950.2 million in
2016, primarily related to payments for the delivery of Seven Seas Explorer, ship improvements, ships under construction and shoreside
projects. Net cash used in investing activities was $330.5 million in 2015, primarily related to payments for ship improvements,
ships under construction and shoreside projects.
Net cash used in financing activities was $99.0 million in 2016
primarily due to net repayments of our New Revolving Loan Facility, and other loan facilities and the repurchase of our ordinary
shares and deferred financing fees and other. Net cash used in financing activities was $497.6 million in 2015 primarily due to
net repayments of our Revolving Loan Facility and other loan facilities.
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 of September 30, 2016, anticipated capital expenditures were $157.5 million for the remainder of 2016 and $1.3
billion for each of the years ending December 31, 2017 and 2018, of which we have export credit financing in place for the
expenditures related to ship construction contracts of $47.8 million for the remainder of 2016, $762.6 million
for 2017 and $732.9 million for 2018. These future expected capital expenditures will significantly increase our depreciation
and amortization expense.
We have Norwegian Joy, Norwegian Bliss and one additional Breakaway
Plus Class Ship on order with Meyer Werft shipyard for delivery in the spring of 2017, spring of 2018 and the fall of 2019, respectively.
These ships will be amongst the largest in our fleet, reaching approximately 164,600 Gross Tons. The combined contract price of
these three ships is approximately €2.6 billion, or $2.9 billion based on the euro/U.S. dollar exchange rate as of
September 30, 2016. We have export credit financing in place that provides financing for 80% of their contract prices. We have
an Explorer Class Ship on order with Fincantieri shipyard with an original contract price of approximately €422.0 million,
or approximately $474.1 million based on the euro/U.S. dollar exchange rate as of September 30, 2016. We have export credit
financing in place that provides financing for 80% of the contract price. The Explorer Class Ship is expected to be delivered
in the winter of 2020.
In connection with the contracts to build these ships, we do
not anticipate any contractual breaches or cancellation to occur. However, if any would occur, it could result in, among other
things, the forfeiture of prior deposits or payments made by us, subject to certain refund guarantees, and potential claims and
impairment losses which may materially impact our business, financial condition and results of operations.
Capitalized interest for the three and nine months ended September
30, 2016 was $8.9 million and $24.9 million, respectively, and for the three and nine months ended September 30, 2015 was $9.1
million and $24.2 million, respectively, primarily associated with the construction of our Breakaway Plus Class Ships.
Off-Balance Sheet Transactions
None.
Contractual Obligations
As of September 30, 2016, our contractual obligations with initial
or remaining terms in excess of one year, including interest payments on long-term debt obligations, were as follows (in thousands):
|
|
Total
|
|
|
Less than
1 year
|
|
|
1-3 years
|
|
|
3-5 years
|
|
|
More than
5 years
|
|
Long-term debt (1)
|
|
$
|
6,503,978
|
|
|
$
|
566,911
|
|
|
$
|
1,104,015
|
|
|
$
|
3,231,018
|
|
|
$
|
1,602,034
|
|
Operating leases (2)
|
|
|
153,735
|
|
|
|
15,135
|
|
|
|
30,277
|
|
|
|
28,927
|
|
|
|
79,396
|
|
Ship construction contracts (3)
|
|
|
3,220,716
|
|
|
|
953,312
|
|
|
|
1,115,038
|
|
|
|
1,152,366
|
|
|
|
—
|
|
Port facilities (4)
|
|
|
265,083
|
|
|
|
42,876
|
|
|
|
63,260
|
|
|
|
59,329
|
|
|
|
99,618
|
|
Interest (5)
|
|
|
990,580
|
|
|
|
210,620
|
|
|
|
383,240
|
|
|
|
242,487
|
|
|
|
154,233
|
|
Other (6)
|
|
|
164,170
|
|
|
|
56,146
|
|
|
|
54,186
|
|
|
|
30,266
|
|
|
|
23,572
|
|
Total
|
|
$
|
11,298,262
|
|
|
$
|
1,845,000
|
|
|
$
|
2,750,016
|
|
|
$
|
4,744,393
|
|
|
$
|
1,958,853
|
|
(1)
|
Includes premiums aggregating $0.6 million. Also includes capital leases. The amount excludes deferred financing fees which are included in the consolidated balance sheets as an offset to long-term debt.
|
(2)
|
Primarily for offices, motor vehicles and office equipment.
|
(3)
|
For our newbuild ships based on the euro/U.S. dollar exchange rate as of September 30, 2016. Export credit financing is in place from syndicates of banks.
|
(4)
|
Primarily for our usage of certain port facilities.
|
(5)
|
Includes fixed and variable rates with LIBOR held constant as of September 30, 2016.
|
(6)
|
Future commitments for service and maintenance contracts and other Business Enhancement Capital Expenditures.
|
The table above does not include $11.2 million of unrecognized
tax benefits.
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
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, 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 our debt. We believe we were in compliance with these covenants as of September 30, 2016.
The impact of changes in world economies and especially the
global credit markets has created 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, additional available borrowings under our New Revolving Loan Facility and our ability to issue debt securities or raise
additional equity, will be sufficient to fund operations, debt payment requirements, capital expenditures and maintain compliance
with covenants under our debt agreements over the next twelve-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.