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
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Revenue
|
|
|
|
|
|
|
|
|
Passenger ticket
|
|
$
|
786,694
|
|
|
$
|
740,112
|
|
Onboard and other
|
|
|
364,087
|
|
|
|
337,520
|
|
Total revenue
|
|
|
1,150,781
|
|
|
|
1,077,632
|
|
Cruise operating expense
|
|
|
|
|
|
|
|
|
Commissions, transportation and other
|
|
|
194,140
|
|
|
|
175,437
|
|
Onboard and other
|
|
|
68,411
|
|
|
|
63,965
|
|
Payroll and related
|
|
|
192,636
|
|
|
|
177,143
|
|
Fuel
|
|
|
88,886
|
|
|
|
81,672
|
|
Food
|
|
|
46,178
|
|
|
|
51,003
|
|
Other
|
|
|
129,547
|
|
|
|
115,261
|
|
Total cruise operating expense
|
|
|
719,798
|
|
|
|
664,481
|
|
Other operating expense
|
|
|
|
|
|
|
|
|
Marketing, general and administrative
|
|
|
192,044
|
|
|
|
180,574
|
|
Depreciation and amortization
|
|
|
119,205
|
|
|
|
101,295
|
|
Total other operating expense
|
|
|
311,249
|
|
|
|
281,869
|
|
Operating income
|
|
|
119,734
|
|
|
|
131,282
|
|
Non-operating income (expense)
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
(52,960
|
)
|
|
|
(59,754
|
)
|
Other income (expense), net
|
|
|
(2,815
|
)
|
|
|
2,805
|
|
Total non-operating income (expense)
|
|
|
(55,775
|
)
|
|
|
(56,949
|
)
|
Net income before income taxes
|
|
|
63,959
|
|
|
|
74,333
|
|
Income tax expense
|
|
|
(2,049
|
)
|
|
|
(1,104
|
)
|
Net income
|
|
$
|
61,910
|
|
|
$
|
73,229
|
|
Weighted-average shares outstanding
|
|
|
|
|
|
|
|
|
Basic
|
|
|
227,468,526
|
|
|
|
227,239,533
|
|
Diluted
|
|
|
228,555,952
|
|
|
|
228,112,035
|
|
Earnings per share
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.27
|
|
|
$
|
0.32
|
|
Diluted
|
|
$
|
0.27
|
|
|
$
|
0.32
|
|
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
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Net income
|
|
$
|
61,910
|
|
|
$
|
73,229
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
Shipboard Retirement Plan
|
|
|
105
|
|
|
|
108
|
|
Cash flow hedges:
|
|
|
|
|
|
|
|
|
Net unrealized gain (loss)
|
|
|
(7,283
|
)
|
|
|
70,450
|
|
Amount realized and reclassified into earnings
|
|
|
9,705
|
|
|
|
34,550
|
|
Total other comprehensive income
|
|
|
2,527
|
|
|
|
105,108
|
|
Total comprehensive income
|
|
$
|
64,437
|
|
|
$
|
178,337
|
|
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)
|
|
March
31,
2017
|
|
|
December 31,
2016
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
219,789
|
|
|
$
|
128,347
|
|
Accounts receivable, net
|
|
|
47,949
|
|
|
|
63,215
|
|
Inventories
|
|
|
71,439
|
|
|
|
66,255
|
|
Prepaid expenses and other assets
|
|
|
149,174
|
|
|
|
153,276
|
|
Total current assets
|
|
|
488,351
|
|
|
|
411,093
|
|
Property and equipment, net
|
|
|
10,149,166
|
|
|
|
10,117,689
|
|
Goodwill
|
|
|
1,388,931
|
|
|
|
1,388,931
|
|
Tradenames
|
|
|
817,525
|
|
|
|
817,525
|
|
Other long-term assets
|
|
|
232,278
|
|
|
|
238,673
|
|
Total assets
|
|
$
|
13,076,251
|
|
|
$
|
12,973,911
|
|
Liabilities and shareholders’ equity
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
$
|
531,778
|
|
|
$
|
560,193
|
|
Accounts payable
|
|
|
71,123
|
|
|
|
38,002
|
|
Accrued expenses and other liabilities
|
|
|
531,375
|
|
|
|
541,753
|
|
Advance ticket sales
|
|
|
1,372,483
|
|
|
|
1,172,870
|
|
Total current liabilities
|
|
|
2,506,759
|
|
|
|
2,312,818
|
|
Long-term debt
|
|
|
5,644,175
|
|
|
|
5,838,494
|
|
Other long-term liabilities
|
|
|
300,035
|
|
|
|
284,873
|
|
Total liabilities
|
|
|
8,450,969
|
|
|
|
8,436,185
|
|
Commitments and contingencies (Note 8)
|
|
|
|
|
|
|
|
|
Shareholders’ equity:
|
|
|
|
|
|
|
|
|
Ordinary shares, $.001 par value; 490,000,000 shares authorized; 233,216,457 shares issued and 227,904,496 shares outstanding at March 31, 2017 and 232,555,937 shares issued and 227,243,976 shares outstanding at December 31, 2016
|
|
|
232
|
|
|
|
232
|
|
Additional paid-in capital
|
|
|
3,911,085
|
|
|
|
3,890,119
|
|
Accumulated other comprehensive income (loss)
|
|
|
(311,946
|
)
|
|
|
(314,473
|
)
|
Retained earnings
|
|
|
1,265,166
|
|
|
|
1,201,103
|
|
Treasury shares (5,311,961 ordinary shares at March 31, 2017 and December 31, 2016, at cost)
|
|
|
(239,255
|
)
|
|
|
(239,255
|
)
|
Total shareholders’ equity
|
|
|
4,625,282
|
|
|
|
4,537,726
|
|
Total liabilities and shareholders’ equity
|
|
$
|
13,076,251
|
|
|
$
|
12,973,911
|
|
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)
|
|
Three Months Ended
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
61,910
|
|
|
$
|
73,229
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense
|
|
|
121,593
|
|
|
|
104,686
|
|
Loss (gain) on derivatives
|
|
|
406
|
|
|
|
(11,948
|
)
|
Deferred income taxes, net
|
|
|
1,186
|
|
|
|
158
|
|
Provision for bad debts and inventory
|
|
|
323
|
|
|
|
575
|
|
Share-based compensation expense
|
|
|
18,203
|
|
|
|
15,245
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
14,943
|
|
|
|
(1,042
|
)
|
Inventories
|
|
|
(5,184
|
)
|
|
|
(4,360
|
)
|
Prepaid expenses and other assets
|
|
|
(9,473
|
)
|
|
|
(5,390
|
)
|
Accounts payable
|
|
|
27,423
|
|
|
|
2,750
|
|
Accrued expenses and other liabilities
|
|
|
(19,321
|
)
|
|
|
7,572
|
|
Advance ticket sales
|
|
|
222,935
|
|
|
|
148,621
|
|
Net cash provided by operating activities
|
|
|
434,944
|
|
|
|
330,096
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Additions to property and equipment, net
|
|
|
(117,777
|
)
|
|
|
(132,027
|
)
|
Settlement of derivatives
|
|
|
—
|
|
|
|
(1,167
|
)
|
Net cash used in investing activities
|
|
|
(117,777
|
)
|
|
|
(133,194
|
)
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Repayments of long-term debt
|
|
|
(465,237
|
)
|
|
|
(308,248
|
)
|
Proceeds from long-term debt
|
|
|
236,000
|
|
|
|
204,000
|
|
Proceeds from employee related plans
|
|
|
9,466
|
|
|
|
3,148
|
|
Net share settlement of restricted share units
|
|
|
(4,550
|
)
|
|
|
—
|
|
Purchases of treasury shares
|
|
|
—
|
|
|
|
(49,999
|
)
|
Deferred financing fees and other
|
|
|
(1,404
|
)
|
|
|
(6,873
|
)
|
Net cash used in financing activities
|
|
|
(225,725
|
)
|
|
|
(157,972
|
)
|
Net increase in cash and cash equivalents
|
|
|
91,442
|
|
|
|
38,930
|
|
Cash and cash equivalents at beginning of period
|
|
|
128,347
|
|
|
|
115,937
|
|
Cash and cash equivalents at end of period
|
|
$
|
219,789
|
|
|
$
|
154,867
|
|
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, 2015
|
|
$
|
232
|
|
|
$
|
3,814,536
|
|
|
$
|
(412,650
|
)
|
|
$
|
568,018
|
|
|
$
|
(189,256
|
)
|
|
$
|
3,780,880
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation
|
|
|
—
|
|
|
|
15,245
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
15,245
|
|
Issuance of shares under employee related plans
|
|
|
—
|
|
|
|
3,148
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,148
|
|
Treasury shares
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(49,999
|
)
|
|
|
(49,999
|
)
|
Other comprehensive income, net
|
|
|
—
|
|
|
|
—
|
|
|
|
105,108
|
|
|
|
—
|
|
|
|
—
|
|
|
|
105,108
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
73,229
|
|
|
|
—
|
|
|
|
73,229
|
|
Balance, March 31, 2016
|
|
$
|
232
|
|
|
$
|
3,832,929
|
|
|
$
|
(307,542
|
)
|
|
$
|
641,247
|
|
|
$
|
(239,255
|
)
|
|
$
|
3,927,611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2016
|
|
$
|
232
|
|
|
$
|
3,890,119
|
|
|
$
|
(314,473
|
)
|
|
$
|
1,201,103
|
|
|
$
|
(239,255
|
)
|
|
$
|
4,537,726
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation
|
|
|
—
|
|
|
|
18,203
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
18,203
|
|
Issuance under employee related plans
|
|
|
—
|
|
|
|
9,466
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
9,466
|
|
Change in accounting policy (share-based forfeitures)
|
|
|
—
|
|
|
|
(2,153
|
)
|
|
|
—
|
|
|
|
2,153
|
|
|
|
—
|
|
|
|
—
|
|
Net settlement of restricted share units
|
|
|
—
|
|
|
|
(4,550
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
(4,550
|
)
|
Other comprehensive income, net
|
|
|
—
|
|
|
|
—
|
|
|
|
2,527
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,527
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
61,910
|
|
|
|
—
|
|
|
|
61,910
|
|
Balance, March 31, 2017
|
|
$
|
232
|
|
|
$
|
3,911,085
|
|
|
$
|
(311,946
|
)
|
|
$
|
1,265,166
|
|
|
$
|
(239,255
|
)
|
|
$
|
4,625,282
|
|
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 Cruise Line” or “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). 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
|
We are a leading global cruise company which operates the Norwegian
Cruise Line, Oceania Cruises and Regent Seven Seas Cruises brands. As of March 31, 2017, we had 24 ships with approximately 46,500
Berths. We plan to introduce eight additional ships through 2025 and we have an option to introduce two additional ships for delivery
in 2026 and 2027, subject to certain conditions. One of the eight ships, Norwegian Joy, a ship tailored for Chinese travelers,
was delivered in April 2017. Norwegian Bliss and an additional Breakaway Plus Class Ship are on order for delivery in the spring
of 2018 and fall of 2019. We have an Explorer Class Ship on order for delivery in the winter of 2020.
Project
Leonardo will introduce an additional four ships with expected delivery dates through 2025.
These additions to our fleet
(exclusive of the option for two additional ships) will increase our total Berths to approximately 72,300.
|
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, 2016, 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 March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Net income
|
|
$
|
61,910
|
|
|
$
|
73,229
|
|
Basic weighted-average shares outstanding
|
|
|
227,468,526
|
|
|
|
227,239,533
|
|
Dilutive effect of awards
|
|
|
1,087,426
|
|
|
|
872,502
|
|
Diluted weighted-average shares outstanding
|
|
|
228,555,952
|
|
|
|
228,112,035
|
|
Basic earnings per share
|
|
$
|
0.27
|
|
|
$
|
0.32
|
|
Diluted earnings per share
|
|
$
|
0.27
|
|
|
$
|
0.32
|
|
For the three months ended March 31, 2017 and 2016 a total of
7.5 million and 7.6 million shares, respectively, have been excluded from diluted weighted-average shares outstanding because
the effect of including them would have been anti-dilutive.
Revenue and Expense Recognition
Revenue and expenses include port fees and taxes. The amounts
included on a gross basis are $71.7 million and $62.5 million for the three months ended March 31, 2017 and 2016, 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 income (expense), net and such losses were approximately $2.7 million and $4.2 million for the three months ended
March 31, 2017 and 2016, respectively.
Recently Issued Accounting Pronouncements
In January 2017, the Financial Accounting Standards Board
(“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-04 which simplifies the test for
goodwill impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by
comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. The guidance
is effective for annual or any interim goodwill impairment tests in years beginning after December 15, 2019. Early adoption
is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We do not
expect to early adopt this guidance. We are currently evaluating the impact of the adoption of this guidance to our
consolidated financial statements.
In August 2016, the FASB issued 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 collectability, 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 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 reviewing our existing leases to evaluate the impact of the
adoption of this guidance 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 expect to adopt a modified retrospective application for annual periods beginning after December 15, 2017. 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 our performance obligations and believe that
our application of the guidance could result in changes in classification and additional disclosures.
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 tables (in thousands, except amortization period):
|
|
March
31, 2017
|
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
|
Weighted-
Average
Amortization
Period (Years)
|
|
Customer relationships
|
|
$
|
120,000
|
|
|
$
|
(44,161
|
)
|
|
$
|
75,839
|
|
|
|
6.0
|
|
Licenses
|
|
|
3,368
|
|
|
|
(989
|
)
|
|
|
2,379
|
|
|
|
5.6
|
|
Non-compete agreements
|
|
|
660
|
|
|
|
(660
|
)
|
|
|
—
|
|
|
|
1.0
|
|
Total intangible assets subject to amortization
|
|
$
|
124,028
|
|
|
$
|
(45,810
|
)
|
|
$
|
78,218
|
|
|
|
|
|
License (Indefinite-lived)
|
|
$
|
4,427
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
December
31, 2016
|
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
|
Weighted-
Average
Amortization
Period (Years)
|
|
Customer relationships
|
|
$
|
120,000
|
|
|
$
|
(36,593
|
)
|
|
$
|
83,407
|
|
|
|
6.0
|
|
Licenses
|
|
|
3,368
|
|
|
|
(807
|
)
|
|
|
2,561
|
|
|
|
5.6
|
|
Non-compete agreements
|
|
|
660
|
|
|
|
(495
|
)
|
|
|
165
|
|
|
|
1.0
|
|
Total intangible assets subject to amortization
|
|
$
|
124,028
|
|
|
$
|
(37,895
|
)
|
|
$
|
86,133
|
|
|
|
|
|
License (Indefinite-lived)
|
|
$
|
4,427
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
The aggregate amortization expense is as follows (in thousands):
|
|
Three
months ended
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Amortization expense
|
|
$
|
7,915
|
|
|
$
|
5,389
|
|
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
|
|
2018
|
|
$
|
26,163
|
|
2019
|
|
|
18,489
|
|
2020
|
|
|
9,906
|
|
2021
|
|
|
75
|
|
2022
|
|
|
75
|
|
|
4.
|
Accumulated Other Comprehensive
Income (Loss)
|
Accumulated other comprehensive income (loss) for the three
months ended March 31, 2017 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
|
|
$
|
(314,473
|
)
|
|
$
|
(307,618
|
)
|
|
$
|
(6,855
|
)
|
Current period other comprehensive income before reclassifications
|
|
|
(7,283
|
)
|
|
|
(7,283
|
)
|
|
|
—
|
|
Amounts reclassified into earnings
|
|
|
9,810
|
|
|
|
9,705
|
(1)
|
|
|
105
|
(2)
|
Accumulated other comprehensive income (loss) at end of period
|
|
$
|
(311,946
|
)
|
|
$
|
(305,196
|
)(3)
|
|
$
|
(6,750
|
)
|
|
(1)
|
We refer you to Note 6—
“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 $43.5 million of
loss expected to be reclassified into earnings in the next 12 months.
|
Accumulated other comprehensive income (loss) for the three
months ended March 31, 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
|
|
|
70,450
|
|
|
|
70,450
|
|
|
|
—
|
|
Amounts reclassified into earnings
|
|
|
34,658
|
|
|
|
34,550
|
(1)
|
|
|
108
|
(2)
|
Accumulated other comprehensive income (loss) at end of period
|
|
$
|
(307,542
|
)
|
|
$
|
(300,298
|
)
|
|
$
|
(7,244
|
)
|
|
(1)
|
We refer you to Note 6—
“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 $31.5 million for the
three months ended March 31, 2017 primarily due to ship improvement projects and ships under construction.
|
6.
|
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), net 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):
The following table sets forth our derivatives measured at fair
value and discloses the balance sheet location (in thousands):
|
|
|
|
Asset
|
|
|
Liability
|
|
|
|
Balance
Sheet location
|
|
March
31,
2017
|
|
|
December 31,
2016
|
|
|
March
31,
2017
|
|
|
December 31,
2016
|
|
Fuel swaps designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses and other assets
|
|
$
|
11,630
|
|
|
$
|
20,288
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
Accrued expenses and other liabilities
|
|
|
622
|
|
|
|
—
|
|
|
|
45,690
|
|
|
|
44,271
|
|
|
|
Other long-term liabilities
|
|
|
7,827
|
|
|
|
13,237
|
|
|
|
42,130
|
|
|
|
38,608
|
|
Foreign currency forward contracts designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other long-term assets
|
|
|
225
|
|
|
|
14
|
|
|
|
—
|
|
|
|
—
|
|
|
|
Accrued expenses and other liabilities
|
|
|
—
|
|
|
|
—
|
|
|
|
54,086
|
|
|
|
61,788
|
|
|
|
Other long-term liabilities
|
|
|
—
|
|
|
|
—
|
|
|
|
78,247
|
|
|
|
88,920
|
|
Interest rate swaps designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued expenses and other liabilities
|
|
|
—
|
|
|
|
—
|
|
|
|
2,886
|
|
|
|
3,331
|
|
|
|
Other long-term liabilities
|
|
|
—
|
|
|
|
—
|
|
|
|
453
|
|
|
|
1,151
|
|
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):
March 31, 2017
|
|
Gross Amounts
|
|
|
Gross
Amounts
Offset
|
|
|
Total
Net
Amounts
|
|
|
Gross
Amounts Not
Offset
|
|
|
Net Amounts
|
|
Assets
|
|
$
|
11,855
|
|
|
$
|
—
|
|
|
$
|
11,855
|
|
|
$
|
(225
|
)
|
|
$
|
11,630
|
|
Liabilities
|
|
|
223,492
|
|
|
|
(8,449
|
)
|
|
|
215,043
|
|
|
|
(135,672
|
)
|
|
|
79,371
|
|
December 31, 2016
|
|
Gross Amounts
|
|
|
Gross
Amounts
Offset
|
|
|
Total
Net
Amounts
|
|
|
Gross
Amounts Not
Offset
|
|
|
Net Amounts
|
|
Assets
|
|
$
|
20,302
|
|
|
$
|
—
|
|
|
$
|
20,302
|
|
|
$
|
(14
|
)
|
|
$
|
20,288
|
|
Liabilities
|
|
|
238,069
|
|
|
|
(13,237
|
)
|
|
|
224,832
|
|
|
|
(155,190
|
)
|
|
|
69,642
|
|
Fuel Swaps
As of March 31, 2017, 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 1.6 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
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Loss recognized in other comprehensive income – effective portion
|
|
$
|
(26,203
|
)
|
|
$
|
(9,506
|
)
|
Loss recognized in other income (expense), net – ineffective portion
|
|
|
(370
|
)
|
|
|
(5,227
|
)
|
Amount reclassified from accumulated other comprehensive income (loss) into fuel expense
|
|
|
8,003
|
|
|
|
31,137
|
|
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
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Amount reclassified from accumulated other comprehensive income (loss) into other income (expense), net
|
|
$
|
—
|
|
|
$
|
1,529
|
|
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
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Amount reclassified from accumulated other comprehensive income (loss) into depreciation and amortization expense
|
|
$
|
330
|
|
|
$
|
330
|
|
Foreign Currency Forward Contracts
As of March 31, 2017, 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 €2.6 billion, or $2.8 billion
based on the euro/U.S. dollar exchange rate as of March 31, 2017.
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
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Gain recognized in other comprehensive income – effective portion
|
|
$
|
18,636
|
|
|
$
|
82,511
|
|
Gain (loss) recognized in other income (expense), net – ineffective portion
|
|
|
(50
|
)
|
|
|
11
|
|
Amount reclassified from accumulated other comprehensive income (loss) into depreciation and amortization expense
|
|
|
618
|
|
|
|
645
|
|
Foreign Currency Collar
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
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Amount reclassified from accumulated other comprehensive income (loss) into depreciation and amortization expense
|
|
$
|
(91
|
)
|
|
$
|
(91
|
)
|
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
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Gain recognized in other income (expense)
|
|
$
|
—
|
|
|
$
|
13,625
|
|
Interest Rate Swaps
As of March 31, 2017, 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 $282.0 million as of March 31, 2017.
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
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Gain (loss) recognized in other comprehensive income – effective portion
|
|
$
|
284
|
|
|
$
|
(2,555
|
)
|
Gain recognized in other income (expense), net – ineffective portion
|
|
|
—
|
|
|
|
3
|
|
Amount reclassified from accumulated other comprehensive income (loss) into interest expense, net
|
|
|
845
|
|
|
|
1,000
|
|
Long-Term Debt
As of March 31, 2017 and December 31, 2016, the fair value of
our long-term debt, including the current portion, was $6,294.0 million and $6,525.7 million, respectively, which was $8.7 million
and $11.6 million higher, 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.
|
7.
|
Employee Benefits and
Compensation Plans
|
Share-Based Compensation
As a result of our adoption of ASU No. 2016-09, in the first
quarter of 2017, we began accounting for forfeitures as they occur, rather than estimating expected forfeitures. Pursuant to the
modified-retrospective application, the net cumulative effect of this change was recognized as a $2.2 million increase to retained
earnings as of January 1, 2017 (we refer you to our consolidated statements of changes in shareholders’ equity).
Share Option Awards
The following is a summary of option activity under our Amended
and Restated 2013 Performance Incentive Plan for the three months ended March 31, 2017 (excludes the impact of 208,335 previously
awarded performance-based options as no grant date has been established):
|
|
Number
of Share Option
Awards
|
|
|
Weighted-Average Exercise
Price
|
|
|
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 January 1, 2017
|
|
|
7,775,058
|
|
|
|
432,978
|
|
|
|
208,333
|
|
|
$
|
48.04
|
|
|
$
|
23.86
|
|
|
$
|
59.43
|
|
|
|
7.81
|
|
|
$
|
35,429
|
|
Granted
|
|
|
—
|
|
|
|
156,249
|
|
|
|
—
|
|
|
|
—
|
|
|
|
59.43
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
(270,157
|
)
|
|
|
(49,315
|
)
|
|
|
—
|
|
|
|
27.01
|
|
|
|
19.00
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Forfeited and cancelled
|
|
|
(233,948
|
)
|
|
|
(93,749
|
)
|
|
|
—
|
|
|
|
56.52
|
|
|
|
59.43
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding as of March 31, 2017
|
|
|
7,270,953
|
|
|
|
446,163
|
|
|
|
208,333
|
|
|
$
|
48.55
|
|
|
$
|
29.38
|
|
|
$
|
59.43
|
|
|
|
7.67
|
|
|
$
|
51,491
|
|
Restricted Ordinary Share Awards
The following is a summary of restricted ordinary share activity
for the three months ended March 31, 2017:
|
|
Number
of
Time-Based
Awards
|
|
|
Weighted-
Average Grant
Date Fair
Value
|
|
Non-vested as of January 1, 2017
|
|
|
16,872
|
|
|
$
|
7.63
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
Vested
|
|
|
(9,780
|
)
|
|
|
5.85
|
|
Forfeited or expired
|
|
|
—
|
|
|
|
—
|
|
Non-vested and expected to vest as of March 31, 2017
|
|
|
7,092
|
|
|
$
|
10.08
|
|
Restricted Share Unit Awards
On March 1, 2017, we granted 1.7 million time-based restricted
share unit awards to our employees which vest equally over three years. Additionally, on March 1, 2017, we awarded 121,000 performance-based
restricted share units to certain members of our management team which vest upon the achievement of certain pre-established performance
targets.
The following is a summary of restricted share unit activity
for the three months ended March 31, 2017 (excludes the impact of 171,000 previously awarded performance-based restricted share
units as no grant date was established):
|
|
Number
of
Time-Based
Awards
|
|
|
Weighted-
Average Grant
Date Fair
Value
|
|
|
Number
of
Performance-
Based
Awards
|
|
|
Weighted-
Average Grant
Date Fair Value
|
|
|
Number
of
Market-
Based
Awards
|
|
|
Weighted-
Average Grant
Date Fair Value
|
|
Non-vested as of January 1, 2017
|
|
|
1,305,335
|
|
|
$
|
50.38
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
50,000
|
|
|
$
|
59.43
|
|
Granted
|
|
|
1,730,374
|
|
|
|
50.92
|
|
|
|
37,500
|
|
|
|
49.76
|
|
|
|
—
|
|
|
|
—
|
|
Vested
|
|
|
(379,675
|
)
|
|
|
50.61
|
|
|
|
(15,000
|
)
|
|
|
49.76
|
|
|
|
—
|
|
|
|
—
|
|
Forfeited or expired
|
|
|
(11,002
|
)
|
|
|
50.48
|
|
|
|
(22,500
|
)
|
|
|
49.76
|
|
|
|
—
|
|
|
|
—
|
|
Non-vested and expected to vest as of March 31, 2017
|
|
|
2,645,032
|
|
|
$
|
50.70
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
50,000
|
|
|
$
|
59.43
|
|
The share-based compensation expense for the three months ended
March 31, 2017 was $18.2 million of which $17.4 million was recorded in marketing, general and administrative expense and $0.8
million was recorded in payroll and related expense.
|
8.
|
Commitments and Contingencies
|
Ship Construction Contracts
Norwegian Joy was delivered in April 2017, we refer you to
Note 10— “Subsequent Events”. We have two other Breakaway Plus Class Ships on order for delivery in the spring
of 2018 and fall of 2019, respectively. Norwegian Joy and the two other Breakaway Plus Class Ships are approximately 168,000 Gross
Tons each with approximately 3,880 to 4,000 Berths each. We have an Explorer Class Ship on order for delivery in the winter of
2020. We have export credit financing in place that provides financing for 80% of each ship’s contract price.
As
of March 31, 2017, the aggregate cost of these four ships on order was approximately € 3.1 billion or $3.3 billion
based on the exchange rate as of March 31, 2017.
Project
Leonardo will introduce an additional four ships with expected delivery dates through 2025 and we have an option to introduce two
additional ships for delivery in 2026 and 2027, subject to certain conditions. These four ships are each approximately 140,000
Gross Tons with approximately 3,300 Berths. The contract price for each of the additional four ships is approximately €800.0
million or $852.2 million based on the exchange rate as of March 31, 2017. For ships expected to be delivered after 2023, the contract
price is subject to adjustment under certain circumstances.
We have export credit financing in place for the four ships
that provides financing for 80% of the contract price of each ship expected to be delivered through 2025, subject to certain conditions.
In connection with the contracts to build the 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 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.
|
9.
|
Supplemental Cash Flow
Information
|
For the three months ended March 31, 2017 and 2016 we had non-cash
investing activities in connection with property and equipment of $23.0 million and $7.5 million, respectively.
Norwegian Joy was delivered in April 2017. This ship is
approximately 168,000 Gross Tons with approximately 3,880 Berths.
In April 2017, we obtained export credit financing for the four Project Leonardo ships that provides financing for 80% of the contract price of each ship expected to be delivered
through 2025, subject to certain conditions.
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”
and “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;
|
|
•
|
adverse events impacting the security of travel, such as terrorist acts, armed conflict and threats thereof, acts of piracy,
and other international events;
|
|
•
|
the risks and increased costs associated with operating internationally;
|
|
•
|
our expansion into and investments in new markets;
|
|
•
|
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;
|
|
•
|
an impairment of our tradenames or goodwill which could adversely affect our financial condition and operating results;
|
|
•
|
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;
|
|
•
|
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;
|
|
•
|
overcapacity in key markets or globally;
|
|
•
|
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.
|
The
above examples are not exhaustive and new risks emerge from time to time. Such forward-looking statements are based on our current
beliefs, assumptions, expectations, estimates and projections regarding our present and future business strategies and the environment
in which we expect to operate in the future. These forward-looking statements speak only as of the date made. We expressly disclaim
any obligation or undertaking to release publicly any updates or revisions to any forward-looking statement to reflect any change
in our expectations with regard thereto or any change of events, conditions or circumstances on which any such statement was based,
except as required by law.
Terminology
This report includes certain non-GAAP financial measures, such
as Net Revenue, Net Yield, Net Cruise Cost, Adjusted Net 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), net 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 expense 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 the 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.
•
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.
•
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.
•
New Revolving Loan Facility
.
$750.0
million senior secured revolving credit facility maturing on June 6, 2021, subject to an earlier
springing maturity
date.
•
Project Leonardo.
The
next generation of ships for our Norwegian brand.
•
ROI Capital Expenditures.
Comprised of project-based
capital expenditures which have a quantified return on investment.
•
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 year ended December 31, 2016, we incurred $28.0 million of amounts related to the
extinguishment of debt and $11.2 million of deferred financing fees due to the refinancing of certain credit facilities. We included
these as adjustments in the reconciliation of Adjusted Net Income since these amounts are not representative of our day-to-day
operations and we have included similar adjustments in prior periods; however, these adjustments did not occur and are not included
in the periods presented within this Form 10-Q.
You are encouraged to evaluate each adjustment used in calculating
our non-GAAP financial measures and the reasons we consider our non-GAAP financial measures appropriate for supplemental analysis.
In evaluating our non-GAAP financial measures, you should be aware that in the future we may incur expenses similar to the adjustments
in our presentation. Our non-GAAP financial measures have limitations as analytical tools, and you should not consider these measures
in isolation or as a substitute for analysis of our results as reported under GAAP. Our presentation of our non-GAAP financial
measures should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items.
Our non-GAAP financial measures may not be comparable to other companies. Please see a historical reconciliation of these measures
to the most comparable GAAP measure presented in our consolidated financial statements below in the “Results of Operations”
section.
Financial Presentation
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
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,
2016 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, 2016.
However, in accordance with
Item 303(a)(3)(ii) of Regulation
S-K and Section V of SEC Release No. 33-8350
, we are including additional disclosure which is presented below:
Asset Impairment
We review our long-lived assets, principally ships, for impairment
whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Assets are grouped
and evaluated at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of
other groups of assets. We consider historical performance and future estimated results in our evaluation of potential impairment
and then compare the carrying amount of the asset to the estimated future cash flows expected to result from the use of the asset.
If the carrying amount of the asset exceeds the estimated expected undiscounted future cash flows, we measure the amount of the
impairment by comparing the carrying amount of the asset to its fair value. We estimate fair value based on the best information
available making whatever estimates, judgments and projections we considered necessary. The estimation of fair value is generally
measured by discounting expected future cash flows at discount rates commensurate with the risk involved.
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. For
our evaluation of goodwill and tradenames we use the Step 0 Test which allows us to first assess qualitative factors to determine
whether it is more likely than not (i.e., more than 50%) that the fair value of a reporting unit is less than its carrying value.
In order to make this evaluation, we consider the following circumstances:
|
•
|
General macroeconomic conditions such as a deterioration
in general economic conditions; limitations on accessing capital; fluctuations in foreign exchange rates; or other developments
in equity and credit markets;
|
|
•
|
Industry and market conditions such as a deterioration
in the environment in which an entity operates; an increased competitive environment; a decline in market-dependent multiples
or metrics (in both absolute terms and relative to peers); a change in the market for an entity’s products or services;
or a regulatory or political development;
|
|
•
|
Changes in cost factors that have a negative effect on
earnings and cash flows;
|
|
•
|
Overall financial performance (for both actual and expected
performance);
|
|
•
|
Entity and reporting unit specific events such as changes
in management, key personnel, strategy, or customers; litigation; or a change in the composition or carrying amount of net assets;
and
|
|
•
|
Share price (in both absolute terms and relative to peers).
|
We believe our estimates and judgments with respect to our long-lived
assets, principally ships, and goodwill and other indefinite-lived intangible assets are reasonable. Nonetheless, if there was
a material change in assumptions used in the determination of such fair values or if there is a material change in the conditions
or circumstances that influence such assets, we could be required to record an impairment charge. If a material change occurred,
we may conduct a quantitative assessment comparing the fair value of each reporting unit to its carrying value, including goodwill.
This is called the Step I Test which consists of a combined approach using the expected future cash flows and market multiples
to determine the fair value of the reporting units.
In the third quarter of 2016, based on the performance of the
Oceania Cruises reporting unit, we performed an interim goodwill impairment evaluation consisting of a Step I Test. Based on that
evaluation, we determined that there was no impairment of goodwill because its fair value exceeded its carrying value. For our
annual impairment evaluation, we performed a Step 0 Test for the Norwegian reporting unit and Step I Tests for the Regent Seven
Seas and the Oceania Cruises reporting units. As a result of the Step 0 Test for the Norwegian reporting unit, we determined there
were no factors indicating it was more likely than not (i.e., more than 50%) that the fair value of the reporting unit was less
than its carrying value. Based on the results of the Step 1 Tests, we determined there was no impairment of goodwill because the
fair value of the Oceania Cruises and Regent Seven Seas reporting units exceeded their carrying values by 24% and 81%, respectively.
However, if the fair value of any reporting unit declines in future periods, its goodwill may become impaired at that time. As
of December 31, 2016 and March 31, 2017, there was $523.0 million, $462.1 million and $403.8 million of goodwill for the Oceania
Cruises, Regent Seven Seas and Norwegian reporting units, respectively. As of December 31, 2016, our annual review consisting
of the Step 0 and Step I Tests supported the carrying values of these assets. Subsequent to December 31, 2016, the Company has
continued to monitor the results of each of these reporting units and will perform the necessary tests should events occur or circumstances
change that indicate the carrying value of a reporting unit may not be recoverable.
Quarterly Overview
In February 2017, we announced that we plan to introduce an
additional four ships with expected delivery dates through 2025 and we have an option to introduce two additional ships for delivery
in 2026 and 2027, subject to certain conditions. These four ships are each approximately 140,000 Gross Tons with approximately
3,300 Berths. The contract price for each of the additional four ships is approximately €800.0 million or $852.2 million based
on the exchange rate as of March 31, 2017. For ships expected to be delivered after 2023, the contract price is subject to adjustment
under certain circumstances. We have export credit financing in place for the four ships that provides financing for 80% of the
contract price of each ship expected to be delivered through 2025, subject to certain conditions.
Three months ended March 31, 2017 (“2017”) compared
to three months ended March 31, 2016 (“2016”)
|
•
|
Total revenue increased 6.8% to $1.2 billion in 2017 compared
to $1.1 billion in 2016.
|
|
•
|
Net Revenue in 2017 increased 6.0% to $888.2 million from
$838.2 million in 2016.
|
|
•
|
Net income and diluted EPS was $61.9 million and $0.27,
respectively, in 2017.
|
|
•
|
Operating income was $119.7 million in 2017 compared to
$131.3 million in 2016.
|
|
•
|
Adjusted Net Income and Adjusted EPS were $91.2 million
and $0.40, respectively, in 2017, which included $29.2 million of adjustments primarily consisting of expenses related to non-cash
compensation and certain other adjustments.
|
|
•
|
Adjusted EBITDA improved 3.1% in 2017 compared to 2016.
|
We refer you to our “Results of Operations” below
for a calculation of Net Revenue, Net Yield, Adjusted Net Income, Adjusted EPS and Adjusted EBITDA.
Results of Operations
The following table sets forth operating data as a percentage
of total revenue:
|
|
Three Months Ended
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Revenue
|
|
|
|
|
|
|
|
|
Passenger ticket
|
|
|
68.4
|
%
|
|
|
68.7
|
%
|
Onboard and other
|
|
|
31.6
|
%
|
|
|
31.3
|
%
|
Total revenue
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
Cruise operating expense
|
|
|
|
|
|
|
|
|
Commissions, transportation and other
|
|
|
16.9
|
%
|
|
|
16.3
|
%
|
Onboard and other
|
|
|
5.9
|
%
|
|
|
6.0
|
%
|
Payroll and related
|
|
|
16.7
|
%
|
|
|
16.4
|
%
|
Fuel
|
|
|
7.7
|
%
|
|
|
7.6
|
%
|
Food
|
|
|
4.0
|
%
|
|
|
4.7
|
%
|
Other
|
|
|
11.3
|
%
|
|
|
10.7
|
%
|
Total cruise operating expense
|
|
|
62.5
|
%
|
|
|
61.7
|
%
|
|
|
|
|
|
|
|
|
|
Other operating expense
|
|
|
|
|
|
|
|
|
Marketing, general and administrative
|
|
|
16.7
|
%
|
|
|
16.8
|
%
|
Depreciation and amortization
|
|
|
10.4
|
%
|
|
|
9.4
|
%
|
Total other operating expense
|
|
|
27.1
|
%
|
|
|
26.2
|
%
|
Operating income
|
|
|
10.4
|
%
|
|
|
12.1
|
%
|
|
|
|
|
|
|
|
|
|
Non-operating income (expense)
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
(4.6
|
)%
|
|
|
(5.5
|
)%
|
Other income (expense), net
|
|
|
(0.2
|
)%
|
|
|
0.3
|
%
|
Total non-operating income (expense)
|
|
|
(4.8
|
)%
|
|
|
(5.2
|
)%
|
Net income before income taxes
|
|
|
5.6
|
%
|
|
|
6.9
|
%
|
Income tax expense
|
|
|
(0.2
|
)%
|
|
|
(0.1
|
)%
|
Net income
|
|
|
5.4
|
%
|
|
|
6.8
|
%
|
The following table sets forth selected statistical information:
|
|
Three
Months Ended
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Passengers carried
|
|
|
528,354
|
|
|
|
551,475
|
|
Passenger Cruise Days
|
|
|
4,230,518
|
|
|
|
4,285,294
|
|
Capacity Days
|
|
|
4,030,616
|
|
|
|
3,990,942
|
|
Occupancy Percentage
|
|
|
105.0
|
%
|
|
|
107.4
|
%
|
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
March 31,
|
|
|
|
2017
|
|
|
2017
Constant
Currency
|
|
|
2016
|
|
Passenger ticket revenue
|
|
$
|
786,694
|
|
|
$
|
794,507
|
|
|
$
|
740,112
|
|
Onboard and other revenue
|
|
|
364,087
|
|
|
|
364,087
|
|
|
|
337,520
|
|
Total revenue
|
|
|
1,150,781
|
|
|
|
1,158,594
|
|
|
|
1,077,632
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions, transportation and other expense
|
|
|
194,140
|
|
|
|
196,518
|
|
|
|
175,437
|
|
Onboard and other expense
|
|
|
68,411
|
|
|
|
68,411
|
|
|
|
63,965
|
|
Net Revenue
|
|
|
888,230
|
|
|
|
893,665
|
|
|
|
838,230
|
|
Non-GAAP Adjustment:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue (1)
|
|
|
—
|
|
|
|
—
|
|
|
|
460
|
|
Adjusted Net Revenue
|
|
$
|
888,230
|
|
|
$
|
893,665
|
|
|
$
|
838,690
|
|
Capacity Days
|
|
|
4,030,616
|
|
|
|
4,030,616
|
|
|
|
3,990,942
|
|
Gross Yield
|
|
$
|
285.51
|
|
|
$
|
287.45
|
|
|
$
|
270.02
|
|
Net Yield
|
|
$
|
220.37
|
|
|
$
|
221.72
|
|
|
$
|
210.03
|
|
Adjusted Net Yield
|
|
$
|
220.37
|
|
|
$
|
221.72
|
|
|
$
|
210.15
|
|
|
(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
March 31,
|
|
|
|
2017
|
|
|
2017
Constant
Currency
|
|
|
2016
|
|
Total cruise operating expense
|
|
$
|
719,798
|
|
|
$
|
721,967
|
|
|
$
|
664,481
|
|
Marketing, general and administrative expense
|
|
|
192,044
|
|
|
|
192,363
|
|
|
|
180,574
|
|
Gross Cruise Cost
|
|
|
911,842
|
|
|
|
914,330
|
|
|
|
845,055
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions, transportation and other expense
|
|
|
194,140
|
|
|
|
196,518
|
|
|
|
175,437
|
|
Onboard and other expense
|
|
|
68,411
|
|
|
|
68,411
|
|
|
|
63,965
|
|
Net Cruise Cost
|
|
|
649,291
|
|
|
|
649,401
|
|
|
|
605,653
|
|
Less: Fuel expense
|
|
|
88,886
|
|
|
|
88,886
|
|
|
|
81,672
|
|
Net Cruise Cost Excluding Fuel
|
|
|
560,405
|
|
|
|
560,515
|
|
|
|
523,981
|
|
Less Non-GAAP Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash deferred compensation (1)
|
|
|
823
|
|
|
|
823
|
|
|
|
791
|
|
Non-cash share-based compensation (2)
|
|
|
18,203
|
|
|
|
18,203
|
|
|
|
15,245
|
|
Severance payments and other fees (3)
|
|
|
2,399
|
|
|
|
2,399
|
|
|
|
2,030
|
|
Acquisition of Prestige expenses (4)
|
|
|
250
|
|
|
|
250
|
|
|
|
1,741
|
|
Adjusted Net Cruise Cost Excluding Fuel
|
|
$
|
538,730
|
|
|
$
|
538,840
|
|
|
$
|
504,174
|
|
Capacity Days
|
|
|
4,030,616
|
|
|
|
4,030,616
|
|
|
|
3,990,942
|
|
Gross Cruise Cost per Capacity Day
|
|
$
|
226.23
|
|
|
$
|
226.85
|
|
|
$
|
211.74
|
|
Net Cruise Cost per Capacity Day
|
|
$
|
161.09
|
|
|
$
|
161.12
|
|
|
$
|
151.76
|
|
Net Cruise Cost Excluding Fuel per Capacity Day
|
|
$
|
139.04
|
|
|
$
|
139.06
|
|
|
$
|
131.29
|
|
Adjusted Net Cruise Cost Excluding Fuel per Capacity Day
|
|
$
|
133.66
|
|
|
$
|
133.69
|
|
|
$
|
126.33
|
|
|
(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)
|
Severance payments and other expenses related to restructuring costs and other severance arrangements, which are included in marketing, general and administrative expense.
|
|
(4)
|
Expenses related to the Acquisition of Prestige, which are included in marketing, general and administrative expense.
|
Adjusted Net Income and Adjusted EPS were calculated as follows
(in thousands, except share and per share data):
|
|
Three
Months Ended
March
31,
|
|
|
|
2017
|
|
|
2016
|
|
Net income
|
|
$
|
61,910
|
|
|
$
|
73,229
|
|
Non-GAAP Adjustments:
|
|
|
|
|
|
|
|
|
Non-cash deferred compensation (1)
|
|
|
823
|
|
|
|
791
|
|
Non-cash share-based compensation (2)
|
|
|
18,203
|
|
|
|
15,245
|
|
Severance payments and other fees (3)
|
|
|
2,399
|
|
|
|
2,030
|
|
Acquisition of Prestige expenses (4)
|
|
|
250
|
|
|
|
1,741
|
|
Deferred revenue (5)
|
|
|
—
|
|
|
|
460
|
|
Amortization of intangible assets (6)
|
|
|
7,568
|
|
|
|
5,268
|
|
Derivative adjustment (7)
|
|
|
—
|
|
|
|
(12,096
|
)
|
Adjusted Net Income
|
|
$
|
91,153
|
|
|
$
|
86,668
|
|
Diluted weighted-average shares outstanding – Net income and Adjusted Net Income
|
|
|
228,555,952
|
|
|
|
228,112,035
|
|
Diluted earnings per share
|
|
$
|
0.27
|
|
|
$
|
0.32
|
|
Adjusted EPS
|
|
$
|
0.40
|
|
|
$
|
0.38
|
|
|
(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)
|
Severance payments and other expenses related to restructuring costs and other severance arrangements, which are included in marketing, general and administrative expense.
|
|
(4)
|
Expenses related to the Acquisition of Prestige, which are included in marketing, general and administrative expense.
|
|
(5)
|
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 passenger ticket revenue.
|
|
(6)
|
Amortization of intangible assets related to the Acquisition of Prestige, which are included in depreciation and amortization expense.
|
|
(7)
|
A gain of approximately $13.6 million for the fair value adjustment of a foreign exchange collar which does not receive hedge accounting and losses of approximately $(1.5) million for the dedesignation of certain fuel swaps.
|
EBITDA and Adjusted EBITDA were calculated as follows (in thousands):
|
|
Three
Months Ended
March
31,
|
|
|
|
2017
|
|
|
2016
|
|
Net income
|
|
$
|
61,910
|
|
|
$
|
73,229
|
|
Interest expense, net
|
|
|
52,960
|
|
|
|
59,754
|
|
Income tax expense
|
|
|
2,049
|
|
|
|
1,104
|
|
Depreciation and amortization expense
|
|
|
119,205
|
|
|
|
101,295
|
|
EBITDA
|
|
|
236,124
|
|
|
|
235,382
|
|
Other (income) expense, net (1)
|
|
|
2,815
|
|
|
|
(2,805
|
)
|
Non-GAAP Adjustments:
|
|
|
|
|
|
|
|
|
Non-cash deferred compensation (2)
|
|
|
823
|
|
|
|
791
|
|
Non-cash share-based compensation (3)
|
|
|
18,203
|
|
|
|
15,245
|
|
Severance payments and other fees (4)
|
|
|
2,399
|
|
|
|
2,030
|
|
Acquisition of Prestige expenses (5)
|
|
|
250
|
|
|
|
1,741
|
|
Deferred revenue (6)
|
|
|
—
|
|
|
|
460
|
|
Adjusted EBITDA
|
|
$
|
260,614
|
|
|
$
|
252,844
|
|
(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)
|
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 Acquisition of Prestige, which are included in marketing, general and administrative expense.
|
(6)
|
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 passenger ticket revenue.
|
Three months ended March 31, 2017 (“2017”) compared
to three months ended March 31, 2016 (“2016”)
Revenue
Total revenue increased 6.8% to $1.2 billion in 2017 compared
to $1.1 billion in 2016 due to an increase in passenger ticket pricing and higher onboard and other revenue.
Gross
Yield increased 5.7%.
Net Revenue in 2017 increased 6.0% to $888.2 million from $838.2 million in 2016 due to an increase
in Capacity Days of 1.0% and an increase in Net Yield of 4.9% partially offset by a slight decrease in Occupancy Percentage. The
increase in Capacity Days was primarily due to Sirena joining our fleet in April 2016 and the delivery of Seven Seas Explorer in
June 2016 partially offset by Dry-docks during the period. The increase in Gross Yield and Net Yield was primarily due to an increase
in passenger ticket pricing and higher onboard and other revenue. Adjusted Net Revenue, in 2016, includes a deferred revenue fair
value adjustment of $0.5 million related to the Acquisition of Prestige. On a Constant Currency basis, Net Yield and Adjusted Net
Yield increased 5.6% and 5.5%, respectively, in 2017 compared to 2016.
Expense
Gross Cruise Cost increased 7.9% in 2017 compared to 2016 due
to an increase in total cruise operating expense and marketing, general and administrative expenses. Total cruise operating expense
increased 8.3% in 2017 compared to 2016 primarily due to the increase in Capacity Days as discussed above, crew payroll and related
costs and an increase in repairs and maintenance including Dry-dock expenses. Total other operating expense increased 10.4% in
2017 compared to 2016 primarily due to an increase in depreciation and amortization expense primarily due to ship improvement projects
and the ship additions as well as an increase in marketing, general and administrative expenses primarily due to an increase in
share-based compensation expense of $3.0 million. On a Capacity Day basis, Net Cruise Cost increased 6.1% (6.2% on a Constant Currency
basis) due to an increase in crew payroll and related costs, maintenance and repairs including Dry-dock and share-based compensation
expense discussed above. Adjusted Net Cruise Cost Excluding Fuel per Capacity Day increased 5.8% (on an actual and a Constant Currency
basis) primarily due to the increase in expenses discussed above.
Interest expense, net decreased to $53.0 million in 2017 from
$59.8 million in 2016 reflecting a decrease in average debt outstanding partially offset by an increase in LIBOR rates.
Other income (expense), net was an expense of $2.8 million in
2017 compared to income of $2.8 million in 2016. In 2017, the expense was primarily related to losses on foreign currency exchange
and unrealized and realized losses on derivatives. In 2016, the income was primarily related to unrealized gains on derivatives
partially offset by realized losses on derivatives and losses on foreign currency exchange.
In 2017, we had an income tax expense of $2.0 million compared
to $1.1 million in 2016.
Liquidity and Capital Resources
General
As of March 31, 2017, our liquidity was $969.8 million consisting
of $219.8 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 March 31, 2017, we had a working capital deficit of $2.0
billion. This deficit included $1.4 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 optimize our capital structure, taking
into consideration our current and expected capital 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 “2017” refer
to the three months ended March 31, 2017 and references to “2016” refer to the three months ended March 31, 2016.
Net cash provided by operating activities was $434.9 million
in 2017 as compared to $330.1 million in 2016. The net cash provided by operating activities included timing differences in cash
receipts and payments relating to operating assets and liabilities. Advance ticket sales increased to $222.9 million in 2017 compared
to $148.6 million in 2016.
Net cash used in investing activities was $117.8 million in
2017 and $133.2 million in 2016, primarily related to payments for ship improvements, ships under construction and shoreside projects.
Net cash used in financing activities was $225.7 million in
2017 and $158.0 million in 2016 primarily due to net repayments of our New Revolving Loan Facility and other loan facilities. Additionally,
in 2016, we had the repurchase of our ordinary shares.
Future Capital Commitments
Future capital commitments consist of contracted commitments,
including ship construction contracts, and future expected capital expenditures necessary for operations. As of March 31, 2017,
excluding Project Leonardo, our anticipated capital expenditures were $1.1 billion for the remainder of 2017, $1.3 billion for
the year ending December 31, 2018 and $1.2 billion for the year ending December 31, 2019, of which we have export credit financing
in place for the expenditures related to ship construction contracts of $0.8 billion for the remainder of 2017, $0.7 billion
for 2018 and $0.6 billion for 2019.
Project
Leonardo will introduce an additional four ships with expected delivery dates through 2025 and we have an option to introduce two
additional ships for delivery in 2026 and 2027, subject to certain conditions. These four ships are each approximately 140,000
Gross Tons with approximately 3,300 Berths. The contract price for each of the additional four ships is approximately €800.0
million or $852.2 million based on the exchange rate as of March 31, 2017. For ships expected to be delivered after 2023, the contract
price is subject to adjustment under certain circumstances. The additional a
nticipated capital expenditures for these ships
were $70.8 million for the remainder of 2017, $5.2 million for the year ending December 31, 2018 and $6.4 million for the year
ending December 31, 2019, of which we have export credit financing in place for the expenditures related to ship construction contracts
of $54.5 million for 2018.
Norwegian Joy was delivered in April 2017, we refer you to
our consolidated notes to our financial statements, Note 10— “Subsequent Events”. We have two other Breakaway
Plus Class Ships on order for delivery in the spring of 2018 and fall of 2019, respectively. Norwegian Joy and the two other Breakaway
Plus Class Ships are approximately 168,000 Gross Tons each with approximately 3,880 to 4,000 Berths each. We have an Explorer
Class Ship on order for delivery in the winter of 2020. The combined contract price of these four ships was approximately €3.1
billion, or $3.3 billion based on the euro/U.S. dollar exchange rate as of March 31, 2017. We have export credit financing
in place that provides financing for 80% of each ship’s contract price.
In connection with the contracts to build the 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 and potential claims and impairment losses which may materially impact
our business, financial condition and results of operations.
Capitalized interest for the three months ended March 31, 2017
and 2016 was $8.5 million and $7.1 million, respectively, primarily associated with construction of our newbuild ships.
Off-Balance Sheet Transactions
None.
Contractual Obligations
As of March 31, 2017, 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)
|
|
$
|
6,285,799
|
|
|
$
|
531,778
|
|
|
$
|
1,135,178
|
|
|
$
|
3,180,792
|
|
|
$
|
1,438,051
|
|
Operating leases (2)
|
|
|
147,977
|
|
|
|
15,979
|
|
|
|
30,647
|
|
|
|
28,471
|
|
|
|
72,880
|
|
Ship construction contracts (3)
|
|
|
3,200,349
|
|
|
|
976,091
|
|
|
|
2,224,258
|
|
|
|
—
|
|
|
|
—
|
|
Port facilities (4)
|
|
|
266,201
|
|
|
|
45,666
|
|
|
|
63,910
|
|
|
|
53,318
|
|
|
|
103,307
|
|
Interest (5)
|
|
|
973,930
|
|
|
|
208,672
|
|
|
|
371,123
|
|
|
|
256,708
|
|
|
|
137,427
|
|
Other (6)
|
|
|
187,309
|
|
|
|
56,330
|
|
|
|
71,787
|
|
|
|
38,693
|
|
|
|
20,499
|
|
Total
|
|
$
|
11,061,565
|
|
|
$
|
1,834,516
|
|
|
$
|
3,896,903
|
|
|
$
|
3,557,982
|
|
|
$
|
1,772,164
|
|
|
(1)
|
Includes premiums aggregating $0.5 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, not including Project Leonardo, based on the euro/U.S. dollar exchange rate as of March 31, 2017. 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 March 31, 2017.
|
|
(6)
|
Future commitments for service, maintenance and other Business Enhancement Capital Expenditure contracts.
|
The table above does not include $11.1 million of unrecognized
tax benefits.
Contractual obligations for Project Leonardo, subject to certain
conditions, which are not included in the table above (in thousands):
|
|
Total
|
|
|
Less than
1 year
|
|
|
1-3
years
|
|
|
3-5
years
|
|
|
More than
5 years
|
|
Ship construction contracts (four ships)
|
|
$
|
3,408,640
|
|
|
$
|
68,173
|
|
|
$
|
—
|
|
|
$
|
255,648
|
|
|
$
|
3,084,819
|
|
Other
Certain service providers may require collateral in the normal
course of our business. The amount of collateral may change based on certain terms and conditions.
As a routine part of our business, depending on market conditions,
exchange rates, pricing and our strategy for growth, we regularly consider opportunities to enter into contracts for the building
of additional ships. We may also consider the sale of ships, potential acquisitions and strategic alliances. If any of these were
to occur, they may be financed through the incurrence of additional permitted indebtedness, through cash flows from operations,
or through the issuance of debt, equity or equity-related securities.
Funding Sources
Certain of our debt agreements contain covenants that, among
other things, require us to maintain a minimum level of liquidity, as well as limit our net funded debt-to-capital ratio, maintain
certain other ratios and restrict our ability to pay dividends. Substantially all of our ships and other property and equipment
are pledged as collateral for certain of our debt. We believe we were in compliance with these covenants as of March 31, 2017.
The impact of changes in world economies and especially the
global credit markets can create a challenging environment and may reduce future consumer demand for cruises and adversely affect
our counterparty credit risks. In the event this environment deteriorates, our business, financial condition and results of operations
could be adversely impacted.
We believe our cash on hand, expected future operating cash
inflows, additional available borrowings under our New Revolving Loan Facility and our ability to issue debt securities or additional
equity securities, will be sufficient to fund operations, debt payment requirements, capital expenditures and maintain compliance
with covenants under our debt agreements over the next 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.