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NCLH > SEC Filings for NCLH > Form 10-Q on 8-May-2013All Recent SEC Filings

Show all filings for NORWEGIAN CRUISE LINE HOLDINGS LTD. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for NORWEGIAN CRUISE LINE HOLDINGS LTD.


8-May-2013

Quarterly Report


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 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 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 for 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 adverse impact of the worldwide economic downturn and related factors such as high levels of unemployment and underemployment, 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;

changes in cruise capacity, as well as capacity changes in the overall vacation industry;

intense competition from other cruise companies as well as non-cruise vacation alternatives which may affect our ability to compete effectively;

our substantial leverage, including the inability to generate the necessary amount of cash to service our existing debt, repay our credit facilities if payment is accelerated and incur substantial indebtedness in the future;

changes in fuel prices or other cruise operating costs;

the risks associated with operating internationally;

the continued borrowing availability under our credit facilities and compliance with our financial covenants;

our ability to incur significantly more debt despite our substantial existing indebtedness;

the impact of 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;

adverse events impacting the security of travel that may affect consumer demand for cruises such as terrorist acts, acts of conspiracy, armed conflict and other international events;

the impact of any future changes relating to how travel agents sell and market our cruises;

the impact of any future increases in the price of, or major changes or reduction in, commercial airline services;

the impact of the spread of contagious diseases;

accidents and other incidents affecting the health, safety, security and vacation satisfaction of guests or causing damage to ships, which could cause the modification of itineraries or cancellation of a cruise or series of cruises;

the impact of any breaches in data security or other disturbances to our information technology and other networks;

our ability to attract and retain key personnel and qualified shipboard crew, maintain good relations with employee unions, maintain or renegotiate our collective bargaining agreements on favorable terms and prevent any disruptions in work;

the continued availability of attractive port destinations;

the control of our Company by certain of our shareholders whose interests may not continue to be aligned with ours;


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the impact of problems encountered at shipyards, as well as, any potential claim, impairment loss, cancellation or breach of contract in connection with our contracts with shipyards;

changes involving the tax, environmental, health, safety, security and other regulatory regimes in which we operate;

our ability to obtain insurance coverage on terms that are favorable or consistent with our expectations;

the lack of acceptance of new itineraries, products or services by our targeted guests;

our ability to implement brand strategies and our shipbuilding programs, and to continue to expand our brands and business worldwide;

the costs of new initiatives and our ability to achieve expected cost savings from our new initiatives;

changes in interest rates and/or foreign currency rates;

increases in our future fuel expenses related to implementing IMO regulations, which require the use of higher priced low sulfur fuels in certain cruising areas;

the delivery schedules and estimated costs of new ships on terms that are favorable or consistent with our expectations;

the impact of pending or threatened litigation and investigations;

the impact of changes in our credit ratings;

the possibility of environmental liabilities and other damage that is not covered by insurance or that exceeds our insurance coverage;

our ability to attain and maintain any price increases for our products;

the impact of delays, costs and other factors resulting from emergency ship repairs as well as scheduled repairs, maintenance and refurbishment of our ships;

the implementation of regulations in the U.S. requiring U.S. citizens to obtain passports for travel to additional foreign destinations;

the impact of weather and natural disasters; and

other factors set forth under "Risk Factors."

The above examples are not exhaustive and new risks emerge from time to time. Except as required by law, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. 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 of this report. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statement contained herein to reflect any change in our expectations with regard hereto or any change of events, conditions or circumstances on which any such statement was based.

The interim consolidated financial statements should be read in conjunction with our audited consolidated financial statements for the year ended December 31, 2012, which are included in our most recently filed Annual Report on Form 10-K.

Terminology

Unless otherwise indicated in this report, the following terms have the meanings set forth below:

Adjusted EBITDA. EBITDA adjusted for other income (expense) and other supplemental adjustments (we refer you to "Results of Operations" for a calculation of Adjusted EBITDA).

Adjusted EPS. Diluted earnings (loss) per share adjusted for supplemental adjustments (we refer you to "Results of Operations" for a calculation of Adjusted EPS).


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Adjusted Net Cruise Cost Excluding Fuel. Net Cruise Cost less fuel expense adjusted for supplemental adjustments (we refer you to "Results of Operations" for a calculation of Adjusted Net Cruise Cost Excluding Fuel).

Adjusted Net Income. Net income adjusted for supplemental adjustments (we refer you to "Results of Operations" for a calculation of Adjusted Net Income).

Berths. Double occupancy capacity per cabin (single occupancy per studio cabin) even though many cabins can accommodate three or more passengers.

Capacity Days. Available Berths multiplied by the number of cruise days for the period.

Charter. The hire of a ship for a specified period of time.

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, depreciation and amortization.

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.

IMO. International Maritime Organization, a United Nations agency that sets international standards for shipping.

IPO. The initial public offering of 27,058,824 ordinary shares, par value $.001 per share, of NCLH, which was consummated on January 24, 2013.

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.

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.

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.

Non-GAAP Financial Measures

We use certain non-GAAP financial measures, such as Net Revenue, Net Yield, Net Cruise Cost, Net Cruise Cost Excluding Fuel, Adjusted Net Cruise Cost Excluding Fuel, Adjusted EBITDA and Adjusted Net Income to enable us to analyze our performance. 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 and are commonly used in the cruise industry to measure revenue performance. In measuring our ability to control costs in a manner that positively impacts net income, we believe changes in Net Cruise Cost and Net Cruise Cost Excluding Fuel to be the most relevant indicators of our performance and are commonly used in the cruise industry as a measurement of costs.

As our business includes the sourcing of passengers and deployment of vessels outside of North America, a portion of our revenue and expenses are denominated in foreign currencies, particularly euro and British Pound sterling, 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, is a factor in the evaluation of the performance of management and is the primary metric used in determining the


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Company's performance incentive bonus paid to its employees. We believe that Adjusted EBITDA is a useful measure in determining the Company's performance as it reflects certain operating drivers of the Company's business, such as sales growth, operating costs, marketing, general and administrative expense and other operating income and expense. You are encouraged to evaluate each adjustment and the reasons we consider them appropriate for supplemental analysis. In evaluating Adjusted EBITDA, you should be aware that in the future we may incur expenses similar to the adjustments in this presentation. Our use of Adjusted EBITDA has limitations as an analytical tool, and you should not consider this measure in isolation or as a substitute for analysis of our results as reported under GAAP. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items.

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 measures 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. Our non-GAAP financial measures may not be comparable to other companies. Please see a historical reconciliation of these measures to items in our consolidated financial statements below in the "Results of Operations" section.

In addition, we utilize Adjusted Net Income as a supplemental financial measure to demonstrate GAAP net income excluding non-recurring, infrequent or unusual charges. These charges vary from period to period; thus, our presentation of Adjusted Net Income may not be indicative of future adjustments or results.

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 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 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 passengers purchase these items from us.

Onboard and other revenue primarily consists of revenue from gaming, beverage sales, specialty dining, shore excursions, retail sales and spa services. 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 and certain port expenses.

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 shore excursions, beverage sales and gaming.

Payroll and related consists of the cost of wages and benefits for shipboard employees.

Fuel includes fuel costs, the impact of certain fuel hedges and fuel delivery costs.

Food consists of food costs for passengers and crew.

Other consists of repairs and maintenance (including Dry-dock costs), ship insurance, Charter costs and other ship expenses.


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Executive Quarterly Overview

In January 2013, the IPO was completed at a price of $19.00 per share and in February 2013 NCLC issued $300.0 million aggregate principal amount of senior notes bearing interest at a rate of 5% per annum maturing on February 15, 2018 (the "Notes Offering").

For the first quarter of 2013, the Company reported Adjusted Net Income of $12.9 million and Adjusted EPS of $0.06, which excludes $110.4 million in expenses related to debt prepayments funded by the aggregate net proceeds from the IPO and the Notes Offering as well as non-cash share-based compensation and other expenses related to the IPO. On a GAAP basis, net loss attributable to Norwegian Cruise Line Holdings Ltd. and diluted loss per share were $(96.4) million and $(0.49), respectively.

Three months ended March 31, 2013 ("2013") compared to the three months ended March 31, 2012 ("2012")

Total revenue increased 2.4% to $527.6 million in 2013 compared to $515.4 million in 2012. Net Revenue in 2013 increased 1.3% to $390.7 million from $385.6 million in 2012 due to an increase in Net Yield of 3.3% partially offset by lower Capacity Days primarily due to a planned Dry-dock.

Operating income in 2013, which includes $18.5 million of share-based compensation expense related to the IPO, was $31.0 million compared to $46.4 million in 2012 and Adjusted EBITDA (we refer you to our "Results of Operations" below for a calculation of Adjusted EBITDA) improved 6.6% for the same period.

Results of Operations

The following table sets forth operating data as a percentage of revenue:



                                                                   Three Months Ended
                                                                       March 31,
                                                                  2013            2012
Revenue
Passenger ticket                                                     68.0 %         68.2 %
Onboard and other                                                    32.0 %         31.8 %

Total revenue                                                       100.0 %        100.0 %

Cruise operating expense
Commissions, transportation and other                                17.9 %         17.6 %
Onboard and other                                                     8.0 %          7.6 %
Payroll and related                                                  14.0 %         14.2 %
Fuel                                                                 13.7 %         12.7 %
Food                                                                  5.7 %          6.1 %
Other                                                                 9.4 %         10.1 %

Total cruise operating expense                                       68.7 %         68.3 %

Other operating expense
Marketing, general and administrative                                16.2 %         13.8 %
Depreciation and amortization                                         9.2 %          8.9 %

Total other operating expense                                        25.4 %         22.7 %


Operating income                                                      5.9 %          9.0 %

Non-operating income (expense)
Interest expense, net                                               (24.2 )%        (9.0 )%
Other income (expense)                                               (0.2 )%         0.6 %

Total non-operating income (expense)                                (24.4 )%        (8.4 )%


Net income (loss)                                                   (18.5 )%         0.6 %
Net loss attributable to non-controlling interest                    (0.2 )%          -  %

Net income (loss) attributable to Norwegian Cruise Line
Holdings Ltd.                                                       (18.3 )%         0.6 %


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The following table sets forth selected statistical information:

                                             Three Months Ended
                                                 March 31,
                                           2013             2012
                Passengers carried          368,010          384,877
                Passenger Cruise Days     2,528,192        2,581,687
                Capacity Days             2,351,299        2,398,374
                Occupancy Percentage          107.5 %          107.6 %

Gross Yield and Net Yield were calculated as follows (in thousands, except Capacity Days and Yield data):

                                                                 Three Months Ended
                                                                      March 31,
                                                                        2013
                                                                      Constant
                                                       2013           Currency           2012
Passenger ticket revenue                            $   358,928      $   358,760      $   351,330
Onboard and other revenue                               168,703          168,703          164,100

Total revenue                                           527,631          527,463          515,430
Less:
Commissions, transportation and other expense            94,579           94,532           90,615
Onboard and other expense                                42,371           42,371           39,201

Net Revenue                                         $   390,681      $   390,560      $   385,614

Capacity Days                                         2,351,299        2,351,299        2,398,374
Gross Yield                                         $    224.40      $    224.33      $    214.91
Net Yield                                           $    166.16      $    166.10      $    160.78

Gross Cruise Cost, Net Cruise Cost and Net Cruise Cost Excluding Fuel were calculated as follows (in thousands, except Capacity Days and per Capacity Day data):

                                                                 Three Months Ended
                                                                      March 31,
                                                                        2013
                                                                      Constant
                                                       2013           Currency           2012
Total cruise operating expense                      $   362,689      $   362,738      $   352,027
Marketing, general and administrative expense            85,206           85,168           71,162

Gross Cruise Cost                                       447,895          447,906          423,189
Less:
Commissions, transportation and other expense            94,579           94,532           90,615
Onboard and other expense                                42,371           42,371           39,201

Net Cruise Cost                                         310,945          311,003          293,373
Less:
Fuel expense                                             72,498           72,498           65,526

Net Cruise Cost Excluding Fuel                          238,447          238,505          227,847
Less:
Non-cash share-based compensation related to IPO         18,527           18,527               -

Adjusted Net Cruise Cost Excluding Fuel             $   219,920      $   219,978      $   227,847


Capacity Days                                         2,351,299        2,351,299        2,398,374

Gross Cruise Cost per Capacity Day                  $    190.49      $    190.49      $    176.45
Net Cruise Cost per Capacity Day                    $    132.24      $    132.27      $    122.32
Net Cruise Cost Excluding Fuel per Capacity Day     $    101.41      $    101.44      $     95.00
Adjusted Net Cruise Cost Excluding Fuel per
Capacity Day                                        $     93.53      $     93.56      $     95.00


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Adjusted Net Income was calculated as follows (in thousands, except share and per share data):

                                                                Three Months Ended
                                                                     March 31,
                                                           2013                    2012
Net income (loss) attributable to Norwegian
Cruise Line Holdings Ltd.                              $     (96,395 )         $       3,284
Net loss attributable to non-controlling interest             (1,105 )                    -

Net income (loss)                                            (97,500 )                 3,284
Non-cash share-based compensation related to IPO              18,527                      -
Tax expense related to IPO and debt prepayments                1,376                      -
Expenses related to debt prepayments (1)                      90,505                      -

Adjusted Net Income                                    $      12,908           $       3,284


Diluted weighted-average shares outstanding - Net
income (loss)                                            198,350,433 (2)         178,954,960
Diluted weighted-average shares outstanding -
Adjusted Net Income                                      204,144,512             178,954,960

Diluted earnings (loss) per share                      $       (0.49 )         $        0.02

Adjusted EPS                                           $        0.06           $        0.02

(1) Consists of premiums, write-offs of deferred fees and other expenses related to prepayments of debt.

(2) Excludes 5,794,079 shares, as including these would be antidilutive.

Adjusted EBITDA was calculated as follows (in thousands):

                                                                  Three Months Ended
                                                                       March 31,
                                                                  2013           2012
Net income (loss) attributable to Norwegian Cruise Line
Holdings Ltd.                                                   $ (96,395 )    $  3,284
Interest expense, net                                             127,656        46,170
Depreciation and amortization expense                              48,748        45,797

EBITDA                                                             80,009        95,251
Non-controlling interest                                           (1,105 )          -
Other (income) expense                                                832        (3,010 )
Non-cash compensation and other                                     1,497         1,300
Non-cash share-based compensation related to IPO                   18,527            -

Adjusted EBITDA                                                 $  99,760      $ 93,541

Three months ended March 31, 2013 ("2013") compared to three months ended March 31, 2012 ("2012")

Revenue . . .

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