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NCLH > SEC Filings for NCLH > Form 10-K on 21-Feb-2014All Recent SEC Filings

Show all filings for NORWEGIAN CRUISE LINE HOLDINGS LTD.

Form 10-K for NORWEGIAN CRUISE LINE HOLDINGS LTD.


21-Feb-2014

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Non-GAAP Financial Measures

We use certain non-GAAP financial measures, such as Net Revenue, Net Yield, Net Cruise Cost, Adjusted Net Cruise Cost Excluding Fuel and Adjusted EBITDA to enable us to analyze our performance. See "Terms Used in this Annual Report" for the definition 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 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 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,


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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 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.

In addition, Adjusted Net Income and Adjusted EPS are supplemental financial measures used to demonstrate GAAP net income and EPS excluding certain charges. We use Adjusted Net Income and Adjusted EPS as key performance measures of our earnings performance, and 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. These charges vary from period to period; accordingly, our presentation of Adjusted Net Income and Adjusted EPS may not be indicative of future adjustments or results.

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 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 guests purchase these items from us. Onboard and other revenue primarily consists of revenue from gaming, beverage sales, shore excursions, specialty dining, retail sales, spa services and photo. 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.

Critical Accounting Policies

Our consolidated financial statements have been prepared in accordance with GAAP in the U.S. The preparation of these consolidated financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of our consolidated financial statements and the reported amounts of revenues and expenses during the periods presented. We rely on historical experience and on various other assumptions that we believe to be reasonable under the circumstances to make these estimates and judgments. Actual results could differ materially from these estimates. We believe that the following critical accounting policies affect the significant estimates used in the preparation of our consolidated financial statements. These critical accounting policies, which are presented in detail in our notes to our audited consolidated financial statements, relate to ship accounting, asset impairment and contingencies.


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Ship Accounting

Ships represent our most significant assets, and we record them at cost less accumulated depreciation. Depreciation of ships is computed on a straight-line basis over the estimated service lives of primarily 30 years after a 15% reduction for the estimated residual value of the ship. Improvement costs that we believe add value to our ships are capitalized to the ship and depreciated over the improvements' estimated useful lives. Repairs and maintenance activities are charged to expense as incurred. We account for Dry-dock costs under the direct expense method which requires us to expense all Dry-dock costs as incurred.

We determine the useful life of our ships based primarily on our estimates of the average useful life of the ships' major component systems, such as cabins, main diesels, main electric, superstructure and hull. In addition, we consider the impact of anticipated changes in the vacation market and technological conditions and historical useful lives of similarly-built ships. Given the large and complex nature of our ships, our accounting estimates related to ships and determinations of ship improvement costs to be capitalized require considerable judgment and are inherently uncertain. Should certain factors or circumstances cause us to revise our estimate of ship service lives or projected residual values, depreciation expense could be materially lower or higher. If circumstances cause us to change our assumptions in making determinations as to whether ship improvements should be capitalized, the amounts we expense each year as repairs and maintenance costs could increase, partially offset by a decrease in depreciation expense. If we reduced our estimated average 30-year ship service life by one year, depreciation expense for the year ended December 31, 2013 would have increased by $6.1 million. In addition, if our ships were estimated to have no residual value, depreciation expense for the same period would have increased by $30.6 million. We believe our estimates for ship accounting are reasonable and our methods are consistently applied. We believe that depreciation expense is based on a rational and systematic method to allocate our ships' costs to the periods that benefit from the ships' usage.

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 considered necessary. The estimation of fair value is generally measured by discounting expected future cash flows at discount rates commensurate with the risk involved.

Goodwill and other indefinite-lived assets, principally trade names, are reviewed for impairment on an annual basis or earlier if there is an event or change in circumstances that would indicate that the carrying value of these assets could not be fully recovered.

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. As of December 31, 2013, our annual review supports the carrying value of these assets.

Contingencies

Periodically, we assess potential liabilities related to any lawsuits or claims brought against us or any asserted claims, including tax, legal and/or environmental matters. Although it is typically very difficult to determine the timing and ultimate outcome of such actions, we use our best judgment to determine if it is probable that we will incur an expense related to the settlement or final adjudication of such matters and whether a reasonable estimation of such probable loss, if any, can be made. In assessing probable losses, we take into consideration estimates of the amount of insurance recoveries, if any. In accordance with the guidance on accounting for contingencies, we accrue a liability when we believe a loss is probable and the amount of loss can be reasonably estimated. Due to the inherent uncertainties related to the eventual outcome of litigation and potential insurance recoveries, although we believe that our estimates and judgments are reasonable, it is possible that certain matters may be resolved for amounts materially different from any estimated provisions or previous disclosures.

Executive Overview

Total revenue increased 12.9% to $2.6 billion for the year ended December 31, 2013 compared to $2.3 billion for the year ended December 31, 2012. Net Revenue for the year ended December 31, 2013 increased 13.4% to $1.9 billion from $1.7 billion in the same period in 2012 with an improvement of both Net Yield of 4.3% and Capacity Days of 8.8%.


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For the year ended December 31, 2013, we had Adjusted Net Income and Adjusted EPS of $295.8 million and $1.41, respectively, which excludes $27.9 million of expenses related to non-cash compensation and $165.0 million of expenses related to prepayments of debt, a change in corporate entity structure and our Secondary Offerings. On a GAAP basis, net income attributable to Norwegian Cruise Line Holdings Ltd. and diluted earnings per share were $101.7 million and $0.49, respectively. Operating income increased 10.9% to $395.9 million for the year ended December 31, 2013 from $357.1 million in 2012. A 16.5% improvement in Adjusted EBITDA was achieved for the same period as revenue increased primarily due to an increase in passenger ticket pricing. Our business improvement measures continued to have an impact even with the increase in the cost of fuel. We refer you to our Results of Operations below for a calculation of Net Revenue, Adjusted Net Income, Adjusted EPS and Adjusted EBITDA.

Results of Operations

We reported total revenue, total cruise operating expense, operating income and net income as follows (in thousands, except per share data):

                                                             Year Ended December 31,
                                                    2013              2012              2011
Total revenue                                    $ 2,570,294       $ 2,276,246       $ 2,219,324

Total cruise operating expense                   $ 1,657,659       $ 1,478,433       $ 1,467,876

Operating income                                 $   395,887       $   357,093       $   316,112

Net income attributable to Norwegian Cruise
Line Holdings Ltd.                               $   101,714       $   168,556       $   126,859

Earnings per share:
Basic                                            $      0.50       $      0.95       $      0.71

Diluted                                          $      0.49       $      0.94       $      0.71

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

                                                              Year Ended December 31,
                                                       2013            2012            2011
Revenue
Passenger ticket                                         70.6 %          70.5 %          70.4 %
Onboard and other                                        29.4 %          29.5 %          29.6 %

Total revenue                                           100.0 %         100.0 %         100.0 %

Cruise operating expense
Commissions, transportation and other                    17.7 %          18.0 %          18.5 %
Onboard and other                                         7.6 %           7.7 %           7.6 %
Payroll and related                                      13.3 %          12.9 %          13.1 %
Fuel                                                     11.8 %          12.5 %          11.0 %
Food                                                      5.3 %           5.5 %           5.6 %
Other                                                     8.8 %           8.4 %          10.3 %

Total cruise operating expense                           64.5 %          65.0 %          66.1 %

Other operating expense
Marketing, general and administrative                    11.7 %          11.0 %          11.3 %
Depreciation and amortization                             8.4 %           8.3 %           8.3 %

Total other operating expense                            20.1 %          19.3 %          19.6 %

Operating income                                         15.4 %          15.7 %          14.3 %

Non-operating income (expense)
Interest expense, net                                   (11.0 )%         (8.3 )%         (8.6 )%
Other income (expense)                                    0.1 %            -  %           0.1 %

Total non-operating income (expense)                    (10.9 )%         (8.3 )%         (8.5 )%

Net income before income taxes                            4.5 %           7.4 %           5.8 %
Income tax expense                                       (0.5 )%           -  %          (0.1 )%

Net income                                                4.0 %           7.4 %           5.7 %
Net income attributable to non-controlling
interest                                                   -  %            -  %            -  %

Net income attributable to Norwegian Cruise Line
Holdings Ltd.                                             4.0 %           7.4 %           5.7 %


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The following table sets forth selected statistical information:

                                    Year Ended December 31,
                            2013              2012              2011
Passengers carried         1,628,278         1,503,107         1,530,113
Passenger Cruise Days     11,400,906        10,332,914        10,227,438
Capacity Days             10,446,216         9,602,730         9,454,570
Occupancy Percentage           109.1 %           107.6 %           108.2 %

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

                                                               Year Ended December 31,
                                                         2013                            2012
                                                       Constant                        Constant
                                        2013           Currency          2012          Currency          2011
Passenger ticket revenue            $  1,815,869     $  1,814,397     $ 1,604,563     $ 1,621,412     $ 1,563,363
Onboard and other revenue                754,425          754,425         671,683         671,683         655,961

Total revenue                          2,570,294        2,568,822       2,276,246       2,293,095       2,219,324
Less:
Commissions, transportation and
other expense                            455,816          455,286         410,531         415,030         410,709
Onboard and other expense                195,526          195,526         173,916         173,916         169,329

Net Revenue                         $  1,918,952     $  1,918,010     $ 1,691,799     $ 1,704,149     $ 1,639,286

Capacity Days                         10,446,216       10,446,216       9,602,730       9,602,730       9,454,570
Gross Yield                         $     246.05     $     245.91     $    237.04     $    238.80     $    234.74
Net Yield                           $     183.70     $     183.61     $    176.18     $    177.47     $    173.39

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):

                                                               Year Ended December 31,
                                                         2013                            2012
                                                       Constant                        Constant
                                        2013           Currency          2012          Currency          2011
Total cruise operating expense      $  1,657,659     $  1,655,971     $ 1,478,433     $ 1,487,544     $ 1,467,876
Marketing, general and
administrative expense                   301,155          300,719         251,183         252,615         251,351

Gross Cruise Cost                      1,958,814        1,956,690       1,729,616       1,740,159       1,719,227
Less:
Commissions, transportation and
other expense                            455,816          455,286         410,531         415,030         410,709
Onboard and other expense                195,526          195,526         173,916         173,916         169,329

Net Cruise Cost                        1,307,472        1,305,878       1,145,169       1,151,213       1,139,189
Less: Fuel expense                       303,439          303,439         283,678         283,678         243,503

Net Cruise Cost Excluding Fuel         1,004,033        1,002,439         861,491         867,535         895,686
Less: Other (1)                           33,049           33,049              -               -               -

Adjusted Net Cruise Cost
Excluding Fuel                      $    970,984     $    969,390     $   861,491     $   867,535     $   895,686

Capacity Days                         10,446,216       10,446,216       9,602,730       9,602,730       9,454,570
Gross Cruise Cost per Capacity
Day                                 $     187.51     $     187.31     $    180.12     $    181.22     $    181.84
Net Cruise Cost per Capacity Day    $     125.16     $     125.01     $    119.25     $    119.88     $    120.49
Net Cruise Cost Excluding Fuel
per Capacity Day                    $      96.11     $      95.96     $     89.71     $     90.34     $     94.74
Adjusted Net Cruise Cost
Excluding Fuel per Capacity Day     $      92.95     $      92.80     $     89.71     $     90.34     $     94.74

(1) Consists of non-cash share-based compensation related to our IPO and other supplemental adjustments.


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

                                                            Year Ended December 31,
                                               2013                  2012                  2011
Net income attributable to Norwegian
Cruise Line Holdings Ltd.                  $     101,714         $     168,556         $     126,859
Net income attributable to
non-controlling interest                           1,172                    -                     -

Net income                                       102,886               168,556               126,859
Non-cash compensation                              9,408                 4,500                    -
Non-cash share-based compensation
related to IPO                                    18,527                    -                     -
Expenses related to debt prepayments
(1)                                              160,573                    -                     -
Other (2)                                          4,396                    -                     -

Adjusted Net Income                        $     295,790         $     173,056         $     126,859

Diluted weighted-average shares
outstanding                                  209,239,484           179,023,683           178,859,720

Diluted earnings per share (3)             $        0.49         $        0.94         $        0.71

Adjusted EPS                               $        1.41         $        0.97         $        0.71

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

(2) Expenses incurred from changes in corporate entity structure and our Secondary Offerings.

(3) Diluted earnings per share is computed by dividing net income by diluted weighted-average shares outstanding.

Adjusted EBITDA was calculated as follows (in thousands):

                                                              Year Ended December 31,
                                                      2013             2012             2011
Net income attributable to Norwegian Cruise
Line Holdings Ltd.                                  $ 101,714        $ 168,556        $ 126,859
Interest expense, net                                 282,602          189,930          190,187
Income tax expense                                     11,802              706            1,700
Depreciation and amortization expense                 215,593          189,537          183,985

EBITDA                                                611,711          548,729          502,731
Net income attributable to non-controlling
interest                                                1,172               -                -
Other (income) expense                                 (1,403 )         (2,099 )         (2,634 )
Non-cash compensation and other (1)                    17,188            9,004            5,942
Non-cash share-based compensation related to
IPO                                                    18,527               -                -

Adjusted EBITDA                                     $ 647,195        $ 555,634        $ 506,039

(1) Consists of non-cash compensation, expenses incurred from changes in corporate entity structure, our Secondary Offerings and other supplemental adjustments.

Year Ended December 31, 2013 ("2013") Compared to Year Ended December 31, 2012
("2012")

Revenue

Total revenue increased 12.9% to $2.6 billion in 2013 compared to $2.3 billion in 2012. Net Revenue increased 13.4% in 2013, primarily due to an increase in Capacity Days of 8.8% related to the delivery of Norwegian Breakaway and an increase in Net Yield of 4.3%. The increase in Net Yield was due to an increase in passenger ticket pricing and higher onboard and other revenue, partially due to the introduction of Norwegian Breakaway to the fleet. On a Constant Currency basis, Net Yield increased 4.2% in 2013 compared to 2012.

Expense

Total cruise operating expense increased 12.1% in 2013 compared to 2012 primarily due to an increase in Capacity Days, expenses related to planned Dry-docks and fuel expense, partially offset by the timing of certain expenses. The increase in fuel expense was primarily the result of a 1.7% increase in the average fuel price to $675 per metric ton in 2013 from $664 in 2012. Total other operating expense increased 17.3% in 2013 compared to 2012 primarily due to non-cash expenses related to share-based compensation recognized upon the realization of our IPO, the timing of certain expenses and depreciation expense related to the addition of Norwegian Breakaway. On a Capacity Day basis, Net Cruise Cost increased 5.0% on an as reported and 4.8% on a Constant Currency basis due to the expenses discussed above. Adjusted Net Cruise Cost Excluding Fuel per Capacity Day increased 3.6% and 3.4% on an as reported and Constant Currency basis, respectively, mainly due to the timing of certain expenses.

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