UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended SeptemberJune 30, 20152016
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 001-35784
NORWEGIAN CRUISE LINE HOLDINGS LTD.
(Exact name of registrant as specified in its charter)
Bermuda | 98-0691007 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
7665 Corporate Center Drive, Miami, Florida 33126
(Address of principal executive offices) (zip code)
(305) 436-4000
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act).
Large accelerated filer | x | Accelerated filer | ¨ |
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
There were 229,468,539227,114,541 ordinary shares outstanding as of October 29, 2015.August 3, 2016.
Norwegian Cruise Line Holdings Ltd.
Consolidated Statements of Operations
(Unaudited)
(in thousands, except share and per share data)
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||
2015 | 2014 | 2015 | 2014 | 2016 | 2015 | 2016 | 2015 | |||||||||||||||||||||||||
Revenue | ||||||||||||||||||||||||||||||||
Passenger ticket | $ | 948,059 | $ | 650,323 | $ | 2,406,533 | $ | 1,627,684 | $ | 818,478 | $ | 787,991 | $ | 1,558,590 | $ | 1,458,474 | ||||||||||||||||
Onboard and other | 336,851 | 256,694 | 901,992 | 709,288 | 368,357 | 297,442 | 705,877 | 565,141 | ||||||||||||||||||||||||
Total revenue | 1,284,910 | 907,017 | 3,308,525 | 2,336,972 | 1,186,835 | 1,085,433 | 2,264,467 | 2,023,615 | ||||||||||||||||||||||||
Cruise operating expense | ||||||||||||||||||||||||||||||||
Commissions, transportation and other | 225,586 | 143,194 | 589,851 | 374,716 | 193,536 | 192,438 | 368,973 | 364,265 | ||||||||||||||||||||||||
Onboard and other | 84,171 | 69,389 | 210,701 | 172,780 | 75,790 | 67,885 | 139,755 | 126,530 | ||||||||||||||||||||||||
Payroll and related | 170,694 | 115,968 | 490,253 | 321,386 | 184,476 | 161,930 | 361,619 | 319,559 | ||||||||||||||||||||||||
Fuel | 88,829 | 79,881 | 267,784 | 236,753 | 80,607 | 91,581 | 162,279 | 178,955 | ||||||||||||||||||||||||
Food | 46,419 | 44,819 | 131,969 | 125,236 | 49,769 | 43,699 | 100,772 | 85,550 | ||||||||||||||||||||||||
Other | 102,023 | 58,047 | 307,143 | 197,133 | 121,722 | 98,746 | 236,983 | 205,120 | ||||||||||||||||||||||||
Total cruise operating expense | 717,722 | 511,298 | 1,997,701 | 1,428,004 | 705,900 | 656,279 | 1,370,381 | 1,279,979 | ||||||||||||||||||||||||
Other operating expense | ||||||||||||||||||||||||||||||||
Marketing, general and administrative | 150,558 | 97,111 | 411,879 | 263,584 | 149,307 | 107,164 | 329,881 | 261,321 | ||||||||||||||||||||||||
Depreciation and amortization | 109,798 | 63,786 | 314,381 | 188,885 | 104,610 | 104,607 | 205,905 | 204,583 | ||||||||||||||||||||||||
Total other operating expense | 260,356 | 160,897 | 726,260 | 452,469 | 253,917 | 211,771 | 535,786 | 465,904 | ||||||||||||||||||||||||
Operating income | 306,832 | 234,822 | 584,564 | 456,499 | 227,018 | 217,383 | 358,300 | 277,732 | ||||||||||||||||||||||||
Non-operating income (expense) | ||||||||||||||||||||||||||||||||
Interest expense, net | (49,784 | ) | (32,284 | ) | (153,219 | ) | (95,316 | ) | (68,420 | ) | (52,446 | ) | (128,174 | ) | (103,435 | ) | ||||||||||||||||
Other income (expense) | (1,733 | ) | 3,242 | (35,589 | ) | 3,305 | ||||||||||||||||||||||||||
Other expense | (10,753 | ) | (3,717 | ) | (7,948 | ) | (33,856 | ) | ||||||||||||||||||||||||
Total non-operating income (expense) | (51,517 | ) | (29,042 | ) | (188,808 | ) | (92,011 | ) | (79,173 | ) | (56,163 | ) | (136,122 | ) | (137,291 | ) | ||||||||||||||||
Net income before income taxes | 255,315 | 205,780 | 395,756 | 364,488 | 147,845 | 161,220 | 222,178 | 140,441 | ||||||||||||||||||||||||
Income tax benefit (expense) | (3,528 | ) | (2,502 | ) | (6,931 | ) | 3,761 | |||||||||||||||||||||||||
Income tax expense | (2,599 | ) | (2,726 | ) | (3,703 | ) | (3,403 | ) | ||||||||||||||||||||||||
Net income | 251,787 | 203,278 | 388,825 | 368,249 | $ | 145,246 | $ | 158,494 | $ | 218,475 | $ | 137,038 | ||||||||||||||||||||
Net income attributable to non-controlling interest | — | 2,200 | — | 4,288 | ||||||||||||||||||||||||||||
Net income attributable to Norwegian Cruise Line Holdings Ltd. | $ | 251,787 | $ | 201,078 | $ | 388,825 | $ | 363,961 | ||||||||||||||||||||||||
Weighted-average shares outstanding | ||||||||||||||||||||||||||||||||
Basic | 227,384,616 | 203,220,218 | 225,805,901 | 204,444,469 | 226,972,076 | 225,698,078 | 227,105,804 | 225,003,460 | ||||||||||||||||||||||||
Diluted | 230,274,756 | 208,507,181 | 229,860,900 | 209,992,647 | 227,884,704 | 230,228,144 | 227,997,970 | 229,664,210 | ||||||||||||||||||||||||
Earnings per share | ||||||||||||||||||||||||||||||||
Basic | $ | 1.11 | $ | 0.99 | $ | 1.72 | $ | 1.78 | $ | 0.64 | $ | 0.70 | $ | 0.96 | $ | 0.61 | ||||||||||||||||
Diluted | $ | 1.09 | $ | 0.97 | $ | 1.69 | $ | 1.75 | $ | 0.64 | $ | 0.69 | $ | 0.96 | $ | 0.60 |
The accompanying notes are an integral part of these consolidated financial statements.
1 |
Norwegian Cruise Line Holdings Ltd.
Consolidated Statements of Comprehensive Income
(Unaudited)
(in thousands)
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||
2015 | 2014 | 2015 | 2014 | 2016 | 2015 | 2016 | 2015 | |||||||||||||||||||||||||
Net income | $ | 251,787 | $ | 203,278 | $ | 388,825 | $ | 368,249 | $ | 145,246 | $ | 158,494 | $ | 218,475 | $ | 137,038 | ||||||||||||||||
Other comprehensive loss: | ||||||||||||||||||||||||||||||||
Other comprehensive income: | ||||||||||||||||||||||||||||||||
Shipboard Retirement Plan | 119 | 95 | 358 | 284 | 108 | 120 | 216 | 239 | ||||||||||||||||||||||||
Cash flow hedges: | ||||||||||||||||||||||||||||||||
Net unrealized loss | (105,227 | ) | (37,801 | ) | (138,501 | ) | (44,360 | ) | ||||||||||||||||||||||||
Net unrealized income (loss) | 5,007 | 70,491 | 75,457 | (33,274 | ) | |||||||||||||||||||||||||||
Amount realized and reclassified into earnings | 13,132 | 1,819 | 61,582 | 1,825 | 23,781 | 26,564 | 58,331 | 48,450 | ||||||||||||||||||||||||
Total other comprehensive loss | (91,976 | ) | (35,887 | ) | (76,561 | ) | (42,251 | ) | ||||||||||||||||||||||||
Total other comprehensive income | 28,896 | 97,175 | 134,004 | 15,415 | ||||||||||||||||||||||||||||
Total comprehensive income | 159,811 | 167,391 | 312,264 | 325,998 | $ | 174,142 | $ | 255,669 | $ | 352,479 | $ | 152,453 | ||||||||||||||||||||
Comprehensive income attributable to non-controlling interest | — | 1,781 | — | 3,826 | ||||||||||||||||||||||||||||
Total comprehensive income attributable to Norwegian Cruise Line Holdings Ltd. | $ | 159,811 | $ | 165,610 | $ | 312,264 | $ | 322,172 |
The accompanying notes are an integral part of these consolidated financial statements.
2 |
Norwegian Cruise Line Holdings Ltd.
Consolidated Balance Sheets
(Unaudited)
(in thousands, except share data)
September 30, 2015 | December 31, 2014 | June 30, 2016 | December 31, 2015 | |||||||||||||
Assets | ||||||||||||||||
Current assets: | ||||||||||||||||
Cash and cash equivalents | $ | 230,180 | $ | 84,824 | $ | 145,964 | $ | 115,937 | ||||||||
Accounts receivable, net | 41,995 | 32,432 | 60,366 | 44,996 | ||||||||||||
Inventories | 54,946 | 56,555 | 67,697 | 58,173 | ||||||||||||
Prepaid expenses and other assets | 114,075 | 109,924 | 166,003 | 121,305 | ||||||||||||
Total current assets | 441,196 | 283,735 | 440,030 | 340,411 | ||||||||||||
Property and equipment, net | 8,723,844 | 8,623,773 | 10,068,499 | 9,458,805 | ||||||||||||
Goodwill | 1,388,931 | 1,388,931 | 1,388,931 | 1,388,931 | ||||||||||||
Tradenames | 817,525 | 817,525 | 817,525 | 817,525 | ||||||||||||
Other long-term assets | 375,669 | 459,113 | 242,764 | 259,085 | ||||||||||||
Total assets | $ | 11,747,165 | $ | 11,573,077 | $ | 12,957,749 | $ | 12,264,757 | ||||||||
Liabilities and Shareholders’ Equity | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Current portion of long-term debt | $ | 587,504 | $ | 576,947 | $ | 581,804 | $ | 629,840 | ||||||||
Accounts payable | 44,262 | 101,983 | 46,511 | 51,369 | ||||||||||||
Accrued expenses and other liabilities | 656,859 | 552,514 | 573,812 | 640,568 | ||||||||||||
Due to Affiliate | 38,923 | 37,948 | — | 20,769 | ||||||||||||
Advance ticket sales | 1,103,734 | 817,207 | 1,390,137 | 1,023,973 | ||||||||||||
Total current liabilities | 2,431,282 | 2,086,599 | 2,592,264 | 2,366,519 | ||||||||||||
Long-term debt | 5,096,237 | 5,607,157 | 5,971,143 | 5,767,697 | ||||||||||||
Due to Affiliate | — | 18,544 | ||||||||||||||
Other long-term liabilities | 300,752 | 341,964 | 275,981 | 349,661 | ||||||||||||
Total liabilities | 7,828,271 | 8,054,264 | 8,839,388 | 8,483,877 | ||||||||||||
Commitments and contingencies (Note 10) | ||||||||||||||||
Commitments and contingencies (Note 9) | ||||||||||||||||
Shareholders’ equity: | ||||||||||||||||
Ordinary shares, $.001 par value; 490,000,000 shares authorized; 232,069,970 shares issued and 229,453,999 shares outstanding at September 30, 2015 and 230,116,780 shares issued and 227,630,430 shares outstanding at December 31, 2014 | 232 | 230 | ||||||||||||||
Ordinary shares, $.001 par value; 490,000,000 shares authorized; 232,365,986 shares issued and 227,054,025 shares outstanding at June 30, 2016 and 232,179,786 shares issued and 227,815,301 shares outstanding at December 31, 2015 | 232 | 232 | ||||||||||||||
Additional paid-in capital | 3,797,584 | 3,702,344 | 3,849,537 | 3,814,536 | ||||||||||||
Accumulated other comprehensive income (loss) | (319,203 | ) | (242,642 | ) | (278,646 | ) | (412,650 | ) | ||||||||
Retained earnings | 529,706 | 140,881 | 786,493 | 568,018 | ||||||||||||
Treasury shares (2,615,971 and 2,486,350 ordinary shares at September 30, 2015 and December 31, 2014, respectively, at cost) | (89,425 | ) | (82,000 | ) | ||||||||||||
Treasury shares (5,311,961 and 4,364,485 ordinary shares at June 30, 2016 and December 31, 2015, respectively, at cost) | (239,255 | ) | (189,256 | ) | ||||||||||||
Total shareholders’ equity | 3,918,894 | 3,518,813 | 4,118,361 | 3,780,880 | ||||||||||||
Total liabilities and shareholders’ equity | $ | 11,747,165 | $ | 11,573,077 | $ | 12,957,749 | $ | 12,264,757 |
The accompanying notes are an integral part of these consolidated financial statements.
3 |
Norwegian Cruise Line Holdings Ltd.
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
Nine Months Ended September 30, | Six Months Ended June 30, | |||||||||||||||
2015 | 2014 | 2016 | 2015 | |||||||||||||
Cash flows from operating activities | ||||||||||||||||
Net income | $ | 388,825 | $ | 368,249 | $ | 218,475 | $ | 137,038 | ||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||
Depreciation and amortization expense | 327,861 | 213,306 | 212,268 | 214,717 | ||||||||||||
Loss on derivatives | 21,893 | 129 | 2,866 | 27,475 | ||||||||||||
Deferred income taxes, net | 858 | (3,238 | ) | 388 | 424 | |||||||||||
Contingent consideration | (43,400 | ) | — | |||||||||||||
Gain on contingent consideration | — | (43,400 | ) | |||||||||||||
Write-off of deferred financing fees | 195 | — | 11,427 | 195 | ||||||||||||
Provision for bad debts and inventory | 1,115 | — | ||||||||||||||
Share-based compensation expense | 27,857 | 9,551 | 31,449 | 14,166 | ||||||||||||
Changes in operating assets and liabilities: | ||||||||||||||||
Accounts receivable, net | (9,563 | ) | (7,676 | ) | (16,335 | ) | (4,369 | ) | ||||||||
Inventories | 1,609 | (7,548 | ) | (9,674 | ) | (3,246 | ) | |||||||||
Prepaid expenses and other assets | 491 | (4,276 | ) | (25,903 | ) | (9,932 | ) | |||||||||
Accounts payable | (57,837 | ) | 13,096 | (10,865 | ) | (47,038 | ) | |||||||||
Accrued expenses and other liabilities | 5,996 | 33,529 | (25,798 | ) | 13,063 | |||||||||||
Advance ticket sales | 308,691 | 85,602 | 358,625 | 412,602 | ||||||||||||
Net cash provided by operating activities | 973,476 | 700,724 | 748,038 | 711,695 | ||||||||||||
Cash flows from investing activities | ||||||||||||||||
Additions to property and equipment | (330,808 | ) | (864,837 | ) | ||||||||||||
Investment in intangible asset | (750 | ) | — | |||||||||||||
Additions to property and equipment, net | (764,899 | ) | (205,056 | ) | ||||||||||||
Settlement of derivatives | (34,129 | ) | — | |||||||||||||
Net cash used in investing activities | (331,558 | ) | (864,837 | ) | (799,028 | ) | (205,056 | ) | ||||||||
Cash flows from financing activities | ||||||||||||||||
Repayments of long-term debt | (908,677 | ) | (765,948 | ) | (2,386,427 | ) | (791,403 | ) | ||||||||
Repayments to Affiliate | (18,521 | ) | (18,521 | ) | (18,522 | ) | (18,522 | ) | ||||||||
Proceeds from long-term debt | 375,751 | 1,101,287 | 2,564,116 | 340,060 | ||||||||||||
Proceeds from the exercise of share options | 66,527 | 3,081 | 3,007 | 55,023 | ||||||||||||
Proceeds from employee share purchase plan | 858 | — | 1,172 | — | ||||||||||||
Purchases of treasury shares | (7,425 | ) | (82,000 | ) | (49,999 | ) | — | |||||||||
NCLC partnership tax distributions | — | (3,853 | ) | |||||||||||||
Deferred financing fees and other | (5,075 | ) | (70,531 | ) | (32,330 | ) | (3,663 | ) | ||||||||
Net cash provided by (used in) financing activities | (496,562 | ) | 163,515 | 81,017 | (418,505 | ) | ||||||||||
Net increase (decrease) in cash and cash equivalents | 145,356 | (598 | ) | |||||||||||||
Net increase in cash and cash equivalents | 30,027 | 88,134 | ||||||||||||||
Cash and cash equivalents at beginning of period | 84,824 | 56,467 | 115,937 | 84,824 | ||||||||||||
Cash and cash equivalents at end of period | $ | 230,180 | $ | 55,869 | $ | 145,964 | $ | 172,958 |
The accompanying notes are an integral part of these consolidated financial statements.
4 |
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 (Deficit) | Treasury Shares | Non-controlling Interest | Total Shareholders’ Equity | ||||||||||||||||||||||
Balance, December 31, 2013 | $ | 205 | $ | 2,822,864 | $ | (16,690 | ) | $ | (197,471 | ) | $ | — | $ | 22,358 | $ | 2,631,266 | ||||||||||||
Share-based compensation | — | 9,551 | — | — | — | — | 9,551 | |||||||||||||||||||||
Transactions with Affiliates, net | — | (59 | ) | — | — | — | — | (59 | ) | |||||||||||||||||||
NCLC partnership tax distributions | — | — | — | — | — | (3,853 | ) | (3,853 | ) | |||||||||||||||||||
Proceeds from the exercise of share options | 1 | 3,080 | — | — | — | — | 3,081 | |||||||||||||||||||||
Purchases of treasury shares | — | — | — | — | (82,000 | ) | — | (82,000 | ) | |||||||||||||||||||
Other comprehensive loss | — | — | (41,789 | ) | — | — | (462 | ) | (42,251 | ) | ||||||||||||||||||
Net income | — | — | — | 363,961 | — | 4,288 | 368,249 | |||||||||||||||||||||
Transfers to non-controlling interest | — | (9,041 | ) | — | — | — | 9,041 | — | ||||||||||||||||||||
Balance, September 30, 2014 | $ | 206 | $ | 2,826,395 | $ | (58,479 | ) | $ | 166,490 | $ | (82,000 | ) | $ | 31,372 | $ | 2,883,984 | ||||||||||||
Balance, December 31, 2014 | $ | 230 | $ | 3,702,344 | $ | (242,642 | ) | $ | 140,881 | $ | (82,000 | ) | $ | — | $ | 3,518,813 | ||||||||||||
Share-based compensation | — | 27,857 | — | — | — | — | 27,857 | |||||||||||||||||||||
Proceeds from the exercise of share options | 2 | 66,525 | — | — | — | — | 66,527 | |||||||||||||||||||||
Proceeds from the employee stock purchase plan | — | 858 | — | — | — | — | 858 | |||||||||||||||||||||
Purchases of treasury shares | — | — | — | — | (7,425 | ) | — | (7,425 | ) | |||||||||||||||||||
Other comprehensive loss | — | — | (76,561 | ) | — | — | — | (76,561 | ) | |||||||||||||||||||
Net income | — | — | — | 388,825 | — | — | 388,825 | |||||||||||||||||||||
Balance, September 30, 2015 | $ | 232 | $ | 3,797,584 | $ | (319,203 | ) | $ | 529,706 | $ | (89,425 | ) | $ | — | $ | 3,918,894 |
Ordinary Shares | Additional Paid-in Capital | Accumulated Other Comprehensive Income (Loss) | Retained Earnings | Treasury Shares | Total Shareholders’ Equity | |||||||||||||||||||
Balance, December 31, 2014 | $ | 230 | $ | 3,702,344 | $ | (242,642 | ) | $ | 140,881 | $ | (82,000 | ) | $ | 3,518,813 | ||||||||||
Share-based compensation | — | 14,166 | — | — | — | 14,166 | ||||||||||||||||||
Proceeds from the exercise of share options | 2 | 55,021 | — | — | — | 55,023 | ||||||||||||||||||
Other comprehensive income, net | — | — | 15,415 | — | — | 15,415 | ||||||||||||||||||
Net income | — | — | — | 137,038 | — | 137,038 | ||||||||||||||||||
Balance, June 30, 2015 | $ | 232 | $ | 3,771,531 | $ | (227,227 | ) | $ | 277,919 | $ | (82,000 | ) | $ | 3,740,455 | ||||||||||
Balance, December 31, 2015 | $ | 232 | $ | 3,814,536 | $ | (412,650 | ) | $ | 568,018 | $ | (189,256 | ) | $ | 3,780,880 | ||||||||||
Share-based compensation | — | 31,449 | — | — | — | 31,449 | ||||||||||||||||||
Proceeds from the exercise of share options | — | 2,380 | — | — | — | 2,380 | ||||||||||||||||||
Proceeds from employee share purchase plan | — | 1,172 | — | — | — | 1,172 | ||||||||||||||||||
Treasury shares | — | — | — | — | (49,999 | ) | (49,999 | ) | ||||||||||||||||
Other comprehensive income, net | — | — | 134,004 | — | — | 134,004 | ||||||||||||||||||
Net income | — | — | — | 218,475 | — | 218,475 | ||||||||||||||||||
Balance, June 30, 2016 | $ | 232 | $ | 3,849,537 | $ | (278,646 | ) | $ | 786,493 | $ | (239,255 | ) | $ | 4,118,361 |
The accompanying notes are an integral part of these consolidated financial statements.
5 |
Norwegian Cruise Line Holdings Ltd.
Notes to Consolidated Financial Statements
(Unaudited)
Unless otherwise indicated or the context otherwise requires, references in this report to (i) the “Company,” “we,” “our” and “us” refer to NCLH (as defined below) and its subsidiaries (including Prestige (as defined below), except for periods prior to the consummation of the Acquisition of Prestige (as defined below)), (ii) “NCLC” refers to NCL Corporation Ltd., (iii) “NCLH” refers to Norwegian Cruise Line Holdings Ltd., (iv) “Norwegian” refers to the Norwegian Cruise Line brand and its predecessors, (v) “Prestige” refers to Prestige Cruises International, Inc., together with its consolidated subsidiaries, (vi) “PCH” refers to Prestige Cruise Holdings, Inc., Prestige’s direct wholly owned subsidiary, which in turn is the parent of Oceania Cruises, Inc. (“Oceania”Oceania Cruises”) and Seven Seas Cruises S. DE R.L. (“Regent”) (Oceania Cruises also refers to the brand Oceania Cruisesby the same name and Regent also refers to the brand Regent Seven Seas Cruises), and (vii) “Apollo” refers to Apollo Global Management, LLC, its subsidiaries and the affiliated funds it manages and the “Apollo Holders” refers to one or more of AIF VI NCL (AIV), L.P., AIF VI NCL (AIV II), L.P., AIF VI NCL (AIV III), L.P., AIF VI NCL (AIV IV), L.P., AAA Guarantor — Co-Invest VI (B), L.P., Apollo Overseas Partners (Delaware) VI, L.P., Apollo Overseas Partners (Delaware 892) VI, L.P., Apollo Overseas Partners VI, L.P., Apollo Overseas Partners (Germany) VI, L.P., AAA Guarantor — Co-Invest VII, L.P., AIF VI Euro Holdings, L.P., AIF VII Euro Holdings, L.P., Apollo Alternative Assets, L.P., Apollo Management VI, L.P. and Apollo Management VII, L.P., (viii) “TPG Global” refers to TPG Global, LLC, “TPG” refers to TPG Global and its affiliates and the “TPG Viking Funds” refers to one or more of TPG Viking, L.P., TPG Viking AIV I, L.P., TPG Viking AIV II, L.P., and TPG Viking AIV-III, L.P. and/or certain other affiliated investment funds, each an affiliate of TPG, (ix) “Genting HK”“Affiliate” refers to Genting Hong Kong Limited and/or its affiliates (formerly Star Cruises Limited and/or its affiliates) (Genting HK owns NCLH’s ordinary shares indirectly through Star NCLC Holdings Ltd., its wholly owned subsidiary (“Star NCLC”)), and (x) “Affiliate(s)” or “Sponsor(s)” refers. References to the Apollo Holders, Genting HK and/“U.S.” are to the United States of America, “dollars” or “$” are to U.S. dollars, the TPG Viking Funds.“U.K.” are to the United Kingdom and “euros” or “€” are to the official currency of the Eurozone.
1. |
In February 2011, NCLH is a Bermuda limitedleading global cruise company which operates the Norwegian Cruise Line, Oceania Cruises and Regent Seven Seas Cruises brands. We have 24 ships with approximately 46,500 Berths including Sirena, previously under a Bareboat Charter, which joined our Oceania Cruises’ fleet in April 2016 and Seven Seas Explorer which was formed withdelivered in June 2016. We will introduce four additional ships to our fleet through 2020 including an Explorer Class Ship on order for delivery in the issuancewinter of 2020. Norwegian Joy is on order for delivery in the spring of 2017 and two additional Breakaway Plus Class Ships are on order for deliveries to the Sponsors of, in aggregate, 10,000 ordinary shares, with a par value of $.001 per share. On January 24, 2013, NCLH consummated its initial public offering (“IPO”). In connection with the consummation of the IPO, the Sponsors’ ordinary shares in NCLC were exchanged for the ordinary shares of NCLH at a share exchange ratio of 1.0 to 8.42565 and NCLH became the owner of 100% of the ordinary shares and parent company of NCLC (the “Corporate Reorganization”). Accordingly, NCLH contributed $460.0 million to NCLC and the historical financial statements of NCLC became those of NCLH. The Corporate Reorganization was effected solely for the purpose of reorganizing our corporate structure. NCLH had not prior to the completion of the Corporate Reorganization conducted any activities other than those incidental to its formation and to preparations for the Corporate Reorganization and IPO. The Corporate Reorganization resulted in all parties beingNorwegian fleet in the same economic position as they were immediately priorspring of 2018 and fall of 2019. These additions to the IPO. As the economic position of the investors did not change as part of the Corporate Reorganization, the Corporate Reorganization was considered a nonsubstantive merger from an accounting perspective.
As a result of the Corporate Reorganization, NCLC was treated as a partnership for U.S. federal income tax purposes, and the terms of the partnership (including the economic rights with respect thereto) are set forth in an amended and restated tax agreement for NCLC. Economic interests in NCLC were represented by the partnership interests established under the tax agreement, which we referour fleet will increase our total Berths to as “NCL Corporation Units.” The NCL Corporation Units held by NCLH (as a result of its ownership of 100% of the ordinary shares of NCLC) represented a 97.3% economic interest in NCLC as of the consummation of the IPO. The remaining 2.7% economic interest in NCLC as of the consummation of the IPO was in the form of Management NCL Corporation Units held by management (or former management).
In the fourth quarter of 2014, all Management NCL Corporation Units were exchanged for NCLH ordinary shares and restricted ordinary shares. NCLH became the sole member and 100% owner of the economic interests in NCLC and the non-controlling interest no longer exists. Accordingly, following the exchange of the Management NCL Corporation Units, NCLC is treated as a disregarded entity for U.S. federal income tax purposes. No new NCLC profits interests or Management NCL Corporation Units will be issued; however, NCLH has granted, and expects to continue to grant, equity to its employees and members of its Board of Directors under its long-term incentive plan.approximately 59,300.
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, 2014,2015, which are included in our most recently filed Annual Report on Form 10-K.
During the nine months ended September 30, 2015, we revised the classification of goodwill and intangible assets to separately present goodwill and tradenames. Other intangible assets consisting of customer relationships and backlog are presented within other long-term assets. The revision was not deemed material to the Consolidated Balance Sheet.
Reclassification
Certain amounts in prior periods have been reclassified to conform to the current period presentation.
Shareholders’ Equity
In connection with the Corporate Reorganization, previously granted profits interests to employees were exchanged for Management NCL Corporation Units (“Units”), and the vested Unit holders gained proportionate rights to distributions of NCLC and were therefore allocated a proportionate share of NCLC’s equity. The effect of this change was a $20.2 million increase in the non-controlling interest.
During 2014, following the effectiveness of NCLH’s registration statement on Form S-3, additional performance-based Units became eligible to participate in the earnings of NCLC, and as a result, a proportionate amount of NCLC’s equity was allocated to the additional non-controlling interest. Each Unit holder had the right, subject to the same time-based and performance-based vesting requirements of the profits interests, to exchange Units for NCLH’s ordinary shares at a rate equal to one ordinary share for every Unit. When such an exchange occurred, this resulted in the exchange of non-controlling interest to controlling interest. Accordingly, upon the exchange of a Unit for an ordinary share of NCLH, a portion of the non-controlling interest balance was reclassified to additional paid-in capital. During the nine months ended September 30, 2014, there was $9.0 million transferred to non-controlling interest.
During the nine months ended September 30, 2014, Management NCL Corporation Unit holders were distributed funds for partnership tax payments of $3.9 million. In the fourth quarter of 2014, all Management NCL Corporation Units were exchanged for NCLH ordinary shares and restricted ordinary shares. We refer you to Note 1— “Corporate Reorganization”.
On April 29, 2014, NCLH’s Board of Directors authorized, and NCLH announced, a three-year share repurchase program for up to $500.0 million. NCLH may make repurchases in the open market, in privately negotiated transactions, in accelerated repurchase programs or in structured share repurchase programs, and any repurchases may be made pursuant to Rule 10b5-1 plans. During the nine months ended September 30, 2014, NCLH repurchased approximately 2.5 million ordinary shares under its share repurchase program for $82.0 million, these shares are reflected as treasury shares at cost on the consolidated balance sheet as of September 30, 2014 included in NCLH’s Quarterly Report on Form 10-Q filed on October 31, 2014. During the three and nine months ended September 30, 2015, 46,225 ordinary shares were repurchased to cover tax withholding obligations for employees who received NCLH’s ordinary shares in connection with the Acquisition of Prestige. These shares were not purchased pursuant to any publicly announced share repurchase programs. In addition, 83,396 ordinary shares were repurchased as part of the publicly announced share repurchase program during the three and nine months ended September 30, 2015. As of September 30, 2015, $413.3 million remained available for repurchases of our outstanding ordinary shares under the share repurchase program.
Earnings Per Share
A reconciliation between basic and diluted earnings per share was as follows (in thousands, except share and per share data):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Net income attributable to Norwegian Cruise Line Holdings Ltd. | $ | 251,787 | $ | 201,078 | $ | 388,825 | $ | 363,961 | ||||||||
Net income | $ | 251,787 | $ | 203,278 | $ | 388,825 | $ | 368,249 | ||||||||
Basic weighted-average shares outstanding | 227,384,616 | 203,220,218 | 225,805,901 | 204,444,469 | ||||||||||||
Dilutive effect of share awards | 2,890,140 | 5,286,963 | 4,054,999 | 5,548,178 | ||||||||||||
Diluted weighted-average shares outstanding | 230,274,756 | 208,507,181 | 229,860,900 | 209,992,647 | ||||||||||||
Basic earnings per share | $ | 1.11 | $ | 0.99 | $ | 1.72 | $ | 1.78 | ||||||||
Diluted earnings per share | $ | 1.09 | $ | 0.97 | $ | 1.69 | $ | 1.75 |
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Net income | $ | 145,246 | $ | 158,494 | $ | 218,475 | $ | 137,038 | ||||||||
Basic weighted-average shares outstanding | 226,972,076 | 225,698,078 | 227,105,804 | 225,003,460 | ||||||||||||
Dilutive effect of share awards | 912,628 | 4,530,066 | 892,166 | 4,660,750 | ||||||||||||
Diluted weighted-average shares outstanding | 227,884,704 | 230,228,144 | 227,997,970 | 229,664,210 | ||||||||||||
Basic earnings per share | $ | 0.64 | $ | 0.70 | $ | 0.96 | $ | 0.61 | ||||||||
Diluted earnings per share | $ | 0.64 | $ | 0.69 | $ | 0.96 | $ | 0.60 |
Revenue and Expense Recognition
RevenueDeposits received from guests for future voyages are recorded as advance ticket sales and expense includes taxes assessed by governmental authorities that are directly imposedsubsequently recognized as passenger ticket revenue along with onboard and other revenue, and all associated direct costs of a voyage are recognized as cruise operating expenses on a revenue-producing transaction between a seller and a customer. The amounts included in revenue and expense on a grosspro-rata basis were $70.0 million and $51.5 million forover the three months ended September 30, 2015 and 2014, respectively, and $184.4 million and $134.0 million forperiod of the nine months ended September 30, 2015 and 2014, respectively.
voyage. Guest cancellation penaltiesfees are recognized in passenger ticket revenue in the month of the cancellation. Certain of our product offerings are accounted for under the guidance included within multi-element arrangements and result in an allocation of the fair value between passenger ticket revenue and onboard and other revenue.
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Revenue and expenses include port fees and taxes. The amounts included on a gross basis are $71.8 million and $62.4 million for the three months ended June 30, 2016 and 2015, respectively, and $134.3 million and $114.3 million for the six months ended June 30, 2016 and 2015, respectively.
Foreign Currency
The majority of our transactions are settled in U.S. dollars. We translate assets and liabilities of our foreign subsidiaries at exchange rates in effect at the balance sheet date. Gains or losses resulting from transactions denominated in other currencies are recognized in our consolidated statements of operations within other expense. We recognized gains of $3.9 million and $0.8 million for the three months ended June 30, 2016 and 2015, respectively, and a loss of $0.3 million and a gain of $5.7 million for the six months ended June 30, 2016 and 2015, respectively.
Depreciation and Amortization Expense
The amortization of deferred financing fees areis included in depreciation and amortization expense in the consolidated statements of cash flows butflows; however, for purposes of the consolidated statements of operations they are not included in the depreciation and amortizationinterest expense, in the statements of operations.net.
Recently Issued Accounting Pronouncements
In August 2015,May 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-152016-12 which addresses improvements to clarify presentationthe guidance on revenue from contracts from customers regarding collectibility, noncash consideration, and completed contracts at transition. Additionally, it provides a practical expedient for debt issuance costscontract modifications at transition and an accounting policy election related to line-of-credit arrangements, asthe presentation of sales taxes and other similar taxes collected from customers. The effective date of this was not addressed in ASU No. 2015-03. ASU No. 2015-15 provides that the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. We will consider this guidance is upon adoption of ASU No. 2015-03.2014-09. We are currently evaluating the impact of the adoption of this newly issued 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 newly issued 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 newly issued guidance to our consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09 to improve multiple aspects of the accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. The guidance is effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods with early adoption permitted. We do not believe that the adoption of this guidance will be material to our consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e. lessees and lessors). The ASU requires lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by all leases with terms of more than 12 months. The ASU further modifies lessors’ classification criteria for leases and the accounting for sales-type and direct financing leases. The ASU will also require qualitative and quantitative disclosures designed to give financial statement users additional information on the amount, timing, and uncertainty of cash flows arising from leases. The ASU is effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2018 with early adoption permitted. The ASU is to be applied using a modified retrospective approach. We are currently evaluating the impact of the adoption of this newly issued guidance to our consolidated financial statements.
In July 2015, the FASB issued ASU No. 2015-11 to simplify the measurement of inventory for all entities. This applies to all inventory that is measured using either the first-in, first-out or average cost.cost method. The guidance requires an entity to measure inventory at the lower of cost andor net realizable value. The guidance must be applied prospectively and will be effective for our interim and annual reporting periods beginning after December 15, 2016. Early adoption is permitted as of the beginning of an interim or annual reporting period. We are currently evaluating the impact of the adoption of this newly issued guidance to our consolidated financial statements.
In April 2015, the FASB issued ASU No. 2015-05 to clarify a customer’s accounting for fees paid in a cloud computing arrangement. The amendments provide guidance to customers about whether a cloud computing arrangement includes a software license or if the arrangement should be accounted for as a service contract. This guidance will impact the accounting of software licenses but will not change a customer’s accounting for service contracts. The guidance will be effective for annual periods, including interim periods
7 |
within those annual periods, beginning after December 15, 2015. Early adoption is permitted. An entity can elect to adopt the amendments either prospectively or retrospectively. We are currently evaluating thehave adopted this guidance and there has not been an impact if any, of the adoption of this newly issued guidance to our consolidated financial statements.
In April 2015, the FASB issued ASU No. 2015-03 to simplify the presentation of debt issuance costs. The guidance requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by these amendments. This guidance should be applied on a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance. The guidance will be effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted for financial statements that have not been previously issued. We will adopt this newly issued guidance in our Annual Report on Form 10-K for the year ending December 31, 2015.
In May 2014, FASB issued ASU No. 2014-09 which requires entities to recognize revenue through the application of a five-step model, which includesincluding 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 are currently evaluating the impact of the adoption of this newly issued guidance to our consolidated financial statements.
3. | Intangible Assets |
The gross carrying amounts of intangible assets included within other long-term assets, the related accumulated amortization, the net carrying amounts and the weighted-average amortization periods of the Company’s intangible assets are listed in the following table (in thousands, except amortization period):
September 30, 2015 | June 30, 2016 | |||||||||||||||||||||||||||||||
Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Weighted- Average Amortization Period (Years) | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Weighted- Average Amortization Period (Years) | |||||||||||||||||||||||||
Customer relationship | $ | 120,000 | $ | (12,113 | ) | $ | 107,887 | 6.0 | ||||||||||||||||||||||||
Backlog | 70,000 | (60,472 | ) | 9,528 | 1.0 | |||||||||||||||||||||||||||
Customer relationships | $ | 120,000 | $ | (26,060 | ) | $ | 93,940 | 6.0 | ||||||||||||||||||||||||
Licenses | 3,368 | (115 | ) | 3,253 | 5.6 | 3,368 | (461 | ) | 2,907 | 5.6 | ||||||||||||||||||||||
Non-compete agreements | 660 | (165 | ) | 495 | 1.0 | |||||||||||||||||||||||||||
Total intangible assets subject to amortization | $ | 193,368 | $ | (72,700 | ) | $ | 120,668 | $ | 124,028 | $ | (26,686 | ) | $ | 97,342 | ||||||||||||||||||
License (Indefinite-lived) | $ | 4,427 | $ | — | $ | — |
December 31, 2015 | ||||||||||||||||
Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Weighted- Average Amortization Period (Years) | |||||||||||||
Customer relationships | $ | 120,000 | $ | (15,527 | ) | $ | 104,473 | 6.0 | ||||||||
Backlog | 70,000 | (70,000 | ) | — | 1.0 | |||||||||||
Licenses | 3,368 | (208 | ) | 3,160 | 5.6 | |||||||||||
Total intangible assets subject to amortization | $ | 193,368 | $ | (85,735 | ) | $ | 107,633 | |||||||||
License (Indefinite-lived) | $ | 4,427 | $ | — | $ | — |
The aggregate amortization expense is as follows (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Amortization expense | $ | 20,951 | $ | — | $ | 60,172 | $ | — |
December 31, 2014 | ||||||||||||||||
Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Weighted- Average Amortization Period (Years) | |||||||||||||
Customer relationship | $ | 120,000 | $ | (4,556 | ) | $ | 115,444 | 6.0 | ||||||||
Backlog | 70,000 | (7,972 | ) | 62,028 | 1.0 | |||||||||||
Total intangible assets subject to amortization | $ | 190,000 | $ | (12,528 | ) | $ | 177,472 |
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Amortization expense | $ | 5,562 | $ | 20,992 | $ | 10,951 | $ | 39,222 |
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 | Amortization Expense | ||||||
2016 | $ | 21,659 | ||||||
2017 | 31,177 | $ | 31,342 | |||||
2018 | 26,058 | 26,058 | ||||||
2019 | 18,489 | 18,489 | ||||||
2020 | 9,906 | 9,906 | ||||||
2021 | 75 |
4. |
On November 19, 2014, we completed the Acquisition of Prestige. Consideration for the Acquisition of Prestige includes a cash payment of up to $50 million upon achievement of certain 2015 net revenue milestones. The contingent consideration is valued using various projected 2015 net revenue scenarios weighted by the likelihood of each scenario occurring. The probability-weighted payout is then discounted at an appropriate discount rate commensurate for the risk of meeting the probabilistic cash flows. As the fair value is measured based upon significant inputs that are unobservable in the market, it was classified as Level 3 in the fair value hierarchy. Level 3 consists of significant unobservable inputs we believe market participants would use in pricing the asset or liability based on the best information available. The significant unobservable inputs used in the fair value measurement of the Company’s contingent consideration are the estimated annual net revenue and the probabilities associated with attaining the threshold and target net revenue as defined by the Merger Agreement. A significant increase in the estimated net revenue or an increase in the probability associated
with reaching the target would result in a significantly higher fair value measurement. The maximum fair value would not be able to exceed $50 million, while an amount of net revenue less than 98% of target would result in no payout. For the nine months ended September 30, 2015, the fair value of the contingent consideration was reduced to zero based upon updates to the probability-weighted assessment of various projected revenue scenarios. We do not believe that the net revenue target will be met, and accordingly, we recognized a $43.4 million fair value adjustment during the nine months ended September 30, 2015, which was included in marketing, general and administrative expense.
The following table summarizes the change in fair value of the contingent consideration liability (in thousands):
Contingent Consideration Liability | ||||
Balance as of December 31, 2014 | $ | 43,400 | ||
Fair value adjustment (Level 3) | (43,400 | ) | ||
Balance as of September 30, 2015 | $ | — |
Accumulated Other Comprehensive Income (Loss) |
Accumulated other comprehensive income (loss) for the ninesix months ended SeptemberJune 30, 20152016 was as follows (in thousands):
Accumulated Other Comprehensive Income (Loss) | Change Related to Cash Flow Hedges | Change Related to Shipboard Retirement Plan | ||||||||||
Accumulated other comprehensive income (loss) at beginning of period | $ | (242,642 | ) | $ | (234,188 | ) | $ | (8,454 | ) | |||
Current period other comprehensive loss before reclassifications | (138,501 | ) | (138,501 | ) | — | |||||||
Amounts reclassified into earnings | 61,940 | 61,582 | (1) | 358 | (2) | |||||||
Accumulated other comprehensive income (loss) at end of period | $ | (319,203 | ) | $ | (311,107 | )(3) | $ | (8,096 | ) |
8 |
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 | 75,457 | 75,457 | — | |||||||||
Amounts reclassified into earnings | 58,547 | 58,331 | (1) | 216 | (2) | |||||||
Accumulated other comprehensive income (loss) at end of period | $ | (278,646 | ) | $ | (271,510 | )(3) | $ | (7,136 | ) |
(1) | We refer you to Note |
(2) | Amortization of prior-service cost and actuarial loss reclassified to payroll and related expense. |
(3) | Includes |
Accumulated other comprehensive income (loss) for the ninesix months ended SeptemberJune 30, 20142015 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) | Change Related to Cash Flow Hedges | Change Related to Shipboard Retirement Plan | |||||||||||||||||||
Accumulated other comprehensive income (loss) at beginning of period | $ | (16,690 | ) | $ | (10,532 | ) | $ | (6,158 | ) | $ | (242,642 | ) | $ | (234,188 | ) | $ | (8,454 | ) | ||||||
Current period other comprehensive loss before reclassifications | (43,875 | ) | (43,875 | ) | — | (33,274 | ) | (33,274 | ) | — | ||||||||||||||
Amounts reclassified into earnings | 2,086 | 1,806 | (1) | 280 | (2) | 48,689 | 48,450 | (1) | 239 | (2) | ||||||||||||||
Accumulated other comprehensive income (loss) at end of period | $ | (58,479 | ) | $ | (52,601 | ) | $ | (5,878 | ) | $ | (227,227 | ) | $ | (219,012 | ) | $ | (8,215 | ) |
(1) | We refer you to Note |
(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 $609.7 million for the six months ended June 30, 2016 primarily due to the delivery of Seven Seas Explorer and the refurbishment of several ships.
6. |
In AugustJune 2016, NCLC and May 2015, the Selling Shareholders sold an aggregate of 40,000,000 ordinary sharesVoyager Vessel Company, LLC, indirect subsidiaries of NCLH, in Secondary Equity Offerings. In March 2015, Genting HKentered into a Second Amended and Restated Credit Agreement (the “Amended Senior Secured Credit Facility”) with a syndicate of banks which restates the Amended and Restated Credit Agreement, dated as of October 31, 2014 (the “Existing Senior Secured Credit Facility”). The Amended Senior Secured Credit Facility amends the Existing Senior Secured Credit Facility to, among other things, (i) (a) increase the aggregate amount of commitments under the Revolving Loan Facility from $625.0 million to $750.0 million (the “New Revolving Loan Facility”) and (b) increase the aggregate principal amount outstanding under the $1.38 billion term loan facility from $1.16 billion to $1.51 billion (the “New Term Loan A Facility”) and (ii) extend the maturity of the New Term Loan A Facility and the TPG Viking Funds sold 12,500,000 ordinary sharesNew Revolving Loan Facility to June 2021 (the “Extended Maturity Date”). The agreement incorporates a springing maturity date for the New Term Loan A Facility and the New Revolving Loan Facility such that both mature on (A) the earlier date that is 91 days prior to the final maturity date of NCLH in a Secondary Equity Offering. The Company didNCLC’s $680.0 million aggregate principal amount of 5.25% senior unsecured notes due 2019 (the “5.25% Notes”) if on such date (x) the 5.25% Notes have not receive anybeen repaid (or refinanced with indebtedness maturing after the Extended Maturity Date) by such date and (y) free liquidity does not exceed the aggregate principal amount of outstanding 5.25% Notes by at least $50.0 million and (B) the earlier date that is 91 days prior to the final maturity date of NCLC’s $600.0 million aggregate principal amount of 4.625% senior unsecured notes due 2020 (the “4.625% Notes”) if on such date (x) the 4.625% Notes have not been repaid (or refinanced with indebtedness maturing after the Extended Maturity Date) by such date and (y) free liquidity does not exceed the aggregate principal amount of outstanding 4.625% Notes by at least $50.0 million. NCLC used proceeds of approximately $1.59 billion from these offerings. Asthe New Term Loan A Facility and the New Revolving Loan Facility to prepay the entire outstanding principal amount of September 30, 2015, the approximate relative ownership percentages of NCLH’s ordinary shares were as follows:Revolving Loan Facility, the Apollo Holders (18.0%), Genting HK (13.3%),$1.38 billion term loan facility and the TPG Viking Funds (2.3%), and public shareholders (66.4%).$350.0 million term loan facility.
In March 2015, we entered intoThe New Term Loan A Facility and New Revolving Loan Facility bear interest at a rate per annum of (a) an agreement with SWB Yankees, LLC related to sponsorship of and advertising with the Scranton/Wilkes-Barre RailRiders,adjusted LIBOR rate or (b) a Minor League Baseball team. Pursuantbase rate determined by reference to the agreement, we will paygreatest of (i) the federal funds rate plus 0.50%, (ii) the prime rate in effect on such day and (iii) the adjusted LIBOR rate plus 1%, in each case plus an annual feeapplicable margin that is determined by reference to SWB Yankees, LLCa total leverage ratio, with an applicable margin of $200,000. Mr. David M. Abrams, one of our directors,between 2.25% and 1.50% with respect to Eurocurrency loans and between 1.25% and 0.50% with respect to base rate loans. The initial applicable margin for borrowings is the co-managing partner of the Scranton/Wilkes-Barre RailRiders.2.25% with respect to Eurocurrency borrowings and 1.25% with respect to base rate borrowings.
The New Term Loan A Facility will be paid in quarterly installments commencing in September 2016, in a principal amount equal to (a) in the case of installments payable on or prior to June 6, 2018, 1.25% of the loans outstanding immediately after the closing date under the New Term Loan A Facility and (b) in the case of installments payable after June 6, 2018, 2.50% of the loans outstanding immediately after the closing date under the New Term Loan A Facility, with the remaining unpaid principal amount of loans under the New Term Loan A Facility due and payable in full at maturity on June 6, 2021. Principal amounts outstanding under the New Revolving Loan Facility are due and payable in full at maturity on June 6, 2021, subject to earlier repayment pursuant to the springing maturity date described above.
In addition to paying interest on outstanding principal under the borrowings, we are obligated to pay a quarterly commitment fee at a rate determined by reference to a total leverage ratio, with a maximum commitment fee of 40% of the applicable margin for Eurocurrency loans.
In June 2016, we took delivery of Seven Seas Explorer. To finance the payment due upon delivery, we had export financing in place for 80% of the contract price. The associated $373.6 million term loan bears interest at 3.43% with a maturity date of June 30, 2028. Principal and interest payments shall be paid semiannually.
7. |
NCLH is treated as a corporation for U.S. federal income tax purposes. For the three months ended September 30, 2015, we had an income tax expense of $3.5 million compared to $2.5 million for the three months ended September 30, 2014. For the nine months ended September 30, 2015 we had an income tax expense of $6.9 million compared to an income tax benefit of $3.8 million for the nine months ended September 30, 2014. The benefit for the nine month period of 2014 includes a $5.3 million non-recurring benefit associated with the election of a tax method to calculate deductible interest expense.
Fair Value Measurements and Derivatives |
Fair value is defined as the price at which an orderly transaction to sell an asset or to transfer a liability would take place between market participants at the measurement date under current market conditions (that is, an exit price at the measurement date from the perspective of a market participant that holds the asset or owes the liability).
Fair Value Hierarchy
The following hierarchy for inputs used in measuring fair value should maximize the use of observable inputs and minimize the use of unobservable inputs by requiring that the most observable inputs be used when available:
Level 1 | Quoted prices in active markets for identical assets or liabilities that are accessible at the measurement dates. |
Level 2 | Significant other observable inputs that are used by market participants in pricing the asset or liability based on market data obtained from independent sources. |
Level 3 | Significant unobservable inputs we believe market participants would use in pricing the asset or liability based on the best information available. |
Derivatives
We are exposed to market risk attributable to changes in interest rates, foreign currency exchange rates and fuel prices. We attempt to minimize these risks through a combination of our normal operating and financing activities and through the use of derivatives. We assess whether derivatives used in hedging transactions are “highly effective” in offsetting changes in the cash flow of our hedged forecasted transactions. We use regression analysis for this hedge relationship and high effectiveness is achieved when a statistically valid relationship reflects a high degree of offset and correlation between the fair values of the derivative and the hedged forecasted transaction. Cash flows from the derivatives are classified in the same category as the cash flows from the underlying hedged transaction. The determination of ineffectiveness is based on the amount of dollar offset between the cumulative change in fair value of the derivative and the cumulative change in fair value of the hedged transaction at the end of the reporting period. If it is determined that a derivative is not highly effective as a hedge, or if the hedged forecasted transaction is no longer probable of occurring, then the amount recognized in accumulated other comprehensive income (loss) is released to earnings. In addition, the ineffective portion of our highly effective hedges is recognized in earnings immediately and reported in other income (expense) in our consolidated statements of operations. There are no amounts excluded from the assessment of hedge effectiveness and there are no credit-risk-related contingent features in our derivative agreements.
We monitor concentrations of credit risk associated with financial and other institutions with which we conduct significant business. Credit risk, including but not limited to counterparty non-performance under derivatives and our New Revolving Loan Facility, is not considered significant, as we primarily conduct business with large, well-established financial institutions that we have established relationships with and that have credit risks acceptable to us or the credit risk is spread out among a large number of creditors. We do not anticipate non-performance by any of our significant counterparties.
The following table sets forth our derivatives measured at fair value and discloses the balance sheet location (in thousands):
Asset | Liability | Asset | Liability | |||||||||||||||||||||||||||||||||
Balance Sheet location | September 30, 2015 | December 31, 2014 | September 30, 2015 | December 31, 2014 | Balance Sheet location | June 30, 2016 | December 31, 2015 | June 30, 2016 | December 31, 2015 | |||||||||||||||||||||||||||
Fuel swaps designated as hedging instruments | ||||||||||||||||||||||||||||||||||||
Prepaid expenses and other assets | $ | 15,972 | $ | — | $ | — | $ | — | ||||||||||||||||||||||||||||
Other long-term assets | 7,084 | — | — | — | ||||||||||||||||||||||||||||||||
Accrued expenses and other liabilities | $ | 2,610 | $ | — | $ | 101,328 | $ | 111,304 | Accrued expenses and other liabilities | — | — | 82,672 | 128,740 | |||||||||||||||||||||||
Other long-term liabilities | 4,953 | 190 | 88,516 | 77,250 | Other long-term liabilities | 7,340 | — | 79,646 | 132,494 | |||||||||||||||||||||||||||
Fuel swaps not designated as hedging instruments | ||||||||||||||||||||||||||||||||||||
Accrued expenses and other liabilities | — | — | 10,215 | — | Accrued expenses and other liabilities | — | — | 1,801 | — | |||||||||||||||||||||||||||
Foreign currency forward contracts designated as hedging instruments | ||||||||||||||||||||||||||||||||||||
Prepaid expenses and other assets | 988 | — | — | — | Prepaid expenses and other assets | 6,135 | — | 3,414 | — | |||||||||||||||||||||||||||
Other long-term assets | 1,538 | — | — | — | Other long-term assets | 2,577 | 3,446 | 386 | 1,370 | |||||||||||||||||||||||||||
Accrued expenses and other liabilities | — | — | 84,316 | 29,498 | Accrued expenses and other liabilities | 731 | — | 13,514 | 8,737 | |||||||||||||||||||||||||||
Other long-term liabilities | — | — | 11,933 | 118 | Other long-term liabilities | 1,814 | 551 | 20,165 | 24,181 | |||||||||||||||||||||||||||
Foreign currency collar not designated as a hedging instrument | ||||||||||||||||||||||||||||||||||||
Accrued expenses and other liabilities | — | — | 35,392 | 16,744 | Accrued expenses and other liabilities | — | — | — | 42,993 | |||||||||||||||||||||||||||
Interest rate swaps designated as hedging instruments | ||||||||||||||||||||||||||||||||||||
Accrued expenses and other liabilities | — | — | 5,626 | 5,736 | Accrued expenses and other liabilities | — | — | 4,328 | 4,079 | |||||||||||||||||||||||||||
Other long-term liabilities | — | — | 5,397 | 3,104 | Other long-term liabilities | — | — | 3,973 | 3,395 | |||||||||||||||||||||||||||
Interest rate swap not designated as a hedging instrument | ||||||||||||||||||||||||||||||||||||
Accrued expenses and other liabilities | — | — | — | 3,823 |
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 freerisk-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 as of September 30, 2015 and December 31, 2014.3.
Our derivative contracts include rights of offset with our counterparties. We have elected to net certain assets and liabilities within counterparties.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 the consolidated balance sheetsassets and liabilities (in thousands):
September 30, 2015 | Gross Amounts | Gross Amounts Offset | Total Net Amounts | Gross Amounts Not Offset | Net Amounts | |||||||||||||||||||||||||||||||||||
June 30, 2016 | Gross Amounts | Gross Amounts Offset | Total Net Amounts | Gross Amounts Not Offset | Net Amounts | |||||||||||||||||||||||||||||||||||
Assets | $ | 2,526 | $ | — | $ | 2,526 | $ | (2,526 | ) | $ | — | $ | 31,768 | $ | (3,800 | ) | $ | 27,968 | $ | (2,715 | ) | $ | 25,253 | |||||||||||||||||
Liabilities | 342,723 | (7,563 | ) | 335,160 | (142,664 | ) | 192,496 | 206,099 | (9,885 | ) | 196,214 | (30,707 | ) | 165,507 |
December 31, 2014 | Gross Amounts | Gross Amounts Offset | Total Net Amounts | Gross Amounts Not Offset | Net Amounts | |||||||||||||||||||||||||||||||||||
December 31, 2015 | Gross Amounts | Gross Amounts Offset | Total Net Amounts | Gross Amounts Not Offset | Net Amounts | |||||||||||||||||||||||||||||||||||
Assets | $ | 3,446 | $ | (1,370 | ) | $ | 2,076 | $ | (2,043 | ) | $ | 33 | ||||||||||||||||||||||||||||
Liabilities | $ | 247,577 | $ | (190 | ) | $ | 247,387 | $ | (59,023 | ) | $ | 188,364 | 344,619 | (551 | ) | 344,068 | (336,645 | ) | 7,423 |
Fuel Swaps
As of SeptemberJune 30, 2015,2016, we had fuel swaps maturing through December 31, 2019 which are used to mitigate the financial impact of volatility in fuel prices pertaining to approximately 1.41.8 million metric tons of our projected fuel purchases.
The effects on the consolidated financial statements of the fuel swaps which were designated as cash flow hedges were as follows (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Loss recognized in other comprehensive income (loss) – effective portion | $ | (101,056 | ) | $ | (27,777 | ) | $ | (69,724 | ) | $ | (25,938 | ) | ||||
Loss recognized in other income (expense) – ineffective portion | (1,580 | ) | (51 | ) | (10,825 | ) | (16 | ) | ||||||||
Amount reclassified from accumulated other comprehensive income (loss) into fuel expense | 11,670 | 578 | 47,503 | (1,345 | ) |
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Gain recognized in other comprehensive income – effective portion | $ | 85,808 | $ | 34,133 | $ | 76,302 | $ | 31,332 | ||||||||
Loss recognized in other expense – ineffective portion | (3,524 | ) | (3,194 | ) | (8,751 | ) | (9,245 | ) | ||||||||
Amount reclassified from accumulated other comprehensive income (loss) into fuel expense | 20,440 | 15,297 | 51,577 | 35,833 |
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As of SeptemberJune 30, 2015,2016, we had bought fuel swaps pertaining to approximately 40,00022,000 metric tons offset by sold fuel swaps which were not designated as cash flow hedges. The boughtThese fuel swaps were previously designated as cash flow hedges and were dedesignated due to a change in our expected future fuel purchases mix.
The effects on the consolidated financial statements of the fuel swaps which were dedesignated and recognized into earnings were as follows (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Amount reclassified from accumulated other comprehensive income (loss) into other income (expense) | $ | — | $ | — | $ | 10,000 | $ | — | ||||||||
Loss recognized in other income (expense) | (4,716 | ) | — | (4,716 | ) | — |
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Loss recognized in other expense | $ | (92 | ) | $ | — | $ | (92 | ) | $ | — | ||||||
Amount reclassified from accumulated other comprehensive income (loss) into other expense | 1,465 | 10,000 | 2,994 | 10,000 |
Fuel Collars and Options
We had fuel collars that matured and fuel options maturing through December 2014, which were used to mitigate the financial impact of volatility in fuel prices of our fuel purchases.
The effects on the consolidated financial statements of the fuel collars which were designated as cash flow hedges were as follows (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Loss recognized in other comprehensive income (loss) – effective portion | $ | — | $ | (127 | ) | $ | — | $ | (436 | ) | ||||||
Gain recognized in other income (expense) – ineffective portion | — | 4 | — | 111 | ||||||||||||
Amount reclassified from accumulated other comprehensive income (loss) into fuel expense | — | 370 | 248 | 1,111 |
The effects on the consolidated financial statements of the fuel options which were not designated as hedging instruments were as follows (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Gain (loss) recognized in other income (expense) | $ | — | $ | (59 | ) | $ | — | $ | 127 |
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Amount reclassified from accumulated other comprehensive income (loss) into fuel expense | $ | — | $ | 10 | $ | — | $ | 248 |
Foreign Currency Options
We had foreign currency options that matured through January 2014, which consisted of call options with deferred premiums. These options were used to mitigate the financial impact of volatility in foreign currency exchange rates related to our ship construction contracts denominated in euros. If the spot rate at the date the ships were delivered was less than the strike price under these option contracts, we would have paid the deferred premium and would not exercise the foreign currency options.
The effects on the consolidated financial statements of the foreign currency options which were designated as cash flow hedges were as follows (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Loss recognized in other comprehensive income (loss) – effective portion | $ | — | $ | — | $ | — | $ | (1,157 | ) | |||||||
Loss recognized in other income (expense) – ineffective portion | — | — | — | (241 | ) | |||||||||||
Amount reclassified from accumulated other comprehensive income (loss) into depreciation and amortization expense | 330 | 330 | 990 | 938 |
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Amount reclassified from accumulated other comprehensive income (loss) into depreciation and amortization expense | $ | 330 | $ | 330 | $ | 660 | $ | 660 |
Foreign Currency Forward Contracts
As of SeptemberJune 30, 2015,2016, we had foreign currency forward contracts which wereare used to mitigate the financial impact of volatility in foreign currency exchange rates related to our ship construction contracts and forecasted Dry-dock payments denominated in euros. The notional amount of our foreign currency forward contracts was €0.9€2.3 billion, or $1.0$2.6 billion based on the euro/U.S. dollar exchange rate as of SeptemberJune 30, 2015.2016.
The effects on the consolidated financial statements of the foreign currency forward contracts which were designated as cash flow hedges were as follows (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Loss recognized in other comprehensive income (loss) – effective portion | $ | (1,519 | ) | $ | (11,199 | ) | $ | (61,966 | ) | $ | (12,187 | ) | ||||
Loss recognized in other income (expense) – ineffective portion | (3 | ) | — | (10 | ) | (1 | ) | |||||||||
Amount reclassified from accumulated other comprehensive income (loss) into depreciation and amortization expense | (64 | ) | (63 | ) | (191 | ) | (180 | ) |
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Gain (loss) recognized in other comprehensive income – effective portion | $ | (79,900 | ) | $ | 36,928 | $ | 2,611 | $ | (60,447 | ) | ||||||
Gain (loss) recognized in other expense – ineffective portion | (2 | ) | 8 | 9 | (7 | ) | ||||||||||
Amount reclassified from accumulated other comprehensive income (loss) into depreciation and amortization expense | 656 | (63 | ) | 1,301 | (127 | ) |
We had a foreign currency forward contractcontracts that matured and were used to mitigate the volatility of foreign currency exchange rates related to a foreign currency financial instrumentinstruments denominated in Norwegian kroner that matured in July 2015.foreign currencies.
12 |
The effects on the consolidated financial statements of the foreign currency forward contractcontracts which waswere not designated as a cash flow hedge washedges were as follows (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Gain recognized in other income (expense) | $ | 585 | $ | — | $ | 684 | $ | — |
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Gain (loss) recognized in other expense | $ | (6,133 | ) | $ | 99 | $ | (6,133 | ) | $ | 99 |
Foreign Currency CollarCollars
We had a foreign currency collarcollars that matured in January 2014, which wasand were used to mitigate the volatility of foreign currency exchange rates related to our ship construction contracts denominated in euros.
The effects on the consolidated financial statements of the foreign currency collar which was designated as a cash flow hedge was as follows (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Loss recognized in other comprehensive income (loss) – effective portion | $ | — | $ | — | $ | — | $ | (1,588 | ) | |||||||
Amount reclassified from accumulated other comprehensive income (loss) into depreciation and amortization expense | (91 | ) | (91 | ) | (273 | ) | (242 | ) |
As of September 30, 2015, we had a foreign currency collar which was used to mitigate the financial impact of volatility in foreign currency exchange rates related to a ship construction contract. The notional amount of our foreign currency collar was €274.4 million, or $306.7 million based on the euro/U.S. dollar exchange rate as of September 30, 2015.
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Amount reclassified from accumulated other comprehensive income (loss) into depreciation and amortization expense | $ | (91 | ) | $ | (91 | ) | $ | (182 | ) | $ | (182 | ) |
The effect on the consolidated financial statements of the foreign currency collar contract which was not designated as a cash flow hedge was as follows (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Gain (loss) recognized in other income (expense) | $ | 955 | $ | — | $ | (18,648 | ) | $ | — |
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Gain (loss) recognized in other expense | $ | (3,313 | ) | $ | 9,350 | $ | 10,312 | $ | (19,603 | ) |
Interest Rate Swaps
As of SeptemberJune 30, 2015,2016, we had interest rate swap agreements to mitigatehedge 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 $1.1 billion.$366.3 million.
The effects on the consolidated financial statements of the interest ratesrate swaps which were designated as cash flow hedges were as follows (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Gain (loss) recognized in other comprehensive income (loss) – effective portion | $ | (2,652 | ) | $ | 1,302 | $ | (6,811 | ) | $ | (3,054 | ) | |||||
Loss recognized in other income (expense) – ineffective portion | (9 | ) | — | (21 | ) | — | ||||||||||
Amount reclassified from accumulated other comprehensive income (loss) into interest expense, net | 1,287 | 695 | 3,305 | 1,543 |
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Loss recognized in other comprehensive income – effective portion | $ | (901 | ) | $ | (570 | ) | $ | (3,456 | ) | $ | (4,159 | ) | ||||
Gain (loss) recognized in other expense – ineffective portion | — | (5 | ) | 3 | (12 | ) | ||||||||||
Amount reclassified from accumulated other comprehensive income (loss) into interest expense, net | 981 | 1,081 | 1,981 | 2,018 |
We had an interest rate swap that matured in January 2015, which was used to mitigate our exposure to interest rate movements and to manage our interest expense.
The effect on the consolidated financial statements of the interest rate swap contract which was not designated as a cash flow hedgehedging instrument was as follows (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Loss recognized in other income (expense) | $ | — | $ | — | $ | (2 | ) | $ | — |
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Loss recognized in other expense | $ | — | $ | — | $ | — | $ | (2 | ) |
Long-Term Debt
As of SeptemberJune 30, 20152016 and December 31, 2014,2015, the fair value of our long-term debt, including the current portion, was $5,765.7 million$6.7 billion and $6,229.1 million,$6.5 billion, respectively, which was $82.6$11.5 million higher and $45.0$6.6 million higher,lower, respectively, than the carrying values. The difference between the fair value and carrying value of our long-term debt is due to our fixed and variable rate debt obligations carrying interest rates that are above or below market rates at the measurement dates. The fair value of our long-term debt was
13 |
calculated based on estimated rates for the same or similar instruments with similar terms and remaining maturities.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 other than our long-term debt approximate fair value.
Employee Benefits and |
Share Option Awards
On JulyMarch 1, 2015,2016, we granted 3.51.0 million share option awards to our employees at an exercise price of $56.19$50.31 with a contractual term of ten years. The share options vest equally over three years.
On August 4, 2015, we granted 700,000 share option awards to our employees at an exercise price of $59.43 with a contractual term of ten years. The share options vest equally over three years. In addition, on August 4, 2015, we entered into an amendment to the employment agreement with our President and Chief Executive Officer pursuant to which we awarded 625,000 time-based share option awards, 416,667 performance-based share option awards and 208,333 market-based share option awards at an exercise price of $59.43 and contractual term of ten years. The time-based share option awards vest 50% on June 30, 2017 and 50% on June 30, 2019. The performance-based and market-based share option awards vest upon the achievement of certain performance and market-related metrics.
The performance-based awards are subject to performance conditions such that the number of awards that ultimately vest depends on the adjusted earnings per share (“Adjusted EPS”) and adjusted return on invested capital (“Adjusted ROIC”) achieved by the Company during the performance period compared to targets established at the award date. Because the terms of the performance-based awards provide discretion to make certain adjustments to the performance calculation, the service inception date of these awards precedes the grant date. Accordingly, the Company recognizes compensation expense beginning on the service inception date and remeasures the fair value of the awards until a grant date occurs. The estimate of the awards’ fair value will be fixed in the period in which the grant date occurs, and cumulative compensation expense will be adjusted based on the fair value at the grant date.
The following is a summary of option activity under our share option plan for the ninesix months ended SeptemberJune 30, 20152016 (excludes the impact of 416,667 performance based awards364,584 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, 2015 | 6,079,881 | 1,457,314 | — | $ | 29.92 | $ | 19.00 | $ | — | 7.61 | $ | 142,831 | ||||||||||||||||||||
Granted | 5,070,000 | — | 208,333 | 56.62 | — | 59.43 | ||||||||||||||||||||||||||
Exercised | (2,090,746 | ) | (493,009 | ) | — | 27.34 | 19.00 | — | ||||||||||||||||||||||||
Forfeited and cancelled | (1,165,874 | ) | (477,611 | ) | — | 34.18 | 19.00 | — | ||||||||||||||||||||||||
Outstanding as of September 30, 2015 | 7,893,261 | 486,694 | 208,333 | $ | 47.12 | $ | 19.00 | $ | 59.43 | 8.80 | $ | 101,781 |
The total intrinsic value of options exercised during the three and nine months ended September 30, 2015 was $14.6 million and $64.1 million, respectively, and total cash received by the Company from options exercised was $11.5 million and $66.5 million for the three and nine months ended September 30, 2015, respectively. Share-based compensation expense for the three months ended September 30, 2015 was $13.7 million and for the nine months ended September 30, 2015 was $27.8 million, which includes $8.2 million related to the acceleration of certain equity awards of the former President and Chief Executive Officer, and was recorded in marketing, general and administrative expense.
Number of Share Option Awards | Weighted-Average Exercise Price Per Share | Weighted- Average Contractual Term | Aggregate Intrinsic Value | |||||||||||||||||||||||||||||
Time- Based Awards | Performance- Based Awards | Market- Based Awards | Time- Based Awards | Performance- Based Awards | Market- Based Awards | (years) | (in thousands) | |||||||||||||||||||||||||
Outstanding as of December 31, 2015 | 7,702,071 | 432,752 | 208,333 | $ | 47.35 | $ | 19.00 | $ | 59.43 | 8.59 | $ | 104,864 | ||||||||||||||||||||
Granted | 1,060,000 | 52,083 | — | 50.13 | 59.43 | — | ||||||||||||||||||||||||||
Exercised | (89,534 | ) | (51,857 | ) | — | 25.48 | 19.00 | — | ||||||||||||||||||||||||
Forfeited and cancelled | (466,527 | ) | — | — | 49.10 | — | — | |||||||||||||||||||||||||
Outstanding as of June 30, 2016 | 8,206,010 | 432,978 | 208,333 | $ | 47.85 | $ | 23.86 | $ | 59.43 | 8.31 | $ | 30,800 |
Restricted Ordinary Share Awards
The following is a summary of restricted ordinary share activity for the ninesix months ended SeptemberJune 30, 2015:2016:
Number of Time-Based Awards | Weighted- Average Grant Date Fair Value | Number of Performance- Based Awards | Weighted- Average Grant Date Fair Value | |||||||||||||
Non-vested as of January 1, 2015 | 196,644 | $ | 3.43 | 1,208,608 | $ | 3.37 | ||||||||||
Granted | 5,165 | 47.56 | — | — | ||||||||||||
Vested | (81,581 | ) | 5.74 | (620,739 | ) | 3.92 | ||||||||||
Forfeited or Expired | (74,980 | ) | 2.67 | (587,869 | ) | 2.79 | ||||||||||
Non-vested and expected to vest as of September 30, 2015 | 45,248 | 5.57 | — | — |
Number of Time-Based Awards | Weighted- Average Grant Date Fair Value Per Share | |||||||
Non-vested as of January 1, 2016 | 43,653 | $ | 5.87 | |||||
Granted | — | — | ||||||
Vested | (16,830 | ) | 5.85 | |||||
Forfeited or expired | (352 | ) | 2.50 | |||||
Non-vested and expected to vest as of June 30, 2016 | 26,471 | $ | 5.92 |
Restricted Share UnitsUnit Awards
On August 4, 2015,March 1, 2016, we entered into an amendment to the employment agreement with our President and Chief Executive Officer pursuant to which we awarded 150,000 time-basedgranted 1.2 million restricted share unit awards 100,000 performance-based restricted share unit awards and 50,000 market-based restricted share unit awards. The time-based restricted share unit awardsto our employees which vest equally on June 30, 2016, 2017, 2018 and 2019, respectively. The performance-based and market-based restricted share unit awards vest upon the achievement of certain performance and market-related metrics.over three years.
The performance-based awards are subject to performance conditions such that the number of awards that ultimately vest depends on the adjusted earnings per share (“Adjusted EPS”) and adjusted return on invested capital (“Adjusted ROIC”) achieved by the Company during the performance period compared to targets established at the award date. Because the terms of the performance-based awards provide discretion to make certain adjustments to the performance calculation, the service inception date of these awards precedes the grant date. Accordingly, the Company recognizes compensation expense beginning on the service inception date and remeasures the fair value of the awards until a grant date occurs. The estimate of the awards’ fair value will be fixed in the period in which the grant date occurs, and cumulative compensation expense will be adjusted based on the fair value at the grant date.
The following is a summary of restricted share unit activity for the ninesix months ended SeptemberJune 30, 20152016 (excludes the impact of 100,00087,500 previously awarded performance-based awardsrestricted share units as no grant date was established):
Number of Time-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, 2015 | ||||||||||||||||
Granted | 150,000 | $ | 59.43 | 50,000 | $ | 59.43 | ||||||||||
Vested | — | — | — | — | ||||||||||||
Forfeited or Expired | — | — | — | — | ||||||||||||
Non-vested and expected to vest as of September 30, 2015 | 150,000 | $ | 59.43 | 50,000 | $ | 59.43 |
Number of Time-Based Awards | Weighted- Average Grant Date Fair Value Per Share | Number of Performance- Based Awards | Weighted- Average Grant Date Fair Value Per Share | Number of Market- Based Awards | Weighted- Average Grant Date Fair Value Per Share | |||||||||||||||||||
Non-vested as of January 1, 2016 | 150,000 | $ | 59.43 | — | $ | — | 50,000 | $ | 59.43 | |||||||||||||||
Granted | 1,246,990 | 50.41 | 12,500 | 50.00 | — | — | ||||||||||||||||||
Vested | (37,500 | ) | 59.43 | (12,500 | ) | 50.00 | — | — | ||||||||||||||||
Forfeited or expired | (50,000 | ) | 50.31 | — | — | — | — | |||||||||||||||||
Non-vested and expected to vest as of June 30, 2016 | 1,309,490 | $ | 51.19 | — | $ | — | 50,000 | $ | 59.43 |
Other Employee Matters
On January 8, 2015, Kevin M. Sheehan resigned as President and Chief Executive Officer ofThe share-based compensation expense for the Company, together with all of his positions and offices with the Company and its subsidiaries or affiliates, effective immediately. In connection with Mr. Sheehan’s resignation from the Company, Mr. Sheehan and the Company entered into a Separation Agreement and Release (the “Separation Agreement”). The Separation Agreement sets forth the terms of Mr. Sheehan’s resignation from the Company, including, among other things, a general release of claims in favor of the Company and certain non-competition, non-solicitation, confidentiality and cooperation undertakings. The Separation Agreement also provides that Mr. Sheehan will receive (i) all of his accrued and unpaid base salary (and accrued and unpaid vacation time) through January 8, 2015 (the “Effective Date”), (ii) his previously approved bonus payment for fiscal year 2014 of $1,627,500, (iii) a one-time cash separation payment in an amount equal to his base salary and target bonus and (iv) vesting of a portion of his outstanding unvested equity-based awards as of the Effective Date, and all remaining unvested equity-based awards shall immediately terminate, expire and be forfeited as of the Effective Date. This resulted in a total severance expense of $13.4six months ended June 30, 2016 was $31.4 million of which $8.2$27.7 million was due to the acceleration of the equity-based awards which was recorded in marketing, general and administrative expense and $3.7 million was recorded in January 2015.payroll and related expense.
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Frank J. Del Rio was appointed President and Chief Executive OfficerTable of the Company as of January 8, 2015.Contents
Commitments and Contingencies |
Ship Construction Contracts
Norwegian Escape was delivered in October 2015. We have threeNorwegian Joy and two other Breakaway Plus Class Ships on order with Meyer Werft shipyard for delivery in the spring of 2017, spring of 2018 and fall of 2019.2019, respectively. These ships will be amongst the largest in our fleet, reaching approximately 164,600 Gross Tons and approximately 4,000 Berths each.Tons. The combined contract price of these three ships is approximately €2.5€2.6 billion, or $2.8$2.9 billion based on the euro/U.S. dollar exchange rate as of SeptemberJune 30, 2015.2016. We have export credit financing in place that provides financing for 80% of their contract prices. In June 2016, we took delivery of Seven Seas Explorer. We also have a contractan additional Explorer Class Ship on order with Fincantieri shipyard to build a luxury cruise ship to be named Seven Seas Explorer. Thewith an original contract price of the ship is approximately €367.2€422.0 million, or approximately $410.4$468.7 million based on the euro/U.S. dollar exchange rate as of SeptemberJune 30, 2015.2016. We have export credit financing in place that provides financing for 80% of the ship’s contract price. Seven SeasThe additional Explorer Class Ship is expected to be delivered in the summerwinter of 2016.2020.
In connection with the contracts to build these ships, we do not anticipate any contractual breaches or cancellation to occur. However, if any would occur, it could result in, among other things, the forfeiture of prior deposits or payments made by us, subject to certain refund guarantees, and potential claims and impairment losses which may materially impact our business, financial condition and results of operations.
Litigation
In 2015, the Alaska Department of Environmental Conservation issued Notices of Violations to major cruise lines that operated in the state of Alaska, including Norwegian, for alleged violations of the Alaska Marine Vessel Visible Emission Standards that occurred over the last several years. We are cooperating with the Alaska Department of Environmental Conservation and conducting our own internal investigation into these matters. However, we do not believe the ultimate outcome will have a material impact on our financial condition, results of operations or cash flows.
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. We intend to vigorously defend our legal position on all claims and, to the extent necessary, seek recovery.
Restructuring Costs |
Due to the Acquisition of Prestige, a number of employee positions were consolidated. As of SeptemberJune 30, 2015,2016, we had an accrued expenseaccrual balance of $3.1$1.9 million for restructuring costs for severance and other employee-related costs. An additionalThe expense of $11.6$2.4 million was recorded for the ninesix months ended SeptemberJune 30, 2015 and2016 is included in marketing, general and administrative expense.
The following table summarizes changes in the accrual for restructuring costs (in thousands):
Restructuring costs | Restructuring costs | |||||||
Accrued expense balance as of December 31, 2014 | $ | (7,956 | ) | |||||
Accrued expense balance as of December 31, 2015 | $ | (4,144 | ) | |||||
Amounts paid | 16,418 | 4,610 | ||||||
Additional accrued expense | (11,568 | ) | (2,404 | ) | ||||
Accrued expense balance as of September 30, 2015 | $ | (3,106 | ) | |||||
Accrued expense balance as of June 30, 2016 | $ | (1,938 | ) |
Supplemental Cash Flow Information |
For the ninesix months ended SeptemberJune 30, 2016, we had non-cash investing activities in connection with property and equipment of $32.0 million and for the six months ended June 30, 2015, we had non-cash investing activities in connection with capital leases of $28.5 million and capital expenditures of $6.5$27.6 million.
Revision to the Consolidated Statement of Cash Flows |
During the three months ended September 30, 2015, we determined that for the three months ended March 31, 2015 and six months ended June 30, 2015, cash payments related to property and equipment were reported as a decrease in cash flows from operating activities related to the change in accrued expenses and other liabilities and prepaid and other assets when it should have been reported as a decrease in cash flows from investing activities related to additions to property and equipment. The Consolidated Statementsconsolidated statements of Cash Flowscash flows for the three months ended March 31, 2015 and six months ended June 30, 2015 will behave been revised in future Form 10-Q filings, to increase cash from operating activities related to the change in accrued expenses and other liabilities and prepaid and other assets and increase in investing cash outflowoutflows from additions to property and equipment by $14.6 million and 18.5 million, respectively.$18.5 million. We have determined that the revision is not material to our consolidated financial statements individually and in the aggregate.
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During the three months ended June 30, 2015, we determined that for the year ended December 31, 2014, non-cash transactions related to the financingTable of one of our ships was reported as cash used for additions to property and equipment and cash provided by proceeds from long-term debt. The Consolidated Statement of Cash Flows, for the year ended December 31, 2014, will be revised in our Form 10-K for the year ending December 31, 2015, by decreasing cash used for additions to property and equipment and cash provided by proceeds from long-term debt by $82.0 million. We have determined that the revision is not material to our consolidated financial statements.Contents
Subsequent Event |
Norwegian Escape was deliveredAmendment to Credit Agreement
NCLC, a subsidiary of NCLH, entered into a Supplemental Agreement, dated July 26, 2016, by and among NCLC, as guarantor, Breakaway Four, Ltd. (the “Borrower”), as borrower, NCL International Ltd., as shareholder, and KfW IPEX-Bank GmbH (“KfW”), as facility agent and lender (the “Credit Agreement Amendment”), which amends the Credit Agreement, dated as of October 12, 2012, by and among NCLC, as parent, the Borrower and KfW, as facility agent and lender (the “Existing Credit Agreement”). The Credit Agreement Amendment amends the Existing Credit Agreement to, among other things, increase the aggregate principal amount of commitments under the multi-draw term loan credit facility from €590.5 million to €729.9 million.
Except as provided in October 2015. This ship is approximately 164,600 Gross Tons with approximately 4,200 Berths.the Credit Agreement Amendment, all other provisions of the Existing Credit Agreement remain in full force.
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:to the impact of:
adverse |
The above examples are not exhaustive and new risks emerge from time to time. OurSuch forward-looking statements are based on our current beliefs, assumptions, expectations, estimates and projections regarding our present and future business strategies and the environment in which we will operate in the future. These forward-looking statements speak only as of the date made. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statement contained herein 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.
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The interim consolidated financial statements should be read in conjunction with our audited consolidated financial statements for the year ended December 31, 2014, which are included in our most recently filed Annual Report on Form 10-K.Table of Contents
Terminology
This report includes certain non-GAAP financial measures, such as Net Revenue, Net Yield, Net Cruise Cost, Adjusted Net Yield,Revenue, Adjusted Net Revenue,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. The acquisition consideration is subject to an additional cash payment of up to $50.0 million upon achievement of certain 2015 revenue milestones.
•Adjusted EBITDA. EBITDA adjusted for other income (expense) and other supplemental adjustments.
•Adjusted EPS. Adjusted Net Income divided by the number of diluted weighted-average shares.shares outstanding.
•Adjusted Net Cruise Cost Excluding Fuel. Net Cruise Cost less fuel expenseExcluding Fuel adjusted for supplemental adjustments.
•Adjusted Net Income. Net income adjusted for supplemental adjustments.
•Adjusted Net Revenue. Net Revenue adjusted for supplemental adjustments.
•Adjusted Net Yield. Net Yield adjusted for supplemental adjustments.
• BareboatCharter. 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 stateroomcabin (single occupancy per studio stateroom)cabin) even though many stateroomscabins 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.
•Breakaway Two Credit Facility.€529.8 million Breakaway Two Credit Agreement, dated as of November 18, 2010, by and among Breakaway Two, Ltd. and a syndicate of international banks and related Guarantee by NCL Corporation Ltd., as amended.
•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.
•Charter. The hire of a ship for a specified period of time whereby no crew or provisions are provided by the Company.
•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.
•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.
•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.
•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.
•Management NCL Corporation Units. NCLC’s previously outstanding profits interests issued to management (or former management) of NCLC which were converted into units in NCLCNCLC. All Management NCL Corporation Units were exchanged for NCLH ordinary shares and restricted shares in connection with the Corporate Reorganization.fourth quarter of 2014.
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•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.
•NewRevolving Loan Facility. $750.0 million senior secured revolving credit facility maturing on June 6, 2021, subject to an earlier springing maturity date as described in Note 6— “Long-Term Debt” in our Consolidated Financial Statements included herein. The New Revolving Loan Facility amended and restated the Revolving Loan Facility.
•Occupancy Percentage. The ratio of Passenger Cruise Days to Capacity Days. A percentage in excess of 100% indicates that three or more passengers occupied some staterooms.cabins.
•Passenger Cruise Days. The number of passengers carried for the period, multiplied by the number of days in their respective cruises.
•Revolving Loan Facility. $625.0 million senior secured revolving credit facility maturingwhich was to mature on May 24, 2018.2018 was amended and restated in June 2016 (such amendment and restatement is referred to herein as the New Revolving Loan Facility).
•ROI Capital Expenditures.Comprised of project-based capital expenditures which have a quantified return on investment.
•Secondary Equity Offering(s).Secondary public offering(s) of NCLH’s ordinary shares in December 2015, August 2015, May 2015, March 2015, March 2014, December 2013 and August 2013.
•Selling Shareholders. Apollo Holders, Star NCLC and the TPG Viking Funds.
•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 North America,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 excludes 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
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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. 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 three and six months ended June 30, 2016 we incurred an $11.4 million write-off of deferred financing fees due to the refinancing of certain credit facilities. We included the $11.4 million as an adjustment in the reconciliation of Adjusted Net Income since these amounts are not representative of our day-to-day operations and we have included other write-offs of deferred financing fees as adjustments in prior periods.
You are encouraged to evaluate each adjustment used in calculating our non-GAAP financial measures and the reasons we consider our non-GAAP financial measures appropriate for supplemental analysis. In evaluating our non-GAAP financial measures, you should be aware that in the future we may incur expenses similar to the adjustments in our presentation. Our non-GAAP financial measures have limitations as analytical tools, and you should not consider these measures in isolation or as a substitute for analysis of our results as reported under GAAP. Our presentation of our non-GAAP financial measures should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. Our non-GAAP financial measures may not be comparable to
other companies. Please see a historical reconciliation of these measures to the most comparable GAAP measure presented in our consolidated financial statements below in the “Results of Operations” section.
Financial Presentation
Revenue from our cruise and cruise-related activities are categorized by us as “passenger ticket revenue” and “onboard and other revenue.” Passenger ticket revenue and onboard and other revenue vary according to product offering, the size of the ship in operation, the length of cruises operated and the markets in which the ship operates. Our revenue is seasonal based on demand for cruises, which has historically been strongest during the Northern Hemisphere’s summer months.
Passenger ticket revenue primarily consists of revenue for accommodations, meals in certain restaurants on the ship, certain onboard entertainment, and includes revenue for service charges and air and land transportation to and from the ship to the extent guests purchase these items from us. Onboard and other revenue primarily consists of revenue from gaming, beverage sales, shore excursions, specialty dining, retail sales, spa services, photo services as well as certain Bareboat Charter revenue. We record onboard revenue from onboard activities we perform directly or that are performed by independent concessionaires, from which we receive a share of their revenue.
Our cruise operating expense is classified as follows:
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, 20142015 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, 2014.2015.
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Quarterly Overview
For the third quarter of 2015, on a GAAP basis, net income and diluted earnings per share were $251.8 million and $1.09, respectively. We reported Adjusted Net Income of $311.1 million and Adjusted EPS of $1.35, which excludes $17.0 million of expenses related to non-cash compensation, $0.4 million related to Secondary Equity Offering expenses, $1.4 million of severance costs, $6.1 million of expenses related to the Acquisition of Prestige, $3.0 million of a deferred revenue adjustment, $20.9 million related to the amortization of intangible assets, $3.8 million related to derivative expense and $6.8 million related to contract termination expenses.
In August 2015, the Selling Shareholders sold 20,000,000 ordinary shares of NCLH in a Secondary Equity Offering. We did not receive any proceeds from this offering.
Norwegian Escape
Three months ended SeptemberJune 30, 20152016 (“2015”2016”) compared to the three months ended SeptemberJune 30, 20142015 (“2014”2015”)
Total revenue increased 41.7%9.3% to $1.3$1.2 billion in 2016 compared to $1.1 billion in 2015 comparedprimarily due to $0.9 billionan increase in 2014.Capacity Days and improved pricing. Gross Yield was relatively unchanged. Net Revenue in 20152016 increased 40.4%11.2% to $975.2$917.5 million from $694.4$825.1 million in 20142015 due to an increase in Capacity Days of 17.6%9.4% and an increase in Net Yield of 19.4%.The1.7%. The increase in Capacity Days was primarily due to the Acquisitiondelivery of Prestige.Norwegian Escape in October 2015 and Sirena joining our fleet in April 2016 slightly offset by the scheduled Dry-docks. The increase in Net Yield was primarily due to improved pricing.
We had net income and diluted EPS of $145.2 million and $0.64, respectively, in 2016. Operating income was $306.8$227.0 million in 20152016 compared to $234.8$217.4 million in 20142015. We had Adjusted Net Income and Adjusted EPS of $192.6 million and $0.85, respectively, in 2016, which includes $47.3 million of adjustments primarily consisting of expenses related to deferred financing fees, derivatives, non-cash compensation and certain other adjustments. Adjusted EBITDA improved 37.1% for the same period (we12.0% in 2016 compared to 2015. We refer you to our “Results of Operations”Operations��� below for a calculation of Net Revenue, Net Yield, Adjusted EBITDA).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 September 30, | Nine Months Ended September 30, | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||
2015 | 2014 | 2015 | 2014 | 2016 | 2015 | 2016 | 2015 | |||||||||||||||||||||||||
Revenue | ||||||||||||||||||||||||||||||||
Passenger ticket | 73.8 | % | 71.7 | % | 72.7 | % | 69.6 | % | 69.0 | % | 72.6 | % | 68.8 | % | 72.1 | % | ||||||||||||||||
Onboard and other | 26.2 | % | 28.3 | % | 27.3 | % | 30.4 | % | 31.0 | % | 27.4 | % | 31.2 | % | 27.9 | % | ||||||||||||||||
Total revenue | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||||||||||
Cruise operating expense | ||||||||||||||||||||||||||||||||
Commissions, transportation and other | 17.6 | % | 15.8 | % | 17.8 | % | 16.0 | % | 16.3 | % | 17.7 | % | 16.3 | % | 18.0 | % | ||||||||||||||||
Onboard and other | 6.6 | % | 7.7 | % | 6.4 | % | 7.4 | % | 6.4 | % | 6.3 | % | 6.2 | % | 6.3 | % | ||||||||||||||||
Payroll and related | 13.3 | % | 12.8 | % | 14.8 | % | 13.8 | % | 15.5 | % | 14.9 | % | 16.0 | % | 15.8 | % | ||||||||||||||||
Fuel | 6.9 | % | 8.8 | % | 8.1 | % | 10.1 | % | 6.8 | % | 8.5 | % | 7.2 | % | 8.9 | % | ||||||||||||||||
Food | 3.6 | % | 4.9 | % | 4.0 | % | 5.4 | % | 4.2 | % | 4.0 | % | 4.4 | % | 4.2 | % | ||||||||||||||||
Other | 7.9 | % | 6.4 | % | 9.3 | % | 8.4 | % | 10.3 | % | 9.1 | % | 10.4 | % | 10.1 | % | ||||||||||||||||
Total cruise operating expense | 55.9 | % | 56.4 | % | 60.4 | % | 61.1 | % | 59.5 | % | 60.5 | % | 60.5 | % | 63.3 | % | ||||||||||||||||
Other operating expense | ||||||||||||||||||||||||||||||||
Marketing, general and administrative | 11.7 | % | 10.7 | % | 12.4 | % | 11.3 | % | 12.6 | % | 9.9 | % | 14.6 | % | 12.9 | % | ||||||||||||||||
Depreciation and amortization | 8.5 | % | 7.0 | % | 9.5 | % | 8.1 | % | 8.8 | % | 9.6 | % | 9.1 | % | 10.1 | % | ||||||||||||||||
Total other operating expense | 20.2 | % | 17.7 | % | 21.9 | % | 19.4 | % | 21.4 | % | 19.5 | % | 23.7 | % | 23.0 | % | ||||||||||||||||
Operating income | 23.9 | % | 25.9 | % | 17.7 | % | 19.5 | % | 19.1 | % | 20.0 | % | 15.8 | % | 13.7 | % | ||||||||||||||||
Non-operating income (expense) | ||||||||||||||||||||||||||||||||
Interest expense, net | (3.9 | )% | (3.6 | )% | (4.6 | )% | (4.1 | )% | (5.8 | )% | (4.8 | )% | (5.7 | )% | (5.1 | )% | ||||||||||||||||
Other income (expense) | (0.1 | )% | 0.4 | % | (1.1 | )% | 0.2 | % | ||||||||||||||||||||||||
Other expense | (0.9 | )% | (0.4 | )% | (0.3 | )% | (1.7 | )% | ||||||||||||||||||||||||
Total non-operating income (expense) | (4.0 | )% | (3.2 | )% | (5.7 | )% | (3.9 | )% | (6.7 | )% | (5.2 | )% | (6.0 | )% | (6.8 | )% | ||||||||||||||||
Net income before income taxes | 19.9 | % | 22.7 | % | 12.0 | % | 15.6 | % | 12.4 | % | 14.8 | % | 9.8 | % | 6.9 | % | ||||||||||||||||
Income tax benefit (expense) | (0.3 | )% | (0.3 | )% | (0.2 | )% | 0.2 | % | ||||||||||||||||||||||||
Income tax expense | (0.2 | )% | (0.2 | )% | (0.2 | )% | (0.1 | )% | ||||||||||||||||||||||||
Net income | 19.6 | % | 22.4 | % | 11.8 | % | 15.8 | % | 12.2 | % | 14.6 | % | 9.6 | % | 6.8 | % | ||||||||||||||||
Net income attributable to non-controlling interest | — | % | 0.2 | % | — | % | 0.2 | % | ||||||||||||||||||||||||
Net income attributable to Norwegian Cruise Line Holdings Ltd. | 19.6 | % | 22.2 | % | 11.8 | % | 15.6 | % |
21 |
The following table sets forth selected statistical information:
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||
2015 | 2014 | 2015 | 2014 | 2016 | 2015 | 2016 | 2015 | |||||||||||||||||||||||||
Passengers carried | 574,011 | 518,394 | 1,615,213 | 1,456,394 | 574,838 | 527,676 | 1,126,313 | 1,041,202 | ||||||||||||||||||||||||
Passenger Cruise Days | 4,208,605 | 3,609,294 | 11,925,493 | 10,079,345 | 4,237,020 | 3,948,773 | 8,522,314 | 7,716,888 | ||||||||||||||||||||||||
Capacity Days | 3,696,549 | 3,143,592 | 10,887,160 | 9,113,991 | 3,974,508 | 3,634,143 | 7,965,450 | 7,190,611 | ||||||||||||||||||||||||
Occupancy Percentage | 113.9 | % | 114.8 | % | 109.5 | % | 110.6 | % | 106.6 | % | 108.7 | % | 107.0 | % | 107.3 | % |
Net Revenue, Adjusted Net Revenue, Gross Yield, Net Yield and Adjusted Net Yield were calculated as follows (in thousands, except Capacity Days and Yield data):
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||||||||||||||||
2015 | 2015 Constant Currency | 2014 | 2015 | 2015 Constant Currency | 2014 | 2016 | 2016 Constant Currency | 2015 | 2016 | 2016 Constant Currency | 2015 | |||||||||||||||||||||||||||||||||||||
Passenger ticket revenue | $ | 948,059 | $ | 979,036 | $ | 650,323 | $ | 2,406,533 | $ | 2,457,524 | $ | 1,627,684 | $ | 818,478 | $ | 822,398 | $ | 787,991 | $ | 1,558,590 | $ | 1,575,030 | $ | 1,458,474 | ||||||||||||||||||||||||
Onboard and other revenue | 336,851 | 336,851 | 256,694 | 901,992 | 901,544 | 709,288 | 368,357 | 368,358 | 297,442 | 705,877 | 705,877 | 565,141 | ||||||||||||||||||||||||||||||||||||
Total revenue | 1,284,910 | 1,315,887 | 907,017 | 3,308,525 | 3,359,068 | 2,336,972 | 1,186,835 | 1,190,756 | 1,085,433 | 2,264,467 | 2,280,907 | 2,023,615 | ||||||||||||||||||||||||||||||||||||
Less: | ||||||||||||||||||||||||||||||||||||||||||||||||
Commissions, transportation and other expense | 225,586 | 232,954 | 143,194 | 589,851 | 596,886 | 374,716 | 193,536 | 194,383 | 192,438 | 368,973 | 373,288 | 364,265 | ||||||||||||||||||||||||||||||||||||
Onboard and other expense | 84,171 | 84,171 | 69,389 | 210,701 | 210,251 | 172,780 | 75,790 | 75,790 | 67,885 | 139,755 | 139,755 | 126,530 | ||||||||||||||||||||||||||||||||||||
Net Revenue | 975,153 | 998,762 | 694,434 | 2,507,973 | 2,551,931 | 1,789,476 | 917,509 | 920,583 | 825,110 | 1,755,739 | 1,767,864 | 1,532,820 | ||||||||||||||||||||||||||||||||||||
Non-GAAP Adjustment: | ||||||||||||||||||||||||||||||||||||||||||||||||
Deferred revenue (1) | 3,026 | 3,026 | — | 31,514 | 31,514 | — | 297 | 297 | 7,294 | 757 | 757 | 28,488 | ||||||||||||||||||||||||||||||||||||
Adjusted Net Revenue | $ | 978,179 | $ | 1,001,788 | $ | 694,434 | $ | 2,539,487 | $ | 2,583,445 | $ | 1,789,476 | $ | 917,806 | $ | 920,880 | $ | 832,404 | $ | 1,756,496 | $ | 1,768,621 | $ | 1,561,308 | ||||||||||||||||||||||||
Capacity Days | 3,696,549 | 3,696,549 | 3,143,592 | 10,887,160 | 10,887,160 | 9,113,991 | 3,974,508 | 3,974,508 | 3,634,143 | 7,965,450 | 7,965,450 | 7,190,611 | ||||||||||||||||||||||||||||||||||||
Gross Yield | $ | 347.60 | $ | 355.98 | $ | 288.53 | $ | 303.89 | $ | 308.53 | $ | 256.42 | $ | 298.61 | $ | 299.60 | $ | 298.68 | $ | 284.29 | $ | 286.35 | $ | 281.42 | ||||||||||||||||||||||||
Net Yield | $ | 263.80 | $ | 270.19 | $ | 220.90 | $ | 230.36 | $ | 234.40 | $ | 196.34 | $ | 230.85 | $ | 231.62 | $ | 227.04 | $ | 220.42 | $ | 221.94 | $ | 213.17 | ||||||||||||||||||||||||
Adjusted Net Yield | $ | 264.62 | $ | 271.01 | $ | 220.90 | $ | 233.26 | $ | 237.29 | $ | 196.34 | $ | 230.92 | $ | 231.70 | $ | 229.05 | $ | 220.51 | $ | 222.04 | $ | 217.13 |
(1) | Reflects deferred revenue fair value adjustments related to the Acquisition of Prestige that were made pursuant to business combination accounting rules. |
Gross Cruise Cost, Net Cruise Cost, Net Cruise Cost Excluding Fuel and Adjusted Net Cruise Cost Excluding Fuel were calculated as follows (in thousands, except Capacity Days and per Capacity Day data):
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||||||||||||||||
2015 | 2015 Constant Currency | 2014 | 2015 | 2015 Constant Currency | 2014 | 2016 | 2016 Constant Currency | 2015 | 2016 | 2016 Constant Currency | 2015 | |||||||||||||||||||||||||||||||||||||
Total cruise operating expense | $ | 717,722 | $ | 729,349 | $ | 511,298 | $ | 1,997,701 | $ | 2,010,801 | $ | 1,428,004 | $ | 705,900 | $ | 707,178 | $ | 656,279 | $ | 1,370,381 | $ | 1,376,337 | $ | 1,279,979 | ||||||||||||||||||||||||
Marketing, general and administrative expense | 150,558 | 151,846 | 97,111 | 411,879 | 415,898 | 263,584 | 149,307 | 149,288 | 107,164 | 329,881 | 330,604 | 261,321 | ||||||||||||||||||||||||||||||||||||
Gross Cruise Cost | 868,280 | 881,195 | 608,409 | 2,409,580 | 2,426,699 | 1,691,588 | 855,207 | 856,466 | 763,443 | 1,700,262 | 1,706,941 | 1,541,300 | ||||||||||||||||||||||||||||||||||||
Less: | ||||||||||||||||||||||||||||||||||||||||||||||||
Commissions, transportation and other expense | 225,586 | 232,954 | 143,194 | 589,851 | 596,886 | 374,716 | 193,536 | 194,383 | 192,438 | 368,973 | 373,288 | 364,265 | ||||||||||||||||||||||||||||||||||||
Onboard and other expense | 84,171 | 84,171 | 69,389 | 210,701 | 210,251 | 172,780 | 75,790 | 75,790 | 67,885 | 139,755 | 139,755 | 126,530 | ||||||||||||||||||||||||||||||||||||
Net Cruise Cost | 558,523 | 564,070 | 395,826 | 1,609,028 | 1,619,562 | 1,144,092 | 585,881 | 586,293 | 503,120 | 1,191,534 | 1,193,898 | 1,050,505 | ||||||||||||||||||||||||||||||||||||
Less: Fuel expense | 88,829 | 88,829 | 79,881 | 267,784 | 267,784 | 236,753 | 80,607 | 80,607 | 91,581 | 162,279 | 162,279 | 178,955 | ||||||||||||||||||||||||||||||||||||
Net Cruise Cost Excluding Fuel | 469,694 | 475,241 | 315,945 | 1,341,244 | 1,351,778 | 907,339 | 505,274 | 505,686 | 411,539 | 1,029,255 | 1,031,619 | 871,550 | ||||||||||||||||||||||||||||||||||||
Less Non-GAAP Adjustments: | ||||||||||||||||||||||||||||||||||||||||||||||||
Non-cash deferred compensation (1) | 3,277 | 3,277 | 2,535 | 5,759 | 5,759 | 5,144 | 792 | 792 | 1,029 | 1,583 | 1,583 | 2,482 | ||||||||||||||||||||||||||||||||||||
Non-cash share-based compensation (2) | 13,691 | 13,691 | 4,473 | 27,857 | 27,857 | 9,552 | 16,204 | 16,204 | 2,161 | 31,449 | 31,449 | 14,166 | ||||||||||||||||||||||||||||||||||||
Secondary Equity Offering expenses (3) | 362 | 362 | — | 1,384 | 1,384 | 2,075 | ||||||||||||||||||||||||||||||||||||||||||
Secondary Equity Offerings’ expenses (3) | — | — | 1,022 | — | — | 1,022 | ||||||||||||||||||||||||||||||||||||||||||
Severance payments and other fees (4) | 1,369 | 1,369 | — | 15,045 | 15,045 | — | 869 | 869 | 3,289 | 2,899 | 2,899 | 13,676 | ||||||||||||||||||||||||||||||||||||
Management NCL Corporation Units exchange expenses (5) | — | — | — | 624 | 624 | — | — | — | — | — | — | 624 | ||||||||||||||||||||||||||||||||||||
Acquisition of Prestige expenses (6) | 6,098 | 6,098 | 20,268 | 17,389 | 17,389 | 20,268 | 1,273 | 1,273 | 10,891 | 3,014 | 3,014 | 11,291 | ||||||||||||||||||||||||||||||||||||
Contingent consideration adjustment (7) | — | — | — | (43,400 | ) | (43,400 | ) | — | — | — | (34,300 | ) | — | — | (43,400 | ) | ||||||||||||||||||||||||||||||||
Contract termination expenses (8) | 3,319 | 3,319 | — | 3,319 | 3,319 | — | ||||||||||||||||||||||||||||||||||||||||||
Other (9) | — | — | 810 | — | — | 2,943 | ||||||||||||||||||||||||||||||||||||||||||
Adjusted Net Cruise Cost Excluding Fuel | $ | 441,578 | $ | 447,125 | $ | 287,859 | $ | 1,313,267 | $ | 1,323,801 | $ | 867,357 | $ | 486,136 | $ | 486,548 | $ | 427,447 | $ | 990,310 | $ | 992,674 | $ | 871,689 | ||||||||||||||||||||||||
Capacity Days | 3,696,549 | 3,696,549 | 3,143,592 | 10,887,160 | 10,887,160 | 9,113,991 | 3,974,508 | 3,974,508 | 3,634,143 | 7,965,450 | 7,965,450 | 7,190,611 | ||||||||||||||||||||||||||||||||||||
Gross Cruise Cost per Capacity Day | $ | 234.89 | $ | 238.38 | $ | 193.54 | $ | 221.32 | $ | 222.90 | $ | 185.60 | $ | 215.17 | $ | 215.49 | $ | 210.08 | $ | 213.45 | $ | 214.29 | $ | 214.35 | ||||||||||||||||||||||||
Net Cruise Cost per Capacity Day | $ | 151.09 | $ | 152.59 | $ | 125.92 | $ | 147.79 | $ | 148.76 | $ | 125.53 | $ | 147.41 | $ | 147.51 | $ | 138.44 | $ | 149.59 | $ | 149.88 | $ | 146.09 | ||||||||||||||||||||||||
Net Cruise Cost Excluding Fuel per Capacity Day | $ | 127.06 | $ | 128.56 | $ | 100.50 | $ | 123.20 | $ | 124.16 | $ | 99.55 | $ | 127.13 | $ | 127.23 | $ | 113.24 | $ | 129.21 | $ | 129.51 | $ | 121.21 | ||||||||||||||||||||||||
Adjusted Net Cruise Cost Excluding Fuel per Capacity Day | $ | 119.46 | $ | 120.96 | $ | 91.57 | $ | 120.63 | $ | 121.59 | $ | 95.17 | $ | 122.31 | $ | 122.42 | $ | 117.62 | $ | 124.33 | $ | 124.62 | $ | 121.23 |
(1) | Non-cash deferred compensation expenses related to the crew pension plan and other crew expenses, which are included in payroll and related expense. |
(2) | Non-cash share-based compensation expenses related to equity awards, which are included in marketing, general and administrative expense and payroll and related expense. |
(3) | Expenses related to the Secondary Equity Offerings, which are included in marketing, general and administrative expense. |
(4) | Severance payments and other expenses related to restructuring costs and other severance arrangements, which are included in marketing, general and administrative expense. |
(5) | Expenses related to the exchange of Management NCL Corporation Units for ordinary shares, which are included in marketing, general and administrative expense. |
(6) | Expenses related to the Acquisition of Prestige, which are included in marketing, general and administrative expense. |
(7) | Contingent consideration fair value adjustment related to the Acquisition of Prestige, which is |
Adjusted Net Income and Adjusted EPS were calculated as follows (in thousands, except share and per share data):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Net income attributable to Norwegian Cruise Line Holdings Ltd. | $ | 251,787 | $ | 201,078 | $ | 388,825 | $ | 363,961 | ||||||||
Net income attributable to non-controlling interest | — | 2,200 | — | 4,288 | ||||||||||||
Net income | 251,787 | 203,278 | 388,825 | 368,249 | ||||||||||||
Non-GAAP Adjustments: | ||||||||||||||||
Non-cash deferred compensation (1) | 3,277 | 2,535 | 5,759 | 5,144 | ||||||||||||
Non-cash share-based compensation (2) | 13,691 | 4,473 | 28,030 | 9,552 | ||||||||||||
Secondary Equity Offerings’ expenses (3) | 362 | — | 1,384 | 2,075 | ||||||||||||
Tax benefit (4) | — | 870 | — | (5,304 | ) | |||||||||||
Severance payments and other fees (5) | 1,369 | — | 15,045 | — | ||||||||||||
Management NCL Corporation Units exchange expenses (6) | — | — | 624 | — | ||||||||||||
Acquisition of Prestige expenses (7) | 6,098 | 20,268 | 17,389 | 20,268 | ||||||||||||
Deferred revenue (8) | 3,026 | — | 31,514 | — | ||||||||||||
Amortization of intangible assets (9) | 20,914 | — | 59,973 | — | ||||||||||||
Contingent consideration adjustment (10) | — | — | (43,400 | ) | — | |||||||||||
Derivative loss (11) | 3,767 | — | 33,370 | — | ||||||||||||
Contract termination expenses (12) | 6,848 | — | 6,848 | — | ||||||||||||
Other (13) | — | 810 | — | 2,943 | ||||||||||||
Adjusted Net Income | $ | 311,139 | $ | 232,234 | $ | 545,361 | $ | 402,927 | ||||||||
Diluted weighted–average shares outstanding – Net income and Adjusted Net Income | 230,274,756 | 208,507,181 | 229,860,900 | 209,992,647 | ||||||||||||
Diluted earnings per share | $ | 1.09 | $ | 0.97 | $ | 1.69 | $ | 1.75 | ||||||||
Adjusted EPS | $ | 1.35 | $ | 1.11 | $ | 2.37 | $ | 1.92 |
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Net income | 145,246 | 158,494 | 218,475 | 137,038 | ||||||||||||
Non-GAAP Adjustments: | ||||||||||||||||
Non-cash deferred compensation (1) | 792 | 1,029 | 1,583 | 2,482 | ||||||||||||
Non-cash share-based compensation (2) | 16,204 | 2,334 | 31,449 | 14,339 | ||||||||||||
Secondary Equity Offerings’ expenses (3) | — | 1,022 | — | 1,022 | ||||||||||||
Severance payments and other fees (4) | 869 | 3,289 | 2,899 | 13,676 | ||||||||||||
Management NCL Corporation Units exchange expenses (5) | — | — | — | 624 | ||||||||||||
Acquisition of Prestige expenses (6) | 1,273 | 10,891 | 3,014 | 11,291 | ||||||||||||
Deferred revenue (7) | 297 | 7,294 | 757 | 28,488 | ||||||||||||
Amortization of intangible assets (8) | 5,267 | 20,913 | 10,535 | 39,059 | ||||||||||||
Contingent consideration adjustment (9) | — | (34,300 | ) | — | (43,400 | ) | ||||||||||
Derivative adjustment (10) | 10,911 | 650 | (1,185 | ) | 29,603 | |||||||||||
Deferred financing fees and other (11) | 11,714 | — | 11,714 | — | ||||||||||||
Adjusted Net Income | $ | 192,573 | $ | 171,616 | $ | 279,241 | $ | 234,222 | ||||||||
Diluted weighted–average shares outstanding | 227,884,704 | 230,228,144 | 227,997,970 | 229,664,210 | ||||||||||||
Diluted earnings per share | $ | 0.64 | $ | 0.69 | $ | 0.96 | $ | 0.60 | ||||||||
Adjusted EPS | $ | 0.85 | $ | 0.75 | $ | 1.22 | $ | 1.02 |
(1) | Non-cash deferred compensation expenses related to the crew pension plan and other crew expenses, which are included in payroll and related expense. |
(2) | Non-cash share-based compensation expenses related to equity awards, which are included in marketing, general and administrative expense and payroll and related expense. |
(3) | Expenses related to the Secondary Equity Offerings, which are included in marketing, general and administrative expense. | |
(4) | Severance payments and other expenses related to restructuring costs and other severance arrangements, which are included in marketing, general and administrative expense. | |
(5) | Expenses related to the exchange of Management NCL Corporation Units for ordinary shares, which are included in marketing, general and administrative expense. | |
(6) | Expenses related to the Acquisition of Prestige, which are included in marketing, general and administrative expense. | |
(7) | Deferred revenue fair value adjustments related to the Acquisition of Prestige that were made pursuant to business combination accounting rules, which are primarily included in Net Revenue. |
(8) | Amortization of | |
(9) | Contingent consideration fair value adjustment related to the Acquisition of Prestige, which is included in marketing, general and administrative expense. | |
(10) | Losses and net gains for the fair value adjustment of a foreign exchange collar which does not receive hedge accounting and losses due to the dedesignation of certain fuels swaps. These adjustments are included in other expense. | |
(11) | Primarily related to the write-off of deferred financing fees related to the refinancing of certain credit facilities, which is included in interest expense, net. |
EBITDA and Adjusted EBITDA were calculated as follows (in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Net income | $ | 145,246 | $ | 158,494 | $ | 218,475 | $ | 137,038 | ||||||||
Interest expense, net | 68,420 | 52,446 | 128,174 | 103,435 | ||||||||||||
Income tax expense | 2,599 | 2,726 | 3,703 | 3,403 | ||||||||||||
Depreciation and amortization expense | 104,610 | 104,607 | 205,905 | 204,583 | ||||||||||||
EBITDA | 320,875 | 318,273 | 556,257 | 448,459 | ||||||||||||
Other expense (1) | 10,753 | 3,717 | 7,948 | 33,856 | ||||||||||||
Non-GAAP Adjustments: | ||||||||||||||||
Non-cash deferred compensation (2) | 792 | 1,029 | 1,583 | 2,482 | ||||||||||||
Non-cash share-based compensation (3) | 16,204 | 2,161 | 31,449 | 14,166 | ||||||||||||
Secondary Equity Offerings’ expenses (4) | — | 1,022 | — | 1,022 | ||||||||||||
Severance payments and other fees (5) | 869 | 3,289 | 2,899 | 13,676 | ||||||||||||
Management NCL Corporation Units exchange expenses (6) | — | — | — | 624 | ||||||||||||
Acquisition of Prestige expenses (7) | 1,273 | 10,891 | 3,014 | 11,291 | ||||||||||||
Deferred revenue (8) | 297 | 7,294 | 757 | 28,488 | ||||||||||||
Contingent consideration adjustment (9) | — | (34,300 | ) | — | (43,400 | ) | ||||||||||
Adjusted EBITDA | $ | 351,063 | $ | 313,376 | $ | 603,907 | $ | 510,664 |
(2) | Non-cash deferred compensation expenses related to the crew pension plan and other crew expenses, which |
(3) | Non-cash share-based compensation expenses related to equity awards, which are included in marketing, general and administrative expense and payroll and related expense. |
(4) | Expenses related to the Secondary Equity Offerings, which are included in marketing, general and administrative expense. |
(5) | Severance payments and other expenses related to restructuring costs and other severance arrangements, which are included in marketing, general and administrative expense. |
(6) | Expenses related to the exchange of Management NCL Corporation Units for ordinary shares, which are included in marketing, general and administrative expense. |
(7) | Expenses related to the Acquisition of Prestige, which are included in marketing, general and administrative expense. |
(8) | Deferred revenue fair value adjustments related to the Acquisition of Prestige that were made pursuant to business combination accounting rules, which are primarily included in Net Revenue. |
(9) |
Contingent consideration fair value adjustment related to the Acquisition of Prestige, which is included in marketing, general and administrative expense. |
EBITDA and Adjusted EBITDA was calculated as follows (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Net income attributable to Norwegian Cruise Line Holdings Ltd. | $ | 251,787 | $ | 201,078 | $ | 388,825 | $ | 363,961 | ||||||||
Interest expense, net | 49,784 | 32,284 | 153,219 | 95,316 | ||||||||||||
Income tax (benefit) expense | 3,528 | 2,502 | 6,931 | (3,761 | ) | |||||||||||
Depreciation and amortization expense | 109,798 | 63,786 | 314,381 | 188,885 | ||||||||||||
EBITDA | 414,897 | 299,650 | 863,356 | 644,401 | ||||||||||||
Net income attributable to non-controlling interest | — | 2,200 | — | 4,288 | ||||||||||||
Other (income) expense | 1,733 | (3,242 | ) | 35,589 | (3,305 | ) | ||||||||||
Non-GAAP Adjustments: | ||||||||||||||||
Non-cash deferred compensation (1) | 3,277 | 2,535 | 5,759 | 5,144 | ||||||||||||
Non-cash share-based compensation (2) | 13,691 | 4,473 | 27,857 | 9,552 | ||||||||||||
Secondary Equity Offerings’ expenses (3) | 362 | — | 1,384 | 2,075 | ||||||||||||
Severance payments and other fees (4) | 1,369 | — | 15,045 | — | ||||||||||||
Management NCL Corporation Units exchange expenses (5) | — | — | 624 | — | ||||||||||||
Acquisition of Prestige expenses (6) | 6,098 | 20,268 | 17,389 | 20,268 | ||||||||||||
Deferred revenue (7) | 3,026 | — | 31,514 | — | ||||||||||||
Contingent consideration adjustment (8) | — | — | (43,400 | ) | — | |||||||||||
Contract termination expenses (9) | 3,319 | — | 3,319 | — | ||||||||||||
Other (10) | — | 810 | — | 2,943 | ||||||||||||
Adjusted EBITDA | $ | 447,772 | $ | 326,694 | $ | 958,436 | $ | 685,366 |
Three months ended SeptemberJune 30, 20152016 (“2015”2016”) compared to three months ended SeptemberJune 30, 20142015 (“2014”2015”)
Revenue
Total revenue increased 41.7%9.3% to $1.3$1.2 billion in 2016 compared to $1.1 billion in 2015 comparedprimarily due to $0.9 billionan increase in 2014.Capacity Days and improved pricing. Gross Yield was relatively unchanged. Net Revenue in 20152016 increased 40.4%11.2% to $975.2$917.5 million from $694.4$825.1 million in 20142015 due to an increase in Capacity Days of 17.6%9.4% and an increase in Net Yield of 19.4%1.7%.The increase in Capacity Days was primarily due to the Acquisitiondelivery of Prestige.Norwegian Escape in October 2015 and Sirena joining our fleet in April 2016 slightly offset by the scheduled Dry-docks. The increase in Net Yield was primarily due to an increase in passenger ticket pricing and higher onboard and other revenue.improved pricing. Adjusted Net Revenue includes a deferred revenue fair value adjustment of $3.0$7.3 million in 2015 related to the Acquisition of Prestige. On a Constant Currency basis, Net Yield and Adjusted Net Yield increased 22.3%2.0% and 22.7%1.2%, respectively, in 20152016 compared to 2014.2015.
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Expense
Gross Cruise Cost increased 12.0% in 2016 compared to 2015 due to an increase in total cruise operating expense and marketing, general and administrative expense. Total cruise operating expense increased 40.4%7.6% in 20152016 compared to 20142015 primarily due to the increase in Capacity Days as discussed above.above and an increase in Dry-dock expenses. Total other operating expense increased 61.8%19.9% in 20152016 compared to 20142015 primarily due to the amortization expense related to the Prestige intangible assets and depreciation expense related to the Prestige ships as well as an increase in marketing, general and administrative expenses, primarilywhich included an increase in share-based compensation expense of $11.8 million. The increase was also due to recognition of a $34.3 million contingent consideration adjustment related to the Acquisition of Prestige which resulted in a reduction to expense in 2015 but not in 2016. Depreciation and amortization expense was relatively unchanged as the increase due to the addition of Norwegian Escape and ship improvement projects in 2016 was offset by the recognition in 2015 of an incremental $15.6 million of amortization of intangible assets due to the Acquisition of Prestige. On a Capacity Day basis, Net Cruise Cost increased 20.0% (21.2%6.5% (6.6% on a Constant Currency basis) due to certain crew relatedthe increases in expenses and an increasediscussed above partially offset by a decrease in marketing, general and administrative expenses as discussed above.fuel expense which was primarily due to a 15.9% decrease in the average fuel price to $469 per metric ton in 2016 from $558 per metric ton in 2015. Adjusted Net Cruise Cost Excluding Fuel per Capacity Day increased 30.5% (32.1%4.0% (4.1% on a Constant Currency basis) primarily due to the increase in certain expenses discussed above. We refer you to the “Results of Operations” above for a reconciliation of Gross Cruise Cost to Adjusted Net Cruise Cost Excluding Fuel.
Interest expense, net increased to $49.8$68.4 million in 20152016 from $32.3$52.4 million in 20142015 primarily due to an increase in average debt balances outstanding in connectionprimarily associated with the Acquisitiondelivery of Prestige. Norwegian Escape in October 2015 and slightly higher interest rates due to an increase in LIBOR rates. The increase in interest expense, net also includes a write-off of $11.4 million of deferred financing fees related to the refinancing of certain of our credit facilities.
Other income (expense)expense was an expense of $1.7$10.8 million in 20152016 compared to income of $3.2$3.7 million in 20142015. In 2016, the expense was primarily related to unrealized and realized losses on fuel swap derivative hedge contracts and foreign exchange derivative hedge contracts partially offset by gains on foreign currency exchange. In 2015, the expense recorded fromwas primarily related to the dedesignation of certain fuel swap derivative hedge contracts and the ineffectiveness of settled fuel swaps in 2015. The expense in 2015 was partially offset by income related to the fair value adjustment offor a foreign exchange collar which does not receive hedge accounting treatment and foreign currency transaction gains.treatment.
In 2015,2016, we had an income tax expense of $3.5$2.6 million compared to $2.5$2.7 million in 2014.2015.
NineSix months ended SeptemberJune 30, 2016 (“2016”) compared to six months ended June 30, 2015 (“2015”) compared to nine months ended September 30, 2014 (“2014”)
Revenue
Total revenue increased 41.6% to $3.3 billion in 2015 compared11.9% to $2.3 billion in 2014.2016 compared to $2.0 billion in 2015 primarily due to an increase in Capacity Days and improved pricing. Gross Yield increased slightly. Net Revenue in 20152016 increased 40.2%14.5% to $2.5$1.8 billion from $1.8$1.5 billion in 20142015 due to an increase in Capacity Days of 19.5%10.8% and an increase in Net Yield of 17.3%3.4%.The increase in Capacity Days was primarily due to the Acquisition of Prestige and the operationdelivery of Norwegian Getaway forEscape in October 2015 slightly offset by the entire nine months of 2015.scheduled Dry-docks in 2016. The increase in Net Yield was primarily due to an increase in passenger ticket pricing and higher onboard and other revenue.improved pricing. Adjusted Net Revenue includes a deferred revenue fair value adjustment of $31.5$28.5 million in 2015 related to the Acquisition of Prestige. On a Constant Currency basis, Net Yield and Adjusted Net Yield increased 19.4%4.1% and 20.9%2.3%, respectively, in 20152016 compared to 2014.2015.
Expense
Gross Cruise Cost increased 10.3% in 2016 compared to 2015 due to an increase in total cruise operating expense and marketing, general and administrative expense. Total cruise operating expense increased 39.9%7.1% in 20152016 compared to 20142015 primarily due to the increase in Capacity Days as discussed above.above and an increase in Dry-dock expenses. Total other operating expense increased 60.5%15.0% in 20152016 compared to 20142015 primarily due to an increase in marketing, general and administrative expenses primarilywhich included an increase in advertising expenses of $12.5 million and share-based compensation of $13.6 million. The increase was also due to recognition of a $43.4 million contingent consideration adjustment related to the Acquisition of Prestige including certain restructuringwhich resulted in a reduction to expense in 2015 but not in 2016. Depreciation and severance costs, as well as amortization expense relatedwas relatively unchanged as the increase due to the Prestige intangible assetsaddition of Norwegian Escape and depreciation expense related to the Prestige ships. Thisship improvement projects in 2016 was partially offset by the adjustment for the contingent consideration relatedrecognition in 2015 of an incremental $28.5 million of amortization of intangible assets due to the Acquisition of Prestige. On a Capacity Day basis, Net Cruise Cost increased 17.7% (18.5%2.4% (2.6% on a Constant Currency basis) due to an increasethe increases in marketing, general and administrative expenses as discussed above and certain crew related expenses partially offset by thea decrease in fuel expense which was primarily the result of an 13.5%due to a 16.4% decrease in the average fuel price to $550$453 per metric ton in 20152016 from $636$542 per metric ton in 2014.2015. Adjusted Net Cruise Cost Excluding Fuel per Capacity Day increased 26.8% (27.8%2.6% (2.8% on a Constant Currency basis) primarily due to the increase in certain expenses discussed above. We refer you to the “Results of Operations” above for a reconciliation of Gross Cruise Cost to Adjusted Net Cruise Cost Excluding Fuel.
Interest expense, net increased to $153.2$128.2 million in 20152016 from $95.3$103.4 million in 20142015 primarily due to an increase in average debt balances outstanding in connectionprimarily associated with the Acquisitiondelivery of Prestige. Norwegian Escape in October 2015 as well as higher interest rates due
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to an increase in LIBOR rates. The increase in interest expense, net also includes a write-off of $11.4 million of deferred financing fees related to the refinancing of certain of our credit facilities.
Other income (expense)expense was an expense of $35.6$7.9 million in 20152016 compared to incomean expense of $3.3$33.9 million in 20142015. In 2016, the expense was primarily related to unrealized and realized losses on fuel swap derivative hedge contracts and losses on foreign exchange partially offset by gains on foreign exchange derivative hedge contracts. In 2015, the expense fromwas primarily related to the dedesignation of certain fuel swap derivative hedge contracts and the ineffectiveness of settled fuel swaps in 2015. Also included in 2015 was the expense related to the fair value adjustment offor a foreign exchange collar which does not receive hedge accounting treatment.
In 2015,2016, we had an income tax expense of $6.9 million. In 2014, we had an income tax benefit of $3.8 million. During the fourth quarter of 2013, we completed the implementation of a global tax platform, which had a favorable impact on the amount of income subject$3.7 million compared to U.S. corporate tax. This favorable impact continued through calendar year 2014. In addition, during the first quarter of 2014, we received information which allowed us to elect a tax method to calculate deductible interest expense resulting$3.4 million in a tax benefit of $11.1 million including a $5.3 million non-recurring benefit that has been excluded from Adjusted Net Income and Adjusted EPS for the nine months ended September 30, 2014.2015.
Liquidity and Capital Resources
General
As of SeptemberJune 30, 2015,2016, our liquidity was $855.2$817.0 million consisting of $230.2$146.0 million in cash and cash equivalents and $625.0$671.0 million which is the full amount available under our New Revolving Loan Facility. Our primary ongoing liquidity requirements are to finance working capital, capital expenditures and debt service.
As of SeptemberJune 30, 2015,2016, we had a working capital deficit of $2.0$2.2 billion. This deficit included $1.1$1.4 billion of advance ticket sales, which represents the passenger ticket revenue we collect in advance of sailing dates, and accordingly, are substantially more like deferred revenue balances rather than actual current cash liabilities. Our business model, along with our New Revolving Loan Facility, allows us to operate with a working capital deficit and still meet our operating, investing and financing needs.
We evaluate potential sources of additional liquidity, including the capital markets, in the ordinary course of business. We believe that prevailing market conditions, particularly in the debt capital markets, are generally favorable. We will continue to evaluate opportunities to increase our liquidity in the near term, taking into consideration our current and expected requirements, our assessment of prevailing market conditions and expectations regarding future conditions, and the contractual and other restrictions to which we are subject.
Sources and Uses of Cash
In this section, references to “2016” refer to the six months ended June 30, 2016 and references to “2015” refer to the ninesix months ended SeptemberJune 30, 2015 and references to “2014” refer to the nine months ended September 30, 2014.2015.
Net cash provided by operating activities was $973.5$748.0 million in 20152016 as compared to $700.7$711.7 million in 2014.2015. The change in net cash provided by operating activities reflects net income in 2016 of $218.5 compared to a net income in 2015 of $137.0 million. The net cash provided by operating activities included timing differences in cash receipts and payments relating to operating assets and liabilities with advance ticket sales of $308.7 million in 2015 compared to $85.6 million in 2014.liabilities.
Net cash used in investing activities was $331.6$799.0 million in 2015,2016, primarily related to payments for our newbuildthe delivery of Seven Seas Explorer, ship improvements, ships and ship improvementsunder construction and shoreside projects. Net cash used in investing activities was $864.8$205.1 million in 2014,2015, primarily related to the payments for delivery of Norwegian Getaway as well as payments related to our Breakaway Plus Class Ships and other ship improvements, ships under construction and shoreside projects.
Net cash provided by financing activities was $81.0 million in 2016 primarily due to net proceeds of our New Revolving Loan Facility and other loan facilities partially offset by the repurchase of our ordinary shares and deferred financing fees and other in 2016. Net cash used in financing activities was $496.6$418.5 million in 2015 primarily due to net repayments of our Revolving Loan Facility and other loan facilities. Net cash provided by financing activities was $163.5 million in 2014, primarily due to proceeds from the Breakaway Two Credit Facility and credit facilities related to our Breakaway Plus Class Ships partially offset by repayments of our Revolving Loan Facility and other borrowings.
Future Capital Commitments
Future capital commitments consist of contracted commitments, including ship construction contracts, and future expected capital expenditures necessary for operations.operations as well as our ship refurbishment projects. As of SeptemberJune 30, 2015,2016, anticipated capital expenditures were $0.9$0.2 billion for the remainder of 2015,2016 and $1.0 billion and $1.1$1.3 billion for each of the years ending December 31, 20162017 and 2017, respectively,2018, of which we have export credit financing in place for the expenditures related to ship construction contracts of $0.6 billion$47.8 million for the remainder of 2015, $0.5 billion for 2016, and $0.6 billion for 2017.2017 and $0.7 billion for 2018. These future expected capital expenditures will significantly increase our depreciation and amortization expense.
Norwegian Escape was delivered in October 2015. We have threeNorwegian Joy and two other Breakaway Plus Class Ships on order with Meyer Werft shipyard for delivery in the spring of 2017, spring of 2018 and fall of 2019.2019, respectively. These ships will be the largest in our fleet, reaching approximately 164,600 Gross Tons and approximately 4,000 Berths each.Tons. The combined contract price of these three ships is approximately €2.5€2.6 billion, or $2.8$2.9 billion based on the euro/U.S. dollar exchange rate as of SeptemberJune 30, 2015.2016. We have export credit financing in place that provides financing for 80% of their contract prices. In June 2016, we took delivery of Seven Seas Explorer. We also have a contractan additional Explorer Class Ship on order with Fincantieri shipyard to build a luxury cruise ship to be named Seven Seas Explorer. Thewith an original contract price of the ship is approximately €367.2€422.0 million, or approximately $410.4$468.7 million based on the euro/U.S. dollar exchange rate as of SeptemberJune 30, 2015.2016. We have export credit financing in place that provides financing for 80% of the ship’s contract price. Seven SeasThe additional Explorer Class Ship is expected to be delivered in the summerwinter of 2016.2020.
In connection with the contracts to build these ships, we do not anticipate any contractual breaches or cancellation to occur. However, if any would occur, it could result in, among other things, the forfeiture of prior deposits or payments made by us, subject to certain refund guarantees, and potential claims and impairment losses which may materially impact our business, financial condition and results of operations.
Capitalized interest for the three and ninesix months ended SeptemberJune 30, 20152016 was $9.1$8.9 million and $24.2$16.0 million, respectively, and for the three and ninesix months ended SeptemberJune 30, 20142015 was $5.5$7.4 million and $14.7$15.1 million, respectively, primarily associated with the construction of our Breakaway Plus Class Ships.
Off-Balance Sheet Transactions
None.
Contractual Obligations
As of SeptemberJune 30, 2015,2016, our contractual obligations with initial or remaining terms in excess of one year, including interest payments on long-term debt obligations, were as follows (in thousands):
Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | ||||||||||||||||
Long-term debt (1) | $ | 5,683,741 | $ | 587,504 | $ | 2,156,897 | $ | 1,316,504 | $ | 1,622,836 | ||||||||||
Due to Affiliate (2) | 38,923 | 38,923 | — | — | — | |||||||||||||||
Operating leases (3) | 147,672 | 11,980 | 24,870 | 25,199 | 85,623 | |||||||||||||||
Ship construction contracts (4) | 3,821,206 | 1,276,121 | 1,716,126 | 828,959 | — | |||||||||||||||
Port facilities (5) | 199,218 | 18,703 | 53,279 | 43,657 | 83,579 | |||||||||||||||
Interest (6) | 749,298 | 172,004 | 288,461 | 166,020 | 122,813 | |||||||||||||||
Other (7) | 126,211 | 48,739 | 36,787 | 14,617 | 26,068 | |||||||||||||||
Total | $ | 10,766,269 | $ | 2,153,974 | $ | 4,276,420 | $ | 2,394,956 | $ | 1,940,919 |
Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | ||||||||||||||||
Long-term debt (1) | $ | 6,681,472 | $ | 581,804 | $ | 1,098,874 | $ | 3,347,485 | $ | 1,653,309 | ||||||||||
Operating leases (2) | 154,896 | 13,857 | 29,326 | 28,997 | 82,716 | |||||||||||||||
Ship construction contracts (3) | 3,212,792 | 951,838 | 1,113,418 | 1,147,536 | — | |||||||||||||||
Port facilities (4) | 280,723 | 43,177 | 67,001 | 53,843 | 116,702 | |||||||||||||||
Interest (5) | 1,008,903 | 211,013 | 383,754 | 252,439 | 161,697 | |||||||||||||||
Other (6) | 158,625 | 56,370 | 48,848 | 29,985 | 23,422 | |||||||||||||||
Total | $ | 11,497,411 | $ | 1,858,059 | $ | 2,741,221 | $ | 4,860,285 | $ | 2,037,846 |
(1) |
Primarily for offices, motor vehicles and office equipment. |
(3) | For our newbuild ships based on the euro/U.S. dollar exchange rate as of |
(4) | Primarily for our usage of certain port facilities. |
(5) | Includes fixed and variable rates with LIBOR held constant as of |
(6) | Future commitments for service and maintenance contracts and other Business Enhancement Capital |
AsThe table above does not include $11.2 million of September 30, 2015, we had a liability for unrecognized tax benefits and an accrual for the payment of related interest and penalties totaling $11.4 million. Due to the uncertainties related to these tax matters, we are unable to make a reasonably reliable estimate when cash settlement with a taxing authority will occur in relation to these liabilities.benefits.
Other
Certain of our service providers may require collateral in the normal course of our business. The amount of collateral may change based on certain terms and conditions.
As a routine part of our business, depending on market conditions, exchange rates, pricing and our strategy for growth, we regularly consider opportunities to enter into contracts for the building of additional ships. We may also consider the sale of ships, potential acquisitions and strategic alliances. If any of these were to occur, they may be financed through the incurrence of additional permitted indebtedness, through cash flows from operations, or through the issuance of debt, equity or equity-related securities.
Funding Sources
Our debt agreements contain covenants that, among other things, require us to maintain a minimum level of liquidity, as well as limit our net funded debt-to-capital ratio, maintain certain other ratios and restrict our ability to pay dividends. Our ships and substantially all other property and equipment are pledged as collateral for substantially all of our debt. We believe we were in compliance with these covenants as of SeptemberJune 30, 2015.2016.
The impact of changes in world economies and especially the global credit markets has created a challenging environment and may reduce future consumer demand for cruises and adversely affect our counterparty credit risks. In the event this environment deteriorates, our business, financial condition and results of operations could be adversely impacted.
We believe our cash on hand, expected future operating cash inflows, additional available borrowings under our New Revolving Loan Facility and our ability to issue debt securities or raise additional equity, will be sufficient to fund operations, debt payment requirements, capital expenditures and maintain compliance with covenants under our debt agreements over the next twelve-month
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period. There is no assurance that cash flows from operations and additional financings will be available in the future to fund our future obligations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
General
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. The financial impacts of these derivative instruments are primarily offset by corresponding changes in the underlying exposures being hedged. We achieve this by closely matching the amount, term and conditions of the derivatives with the underlying risk being hedged. We do not hold or issue derivatives for trading or other speculative purposes. Derivative positions are monitored using techniques including market valuations and sensitivity analyses.
Interest Rate Risk
As of SeptemberJune 30, 2015,2016, we had interest rate swap agreements to mitigatehedge our exposure to interest rate movements and to manage our interest expense. As of SeptemberJune 30, 2015, 61%2016, 55% of our debt was fixed and 39%45% was variable, which includes the effects of the interest rate swaps. The notional amount of outstanding debt associated with the interest rate swap agreements as of SeptemberJune 30, 20152016 was $1.1 billion.$366.3 million. Based on our SeptemberJune 30, 20152016 outstanding variable rate debt balance, a one percentage point increase in annual LIBOR interest rates would increase our annual interest expense by approximately $24.1$30.1 million excluding the effects of capitalization of interest.
Foreign Currency Exchange Rate Risk
As of SeptemberJune 30, 2015,2016, we had foreign currency derivatives to hedge the exposure to volatility in foreign currency exchange rates related to our ship construction contracts denominated in euros. These derivatives hedge the foreign currency exchange rate risk on a portion of the payments on our ship construction contracts and forecasted Dry-dock payments.contracts. The payments not hedged aggregate €2.1 billion,€506.4 million, or $2.3 billion$562.4 million based on the euro/U.S. dollar exchange rate as of SeptemberJune 30, 2015.2016. We estimate that a 10% change in the euro as of SeptemberJune 30, 20152016 would result in a $238.8$56.2 million change in the U.S. dollar value of the foreign currency denominated remaining payments.
Fuel Price Risk
Our exposure to market risk for changes in fuel prices relates to the forecasted purchases of fuel on our ships. Fuel expense, as a percentage of our total cruise operating expense, was 12.4%11.4% and 15.6%14.0% for the three months ended SeptemberJune 30, 20152016 and 2014,2015, respectively, and 13.4%11.8% and 16.6%14.0% for the ninesix months ended SeptemberJune 30, 20152016 and 2014,2015, respectively. We use fuel derivative agreements to mitigate the financial impact of fluctuations in fuel prices and as of SeptemberJune 30, 2015,2016, we had hedged approximately 59%88%, 59%82%, 54%, 42%55% and 8%50% of our 2015,remaining 2016, 2017, 2018 and 2019 projected metric tons of fuel purchases, respectively. We estimate that a 10% increase in our weighted-average fuel price would increase our anticipated remaining 20152016 fuel expense by $6.7$13.0 million. This increase would be partially offset by an increase in the fair value of our fuel swap agreements of $2.5$8.0 million. Fair value of our derivative contracts is derived using valuation models that utilize the income valuation approach. These valuation models take into account the contract terms such as maturity, as well as other inputs such as fuel types, fuel curves, creditworthiness of the counterparty and the Company, as well as other data points.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management has evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures, as such term is defined in Exchange Act Rule 13a-15(e), as of SeptemberJune 30, 2015.2016. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon our management’s evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of SeptemberJune 30, 20152016 to provide reasonable assurance that the information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange
Commission, and that it is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
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Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting during the quarter ended SeptemberJune 30, 20152016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on the Effectiveness of Controls
It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system will be met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there is only the reasonable assurance that our controls will succeed in achieving their goals under all potential future conditions.
In 2015, the Alaska Department of Environmental Conservation issued Notices of Violations to major cruise lines that operated in the state of Alaska, including Norwegian, for alleged violations of the Alaska Marine Vessel Visible Emission Standards that occurred over the last several years. We are cooperating with the Alaska Department of Environmental Conservation and conducting our own internal investigation into these matters. However, we do not believe the ultimate outcome will have a material impact on our financial condition, results of operations or cash flows.
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. We intend to vigorously defend our legal position on all claims and, to the extent necessary, seek recovery.
We refer you to our 20142015 Annual Report on Form 10-K for a discussion of the risk factors that affect our business and financial results. We wish to caution the reader that the risk factors discussed in “Item“Item 1A. Risk Factors”Factors” in our 20142015 Annual Report on Form 10-K, and those described below and elsewhere in this report or other Securities and Exchange Commission filings, could cause future results to differ materially from those stated in any forward-looking statements.
Other than the risk factors set forth below, there have been no material changes to our risk factors disclosed in our 2015 Annual Report on Form 10-K. The first risk factor below is an amended and restated version of a risk factor included in “Item 1A. Risk Factors” in our 2015 Annual Report on Form 10-K:
Our hedging strategiesConducting business internationally may not be cost-effective or adequately protect us fromresult in increased costs relatedand risks.
We operate our business internationally and plan to continue to develop our international presence. Operating internationally exposes us to a number of risks, including political risks, risks of increases in duties and taxes, risks relating to anti-bribery laws, as well as risks that laws and policies affecting cruising, vacation or maritime businesses, or governing the operations of foreign-based companies may change. Additional risks include imposition of trade barriers, restrictions on repatriation of earnings, withholding and other taxes on remittances and other payments by subsidiaries and changes in fuel prices.and application of foreign taxation structures, including value added taxes. If we are unable to address these risks adequately, our business, financial condition and results of operations could be materially and adversely affected.
Operating internationally also exposes us to numerous and sometimes conflicting legal and regulatory requirements. In ordermany parts of the world, including countries in which we operate, practices in the local business communities might not conform to manage risks associated withinternational business standards. We have implemented safeguards and policies to prevent violations of various anti-corruption laws that prohibit improper payments or offers of payments to foreign governments and their officials for the variable market pricespurpose of fuel,obtaining or retaining business by our employees and agents. However, our existing safeguards and policies and any future improvements may prove to be less than effective and our employees or agents may engage in conduct prohibited by our policies, but for which we routinely hedgenevertheless may be held responsible. If our employees or agents violate our policies, if we fail to maintain adequate record-keeping and internal accounting practices to accurately record our transactions or if we fail to implement or maintain other adequate safeguards, we may be subject to regulatory sanctions or severe criminal or civil sanctions and penalties.
We have operations in and source passengers from the United Kingdom and other member countries of the European Union. On June 23, 2016, voters in the United Kingdom approved an advisory referendum to withdraw from the European Union. The proposed withdrawal has resulted in increased volatility in the global financial markets and caused severe volatility in global currency exchange rate fluctuations that resulted in the strengthening of the U.S. dollar against foreign currencies, such as the euro, in which we do business. The proposed withdrawal could potentially adversely affect tax, legal and regulatory regimes to which our business in the region is subject. The withdrawal could also, among other potential outcomes, disrupt the free movement of goods, services and people between the United Kingdom and the European Union. Further, uncertainty around these issues could lead to adverse effects on the economy of the United Kingdom and the other economies in which we operate making it more difficult to source passengers from these regions. These events could have a portionmaterial adverse effect on our business, financial condition and results of operations.
An impairment of our future fuel requirements. However, our hedging program may not be successful in mitigating higher fuel costs, and any price protection provided may be limited due to market conditions, including choice of hedging instruments, breakdown of correlation between hedging instrument and market price of fuel and failure of hedge counterparties. To the extent that we use hedge contracts that have the potential to create an obligation to pay upon settlement if fuel prices decline significantly, such hedge contracts may limit our ability to benefit fully from lower fuel costs in the future. There can be no assurance that our hedging arrangements will be cost-effective, will provide any particular level of protection against rises in fuel pricestradenames or that our counterparties will be able to perform under our hedging arrangements. Additionally, deterioration in our financial condition could negatively affect our ability to enter into new hedge contracts in the future.
Despite our substantial indebtedness, we may still be able to incur significantly more debt, which could further limit cash flow available for our operations andgoodwill could adversely affect our financial condition operations, prospects and flexibility.operating results.
We evaluate tradenames and goodwill for impairment on an annual basis, or more frequently when circumstances indicate that the carrying value of a reporting unit may not be ablerecoverable. Several factors including a challenging operating environment, impacts affecting consumer demand or spending, the deterioration of general macroeconomic conditions, or other factors could result in a change to incur substantial additional indebtedness at any timethe future cash flows we expect to derive from our operations. Reductions of the cash flows used in the future. Althoughimpairment analyses may result in the termsrecording of the agreements governing our indebtedness contain restrictions on our ability to incur additional indebtedness, these restrictions are subjectan impairment charge to a number of important qualifications and exceptions, and the indebtedness incurred in compliance with these restrictions could be substantial.
If our cash flows and capital resources are insufficient to meet our liquidity needs, we may be forced to reducereporting unit’s tradename or delay capital expenditures, seek additional capital, restructure or refinance our indebtedness or sell assets. 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.goodwill. We will continue to evaluate opportunities to increase our liquidity in the near term, taking into consideration our currentmonitor these intangible assets for potential impairment and expected requirements, our assessment of prevailing market conditions and expectations regarding future conditions, and the contractual and other restrictions to which we are subject.
An increase in our level of indebtedness could further limit cash flow available for our operations and could adversely affect our financial condition, operations, prospects and flexibility. Our substantial indebtedness could:
• make it more difficult for us to satisfy our obligations with respect to our indebtedness, and any failure to comply with the obligations of anyperform interim testing of our debt instruments, including restrictive covenants and borrowing conditions, could result in an event of default under the agreements governing our indebtedness;
Any adverse findings from our assessment of our internal controls could result in a loss of investor confidence in our financial reports, significant expenses to remediate any internal control deficiencies and could ultimately have an adverse effect on our share price.
As a public company, we are subject to the internal control provisions of Section 404 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) which requires, among other things, that we maintain effective internal control over financial reporting. We cannot be certain that our internal control measures will continue to provide adequate control over our financial processes and reporting and ensure compliance with Section 404 of the Sarbanes-Oxley Act. Furthermore, as we grow our business or acquire other businesses, our internal controls may become more complex and we may require significantly more resources to ensure they remain effective. Failure to implement required new or improved controls, or difficulties encountered in their implementation, either in our existing business or in businesses that we may acquire, could harm our operating results or cause us to fail to meet our reporting obligations. We are in the process of integrating our internal control over financial reporting with Prestige’s controls and procedures. However, there can be no assurance that we will be able to do so effectively in the one-year post-acquisition exemption period or at all.
If we or our independent registered public accounting firm identify material weaknesses in our internal controls, the disclosure of that fact, even if quickly remedied, may cause investors to lose confidence in our financial statements and the trading price of our ordinary shares may decline.necessary.
Remediation of a material weakness could require us to incur significant expense and if we fail to remedy any material weakness, our financial statements may be inaccurate, our ability to report our financial results on a timely and accurate basis may be adversely affected, the trading price of our ordinary shares may decline, and we may be subject to sanctions or investigation by regulatory authorities. We may also be required to restate our financial statements from prior periods.Contents
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Share repurchase activity duringPurchases of Equity Securities by the three months ended September 30, 2015 was as follows:
Period | Total Number of Shares Purchased(1) | Average Price Paid per Share | Total Number of Shares Purchased as Part of a Publicly Announced Program(2) | Approximate Dollar Value of Shares that May Yet be Purchased Under the Program (in thousands) | ||||||||||||
July 1, 2015 - July 31, 2015 | — | $ | — | — | $ | 418,000 | ||||||||||
August 1, 2015 - August 31, 2015 | 46,225 | $ | 59.72 | — | $ | 418,000 | ||||||||||
September 1, 2015 - September 30, 2015 | 83,396 | $ | 55.94 | 83,396 | $ | 413,335 | ||||||||||
Total for the three months ended September 30, 2015 | 129,621 | $ | 57.29 | 83,396 | $ | 413,335 |
1The total number of shares purchased includes: (i) 46,225 ordinary shares purchased to cover tax withholding obligations for employees who received NCLH’s ordinary shares in the Acquisition of Prestige and were not purchased pursuant to any publicly announced share repurchase programs and (ii) 83,396 shares purchased pursuant to the share repurchase program described in footnote 2 below.Issuer
2On April 29, 2014, NCLH’s Board of Directors authorized, and NCLH announced, a three-year share repurchase program for up to $500.0 million. NCLH may make repurchases in the open market, in privately negotiated transactions, in accelerated repurchase programs or in structured share repurchase programs, and any repurchases may be made pursuant to Rule 10b5-1 plans. This column disclosesThere was no share repurchase activity during the numberthree months ended June 30, 2016 and as of June 30, 2016, $263.5 million remained available for repurchases of our outstanding ordinary shares purchased pursuant tounder the plan during the period.share repurchase program.
2.1 | Agreement and Plan of Merger, dated as of September 2, 2014, by and among Prestige Cruises International, Inc., Norwegian Cruise Line Holdings Ltd., Portland Merger Sub, Inc. and Apollo Management, L.P. (incorporated herein by reference to Exhibit 2.1 to Norwegian Cruise Line Holdings Ltd.’s Form 8-K filed on September 4, 2014 (File No. 001-35784)) |
2.2 | Amendment No. 1 to the Agreement and Plan of Merger, dated as of October 6, 2014, by and among Prestige Cruises International, Inc., Norwegian Cruise Line Holdings Ltd., Portland Merger Sub, Inc. and Apollo Management, L.P. (incorporated herein by reference to Exhibit 2.1 to Norwegian Cruise Line Holdings Ltd.’s Form 8-K filed on October 8, 2014 (File No. 001-35784)) |
10.1* | |
31.1* | Certification of the President and Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 |
31.2* | Certification of the Executive Vice President and Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 |
32.1** | Certifications of the President and Chief Executive Officer and the Executive Vice President and Chief Financial Officer pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934 and Section 1350 of Chapter 63 of Title 18 of the United States Code |
101* | The following unaudited financial statements are from Norwegian Cruise Line Holdings Ltd.’s Quarterly Report on Form 10-Q for the quarter ended |
(i) | the Consolidated Statements of Operations for the three and | |
(ii) | the Consolidated Statements of Comprehensive Income for the three and | |
(iii) | the Consolidated Balance Sheets as of | |
(iv) | the Consolidated Statements of Cash Flows for the | |
(v) | the Consolidated Statements of Changes in | |
(vi) | the Notes to the Consolidated Financial Statements, tagged in summary and detail. |
* | Filed herewith. |
** | Furnished herewith. |
+ | Confidential treatment has been requested with respect to certain portions of this exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission. |
# | Management contract or compensatory plan. |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
NORWEGIAN CRUISE LINE HOLDINGS LTD. (Registrant) | ||
By: | /s/ FRANK J. DEL RIO | |
Name: | Frank J. Del Rio | |
Title: | President and Chief Executive Officer | |
(Principal Executive Officer) | ||
By: | /s/ WENDY A. BECK | |
Name: | Wendy A. Beck | |
Title: | Executive Vice President and Chief Financial | |
Officer | ||
(Principal Financial | ||
Dated: November 4, 2015August 9, 2016