Business Context and Reporting Period
Company: Norwegian Cruise Line Holdings Ltd. (NCLH) and its subsidiary NCL Corporation Ltd. (NCLC).
Reporting Period: Fiscal year ended December 31, 2012.
Corporate Status: This 10-K reflects the financial results of NCLC prior to the consummation of NCLH's Initial Public Offering (IPO) on January 24, 2013. NCLH was formed in February 2011 as a Bermuda exempted company to facilitate the IPO. Following the IPO, NCLH became the parent company of NCLC, holding a 97.3% economic interest. The company operates 11 cruise ships under the "Freestyle Cruising" brand, serving markets in North America, Europe, and the Asia-Pacific region.
Key Financial Metrics (Year Ended Dec 31, 2012)
| Metric | 2012 Value | 2011 Value | Change |
|---|---|---|---|
| Total Revenue | $2,276.2 million | $2,219.3 million | +2.6% |
| Net Revenue (Non-GAAP) | $1,691.8 million | $1,639.3 million | +3.2% |
| Operating Income | $357.1 million | $316.1 million | +13.0% |
| Net Income | $168.6 million | $126.9 million | +32.8% |
| Adjusted EBITDA (Non-GAAP) | $555.6 million | $506.0 million | +9.8% |
| Adjusted EBITDA Margin | 24.4% | 22.8% | +160 bps |
| Long-Term Debt (incl. current) | $2,985.4 million | $3,038.1 million | -1.7% |
| Liquidity | $470.1 million | N/A | N/A |
| Cash & Equivalents | $45.5 million | $58.9 million | -22.7% |
Operational Data:
- Passengers Carried: 1,503,107 (down 1.8% from 2011).
- Capacity Days: 9,602,730 (up 1.6% from 2011).
- Occupancy Percentage: 107.6% (down from 108.2% in 2011).
- Net Yield: $176.18 per Capacity Day (up 1.6% from 2011).
Material Changes vs. Prior Period
- Revenue Growth: Driven primarily by a 1.6% increase in Net Yield due to higher passenger ticket pricing, offsetting a slight decline in passenger volume. Onboard revenue yield increased 27.7% since 2007, driven by casino, beverage, and specialty dining.
- Expense Management: Total cruise operating expenses increased slightly, largely due to a 16.3% increase in average fuel prices ($664/ton in 2012 vs. $571/ton in 2011). However, Net Cruise Cost excluding fuel per Capacity Day decreased 5.3% due to business improvement initiatives.
- Profitability: Operating income margin expanded to 15.7% from 14.3% in 2011. Net income increased significantly due to higher operating income and a reduction in foreign exchange losses compared to prior years.
- Debt Reduction: Total debt decreased by approximately $53 million, aided by the issuance of $100 million in senior unsecured notes in 2012.
Guidance, Outlook, and Risks
Outlook and Capital Commitments:
- Newbuild Program: The company has three ships on order (Norwegian Breakaway, Norwegian Getaway, and Breakaway Plus) with an option for a fourth. Breakaway and Getaway are scheduled for delivery in 2013 and 2014, respectively. Breakaway Plus is scheduled for late 2015.
- Capital Expenditures: Anticipated capital expenditures are $851.0 million for 2013, $855.9 million for 2014, and $888.9 million for 2015. Approximately 80-90% of newbuild costs are financed via export credit facilities.
- Strategy: Focus on "Freestyle Cruising," expanding premium itineraries (Europe, Alaska, Hawaii), and maximizing Net Yield through base-loading strategies and onboard spending.
Key Risks and Contingencies:
- Substantial Indebtedness: The company carries approximately $3.0 billion in debt. A 1% increase in LIBOR would increase annual interest expense by ~$18.2 million. Debt covenants restrict dividends and additional borrowing.
- Fuel Price Volatility: Fuel accounted for 19.2% of cruise operating expenses in 2012. The company hedges approximately 69% of 2013 fuel purchases.
- Regulatory and Tax: The company relies on Section 883 of the U.S. Internal Revenue Code for exemption from U.S. federal income tax on shipping income. This exemption depends on maintaining specific stock ownership tests (Publicly Traded Test).
- Legal Proceedings: Pending class action lawsuits regarding crew wages and retirement benefits. The company intends to vigorously defend these claims.
Investor Verification Checklist
- Debt Covenants: Verify compliance with financial ratios and liquidity requirements under the $750 million revolving credit facility and senior notes.
- Tax Exemption Status: Confirm the company's continued qualification for the Section 883 tax exemption following the IPO and changes in shareholder structure.
- Newbuild Financing: Review the terms and funding status of export credit facilities for Norwegian Breakaway, Getaway, and Breakaway Plus.
- Fuel Hedging: Assess the effectiveness of fuel hedges in mitigating the impact of rising fuel costs on operating margins.
- Legal Exposure: Monitor the status of crew wage class action lawsuits and potential liability accruals.
- Shareholder Structure: Understand the voting rights and control provisions in the Shareholders' Agreement between Genting HK, Apollo Funds, and TPG Viking Funds.