UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

 

FORM 10-Q

 

 

 

 

(Mark One)

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2016

 

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 227,179,962 ordinary shares outstanding as of November 3, 2016.

 

 

 

 

  

  

TABLE OF CONTENTS

 

    Page
PART I. FINANCIAL INFORMATION  
     
Item 1. Financial Statements 1
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 17
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 28
     
Item 4. Controls and Procedures 28
   
PART II. OTHER INFORMATION  
     
Item 1. Legal Proceedings 30
     
Item 1A. Risk Factors 30
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 31
     
Item 6. Exhibits 31
   
SIGNATURES 33

 

 

 Table of Contents

 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Norwegian Cruise Line Holdings Ltd.

Consolidated Statements of Operations

(Unaudited)

(in thousands, except share and per share data)

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2016   2015   2016   2015 
Revenue                    
Passenger ticket  $1,071,815   $948,059   $2,630,405   $2,406,533 
Onboard and other   412,921    336,851    1,118,798    901,992 
Total revenue   1,484,736    1,284,910    3,749,203    3,308,525 
Cruise operating expense                    
Commissions, transportation and other   249,519    225,586    618,492    589,851 
Onboard and other   90,661    84,171    230,416    210,701 
Payroll and related   193,122    170,694    554,741    490,253 
Fuel   86,250    88,829    248,529    267,784 
Food   50,902    46,419    151,674    131,969 
Other   114,280    102,023    351,263    307,143 
Total cruise operating expense   784,734    717,722    2,155,115    1,997,701 
Other operating expense                    
Marketing, general and administrative   174,813    150,558    504,694    411,879 
Depreciation and amortization   111,575    109,798    317,480    314,381 
Total other operating expense   286,388    260,356    822,174    726,260 
Operating income   413,614    306,832    771,914    584,564 
Non-operating income (expense)                    
Interest expense, net   (60,662)   (49,784)   (188,836)   (153,219)
Other expense   (5,333)   (1,733)   (13,281)   (35,589)
Total non-operating income (expense)   (65,995)   (51,517)   (202,117)   (188,808)
Net income before income taxes   347,619    255,315    569,797    395,756 
Income tax expense   (5,241)   (3,528)   (8,944)   (6,931)
Net income  $342,378   $251,787   $560,853   $388,825 
Weighted-average shares outstanding                    
Basic   227,096,142    227,384,616    227,102,560    225,805,901 
Diluted   227,598,607    230,274,756    227,859,617    229,860,900 
Earnings per share                    
Basic  $1.51   $1.11   $2.47   $1.72 
Diluted  $1.50   $1.09   $2.46   $1.69 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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Norwegian Cruise Line Holdings Ltd.

Consolidated Statements of Comprehensive Income

(Unaudited)

(in thousands)

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2016   2015   2016   2015 
Net income  $342,378   $251,787   $560,853   $388,825 
Other comprehensive income (loss):                    
Shipboard Retirement Plan   107    119    323    358 
Cash flow hedges:                    
Net unrealized income (loss)   37,051    (105,227)   112,508    (138,501)
Amount realized and reclassified into earnings   18,327    13,132    76,658    61,582 
Total other comprehensive income (loss)   55,485    (91,976)   189,489    (76,561)
Total comprehensive income  $397,863   $159,811   $750,342   $312,264 

  

The accompanying notes are an integral part of these consolidated financial statements.

 

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Norwegian Cruise Line Holdings Ltd.

Consolidated Balance Sheets

(Unaudited)

(in thousands, except share data)

 

   September 30,
2016
   December 31,
2015
 
Assets          
Current assets:          
Cash and cash equivalents  $155,431   $115,937 
Accounts receivable, net   55,838    44,996 
Inventories   65,983    58,173 
Prepaid expenses and other assets   159,447    121,305 
Total current assets   436,699    340,411 
Property and equipment, net   10,054,220    9,458,805 
Goodwill   1,388,931    1,388,931 
Tradenames   817,525    817,525 
Other long-term assets   245,965    259,085 
Total assets  $12,943,340   $12,264,757 
Liabilities and Shareholders’ Equity          
Current liabilities:          
Current portion of long-term debt  $566,911   $629,840 
Accounts payable   51,494    51,369 
Accrued expenses and other liabilities   520,079    640,568 
Due to Affiliate       20,769 
Advance ticket sales   1,210,505    1,023,973 
Total current liabilities   2,348,989    2,366,519 
Long-term debt   5,815,248    5,767,697 
Other long-term liabilities   242,376    349,661 
Total liabilities   8,406,613    8,483,877 
Commitments and contingencies (Note 9)          
Shareholders’ equity:          
Ordinary shares, $.001 par value; 490,000,000 shares authorized; 232,467,409 shares issued and 227,155,448 shares outstanding at September 30, 2016 and 232,179,786 shares issued and 227,815,301 shares outstanding at December 31, 2015   232    232 
Additional paid-in capital   3,870,040    3,814,536 
Accumulated other comprehensive income (loss)   (223,161)   (412,650)
Retained earnings   1,128,871    568,018 
Treasury shares (5,311,961 and 4,364,485 ordinary shares at September 30, 2016 and December 31, 2015, respectively, at cost)   (239,255)   (189,256)
Total shareholders’ equity   4,536,727    3,780,880 
Total liabilities and shareholders’ equity  $12,943,340   $12,264,757 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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Norwegian Cruise Line Holdings Ltd.

Consolidated Statements of Cash Flows

(Unaudited)

(in thousands)

 

   Nine Months Ended
September 30,
 
   2016   2015 
Cash flows from operating activities          
Net income  $560,853   $388,825 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation and amortization expense   327,366    327,861 
Loss on derivatives   1,007    21,893 
Deferred income taxes, net   707    858 
Gain on contingent consideration       (43,400)
Write-off of deferred financing fees   11,537    195 
Provision for bad debts and inventory   1,767     
Share-based compensation expense   48,289    27,857 
Changes in operating assets and liabilities:          
Accounts receivable, net   (11,286)   (9,563)
Inventories   (9,133)   1,609 
Prepaid expenses and other assets   (16,197)   (599)
Accounts payable   2,551    (57,837)
Accrued expenses and other liabilities   (9,149)   6,996 
Advance ticket sales   180,447    308,691 
Net cash provided by operating activities   1,088,759    973,386 
Cash flows from investing activities          
Additions to property and equipment, net   (915,936)   (330,808)
Settlement of derivatives   (34,300)   1,090 
Investment in trademark       (750)
Net cash used in investing activities   (950,236)   (330,468)
Cash flows from financing activities          
Repayments of long-term debt   (2,687,621)   (908,677)
Repayments to Affiliate   (18,522)   (18,521)
Proceeds from long-term debt   2,687,355    375,751 
Proceeds from the exercise of share options   4,784    66,527 
Proceeds from employee share purchase plan   2,431    858 
Purchases of treasury shares   (49,999)   (7,425)
Deferred financing fees and other   (37,457)   (6,075)
Net cash used in financing activities   (99,029)   (497,562)
Net increase in cash and cash equivalents   39,494    145,356 
Cash and cash equivalents at beginning of period   115,937    84,824 
Cash and cash equivalents at end of period  $155,431   $230,180 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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Norwegian Cruise Line Holdings Ltd.

Consolidated Statements of Changes in Shareholders’ Equity

(Unaudited)

(in thousands)

 

   Ordinary
Shares
   Additional
Paid-in
Capital
   Accumulated
Other
Comprehensive
Income (Loss)
   Retained
Earnings
   Treasury
Shares
   Total
Shareholders’
Equity
 
Balance, December 31, 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 employee share purchase plan       858                858 
Purchases of treasury shares                   (7,425)   (7,425)
Other comprehensive loss, net           (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 
                               
Balance, December 31, 2015  $232   $3,814,536   $(412,650)  $568,018   $(189,256)  $3,780,880 
Share-based compensation       48,289                48,289 
Proceeds from the exercise of share options       4,784                4,784 
Proceeds from employee share purchase plan       2,431                2,431 
Purchases of treasury shares                   (49,999)   (49,999)
Other comprehensive income, net           189,489            189,489 
Net income               560,853        560,853 
Balance, September 30, 2016  $232   $3,870,040   $(223,161)  $1,128,871   $(239,255)  $4,536,727 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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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 Cruises”) and Seven Seas Cruises S. DE R.L. (“Regent”) (Oceania Cruises also refers to the brand by the same name and Regent also refers to the brand Regent Seven Seas Cruises) and (vii) “Affiliate” refers to Genting Hong Kong Limited and/or its affiliates (formerly Star Cruises Limited and/or its affiliates). References to the “U.S.” are to the United States of America, “dollars” or “$” are to U.S. dollars, the “U.K.” are to the United Kingdom and “euros” or “€” are to the official currency of the Eurozone.

 

1.Description of Business and Organization

 

NCLH is a leading 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 delivered in June 2016. We will introduce four additional ships to our fleet through 2020. Norwegian Joy, Norwegian Bliss and one additional Breakaway Plus Class Ship is on order for delivery in the spring of 2017, the spring of 2018 and the fall of 2019, respectively. An Explorer Class Ship is on order for delivery in the winter of 2020. These additions to our fleet will increase our total Berths to approximately 59,000.

 

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, 2015, which are included in our most recently filed Annual Report on Form 10-K.

 

Reclassification

 

Certain amounts in prior periods have been reclassified to conform to the current period presentation.

 

Earnings Per Share

 

A reconciliation between basic and diluted earnings per share was as follows (in thousands, except share and per share data):

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2016   2015   2016   2015 
Net income  $342,378   $251,787   $560,853   $388,825 
Basic weighted-average shares outstanding   227,096,142    227,384,616    227,102,560    225,805,901 
Dilutive effect of share awards   502,465    2,890,140    757,057    4,054,999 
Diluted weighted-average shares outstanding   227,598,607    230,274,756    227,859,617    229,860,900 
Basic earnings per share  $1.51   $1.11   $2.47   $1.72 
Diluted earnings per share  $1.50   $1.09   $2.46   $1.69 

 

Revenue and Expense Recognition

 

Deposits received from guests for future voyages are recorded as advance ticket sales and are subsequently 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 pro-rata basis over the period of the voyage. Guest cancellation fees 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 $80.3 million and $70.1 million for the three months ended September 30, 2016 and 2015, respectively, and $214.3 million and $184.4 million for the nine months ended September 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 losses of $1.5 million and gains of $3.1 million for the three months ended September 30, 2016 and 2015, respectively, and losses of $1.9 million and gains of $8.8 million for the nine months ended September 30, 2016 and 2015, respectively.

 

Depreciation and Amortization Expense

 

The amortization of deferred financing fees is included in depreciation and amortization expense in the consolidated statements of cash flows; however, for purposes of the consolidated statements of operations it is included in interest expense, net.

 

Goodwill

 

We evaluate goodwill for impairment annually or more frequently when an event occurs or circumstances change that indicates the carrying value of a reporting unit may not be recoverable. Based on the recent performance of the Oceania Cruises’ reporting unit, we performed an interim Step 1 Test which consists of a combined approach using the expected future cash flows and market multiples to determine the fair value of the reporting unit. We determined that there was no impairment of goodwill as the Step 1 Test supports the carrying value of the reporting unit. 

 

Recently Issued Accounting Pronouncements

 

In August 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-15 which amends Topic 230 (Statement of Cash Flows) to eliminate discrepancies in reporting certain items in the statement of cash flows. The guidance is effective for annual periods beginning after December 15, 2017 and interim periods within those annual periods with early adoption permitted. The transition should be made using a retrospective approach. We do not believe that the adoption of this guidance will be material to our consolidated statements of cash flows.

 

In May 2016, the FASB issued ASU No. 2016-12 which addresses improvements to the guidance on revenue from contracts from customers regarding collectibility, noncash consideration, and completed contracts at transition. Additionally, it provides a practical expedient for contract modifications at transition and an accounting policy election related to the presentation of sales taxes and other similar taxes collected from customers. The effective date of this guidance is upon adoption of ASU No. 2014-09 which is presented below. We are currently evaluating the impact of the adoption of this guidance to our consolidated financial statements.

 

In May 2016, the FASB issued ASU No. 2016-11 which is a rescission of Securities and Exchange Commission guidance related to the issuance of ASU No. 2014-09 which is presented below. The effective date of this guidance is upon adoption of ASU No. 2014-09. We are currently evaluating the impact of the adoption of this guidance to our consolidated financial statements.

 

In April 2016, the FASB issued ASU No. 2016-10 which does not change the core principle of the guidance in ASU No. 2014-09 but clarifies two aspects: identifying performance obligations and the licensing implementation guidance, while retaining the related principles for those areas. The effective date of this guidance is upon adoption of ASU No. 2014-09. We are currently evaluating the impact of the adoption of this guidance to our consolidated financial statements.

 

In 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 guidance to our consolidated financial statements.

 

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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 method. The guidance requires an entity to measure inventory at the lower of cost and 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 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 within those annual periods, beginning after December 15, 2015. We have adopted this guidance and there has not been an impact to our consolidated financial statements.

 

In May 2014, the FASB issued ASU No. 2014-09 which requires entities to recognize revenue through the application of a five-step model, including identification of the contract, identification of the performance obligations, determination of the transaction price, allocation of the transaction price to the performance obligation and recognition of revenue as the entity satisfies the performance obligations. Entities have the option of using either a full retrospective or a modified approach to adopt the guidance. In August 2015, the FASB issued ASU No. 2015-14 deferring the effective date for one year. We can elect to adopt the provisions of ASU No. 2014-09 for annual periods beginning after December 15, 2017 including interim periods within that reporting period or we can elect to early adopt the guidance as of the original effective date. We have initiated an assessment of our systems, data and processes related to the implementation of this guidance. This assessment is expected to be completed during 2017. Additionally, we are currently evaluating the potential impact on 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, 2016 
   Gross Carrying
Amount
   Accumulated
Amortization
   Net Carrying
Amount
   Weighted-
Average
Amortization
Period (Years)
 
Customer relationships  $120,000   $(31,326)  $88,674    6.0 
Licenses   3,368    (631)   2,737    5.6 
Non-compete agreements   660    (330)   330    1.0 
Total intangible assets subject to amortization  $124,028   $(32,287)  $91,741      
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,
 
   2016   2015   2016   2015 
Amortization expense  $5,601   $20,951   $16,552   $60,172 
                     

 

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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
 
2017  $31,067 
2018   26,163 
2019   18,489 
2020   9,906 
2021   75 

 

4.Accumulated Other Comprehensive Income (Loss)

 

Accumulated other comprehensive income (loss) for the nine months ended September 30, 2016 was as follows (in thousands): 

 

   Accumulated
Other
Comprehensive
Income (Loss)
   Change
Related to
Cash Flow
Hedges
   Change
Related to
Shipboard
Retirement
Plan
 
Accumulated other comprehensive income (loss) at beginning of period  $(412,650)  $(405,298)  $(7,352)
Current period other comprehensive income before reclassifications   112,508    112,508     
Amounts realized and  reclassified into earnings   76,981    76,658(1)   323(2)
Accumulated other comprehensive income (loss) at end of period  $(223,161)  $(216,132)(3)  $(7,029)

 

(1) We refer you to Note 7— “Fair Value Measurements and Derivatives” for the affected line items in the consolidated statements of operations.
(2) Amortization of prior-service cost and actuarial loss reclassified to payroll and related expense.
(3) Includes $67.2 million of loss expected to be reclassified into earnings in the next 12 months.

 

Accumulated other comprehensive income (loss) for the nine months ended September 30, 2015 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 realized and  reclassified into earnings   61,940    61,582(1)   358(2)
Accumulated other comprehensive income (loss) at end of period  $(319,203)  $(311,107)  $(8,096)

 

(1) We refer you to Note 7— “Fair Value Measurements and Derivatives” for the affected line items in the consolidated statements of operations.
(2) Amortization of prior-service cost and actuarial loss reclassified to payroll and related expense.

 

5.Property and Equipment, net

 

Property and equipment, net increased $595.4 million for the nine months ended September 30, 2016 primarily due to the delivery of Seven Seas Explorer and the refurbishment of several ships.

 

6.Long-Term Debt

 

In June 2016, NCLC and Voyager Vessel Company, LLC, indirect subsidiaries of NCLH, entered 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 New 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 NCLC’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 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 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 the New Term Loan A Facility and the New Revolving Loan Facility to prepay the entire outstanding principal amount of the Revolving Loan Facility, the $1.38 billion term loan facility and a $350.0 million term loan facility.

 

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The New Term Loan A Facility and New Revolving Loan Facility bear interest at a rate per annum of (a) an adjusted LIBOR rate or (b) a base rate determined by reference to the greatest 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 applicable margin that is determined by reference to a total leverage ratio, with an applicable margin of 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 2.25% with respect to Eurocurrency borrowings and 1.25% with respect to base rate borrowings.

 

The New Term Loan A Facility is required to be repaid in quarterly installments that commenced 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 are payable semiannually.

 

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 the Credit Agreement Amendment, all other provisions of the Existing Credit Agreement remain in full force. 

 

7.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.

  

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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  
    Balance Sheet location   September 30,
2016
    December 31,
2015
    September 30,
2016
    December 31,
2015
 
Fuel swaps designated as hedging instruments                                    
    Prepaid expenses and other assets   $ 13,740     $     $     $  
    Other long-term assets     3,462             145        
    Accrued expenses and other liabilities                 73,923       128,740  
    Other long-term liabilities     7,167             65,529       132,494  
Foreign currency forward contracts designated as hedging instruments                                    
    Prepaid expenses and other assets     10,153             1,381        
    Other long-term assets     14,980       3,446       2,363       1,370  
    Accrued expenses and other liabilities     1,065             8,930       8,737  
    Other long-term liabilities     1,567       551       4,943       24,181  
Foreign currency collar not designated as a hedging instrument                                    
    Accrued expenses and other liabilities                       42,993  
Interest rate swaps designated as hedging instruments                                    
    Accrued expenses and other liabilities                 3,858       4,079  
    Other long-term liabilities                 2,594       3,395  

 

The fair values of swap and forward contracts are determined based on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets. The Company determines the value of options and collars utilizing an option pricing model based on inputs that are either readily available in public markets or can be derived from information available in publicly quoted markets. The option pricing model used by the Company is an industry standard model for valuing options and is used by the broker/dealer community. The inputs to this option pricing model are the option strike price, underlying price, risk-free rate of interest, time to expiration, and volatility. The fair value of option contracts considers both the intrinsic value and any remaining time value associated with those derivatives that have not yet settled. The Company also considers counterparty credit risk and its own credit risk in its determination of all estimated fair values. Our derivatives and financial instruments were categorized as Level 2 in the fair value hierarchy, and we had no derivatives or financial instruments categorized as Level 1 or Level 3.

 

Our derivative contracts include rights of offset with our counterparties. We have elected to net certain assets and liabilities within counterparties when the rights of offset exist. We are not required to post cash collateral related to our derivative instruments.

 

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The following table discloses the gross and net amounts recognized within assets and liabilities (in thousands):

 

September 30, 2016  Gross Amounts   Gross
Amounts
Offset
   Total Net
Amounts
   Gross
Amounts Not
Offset
   Net Amounts 
Assets  $42,335   $(3,889)  $38,446   $(11,179)  $27,267 
Liabilities   159,777    (9,799)   149,978    (10,802)   139,176 

 

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   344,619    (551)   344,068    (336,645)   7,423 

   

Fuel Swaps

 

As of September 30, 2016, we had fuel swaps maturing through December 31, 2020 which are used to mitigate the financial impact of volatility in fuel prices pertaining to approximately 1.7 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,
 
   2016   2015   2016   2015 
Gain (loss) recognized in other comprehensive income (loss)  – effective portion  $(157)  $(101,056)  $76,145   $(69,724)
Loss recognized in other expense – ineffective portion   (2,602)   (1,580)   (11,353)   (10,825)
Amount reclassified from accumulated other comprehensive income (loss) into fuel expense   16,427    11,670    68,004    47,503 

 

We had fuel swaps that matured which were not designated as cash flow hedges. These fuel swaps were previously designated as cash flow hedges and were dedesignated due to a change in our expected future fuel purchases mix.

 

The effects on the consolidated financial statements of the fuel swaps which were dedesignated and recognized into earnings were as follows (in thousands):

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2016   2015   2016   2015 
Loss recognized in other expense  $(179)  $(4,716)  $(271)  $(4,716)
Amount reclassified from accumulated other comprehensive income (loss) into other expense           2,994    10,000 

 

Fuel Collars

 

We had fuel collars that matured and 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,
 
   2016   2015   2016   2015 
Amount reclassified from accumulated other comprehensive income (loss) into fuel expense  $   $   $   $248 
                     

Foreign Currency Options

 

We had foreign currency options that matured which consisted of call options with deferred premiums. These options were used to mitigate the financial impact of volatility in foreign currency exchange rates related to our ship construction contracts denominated in euros. If the spot rate at the date the ships were delivered was less than the strike price under these option contracts, we would have paid the deferred premium and would not exercise the foreign currency options.

 

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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,
 
   2016   2015   2016   2015 
Amount reclassified from accumulated other comprehensive income (loss) into depreciation and amortization expense  $330   $330   $990   $990 

 

Foreign Currency Forward Contracts

 

As of September 30, 2016, we had foreign currency forward contracts which are used to mitigate the financial impact of volatility in foreign currency exchange rates related to our ship construction contracts denominated in euros. The notional amount of our foreign currency forward contracts was €2.3 billion, or $2.6 billion based on the euro/U.S. dollar exchange rate as of September 30, 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,
 
   2016   2015   2016   2015 
Gain (loss) recognized in other comprehensive income (loss) – effective portion  $36,390   $(1,519)  $39,001   $(61,966)
Loss recognized in other expense – ineffective portion   (190)   (3)   (181)   (10)
Amount reclassified from accumulated other comprehensive income (loss) into depreciation and amortization expense   665    (64)   1,966    (191)

 

We had foreign currency forward contracts that matured and were used to mitigate the volatility of foreign currency exchange rates related to financial instruments denominated in foreign currencies.

 

The effects on the consolidated financial statements of foreign currency forward contracts which were not designated as cash flow hedges were as follows (in thousands):

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2016   2015   2016   2015 
Gain (loss) recognized in other expense  $   $585   $(6,133)  $684 
                     

Foreign Currency Collars

 

We had foreign currency collars that matured and were used to mitigate the volatility of foreign currency exchange rates related to our ship construction contracts denominated in euros.

 

The effects on the consolidated financial statements of the foreign currency collar which was designated as a cash flow hedge was as follows (in thousands):

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2016   2015   2016   2015 
Amount reclassified from accumulated other comprehensive income (loss) into depreciation and amortization expense  $(91)  $(91)  $(273)  $(273)
                     

The effect on the consolidated financial statements of the foreign currency collar which was not designated as a cash flow hedge was as follows (in thousands):

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2016   2015   2016   2015 
Gain (loss) recognized in other expense  $   $955   $10,312   $(18,648)
                     

Interest Rate Swaps

 

As of September 30, 2016, we had interest rate swap agreements to hedge our exposure to interest rate movements and to manage our interest expense. The notional amount of outstanding debt associated with the interest rate swap agreements was $339.8 million as of September 30, 2016.

 

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The effects on the consolidated financial statements of the interest rate swaps which were designated as cash flow hedges were as follows (in thousands): 

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2016   2015   2016   2015 
Gain (loss) recognized in other comprehensive income (loss)– effective portion  $818   $(2,652)  $(2,638)  $(6,811)
Gain (loss) recognized in other expense – ineffective portion       (9)   3    (21)
Amount reclassified from accumulated other comprehensive income (loss) into interest expense, net   996    1,287    2,977    3,305 

 

We had an interest rate swap that matured 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 hedging instrument was as follows (in thousands):

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2016   2015   2016   2015 
Loss recognized in other expense  $   $   $   $(2)
                     

Long-Term Debt

 

As of September 30, 2016 and December 31, 2015, the fair value of our long-term debt, including the current portion, was $6.5 billion which was $16.4 million higher and $6.6 million 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 calculated based on estimated rates for the same or similar instruments with similar terms and remaining maturities resulting in Level 2 inputs in the fair value hierarchy. Market risk associated with our long-term variable rate debt is the potential increase in interest expense from an increase in interest rates. The calculation of the fair value of our long-term debt is considered a Level 2 input.

 

Other

 

The carrying amounts reported in the consolidated balance sheets of all other financial assets and liabilities approximate fair value.

 

8.Employee Benefits and Compensation Plans

 

Share Option Awards

 

On March 1, 2016, we granted 1.0 million share option awards to our employees at an exercise price of $50.31 with a contractual term of ten years. The share options vest equally over three years.

 

The following is a summary of option activity under our share option plan for the nine months ended September 30, 2016 (excludes the impact of 364,584 previously awarded performance-based options as no grant date has been established):

 

    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     1,095,000       52,083             49.88       59.43                        
Exercised     (169,527 )     (51,857 )           27.64       19.00                        
Forfeited and cancelled     (583,492 )                 49.46                              
Outstanding as of September 30, 2016     8,044,052       432,978       208,333     $ 47.96     $ 23.86     $ 59.43       8.07     $ 24,633  

 

Restricted Ordinary Share Awards

 

The following is a summary of restricted ordinary share activity for the nine months ended September 30, 2016:

 

   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   (26,118)   4.81 
Forfeited or expired   (352)   2.50 
Non-vested and expected to vest as of September 30, 2016   17,183   $7.55 

 

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Restricted Share Unit Awards

 

On March 1, 2016, we granted 1.2 million restricted share unit awards to our employees which vest equally over three years. 

 

The following is a summary of restricted share unit activity for the nine months ended September 30, 2016 (excludes the impact of 87,500 previously awarded performance-based restricted share units as no grant date was established):

 

    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     1,328,490       49.62       12,500       50.00              
Vested     (37,500 )     59.43       (12,500 )     50.00              
Forfeited or expired     (83,655 )     50.51                          
Non-vested and expected to vest as of September 30, 2016     1,357,335     $ 50.38           $       50,000     $ 59.43  

 

The share-based compensation expense for the three months ended September 30, 2016 was $16.8 million of which $15.0 million was recorded in marketing, general and administrative expense and $1.8 million was recorded in payroll and related expense. The nine months ended September 30, 2016 was $48.3 million of which $42.7 million was recorded in marketing, general and administrative expense and $5.6 million was recorded in payroll and related expense.

 

9.Commitments and Contingencies

 

Ship Construction Contracts

 

We have Norwegian Joy, Norwegian Bliss and one additional Breakaway Plus Class Ship on order with Meyer Werft shipyard for delivery in the spring of 2017, spring of 2018 and the fall of 2019, respectively. These ships will be amongst the largest in our fleet, reaching approximately 164,600 Gross Tons. The combined contract price of these three ships is approximately €2.6 billion, or $2.9 billion based on the euro/U.S. dollar exchange rate as of September 30, 2016. We have export credit financing in place that provides financing for 80% of their contract prices. We have an Explorer Class Ship on order with Fincantieri shipyard with an original contract price of approximately €422.0 million, or approximately $474.1 million based on the euro/U.S. dollar exchange rate as of September 30, 2016. We have export credit financing in place that provides financing for 80% of the contract price. The Explorer Class Ship is expected to be delivered in the winter of 2020.

 

In connection with the contracts to build these ships, we do not anticipate any contractual breaches or cancellations 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 the normal course of our business, various claims and lawsuits have been filed or are pending against us. Most of these claims and lawsuits are covered by insurance and, accordingly, the maximum amount of our liability is typically limited to our deductible amount.

 

Nonetheless, the ultimate outcome of these claims and lawsuits that are not covered by insurance cannot be determined at this time. We have evaluated our overall exposure with respect to all of our threatened and pending litigation and, to the extent required, we have accrued amounts for all estimable probable losses associated with our deemed exposure. We are currently unable to estimate any other potential contingent losses beyond those accrued, as discovery is not complete nor is adequate information available to estimate such range of loss or potential recovery. However, based on our current knowledge, we do not believe that the aggregate amount or range of reasonably possible losses with respect to these matters will be material to our consolidated results of operations, financial condition or cash flows. We intend to vigorously defend our legal position on all claims and, to the extent necessary, seek recovery.

 

10.Restructuring Costs

 

Due to the Acquisition of Prestige, a number of employee positions were consolidated. As of September 30, 2016, we had no accrual balance for restructuring costs for severance and other employee-related costs. The expense of $0.1 million for the nine months ended September 30, 2016 is included in marketing, general and administrative expense.

 

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The following table summarizes changes in the accrual for restructuring costs (in thousands):

 

   Restructuring costs 
Accrued expense balance as of December 31, 2015  $(4,144)
Amounts paid   4,254 
Additional accrued expense   (110)
Accrued expense balance as of September 30, 2016  $

 

11.Supplemental Cash Flow Information

 

For the nine months ended September 30, 2016, we had non-cash investing activities in connection with property and equipment of $22.3 million and for the nine months ended September 30, 2015, we had non-cash investing activities in connection with capital leases of $28.5 million and capital expenditures of $6.5 million.   

 

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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,” “future” and similar words. Forward-looking statements do not guarantee future performance and may involve risks, uncertainties and other factors which could cause our actual results, performance or achievements to differ materially from the future results, performance or achievements expressed or implied in those forward-looking statements. Examples of these risks, uncertainties and other factors include, but are not limited to the impact of:

 

  adverse general economic and related factors, such as fluctuating or increasing levels of unemployment, underemployment and the volatility of fuel prices, declines in the securities and real estate markets, and perceptions of these conditions that decrease the level of disposable income of consumers or consumer confidence;
  the risks and increased costs associated with operating internationally;
  an impairment of our tradenames or goodwill which could adversely affect our financial condition and operating results;
  our efforts to expand our business into new markets;
  adverse events impacting the security of travel, such as terrorist acts, acts of piracy, armed conflict and threats thereof and other international events;
  breaches in data security or other disturbances to our information technology and other networks;
  the spread of epidemics and viral outbreaks;
  adverse incidents involving cruise ships;
  changes in fuel prices and/or other cruise operating costs;
  our hedging strategies;
  our inability to obtain adequate insurance coverage;
  our substantial indebtedness, including the ability to raise additional capital to fund our operations, and to generate the necessary amount of cash to service our existing debt;
  restrictions in the agreements governing our indebtedness that limit our flexibility in operating our business;
  the significant portion of our assets pledged as collateral under our existing debt agreements and the ability of our creditors to accelerate the repayment of our indebtedness;
  our ability to incur significantly more debt despite our substantial existing indebtedness;
  volatility and disruptions in the global credit and financial markets, which may adversely affect our ability to borrow and could increase our counterparty credit risks, including those under our credit facilities, derivatives, contingent obligations, insurance contracts and new ship progress payment guarantees;
  fluctuations in foreign currency exchange rates;
  our inability to recruit or retain qualified personnel or the loss of key personnel;
  future changes relating to how external distribution channels sell and market our cruises;
  our reliance on third parties to provide hotel management services to certain ships and certain other services;
  delays in our shipbuilding program and ship repairs, maintenance and refurbishments;
  future increases in the price of, or major changes or reduction in, commercial airline services;
  seasonal variations in passenger fare rates and occupancy levels at different times of the year;
  our ability to keep pace with developments in technology;
  amendments to our collective bargaining agreements for crew members and other employee relation issues;
  the continued availability of attractive port destinations;
  pending or threatened litigation, investigations and enforcement actions;
  changes involving the tax and environmental regulatory regimes in which we operate; and
  other factors set forth under “Risk Factors” in our most recently filed Annual Report on Form 10-K and “Item 1A. Risk Factors” in this report.

 

The above examples are not exhaustive and new risks emerge from time to time. Such forward-looking statements are based on our current beliefs, assumptions, expectations, estimates and projections regarding our present and future business strategies and the environment in which we 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 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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Terminology

 

This report includes certain non-GAAP financial measures, such as Net Revenue, Net Yield, Net Cruise Cost, Adjusted Net Revenue, Adjusted Net Yield, Adjusted Net Cruise Cost Excluding Fuel, Adjusted EBITDA, Adjusted Net Income and Adjusted EPS. Definitions of these non-GAAP financial measures are included below. For further information about our non-GAAP financial measures including detailed adjustments made in calculating our non-GAAP financial measures and a reconciliation to the most directly comparable GAAP financial measure, we refer you to “Results of Operations” below.

 

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

 

Acquisition of Prestige. In November 2014, pursuant to the Merger Agreement, we acquired Prestige in a cash and stock transaction for total consideration of $3.025 billion, including the assumption of debt.

 

Adjusted EBITDA. EBITDA adjusted for other income (expense) and other supplemental adjustments.

 

Adjusted EPS. Adjusted Net Income divided by the number of diluted weighted-average shares outstanding.

 

Adjusted Net Cruise Cost Excluding Fuel. Net Cruise Cost Excluding Fuel adjusted for supplemental adjustments.

 

Adjusted Net Income. Net income adjusted for supplemental adjustments.

 

Adjusted Net Revenue. Net Revenue adjusted for supplemental adjustments.

 

Adjusted Net Yield. Net Yield adjusted for supplemental adjustments.

 

Bareboat Charter. The hire of a ship for a specified period of time whereby no crew or provisions are provided by the Company.

 

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

 

Breakaway Class Ships. Norwegian Breakaway and Norwegian Getaway.

 

• Breakaway Plus Class Ships. The next generation of ships which are similar in design and innovation to Breakaway Class Ships.

 

Business Enhancement Capital Expenditures. Capital expenditures other than those related to new ship construction and ROI Capital Expenditures.

 

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

 

Constant Currency. A calculation whereby foreign currency-denominated revenue and expenses in a period are converted at the U.S. dollar exchange rate of a comparable period in order to eliminate the effects of foreign exchange fluctuations.

 

Dry-dock. A process whereby a ship is positioned in a large basin where all of the fresh/sea water is pumped out in order to carry out cleaning and repairs of those parts of a ship which are below the water line.

 

EBITDA. Earnings before interest, taxes, and depreciation and amortization.

 

EPS. Earnings per share.

 

Explorer Class Ships. Regent’s Seven Seas Explorer and a second ship on order.

 

GAAP. Generally accepted accounting principles in the U.S.

 

Gross Cruise Cost. The sum of total cruise operating expense and marketing, general and administrative expense.

 

Gross Tons. A unit of enclosed passenger space on a cruise ship, such that one gross ton = 100 cubic feet or 2.831 cubic meters.

 

Gross Yield. Total revenue per Capacity Day. 

 

Management NCL Corporation Units. NCLC’s previously outstanding profits interests issued to management (or former management) of NCLC which were converted into units in NCLC. All Management NCL Corporation Units were exchanged for NCLH ordinary shares and restricted shares in the fourth quarter of 2014.

 

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.

 

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Net Revenue. Total revenue less commissions, transportation and other expense and onboard and other expense.

 

Net Yield. Net Revenue per Capacity Day. 

 

New Revolving 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 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 which was to mature on May 24, 2018 and 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.

 

Shipboard Retirement Plan. An unfunded defined benefit pension plan for certain crew members which computes benefits based on years of service, subject to certain requirements.

 

Non-GAAP Financial Measures

 

We use certain non-GAAP financial measures, such as Net Revenue, Adjusted Net Revenue, Net Yield, Adjusted Net Yield, Net Cruise Cost, Adjusted Net Cruise Cost Excluding Fuel, Adjusted EBITDA, Adjusted Net Income and Adjusted EPS, to enable us to analyze our performance. See “Terminology” for the definitions of these non-GAAP financial measures. We utilize Net Revenue and Net Yield to manage our business on a day-to-day basis and believe that they are the most relevant measures of our revenue performance because they reflect the revenue earned by us net of significant variable costs. In measuring our ability to control costs in a manner that positively impacts net income, we believe changes in Net Cruise Cost and Adjusted Net Cruise Cost Excluding Fuel to be the most relevant indicators of our performance.

 

As our business includes the sourcing of passengers and deployment of vessels outside of the U.S., a portion of our revenue and expenses are denominated in foreign currencies, particularly British pound, Canadian dollar, euro and Australian dollar which are subject to fluctuations in currency exchange rates versus our reporting currency, the U.S. dollar. In order to monitor results excluding these fluctuations, we calculate certain non-GAAP measures on a Constant Currency basis whereby current period revenue and expenses denominated in foreign currencies are converted to U.S. dollars using currency exchange rates of the comparable period. We believe that presenting these non-GAAP measures on both a reported and Constant Currency basis is useful in providing a more comprehensive view of trends in our business.

 

We believe that Adjusted EBITDA is appropriate as a supplemental financial measure as it is used by management to assess operating performance. We believe that Adjusted EBITDA is a useful measure in determining our performance as it reflects certain operating drivers of our business, such as sales growth, operating costs, marketing, general and administrative expense and other operating income and expense. Adjusted EBITDA is not a defined term under GAAP. Adjusted EBITDA is not intended to be a measure of liquidity or cash flows from operations or a measure comparable to net income as it does not take into account certain requirements such as capital expenditures and related depreciation, principal and interest payments and tax payments and it includes other supplemental adjustments.

 

In addition, Adjusted Net Revenue and Adjusted Net Yield, which exclude certain business combination accounting entries, are non-GAAP financial measures that we believe are useful as supplemental measures in evaluating the performance of our operating business and provide greater transparency into our results of operations. Adjusted Net Income and Adjusted EPS are non-GAAP financial measures that exclude certain amounts and are used to supplement GAAP net income and EPS. We use Adjusted Net Income and Adjusted EPS as key performance measures of our earnings performance. We believe that both management and investors benefit from referring to these non-GAAP financial measures in assessing our performance and when planning, forecasting and analyzing future periods. These non-GAAP financial measures also facilitate management’s internal comparison to our historical performance. In addition, management uses Adjusted EPS as a performance measure for our incentive compensation. The amounts excluded in the presentation of these non-GAAP financial measures may vary from period to period; accordingly, our presentation of Adjusted Net Revenue, Adjusted Net Yield, Adjusted Net Income and Adjusted EPS may not be indicative of future adjustments or results. For example, for the nine months ended September 30, 2016, we incurred an $11.2 million write-off, primarily due to deferred financing fees due to the refinancing of certain credit facilities. We included the deferred financing fees 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.

 

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You are encouraged to evaluate each adjustment used in calculating our non-GAAP financial measures and the reasons we consider our non-GAAP financial measures appropriate for supplemental analysis. In evaluating our non-GAAP financial measures, you should be aware that in the future we may incur expenses similar to the adjustments in our presentation. Our non-GAAP financial measures have limitations as analytical tools, and you should not consider these measures in isolation or as a substitute for analysis of our results as reported under GAAP. Our presentation of our non-GAAP financial measures should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. Our non-GAAP financial measures may not be comparable to other companies. Please see a historical reconciliation of these measures to the most comparable GAAP measure presented in our consolidated financial statements below in the “Results of Operations” section.

 

Financial Presentation

 

Revenue from our cruise and cruise-related activities are categorized by us as “passenger ticket revenue” and “onboard and other revenue.” Passenger ticket revenue and onboard and other revenue vary according to product offering, the size of the ship in operation, the length of cruises operated and the markets in which the ship operates. Our revenue is seasonal based on demand for cruises, which has historically been strongest during the Northern Hemisphere’s summer months.

 

Passenger ticket revenue primarily consists of revenue for accommodations, meals in certain restaurants on the ship, certain onboard entertainment, and includes revenue for service charges and air and land transportation to and from the ship to the extent guests purchase these items from us. Onboard and other revenue primarily consists of revenue from gaming, beverage sales, shore excursions, specialty dining, retail sales, spa services, photo services as well as certain Bareboat Charter revenue. We record onboard revenue from onboard activities we perform directly or that are performed by independent concessionaires, from which we receive a share of their revenue.

 

Our cruise operating expense is classified as follows:

 

  Commissions, transportation and other primarily consists of direct costs associated with passenger ticket revenue. These costs include travel agent commissions, air and land transportation expenses, related credit card fees, costs associated with service charges, certain port expenses and the costs associated with shore excursions and hotel accommodations included as part of the overall cruise purchase price.

 

  Onboard and other primarily consists of direct costs that are incurred in connection with onboard and other revenue. These include costs incurred in connection with gaming, beverage sales and shore excursions.

 

  Payroll and related consists of the cost of wages and benefits for shipboard employees and costs of certain inventory items, including food, for a third party that provides crew and other hotel services for certain ships.

 

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

 

  Food consists of food costs for passengers and crew on certain ships.

 

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

 

Critical Accounting Policies

 

We evaluate goodwill for impairment annually or more frequently when an event occurs or circumstances change that indicates the carrying value of a reporting unit may not be recoverable. Based on the recent performance of the Oceania Cruises’ reporting unit, we performed an interim goodwill impairment evaluation. Based on that evaluation, we determined that there was no impairment of goodwill because its fair value exceeded its carrying value. However, if the fair value of that reporting unit declines in future periods, its goodwill may become impaired at that time. As of September 30, 2016, there was $523.0 million of goodwill for the Oceania Cruises’ reporting unit.

 

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, 2015 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, 2015.

 

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Quarterly Overview

  

Three months ended September 30, 2016 (“2016”) compared to the three months ended September 30, 2015 (“2015”)

 

Total revenue increased 15.6% to $1.5 billion in 2016 compared to $1.3 billion in 2015 primarily due to an increase in Capacity Days and improved pricing. Gross Yield increased 1.5%. Net Revenue in 2016 increased 17.4% to $1.1 billion from $975.2 million in 2015 due to an increase in Capacity Days of 13.9% and an increase in Net Yield of 3.1%. The increase in Capacity Days was primarily due to the delivery of Norwegian Escape in October 2015, Sirena joining our fleet in April 2016 and the delivery of Seven Seas Explorer in June 2016. The increase in Net Yield was primarily due to improved pricing.

 

We had net income and diluted EPS of $342.4 million in 2016 and $1.50, respectively. Operating income was $413.6 million in 2016 compared to $306.8 million in 2015. We had Adjusted Net Income and Adjusted EPS of $369.3 million and $1.62, respectively, in 2016, which includes $26.9 million of adjustments primarily consisting of expenses related to non-cash compensation, severance and other fees and certain other adjustments. Adjusted EBITDA improved 22.3% in 2016 compared to 2015. We refer you to our “Results of Operations” below for a calculation of Net Revenue, Gross Yield, Net Yield, Adjusted Net Income 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,
 
   2016   2015   2016   2015 
Revenue                    
Passenger ticket   72.2%   73.8%   70.2%   72.7%
Onboard and other   27.8%   26.2%   29.8%   27.3%
Total revenue   100.0%   100.0%   100.0%   100.0%
Cruise operating expense                    
Commissions, transportation and other   16.8%   17.6%   16.5%   17.8%
Onboard and other   6.1%   6.6%   6.1%   6.4%
Payroll and related   13.0%   13.3%   14.8%   14.8%
Fuel   5.8%   6.9%   6.6%   8.1%
Food   3.4%   3.6%   4.0%   4.0%
Other   7.7%   7.9%   9.4%   9.3%
Total cruise operating expense   52.8%   55.9%   57.4%   60.4%
Other operating expense                    
Marketing, general and administrative   11.8%   11.7%   13.5%   12.4%
Depreciation and amortization   7.5%   8.5%   8.5%   9.5%
Total other operating expense   19.3%   20.2%   22.0%   21.9%
Operating income   27.9%   23.9%   20.6%   17.7%
Non-operating income (expense)                    
Interest expense, net   (4.1)%   (3.9)%   (5.0)%   (4.6)%
Other expense   (0.4)%   (0.1)%   (0.4)%   (1.1)%
Total non-operating income (expense)   (4.5)%   (4.0)%   (5.4)%   (5.7)%
                     
Net income before income taxes   23.4%   19.9%   15.2%   12.0%
Income tax expense   (0.3)%   (0.3)%   (0.2)%   (0.2)%
Net income   23.1%   19.6%   15.0%   11.8%
                     

 

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The following table sets forth selected statistical information:

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2016   2015   2016   2015 
Passengers carried   635,654    574,011    1,761,967    1,615,213 
Passenger Cruise Days   4,674,286    4,208,605    13,196,600    11,925,493 
Capacity Days   4,209,562    3,696,549    12,175,012    10,887,160 
Occupancy Percentage   111.0%   113.9%   108.4%   109.5%

 

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,
 
   2016   2016
Constant
Currency
   2015   2016   2016
Constant
Currency
   2015 
Passenger ticket revenue  $1,071,815   $1,080,784   $948,059   $2,630,405   $2,655,815   $2,406,533 
Onboard and other revenue   412,921    412,921    336,851    1,118,798    1,118,798    901,992 
Total revenue   1,484,736    1,493,705    1,284,910    3,749,203    3,774,613    3,308,525 
Less:                              
Commissions, transportation and other expense   249,519    251,488    225,586    618,492    624,775    589,851 
Onboard and other expense   90,661    90,661    84,171    230,416    230,416    210,701 
Net Revenue   1,144,556    1,151,556    975,153    2,900,295    2,919,422    2,507,973 
Non-GAAP Adjustment:                              
Deferred revenue (1)   300    300    3,026    1,057    1,057    31,514 
Adjusted Net Revenue  $1,144,856   $1,151,856   $978,179   $2,901,352   $2,920,479   $2,539,487 
Capacity Days   4,209,562    4,209,562    3,696,549    12,175,012    12,175,012    10,887,160 
Gross Yield  $352.71   $354.84   $347.60   $307.94   $310.03   $303.89 
Net Yield  $271.89   $273.56   $263.80   $238.22   $239.79   $230.36 
Adjusted Net Yield  $271.97   $273.63   $264.62   $238.30   $239.87   $233.26 

 

(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,
 
   2016   2016
Constant
Currency
   2015   2016   2016
Constant
Currency
   2015 
Total cruise operating expense  $784,734   $786,209   $717,722   $2,155,115   $2,162,546   $1,997,701 
Marketing, general and administrative expense   174,813    175,353    150,558    504,694    505,957    411,879 
Gross Cruise Cost   959,547    961,562    868,280    2,659,809    2,668,503    2,409,580 
Less:                              
Commissions, transportation and other expense   249,519    251,488    225,586    618,492    624,775    589,851 
Onboard and other expense   90,661    90,661    84,171    230,416    230,416    210,701 
Net Cruise Cost   619,367    619,413    558,523    1,810,901    1,813,312    1,609,028 
Less: Fuel expense   86,250    86,250    88,829    248,529    248,529    267,784 
Net Cruise Cost Excluding Fuel   533,117    533,163    469,694    1,562,372    1,564,783    1,341,244 
Less Non-GAAP Adjustments:                              
Non-cash deferred compensation (1)   792    792    3,277    2,375    2,375    5,759 
Non-cash share-based compensation (2)   16,840    16,840    13,691    48,289    48,289    27,857 
Secondary Equity Offerings’ expenses (3)           362            1,384 
Severance payments and other fees (4)   2,587    2,587    1,369    5,486    5,486    15,045 
Management NCL Corporation Units exchange expenses (5)                       624 
Acquisition of Prestige expenses (6)   1,696    1,696    6,098    4,710    4,710    17,389 
Contingent consideration adjustment (7)                       (43,400)
Contract termination expenses (8)           3,319            3,319 
Adjusted Net Cruise Cost Excluding Fuel  $511,202   $511,248   $441,578   $1,501,512   $1,503,923   $1,313,267 
                               
Capacity Days   4,209,562    4,209,562    3,696,549    12,175,012    12,175,012    10,887,160 
Gross Cruise Cost per Capacity Day  $227.94   $228.42   $234.89   $218.46   $219.18   $221.32 
Net Cruise Cost per Capacity Day  $147.13   $147.14   $151.09   $148.74   $148.94   $147.79 
Net Cruise Cost Excluding Fuel per Capacity Day  $126.64   $126.66   $127.06   $128.33   $128.52   $123.20 
Adjusted Net Cruise Cost Excluding Fuel per Capacity Day  $121.44   $121.45   $119.46   $123.33   $123.53   $120.63 

 

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  (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 included in marketing, general and administrative expense.
  (8) Contract termination expenses related to the Acquisition of Prestige, which are included in other cruise operating expense.

 

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,

 
   2016   2015   2016   2015 
Net income   342,378    251,787    560,853    388,825 
Non-GAAP Adjustments:                    
Non-cash deferred compensation (1)   792    3,277    2,375    5,759 
Non-cash share-based compensation (2)   16,840    13,691    48,289    28,030 
Secondary Equity Offerings’ expenses (3)       362        1,384 
Severance payments and other fees (4)   2,587    1,369    5,486    15,045 
Management NCL Corporation Units exchange expenses (5)               624 
Acquisition of Prestige expenses (6)   1,696    6,098    4,710    17,389 
Deferred revenue (7)   300    3,026    1,057    31,514 
Amortization of intangible assets (8)   5,267    20,914    15,802    59,973 
Contingent consideration adjustment (9)               (43,400)
Derivative adjustment (10)       3,767    (1,185)   33,370 
Contract termination expenses (11)       6,848        6,848 
Deferred financing fees and other (12)   (558)       11,156     
Adjusted Net Income  $369,302   $311,139   $648,543   $545,361 
Diluted weighted–average shares outstanding   227,598,607    230,274,756    227,859,617    229,860,900 
Diluted earnings per share  $1.50   $1.09   $2.46   $1.69 
Adjusted EPS  $1.62   $1.35   $2.85   $2.37 

 

  (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.

 

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  (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 intangible assets related to the Acquisition of Prestige, which are included in depreciation and amortization expense.
  (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 did not receive hedge accounting and losses due to the dedesignation of certain fuels swaps. These adjustments are included in other expense.
  (11) Contract termination expenses related to the Acquisition of Prestige, which are included in other cruise operating expense and depreciation and amortization expense.
  (12) For the nine months ended September 30, 2016, primarily reflects the write-off of deferred financing fees related to the refinancing of certain credit facilities, which is included in interest expense, net. For the three months ended September 30, 2016, reflects a tax benefit adjustment.

 

EBITDA and Adjusted EBITDA were calculated as follows (in thousands):

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2016   2015   2016   2015 
Net income  $342,378   $251,787   $560,853   $388,825 
Interest expense, net   60,662    49,784    188,836    153,219 
Income tax expense   5,241    3,528    8,944    6,931 
Depreciation and amortization expense   111,575    109,798    317,480    314,381 
EBITDA   519,856    414,897    1,076,113    863,356 
Other expense (1)   5,333    1,733    13,281    35,589 
Non-GAAP Adjustments:                    
Non-cash deferred compensation (2)   792    3,277    2,375    5,759 
Non-cash share-based compensation (3)   16,840    13,691    48,289    27,857 
Secondary Equity Offerings’ expenses (4)       362        1,384 
Severance payments and other fees (5)   2,587    1,369    5,486    15,045 
Management NCL Corporation Units exchange expenses (6)               624 
Acquisition of Prestige expenses (7)   1,696    6,098    4,710    17,389 
Deferred revenue (8)   300    3,026    1,057    31,514 
Contingent consideration adjustment (9)               (43,400)
Contract termination expenses (10)       3,319        3,319 
Adjusted EBITDA  $547,404   $447,772   $1,151,311   $958,436 

 

(1) Primarily consists of gains and losses, net for derivative contracts and forward currency exchanges.
(2) Non-cash deferred compensation expenses related to the crew pension plan and other crew expenses, which are included in payroll and related expense.
(3) Non-cash share-based compensation expenses related to equity awards, which are included in marketing, general and administrative expense and payroll and related expense.
(4) 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.
(10) Contract termination expenses related to the Acquisition of Prestige, which are included in other cruise operating expense.

 

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Three months ended September 30, 2016 (“2016”) compared to three months ended September 30, 2015 (“2015”)

 

Revenue

 

Total revenue increased 15.6% to $1.5 billion in 2016 compared to $1.3 billion in 2015 primarily due to an increase in Capacity Days and improved pricing. Gross Yield increased 1.5%. Net Revenue in 2016 increased 17.4% to $1.1 billion from $975.2 million in 2015 due to an increase in Capacity Days of 13.9% and an increase in Net Yield of 3.1%.The increase in Capacity Days was primarily due to the delivery of Norwegian Escape in October 2015, Sirena joining our fleet in April 2016 and the delivery of Seven Seas Explorer in June 2016. The increase in Net Yield was primarily due to improved pricing. Adjusted Net Revenue includes a deferred revenue fair value adjustment of $3.0 million in 2015 related to the Acquisition of Prestige. On a Constant Currency basis, Net Yield and Adjusted Net Yield increased 3.7% and 3.4%, respectively, in 2016 compared to 2015. We refer you to the “Results of Operations” above for a reconciliation of Gross Yield to Adjusted Net Yield.

 

Expense

 

Gross Cruise Cost increased 10.5% 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 9.3% in 2016 compared to 2015 primarily due to the increase in Capacity Days as discussed above. Total other operating expense increased 10.0% in 2016 compared to 2015 primarily due to an increase in marketing, general and administrative expenses, which included an increase in marketing expenses of $16.0 million. 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 decreased 2.6% on an actual and a Constant Currency basis as the increases in expenses discussed above were primarily offset by the decrease in fuel expense. The average fuel price decreased 11.5% to $500 per metric ton in 2016 from $565 per metric ton in 2015. Adjusted Net Cruise Cost Excluding Fuel per Capacity Day increased 1.7% on an actual and a Constant Currency basis primarily due to the increase in marketing, general and administrative 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 $60.7 million in 2016 from $49.8 million in 2015 primarily due to an increase in average debt balances outstanding primarily associated with the delivery of Norwegian Escape in October 2015 and Seven Seas Explorer in June 2016 as well as slightly higher interest rates due to an increase in LIBOR rates.

 

Other expense was $5.3 million in 2016 compared to $1.7 million in 2015. In 2016, the expense was primarily related to unrealized and realized losses on fuel swap derivative hedge contracts and foreign exchange derivative hedge contracts and foreign currency transaction losses. In 2015, the expense was 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 for a foreign exchange collar which did not receive hedge accounting treatment and foreign currency transaction gains.

 

In 2016, we had an income tax expense of $5.2 million compared to $3.5 million in 2015.

 

Nine months ended September 30, 2016 (“2016”) compared to nine months ended September 30, 2015 (“2015”)

 

Revenue

 

Total revenue increased 13.3% to $3.7 billion in 2016 compared to $3.3 billion in 2015 primarily due to an increase in Capacity Days and improved pricing. Gross Yield increased 1.3%. Net Revenue in 2016 increased 15.6% to $2.9 billion from $2.5 billion in 2015 due to an increase in Capacity Days of 11.8% and an increase in Net Yield of 3.4%. The increase in Capacity Days was primarily due to the delivery of Norwegian Escape in October 2015, Sirena joining our fleet in April 2016 and the delivery of Seven Seas Explorer in June 2016, slightly offset by the scheduled Dry-docks in 2016. The increase in Net Yield was primarily due to improved pricing. Adjusted Net Revenue includes a deferred revenue fair value adjustment of $31.5 million in 2015 related to the Acquisition of Prestige. On a Constant Currency basis, Net Yield and Adjusted Net Yield increased 4.1% and 2.8%, respectively, in 2016 compared to 2015. We refer you to the “Results of Operations” above for a reconciliation of Gross Yield to Adjusted Net Yield.

 

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Expense 

 

Gross Cruise Cost increased 10.4% 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 7.9% in 2016 compared to 2015 primarily due to the increase in Capacity Days as discussed above and an increase in Dry-dock expenses. Total other operating expense increased 13.2% in 2016 compared to 2015 primarily due to an increase in marketing, general and administrative expenses which included an increase in marketing expenses of $28.5 million and share-based compensation of $20.5 million. The increase was also due to recognition of a $43.4 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 $44.2 million of amortization of intangible assets due to the Acquisition of Prestige. On a Capacity Day basis, Net Cruise Cost remained relatively unchanged on an actual and a Constant Currency basis, due to the increases in expenses discussed above which were primarily offset by a decrease in fuel expense. The average fuel price decreased 14.9% to $468 per metric ton in 2016 from $550 per metric ton in 2015. Adjusted Net Cruise Cost Excluding Fuel per Capacity Day increased 2.2% primarily due to the expenses discussed above (2.4% on a Constant Currency basis). 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 $188.8 million in 2016 from $153.2 million in 2015 primarily due to an increase in average debt balances outstanding primarily associated with the delivery of Norwegian Escape in October 2015 and Seven Seas Explorer in June 2016 as well as higher interest rates due to an increase in LIBOR rates. The increase in interest expense, net also includes a write-off of $11.5 million of deferred financing fees related to the refinancing of certain of our credit facilities.

 

Other expense was $13.3 million in 2016 compared to $35.6 million in 2015. 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 was 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 for a foreign exchange collar which did not receive hedge accounting treatment.

 

In 2016, we had an income tax expense of $8.9 million compared to $6.9 million in 2015. 

 

Liquidity and Capital Resources

 

General

 

As of September 30, 2016, our liquidity was $905.4 million consisting of $155.4 million in cash and cash equivalents and $750.0 million under our New Revolving Loan Facility. Our primary ongoing liquidity requirements are to finance working capital, capital expenditures and debt service.

 

As of September 30, 2016, we had a working capital deficit of $1.9 billion. This deficit included $1.2 billion of advance ticket sales, which represents the revenue we collect in advance of sailing dates, and accordingly, are substantially more like deferred revenue balances rather than actual current cash liabilities. Our business model, along with our New Revolving Loan Facility, allows us to operate with a working capital deficit and still meet our operating, investing and financing needs.

 

We evaluate potential sources of additional liquidity, including the capital markets, in the ordinary course of business. We believe that prevailing market conditions, particularly in the debt capital markets, are generally favorable. We will continue to evaluate opportunities to 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 nine months ended September 30, 2016 and references to “2015” refer to the nine months ended September 30, 2015.

 

Net cash provided by operating activities was $1.1 billion in 2016 as compared to $973.4 million in 2015. The change in net cash provided by operating activities reflects net income in 2016 of $560.9 million compared to a net income in 2015 of $388.8 million. The net cash provided by operating activities included timing differences in cash receipts and payments relating to operating assets and liabilities.

 

Net cash used in investing activities was $950.2 million in 2016, primarily related to payments for the delivery of Seven Seas Explorer, ship improvements, ships under construction and shoreside projects. Net cash used in investing activities was $330.5 million in 2015, primarily related to payments for ship improvements, ships under construction and shoreside projects.

 

Net cash used in financing activities was $99.0 million in 2016 primarily due to net repayments of our New Revolving Loan Facility, and other loan facilities and the repurchase of our ordinary shares and deferred financing fees and other. Net cash used in financing activities was $497.6 million in 2015 primarily due to net repayments of our Revolving Loan Facility and other loan facilities.

 

Future Capital Commitments

 

Future capital commitments consist of contracted commitments, including ship construction contracts, and future expected capital expenditures necessary for operations as well as our ship refurbishment projects. As of September 30, 2016, anticipated capital expenditures were $157.5 million for the remainder of 2016 and $1.3 billion for each of the years ending December 31, 2017 and 2018, of which we have export credit financing in place for the expenditures related to ship construction contracts of $47.8 million for the remainder of 2016, $762.6 million for 2017 and $732.9 million for 2018. These future expected capital expenditures will significantly increase our depreciation and amortization expense.

 

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We have Norwegian Joy, Norwegian Bliss and one additional Breakaway Plus Class Ship on order with Meyer Werft shipyard for delivery in the spring of 2017, spring of 2018 and the fall of 2019, respectively. These ships will be amongst the largest in our fleet, reaching approximately 164,600 Gross Tons. The combined contract price of these three ships is approximately €2.6 billion, or $2.9 billion based on the euro/U.S. dollar exchange rate as of September 30, 2016. We have export credit financing in place that provides financing for 80% of their contract prices. We have an Explorer Class Ship on order with Fincantieri shipyard with an original contract price of approximately €422.0 million, or approximately $474.1 million based on the euro/U.S. dollar exchange rate as of September 30, 2016. We have export credit financing in place that provides financing for 80% of the contract price. The Explorer Class Ship is expected to be delivered in the winter of 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 nine months ended September 30, 2016 was $8.9 million and $24.9 million, respectively, and for the three and nine months ended September 30, 2015 was $9.1 million and $24.2 million, respectively, primarily associated with the construction of our Breakaway Plus Class Ships.

 

Off-Balance Sheet Transactions

 

None.

 

Contractual Obligations 

 

As of September 30, 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)   $ 6,503,978     $ 566,911     $ 1,104,015     $ 3,231,018     $ 1,602,034  
Operating leases (2)     153,735       15,135       30,277       28,927       79,396  
Ship construction contracts (3)     3,220,716       953,312       1,115,038       1,152,366        
Port facilities (4)     265,083       42,876       63,260       59,329       99,618  
Interest (5)     990,580       210,620       383,240       242,487       154,233  
Other (6)     164,170       56,146       54,186       30,266       23,572  
Total   $ 11,298,262     $ 1,845,000     $ 2,750,016     $ 4,744,393     $ 1,958,853  

 

(1) Includes premiums aggregating $0.6 million. Also includes capital leases. The amount excludes deferred financing fees which are included in the consolidated balance sheets as an offset to long-term debt.
(2) Primarily for offices, motor vehicles and office equipment.
(3) For our newbuild ships based on the euro/U.S. dollar exchange rate as of September 30, 2016. Export credit financing is in place from syndicates of banks.
(4) Primarily for our usage of certain port facilities.
(5) Includes fixed and variable rates with LIBOR held constant as of September 30, 2016.
(6) Future commitments for service and maintenance contracts and other Business Enhancement Capital Expenditures.

 

The table above does not include $11.2 million of unrecognized tax benefits.

 

Other

 

Certain service providers may require collateral in the normal course of our business. The amount of collateral may change based on certain terms and conditions.

 

As a routine part of our business, depending on market conditions, exchange rates, pricing and our strategy for growth, we regularly consider opportunities to enter into contracts for the building of additional ships. We may also consider the sale of ships, potential acquisitions and strategic alliances. If any of these were to occur, they may be financed through the incurrence of additional permitted indebtedness, through cash flows from operations, or through the issuance of debt, equity or equity-related securities.

 

Funding Sources

 

Our debt agreements contain covenants that, among other things, require us to maintain a minimum level of liquidity, as well as limit our net funded debt-to-capital ratio, maintain certain other ratios and restrict our ability to pay dividends. Substantially all of our ships and other property and equipment are pledged as collateral for our debt. We believe we were in compliance with these covenants as of September 30, 2016.

 

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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 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 September 30, 2016, we had interest rate swap agreements to hedge our exposure to interest rate movements and to manage our interest expense. As of September 30, 2016, 56% of our debt was fixed and 44% 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 September 30, 2016 was $339.8 million. Based on our September 30, 2016 outstanding variable rate debt balance, a one percentage point increase in annual LIBOR interest rates would increase our annual interest expense by approximately $28.9 million excluding the effects of capitalization of interest.

 

Foreign Currency Exchange Rate Risk

 

As of September 30, 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. The payments not hedged aggregate €506.4 million, or $568.9 million based on the euro/U.S. dollar exchange rate as of September 30, 2016. We estimate that a 10% change in the euro as of September 30, 2016 would result in a $56.9 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 11.0% and 12.4% for the three months ended September 30, 2016 and 2015, respectively, and 11.5% and 13.4% for the nine months ended September 30, 2016 and 2015, respectively. We use fuel derivative agreements to mitigate the financial impact of fluctuations in fuel prices and as of September 30, 2016, we had hedged approximately 90%, 79%, 57%, 48% and 5% of our remaining 2016, 2017, 2018, 2019 and 2020 projected metric tons of fuel purchases, respectively. We estimate that a 10% increase in our weighted-average fuel price would increase our anticipated 2016 fuel expense by $6.5 million. This increase would be partially offset by an increase in the fair value of our fuel swap agreements of $4.5 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 September 30, 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 September 30, 2016 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 September 30, 2016 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.

 

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PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

 

In the normal course of our business, various claims and lawsuits have been filed or are pending against us. Most of these claims and lawsuits are covered by insurance and, accordingly, the maximum amount of our liability is typically limited to our deductible amount.

 

Nonetheless, the ultimate outcome of these claims and lawsuits that are not covered by insurance cannot be determined at this time. We have evaluated our overall exposure with respect to all of our threatened and pending litigation and, to the extent required, we have accrued amounts for all estimable probable losses associated with our deemed exposure. We are currently unable to estimate any other potential contingent losses beyond those accrued, as discovery is not complete nor is adequate information available to estimate such range of loss or potential recovery. However, based on our current knowledge, we do not believe that the aggregate amount or range of reasonably possible losses with respect to these matters will be material to our consolidated results of operations, financial condition or cash flows. We intend to vigorously defend our legal position on all claims and, to the extent necessary, seek recovery.

 

Item 1A. Risk Factors

 

We refer you to our 2015 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 1A. Risk Factors” in our 2015 Annual Report on Form 10-K, 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:

 

Conducting business internationally may result in increased costs and 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 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 many parts of the world, including countries in which we operate, practices in the local business communities might not conform to international 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 purpose of 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 nevertheless 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 material adverse effect on our business, financial condition and results of operations.

 

An impairment of our tradenames or goodwill could adversely affect our financial condition and 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 recoverable. 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 the future cash flows we expect to derive from our operations. Reductions of the cash flows used in the impairment analyses may result in the recording of an impairment charge to a reporting unit’s tradename or goodwill. We will continue to monitor these intangible assets for potential impairment and perform interim testing of our tradenames or goodwill as necessary.

 

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

Purchases of Equity Securities by the Issuer

 

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. There was no share repurchase activity during the three months ended September 30, 2016 and as of September 30, 2016, $263.5 million remained available for repurchases of our outstanding ordinary shares under the share repurchase program.

 

Item 6. Exhibits

 

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* Supplemental Agreement, dated July 26, 2016, to €590.5 million Breakaway Four Credit Agreement, dated October 12, 2012, by and among Breakaway Four, Ltd., as borrower, NCL Corporation Ltd., as guarantor, NCL International, Ltd., as shareholder and KfW IPEX-Bank GmbH, as facility agent and lender +
   
10.2 Employment Agreement by and between Prestige Cruise Services, LLC and Robert J. Binder, entered into on September 16, 2016 (incorporated herein by reference to Exhibit 10.1 to Norwegian Cruise Line Holdings Ltd.’s Form 8-K filed on September 19, 2016 (File No. 001-35784)) #
   
10.3 Employment Agreement by and between NCL (Bahamas) Ltd. and Andrew Stuart, entered into on September 16, 2016 (incorporated herein by reference to Exhibit 10.2 to Norwegian Cruise Line Holdings Ltd.’s Form 8-K filed on September 19, 2016 (File No. 001-35784)) #
   
10.4 Employment Agreement by and between Prestige Cruise Services, LLC and Jason Montague, entered into on September 16, 2016 (incorporated herein by reference to Exhibit 10.3 to Norwegian Cruise Line Holdings Ltd.’s Form 8-K filed on September 19, 2016 (File No. 001-35784)) #
   
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 consolidated financial statements are from Norwegian Cruise Line Holdings Ltd.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2016, formatted in Extensible Business Reporting Language (XBRL), as follows:

 

  (i) the Consolidated Statements of Operations for the three and nine months ended September 30, 2016 and 2015;
     
  (ii) the Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2016 and 2015;
     
  (iii) the Consolidated Balance Sheets as of September 30, 2016 and December 31, 2015;
     
  (iv) the Consolidated Statements of Cash Flows for the nine months ended September 30, 2016 and 2015;
     
  (v) the Consolidated Statements of Changes in Shareholders’ Equity for the nine months ended September 30, 2016 and 2015; and
     
  (vi) the Notes to the Consolidated Financial Statements, tagged in summary and detail.

 

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* 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.

 

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SIGNATURES

 

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 Officer)

 

Dated: November 9, 2016

   

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