UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended ~~June~~September 30, 2018

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: 333-128780

NCL CORPORATION LTD.

(Exact name of registrant as specified in its charter)

Bermuda	20-0470163
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	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 ¨ No x

(Note: The registrant is a voluntary filer of reports required to be filed under Section 13 or 15 (d) of the Securities Exchange Act of 1934).

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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨	Accelerated filer ¨
Non-accelerated filer x ~~(Do not check if a smaller reporting company)~~	Smaller reporting company ¨
Emerging growth company ¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

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 31,164,004 ordinary shares outstanding as of ~~July~~October 31, 2018.

TABLE OF CONTENTS

~~Table of Contents~~

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

NCL Corporation Ltd.

Consolidated Statements of Operations

(Unaudited)

(in thousands)

Three Months Ended
June 30, Six Months Ended
June 30,
2018 2017 2018 2017
Revenue
Passenger ticket $ 1,077,046 $ 938,014 $ 1,966,912 $ 1,724,708
Onboard and other 445,128 406,089 848,665 770,176
Total revenue 1,522,174 1,344,103 2,815,577 2,494,884
Cruise operating expense
Commissions, transportation and other 249,875 223,315 468,215 417,455
Onboard and other 92,797 83,367 163,485 151,778
Payroll and related 219,337 194,724 429,161 387,360
Fuel 95,212 86,663 188,643 175,549
Food 54,091 47,340 104,747 93,518
Other 151,471 116,833 276,623 246,380
Total cruise operating expense 862,783 752,242 1,630,874 1,472,040
Other operating expense
Marketing, general and administrative 225,665 192,965 451,423 384,511
Depreciation and amortization 140,704 123,141 271,948 242,346
Total other operating expense 366,369 316,106 723,371 626,857
Operating income 293,022 275,755 461,332 395,987
Non-operating income (expense)
Interest expense, net (72,988 ) (64,196 ) (132,686 ) (117,158 )
Other income (expense), net 12,922 (5,609 ) 11,256 (8,424 )
Total non-operating income (expense) (60,066 ) (69,805 ) (121,430 ) (125,582 )
Net income before income taxes 232,956 205,950 339,902 270,405
Income tax expense (3,416 ) (4,509 ) (4,979 ) (5,826 )
Net income $ 229,540 $ 201,441 $ 334,923 $ 264,579
Three Months Ended
September 30, Nine Months Ended
September 30,
2018 2017 2018 2017
Revenue
Passenger ticket $ 1,334,460 $ 1,192,023 $ 3,301,372 $ 2,916,731
Onboard and other 523,896 459,715 1,372,561 1,229,891
Total revenue 1,858,356 1,651,738 4,673,933 4,146,622
Cruise operating expense
Commissions, transportation and other 301,349 266,173 769,564 683,628
Onboard and other 117,747 98,476 281,232 250,254
Payroll and related 227,707 206,142 656,868 593,502
Fuel 99,643 91,231 288,286 266,780
Food 56,038 53,883 160,785 147,401
Other 126,460 122,260 403,083 368,640
Total cruise operating expense 928,944 838,165 2,559,818 2,310,205
Other operating expense
Marketing, general and administrative 234,459 201,588 685,882 586,099
Depreciation and amortization 143,700 134,532 415,648 376,878
Total other operating expense 378,159 336,120 1,101,530 962,977
Operating income 551,253 477,453 1,012,585 873,440
Non-operating (expense) income
Interest expense, net (69,540 ) (66,339 ) (202,226 ) (183,497 )
Other income (expense), net 98 (3,262 ) 11,354 (11,686 )
Total non-operating expense (69,442 ) (69,601 ) (190,872 ) (195,183 )
Net income before income taxes 481,811 407,852 821,713 678,257
Income tax expense (6,399 ) (11,625 ) (11,378 ) (17,451 )
Net income $ 475,412 $ 396,227 $ 810,335 $ 660,806

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

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NCL Corporation Ltd.
Consolidated Statements of Comprehensive Income
(Unaudited)
(in thousands)

Three Months Ended
June 30, Six Months Ended
June 30, Three Months Ended
September 30, Nine Months Ended
September 30,
2018 2017 2018 2017 2018 2017 2018 2017
Net income $ 229,540 $ 201,441 $ 334,923 $ 264,579 $ 475,412 $ 396,227 $ 810,335 $ 660,806
Other comprehensive income (loss):
Other comprehensive income:
Shipboard Retirement Plan 107 104 212 209 107 104 319 313
Cash flow hedges:
Net unrealized gain (loss) (15,894 ) 131,519 32,682 124,236
Net unrealized gain 15,365 97,276 48,047 221,512
Amount realized and reclassified into earnings (6,723 ) 10,244 (8,508 ) 19,949 (10,706 ) 11,644 (19,214 ) 31,593
Total other comprehensive income (loss) (22,510 ) 141,867 24,386 144,394
Total other comprehensive income 4,766 109,024 29,152 253,418
Total comprehensive income $ 207,030 $ 343,308 $ 359,309 $ 408,973 $ 480,178 $ 505,251 $ 839,487 $ 914,224

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

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NCL Corporation Ltd.
Consolidated Balance Sheets
(Unaudited)
(in thousands, except share data)

June 30,
2018 December 31,
2017 September 30,
2018 December 31,
2017
Assets
Current assets:
Cash and cash equivalents $ 203,220 $ 170,757 $ 278,546 $ 170,757
Accounts receivable, net 44,212 43,961 45,997 43,961
Inventories 93,136 82,121 95,950 82,121
Prepaid expenses and other assets 328,737 216,111 298,263 216,111
Total current assets 669,305 512,950 718,756 512,950
Property and equipment, net 12,085,701 11,040,488 12,029,140 11,040,488
Goodwill 1,388,931 1,388,931 1,388,931 1,388,931
Tradenames 817,525 817,525 817,525 817,525
Other long-term assets 365,999 310,445 353,119 310,445
Total assets $ 15,327,461 $ 14,070,339 $ 15,307,471 $ 14,070,339
Liabilities and shareholders’ equity
Current liabilities:
Current portion of long-term debt $ 679,767 $ 619,373 $ 679,908 $ 619,373
Accounts payable 54,676 53,317 59,423 53,317
Accrued expenses and other liabilities 618,623 512,504 659,837 512,504
Due to NCLH 53,981 61,732 53,042 61,732
Advance ticket sales 1,951,701 1,303,498 1,648,742 1,303,498
Total current liabilities 3,358,748 2,550,424 3,100,952 2,550,424
Long-term debt 6,149,221 5,688,392 5,875,252 5,688,392
Other long-term liabilities 183,647 162,919 186,707 162,919
Total liabilities 9,691,616 8,401,735 9,162,911 8,401,735
Commitments and contingencies (Note 10)
Shareholders’ equity:
Ordinary shares, $.0012 par value; 40,000,000 shares authorized; 31,164,004 shares issued and outstanding at June 30, 2018 and December 31, 2017 37 37
Ordinary shares, $.0012 par value; 40,000,000 shares authorized; 31,164,004 shares issued and outstanding at September 30, 2018 and December 31, 2017 37 37
Additional paid-in capital 3,928,006 3,874,586 3,956,543 3,874,586
Accumulated other comprehensive income 49,639 25,253 54,405 25,253
Retained earnings 1,658,163 1,768,728 2,133,575 1,768,728
Total shareholders’ equity 5,635,845 5,668,604 6,144,560 5,668,604
Total liabilities and shareholders’ equity $ 15,327,461 $ 14,070,339 $ 15,307,471 $ 14,070,339

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

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NCL Corporation Ltd.
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)

Six Months Ended
June 30, Nine Months Ended
September 30,
2018 2017 2018 2017
Cash flows from operating activities
Net income $ 334,923 $ 264,579 $ 810,335 $ 660,806
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense 274,842 248,618
Loss on derivatives 4 375
Depreciation and amortization 420,154 385,957
Gain on derivatives — (71 )
Deferred income taxes, net 2,131 4,732 3,875 14,969
Loss on extinguishment of debt 6,346 — 6,346 —
Provision for bad debts and inventory 2,197 535 3,420 1,592
Share-based compensation expense 59,835 42,220 88,797 63,664
Net foreign currency adjustments (3,884 ) — (4,494 ) —
Changes in operating assets and liabilities:
Accounts receivable, net (2,087 ) 12,301 (5,084 ) 656
Inventories (11,422 ) (10,814 ) (14,237 ) (13,923 )
Prepaid expenses and other assets (74,536 ) (21,292 ) (34,451 ) (14,626 )
Accounts payable 3,761 10,121 3,119 3,909
Accrued expenses and other liabilities 54,777 (28,668 ) 133,898 76,571
Advance ticket sales 612,332 400,920 316,268 187,131
Net cash provided by operating activities 1,259,219 923,627 1,727,946 1,366,635
Cash flows from investing activities
Additions to property and equipment, net (1,251,434 ) (1,065,265 ) (1,361,678 ) (1,129,514 )
Promissory note receipts 501 — 755 —
Settlement of derivatives 64,796 (35,255 ) 64,796 (35,255 )
Net cash used in investing activities (1,186,137 ) (1,100,520 ) (1,296,127 ) (1,164,769 )
Cash flows from financing activities
Repayments of long-term debt (906,897 ) (921,329 ) (1,233,499 ) (1,006,620 )
Proceeds from long-term debt 1,445,352 1,217,060 1,491,352 1,217,060
Due to NCLH, net (7,751 ) 9,519 (8,690 ) 20,543
Dividends (445,500 ) — (445,500 ) —
Contribution from NCLH 7,000 — 7,000 —
Net share settlement of restricted share units (13,415 ) (6,187 ) (13,840 ) (6,342 )
Early redemption premium (5,154 ) — (5,154 ) —
Deferred financing fees (114,254 ) (31,000 ) (115,699 ) (32,473 )
Net cash provided by (used in) financing activities (40,619 ) 268,063
Net cash (used in) provided by financing activities (324,030 ) 192,168
Net increase in cash and cash equivalents 32,463 91,170 107,789 394,034
Cash and cash equivalents at beginning of period 170,757 126,041 170,757 126,041
Cash and cash equivalents at end of period $ 203,220 $ 217,211 $ 278,546 $ 520,075

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

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NCL Corporation Ltd.
Consolidated Statements of Changes in Shareholders’ Equity
(Unaudited)
(in thousands)

Ordinary
Shares Additional
Paid-in
Capital Accumulated
Other
Comprehensive
Income (Loss) Retained
Earnings Total
Shareholders’
Equity Ordinary
Shares Additional
Paid-in
Capital Accumulated
Other
Comprehensive
(Loss) Income Retained
Earnings Total
Shareholders’
Equity
Balance, December 31, 2016 $ 37 $ 3,796,042 $ (316,186 ) $ 1,007,780 $ 4,487,673 $ 37 $ 3,796,042 $ (316,186 ) $ 1,007,780 $ 4,487,673
Share-based compensation — 42,220 — — 42,220 — 63,664 — — 63,664
Net share settlement of restricted share units — (6,187 ) — — (6,187 ) — (6,342 ) — — (6,342 )
Change in accounting policy (share-based forfeitures) — (2,153 ) — 2,153 — — (2,153 ) — 2,153 —
Other comprehensive income, net — — 144,394 — 144,394 — — 253,418 — 253,418
Net income — — — 264,579 264,579 — — — 660,806 660,806
Balance, June 30, 2017 $ 37 $ 3,829,922 $ (171,792 ) $ 1,274,512 $ 4,932,679
Balance, September 30, 2017 $ 37 $ 3,851,211 $ (62,768 ) $ 1,670,739 $ 5,459,219

Balance, December 31, 2017 $ 37 $ 3,874,586 $ 25,253 $ 1,768,728 $ 5,668,604 $ 37 $ 3,874,586 $ 25,253 $ 1,768,728 $ 5,668,604
Share-based compensation — 59,835 — — 59,835 — 88,797 — — 88,797
Net share settlement of restricted share units — (13,415 ) — — (13,415 ) — (13,840 ) — — (13,840 )
Contribution from NCLH — 7,000 — — 7,000 — 7,000 — — 7,000
Cumulative change in accounting policy — — (12 ) 12 — — — (12 ) 12 —
Other comprehensive income, net — — 24,398 — 24,398 — — 29,164 — 29,164
Dividends — — — (445,500 ) (445,500 ) — — — (445,500 ) (445,500 )
Net income — — — 334,923 334,923 — — — 810,335 810,335
Balance, June 30, 2018 $ 37 $ 3,928,006 $ 49,639 $ 1,658,163 $ 5,635,845
Balance, September 30, 2018 $ 37 $ 3,956,543 $ 54,405 $ 2,133,575 $ 6,144,560

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

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NCL Corporation 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 NCLC (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 Cruise Line” or “Norwegian” refers to the Norwegian Cruise Line brand and its predecessors, (v) “Prestige” refers to Prestige Cruises International S. de R.L. (formerly Prestige Cruises International, Inc.), together with its consolidated subsidiaries, including Prestige Cruise Holdings S. de R.L. (formerly Prestige Cruise Holdings, Inc.), Prestige’s direct wholly-owned subsidiary, which in turn is the parent of Oceania Cruises S. de R.L. (formerly Oceania Cruises, Inc.) (“Oceania Cruises”) and Seven Seas Cruises S. DEde 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), (vi) “Apollo” refers to Apollo Global Management, LLC, its subsidiaries and the affiliated funds it manages and the “Apollo Holders” refers to one or more of NCL Athene LLC, AIF VI NCL (AIV), L.P., AIF VI NCL (AIV II), L.P., AIF VI NCL (AIV III), L.P., AIF VI NCL (AIV IV), L.P., Apollo Overseas Partners (Delaware) VI, L.P., Apollo Overseas Partners (Delaware 892) VI, L.P., Apollo Overseas Partners VI, L.P., Apollo Overseas Partners (Germany) VI, L.P., AAA Guarantor — Co-Invest VII, L.P., AIF VI Euro Holdings, L.P., AIF VII Euro Holdings, L.P., Apollo Alternative Assets, L.P., Apollo Management VI, L.P. and Apollo Management VII, L.P. and (vii) “Genting HK” refers to Genting Hong Kong Limited and/or its affiliates (formerly Star Cruises Limited and/or its affiliates) (Genting HK owns NCLH’s ordinary shares indirectly through Star NCLC Holdings Ltd., its Bermuda wholly-owned subsidiary (“Star NCLC”)).
References to the “U.S.” are to the United States of America, and “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. We refer you to “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations— “Terminology” for the capitalized terms used and not otherwise defined throughout these notes to consolidated financial statements.

1. Description of Business and Organization

We are a leading global cruise company which operates the Norwegian Cruise Line, Oceania Cruises and Regent Seven Seas Cruises brands. As of ~~June~~September 30, 2018, we had 26 ships with approximately 54,400 Berths. We plan to introduce eight additional ships through 2027, subject to certain conditions. Norwegian Encore is on order for delivery in the fall of 2019. We also have an Explorer Class Ship, Seven Seas Splendor, on order for delivery in the winter of 2020. Project Leonardo will introduce an additional six ships with expected delivery dates from 2022 through 2027. These additions to our fleet will increase our total Berths to approximately 78,900.

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, 2017, which are included in our most recent Annual Report on Form 10-K filed for the year ended December 31, 2017 (“Annual Report”), with the ~~Securities and Exchange Commission.~~SEC.

Revenue and Expense Recognition

On January 1, 2018, we adopted the Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. 2014-09, ~~(“Topic 606”) -~~ Revenue from Contracts with ~~Customers.~~Customers, (Topic 606)(“Topic 606”). Topic 606 supersedes the revenue recognition requirements in Accounting Standards Codification ~~605 -~~ 605—Revenue ~~Recognition.~~Recognition (“Topic 605”). Using the modified retrospective method, we applied the new requirements to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented below under ~~Topic 606,~~“— Financial Statement Presentation” and “— Impacts on Financial Statements,” while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under Topic 605.

6
Nature of ~~goods~~Goods and ~~services~~Services

We offer our guests a multitude of cruise fare options when booking a cruise. Our cruise ticket prices generally include cruise fare and a wide variety of onboard activities and amenities, as well as meals and entertainment. In some instances, cruise ticket prices include round-trip airfare to and from the port of embarkation, complimentary beverages, unlimited shore excursions, free internet, pre-cruise hotel packages, and on some of the exotic itineraries, ~~pre~~pre- or ~~post land~~post-land packages. Prices vary depending on the particular cruise itinerary, stateroom category selected and the time of year that the voyage takes place. Passenger ticket revenue also includes full ship charters as well as port fees and taxes.
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~~Table of Contents~~

During the voyage, we generate onboard and other revenue for additional products and services which are not included in the cruise fare, including casino operations, certain food and beverage, gift shop purchases, spa services, photo services and other similar items. Food and beverage, casino operations and shore excursions are generally managed directly by us while retail shops, spa services, art auctions and internet services may be managed through contracts with third-party concessionaires. These contracts generally entitle us to a fixed percentage of the gross sales derived from these ~~concessions.~~concessions, which is recognized on a net basis. While some onboard goods and services may be prepaid prior to the voyage, we utilize point-of-sale systems for discrete purchases made onboard. Certain of our product offerings are bundled and we allocate the value of the bundled goods and services between passenger ticket revenue and onboard and other revenue based upon the relative standalone selling prices of those goods and services.

Timing of ~~satisfaction~~Satisfaction of ~~performance obligations~~Performance Obligations and ~~significant payment terms~~Significant Payment Terms

The payment terms and cancellation policies vary by brand, stateroom category, length of voyage, and country of purchase. A deposit for a future booking is required at or soon after the time of booking. Final payment is generally due between 120 days and 180 days before the voyage. Deposits on advance ticket sales are deferred when received, and include amounts that are refundable. Deferred amounts are subsequently recognized as revenue ratably during the voyage sailing days as services are rendered over time on the ship. Deposits are generally cancellable and refundable prior to sailing, but may be subject to penalties, depending on the timing of cancellation. The inception of substantive cancellation penalties generally coincides with the dates that final payment is due, and penalties generally increase as the voyage sail date approaches. Cancellation fees are recognized in passenger ticket revenue in the month of the cancellation.
Goods and services associated with onboard revenue are generally provided at a point in time and revenue is recognized when the performance obligation is satisfied. Onboard goods and services rendered may be paid at disembarkation. A receivable is recognized for onboard goods and services rendered when the voyage is not completed before the end of the period.

Cruises that are reserved under full ship charter agreements are subject to the payment terms of the specific agreement and may be either cancelable or non-cancelable. Deposits received on charter voyages are deferred when received and included in advance ticket sales. Deferred amounts are subsequently recognized as revenue ratably over the voyage sailing dates.
~~Financial statement presentation~~
As of January 1, 2018, in connection with the adoption of Topic 606, we reclassified $51.6 million of deferred costs associated with obtaining customer contracts to prepaid expenses and other assets from advance ticket sales.

Segment Reporting

We have concluded that our business has a single reportable segment. Each brand, Norwegian, Oceania Cruises and Regent, constitutes a business for which discrete financial information is available and management regularly reviews the brand level operating results and, therefore, each brand is considered an operating segment. Our operating segments have similar economic and qualitative characteristics, including similar long-term margins and similar products and services; therefore, we aggregate all of the operating segments into one reportable segment.

Although we sell cruises on an international basis, our passenger ticket revenue is primarily attributed to U.S.-sourced guests who make reservations in the U.S. Revenue attributable to U.S.-sourced guests has historically approximated 75-80%. No other individual country’s revenues exceed 10% in any given period.

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Disaggregation of Revenue

Revenue and cash flows are affected by economic factors in various geographical regions.
Revenues by destination ~~were as follows~~consisted of the following (in thousands):

Three Months Ended
June 30, Six Months Ended
June 30,
2018 2017 2018 2017
North America $ 851,569 $ 769,368 $ 1,726,748 $ 1,620,039
Europe 432,296 419,944 463,366 446,106
Asia-Pacific 153,673 55,514 421,391 188,944
Other 84,636 99,277 204,072 239,795
Total revenue $ 1,522,174 $ 1,344,103 $ 2,815,577 $ 2,494,884
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Three Months Ended
September 30, Nine Months Ended
September 30,
2018 2017 2018 2017
North America $ 997,550 $ 873,062 $ 2,724,298 $ 2,493,101
Europe 763,680 679,168 1,227,046 1,125,274
Asia-Pacific 77,986 79,439 499,377 268,383
Other 19,140 20,069 223,212 259,864
Total revenue $ 1,858,356 $ 1,651,738 $ 4,673,933 $ 4,146,622

Contract Balances

Receivables from customers are included within accounts receivables, net. As of ~~June~~September 30, 2018 and January 1, 2018, our receivables from customers were ~~$18.3~~$19.7 million and $13.8 million, respectively.

Contract liabilities represent the Company’s obligation to transfer goods and services to a customer. A customer deposit held for a future cruise is generally considered a contract liability only when final payment is both due and paid by the customer and is usually recognized in earnings within 180 days of becoming a contract. Other deposits held and included within advance ticket sales or other long-term liabilities are not considered contract liabilities as they are largely cancelable and refundable. Our contract liabilities are included within advance ticket sales. As of ~~June~~September 30, 2018 and January 1, 2018, our contract liabilities were ~~$1.5~~$1.3 billion and $1.0 billion, respectively. Of the amounts included within contract liabilities, approximately 50% were refundable in accordance with our cancellation policies. Approximately $1.0 billion of the January 1, 2018 contract liability balance has been recognized in revenue for the ~~six~~nine months ended ~~June~~September 30, 2018.

Our revenue is seasonal and based on the demand for cruises. Historically, the seasonality of the North American cruise industry generally results in the greatest demand for cruises during the Northern Hemisphere’s summer months. This predictable seasonality in demand has resulted in fluctuations by quarter in our revenue and results of operations. The seasonality of our results is increased due to ships being taken out of service for regularly scheduled Dry-docks, which we typically schedule during non-peak demand periods. This seasonality will result in higher contract liability balances as a result of an increased number of reservations preceding these peak demand periods. The addition of new ships also increases the contract liability balances prior to a new ship’s delivery, as staterooms are usually made available for reservation prior to the inaugural cruise. Norwegian Bliss, with approximately 4,000 ~~berths,~~Berths, was delivered on April 19, 2018 and added 8% capacity to our ~~fleet, was delivered on April 19, 2018.~~fleet.

Practical Expedients and Exemptions

We do not disclose information about remaining performance obligations that have original expected durations of one year or less. We recognize revenue in an amount that corresponds directly with the value to the customer of our performance completed to date. Variable consideration, which will be determined based on a future rate and passenger count, is excluded from the disclosure and these amounts are not material. These variable non-disclosed contractual amounts relate to our non-cancelable charter agreements and a leasing arrangement with a certain port, both of which are long-term in nature. Amounts that are fixed in nature due to the application of minimum guarantees are also not material and are not disclosed.

Contract Costs

Management expects that incremental commissions and credit card fees paid as a result of obtaining ticket contracts are recoverable; therefore, we recognize these amounts as assets when they are paid prior to the voyage. Costs of air tickets and port taxes and fees that fulfill future performance obligations are also considered recoverable and are recorded as assets. As of ~~June~~September 30, 2018, ~~$140.4~~$118.4 million of costs incurred to obtain customers and ~~$28.9~~$25.6 million of costs to fulfill contracts with customers are recognized as assets within prepaid expenses and other assets. Incremental commissions, credit card fees, air ticket costs, and port taxes and fees are recognized ratably over the voyage sailing dates, concurrent with associated revenue, and are primarily in commissions, transportation and other expense.
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Financial Statement Presentation
As of January 1, 2018, in connection with the adoption of Topic 606, we reclassified $51.6 million of deferred costs associated with obtaining customer contracts to prepaid expenses and other assets from advance ticket sales.

Impacts on Financial Statements

The adoption of Topic 606 does not change the timing, classification or amount of revenue recognized from customers in our consolidated financial statements nor does it change the timing, classification or amount of incremental costs to obtain and fulfill those contracts with customers. Therefore, the adoption had no impact on our consolidated statement of operations or consolidated statement of comprehensive income.

The following table summarizes the ~~impacts~~impact of the adoption of Topic 606 ~~adoption~~ on our consolidated balance sheet which has been adjusted for deferred contract costs that would have been included, net, in ~~Advance~~advance ticket sales as of ~~June~~September 30, 2018 (in thousands):

As reported Adjustments Balances without
adoption of Topic
606
Prepaid expenses and other assets $ 328,737 $ (81,936 ) $ 246,801
Total assets 15,327,461 (81,936 ) 15,245,525
Advance ticket sales 1,951,701 (81,936 ) 1,869,765
Total liabilities and shareholders’ equity $ 15,327,461 $ (81,936 ) $ 15,245,525
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As Reported Adjustments Balances Without
Adoption of Topic
606
Prepaid expenses and other assets $ 298,263 $ (59,881 ) $ 238,382
Total assets $ 15,307,471 $ (59,881 ) $ 15,247,590
Advance ticket sales $ 1,648,742 $ (59,881 ) $ 1,588,861
Total liabilities and shareholders’ equity $ 15,307,471 $ (59,881 ) $ 15,247,590

The following table summarizes the ~~impacts~~impact of ~~our~~the adoption of Topic 606 on our consolidated statement of cash flows for the ~~six~~nine months ended ~~June~~September 30, 2018 (in thousands):

As reported Adjustments Balances without
adoption of Topic
606 As Reported Adjustments Balances Without
Adoption of Topic
606
Changes in operating assets and liabilities:
Prepaid expenses and other assets $ (74,536 ) $ 30,337 $ (44,199 ) $ (34,451 ) $ 8,282 $ (26,169 )
Advance ticket sales 612,332 (30,337 ) 581,995 $ 316,268 $ (8,282 ) $ 307,986
Net cash provided by operating activities $ 1,259,219 $ — $ 1,259,219 $ 1,727,946 $ — $ 1,727,946

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. We recognized a ~~gain~~loss of ~~$12.7~~$0.2 million and ~~a loss of $8.1~~$4.0 million for the three months ended ~~June~~September 30, 2018 and 2017, respectively, and a gain of ~~$10.9~~$10.7 million and a loss of ~~$10.8~~$14.8 million for the ~~six~~nine months ended ~~June~~September 30, 2018 and 2017, respectively, related to transactions denominated in other currencies.

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 ~~they are~~the amortization of deferred financing fees is included in interest expense, net.

Recently Issued and Adopted Accounting Guidance

In ~~February 2016,~~August 2018, the ~~Financial Accounting Standards Board (“FASB”)~~FASB issued ASU No. ~~2016-02~~2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract (a consensus of the FAS Emerging Issues Task Force), which ~~sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties~~is designed 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 andalign the accounting for ~~sales-type and direct financing leases.~~costs of implementing a cloud computing service arrangement, regardless of whether the hosting arrangement conveys a license to the hosted software. The ~~ASU will also require qualitative and quantitative disclosures designed~~update requires that for hosting arrangements considered to ~~give financial statement users additional information on~~be a service contract, the ~~amount, timing, and uncertainty~~criteria for capitalization of ~~cash flows arising from leases.~~developing or obtaining internal-use software shall be applied. The ~~ASU~~update is effective for annual ~~reporting~~ periods, ~~and~~including interim periods within those annual periods, beginning after December 15, ~~2018~~2020, with early adoption ~~permitted. The ASU is to be applied using a modified retrospective approach. To evaluate the impact of the~~permitted, including adoption ~~of this guidance, we have engaged a third party to assist us~~ in our review of existing leases and evaluation of contracts to determine what might be considered a lease under the new guidance. We are also evaluating certain practical expedients offered by the guidance and their effects upon adoption.
In December 2017, the Tax Cuts and Jobs Act (“the Act”) was enacted. Among other provisions, the Act reduces the U.S. federal corporate tax rate from 35% to 21%. The SEC staff issued Staff Accounting Bulletin No. 118, which addresses how a company recognizes provisional amounts when a company does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete its accounting for the effect of the changes required by the Act. The measurement period ends when a company has obtained, prepared and analyzed the information necessary to finalize its accounting, but cannot extend beyond one year. As of June 30, 2018, we have not completed the accounting for the tax effects of enactment of the Act; however, as described below, we have made a reasonable estimate of the effects on existing deferred tax balances. These amounts are provisional and subject to change. The most significant impact of the Act for the Company was a $4.5 million reduction of the value of net deferred tax liabilities (which represent future tax expenses) that was recorded in 2017 as a discrete tax benefit as a result of lowering the U.S. corporate income tax rate from 35% to 21%. The tax benefit represents a provisional amount and the Company’s current best estimates. Any adjustments recorded to the provisional amount through the end of 2018 will be included in income from operations as an adjustment to tax expense. The provisional amounts incorporate assumptions made based upon the Company’s current interpretation of the Act and may change as the Company receives additional clarification and implementation guidance. Other aspects of the Act are either not applicable or not expected to have a material impact on the Company’s financial statements.
In January 2017, the FASB issued ASU No. 2017-04 which simplifies the test for goodwill impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. The guidance is effective for annual or any interim ~~goodwill impairment tests in years beginning after December 15, 2019. Early adoption~~period. A prospective or retrospective transition approach must be elected. The Company is ~~permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We do not expect to early adopt this guidance. We will evaluate~~evaluating the impact of this guidance ~~to our~~on the Company’s consolidated financial ~~statements upon adoption of the guidance.~~ statements.

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On January 1, 2018, wethe Company adopted ASU No. 2017-12,Derivatives and Hedging (Topic 815) — Targeted Improvements to Accounting for Hedging Activities, which simplifies the accounting for derivatives. For derivative instruments that are designated and qualify as cash flow hedges, the gain or loss on the derivative instrument is reported as a component of other comprehensive income, reclassified into earnings in the same period or periods during which the hedged transaction affects earnings and presented in the same income statement line item as the earnings effect of the hedged item. The Company recorded a cumulative effect adjustment to accumulated other comprehensive income (loss) with a corresponding adjustment to the opening balance of retained earnings related to the elimination of the separate measurement of ineffectiveness for its cash flow hedges, upon adoption. The adjustments were not material to the Company’s consolidated financial statements. We refer you to Note 8. “Fair Value Measurements and Derivatives” in these notes to consolidated financial statements.
On January 1, 2018, the Company adopted ASU No. 2016-16,Income Taxes (Topic 740) — Intra-Entity Transfers of Assets Other Than Inventory,which requires companies to recognize the income-tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs, rather than when the asset has been sold to an outside party. No cumulative-effect adjustment was necessary as the Company did not have previously unamortized deferred income tax expense from past intra-entity transfers. The adoption does not have an impact on continuing operations, net income or any other financial statement line items for the current period.

On
In December 2017, the Tax Cuts and Jobs Act (“the Act”) was enacted. Among other provisions, the Act reduced the corporate income tax rate from 35% to 21%. Also in December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, which addresses the recognition of provisional amounts when a company does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete its accounting for the effect of the changes required by the Act. The measurement period ends when a company has obtained, prepared and analyzed the information necessary to finalize its accounting, but cannot extend beyond one year. As of September 30, 2018, the Company has not completed the accounting for the tax effects of enactment of the Act; however, as described below, the Company has made reasonable provisional best estimates, which are subject to change. The most significant impact of the Act for the Company was a $4.5 million reduction of the value of net deferred tax liabilities (which represent future tax expenses) recorded in 2017 as a discrete tax benefit resulting from the corporate tax rate reduction from 35% to 21%. Any adjustments to the provisional amount through the end of 2018 will be recorded as adjustments to income tax expense in income from operations. The provisional amounts incorporate assumptions made based upon the Company’s current interpretation of the Act and may change as the Company receives additional clarification and implementation guidance. Other aspects of the Act are either not applicable or not expected to have a material impact on the Company’s consolidated financial statements.
In January ~~1, 2018, we adopted~~2017, the FASB issued ASU No. ~~2017-12~~2017-04,Intangibles—Goodwill and Other (Topic 350) — Simplifying the Test for Goodwill Impairment, which simplifies the test for goodwill impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. The guidance is effective for annual or any interim goodwill impairment tests in years beginning after December 15, 2019, with early adoption permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company does not expect to early adopt this guidance. The Company will evaluate, upon adoption of this guidance, the impact of this guidance on the Company’s consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02,Leases (Topic 842),which sets out the principles for the recognition, measurement, presentation and disclosure of leases. The update was issuedto increase transparency and comparability among organizations byrecognizing rights and obligations resulting from leases as lease assets and liabilities on the balance sheetand disclosing key information about leasing arrangements for leases with a term of 12 months or more. The update modifies lessors’ classification criteria for leases and the accounting for ~~derivatives. For derivative instruments~~sales-type and direct financing leases. The update requires 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 update is effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2018, with early adoption permitted. The Company has engaged a third party to assist in reviewing the Company’s existing leases and evaluating the Company’s existing contracts to identify those that are ~~designated and qualify as a cash flow hedge,~~considered to be leases under the ~~gain or loss on~~new guidance. The Company plans to adopt the ~~derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in~~practical expedients offered by the ~~same period or periods during which the hedged transaction affects earnings~~guidance and is ~~presented in~~evaluating the ~~same income statement line item as the earnings effect~~impact of those expedients upon adoption. The update is to be applied retrospectively with a cumulative-effect adjustment on January 1, 2019. Upon implementation of the ~~hedged item. Upon adoption,~~guidance, the ~~guidance required a cumulative effect adjustment, relating~~Company expects to increase, on its consolidated balance sheet, both assets and liabilities to reflect the ~~elimination of~~lease rights and obligations, respectively, and the ~~separate measurement of ineffectiveness for cash flow hedges,~~Company expects to accumulated other comprehensive income (loss) with a corresponding adjustment to the opening balance of retained earnings which was not material to our financial statements (we refer you to Note 8. “Fair Value Measurements and Derivatives”).make additional related disclosures.
10

3. Intangible Assets

The carrying amounts of intangible assets subject to amortization are included ~~within~~in other long-term ~~assets. The gross carrying amounts of intangible~~ assets in the ~~related accumulated amortization, the net carrying amounts and the weighted-average amortization periods~~consolidated balance sheets.
Intangible assets consisted of the ~~Company’s intangible assets are listed in the~~ following ~~tables~~ (in thousands, except amortization period):

June 30, 2018 September 30, 2018
Gross Carrying
Amount Accumulated
Amortization Net Carrying
Amount Weighted-
Average
Amortization
Period (Years) Gross Carrying
Amount Accumulated
Amortization Net Carrying
Amount
Weighted-
Average
Amortization
Period
(in years)

Customer relationships $ 120,000 $ (79,311 ) $ 40,689 6.0 $ 120,000 $ (85,533 ) $ 34,467 6.0
Licenses 3,368 (2,213 ) 1,155 5.6 3,368 (2,544 ) 824 5.6
Total intangible assets subject to amortization $ 123,368 $ (81,524 ) $ 41,844 $ 123,368 $ (88,077 ) $ 35,291

December 31, 2017 December 31, 2017
Gross Carrying
Amount Accumulated
Amortization Net Carrying
Amount Weighted-
Average
Amortization
Period (Years) Gross Carrying
Amount Accumulated
Amortization Net Carrying
Amount
Weighted-
Average
Amortization
Period
(in years)

Customer relationships $ 120,000 $ (66,866 ) $ 53,134 6.0 $ 120,000 $ (66,866 ) $ 53,134 6.0
Licenses 3,368 (1,601 ) 1,767 5.6 3,368 (1,601 ) 1,767 5.6
Non-compete agreements 660 (660 ) — 1.0 660 (660 ) — 1.0
Total intangible assets subject to amortization $ 124,028 $ (69,127 ) $ 54,901 $ 124,028 $ (69,127 ) $ 54,901

~~The aggregate amortization expense is as follows (in thousands):~~
Three Months Ended
June 30, Six Months Ended
June 30,
2018 2017 2018 2017
Amortization expense $ 6,553 $ 7,750 $ 13,057 $ 15,665
The following table sets forth the ~~Company’s estimated~~ aggregate amortization ~~expense~~of intangible assets for ~~each of~~ the ~~five years below~~periods presented (in thousands):

Year ended December 31, Amortization
Expense
2019 $ 18,489
2020 9,906
2021 75
2022 75
2023 75
Three Months Ended
September 30, Nine Months Ended
September 30,
2018 2017 2018 2017
Amortization expense $ 6,553 $ 7,780 $ 19,610 $ 23,445
The following table sets forth the estimated annual aggregate amortization of intangible assets for the periods presented (in thousands):
Year Ended December 31, Amortization
Expense
2019 $ 18,489
2020 9,906
2021 75
2022 75
2023 75

4. Accumulated Other Comprehensive Income

Accumulated other comprehensive income (loss) consisted of the following for the ~~six months ended June 30, 2018 was as follows~~periods presented (in thousands):

Accumulated
Other
Comprehensive
Income (Loss) Change
Related to
Cash Flow
Hedges Change
Related to
Shipboard
Retirement
Plan
Accumulated other comprehensive income at beginning of period $ 25,253 $ 33,214 $ (7,961 )
Current period other comprehensive income before reclassifications 32,682 32,682 —
Amounts reclassified into earnings (8,296 ) (8,508 )(1) 212 (2)
Accumulated other comprehensive income at end of period $ 49,639 $ 57,388 (3) $ (7,749 )
~~(1)~~ ~~We refer you to Note 8 — “Fair Value Measurements and Derivatives” for the affected line items in the consolidated statements of operations.~~
Nine Months Ended September 30, 2018
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 $ 25,253 $ 33,214 $ (7,961 )
Current period other comprehensive income before reclassifications 48,047 48,047 —
Amounts reclassified into earnings (18,895 ) (19,214 ) (1)             319 (2)
Accumulated other comprehensive income (loss) at end of period $ 54,405 $ 62,047   (3) $ (7,642 )

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~~(2)~~ ~~Amortization of prior-service cost and actuarial loss reclassified to other income (expense).~~
~~(3)~~ ~~Includes $49.3 million of gain expected to be reclassified into earnings in the next 12 months.~~
~~Accumulated other comprehensive loss for the six months ended June 30, 2017 was as follows (in thousands):~~
Nine Months Ended September 30, 2017
Accumulated
Other
Comprehensive
Loss Change
Related to
Cash Flow
Hedges Change
Related to
Shipboard
Retirement
Plan Accumulated
Other
Comprehensive
(Loss) Income Change
Related to
Cash Flow
Hedges Change
Related to
Shipboard
Retirement
Plan
Accumulated other comprehensive loss at beginning of period $ (316,186 ) $ (308,265 ) $ (7,921 ) $ (316,186) $ (308,265 ) $ (7,921 )
Current period other comprehensive income before reclassifications 124,236 124,236 — 221,512 221,512 —
Amounts reclassified into earnings 20,158 19,949 (1) 209 (2) 31,906 31,593 (1)              313 (4)
Accumulated other comprehensive loss at end of period $ (171,792 ) $ (164,080 ) $ (7,712 ) $ (62,768 ) $ (55,160 ) $ (7,608 )

(1) We refer you to Note ~~8 —~~8— “Fair Value Measurements and Derivatives” in these notes to consolidated financial statements for the affected line items in the consolidated statements of operations.
(2) Amortization of prior-service cost and actuarial loss reclassified to other income (expense), net.
(3) Includes $55.0 million of gain expected to be reclassified into earnings in the next 12 months.
(4) Amortization of prior-service cost and actuarial loss reclassified to payroll and related expense.

5. Property and Equipment, net

Property and equipment, net increased $1.0 billion for the ~~six~~nine months ended ~~June~~September 30, 2018 primarily due to the delivery of Norwegian Bliss and ship improvement projects.

6. Long-Term Debt

On April 19, 2018, we took delivery of Norwegian Bliss. To finance the payment due upon delivery, we had export financing in place for 80% of the contract price. The associated $850.0 million term loan bears interest at a fixed rate of 3.92% with a maturity date of April 19, 2030. Principal and interest payments are payable semiannually.

On April 4, 2018, we redeemed $135.0 million principal amount of the $700.0 million aggregate principal amount of outstanding 4.750% Senior Notes due 2021 (the “Notes”) at a price equal to 100% of the principal amount of the Notes being redeemed and paid the premium of $5.1 million and accrued interest of $1.9 million. The redemption also resulted in a write off of $1.2 million of certain fees. Following the partial redemption, $565.0 million aggregate principal amount of Notes remained outstanding.

7. Related Party Disclosures

In March 2018, as part of a public equity offering of NCLH’s ordinary shares owned by the Apollo Holders and Genting HK, NCLH repurchased 4,722,312 of its ordinary shares sold in the offering for approximately $263.5 million pursuant to its then existing share repurchase program.
As of ~~June~~September 30, 2018, the ownership ~~percentages~~ of NCLH’s ordinary shares ~~were as follows:~~consisted of the following:

Shareholder Number of
Shares Percentage
Ownership
Apollo Holders 15,728,782 7.1 %
Genting HK 3,148,307 1.4 %

8. 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).

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~~Table of Contents~~

Fair Value Hierarchy

The following hierarchy for inputs used in measuring fair value should maximize the use of observable inputs and minimize the use of unobservable inputs by requiring that the most observable inputs be used when available:

Level 1 — Quoted prices in active markets for identical assets or liabilities that are accessible at the measurement dates.
Level 2 — Significant other observable inputs that are used by market participants in pricing the asset or liability based on market data obtained from independent sources.
Level 3 — Significant unobservable inputs we believe market participants would use in pricing the asset or liability based on the best information available.

Derivatives

We are exposed to market risk attributable to changes in interest rates, foreign currency exchange rates and fuel prices. We attempt to minimize these risks through a combination of our normal operating and financing activities and through the use of derivatives. We assess whether derivatives used in hedging transactions are “highly effective” in offsetting changes in the cash flow of our hedged forecasted transactions. We use regression analysis for this hedge relationship and high effectiveness is achieved when a statistically valid relationship reflects a high degree of offset and correlation between the fair values of the derivative and the hedged forecasted transaction. 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, is not considered significant, as we primarily conduct business with large, well-established financial institutions with which we have established relationships, and which have credit risks acceptable to us, or the credit risk is spread out among ~~a large number of~~many creditors. We do not anticipate non-performance by any of our significant counterparties.

As of ~~June~~September 30, 2018, we had fuel swaps, ~~maturing through December 31, 2020~~ which are used to mitigate the financial impact of volatility of fuel prices pertaining to approximately ~~1.0~~0.9 million metric tons of our projected fuel ~~purchases.~~purchases, maturing through December 31, 2020.

As of ~~June~~September 30, 2018, we had foreign currency forward contracts, matured foreign currency options and matured foreign currency collars 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 ~~€1.5~~€2.0 billion, or ~~$1.8~~$2.3 billion based on the euro/U.S. dollar exchange rate as of ~~June~~September 30, 2018.

As of ~~June~~September 30, 2018, we had interest rate swap agreements which are used to hedge our exposure to interest rate movements and to manage our interest expense. The notional amount of our outstanding debt associated with the interest rate swap agreements was $1.0 billion as of ~~June~~September 30, 2018.

The ~~following table sets forth our~~ derivatives measured at fair value and ~~discloses~~ the respective location in the consolidated balance ~~sheet location~~sheets include the following (in thousands):

Asset Liability
Balance Sheet location June 30,
2018 December 31,
2017 June 30,
2018 December 31,
2017
Fuel contracts designated as hedging instruments
Prepaid expenses and other assets $ 48,058 $ 19,220 $ — $ 2,406
Other long-term assets 32,482 19,854 658 3,469
Accrued expenses and other liabilities — — — 3,348
Other long-term liabilities — 576 — 2,148
Foreign currency contracts designated as hedging instruments
Prepaid expenses and other assets 3,502 52,300 — 730
Other long-term assets 42,186 85,081 2,960 —
Other long-term liabilities — — 4,760 —
Interest contracts designated as hedging instruments
Prepaid expenses and other assets 621 — — —
Other long-term assets 1,362 — — —
Accrued expenses and other liabilities — — — 1,020
Total derivatives designated as hedging instruments $ 128,211 $ 177,031 $ 8,378 $ 13,121
Assets Liabilities
Derivative Contracts Designated as
Hedging Instruments
Balance Sheet Location September 30,
2018 December 31,
2017 September 30,
2018 December 31,
2017
Fuel contracts
Prepaid expenses and other assets $ 52,471 $ 19,220 $ — $ 2,406
Other long-term assets 32,357 19,854 281 3,469
Accrued expenses and other liabilities — — — 3,348
Other long-term liabilities — 576 — 2,148
Foreign currency contracts
Prepaid expenses and other assets 2,229 52,300 — 730
Other long-term assets 33,337 85,081 2,976 —
Accrued expenses and other liabilities — — 118 —
Other long-term liabilities 4,747 — 9,312 —
Interest rate contracts
Prepaid expenses and other assets 1,984 — — —
Other long-term assets 1,177 — — —
Accrued expenses and other liabilities — — — 1,020
Total derivative contracts designated as hedging instruments $ 128,302 $ 177,031 $ 12,687 $ 13,121

13
~~Table of Contents~~

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.

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

June 30, 2018 Gross Amounts Gross
Amounts
Offset Total Net
Amounts Gross
Amounts Not
Offset Net Amounts
September 30, 2018
Gross
Amounts
Gross
Amounts
Offset Total Net
Amounts
Gross
Amounts
Not Offset
Net Amounts
Assets $ 128,211 $ (3,618 ) $ 124,593 $ (42,913 ) $ 81,680 $ 123,555 $ (3,257 ) $ 120,298 $ (34,549 ) $ 85,749
Liabilities 4,760 — 4,760 (4,760 ) — 9,430 (4,747 ) 4,683 (3,716 ) 967

December 31, 2017 Gross Amounts Gross
Amounts
Offset Total Net
Amounts Gross
Amounts Not
Offset Net Amounts
Gross
Amounts
Gross
Amounts
Offset Total Net
Amounts
Gross
Amounts
Not Offset
Net Amounts
Assets $ 176,455 $ (6,605 ) $ 169,850 $ (127,924 ) $ 41,926 $ 176,455 $ (6,605 ) $ 169,850 $ (127,924 ) $ 41,926
Liabilities 6,516 (576 ) 5,940 (1,020 ) 4,920 6,516 (576 ) 5,940 (1,020 ) 4,920

The effects of cash flow hedge accounting on accumulated other comprehensive income (loss) ~~were as follows~~include the following (in thousands):

Derivatives Amount of gain or (loss)
recognized in other
comprehensive income Location of gain or
(loss) reclassified
from accumulated
other
comprehensive
income (loss) into
income Amount of gain or (loss) reclassified
from accumulated other comprehensive
income (loss) into income
Amount of Gain (Loss)
Recognized in Other
Comprehensive Income

Location of Gain
(Loss) Reclassified
from Accumulated
Other Comprehensive
Income (Loss) into
Income

Amount of Gain (Loss) Reclassified
from Accumulated Other Comprehensive
Income (Loss) into Income

Three Months
Ended June 30,
2018 Three Months
Ended June 30,
2017 Three Months
Ended June 30,
2018 Three Months
Ended June 30,
2017
Three Months Ended
September 30, 2018

Three Months Ended
September 30, 2017

Three Months Ended
September 30, 2018

Three Months Ended
September 30, 2017

Fuel contracts $ 70,508 $ (4,884 ) Fuel $ 7,904 $ (8,584 ) $ 24,439 $ 30,452 Fuel $ 11,595 $ (9,796 )
Foreign currency contracts (88,382 ) 136,428 Depreciation and amortization expense (899 ) (895 ) (10,062 ) 66,849 Depreciation and amortization (703 ) (1,157 )
Interest rate contracts 1,980 (25 ) Interest expense, net (282 ) (765 ) 988 (25 ) Interest expense, net (186 ) (691 )
Total gain (loss) recognized in other comprehensive income $ (15,894 ) $ 131,519 $ 6,723 $ (10,244 ) $ 15,365 $ 97,276 $ 10,706 $ (11,644 )

14

The effects of cash flow hedge accounting on the consolidated statements of operations ~~were as follows~~include the following (in thousands):

For the Three months
Ended June 30, 2018 For the Three months
Ended June 30, 2017
Fuel Depreciation
and
amortization Interest
expense, net Fuel Depreciation
and
amortization Interest
expense, net
Total amounts of income and expense line items presented in the consolidated statements of operations in which the effects of cash flow hedges are recorded $ 95,212 $ 140,704 $ 72,988 $ 86,663 $ 123,141 $ 64,196
Amount of gain or (loss) reclassified from accumulated other comprehensive income (loss) into income
Fuel contracts 7,904 — — (8,584 ) — —
Foreign currency contracts — (899 ) — — (895 ) —
Interest rate contracts — — (282 ) — — (765 )
14
~~Table of Contents~~
Three Months Ended September 30, 2018 Three Months Ended September 30, 2017
Fuel Depreciation
and
Amortization Interest
Expense, net Fuel Depreciation
and
Amortization Interest
Expense, net
Total amounts of income and expense line items presented in the consolidated statements of operations in which the effects of cash flow hedges are recorded $ 99,643 $ 143,700 $ 69,540 $ 91,231 $ 134,532 $ 66,339

Amount of gain (loss) reclassified from accumulated other comprehensive income (loss) into income
Fuel contracts 11,595 — — (9,796 ) — —
Foreign currency contracts — (703 ) — — (1,157 ) —
Interest rate contracts — — (186 ) — — (691 )

The effects of cash flow hedge accounting on accumulated other comprehensive income (loss) ~~were as follows~~include the following (in thousands):

Derivatives Amount of gain or (loss)
recognized in other
comprehensive income Location of gain or
(loss) reclassified
from accumulated
other
comprehensive
income (loss) into
income Amount of gain or (loss) reclassified
from accumulated other comprehensive
income (loss) into income
Amount of Gain (Loss)
Recognized in Other
Comprehensive Income

Location of Gain
(Loss) Reclassified
from Accumulated
Other Comprehensive
Income (Loss) into
Income

Amount of Gain (Loss) Reclassified
from Accumulated Other Comprehensive
Income (Loss) into Income

Six Months
Ended June 30,
2018 Six Months
Ended June 30,
2017 Six Months
Ended June 30,
2018 Six Months
Ended June 30,
2017
Nine Months Ended
September 30, 2018

Nine Months Ended
September 30, 2017

Nine Months Ended
September 30, 2018

Nine Months Ended
September 30, 2017

Fuel contracts $ 64,496 $ (31,087 ) Fuel $ 11,429 $ (16,587 ) $ 88,935 $ (635 ) Fuel $ 23,024 $ (26,383 )
Foreign currency contracts (33,889 ) 155,064 Depreciation and amortization expense (2,058 ) (1,752 ) (43,951 ) 221,913 Depreciation and amortization (2,761 ) (2,909 )
Interest rate contracts 2,075 259 Interest expense, net (863 ) (1,610 ) 3,063 234 Interest expense, net (1,049 ) (2,301 )
Total gain (loss) recognized in other comprehensive income $ 32,682 $ 124,236 $ 8,508 $ (19,949 ) $ 48,047 $ 221,512 $ 19,214 $ (31,593 )

The effects of cash flow hedge accounting on the consolidated statements of operations ~~were as follows~~include the following (in thousands):

For the Six Months
Ended June 30, 2018 For the Six Months
Ended June 30, 2017 Nine Months Ended September 30, 2018 Nine Months Ended September 30, 2017
Fuel Depreciation
and
amortization Interest
expense, net Fuel Depreciation
and
amortization Interest
expense, net Fuel Depreciation
and
Amortization Interest
Expense, net Fuel Depreciation
and
Amortization Interest
Expense, Net
Total amounts of income and expense line items presented in the consolidated statements of operations in which the effects of cash flow hedges are recorded $ 188,643 $ 271,948 $ 132,686 $ 175,549 $ 242,346 $ 117,156 $ 288,286 $ 415,648 $ 202,226 $ 266,780 $ 376,878 $ 183,497

Amount of gain or (loss) reclassified from accumulated other comprehensive income (loss) into income
Amount of gain (loss) reclassified from accumulated other comprehensive income (loss) into income
Fuel contracts 11,429 — — (16,587 ) — — 23,024 — — (26,383 ) — —
Foreign currency contracts — (2,058 ) — — (1,752 ) — — (2,761 ) — — (2,909 ) —
Interest rate contracts — — (863 ) — — (1,610 ) — — (1,049 ) — — (2,301 )

Long-Term Debt

As of ~~June~~September 30, 2018 and December 31, 2017, the fair value of our long-term debt, including the current portion, was ~~$6,964.9~~$6,693.9 million and $6,448.6 million, respectively, which was ~~$4.2~~$13.9 million and $23.5 million higher, 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.

15
Other

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

9. Employee Benefits and Compensation Plans

Share Option Awards

The following istable sets forth a summary of option activity under NCLH’s Amended and Restated 2013 Performance Incentive Plan, ~~for the six months ended June 30, 2018. The amounts include~~including 208,335 ~~of performance-based awards, which were~~ previously awarded asperformance-based share option awards, for which a grant date ~~had been~~was established in 2018, for the ~~first quarter of 2018.~~period presented:

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~~Table of Contents~~
Number of Share Option
Awards Weighted-Average Exercise
Price Weighted-
Average
Contractual Term Aggregate
Intrinsic Value Number of Share Option Awards Weighted-Average Exercise Price
Weighted-
Average
Contractual
Term
Aggregate
Intrinsic Value
Time-
Based
Awards Performance-
Based
Awards Market-
Based
Awards Time-
Based
Awards Performance-
Based
Awards Market-
Based
Awards (years) (in thousands) Time-
Based
Awards Performance-
Based
Awards Market-
Based
Awards Time-
Based
Awards Performance-
Based
Awards Market-
Based
Awards (in years) (in thousands)
Outstanding as of January 1, 2018 6,580,898 373,969 208,333 $ 49.18 $ 31.39 $ 59.43 6.99 $ 50,021 6,580,898 373,969 208,333 $ 49.18 $ 31.39 $ 59.43 6.99 $ 50,021
Granted — 208,335 — — 59.43 — — — — 208,335 — $ — $ 59.43 $ — — $ —
Exercised (468,540 ) (106,109 ) — 33.46 19.00 — — — (625,611 ) (109,285 ) — $ 34.44 $ 19.00 $ — — $ —
Forfeited and cancelled (169,000 ) (52,084 ) — 54.75 59.43 — — — (192,333 ) (52,084 ) — $ 54.70 $ 59.43 $ — — $ —
Outstanding as of June 30, 2018 5,943,358 424,111 208,333 $ 50.26 $ 44.82 $ 59.43 6.69 $ 23,885
Outstanding as of September 30, 2018 5,762,954 420,935 208,333 $ 50.60 $ 45.01 $ 59.43 6.46 $ 47,269

Restricted Ordinary Share Awards

The following is a summary of NCLH’s restricted ~~NCLH~~ ordinary share activity for the ~~six months ended June 30, 2018:~~period presented:

Number of
Time-Based
Awards Weighted-
Average Grant
Date Fair
Value
Non-vested as of January 1, 2018 858 $ 58.33
Granted — —
Vested (429 ) 58.25
Forfeited or expired — —
Non-vested and expected to vest as of June 30, 2018 429 $ 58.41
Number of
Time-Based
Awards
Weighted-
Average Grant
Date Fair Value

Non-vested as of January 1, 2018 858 $ 58.33
Vested (429 ) $ 58.25
Non-vested as of September 30, 2018 429 $ 58.41

Restricted Share Unit Awards

On March 1, 2018, NCLH granted to certain employees 1.6 million time-based restricted share unit awards ~~to our employees~~ which vest equally over three years. ~~Additionally,~~Also on March 1, 2018, NCLH also granted ~~0.5 million performance-based restricted share units~~ to certain members of our management team 0.5 million performance-based restricted share units, which vest upon the achievement of certain pre-established performance targets ~~(the number reported~~and which amount assumes the maximum level of ~~achievement).~~achievement.

The following istable sets forth a summary of restricted share unit activity ~~for the six months ended June 30, 2018. The amounts include~~and includes 0.3 million previously awarded performance-based restricted share awards for which ~~were previously awarded, as a~~the grant date ~~had been~~was established in ~~the first quarter of~~ 2018 (the number reported assumes the maximum level of achievement)., for the period presented:

Number of
Time-Based
Awards Weighted-
Average Grant
Date Fair Value Number of
Performance-
Based Awards Weighted-
Average Grant
Date Fair Value Number of
Market-
Based Awards Weighted-
Average Grant
Date Fair Value
Non-vested as of January 1, 2018 2,555,477 $ 50.86 — $ — 50,000 $ 59.43
Granted 1,613,077 $ 56.73 843,998 $ 56.58 — $ —
Vested (1,032,760 ) $ 50.66 — $ — — $ —
Forfeited or expired (142,227 ) $ 53.31 (18,384 ) $ 56.43 — $ —
Non-vested as of September 30, 2018 2,993,567 $ 53.98 825,614 $ 56.58 50,000 $ 59.43

Number of
Time-Based
Awards Weighted-
Average Grant
Date Fair
Value Number of
Performance-
Based
Awards Weighted-
Average Grant
Date Fair Value Number of
Market-
Based
Awards Weighted-
Average Grant
Date Fair Value
Non-vested as of January 1, 2018 2,555,477 $ 50.86 — $ — 50,000 $ 59.43
Granted 1,613,077 56.73 843,998 56.58 — —
Vested (1,006,184 ) 50.61 — — — —
Forfeited or expired (81,980 ) 53.29 (12,500 ) 59.43 — —
Non-vested and expected to vest as of June 30, 2018 3,080,390 $ 53.96 831,498 $ 56.58 50,000 $ 59.43
16

~~The share-based~~Share-based compensation expense for the three and nine months ended ~~June~~September 30, 2018 was ~~$31.7~~$29.0 million and $88.8 million, respectively, of which ~~$27.3~~$24.9 million and $77.0 million, respectively, was recorded in marketing, general and administrative expense and ~~$4.4~~$4.1 million and $11.8 million, respectively, was recorded in payroll and related ~~expense. The share-based compensation~~ expense, ~~for~~in the ~~six months ended June 30, 2018 was $59.8 million~~consolidated statements of ~~which $52.1 million was recorded in marketing, general and administrative expense and $7.7 million was recorded in payroll and related expense. The share-based~~operations.
Share-based compensation expense for the three and nine months ended ~~June~~September 30, 2017 was ~~$24.0~~$21.5 million and $63.7 million, respectively, of which ~~$21.1~~$18.6 million and $57.1 million, respectively, was recorded in marketing, general and administrative expense and $2.9 million and $6.6 million, respectively, was recorded in payroll and related ~~expense. The share-based compensation~~ expense ~~for~~in the ~~six months ended June 30, 2017 was $42.2 million~~consolidated statements of ~~which $38.5 million was recorded in marketing, general and administrative expense and $3.7 million was recorded in payroll and related expense.~~operations.
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10. Commitments and Contingencies

Ship Construction Contracts

Project Leonardo will introduce an additional six ships, each approximately 140,000 Gross Tons with 3,300 Berths, with expected delivery dates from 2022 through 2027, subject to certain conditions. ~~Each~~The effectiveness of the ~~six Project Leonardo~~confirmed orders to construct two of the ships, expected to be delivered in 2026 and 2027, is contingent, among other things, upon the Company’s entry into committed financing arrangements. We have a Breakaway Plus Class Ship, Norwegian Encore, with approximately ~~140,000~~168,000 Gross Tons with ~~approximately 3,300 Berths. We have~~4,000 Berths, on order for delivery in the fall of 2019, and an Explorer Class Ship, Seven Seas Splendor, with approximately 55,000 Gross Tons with 750 Berths, on order for delivery in the winter of 2020. This ship is approximately 55,000 Gross Tons and 750 Berths. We have one additional Breakaway Plus Class Ship, Norwegian Encore, on order for delivery in the fall of 2019. Norwegian Encore is approximately 168,000 Gross Tons with approximately 4,000 Berths.
The combined contract price of ~~these~~the aforementioned eight ships ~~was~~is approximately ~~€7.2~~€7.1 billion, or $8.4 billion based on the euro/U.S. dollar exchange rate as of ~~June~~September 30, 2018. WeFor six of the ships, we have obtained export credit financing, ~~for six of the ships~~ which is expected to fund approximately 80% of the contract price of each ship expected to be delivered through 2025, subject to certain conditions. ~~Two of the Leonardo ships are confirmed orders expected to be delivered in 2026 and 2027, subject to financing (we refer you to Note 13— “Subsequent Event”).~~
~~In connection with the contracts to build these ships, we~~We do not anticipate any contractual breach or cancellation of the contracts to ~~occur. However,~~build these ships; however, if any were to 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.

11. Other Income (Expense), Net

For the three and ~~six~~nine months ended ~~June~~September 30, 2018, other income (expense), net was income of ~~$12.9~~$0.1 million and ~~$11.3~~$11.4 million, respectively, primarily due to foreign currency exchange gains. For the three ~~and six~~ months ended ~~June~~September 30, 2017, other income (expense), net was expense of ~~$5.6~~$3.3 million, ~~and $8.4~~due to foreign currency exchange losses. For the nine months ended September 30, 2017, other income (expense), net was expense of $11.7 million, ~~respectively,~~ due to foreign currency exchange losses, partially offset by a gain from an insurance claim.

12. Supplemental Cash Flow Information

For the ~~six~~nine months ended ~~June~~September 30, 2018, ~~and 2017,~~ we had non-cash investing activities ~~in connection with~~related to property and equipment of ~~$48.9~~$17.8 million and ~~$10.3 million, respectively. For the six months ended June 30, 2018, we had~~ net foreign currency adjustments of ~~$3.9~~$4.5 million related to euro-denominated debt ~~in connection with~~related to the financing ~~for~~of two of our Project Leonardo ships. For the ~~six~~nine months ended ~~June~~September 30, 2017, we had non-cash investing activities ~~in connection with~~related to property and equipment of $15.2 million and non-cash investing activities related to capital leases of ~~$5.4~~$13.3 million.
~~13.~~ ~~Subsequent Event~~
On July 11, 2018, NCLC confirmed orders to construct two Project Leonardo ships expected to be delivered in 2026 and 2027. NCLC previously announced the option to order these two ships. The effectiveness of the orders is contingent on NCLC’s entry into committed financing arrangements.

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

· adverse events impacting the security of travel, such as terrorist acts, armed conflict and threats thereof, acts of piracy, and other international events;

· adverse incidents involving cruise ships;

· 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 spread of epidemics and viral outbreaks;

· our expansion into and investments in new markets;

· the risks and increased costs associated with operating internationally;

· breaches in data security or other disturbances to our information technology and other networks;

· changes in fuel prices and/or other cruise operating costs;

· fluctuations in foreign currency exchange rates;

· overcapacity in key markets or globally;

· the unavailability of attractive port destinations;

· evolving requirements and regulations regarding data privacy and protection and any actual or perceived compliance failures by us;

· our indebtedness and 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;

· 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;

· our inability to recruit or retain qualified personnel or the loss of key personnel;

· delays in our shipbuilding program and ship repairs, maintenance and refurbishments;

· our reliance on third parties to provide hotel management services to certain ships and certain other services;

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

· amendments to our collective bargaining agreements for crew members and other employee relation issues;

· our inability to obtain adequate insurance coverage;

· future changes relating to how external distribution channels sell and market our cruises;

· pending or threatened litigation, investigations and enforcement actions;

· our ability to keep pace with developments in technology;

· seasonal variations in passenger fare rates and occupancy levels at different times of the year;

· changes involving the tax and environmental regulatory regimes in which we operate; and

· other factors set forth under “Risk Factors.”

The above examples are not exhaustive and new risks, uncertainties and other factors 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 expect to 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.

Terminology

This report includes certain non-GAAP financial measures, such as Net Revenue, Net Yield, Net Cruise Cost, Adjusted Net Cruise Cost Excluding Fuel, Adjusted ~~EBITDA~~Net Income and Adjusted ~~Net Income.~~EBITDA. Definitions of these non-GAAP financial measures are included below. ~~For~~We refer you to “Results of Operations” 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.~~measure.

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

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

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

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

•Adjusted Net Income. Net income adjusted for supplemental adjustments.

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

•Breakaway Four Loan. €729.9 million Breakaway ~~four~~Four loan maturing in 2029.

•Breakaway Plus Class Ships. Norwegian Escape, Norwegian Joy, Norwegian Bliss and a ~~fourth~~ ship on order, Norwegian Encore.

•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 ~~the~~ foreign exchange fluctuations.

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

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

19
•Explorer Class Ships.Regent’s Seven Seas Explorer and a ~~second~~ ship on order, Seven Seas Splendor.
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•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 =equals 100 cubic feet or 2.831 cubic meters.

•Gross Yield. Total revenue per Capacity Day.

•Net Cruise Cost. Gross Cruise Cost less commissions, transportation and other expense and onboard and other expense.

•Net Cruise Cost Excluding Fuel. Net Cruise Cost less fuel expense.

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

•Net Yield. Net Revenue per Capacity Day.

•Occupancy Percentage. The ratio of Passenger Cruise Days to Capacity Days. A percentage ~~in excess of~~greater than 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.

•Project Leonardo.The next generation of ships for our Norwegian brand.

•Revolving Loan Facility. $875.0 million senior secured revolving credit facility maturing ~~on June 6,~~in 2021.

•ROI Capital Expenditures.Comprised of project-based capital expenditures which have a quantified return on investment.

•SEC.U.S. Securities and Exchange Commission.

•Secondary Equity Offering(s).Secondary public offering(s) of NCLH’s ordinary shares in March 2018, November 2017, August 2017, 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, Net Yield, Net Cruise Cost, Adjusted Net Cruise Cost Excluding Fuel, Adjusted ~~EBITDA~~Net Income and Adjusted ~~Net Income~~EBITDA to enable us to analyze our performance. ~~See~~We refer you to “Terminology” above for the definitions of these and other 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 we 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.

20
We believe that Adjusted EBITDA is appropriate as a supplemental financial measure as it is used by management to assess operating performance. We also 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 nor is it 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.

Adjusted Net Income is a non-GAAP financial measure that excludes certain amounts and is used to supplement GAAP net income. We use Adjusted Net Income as a key performance measure of our earnings performance. We believe that both management and investors benefit from referring to this non-GAAP financial measure in assessing our performance and when planning, forecasting and analyzing future periods. This non-GAAP financial measure also facilitates management’s internal comparison to our historical performance. The amounts excluded in the presentation of this non-GAAP financial measure may vary from period to period; accordingly, our presentation of Adjusted Net Income may not be indicative of future adjustments or results. For example, for the ~~three and six~~nine months ended ~~June~~September 30, 2018, we incurred $6.3 million related to the extinguishment of debt due to the partial redemption of our 4.750% Senior Notes due 2021. We included this as an adjustment in the reconciliation of Adjusted Net Income since the extinguishment of debt is not representative of our day-to-day operations and we have included similar adjustments in prior periods; however, this adjustment did not occur in the comparable prior ~~periods~~period or the three months ended September 30, 2018, each of which is presented with this Quarterly Report on Form 10-Q and this adjustment is therefore not included in the ~~prior periods reconciliation.~~reconciliation for these 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~~We categorize revenue from our cruise and cruise-related activities ~~are categorized by us~~ as either “passenger ~~ticket revenue” and~~ticket” revenue or “onboard and ~~other~~other” revenue.” Passenger ticket revenue and onboard and other revenue vary according to the 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 casino, beverage sales, shore excursions, specialty dining, retail sales, spa services and photo services. Our onboard revenue is derived 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, 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~~revenue, including casino, beverage sales and shore ~~excursions.~~excursions expenses.

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~~including Dry-dock ~~costs),~~costs, ship insurance and other ship expenses.

Critical Accounting Policies

~~For a discussion of our critical accounting policies and estimates, see~~We refer you to “Critical Accounting Policies” included in our Annual Report ~~on Form 10-K for~~filed with the ~~year ended December 31, 2017~~SEC, under ~~the caption “Management’s~~“Item 7— Management’s Discussion and Analysis of Financial Condition and Results of ~~Operations.”~~Operations” for a discussion of our critical accounting policies and estimates. 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, 2017.~~Report.

Quarterly Overview

Three ~~months ended June~~Months Ended September 30, 2018 (“2018”) ~~compared~~Compared to ~~three months ended June~~Three Months Ended September 30, 2017 (“2017”)

Total revenue increased ~~13.2%~~12.5% to ~~$1.5~~$1.9 billion from $1.7 billion.
Net Revenue increased 11.8% to $1.4 billion from $1.3 billion.

Net ~~Revenue increased 13.7%~~income was $475.4 million, as compared to ~~$1.2 billion from $1.0 billion.~~$396.2 million.

• ~~Net income was $229.5 million compared to $201.4 million.~~
• ~~Operating income increased to $293.0 million from $275.8 million.~~
Operating income increased to $551.3 million from $477.5 million.

Adjusted Net Income was ~~$274.8~~$511.5 million in 2018, which included ~~$45.2~~$36.0 million of adjustments primarily consisting of expenses related to non-cash compensation, amortization of intangible assets and certain other adjustments. Adjusted Net Income was ~~$235.7~~$432.1 million in 2017, which included ~~$34.3~~$35.8 million of adjustments primarily consisting of expenses related to non-cash compensation ~~amortization of intangible assets~~ and certain other adjustments.

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Adjusted EBITDA improved ~~9.5%~~14.0% to ~~$466.1~~$724.5 million compared to ~~$425.6~~$635.8 million.

We refer you to ~~our~~ “Results of Operations” below for a calculation of Net Revenue, Adjusted ~~Net Income~~EBITDA and Adjusted ~~EBITDA.~~Net Income.

Results of Operations

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

Three Months Ended
June 30, Six Months Ended
June 30,
2018 2017 2018 2017
Revenue
Passenger ticket 70.8 % 69.8 % 69.9 % 69.1 %
Onboard and other 29.2 % 30.2 % 30.1 % 30.9 %
Total revenue 100.0 % 100.0 % 100.0 % 100.0 %
Cruise operating expense
Commissions, transportation and other 16.4 % 16.6 % 16.6 % 16.7 %
Onboard and other 6.1 % 6.2 % 5.8 % 6.1 %
Payroll and related 14.4 % 14.5 % 15.2 % 15.5 %
Fuel 6.2 % 6.4 % 6.7 % 7.0 %
Food 3.6 % 3.5 % 3.7 % 3.8 %
Other 10.0 % 8.7 % 9.9 % 9.9 %
Total cruise operating expense 56.7 % 55.9 % 57.9 % 59.0 %
Other operating expense
Marketing, general and administrative 14.8 % 14.4 % 16.0 % 15.4 %
Depreciation and amortization 9.2 % 9.2 % 9.7 % 9.7 %
Total other operating expense 24.0 % 23.6 % 25.7 % 25.1 %
Operating income 19.3 % 20.5 % 16.4 % 15.9 %
Non-operating income (expense)
Interest expense, net (4.8 )% (4.8 )% (4.7 )% (4.7 )%
Other income (expense), net 0.8 % (0.4 )% 0.4 % (0.3 )%
Total non-operating income (expense) (4.0 )% (5.2 )% (4.3 )% (5.0 )%
Net income before income taxes 15.3 % 15.3 % 12.1 % 10.9 %
Income tax expense (0.2 )% (0.3 )% (0.2 )% (0.3 )%
Net income 15.1 % 15.0 % 11.9 % 10.6 %
Three Months Ended
September 30, Nine Months Ended
September 30,
2018 2017 2018 2017
Revenue
Passenger ticket 71.8 % 72.2 % 70.6 % 70.3 %
Onboard and other 28.2 % 27.8 % 29.4 % 29.7 %
Total revenue 100.0 % 100.0 % 100.0 % 100.0 %
Cruise operating expense
Commissions, transportation and other 16.2 % 16.1 % 16.5 % 16.5 %
Onboard and other 6.3 % 6.0 % 6.0 % 6.0 %
Payroll and related 12.3 % 12.5 % 14.1 % 14.3 %
Fuel 5.4 % 5.5 % 6.2 % 6.4 %
Food 3.0 % 3.3 % 3.4 % 3.6 %
Other 6.8 % 7.4 % 8.6 % 8.9 %
Total cruise operating expense 50.0 % 50.8 % 54.8 % 55.7 %
Other operating expense
Marketing, general and administrative 12.7 % 12.2 % 14.6 % 14.1 %
Depreciation and amortization 7.7 % 8.1 % 8.9 % 9.1 %
Total other operating expense 20.4 % 20.3 % 23.5 % 23.2 %
Operating income 29.6 % 28.9 % 21.7 % 21.1 %
Non-operating (expense) income
Interest expense, net (3.7 )% (4.0 )% (4.3 )% (4.4 )%
Other income (expense), net 0.0 % (0.2 )% 0.2 % (0.3 )%
Total non-operating expense (3.7 )% (4.2 )% (4.1 )% (4.7 )%
Net income before income taxes 25.9 % 24.7 % 17.6 % 16.4 %
Income tax expense (0.3 )% (0.7 )% (0.3 )% (0.4 )%
Net income 25.6 % 24.0 % 17.3 % 16.0 %
The following table sets forth selected statistical information:

Three Months Ended
June 30, Six Months Ended
June 30, Three Months Ended September 30, Nine Months Ended September 30,
2018 2017 2018 2017 2018 2017 2018 2017
Passengers carried 687,820 598,942 1,305,260 1,127,296 823,413 741,216 2,128,673 1,868,512
Passenger Cruise Days 4,959,446 4,517,788 9,684,050 8,748,306 5,493,932 5,071,115 15,177,982 13,819,421
Capacity Days 4,550,217 4,189,750 9,016,688 8,220,366 4,941,643 4,590,789 13,958,331 12,811,155
Occupancy Percentage 109.0 % 107.8 % 107.4 % 106.4 % 111.2 % 110.5 % 108.7 % 107.9 %

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

Three Months Ended
June 30, Six Months Ended
June 30,
2018 2018
Constant
Currency 2017 2018 2018
Constant
Currency 2017
Passenger ticket revenue $ 1,077,046 $ 1,067,224 $ 938,014 $ 1,966,912 $ 1,944,016 $ 1,724,708
Onboard and other revenue 445,128 445,128 406,089 848,665 848,665 770,176
Total revenue 1,522,174 1,512,352 1,344,103 2,815,577 2,792,681 2,494,884
Less:
Commissions, transportation and other expense 249,875 247,696 223,315 468,215 462,987 417,455
Onboard and other expense 92,797 92,797 83,367 163,485 163,485 151,778
Net Revenue $ 1,179,502 $ 1,171,859 $ 1,037,421 $ 2,183,877 $ 2,166,209 $ 1,925,651
Capacity Days 4,550,217 4,550,217 4,189,750 9,016,688 9,016,688 8,220,366
Gross Yield $ 334.53 $ 332.37 $ 320.81 $ 312.26 $ 309.72 $ 303.50
Net Yield $ 259.22 $ 257.54 $ 247.61 $ 242.20 $ 240.24 $ 234.25
22
~~Table of Contents~~
Three Months Ended September 30, Nine Months Ended September 30,
2018 2018
Constant
Currency 2017 2018 2018
Constant
Currency 2017
Passenger ticket revenue $ 1,334,460 $ 1,336,565 $ 1,192,023 $ 3,301,372 $ 3,280,610 $ 2,916,731
Onboard and other revenue 523,896 523,896 459,715 1,372,561 1,372,561 1,229,891
Total revenue 1,858,356 1,860,461 1,651,738 4,673,933 4,653,171 4,146,622
Less:
Commissions, transportation and other expense 301,349 301,614 266,173 769,564 764,601 683,628
Onboard and other expense 117,747 117,747 98,476 281,232 281,232 250,254
Net Revenue $ 1,439,260 $ 1,441,100 $ 1,287,089 $ 3,623,137 $ 3,607,338 $ 3,212,740
Capacity Days 4,941,643 4,941,643 4,590,789 13,958,331 13,958,331 12,811,155
Gross Yield $ 376.06 $ 376.49 $ 359.79 $ 334.85 $ 333.36 $ 323.67
Net Yield $ 291.25 $ 291.62 $ 280.36 $ 259.57 $ 258.44 $ 250.78

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
June 30, Six Months Ended
June 30, Three Months Ended September 30, Nine Months Ended September 30,
2018 2018
Constant
Currency 2017 2018 2018
Constant
Currency 2017 2018 2018
Constant
Currency 2017 2018 2018
Constant
Currency 2017
Total cruise operating expense $ 862,783 $ 855,300 $ 752,242 $ 1,630,874 $ 1,618,893 $ 1,472,040 $ 928,944 $ 927,984 $ 838,165 $ 2,559,818 $ 2,546,877 $ 2,310,205
Marketing, general and administrative expense 225,665 225,000 192,965 451,423 448,436 384,511 234,459 235,189 201,588 685,882 683,625 586,099
Gross Cruise Cost 1,088,448 1,080,300 945,207 2,082,297 2,067,329 1,856,551 1,163,403 1,163,173 1,039,753 3,245,700 3,230,502 2,896,304
Less:
Commissions, transportation and other expense 249,875 247,696 223,315 468,215 462,987 417,455 301,349 301,614 266,173 769,564 764,601 683,628
Onboard and other expense 92,797 92,797 83,367 163,485 163,485 151,778 117,747 117,747 98,476 281,232 281,232 250,254
Net Cruise Cost 745,776 739,807 638,525 1,450,597 1,440,857 1,287,318 744,307 743,812 675,104 2,194,904 2,184,669 1,962,422
Less: Fuel expense 95,212 95,212 86,663 188,643 188,643 175,549 99,643 99,643 91,231 288,286 288,286 266,780
Net Cruise Cost Excluding Fuel 650,564 644,595 551,862 1,261,954 1,252,214 1,111,769 644,664 644,169 583,873 1,906,618 1,896,383 1,695,642
Less Non-GAAP Adjustments:
Non-cash deferred compensation (1) 542 542 823 1,084 1,084 1,646
Non-cash share-based compensation (2) 31,733 31,733 24,017 59,835 59,835 42,220
Severance payments and other fees (3) — — — — — 2,399
Acquisition of Prestige expenses (4) — — 250 — — 500
Other (5) 80 80 1,606 (912 ) (912 ) 1,606
Non-cash deferred compensation expense (1) 543 543 878 1,627 1,627 2,524
Non-cash share-based compensation expense (2) 28,962 28,962 21,444 88,797 88,797 63,664
Secondary Equity Offering expenses (3) — — 462 — — 462
Severance payments and other fees (4) — — — — — 2,399
Acquisition of Prestige expenses (5) — — — — — 500
Other (6) — — 999 (912 ) (912 ) 2,605
Adjusted Net Cruise Cost Excluding Fuel $ 618,209 $ 612,240 $ 525,166 $ 1,201,947 1,192,207 $ 1,063,398 $ 615,159 $ 614,664 $ 560,090 $ 1,817,106 $ 1,806,871 $ 1,623,488

Capacity Days 4,550,217 4,550,217 4,189,750 9,016,688 9,016,688 8,220,366 4,941,643 4,941,643 4,590,789 13,958,331 13,958,331 12,811,155
Gross Cruise Cost per Capacity Day $ 239.21 $ 237.42 $ 225.60 $ 230.94 $ 229.28 $ 225.85 $ 235.43 $ 235.38 $ 226.49 $ 232.53 $ 231.44 $ 226.08
Net Cruise Cost per Capacity Day $ 163.90 $ 162.59 $ 152.40 $ 160.88 $ 159.80 $ 156.60 $ 150.62 $ 150.52 $ 147.06 $ 157.25 $ 156.51 $ 153.18
Net Cruise Cost Excluding Fuel per Capacity Day $ 142.97 $ 141.66 $ 131.72 $ 139.96 $ 138.88 $ 135.25 $ 130.46 $ 130.36 $ 127.18 $ 136.59 $ 135.86 $ 132.36
Adjusted Net Cruise Cost Excluding Fuel per Capacity Day $ 135.86 $ 134.55 $ 125.35 $ 133.30 $ 132.22 $ 129.36 $ 124.48 $ 124.38 $ 122.00 $ 130.18 $ 129.45 $ 126.72

(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) Secondary Equity Offering expenses are included in marketing, general and administrative expense.
(4) Severance payments and other fees related to restructuring costs and other severance arrangements ~~which are included in marketing, general and administrative expense.~~
~~(4)~~ ~~Expenses related to the Acquisition of Prestige, which~~ are included in marketing, general and administrative expense.
(5) ~~Primarily~~Acquisition of Prestige expenses are included in marketing, general and administrative expense.
(6) Other primarily related to expenses and reimbursements ~~related to~~for certain legal costs ~~which are~~ included in marketing, general and administrative expense.

Adjusted Net Income was calculated as follows (in thousands):

Three Months Ended
June 30, Six Months Ended
June 30,
2018 2017 2018 2017
Net income $ 229,540 $ 201,441 $ 334,923 $ 264,579
Non-GAAP Adjustments:
Non-cash deferred compensation (1) 864 823 1,727 1,646
Non-cash share-based compensation (2) 31,733 24,017 59,835 42,220
Severance payments and other fees (3) — — — 2,399
Acquisition of Prestige expenses (4) — 250 — 500
Amortization of intangible assets (5) 6,222 7,568 12,444 15,136
Extinguishment of debt (6) 6,346 — 6,346 —
Other (7) 80 1,606 (912 ) 1,606
Adjusted Net Income $ 274,785 $ 235,705 $ 414,363 $ 328,086
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~~Table of Contents~~
Three Months Ended September 30, Nine Months Ended September 30,
2018 2017 2018 2017
Net income $ 475,412 $ 396,227 $ 810,335 $ 660,806
Non-GAAP Adjustments:
Non-cash deferred compensation expenses (1) 864 878 2,591 2,524
Non-cash share-based compensation expenses (2) 28,962 21,444 88,797 63,664
Secondary Equity Offering expenses (3) — 462 — 462
Severance payments and other fees (4) — — — 2,399
Acquisition of Prestige expenses (5) — — — 500
Amortization of intangible assets (6) 6,222 7,568 18,666 22,704
Extinguishment of debt (7) — — 6,346 —
Impairment on assets held for sale (8) — 2,935 — 2,935
Tax benefit (9) — 1,550 — 1,550
Other (10) — 999 (912 ) 2,605
Adjusted Net Income $ 511,460 $ 432,063 $ 925,823 $ 760,149

(1) Non-cash deferred compensation expenses related to the crew pension plan and other crew expenses, which are included in payroll and related expense and other income (expense)., net.
(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) Secondary Equity Offering expenses are included in marketing, general and administrative expense.
(4) Severance payments and other fees related to restructuring costs and other severance arrangements ~~which are included in marketing, general and administrative expense.~~
~~(4)~~ ~~Expenses related to the Acquisition of Prestige, which~~ are included in marketing, general and administrative expense.
(5) Acquisition of Prestige expenses are included in marketing, general and administrative expense.
(6) Amortization of intangible assets related to the Acquisition of Prestige, which are included in depreciation and amortization expense.
~~(6)~~(7) Losses on extinguishments of debt due to the partial redemption of our 4.750% Senior Notes due 2021, which are included in interest expense, net.
~~(7)~~(8) ~~Primarily~~Loss on sale of Hawaii land-based operations.
(9) Tax benefit primarily due to the reversal of tax contingency reserves in 2017.
(10) Other primarily related to expenses and reimbursements ~~related to~~for certain legal costs, which are included in marketing, general and administrative expense.
EBITDA and Adjusted EBITDA were calculated as follows (in thousands):

Three Months Ended
June 30, Six Months Ended
June 30, Three Months Ended
September 30, Nine Months Ended
September 30,
2018 2017 2018 2017 2018 2017 2018 2017
Net income $ 229,540 $ 201,441 $ 334,923 $ 264,579 $ 475,412 $ 396,227 $ 810,335 $ 660,806
Interest expense, net 72,988 64,196 132,686 117,158 69,540 66,339 202,226 183,497
Income tax expense 3,416 4,509 4,979 5,826 6,399 11,625 11,378 17,451
Depreciation and amortization expense 140,704 123,141 271,948 242,346
Depreciation and amortization 143,700 134,532 415,648 376,878
EBITDA 446,648 393,287 744,536 629,909 695,051 608,723 1,439,587 1,238,632
Other (income) expense (1) (12,922 ) 5,609 (11,256 ) 8,424 (98 ) 3,262 (11,354 ) 11,686
Non-GAAP Adjustments:
Non-cash deferred compensation (2) 542 823 1,084 1,646
Non-cash share-based compensation (3) 31,733 24,017 59,835 42,220
Severance payments and other fees (4) — — — 2,399
Acquisition of Prestige expenses (5) — 250 — 500
Other (6) 80 1,606 (912 ) 1,606
Non-cash deferred compensation expenses (2) 543 878 1,627 2,524
Non-cash share-based compensation expenses (3) 28,962 21,444 88,797 63,664
Secondary Equity Offering expenses (4) — 462 — 462
Severance payments and other fees (5) — — — 2,399
Acquisition of Prestige expenses (6) — — — 500
Other (7) — 999 (912 ) 2,605
Adjusted EBITDA $ 466,081 $ 425,592 $ 793,287 $ 686,704 $ 724,458 $ 635,768 $ 1,517,745 $ 1,322,472

(1) Primarily consists of gains and losses, net for foreign 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) ~~(4)~~Secondary Equity Offering expenses are included in marketing, general and administrative expense.
(5) Severance payments and other fees related to restructuring costs and other severance arrangements, which are included in marketing, general and administrative expense.
(6) ~~(5)~~ ~~Expenses related to the~~ Acquisition of Prestige ~~which~~expenses are included in marketing, general and administrative expense.
(7) ~~(6)~~ ~~Primarily~~Other primarily related to expenses and reimbursements ~~related to~~for certain legal costs, which are included in marketing, general and administrative expense.

Three ~~months ended June~~Months Ended September 30, 2018 (“2018”) ~~compared~~Compared to ~~three months ended June~~Three Months Ended September 30, 2017 (“2017”)

Revenue

Total revenue increased ~~13.2%~~12.5% to ~~$1.5~~$1.9 billion in 2018, ~~from $1.3~~as compared to $1.7 billion in 2017. Gross Yield increased ~~4.3%~~4.5%. Net Revenue increased ~~13.7%~~11.8% to ~~$1.2~~$1.4 billion in 2018, from ~~$1.0~~$1.3 billion in 2017, due to an increase in Capacity Days of ~~8.6%~~7.6% and an increase in Net Yield of ~~4.7%~~3.9%. The increase in Capacity Days was primarily due to Norwegian ~~Joy joining our fleet in the second quarter of 2017 and Norwegian~~ Bliss joining our fleet in the second quarter of ~~2018, partially offset by scheduled Dry-docks.~~2018. The increase in Gross Yield and Net Yield was primarily due to an increase in passenger ticket pricing and Occupancy Percentage. On a Constant Currency basis, Net Yield increased 4.0%.
24
~~Table of Contents~~
Expense

Total cruise operating expense increased ~~14.7%~~10.8% in 2018, as compared to 2017, primarily due to the increase in Capacity ~~Days as discussed above.~~Days. Gross Cruise Cost increased ~~15.2%~~11.9% in 2018, as compared to 2017, primarily due to ~~an increase in~~higher total cruise operating expense, and to a lesser extent, due to higher marketing, general and administrative expenses. Total other operating expense increased ~~15.9%~~12.5% in 2018, as compared to 2017. Marketing, general and administrative expenses increased primarily due to ~~an increase in~~higher incentive ~~compensation.~~compensation expense. Depreciation and amortization ~~expenses~~expense increased primarily due to the addition of Norwegian ~~Joy and Norwegian~~ Bliss and ship improvement projects. ~~On a Capacity Day basis,~~ Net Cruise Cost per Capacity Day increased ~~7.5% (6.7%~~2.4% (2.4% on a Constant Currency basis) due to ~~an increase in maintenance and repairs including Dry-dock expenses and an increase in~~higher marketing, general and administrative expenses. Adjusted Net Cruise Cost Excluding Fuel per Capacity Day increased ~~8.4% (7.3%~~2.0% (2.0% on a Constant Currency basis).

Interest expense, net was ~~$73.0~~$69.5 million in 2018, as compared to ~~$64.2~~$66.3 million in 2017. The increase in interest expense reflects additional debt incurred in connection with the delivery of Norwegian Bliss in April 2018, ~~the delivery of Norwegian Joy in April 2017,~~ Project Leonardo financing, ~~as well as~~and higher interest rates due to an increase in ~~LIBOR,~~London Interbank Offered Rate (“LIBOR”). The increase in interest expense was partially offset by the benefit from the October 2017 full redemption ~~in October 2017~~ of our 4.625% Senior Notes due 2020 and the benefit from the April 2018 partial $135.0 million ~~partial~~ redemption ~~in April 2018~~ of our 4.75% Senior Notes due 2021. ~~Also included in 2018 is the $6.3 million of redemption premium and write-off of fees in connection with the partial redemption mentioned above.~~
Other income (expense), net was income of ~~$12.9~~$0.1 million in 2018, as compared to an expense of ~~$5.6~~$3.3 million in 2017. InOther income in 2018 ~~the income~~ was primarily ~~related~~due to gains on foreign currency ~~exchange. In~~exchange; whereas, other expense in 2017 ~~the expense~~ was primarily ~~related~~due to losses on foreign currency ~~exchange and unrealized and realized losses on derivatives partially offset by income from an insurance settlement.~~exchange.

~~In 2018, we had an income~~Income tax expense ~~of $3.4~~was $6.4 million in 2018, as compared to ~~$4.5~~$11.6 million in 2017. Income tax in 2017 reflects a tax benefit of $1.3 million associated with the reversal of prior years’ tax contingency reserves due to the expiration of the statute of limitations.

~~Six months ended June~~Nine Months Ended September 30, 2018 (“2018”) ~~compared~~Compared to ~~six months ended June~~Nine Months Ended September 30, 2017 (“2017”)

Revenue

Total revenue increased ~~12.9%~~12.7% to ~~$2.8~~$4.7 billion in 2018, ~~from $2.5~~as compared to $4.1 billion in 2017. Gross Yield increased ~~2.9%~~3.5%. Net Revenue increased ~~13.4%~~12.8% to ~~$2.2~~$3.6 billion in 2018, from ~~$1.9~~$3.2 billion in 2017, due to an increase in Capacity Days of ~~9.7%~~9.0% and an increase in Net Yield of ~~3.4%~~3.5%. The increase in Capacity Days was primarily due to Norwegian Joy ~~joining our fleet in 2017~~ and Norwegian Bliss joining our fleet in the second quarter of ~~2018.~~2017 and 2018, respectively. The increase in Gross Yield and Net Yield was primarily due to an increase in passenger ticket ~~pricing.~~pricing and Occupancy Percentage. On a Constant Currency basis, Net Yield increased ~~2.6%~~3.1%.

Expense

Total cruise operating expense increased 10.8% in 2018, as compared to 2017, primarily due to the increase in Capacity ~~Days as discussed above.~~Days. Gross Cruise Cost increased ~~12.2%~~12.1% in 2018, as compared to 2017, due to ~~an increase in~~higher total cruise operating expense and, to a lesser extent, due to higher marketing, general and administrative expenses. Total other operating expense increased ~~15.4%~~14.4% in 2018, as compared to 2017. Marketing, general and administrative expenses increased primarily due to ~~an increase in~~higher incentive ~~compensation.~~compensation expense. Depreciation and amortization ~~expenses~~expense increased primarily due to the additions of Norwegian ~~Bliss~~Joy and Norwegian ~~Joy~~Bliss and ship improvement projects. ~~On a Capacity Day basis,~~ Net Cruise Cost per Capacity Day increased 2.7% ~~(2.0%~~(2.2% on a Constant Currency basis) due to ~~an increase in~~higher marketing, general and administrative expenses and, ~~an increase in~~to a lesser extent, due to higher maintenance and repairs, including Dry-dock expenses. Adjusted Net Cruise Cost Excluding Fuel per Capacity Day increased ~~3.0%~~2.7% (2.2% on a Constant Currency basis).

Interest expense, net was ~~$132.7~~$202.2 million in 2018, as compared to ~~$117.2~~$183.5 million in 2017. The increase in interest expense reflects additional debt incurred in connection with the delivery of Norwegian Joy and Norwegian Bliss in ~~April~~the second quarter of 2017 and 2018, ~~the delivery of Norwegian Joy in April 2017,~~respectively, Project Leonardo financing, ~~as well as~~and higher interest rates due to an increase in ~~LIBOR,~~LIBOR. The increase in interest expense was partially offset by the benefit from the October 2017 full redemption ~~in October 2017~~ of our 4.625% Senior Notes due 2020 and the benefit from the April 2018 partial $135.0 million ~~partial~~ redemption ~~in April 2018~~ of our 4.75% Senior Notes due 2021. Also included in 2018 is ~~the~~ $6.3 million of redemption premium and write-off of fees in connection with the partial ~~redemption mentioned above.~~redemption.

Other income (expense), net was income of ~~$11.3~~$11.4 million in 2018, as compared to an expense of ~~$8.4~~$11.7 million in 2017. InOther income in 2018 ~~the income~~ was primarily ~~related~~due to gains on foreign currency ~~exchange. In~~exchange; whereas, other expense in 2017 ~~the expense~~ was primarily ~~related~~due to losses on foreign currency exchange, ~~and unrealized and realized losses on derivatives~~ partially offset by an insurance settlement.

~~In 2018, we had an income~~Income tax expense ~~of $5.0~~was $11.4 million in 2018, as compared to ~~$5.8~~$17.5 million in 2017. Income tax in 2017 reflects a tax benefit of $1.3 million associated with the reversal of prior years’ tax contingency reserves due to the expiration of the statute of limitations.

Liquidity and Capital Resources

General

As of ~~June~~September 30, 2018, our liquidity was ~~$889.2 million~~$1.2 billion consisting of ~~$203.2~~$278.5 million in cash and cash equivalents and ~~$686.0~~$875.0 million available under our Revolving Loan Facility. Our primary ongoing liquidity requirements are to finance working capital, capital expenditures and debt service.

As of ~~June~~September 30, 2018, we had a working capital deficit of ~~$2.7~~$2.4 billion. This deficit included ~~$2.0~~$1.6 billion of advance ticket sales, which represents the total revenue we collect in advance of sailing dates and accordingly is substantially more like deferred revenue balances rather than actual current cash liabilities. Our business model, along with our Revolving Loan Facility, allows us to operate with a working capital deficit and still meet our operating, investing and financing needs.
25
~~Table of Contents~~

We evaluate potential sources of additional liquidity, including the capital markets, in the ordinary course of business. We will continue to evaluate opportunities to optimize our capital structure, taking into consideration our current and expected capital requirements, our assessment of prevailing market conditions and expectations regarding future conditions, and the contractual and other restrictions to which we are subject.

26
Sources and Uses of Cash

~~In this section, references to “2018” refer to the six months ended June~~Nine Months Ended September 30, 2018 ~~and references~~(“2018”) Compared to ~~“2017” refer to the six months ended June~~Nine Months Ended September 30, ~~2017.~~2017 (“2017”)

Net cash provided by operating activities was ~~$1.3~~$1.7 billion in 2018, as compared to ~~$923.6 million~~$1.4 billion in 2017. The net cash provided by operating activities included timing differences in cash receipts and payments relating to operating assets and liabilities. Advance ticket sales increased by ~~$612.3~~$316.3 million in 2018 compared to ~~$400.9~~$187.1 million in 2017. Without the adoption of ~~ASU No. 2014-09, the Advance~~Topic 606, advance ticket sales would have increased by ~~$582.0~~$308.0 million in ~~2018 (we~~2018. We refer you to Note 2— “Summary of Significant Accounting Policies— Revenue and Expense Recognition” ofin the ~~Notes~~notes to ~~Consolidated Financial Statements~~consolidated financial statements for ~~more on~~a discussion of the effects of the adoption of ~~ASU No. 2014-09).~~Topic 606.

Net cash used in investing activities was ~~$1.2~~$1.3 billion in 2018, ~~and $1.1~~as compared to $1.2 billion in 2017, primarily related to payments for ship deliveries, ships under construction and ship improvement projects.

Net cash used in financing activities was ~~$40.6~~$324.0 million in 2018, as compared to net cash provided by financing activities of $192.2 million in 2017. The net cash used in financing activities in 2018 was primarily due to net repayments of our Revolving Loan Facility and other loan facilities, offset by borrowings on newbuild facilities. We ~~redeemed~~made a partial redemption in April 2018 of $135.0 million ~~principal amount~~ of ~~the $700.0 million aggregate principal amount of outstanding 4.750%~~our 4.75% Senior Notes due 2021. Additionally, in 2018, we issued a dividend for the repurchase of NCLH ordinary shares and we incurred deferred financing fees related to financing of newbuild ships. Net cash provided by financing activities ~~was $268.1 million~~ in 2017 was primarily due to the proceeds from our Breakaway Four Loan, ~~facility~~ partially offset by the repayments of other loan facilities, our net repayment of our then existing revolving loan facility and payment of deferred financing fees.

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 ~~June~~September 30, 2018, our anticipated capital expenditures were $0.3 billion for the remainder of 2018 and ~~$1.3~~$1.4 billion and $0.9 billion for the years ending December 31, 2019 and 2020, respectively. We have export credit financing in place for the anticipated expenditures related to ship construction contracts of $0.05 billion for the remainder of 2018, $0.6 billion for 2019 and $0.5 billion for 2020. These future expected capital expenditures will significantly increase our depreciation and amortization expense as we take delivery of the ships.

Project Leonardo will introduce an additional six ships, each approximately 140,000 Gross Tons with 3,300 Berths, with expected delivery dates from 2022 through 2027, subject to certain conditions. ~~Each~~The effectiveness of the ~~six Project Leonardo~~confirmed orders to construct two of the ships, expected to be delivered in 2026 and 2027, is contingent, among other things, upon the Company’s entry into committed financing arrangements, with terms acceptable to us. We have a Breakaway Plus Class Ship, Norwegian Encore, approximately ~~140,000~~168,000 Gross Tons with ~~approximately 3,300 Berths. We have~~4,000 Berths, on order for delivery in the fall of 2019, and an Explorer Class Ship, Seven Seas Splendor, approximately 55,000 Gross Tons with 750 Berths, on order for delivery in the winter of 2020. This ship is approximately 55,000 Gross Tons and 750 Berths. We have one additional Breakaway Plus Class Ship, Norwegian Encore, on order for delivery in the fall of 2019. Norwegian Encore is approximately 168,000 Gross Tons with approximately 4,000 Berths.
The combined contract price of the aforementioned eight ships ~~was~~is approximately ~~€7.2~~€7.1 billion, or $8.4 billion based on the euro/U.S. dollar exchange rate as of ~~June~~September 30, 2018. WeFor six of the ships, we have obtained export credit financing, ~~for six of the ships~~ which is expected to fund approximately 80% of the contract price of each ship expected to be delivered through 2025, subject to certain conditions. Two of the Leonardo ships are confirmed orders expected to be delivered in 2026 and 2027, subject to financing (we refer you to Note 13— “Subsequent Event” of the Notes to Consolidated Financial Statements).
~~In connection with the contracts to build these ships, we~~We do not anticipate any contractual breach or cancellation of the contracts to ~~occur. However,~~build these ships; however, if any were to 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 ~~six~~nine months ended ~~June~~September 30, 2018 was ~~$6.8~~$6.4 million and ~~$16.8~~$23.2 million, respectively, and for the three and ~~six~~nine months ended ~~June~~September 30, 2017 it was ~~$7.1~~$6.2 million and ~~$15.6~~$21.8 million, respectively, primarily associated with the construction of our newbuild ships.

Off-Balance Sheet Transactions

None.

26 27
~~Table of Contents~~

Contractual Obligations

As of ~~June~~September 30, 2018, our contractual obligations with initial or remaining terms in excess of one year, including interest payments on long-term debt obligations, ~~were as follows~~included the following (in thousands):

Total Less than
1 year 1-3 years 3-5 years More than
5 years Total Less than
1 year 1-3 years 3-5 years More than
5 years
Long-term debt (1) $ 6,960,218 $ 679,767 $ 1,358,238 $ 2,980,194 $ 1,942,019 $ 6,679,612 $ 679,908 $ 2,205,859 $ 1,882,111 $ 1,911,734
Operating leases (2) 134,669 16,172 31,711 27,946 58,840 131,737 17,456 31,180 27,562 55,539
Ship construction contracts (3) 5,154,562 107,904 1,476,876 1,906,969 1,662,813 5,184,623 107,904 1,446,033 1,971,744 1,658,942
Port facilities (4) 1,046,408 60,160 115,480 116,047 754,721 1,002,302 61,757 116,169 116,432 707,944
Interest (5) 1,063,042 231,849 421,924 195,801 213,468 1,016,039 219,023 399,608 189,715 207,693
Other (6)(7) 1,451,355 234,985 428,023 358,283 430,064 1,428,885 250,748 431,078 357,587 389,472
Total(8) $ 15,810,254 $ 1,330,837 $ 3,832,252 $ 5,585,240 $ 5,061,925 $ 15,443,198 $ 1,336,796 $ 4,629,927 $ 4,545,151 $ 4,931,324

(1) ~~Includes~~Long-term debt includes discounts and premiums aggregating $0.4 ~~million. Also includes~~million and capital leases. ~~The amount~~Long-term debt excludes deferred financing fees which are ~~included~~a direct deduction from the carrying value of the related debt liability in the consolidated balance ~~sheets as an offset to long-term debt.~~sheets.
(2) ~~Primarily~~Operating leases are primarily for offices, motor vehicles and office equipment.
(3) ~~For~~Ship construction contracts are for our newbuild ships based on the euro/U.S. dollar exchange rate as of ~~June~~September 30, 2018. Export credit financing is in place from syndicates of banks. The amount does not include the two Project Leonardo ships which are subject to financing, as described below.
(4) ~~Primarily for~~Port facilities represent our usage of certain port facilities.
(5) ~~Includes~~Interest includes fixed and variable rates with LIBOR held constant as of ~~June~~September 30, 2018.
(6) ~~Future~~Other includes future commitments for service, maintenance and other Business Enhancement Capital ~~Expenditure~~Expenditures contracts.
(7) ~~The table has been updated to reflect~~Other also includes revisions to amounts previously included in ~~the~~our Annual Report, ~~on Form 10-K for the year ended December 31, 2017~~ for the periods of less than 3 ~~years in~~years.
(8) $0.5 million of unrecognized tax benefits were excluded from the ~~“Other” category.~~“Total” contractual obligations as of September 30, 2018 because an estimate of the timing of future tax settlements cannot be reasonably determined.

The ~~table above does not include $0.5 million of unrecognized tax benefits.~~
~~The following ship construction contract commitments for the~~ two Project Leonardo ships expected to be delivered in 2026 and 2027 are not included in the table above because the effectiveness of the confirmed orders to construct the two ships is contingent, ~~on NCLC’s~~among other things, upon the Company’s entry into committed financing ~~arrangements~~arrangements. The ship construction contract commitments include the following (in thousands):

Total Less than
1 year 1-3 years 3-5 years More than
5 years
Ship construction contracts $ 1,869,440 $ 37,389 $ — $ — $ 1,832,051
Total Less than
1 year 1-3 years 3-5 years More than
5 years
Ship construction contracts $ 1,856,640 $ 37,133 $ — $ — $ 1,819,507

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

Certain of 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 certain of our debt. We believe we were in compliance with these covenants as of ~~June~~September 30, 2018.

In addition, our existing debt agreements restrict, and any of our future debt arrangements may restrict, among other things, the ability of NCLC to make distributions and/or pay dividends to NCLH and NCLH’s ability to pay cash dividends to its shareholders. NCLH is a holding company and depends upon its subsidiaries for their ability to pay distributions to finance any dividend or pay any other obligations of NCLH. However, we do not believe that these restrictions have had or are expected to have an impact on our ability to meet any cash obligations.
The impact of changes in world economies and especially the global credit markets can create 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 Revolving Loan Facility and our ability to issue debt securities or additional equity securities, 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.
27
~~Table of Contents~~

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 notional, 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 ~~June~~September 30, 2018, we had interest rate swap agreements to ~~hedge our exposure to interest rate movements and to~~ manage our interest ~~expense.~~expense by hedging the interest rate risks associated with variable rates on our outstanding borrowings. As of ~~June~~September 30, 2018, ~~70%~~73% of our debt was fixed and ~~30%~~27% was variable, which includes the effects of the interest rate swaps. The notional amount of our outstanding debt associated with the interest rate swap agreements was $1.0 billion as of September 30, 2018. As of December 31, 2017, 54% of our debt was fixed and 46% was variable, which includes the effects of the interest rate swaps. The notional amount of outstanding debt associated with the interest rate swap agreements was $218.6 million as of ~~June~~December 31, 2017. The change from December 31, 2017 to September 30, 2018 was ~~$1.0 billion.~~ due to additional interest rate swaps executed and the repayment of variable rate debt.
Based on our ~~June~~September 30, 2018 outstanding variable rate debt balance, a one percentage point increase in annual LIBOR interest rates would increase our annual interest expense by approximately ~~$20.9~~$18.4 million excluding the effects of capitalization of interest.

Foreign Currency Exchange Rate Risk

As of ~~June~~September 30, 2018, 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 ~~€3.0~~€2.4 billion or ~~$3.5~~$2.7 billion based on the euro/U.S. dollar exchange rate as of ~~June~~September 30, 2018. As of December 31, 2017, the payments not hedged aggregated €3.3 billion, or $4.0 billion, based on the euro/U.S. dollar exchange rate as of December 31, 2017. The change from December 31, 2017 to September 30, 2018 was due to the delivery of a ship in April 2018 and additional foreign exchange derivatives executed. We estimate that a 10% change in the euro as of ~~June~~September 30, 2018 would result in a $0.3 billion 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%~~10.7% and ~~11.5%~~10.9% for the three months ended ~~June~~September 30, 2018 and 2017, respectively, and ~~11.6%~~11.3% and ~~11.9%~~11.5% for the ~~six~~nine months ended ~~June~~September 30, 2018 and 2017, respectively. We use fuel derivative agreements to mitigate the financial impact of fluctuations in fuel prices and as of ~~June~~September 30, 2018, we had hedged approximately 64%, ~~49%~~48% and ~~26%~~38% of our remaining 2018, 2019 and 2020, respectively, projected metric tons of fuel purchases. As of December 31, 2017, we had hedged approximately 65%, 48% and 26% of our 2018, 2019 and 2020, respectively, projected metric tons of fuel purchases. The change in fuel price risk from December 31, 2017 to September 30, 2018 was due to additional fuel hedges executed.
We estimate that a 10% increase in our weighted-average fuel price would increase our anticipated 2018 fuel expense by ~~$22.3~~$11.9 million. This increase would be partially offset by an increase in the fair value of our fuel swap agreements of ~~$11.4~~$6.3 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~~and other inputs such as fuel types, fuel curves, creditworthiness of the counterparty and the Company, as well as other data points.
29

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management has evaluated, with the participation of our Chief Executive Officer and ~~Interim~~ Chief Financial Officer, the effectiveness of our disclosure controls and procedures, as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (“Securities Exchange Act”), as of ~~June~~September 30, 2018. 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 management’s evaluation, our Chief Executive Officer and ~~Interim~~ Chief Financial Officer concluded that our disclosure controls and procedures were effective as of ~~June~~September 30, 2018, 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 SEC, and that it is accumulated and communicated to our management, including our Chief Executive Officer and ~~Interim~~ Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting during the quarter ended ~~June~~September 30, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
28
~~Table of Contents~~

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.
29
~~Table of Contents~~

PART II. OTHER INFORMATION

Item 1. Legal Proceedings
On September 21, 2018, a purported class-action lawsuit was filed by Marta and Jerry Phillips and others against NCL Corporation Ltd. in the United States District Court for the Southern District of Florida relating to the marketing and sales of our Booksafe Travel Protection Plan. The plaintiffs purport to represent an alleged class of passengers who purchased Booksafe Travel Protection Plans. The complaint alleges that the Company concealed that it received proceeds on the sale of the travel insurance portion of the plan. We believe we have meritorious defenses to the claim and that any liability which may arise as a result of this action will not have a material impact on our consolidated financial statements.

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 ~~2017~~ 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 ~~2017~~ Annual Report, ~~on Form 10-K,~~ elsewhere in this report or other SEC filings, could cause future results to differ materially from those stated in any forward-looking statements.

Other than the risk ~~factor~~factors set forth below, ~~regarding data privacy and protection regulations,~~ there have been no material changes in our risk factors from those disclosed in our ~~2017~~ Annual ~~Report~~Report.
Breaches in data security or other disturbances to our information technology and other networks could impair our operations and have a material adverse impact on ~~Form 10-K.~~our business, financial condition and results of operations.
The integrity and reliability of our information technology systems and other networks are crucial to our business operations. Disruptions to these systems or networks could impair our operations and have an adverse impact on our financial results and negatively affect our reputation and customer demand. In addition, certain networks are dependent on third-party technologies, systems and service providers for which there is no certainty of uninterrupted availability. Among other things, actual or threatened natural disasters (e.g., hurricanes, earthquakes, tornadoes, fires, floods or similar events), information systems failures, computer viruses, denial of service attacks and other cyber-attacks may cause disruptions to our information technology, telecommunications and other networks. While we have and continue to invest in business continuity, disaster recovery, data restoration plans and data and information technology security, we cannot completely insulate ourselves from disruptions that could result in adverse effects on our operations and financial results. We carry limited business interruption insurance for certain shoreside operations, subject to limitations, exclusions and deductibles.
We have made significant investments in our information technology systems to optimize booking procedures, enhance the marketing power of our websites and control costs. As part of our ordinary business operations, we and certain of our third-party service providers collect, process, transmit and store a large volume of personally identifiable information, including email addresses, home addresses and financial data such as credit card information. The security of the systems and networks where we and our service providers store this data is a critical element of our business. We review and update our systems and have implemented processes and procedures to protect against security breaches and unauthorized access to our data. Despite our implementation of security measures, our systems and networks are vulnerable to computer viruses, malware, worms, hackers and other security issues, including physical and electronic break-ins, router disruption, sabotage or espionage, disruptions from unauthorized access and tampering (including through social engineering such as phishing attacks), impersonation of authorized users and coordinated denial-of-service attacks. For example, in October 2018, we discovered limited instances of unauthorized access to certain employee e-mail communications, some of which contained proprietary business and personally identifiable information. We have implemented additional safeguards, and we do not believe that we experienced any material losses related to this incident; however, there can be no assurance that this or any other breach or incident will not have a material impact on our operations and financial results in the future. In addition, we may not be in a position to promptly address attacks or unauthorized access or to implement adequate preventative measures if we are unable to immediately detect such attacks. Our failure to successfully prevent, mitigate or timely respond to any unauthorized use of our information systems to gain access to sensitive information, corrupt data or create general disturbances in our operations systems could impair our ability to conduct business and damage our reputation.
We are also subject to laws relating to privacy of personal data, including European Union data privacy regulations. The compromise of our information systems resulting in the loss, disclosure, misappropriation of or access to the personally identifiable information of our guests, prospective guests or employees could result in governmental investigation, civil liability or regulatory penalties under laws protecting the privacy of personal information, any or all of which could disrupt our operations and materially adversely affect our business. Additionally, any material failure by us or our service providers to maintain compliance with the Payment Card Industry security requirements or to rectify a data security issue may result in fines and restrictions on our ability to accept credit cards as a form of payment.
In the event of a data security breach of our systems and/or third-party systems or a denial of service attack, we may incur costs associated with the following: response, notification, forensics, regulatory investigations, public relations, consultants, credit identity monitoring, credit freezes, fraud alert, credit identity restoration, credit card cancellation, credit card reissuance or replacement, data restoration, regulatory fines and penalties, vendor fines and penalties, legal fees, damages and settlements. In addition, data security breaches or denial of service attacks may cause business interruption, information technology disruption, disruptions as a result of regulatory investigation or litigation, digital asset loss related to corrupted or destroyed data, damage to our reputation, damages to intangible property and other intangible damages, such as loss of consumer confidence, all of which could impair our operations and have an adverse impact on our financial results.
31

Evolving requirements and regulations regarding data privacy and protection and any actual or perceived compliance failures by us could increase our liability and costs and otherwise materially adversely affect our business operations.

We process and store sensitive information relating to our guests, employees, business partners and others and we are subject to requirements and regulations regarding data privacy and protection in multiple jurisdictions. Government regulators, privacy advocates and individuals are increasingly scrutinizing how companies collect, process, store, share and transmit personal data. New laws governing data privacy and protection, such as the European Union’s General Data Protection Regulation (“GDPR”) have been enacted and more are being considered worldwide. The GDPR contains stringent data privacy and protection requirements and enables regulators to impose significant penalties for non-compliance. The regulatory framework for data privacy and protection is uncertain for the foreseeable future, and it is possible that legal and regulatory obligations may continue to increase and may be interpreted and applied in a manner that is inconsistent or possibly conflicting from one jurisdiction to another.

Any actual or perceived failure by us or our business partners to comply with posted privacy policies, federal, state or international data privacy and protection laws and regulations, or privacy commitments contained in our contracts could result in proceedings against us by governmental entities or others and significant fines, which could have a material adverse effect on our business and operating results and harm our reputation. Additionally, if third parties we work with, such as vendors, violate applicable laws or regulations or our policies, such violations may also result in increased liability for us and have an adverse effect on our business.

Existing and future legal and regulatory restrictions on our ability to collect and use data could also negatively affect our ability to market our business, result in increased compliance costs, and otherwise affect our business processes, all of which could have an adverse effect on our financial results.
~~Item 5. Other Information~~
~~None.~~

Item 6. Exhibits

10.1 Employment Agreement by and between NCL (Bahamas) Ltd. and Mark Kempa, entered into on September 10, 2018 (incorporated herein by reference to Exhibit 10.1 to Norwegian Cruise Line Holdings Ltd.’s Current Report on Form 8-K filed on September 11, 2018 (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 ~~Interim~~Executive Vice President and Chief Financial Officer ~~and Senior Vice President, Finance~~ 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 ~~Interim~~Executive Vice President and Chief Financial Officer ~~and Senior Vice President, Finance~~ 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 NCL Corporation Ltd.’s Quarterly Report on Form 10-Q for the ~~quarter~~quarterly period ended ~~June~~September 30, 2018, formatted in Extensible Business Reporting Language (XBRL), as follows:

(i) the Consolidated Statements of Operations for the three and ~~six~~nine months ended ~~June~~September 30, 2018 and 2017;
30
~~Table of Contents~~

(ii) the Consolidated Statements of Comprehensive Income for the three and ~~six~~nine months ended ~~June~~September 30, 2018 and 2017;

(iii) the Consolidated Balance Sheets as of ~~June~~September 30, 2018 and December 31, 2017;

(iv) the Consolidated Statements of Cash Flows for the ~~six~~nine months ended ~~June~~September 30, 2018 and 2017;

(v) the Consolidated Statements of Changes in Shareholders’ Equity for the ~~six~~nine months ended ~~June~~September 30, 2018 and 2017; and

(vi) the Notes to the Consolidated Financial Statements, tagged in summary and detail.

* Filed herewith.

** Furnished herewith.
† Management contract or compensatory plan.

31 32
~~Table of Contents~~

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.

NCL CORPORATION LTD.
(Registrant)

By: /s/~~Frank~~ FRANK J. ~~Del Rio~~DEL RIO
Name: Frank J. Del Rio
Title: President and Chief Executive Officer
(Principal Executive Officer)

By: /s/MARK A. KEMPA
Name: Mark A. Kempa
Title: ~~Interim~~Executive Vice President and Chief Financial Officer ~~and Senior Vice President, Finance~~
(Principal Financial Officer)

Dated: ~~August~~November 9, 2018

32 33

		Page
PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements	21

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	2829

Item 4.	Controls and Procedures	2830

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	30

Item 1A.	Risk Factors	30

Item 5.	~~Other Information~~	30

~~Item~~ 6.	Exhibits	3032

SIGNATURES		3233

	Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017
Revenue
Passenger ticket	$	1,077,046		$	938,014		$	1,966,912		$	1,724,708
Onboard and other		445,128			406,089			848,665			770,176
Total revenue		1,522,174			1,344,103			2,815,577			2,494,884
Cruise operating expense
Commissions, transportation and other		249,875			223,315			468,215			417,455
Onboard and other		92,797			83,367			163,485			151,778
Payroll and related		219,337			194,724			429,161			387,360
Fuel		95,212			86,663			188,643			175,549
Food		54,091			47,340			104,747			93,518
Other		151,471			116,833			276,623			246,380
Total cruise operating expense		862,783			752,242			1,630,874			1,472,040
Other operating expense
Marketing, general and administrative		225,665			192,965			451,423			384,511
Depreciation and amortization		140,704			123,141			271,948			242,346
Total other operating expense		366,369			316,106			723,371			626,857
Operating income		293,022			275,755			461,332			395,987
Non-operating income (expense)
Interest expense, net		(72,988	)		(64,196	)		(132,686	)		(117,158	)
Other income (expense), net		12,922			(5,609	)		11,256			(8,424	)
Total non-operating income (expense)		(60,066	)		(69,805	)		(121,430	)		(125,582	)
Net income before income taxes		232,956			205,950			339,902			270,405
Income tax expense		(3,416	)		(4,509	)		(4,979	)		(5,826	)
Net income	$	229,540		$	201,441		$	334,923		$	264,579

	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Revenue
Passenger ticket	$	1,334,460		$	1,192,023		$	3,301,372		$	2,916,731
Onboard and other		523,896			459,715			1,372,561			1,229,891
Total revenue		1,858,356			1,651,738			4,673,933			4,146,622
Cruise operating expense
Commissions, transportation and other		301,349			266,173			769,564			683,628
Onboard and other		117,747			98,476			281,232			250,254
Payroll and related		227,707			206,142			656,868			593,502
Fuel		99,643			91,231			288,286			266,780
Food		56,038			53,883			160,785			147,401
Other		126,460			122,260			403,083			368,640
Total cruise operating expense		928,944			838,165			2,559,818			2,310,205
Other operating expense
Marketing, general and administrative		234,459			201,588			685,882			586,099
Depreciation and amortization		143,700			134,532			415,648			376,878
Total other operating expense		378,159			336,120			1,101,530			962,977
Operating income		551,253			477,453			1,012,585			873,440
Non-operating (expense) income
Interest expense, net		(69,540	)		(66,339	)		(202,226	)		(183,497	)
Other income (expense), net		98			(3,262	)		11,354			(11,686	)
Total non-operating expense		(69,442	)		(69,601	)		(190,872	)		(195,183	)
Net income before income taxes		481,811			407,852			821,713			678,257
Income tax expense		(6,399	)		(11,625	)		(11,378	)		(17,451	)
Net income	$	475,412		$	396,227		$	810,335		$	660,806

	June 30, 2018		December 31, 2017		September 30, 2018		December 31, 2017
Assets
Current assets:
Cash and cash equivalents	$	203,220	$	170,757	$	278,546	$	170,757
Accounts receivable, net		44,212		43,961		45,997		43,961
Inventories		93,136		82,121		95,950		82,121
Prepaid expenses and other assets		328,737		216,111		298,263		216,111
Total current assets		669,305		512,950		718,756		512,950
Property and equipment, net		12,085,701		11,040,488		12,029,140		11,040,488
Goodwill		1,388,931		1,388,931		1,388,931		1,388,931
Tradenames		817,525		817,525		817,525		817,525
Other long-term assets		365,999		310,445		353,119		310,445
Total assets	$	15,327,461	$	14,070,339	$	15,307,471	$	14,070,339
Liabilities and shareholders’ equity
Current liabilities:
Current portion of long-term debt	$	679,767	$	619,373	$	679,908	$	619,373
Accounts payable		54,676		53,317		59,423		53,317
Accrued expenses and other liabilities		618,623		512,504		659,837		512,504
Due to NCLH		53,981		61,732		53,042		61,732
Advance ticket sales		1,951,701		1,303,498		1,648,742		1,303,498
Total current liabilities		3,358,748		2,550,424		3,100,952		2,550,424
Long-term debt		6,149,221		5,688,392		5,875,252		5,688,392
Other long-term liabilities		183,647		162,919		186,707		162,919
Total liabilities		9,691,616		8,401,735		9,162,911		8,401,735
Commitments and contingencies (Note 10)
Shareholders’ equity:
Ordinary shares, $.0012 par value; 40,000,000 shares authorized; 31,164,004 shares issued and outstanding at June 30, 2018 and December 31, 2017		37		37
Ordinary shares, $.0012 par value; 40,000,000 shares authorized; 31,164,004 shares issued and outstanding at September 30, 2018 and December 31, 2017						37		37
Additional paid-in capital		3,928,006		3,874,586		3,956,543		3,874,586
Accumulated other comprehensive income		49,639		25,253		54,405		25,253
Retained earnings		1,658,163		1,768,728		2,133,575		1,768,728
Total shareholders’ equity		5,635,845		5,668,604		6,144,560		5,668,604
Total liabilities and shareholders’ equity	$	15,327,461	$	14,070,339	$	15,307,471	$	14,070,339

	Ordinary Shares		Additional Paid-in Capital			Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Total Shareholders’ Equity			Ordinary Shares		Additional Paid-in Capital			Accumulated Other Comprehensive (Loss) Income			Retained Earnings			Total Shareholders’ Equity
Balance, December 31, 2016	$	37	$	3,796,042		$	(316,186	)	$	1,007,780		$	4,487,673		$	37	$	3,796,042		$	(316,186	)	$	1,007,780		$	4,487,673
Share-based compensation		—		42,220			—			—			42,220			—		63,664			—			—			63,664
Net share settlement of restricted share units		—		(6,187	)		—			—			(6,187	)		—		(6,342	)		—			—			(6,342	)
Change in accounting policy (share-based forfeitures)		—		(2,153	)		—			2,153			—			—		(2,153	)		—			2,153			—
Other comprehensive income, net		—		—			144,394			—			144,394			—		—			253,418			—			253,418
Net income		—		—			—			264,579			264,579			—		—			—			660,806			660,806
Balance, June 30, 2017	$	37	$	3,829,922		$	(171,792	)	$	1,274,512		$	4,932,679
Balance, September 30, 2017															$	37	$	3,851,211		$	(62,768	)	$	1,670,739		$	5,459,219

Balance, December 31, 2017	$	37	$	3,874,586		$	25,253		$	1,768,728		$	5,668,604		$	37	$	3,874,586		$	25,253		$	1,768,728		$	5,668,604
Share-based compensation		—		59,835			—			—			59,835			—		88,797			—			—			88,797
Net share settlement of restricted share units		—		(13,415	)		—			—			(13,415	)		—		(13,840	)		—			—			(13,840	)
Contribution from NCLH		—		7,000			—			—			7,000			—		7,000			—			—			7,000
Cumulative change in accounting policy		—		—			(12	)		12			—			—		—			(12	)		12			—
Other comprehensive income, net		—		—			24,398			—			24,398			—		—			29,164			—			29,164
Dividends		—		—			—			(445,500	)		(445,500	)		—		—			—			(445,500	)		(445,500	)
Net income		—		—			—			334,923			334,923			—		—			—			810,335			810,335
Balance, June 30, 2018	$	37	$	3,928,006		$	49,639		$	1,658,163		$	5,635,845
Balance, September 30, 2018															$	37	$	3,956,543		$	54,405		$	2,133,575		$	6,144,560

	As reported		Adjustments			Balances without adoption of Topic 606
Prepaid expenses and other assets	$	328,737	$	(81,936	)	$	246,801
Total assets		15,327,461		(81,936	)		15,245,525
Advance ticket sales		1,951,701		(81,936	)		1,869,765
Total liabilities and shareholders’ equity	$	15,327,461	$	(81,936	)	$	15,245,525

	June 30, 2018									September 30, 2018
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Weighted- Average Amortization Period (Years)		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Weighted- Average Amortization Period (in years)
Customer relationships	$	120,000	$	(79,311	)	$	40,689		6.0	$	120,000	$	(85,533	)	$	34,467		6.0
Licenses		3,368		(2,213	)		1,155		5.6		3,368		(2,544	)		824		5.6
Total intangible assets subject to amortization	$	123,368	$	(81,524	)	$	41,844			$	123,368	$	(88,077	)	$	35,291

	December 31, 2017									December 31, 2017
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Weighted- Average Amortization Period (Years)		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Weighted- Average Amortization Period (in years)
Customer relationships	$	120,000	$	(66,866	)	$	53,134		6.0	$	120,000	$	(66,866	)	$	53,134		6.0
Licenses		3,368		(1,601	)		1,767		5.6		3,368		(1,601	)		1,767		5.6
Non-compete agreements		660		(660	)		—		1.0		660		(660	)		—		1.0
Total intangible assets subject to amortization	$	124,028	$	(69,127	)	$	54,901			$	124,028	$	(69,127	)	$	54,901

Year ended December 31,	Amortization Expense
2019	$	18,489
2020		9,906
2021		75
2022		75
2023		75

	Accumulated Other Comprehensive Income (Loss)			Change Related to Cash Flow Hedges			Change Related to Shipboard Retirement Plan
Accumulated other comprehensive income at beginning of period	$	25,253		$	33,214		$	(7,961	)
Current period other comprehensive income before reclassifications		32,682			32,682			—
Amounts reclassified into earnings		(8,296	)		(8,508	)(1)		212	(2)
Accumulated other comprehensive income at end of period	$	49,639		$	57,388	(3)	$	(7,749	)

	Nine Months Ended September 30, 2018
	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	$	25,253		$	33,214		$	(7,961	)
Current period other comprehensive income before reclassifications		48,047			48,047			—
Amounts reclassified into earnings		(18,895	)		(19,214	) (1)		319	(2)
Accumulated other comprehensive income (loss) at end of period	$	54,405		$	62,047	(3)	$	(7,642	)

										Nine Months Ended September 30, 2017
	Accumulated Other Comprehensive Loss			Change Related to Cash Flow Hedges			Change Related to Shipboard Retirement Plan			Accumulated Other Comprehensive (Loss) Income			Change Related to Cash Flow Hedges			Change Related to Shipboard Retirement Plan
Accumulated other comprehensive loss at beginning of period	$	(316,186	)	$	(308,265	)	$	(7,921	)	$	(316,186)		$	(308,265	)	$	(7,921	)
Current period other comprehensive income before reclassifications		124,236			124,236			—			221,512			221,512			—
Amounts reclassified into earnings		20,158			19,949	(1)		209	(2)		31,906			31,593	(1)		313	(4)
Accumulated other comprehensive loss at end of period	$	(171,792	)	$	(164,080	)	$	(7,712	)	$	(62,768	)	$	(55,160	)	$	(7,608	)

Shareholder	Number of Shares		Percentage Ownership
Apollo Holders		15,728,782		7.1	%
Genting HK		3,148,307		1.4	%

		Asset				Liability
	Balance Sheet location	June 30, 2018		December 31, 2017		June 30, 2018		December 31, 2017
Fuel contracts designated as hedging instruments
	Prepaid expenses and other assets	$	48,058	$	19,220	$	—	$	2,406
	Other long-term assets		32,482		19,854		658		3,469
	Accrued expenses and other liabilities		—		—		—		3,348
	Other long-term liabilities		—		576		—		2,148
Foreign currency contracts designated as hedging instruments
	Prepaid expenses and other assets		3,502		52,300		—		730
	Other long-term assets		42,186		85,081		2,960		—
	Other long-term liabilities		—		—		4,760		—
Interest contracts designated as hedging instruments
	Prepaid expenses and other assets		621		—		—		—
	Other long-term assets		1,362		—		—		—
	Accrued expenses and other liabilities		—		—		—		1,020
Total derivatives designated as hedging instruments		$	128,211	$	177,031	$	8,378	$	13,121

		Assets				Liabilities
Derivative Contracts Designated as Hedging Instruments	Balance Sheet Location	September 30, 2018		December 31, 2017		September 30, 2018		December 31, 2017
Fuel contracts
	Prepaid expenses and other assets	$	52,471	$	19,220	$	—	$	2,406
	Other long-term assets		32,357		19,854		281		3,469
	Accrued expenses and other liabilities		—		—		—		3,348
	Other long-term liabilities		—		576		—		2,148
Foreign currency contracts
	Prepaid expenses and other assets		2,229		52,300		—		730
	Other long-term assets		33,337		85,081		2,976		—
	Accrued expenses and other liabilities		—		—		118		—
	Other long-term liabilities		4,747		—		9,312		—
Interest rate contracts
	Prepaid expenses and other assets		1,984		—		—		—
	Other long-term assets		1,177		—		—		—
	Accrued expenses and other liabilities		—		—		—		1,020
Total derivative contracts designated as hedging instruments		$	128,302	$	177,031	$	12,687	$	13,121

June 30, 2018	Gross Amounts		Gross Amounts Offset			Total Net Amounts		Gross Amounts Not Offset			Net Amounts
September 30, 2018													Gross Amounts		Gross Amounts Offset			Total Net Amounts		Gross Amounts Not Offset			Net Amounts
Assets	$	128,211	$	(3,618	)	$	124,593	$	(42,913	)	$	81,680	$	123,555	$	(3,257	)	$	120,298	$	(34,549	)	$	85,749
Liabilities		4,760		—			4,760		(4,760	)		—		9,430		(4,747	)		4,683		(3,716	)		967

Derivatives	Amount of gain or (loss) recognized in other comprehensive income						Location of gain or (loss) reclassified from accumulated other comprehensive income (loss) into income	Amount of gain or (loss) reclassified from accumulated other comprehensive income (loss) into income						Amount of Gain (Loss) Recognized in Other Comprehensive Income						Location of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income (Loss) into Income	Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income (Loss) into Income
	Three Months Ended June 30, 2018			Three Months Ended June 30, 2017				Three Months Ended June 30, 2018			Three Months Ended June 30, 2017			Three Months Ended September 30, 2018			Three Months Ended September 30, 2017				Three Months Ended September 30, 2018			Three Months Ended September 30, 2017
Fuel contracts	$	70,508		$	(4,884	)	Fuel	$	7,904		$	(8,584	)	$	24,439		$	30,452		Fuel	$	11,595		$	(9,796	)
Foreign currency contracts		(88,382	)		136,428		Depreciation and amortization expense		(899	)		(895	)		(10,062	)		66,849		Depreciation and amortization		(703	)		(1,157	)
Interest rate contracts		1,980			(25	)	Interest expense, net		(282	)		(765	)		988			(25	)	Interest expense, net		(186	)		(691	)
Total gain (loss) recognized in other comprehensive income	$	(15,894	)	$	131,519			$	6,723		$	(10,244	)	$	15,365		$	97,276			$	10,706		$	(11,644	)

	For the Three months Ended June 30, 2018								For the Three months Ended June 30, 2017
	Fuel		Depreciation and amortization			Interest expense, net			Fuel			Depreciation and amortization			Interest expense, net
Total amounts of income and expense line items presented in the consolidated statements of operations in which the effects of cash flow hedges are recorded	$	95,212	$	140,704		$	72,988		$	86,663		$	123,141		$	64,196
Amount of gain or (loss) reclassified from accumulated other comprehensive income (loss) into income
Fuel contracts		7,904		—			—			(8,584	)		—			—
Foreign currency contracts		—		(899	)		—			—			(895	)		—
Interest rate contracts		—		—			(282	)		—			—			(765	)

	Three Months Ended September 30, 2018								Three Months Ended September 30, 2017
	Fuel		Depreciation and Amortization			Interest Expense, net			Fuel			Depreciation and Amortization			Interest Expense, net
Total amounts of income and expense line items presented in the consolidated statements of operations in which the effects of cash flow hedges are recorded	$	99,643	$	143,700		$	69,540		$	91,231		$	134,532		$	66,339

Amount of gain (loss) reclassified from accumulated other comprehensive income (loss) into income
Fuel contracts		11,595		—			—			(9,796	)		—			—
Foreign currency contracts		—		(703	)		—			—			(1,157	)		—
Interest rate contracts		—		—			(186	)		—			—			(691	)

	For the Six Months Ended June 30, 2018								For the Six Months Ended June 30, 2017									Nine Months Ended September 30, 2018								Nine Months Ended September 30, 2017
	Fuel		Depreciation and amortization			Interest expense, net			Fuel			Depreciation and amortization			Interest expense, net			Fuel		Depreciation and Amortization			Interest Expense, net			Fuel			Depreciation and Amortization			Interest Expense, Net
Total amounts of income and expense line items presented in the consolidated statements of operations in which the effects of cash flow hedges are recorded	$	188,643	$	271,948		$	132,686		$	175,549		$	242,346		$	117,156		$	288,286	$	415,648		$	202,226		$	266,780		$	376,878		$	183,497

Amount of gain or (loss) reclassified from accumulated other comprehensive income (loss) into income
Amount of gain (loss) reclassified from accumulated other comprehensive income (loss) into income
Fuel contracts		11,429		—			—			(16,587	)		—			—			23,024		—			—			(26,383	)		—			—
Foreign currency contracts		—		(2,058	)		—			—			(1,752	)		—			—		(2,761	)		—			—			(2,909	)		—
Interest rate contracts		—		—			(863	)		—			—			(1,610	)		—		—			(1,049	)		—			—			(2,301	)

	Number of Share Option Awards								Weighted-Average Exercise Price						Weighted- Average Contractual Term		Aggregate Intrinsic Value		Number of Share Option Awards								Weighted-Average Exercise Price						Weighted- Average Contractual Term		Aggregate Intrinsic Value
	Time- Based Awards			Performance- Based Awards			Market- Based Awards		Time- Based Awards		Performance- Based Awards		Market- Based Awards		(years)		(in thousands)		Time- Based Awards			Performance- Based Awards			Market- Based Awards		Time- Based Awards		Performance- Based Awards		Market- Based Awards		(in years)		(in thousands)
Outstanding as of January 1, 2018		6,580,898			373,969			208,333	$	49.18	$	31.39	$	59.43		6.99	$	50,021		6,580,898			373,969			208,333	$	49.18	$	31.39	$	59.43		6.99	$	50,021
Granted		—			208,335			—		—		59.43		—		—		—		—			208,335			—	$	—	$	59.43	$	—		—	$	—
Exercised		(468,540	)		(106,109	)		—		33.46		19.00		—		—		—		(625,611	)		(109,285	)		—	$	34.44	$	19.00	$	—		—	$	—
Forfeited and cancelled		(169,000	)		(52,084	)		—		54.75		59.43		—		—		—		(192,333	)		(52,084	)		—	$	54.70	$	59.43	$	—		—	$	—
Outstanding as of June 30, 2018		5,943,358			424,111			208,333	$	50.26	$	44.82	$	59.43		6.69	$	23,885
Outstanding as of September 30, 2018																				5,762,954			420,935			208,333	$	50.60	$	45.01	$	59.43		6.46	$	47,269

	Number of Time-Based Awards			Weighted- Average Grant Date Fair Value
Non-vested as of January 1, 2018		858		$	58.33
Granted		—			—
Vested		(429	)		58.25
Forfeited or expired		—			—
Non-vested and expected to vest as of June 30, 2018		429		$	58.41

	Number of Time-Based Awards			Weighted- Average Grant Date Fair Value
Non-vested as of January 1, 2018		858		$	58.33
Vested		(429	)	$	58.25
Non-vested as of September 30, 2018		429		$	58.41

	Number of Time-Based Awards			Weighted- Average Grant Date Fair Value		Number of Performance- Based Awards			Weighted- Average Grant Date Fair Value		Number of Market- Based Awards		Weighted- Average Grant Date Fair Value
Non-vested as of January 1, 2018		2,555,477		$	50.86		—		$	—		50,000	$	59.43
Granted		1,613,077		$	56.73		843,998		$	56.58		—	$	—
Vested		(1,032,760	)	$	50.66		—		$	—		—	$	—
Forfeited or expired		(142,227	)	$	53.31		(18,384	)	$	56.43		—	$	—
Non-vested as of September 30, 2018		2,993,567		$	53.98		825,614		$	56.58		50,000	$	59.43

	Number of Time-Based Awards			Weighted- Average Grant Date Fair Value		Number of Performance- Based Awards			Weighted- Average Grant Date Fair Value		Number of Market- Based Awards		Weighted- Average Grant Date Fair Value
Non-vested as of January 1, 2018		2,555,477		$	50.86		—		$	—		50,000	$	59.43
Granted		1,613,077			56.73		843,998			56.58		—		—
Vested		(1,006,184	)		50.61		—			—		—		—
Forfeited or expired		(81,980	)		53.29		(12,500	)		59.43		—		—
Non-vested and expected to vest as of June 30, 2018		3,080,390		$	53.96		831,498		$	56.58		50,000	$	59.43

	·	the unavailability of attractive port destinations;

	·	evolving requirements and regulations regarding data privacy and protection and any actual or perceived compliance failures by us;

•	~~Net income was $229.5 million compared to $201.4 million.~~

•	~~Operating income increased to $293.0 million from $275.8 million.~~

	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017			2018			2017			2018			2017
Passengers carried		687,820			598,942			1,305,260			1,127,296			823,413			741,216			2,128,673			1,868,512
Passenger Cruise Days		4,959,446			4,517,788			9,684,050			8,748,306			5,493,932			5,071,115			15,177,982			13,819,421
Capacity Days		4,550,217			4,189,750			9,016,688			8,220,366			4,941,643			4,590,789			13,958,331			12,811,155
Occupancy Percentage		109.0	%		107.8	%		107.4	%		106.4	%		111.2	%		110.5	%		108.7	%		107.9	%

	(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)	Secondary Equity Offering expenses are included in marketing, general and administrative expense.
	(4)	Severance payments and other fees related to restructuring costs and other severance arrangements ~~which are included in marketing, general and administrative expense.~~
	~~(4)~~	~~Expenses related to the Acquisition of Prestige, which~~ are included in marketing, general and administrative expense.
	(5)	~~Primarily~~Acquisition of Prestige expenses are included in marketing, general and administrative expense.
	(6)	Other primarily related to expenses and reimbursements ~~related to~~for certain legal costs ~~which are~~ included in marketing, general and administrative expense.

	(1)	Primarily consists of gains and losses, net for foreign 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)	~~(4)~~Secondary Equity Offering expenses are included in marketing, general and administrative expense.
(5)	Severance payments and other fees related to restructuring costs and other severance arrangements, which are included in marketing, general and administrative expense.
(6)	~~(5)~~	~~Expenses related to the~~ Acquisition of Prestige ~~which~~expenses are included in marketing, general and administrative expense.
(7)	~~(6)~~	~~Primarily~~Other primarily related to expenses and reimbursements ~~related to~~for certain legal costs, which are included in marketing, general and administrative expense.