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 30, 20202021
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 333-128780
NCL CORPORATION LTD.
(Exact name of registrant as specified in its charter)
Bermuda |
| 20-0470163 |
(State or other jurisdiction of incorporation or organization) |
| (I.R.S. Employer Identification No.) |
|
|
|
7665 Corporate Center Drive, Miami, Florida 33126 |
| 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)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
N/A | N/A | N/A |
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 ⌧
(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 every Interactive Data File required to be submitted 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 such files). Yes ⌧ No ◻
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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 ⌧ | 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 ⌧
There were 31,164,004 ordinary shares outstanding as of July 31, 2020.2021.
TABLE OF CONTENTS
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
NCL Corporation Ltd.
Consolidated Statements of Operations
(Unaudited)
(in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended | | Three Months Ended | | Six Months Ended | ||||||||||||||||
| | June 30, | | June 30, | | June 30, | | June 30, | ||||||||||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||||||
Revenue | | |
|
| |
| | |
|
| |
| | |
|
| |
| | |
|
| |
|
Passenger ticket | | $ | 13,835 | | $ | 1,179,404 | | $ | 854,626 | | $ | 2,152,677 | | $ | 1,584 | | $ | 13,835 | | $ | 1,750 | | $ | 854,626 |
Onboard and other | |
| 3,094 | |
| 484,873 | |
| 409,185 | |
| 915,230 | |
| 2,784 | |
| 3,094 | |
| 5,718 | |
| 409,185 |
Total revenue | |
| 16,929 | |
| 1,664,277 | |
| 1,263,811 | |
| 3,067,907 | |
| 4,368 | |
| 16,929 | |
| 7,468 | |
| 1,263,811 |
Cruise operating expense | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Commissions, transportation and other | |
| 34,601 | |
| 297,691 | |
| 366,969 | |
| 526,955 | |
| 6,564 | |
| 34,601 | |
| 15,597 | |
| 366,969 |
Onboard and other | |
| 3,188 | |
| 107,063 | |
| 78,161 | |
| 186,476 | |
| 1,276 | |
| 3,188 | |
| 2,535 | |
| 78,161 |
Payroll and related | |
| 128,744 | |
| 229,385 | |
| 375,891 | |
| 452,492 | |
| 86,647 | |
| 128,744 | |
| 168,785 | |
| 375,891 |
Fuel | |
| 48,992 | |
| 100,531 | |
| 174,016 | |
| 198,784 | |
| 54,090 | |
| 48,992 | |
| 96,693 | |
| 174,016 |
Food | |
| 6,997 | |
| 54,347 | |
| 56,213 | |
| 109,392 | |
| 4,334 | |
| 6,997 | |
| 10,642 | |
| 56,213 |
Other | |
| 79,130 | |
| 169,407 | |
| 244,662 | |
| 310,976 | |
| 96,816 | |
| 79,130 | |
| 156,330 | |
| 244,662 |
Total cruise operating expense | |
| 301,652 | |
| 958,424 | |
| 1,295,912 | |
| 1,785,075 | |
| 249,727 | |
| 301,652 | |
| 450,582 | |
| 1,295,912 |
Other operating expense | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Marketing, general and administrative | |
| 130,562 | |
| 239,988 | |
| 400,469 | |
| 488,322 | |
| 184,901 | |
| 130,562 | |
| 387,967 | |
| 400,469 |
Depreciation and amortization | |
| 179,252 | |
| 156,271 | |
| 377,449 | |
| 326,012 | |
| 174,262 | |
| 179,252 | |
| 344,578 | |
| 377,449 |
Impairment loss | | | — | | | — | | | 1,607,797 | |
| — | | | — | | | — | | | — | |
| 1,607,797 |
Total other operating expense | |
| 309,814 | |
| 396,259 | |
| 2,385,715 | |
| 814,334 | |
| 359,163 | |
| 309,814 | |
| 732,545 | |
| 2,385,715 |
Operating income (loss) | |
| (594,537) | |
| 309,594 | |
| (2,417,816) | |
| 468,498 | ||||||||||||
Operating loss | |
| (604,522) | |
| (594,537) | |
| (1,175,659) | |
| (2,417,816) | ||||||||||||
Non-operating income (expense) | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Interest expense, net | |
| (120,585) | |
| (65,969) | |
| (189,492) | |
| (139,472) | |
| (179,448) | |
| (120,585) | |
| (639,780) | |
| (189,492) |
Other income (expense), net | |
| (242,230) | |
| 3,616 | |
| (236,407) | |
| 3,182 | |
| (82,627) | |
| (242,230) | |
| (371,892) | |
| (236,407) |
Total non-operating income (expense) | |
| (362,815) | |
| (62,353) | |
| (425,899) | |
| (136,290) | |
| (262,075) | |
| (362,815) | |
| (1,011,672) | |
| (425,899) |
Net income (loss) before income taxes | |
| (957,352) | |
| 247,241 | |
| (2,843,715) | |
| 332,208 | ||||||||||||
Net loss before income taxes | |
| (866,597) | |
| (957,352) | |
| (2,187,331) | |
| (2,843,715) | ||||||||||||
Income tax benefit (expense) | |
| 6,287 | |
| (3,965) | |
| 10,384 | |
| 30,472 | |
| (927) | |
| 6,287 | |
| (2,655) | |
| 10,384 |
Net income (loss) | | $ | (951,065) | | $ | 243,276 | | $ | (2,833,331) | | $ | 362,680 | ||||||||||||
Net loss | | $ | (867,524) | | $ | (951,065) | | $ | (2,189,986) | | $ | (2,833,331) |
The accompanying notes are an integral part of these consolidated financial statements.
3
NCL Corporation Ltd.
Consolidated Statements of Comprehensive Income (Loss)Loss
(Unaudited)
(in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended | | Three Months Ended | | Six Months Ended | ||||||||||||||||
| | June 30, | | June 30, | | June 30, | | June 30, | ||||||||||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||||||
Net income (loss) | | $ | (951,065) | | $ | 243,276 | | $ | (2,833,331) | | $ | 362,680 | ||||||||||||
Net loss | | $ | (867,524) | | $ | (951,065) | | $ | (2,189,986) | | $ | (2,833,331) | ||||||||||||
Other comprehensive income (loss): | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Shipboard Retirement Plan | |
| 102 | | | 94 | | | 204 | | | 189 | |
| 99 | | | 102 | | | 197 | | | 204 |
Cash flow hedges: | |
| | | | | | | | | | | |
| | | | | | | | | | |
Net unrealized gain (loss) | |
| 54,478 | | | (17,189) | | | (251,382) | | | (2,037) | |
| 44,674 | | | 54,478 | | | (28,363) | | | (251,382) |
Amount realized and reclassified into earnings | |
| 28,782 | | | (9,274) | | | 50,781 | | | (16,274) | |
| 13,542 | | | 28,782 | | | 35,380 | | | 50,781 |
Total other comprehensive income (loss) | |
| 83,362 | |
| (26,369) | |
| (200,397) | |
| (18,122) | |
| 58,315 | |
| 83,362 | |
| 7,214 | |
| (200,397) |
Total comprehensive income (loss) | | $ | (867,703) | | $ | 216,907 | | $ | (3,033,728) | | $ | 344,558 | ||||||||||||
Total comprehensive loss | | $ | (809,209) | | $ | (867,703) | | $ | (2,182,772) | | $ | (3,033,728) |
The accompanying notes are an integral part of these consolidated financial statements.
4
NCL Corporation Ltd.
Consolidated Balance Sheets
(Unaudited)
(in thousands, except share data)
| | | | | | | | | | | | | | |
|
| June 30, | | December 31, | |
| June 30, | | December 31, | | ||||
|
| 2020 |
| 2019 | |
| 2021 |
| 2020 | | ||||
Assets | | |
|
| |
| | | |
|
| |
| |
Current assets: | | |
|
| |
| | | |
|
| |
| |
Cash and cash equivalents | | $ | 2,258,574 | | $ | 231,239 | | | $ | 2,749,233 | | $ | 3,299,340 | |
Accounts receivable, net | |
| 74,213 | |
| 75,109 | | |
| 422,598 | |
| 20,578 | |
Inventories | |
| 82,263 | |
| 95,427 | | |
| 92,041 | |
| 82,381 | |
Prepaid expenses and other assets | |
| 330,514 | |
| 306,616 | | |
| 194,124 | |
| 147,556 | |
Total current assets | |
| 2,745,564 | |
| 708,391 | | |
| 3,457,996 | |
| 3,549,855 | |
Property and equipment, net | |
| 13,488,514 | |
| 13,135,337 | | |
| 13,431,884 | |
| 13,411,226 | |
Goodwill | |
| 98,134 | |
| 1,388,931 | | |
| 98,134 | |
| 98,134 | |
Tradenames | |
| 500,525 | |
| 817,525 | | |||||||
Trade names | |
| 500,525 | |
| 500,525 | | |||||||
Other long-term assets | |
| 690,218 | |
| 612,864 | | |
| 1,030,586 | |
| 831,888 | |
Total assets | | $ | 17,522,955 | | $ | 16,663,048 | | | $ | 18,519,125 | | $ | 18,391,628 | |
Liabilities and shareholders’ equity | |
|
| |
|
| | |
|
| |
|
| |
Current liabilities: | |
|
| |
|
| | |
|
| |
|
| |
Current portion of long-term debt | | $ | 337,338 | | $ | 746,358 | | | $ | 361,233 | | $ | 124,885 | |
Accounts payable | |
| 484,927 | |
| 100,777 | | |
| 110,628 | |
| 83,136 | |
Accrued expenses and other liabilities | |
| 647,537 | |
| 782,665 | | |
| 631,634 | |
| 596,717 | |
Due to NCLH | |
| 35,229 | |
| 35,044 | | |
| 39,114 | |
| 37,790 | |
Advance ticket sales | |
| 1,113,374 | |
| 1,954,980 | | |
| 1,076,826 | |
| 1,109,826 | |
Total current liabilities | |
| 2,618,405 | |
| 3,619,824 | | |
| 2,219,435 | |
| 1,952,354 | |
Long-term debt | |
| 8,922,948 | |
| 6,055,335 | | |
| 10,645,941 | |
| 10,128,754 | |
Exchangeable notes | | | 1,454,022 | | | — | | | | 2,374,684 | | | 2,691,720 | |
Other long-term liabilities | |
| 593,257 | |
| 526,089 | | |
| 699,544 | |
| 447,492 | |
Total liabilities | |
| 13,588,632 | |
| 10,201,248 | | |
| 15,939,604 | |
| 15,220,320 | |
Commitments and contingencies (Note 11) | |
|
| |
|
| | |||||||
Commitments and contingencies (Note 9) | |
|
| |
|
| | |||||||
Shareholders’ equity: | |
|
| |
|
| | |
|
| |
|
| |
Preference shares (Series A-1: $1,000 par value; 2,000,000 shares authorized; 0 shares issued and outstanding at June 30, 2020 and Series A-2: $1,000 par value; 2,000,000 shares authorized; 0 shares issued and outstanding at June 30, 2020) | | | — | | | — | | |||||||
Ordinary shares ($0.0012 par value; 40,000,000 shares authorized; 31,164,004 shares issued and outstanding at June 30, 2020 and December 31, 2019) | |
| 37 | |
| 37 | | |||||||
Preference shares (Series A-1: $1,000 par value; 2,000,000 shares authorized; 0 shares issued and outstanding at June 30, 2021 and December 31, 2020; Series A-2: $1,000 par value; 2,000,000 shares authorized; 0 shares issued and outstanding at June 30, 2021 and December 31, 2020; and Series A-3: $1,000 par value; 1,000,000 shares authorized; 0 shares issued and outstanding at June 30, 2021 and December 31, 2020) | | | — | | | — | | |||||||
Ordinary shares ($0.0012 par value; 40,000,000 shares authorized; 31,164,004 shares issued and outstanding at June 30, 2021 and December 31, 2020) | |
| 37 | |
| 37 | | |||||||
Additional paid-in capital | |
| 4,565,658 | |
| 4,061,330 | | |
| 7,312,710 | |
| 5,721,725 | |
Accumulated other comprehensive income (loss) | |
| (497,600) | |
| (297,203) | | |
| (234,616) | |
| (241,830) | |
Retained earnings (deficit) | |
| (133,772) | |
| 2,697,636 | | |
| (4,498,610) | |
| (2,308,624) | |
Total shareholders’ equity | |
| 3,934,323 | |
| 6,461,800 | | |
| 2,579,521 | |
| 3,171,308 | |
Total liabilities and shareholders’ equity | | $ | 17,522,955 | | $ | 16,663,048 | | | $ | 18,519,125 | | $ | 18,391,628 | |
The accompanying notes are an integral part of these consolidated financial statements.
5
NCL Corporation Ltd.
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
| | | | | | | | | | | | |
| | Six Months Ended | | Six Months Ended | ||||||||
| | June 30, | | June 30, | ||||||||
|
| 2020 |
| 2019 |
| 2021 |
| 2020 | ||||
Cash flows from operating activities |
| |
|
| |
|
| |
|
| |
|
Net income (loss) | | $ | (2,833,331) | | $ | 362,680 | ||||||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | |
|
| |
|
| ||||||
Net loss | | $ | (2,189,986) | | $ | (2,833,331) | ||||||
Adjustments to reconcile net loss to net cash used in operating activities: | |
|
| |
|
| ||||||
Depreciation and amortization expense | |
| 397,608 | |
| 326,471 | |
| 415,000 | |
| 397,608 |
Impairment loss | | | 1,607,797 | | | — | | | — | | | 1,607,797 |
Deferred income taxes, net | |
| (13,099) | |
| (29,857) | |
| 12 | |
| (13,099) |
Loss on derivatives | |
| 223,919 | |
| — | |
| 402,102 | |
| 223,919 |
Loss on extinguishment of debt | | | 5,014 | | | 3,988 | | | 237,065 | | | 5,014 |
Provision for bad debts and inventory obsolescence | |
| 10,359 | |
| 1,057 | |
| 7,211 | |
| 10,359 |
Gain on involuntary conversion of assets | | | (1,403) | | | (2,810) | | | (1,817) | | | (1,403) |
Share-based compensation expense | |
| 55,147 | |
| 56,650 | |
| 49,052 | |
| 55,147 |
Net foreign currency adjustments | |
| 160 | |
| (716) | |
| (3,767) | |
| 160 |
Changes in operating assets and liabilities: | |
| | |
| | |
| | |
| |
Accounts receivable, net | |
| (2,108) | |
| (15,120) | |
| (408,120) | |
| (2,108) |
Inventories | |
| 11,996 | |
| (1,343) | |
| (9,956) | |
| 11,996 |
Prepaid expenses and other assets | |
| (111,454) | |
| (57,227) | |
| (242,642) | |
| (111,454) |
Accounts payable | |
| 369,519 | |
| (81,690) | |
| 26,205 | |
| 369,519 |
Accrued expenses and other liabilities | |
| (202,647) | |
| (70,190) | |
| 45,783 | |
| (202,647) |
Advance ticket sales | |
| (844,244) | |
| 558,579 | |
| 191,609 | |
| (844,244) |
Net cash provided by (used in) operating activities | |
| (1,326,767) | |
| 1,050,472 | ||||||
Net cash used in operating activities | |
| (1,482,249) | |
| (1,326,767) | ||||||
Cash flows from investing activities | |
|
| |
|
| |
|
| |
|
|
Additions to property and equipment, net | |
| (725,477) | |
| (413,888) | |
| (309,481) | |
| (725,477) |
Cash received on settlement of derivatives | |
| — | |
| 289 | ||||||
Cash paid on settlement of derivatives | | | (28,606) | | | — | | | (8,559) | | | (28,606) |
Other | | | 2,519 | | | 4,047 | | | 2,825 | | | 2,519 |
Net cash used in investing activities | |
| (751,564) | |
| (409,552) | |
| (315,215) | |
| (751,564) |
Cash flows from financing activities | |
|
| |
|
| |
|
| |
|
|
Repayments of long-term debt | |
| (207,863) | |
| (2,808,615) | |
| (879,679) | |
| (207,863) |
Proceeds from long-term debt | |
| 3,962,655 | |
| 2,652,000 | |
| 1,223,110 | |
| 3,962,655 |
Dividends | |
| — | |
| (194,000) | ||||||
Due to NCLH, net | |
| 185 | |
| (9,675) | |
| 1,323 | |
| 185 |
Contribution from NCLH | |
| 464,499 | |
| 3,500 | |
| 1,558,957 | |
| 464,499 |
Net share settlement of restricted share units | |
| (15,318) | |
| (20,830) | |
| (16,658) | |
| (15,318) |
Early redemption premium | |
| — | |
| (117) | |
| (611,164) | |
| — |
Deferred financing fees | |
| (94,559) | |
| (9,330) | ||||||
Net cash provided by (used in) financing activities | |
| 4,109,599 | |
| (387,067) | ||||||
Deferred financing fees and other | |
| (28,532) | |
| (94,559) | ||||||
Net cash provided by financing activities | |
| 1,247,357 | |
| 4,109,599 | ||||||
Effect of exchange rates on cash and cash equivalents | | | (3,933) | | | — | | | — | | | (3,933) |
Net increase in cash and cash equivalents | |
| 2,027,335 | |
| 253,853 | ||||||
Net increase (decrease) in cash and cash equivalents | |
| (550,107) | |
| 2,027,335 | ||||||
Cash and cash equivalents at beginning of period | |
| 231,239 | |
| 162,419 | |
| 3,299,340 | |
| 231,239 |
Cash and cash equivalents at end of period | | $ | 2,258,574 | | $ | 416,272 | | $ | 2,749,233 | | $ | 2,258,574 |
The accompanying notes are an integral part of these consolidated financial statements.
6
NCL Corporation Ltd.
Consolidated Statements of Changes in Shareholders’ Equity
(Unaudited)
(in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2020 | | Three Months Ended June 30, 2021 | ||||||||||||||||||||||||||
| | | | | | | | Accumulated | | | | | | | | | | | | | | Accumulated | | | | | | | ||
| | | | | Additional | | Other | | Retained | | Total | | | | | Additional | | Other | | Retained | | Total | ||||||||
| | Ordinary | | Paid-in | | Comprehensive | | Earnings | | Shareholders’ | | Ordinary | | Paid-in | | Comprehensive | | Earnings | | Shareholders’ | ||||||||||
| | Shares |
| Capital |
| Income (Loss) |
| (Deficit) |
| Equity | | Shares |
| Capital |
| Income (Loss) |
| (Deficit) |
| Equity | ||||||||||
Balance, March 31, 2020 | | $ | 37 | | $ | 4,101,613 | | $ | (580,962) | | $ | 817,293 | | $ | 4,337,981 | |||||||||||||||
Balance, March 31, 2021 | | $ | 37 | | $ | 7,291,240 | | $ | (292,931) | | $ | (3,631,086) | | $ | 3,367,260 | |||||||||||||||
Share-based compensation | |
| — | |
| 22,389 | |
| — | |
| — | |
| 22,389 | |
| — | |
| 22,451 | |
| — | |
| — | |
| 22,451 |
Net share settlement of restricted share units | |
| — | |
| (343) | |
| — | |
| — | |
| (343) | |
| — | |
| (615) | |
| — | |
| — | |
| (615) |
Cumulative change in accounting policy | | | — | | | — | | | — | | | — | | | — | |||||||||||||||
Contribution from NCLH | |
| — | |
| 441,999 | |
| — | |
| — | |
| 441,999 | |||||||||||||||
Other | |
| — | |
| (366) | |
| — | |
| — | |
| (366) | |||||||||||||||
Other comprehensive income, net | |
| — | |
| — | |
| 83,362 | |
| — | |
| 83,362 | |
| — | |
| — | |
| 58,315 | |
| — | |
| 58,315 |
Net loss | |
| — | |
| — | |
| — | |
| (951,065) | |
| (951,065) | |
| — | |
| — | |
| — | |
| (867,524) | |
| (867,524) |
Balance, June 30, 2020 | | $ | 37 | | $ | 4,565,658 | | $ | (497,600) | | $ | (133,772) | | $ | 3,934,323 | |||||||||||||||
Balance, June 30, 2021 | | $ | 37 | | $ | 7,312,710 | | $ | (234,616) | | $ | (4,498,610) | | $ | 2,579,521 | |||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, 2020 | | Six Months Ended June 30, 2021 | ||||||||||||||||||||||||||
| | | | | | | | Accumulated | | | | | | | | | | | | | | Accumulated | | | | | | | ||
| | | | | Additional | | Other | | Retained | | Total | | | | | Additional | | Other | | Retained | | Total | ||||||||
| | Ordinary | | Paid-in | | Comprehensive | | Earnings | | Shareholders’ | | Ordinary | | Paid-in | | Comprehensive | | Earnings | | Shareholders’ | ||||||||||
|
| Shares |
| Capital |
| Income (Loss) |
| (Deficit) |
| Equity |
| Shares |
| Capital |
| Income (Loss) |
| (Deficit) |
| Equity | ||||||||||
Balance, December 31, 2019 | | $ | 37 | | $ | 4,061,330 | | $ | (297,203) | | $ | 2,697,636 | | $ | 6,461,800 | |||||||||||||||
Balance, December 31, 2020 | | $ | 37 | | $ | 5,721,725 | | $ | (241,830) | | $ | (2,308,624) | | $ | 3,171,308 | |||||||||||||||
Share-based compensation | |
| — | |
| 55,147 | |
| — | |
| — | |
| 55,147 | |
| — | |
| 49,052 | |
| — | |
| — | |
| 49,052 |
Net share settlement of restricted share units | |
| — | |
| (15,318) | |
| — | |
| — | |
| (15,318) | |
| — | |
| (16,658) | |
| — | |
| — | |
| (16,658) |
Cumulative change in accounting policy | | | — | | | — | | | — | | | 1,923 | | | 1,923 | |||||||||||||||
Contribution from NCLH | |
| — | |
| 464,499 | |
| — | |
| — | |
| 464,499 | |
| — | |
| 1,558,957 | |
| — | |
| — | |
| 1,558,957 |
Other comprehensive loss, net | |
| — | |
| — | |
| (200,397) | |
| — | |
| (200,397) | |||||||||||||||
Other | | | — | | | (366) | | | — | | | — | | | (366) | |||||||||||||||
Other comprehensive income, net | |
| — | |
| — | |
| 7,214 | |
| — | |
| 7,214 | |||||||||||||||
Net loss | |
| — | |
| — | |
| — | |
| (2,833,331) | |
| (2,833,331) | |
| — | |
| — | |
| — | |
| (2,189,986) | |
| (2,189,986) |
Balance, June 30, 2020 | | $ | 37 | | $ | 4,565,658 | | $ | (497,600) | | $ | (133,772) | | $ | 3,934,323 | |||||||||||||||
Balance, June 30, 2021 | | $ | 37 | | $ | 7,312,710 | | $ | (234,616) | | $ | (4,498,610) | | $ | 2,579,521 |
The accompanying notes are an integral part of these consolidated financial statements.
7
NCL Corporation Ltd.
Consolidated Statements of Changes in Shareholders’ Equity - Continued
(Unaudited)
(in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2019 | | Three Months Ended June 30, 2020 | ||||||||||||||||||||||||||
| | | | | | | | Accumulated | | | | | | | | | | | | | | Accumulated | | | | | | | ||
| | | | | Additional | | Other | | Retained | | Total | | | | | Additional | | Other | | Retained | | Total | ||||||||
| | Ordinary | | Paid-in | | Comprehensive | | Earnings | | Shareholders’ | | Ordinary | | Paid-in | | Comprehensive | | Earnings | | Shareholders’ | ||||||||||
| | Shares |
| Capital |
| Income (Loss) |
| (Deficit) |
| Equity | | Shares |
| Capital |
| Income (Loss) |
| (Deficit) |
| Equity | ||||||||||
Balance, March 31, 2019 | | $ | 37 | | $ | 3,991,863 | | $ | (155,113) | | $ | 2,022,834 | | $ | 5,859,621 | |||||||||||||||
Balance, March 31, 2020 | | $ | 37 | | $ | 4,101,613 | | $ | (580,962) | | $ | 817,293 | | $ | 4,337,981 | |||||||||||||||
Share-based compensation | |
| — | |
| 29,651 | |
| — | |
| — | |
| 29,651 | |
| — | |
| 22,389 | |
| — | |
| — | |
| 22,389 |
Net share settlement of restricted share units | |
| — | |
| (1,980) | |
| — | |
| — | |
| (1,980) | |
| — | |
| (343) | |
| — | |
| — | |
| (343) |
Contribution from NCLH | |
| — | |
| 3,500 | |
| — | |
| — | |
| 3,500 | |
| — | |
| 441,999 | |
| — | |
| — | |
| 441,999 |
Other comprehensive loss, net | |
| — | |
| — | |
| (26,369) | |
| — | |
| (26,369) | |||||||||||||||
Net income | |
| — | |
| — | |
| — | |
| 243,276 | |
| 243,276 | |||||||||||||||
Balance, June 30, 2019 | | $ | 37 | | $ | 4,023,034 | | $ | (181,482) | | $ | 2,266,110 | | $ | 6,107,699 | |||||||||||||||
Other comprehensive income, net | |
| — | |
| — | |
| 83,362 | |
| — | |
| 83,362 | |||||||||||||||
Net loss | |
| — | |
| — | |
| — | |
| (951,065) | |
| (951,065) | |||||||||||||||
Balance, June 30, 2020 | | $ | 37 | | $ | 4,565,658 | | $ | (497,600) | | $ | (133,772) | | $ | 3,934,323 | |||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, 2019 | | Six Months Ended June 30, 2020 | ||||||||||||||||||||||||||
|
| | | | | | | Accumulated | | | | | | |
| | | | | | | Accumulated | | | | | | | ||
| | | | | Additional | | Other | | Retained | | Total | | | | | Additional | | Other | | Retained | | Total | ||||||||
| | Ordinary | | Paid-in | | Comprehensive | | Earnings | | Shareholders’ | | Ordinary | | Paid-in | | Comprehensive | | Earnings | | Shareholders’ | ||||||||||
|
| Shares |
| Capital |
| Income (Loss) |
| (Deficit) |
| Equity |
| Shares |
| Capital |
| Income (Loss) |
| (Deficit) |
| Equity | ||||||||||
Balance, December 31, 2018 | | $ | 37 | | $ | 3,983,714 | | $ | (163,360) | | $ | 2,097,430 | | $ | 5,917,821 | |||||||||||||||
Balance, December 31, 2019 | | $ | 37 | | $ | 4,061,330 | | $ | (297,203) | | $ | 2,697,636 | | $ | 6,461,800 | |||||||||||||||
Share-based compensation | |
| — | |
| 56,650 | |
| — | |
| — | |
| 56,650 | |
| — | |
| 55,147 | |
| — | |
| — | |
| 55,147 |
Net share settlement of restricted share units | |
| — | |
| (20,830) | |
| — | |
| — | |
| (20,830) | |
| — | |
| (15,318) | |
| — | |
| — | |
| (15,318) |
Contribution from NCLH | | | — | | | 3,500 | | | — | | | — | | | 3,500 | | | — | | | 464,499 | | | — | | | — | | | 464,499 |
Cumulative change in accounting policy | |
| — | |
| — | |
| — | |
| 1,923 | |
| 1,923 | |||||||||||||||
Other comprehensive loss, net | |
| — | |
| — | |
| (18,122) | |
| — | |
| (18,122) | |
| — | |
| — | |
| (200,397) | |
| — | |
| (200,397) |
Dividends | | | — | | | — | | | — | | | (194,000) | | | (194,000) | |||||||||||||||
Net income | |
| — | |
| — | |
| — | |
| 362,680 | |
| 362,680 | |||||||||||||||
Balance, June 30, 2019 | | $ | 37 | | $ | 4,023,034 | | $ | (181,482) | | $ | 2,266,110 | | $ | 6,107,699 | |||||||||||||||
Net loss | |
| — | |
| — | |
| — | |
| (2,833,331) | |
| (2,833,331) | |||||||||||||||
Balance, June 30, 2020 | | $ | 37 | | $ | 4,565,658 | | $ | (497,600) | | $ | (133,772) | | $ | 3,934,323 |
The accompanying notes are an integral part of these consolidated financial statements.
8
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, and (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. de R.L. (“Regent”) (Oceania Cruises also refers to the brand by the same name and Regent also refers to the brand Regent Seven Seas Cruises).
References to the “U.S.” are to the United States of America, and “dollar(s)” or “$” are to U.S. dollars, the “U.K.” are to the United Kingdom and “euro(s)” 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 30, 2020,2021, we had 28 ships with approximately 59,150 Berths and had orders for 9 additional ships to be delivered through 2027, subject to certain conditions.2027. Due to the novel coronavirus (“COVID-19”), we have temporarily suspended all global cruise voyages from March 2020 through October 31, 2020.June 2021 and began resuming cruise voyages in July 2021 on a limited basis. We refer you to Note 2 – “Summary of Significant Accounting Policies” for further information.
We have 1 Explorer Class Ship on order for delivery in 2023. We have 2 Allura Class Ships on order for delivery in 2023 and 2025. Project Leonardo will introduce an additional 6 ships with expected delivery dates from 2022 through 2027. These additions to our fleet will increase our total Berths to approximately 82,000.83,000, which includes additional Berths we plan to add to our Project Leonardo ships, subject to certain conditions. The impacts of COVID-19 on the shipyards where our ships are under construction (or will be constructed) have resulted in some delays in expected ship deliveries, and the impacts of COVID-19 could result in additional delays in ship deliveries in the future, which may be prolonged.
9
2. Summary of Significant Accounting Policies
Liquidity and Management’s Plan
Due to the continued spreadimpact of COVID-19, growingongoing travel restrictions and limited access to ports around the world, in March 2020, the Company implemented a voluntary suspension of all cruise voyages across its three3 brands. As of June 30, 2021, none of our ships were operating with guests on board; however, all of our brands which has subsequently been extended through October 31, 2020. On March 14, 2020, concurrent with our and the broaderhave announced resumption of cruise industry’s original suspension, the U.S. Centers for Disease Control and Prevention (“CDC”) issued a No Sail Order through April 13, 2020, which was subsequently extended through July 24, 2020. On July 16, 2020, the CDC extended its No Sail Order until the earliest of (a) the expiration of the Secretary of Health and Human Services’ declaration that COVID-19 constitutes a public health emergency, (b) the date the Director of the CDC rescinds or modifies the No Sail Order based on specific public health or other considerations or (c)voyages by September 30, 2020. In addition, the duration2021 as part of any voluntary suspensions weour phased return to service and two ships have implemented and the resumption of operations outside of the United States will be dependent, in part, on the severity and duration of the COVID-19 pandemic, the status of the CDC’s No Sail Order, the lifting of various travel restrictions and travel bans issued by various countries around the world, as well as the availability of ports around the world.currently commenced voyages. Significant events affecting travel, including COVID-19, typically have an impact on the demand for cruise vacations, with the full extent of the impact generally determined by the length of time the event influences travel decisions. We believe the ongoing effects of COVID-19 on our operations and global bookings have had, and will continue to have, a significant impact on our financial results and liquidity, and such negative impact may continue well beyond the containment of the pandemic.
In January 2021, we amended our Senior Secured Credit Facility to further defer certain amortization payments due prior to June 30, 2022 and to waive certain financial and other covenants through December 31, 2022. In February 2021, we amended certain of our export-credit backed facilities to further defer amortization payments through March 31, 2022, and we amended all of our export-credit backed facilities to suspend certain financial covenants through December 31, 2022. In connection with such amendments of our Senior Secured Credit Facility and our export-credit backed facilities, our minimum liquidity requirement was increased to $200 million and such requirement applies through December 31, 2022. In March 2021, the Company received additional financing through various debt financings and an outbreak. Dueequity offering, collectively totaling approximately $2.7 billion in gross proceeds. From the proceeds, approximately $1.5 billion was used to extinguish debt. Refer to Note 6 – “Long-Term Debt” for further details of the above transactions.
In the second quarter of 2021, we announced a phased relaunch of certain cruise voyages beginning in July 2021 with our ships initially operating at reduced occupancy levels. The Company has announced its phased relaunch plans for all 28 ships across its three brands which began with Norwegian Jade on July 25, 2021 and continues through April 1, 2022. The first cruise to commence in the U.S. was on August 7, 2021 with Norwegian Encore sailing to Alaska from Seattle. The Company expects to have approximately 40% of capacity operating by September 30, 2021 and approximately 75% by December 31, 2021 with the full fleet expected to be back in operation by April 1, 2022. The timing for bringing our ships back to service and the percentage of our fleet in service will depend on a number of factors including, but not limited to, the unknown duration and extent of the COVID-19 pandemic, further resurgences and new more contagious and/or vaccine-resistant variants of COVID-19, the availability, distribution, rate of public acceptance and efficacy of vaccines and therapeutics for COVID-19, our ability to comply with governmental regulations, port availability, travel restrictions, bans and advisories, and our ability to re-staff our ships and implement new health and safety protocols.
The estimation of our future cash flow projections includes numerous assumptions that are subject to various risks and uncertainties. Upon the potential unavailabilityrelaunch of ports and/or destinations, unknowncruise voyages, our principal assumptions for future cash flow projections include:
● | Expected gradual phased relaunch at reduced occupancy levels, increasing over time until we reach historical occupancy levels; |
● | Forecasted cash collections primarily upon completion of future voyages and the payment of cash refunds for any further cancellations, in accordance with the terms of our credit card processing agreements (see Note 9 - “Commitments and Contingencies”); and |
● | Expected incremental expenses for resumption of cruise voyages, including the maintenance of and compliance with additional health and safety protocols. |
10
We cannot make assurances that our assumptions used to estimate our liquidity requirements will not change due to the unique and timingunpredictable nature of redeploymentsthe pandemic, including its magnitude and a general impact on consumer sentiment regarding cruise travel,duration. Accordingly, the full effect of the COVID-19 pandemic on our financial performance and financial condition cannot be quantified at this time, but wetime. We have made reasonable estimates and judgments of the impact of COVID-19 within our financial statements and there may be material changes to those estimates in future periods. We will report a net loss for the three months ending September 30, 2021 and expect to report a net loss until we are able to resume regular voyages, including for the year ending December 31, 2020.
Since March 2020, we have taken several actions to bolster our financial condition while our global cruise voyages are suspended. In March 2020, NCLC borrowed the full amount of $1.55 billion under its $875 million Revolving Loan Facility and its $675 million Epic Credit Facility, dated as of March 5, 2020.2021. We have taken additional measuresactions to improve our liquidity, by refinancing existingincluding completing various capital market transactions and making capital expenditure and operating expense reductions, and we expect to continue to pursue other opportunities to improve our liquidity and to refinance our debt amortization,to reduce interest expense and extend maturities.
Based on these actions and assumptions regarding the impact of COVID-19, and considering our available liquidity including under our agreements with export credit agenciescash and related governments, and by extending the maturities and refinancing amortization under other agreements, which has resulted in approximately $1.6cash equivalents of $2.7 billion as of payment deferrals. See Note 8 – “Long-Term Debt” for further information. Through June 30, 2020, NCLH and NCLC received additional financing through various debt financings and an equity offering totaling $2.4 billion in gross proceeds. The equity offering, which was recognized as a capital contribution to NCLC, resulted in 41,818,181 NCLH shares being issued in exchange for gross proceeds of $460 million. See Note 8 – “Long-Term Debt” for further information on the debt financings. Subsequent to June 30, 2020, NCLH and NCLC received another $1.5 billion in gross proceeds from additional debt financings and an additional equity offering, of which approximately $675 million was used to repay in full and terminate the Epic Credit Facility. Refer to Note 8 – “Long-Term Debt” for further information on the debt financings and Note 16 – “Subsequent Events” for further information on the equity financing. The Company has also undertaken several proactive cost reduction and cash conservation measures to mitigate the financial and operational impacts of COVID-19, through the reduction of capital expenditures and operating expenses, including food, fuel, insurance, port charges and reduced crew manning of vessels during the suspension, resulting in lower crew payroll expense.
In accordance with Accounting Standards Update (“ASU”) No. 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, the Company has evaluated whether there are conditions and events, considered in the aggregate,2021, we have concluded that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the consolidated financial statements are issued. Based on the actions the Company has taken as described above and our resulting current resources, the Company has alleviated the substantial doubt previously disclosed and haswe have sufficient liquidity to satisfy our obligations overfor at least the next twelve months and maintain minimum levels of liquidity as required by certain of our debt agreements..
10
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; however, demand for cruises during the summer months ofour cruise voyages were completely suspended from March 2020 has been materially adversely impacted byuntil July 2021 due to the COVID-19 pandemic. The interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2019,2020, which are included in our most recent Annual Report on Form 10-K filed with the SEC as updated by our Current Report on Form 8-K filed on July 8, 2020.
Reclassifications
Certain amounts in prior periods have been reclassified to conform to the current period presentation.February 26, 2021.
Foreign Currency
The majority of our transactions are settled in U.S. dollars. We remeasure assets and liabilities denominated in foreign currencies at exchange rates in effect at the balance sheet date. Gains or losses resulting from transactions denominated in other currencies are recognized in our consolidated statements of operations within other income (expense), net. We recognized a gain of $0.2 million and a loss of $10.2 million and $3.3 million for the three months ended June 30, 20202021 and 2019,2020, respectively, and a gaingains of $9.7$5.0 million and a loss of $4.3$9.7 million for the six months ended June 30, 20202021 and 2019,2020, respectively, related to transactions denominated in other currencies.
Depreciation and Amortization Expense
The amortization of deferred financing fees isand debt discounts are included in depreciation and amortization expense in the consolidated statements of cash flows; however, for purposes of the consolidated statements of operations they are included in interest expense, net.
Accounts Receivable, Net
Accounts receivable, net includes $400.7 million due from credit card processors as of June 30, 2021, which is expected to be collected within the next 12 months. Prior to the resumption of cruise operations, these amounts were classified in other long-term assets as a result of the uncertainty surrounding the timing of their collection.
Recently Issued Accounting Guidance
In March 2020, the Financial Accounting Standards Board (“FASB”) issued ASUAccounting Standards Update (“ASU”) No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”), which provided guidance to alleviate the burden in accounting for reference rate reform by allowing certain expedients and exceptions in applying GAAP to contracts, hedging relationships and other transactions impacted by reference rate reform. The provisions apply only to those transactions that reference LIBOR or another
11
reference rate expected to be discontinued due to reference rate reform. Adoption of the provisions of ASU 2020-04 are optional and are effective from March 12, 2020 through December 31, 2022. As of June 30, 2021, we have not adopted any expedients and exceptions under ASU 2020-04. We are currently evaluatingwill continue to evaluate the impact of ASU 2020-04 on our consolidated financial statements.
11
3. Revenue Recognition
Disaggregation of Revenue
Revenue and cash flows are affected by economic factors in various geographical regions. Revenues by destination were as follows (in thousands):
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended | | Three Months Ended | | Six Months Ended | ||||||||||
| | June 30, | | June 30, | | June 30, | | June 30, | ||||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| 2020 |
| 2020 | ||||||
North America | | $ | 3,366 | | $ | 968,466 | | $ | 954,422 | | $ | 1,951,455 | | $ | 3,366 | | $ | 954,422 |
Europe | |
| 9,701 | |
| 508,435 | |
| 23,036 | |
| 542,187 | |
| 9,701 | |
| 23,036 |
Asia-Pacific | |
| — | |
| 67,239 | |
| 150,921 | |
| 290,006 | |
| — | |
| 150,921 |
South America | | | — | | | 3,765 | | | 76,306 | | | 94,068 | | | — | | | 76,306 |
Other | |
| 3,862 | |
| 116,372 | |
| 59,126 | |
| 190,191 | |
| 3,862 | |
| 59,126 |
Total revenue | | $ | 16,929 | | $ | 1,664,277 | | $ | 1,263,811 | | $ | 3,067,907 | | $ | 16,929 | | $ | 1,263,811 |
Amounts for the three and six months ended June 30, 2021 were excluded as the information was not meaningful. North America includes the U.S., the Caribbean, Canada and Mexico. Europe includes the Baltic region, Canary Islands and Mediterranean. Asia-Pacific includes Australia, New Zealand and Asia. Other includes all other international territories.
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 1 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%.75-85% of total revenue. No other individual country’s revenues exceed 10% in any given period.
Contract Balances
Receivables from customers are included within accounts receivable, net. As of June 30, 20202021 and December 31, 2019,2020, our receivables from customers were $4.5$0.9 million and $15.3$1.0 million, respectively.
Beginning in March 2020, our brands launched new cancellation policies to permit our guests to cancel cruises which are not part of the Company’s temporary suspension of voyages up to 48 hours or 15 days depending on the brand, prior to embarkation and receive a refund in the form of a credit to be applied toward a future cruise.departure. These programs are currently in place for cruises booked through specific time periods specified by brand, and for cruises scheduled to embark through specified timeOctober 31, 2021. Certain cruises booked for certain periods, depending on the brand. The futurewill be permitted a 60-day cancellation window for refunds. Future cruise credit iscredits that have been issued are valid for any sailing through December 31, 2022, and we may extend this offer. The future cruise credits are not contracts, and therefore, guests who have elected this option are excluded from our contract liability balance; however, the credit for the original amount paid is included in advance ticket sales.sales or other long-term liabilities as applicable.
Our contract liabilities are included within advance ticket sales. As of June 30, 20202021 and December 31, 2019,2020, our contract liabilities were $66.1$50.5 million and $1.4 billion,$23.1 million, respectively. Of the amounts included within contract liabilities asadvance ticket
12
sales, the vast majority of deposits held are refundable in accordance with our cancellation policies.policies and it is uncertain to what extent guests may request refunds. Refunds payable to guests are included in accounts payable. For the six months ended June 30, 2020, $0.9 billion of2021, no revenue recognized was included in the contract liability balance at the beginning of the period. The revenue recognized in the six months ended June 30, 2020 that was included in contract liabilities as of the beginning of the period was $0.9 billion.
12
For cruise vacations that had been cancelled by us due to COVID-19, during the three months ended June 30, 2021 and 2020, approximately $11.2 million and $38.6 million, respectively, and during the six months ended June 30, 2021 and 2020, approximately $26.0 million and $130.6 million, respectively, in costs to obtain these contracts, consisting of protected commissions, including those paid to employees, and credit card fees, were recognized in earnings during the three and six months ended June 30, 2020, respectively.earnings.
4. Intangible Assets
We evaluate goodwill and tradenames for impairment annually or more frequently when an event occurs or circumstances change that indicates the carrying value of a reporting unit may not be recoverable. In March 2020, the Company announced a voluntary suspension of all cruise voyages for its three brands, which has subsequently been extended through October 31, 2020. Due to the temporary suspension of operations and decline in our stock price, we performed interim goodwill and tradename impairment tests as of March 31, 2020. We refer you to Note 9 – “Fair Value Measurements and Derivatives” for information on our valuation assumptions.
The changes in the carrying amount of goodwill for each reporting unit for the six months ended June 30, 2020 are as follows (in thousands):
| | | | | | | | | | | | |
| | Reporting Unit | | | | |||||||
| | Norwegian | | | | Regent | | | ||||
| | Cruise | | Oceania | | Seven Seas | | Total | ||||
| | Line |
| Cruises |
| Cruises |
| Goodwill | ||||
Balance, December 31, 2019 |
| $ | 403,805 | | $ | 523,026 | | $ | 462,100 | | $ | 1,388,931 |
Impairment loss |
| | (403,805) |
| | (523,026) |
| | (363,966) |
| | (1,290,797) |
Balance, June 30, 2020 | | $ | — | | $ | — | | $ | 98,134 | | $ | 98,134 |
We also impaired our tradenames for Oceania Cruises and Regent Seven Seas Cruises by $170.0 million and $147.0 million, respectively. Following these impairments, the carrying value of our tradenames was $500.5 million.
The carrying amounts of intangible assets subject to amortization are included within other long-term assets. The gross carrying amounts of intangible assets, the related accumulated amortization, the net carrying amounts and the weighted-average amortization periods of the Company’s intangible assets are listed in the following tables (in thousands, except amortization period):
| | | | | | | | | | | |
| | June 30, 2020 | |||||||||
|
| | |
| | |
| | |
| Weighted- |
| | | | | | | | | | | Average |
| | Gross Carrying | | Accumulated | | Net Carrying | | Amortization | |||
| | Amount | | Amortization | | Amount |
| Period (Years) | |||
Customer relationships | | $ | 120,000 | | $ | (115,716) | | $ | 4,284 |
| 6.0 |
License | |
| 750 | |
| (369) | |
| 381 |
| 10.0 |
Total intangible assets subject to amortization | | $ | 120,750 | | $ | (116,085) | | $ | 4,665 |
|
|
| | | | | | | | | | | |
| | December 31, 2019 | |||||||||
|
| | |
| | |
| | |
| Weighted- |
| | | | | | | | | | | Average |
| | Gross Carrying | | Accumulated | | Net Carrying | | Amortization | |||
| | Amount | | Amortization | | Amount |
| Period (Years) | |||
Customer relationships | | $ | 120,000 | | $ | (110,169) | | $ | 9,831 |
| 6.0 |
Licenses | |
| 750 | |
| (331) | |
| 419 |
| 10.0 |
Total intangible assets subject to amortization | | $ | 120,750 | | $ | (110,500) | | $ | 10,250 |
|
|
13
The aggregate amortization expense for intangible assets is as follows (in thousands):
| | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended | ||||||||
| | June 30, | | June 30, | ||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||
Amortization expense | | $ | 2,792 | | $ | 4,622 | | $ | 5,585 | | $ | 9,244 |
The following table sets forth the Company’s estimated aggregate amortization expense for each of the five years below (in thousands):
| | | |
|
| Amortization | |
Year Ended December 31, | | Expense | |
2021 | | $ | 75 |
2022 | | | 75 |
2023 | | | 75 |
2024 | | | 75 |
2025 | | | 44 |
5.4. Leases
In April 2020, the FASB issued interpretive guidance relating to the accounting for lease concessions provided as a result of COVID-19. In this guidance, entities can elect not to apply lease modification accounting with respect to such lease concessions and instead, treat the concession as if it was a part of the existing contract. The Company has elected to not evaluate leases under the lease modification accounting framework for concessions that result from effects of the COVID-19 pandemic. In relation to our rights to use port facilities, we have elected the approach consistent with resolving a contingency, which allows us to remeasure the lease liability and recognize the amount of change in the lease liability as an adjustment to the carrying amount of the associated right-of-use asset. As the full amount of the concession will not be determinable until the force majeure period under the related arrangements have ended, the contingency has not been resolved as of June 30, 2020.periodic remeasurements will be required. During the contingency period, we are recognizing lease expense for these port facilities as incurred.
Lease balances were as follows (in thousands):
| | | | | | | | | | | | | | | | |
|
| Balance Sheet location |
| June 30, 2020 |
| December 31, 2019 |
| Balance Sheet location |
| June 30, 2021 |
| December 31, 2020 | ||||
Operating leases | | | | | | | |
| | | | | | | |
|
Right-of-use assets |
| Other long-term assets |
| $ | 228,792 | | $ | 236,604 |
| Other long-term assets |
| $ | 202,569 |
| $ | 209,037 |
Current operating lease liabilities |
| Accrued expenses and other liabilities |
| | 29,677 | | | 39,126 |
| Accrued expenses and other liabilities |
| | 22,450 |
| | 17,700 |
Non-current operating lease liabilities |
| Other long-term liabilities |
| | 193,585 | | | 207,243 |
| Other long-term liabilities |
| | 173,845 |
| | 185,414 |
| | | | | | | | | | | | | | | | |
Finance leases | | | | | | | | | | | | | | | | |
Right-of-use assets |
| Property and equipment, net |
| | 12,899 | | | 13,873 |
| Property and equipment, net |
| | 10,960 |
| | 11,948 |
Current finance lease liabilities |
| Current portion of long-term debt |
| | 5,698 | | | 6,419 |
| Current portion of long-term debt |
| | 5,267 |
| | 5,143 |
Non-current finance lease liabilities |
| Long-term debt |
| | 6,913 | | | 8,812 |
| Long-term debt |
| | 2,718 |
| | 4,648 |
5. Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) for the six months ended June 30, 2021 was as follows (in thousands):
| | | | | | | | | | |
| | Six Months Ended June 30, 2021 |
| |||||||
|
| | |
| | |
| Change |
| |
| | Accumulated | | Change | | Related to |
| |||
| | Other | | Related to | | Shipboard |
| |||
|
| Comprehensive |
| Cash Flow | | Retirement | | |||
| | Income (Loss) | | Hedges | | Plan | | |||
Accumulated other comprehensive income (loss) at beginning of period | | $ | (241,830) | | $ | (234,981) |
| $ | (6,849) |
|
Current period other comprehensive loss before reclassifications | |
| (28,363) | |
| (28,363) |
|
| — |
|
Amounts reclassified into earnings | |
| 35,577 | |
| 35,380 | (1) |
| 197 | (2) |
Accumulated other comprehensive income (loss) at end of period | | $ | (234,616) | | $ | (227,964) | (3) | $ | (6,652) |
|
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6. Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) for the six months ended June 30, 2020 was as follows (in thousands):
| | | | | | | | | | |
| | Six Months Ended June 30, 2020 |
| |||||||
|
| | |
| | |
| Change |
| |
| | Accumulated | | Change | | Related to |
| |||
| | Other | | Related to | | Shipboard |
| |||
|
| Comprehensive |
| Cash Flow | | Retirement | | |||
| | Income (Loss) | | Hedges | | Plan | | |||
Accumulated other comprehensive income (loss) at beginning of period | | $ | (297,203) | | $ | (290,009) |
| $ | (7,194) |
|
Current period other comprehensive loss before reclassifications | |
| (251,382) | |
| (251,382) |
|
| — |
|
Amounts reclassified into earnings | |
| 50,985 | |
| 50,781 | (1) |
| 204 | (2) |
Accumulated other comprehensive income (loss) at end of period | | $ | (497,600) | | $ | (490,610) | (3) | $ | (6,990) |
|
Accumulated other comprehensive income (loss) for the six months ended June 30, 2019 was as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, 2019 |
| | Six Months Ended June 30, 2020 |
| ||||||||||||||
|
| | |
| | |
| Change |
|
| | |
| | |
| Change |
| ||
| | Accumulated | | Change | | Related to |
| | Accumulated | | Change | | Related to |
| ||||||
| | Other | | Related to | | Shipboard |
| | Other | | Related to | | Shipboard |
| ||||||
| | Comprehensive | | Cash Flow | | Retirement |
| | Comprehensive | | Cash Flow | | Retirement |
| ||||||
| | Income (Loss) | | Hedges | | Plan | | | Income (Loss) | | Hedges | | Plan | | ||||||
Accumulated other comprehensive income (loss) at beginning of period | | $ | (163,360) | | $ | (158,096) | | $ | (5,264) | | | $ | (297,203) | | $ | (290,009) |
| $ | (7,194) | |
Current period other comprehensive loss before reclassifications | |
| (2,037) | |
| (2,037) |
|
| — | | |
| (251,382) | |
| (251,382) |
|
| — | |
Amounts reclassified into earnings | |
| (16,085) | |
| (16,274) | (1) |
| 189 | (2) | |
| 50,985 | |
| 50,781 | (1) |
| 204 | (2) |
Accumulated other comprehensive income (loss) at end of period | | $ | (181,482) | | $ | (176,407) |
| $ | (5,075) | | | $ | (497,600) | | $ | (490,610) |
| $ | (6,990) | |
(1) | We refer you to Note |
(2) | Amortization of prior-service cost and actuarial loss reclassified to other income (expense), net. |
(3) | Includes |
7. Property and Equipment, net6. Long-Term Debt
Property and equipment, net increased $353.2 million for the six months ended June 30, 2020 primarily due to the delivery of Seven Seas Splendor in January 2020 and ship improvement projects slightly offset by a $25.5 million impairment of projects that will not be completed, which has been recognized in depreciation and amortization expense.Credit Facilities
8. Long-Term Debt
RevolvingIn January 2021, NCLC entered into an amendment agreement (the “First Amendment”), which amends the Amended and Restated Credit Facilities
In MarchAgreement, dated as of May 8, 2020 NCLC had borrowed(the “Fifth ARCA” and, as amended by the full amount of $875 million under its existing Revolving Loan Facility maturing on January 2, 2024. As ofFirst Amendment, the “Senior Secured Credit Facility”). The First Amendment provides that, among other things, (a) amortization payments due between the First Amendment effective date and prior to June 30, 2020 borrowings2022 (the “First Amendment Deferral Period”) on the Legacy Term Loan A and Term Loan A-1 held by lenders that have consented to such deferral (the “First Amendment Deferring Lenders”) are deferred and such deferred principal amount constitutes a separate tranche of loans (the “Deferred Term Loan A-1”) and (b) the tranche of loans held by certain lenders (the “Fifth ARCA Deferring Lenders”) on which amortization payments due within the first year after effectiveness of the Fifth ARCA were deferred (the “Deferred Term Loan A”) of First Amendment Deferring Lenders were converted into Deferred Term Loan A-1 loans. The class of loans constituting the Term Loan A Facility (other than the Deferred Term Loan A) held by the Fifth ARCA Deferring Lenders (the “Term Loan A-1”) and the class of loans constituting the portion of the Term Loan A Facility that is held by lenders other than the Fifth ARCA Deferring Lenders (the “Legacy Term Loan A”) that were held by the First Amendment Deferring Lenders (other than amounts converted into the Deferred Term Loan A-1) constitute a separate tranche of loans (the “Term Loan A-2”), with the same terms as the Legacy Term Loan A and Term Loan A-1 under the RevolvingFifth ARCA, except that amortization payments on the Term Loan Facility bearA-2 shall be deferred during the First Amendment Deferral Period and thereafter such Term Loan A-2 will amortize in an aggregate principal amount equal to approximately 5.88% per annum and the interest rate for Term Loan A-2 shall be modified as described below. The Deferred Term Loan A-1 will accrue interest (x) in the case of Eurocurrency loans, at a per annum rate based on LIBOR plus a margin of 1.50%.
In March 2020, NCLC entered into2.50% or (y) in the case of base rate loans, at a $675 million revolving credit facility maturingper annum rate based on March 4, 2021, with JPMorgan Chase Bank, N.A., as administrative agent and as collateral agent, and certain other lenders party thereto. NCLC borrowed $675 million under the Epic Credit Facility, which bore interest at LIBORbase rate plus a margin of 0.80%1.50%. After the end of the First Amendment Deferral Period, the Deferred Term Loan A-1 will amortize in an aggregate principal amount equal to 25% per annum of the Deferred Term Loan A-1 outstanding immediately after the consummation of the First Amendment, in quarterly installments, and in the case of such payment due on the maturity date, an amount equal to the then unpaid principal amount of the Deferred Term Loan A-1 outstanding. The facility was securedLegacy Term Loan A, Term Loan A-1 and Deferred Term Loan A that were held by Norwegian Epic, Ltd. In April 2020, NCLC entered into an incremental assumption agreement whichlenders other than the First Amendment Deferring Lenders constitute separate classes of loans and were unchanged. The First Amendment resulted in deferred amortization payments aggregating approximately $70 million prior to June 30, 2022.
The First Amendment provides that, (a) from the First Amendment effective date to and including December 31, 2022 (the “Covenant Relief Period”) the testing of the loan to value, debt to capitalization and EBITDA to debt service covenants under the Senior Secured Credit Facility will be suspended and the free liquidity test will be replaced by a covenant to maintain at least $200 million in free liquidity, certified on a monthly basis. During the Covenant Relief
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extendedPeriod the maturity date ofinterest rate for Term Loan A-2 and revolving loans held by Lenders that consented to the revolving facility commitments under the Epic Credit Facility to March 3, 2022. The revolving facility loans accrued interest at a per annum rate based onFirst Amendment will be LIBOR plus a margin of 1.75% in the case of Eurocurrency loans or at a per annum rate based on the2.00% (or base rate plus 1.00%) with decreases subject to a margin of 0.75% inleverage-based pricing grid. The First Amendment also makes certain other changes to the case of base rate loans. The EpicSenior Secured Credit Facility, was repaid in July 2020including tightening certain of the baskets applicable to our ability to make certain asset dispositions, investments and terminated as discussed below.restricted payments.
Modifications
In April 2020,Additionally, in February 2021, NCLC amended an aggregate amountall of $386its export-credit backed facilities to defer amortization payments aggregating approximately $680 million through March 31, 2022 and/or make certain changes in respect of export credit backedcovenants and undertakings contained therein.
The facilities that finance Norwegian Breakaway, Norwegian Getaway, Norwegian Escape, Norwegian Joy, Norwegian Bliss, and Norwegian Encore, to incorporate the terms of a 12-month debt holiday initiative offered to the cruise industry by Euler Hermes Aktiengesellschaft (“Hermes”), the official export credit agency of Germany. The debt holiday was initiated to provide interim debt serviceSeven Seas Explorer, Seven Seas Splendor, Riviera and financial covenant relief for borrowers during the current global COVID-19 pandemic with respectMarina were amended to their Hermes guaranteed financings. The amended agreements provide that, among other things, (a) amortization payments due from April 1, 20202021 to March 31, 20212022 (the “Deferral“Second Deferral Period”) on the loans will be deferred and (b) the principal amounts so deferred will constitute separate tranches of loans under the facilities. The separate tranches of loans will accrue interest at a floating rate per annum based on six-month LIBOR plus a margin as follows:
| | | |
| | Margin | |
€529.8 million Breakaway one loan (Norwegian Breakaway) | |
| % |
€529.8 million Breakaway two loan (Norwegian Getaway) | |
| % |
€590.5 million Breakaway three loan (Norwegian Escape) | | 1.50 | % |
€729.9 million Breakaway four loan (Norwegian Joy) | | 1.50 | % |
€710.8 million Seahawk 1 term loan (Norwegian Bliss) | |
| % |
€748.7 million Seahawk 2 term loan (Norwegian Encore) | |
| % |
After the end of the Deferral Period, the deferred amounts will amortize in 8 equal semiannual installments.
Also in April 2020, NCLC amended its $230 million credit agreement, dated as of January 10, 2019, with Nordea Bank ABP, New York Branch, as administrative agent, and certain other lenders. The amendment extends the maturity date of the term loan to January 10, 2022. From January 10, 2021 to January 10, 2022, the loan shall accrue interest at a per annum rate based on LIBOR plus a margin of 1.75% in the case of Eurocurrency loans or at a per annum rate based on the base rate plus a margin of 0.75% in the case of base rate loans.
In May 2020, NCLC amended its $260 million credit agreement, dated as of May 15, 2019, with Bank of America, N.A., as administrative agent and collateral agent, and certain other lenders. The amendment provides that (a) amortization payments due through May 1, 2021 will be deferred following the consummation of certain debt and equity financings, which resulted in aggregate gross proceeds greater than the amount required for the extension and (b) the principal amount so deferred will constitute a separate tranche of loans under the facility (the “Deferred Jewel Loans”). The Deferred Jewel Loans will accrue interest at a per annum rate based on LIBOR plus a margin of 2.50% in the case of Eurocurrency loans or at a per annum rate based on the base rate plus a margin of 1.50% in the case of base rate loans. After the end of the deferral period, the deferred loan payments will amortize in an aggregate principal amount equal to 25% per annum in semiannual installments, and in the case of such payment due on the maturity date, an amount equal to the then unpaid principal amount of the Deferred Jewel Loans outstanding.
NCLC entered into a Fifth Amended and Restated Credit Agreement, dated as of May 8, 2020, with a subsidiary of NCLC, as co-borrower and JPMorgan Chase Bank, N.A., as administrative agent, and lenders holding 87.57% of the term loans outstanding (the “Term A Deferring Lenders”). This revised facility provides that, among other things, (a) amortization payments due within the first year after effectiveness on the loans under the term A loans (the “Term A Loans”) held by the Term A Deferring Lenders will be deferred and (b) the principal amount so deferred will constitute a separate tranche of loans (the “Deferred Term A Loans”). The Deferred Term A Loans will accrue interest (x) in the case of Eurocurrency loans, at a per annum rate based on LIBOR plus a margin of 2.50% or (y) in the case of base rate loans, at a per annum rate based on the base rate plus a margin of 1.50%. After the end of the deferral period, the Deferred Term A Loans will amortize in an aggregate principal amount equal to 25% per annum of the Deferred Term A Loans, in quarterly installments, and in the case of such payment due on the maturity date, an amount equal to the then unpaid
16
principal amount of the Deferred Term A Loans outstanding. The Term A Loans (other than the Deferred Term A Loans) that are held by the Term A Deferring Lenders shall constitute a separate class of loans (the “Legacy Term A Loans), with the same terms as the Term A Loans under the Fourth Amended and Restated Credit Agreement, except that the amortization payments on the Legacy Term A Loans shall be deferred during the deferral period. The Term A Loans that are held by lenders other than the Term A Deferring Lenders shall constitute a separate class of loans with the same terms as the Term A Loans under the Fourth Amended and Restated Credit Agreement.
In June 2020, NCLC amended the credit facilities secured by Seven Seas Explorer, Seven Seas Splendor, Riviera, Marina, Leonardo One and Leonardo Two to defer amortization with respect to certain of the debt outstanding under the agreements (the “Supplemental Agreements”). The amendments for the Seven Seas Explorer, Seven Seas Splendor, Riviera, Marina, Leonardo One and Leonardo Two facilities summarized below provide $156 million of incremental liquidity to the Company through March 2021 and are subject to certain customary conditions.
The Supplemental Agreements of Seven Seas Explorer, Seven Seas Splendor, Riviera, and Marina provide that, among other things, (a) amortization payments due during the Deferral Period on the loans will be deferred and (b) the principal amount so deferred will constitute a separate tranche of loans (the “Deferred Loans”). The Deferred Loans will accrue interest at a floating rate per annum based on six-month LIBOR plus a margin as follows:
|
|
|
|
|
|
|
|
Explorer newbuild loan | |
| % |
Splendor newbuild loan | |
| % |
Marina newbuild loan | |
| % |
Riviera newbuild loan | |
| % |
After the end of the Second Deferral Period, the Deferred Loansdeferred loans will amortize in an aggregate principal amount equal to 25%20% per annum of the Deferred Loans,deferred loans, in semiannual installments. Any breach
In addition, all of NCLC’s export-credit backed facilities were amended to provide that, from the effective date of the amendments to and including December 31, 2022, certain of the financial covenants under each respective facility duringsuch facilities will be suspended and the Deferral Period underfree liquidity test will be replaced by a covenant to maintain at least $200 million in free liquidity. The amendments also made certain other changes to the Supplemental Agreements will not constitute an event of default. In addition, consistent with our amendments to our Hermes-backed credit facilities, described above, additionalincluding imposing further restrictions on restricted paymentsNCLC’s ability to incur debt, create security, issue equity and make dividends and other distributions.
In April 2021, an agreement was executed to defer certain other covenants were added.newbuild related debt amortization to July 2022. The aggregate amount of debt amortization that was deferred was €31.2 million, or $37.0 million based on the euro/U.S. dollar exchange rate as of June 30, 2021. The interest rate on the newbuild related debt was increased to 4.5% per annum.
The amendments of the agreements described above noted amendments resulted in aggregate modification costsexpenses of $16.2$52.1 million and a loss on extinguishment of debt of $5.0 million,for the six months ended June 30, 2021, which areis recognized in interest expense, net.
In May 2021, NCLC entered into a €28.8 million loan facility for newbuild related payments. The facility bears interest at a rate of 4.5% per annum. As of June 30, 2021, €9.6 million, or $11.4 million based on the euro/U.S. dollar exchange rate as of June 30, 2021, was drawn under this facility, which matures on July 1, 2022.
SecuredUnsecured Notes
In MayDecember 2020, NCLC conducted a private offering of $675.0$850.0 million aggregate principal amount of 12.25%5.875% senior securedunsecured notes due MayMarch 15, 20242026 (the “2024“2026 Senior SecuredUnsecured Notes”) at 99% original issue discount.. In March 2021, NCLC completed an add-on offering of $575.0 million aggregate principal amount of additional 2026 Senior Unsecured Notes. The 20242026 Senior Secured
15
Unsecured Notes pay interest at 12.25%5.875% per annum, semiannually on MayMarch 15 and NovemberSeptember 15 of each year, commencing on November 15, 2020, to holders of record at the close of business on the immediately preceding MayMarch 1 and NovemberSeptember 1, respectively. NCLC may redeem the 20242026 Senior SecuredUnsecured Notes, in whole or part, at any time prior to FebruaryDecember 15, 2024,2025, at a price equal to 100% of the principal amount of the notes redeemed plus accrued and unpaid interest to, but excluding, the redemption date and a “make-whole premium.” NCLC may redeem the 20242026 Senior SecuredUnsecured Notes, in whole or in part, on or after FebruaryDecember 15, 2024,2025, at a price equal to 100% of the principal amount of the notes plus accrued and unpaid interest to, but excluding, the redemption date. At any time and from time to time prior to December 15, 2022, NCLC may choose to redeem up to 40% of the aggregate principal amount of the 2026 Senior Unsecured Notes with the net proceeds of certain equity offerings, subject to certain restrictions, at a redemption price equal to 105.875% of the principal amount of the 2026 Senior Unsecured Notes redeemed plus accrued and unpaid interest to, but excluding, the redemption date, so long as at least 60% of the aggregate principal amount of the 2026 Senior Unsecured Notes issued remains outstanding following such redemption. The proceeds from the March 2021 issuance were used to repay the $230.0 million Pride of America Credit Facility and the remaining $222.6 million of the Jewel Credit Facility. The repayment of these debt agreements resulted in losses on extinguishment of debt of $1.1 million for the six months ended June 30, 2021, which is recognized in interest expense, net.
In March 2021, NCL Finance, Ltd., an indirect, wholly-owned subsidiary of NCLH and NCLC, additionally conducted a private offering of $525.0 million aggregate principal amount of 6.125% senior unsecured notes due March 15, 2028 (the “2028 Senior Unsecured Notes”). The 2028 Senior Unsecured Notes pay interest at 6.125% per annum, semiannually on March 15 and September 15 of each year, commencing on September 15, 2021, to holders of record at the close of business on the immediately preceding March 1 and September 1, respectively. NCL Finance may redeem the 2028 Senior Unsecured Notes, in whole or part, at any time prior to December 15, 2027, at a price equal to 100% of the principal amount of the notes redeemed plus accrued and unpaid interest to, but excluding, the redemption date and a “make-whole premium.” NCL Finance may redeem the 2028 Senior Unsecured Notes, in whole or in part, on or after December 15, 2027, at a price equal to 100% of the principal amount of the notes plus accrued and unpaid interest to, but excluding, the redemption date. At any time and from time to time prior to FebruaryMarch 15, 2022, NCLC2024, NCL Finance may choose to redeem up to 35%40% of the aggregate principal amount of the 20242028 Senior SecuredUnsecured Notes with the net proceeds of certain equity offerings, subject to certain restrictions, at a redemption price equal to 112.25%106.125% of the principal amount of the 20242028 Senior SecuredUnsecured Notes redeemed plus accrued and unpaid interest to, but excluding, the redemption date, so long as at least 65%60% of the aggregate principal amount of the 20242028 Senior SecuredUnsecured Notes issued remains outstanding following such redemption.
The 2024 Senior Secured Notes are secured by first-priority interests in, among other things and subject to certain agreed security principles, shares of capital stock in certain subsidiary guarantors, two of our vessels, our material intellectual property and two islands that we use in the operations of our cruise business. The 2024 Senior Secured Notes are also guaranteed by our subsidiaries that own the property that secures the 2024 Senior Secured Notes as well as certain
17
additional subsidiaries whose assets will not secure the 2024 Senior Secured Notes. The indentureindentures governing the 20242026 Senior SecuredUnsecured Notes includesand 2028 Senior Unsecured Notes include requirements that, among other things and subject to a number of qualifications and exceptions, restrict the ability of NCLC and its restricted subsidiaries, as applicable, to (i) incur or guarantee additional indebtedness; (ii) pay dividends or distributions on, or redeem or repurchase, equity interests and make other restricted payments; (iii) make investments; (iv) consummate certain asset sales; (v) engage in certain transactions with affiliates; (vi) grant or assume certain liens; and (vii) consolidate, merge or transfer all or substantially all of their assets.
Exchangeable Notes
In MayAugust 2020, the FASB issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40) Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”), which reduces the number of accounting models for convertible debt instruments and enhances transparency in disclosures. One model which is being eliminated is the bifurcation of embedded conversion features that are not accounted for separately as derivatives. Each of the 2024 Exchangeable Notes, 2025 Exchangeable Notes, and Private Exchangeable Notes (as defined below) contain or contained conversion options that may be settled with NCLH’s ordinary shares. As the options will be both indexed to and settled in ordinary shares of NCLH, they are accounted for separately as derivatives for NCLC. Due to the bifurcation of the options as derivatives, NCLC conducteddoes not use one of the models that was eliminated, and the adoption of 2020-06 did not have a private offering ofmaterial effect.
NCLC has outstanding $862.5 million aggregate principal amount of 6.00% exchangeable senior notes due May 15, 2024 (the “2024 Exchangeable Notes”). The 2024 Exchangeable Notes are guaranteed by NCLH on a senior basis.
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Holders may exchange their 2024 Exchangeable Notes at their option into redeemable preference shares of NCLC. Upon exchange, the preference shares will be immediately and automatically exchanged, for each $1,000 principal amount of exchanged 2024 Exchangeable Notes, into a number of NCLH’s ordinary shares based on the exchange rate. The exchange rate will initially be 72.7273 ordinary shares per $1,000 principal amount of 2024 Exchangeable Notes (equivalent to an initial exchange price of approximately $13.75 per ordinary share). The maximum exchange rate is 89.4454 and reflects potential adjustments to the initial exchange rate, which would only be made in the event of certain make-whole fundamental changes or tax redemption events. The maximum exchange rate referred to above is also subject to adjustment for any stock split, stock dividend or similar transaction. The 2024 Exchangeable Notes pay interest at 6.00% per annum, semiannually on May 15 and November 15 of each year, commencing on November 15, 2020, to holders of record at the close of business on the immediately preceding May 1 and November 1, respectively.
In May 2020, NCLH and NCLC entered into an investment agreement with an affiliate of L Catterton (the “Private Investor”), pursuant to which NCLC agreed to sell and issue to the Private Investor (the “Private Exchangeable Notes Transaction”) up to $400 million in aggregate principal amount of exchangeable senior notes due June 1, 2026 (the “Private Exchangeable Notes”). The Private Exchangeable Notes Transaction closed on May 28, 2020. The Private Exchangeable Notes accrue interest at a rate of 7.0% per annum for the first year post-issuance (which will accrete to the principal amount), 4.5% per annum interest (which will accrete to the principal amount) plus 3.0% per annum cash interest for the following four years and 7.5% per annum in cash interest for the final year prior to maturity. The Private Investor has certain registration rights in respect of NCLH’s ordinary shares underlying the Private Exchangeable Notes and is subject to certain customary transfer, voting and standstill restrictions.
The Private Exchangeable Notes are guaranteed by NCLH on a senior basis. Holders may exchange their Private Exchangeable Notes at their option into redeemable preference shares of NCLC. Upon exchange, the preference shares will be immediately and automatically exchanged, for each $1,000 principal amount of exchanged Private Exchangeable Notes, into a number of NCLH’s ordinary shares based on the exchange rate. The exchange rate will initially be approximately 82.6446 ordinary shares per $1,000 principal amount of Private Exchangeable Notes (equivalent to an initial exchange price of $12.10 per ordinary share). The maximum exchange rate is 90.9090 and reflects potential adjustments to the initial exchange rate, which would only be made in the event of certain make-whole fundamental changes or tax redemption events. The maximum exchange rate referred to above is also subject to adjustment for any stock split, stock dividend or similar transaction. NCLC has the right to redeem all or a portion of the Private Exchange Notes at any time after the third anniversary of the issuance date at a price equal to 100% of the accreted principal amount thereof if the market closing price of NCLH’s ordinary shares has been at least 250% of the per share price implied by the exchange rate then in effect for at least 20 trading days during any 30 consecutive trading day period.
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The 2024 Exchangeable Notes and Private Exchangeable Notes contain equity conversion options with a value of $962.4 million as of June 30, 2020, which have been bifurcated from the debt host contracts. We refer you to Note 9 – “Fair Value Measurements and Derivatives” for further information. The net carrying amounts of the exchangeable notes, excluding the conversion options, consist of the following (in thousands):
| | | |
| | June 30, | |
|
| 2020 | |
Principal amount | | $ | 1,262,500 |
Less: Unamortized debt discount, including deferred financing fees | | | (770,828) |
Net carrying value | | $ | 491,672 |
The remaining period over which the unamortized debt discount will be recognized as non-cash interest expense is 3.9 years and 5.9 years for the 2024 Exchangeable Notes and Private Exchangeable Notes, respectively.
The following table presents the interest expense recognized related to the exchangeable notes (in thousands):
| | | |
| | Three and Six Months | |
| | Ended June 30, 2020 | |
Interest expense, including amortization of debt discounts and coupon interest | | $ | 18,577 |
The effective interest rate is 22.94% for the 2024 Exchangeable Notes. The share price of NCLH, to which the value of the conversion option is indexed, had increased significantly between the execution of the agreement for the Private Exchangeable Notes and the date of issuance. As a result, the fair value of the conversion option at issuance exceeded the net proceeds received, and the carrying value of the note recognized was zero, which created an effective interest rate that was not measurable. The excess of the fair value over the net proceeds received was recognized as a loss within other income (expense), net. As the associated financing costs would create a negative carrying value for the note, they were charged to expense in other income (expense), net.
Debt Repayments
The following are scheduled principal repayments on our long-term debt including finance lease obligations as of June 30, 2020 for each of the next five years (in thousands):
| | | |
Year |
| Amount | |
July 1, 2020 - June 30, 2021 | | $ | 337,338 |
July 1, 2021 - June 30, 2022 | |
| 1,858,011 |
July 1, 2022 - June 30, 2023 | |
| 775,009 |
July 1, 2023 - June 30, 2024 | |
| 4,389,872 |
July 1, 2024 - June 30, 2025 | |
| 1,113,479 |
Thereafter | |
| 2,215,306 |
Total | | $ | 10,689,015 |
Debt Covenants
At June 30, 2020, we were in compliance with all of our debt covenants. As part of the Hermes debt holiday and the Supplemental Agreements, we have obtained lender consents to waive compliance with financial covenants for the Deferral Period. If we do not continue to remain in compliance with our covenants, we would have to seek additional amendments to our covenants. However, no assurances can be made that such amendments would be approved by our lenders. Generally, if an event of default under any debt agreement occurs, then pursuant to cross default and/or cross acceleration clauses, substantially all of our outstanding debt and derivative contract payables could become due, and all debt and derivative contracts could be terminated, which could have a material adverse impact to our operations and liquidity.
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July Offerings
In July 2020, NCLC conducted a private offering of $750.0 million aggregate principal amount of 10.25% senior secured notes due February 1, 2026 (the “2026 Senior Secured Notes”). The 2026 Senior Secured Notes pay interest at 10.25% per annum, semiannually on February 1 and August 1 of each year, commencing on February 1, 2021, to holders of record at the close of business on the immediately preceding January 15 and July 15, respectively. NCLC may redeem the 2026 Senior Secured Notes, in whole or part, at any time prior to August 1, 2023, at a price equal to 100% of the principal amount of the notes redeemed plus accrued and unpaid interest to, but excluding, the redemption date and a “make-whole premium.” NCLC may redeem the 2026 Senior Secured Notes, in whole or in part, on or after August 1, 2023, at the redemption prices set forth in the indenture for the 2026 Senior Secures Notes plus accrued and unpaid interest to, but excluding, the redemption date. At any time prior to August 1, 2023, NCLC may choose to redeem up to 35% of the aggregate principal amount of the 2026 Senior Secured Notes with the net proceeds of certain equity offerings, subject to certain restrictions, at a redemption price equal to 110.25% of the principal amount of the 2026 Senior Secured Notes redeemed plus accrued and unpaid interest to, but excluding, the redemption date, so long as at least 65% of the aggregate principal amount of the 2026 Senior Secured Notes issued remains outstanding following such redemption.
NCLC used a portion of the proceeds from the 2026 Senior Secured Notes to repay the $675 million plus accrued and unpaid interestalso has outstanding under the Epic Credit Facility, which was secured by the Norwegian Epic. Following the termination of the Epic Credit Facility, the vessel owned and operated by Norwegian Epic, Ltd. was released as collateral, thereby enabling the 2026 Senior Secured Notes and certain of the related guarantees to be secured by a first-priority security interest in, among other things and subject to certain agreed security principles, the Norwegian Epic. The indenture governing the 2026 Senior Secured Notes includes requirements that, among other things and subject to a number of qualifications and exceptions, restrict the ability of NCLC and its restricted subsidiaries, as applicable, to (i) incur or guarantee additional indebtedness; (ii) pay dividends or distributions on, or redeem or repurchase, equity interests and make other restricted payments; (iii) make investments; (iv) consummate certain asset sales; (v) engage in certain transactions with affiliates; (vi) grant or assume certain liens; and (vii) consolidate, merge or transfer all or substantially all of their assets.
Also in July 2020, NCLC conducted a private offering of $450.0 million aggregate principal amount of 5.375% exchangeable senior notes due August 1, 2025 (the “2025 Exchangeable Notes”). The 2025 Exchangeable Notes are guaranteed by NCLH on a senior basis. Holders may exchange their 2025 Exchangeable Notes at their option into redeemable preference shares of NCLC. Upon exchange, the preference shares will be immediately and automatically exchanged, for each $1,000 principal amount of exchanged 2025 Exchangeable Notes, into a number of NCLH’s ordinary shares based on the exchange rate. The exchange rate will initially be 53.3333 ordinary shares per $1,000 principal amount of 2025 Exchangeable Notes (equivalent to an initial exchange price of approximately $18.75 per ordinary share). The maximum exchange rate is 66.6666 and reflects potential adjustments to the initial exchange rate, which would only be made in the event of certain make-whole fundamental changes or tax redemption events. The maximum exchange rate referred to above is also subject to adjustment for any stock split, stock dividend or similar transaction. The 2025 Exchangeable Notes pay interest at 5.375% per annum, semiannually on February 1 and August 1 of each year, commencing on February 1, 2021, to holders of record at the close of business on the immediately preceding January 15 and July 15, respectively.
9.As of December 31, 2020, NCLC also had outstanding $414.3 million aggregate principal amount of exchangeable senior notes due June 1, 2026 (the “Private Exchangeable Notes”), which amount included interest that had accreted to the principal amount, which were held by an affiliate of L Catterton (the “Private Investor”). The Private Exchangeable Notes accrued interest at a rate of 7.0% per annum for the first year post-issuance (which accreted to the principal amount). Holders were able to exchange their Private Exchangeable Notes at their option into redeemable preference shares of NCLC. Upon exchange, the preference shares would be immediately and automatically exchanged, for each $1,000 principal amount of exchanged Private Exchangeable Notes, into a number of NCLH’s ordinary shares based on the exchange rate. The exchange rate was initially approximately 82.6446 ordinary shares per $1,000 principal amount of Private Exchangeable Notes (equivalent to an initial exchange price of $12.10 per ordinary share). The maximum exchange rate was 90.9090 and reflected potential adjustments to the initial exchange rate, which would only be made in the event of certain make-whole fundamental changes or tax redemption events.
In March 2021, NCLH completed an equity offering that resulted in 52,577,947 ordinary shares being issued for gross proceeds of $1.6 billion. Approximately $1.0 billion of the cash proceeds from the offering were used to repurchase the Private Exchangeable Notes and extinguish the debt. The resulting loss on extinguishment was $236.0 million for the six months ended June 30, 2021, which is recognized in interest expense, net.
The following is a summary of NCLC’s convertible debt instruments as of June 30, 2021 (in thousands):
| | | | | | | | | | | | | | |
| | | | | Unamortized Debt | | | | | | | | | |
| | | | | Discount, | | | | | | | | | |
| | Principal | | including Deferred | | Net Carrying | | Fair Value | ||||||
|
| Amount |
| Financing Fees |
| Amount |
| Amount |
| Leveling | ||||
2024 Exchangeable Notes | | $ | 862,500 | | $ | (303,628) | | $ | 558,872 | | $ | 2,016,560 | | Level 2 |
2025 Exchangeable Notes | | | 450,000 | | | (141,639) | | | 308,361 | | | 844,295 | | Level 2 |
The remaining period over which the unamortized debt discount will be recognized as non-cash interest expense is 2.9 years and 4.1 years for the 2024 Exchangeable Notes and 2025 Exchangeable Notes, respectively.
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The following is a summary of NCLC’s convertible debt instruments as of December 31, 2020 (in thousands):
| | | | | | | | | | | | | | |
| | | | | Unamortized Debt | | | | | | | | | |
| | | | | Discount, | | | | | | | | | |
| | Principal | | including Deferred | | Net Carrying | | Fair Value | ||||||
|
| Amount |
| Financing Fees |
| Amount |
| Amount |
| Leveling | ||||
2024 Exchangeable Notes | | $ | 862,500 | | $ | (338,571) | | $ | 523,929 | | $ | 1,812,975 | | Level 2 |
2025 Exchangeable Notes | | | 450,000 | | | (153,299) | | | 296,701 | | | 772,412 | | Level 2 |
Private Exchangeable Notes | | | 414,311 | | | (399,366) | | | 14,945 | | | 1,098,082 | | Level 2 |
In addition, we recognize debt conversion options within exchangeable notes. Refer to Note 7— “Fair Value Measurements and Derivatives.”
The following provides a summary of the interest expense of NCLC’s convertible debt instruments (in thousands):
| | | | | | |
| | Three Months | | Six Months | ||
| | Ended June 30, 2021 | | Ended June 30, 2021 | ||
Coupon interest | | | 18,985 | | | 43,125 |
Amortization of discount and deferred financing fees | | | 24,150 | | | 47,763 |
Total | | $ | 43,135 | | $ | 90,888 |
Interest expense, including amortization of debt discounts and coupon interest, recognized related to the 2024 Exchangeable Notes and Private Exchangeable Notes was $18.6 million for the three and six months ended June 30, 2020.
The effective interest rate is 22.78% and 15.89% for the 2024 Exchangeable Notes and 2025 Exchangeable Notes, respectively.
Debt Repayments
The following are scheduled principal repayments on our long-term debt including finance lease obligations as of June 30, 2021 for each of the following periods (in thousands):
| | | |
Year |
| Amount | |
Remainder of 2021 | | $ | 18,271 |
2022 | |
| 856,689 |
2023 | |
| 924,216 |
2024 | |
| 5,060,206 |
2025 | |
| 1,054,008 |
Thereafter | |
| 4,579,284 |
Total | | $ | 12,492,674 |
Debt Covenants
We have received certain financial and other debt covenant waivers through December 31, 2022 and added new free liquidity requirements. At June 30, 2021, taking into account such waivers, we were in compliance with all of our debt covenants. If we do not continue to remain in compliance with our covenants, including following the expiration of any current waivers, we would have to seek additional amendments to our covenants. However, no assurances can be made that such amendments would be approved by our lenders. Generally, if an event of default under any debt agreement occurs, then pursuant to cross default and/or cross acceleration clauses, substantially all of our outstanding debt and
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derivative contract payables could become due, and all debt and derivative contracts could be terminated, which would have a material adverse impact on our operations and liquidity.
7. Fair Value Measurements and Derivatives
Fair value is defined as the price at which an orderly transaction to sell an asset or to transfer a liability would take place between market participants at the measurement date under current market conditions (that is, an exit price at the measurement date from the perspective of a market participant that holds the asset or owes the liability).
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Fair Value Hierarchy
The following hierarchy for inputs used in measuring fair value should maximize the use of observable inputs and minimize the use of unobservable inputs by requiring that the most observable inputs be used when available:
Level 1 Quoted prices in active markets for identical assets or liabilities that are accessible at the measurement dates.
Level 2 Significant other observable inputs that are used by market participants in pricing the asset or liability based on market data obtained from independent sources.
Level 3 Significant unobservable inputs we believe market participants would use in pricing the asset or liability based on the best information available.
Derivatives
We are exposed to market risk attributable to changes in interest rates, foreign currency exchange rates and fuel prices. We attempt to minimize these risks through a combination of our normal operating and financing activities and through the use of derivatives. We assess whether derivatives used in hedging transactions are “highly effective” in offsetting changes in the cash flow of our hedged forecasted transactions. We use regression analysis for this hedge relationship and high effectiveness is achieved when a statistically valid relationship reflects a high degree of offset and correlation between the fair values of the derivative and the hedged forecasted transaction. Cash flows from the derivatives are classified in the same category as the cash flows from the underlying hedged transaction. If it is determined that the hedged forecasted transaction is no longer probable of occurring, then the amount recognized in accumulated other comprehensive income (loss) is released to earnings. 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 many creditors. We do not anticipate non-performance by any of our significant counterparties.
As of June 30, 2020,2021, we had fuel swaps, which are used to mitigate the financial impact of volatility of fuel prices pertaining to approximately 1.1 million366 thousand metric tons of our projected fuel purchases, maturing through December 31, 2023.
On January 1, 2021, our fuel swaps designated as hedges for marine gas oil maturing through December 31, 2021 were dedesignated as cash flow hedges. As of June 30, 2020,2021, we had, in aggregate with previously dedesignated fuel swaps, approximately 206 thousand metric tons which were not designated as cash flow hedges. Due to a decrease in forecasted fuel consumption resulting from voyage cancellations due to COVID-19, we released into earnings fuel hedges of approximately 63 thousand metric tons of fuel as these forecasted transactions were no longer probable of occurring. The agreements maturematuring through December 31, 2020.2022.
As of June 30, 2020,2021, 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 €2.0€1.8 billion, or $2.2$2.1 billion based on the euro/U.S. dollar exchange rate as of June 30, 2020.
As of June 30, 2020, we had interest rate swaps and collars, which are used to hedge our exposure to interest rate movements and manage our interest expense. The notional amount of our outstanding debt associated with the interest rate swaps and collars was $0.7 billion as of June 30, 2020.
As of June 30, 2020, we had conversion options embedded in our exchangeable notes. The notional amounts of our outstanding options as of June 30, 2020 were 62.7 million and 33.1 million NCLH shares for the 2024 Exchangeable Notes and Private Exchangeable Notes, respectively.2021.
2119
As of June 30, 2021, we had interest rate swaps and collars, which are used to hedge our exposure to interest rate movements and manage our interest expense. The notional amount of our outstanding debt associated with the interest rate swaps and collars was $0.6 billion as of June 30, 2021.
As of June 30, 2021, we had conversion options embedded in our exchangeable notes. The notional amounts of our outstanding options as of June 30, 2021 were 62.7 million and 24.0 million NCLH shares for the 2024 Exchangeable Notes and 2025 Exchangeable Notes, respectively.
The derivatives measured at fair value and the respective location in the consolidated balance sheets include the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Assets | | Liabilities | | | | | Assets | | Liabilities | ||||||||||||||||
| | | | June 30, | | December 31, | | June 30, | | December 31, | | | | | June 30, | | December 31, | | June 30, | | December 31, | ||||||||
|
| Balance Sheet Location |
| 2020 |
| 2019 |
| 2020 |
| 2019 | |
| Balance Sheet Location |
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||||||
Derivative Contracts Designated as Hedging Instruments | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Fuel contracts |
|
|
| |
|
| |
|
| |
|
| |
|
|
|
|
| |
|
| |
|
| |
|
| |
|
|
| Prepaid expenses and other assets | | $ | 6,921 | | $ | — | | $ | — | | $ | — | |||||||||||||||
|
| Other long-term assets | | $ | — | | $ | 277 | | $ | — | | $ | — | |
| Other long-term assets | | | 17,054 | | | — | | | — | | | — |
|
| Accrued expenses and other liabilities | |
| — | |
| 2,300 | |
| 67,658 | |
| 18,257 | |
| Accrued expenses and other liabilities | |
| — | |
| — | |
| — | |
| 35,973 |
|
| Other long-term liabilities | |
| — | |
| 683 | |
| 77,694 | |
| 17,763 | |
| Other long-term liabilities | |
| — | |
| — | |
| — | |
| 28,947 |
Foreign currency contracts |
|
| |
| | |
| | |
| | |
| | |
|
| |
| | |
| | |
| | |
| |
|
| Prepaid expenses and other assets | |
| 180 | |
| — | |
| — | |
| — | |
| Prepaid expenses and other assets | |
| 1,702 | |
| 5,779 | |
| — | | �� | — |
|
| Other long-term assets | |
| 4,055 | |
| — | |
| — | |
| — | |
| Other long-term assets | |
| 25,389 | |
| 43,250 | |
| — | |
| — |
|
| Accrued expenses and other liabilities | |
| — | |
| — | |
| 30,151 | |
| 33,475 | |
| Accrued expenses and other liabilities | |
| — | |
| — | |
| 74,084 | |
| 14,778 |
|
| Other long-term liabilities | |
| — | |
| 169 | |
| 167,517 | |
| 118,500 | |
| Other long-term liabilities | |
| 2,466 | |
| 6,821 | |
| 30,563 | |
| 44,938 |
Interest rate contracts |
|
| |
| | |
| | |
| | |
| | |
|
| |
| | |
| | |
| | |
| |
|
| Accrued expenses and other liabilities | |
| — | |
| — | |
| 8,820 | |
| 2,178 | |
| Accrued expenses and other liabilities | |
| — | |
| — | |
| 2,919 | |
| 6,776 |
| | Other long-term liabilities | | | — | | | — | | | 3,009 | | | 1,861 | | | Other long-term liabilities | | | — | | | — | | | — | | | 452 |
Total derivatives designated as hedging instruments | | | | $ | 4,235 | | $ | 3,429 | | $ | 354,849 | | $ | 192,034 | | | | | $ | 53,532 | | $ | 55,850 | | $ | 107,566 | | $ | 131,864 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Derivative Contracts Not Designated as Hedging Instruments | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Fuel contracts | | Accrued expenses and other liabilities | | $ | — | | $ | — | | $ | 8,194 | | $ | — | | | | | | | | | | | | | | | |
|
| Prepaid expenses and other assets | | $ | 6,206 | | $ | — | | $ | 1,284 | | $ | — | |||||||||||||||
| | Other long-term assets | | | 2,452 | | | — | | | — | | | — | |||||||||||||||
| | Accrued expenses and other liabilities | | | — | | | 546 | | | — | | | 6,732 | |||||||||||||||
| | Other long-term liabilities | | | — | | | — | | | — | | | 3,534 | |||||||||||||||
| | | | | | | | | | | | | | | |||||||||||||||
Debt conversion options |
| Exchangeable notes | | | — | | | — | | | 962,350 | | | — | |
| Exchangeable notes | | | — | | | — | | | 1,507,451 | | | 1,856,145 |
Total derivatives not designated as hedging instruments | | | | $ | — | | $ | — | | $ | 970,544 | | $ | — | | | | | $ | 8,658 | | $ | 546 | | $ | 1,508,735 | | $ | 1,866,411 |
Total derivatives | | | | $ | 4,235 | | $ | 3,429 | | $ | 1,325,393 | | $ | 192,034 | | | | | $ | 62,190 | | $ | 56,396 | | $ | 1,616,301 | | $ | 1,998,275 |
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 option pricing models 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 models used by the Company are industry standard models for valuing options and are used by the broker/dealer community. The inputs to the option pricing models are the option strike prices, underlying prices, risk-free rates of interest, time to expiration, and both historical and implied volatilities. The fair values of option contracts consider 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 (in thousands):
| | | | | | | | | | | | | | | |
|
| | |
| Gross |
| | |
| Gross |
| | | ||
| | Gross | | Amounts | | Total Net | | Amounts | | | | ||||
June 30, 2020 | | Amounts | | Offset | | Amounts | | Not Offset | | Net Amounts | |||||
Assets | | $ | 4,235 | | $ | — | | $ | 4,235 | | $ | (4,235) | | $ | — |
Liabilities | | | 1,325,393 | | | — | | | 1,325,393 | | | (1,325,393) | | | — |
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| | | | | | | | | | | | | | | |
|
| | |
| Gross |
| | |
| Gross |
| | | ||
| | Gross | | Amounts | | Total Net | | Amounts | | | | ||||
December 31, 2019 | | Amounts | | Offset | | Amounts | | Not Offset | | Net Amounts | |||||
Assets | | $ | 277 | | $ | — | | $ | 277 | | $ | — | | $ | 277 |
Liabilities | | | 192,034 | | | (3,152) | | | 188,882 | | | (149,863) | | | 39,019 |
The effects of cash flow hedge accounting on accumulated other comprehensive income (loss) were as follows (in thousands):
| | | | | | | | | | | | | | |
| | | | | | | | Location of Gain | | | | | | |
| | | | | | | | (Loss) Reclassified | | | | | | |
| | | | | | | | from Accumulated | | Amount of Gain (Loss) Reclassified | ||||
| | Amount of Gain (Loss) | | Other Comprehensive | | from Accumulated Other | ||||||||
| | Recognized in Other | | Income (Loss) into | | Comprehensive | ||||||||
Derivatives | | Comprehensive Income | | Income | | Income (Loss) into Income | ||||||||
| | Three Months | | Three Months | | | | Three Months | | Three Months | ||||
| | Ended | | Ended | | | | Ended | | Ended | ||||
|
| June 30, 2020 |
| June 30, 2019 | | |
| June 30, 2020 |
| June 30, 2019 | ||||
Fuel contracts | | $ | 27,769 | | $ | (16,577) | | Fuel | | $ | (13,878) | | $ | 9,885 |
Fuel contracts | | | — | | | — | | Other income (expense), net | | | (11,964) | | | — |
Foreign currency contracts | |
| 27,694 | |
| 4,181 | | Depreciation and amortization | |
| (1,266) | |
| (703) |
Interest rate contracts | |
| (985) | |
| (4,793) | | Interest expense, net | |
| (1,674) | |
| 92 |
Total gain (loss) recognized in other comprehensive income | | $ | 54,478 | | $ | (17,189) | |
| | $ | (28,782) | | $ | 9,274 |
| | | | | | | | | | | | | | |
| | | | | | | | Location of Gain | | | | | | |
| | | | | | | | (Loss) Reclassified | | | | | | |
| | | | | | | | from Accumulated | | Amount of Gain (Loss) Reclassified | ||||
| | Amount of Gain (Loss) | | Other Comprehensive | | from Accumulated Other | ||||||||
| | Recognized in Other | | Income (Loss) into | | Comprehensive | ||||||||
Derivatives | | Comprehensive Income | | Income | | Income (Loss) into Income | ||||||||
| | Six Months | | Six Months | | | | Six Months | | Six Months | ||||
| | Ended | | Ended | | | | Ended | | Ended | ||||
| | June 30, 2020 |
| June 30, 2019 | | |
| June 30, 2020 |
| June 30, 2019 | ||||
Fuel contracts | | $ | (170,708) | | $ | 79,931 | | Fuel | | $ | (20,095) | | $ | 17,403 |
Fuel contracts | | | — | | | — | | Other income (expense), net | | | (26,284) | | | — |
Foreign currency contracts | |
| (70,193) | |
| (76,097) | | Depreciation and amortization | |
| (2,395) | |
| (1,406) |
Interest rate contracts | |
| (10,481) | |
| (5,871) | | Interest expense, net | |
| (2,007) | |
| 277 |
Total gain (loss) recognized in other comprehensive income | | $ | (251,382) | | $ | (2,037) | |
| | $ | (50,781) | | $ | 16,274 |
2320
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 (in thousands):
| | | | | | | | | | | | | | | |
|
| | |
| Gross |
| | |
| Gross |
| | | ||
| | Gross | | Amounts | | Total Net | | Amounts | | | | ||||
June 30, 2021 | | Amounts | | Offset | | Amounts | | Not Offset | | Net Amounts | |||||
Assets | | $ | 59,724 | | $ | (1,284) | | $ | 58,440 | | $ | (27,091) | | $ | 31,349 |
Liabilities | | | 1,615,017 | | | (2,466) | | | 1,612,551 | | | (1,602,232) | | | 10,319 |
| | | | | | | | | | | | | | | |
|
| | |
| Gross |
| | |
| Gross |
| | | ||
| | Gross | | Amounts | | Total Net | | Amounts | | | | ||||
December 31, 2020 | | Amounts | | Offset | | Amounts | | Not Offset | | Net Amounts | |||||
Assets | | $ | 49,029 | | $ | — | | $ | 49,029 | | $ | (49,029) | | $ | — |
Liabilities | | | 1,998,275 | | | (7,367) | | | 1,990,908 | | | (1,913,496) | | | 77,412 |
The effects of cash flow hedge accounting on accumulated other comprehensive income (loss) were as follows (in thousands):
| | | | | | | | | | | | | | |
| | | | | | | | Location of Gain | | | | | | |
| | | | | | | | (Loss) Reclassified | | | | | | |
| | | | | | | | from Accumulated | | Amount of Gain (Loss) Reclassified | ||||
| | Amount of Gain (Loss) | | Other Comprehensive | | from Accumulated Other | ||||||||
| | Recognized in Other | | Income (Loss) into | | Comprehensive Income | ||||||||
Derivatives | | Comprehensive Loss |
| Income (Expense) |
| (Loss) into Income (Expense) | ||||||||
| | Three Months | | Three Months | | | | Three Months | | Three Months | ||||
| | Ended | | Ended | | | | Ended | | Ended | ||||
|
| June 30, 2021 |
| June 30, 2020 | | |
| June 30, 2021 |
| June 30, 2020 | ||||
Fuel contracts | | $ | 25,456 | | $ | 27,769 | | Fuel | | $ | (8,652) | | $ | (13,878) |
Fuel contracts | | | — | | | — | | Other income (expense), net | | | (1,538) | | | (11,964) |
Foreign currency contracts | |
| 19,281 | |
| 27,694 | | Depreciation and amortization | |
| (1,266) | |
| (1,266) |
Interest rate contracts | |
| (63) | |
| (985) | | Interest expense, net | |
| (2,086) | |
| (1,674) |
Total gain (loss) recognized in other comprehensive loss | | $ | 44,674 | | $ | 54,478 | |
| | $ | (13,542) | | $ | (28,782) |
| | | | | | | | | | | | | | |
| | | | | | | | Location of Gain | | | | | | |
| | | | | | | | (Loss) Reclassified | | | | | | |
| | | | | | | | from Accumulated | | Amount of Gain (Loss) Reclassified | ||||
| | Amount of Gain (Loss) | | Other Comprehensive | | from Accumulated Other | ||||||||
| | Recognized in Other | | Income (Loss) into | | Comprehensive Income | ||||||||
Derivatives | | Comprehensive Loss |
| Income (Expense) |
| (Loss) into Income (Expense) | ||||||||
| | Six Months | | Six Months | | | | Six Months | | Six Months | ||||
| | Ended | | Ended | | | | Ended | | Ended | ||||
| | June 30, 2021 |
| June 30, 2020 | | |
| June 30, 2021 |
| June 30, 2020 | ||||
Fuel contracts | | $ | 49,506 | | $ | (170,708) | | Fuel | | $ | (16,823) | | $ | (20,095) |
Fuel contracts | | | — | | | — | | Other income (expense), net | | | (11,728) | | | (26,284) |
Foreign currency contracts | |
| (78,160) | |
| (70,193) | | Depreciation and amortization | |
| (2,533) | |
| (2,395) |
Interest rate contracts | |
| 291 | |
| (10,481) | | Interest expense, net | |
| (4,296) | |
| (2,007) |
Total gain (loss) recognized in other comprehensive loss | | $ | (28,363) | | $ | (251,382) | |
| | $ | (35,380) | | $ | (50,781) |
21
The effects of cash flow hedge accounting on the consolidated statements of operations include the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2020 | | Three Months Ended June 30, 2019 | | Three Months Ended June 30, 2021 | | Three Months Ended June 30, 2020 | |||||||||||||||||||||||||||||||||||||
|
| | |
| Depreciation |
| | |
| | |
| | |
| Depreciation |
| | |
| | |
| Depreciation |
| | |
| | |
| | |
| Depreciation |
| | |
| | | ||||
| | | | | and | | Interest | | Other Income | | | | | and | | Interest | | | | | and | | Interest | | Other Income | | | | | and | | Interest | | Other Income | |||||||||||
| | Fuel | | Amortization | | Expense, net | | (Expense), net | | Fuel | | Amortization | | Expense, net | | Fuel | | Amortization | | Expense, net | | (Expense), net | | Fuel | | Amortization | | Expense, net | | (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 | | $ | 48,992 | | $ | 179,252 | | $ | 120,585 | | $ | (242,230) | | $ | 100,531 | | $ | 156,271 | | $ | 65,969 | | $ | 54,090 | | $ | 174,262 | | $ | 179,448 | | $ | (82,627) | | $ | 48,992 | | $ | 179,252 | | $ | 120,585 | | $ | (242,230) |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Amount 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 (expense) | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |||||||||||||||||||||
Fuel contracts | | | (13,878) | | | — | | | — | | | — | | | 9,885 | | | — | | | — | | | (8,652) | | | — | | | — | | | — | | | (13,878) | | | — | | | — | | | — |
Foreign currency contracts | | | — | | | (1,266) | | | — | | | — | | | — | | | (703) | | | — | | | — | | | (1,266) | | | — | | | — | | | — | | | (1,266) | | | — | | | — |
Interest rate contracts | | | — | | | — | | | (1,674) | | | — | | | — | | | — | | | 92 | | | — | | | — | | | (2,086) | | | — | | | — | | | — | | | (1,674) | | | — |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Amount of loss reclassified from accumulated other comprehensive income (loss) into income as a result that a forecasted transaction is no longer probable of occurring | | | | | | | | | | | | | | | | | | | | | | ||||||||||||||||||||||||
Amount of gain (loss) reclassified from accumulated other comprehensive income (loss) into income (expense) as a result that a forecasted transaction is no longer probable of occurring | | | | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||
Fuel contracts | | | — | | | — | | | — | | | (11,964) | | | — | | | — | | | — | | | — | | | — | | | — | | | (1,538) | | | — | | | — | | | — | | | (11,964) |
| | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, 2020 | | Six Months Ended June 30, 2019 | |||||||||||||||||
|
| | | | Depreciation | | | | | | | | | | | Depreciation | | | | ||
| | | | | and | | Interest | | Other Income | | | | | and | | Interest | |||||
| | Fuel |
| Amortization |
| Expense, net |
| (Expense), net |
| Fuel |
| Amortization |
| 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 | | $ | 174,016 | | $ | 377,449 | | $ | 189,492 | | $ | (236,407) | | $ | 198,784 | | $ | 326,012 | | $ | 139,472 |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Amount of gain (loss) reclassified from accumulated other comprehensive income (loss) into income | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Fuel contracts | | | (20,095) | | | — | | | — | | | — | | | 17,403 | | | — | | | — |
Foreign currency contracts | | | — | | | (2,395) | | | — | | | — | | | — | | | (1,406) | | | — |
Interest rate contracts | | | — | | | — | | | (2,007) | | | — | | | — | | | — | | | 277 |
| | | | | | | | | | | | | | | | | | | | | |
Amount of loss reclassified from accumulated other comprehensive income (loss) into income as a result that a forecasted transaction is no longer probable of occurring | | | | | | | | | | | | | | | | | | | | | |
Fuel contracts | | | — | | | — | | | — | | | (26,284) | | | — | | | — | | | — |
22
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, 2021 | | Six Months Ended June 30, 2020 | ||||||||||||||||||||
|
| | | | Depreciation | | | | | | | | | | | Depreciation | | | | | | | ||
| | | | | and | | Interest | | Other Income | | | | | and | | Interest | | Other Income | ||||||
| | Fuel |
| Amortization |
| Expense, net |
| (Expense), net |
| Fuel |
| Amortization |
| Expense, net |
| (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 | | $ | 96,693 | | $ | 344,578 | | $ | 639,780 | | $ | (371,892) | | $ | 174,016 | | $ | 377,449 | | $ | 189,492 | | $ | (236,407) |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Amount of gain (loss) reclassified from accumulated other comprehensive income (loss) into income (expense) | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Fuel contracts | | | (16,823) | | | — | | | — | | | — | | | (20,095) | | | — | | | — | | | — |
Foreign currency contracts | | | — | | | (2,533) | | | — | | | — | | | — | | | (2,395) | | | — | | | — |
Interest rate contracts | | | — | | | — | | | (4,296) | | | — | | | — | | | — | | | (2,007) | | | — |
| | | | | | | | | | | | | | | | | | | | | | | | |
Amount of gain (loss) reclassified from accumulated other comprehensive income (loss) into income (expense) as a result that a forecasted transaction is no longer probable of occurring | | | | | | | | | | | | | | | | | | | | | | | | |
Fuel contracts | | | — | | | — | | | — | | | (11,728) | | | — | | | — | | | — | | | (26,284) |
The effects of derivatives not designated as hedging instruments on the consolidated statements of operations include the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Amount of Gain (Loss) Recognized in Income | | | Amount of Gain (Loss) Recognized in Income | ||||||||||||||||||||
| | | Three Months Ended | | Six Months Ended | | | Three Months Ended | | Six Months Ended | ||||||||||||||||
| | | June 30, | | June 30, | | | June 30, | | June 30, | ||||||||||||||||
| Location of Gain (Loss) | | 2020 |
| 2019 |
| 2020 |
| 2019 | Location of Gain (Loss) | | 2021 |
| 2020 |
| 2021 |
| 2020 | ||||||||
Derivatives not designated as hedging instruments | | |
|
| |
|
| |
|
| |
|
| | |
|
| |
|
| |
|
| |
|
|
Fuel contracts | Other income (expense), net | | $ | 3,646 | | $ | — | | $ | 3,646 | | $ | — | Other income (expense), net | | $ | 17,935 | | $ | 3,646 | | $ | 50,107 | | $ | 3,646 |
Debt conversion options | Other income (expense), net | | | 215,625 | | | — | | | 215,625 | | | — | Other income (expense), net | | | (108,127) | | | (215,625) | | | (424,636) | | | (215,625) |
24
Long-Term Debt
As of June 30, 20202021 and December 31, 2019,2020, the fair value of our long-term debt, including the current portion, was $11,142.8 million and $6,957.8 million, respectively,$14.2 billion, which was $236.9 million$0.7 billion higher and $31.3 million$1.0 billion higher, respectively, than the carrying values, excluding deferred financing costs. 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 revolving and term loan facilities was calculated based on estimated rates for the same or similar instruments with similar terms and remaining maturities. The fair value of our exchangeable notes considers observable risk-free rates; credit spreads of the same ofor similar instruments; and share prices, tenors, and historical and implied volatilities which are sourced from observable market data. The inputs are considered to be Level 2 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 or from an increase in share values.
Goodwill and Tradenames23
The Step 1 Test used discounted future cash flows and other market data to determine the fair value of the reporting units at March 31, 2020, which are all considered Level 3 inputs. Our discounted cash flow valuation reflected our principal assumptions of 1) forecasted future operating results and growth rates, which have been prepared under multiple scenarios and are probability weighted, 2) forecasted capital expenditures for fleet growth and ship improvements and 3) a weighted average cost of capital of market participants. Historically, our Step 1 Test consisted of a combined approach using discounted future cash flows and market multiples to determine the fair value of the reporting units. However, for the March 31, 2020 Step 1 Test, the market multiples were used solely as a corroboratory approach given the impact of COVID-19 on the current year’s results, as of the valuation date, as well as prospective results including the lack of any guidance provided, which were not available for our peers. We believe that this approach is the most representative method to assess fair value as it utilizes expectations of long-term growth as well as current market conditions. For the tradenames, we used the relief from royalty method, which uses the same forecasts and discount rates from the discounted cash flow valuation in the goodwill assessment along with a tradename royalty rate assumption. We believe that we made reasonable estimates and judgments. However, a change in our estimated future operating cash flows may result in a decline in fair value in future periods, which may result in a need to recognize additional impairment charges.
Other
The carrying amounts reported in the consolidated balance sheets of all other financial assets and liabilities approximate fair value.
25
10.8. Employee Benefits and Compensation Plans
In January 2013, NCLH adopted the 2013 Performance Incentive Plan, which provided for the issuance of up to 15,035,106 of NCLH’s ordinary shares pursuant to awards granted under the plan. In May 2016, the plan was amended and restated (“Restated 2013 Plan”) pursuant to approval from NCLH’s Board of Directors and NCLH’s shareholders. Among other things, under the Restated 2013 Plan, the number of NCLH’s ordinary shares that may be delivered pursuant to all awards granted under the plan was increased by an additional 12,430,000 shares to a new maximum aggregate limit of 27,465,106 shares. In May 2021, the Restated 2013 Plan was further amended and restated to increase the number of NCLH ordinary shares that may be delivered by 4,910,000 shares to 32,375,106 shares.
Share Option Awards
The following is a summary of option activity under NCLH’s Amended and Restated 2013 Performance Incentive Plan for the six months ended June June��30, 2020:2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | Weighted- | | | | | | | | | | | | | | | | | | | Weighted- | | | ||
| | Number of Share Option Awards | | Weighted-Average Exercise Price | | Average | | Aggregate | | Number of Share Option Awards | | Weighted-Average Exercise Price | | Average | | Aggregate | ||||||||||||||||||||||||
|
| Time- |
| Performance- | �� | Market- |
| Time- |
| Performance- |
| Market- |
| Contractual |
| Intrinsic |
| Time- |
| Performance- |
| Market- |
| Time- |
| Performance- |
| Market- |
| Contractual |
| Intrinsic | ||||||||
| | Based | | Based | | Based | | Based | | Based | | Based | | Term | | Value | | Based | | Based | | Based | | Based | | Based | | Based | | Term | | Value | ||||||||
| | Awards | | Awards | | Awards | | Awards | | Awards | | Awards | | (years) | | (in thousands) | | Awards | | Awards | | Awards | | Awards | | Awards | | Awards | | (years) | | (in thousands) | ||||||||
Outstanding as of January 1, 2020 |
| 4,918,554 |
| 115,489 |
| 208,333 | | $ | 51.84 | | $ | 59.11 | | $ | 59.43 |
| 5.42 | | $ | 33,413 | ||||||||||||||||||||
Exercised |
| (48,221) | | (906) |
| — | | | 44.38 | | | 19.00 | | | — |
|
| |
|
| ||||||||||||||||||||
Outstanding as of January 1, 2021 |
| 4,525,207 |
| 114,583 |
| 208,333 | | $ | 51.96 | | $ | 59.43 | | $ | 59.43 |
| 4.42 | | $ | — | ||||||||||||||||||||
Forfeited and cancelled |
| (163,792) | | — |
| — | | | 50.39 | | | — | | | — |
|
| |
|
|
| (26,833) | | — |
| — | | | 53.62 | | | — | | | — |
| | |
|
|
Outstanding as of June 30, 2020 |
| 4,706,541 |
| 114,583 |
| 208,333 | | | 51.97 | | | 59.43 | | | 59.43 |
| 4.93 | | | — | ||||||||||||||||||||
Outstanding as of June 30, 2021 |
| 4,498,374 |
| 114,583 |
| 208,333 | | | 51.95 | | | 59.43 | | | 59.43 |
| 3.93 | | | — |
Restricted Share Unit Awards
On March 2, 2020,In June 2021, NCLH granted 2.43.1 million time-based restricted share unit awards to our employees, which primarily vest in substantially equal annual installments each March 1 over three years. Additionally, on March 2, 2020,in June 2021, NCLH granted 0.60.7 million performance-based restricted share units to certain members of our management team, which vest upon the achievement of certain pre-established performance targets established for the 2020 and 2021 calendar yearsthrough 2023 and the satisfaction of an additional time-based vesting requirement that generally requires continued employment through March 1, 2023.2024.
The following is a summary of NCLH restricted share unit activity for the six months ended June 30, 2020:2021:
| | | | | | | | | | | | | | | |
|
| Number of |
| Weighted- |
| Number of |
| Weighted- |
| Number of |
| Weighted- | |||
| | Time-Based | | Average Grant | | Performance- | | Average Grant | | Market- | | Average Grant | |||
| | Awards | | Date Fair Value | | Based Awards | | Date Fair Value | | Based Awards | | Date Fair Value | |||
Non-vested as of January 1, 2020 | | 3,245,625 | | $ | 54.94 | | 1,129,396 | | $ | 56.09 | | 50,000 | | $ | 59.43 |
Granted |
| 2,396,824 | | | 35.81 |
| 611,808 | (1) | | 35.59 |
| — | | | — |
Vested |
| (1,599,412) | | | 54.20 |
| (181,682) | | | 56.33 |
| — | | | — |
Forfeited or expired |
| (186,914) | | | 47.45 |
| (63,026) | | | 47.45 |
| — | | | — |
Non-vested as of June 30, 2020 |
| 3,856,123 | | | 43.72 |
| 1,496,496 | | | 48.04 |
| 50,000 | | | 59.43 |
| | | | | | | | | | | | | | | |
|
| Number of |
| Weighted- |
| Number of |
| Weighted- |
| Number of |
| Weighted- | |||
| | Time-Based | | Average Grant | | Performance- | | Average Grant | | Market- | | Average Grant | |||
| | Awards | | Date Fair Value | | Based Awards | | Date Fair Value | | Based Awards | | Date Fair Value | |||
Non-vested as of January 1, 2021 | | 6,663,925 | | $ | 30.54 | | 1,565,184 | | $ | 39.42 | | 50,000 | | $ | 59.43 |
Granted |
| 3,124,241 | | | 30.92 |
| 736,898 | | | 40.89 |
| — | | | — |
Vested |
| (1,743,479) | | | 47.01 |
| (460,969) | | | 56.73 |
| — | | | — |
Forfeited or expired |
| (131,969) | | | 26.48 |
| — | | | — |
| — | | | — |
Non-vested as of June 30, 2021 |
| 7,912,718 | | | 27.13 |
| 1,841,113 | | | 35.68 |
| 50,000 | | | 59.43 |
The compensation expense recognized for share-based compensation for the periods presented include the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended | | Three Months Ended | | Six Months Ended | ||||||||||||||||
| | June 30, | | June 30, | | June 30, | | June 30, | ||||||||||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||||||
Payroll and related expense | | $ | 5,029 | | $ | 4,681 | | $ | 9,731 | | $ | 8,485 | | $ | 4,735 | | $ | 5,029 | | $ | 9,700 | | $ | 9,731 |
Marketing, general and administrative expense | |
| 17,360 | |
| 24,970 | |
| 45,416 | |
| 48,165 | |
| 17,716 | |
| 17,360 | |
| 39,352 | |
| 45,416 |
Total share-based compensation expense | | $ | 22,389 | | $ | 29,651 | | $ | 55,147 | | $ | 56,650 | | $ | 22,451 | | $ | 22,389 | | $ | 49,052 | | $ | 55,147 |
24
11.9. Commitments and Contingencies
Ship Construction Contracts
Project Leonardo will introduce an additional 6 ships, each ranging from approximately 140,000 to 156,300 Gross Tons with approximately 3,3003,215 to 3,550 Berths, with expected delivery dates from 2022 through 2027, subject to certain conditions.2027. For the Regent brand, we have an order for 1 Explorer Class Ship to be delivered in 2023, which will be approximately 55,000 Gross Tons and 750 Berths. For the Oceania Cruises brand, we have orders for 2 Allura Class Ships to be delivered in 2023 and
26
2025. Each of the Allura Class Ships will be approximately 67,000 Gross Tons and 1,200 Berths. The impacts of COVID-19 on the shipyards where our ships are under construction (or will be constructed) have resulted in some delays in expected ship deliveries, and the impacts of COVID-19 could result in additional delays in ship deliveries in the future, which may be prolonged.
The combined contract prices of the 9 ships on order for delivery as of June 30, 20202021 was approximately €7.1€7.6 billion, or $8.0$9.0 billion based on the euro/U.S. dollar exchange rate as of June 30, 2020.2021. We have obtained export credit financing which is expected to fund approximately 80% of the contract price of each ship, subject to certain conditions. We do not anticipate any contractual breaches or cancellations to occur. However, if any such events were to occur, it could result in, among other things, the forfeiture of prior deposits or payments made by us and potential claims and impairment losses which may materially impact our business, financial condition and results of operations.
In July 2021, we amended 9 credit facilities for our newbuild agreements and increased the combined commitments under such credit facilities by approximately $770 million to cover owner’s supply (generally consists of provisions for the ship), modifications and financing premiums.
Litigation
Class Actions
On March 12, 2020, a class action complaint, Eric Douglas v. Norwegian Cruise Lines, Frank J. Del Rio and Mark A. Kempa, Case No. 1:20-CV-21107, was filed in the United States District Court for the Southern District of Florida, naming the Company, Frank J. Del Rio, the Company’s President and Chief Executive Officer, and Mark A. Kempa, the Company’s Executive Vice President and Chief Financial Officer, as defendants. Subsequently, two2 similar class action complaints were also filed in the United States District Court for the Southern District of Florida naming the same defendants. On July 31, 2020, a consolidated amended class action complaint was filed by lead plaintiff’s counsel. The complaint assertsasserted claims, purportedly brought on behalf of a class of shareholders, under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder, and allegealleged that the Company made false and misleading statements to the market and customers about COVID-19. The complaint seekssought unspecified damages and an award of costs and expenses, including reasonable attorneys’ fees, on behalf of a purported class of purchasers of our ordinary shares between February 20, 2020 and March 10, 2020. We believe thatOn April 10, 2021, the allegations contained incase was dismissed and closed, and the complaint are without merit and intendplaintiffs no longer have the right to defend the complaint vigorously. We cannot predict at this point the length of time that this action will be ongoing or the liability, if any, which may arise therefrom.appeal.
In addition, in March 2020 the Florida Attorney General announced an investigation related to the Company’s marketing during the COVID-19 outbreak.pandemic. Following the announcement of the investigation by the Florida Attorney General, we received notifications from other attorneys general and governmental agencies that they are conducting similar investigations. The Company is cooperating with these ongoing investigations, the outcomes of which cannot be predicted at this time.
Helms-Burton Act
On August 27, 2019, two2 lawsuits were filed against NCLH in the United States District Court for the Southern District of Florida under Title III of the Cuban Liberty and Solidarity (Libertad) Act of 1996, also known as the Helms-Burton Act. The complaint filed by Havana Docks Corporation alleges it holds an interest in the Havana Cruise Port Terminal and the complaint filed by Javier Garcia-Bengochea alleges that he holds an interest in the Port of Santiago, Cuba, both
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of which were expropriated by the Cuban Government. The complaints further allege that the Company “trafficked” in those properties by embarking and disembarking passengers at these facilities. The plaintiffs seek all available statutory remedies, including the value of the expropriated property, plus interest, treble damages, attorneys’ fees and costs. On January 7, 2020, the United States District Court for the Southern District of Florida dismissed the claim by Havana Docks Corporation. On April 14, 2020, the district court granted Havana Docks Corporation’s motion to reconsider and vacated its order dismissing the claim, allowing Havana Docks Corporation to file an amended complaint on April 16, 2020. On April 24, 2020, we filed a motion seeking permission to appeal the district court’s order which was subsequently denied. On September 1, 2020, the Court entered an order staying all case deadlines and administratively closed the Garcia-Bengochea matter pending the outcome of the appeal in a related case brought by the same plaintiff. We believe we have meritorious defenses to the claims and intend to vigorously defend these matters. As of June 30, 2020,2021, we are unable to reasonably estimate any potential contingent loss from these matters due to a lack of legal precedence.precedent.
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Other
In the normal course of our business, various other 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.
Other Contingencies
The Company also has agreements with its credit card processors that govern approximately $0.9$1.2 billion at June 30, 20202021 in advance ticket sales that have been received by the Company relating to future voyages. These agreements allow the credit card processors to require under certain circumstances, including the existence of a material adverse change, excessive chargebacks and other triggering events, that the Company maintain a reserve which couldwould be satisfied by posting collateral. Currently, we have agreedAlthough the agreements vary, these requirements may generally be satisfied either through a percentage of customer payments withheld or providing cash funds directly to provide athe card processor. Any cash reserve consisting of $70 million of cash and preliminarily agreed to provide second priority liens on certain ships with a collective equity value of approximately $700 million based on appraisals as of December 31, 2019, whichor collateral requested could be increased or decreased based on certain conditions. Ifdecreased. As of June 30, 2021, we dohad a reserve of approximately $800 million with a credit card processor recognized in accounts receivable, net or other long-term assets. Additionally, we are required to fund all refunds until further notice and 100% of incoming advance ticket sales deposits with this credit card processor will be withheld and are not meet an agreed upon minimum liquidity inexpected to be released until the future, wecredit card processor’s exposure is fully collateralized. As of June 30, 2021, the exposure was approximately $940 million. The reserve shortfall of approximately $140 million will decrease as refunds are funded, cruises are provided and amounts withheld by the credit card processor are allocated to the reserve rather than remitted to the Company. We may be required to pledge additional collateral and/or post cash reserves or take other actions that may further reduce our liquidity. Collateral may be released upon satisfaction of certain financial metrics.
12.10. Other Income (Expense), Net
For the three and six months ended June 30, 2021 and 2020, other income (expense), net was of an expense of $82.6 million and $242.2 million, respectively, and for the six months ended June 30, 2021 and 2020, was of an expense of $371.9 million and $236.4 million, respectively, primarily due to losses from conversion options on our exchangeable notes. For the three and six months ended June 30, 2019, other income (expense), net was income of $3.6 million and $3.2 million, respectively, primarily due to gains from insurance proceeds and a litigation settlement partially offset by foreign currency exchange losses.
13. Income Tax Benefit26
For the three and six months ended June 30, 2020, we had an income tax benefitTable of $6.3 million and $10.4 million, respectively. For the three and six months ended June 30, 2019, we had income tax expense of $4.0 million and an income tax benefit $30.5 million, respectively.Contents
For the three and six months ended June 30, 2020, the tax benefit is due to operating losses and the reversal of a valuation allowance. During 2018, we implemented certain tax restructuring strategies that created our ability to utilize the net operating loss carryforwards of Prestige, for which we had previously provided a full valuation allowance. As a result, we recorded a tax benefit of $35.7 million in connection with the reversal of substantially all of the valuation allowance in March 2019.
14.11. Supplemental Cash Flow Information
For the six months ended June 30, 20202021 and 2019,2020, we had non-cash investing activities consisting of changes in connection withaccruals related to property and equipment of $49.1 million and $7.2 million, and $33.6 million, respectively.
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15.12. Related Party Disclosures
NCLC, as issuer, NCLH, as guarantor, and U.S. Bank National Association, as trustee arewere all parties to an indenture, dated May 28, 2020 (the “Indenture”) related to the Private Exchangeable Notes, which are currentlywere held by the Private Investor. The terms of the IndenturePrivate Exchangeable Notes are more fully described under Note 86 — “Long-Term Debt”. Based on the initial exchange rate for the Private Exchangeable Notes, the Private Investor beneficially owned approximately 11%10% of NCLH’s outstanding ordinary shares as of June 30,December 31, 2020. The initial exchange rate infor the Private Exchangeable Notes may becould have been adjusted in the event of certain make-whole fundamental changes or tax redemption events (each, as described in the Indenture), but the maximum number of NCLH ordinary shares issuable upon an exchange in the event of such an adjustment would not exceedhave exceeded 46,577,947. The Private Exchangeable Notes also containcontained certain anti-dilution provisions that could subjecthave subjected the exchange rate to additional adjustment if certain events occur.had occurred.
NCLH, NCLC and the Private Investor also entered into an investor rights agreement dated May 28, 2020 (the “Investor Rights Agreement”), which providesprovided that, among other things, the Private Investor iswas entitled to nominate one person who will be appointedfor appointment to the board of directors of NCLH until the first date on which the Private Investor no longer beneficially ownsowned in the aggregate at least 50% of the number of NCLH’s ordinary shares issuable upon exchange of the Private Exchangeable Notes beneficially owned by the Private Investor in the aggregate as of May 28, 2020 (subject to certain adjustments).
The Investor Rights Agreement also providesprovided for customary registration rights for the Private Investor and its affiliates, including demand and piggyback registration rights, containscontained customary transfer restrictions and providesprovided that the Private Investor and its affiliates arewere subject to a voting agreement with respect to certain matters during a specified period of time.
16.Subsequent Events
In July 2020,a privately negotiated transaction among NCLH, offered 19,166,667 ordinary shares, par value $0.001 per shareNCLC and the Private Investor, NCLC agreed to repurchase all of the public at aoutstanding Private Exchangeable Notes for an aggregate repurchase price of $15.00 per share, which includes 2,500,000 ordinary shares issuedapproximately $1.0 billion (the “Repurchase”). On March 9, 2021, in connection with the underwriters’ full exercisesettlement of the Repurchase, the trustee cancelled the aggregate principal amount outstanding under the Private Exchangeable Notes and confirmed that NCLC had satisfied and discharged its obligations under the Indenture. In connection with the Repurchase, we and the Private Investor agreed to terminate the Investor Rights Agreement effective upon the consummation of the Repurchase. Notwithstanding the termination, we and the Private Investor agreed that certain provisions related to indemnification and expense reimbursement would survive in accordance with their option to acquire additional ordinary shares. Underwriting discounts and commissions were $0.525 per share. The net proceeds from the offering were $277.4 million after deducting the underwriters’ discounts and commissions, but before other fees and expenses.terms.
Both NCLH and NCLC undertook actions related to debt financing and equity-linked financing in July 2020, which are described in Note 8— “Long-Term Debt”.
Additionally, in July 2020, NCLC authorized the share capital of the Company to be increased from $4,000,048,000 to $5,000,048,000 by the creation of 1,000,000 preference shares of par value $1,000 each, such shares to be designated as "Series A-3 Preference Shares" and have the rights and obligations set out in the certificate of designation. The Series A-3 Preference Shares will be issued on exchange of the 2025 Exchangeable Notes.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Statement Concerning Forward-Looking Statements
Some of the statements, estimates or projections contained in this report are “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, actions taken or strategies being considered with respect to our liquidity position, valuation and appraisals of our assets and objectives of management for future operations (including those regarding expected fleet additions, our voluntary suspension of certain cruise voyages, our ability to weather the impacts of the COVID-19 pandemic, our expectations regarding the resumption of cruise voyages and the timing for such resumption of cruise voyages, the implementation of and effectiveness of our health and safety protocols, operational position, demand for voyages, financing opportunities and extensions, and future cost mitigation and cash conservation efforts and efforts to reduce operating expenses and capital expenditures) are forward-looking statements. Many, but not all, of these statements can be found by looking for words like “expect,” “anticipate,” “goal,” “project,” “plan,” “believe,” “seek,” “will,” “may,” “forecast,” “estimate,” “intend,” “future” and similar words. Forward-looking statements do not guarantee future performance and may involve risks, uncertainties and other factors which could cause our actual results, performance or achievements to differ materially from the future results, performance or achievements expressed or implied in those forward-looking statements. Examples of these risks, uncertainties and other factors include, but are not limited to the impact of:
● | the spread of epidemics, pandemics and viral outbreaks and specifically, the COVID-19 |
● | our ability to comply with the CDC’s Conditional Order and any additional or future regulatory restrictions on our operations and to otherwise develop |
● | legislation prohibiting companies from verifying vaccination status; |
● | coordination and cooperation with the CDC, the federal government and global public health authorities to take precautions to protect the health, safety and security of guests, crew and the communities visited and the implementation of any such precautions; |
● | our ability to work with lenders and others or otherwise pursue options to defer, renegotiate or refinance our existing debt profile, near-term debt amortization, newbuild related payments and other obligations and to work with credit card processors to satisfy current or potential future demands for collateral on cash advanced from customers relating to future cruises; |
● | our need for additional financing, which may not be available on favorable terms, or at all, and may be dilutive to existing shareholders; |
● | our indebtedness and restrictions in the agreements governing our indebtedness that require us to maintain minimum levels of liquidity and otherwise limit our flexibility in operating our business, including the significant portion of assets that are collateral under these agreements; |
● | the accuracy of any appraisals of our assets as a result of the impact of the COVID-19 pandemic or otherwise; |
● | our success in reducing operating expenses and capital expenditures and the impact of any such reductions; |
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● | our guests’ election to take cash refunds in lieu of future cruise credits or the continuation of any trends relating to such election; |
● | trends in, or changes to, future bookings and our ability to take future reservations and receive deposits related thereto; |
● | the unavailability of ports of call; |
● | future increases in the price of, or major changes or reduction in, commercial airline services; |
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● | 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; |
● | any further impairment of our trademarks, trade names or goodwill; |
● | breaches in data security or other disturbances to our information technology and other networks or our actual or perceived failure to comply with requirements regarding data privacy and protection; |
● | changes in fuel prices and the type of fuel we are permitted to use and/or other cruise operating costs; |
● | mechanical malfunctions and repairs, delays in our shipbuilding program, maintenance and refurbishments and the consolidation of qualified shipyard facilities; |
● | the risks and increased costs associated with operating internationally; |
● | fluctuations in foreign currency exchange rates; |
● | overcapacity in key markets or globally; |
● | our expansion into and investments in new markets; |
● | our inability to obtain adequate insurance coverage; |
● |
pending or threatened litigation, investigations and enforcement actions; |
● | 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 or employee relations issues; |
● | our reliance on third parties to provide hotel management services for certain ships and certain other services; |
● | our inability to keep pace with developments in technology; |
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● | changes involving the tax and environmental regulatory regimes in which we operate; and |
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● | other factors set forth under “Risk Factors” herein and in our Annual Report on Form 10-K for the year ended December 31, |
Additionally, many of these risks and uncertainties are currently amplified by and will continue to be amplified by, or in the future may be amplified by, the COVID-19 pandemic. It is not possible to predict or identify all such risks. There may be additional risks that we consider immaterial or which are unknown.
The above examples are not exhaustive and new risks emerge from time to time. Such forward-looking statements are based on our current beliefs, assumptions, expectations, estimates and projections regarding our present and future business strategies and the environment in which we 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 and Adjusted Net Income.Loss. Definitions of these non- GAAP financial measures are included below. For further information about our non-GAAP financial measures including detailed adjustments made in calculation our non-GAAP financial measures and a reconciliation to the most directly comparable GAAP financial measure, we refer you to “Results of Operations” below.
Unless otherwise indicated in this report, the following terms have the meanings set forth below:
● | Acquisition of Prestige. In November 2014, we acquired Prestige in a cash and stock transaction for total consideration of $3.025 billion, including the assumption of debt. |
● | Adjusted EBITDA. EBITDA adjusted for other income (expense), net and other supplemental adjustments. |
● | Adjusted Net Cruise Cost Excluding Fuel. Net Cruise Cost Excluding Fuel adjusted for supplemental adjustments. |
● | Adjusted Net |
● | Allura Class Ships. Oceania Cruises’ two ships on order. |
● | Berths. Double occupancy capacity per cabin (single occupancy per studio cabin) even though many cabins can accommodate three or more passengers. |
● | Breakaway Plus Class Ships. Norwegian Escape, Norwegian Joy, Norwegian Bliss and Norwegian Encore. |
● | Capacity Days. Available Berths multiplied by the number of cruise days for the period. |
● | CDC. The U.S. Centers for Disease Control and Prevention. |
● | Conditional Order. The CDC’s Framework for Conditional Sailing Order issued on October 30, 2020 that introduced a phased approach for the resumption of passenger cruises. These phases include: a) the establishment of laboratory testing of crew onboard cruise ships in U.S. waters; b) simulated voyages designed to test a cruise ship operator’s ability to mitigate COVID-19 on cruise ships; c) a certification process; and d) a return to passenger voyages in a manner that mitigates the risk of COVID-19 introduction, transmission or spread among passenger and crew onboard ships and ashore to communities. The Conditional Order replaced |
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the CDC’s previously issued No Sail Order that expired on October 31, 2020 and will remain in effect until the earlier of a) the expiration of the Secretary of Health and Human Services’ declaration that COVID-19 constitutes a public health emergency, b) the CDC Director’s rescission or modification of the Conditional Order based on specific public health or other considerations, or c) November 1, 2021. Effective as of July 23, 2021, for cruise ships arriving in, within, or departing from a port in Florida, the Conditional Order only persists as a non-binding recommendation. |
● | 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 to eliminate the effects of foreign exchange fluctuations. |
● | Dry-dock. A process whereby a ship is positioned in a large basin where all of the fresh/sea water is pumped out in order to carry out cleaning and repairs of those parts of a ship which are below the water line. |
● | EBITDA. Earnings before interest, taxes, and depreciation and amortization. |
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● | Explorer Class Ships. Regent’s Seven Seas Explorer, Seven Seas Splendor, and an additional ship on order. |
● | GAAP. Generally accepted accounting principles in the U.S. |
● | Gross Cruise Cost. The sum of total cruise operating expense and marketing, general and administrative expense. |
● | Gross Tons. A unit of enclosed passenger space on a cruise ship, such that one gross ton equals 100 cubic feet or 2.831 cubic meters. |
● |
● | 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. |
● | Occupancy Percentage. The ratio of Passenger Cruise Days to Capacity Days. A percentage 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. |
● | Pride of America Credit Facility. The Credit Agreement, dated as of January 10, 2019 (as amended by Amendment No. 1 to the Credit Agreement, dated as of April 28, 2020, and as further amended by Amendment No. 2 to the Credit Agreement, dated as of January 29, 2021), among NCLC, as borrower, the lenders party thereto, Nordea Bank Abp, New York Branch, as administrative agent and collateral agent, and Nordea Bank Abp, New York Branch, Mizuho Bank, Ltd., MUFG Bank, Ltd., and Skandinaviska Enskilda Banken AB (Publ), as joint bookrunners, arrangers and co-documentation agents, providing for a $230.0 million senior secured credit facility. |
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● | Project Leonardo. The next generation of ships for our Norwegian brand. |
● | Revolving Loan Facility. $875.0 million senior secured revolving credit facility. |
● | SEC. U.S. Securities and Exchange Commission. |
● | Senior Secured Credit Facility. The Credit Agreement, originally dated as of May 24, 2013, as amended and restated on October 31, 2014, June 6, 2016, October 10, 2017, January 2, 2019 and May 8, 2020, and as further amended on January 29, 2021 and March 25, 2021, by and among NCLC and Voyager Vessel Company, LLC, as co-borrowers, JPMorgan Chase Bank, N.A., as administrative agent and as collateral agent, and various lenders and agents, providing for a senior secured credit facility consisting of (i) the Revolving Loan Facility and (ii) the Term Loan A Facility. |
● | 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. |
● | Term Loan A Facility. The senior secured term loan A facility having an outstanding principal amount of approximately $1.5 billion as of June 30, 2021. |
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 and Adjusted Net Income,Loss, to enable us to analyze our performance. See “Terminology” for the definitions of these and other non-GAAP financial measures. We utilize Net RevenueCruise Cost and Adjusted Net YieldCruise Cost Excluding Fuel to manage our business on a day-to-day basis and believe that they are the most relevant measures of our revenue performance because they reflect the revenue earned by us net of significant variable costs.basis. In measuring our ability to control costs in a manner that positively impacts net income (loss), we believe changes in Net Cruise Cost and Adjusted Net Cruise Cost Excluding Fuel to be the most relevant indicators of our performance. As a result of our voluntary suspension of sailings during the second quarter offrom March 2020 through June 2021, we did not have any Capacity Days.Days during the suspension period. Accordingly, we have not presented herein Gross Yield, Net Yield or per Capacity Day data for the three or six months ended June 30, 2021 or June 30, 2020.
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
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Australian dollar which are subject to fluctuations in currency exchange rates versus our reporting currency, the U.S. dollar. In order to monitor results excluding these fluctuations, we calculate certain non-GAAP measures on a Constant Currency basis, whereby current period revenue and expenses denominated in foreign currencies are converted to U.S. dollars using currency exchange rates of the comparable period. We believe that presenting these non-GAAP measures on both a reported and Constant Currency basis is useful in providing a more comprehensive view of trends in our business.
We believe that Adjusted EBITDA is appropriate as a supplemental financial measure as it is used by management to assess operating performance. We 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 (loss), as it does not take into account certain requirements such as capital expenditures and related depreciation, principal and interest payments and tax payments and it includes other supplemental adjustments.
In addition, Adjusted Net IncomeLoss is a non-GAAP financial measure that excludes certain amounts and is used to supplement GAAP net income.loss. We use Adjusted Net IncomeLoss 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
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this non-GAAP financial measure may vary from period to period; accordingly, our presentation of Adjusted Net IncomeLoss may not be indicative of future adjustments or results. For example, for the six months ended June 30, 2019,2020, we incurred $30.6 million$1.6 billion related to the redeployment of Norwegian Joy from Asia to the U.S.impairment losses. We included this as an adjustment in the reconciliation of Adjusted Net IncomeLoss since the expenses are not representative of our day-to-day operations; however, this adjustment did not occur and is not included in the comparative period presented within this Form 10-Q.
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
We categorize revenue from our cruise and cruise-related activities as either “passenger ticket” revenue or “onboard and other” revenue. Passenger ticket revenue and onboard and other revenue vary according to product offering, the size of the ship in operation, the length of cruises operated and the markets in which the ship operates. Our revenue is seasonal based on demand for cruises, which has historically been strongest during the Northern Hemisphere’s summer months; however, demand for cruises during the summer months ofour cruise voyages were completely suspended from March 2020 has been materially adversely impacted byuntil July 2021 due to the COVID-19 pandemic. Passenger ticket revenue primarily consists of revenue for accommodations, meals in certain restaurants on the ship, certain onboard entertainment, and includes revenue for service charges and air and land transportation to and from the ship to the extent guests purchase these items from us. Onboard and other revenue primarily consists of revenue from gaming, beverage sales, shore excursions, specialty dining, retail sales, spa services and photo 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.
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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 incurred in connection with onboard and other revenue, including casino, beverage sales and shore excursions. |
● | Payroll and related consists of the cost of wages and benefits for shipboard employees and costs of certain inventory items, including food, for a third party that provides crew and other hotel services for certain ships. The cost of crew repatriation, including charters, housing, testing and other costs related to COVID-19 are also included. |
● | Fuel includes fuel costs, the impact of certain fuel hedges and fuel delivery costs. |
● | Food consists of food costs for passengers and crew on certain ships. |
● | Other consists of repairs and maintenance (including Dry-dock costs), ship insurance and other ship expenses. |
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Critical Accounting Policies
For a discussion of our critical accounting policies and estimates, see “Critical Accounting Policies” included in our Annual Report on Form 10-K under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” We have updatedmade no significant changes to our critical accounting policies and estimates from those described in our Annual Report on Form 10-K as follows:10-K.
Asset Impairment
We review our long-lived assets, principally ships, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Assets are grouped and evaluated at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other groups of assets. We consider historical performance and future estimated results in our evaluation of potential impairment and then compare the carrying amount of the asset to the estimated future cash flows expected to result from the use of the asset. If the carrying amount of the asset exceeds the estimated expected undiscounted future cash flows, we measure the amount of the impairment by comparing the carrying amount of the asset to its fair value. We estimate fair value based on the best information available utilizing estimates, judgments and projections as necessary. Our estimate of fair value is generally measured by discounting expected future cash flows at discount rates commensurate with the associated risk.
We evaluate goodwill and tradenames for impairment annually or more frequently when an event occurs or circumstances change that indicates the carrying value of a reporting unit may not be recoverable. For our evaluation of goodwill we use the Step 0 Test which allows us to first assess qualitative factors to determine whether it is more likely than not (i.e., more than 50%) that the fair value of a reporting unit is less than its carrying value. For tradenames we also provide a qualitative assessment to determine if there is any indication of impairment.
In order to make this evaluation, we consider whether any of the following factors or conditions exist:
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We also may conduct a quantitative assessment comparing the fair value of each reporting unit to its carrying value, including goodwill. This is called the Step 1 Test which uses discounted future cash flows and other market data to determine the fair value of the reporting units. Our discounted cash flow valuation reflects our principal assumptions of 1) forecasted future operating results and growth rates, which have been prepared under multiple scenarios and are probability weighted, 2) forecasted capital expenditures for fleet growth and ship improvements and 3) a weighted average cost of capital of market participants. Historically, our Step 1 Test consisted of a combined approach using discounted future cash flows and market multiples to determine the fair value of the reporting units. However, for the March 31, 2020 Step 1 Test, the market multiples were used solely as a corroboratory approach given the impact of COVID-19 on the current year’s results, as of the valuation date, as well as prospective results including the lack of any guidance provided, which were not available for our peers. We believe that this approach is the most representative method to assess fair value as it utilizes expectations of long-term growth as well as current market conditions. For the tradenames, we use the relief from royalty method, which uses the same forecasts and discount rates from the discounted cash flow valuation in the goodwill assessment along with a tradename royalty rate assumption.
We have concluded that our business has three reporting units. Each brand, Oceania Cruises, Regent Seven Seas Cruises and Norwegian, constitutes a business for which discrete financial information is available and management regularly reviews the operating results and, therefore, each brand is considered an operating segment.
During the six months ended June 30, 2020, we recognized a goodwill impairment loss of $1.3 billion. See Note 4- “Intangible Assets” for additional information. As of June 30, 2020, there was $98.1 million of goodwill for the Regent Seven Seas Cruises reporting unit after impairment. We also recognized an impairment loss for our Oceania Cruises and Regent Seven Seas Cruises tradenames during the six months in an aggregate amount of $317.0 million, with $500.5 million remaining as of June 30, 2020. We believe that we have made reasonable estimates and judgments. However, a change in our estimated future operating cash flows may result in a decline in fair value in future periods, which may result in a need to recognize additional impairment charges.
Update Regarding COVID-19 Pandemic
Suspension of Cruise Voyages
Due to the continued spread of COVID-19, growingongoing travel restrictions and limited access to ports around the world, in March 2020, we implemented a voluntary suspension of all cruise voyages across our three brands. The Company has announced its phased relaunch plans for all 28 ships across its three brands which began with Norwegian Jade on July 25, 2021 and continues through April 1, 2022. The first cruise to commence in the U.S. was on August 7, 2021 with Norwegian Encore sailing to Alaska from Seattle. The Company expects to have approximately 40% of capacity operating by September 30, 2021 and approximately 75% by December 31, 2021 with the full fleet expected to be back in operation by April 1, 2022. Certain sailings have been or may be cancelled in conjunction with the new voyage resumption plans for each vessel. As a result of continued travel and port restrictions in certain geographies and in an effort to protect the health, safety and security of guests, crew and communities visited, we subsequently extended this suspension several times, including most recently through October 31, 2020. See Note 2 – “Summary of Significant Accounting Policies – Liquidity and Management’s Plan” for additional information. This is the first time we have completely suspended our cruise voyages, and as a result of these unprecedented circumstances caused by the pandemic, we are not able to predict the full impact of such a suspensionthe pandemic on our Company. The duration of any voluntary suspensions we have implemented andRefer to “Item 1A. Risk Factors” for further details regarding the resumption of operations outside of the United States will be dependent, in part, on the severity and duration ofsignificant impact the COVID-19 pandemic the status of the CDC’s No
36
Sail Order, various travel restrictionshas had, and travel bans issued by various countries around the world, as well as the availability of ports around the world.is expected to continue to have, on our financial condition and operations.
Preparation for the Safe Resumption of Operations
Prior to the suspension of cruise voyages, we had begun developingWe have developed SailSAFETM, a comprehensive and multi-faceted health and safety strategy to enhance our already rigorous healthprotocols and safety protocols to address the unique public health challenges posed by COVID-19, including enhanced screenings, upgraded cleaning and disinfection protocols and plans for social distancing. Several of these protocols were put in place prior to the voyage suspension.COVID-19. In July 2020, we announced a collaboration with Royal Caribbean Group to form a group of experts called the “Healthy Sail Panel” to developguide the industry in the development of new and enhanced cruise health and safety standards in response to the global COVID-19 pandemic.standards. The panel is co-chaired by Dr. Scott Gottlieb, former commissioner of the U.S. Food and Drug Administration, and Governor Mike Leavitt, former Secretary of the U.S. Department of Health and Human Services. The panel’s members areServices, and consists of globally recognized experts from various disciplines, including public health, infectious disease, biosecurity, hospitality and maritime operations. On September 21, 2020, the expert panel published a report, which included detailed best practices across five key areas of focus to protect the public health and safety of guests, crew and the communities where our cruise ships visit. The panel is tasked with collaboratively developingalso submitted its recommendations for cruise lines to advance their public health response to COVID-19, improve safety, and achieve readiness for the safe resumption of operations. The panel will also help the companies assure the plans they will submit to the CDC, in response to a CDC request for public comment to inform future public health guidance and preventative measures relating to travel on cruise ships. The panel’s recommendations have informed new detailed health and safety protocols for our return-to-service plan.
The Company also further extended its depth and breadth of experts with the formation of its SailSAFE Global Health and Wellness Council, comprised of six experts at the forefront of their fields and led by Chairman Dr. Scott Gottlieb. The Council’s work complements the Healthy Sail Panel initiative and focuses on the implementation, compliance with and continuous improvement of health and safety protocols across the Company’s operations. The Company continues to work with its expert advisors, the Healthy Sail Panel, and global public health authorities and government agencies to refine its comprehensive and multi-layered health and safety strategy to enhance its already rigorous health and safety standards in response to COVID-19.
Pursuant to the Conditional Order, the CDC has issued and may continue to issue additional requirements through technical instructions or orders as needed and the phases of the Conditional Order may be subject to change based on public health considerations, including the trajectory of the pandemic and the ability of cruise ship operators to successfully employ measures that mitigate the risk of COVID-19. We have received conditional sailing certificates for certain ships and are in the process of seeking certifications for the remaining ships in our fleet that will be operating out of the U.S. Additionally, in the U.S., certain states have enacted legislation prohibiting companies from verifying the vaccination status of guests. We challenged such a prohibition in Florida in court and received a preliminary injunction allowing us to operate as planned. As a result of these and other regulators apply regulatory requirements and other logistical challenges,
34
the best available public health, sciencetimeline for our ability to return our entire fleet to cruises both in and engineering insights. The Company willoutside of the U.S. is fluid. Nevertheless, we continue to work with the CDC and other federal agencies, public health authorities and national and local governments in areas where it operateswe operate to take all necessary measures to protect itsour guests, crew and the communities visited once operations resume.as we begin to resume operations.
We began a phased relaunch of cruise voyages in July 2021. Initially, ship occupancy will be limited to generally between 60% to 80% of capacity. During the first two months of a ship’s return to service, occupancy is expected to be incrementally increased until the ship reaches full capacity. By the end of 2021, we are planning for all ships to be ready to sail at full capacity. We plan to continue gradually launching ships from each brand through April 1, 2022. Refer to “Item 1A. Risk Factors” for further details regarding the uncertainties of returning to sailing at full fleet capacity.
Modified Policies
On or around March 6, 2020, the Company’sOur brands have launched new cancellation policies for certain sailings booked during certain time periods to permit itsour guests to cancel cruises which arewere not part of the Company’sour temporary suspension of voyages up to 48 hours or 15 days depending on the brand, prior to embarkation and receive a refund in the form of a credit to be applied toward a future cruise. These programs are currently in place for cruises booked through specific time periods specified by brand, and for cruises scheduled to embark through specified timeOctober 31, 2021. Certain cruises booked for certain periods, depending on the brand.will be permitted a 60-day cancellation window for refunds. The future cruise credit iscredits issued under these programs are valid for any sailing through December 31, 2022, and the Companywe may extend this offer. the length of time these future cruise credits may be redeemed. The use of such credits may prevent us from garnering certain future cash collections as staterooms booked by guests with such credits will not be available for sale, resulting in less cash collected from bookings to new guests. The CompanyWe may incur incremental commission expense for the use of these future cruise credits.
In addition, to provide more flexibility to itsour guests, the Company haswe have also introduced a newextended our modified final payment schedule for all 2020 voyages on Regent Seven Seas Cruises through September 30, 2021, on Oceania Cruises through October 31, 2021 and for specified future voyages, and for the majority of voyages on Norwegian Cruise Line through March 31, 2022, which now requires payment 60 days prior to embarkation versus the standard 120 days. Our brands currently expect to provide cash refunds for cash bookings for future sailings we may cancel.
Update on Bookings
The extended suspension of cruise voyages has significantly impacted advanced bookings for the remainder of 2020, which are meaningfully lower than the prior year and at lower prices. Despite limited marketing efforts, there continuesBookings continue to be demandstrong for future cruise vacations. While booking volumesperiods despite reduced sales and marketing investments and a travel agency industry that has not been at full strength since the emergencestart of COVID-19 remain below historical levels, the Company’spandemic. 2022 booking and pricing trends continue to be very positive driven by strong pent-up demand. The Company is experiencing robust future demand across all brands with the overall cumulative booked position andfor full year 2022 meaningfully ahead of 2019’s record levels at higher pricing for 2021 are within historical rangeseven when including bookings made withthe dilutive impact of future cruise credits.
Our operations may be suspended beyond our announced suspensions depending on the status of the CDC No Sail Order, the development of the COVID-19 outbreak, global travel restrictions and port availability and any additional voluntary suspensions we may determine appropriate. Asas a result, current booking data for 2020 may not be informative. In addition, because of our updated cancellation policies, bookings may not be representative of actual cruise revenues.
The ongoing effects of COVID-19 onThere are remaining uncertainties about when our operationsfull fleet will be back in service at historical occupancy levels and, global bookings have had, and we believe they will continue to have, a significant impact on our financial results and liquidity, and such negative impact may continue well beyond the containment of the pandemic. Significant events affecting travel, including COVID-19, typically have an impact on the demand for cruise vacations, with the full extent of the impact generally determined by the length of time the event influences travel decisions. Due to the unknown duration and extent of the COVID-19 pandemic, travel restrictions and
37
advisories, the potential unavailability of ports and/or destinations, unknown cancellations and timing of redeployments and a general impact on consumer sentiment regarding cruise travel,accordingly, we cannot estimate the impact on our business, financial condition or near- or longer-term financial or operational results with certainty, butcertainty; however, we will report a net loss for the three months ending September 30, 2021 and expect to report a net loss on both a GAAP and adjusted basisuntil we are able to resume regular voyages, including for the year ending December 31, 2020.
Crew Repatriation Efforts
The Company2021. Refer to “Item 1A. Risk Factors” for further details regarding the significant impact the COVID-19 pandemic has successfully completed the safe repatriation of the majority of its shipboard team membershad, and is expected to their homes around the globe. The Company has workedcontinue to repatriate over 21,000 shipboard team members, to over 75 countries, through a combination of charteredhave, on our financial condition and commercial air flights as well as the use of certain of the Company’s ships. The Company expects the repatriation efforts to be largely completed within 45 days.operations.
Financing Transactions and Cost Containment Measures
Since March 2020,In 2021, we have taken severalcontinued to take actions to bolster our financial condition while our global cruise voyages are currently suspended, including a series ofdisrupted. In March 2021, we received additional financing through various debt financings and NCLH’s equity financing transactions completedoffering, collectively totaling $2.7 billion in May and July 2020.gross proceeds. From the proceeds, approximately $1.5 billion was used to extinguish debt. Refer to Note 6 – “Long-Term Debt” for further details about the above transactions.
We have also undertakenundertook several proactive cost reduction and cash conservation measures to mitigate the financial and operational impacts of the COVID-19 throughpandemic, including the reduction of capital expenditures described under “Liquidity and Capital Resources” belowdeferral of debt amortization as
35
well as a reduction in operating expenses, including ship operating expenses and selling, general and administrative expenses. Cost savings initiatives to reduce selling, general and administrative expenses, which had already been implemented includeat the beginning of 2021, included the significant reduction or deferral of marketing expenditures, the implementation of a company-wide hiring freeze, the introduction offreezes, a temporary shortened work week and reduced work hours with a commensurate 20% salary or hours reduction for certain shoreside team members, a pause in the Company’sour 401(k) matching contributions, and corporate travel freezes for shoreside employees. Further,employees, and employee furloughs. Some of these cost savings initiatives have been discontinued as partwe begin our resumption of the Company’s ongoing strategy to improve its ability to sustain the long-term health of the business and to preserve financial flexibility during the COVID-19 crisis, the Company has furloughed approximately 20% of the Company’s shoreside employees through October 25, 2020, subject to change based on business needs. While on furlough, employees will not receive salary or hourly wages, but will continue to receive health benefit coverage if they currently participate in a Company sponsored plan.cruise voyages.
See “—Liquidity and Capital Resources” below for more information.
Quarterly Overview
Three months ended June 30, 20202021 (“2020”2021”) compared to three months ended June 30, 20192020 (“2019”2020”)
● | Total revenue decreased |
● | Net |
● | Operating loss was |
38
● | Adjusted Net Loss was $(713.8) million in 2021, which included $153.8 million of adjustments primarily consisting of expenses related to losses on to our debt conversion options. Adjusted Net Loss was $(668.0) million in 2020, which included $283.1 million of adjustments primarily |
● | Adjusted EBITDA decreased |
We refer you to our “Results of Operations” below for a calculation of Net Revenue, Adjusted Net IncomeLoss and Adjusted EBITDA.
Results of Operations
The following table sets forth operating data as a percentage of total revenue:selected statistical information:
| | | | | | | | | | |
| | Three Months Ended | | | Six Months Ended | | ||||
| | June 30, | | | June 30, | | ||||
|
| 2020 |
| 2019 |
|
| 2020 |
| 2019 |
|
Revenue | | | | | | | | | | |
Passenger ticket |
| 81.7 | % | 70.9 | % |
| 67.6 | % | 70.2 | % |
Onboard and other |
| 18.3 | % | 29.1 | % |
| 32.4 | % | 29.8 | % |
Total revenue |
| 100.0 | % | 100.0 | % |
| 100.0 | % | 100.0 | % |
Cruise operating expense | |
| | | | |
| | | |
Commissions, transportation and other |
| 204.4 | % | 17.9 | % |
| 29.0 | % | 17.2 | % |
Onboard and other |
| 18.8 | % | 6.4 | % |
| 6.2 | % | 6.1 | % |
Payroll and related |
| 760.5 | % | 13.8 | % |
| 29.7 | % | 14.7 | % |
Fuel |
| 289.4 | % | 6.0 | % |
| 13.8 | % | 6.5 | % |
Food |
| 41.3 | % | 3.3 | % |
| 4.4 | % | 3.6 | % |
Other |
| 467.5 | % | 10.2 | % |
| 19.4 | % | 10.1 | % |
Total cruise operating expense |
| 1,781.9 | % | 57.6 | % |
| 102.5 | % | 58.2 | % |
Other operating expense | |
| | | | |
| | | |
Marketing, general and administrative |
| 771.2 | % | 14.4 | % |
| 31.7 | % | 15.9 | % |
Depreciation and amortization |
| 1,058.8 | % | 9.4 | % |
| 29.9 | % | 10.6 | % |
Impairment loss | | — | % | — | % | | 127.2 | % | — | % |
Total other operating expense |
| 1,830.0 | % | 23.8 | % |
| 188.8 | % | 26.5 | % |
Operating income (loss) |
| (3,511.9) | % | 18.6 | % |
| (191.3) | % | 15.3 | % |
Non-operating income (expense) | |
| | | | |
| | | |
Interest expense, net |
| (712.3) | % | (3.9) | % |
| (15.0) | % | (4.5) | % |
Other income (expense), net |
| (1,430.9) | % | 0.2 | % |
| (18.7) | % | 0.1 | % |
Total non-operating income (expense) |
| (2,143.2) | % | (3.7) | % |
| (33.7) | % | (4.4) | % |
Net income (loss) before income taxes |
| (5,655.1) | % | 14.9 | % |
| (225.0) | % | 10.9 | % |
Income tax benefit (expense) |
| 37.1 | % | (0.3) | % |
| 0.8 | % | 0.9 | % |
Net income (loss) |
| (5,618.0) | % | 14.6 | % |
| (224.2) | % | 11.8 | % |
| | | | | | | | | |
| | Three Months Ended | | Six Months Ended | | ||||
| | June 30, | | June 30, | | ||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 |
|
Passengers carried |
| — |
| — |
| — |
| 499,729 |
|
Passenger Cruise Days |
| — |
| — |
| — |
| 4,278,602 |
|
Capacity Days |
| — |
| — |
| — |
| 4,123,858 |
|
Occupancy Percentage |
| | | | | | | 103.8 | % |
39
The following table sets forth selected statistical information:
| | | | | | | | | |
| | Three Months Ended | | Six Months Ended | | ||||
| | June 30, | | June 30, | | ||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 |
|
Passengers carried |
| — |
| 682,935 |
| 499,729 |
| 1,327,987 |
|
Passenger Cruise Days |
| — |
| 5,014,083 |
| 4,278,602 |
| 9,989,523 |
|
Capacity Days |
| — |
| 4,626,871 |
| 4,123,858 |
| 9,343,800 |
|
Occupancy Percentage |
| | | 108.4 | % | 103.8 | % | 106.9 | % |
Net Revenue, Gross Yield and Net Yield were calculated as follows (in thousands, except Capacity Days and Yield data):
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended | ||||||||||||||
| | June 30, | | June 30, | ||||||||||||||
|
| | |
| 2020 |
| | |
| | |
| 2020 |
| | | ||
| | | | | Constant | | | | | | | | Constant | | | | ||
| | 2020 | | Currency | | 2019 | | 2020 | | Currency | | 2019 | ||||||
Passenger ticket revenue | | $ | 13,835 | | $ | 13,847 | | $ | 1,179,404 | | $ | 854,626 | | $ | 854,638 | | $ | 2,152,677 |
Onboard and other revenue | |
| 3,094 | |
| 3,094 | |
| 484,873 | |
| 409,185 | |
| 409,185 | |
| 915,230 |
Total revenue | |
| 16,929 | |
| 16,941 | |
| 1,664,277 | |
| 1,263,811 | |
| 1,263,823 | |
| 3,067,907 |
Less: | | |
| | |
| | | | | |
| | |
| | | |
Commissions, transportation and other expense | |
| 34,601 | |
| 34,699 | |
| 297,691 | |
| 366,969 | |
| 367,066 | |
| 526,955 |
Onboard and other expense | |
| 3,188 | |
| 3,188 | |
| 107,063 | |
| 78,161 | |
| 78,161 | |
| 186,476 |
Net Revenue | | $ | (20,860) | | $ | (20,946) | | $ | 1,259,523 | | $ | 818,681 | | $ | 818,596 | | $ | 2,354,476 |
Capacity Days | |
| — | |
| — | |
| 4,626,871 | |
| 4,123,858 | |
| 4,123,858 | |
| 9,343,800 |
Gross Yield | | | | | | | | $ | 359.70 | | | | | | | | $ | 328.34 |
Net Yield | | | | | | | | $ | 272.22 | | | | | | | | $ | 251.98 |
4036
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)thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended | | Three Months Ended | | Six Months Ended | ||||||||||||||||||||||||||||
| | June 30, | | June 30, | | June 30, | | June 30, | ||||||||||||||||||||||||||||
| | | | | 2020 | | | | | | | | 2020 | | | | | | | | 2021 | | | | | | | | 2021 | | | | ||||
|
| | |
| Constant |
| | |
| | |
| Constant |
| | |
| | |
| Constant |
| | |
| | |
| Constant |
| | | ||||
| | 2020 | | Currency | | 2019 | | 2020 | | Currency | | 2019 | | 2021 | | Currency | | 2020 | | 2021 | | Currency | | 2020 | ||||||||||||
Total cruise operating expense | | $ | 301,652 | | $ | 302,552 | | $ | 958,424 | | $ | 1,295,912 | | $ | 1,296,812 | | $ | 1,785,075 | | $ | 249,727 | | $ | 246,884 | | $ | 301,652 | | $ | 450,582 | | $ | 446,491 | | $ | 1,295,912 |
Marketing, general and administrative expense | |
| 130,562 | |
| 130,726 | |
| 239,988 | |
| 400,469 | |
| 400,633 | |
| 488,322 | |
| 184,901 | |
| 183,242 | |
| 130,562 | |
| 387,967 | |
| 384,616 | |
| 400,469 |
Gross Cruise Cost | |
| 432,214 | |
| 433,278 | |
| 1,198,412 | |
| 1,696,381 | |
| 1,697,445 | |
| 2,273,397 | |
| 434,628 | |
| 430,126 | |
| 432,214 | |
| 838,549 | |
| 831,107 | |
| 1,696,381 |
Less: | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | |
Commissions, transportation and other expense | |
| 34,601 | |
| 34,699 | |
| 297,691 | |
| 366,969 | |
| 367,066 | |
| 526,955 | |
| 6,564 | |
| 6,374 | |
| 34,601 | |
| 15,597 | |
| 15,355 | |
| 366,969 |
Onboard and other expense | |
| 3,188 | |
| 3,188 | |
| 107,063 | |
| 78,161 | |
| 78,161 | |
| 186,476 | |
| 1,276 | |
| 1,276 | |
| 3,188 | |
| 2,535 | |
| 2,535 | |
| 78,161 |
Net Cruise Cost | |
| 394,425 | |
| 395,391 | |
| 793,658 | |
| 1,251,251 | |
| 1,252,218 | |
| 1,559,966 | |
| 426,788 | |
| 422,476 | |
| 394,425 | |
| 820,417 | |
| 813,217 | |
| 1,251,251 |
Less: Fuel expense | |
| 48,992 | |
| 48,992 | |
| 100,531 | |
| 174,016 | |
| 174,016 | |
| 198,784 | |
| 54,090 | |
| 54,090 | |
| 48,992 | |
| 96,693 | |
| 96,693 | |
| 174,016 |
Net Cruise Cost Excluding Fuel | |
| 345,433 | |
| 346,399 | |
| 693,127 | |
| 1,077,235 | |
| 1,078,202 | |
| 1,361,182 | |
| 372,698 | |
| 368,386 | |
| 345,433 | |
| 723,724 | |
| 716,524 | |
| 1,077,235 |
Less Non-GAAP Adjustments: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Non-cash deferred compensation (1) | |
| 666 | |
| 666 | |
| 534 | |
| 1,332 | |
| 1,332 | |
| 1,068 | |
| 905 | |
| 905 | |
| 666 | |
| 1,810 | |
| 1,810 | |
| 1,332 |
Non-cash share-based compensation (2) | |
| 22,389 | |
| 22,389 | |
| 29,651 | |
| 55,147 | |
| 55,147 | |
| 56,650 | |
| 22,451 | |
| 22,451 | |
| 22,389 | |
| 49,052 | |
| 49,052 | |
| 55,147 |
Redeployment of Norwegian Joy (3) | |
| — | |
| — | |
| 2,035 | |
| — | |
| — | |
| 7,051 | ||||||||||||||||||
Adjusted Net Cruise Cost Excluding Fuel | | $ | 322,378 | | $ | 323,344 | | $ | 660,907 | | $ | 1,020,756 | | $ | 1,021,723 | | $ | 1,296,413 | | $ | 349,342 | | $ | 345,030 | | $ | 322,378 | | $ | 672,862 | | $ | 665,662 | | $ | 1,020,756 |
Capacity Days | |
| — | |
| — | |
| 4,626,871 | |
| 4,123,858 | |
| 4,123,858 | |
| 9,343,800 | ||||||||||||||||||
Gross Cruise Cost per Capacity Day | | | | | | | | $ | 259.01 | | | | | | | | $ | 243.31 | ||||||||||||||||||
Net Cruise Cost per Capacity Day | | | | | | | | $ | 171.53 | | | | | | | | $ | 166.95 | ||||||||||||||||||
Net Cruise Cost Excluding Fuel per Capacity Day | | | | | | | | $ | 149.80 | | | | | | | | $ | 145.68 | ||||||||||||||||||
Adjusted Net Cruise Cost Excluding Fuel per Capacity Day | | | | | | | | $ | 142.84 | | | | | | | | $ | 138.75 |
(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. |
4137
Adjusted Net Income (Loss)Loss was calculated as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended | | Three Months Ended | | Six Months Ended | ||||||||||||||||
| | June 30, | | June 30, | | June 30, | | June 30, | ||||||||||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||||||
Net income (loss) | | $ | (951,065) | | $ | 243,276 | | $ | (2,833,331) | | $ | 362,680 | ||||||||||||
Net loss | | $ | (867,524) | | $ | (951,065) | | $ | (2,189,986) | | $ | (2,833,331) | ||||||||||||
Non-GAAP Adjustments: | | | | | | | | | | | | | | | | | | | | | | | | |
Non-cash deferred compensation (1) | |
| 992 | |
| 879 | |
| 1,983 | |
| 1,758 | |
| 1,004 | |
| 992 | |
| 2,007 | |
| 1,983 |
Non-cash share-based compensation (2) | |
| 22,389 | |
| 29,651 | |
| 55,147 | |
| 56,650 | |
| 22,451 | |
| 22,389 | |
| 49,052 | |
| 55,147 |
Extinguishment and modification of debt (3) | |
| 21,159 | |
| 1,175 | |
| 21,159 | |
| 7,268 | |
| — | |
| 21,159 | |
| 289,190 | |
| 21,159 |
Amortization of intangible assets (4) | |
| 2,773 | |
| 4,603 | |
| 5,547 | |
| 9,206 | |
| — | |
| 2,773 | |
| — | |
| 5,547 |
Redeployment of Norwegian Joy (5) | |
| — | |
| 5,601 | |
| — | |
| 30,629 | ||||||||||||
Impairment loss (6) | | | 175 | | | — | | | 1,633,337 | | | — | ||||||||||||
Debt conversion option, discount and expenses (7) | |
| 235,612 | |
| — | |
| 235,612 | |
| — | ||||||||||||
Adjusted Net Income (Loss) | | $ | (667,965) | | $ | 285,185 | | $ | (880,546) | | $ | 468,191 | ||||||||||||
Impairment loss (5) | | | — | | | 175 | | | — | | | 1,633,337 | ||||||||||||
Debt conversion option, discount and expenses (6) | |
| 130,311 | |
| 235,612 | |
| 468,605 | |
| 235,612 | ||||||||||||
Adjusted Net Loss | | $ | (713,758) | | $ | (667,965) | | $ | (1,381,132) | | $ | (880,546) |
(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) | Losses on extinguishment of debt and modification of debt are included in interest expense, net. |
(4) | Amortization of intangible assets related to the Acquisition of Prestige, which are included in depreciation and amortization expense. |
(5) |
Impairment loss consists of goodwill, |
Consists of non-cash gains and losses related to our debt conversion options, |
42
EBITDA and Adjusted EBITDA were calculated as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended | | Three Months Ended | | Six Months Ended | ||||||||||||||||
| | June 30, | | June 30, | | June 30, | | June 30, | ||||||||||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||||||
Net income (loss) | | $ | (951,065) | | $ | 243,276 | | $ | (2,833,331) | | $ | 362,680 | ||||||||||||
Net loss | | $ | (867,524) | | $ | (951,065) | | $ | (2,189,986) | | $ | (2,833,331) | ||||||||||||
Interest expense, net | |
| 120,585 | |
| 65,969 | |
| 189,492 | |
| 139,472 | |
| 179,448 | |
| 120,585 | |
| 639,780 | |
| 189,492 |
Income tax (benefit) expense | |
| (6,287) | |
| 3,965 | |
| (10,384) | |
| (30,472) | |
| 927 | |
| (6,287) | |
| 2,655 | |
| (10,384) |
Depreciation and amortization expense | |
| 179,252 | |
| 156,271 | |
| 377,449 | |
| 326,012 | |
| 174,262 | |
| 179,252 | |
| 344,578 | |
| 377,449 |
EBITDA | |
| (657,515) | |
| 469,481 | |
| (2,276,774) | |
| 797,692 | |
| (512,887) | |
| (657,515) | |
| (1,202,973) | |
| (2,276,774) |
Other (income) expense, net (1) | |
| 242,230 | |
| (3,616) | |
| 236,407 | |
| (3,182) | |
| 82,627 | |
| 242,230 | |
| 371,892 | |
| 236,407 |
Non-GAAP Adjustments: | |
|
| |
|
| |
|
| |
|
| ||||||||||||
Other Non-GAAP Adjustments: | |
|
| |
|
| |
|
| |
|
| ||||||||||||
Non-cash deferred compensation (2) | |
| 666 | |
| 534 | |
| 1,332 | |
| 1,068 | |
| 905 | |
| 666 | |
| 1,810 | |
| 1,332 |
Non-cash share-based compensation (3) | |
| 22,389 | |
| 29,651 | |
| 55,147 | |
| 56,650 | |
| 22,451 | |
| 22,389 | |
| 49,052 | |
| 55,147 |
Redeployment of Norwegian Joy (4) | |
| — | |
| 2,035 | |
| — | |
| 7,051 | ||||||||||||
Impairment loss (5) | |
| — | |
| — | |
| 1,607,797 | |
| — | ||||||||||||
Impairment loss (4) | |
| — | |
| — | |
| — | |
| 1,607,797 | ||||||||||||
Adjusted EBITDA | | $ | (392,230) | | $ | 498,085 | | $ | (376,091) | | $ | 859,279 | | $ | (406,904) | | $ | (392,230) | | $ | (780,219) | | $ | (376,091) |
(1) | Primarily consists of |
(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) |
Impairment loss consists of goodwill and |
38
Three months ended June 30, 20202021 (“2020”2021”) compared to three months ended June 30, 20192020 (“2019”2020”)
Revenue
Total revenue decreased 99.0%74.2% to $4.4 million in 2021 compared to $16.9 million in 2020 compared to $1.7 billion in 2019. Net Revenue decreased 101.7% to $(20.9) million in 2020 from $1.3 billion in 2019.2020. In 2021 and 2020, our total revenue was insignificant. The adverse impact on revenue and Net Revenue was due to the cancellation of sailings inbeginning March 13, 2020 as a result of the COVID-19 pandemic.All guests were disembarked from the 28 ships in the Company’s fleet by March 28, 2020.
Expense
Total cruise operating expense decreased 68.5%17.2% in 20202021 compared to 2019.2020. In 2020,2021, our cruise operating expenses were primarily related to crew costs, including salaries, food and other travel costs; fuel; and other ongoing costs such as insurance and ship maintenance. Additionally, in 2020, our cruise operating expenses were increased due to costs associated with the suspension of cruise voyages, including the cost of crew repatriation and the continued payment of protected commissions. Gross Cruise Cost increased 0.6% in 2021 compared to 2020 primarily related to the decrease in costs described above offset by an increase in marketing, general and administrative expenses as we prepare to return to sailing. Total other operating expense increased 15.9% in 2021 compared to 2020 primarily due to the increase in marketing, general and administrative costs as a result of increased advertising costs as well as an increase in salaries and benefits as we return to a more normalized cost structure.
Interest expense, net was $179.4 million in 2021 compared to $120.6 million in 2020. The increase in interest expense reflects additional debt outstanding at higher interest rates, partially offset by lower LIBOR. Also, included in 2020 were losses on extinguishment of debt and debt modification costs of $21.2 million.
Other income (expense), net was expense of $82.6 million in 2021 compared to $242.2 million in 2020. The expenses were primarily due to losses from conversion options on our exchangeable notes.
Six months ended June 30, 2021 (“2021”) compared to six months ended June 30, 2020 (“2020”)
Revenue
Total revenue decreased 99.4% to $7.5 million in 2021 compared to $1.3 billion in 2020. In 2020, voyages were cancelled beginning March 13, 2020. In 2021, our total revenue was insignificant. The adverse impact on revenue was due to the cancellation of sailings in 2021 as a result of the COVID-19 pandemic.
Expense
Total cruise operating expense decreased 65.2% in 2021 compared to 2020. In 2021, our cruise operating expenses were primarily related to crew costs, including salaries, food and other travel costs; fuel; and other ongoing costs such as insurance and ship maintenance. In 2020, our cruise operating expenses subsequent to the suspension of cruise voyages on March 13, 2020 primarily included the cost of protected commissions as additional sailings were cancelled;and crew costs, including salaries, food and other repatriation costs; and fuel. The Company has repatriated the majority of its crew. To repatriate crew as soon as possible, the Company is leveraging certain ships in its fleet to assist with the repatriation efforts along with utilizing scheduled chartered flights.costs. Gross Cruise Cost decreased 63.9%50.6% in 20202021 compared to 20192020 primarily related to the change in costs described above in addition to a decrease in marketing, general and administrative expenses from cost savings initiatives in connection with the COVID-19 pandemic and as described under “Update Regarding COVID-19 Pandemic—Financing Transactions and Cost Containment Measures.” Total other operating expense decreased 21.8%69.3% in 20202021 compared to 20192020 primarily due to the cost savings described aboveimpairment of goodwill and trade names triggered by the COVID-19 pandemic in marketing, general and administrative expenses offset by an increase in depreciation and amortization expense.2020. Depreciation and amortization expense increaseddecreased primarily due to a $25.5 million impairment loss recognized in 2020.
Interest expense, net was $639.8 million in 2021 compared to $189.5 million in 2020. The increase in interest expense reflects losses on extinguishment of debt and debt modification costs of $289.2 million primarily related to the deliveryrepurchase of Norwegian Encore in the fourth quarter of 2019 and Seven Seas Splendor in the first quarter of 2020Private Exchangeable Notes as well as ship improvement projects.additional debt outstanding at higher interest rates, partially offset by lower LIBOR.
4339
Interest expense, net was $120.6 million in 2020 compared to $66.0 million in 2019. The change in interest expense reflects additional debt outstanding, partially offset by lower LIBOR. Included in 2020 were losses on extinguishment of debt and debt modification costs of $21.2 million compared to $1.2 million in 2019.
Other income (expense), net was expense of $242.2$371.9 million in 20202021 compared to income of $3.6$236.4 million in 2019. In 2020, the expense was2020. The expenses were primarily due to losses from conversion options on our exchangeable notes.
In 2020, we had an income tax benefit of $6.3 million compared to expense of $4.0 million in 2019. In 2020, the tax benefit is due to operating losses.
Six months ended June 30, 2020 (“2020”) compared to six months ended June 30, 2019 (“2019”)
Revenue
Total revenue decreased 58.8% to $1.3 billion in 2020 compared to $3.1 billion in 2019. Net Revenue decreased 65.2% to $0.8 billion in 2020 from $2.4 billion in 2019. The adverse impact on revenue and Net Revenue was due to the cancellation of sailings in 2020 as a result of the COVID-19 pandemic, which resulted in a 55.9% decrease in Capacity Days. All guests were disembarked from the 28 ships in the Company’s fleet by March 28, 2020.
Expense
Total cruise operating expense decreased 27.4% in 2020 compared to 2019. In 2020, our expenses subsequent to the suspension of cruise voyages primarily includes the cost of protected commissions and crew costs as discussed above. Additionally, during the first quarter of 2020, there was a notable increase from 2019 in fuel expense associated with the International Maritime Organization’s 2020 regulations, and cruise operating expense increased due to the addition of Norwegian Encore and Seven Seas Splendor to the fleet. Gross Cruise Cost decreased 25.4% in 2020 compared to 2019 primarily due to the changes in cruise operating costs described above in addition to a decrease in marketing, general and administrative expenses, which is primarily due to the cost reductions in marketing and salaries described above. Total other operating expense increased 193.0% in 2020 compared to 2019 primarily due to the impairment of goodwill and tradenames triggered by the COVID-19 pandemic. Depreciation and amortization expense increased primarily due to the delivery of Norwegian Encore in the fourth quarter of 2019 and Seven Seas Splendor in the first quarter of 2020 as well as ship improvement projects.
Interest expense, net was $189.5 million in 2020 compared to $139.5 million in 2019. The change in interest expense reflects additional debt outstanding, partially offset by lower LIBOR. Included in 2020 were losses on extinguishment of debt and debt modification costs of $21.2 million compared to $7.3 million in 2019.
Other income (expense), net was expense of $236.4 million in 2020 compared to income of $3.2 million in 2019. In 2020, the expense was primarily due to losses from conversion options on our exchangeable notes. In 2019, the income was primarily due to gains from insurance proceeds and a litigation settlement partially offset by foreign currency exchange losses.
In 2020, we had an income tax benefit of $10.4 million compared to $30.5 million in 2019. In 2020, the tax benefit is due to operating losses and the reversal of a valuation allowance. During 2018, we implemented certain tax restructuring strategies that created our ability to utilize the net operating loss carryforwards of Prestige, for which we had previously provided a full valuation allowance. As a result, we recorded a tax benefit of $35.7 million in connection with the reversal of substantially all of the valuation allowance in 2019.
Liquidity and Capital Resources
General
As of June 30, 2020,2021, our liquidity was $2.3$2.7 billion consisting of cash and cash equivalents. This does not include additional proceeds received
In January 2021, we amended our Senior Secured Credit Facility to further defer certain amortization payments due prior to June 30, 2022 and to waive certain financial and other covenants through December 31, 2022. In connection with such amendment, our minimum liquidity requirement was increased to $200 million and such requirement applies through December 31, 2022.
In addition, in February 2021, we amended certain of our export-credit backed facilities to defer amortization payments aggregating approximately $680 million through March 31, 2022. We also amended all of our export-credit backed facilities to provide that, from the July capital raise discussed below.
44
Tableeffective date of Contentsthe amendments to and including December 31, 2022, certain of the financial covenants under such facilities will be suspended and the free liquidity test will be replaced by a covenant to maintain at least $200 million in free liquidity. The amendments also made certain other changes to the facilities, including imposing further restrictions on NCLC’s ability to incur debt, create security, issue equity and make dividends and other distributions.
Since March 2020, we have taken several actions to bolster our financial condition while our global cruise voyages are suspended.
In March 2020, NCLC borrowed2021, the full amount of $1.55 billion under its $875 million Revolving Loan Facility and its $675 million Epic Credit Facility, dated as of March 5, 2020. We have taken additional measures to improve our liquidity by refinancing existing debt amortization, including under our agreements with export credit agencies and related governments, and extending the maturities and refinancing amortization under other agreements, which has resulted in approximately $1.6 billion of payment deferrals. See Note 8 – “Long-Term Debt” for further information. Through June 30, 2020, the NCLH and NCLCCompany received additional financing through various debt financings and anNCLH’s equity offering, collectively totaling $2.4$2.7 billion in gross proceeds. The Pride of America Credit Facility and Jewel Credit Facility were extinguished from proceeds of the debt financings. We also extinguished the Private Exchangeable Notes in March 2021 by using approximately $1.0 billion of cash proceeds from NCLH’s equity offering which was recognized as a capital contributioncompleted in March 2021 to NCLC, resulted in 41,818,181 NCLH shares being issued in exchange for gross proceeds of $460 million.repurchase the notes. See Note 86 – “Long-Term Debt” for further information oninformation.
In July 2021, we amended nine credit facilities for our newbuild agreements and increased the debt financings. Subsequentcombined commitments under such credit facilities by approximately $770 million to June 30, 2020,cover owner’s supply (generally consists of provisions for the NCLHship), modifications and NCLC received another $1.5 billion in gross proceeds from additional debt financings and an additional equity offering, of which approximately $675 million was used to repay in full and terminate the Epic Credit Facility. Refer to Note 8 – “Long-Term Debt” for further information on the debt financings and Note 16 – “Subsequent Events” for further information on the equity financing.financing premiums.
The Company has also undertaken several proactive cost reduction and cash conservation measures to mitigate the financial and operational impacts of the COVID-19 pandemic, through the reduction of capital expenditures and operating expenses, including food, fuel, insurance, port charges and reduced crew manning of vessels during the suspension, resulting in lower crew payroll expense. See “—Update“Update Regarding COVID-19 Pandemic—Financing Transactions and Cost Containment Measures” above for further information.
After giving effect to the debt deferrals and cash conservation measures implemented, including the potential deferral of or loans for near-term newbuild related payments, the Company’s targetedThe Company's monthly average cash burn is onfor the second quarter 2021 was approximately $200 million, higher than prior guidance of approximately $190 million and above the prior quarter, as it prepared for a return to service this summer. Return to service expenses are primarily related to repositioning, provisioning and staffing of vessels, implementing new health and safety protocols and a measured ramp up of demand generating marketing investments. Looking ahead, we expect third quarter 2021 monthly average cash burn to increase to approximately $160$285 million per month duringdriven by the suspensioncontinued phased relaunch of operations. This includesadditional vessels.
Cash burn rates include ongoing ship operating expenses, administrative operating costs,expenses, interest expense, (including additional expense per month from the capital markets transactions completed in July 2020), taxes, debt deferral fees and expected necessarynon-newbuild capital expenditures. This excludesexpenditures and exclude cash refunds of customer deposits which are estimated to be, based on behavior to date, approximately 60% of the Company’s balance of advance ticket sales during the suspension of cruise voyages, as well as incoming cash inflows from new and existing bookings, newbuild related capital expenditures and paymentsother working capital changes. Future cash burn rate estimates also exclude unforeseen expenses. The second quarter 2021 cash burn rate and third quarter estimate also reflect the deferral of debt amortization and newbuild related payments.
We continue to expect a gradual phased relaunch of our ships, with our ships initially operating at reduced occupancy levels as described in “Update Regarding COVID-19 Pandemic— Preparation for the Safe Resumption of Operations.” Refer to “Item 1A. Risk Factors” for further details regarding the significant impact the COVID-19 pandemic has had,
40
and is expected to continue to have, on existing bookings. our financial condition and operations. The estimation of our future cash flow projections includes numerous assumptions that are subject to various risks and uncertainties. Refer to Note 2 – “Summary of Significant Accounting Policies” for further information on liquidity and management’s plan.
There can be no assurance that the percentageaccuracy of passengers that accept future cruise certificates over cash refunds will remain in this range as the number of cancelled voyages increases. This also excludes expenses and costs associated with restarting operations and assumes deferral of newbuild capital expenditures and debt amortization through March 31, 2021. Theassumptions used to estimate our liquidity requirements presented are an estimatewill be correct, and do not include unforeseen expenses. our ability to be predictive is uncertain due to the unknown magnitude and duration of the COVID-19 global pandemic. Based on the liquidity needs described aboveestimates and our current resources, the Company haswe have concluded we have sufficient liquidity to satisfy our obligations overfor at least the next twelve monthsmonths. Nonetheless, we anticipate that we will need additional equity and/or debt financing to fund our operations in the future if we are unable to resume our cruise voyages on the schedule expected, and maintain minimum levels of liquidity as required by certainparticularly if a substantial portion of our debt agreements.fleet continues to have suspended cruise voyages for a prolonged period.
We have received certain financial and other debt covenant waivers through December 31, 2022 and added new free liquidity requirements. At June 30, 2020,2021, taking into account such waivers, we were in compliance with all of our debt covenants. As part of the Hermes debt holiday and the Supplemental Agreements we have obtained lender consents to waive compliance with financial covenants for a deferral period from April 1, 2020 to March 31, 2021. If we do not continue to remain in compliance with our covenants, we would have to seek to amend the covenants. However, no assurances can be made that such amendments would be approved by our lenders. Generally, if an event of default under any debt agreement occurs, then pursuant to cross default and/or cross acceleration clauses, substantially all of our outstanding debt and derivative contract payables could become due, and all debt and derivative contracts could be terminated, which couldwould have a material adverse impact to our operations and liquidity.
InSince March 2020, Moody’s has downgraded theour long-term issuer rating to B2, our senior secured rating to B1 and our senior unsecured debt ratings of NCLCrating to Ba2 from Ba1, including its corporate family rating and senior secured bank facility, and to B1 from Ba2 on its senior unsecured rating; and in July 2020, Moody’s placed our ratings on review for potential downgrade. InCaa1. Since April 2020, S&P Global has downgraded theour issuer credit rating of NCLCto B, lowered our issue-level rating on our $875 million Revolving Loan Facility and $1.5 billion Term Loan A Facility to BB- from BB+ and, in May 2020, based, our issue-level rating on our recent debt offering, lowered the issuer-level rating on NCLC’s$675 million 2024 Senior Secured Notes and $750 million 2026 Senior Secured Notes to B+ and our senior unsecured notesrating to B+ from BB- and placed our issuer rating on credit watch with negative implications.B-. If our credit ratings were to be further downgraded, or general market conditions were to ascribe higher risk to our rating levels, our industry, or us, our access to capital and the cost of any debt or equity financing will be further negatively impacted. ThereWe also have significant capacity to incur additional indebtedness under our debt agreements. On May 20, 2021, NCLH’s shareholders authorized a 490,000,000 increase in the number of ordinary shares available for issuance. However, there is no guarantee that debt or equity financings will be available in the future to fund our obligations, or that they will be available on terms consistent with our expectations.
45
As of June 30, 2020, the Company has advanced2021, we had advance ticket sales of $1.2$1.4 billion, including the long-term portion, which includesincluded approximately $0.8 billion of future cruise credits. The CompanyWe also hashave agreements with itsour credit card processors that, govern approximately $0.9 billion atas of June 30, 20202021, governed approximately $1.2 billion in advance ticket sales that havehad been received by the Company relating to future voyages. These agreements allow the credit card processors to require under certain circumstances, including the existence of a material adverse change, excessive chargebacks and other triggering events, that the Company maintain a reserve which couldwould be satisfied by posting collateral. Currently, we have agreedAlthough the agreements vary, these requirements may generally be satisfied either through a percentage of customer payments withheld or providing cash funds directly to provide athe card processor. Any cash reserve consisting of $70 million of cash and preliminarily agreed to provide second priority liens on certain ships with a collective equity value of approximately $700 million based on appraisals as of December 31, 2019, whichor collateral requested could be increased or decreased based on certain conditions. Ifdecreased.
As of June 30, 2021, we dohad a reserve of approximately $800 million with a credit card processor recognized in accounts receivable, net or other long-term assets. Additionally, we are required to fund all refunds until further notice and 100% of incoming advance ticket sales deposits with this credit card processor will be withheld and are not meet an agreed upon minimum liquidity inexpected to be released until the future, wecredit card processor’s exposure is fully collateralized. As of June 30, 2021, the exposure was approximately $940 million. The reserve shortfall of approximately $140 million will decrease as refunds are funded, cruises are provided and amounts withheld by the credit card processor are allocated to the reserve rather than remitted to the Company. We may be required to pledge additional collateral and/or post cash reserves or take other actions that may further reduce our liquidity. Collateral may be released upon satisfaction of certain financial metrics.
41
Sources and Uses of Cash
In this section, references to “2021” refer to the six months ended June 30, 2021 and references to “2020” refer to the six months ended June 30, 2020 and references to “2019” refer to the six months ended June 30, 2019.2020.
Net cash used in operating activities was $1.3$1.5 billion in 20202021 as compared to net cash provided byused in operating activities of $1.1$1.3 billion in 2019.2020. The net cash used in operating activities included timing differences in cash receipts and payments relating to operating assets and liabilities. Advance ticket sales decreasedincreased by $191.6 million in 2021 compared to a decrease of $844.2 million in 2020 while our accounts receivable, net and prepaid expenses and other assets, which contain our reserves with credit card processors, decreased cash by $408.1 million and $242.6 million, respectively, compared to an increasea decrease of $558.6$2.1 million and $111.5 million, respectively, in 2019.2020.
Net cash used in investing activities was $0.8 billion$315.2 million in 2021 and $751.6 million in 2020, and $0.4 billion in 2019, primarily related to newbuild payments in 2021 and payments for Seven Seas Splendor and ship improvement projects.projects in 2020.
Net cash provided by financing activities was $1.2 billion in 2021 primarily due to the proceeds of $2.7 billion from our various notes and a contribution from NCLH’s equity offering partially offset by debt repayments and a related redemption premium associated with extinguishment of the Private Exchangeable Notes. Net cash provided by financing activities was $4.1 billion in 2020 primarily due to the proceeds of $4.0 billion from our revolving credit facilities, various notes, and newbuild loans partially offset by debt repayments. Additionally, we received a contribution of $464.5 million from NCLH. Net cash used in financing activities was $387.1 million in 2019 primarily due to a dividend to NCLH of $194.0 million, net repayments of our Revolving Loan Facility and the net refinancing of term loans offset by the issuance of new debt.
Future Capital Commitments
Future capital commitments consist of contracted commitments, including ship construction contracts. Anticipated expenditures related to ship construction contracts and future expected capital expenditures necessary for operations as well as our ship refurbishment projects. As of June 30, 2020, our anticipated capital expenditures, including capitalized interest, were $263.5 million$0.3 billion for the remainder of 2020, of which we have $47.6 million of2021 and $1.6 billion and $2.5 billion for the years ending December 31, 2022 and 2023, respectively. The Company has export credit financing in place for the anticipated expenditures related to ship construction contracts. Additionally,contracts of $0.2 billion for the Company is finalizingremainder of 2021 and $1.0 billion and $2.0 billion for the documentation to defer another approximately $38.5 million of the 2020 contractual payments related to ship construction. These futureyears ending December 31, 2022 and 2023, respectively. Future expected capital expenditures will significantly increase our depreciation and amortization expense.
Project Leonardo will introduce an additional six ships, each ranging from approximately 140,000 to 156,300 Gross Tons with approximately 3,3003,215 to 3,550 Berths, with expected delivery dates from 2022 through 2027, subject to certain conditions.2027. For the Regent brand, we have an order for one Explorer Class Ship to be delivered in 2023, which will be approximately 55,000 Gross Tons and 750 Berths. For the Oceania Cruises brand, we have orders for two Allura Class Ships to be delivered in 2023 and 2025. Each of the Allura Class Ships will be approximately 67,000 Gross Tons and 1,200 Berths. The impacts of COVID-19 on the shipyards where our ships are under construction (or will be constructed) have resulted in some delays in expected ship deliveries, and the impacts of COVID-19 could result in additional delays in ship deliveries in the future, which may be prolonged.
The combined contract prices of the nine ships on order for delivery was approximately €7.1€7.6 billion, or $8.0$9.0 billion based on the euro/U.S. dollar exchange rate as of June 30, 2020.2021. We have obtained export credit financing which is expected to fund approximately 80% of the contract price of each ship, subject to certain conditions. We do not anticipate any contractual breaches or cancellations to occur. However, if any such events were to occur, it could result
46
in, among other things, the forfeiture of prior deposits or payments made by us and potential claims and impairment losses which may materially impact our business, financial condition and results of operations.
Capitalized interest for the three months ended June 30, 2021 and 2020 and 2019 was $5.6$9.9 million and $8.5$5.6 million, respectively, and for the six months ended June 30, 2021 and 2020 and 2019 was $11.3$18.0 million and $16.3$11.3 million, respectively, primarily associated with the construction of our newbuild ships.
Off-Balance Sheet Arrangements
None.
42
Contractual Obligations
As of June 30, 20202021, our contractual obligations with initial or remaining terms in excess of one year, including interest payments on long-term debt obligations, included the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| | |
| Less than |
| | |
| | |
| More than |
| | |
| Less than |
| | |
| | |
| More than | ||||
| | Total | | 1 year | | 1-3 years | | 3-5 years | | 5 years | | Total | | 1 year | | 1-3 years | | 3-5 years | | 5 years | ||||||||||
Long-term debt (1) | | $ | 10,689,015 | | $ | 337,338 | | $ | 2,633,020 | | $ | 5,503,351 | | $ | 2,215,306 | | $ | 12,492,674 | | $ | 361,189 | | $ | 5,559,953 | | $ | 4,448,294 | | $ | 2,123,238 |
Operating leases (2) | |
| 260,427 | |
| 37,822 | |
| 63,082 | |
| 63,627 | |
| 95,896 | |
| 225,414 | |
| 29,674 | |
| 63,837 | |
| 62,971 | |
| 68,932 |
Ship construction contracts (3) | |
| 5,269,713 | |
| 262,397 | |
| 2,771,298 | |
| 2,236,018 | |
| — | |
| 8,749,304 | |
| 221,170 | |
| 3,888,840 | |
| 2,826,579 | |
| 1,812,715 |
Port facilities (4) | |
| 2,087,213 | |
| 70,137 | |
| 142,624 | |
| 150,104 | |
| 1,724,348 | |
| 2,031,604 | |
| 72,203 | |
| 142,445 | |
| 139,686 | |
| 1,677,270 |
Interest (5) | |
| 1,615,202 | |
| 359,847 | | | 669,540 | |
| 374,106 | |
| 211,709 | |
| 2,429,143 | |
| 565,867 | | | 1,042,441 | |
| 578,552 | |
| 242,283 |
Other (6) | |
| 1,295,758 | |
| 299,188 | |
| 482,063 | |
| 412,144 | |
| 102,363 | |
| 1,028,162 | |
| 279,624 | |
| 437,996 | |
| 307,960 | |
| 2,582 |
Total | | $ | 21,217,328 | | $ | 1,366,729 | | $ | 6,761,627 | | $ | 8,739,350 | | $ | 4,349,622 | | $ | 26,956,301 | | $ | 1,529,727 | | $ | 11,135,512 | | $ | 8,364,042 | | $ | 5,927,020 |
(1) | Long-term debt excludes discounts, premiums, deferred financing fees and conversion options, which are a direct addition or deduction from the carrying value of the related debt liability in the consolidated balance sheets. |
(2) | Operating leases are primarily for |
(3) | Ship construction contracts are for our newbuild ships based on the euro/U.S. dollar exchange rate as of June 30, |
(4) | Port facilities represent our usage of certain port facilities. Our port facilities agreements include force majeure provisions that may alleviate an unspecified amount of obligations under minimum guarantees during the COVID-19 pandemic. In March 2020, the Company provided the required notice that such provisions were being enacted. Customary practice is to prorate these obligations for the annual period impacted. A portion of our port fees may be waived as a result of these provisions, including those ports that are presented within operating leases in the table above. |
(5) | Interest includes fixed and variable rates with LIBOR held constant as of June 30, |
(6) | Other includes future commitments for service, maintenance and other business enhancement capital expenditures contracts. Certain contracts contain provisions which provide for reduced obligations in the case of a ship(s) removed from operations. As a result, we may only be required to cover reasonable costs during the time period whereby our operations have temporarily been suspended. These reasonable costs are |
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.
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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, and 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 believehave received certain financial and other debt covenant waivers through December 31, 2022 and added new free liquidity requirements. At June 30, 2021, taking into account such waivers, we were in compliance with these covenants asall of June 30, 2020.our debt covenants.
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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.
In light of the measures described under "Update Regarding COVID-19 --Pandemic — Financing Transactions and Cost Containment Measures", we believe our cash on hand, expected future operating cash inflows 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 12-month period. Certain debt covenant waivers were received in 2021 to enable the Company to maintain this compliance. Refer to “—Liquidity and Capital Resources” for further information regarding the debt covenant waivers. There is no assurance that cash flows from operations and additional financings will be available in the future to fund our future obligations. Furthermore, we anticipate that we will need additional equity and/or debt financing to fund our operations in the future if we are unable to resume our cruise voyages on the schedule expected, and particularly if a substantial portion of our fleet continues to have suspended cruise voyages for a prolonged period.
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 30, 2020,2021, we had interest rate swap and collar agreements to hedge our exposure to interest rate movements and to manage our interest expense. As of June 30, 2020, 66%2021, 76% of our debt was fixed and 34%24% was variable, which includes the effects of the interest rate swaps and collars. The notional amount of outstanding debt associated with the interest rate derivative agreements as of June 30, 20202021 was $0.7$0.6 billion. As of December 31, 2019, 78%2020, 74% of our debt was fixed and 22%26% 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 $1.7$0.7 billion as of December 31, 2019.2020. The change in our fixed rate percentage from December 31, 20192020 to June 30, 20202021 was primarily due to the maturityaddition of interestfixed rate swaps.debt, which was partially used to repay variable rate debt. Based on our June 30, 20202021 outstanding variable rate debt balance, a one percentage point increase in annual LIBOR interest rates would increase our annual interest expense by approximately $36.7$30.4 million excluding the effects of capitalization of interest.
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Foreign Currency Exchange Rate Risk
As of June 30, 2020,2021, 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 €2.5€5.5 billion, or $2.8$6.5 billion based on the euro/U.S. dollar exchange rate as of June 30, 2020.2021. As of December 31, 2019,2020, the payments not hedged aggregated €3.0€5.0 billion, or $3.4$6.1 billion, based on the euro/U.S. dollar exchange rate as of December 31, 2019.2020. The change from December 31, 20192020 to June 30, 20202021 was due to the deliverymodifications of Seven Seas Splendor.our ship construction contracts. We estimate that a 10% change in the euro as of June 30, 20202021 would result in a $0.3$0.6 billion change in the U.S. dollar value of the foreign currency denominated remaining payments.
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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 16.2%21.7% and 10.5%16.2% for the three months ended June 30, 20202021 and 2019,2020, respectively, and 13.4%21.5% and 11.1%13.4% for the six months ended June 30, 20202021 and 2019,2020, respectively. We use fuel derivative agreements to mitigate the financial impact of fluctuations in fuel prices and as of June 30, 2020,2021, excluding fuel swaps for transactions that are no longer probable of occurrence, we had hedged approximately 80%43%, 52%, 36%37% and 13%14% of our remaining 2020, 2021, 2022 and 2023 projected metric tons of fuel purchases, respectively. As of December 31, 2019,2020, we had hedged approximately 56%59%, 50%37% and 18%15% of our 2020, 2021, 2022 and 20222023 projected metric tons of fuel purchases, respectively. Additional hedges were executedThe percentage of fuel purchases hedged changed between December 31, 20192020 and June 30, 20202021 primarily due to lower ourchanges in forecasted purchases and the termination of certain fuel price risk.swaps.
We estimate that a 10% increase in our weighted-average fuel price would increase our anticipated 20202021 fuel expense by $9.2$15.1 million. This increase would be partially offset by an increase in the fair value of all our fuel swap agreements of $7.7$7.6 million. Fair value of our derivative contracts is derived using valuation models that utilize the income valuation approach. These valuation models take into account the contract terms such as maturity, as well as other inputs such as fuel types, fuel curves, creditworthiness of the counterparty and the Company, as well as other data points.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management has evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures, as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended, as of June 30, 2020.2021. There are inherent limitations in 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 Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 20202021 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 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 30, 20202021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on the Effectiveness of Controls
It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system will be met. In addition, the design of any control system is
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based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there is only the reasonable assurance that our controls will succeed in achieving their goals under all potential future conditions.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Class Actions
On March 12, 2020, a class action complaint, Eric Douglas v. Norwegian Cruise Lines, Frank J. Del RioSee the section titled “Litigation” in “Item 1—Financial Statements—Notes to Consolidated Financial Statements—Note 9 Commitments and Mark A. Kempa, Case No. 1:20-CV-21107, was filedContingencies” in the United States District Court for the Southern District of Florida, naming the Company, Frank J. Del Rio, the Company’s President and Chief Executive Officer, and Mark A. Kempa, the Company’s Executive Vice President and Chief Financial Officer, as defendants. Subsequently, two similar class action complaints were also filed in the United States District Court for the Southern District of Florida naming the same defendants. On July 31, 2020, a consolidated amended class action complaint was filed by lead plaintiff’s counsel. The complaint asserts claims, purportedly brought on behalf of a class of shareholders, under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder, and allege that the Company made false and misleading statements to the market and customers about COVID-19. The complaint seeks unspecified damages and an award of costs and expenses, including reasonable attorneys’ fees, on behalf of a purported class of purchasers of our ordinary shares between February 20, 2020 and March 10, 2020. We believe that the allegations contained in the complaint are without merit and intend to defend the complaint vigorously. We cannot predict at this point the length of time that this action will be ongoing or the liability, if any, which may arise therefrom.
In addition, in March 2020 the Florida Attorney General announced an investigation related to the Company’s marketing during the COVID-19 outbreak. Following the announcement of the investigation by the Florida Attorney General, we received notifications from other attorneys general and governmental agencies that they are conducting similar investigations. The Company is cooperating with these ongoing investigations, the outcomes of which cannot be predicted at this time.
Booksafe Travel Protection Plan
As previously disclosed in our Annual Report on Form 10-K, as updated by our Current Report on Form 8-K filed on July 8, 2020, on September 21, 2018, a proposed 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 alleged that the Company concealed that it received proceeds on the sale of the travel insurance portion of the plan. The complaint sought an unspecified amount of damages, fees and costs. The Company moved to invoke the arbitration clause of the ticket contract to move the case out of Federal Court. On May 29, 2019, the Court granted the motion and compelled the plaintiffs to submit their claims to arbitration on an individual basis, dismissing the claims before the Court with prejudice. The plaintiffs have filed a notice of appeal. We believe we have meritorious defenses to the claim and that any liability which may arise as a resultPart I of this action will not have a material impact on our consolidated financial statements.
Helms-Burton Act
On August 27, 2019, two lawsuits were filed against Norwegian Cruise Line Holdings Ltd., the parent company of NCL Corporation Ltd., in the United States District Courtquarterly report for the Southern District of Florida under Title III of the Cuban Liberty and Solidarity (Libertad) Act of 1996, also known as the Helms-Burton Act. The complaint filed by Havana Docks Corporation alleges it holds an interest in the Havana Cruise Port Terminal and the complaint filed by Javier Garcia-Bengochea alleges that he holds an interest in the Port of Santiago, Cuba, both of which were expropriated by the Cuban Government. The complaints further allege that the Company “trafficked” in those properties by embarking and disembarking passengers at these facilities. The plaintiffs seek all available statutory remedies, including the value of the expropriated property, plus interest, treble damages, attorneys’ fees and costs. On January 7, 2020, the United States District Court for the Southern District of Florida dismissed the claim by Havana Docks Corporation. On April 14, 2020, the district court granted Havana Docks Corporation’s motion to reconsider and vacated its order dismissing the claim, allowing Havana Docks Corporation to file an amended complaint on April 16, 2020. On April 24, 2020, we filed
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a motion seeking permission to appeal the district court’s order which was subsequently denied. We believe we have meritorious defenses to the claims and intend to vigorously defend these matters.
Other
In the normal course of our business, various other 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 ourabout legal position on all claims and, to the extent necessary, seek recovery.proceedings.
Item 1A. Risk Factors
We refer you to our Annual Report on Form 10-K for a discussion of the risk factors that affect our business and financial results. We wish to caution you that the risk factors discussed in “Item 1A. Risk Factors” in our 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. You should not interpret the disclosure of a risk to imply that the risk has not already materialized. COVID-19 has also had the effect of heightening many of the other risks described in the “Risk Factors” included in our Annual Report on Form 10-K, such as those relating to our need to generate sufficient cash flows to service our indebtedness, and our ability to comply with the covenants contained in the agreements that govern our indebtedness.
Other than updates to the risk factors set forth below, there have been no material changes in our risk factors from those disclosed in our Annual Report on Form 10-K.
COVID-19 has had, and is expected to continue to have, a significant impact on our financial condition and operations. The current, and uncertain future, impact of the COVID-19 outbreak,pandemic, including its effect on the ability or desire of people to travel (including on cruises), is expected to continue to impact our results, operations, outlook, plans, goals, growth, reputation, cash flows, liquidity, demand for voyages and share price.
In late 2019, an outbreak of COVID-19 was identified in Wuhan, China. The COVID-19 outbreak has since spread and grown globally, including within the United States and, in March 2020, the President of the United States declared a national emergency. The spread of COVID-19 and the recent developments surrounding the global pandemic are having significant negative impacts on all aspects of our business. In March 2020, we implemented a voluntary suspension of all cruise voyages across our three brands, which haswas subsequently been extended through October 31, 2020. TheJune 2021. We began resuming cruises voyages in July 2021 on a limited basis. We expect the remaining ships in our fleet will continue incrementally resuming voyage operations through April 1, 2022, but due to the uncertainties surrounding the COVID-19 pandemic, it may take us longer than expected to return our entire fleet to cruise voyage operations and/or the suspension maycould potentially be extended again,reinstated after we have begun sailing, and the total length of time the suspensionmajority of our fleet is out of cruise voyage operations may be prolonged. All guests were disembarked from the 28 ships in the Company’s fleet by March 28, 2020. We have actively worked to disembark the vast majority of our crew members who will not remain with our ships through the suspension and transport them safely to their home countries, but our ability to transport crew to and from our ships in the future is dependent on a number of factors, including the ability to transport crew members to their home countries, due to the limited number of commercial flights and charter options available, and governmental restrictions and regulations with respect to disembarking crew members. In addition, we have been, and will continue to be, further negatively impacted by related developments, including heightened governmental regulations and travel advisories, including recommendations and orders by the U.S. Department of State, the CDC and the Department of Homeland Security, and travel bans and restrictions, including the CDC’s No Sail Order, each of which has impacted, and is expected to continue to significantly impact, global guest sourcing and our access to various ports of call.
call around the globe. On October 30, 2020, the CDC issued a Conditional Order that introduces a phased approach for the resumption of passenger cruises in the U.S. depending on a cruise line’s ability to implement certain protocols and procedures. We have received conditional sailing certificates for certain ships and are in the process of seeking certifications for the remaining ships in our fleet that will be operating out of the U.S., but our ability to comply with the Conditional Order in the future is unknown. As a result of these and other regulatory requirements and other logistical challenges, the timeline for our ability to return our entire fleet to cruises both in and outside of the U.S. is fluid. Additionally, in the U.S., certain states have enacted legislation prohibiting companies from verifying the vaccination status of guests, which in some instances we have challenged in court. Compliance with the Conditional Order and other regulations may involve significant costs and could create significant uncertainties about our ability to continue to operate our cruise voyages in the U.S. We will continue to incur COVID-19 related costs as we implement additional health-related protocols on our ships, such as controlled capacity and testing, which may have a significant effect on our operations. In addition, the industry will be subject to enhanced health and safety requirements which may be costly and take a significant amount of time to implement across our fleet. There is no guarantee that the health and safety protocols we implement will be successful in preventing the spread of COVID-19 onboard our ships and among our passengers and crew.
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To date, the outbreak of COVID-19 pandemic has resulted in significant costs and lost revenue as a result of the suspension of sailings,cruise voyages, implementation of additional health and safety measures, reduced demand for cruise vacations, guest compensation, itinerary modifications, redeployments and cancellations, travel restrictions and advisories, the unavailability of ports and/or destinations, costs to return our passengers and certain crew members to their home destinations and expenses to transport our crew to and from our ships and to assist some of our crew that have beenwere unable to return home in an optimal time frame with food and housing. We will
Our ability to transport crew to and from our ships is dependent on a number of factors, including the ability to transport crew members to and from their home countries due to the limited number of commercial flights and charter options available, and governmental restrictions and regulations with respect to disembarking crew members and travel generally. Additionally, our policy that crew members must be fully vaccinated may create logistical challenges due to potential limitations on vaccine supplies, logistical complexities relating to vaccinating crew members who reside in different countries around the world and vaccine hesitancy. Such restrictions on crew travel and challenges in making sure our crew members have been vaccinated could impact our ability to staff our ships as operations continue to incur COVID-19 related costs as we sanitize our ships and implement additional health-related protocols on our ships, such as social distancing measures, which may have a significant effect on our operations. In addition, the industry may be subject to enhanced health and safety requirements in the future which may be costly and take a significant amount of time to implement across our fleet. resume.
Between March 12, 2020 and April 30, 2020, three class action lawsuits were filed against the Companyus under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rule 10b-5 promulgated thereunder, alleging that the Companywe made false and misleading statements to the market and customers about COVID-19.COVID-19, which were combined and later dismissed in April 2021. In addition, in March 2020 the Florida Attorney General announced an investigation related to the Company’sour marketing during the COVID-19 outbreak.pandemic. Following the announcement of the investigation by the Florida Attorney General, we received notifications from other attorneys general and governmental agencies that they are conducting similar investigations. We may be the subject of additional lawsuits and investigations stemming from COVID-19. We cannot predict the number or outcome of any such proceedings and the impact that they will have on our financial results, but any such impact may be material.
We have nine newbuilds on order, scheduled to be delivered through 2027. The impacts of COVID-19 on the shipyards where our ships are under construction (oror will be constructed)constructed, have resulted in some delays in expected ship deliveries, and the impacts of COVID-19 could result in additional delays in ship deliveries in the future, which may be prolonged.
We cannot predictDue to the unknown duration and extent of the COVID-19 pandemic, travel restrictions, bans and advisories, uncertainties around our ability to comply with the Conditional Order and or any additional or future regulatory restrictions on our operations, the potential unavailability of ports and/or destinations, unknown cancellations and timing of redeployments and a general impact on consumer sentiment regarding cruise travel, there are continuing uncertainties about when any of our shipsfull fleet will begin to sail again or when ports will reopen to our ships.be back in service at historical occupancy levels. Moreover, even once travel advisories and restrictions are lifted, demand for cruises may remain weak for a significant length of time and we cannot predict if and when each brand will return to pre-outbreakpre-pandemic demand or pricing.pricing levels. Due to the discretionary nature of leisure travel spending and the competitive nature of the cruise industry, our revenues are heavily influenced by the condition of the U.S. economy and economies in other regions of the world. Unfavorable conditions in these broader economies have resulted, and may result in the future, in decreased demand for cruise vacations, changes in booking practices and related reactions by our competitors, all of which in turn have had, and may continue to have in the future, a strong negative effect on our business. In particular, our bookings may be negatively impacted by enhanced health and safety protocols, including vaccination requirements, concerns that cruises are susceptible to the spread of infectious diseases as well as adverse changes in the perceived or actual economic climate, including higher unemployment rates, declines in income levels and loss of personal wealth resulting from the impact of COVID-19. The ongoing COVID-19 pandemic and associated decline in economic activity and increase in unemployment levels are expected to have a severe and prolonged effect on the global economy generally and, in turn, is expected to depress demand for cruise vacations into the foreseeable future. Due to the uncertainty surrounding the duration and severity of this pandemic, we can provide no assurance as to when and at what pace demand for cruise vacations will return to pre-pandemic levels, if at all. Accordingly, we cannot predict the full impact of COVID-19 on our business, financial condition and results of operations. In addition, we cannot predict the impact COVID-19 will have on our partners, such as travel agencies, suppliers and other vendors. We may be adversely impacted by any adverse impact our partners suffer.
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This is the first time we have completely suspended our cruise voyages, and asAs a result of these unprecedented circumstances we are not able to predict the full impact of such a suspensionthe COVID-19 pandemic on our Company. In particular, we cannot predict the impact on our financial performance and our cash flows required for cash refunds of fares for cancelled sailings as a result of the suspension in our cruise voyages, which may be prolonged,effects of the COVID-19 pandemic and the public’s concern regarding the health and safety of travel, including by cruise ship, and related decreases in demand for travel and cruising. Depending on the lengthtiming for bringing our full fleet back in service and number of the suspension and level of guest acceptance of future cruise credits,cancellations, we may be required to provide cash refunds for a substantial portion of the balance as guests on cancelled sailings were automatically awarded future cruise credits and have the opportunity to contact us instead to request a cash refund. Cash refunds are estimated to be, based on behavior to date, approximately 60% of the Company’s balance of advanceour advanced ticket sales during the suspension of voyages. There can be no assurance that the percentage of passengers that accept future cruise certificates over cash refunds during the suspension of cruise voyages will remain in this range as the number of cancelled voyages increases.sales.
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Moreover, our ability to attract and retain guests and crew depends, in part, upon the perception and reputation of our Company and our brands and the public’s concerns regarding the health and safety of travel generally, as well as regarding the cruise industry and our ships. Actual or perceived risk of infection could have an adverse effect on the public’s perception of the Company, which could harm our reputation and business. Additionally, some of our protocols, such as our requirement that all guests and crew must be vaccinated for our initial voyages, may attract negative publicity.
As a result of the impacts of COVID-19, provisions in our credit card processing and other commercial agreements have and may continue to adversely affect our liquidity. We have agreements with several credit card companies to process the sale of tickets and provide other services. Under these agreements, the credit card companies could, under certain circumstances and upon written notice, require us to maintain a reserve, which reserve couldwould be funded by the credit card companies withholding or offsetting our credit card receivables, or our posting of cash or other collateral. As a result of the impacts of COVID-19, we have seen an increase in demand from consumers for refunds on their tickets, and we anticipate this will continue to be the case for the near future. Requests for refunds may reduce our liquidity and risk triggering liquidity covenantsAs of June 30, 2021, we had a reserve of approximately $800 million with a credit card processor recognized in these processing agreements and, in doing so, could force us to post cashaccounts receivable, net or other collateral as a reservelong-term assets. Additionally, we are required to fund all refunds until further notice and 100% of incoming advance ticket sales deposits with this credit card processor will be withheld and are not expected to be released until the credit card processing companies in accordance withprocessor’s exposure is fully collateralized. As of June 30, 2021, the termsexposure was approximately $940 million. The reserve shortfall of our agreements with them. Currently, we have agreedapproximately $140 million will decrease as refunds are funded, cruises are provided and amounts withheld by the credit card processor are allocated to provide athe reserve consisting of $70 million of cash and preliminarily agreedrather than remitted to provide second priority liens on certain ships with a collective equity value of $700 million based on appraisals as of December 31, 2019, which could be increased or decreased based on certain conditions. If we do not meet an agreed upon minimum liquidity in the future, weCompany. We may be required to pledge additional collateral and/or post cash reserves or take other actions that may further reduce our liquidity. As a consequence, our financial position and liquidity could be further materially impacted.
As a result of all of the foregoing, we expectwill report a net loss on bothfor the three months ending September 30, 2021 and expect to report a U.S. GAAP and adjusted basisnet loss until we are able to resume regular voyages, including for the year ending December 31, 2020.2021. Our ability to forecast our cash inflows and additional capital needs is hampered, and we could be required to raise additional capital in the future. Our access to and cost of financing will depend on, among other things, global economic conditions, conditions in the global financing markets, the availability of sufficient amounts of financing, the terms and conditions of our existing debt agreements and any agreements governing future indebtedness, our prospects and our credit ratings. InSince March 2020, Moody’s has downgraded theour long-term issuer rating to B2, our senior secured rating to B1 and our senior unsecured debt ratings of NCLCrating to Ba2 from Ba1, including its corporate family rating and senior secured bank facility, and to B1 from Ba2 on its senior unsecured rating; and in July 2020, Moody’s placed our ratings on review for potential downgrade. InCaa1. Since April 2020, S&P Global has downgraded theour issuer credit rating of NCLCto B, lowered our issue-level rating on our $875 million Revolving Loan Facility and $1.5 billion Term Loan A Facility to BB- from BB+ and, in May 2020, based, our issue-level rating on our recent debt offering, lowered the issuer-level rating on NCLC’s$675 million 2024 Senior Secured Notes and $750 million 2026 Senior Secured Notes to B+ and our senior unsecured notesrating to B+ from BB- and placed our issuer rating on credit watch with negative implications.B-. If our credit ratings were to be further downgraded, or general market conditions were to ascribe higher risk to our rating levels, our industry, or us, our access to capital and the cost of any debt or equity financing will be further negatively impacted. ThereAccordingly, there is no guarantee that debt or equity financings will be available in the future to fund our obligations, or that they will be available on terms consistent with our expectations.
The agreements governing our indebtedness contain, and any instruments governing future indebtedness of ours may contain, covenants that impose significant operating and financial restrictions on us, including restrictions or prohibitions on our ability to, among other things: incur or guarantee additional debt or issue certain preference shares; pay dividends on or make distributions in respect of our share capital or make other restricted payments, including the ability of the Company’sour subsidiaries to pay dividends or make distributions to the Company;us; repurchase or redeem capital stock or subordinated indebtedness; make certain investments or acquisitions; transfer, sell or create liens on certain assets; and consolidate or merge with, or sell or otherwise dispose of all or substantially all of our assets to other companies. As a result of these covenants, we are limited in the manner in which we conduct our business, and we may be unable to engage in favorable
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business activities or finance future operations or capital needs. The terms of any instruments governing future indebtedness may also require us to provide incremental collateral, which may further restrict our business operations.
In addition, the COVID-19 outbreakpandemic has significantly increased economic and demand uncertainty. The current outbreakpandemic and continued spread of COVID-19 may causehas caused a global recession, which wouldcould have a further adverse impact on our financial condition and operations, and this impact could exist for an extended period of time.
The extent of the effects of the outbreakpandemic on our business and the cruise industry at large is highly uncertain and will ultimately depend on future developments, many of which are outside of our control, including, but not limited to, the duration, spread, severity and any recurrence of the outbreak,pandemic, the severity and transmission rates of new more contagious and/or vaccine-resistant variants of COVID-19, the availability, distribution, rate of public acceptance and efficacy of vaccines and therapeutics for COVID-19, the duration and scope of related federal, state and local
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government orders and restrictions, the extent of the impact of COVID-19 on overall demand for cruise vacations and the length of time it takes for demand and pricing to return and normal economic and operating conditions to resume, all of which are highly uncertain and cannot be predicted. COVID-19 has also had the effect of heightening many of the other risks described in the “Risk Factors” described herein, and included in our Annual Report on Form 10-K, such as those relating to our need to generate sufficient cash flows to service our indebtedness, and our ability to comply with the covenants contained in the agreements that govern our indebtedness.
We could need additional financingAdditionally, epidemics, pandemics and viral outbreaks or other wide-ranging health scares in the future which may not be available on favorable terms, or at all, and may be dilutive to existing shareholders.
We could need additional equity or debt financing to fund our operations in the future, especially if our suspension of cruise voyages is prolonged. We may be unable to obtain any desired additional financing on terms favorable to us, or at all, depending on market and other conditions. The ability to raise additional financing depends on numerous factors that are outside of our control, including general economic and market conditions, the health of financial institutions, our credit ratings and investors’ and lenders’ assessments of our prospects and the prospects of the cruise industry in general, all of which may be impacted by the COVID-19 pandemic. If we raise additional funds through equity or debt issuances, our shareholders could experience dilution of their ownership interest, and these securities could have rights, preferences, and privileges that are superior to that of holders of our ordinary shares. If we raise additional funds by issuing debt, we may be subject to limitations on our operations due to restrictive covenants, which may be more restrictive than the covenants in our existing debt agreements, and we may be required to further encumber our assets. We may not have sufficient available collateral to pledge to support additional financing. If adequate funds are not available on acceptable terms, or at all, we may be unable to fund our operations, or respond to competitive pressures, any of which could negatively affect our business. There can be no assurance that our ability to otherwise access the credit or credit markets will not be adversely affected by changes in the financial markets and the global economy or that such financing will be available to us in sufficient amounts or on acceptable terms. If we are not able to fulfill our liquidity needs through operating cash flows and/or borrowings under credit facilities or otherwise in the capital markets, our business and financial condition could be adversely affected and it may be necessary for us to reorganize our company in its entirety, including through bankruptcy proceedings, and our shareholders may lose their investment in our ordinary shares.
Any further impairment of our tradenames or goodwill couldwould likely also adversely affect our business, financial condition and operating results.
We evaluate tradenames and goodwill for impairment on an annual basis, or more frequently when circumstances indicate that the carrying valueresults of a reporting unit may not be recoverable. Several factors including a challenging operating environment, impacts affecting consumer demand or spending, the deterioration of general macroeconomic conditions, or other factors could result in a change to the future cash flows we expect to derive from our operations. Reductions of the cash flows used in the impairment analyses may result in the recording of an impairment charge to a reporting unit’s tradename or goodwill. During the three months ended March 31, 2020, we recognized a goodwill impairment loss of $1.3 billion. See Note 4 —“Intangible Assets” for additional information. As of June 30, 2020, there was $98.1 million of goodwill for the Regent Seven Seas reporting unit after impairment. We also recognized an impairment loss for our Oceania Cruises and Regent Seven Seas Cruises tradenames during the three months ended March 31, 2020 in an aggregate amount of $317.0 million, with $500.5 million remaining as of June 30, 2020. We believe that we have made reasonable estimates and judgments. However, a change in our estimated future operating cash flows may result in a decline in fair value in future periods, which may result in a need to recognize additional impairment charges.
operationsAny potential government disaster relief assistance, or other governmental assistance due to the impacts of COVID-19, could impose significant limitations on our corporate activities and may not be on terms favorable to us.
If any government agrees to provide disaster relief assistance, or other assistance due to the impacts of COVID-19, it may impose certain requirements on the recipients of the relief including restrictions on executive officer compensation, share buybacks, dividends, prepayment of debt and other similar restrictions until the relief is repaid or redeemed in full. We cannot assure you that any legislation to provide government disaster relief assistance, or other governmental
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assistance to us due to the impacts of COVID-19, will be approved and, even if approved, will not significantly limit our corporate activities or be on terms that are favorable to us. Such restrictions and terms could adversely impact our business and operations.
The accounting for our exchangeable notes issued in July of 2020 may be different for NCLC than for NCLH.
We have a holding company structure, whereby NCLH owns 100% of the equity interests in NCLC. Both NCLH and NCLC prepare audited financial statements that they file with the SEC (NCLC on a voluntary basis). Because the shares ultimately issuable upon conversion of the exchangeable notes issued by NCLC are ordinary shares of NCLH, the accounting treatment of this conversion feature at each entity may be different.
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Item 5. Other Information
Exchangeable Note Issuances
The Private Exchangeable Notes are exchangeable at the option of the holders of such notes, based on the maximum exchange rate of 90.9090 ordinary shares per $1,000 principal amount of Private Exchangeable Notes, into a maximum of 512,358 preference shares of NCLC, which will be immediately and automatically exchanged into a maximum of 46,577,947 ordinary shares of NCLH, based on the principal amount plus potential accreted interest. The maximum exchange rate reflects potential adjustments to the initial exchange rate of 82.6446 ordinary shares per $1,000 principal amount of Private Exchangeable Notes, which would only be made in the event of certain make-whole fundamental changes or tax redemption events. The maximum exchange rate referred to above is also subject to adjustment for any stock split, stock dividend or similar transaction.
The 2024 Exchangeable Notes are exchangeable at the option of the holders of such notes, based on the maximum exchange rate of 89.4454 ordinary shares per $1,000 principal amount of 2024 Exchangeable Notes, into a maximum of 862,500 preference shares of NCLC, which will be immediately and automatically exchanged into a maximum of 77,146,657 ordinary shares of NCLH. The maximum exchange rate reflects potential adjustments to the initial exchange rate of 72.7273 ordinary shares per $1,000 principal amount of 2024 Exchangeable Notes, which would only be made in the event of certain make-whole fundamental changes or tax redemption events. The maximum exchange rate referred to above is also subject to adjustment for any stock split, stock dividend or similar transaction.
The 2025 Exchangeable Notes are exchangeable at the option of the holders of such notes, based on the maximum exchange rate of 66.6666 ordinary shares per $1,000 principal amount of 2025 Exchangeable Notes, into a maximum of 450,000 preference shares of NCLC, which will be immediately and automatically exchanged into a maximum of 29,999,970 ordinary shares of NCLH. The maximum exchange rate reflects potential adjustments to the initial exchange rate of 53.3333 ordinary shares per $1,000 principal amount of 2025 Exchangeable Notes, which would only be made in the event of certain make-whole fundamental changes or tax redemption events. The maximum exchange rate referred to above is also subject to adjustment for any stock split, stock dividend or similar transaction.
Additional information regarding the issuance of shares pursuant to the foregoing exchangeable notes is described in the Current Reports on Form 8-K, including Item 3.02 thereof, filed with the SEC on May 11, 2020 (with respect to the Private Exchangeable Notes and the 2024 Exchangeable Notes), July 21, 2020 and July 31, 2020 (with respect to the 2025 Exchangeable Notes) and in Note 8 – “Long-Term Debt” of this Quarterly Report on Form 10-Q.
Item 6. Exhibits
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101* | | The following unaudited consolidated financial statements from NCL Corporation Ltd.’s Quarterly Report on Form 10‑Q for the quarterly period ended June 30, |
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| | (i) the Consolidated Statements of Operations for the three and six months ended June 30, |
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| | (ii) the Consolidated Statements of Comprehensive |
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| | (iii) the Consolidated Balance Sheets as of June 30, |
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| | (iv) the Consolidated Statements of Cash Flows for the six months ended June 30, |
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| | (v) the Consolidated Statements of Changes in Shareholders’ Equity for the three and six months ended June 30, |
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| | (vi) the Notes to the Consolidated Financial Statements. |
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104* | | The cover page from NCL Corporation Ltd.’s Quarterly Report on Form 10-Q for the quarter ended June 30, |
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*Filed herewith.
** Furnished herewith.