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 September 30, 20212022
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 October 31, 2021.2022.
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 | | Nine Months Ended | | Three Months Ended | | Nine Months Ended | ||||||||||||||||
| | September 30, | | September 30, | | September 30, | | September 30, | ||||||||||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||||||
Revenue | | |
|
| |
| | |
|
| |
| | |
|
| |
| | |
|
| |
|
Passenger ticket | | $ | 86,127 | | $ | 4,667 | | $ | 87,877 | | $ | 859,293 | | $ | 1,105,908 | | $ | 86,127 | | $ | 2,242,255 | | $ | 87,877 |
Onboard and other | |
| 66,954 | |
| 1,851 | |
| 72,672 | |
| 411,036 | |
| 509,602 | |
| 66,954 | |
| 1,082,376 | |
| 72,672 |
Total revenue | |
| 153,081 | |
| 6,518 | |
| 160,549 | |
| 1,270,329 | |
| 1,615,510 | |
| 153,081 | |
| 3,324,631 | |
| 160,549 |
Cruise operating expense | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Commissions, transportation and other | |
| 32,338 | |
| 4,038 | |
| 47,935 | |
| 371,007 | |
| 352,798 | |
| 32,338 | |
| 696,946 | |
| 47,935 |
Onboard and other | |
| 19,306 | |
| 4,728 | |
| 21,841 | |
| 82,889 | |
| 126,740 | |
| 19,306 | |
| 255,445 | |
| 21,841 |
Payroll and related | |
| 154,440 | |
| 65,571 | |
| 323,225 | |
| 441,462 | |
| 287,390 | |
| 154,440 | |
| 790,697 | |
| 323,225 |
Fuel | |
| 79,238 | |
| 48,224 | |
| 175,931 | |
| 222,240 | |
| 186,984 | |
| 79,238 | |
| 503,682 | |
| 175,931 |
Food | |
| 16,672 | |
| 3,426 | |
| 27,314 | |
| 59,639 | |
| 76,810 | |
| 16,672 | |
| 177,483 | |
| 27,314 |
Other | |
| 137,762 | |
| 64,170 | |
| 294,092 | |
| 308,832 | |
| 208,176 | |
| 137,762 | |
| 623,374 | |
| 294,092 |
Total cruise operating expense | |
| 439,756 | |
| 190,157 | |
| 890,338 | |
| 1,486,069 | |
| 1,238,898 | |
| 439,756 | |
| 3,047,627 | |
| 890,338 |
Other operating expense | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Marketing, general and administrative | |
| 228,473 | |
| 156,351 | |
| 616,440 | |
| 556,820 | |
| 375,164 | |
| 228,473 | |
| 999,372 | |
| 616,440 |
Depreciation and amortization | |
| 173,289 | |
| 177,488 | |
| 517,867 | |
| 554,937 | |
| 186,551 | |
| 173,289 | |
| 547,214 | |
| 517,867 |
Impairment loss | | | — | | | — | | | — | |
| 1,607,797 | ||||||||||||
Total other operating expense | |
| 401,762 | |
| 333,839 | |
| 1,134,307 | |
| 2,719,554 | |
| 561,715 | |
| 401,762 | |
| 1,546,586 | |
| 1,134,307 |
Operating loss | |
| (688,437) | |
| (517,478) | |
| (1,864,096) | |
| (2,935,294) | |
| (185,103) | |
| (688,437) | |
| (1,269,582) | |
| (1,864,096) |
Non-operating income (expense) | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Interest expense, net | |
| (184,524) | |
| (154,501) | |
| (824,304) | |
| (343,993) | |
| (176,769) | |
| (184,524) | |
| (692,898) | |
| (824,304) |
Other income (expense), net | |
| 226,442 | |
| (89,005) | |
| (145,450) | |
| (325,412) | |
| 29,600 | |
| 226,442 | |
| 520,471 | |
| (145,450) |
Total non-operating income (expense) | |
| 41,918 | |
| (243,506) | |
| (969,754) | |
| (669,405) | |
| (147,169) | |
| 41,918 | |
| (172,427) | |
| (969,754) |
Net loss before income taxes | |
| (646,519) | |
| (760,984) | |
| (2,833,850) | |
| (3,604,699) | |
| (332,272) | |
| (646,519) | |
| (1,442,009) | |
| (2,833,850) |
Income tax benefit (expense) | |
| (294) | |
| 2,832 | |
| (2,949) | |
| 13,216 | ||||||||||||
Income tax expense | |
| (978) | |
| (294) | |
| (4,824) | |
| (2,949) | ||||||||||||
Net loss | | $ | (646,813) | | $ | (758,152) | | $ | (2,836,799) | | $ | (3,591,483) | | $ | (333,250) | | $ | (646,813) | | $ | (1,446,833) | | $ | (2,836,799) |
The accompanying notes are an integral part of these consolidated financial statements.
3
NCL Corporation Ltd.
Consolidated Statements of Comprehensive Loss
(Unaudited)
(in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Nine Months Ended | ||||||||||||||||
| | September 30, | | September 30, | | September 30, | | September 30, | ||||||||||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||||||
Net loss | | $ | (646,813) | | $ | (758,152) | | $ | (2,836,799) | | $ | (3,591,483) | | $ | (333,250) | | $ | (646,813) | | $ | (1,446,833) | | $ | (2,836,799) |
Other comprehensive income (loss): | |
|
| |
|
| |
|
| |
|
| ||||||||||||
Other comprehensive loss: | |
|
| |
|
| |
|
| |
|
| ||||||||||||
Shipboard Retirement Plan | |
| 98 | | | 101 | | | 295 | | | 305 | |
| 95 | | | 98 | | | 2,665 | | | 295 |
Cash flow hedges: | |
| | | | | | | | | | | |
| | | | | | | | | | |
Net unrealized gain (loss) | |
| (45,134) | | | 87,710 | | | (73,497) | | | (163,672) | ||||||||||||
Net unrealized loss | |
| (195,543) | | | (45,134) | | | (246,742) | | | (73,497) | ||||||||||||
Amount realized and reclassified into earnings | |
| 12,948 | | | 36,072 | | | 48,328 | | | 86,853 | |
| (31,762) | | | 12,948 | | | (75,339) | | | 48,328 |
Total other comprehensive income (loss) | |
| (32,088) | |
| 123,883 | |
| (24,874) | |
| (76,514) | ||||||||||||
Total other comprehensive loss | |
| (227,210) | |
| (32,088) | |
| (319,416) | |
| (24,874) | ||||||||||||
Total comprehensive loss | | $ | (678,901) | | $ | (634,269) | | $ | (2,861,673) | | $ | (3,667,997) | | $ | (560,460) | | $ | (678,901) | | $ | (1,766,249) | | $ | (2,861,673) |
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)
| | | | | | | |
|
| September 30, | | December 31, | | ||
|
| 2021 |
| 2020 | | ||
Assets | | |
|
| |
| |
Current assets: | | |
|
| |
| |
Cash and cash equivalents | | $ | 1,933,908 | | $ | 3,299,340 | |
Accounts receivable, net | |
| 990,384 | |
| 20,578 | |
Inventories | |
| 108,177 | |
| 82,381 | |
Prepaid expenses and other assets | |
| 241,259 | |
| 147,556 | |
Total current assets | |
| 3,273,728 | |
| 3,549,855 | |
Property and equipment, net | |
| 13,480,120 | |
| 13,411,226 | |
Goodwill | |
| 98,134 | |
| 98,134 | |
Trade names | |
| 500,525 | |
| 500,525 | |
Other long-term assets | |
| 1,370,046 | |
| 831,888 | |
Total assets | | $ | 18,722,553 | | $ | 18,391,628 | |
Liabilities and shareholders’ equity | |
|
| |
|
| |
Current liabilities: | |
|
| |
|
| |
Current portion of long-term debt | | $ | 543,739 | | $ | 124,885 | |
Accounts payable | |
| 94,949 | |
| 83,136 | |
Accrued expenses and other liabilities | |
| 860,619 | |
| 596,717 | |
Due to NCLH | |
| 40,480 | |
| 37,790 | |
Advance ticket sales | |
| 1,440,294 | |
| 1,109,826 | |
Total current liabilities | |
| 2,980,081 | |
| 1,952,354 | |
Long-term debt | |
| 10,583,507 | |
| 10,128,754 | |
Exchangeable notes | | | 2,178,874 | | | 2,691,720 | |
Other long-term liabilities | |
| 1,039,563 | |
| 447,492 | |
Total liabilities | |
| 16,782,025 | |
| 15,220,320 | |
Commitments and contingencies (Note 10) | |
|
| |
|
| |
Shareholders’ equity: | |
|
| |
|
| |
Preference shares (Series A-1: $1,000 par value; 2,000,000 shares authorized; 0 shares issued and outstanding at September 30, 2021 and December 31, 2020; Series A-2: $1,000 par value; 2,000,000 shares authorized; 0 shares issued and outstanding at September 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 September 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 September 30, 2021 and December 31, 2020) | |
| 37 | |
| 37 | |
Additional paid-in capital | |
| 7,352,618 | |
| 5,721,725 | |
Accumulated other comprehensive income (loss) | |
| (266,704) | |
| (241,830) | |
Retained earnings (deficit) | |
| (5,145,423) | |
| (2,308,624) | |
Total shareholders’ equity | |
| 1,940,528 | |
| 3,171,308 | |
Total liabilities and shareholders’ equity | | $ | 18,722,553 | | $ | 18,391,628 | |
| | | | | | | |
|
| September 30, | | December 31, | | ||
|
| 2022 |
| 2021 | | ||
Assets | | |
|
| |
| |
Current assets: | | |
|
| |
| |
Cash and cash equivalents | | $ | 1,180,754 | | $ | 1,500,357 | |
Short-term investments | | | — | | | 240,000 | |
Accounts receivable, net | |
| 393,118 | |
| 1,167,473 | |
Inventories | |
| 155,880 | |
| 118,205 | |
Prepaid expenses and other assets | |
| 416,800 | |
| 264,691 | |
Total current assets | |
| 2,146,552 | |
| 3,290,726 | |
Property and equipment, net | |
| 14,511,649 | |
| 13,528,806 | |
Goodwill | |
| 98,134 | |
| 98,134 | |
Trade names | |
| 500,525 | |
| 500,525 | |
Other long-term assets | |
| 1,683,237 | |
| 1,300,804 | |
Total assets | | $ | 18,940,097 | | $ | 18,718,995 | |
Liabilities and shareholders’ equity | |
|
| |
|
| |
Current liabilities: | |
|
| |
|
| |
Current portion of long-term debt | | $ | 1,012,722 | | $ | 876,890 | |
Accounts payable | |
| 141,305 | |
| 233,172 | |
Accrued expenses and other liabilities | |
| 1,216,769 | |
| 1,058,401 | |
Due to NCLH | |
| 53,771 | |
| 37,995 | |
Advance ticket sales | |
| 2,291,624 | |
| 1,561,336 | |
Total current liabilities | |
| 4,716,191 | |
| 3,767,794 | |
Long-term debt | |
| 10,718,574 | |
| 9,863,980 | |
Exchangeable notes | | | 1,919,236 | | | 1,801,517 | |
Other long-term liabilities | |
| 994,985 | |
| 997,055 | |
Total liabilities | |
| 18,348,986 | |
| 16,430,346 | |
Commitments and contingencies (Note 10) | |
|
| |
|
| |
Shareholders’ equity: | |
|
| |
|
| |
Preference shares (Series A-1: $1,000 par value; 2,000,000 shares authorized; 0 shares issued and outstanding at September 30, 2022 and December 31, 2021; Series A-3: $1,000 par value; 1,000,000 shares authorized; 0 shares issued and outstanding at September 30, 2022 and December 31, 2021; Series A-4: $1,000 par value; 2,000,000 shares authorized; 0 shares issued and outstanding at September 30, 2022 and December 31, 2021; and Series A-5: $1,000 par value; 1,000,000 shares authorized; 0 shares issued and outstanding at September 30, 2022) | | | — | | | — | |
Ordinary shares ($0.0012 par value; 40,000,000 shares authorized; 31,164,004 shares issued and outstanding at September 30, 2022 and December 31, 2021) | |
| 37 | |
| 37 | |
Additional paid-in capital | |
| 8,558,481 | |
| 8,489,770 | |
Accumulated other comprehensive income (loss) | |
| (606,215) | |
| (286,799) | |
Accumulated deficit | |
| (7,361,192) | |
| (5,914,359) | |
Total shareholders’ equity | |
| 591,111 | |
| 2,288,649 | |
Total liabilities and shareholders’ equity | | $ | 18,940,097 | | $ | 18,718,995 | |
The accompanying notes are an integral part of these consolidated financial statements.
5
NCL Corporation Ltd.
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
| | | | | | | | | | | | |
| | Nine Months Ended | | Nine Months Ended | ||||||||
| | September 30, | | September 30, | ||||||||
|
| 2021 |
| 2020 |
| 2022 |
| 2021 | ||||
Cash flows from operating activities |
| |
|
| |
|
| |
|
| |
|
Net loss | | $ | (2,836,799) | | $ | (3,591,483) | | $ | (1,446,833) | | $ | (2,836,799) |
Adjustments to reconcile net loss to net cash used in operating activities: | |
|
| |
|
| |
|
| |
|
|
Depreciation and amortization expense | |
| 626,843 | |
| 598,380 | |
| 661,928 | |
| 626,843 |
Impairment loss | | | — | | | 1,607,797 | ||||||
Deferred income taxes, net | |
| 79 | |
| (17,550) | ||||||
Loss on derivatives | |
| 179,354 | |
| 293,045 | ||||||
(Gain) loss on derivatives | |
| (420,050) | |
| 179,354 | ||||||
Loss on extinguishment of debt | | | 237,065 | | | 10,480 | | | 188,433 | | | 237,065 |
Provision for bad debts and inventory obsolescence | |
| 14,118 | |
| 16,293 | |
| 5,438 | |
| 14,118 |
Gain on involuntary conversion of assets | | | (7,706) | | | (1,340) | | | (1,880) | | | (7,706) |
Share-based compensation expense | |
| 88,974 | |
| 81,009 | |
| 88,923 | |
| 88,974 |
Net foreign currency adjustments | |
| (7,238) | |
| 3,746 | ||||||
Net foreign currency adjustments on euro-denominated debt | |
| (17,672) | |
| (7,238) | ||||||
Changes in operating assets and liabilities: | |
| | |
| | |
| | |
| |
Accounts receivable, net | |
| (979,890) | |
| (12,103) | |
| 765,692 | |
| (979,890) |
Inventories | |
| (26,676) | |
| 12,757 | |
| (38,388) | |
| (26,676) |
Prepaid expenses and other assets | |
| (65,856) | |
| 85,424 | |
| (555,241) | |
| (65,752) |
Accounts payable | |
| 15,012 | |
| 11,536 | |
| (97,802) | |
| 15,012 |
Accrued expenses and other liabilities | |
| 141,264 | |
| (179,764) | |
| 117,246 | |
| 141,239 |
Advance ticket sales | |
| 469,595 | |
| (834,560) | |
| 713,447 | |
| 469,595 |
Net cash used in operating activities | |
| (2,151,861) | |
| (1,916,333) | |
| (36,759) | |
| (2,151,861) |
Cash flows from investing activities | |
|
| |
|
| |
|
| |
|
|
Additions to property and equipment, net | |
| (539,530) | |
| (873,142) | |
| (1,628,442) | |
| (539,530) |
Purchases of short-term investments | | | — | | | (770,000) | ||||||
Proceeds from maturities of short-term investments | | | 240,000 | | | 205,000 | ||||||
Cash paid on settlement of derivatives | | | (14,465) | | | (31,520) | | | (214,035) | | | (14,465) |
Other | | | 11,024 | | | 3,047 | | | 10,991 | | | 11,024 |
Net cash used in investing activities | |
| (542,971) | |
| (901,615) | |
| (1,591,486) | |
| (1,107,971) |
Cash flows from financing activities | |
|
| |
|
| |
|
| |
|
|
Repayments of long-term debt | |
| (889,206) | |
| (888,800) | |
| (1,465,439) | |
| (889,206) |
Proceeds from long-term debt | |
| 1,345,041 | |
| 5,225,090 | |
| 3,003,003 | |
| 1,345,041 |
Due to NCLH, net | |
| 2,690 | |
| 962 | |
| 15,776 | |
| 2,690 |
Contribution from NCLH | |
| 1,558,957 | |
| 741,795 | |
| — | |
| 1,558,957 |
Net share settlement of restricted share units | |
| (16,672) | |
| (15,334) | |
| (20,212) | |
| (16,672) |
Early redemption premium | |
| (611,164) | |
| (1,376) | |
| (172,012) | |
| (611,164) |
Deferred financing fees and other | |
| (60,246) | |
| (117,388) | |
| (52,474) | |
| (60,246) |
Net cash provided by financing activities | |
| 1,329,400 | |
| 4,944,949 | |
| 1,308,642 | |
| 1,329,400 |
Effect of exchange rates on cash and cash equivalents | | | — | | | (3,267) | ||||||
Net increase (decrease) in cash and cash equivalents | |
| (1,365,432) | |
| 2,123,734 | ||||||
Net decrease in cash and cash equivalents | |
| (319,603) | |
| (1,930,432) | ||||||
Cash and cash equivalents at beginning of period | |
| 3,299,340 | |
| 231,239 | |
| 1,500,357 | |
| 3,299,340 |
Cash and cash equivalents at end of period | | $ | 1,933,908 | | $ | 2,354,973 | | $ | 1,180,754 | | $ | 1,368,908 |
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 September 30, 2021 | | Three Months Ended September 30, 2022 | ||||||||||||||||||||||||||
| | | | | | | | Accumulated | | | | | | | | | | | | | | Accumulated | | | | | | | ||
| | | | | Additional | | Other | | Retained | | Total | | | | | Additional | | Other | | | | | Total | |||||||
| | Ordinary | | Paid-in | | Comprehensive | | Earnings | | Shareholders’ | | Ordinary | | Paid-in | | Comprehensive | | Accumulated | | Shareholders’ | ||||||||||
| | Shares |
| Capital |
| Income (Loss) |
| (Deficit) |
| Equity | | Shares |
| Capital |
| Income (Loss) |
| Deficit |
| Equity | ||||||||||
Balance, June 30, 2021 | | $ | 37 | | $ | 7,312,710 | | $ | (234,616) | | $ | (4,498,610) | | $ | 2,579,521 | |||||||||||||||
Balance, June 30, 2022 | | $ | 37 | | $ | 8,540,619 | | $ | (379,005) | | $ | (7,027,942) | | $ | 1,133,709 | |||||||||||||||
Share-based compensation | |
| — | |
| 39,922 | |
| — | |
| — | |
| 39,922 | |
| — | |
| 26,083 | |
| — | |
| — | |
| 26,083 |
Net share settlement of restricted share units | |
| — | |
| (14) | |
| — | |
| — | |
| (14) | |
| — | |
| (8,221) | |
| — | |
| — | |
| (8,221) |
Other comprehensive loss, net | |
| — | |
| — | |
| (32,088) | |
| — | |
| (32,088) | |
| — | |
| — | |
| (227,210) | |
| — | |
| (227,210) |
Net loss | |
| — | |
| — | |
| — | |
| (646,813) | |
| (646,813) | |
| — | |
| — | |
| — | |
| (333,250) | |
| (333,250) |
Balance, September 30, 2021 | | $ | 37 | | $ | 7,352,618 | | $ | (266,704) | | $ | (5,145,423) | | $ | 1,940,528 | |||||||||||||||
Balance, September 30, 2022 | | $ | 37 | | $ | 8,558,481 | | $ | (606,215) | | $ | (7,361,192) | | $ | 591,111 | |||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2021 | | Nine Months Ended September 30, 2022 | ||||||||||||||||||||||||||
| | | | | | | | Accumulated | | | | | | | | | | | | | | Accumulated | | | | | | | ||
| | | | | Additional | | Other | | Retained | | Total | | | | | Additional | | Other | | | | | Total | |||||||
| | Ordinary | | Paid-in | | Comprehensive | | Earnings | | Shareholders’ | | Ordinary | | Paid-in | | Comprehensive | | Accumulated | | Shareholders’ | ||||||||||
|
| Shares |
| Capital |
| Income (Loss) |
| (Deficit) |
| Equity |
| Shares |
| Capital |
| Income (Loss) |
| Deficit |
| Equity | ||||||||||
Balance, December 31, 2020 | | $ | 37 | | $ | 5,721,725 | | $ | (241,830) | | $ | (2,308,624) | | $ | 3,171,308 | |||||||||||||||
Balance, December 31, 2021 | | $ | 37 | | $ | 8,489,770 | | $ | (286,799) | | $ | (5,914,359) | | $ | 2,288,649 | |||||||||||||||
Share-based compensation | |
| — | |
| 88,974 | |
| — | |
| — | |
| 88,974 | |
| — | |
| 88,923 | |
| — | |
| — | |
| 88,923 |
Net share settlement of restricted share units | |
| — | |
| (16,672) | |
| — | |
| — | |
| (16,672) | |
| — | |
| (20,212) | |
| — | |
| — | |
| (20,212) |
Contribution from NCLH | |
| — | |
| 1,558,957 | |
| — | |
| — | |
| 1,558,957 | |||||||||||||||
Other | | | — | | | (366) | | | — | | | — | | | (366) | |||||||||||||||
Other comprehensive loss, net | |
| — | |
| — | |
| (24,874) | |
| — | |
| (24,874) | |
| — | |
| — | |
| (319,416) | |
| — | |
| (319,416) |
Net loss | |
| — | |
| — | |
| — | |
| (2,836,799) | |
| (2,836,799) | |
| — | |
| — | |
| — | |
| (1,446,833) | |
| (1,446,833) |
Balance, September 30, 2021 | | $ | 37 | | $ | 7,352,618 | | $ | (266,704) | | $ | (5,145,423) | | $ | 1,940,528 | |||||||||||||||
Balance, September 30, 2022 | | $ | 37 | | $ | 8,558,481 | | $ | (606,215) | | $ | (7,361,192) | | $ | 591,111 |
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 September 30, 2020 | | Three Months Ended September 30, 2021 | ||||||||||||||||||||||||||
| | | | | | | | Accumulated | | | | | | | | | | | | | | Accumulated | | | | | | | ||
| | | | | Additional | | Other | | Retained | | Total | | | | | Additional | | Other | | | | | Total | |||||||
| | Ordinary | | Paid-in | | Comprehensive | | Earnings | | Shareholders’ | | Ordinary | | Paid-in | | Comprehensive | | Accumulated | | Shareholders’ | ||||||||||
| | Shares |
| Capital |
| Income (Loss) |
| (Deficit) |
| Equity | | Shares |
| Capital |
| Income (Loss) |
| Deficit |
| Equity | ||||||||||
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 | |||||||||||||||
Share-based compensation | |
| — | |
| 25,862 | |
| — | |
| — | |
| 25,862 | |
| — | |
| 39,922 | |
| — | |
| — | |
| 39,922 |
Net share settlement of restricted share units | |
| — | |
| (16) | |
| — | |
| — | |
| (16) | |
| — | |
| (14) | |
| — | |
| — | |
| (14) |
Contribution from NCLH | |
| — | |
| 277,296 | |
| — | |
| — | |
| 277,296 | |||||||||||||||
Other comprehensive income, net | |
| — | |
| — | |
| 123,883 | |
| — | |
| 123,883 | |||||||||||||||
Other comprehensive loss, net | |
| — | |
| — | |
| (32,088) | |
| — | |
| (32,088) | |||||||||||||||
Net loss | |
| — | |
| — | |
| — | |
| (758,152) | |
| (758,152) | |
| — | |
| — | |
| — | |
| (646,813) | |
| (646,813) |
Balance, September 30, 2020 | | $ | 37 | | $ | 4,868,800 | | $ | (373,717) | | $ | (891,924) | | $ | 3,603,196 | |||||||||||||||
Balance, September 30, 2021 | | $ | 37 | | $ | 7,352,618 | | $ | (266,704) | | $ | (5,145,423) | | $ | 1,940,528 | |||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2020 | | Nine Months Ended September 30, 2021 | ||||||||||||||||||||||||||
|
| | | | | | | Accumulated | | | | | | |
| | | | | | | Accumulated | | | | | | | ||
| | | | | Additional | | Other | | Retained | | Total | | | | | Additional | | Other | | | | | Total | |||||||
| | Ordinary | | Paid-in | | Comprehensive | | Earnings | | Shareholders’ | | Ordinary | | Paid-in | | Comprehensive | | Accumulated | | 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 | |
| — | |
| 81,009 | |
| — | |
| — | |
| 81,009 | |
| — | |
| 88,974 | |
| — | |
| — | |
| 88,974 |
Net share settlement of restricted share units | |
| — | |
| (15,334) | |
| — | |
| — | |
| (15,334) | |
| — | |
| (16,672) | |
| — | |
| — | |
| (16,672) |
Contribution from NCLH | | | — | | | 741,795 | | | — | | | — | | | 741,795 | | | — | | | 1,558,957 | | | — | | | — | | | 1,558,957 |
Cumulative change in accounting policy | |
| — | |
| — | |
| — | |
| 1,923 | |
| 1,923 | |||||||||||||||
Other | | | — | | | (366) | | | — | | | — | | | (366) | |||||||||||||||
Other comprehensive loss, net | |
| — | |
| — | |
| (76,514) | |
| — | |
| (76,514) | |
| — | |
| — | |
| (24,874) | |
| — | |
| (24,874) |
Net loss | |
| — | |
| — | |
| — | |
| (3,591,483) | |
| (3,591,483) | |
| — | |
| — | |
| — | |
| (2,836,799) | |
| (2,836,799) |
Balance, September 30, 2020 | | $ | 37 | | $ | 4,868,800 | | $ | (373,717) | | $ | (891,924) | | $ | 3,603,196 | |||||||||||||||
Balance, September 30, 2021 | | $ | 37 | | $ | 7,352,618 | | $ | (266,704) | | $ | (5,145,423) | | $ | 1,940,528 |
The accompanying notes are an integral part of these consolidated financial statements.
8
NCLNCL 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), (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”“Oceania Cruises” 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”)brand and (vi) “Regent” refers to the Regent 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).brand.
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 September 30, 2021,2022, we had 2829 ships with approximately 59,15062,000 Berths and had orders for 9eight additional ships to be delivered through 2027. We have converted some double occupancy cabins to studio cabins and we expect to convert an additional 900 cabins in early 2023. Due to the novel coronavirus (“COVID-19”),COVID-19, we temporarily suspended all global cruise voyages from March 2020 until July 2021, when we resumed cruise voyages on a limited basis. We refer you to Note 2 – “Summary of Significant Accounting Policies” for further information.
Norwegian Prima was delivered in July 2022. We have 1five additional Prima Class Ships on order with currently scheduled delivery dates from 2023 through 2027. We have one Explorer Class Ship on order for delivery in 2023. We have 2two 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 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.82,000.
9
2. Summary of Significant Accounting Policies
Liquidity and Management’s Plan
Due to the impact of COVID-19, 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 3three brands. As of the date hereof, 11 of our ships were operating with guests on board as part of our phased return to service. Significant events affecting travel, including COVID-19, typically have an impact on 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 equity offering, collectively totaling approximately $2.7 billion in gross proceeds. From the proceeds, approximately $1.5 billion was used to extinguish debt. In November 2021, the Company executed a $1 billion commitment through August 15, 2022 that provides additional liquidity to the Company. Refer to Note 7 – “Long-Term Debt” for further details of the above transactions.
In the third quarter of 2021, we began a phased relaunch of certain cruise voyages with our ships initially operating at reduced occupancy levels. TheIn early May 2022, the Company continues to execute oncompleted the phased relaunch plansof its entire fleet with all ships now in operation with guests on board.
Significant events affecting travel typically have an impact on demand for its 28-ship fleet. The Company expects to have approximately 75% of capacity operating by December 31, 2021cruise vacations, with the full fleet expected to be back in operationextent of the impact determined by April 1, 2022.the length of time the event influences travel decisions. The timing for bringing our ships back to service, the level of occupancy on our ships and the percentage of our fleet in service will depend on a number of factors including, but not limited to, the duration and extent of the COVID-19 pandemic, further resurgences and new more contagious and/or vaccine-resistant variants of COVID-19 or the availability, distribution, rateemergence of other public acceptance and efficacy of vaccines and therapeutics for COVID-19,health crises, our ability to comply with governmental regulations and implement new health and safety protocols, port availability, travel restrictions, bans and advisories, and our ability to re-staffstaff our shipsships. In addition, as a result of conditions associated with the COVID-19 pandemic and implement new healthother global events, such as Russia’s ongoing invasion of Ukraine and safety protocols.actions taken by the United States and other governments in response to the invasion, the global economy, including the financial and credit markets, has recently experienced significant volatility and disruptions, including increases in inflation rates, fuel prices, and interest rates. These conditions have resulted, and may continue to result, in increased expenses and may also impact travel or consumer discretionary spending. We believe the ongoing effects of the foregoing factors and events on our operations and global bookings have had, and will continue to have, a significant impact on our financial results and liquidity.
9
The estimation of our future cash flow projections includes numerous assumptions that are subject to various risks and uncertainties. Our principal assumptions for future cash flow projections include:
● | Expected gradual |
● | Expected increase in revenue per passenger cruise day through a combination of both passenger ticket and onboard revenue as compared to 2019; |
● | Forecasted cash collections |
● | Expected |
10
We cannot make assurances that our assumptions used to estimate our liquidity requirements will not change due to the unique and unpredictabledynamic nature of the pandemic, including its magnitude and duration.current economic landscape. Accordingly, the full effect of the COVID-19 pandemic and other global events impacting macroeconomic conditions and travel and consumer discretionary spending, including Russia’s ongoing invasion of Ukraine, on our financial performance and financial condition cannot be quantified at this time. We have made reasonable estimates and judgments of the impact of COVID-19these events 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 and year ending December 31, 2021 and expect to report a net loss until we are able to resume regular voyages. We have taken actions to improve our liquidity, including completing various capital market transactions and making capital expenditure and operating expense reductions, and we expect to continue to pursue otherfurther opportunities to improve our liquidity and to refinance our debt to reduce interest expense and extend maturities.liquidity.
Based on these actions and assumptions regarding the impact of COVID-19,as discussed above, and considering our available liquidity, including cash and cash equivalents of $1.9$1.2 billion as of September 30, 2021,2022 and the net impact of our $1 billion undrawn commitment less related fees (see Note 7 – “Long-Term Debt”), we have concluded that we have sufficient liquidity to satisfy our obligations for at least the next twelve months.
Subsequent to the liquidity assessment period (twelve months from the issuance of these financial statements), the Company has approximately $2.2 billion of debt that will mature in January 2024. The Company is currently taking steps to address this maturity.
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, our cruise voyages were completely suspended from March 2020 until July 2021 due to the COVID-19 pandemic and our resumption of cruise voyages will bewas phased in gradually as described under “—Liquidity and Management’s Plan” above.gradually. The interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2020,2021, which are included in our most recent Annual Report on Form 10-K filed with the SEC on February 26,March 1, 2022.
Revisions to Previously Reported Quarterly Financial Statements
During the fourth quarter of 2021, the Company identified an error in its consolidated balance sheet as of September 30, 2021 and consolidated statement of cash flows for the nine months ended September 30, 2021. Based on their nature, certain amounts shown as cash and cash equivalents should have been classified as short-term investments. We have determined that these errors were not material to the previously issued interim financial statements for the period ended September 30, 2021.
10
As a result of the error, the amounts previously reported as cash and cash equivalents have been reclassified to cash flows used in investing activities in the consolidated statement of cash flows for the nine months ended September 30, 2021 as follows (in thousands):
| | | | | | | | | |
| | Nine months ended September 30, 2021 | |||||||
|
| Previously |
| |
| As | |||
| | Reported | | Adjustments | | Reported | |||
Cash flows from investing activities |
| |
| | |
|
| |
|
Purchases of short-term investments | | $ | — | | $ | (770,000) | | $ | (770,000) |
Proceeds from maturities of short-term investments | | | — | | | 205,000 | | | 205,000 |
Net cash used in investing activities | | | (542,971) | | | (565,000) | | | (1,107,971) |
| | | | | | | | | |
Net decrease in cash and cash equivalents | | | (1,365,432) | | | (565,000) | | | (1,930,432) |
Cash and cash equivalents at end of period | | | 1,933,908 | | | (565,000) | | | 1,368,908 |
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. GainsThe resulting 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 gaingains of $9.9$34.7 million and a loss of $12.3$9.9 million for the three months ended September 30, 20212022 and 2020,2021, respectively, and a gaingains of $14.9$79.4 million and a loss of $2.6$14.9 million for the nine months ended September 30, 20212022 and 2020,2021, respectively, related to transactionsremeasurement of assets and liabilities denominated in otherforeign currencies. Remeasurements of foreign currency related to operating activities are recognized within changes in operating assets and liabilities in the consolidated statement of cash flows.
Depreciation and Amortization Expense
The amortization of deferred financing fees and 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 $964.7included $237.0 million and $1.1 billion due from credit card processors as of September 30, 2022 and December 31, 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.respectively.
Recently Issued Accounting Guidance
In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting 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
11
impacted by reference rate reform. The provisions apply only to those transactions that reference LIBOR or another 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 September 30, 2021,2022, we have not adopted any expedients and exceptions under ASU 2020-04. We will 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 | | Nine Months Ended | | Three Months Ended | | Nine Months Ended | ||||||||||
| | September 30, | | September 30, | | September 30, | | September 30, | ||||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| 2022 |
| 2022 | ||||||
North America | | $ | 77,418 | | $ | 1,967 | | $ | 80,562 | | $ | 956,389 | | $ | 892,971 | | $ | 2,053,909 |
Europe | |
| 75,474 | |
| 2,195 | |
| 78,316 | |
| 25,231 | |
| 718,435 | |
| 1,243,149 |
Asia-Pacific | |
| 74 | |
| 362 | |
| 1,061 | |
| 151,283 | |
| 2,957 | |
| 24,611 |
South America | | | 115 | | | 471 | | | 610 | | | 76,777 | ||||||
Other | |
| — | |
| 1,523 | |
| — | |
| 60,649 | | | 1,147 | | | 2,962 |
Total revenue | | $ | 153,081 | | $ | 6,518 | | $ | 160,549 | | $ | 1,270,329 | | $ | 1,615,510 | | $ | 3,324,631 |
Amounts for the comparative three and nine months ended September 30, 2021 are excluded as the information is 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 1one 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 75-85%80-87% of total revenue.revenue over the preceding three fiscal years. 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 September 30, 2021 and December 31, 2020,2022, our receivables from customers were $7.8 million and $1.0 million, respectively.$58.5 million.
Beginning in March 2020, our brands launched new
Our cancellation policies to permit ourcertain guests to cancel cruises which are not part of the Company’s temporary suspension of voyagesbooked within certain windows for specified time periods up to 15 days prior to departure. These programs weredeparture or in placethe event of a positive COVID-19 test, and the guests will receive future cruise credits. Standard cancellation penalties apply for cruises booked through specific time periods specified by brand, and for cruises scheduled to embark through October 31, 2021. Certain cruises booked for certain periods, will be permitted a 60-day cancellation window for refunds.all sailings after September 30, 2022. Future cruise credits that have been issued as face value reimbursement for cancelled bookings due to COVID-19 are generally valid for any sailing through December 31, 2022,June 30, 2023, and we may further extend this offer. The future cruise credits are not contracts, and therefore, guests who elected this option are excluded from our contract liability balance; however, the credit for the original amount paid is included in advance ticket sales or other long-term liabilities as applicable.sales.
12
Our contract liabilities are included within advance ticket sales. As of September 30, 20212022 and December 31, 2020,2021, our contract liabilities were $234.0 million$1.6 billion and $23.1$161.8 million, respectively. Of the amounts included within contract liabilities as of September 30, 2022, approximately 25%40% were refundable in accordance with our cancellation policies. Of the deposits included within advance ticket sales, the vast majority are refundable in accordance with our cancellation policies and it is uncertain to what extent guests may request refunds. Refunds payable to guests are included in accounts payable. For the nine months ended September 30, 2021, no2022, $123.1 million of revenue recognized was included in the contract liability balance at the beginning of the period. The revenue recognized in the nine months ended September 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 September 30, 2021, and 2020, approximately $0.9 million, and $15.5 million, respectively, and during the nine months ended September 30, 2022 and 2021, and 2020, approximately $26.9$0.3 million and $160.4$26.9 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.
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. TheIn 2020, 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, periodic remeasurements will be required. During the contingency period, we are recognizing lease expense for theseSeptember 30, 2022, certain of our port facilities as incurred.were remeasured with an increase of $35.2 million to other long-term assets and other long-term liabilities.
LeaseOperating lease balances were as follows (in thousands):
| | | | | | | | |
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| Balance Sheet location |
| September 30, 2021 |
| December 31, 2020 | ||
Operating leases | | | | | | | |
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Right-of-use assets |
| Other long-term assets |
| $ | 789,303 |
| $ | 209,037 |
Current operating lease liabilities |
| Accrued expenses and other liabilities |
| | 37,109 |
| | 17,700 |
Non-current operating lease liabilities |
| Other long-term liabilities |
| | 662,043 |
| | 185,414 |
| | | | | | | | |
Finance leases | | | | | | | | |
Right-of-use assets |
| Property and equipment, net |
| | 10,078 |
| | 11,948 |
Current finance lease liabilities |
| Current portion of long-term debt |
| | 4,561 |
| | 5,143 |
Non-current finance lease liabilities |
| Long-term debt |
| | 2,135 |
| | 4,648 |
During the three and nine months ended September 30, 2021, right-of-use assets obtained in exchange for lease obligations were $501.4 million for operating leases to use certain port faciliaties. The leases had terms ranging from approximately 20 years to 32 years and incremental borrowing rates ranging from 4.3% to 5.8%.
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| Balance Sheet location |
| September 30, 2022 |
| December 31, 2021 | ||
Operating leases | | | | | | | |
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Right-of-use assets |
| Other long-term assets |
| $ | 826,334 |
| $ | 794,187 |
Current operating lease liabilities |
| Accrued expenses and other liabilities |
| | 40,708 |
| | 34,407 |
Non-current operating lease liabilities |
| Other long-term liabilities |
| | 696,917 |
| | 670,688 |
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As of September 30, 2021, maturities of lease liabilities were as follows (in thousands):
| | | | |
| | Operating | | |
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| leases |
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Remainder of 2021 | | $ | 12,423 | |
2022 |
| | 42,937 | |
2023 | | | 61,225 | |
2024 | | | 64,996 | |
2025 | | | 66,514 | |
Thereafter | | | 1,083,480 | |
Total | | | 1,331,575 | |
Less: Present value discount | | | (632,423) | |
Present value of lease liabilities |
| $ | 699,152 | |
5. Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) for the nine months ended September 30, 20212022 was as follows (in thousands):
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| | Nine Months Ended September 30, 2021 |
| | Nine Months Ended September 30, 2022 |
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| | Other | | Related to | | Shipboard |
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| Cash Flow | | Retirement | |
| Comprehensive |
| Cash Flow | | Retirement | | ||||||
| | Income (Loss) | | Hedges | | Plan | | | Income (Loss) | | Hedges | | Plan | | ||||||
Accumulated other comprehensive income (loss) at beginning of period | | $ | (241,830) | | $ | (234,981) |
| $ | (6,849) |
| | $ | (286,799) | | $ | (280,343) |
| $ | (6,456) |
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Current period other comprehensive loss before reclassifications | |
| (73,497) | |
| (73,497) |
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| — |
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Current period other comprehensive income (loss) before reclassifications | |
| (244,361) | |
| (246,742) |
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| 2,381 |
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Amounts reclassified into earnings | |
| 48,623 | |
| 48,328 | (1) |
| 295 | (2) | |
| (75,055) | |
| (75,339) | (1) |
| 284 | (2) |
Accumulated other comprehensive income (loss) at end of period | | $ | (266,704) | | $ | (260,150) | (3) | $ | (6,554) |
| | $ | (606,215) | | $ | (602,424) | (3) | $ | (3,791) |
|
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Accumulated other comprehensive income (loss) for the nine months ended September 30, 20202021 was as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2020 |
| | Nine Months Ended September 30, 2021 |
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|
| | |
| | |
| Change |
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| | |
| 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 | | $ | (297,203) | | $ | (290,009) |
| $ | (7,194) | | | $ | (241,830) | | $ | (234,981) |
| $ | (6,849) | |
Current period other comprehensive loss before reclassifications | |
| (163,672) | |
| (163,672) |
|
| — | | |
| (73,497) | |
| (73,497) |
|
| — | |
Amounts reclassified into earnings | |
| 87,158 | |
| 86,853 | (1) |
| 305 | (2) | |
| 48,623 | |
| 48,328 | (1) |
| 295 | (2) |
Accumulated other comprehensive income (loss) at end of period | | $ | (373,717) | | $ | (366,828) |
| $ | (6,889) | | | $ | (266,704) | | $ | (260,150) |
| $ | (6,554) | |
(1) | We refer you to Note 8— “Fair Value Measurements and Derivatives” for the affected line items in the consolidated statements of operations. |
(2) | Amortization of prior-service cost and actuarial loss reclassified to other income (expense), net. |
(3) | Includes |
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6.Property and Equipment, net
Property and equipment, net increased $68.9 million$1.0 billion for the nine months ended September 30, 20212022 primarily due to the delivery of Norwegian Prima. We determine the weighted average useful lives of our ships under constructionbased primarily on our estimates of the useful lives of the ships’ major component systems on the date of acquisition, such as cabins, main diesels, main electric, superstructure and hull, and their related proportional weighting to the ship improvement projects.as a whole. We have assessed the weighted-average useful life of the components of Norwegian Prima and assigned a useful life of 35 years with a 10% residual value to the Prima Class Ships. The useful life and residual value consider the historical useful lives of similar assets, manufacturer recommended lives, planned maintenance programs, anticipated changes in technological conditions and the related proportional weighting of the major components of the Prima Class Ships.
7. Long-Term Debt
Credit Facilities
In January 2021, NCLC entered into an amendment agreement (the “First Amendment”), which amends the Amended and Restated Credit Agreement, dated as of May 8, 2020 (the “Fifth ARCA” and, as amended by the First 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,February 2022, (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 Fifth ARCA, except that amortization payments on the Term Loan A-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 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 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 Legacy Term Loan A, Term Loan A-1 and Deferred Term Loan A that were held by lenders 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 Period the interest rate for Term Loan A-2 and revolving loans held by Lenders that consented to the First Amendment will be LIBOR plus 2.00% (or base rate plus 1.00%) with decreases subject to a leverage-based pricing grid. The First Amendment also makes certain other changes to the Senior Secured Credit Facility, including tightening certain of the baskets applicable to our ability to make certain asset dispositions, investments and restricted payments.
Additionally, in February 2021, NCLC amended all of its export-credit backed facilities to defer amortization payments aggregating approximately $680 million through March 31, 2022 and/or make certain changes in respect of covenants and undertakings contained therein.
The facilities that finance Norwegian Breakaway, Norwegian Getaway, Norwegian Escape, Norwegian Joy, Norwegian Bliss, Norwegian Encore, Seven Seas Explorer, Seven Seas Splendor, Riviera and Marina were amended to provide that, among other things, (a) amortization payments due from April 1, 2021 to March 31, 2022 (the “Second Deferral Period”) on the loans will be deferred and (b) the principal amounts so deferred will constitute separate tranches of loans under
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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:
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After the end of the Second Deferral Period, the deferred loans will amortize in an aggregate principal amount equal to 20% per annum of the deferred loans, in semiannual installments.
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 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.
In April 2021, an agreement was executed to defer certain newbuild related debt amortization to July 2022. The aggregate amount of debt amortization that was deferred was €31.2 million, or $36.1 million based on the euro/U.S. dollar exchange rate as of September 30, 2021. The interest rate on the newbuild related debt was increased to 4.5% per annum.
The amendments of the agreements described above resulted in aggregate modification expenses of $52.1 million for the nine months ended September 30, 2021, which is 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 September 30, 2021, €19.2 million, or $22.2 million based on the euro/U.S. dollar exchange rate as of September 30, 2021, was drawn under this facility, which matures on July 1, 2022.
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. Subsequently, in September 2021, excess commitments totaling approximately $230 million were cancelled under 2 of the credit facilities as a result of hedging euro below the rate used to determine the maximum commitments in U.S. dollars.
Unsecured Notes
In December 2020, NCLC conducted a private offering (the “Notes Offering”) of $850.0$1,000 million in aggregate principal amount of 5.875% senior unsecuredsecured notes due March 15, 20262027 (the “2026 Senior Unsecured“2027 Secured Notes”). In March 2021, NCLC completed an add-on offering of $575.0 and $600 million in aggregate principal amount of additional 2026 Senior7.750% senior notes due 2029 (the “2029 Unsecured Notes. Notes”).
The 2026 Senior Unsecured2027 Secured Notes payare jointly and severally guaranteed on a senior secured basis by Pride of Hawaii, LLC, Norwegian Epic, Ltd. and Sirena Acquisition. The 2027 Secured Notes and the related guarantees are secured by a first-priority interest at 5.875% per annum, semiannually on March 15in, among other things and September 15subject to certain agreed security principles, three of each year, to holders of record atour vessels, namely the close of business onNorwegian Jade vessel, the immediately preceding March 1Norwegian Epic vessel and September 1, respectively. the Sirena vessel.
NCLC may redeem the 2026 Senior Unsecured2027 Secured Notes at its option, in whole or in part, at any time and from time to time prior to DecemberFebruary 15, 2025,2024, at a “make-whole” redemption price, equal to 100% of the principal amount of the notes redeemed plus accrued and unpaid interest and additional amounts, if any, to, but excluding, the redemption date and a “make-whole premium.”date. NCLC may redeem the 2026 Senior Unsecured2027 Secured Notes at its option, in whole or in part, at any time and from time to time on or after DecemberFebruary 15, 2025,2024, at a price equal to 100% of the principal amount ofredemption prices set forth in the notesindenture governing the 2027 Secured Notes, plus accrued and unpaid interest and additional amounts, if any, to, but excluding, the redemption date. At any time and from time to time prior to DecemberFebruary 15, 2022,
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2024, NCLC may choose to redeem up to 40% of the aggregate principal amount of the 2026 Senior Unsecured2027 Secured 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 Senior2027 Secured 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 2027 Secured Notes issued remains outstanding following such redemption.
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NCLC may redeem the 2029 Unsecured Notes at its option, in whole or in part, at any time and from time to time prior to November 15, 2028, at a “make-whole” redemption price, plus accrued and unpaid interest and additional amounts, if any, to, but excluding, the redemption date. NCLC may redeem the 2029 Unsecured Notes at its option, in whole or in part, at any time and from time to time on or after November 15, 2028, at a redemption price equal to 100% of the principal amount of 2029 Unsecured Notes redeemed, plus accrued and unpaid interest and additional amounts, if any, to, but excluding, the redemption date. At any time and from time to time prior to February 15, 2025, NCLC may choose to redeem up to 40% of the aggregate principal amount of the 2029 Unsecured Notes with the net proceeds of certain equity offerings, subject to certain restrictions, at a redemption price equal to 107.750% of the principal amount of the 2029 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 nine months ended September 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, 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 March 15, 2024, NCL Finance may choose to redeem up to 40% of the aggregate principal amount of the 2028 Senior Unsecured Notes with the net proceeds of certain equity offerings, subject to certain restrictions, at a redemption price equal to 106.125% of the principal amount of the 2028 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 2028 Senior2029 Unsecured Notes issued remains outstanding following such redemption.
The indentures governing the 2026 Senior Unsecured2027 Secured Notes and 2028 Seniorthe 2029 Unsecured Notes include requirements that, among other things and subject to a number of qualifications and exceptions, restrict our ability and the ability of NCLC and itsour 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 theirour assets.
In November 2021, the Company executedFebruary 2022, NCLC also conducted a $1 billion commitment through August 15, 2022 that provides additional liquidity to the Company. If drawn, this commitment will convert into an unsecured note paying interest at 8.0% per annum, semiannually, and maturingprivate offering (the “Exchangeable Notes Offering”) of $473.2 million in April 2024. As of the date hereof, the Company has not drawn under this commitment.
Exchangeable Notes
In August 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 does not use one of the models that was eliminated, and the adoption of 2020-06 did not have a material effect.
NCLC has outstanding $862.5 million aggregate principal amount of 6.00%2.5% exchangeable senior notes due MayFebruary 15, 20242027 (the “2024“2027 2.5% Exchangeable Notes”). The 20242027 2.5% Exchangeable Notes are guaranteed by NCLH on a senior basis. HoldersAt their option, holders may exchange their 20242027 2.5% Exchangeable Notes for, at their optionthe election of NCLC, cash, ordinary shares of NCLH or a combination of cash and ordinary shares of NCLH, at any time prior to the close of business on the business day immediately preceding August 15, 2026, subject to the satisfaction of certain conditions and during certain periods, and on or after August 15, 2026 until the close of business on the business day immediately preceding the maturity date, regardless of whether such conditions have been met. If NCLC elects to satisfy its exchange obligation solely in ordinary shares or in a combination of ordinary shares and cash, upon exchange, the 2027 2.5% Exchangeable Notes will convert into redeemable preference shares of NCLC. Upon exchange, the preference sharesNCLC, which will be immediately and automatically exchanged, for each $1,000 principal amount of
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exchanged 20242027 2.5% Exchangeable Notes, into a number of NCLH’s ordinary shares based on the exchange rate. The exchange rate will initially be 72.727328.9765 ordinary shares per $1,000 principal amount of 20242027 2.5% Exchangeable Notes (equivalent to an initial exchange price of approximately $13.75$34.51 per ordinary share). The maximum exchange rate is 89.445444.1891 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 exchange rate referred to above is also subject to adjustment for any stock split, stock dividend or similar transaction. The 20242027 2.5% Exchangeable Notes pay interest at 6.00%2.5% per annum, semiannually on MayFebruary 15 and NovemberAugust 15 of each year, to holders of record at the close of business on the immediately preceding May 1 and November 1, respectively.
NCLC also has outstanding $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 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, to holders of record at the close of business on the immediately preceding January 15 and July 15, respectively.
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 tohas used 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 cashnet proceeds from the offering were used to repurchaseNotes Offering and the Private Exchangeable Notes Offering to redeem (the “Redemption”) all of the outstanding 2024 Senior Secured Notes and extinguish2026 Senior Secured Notes and to make scheduled principal payments on debt maturing in 2022, including, in each case, to pay any accrued and unpaid interest thereon, as well as related premiums, fees and expenses. Simultaneously with the debt.Redemption, and pursuant to certain provisions contained in the indentures governing the 2026 Senior Unsecured Notes and the 2028 Senior Unsecured Notes, each of the guarantors party to such indentures were released from their obligations thereunder. The resulting losslosses on extinguishment was $236.0extinguishments, which are recognized in interest expense, net, were $188.4 million for the nine months ended September 30, 2021, which is recognized in interest expense, net.2022.
In July 2022, the Company entered into a $1 billion amended and restated commitment letter with the purchasers named therein (collectively, the “Commitment Parties”), which supersedes a $1 billion commitment letter previously executed in November 2021. The following is a summaryamended commitment has been extended through March 31, 2023. Under the amended commitment, the Commitment Parties have agreed to purchase an aggregate of $1 billion of notes at NCLC’s convertible debt instruments asoption. NCLC has the option to make up to two draws, in which case NCLC will issue an aggregate of September 30, 2021 (in thousands):
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| | | | | Unamortized Debt | | | �� | | | | | | |
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| | Principal | | including Deferred | | Net Carrying | | Fair Value | ||||||
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| Amount |
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| Leveling | ||||
2024 Exchangeable Notes | | $ | 862,500 | | $ | (284,106) | | $ | 578,394 | | $ | 1,838,514 | | Level 2 |
2025 Exchangeable Notes | | | 450,000 | | | (135,250) | | | 314,750 | | | 777,285 | | Level 2 |
The remaining period over which(i) $450 million principal amount of 8.0% senior secured notes due 2025 (the “Secured Notes”) and (ii) $550 million principal amount of 8.0% senior notes due three years after the unamortized debt discount will be recognized as non-cash interest expense is 2.6 yearsissue date (the “Unsecured Notes” and, 3.8 years fortogether with the 2024 ExchangeableSecured Notes, and 2025 Exchangeable Notes, respectively.
the
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“Notes”). The Secured Notes must be issued prior to the Unsecured Notes, and the principal amount of Secured Notes issuable will be increased to the extent that NCLC obtains an increase in obligations that may be secured by liens on collateral pursuant to the terms and conditions of NCLC’s debt agreements (with the principal amount of Unsecured Notes decreased commensurately). If drawn, the Secured Notes will be secured by first-priority interests in, among other things and subject to certain agreed security principles, shares of capital stock in certain guarantors, our material intellectual property and two islands that we use in the operations of our cruise business. The Secured Notes will also be guaranteed by our subsidiaries that own the property that secures the Secured Notes as well as certain additional subsidiaries whose assets do not secure the Secured Notes if drawn. If drawn, the Notes will be subject to a quarterly duration fee of 1.5% with respect to the Secured Notes and a semi-annual duration fee of 3.0% with respect to the Unsecured Notes, as well as draw fees of 3.0% with respect to the Secured Notes and 5.0% with respect to the Unsecured Notes. As of November 8, 2022, the Company has not drawn under this commitment.
We had export credit financing in place for 80% of the contract price for Norwegian Prima, for which we took delivery in July 2022. The associated $1.1 billion term loan bears interest at a fixed rate of 2.68% with a maturity date of July 31, 2034. Principal and interest payments are payable semiannually.
Exchangeable Notes
The following is a summary of NCLC’s convertible debt instrumentsexchangeable notes as of December 31, 2020September 30, 2022 (in thousands):
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| | | | | Unamortized Debt | | | | | | | | | | | | | Unamortized Debt | | | | | | | | | ||
| | | | | Discount, | | | | | | | | | | | | | Discount, | | | | | | | | | ||
| | Principal | | including Deferred | | Net Carrying | | Fair Value | | Principal | | including Deferred | | Net Carrying | | Fair Value | ||||||||||||
|
| Amount |
| Financing Fees |
| Amount |
| Amount |
| Leveling |
| Amount |
| Financing Fees |
| Amount |
| Amount |
| Leveling | ||||||||
2024 Exchangeable Notes | | $ | 862,500 | | $ | (338,571) | | $ | 523,929 | | $ | 1,812,975 | | Level 2 | | $ | 146,601 | | $ | (33,102) | | $ | 113,499 | | $ | 157,958 | | Level 2 |
2025 Exchangeable Notes | | | 450,000 | | | (153,299) | | | 296,701 | | | 772,412 | | Level 2 | | | 450,000 | | | (107,459) | | | 342,541 | | | 419,864 | | Level 2 |
Private Exchangeable Notes | | | 414,311 | | | (399,366) | | | 14,945 | | | 1,098,082 | | Level 2 | ||||||||||||||
2027 1.125% Exchangeable Notes | | | 1,150,000 | | | (226,515) | | | 923,485 | | | 735,161 | | Level 2 | ||||||||||||||
2027 2.5% Exchangeable Notes | | | 473,175 | | | (94,111) | | | 379,064 | | | 320,974 | | Level 2 |
In addition, we recognize debt conversion options withinThe following is a summary of NCLC’s exchangeable notes. Refer to Note 8— “Fair Value Measurements and Derivatives.”notes as of December 31, 2021 (in thousands):
| | | | | | | | | | | | | | |
| | | | | Unamortized Debt | | | | | | | | | |
| | | | | Discount, | | | | | | | | | |
| | Principal | | including Deferred | | Net Carrying | | Fair Value | ||||||
|
| Amount |
| Financing Fees |
| Amount |
| Amount |
| Leveling | ||||
2024 Exchangeable Notes | | $ | 146,601 | | $ | (44,772) | | $ | 101,829 | | $ | 249,358 | | Level 2 |
2025 Exchangeable Notes | | | 450,000 | | | (128,603) | | | 321,397 | | | 642,591 | | Level 2 |
2027 1.125% Exchangeable Notes | | | 1,150,000 | | | (259,380) | | | 890,620 | | | 1,088,510 | | Level 2 |
The following provides a summary of the interest expense of NCLC’s convertible debt instrumentsexchangeable notes (in thousands):
| | | | | | | | | | | | | ||||||
| | | | | | | | Three Months Ended | | Nine Months Ended | ||||||||
| | Three Months | | Nine Months | | September 30, | | September 30, | ||||||||||
| | Ended September 30, 2021 | | Ended September 30, 2021 | | 2022 |
| 2021 | | 2022 |
| 2021 | ||||||
Coupon interest | | | 18,984 | | | 62,109 | | $ | 14,405 | | $ | 18,984 | | $ | 41,321 | | $ | 62,109 |
Amortization of discount and deferred financing fees | | | 25,911 | | | 73,674 | | | 27,444 | | | 25,911 | | | 76,651 | | | 73,674 |
Total | | $ | 44,895 | | $ | 135,783 | | $ | 41,849 | | $ | 44,895 | | $ | 117,972 | | $ | 135,783 |
Interest expense, including amortization16
As of September 30, 2020, respectively.
The2022, the effective interest rate is 22.78%22.74%, 15.89%, 6.28% and 15.89%7.88% for the 2024 Exchangeable Notes, 2025 Exchangeable Notes, 2027 1.125% Exchangeable Notes and 20252027 2.5% Exchangeable Notes, respectively.
Debt Repayments
The following are scheduled principal repayments on our long-term debt including exchangeable notes which can be settled in shares and finance lease obligations as of September 30, 2021 for each of the following periods2022 (in thousands):
| | | | | | |
Year |
| Amount |
| Amount | ||
Remainder of 2021 | | $ | 9,794 | |||
2022 | |
| 866,626 | |||
Remainder of 2022 | | $ | 332,696 | |||
2023 | |
| 933,399 | |
| 1,001,343 |
2024 | |
| 5,069,391 | |
| 3,763,958 |
2025 | |
| 1,063,107 | |
| 1,148,007 |
2026 | |
| 2,050,992 | |||
2027 | | | 3,101,980 | |||
Thereafter | |
| 4,659,587 | |
| 2,753,755 |
Total | | $ | 12,601,904 | | $ | 14,152,731 |
Debt Covenants
We have receivedDuring the year ended December 31, 2021, we amended certain financial and other debt covenant waivers through December 31, 2022covenants and added new free liquidity requirements. AtAs of September 30, 2021,2022, taking into account such waivers,amendments, 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 or waivers of our covenants. However, no assurances can be made that such amendments or waivers 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
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debt and 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.
8. Fair Value Measurements and Derivatives
Fair value is defined as the price at which an orderly transaction to sell an asset or to transfer a liability would take place between market participants at the measurement date under current market conditions (that is, an exit price at the measurement date from the perspective of a market participant that holds the asset or owes the liability).
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 qualitative assessments or regression analysis for this
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hedge relationshiprelationships 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, except when the hedged item is a contractually specified component, 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 September 30, 2021,2022, we had fuel swaps, which are used to mitigate the financial impact of volatility of fuel prices pertaining to approximately 366452 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 September 30, 2021,2022, we had in aggregate with previously dedesignated fuel swaps pertaining to approximately 15315 thousand metric tons of our projected fuel purchases which were not designated as cash flow hedges maturing through December 31, 2022.2023.
As of September 30, 2021,2022, 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 hedged foreign currency forward contracts was €2.3€1.7 billion, or $2.7$1.7 billion based on the euro/U.S. dollar exchange rate as of September 30, 2021.2022.
As of September 30, 2022, we had conversion options embedded in our exchangeable notes. The notional amounts of our outstanding options as of September 30, 2022 were 10.7 million, 24.0 million, 34.1 million and 13.7 million NCLH shares for the 2024 Exchangeable Notes, 2025 Exchangeable Notes, 2027 1.125% Exchangeable Notes and 2027 2.5% Exchangeable Notes, respectively.
2018
As of September 30, 2021, we had an interest rate swap, which is 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 swap was $0.2 billion as of September 30, 2021.
As of September 30, 2021, we had conversion options embedded in our exchangeable notes. The notional amounts of our outstanding options as of September 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 | ||||||||||||||||
| | | | September 30, | | December 31, | | September 30, | | December 31, | | | | September 30, | | December 31, | | September 30, | | December 31, | ||||||||
|
| Balance Sheet Location |
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| Balance Sheet Location |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||||||
Derivative Contracts Designated as Hedging Instruments | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Fuel contracts |
|
|
| |
|
| |
|
| |
|
| |
|
|
|
| |
|
| |
|
| |
|
| |
|
|
| Prepaid expenses and other assets | | $ | 20,852 | | $ | — | | $ | — | | $ | — |
| Prepaid expenses and other assets | | $ | 62,387 | | $ | 29,349 | | $ | 2,713 | | $ | — |
|
| Other long-term assets | | | 22,324 | | | — | | | — | | | — |
| Other long-term assets | | | 14,908 | | | 19,554 | | | 1,924 | | | — |
|
| Accrued expenses and other liabilities | |
| — | |
| — | |
| — | |
| 35,973 |
| Accrued expenses and other liabilities | |
| 2,363 | |
| — | |
| 3,028 | |
| — |
|
| Other long-term liabilities | |
| — | |
| — | |
| — | |
| 28,947 |
| Other long-term liabilities | |
| 549 | |
| — | |
| 1,236 | |
| — |
Foreign currency contracts |
|
| |
| | |
| | |
| | |
| |
|
| |
| | |
| | |
| | |
| |
|
| Prepaid expenses and other assets | |
| 819 | |
| 5,779 | |
| — | |
| — |
| Prepaid expenses and other assets | |
| — | |
| 4,898 | |
| — | |
| — |
|
| Other long-term assets | |
| 10,898 | |
| 43,250 | |
| — | |
| — |
| Accrued expenses and other liabilities | |
| — | |
| — | |
| 240,918 | |
| 98,592 |
|
| Accrued expenses and other liabilities | |
| — | |
| — | |
| 90,954 | |
| 14,778 |
| Other long-term liabilities | |
| — | |
| — | |
| 68,878 | |
| 73,496 |
|
| Other long-term liabilities | |
| 2,410 | |
| 6,821 | |
| 56,775 | |
| 44,938 | ||||||||||||||
Interest rate contracts |
|
| |
| | |
| | |
| | |
| |
|
| |
| | |
| | |
| | |
| |
|
| Accrued expenses and other liabilities | |
| — | |
| — | |
| 1,281 | |
| 6,776 | ||||||||||||||
| | Other long-term liabilities | | | — | | | — | | | — | | | 452 |
| Accrued expenses and other liabilities | |
| — | |
| — | |
| — | |
| 469 |
Total derivatives designated as hedging instruments | | | | $ | 57,303 | | $ | 55,850 | | $ | 149,010 | | $ | 131,864 | | | | $ | 80,207 | | $ | 53,801 | | $ | 318,697 | | $ | 172,557 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Derivative Contracts Not Designated as Hedging Instruments | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Fuel contracts | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| Prepaid expenses and other assets | | $ | 12,283 | | $ | — | | $ | — | | $ | — |
| Prepaid expenses and other assets | | $ | 9 | | $ | 10,836 | | $ | 184 | | $ | — |
| | Other long-term assets | | | 1,873 | | | — | | | — | | | — | | Other long-term assets | | | — | | | 3,476 | | | 522 | | | — |
| | Accrued expenses and other liabilities | | | — | | | 546 | | | — | | | 6,732 | | Accrued expenses and other liabilities | | | — | | | — | | | 138 | | | — |
| | Other long-term liabilities | | | — | | | — | | | — | | | 3,534 | | Other long-term liabilities | | | — | | | — | | | 200 | | | — |
Debt conversion options | | | | | | | | | | | | | | | ||||||||||||||
| | | | | | | | | | | | | | |
| Exchangeable notes | | | — | | | — | | | 160,647 | | | 487,671 |
Debt conversion options |
| Exchangeable notes | | | — | | | — | | | 1,285,730 | | | 1,856,145 | ||||||||||||||
Total derivatives not designated as hedging instruments | | | | $ | 14,156 | | $ | 546 | | $ | 1,285,730 | | $ | 1,866,411 | | | | $ | 9 | | $ | 14,312 | | $ | 161,691 | | $ | 487,671 |
Total derivatives | | | | $ | 71,459 | | $ | 56,396 | | $ | 1,434,740 | | $ | 1,998,275 | | | | $ | 80,216 | | $ | 68,113 | | $ | 480,388 | | $ | 660,228 |
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.
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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 |
| | |
| Gross |
| | | ||||
| | Gross | | Amounts | | Total Net | | Amounts | | | | | Gross | | Amounts | | Total Net | | Amounts | | | | ||||||||
September 30, 2021 | | Amounts | | Offset | | Amounts | | Not Offset | | Net Amounts | ||||||||||||||||||||
September 30, 2022 | | Amounts | | Offset | | Amounts | | Not Offset | | Net Amounts | ||||||||||||||||||||
Assets | | $ | 69,049 | | $ | — | | $ | 69,049 | | $ | (69,049) | | $ | — | | $ | 77,304 | | $ | (5,343) | | $ | 71,961 | | $ | — | | $ | 71,961 |
Liabilities | | | 1,434,740 | | | (2,410) | | | 1,432,330 | | | (1,423,212) | | | 9,118 | | | 475,045 | | | (2,912) | | | 472,133 | | | (470,443) | | | 1,690 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| | |
| Gross |
| | |
| Gross |
| | |
| | |
| Gross |
| | |
| Gross |
| | | ||||
| | Gross | | Amounts | | Total Net | | Amounts | | | | | Gross | | Amounts | | Total Net | | Amounts | | | | ||||||||
December 31, 2020 | | Amounts | | Offset | | Amounts | | Not Offset | | Net Amounts | ||||||||||||||||||||
December 31, 2021 | | Amounts | | Offset | | Amounts | | Not Offset | | Net Amounts | ||||||||||||||||||||
Assets | | $ | 49,029 | | $ | — | | $ | 49,029 | | $ | (49,029) | | $ | — | | $ | 68,113 | | $ | — | | $ | 68,113 | | $ | (68,113) | | $ | — |
Liabilities | | | 1,998,275 | | | (7,367) | | | 1,990,908 | | | (1,913,496) | | | 77,412 | | | 660,228 | | | — | | | 660,228 | | | (660,228) | | | — |
The effects of cash flow hedge accounting on accumulated other comprehensive income (loss) were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Location of Gain | | | | | | | | | | | | | | Location of Gain | | | | | | |
| | | | | | | | (Loss) Reclassified | | | | | | | | | | | | | | (Loss) Reclassified | | | | | | |
| | | | | | | | from Accumulated | | Amount of Gain (Loss) Reclassified | | | | | | | | from Accumulated | | Amount of Gain (Loss) Reclassified | ||||||||
| | Amount of Gain (Loss) | | Other Comprehensive | | from Accumulated Other | | Amount of Gain (Loss) | | Other Comprehensive | | from Accumulated Other | ||||||||||||||||
| | Recognized in Other | | Income (Loss) into | | Comprehensive Income | | Recognized in Other | | Income (Loss) into | | Comprehensive Income | ||||||||||||||||
Derivatives | | Comprehensive Loss |
| Income (Expense) |
| (Loss) into Income (Expense) | | Comprehensive Loss |
| Income (Expense) |
| (Loss) into Income (Expense) | ||||||||||||||||
| | Three Months | | Three Months | | | | Three Months | | Three Months | | Three Months | | Three Months | | | | Three Months | | Three Months | ||||||||
| | Ended | | Ended | | | | Ended | | Ended | | Ended | | Ended | | | | Ended | | Ended | ||||||||
|
| September 30, 2021 |
| September 30, 2020 | | |
| September 30, 2021 |
| September 30, 2020 |
| September 30, 2022 |
| September 30, 2021 | | |
| September 30, 2022 |
| September 30, 2021 | ||||||||
Fuel contracts | | $ | 19,202 | | $ | (10,958) | | Fuel | | $ | (10,278) | | $ | (15,091) | | $ | (48,593) | | $ | 19,202 | | Fuel | | $ | 33,886 | | $ | (10,278) |
Fuel contracts | | | — | | | — | | Other income (expense), net | | | (65) | | | (17,434) | | | — | | | — | | Other income (expense), net | | | (293) | | | (65) |
Foreign currency contracts | |
| (64,306) | |
| 98,539 | | Depreciation and amortization | |
| (1,267) | |
| (1,267) | |
| (146,950) | |
| (64,306) | | Depreciation and amortization | |
| (1,831) | |
| (1,267) |
Interest rate contracts | |
| (30) | |
| 129 | | Interest expense, net | |
| (1,338) | |
| (2,280) | |
| — | |
| (30) | | Interest expense, net | |
| — | |
| (1,338) |
Total gain (loss) recognized in other comprehensive loss | | $ | (45,134) | | $ | 87,710 | |
| | $ | (12,948) | | $ | (36,072) | | $ | (195,543) | | $ | (45,134) | |
| | $ | 31,762 | | $ | (12,948) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Location of Gain | | | | | | | | | | | | | | Location of Gain | | | | | | |
| | | | | | | | (Loss) Reclassified | | | | | | | | | | | | | | (Loss) Reclassified | | | | | | |
| | | | | | | | from Accumulated | | Amount of Gain (Loss) Reclassified | | | | | | | | from Accumulated | | Amount of Gain (Loss) Reclassified | ||||||||
| | Amount of Gain (Loss) | | Other Comprehensive | | from Accumulated Other | | Amount of Gain (Loss) | | Other Comprehensive | | from Accumulated Other | ||||||||||||||||
| | Recognized in Other | | Income (Loss) into | | Comprehensive Income | | Recognized in Other | | Income (Loss) into | | Comprehensive Income | ||||||||||||||||
Derivatives | | Comprehensive Loss |
| Income (Expense) |
| (Loss) into Income (Expense) | | Comprehensive Loss |
| Income (Expense) |
| (Loss) into Income (Expense) | ||||||||||||||||
| | Nine Months | | Nine Months | | | | Nine Months | | Nine Months | | Nine Months | | Nine Months | | | | Nine Months | | Nine Months | ||||||||
| | Ended | | Ended | | | | Ended | | Ended | | Ended | | Ended | | | | Ended | | Ended | ||||||||
| | September 30, 2021 |
| September 30, 2020 | | |
| September 30, 2021 |
| September 30, 2020 | | September 30, 2022 |
| September 30, 2021 | | |
| September 30, 2022 |
| September 30, 2021 | ||||||||
Fuel contracts | | $ | 68,708 | | $ | (181,666) | | Fuel | | $ | (27,101) | | $ | (35,186) | | $ | 96,139 | | $ | 68,708 | | Fuel | | $ | 80,037 | | $ | (27,101) |
Fuel contracts | | | — | | | — | | Other income (expense), net | | | (11,793) | | | (43,718) | | | — | | | — | | Other income (expense), net | | | (293) | | | (11,793) |
Foreign currency contracts | |
| (142,466) | |
| 28,346 | | Depreciation and amortization | |
| (3,800) | |
| (3,662) | |
| (342,881) | |
| (142,466) | | Depreciation and amortization | |
| (4,365) | |
| (3,800) |
Interest rate contracts | |
| 261 | |
| (10,352) | | Interest expense, net | |
| (5,634) | |
| (4,287) | |
| — | |
| 261 | | Interest expense, net | |
| (40) | |
| (5,634) |
Total gain (loss) recognized in other comprehensive loss | | $ | (73,497) | | $ | (163,672) | |
| | $ | (48,328) | | $ | (86,853) | | $ | (246,742) | | $ | (73,497) | |
| | $ | 75,339 | | $ | (48,328) |
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The effects of cash flow hedge accounting on the consolidated statements of operations include the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2021 | | Three Months Ended September 30, 2020 | | Three Months Ended September 30, 2022 | | Three Months Ended September 30, 2021 | ||||||||||||||||||||||||||||||||||||||||
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| | |
| Depreciation |
| | |
| | |
| | |
| Depreciation |
| | |
| | |
| | |
| Depreciation |
| | |
| | |
| | |
| Depreciation |
| | |
| | | ||||
| | | | | and | | Interest | | Other Income | | | | | and | | Interest | | Other Income | | | | | and | | Interest | | Other Income | | | | | and | | Interest | | Other Income | ||||||||||||
| | Fuel | | Amortization | | Expense, net | | (Expense), net | | Fuel | | Amortization | | Expense, net | | (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 | | $ | 79,238 | | $ | 173,289 | | $ | 184,524 | | $ | 226,442 | | $ | 48,224 | | $ | 177,488 | | $ | 154,501 | | $ | (89,005) | | $ | 186,984 | | $ | 186,551 | | $ | 176,769 | | $ | 29,600 | | $ | 79,238 | | $ | 173,289 | | $ | 184,524 | | $ | 226,442 |
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Amount of gain (loss) reclassified from accumulated other comprehensive income (loss) into income (expense) | | |
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Fuel contracts | | | (10,278) | | | — | | | — | | | — | | | (15,091) | | | — | | | — | | | — | | | 33,886 | | | — | | | — | | | — | | | (10,278) | | | — | | | — | | | — |
Foreign currency contracts | | | — | | | (1,267) | | | — | | | — | | | — | | | (1,267) | | | — | | | — | | | — | | | (1,831) | | | — | | | — | | | — | | | (1,267) | | | — | | | — |
Interest rate contracts | | | — | | | — | | | (1,338) | | | — | | | — | | | — | | | (2,280) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (1,338) | | | — |
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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 | | | — | | | — | | | — | | | (65) | | | — | | | — | | | — | | | (17,434) | | | — | | | — | | | — | | | (293) | | | — | | | — | | | — | | | (65) |
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Amount of gain recognized in income as a result of failing effectiveness tests | | | | | | | | | | | | | | | | | | | | | | | | | ||||||||||||||||||||||||
Fuel contracts | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 5,507 |
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2021 | | Nine Months Ended September 30, 2020 | | Nine Months Ended September 30, 2022 | | Nine Months Ended September 30, 2021 | ||||||||||||||||||||||||||||||||||||||||
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| | | | Depreciation | | | | | | | | | | | Depreciation | | | | | | |
| | | | Depreciation | | | | | | | | | | | Depreciation | | | | | | | ||||
| | | | | and | | Interest | | Other Income | | | | | and | | Interest | | Other Income | | | | | and | | Interest | | Other Income | | | | | and | | Interest | | Other Income | ||||||||||||
| | Fuel |
| Amortization |
| Expense, net |
| (Expense), net |
| Fuel |
| Amortization |
| Expense, net |
| (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 | | $ | 175,931 | | $ | 517,867 | | $ | 824,304 | | $ | (145,450) | | $ | 222,240 | | $ | 554,937 | | $ | 343,993 | | $ | (325,412) | | $ | 503,682 | | $ | 547,214 | | $ | 692,898 | | $ | 520,471 | | $ | 175,931 | | $ | 517,867 | | $ | 824,304 | | $ | (145,450) |
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Amount of gain (loss) reclassified from accumulated other comprehensive income (loss) into income (expense) | |
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Fuel contracts | | | (27,101) | | | — | | | — | | | — | | | (35,186) | | | — | | | — | | | — | | | 80,037 | | | — | | | — | | | — | | | (27,101) | | | — | | | — | | | — |
Foreign currency contracts | | | — | | | (3,800) | | | — | | | — | | | — | | | (3,662) | | | — | | | — | | | — | | | (4,365) | | | — | | | — | | | — | | | (3,800) | | | — | | | — |
Interest rate contracts | | | — | | | — | | | (5,634) | | | — | | | — | | | — | | | (4,287) | | | — | | | — | | | — | | | (40) | | | — | | | — | | | — | | | (5,634) | | | — |
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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 | | | — | | | — | | | — | | | (11,793) | | | — | | | — | | | — | | | (43,718) | | | — | | | — | | | — | | | (293) | | | — | | | — | | | — | | | (11,793) |
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Amount of gain recognized in income as a result of failing effectiveness tests | | | | | | | | | | | | | | | | | | | | | | | | | ||||||||||||||||||||||||
Fuel contracts | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 5,507 |
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 | | Nine Months Ended | | | Three Months Ended | | Nine Months Ended | ||||||||||||||||
| | | September 30, | | September 30, | | | September 30, | | September 30, | ||||||||||||||||
| Location of Gain (Loss) | | 2021 |
| 2020 |
| 2021 |
| 2020 | Location of Gain (Loss) | | 2022 |
| 2021 |
| 2022 |
| 2021 | ||||||||
Derivatives not designated as hedging instruments | | |
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Fuel contracts | Other income (expense), net | | $ | 7,398 | | $ | (17) | | $ | 57,505 | | $ | 3,629 | Other income (expense), net | | $ | (733) | | $ | 7,398 | | $ | 33,345 | | $ | 57,505 |
Foreign currency contracts | Other income (expense), net | | | (1,905) | | | (4) | | | (13,761) | | | (61) | |||||||||||||
Debt conversion options | Other income (expense), net | | | 221,722 | | | (65,225) | | | (202,914) | | | (280,850) | Other income (expense), net | | | (1,862) | | | 221,722 | | | 419,898 | | | (202,914) |
Long-Term Debt
As of September 30, 20212022 and December 31, 2020,2021, the fair value of our long-term debt, including the current portion, was $14.2$12.0 billion and $12.5 billion, respectively, which was $0.7$1.9 billion higher and $1.0$0.2 billion higher,lower, 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
24
notes considers observable risk-free rates; credit spreads of the same or 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.
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Other
The carrying amounts reported in the consolidated balance sheets of all other financial assets and liabilities approximate fair value.
9. Employee Benefits and Compensation Plans
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 and May 2021, the plan was amended and restated (“Restated(the “Restated 2013 Plan”) pursuant to approval from NCLH’sthe 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 27,465,10632,375,106 shares. In May 2021,June 2022, NCLH’s shareholders approved a further amendment and restatement of 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 shares7,000,000, resulting in an increase in the maximum aggregate limit to 32,375,10639,375,106 shares.
Share Option Awards
The following is a summary of option activity under NCLH’s Restated 2013 Plan for the nine months ended September 30, 2021:
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | Weighted- | | | |
| | Number of Share Option Awards | | Weighted-Average Exercise Price | | Average | | Aggregate | ||||||||||||
|
| Time- |
| Performance- |
| Market- |
| Time- |
| Performance- |
| Market- |
| Contractual |
| Intrinsic | ||||
| | Based | | Based | | Based | | Based | | Based | | Based | | Term | | Value | ||||
| | Awards | | Awards | | Awards | | Awards | | Awards | | Awards | | (years) | | (in thousands) | ||||
Outstanding as of January 1, 2021 |
| 4,525,207 |
| 114,583 |
| 208,333 | | $ | 51.96 | | $ | 59.43 | | $ | 59.43 |
| 4.42 | | $ | — |
Forfeited and cancelled |
| (96,862) | | — |
| — | | | 52.49 | | | — | | | — |
| | |
|
|
Outstanding as of September 30, 2021 |
| 4,428,345 |
| 114,583 |
| 208,333 | | | 51.95 | | | 59.43 | | | 59.43 |
| 3.68 | | | — |
Restricted Share Unit Awards
In June 2021,March 2022, NCLH granted 3.14.8 million time-based restricted share unit awards to our employees, which primarily vest in substantially equal installments each March 1 over three years. Additionally, in June 2021,March 2022, NCLH granted 0.71.9 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 through 20232024 and the satisfaction of an additional time-based vesting requirement that generally requires continued employment through March 1, 2024.2025.
The following is a summary of NCLH restricted share unit activity for the nine months ended September 30, 2021:2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| Number of |
| Weighted- |
| Number of |
| Weighted- |
| Number of |
| Weighted- |
| Number of |
| Weighted- |
| Number of |
| Weighted- |
| Number of |
| Weighted- | ||||||
| | Time-Based | | Average Grant | | Performance- | | Average Grant | | Market- | | Average Grant | | Time-Based | | Average Grant | | Performance- | | Average Grant | | Market- | | Average Grant | ||||||
| | Awards | | Date Fair Value | | Based Awards | | Date Fair Value | | Based Awards | | Date Fair Value | | 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 | |||||||||||||||
Non-vested as of January 1, 2022 | | 7,771,623 | | $ | 27.02 | | 1,841,113 | | $ | 35.68 | | 50,000 | | $ | 59.43 | |||||||||||||||
Granted |
| 3,135,993 | | | 30.89 |
| 736,898 | | | 40.89 |
| — | | | — |
| 4,890,659 | | | 18.56 |
| 1,857,750 | | | 18.48 |
| — | | | — |
Vested |
| (1,746,838) | | | 47.01 |
| (460,969) | | | 56.73 |
| — | | | — |
| (4,927,151) | | | 25.18 |
| (520,129) | | | 28.39 |
| — | | | — |
Forfeited or expired |
| (225,752) | | | 28.71 |
| — | | | — |
| — | | | — |
| (287,949) | | | 24.07 |
| (292,043) | | | 35.59 |
| — | | | — |
Non-vested as of September 30, 2021 |
| 7,827,328 | | | 27.05 |
| 1,841,113 | | | 35.68 |
| 50,000 | | | 59.43 | |||||||||||||||
Non-vested as of September 30, 2022 |
| 7,447,182 | | | 22.80 |
| 2,886,691 | | | 25.93 |
| 50,000 | | | 59.43 |
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The compensation expense recognized for share-based compensation for the periods presented include the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Nine Months Ended | ||||||||||||||||
| | September 30, | | September 30, | | September 30, | | September 30, | ||||||||||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||||||
Payroll and related expense | | $ | 6,525 | | $ | 5,483 | | $ | 16,225 | | $ | 15,214 | | $ | 4,677 | | $ | 6,525 | | $ | 16,613 | | $ | 16,225 |
Marketing, general and administrative expense | |
| 33,397 | |
| 20,379 | |
| 72,749 | |
| 65,795 | |
| 21,406 | |
| 33,397 | |
| 72,310 | |
| 72,749 |
Total share-based compensation expense | | $ | 39,922 | | $ | 25,862 | | $ | 88,974 | | $ | 81,009 | | $ | 26,083 | | $ | 39,922 | | $ | 88,923 | | $ | 88,974 |
10. Commitments and Contingencies
Ship Construction Contracts
Project Leonardo will introduce anFor the Norwegian brand, the first Prima Class Ship, Norwegian Prima, at approximately 143,500 Gross Tons and with 3,100 Berths, was delivered in July 2022. We have five additional 6 ships,Prima Class Ships on order, each ranging from approximately 140,000143,500 to 156,300 Gross Tons with approximately 3,2153,100 to 3,550 Berths, with expectedcurrently scheduled delivery dates from 20222023 through 2027. For the Regent brand, we have an order for 1one 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 2two Allura Class Ships to be delivered in 2023 and 2025. Each of the Allura Class Ships will be
23
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), Russia’s ongoing invasion of Ukraine and/or other macroeconomic events, have already resulted in some delays in expected ship deliveries, anddeliveries. These impacts along with other potential modifications the impacts of COVID-19 couldCompany may make to its newbuilds, including potential initiatives to improve environmental sustainability, are expected to result in additional delays in ship deliveries in the future, which may be prolonged.
The combined contract prices of the 9eight ships on order for delivery as of September 30, 20212022 was approximately €7.6€6.7 billion, or $8.8$6.6 billion based on the euro/U.S. dollar exchange rate as of September 30, 2021.2022. 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.
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, 2 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 asserted 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 alleged that the Company made false and misleading statements to the market and customers about COVID-19. The complaint sought 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. On April 10, 2021, the case was dismissed and closed, and the plaintiffs no longer have the right to appeal.
Investigations
In March 2020, the Florida Attorney General announced an investigation related to the Company’s marketing during the COVID-19 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.
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Helms-Burton Act
On August 27, 2019, 2two lawsuits were filed against NCLHNorwegian Cruise Line Holdings Ltd. 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 (the “Havana Docks Matter”) alleges it holds an interest in the Havana Cruise Port Terminal and the complaint filed by Javier Garcia-Bengochea (the “Garcia-Bengochea Matter”) 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.facilities, as well as profiting from the Cuban Government’s possession of the property. 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. Discovery in the Havana Docks Matter has now concluded and appropriate motions for summary judgement have been filed. Trial for the Havana Docks Matter is scheduled for March 2022. On September 1, 2020, the Courtcourt in the Garcia-Bengochea Matter entered an order staying all case deadlines and administratively closed the Garcia-Bengochea Mattercase pending the outcome of thean appeal in a related case brought by the same plaintiff.plaintiff, in which the district court granted another cruise line defendant judgment on the pleadings. In the Havana Docks Matter, after various motions challenging the sufficiency of plaintiff’s complaint were resolved and voluminous discovery was completed, both sides filed motions for summary judgment. On March 21, 2022, the court issued an order granting plaintiff’s motion for summary judgment on the issue of liability. The court scheduled a trial on determination of damages only for November 2022. The plaintiff elected to seek what the court ruled to be its baseline statutory damage amount, which is the amount of the certified claim plus interest, trebled and with attorneys’ fees. Given this, there is no fact issue to be tried, and the matter was removed from the trial calendar. The parties are presently engaged in pre-judgment briefing which the court will need to resolve before it enters a final judgment and the Company takes its plenary appeal. We believe we have meritorious defenses tothat the claimslikelihood of loss is reasonably possible but not probable at this time, therefore, no liability has been recorded. Based on the calculation of the baseline statutory damages motions that were granted, the damage award reflected in final judgment, exclusive of plaintiff’s attorney’s fees and intend to vigorously defend these matters. Ascosts, may be approximately $110 million. The entry of September 30, 2021,final judgment is expected in late December 2022 or early 2023. For the Garcia Bengochea Matter, we are unable to reasonably estimate any potential contingent loss from these matters dueor range of losses. The ability to amake such estimates and judgments can be affected by various factors including, among other things: lack of legal precedent.precedent, stage of the proceedings, legal uncertainties inherent within the litigation process, availment of appellate remedies, and involvement of numerous parties. We continue to believe we have meritorious defenses to these matters and plan to appeal the Havana Docks Matter. However, if the plaintiffs prevail in the final outcome of these matters, there may be a material adverse impact on the Company’s financial condition, results of operations and/or cash flows.
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Other
We are a party to a claim against a vendor which has resulted in a verdict of approximately $159 million in favor of the Company in October 2022. At this time, there can be no assurance that the Company will ultimately prevail in the final outcome of this claim as the verdict may be appealed and no receivable has been recognized.
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 $1.5$2.1 billion in advance ticket sales at September 30, 20212022 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 would be satisfied by posting collateral. Although the agreements vary, these requirements may generally be satisfied either through a percentage of customer payments withheld or providing cash funds directly to the card processor. Any cash reserve or collateral requested could be increased or decreased. As of September 30, 2021,2022, we had cash reserves of approximately $1.2 billion$742.5 million with credit card processors, of which approximately $237.0 million is recognized in accounts receivable, net orand approximately $505.5 million in other long-term assets. Subsequent toAs of September 30, 2021, $388.3 million in2022, a portion of the cash reserves have been releasedis classified as long-term due to the Company.a change in terms to a static reserve, as currently required by a credit card processor, subject to periodic review. We may be required to pledge additional collateral and/or post additional cash reserves or take other actions that may further reduce our liquidity.
11. Other Income (Expense), Net
For the three months ended September 30, 2021 and 2020,2022, other income (expense), net was income of $226.4$29.6 million and expenseprimarily due to gains on foreign currency remeasurements. For the three months ended September 30, 2021, other income (expense), net was income of $89.0$226.4 million, respectively, and for the nine months ended September 30, 2022 and 2021, was income of $520.5 million and 2020, was expense of
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$145.5 million and $325.4 $145.5 million, respectively, primarily due to net gains and losses from conversion options on our exchangeable notes.
12. Supplemental Cash Flow Information
For the nine months ended September 30, 20212022 and 2020,2021, we had non-cash investing activities consisting of changes in accruals related to property and equipment of $64.6$101.7 million and $29.1$64.6 million, respectively.
13. Related Party Disclosures
NCLC, as issuer, NCLH, as guarantor, and U.S. Bank National Association, as trustee, were all parties to an indenture, dated May 28, 2020 (the “Indenture”) related to the Private Exchangeable Notes, which were held by the Private Investor. The termsan affiliate of the Private Exchangeable Notes are more fully described under Note 7 — “Long-Term Debt”L Catterton (the “Private Investor”). Based on the initial exchange rate for the Private Exchangeable Notes, the Private Investor beneficially owned approximately 10% of NCLH’s outstanding ordinary shares as of December 31, 2020. The initial exchange rate for the Private Exchangeable Notes could 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 have exceeded 46,577,94746,577,947. The
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Private Exchangeable Notes also contained certain anti-dilution provisions that could have subjected the exchange rate to additional adjustment if certain events had occurred.
NCLH, NCLC and the Private Investor also entered into an investor rights agreement, dated May 28, 2020 (the “Investor Rights Agreement”), which provided that, among other things, the Private Investor was entitled to nominate one person for appointment to the board of directors of NCLH until the first date on which the Private Investor no longer beneficially owned 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 provided for customary registration rights for the Private Investor and its affiliates, including demand and piggyback registration rights, contained customary transfer restrictions and provided that the Private Investor and its affiliates were subject to a voting agreement with respect to certain matters during a specified period of time.
In a privately negotiated transaction among NCLH, NCLC and the Private Investor, NCLC agreed to repurchase all of the outstanding Private Exchangeable Notes for an aggregate repurchase price of approximately $1.0 billion (the “Repurchase”). On March 9, 2021, in connection with the settlement 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 terms.
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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 suspension of certain cruise voyages, our ability to weatherexpectations regarding the impacts of the COVID-19 pandemic, Russia’s invasion of Ukraine and general macroeconomic conditions, our expectations regarding the resumption of cruise voyages and the timing for such resumption of cruise voyages,voyage occupancy, the implementation of and effectiveness of our health and safety protocols, operational position, demand for voyages, plans or goals for our sustainability program and decarbonization efforts, our expectations for future cash flows and profitability, 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, including the COVID-19 pandemic, and their effect on the ability or desire of people to travel (including on cruises), which is expected to continue to adversely impact our results, operations, outlook, plans, goals, growth, reputation, cash flows, liquidity, demand for voyages and share price;
29implementing precautions in coordination with regulators and global public health authorities to protect the health, safety and security of guests, crew and the communities we visit and to comply with regulatory restrictions related to the pandemic;
our indebtedness and restrictions in the agreements governing our indebtedness that require us to maintain minimum levels of liquidity and be in compliance with maintenance covenants and otherwise limit our flexibility in operating our business, including the significant portion of assets that are collateral under these agreements;
our ability to work with lenders and others or otherwise pursue options to defer, renegotiate, refinance or restructure 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 or financing to optimize our balance sheet, which may not be available on favorable terms, or at all, and our outstanding exchangeable notes and any future financing which may be dilutive to existing shareholders;
the unavailability of ports of call;
future increases in the price of, or major changes or reduction in, commercial airline services;
changes involving the tax and environmental regulatory regimes in which we operate, including new regulations aimed at reducing greenhouse gas emissions;
the accuracy of any appraisals of our assets as a result of the impact of the COVID-19 pandemic or otherwise;
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our success in controlling operating expenses and capital expenditures;
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Table of Contentstrends in, or changes to, future bookings and our ability to take future reservations and receive deposits related thereto;
adverse events impacting the security of travel, such as terrorist acts, armed conflict, such as Russia’s invasion of Ukraine, and threats thereof, acts of piracy, and other international events;
adverse incidents involving cruise ships;
adverse general economic and related factors, including as a result of the impact of the COVID-19 pandemic, Russia’s invasion of Ukraine or otherwise, such as fluctuating or increasing levels of interest rates, inflation, 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;
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;
our inability to recruit or retain qualified personnel or the loss of key personnel or employee relations issues;
our inability to obtain adequate insurance coverage;
pending or threatened litigation, investigations and enforcement actions;
any further impairment of our trademarks, trade names or goodwill;
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 reliance on third parties to provide hotel management services for certain ships and certain other services;
fluctuations in foreign currency exchange rates;
our expansion into new markets and investments in new markets and land-based destination projects;
overcapacity in key markets or globally; and
other factors set forth under “Risk Factors” herein and in our Annual Report on Form 10 K for the year ended December 31, 2021, filed with the SEC on March 1, 2022 (“Annual Report on Form 10 K”).
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.pandemic, Russia’s invasion of Ukraine and the impact of general macroeconomic conditions. It is not possible to predict or identify all such risks. There may be additional risks that we consider immaterial or which are unknown.
In addition, some28
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 Adjusted Gross Margin, Net Cruise Cost, Adjusted Net Cruise Cost Excluding Fuel, Adjusted EBITDA and Adjusted Net 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:
● |
● | 2024 Senior Secured Notes. |
● | 2025 Exchangeable Notes. On July 21, 2020, pursuant to an indenture among NCLC, as issuer, NCLH, as guarantor, and U.S. Bank National Association, as trustee, NCLC issued $450.0 million aggregate principal amount of exchangeable senior notes due 2025. |
● | 2026 Senior Secured Notes. On July 21, 2020, pursuant to an indenture among NCLC, as issuer, the guarantors party thereto, and U.S. Bank National Association, as trustee and security agent, NCLC issued $750.0 million aggregate principal amount of 10.25% senior secured notes due 2026. |
● | 2027 1.125% Exchangeable Notes. On November |
● | Adjusted EBITDA. EBITDA adjusted for other income (expense), net and other supplemental adjustments. |
● | Adjusted Gross Margin. Gross margin adjusted for payroll and related, fuel, food, other and ship depreciation. Gross margin is calculated pursuant to GAAP as total revenue less total cruise operating expense and ship depreciation. |
● | Adjusted Net Cruise Cost Excluding Fuel. Net Cruise Cost Excluding Fuel adjusted for supplemental adjustments. |
● | Adjusted Net Loss. Net loss adjusted for supplemental adjustments. |
● | Allura Class Ships. Oceania Cruises’ |
● | Berths. Double occupancy capacity per cabin (single occupancy per studio cabin) even though many cabins can accommodate three or more passengers. |
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● | Capacity Days. Berths available for sale multiplied by the number of cruise days for the period for ships in service. |
● | CDC. The U.S. Centers for Disease Control and Prevention. |
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● | 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. |
● | Explorer Class Ships. Regent’s Seven Seas Explorer, Seven Seas Splendor, and Seven Seas Grandeur. |
● | 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. |
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● |
● |
● | Revolving Loan Facility. $875.0 million senior secured revolving credit facility. |
● | SEC. U.S. Securities and Exchange Commission. |
● | 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 September 30, |
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Non-GAAP Financial Measures
We use certain non-GAAP financial measures, such as Adjusted Gross Margin, Net Cruise Cost, Adjusted Net Cruise Cost Excluding Fuel, Adjusted EBITDA and Adjusted Net Loss, to enable us to analyze our performance. See “Terminology” for the definitions of these and other non-GAAP financial measures. We utilize Adjusted Gross Margin to manage our business on a day-to-day basis because it reflects revenue earned net of certain direct variable costs. We also utilize Net Cruise Cost and Adjusted Net Cruise Cost Excluding Fuel to manage our business on a day-to-day basis. In measuring our ability to control costs in a manner that positively impacts net income (loss), we believe changes in Adjusted Gross Margin, 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 from March 2020 until July 2021, we did not have any Capacity Days during the suspension period. Accordingly, we have not presented herein per Capacity Day data for the three or nine months ended September 30, 2021 or September 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 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.
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In addition, Adjusted Net Loss is a non-GAAP financial measure that excludes certain amounts and is used to supplement GAAP net loss. We use Adjusted Net Loss as a key performance measure of our earnings performance. We believe that both management and investors benefit from referring to this non-GAAP financial measure in assessing our performance and when planning, forecasting and analyzing future periods. This non-GAAP financial measure also facilitates management’s internal comparison to our historical performance. The amounts excluded in the presentation of this non-GAAP financial measure may vary from period to period; accordingly, our presentation of Adjusted Net Loss may not be indicative of future adjustments or results. For example, for the nine months ended September 30, 2020, we incurred $1.6 billion related to impairment losses. We included this as an adjustment in the reconciliation of Adjusted Net Loss 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, our cruise voyages were completely suspended from March 2020 until July 2021 due to the COVID-19 pandemic and our resumption of cruise voyages will bewas phased in gradually as described under “—Update Regarding COVID-19 Pandemic” below.gradually. Passenger ticket revenue primarily consists of
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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.
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. |
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● | Other consists of repairs and maintenance (including Dry-dock costs), ship insurance and other ship expenses. |
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 made no significant changes to our critical accounting policies and estimates from those described in our Annual Report on Form 10-K.
Russia’s Invasion of Ukraine
The conflict from Russia’s ongoing invasion of Ukraine resulted in the cancellation or modification of approximately 60 sailings in 2022, which included all voyages with calls to ports in Russia. Three ships were redeployed as a result of the conflict including Norwegian Getaway to Port Canaveral, Oceania Cruises’ Marina to the British Isles and Regent’s Seven Seas Splendor to Northern Europe. In addition, the Company has also removed all calls to ports in Russia from its itineraries in 2023 and 2024. In addition to the direct impacts noted above, the conflict has also had indirect adverse impacts on customer demand (see “Update on Bookings”) and the cost of fuel and could continue to have an impact on travel and consumer discretionary spending.
Update Regarding COVID-19 Pandemic
SuspensionSafe Resumption of Cruise VoyagesOperations
Due to the impact of COVID-19, travel restrictions and limited access to ports around the world, in March 2020, the Company implemented a voluntary suspension of all cruise voyages across our three brands. AsIn the third quarter of 2021, we began a phased relaunch of certain cruise voyages with ships initially operating at reduced occupancy levels. In early May 2022, the date hereof, 11Company completed the phased relaunch of ourits entire fleet with all ships were operatingnow in operation with guests on board as partboard. The level of occupancy on our ships and the percentage of our phased returnfleet in service will depend on a number of factors including, but not limited to, service. The Company continues to execute on the phased relaunch plans for its 28-ship fleet. The Company expects to have approximately 75%duration and extent of capacity operating 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 the unprecedented circumstances caused by the pandemic, we are not able to predict the full impact of the pandemic on our Company. Refer to “Item 1A. Risk Factors” for further details regarding the significant impact the COVID-19 pandemic, has had, and is expected to continue to have, on our financial condition and operations.
Preparation for the Safe Resumptionfurther resurgences of Operations
We have developed SailSAFETM, a comprehensive and multi-faceted health and safety strategy to enhance our already rigorous protocols and address the unique public health challenges posed by 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 guide the industry in the development of new and enhanced cruise health and safety 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, 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 also submitted its recommendations 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 four 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 instructionsCOVID-19 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 additional 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 regulatory requirements and other logistical challenges,
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the timeline foremergence of other public health crises, our ability to returncomply with governmental regulations and implement new health and safety protocols, port availability, travel restrictions, bans and advisories, our entire fleetability to cruises bothstaff certain ships and additionally the impact of other events impacting travel or consumer discretionary spending, such as Russia’s ongoing invasion of Ukraine, and general macroeconomic conditions discussed below under “Macroeconomic Trends and Uncertainties.”
The Company continues to benefit from significant improvements in the public health environment. In July 2022, the CDC announced that its voluntary COVID-19 Program for Cruise Ships Operating in U.S. Waters was no longer in effect, but that it will continue to publish health and outsidesafety guidance. The Company continues to operate under its science-backed SailSAFE health and safety program which will evolve along with the public health environment. On Oceania Cruises, vaccinated guests aged 12 and over will no longer have any pre-cruise COVID-19 related protocols and unvaccinated travelers may embark with a negative COVID-19 test taken within 72 hours prior to departure. Guests 11 and under will be exempt from all vaccination and testing requirements. On Regent, fully vaccinated guests are not required to test prior to embarkation and unvaccinated guests or those unwilling to present proof of vaccination must present a negative COVID-19 test prior to embarkation. Effective October 4, 2022, Norwegian updated its global health and safety protocols to remove all COVID-19 testing, masking and vaccination requirements for guests. Requirements may differ for guests traveling on voyages departing from or visiting destinations with specific local regulations. The Company will continue to evaluate its protocols and modify as needed as the U.S. is fluid. Nevertheless, wepublic health environment evolves.
The Company continues to follow applicable travel guidelines and local protocols as required by the ports and destinations it visits. We continue to work with other federal agencies, public health authorities and national and local governments in areas where we operate to take all necessary measures to protect our guests, crew and the communities visitedvisited. The protocol revisions in conjunction with continued easing of travel restrictions and reopening to cruise in more ports around the globe are positive as we beginit reduces friction, expands the addressable cruise market, brings variety to resume operations.
We began a phased relaunch of cruise voyages in July 2021. Initially each ship is expected to operate at reduced occupancy, which will gradually increase over time. Baseditineraries, and provides additional catalysts on the current conditions, we are planning for all shipsroad to sail at full capacity by June 30, 2022. 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.recovery.
Modified Policies
Our brandsWe have launched new cancellation policies for certain sailings booked during certain time periods to permit ourcertain guests to cancel cruises which were not part of oura temporary suspension of voyages up to 15 days prior to embarkation or in the event of a positive COVID-19 test and receive a refund in the form of a credit to be applied toward a future cruise. These programs wereare in place for cruises booked through specific time periods specified by brand,brand. Standard payment schedules and cancellation penalties apply for cruises scheduled to embark through October 31, 2021. Certain cruises booked for certain periods, will be permitted a 60-day cancellation window for refunds.all sailings after September 30, 2022. The future cruise credits that have been issued under these programsas face value reimbursement for cancelled bookings due to COVID-19 are generally valid for any sailing through December 31, 2022,June 30, 2023, and we may further extend 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. We may incur incremental commission expense for the use of these future cruise credits. In addition, to provide more flexibility to our guests, we have also extended our modified final payment schedule for all 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 April 30, 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.
Financing Transactions
In 2022, we have continued to take actions to bolster our financial condition while the global cruise environment remains challenging. To enhance our liquidity profile and financial flexibility, in February 2022, we received additional financing through various debt financings, collectively totaling $2.1 billion in gross proceeds, which has been used to redeem all of the outstanding 2024 Senior Secured Notes and 2026 Senior Secured Notes and to make scheduled principal payments on debt maturing in 2022, including, in each case, to pay any accrued and unpaid interest thereon, as well as related premiums, fees and expenses.
In July 2022, the Company amended its $1 billion commitment, which provides additional liquidity to the Company, extending the commitment through March 31, 2023. The Company has not drawn and currently does not intend to draw under this commitment.
See Note 7 – “Long-Term Debt” for more information.
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Update on Bookings
Net booking volumes inAs expected, the third quarter of 2021 were negatively impacted by the Delta variant of COVID-19. The resulting slowdown in net booking volumes was heavily weighted to sailings inCompany’s current cumulative booked position for the fourth quarter of 2021 and early 2022 and improved sequentially through 2022. The impact has since abated and net bookings have materially improved over the past several weeks with particular strength for bookings related to sailings in the second half of 2022 and into 2023. Despite the temporary Delta impact, the Company’s overall cumulative booked position for full year 2022 is in line with 2019’s record levelsbelow the comparable 2019 period but at higher pricingprices even when including the dilutive impact of future cruise credits. The overallBooking trends for full year 2023 remain positive with cumulative booked position equal to record 2019 levels inclusive of the Company’s increase in capacity. Pricing is higher than that of 2019 at a similar point in time for the second half of 2022, when the full fleet is expectedyear 2023. Net booking volumes continue to be backat the pace needed to reach historical Occupancy Percentage levels in operation and at normalized occupancy levels, is meaningfully higher than 2019 and at higher prices. Our2023; however, our full fleet may not resume operationsachieve historical occupancy levels on our expected schedule and as a result, current booking data may not be informative. In addition, because of our updated cancellation policies, bookings may not be representative of actual cruise revenues.
There are remaining uncertainties about when our full fleet will be back in service at historical occupancy levels and, accordingly, we cannot estimate the impact on our business, financial condition or near- or longer-term financial or operational results with certainty; however, we will report a net loss for the three monthsfourth quarter of 2022.
Macroeconomic Trends and year ending December 31, 2021Uncertainties
As a result of conditions associated with the COVID-19 pandemic and other global events, such as Russia’s ongoing invasion of Ukraine and actions taken by the United States and other governments in response to the invasion, the global economy, including the financial and credit markets, has recently experienced significant volatility and disruptions, including increases in inflation rates, fuel prices, and interest rates. Our costs have been, and are expected to continue to be, impacted by these increases. To attempt to mitigate the risk of adverse changes in fuel prices and interest expense, we have used and may continue to use derivatives. In an attempt to mitigate risks related to inflation, our Supply Chain Department has negotiated contracts with varying terms, with a goal of providing us with the ability to take advantage of cost declines when they occur, and diversified our sourcing options. Due to the dynamic nature of the current economic landscape, the severity and duration of the impact of these conditions on our business cannot be predicted. See Item 1A, “Risk Factors” for additional information.
Climate Change
We believe the increasing focus on climate change and evolving regulatory requirements may materially impact our future capital expenditures and results of operations. We expect to report a net loss untilincur significant expenses related to these regulatory requirements, which may include expenses related to greenhouse gas emissions reduction initiatives and the purchase of emissions allowances, among other things. If requirements become more stringent, we may be required to change certain operating procedures, for example slowing the speed of our ships, which could adversely impact our operations. We are ableevaluating the effects of climate change related requirements, which are still evolving, and, consequently, the full impact to resume regular voyages.the Company is not yet known. Refer to “Impacts related to climate change may adversely affect our business, financial condition and results of operations” in “Item 1A. Risk Factors” in our Annual Report on Form 10-K for further details regarding the significant impact the COVID-19 pandemic has had, and is expectedinformation.
Quarterly Overview
Three months ended September 30, 2022 (“2022”) compared to continue to have, on our financial condition and operations.
Financing Transactions and Cost Containment Measures
Inthree months ended September 30, 2021 we have continued to take actions to bolster our financial condition while our global cruise voyages are disrupted. In March 2021, we received additional financing through various debt financings and NCLH’s equity offering, collectively totaling $2.7 billion in gross proceeds. From the proceeds, approximately $1.5 billion was used to extinguish debt. In November 2021, the Company executed a $1 billion commitment through August 15, 2022 that(“2021”)
● | Total revenue increased to $1.6 billion compared to $153.1 million. |
● | Net loss was $(333.3) million compared to $(646.8) million. |
● | Operating loss was $(185.1) million compared to $(688.4) million. |
● | Gross margin was $202.2 million compared to $(445.8) million. Adjusted Gross Margin was $1.1 billion compared to $101.4 million. |
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provides additional liquidity to the Company. Refer to Note 7 – “Long-Term Debt” for further details about the above transactions.
We undertook several proactive cost reduction and cash conservation measures to mitigate the financial and operational impacts of the COVID-19 pandemic, including the reduction of capital expenditures and deferral of debt amortization as 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 at the beginning of 2021, included the significant reduction or deferral of marketing expenditures, the implementation of hiring freezes, a 20% salary or hours reduction for certain shoreside team members, a pause in our 401(k) matching contributions, corporate travel freezes for shoreside employees, and employee furloughs. These cost savings initiatives have now been discontinued as we continue our resumption of cruise voyages.
See “—Liquidity and Capital Resources” below for more information.
Quarterly Overview
Three months ended September 30, 2021 (“2021”) compared to three months ended September 30, 2020 (“2020”)
● | Adjusted Net Loss was |
● | Adjusted EBITDA |
We refer you to our “Results of Operations” below for a calculation of Adjusted Gross Margin, Adjusted Net Loss and Adjusted EBITDA.
Results of Operations
The following table sets forth selected statistical information:
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | | Three Months Ended | | Nine Months Ended |
| ||||||||
| | September 30, | | September 30, | | | September 30, | | September 30, | | ||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 |
|
| 2022 |
| 2021 |
| 2022 |
| 2021 |
|
Passengers carried |
| 57,931 |
| — |
| 57,931 |
| 499,729 |
|
| 526,838 |
| 57,931 |
| 1,111,931 |
| 57,931 | |
Passenger Cruise Days |
| 402,656 |
| — |
| 402,656 |
| 4,278,602 |
|
| 3,982,559 |
| 402,656 |
| 8,411,308 |
| 402,656 | |
Capacity Days |
| 701,350 |
| — |
| 701,350 |
| 4,123,858 |
|
| 4,887,415 |
| 701,350 |
| 12,505,203 |
| 701,350 | |
Occupancy Percentage |
| 57.4 | % | | | 57.4 | % | 103.8 | % |
| 81.5 | % | 57.4 | % | 67.3 | % | 57.4 | % |
(1) | Excludes certain capacity on Pride of America which is temporarily unavailable. |
Adjusted Gross Margin was calculated as follows (in thousands):
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | ||||||||||||||
| | September 30, | | September 30, | ||||||||||||||
|
| | |
| 2022 |
| | |
| | |
| 2022 |
| | | ||
| | | | | Constant | | | | | | | | Constant | | | | ||
| | 2022 | | Currency | | 2021 | | 2022 | | Currency | | 2021 | ||||||
Total revenue | | $ | 1,615,510 | | $ | 1,634,452 | | $ | 153,081 | | $ | 3,324,631 | | $ | 3,351,727 | | $ | 160,549 |
Less: | | |
| | |
| | | | | |
| | |
| | | |
Total cruise operating expense | |
| 1,238,898 | |
| 1,252,792 | |
| 439,756 | |
| 3,047,627 | |
| 3,070,239 | |
| 890,338 |
Ship depreciation | |
| 174,393 | |
| 174,393 | |
| 159,116 | |
| 511,785 | |
| 511,785 | |
| 482,273 |
Gross margin | | | 202,219 | | | 207,267 | | | (445,791) | | | (234,781) | | | (230,297) | | | (1,212,062) |
Ship depreciation | | | 174,393 | | | 174,393 | | | 159,116 | | | 511,785 | | | 511,785 | | | 482,273 |
Payroll and related | | | 287,390 | | | 287,576 | | | 154,440 | | | 790,697 | | | 791,008 | | | 323,225 |
Fuel | | | 186,984 | | | 187,064 | | | 79,238 | | | 503,682 | | | 503,787 | | | 175,931 |
Food | | | 76,810 | | | 78,477 | | | 16,672 | | | 177,483 | | | 179,549 | | | 27,314 |
Other | | | 208,176 | | | 214,931 | | | 137,762 | | | 623,374 | | | 635,919 | | | 294,092 |
Adjusted Gross Margin | | $ | 1,135,972 | | $ | 1,149,708 | | $ | 101,437 | | $ | 2,372,240 | | $ | 2,391,751 | | $ | 90,773 |
3735
Gross Cruise Cost, Net Cruise Cost, Net Cruise Cost Excluding Fuel and Adjusted Net Cruise Cost Excluding Fuel were calculated as follows (in thousands):
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | ||||||||||||||
| | September 30, | | September 30, | ||||||||||||||
| | | | | 2021 | | | | | | | | 2021 | | | | ||
|
| | |
| Constant |
| | |
| | |
| Constant |
| | | ||
| | 2021 | | Currency | | 2020 | | 2021 | | Currency | | 2020 | ||||||
Total cruise operating expense | | $ | 439,756 | | $ | 437,453 | | $ | 190,157 | | $ | 890,338 | | $ | 883,944 | | $ | 1,486,069 |
Marketing, general and administrative expense | |
| 228,473 | |
| 228,236 | |
| 156,351 | |
| 616,440 | |
| 612,852 | |
| 556,820 |
Gross Cruise Cost | |
| 668,229 | |
| 665,689 | |
| 346,508 | |
| 1,506,778 | |
| 1,496,796 | |
| 2,042,889 |
Less: | | |
| | | | | | | | |
| | | | | | |
Commissions, transportation and other expense | |
| 32,338 | |
| 32,304 | |
| 4,038 | |
| 47,935 | |
| 47,659 | |
| 371,007 |
Onboard and other expense | |
| 19,306 | |
| 19,306 | |
| 4,728 | |
| 21,841 | |
| 21,841 | |
| 82,889 |
Net Cruise Cost | |
| 616,585 | |
| 614,079 | |
| 337,742 | |
| 1,437,002 | |
| 1,427,296 | |
| 1,588,993 |
Less: Fuel expense | |
| 79,238 | |
| 79,238 | |
| 48,224 | |
| 175,931 | |
| 175,931 | |
| 222,240 |
Net Cruise Cost Excluding Fuel | |
| 537,347 | |
| 534,841 | |
| 289,518 | |
| 1,261,071 | |
| 1,251,365 | |
| 1,366,753 |
Less Non-GAAP Adjustments: | | | | | | | | | | | | | | | | | | |
Non-cash deferred compensation (1) | |
| 904 | |
| 904 | |
| 667 | |
| 2,714 | |
| 2,714 | |
| 1,999 |
Non-cash share-based compensation (2) | |
| 39,922 | |
| 39,922 | |
| 25,862 | |
| 88,974 | |
| 88,974 | |
| 81,009 |
Adjusted Net Cruise Cost Excluding Fuel | | $ | 496,521 | | $ | 494,015 | | $ | 262,989 | | $ | 1,169,383 | | $ | 1,159,677 | | $ | 1,283,745 |
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | ||||||||||||||
| | September 30, | | September 30, | ||||||||||||||
| | | | | 2022 | | | | | | | | 2022 | | | | ||
|
| | |
| Constant |
| | |
| | |
| Constant |
| | | ||
| | 2022 | | Currency | | 2021 | | 2022 | | Currency | | 2021 | ||||||
Total cruise operating expense | | $ | 1,238,898 | | $ | 1,252,792 | | $ | 439,756 | | $ | 3,047,627 | | $ | 3,070,239 | | $ | 890,338 |
Marketing, general and administrative expense | |
| 375,164 | |
| 378,876 | |
| 228,473 | |
| 999,372 | |
| 1,007,122 | |
| 616,440 |
Gross Cruise Cost | |
| 1,614,062 | |
| 1,631,668 | |
| 668,229 | |
| 4,046,999 | |
| 4,077,361 | |
| 1,506,778 |
Less: | | |
| | | | | | | | |
| | | | | | |
Commissions, transportation and other expense | |
| 352,798 | |
| 358,004 | |
| 32,338 | |
| 696,946 | |
| 704,531 | |
| 47,935 |
Onboard and other expense | |
| 126,740 | |
| 126,740 | |
| 19,306 | |
| 255,445 | |
| 255,445 | |
| 21,841 |
Net Cruise Cost | |
| 1,134,524 | |
| 1,146,924 | |
| 616,585 | |
| 3,094,608 | |
| 3,117,385 | |
| 1,437,002 |
Less: Fuel expense | |
| 186,984 | |
| 187,064 | |
| 79,238 | |
| 503,682 | |
| 503,787 | |
| 175,931 |
Net Cruise Cost Excluding Fuel | |
| 947,540 | |
| 959,860 | |
| 537,347 | |
| 2,590,926 | |
| 2,613,598 | |
| 1,261,071 |
Less Non-GAAP Adjustments: | | | | | | | | | | | | | | | | | | |
Non-cash deferred compensation (1) | |
| 700 | |
| 700 | |
| 904 | |
| 2,098 | |
| 2,098 | |
| 2,714 |
Non-cash share-based compensation (2) | |
| 26,083 | |
| 26,083 | |
| 39,922 | |
| 88,923 | |
| 88,923 | |
| 88,974 |
Adjusted Net Cruise Cost Excluding Fuel | | $ | 920,757 | | $ | 933,077 | | $ | 496,521 | | $ | 2,499,905 | | $ | 2,522,577 | | $ | 1,169,383 |
(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. |
38
Adjusted Net Loss was calculated as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Nine Months Ended | ||||||||||||||||
| | September 30, | | September 30, | | September 30, | | September 30, | ||||||||||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||||||
Net loss | | $ | (646,813) | | $ | (758,152) | | $ | (2,836,799) | | $ | (3,591,483) | | $ | (333,250) | | $ | (646,813) | | $ | (1,446,833) | | $ | (2,836,799) |
Non-GAAP Adjustments: | | | | | | | | | | | | | | | | | | | | | | | | |
Non-cash deferred compensation (1) | |
| 1,002 | |
| 992 | |
| 3,009 | |
| 2,975 | |
| 1,012 | |
| 1,002 | |
| 3,036 | |
| 3,009 |
Non-cash share-based compensation (2) | |
| 39,922 | |
| 25,862 | |
| 88,974 | |
| 81,009 | |
| 26,083 | |
| 39,922 | |
| 88,923 | |
| 88,974 |
Extinguishment and modification of debt (3) | |
| 3,562 | |
| 6,636 | |
| 292,752 | |
| 27,795 | |
| — | |
| 3,562 | |
| 188,433 | |
| 292,752 |
Amortization of intangible assets (4) | |
| — | |
| 2,774 | |
| — | |
| 8,321 | ||||||||||||
Impairment loss (5) | | | — | | | — | | | — | | | 1,633,337 | ||||||||||||
Debt conversion option, discount and expenses (6) | |
| (197,921) | |
| 83,296 | |
| 270,684 | |
| 318,908 | ||||||||||||
Debt conversion option, discount and expenses (4) | |
| 26,634 | |
| (197,921) | |
| (350,695) | |
| 270,684 | ||||||||||||
Adjusted Net Loss | | $ | (800,248) | | $ | (638,592) | | $ | (2,181,380) | | $ | (1,519,138) | | $ | (279,521) | | $ | (800,248) | | $ | (1,517,136) | | $ | (2,181,380) |
(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) |
Consists of non-cash gains and losses related to our debt conversion options, which are recognized in other income (expense), net. Also includes the related debt discount, which is amortized to interest expense, net. |
36
EBITDA and Adjusted EBITDA were calculated as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Nine Months Ended | ||||||||||||||||
| | September 30, | | September 30, | | September 30, | | September 30, | ||||||||||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||||||
Net loss | | $ | (646,813) | | $ | (758,152) | | $ | (2,836,799) | | $ | (3,591,483) | | $ | (333,250) | | $ | (646,813) | | $ | (1,446,833) | | $ | (2,836,799) |
Interest expense, net | |
| 184,524 | |
| 154,501 | |
| 824,304 | |
| 343,993 | |
| 176,769 | |
| 184,524 | |
| 692,898 | |
| 824,304 |
Income tax (benefit) expense | |
| 294 | |
| (2,832) | |
| 2,949 | |
| (13,216) | ||||||||||||
Income tax expense | |
| 978 | |
| 294 | |
| 4,824 | |
| 2,949 | ||||||||||||
Depreciation and amortization expense | |
| 173,289 | |
| 177,488 | |
| 517,867 | |
| 554,937 | |
| 186,551 | |
| 173,289 | |
| 547,214 | |
| 517,867 |
EBITDA | |
| (288,706) | |
| (428,995) | |
| (1,491,679) | |
| (2,705,769) | |
| 31,048 | |
| (288,706) | |
| (201,897) | |
| (1,491,679) |
Other (income) expense, net (1) | |
| (226,442) | |
| 89,005 | |
| 145,450 | |
| 325,412 | |
| (29,600) | |
| (226,442) | |
| (520,471) | |
| 145,450 |
Other Non-GAAP Adjustments: | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Non-cash deferred compensation (2) | |
| 904 | |
| 667 | |
| 2,714 | |
| 1,999 | |
| 700 | |
| 904 | |
| 2,098 | |
| 2,714 |
Non-cash share-based compensation (3) | |
| 39,922 | |
| 25,862 | |
| 88,974 | |
| 81,009 | |
| 26,083 | |
| 39,922 | |
| 88,923 | |
| 88,974 |
Impairment loss (4) | |
| — | |
| — | |
| — | |
| 1,607,797 | ||||||||||||
Adjusted EBITDA | | $ | (474,322) | | $ | (313,461) | | $ | (1,254,541) | | $ | (689,552) | | $ | 28,231 | | $ | (474,322) | | $ | (631,347) | | $ | (1,254,541) |
(1) | Primarily consists of gains or losses from conversion options on our exchangeable |
(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. |
39
Three months ended September 30, 20212022 (“2021”2022”) compared to three months ended September 30, 20202021 (“2020”2021”)
Revenue
Revenue
Total revenue increased to $1.6 billion in 2022 compared to $153.1 million in 20212021. In 2022, revenue increased as we had returned to service with 4.0 million Passenger Cruise Days compared to $6.50.4 million in 2020. Revenue in 2021 and 2020 has been adversely impacted due to the cancellation of sailings as a result of the COVID-19 pandemic. Revenue increased in 2021 as certain ships have returned to service.2021.
Expense
Expense
Total cruise operating expense increased 131.3%181.7% in 20212022 compared to 2020.2021. In 2022, the third quarter had the entire 29-ship fleet in service compared to 2021, our cruise operating expenses increased primarily relatedwhich began with no ships in service and ended with only 8 ships returned to crew costs, including salaries, food and other travel costs as we began our return to service; fuel; ship maintenance, including Dry-dock expenses; and costs related to COVID-19, including crew and passenger testing.service. In 2020,2022, our cruise operating expenses were primarilyincreased due to the resumption of voyages, resulting in higher payroll, fuel, and direct variable costs of fully operating ships. Costs for certain items such as food, fuel and logistics also increased related to crewinflation. Additionally, in 2022, there was an increase in COVID-19 related costs, including salaries, food and other repatriation costs; fuel; and other ongoing costs such as insurance and ship maintenance.testing. Gross Cruise Cost increased 92.8%141.5% in 20212022 compared to 2020 primarily related to the increase in costs described above and an increase in marketing, general and administrative expenses as we return to sailing. Total other operating expense increased 20.3% in 2021 compared to 2020 primarily due to the increase in marketing, general and administrative costs as a result of the discontinuation of cost savings initiatives described under “Update Regarding COVID-19 Pandemic—Financing Transactions and Cost Containment Measures” as we return to service.
Interest expense, net was $184.5 million in 2021 compared to $154.5 million in 2020. The increase in interest expense reflects additional debt outstanding at higher interest rates, partially offset by lower LIBOR.
Other income (expense), net was income of $226.4 million in 2021 compared to expense of $89.0 million in 2020. The income and expenses were primarily due to gains and losses from conversion options on our exchangeable notes.
Nine months endedSeptember 30, 2021 (“2021”) compared to nine months endedSeptember 30, 2020 (“2020”)
Revenue
Total revenue decreased 87.4% to $160.5 million in 2021 compared to $1.3 billion in 2020. In 2021, the adverse impact on revenue was due to the cancellation of sailings as a result of the COVID-19 pandemic and lower occupancy as we return to service. In 2020, voyages were cancelled beginning March 13, 2020.
Expense
Total cruise operating expense decreased 40.1% 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, including Dry-dock expenses. In 2020, our cruise operating expenses subsequent to the suspension of cruise voyages on March 13, 2020 primarily included the cost of protected commissions and crew costs, including salaries, food and other repatriation costs. Gross Cruise Cost decreased 26.2% in 2021 compared to 2020 primarily related to the change in costs described above offset byplus an increase in marketing, general and administrative expenses primarily related to the discontinuation of cost savings initiatives described under “Update Regarding COVID-19 Pandemic—Financing Transactions and Cost Containment Measures” as we return to service.increased marketing costs. Total other operating expense decreased 58.3%increased 39.8% in 20212022 compared to 20202021 primarily due to the impairment of goodwillincrease in marketing, general and trade names triggered by the COVID-19 pandemic in 2020. Depreciation and amortization expense decreased primarily due to a $25.5 million impairment loss recognized in 2020.administrative expenses.
Interest expense, net was $824.3$176.8 million in 20212022 compared to $344.0$184.5 million in 2020.2021. The increasedecrease in interest expense primarily reflects losses on extinguishmentlower interest expense in connection with recent refinancings and higher interest income, partially offset by higher debt balances and higher rates.
Other income (expense), net was income of debt and debt modification costs$29.6 million in 2022 compared to income of $292.8$226.4 million in 2021. In 2022, the income primarily related to gains on foreign currency remeasurements. In 2021, the repurchase of the Private Exchangeable Notes as well as additional debt outstanding at higher interest rates, partially offset by lower LIBOR.gains were primarily due to changes from conversion options on our exchangeable notes.
4037
Nine months ended September 30, 2022 (“2022”) compared to nine months ended September 30, 2021 (“2021”)
Revenue
Total revenue increased to $3.3 billion in 2022 compared to $160.5 million in 2021. In 2022, revenue increased as we returned to service with 8.4 million Passenger Cruise Days compared to 0.4 million in 2021.
Expense
Total cruise operating expense increased 242.3% in 2022 compared to 2021. In 2022, the nine months started with 16 ships operating with guests onboard and ended with the entire 29-ship fleet in service compared to 2021, during which only 8 ships were returned to service in the third quarter. In 2022, our cruise operating expenses were increased due to the resumption of voyages, resulting in higher payroll, fuel, and direct variable costs of fully operating ships. Costs for certain items such as food, fuel and logistics also increased related to inflation. Additionally, in 2022, there was an increase in COVID-19 related costs, including testing. Gross Cruise Cost increased 168.6% in 2022 compared to 2021 primarily related to the change in costs described above plus an increase in marketing, general and administrative expenses primarily related to increased marketing costs as we returned to service. Total other operating expense increased 36.3% in 2022 compared to 2021 primarily due to the increase in marketing, general and administrative expenses.
Interest expense, net was $692.9 million in 2022 compared to $824.3 million in 2021. The decrease in interest expense reflects lower losses in 2022 from extinguishment of debt and debt modification costs, which were $188.4 million in 2022 compared to $292.8 million in 2021. Excluding these losses, interest expense decreased primarily as a result of lower interest expense in connection with the recent refinancings, partially offset by higher debt balances and higher rates.
Other income (expense), net was income of $520.5 million in 2022 compared to expense of $145.5 million in 2021 compared to $325.4 million in 2020.2021. The expensesgains and losses were primarily due to losseschanges from conversion options on our exchangeable notes.
Liquidity and Capital Resources
General
As of September 30, 2021,2022, our liquidity was $1.9 billion consistingconsisted of cash and cash equivalents.equivalents of $1.2 billion and a $1 billion undrawn commitment less related fees. Our primary ongoing liquidity requirements are to finance working capital, capital expenditures and debt service.
In January 2021,February 2022, 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 effective date of the 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.
In March 2021, the Company received additional financing through various debt financings, and NCLH’s equity offering, collectively totaling $2.7$2.1 billion in gross proceeds. The Pride of America Credit Facility and Jewel Credit Facility were extinguished from proceeds, which has been used to redeem all of the outstanding 2024 Senior Secured Notes and 2026 Senior Secured Notes and to make scheduled principal payments on debt financings. We also extinguished the Private Exchangeable Notesmaturing in March 2021 by using approximately $1.0 billion of cash proceeds from NCLH’s equity offering completed2022, including, in March 2021each case, to repurchase the notes. See Note 7 – “Long-Term Debt” for further information.
In July 2021, we amended nine credit facilities for our newbuild agreementspay any accrued 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), modificationsunpaid interest thereon, as well as related premiums, fees and financing premiums.
In November 2021, the Company executed a $1 billion commitment through August 15, 2022 that provides additional liquidity to the Company.expenses. Refer to Note 7 – “Long-Term Debt” for further information.
The Company's monthly average cash burn for the third quarter of 2021 was approximately $275 million, below prior guidance of approximately $285 million. Looking ahead,In July 2022, the Company expects fourth quarter of 2021 monthly average cash burnamended its $1 billion commitment, which provides additional liquidity to increase to approximately $350 million driven by the continued phased relaunch of additional vessels. This cash burn rateCompany, extending the commitment through March 31, 2023. The Company has not drawn and currently does not include expected cash inflows from new and existing bookings or contribution from ships that have re-entered service.intend to draw under this commitment. See Note 7 – “Long-Term Debt” for more information.
Cash burn rates include ongoing ship operating expenses, administrative operating expenses, interest expense, taxes, debt deferral fees and expected non-newbuild capital expenditures and exclude cash refunds of customer deposits as well as cash inflows from new and existing bookings, newbuild related capital expenditures and other working capital changes. Future cash burn rate estimates also exclude unforeseen expenses. The third quarter of 2021 cash burn rate and fourth 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, and is expected to continue to have, on 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. Refer to “Item 1A. Risk Factors” for further details regarding uncertainty related to Russia’s ongoing invasion of Ukraine and “Item 1A. Risk Factors” in our Annual Report on Form 10-K for other risks and uncertainties that may cause our results to differ from our expectations.
4138
There can be no assurance that the accuracy of the assumptions used to estimate our liquidity requirements will be correct, and our ability to be predictive is uncertain due to the unknown magnitude and durationdynamic nature of the current operating environment, including the impacts of the COVID-19 global pandemic.pandemic, Russia’s ongoing invasion of Ukraine and current macroeconomic conditions such as inflation, rising fuel prices and rising interest rates. Based on the liquidity estimates and our current resources, we have concluded we have sufficient liquidity to satisfy our obligations for at least the next twelve12 months. 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 particularly if a substantial portion of our fleet continues to have suspendedsuspends cruise voyages or operateoperates at significantly reduced occupancy levels for a prolonged period. We also expectThere is no assurance that cash flows from operations and additional financings will be available in the future to opportunisticallyfund our future obligations. Beyond 12 months, we will pursue refinancingrefinancings and other balance sheet optimization transactions from time to time which could include equity, equity-linkedin order to reduce interest expense or extend debt financing.maturities. We expect to collaborate with financing institutions regarding these refinancing and optimization transactions as opportunities arise in the short-term to amend long-term arrangements.
We have received amendments to certain financial and other debt covenant waivers through December 31, 2022covenants and added new free liquidity requirements. At September 30, 2021,2022, taking into account such waivers,amendments, we were in compliance with all of our debt covenants. If we do not continue to remain in compliance with our covenants, we would have to seek additional amendments to or waivers of the covenants. The Company is currently taking steps to further amend thecertain financial and other debt covenants. However, no assurances can be made that such amendments or waivers 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 would have a material adverse impact to our operations and liquidity.
Since March 2020, Moody’s has downgraded our long-term issuer rating to B2, our senior secured rating to B1 and our senior unsecured rating to Caa1. In September 2022, Moody’s reaffirmed our current ratings. Since April 2020, S&P Global has downgraded our issuer credit rating to B, lowered our issue-level rating on our $875 million Revolving Loan Facility and $1.5 billion Term Loan A Facility to BB-, our issue-level rating on our $675 million 2024 Senior Secured Notes and $750 million 2026 Senior Secured Notesother senior secured notes to B+ and our senior unsecured rating to 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. We also have significant capacity to incur additional indebtedness under our debt agreements. On May 20, 2021, NCLH’s shareholdersagreements and may issue additional ordinary shares from time to time, subject to our authorized a 490,000,000 increase in the number of ordinary shares available for issuance.shares. 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.
As of September 30, 2021,2022, we had advance ticket sales of $1.7$2.5 billion, including the long-term portion, which included approximately $0.75 billion$258 million of future cruise credits. We also have agreements with our credit card processors that, as of September 30, 2021,2022, governed approximately $1.5$2.1 billion in advance ticket sales that had 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 would be satisfied by posting collateral. Although the agreements vary, these requirements may generally be satisfied either through a percentage of customer payments withheld or providing cash funds directly to the card processor. Any cash reserve or collateral requested could be increased or decreased.
As of September 30, 2021,2022, we had cash collateral reserves of approximately $1.2 billion$742.5 million with credit card processors, of which approximately $237.0 million is recognized in accounts receivable, net orand approximately $505.5 million in other long-term assets. Subsequent to September 30, 2021, $388.3 million in cash reserves have been released to the Company. We may be required to pledge additional collateral and/or post additional cash reserves or take other actions that may further reduce our liquidity.
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Sources and Uses of Cash
In this section, references to “2022” refer to the nine months ended September 30, 2022 and references to “2021” refer to the nine months ended September 30, 2021 and references to “2020” refer to the nine months ended September 30, 2020.2021.
Net cash used in operating activities was $2.2 billion$36.8 million in 20212022 as compared to net cash used in operating activities of $1.9$2.2 billion in 2020.2021. The net cash used in operating activities included net losses and timing differences in cash receipts
39
and payments relating to operating assets and liabilities. The net losses include losses on extinguishment of debt of $188.4 million in 2022 and $237.1 million in 2021. Advance ticket sales increased by $713.4 million in 2022. Advance ticket sales increased by $469.6 million in 2021 compared to a decrease of $834.6 millionwhile the change in 2020 while our accounts receivable, net, which containsincludes our reserves with credit card processors, decreased cash by $979.9 million compared to a decrease of $12.1 million in 2020.2021.
Net cash used in investing activities was $543.0 million$1.6 billion in 20212022 and $901.6 million$1.1 billion in 2020,2021. The net cash used in investing activities was primarily related to the delivery of Norwegian Prima in 2022. The net cash used in investing activities was primarily related to purchases of short-term investments, newbuild payments and ship improvement projects partially offset by proceeds from maturities of short-term investments in 20212021.
Net cash provided by financing activities was $1.3 billion in 2022 primarily due to newbuild loans and payments for Seven Seas Splendorthe proceeds of $2.1 billion from our various note offerings partially offset by debt repayments and ship improvement projects in 2020.
related redemption premiums associated with extinguishment of certain senior secured notes. Net cash provided by financing activities was $1.3 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 $4.9 billion in 2020 primarily due to the proceeds of $5.2 billion from our revolving credit facilities, various notes, and newbuild loans partially offset by debt repayments. Additionally, we received a contribution of $741.8 million from NCLH.
Future Capital Commitments
Future capital commitments consist of contracted commitments, including ship construction contracts. Anticipated expenditures related to ship construction contracts were $0.1 billion$84.5 million for the remainder of 20212022 and $1.6$2.4 billion and $2.5$0.5 billion for the years ending December 31, 20222023 and 2023, respectively.2024, respectively, reflecting delays in certain scheduled ship delivery dates. The Company has export credit financing in place for the anticipated expenditures related to ship construction contracts of $0.1 billion for the remainder of 2021 and $1.0$1.9 billion and $2.0$0.1 billion for the years ending December 31, 20222023 and 2023,2024, respectively. Anticipated non-newbuild capital expenditures for the remainder of 20212022 are approximately $0.2 billion and approximately $0.5 billion for the year ended December 31, 2022, which includes health and safety investments.$155 million. Future expected capital expenditures will significantly increase our depreciation and amortization expense.
Project Leonardo will introduce anFor the Norwegian brand, the first Prima Class Ship, Norwegian Prima, at approximately 143,500 Gross Tons and with 3,100 Berths, was delivered in July 2022. We have five additional six ships,Prima Class Ships on order, each ranging from approximately 140,000143,500 to 156,300 Gross Tons with approximately 3,2153,100 to 3,550 Berths, with expectedcurrently scheduled delivery dates from 20222023 through 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), Russia’s ongoing invasion of Ukraine and/or other macroeconomic events, have already resulted in some delays in expected ship deliveries, anddeliveries. These impacts along with other potential modifications the impacts of COVID-19 couldCompany may make to its newbuilds, including potential initiatives to improve environmental sustainability, are expected to result in additional delays in ship deliveries in the future, which may be prolonged.
The combined contract prices of the nineeight ships on order for delivery was approximately €7.6€6.7 billion, or $8.8$6.6 billion based on the euro/U.S. dollar exchange rate as of September 30, 2021.2022. 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.
Capitalized interest for the three months ended September 30, 2022 and 2021 and 2020 was $12.5$17.0 million and $6.8$12.5 million, respectively, and for the nine months ended September 30, 2022 and 2021 and 2020 was $30.6$45.1 million and $18.1$30.6 million, respectively, primarily associated with the construction of our newbuild ships.
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Off-Balance Sheet ArrangementsMaterial Cash Requirements
None.
Contractual Obligations
As of September 30, 2021,2022, our contractual obligations with initial or remaining terms in excess of one year, including interest payments on long-termmaterial cash requirements for debt obligations, included the followingand ship construction were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | |
|
| Remainder of |
| | |
| | |
| | |
| | | | | | | | | | | | |
| | 2022 |
| 2023 |
| 2024 |
| 2025 |
| 2026 |
| 2027 |
| Thereafter |
| Total | ||||||||
Long-term debt (1) | | $ | 446,559 | | $ | 1,610,548 | | $ | 4,202,925 | | $ | 1,527,174 | | $ | 2,338,005 | | $ | 3,283,685 | | $ | 2,980,662 | | $ | 16,389,558 |
Ship construction contracts (2) | |
| 81,979 | | | 2,232,211 | | | 983,027 | | | 1,396,004 | | | 871,534 | | | 761,282 | | | — | |
| 6,326,037 |
Total | | $ | 528,538 | | $ | 3,842,759 | | $ | 5,185,952 | | $ | 2,923,178 | | $ | 3,209,539 | | $ | 4,044,967 | | $ | 2,980,662 | | $ | 22,715,595 |
| | | | | | | | | | | | | | | |
|
| | |
| Less than |
| | |
| | |
| More than | ||
| | Total | | 1 year | | 1-3 years | | 3-5 years | | 5 years | |||||
Long-term debt (1) | | $ | 12,601,904 | | $ | 543,701 | | $ | 5,484,750 | | $ | 4,422,019 | | $ | 2,151,434 |
Operating leases (2) | |
| 1,331,575 | |
| 49,288 | |
| 120,343 | |
| 131,846 | |
| 1,030,098 |
Ship construction contracts (3) | |
| 8,501,410 | |
| 1,500,556 | |
| 2,533,925 | |
| 3,581,820 | |
| 885,109 |
Port facilities (4) | |
| 522,564 | |
| 27,957 | |
| 64,707 | |
| 52,752 | |
| 377,148 |
Interest (5) | |
| 2,308,796 | |
| 560,465 | | | 1,034,129 | |
| 524,251 | |
| 189,951 |
Other (6) | |
| 1,217,097 | |
| 112,658 | |
| 439,542 | |
| 416,017 | |
| 248,880 |
Total | | $ | 26,483,346 | | $ | 2,794,625 | | $ | 9,677,396 | | $ | 9,128,705 | | $ | 4,882,620 |
(1) |
(2) |
Ship construction contracts are for our newbuild ships based on the euro/U.S. dollar exchange rate as of September 30, |
| | | | | | | | | | | | | | | | | | | | | | | | |
|
| Remainder of |
| | |
| | |
| | |
| | | | | | | | | | | | |
| | 2022 |
| 2023 |
| 2024 |
| 2025 |
| 2026 |
| 2027 |
| Thereafter |
| Total | ||||||||
Ship construction contracts | | $ | 25,047 | | $ | 2,178,120 | | $ | 249,655 | | $ | 1,463,558 | | $ | 1,648,375 | | $ | 761,282 | | $ | — | | $ | 6,326,037 |
Other
Certain service providers may require collateral in the normal course of our business. The amount of collateral may change based on certain terms and conditions.
As a routine part of our business, depending on market conditions, exchange rates, pricing and our strategy for growth, we regularly consider opportunities to enter into contracts for the building of additional ships. We may also consider the sale of ships, potential acquisitions and strategic alliances. If any of these were to occur, they may be financed through the incurrence of additional permitted indebtedness, through cash flows from operations, or through the issuance of debt, equity or equity-related securities.
Funding Sources
Certain of our debt agreements contain covenants that, among other things, require us to maintain a minimum level of liquidity, as well as limit our net funded debt-to-capital ratio and maintain certain other ratios and restrict our ability to pay dividends.ratios. Substantially all of our ships and other property and equipment are pledged as collateral for certain of our debt. We have received amendments to certain financial and other debt covenant waivers through December 31, 2022covenants and added new
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free liquidity requirements. At September 30, 2021,After taking into account such waivers,amendments, we believe we were in compliance with allthese covenants as of our debt covenants.September 30, 2022.
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.
In light of the measures described under "Update Regarding COVID-19 Pandemic—Financing Transactions and Cost Containment Measures", weWe believe our cash on hand, the recently completednet impact of the undrawn $1 billion commitment less related fees, the expected return of a portion of the cash collateral from our credit card processors, 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 waiverscovenants were receivedpreviously amended in 2021 to enable the Company to maintain this compliance.compliance, and the Company is currently taking steps to further amend certain financial and other debt covenants. Refer to “—Liquidity and Capital Resources”Resources—General” for further information regarding the debt covenant waivers. There is no assurance thatwaivers and liquidity requirements.
Other
Certain service providers may require collateral in the normal course of our business. The amount of collateral may change based on certain terms and conditions.
As a routine part of our business, depending on market conditions, exchange rates, pricing and our strategy for growth, we regularly consider opportunities to enter into contracts for the building of additional ships. We may also consider the sale of ships, potential acquisitions and strategic alliances. If any of these transactions 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.
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We refer you to “—Liquidity and additional financings will be available in the futureCapital Resources—General” for information regarding collateral provided 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 or operate at significantly reduced occupancy levels for a prolonged period. We also expect to opportunistically pursue refinancings and other balance sheet optimization transactions from time to time, which could include equity, equity-linked or debt financings.credit card processors.
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 September 30, 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 September 30, 2021, 73%2022, 75% of our debt was fixed and 27%25% was variable. As of December 31, 2021, 72% of our debt was fixed and 28% was variable, which includes the effects of thean interest rate swaps. The notional amount of outstanding debt associated withswap that matured during the interest rate derivative agreements as ofnine months ended September 30, 2021 was $0.2 billion. As of December 31, 2020, 74% of our debt was fixed and 26% was variable, which includes the effects of the interest rate swaps and collars.2022. The notional amount of our outstanding debt associated with the interest rate swaps and collarsswap was $0.7$0.2 billion as of December 31, 2020.2021. The change in our fixed rate percentage from December 31, 20202021 to SeptemberJune 30, 20212022 was primarily due to the maturityaddition of various interestfixed rate derivatives.debt. Based on our September 30, 20212022 outstanding variable rate debt balance, a one percentage point increase in annual LIBOR interest rates would increase our annual interest expense by approximately $34.2$35.6 million excluding the effects of capitalization of interest.
Foreign Currency Exchange Rate Risk
As of September 30, 2021,2022, 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 €4.9€4.4 billion, or $4.3 billion based on the euro/U.S. dollar exchange rate as of September 30, 2022. As of December 31, 2021, the payments not hedged aggregated €5.0 billion, or $5.7 billion, based on the euro/U.S. dollar exchange rate as of September 30, 2021. As of
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December 31, 2020, the payments not hedged aggregated €5.0 billion, or $6.1 billion, based on the euro/U.S. dollar exchange rate as of December 31, 2020.2021. The change from December 31, 20202021 to September 30, 20212022 was due to the addition of foreign currency hedges.forwards and the delivery of Norwegian Prima. We estimate that a 10% change in the euro as of September 30, 20212022 would result in a $0.6$0.4 billion change in the U.S. dollar value of the foreign currency denominated remaining payments.
Fuel Price Risk
Our exposure to market risk for changes in fuel prices relates to the forecasted purchases of fuel on our ships. Fuel expense, as a percentage of our total cruise operating expense, was 18.0%15.1% and 25.4%18.0% for the three months ended September 30, 20212022 and 2020,2021, respectively, and 19.8%was 16.5% and 15.0%19.8% for the nine months ended September 30, 20212022 and 2020,2021, respectively. We use fuel derivative agreements to mitigate the financial impact of fluctuations in fuel prices and as of September 30, 2021, excluding fuel swaps for transactions that are no longer probable of occurrence,2022, we had hedged approximately 47%, 35%44% and 14%38% of our remaining 2021, 2022 and 2023 projected metric tons of fuel purchases, respectively. As of December 31, 2020,2021, we had hedged approximately 59%, 37%42% and 15%24% of our 2021, 2022 and 2023 projected metric tons of fuel purchases, respectively. The percentage of fuel purchases hedged changed between December 31, 20202021 and September 30, 20212022 primarily due to changes in forecasted purchases and the terminationaddition of certain fuel swaps.
We estimate that a 10% increase in our weighted-average fuel price would increase our anticipated 2021 fuel expense for the remainder of 2022 by $10.9$20.5 million. This increase would be offset by an increase in the fair value of all our fuel swap agreements of $4.8$10.6 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
42
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 September 30, 2021.2022. 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 September 30, 20212022 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 September 30, 20212022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on the Effectiveness of Controls
It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system will be met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there is only the reasonable assurance that our controls will succeed in achieving their goals under all potential future conditions.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Our threshold for disclosing material environmental legal proceedings involving a governmental authority where potential monetary sanctions are involved is $1 million.
See the section titled “Litigation” in “Item 1—Financial Statements—Notes to Consolidated Financial Statements—Note 10 Commitments and Contingencies” in Part I of this quarterly report for information about legal 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. The COVID-19 haspandemic, Russia’s invasion of Ukraine and the impact of general macroeconomic conditions have 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-19Global events and conditions, including terrorist acts, armed conflicts, including Russia’s ongoing invasion of Ukraine, acts of piracy, and other international events impacting the security of travel or the global economy, or threats thereof, could adversely affect our business.
Global events and conditions, including the threat or possibility of future terrorist acts, outbreaks of hostilities or armed conflict, political unrest and instability, the issuance of government travel advisories or elevated threat warnings, increases in the activity of pirates, and other geo-political uncertainties, or the possibility or fear of such events, have had in the past and may again in the future have an adverse impact on our business. Any of these events or conditions may adversely affect demand for, and by extension pricing of, our cruises. Such events or conditions may also have downstream effects on the global economic environment, including increased fuel and commodity pricing, supply chain shortages, labor shortages, volatility in the global capital markets, contraction of the global economy leading to decreased consumer discretionary spending, and other effects impossible to predict at this time.
Armed conflicts, including Russia’s ongoing invasion of Ukraine, have impacted, and could in the future impact, our profitability and product offering by limiting the destinations to which we can travel and our operations by making it more difficult to source crew members and third-party vendors from affected regions and making it more difficult or costly to source goods we need to run our operations or to build or maintain our ships. Further, the Russia-Ukraine conflict has contributed to extreme volatility in the global financial markets and has had, and is expected to continue to have, a significant impact on our financial condition and operations. The current, and uncertain future, impactfurther global economic consequences, including disruptions of the COVID-19 pandemic, including its effect on the abilityglobal supply chain and energy markets and heightened volatility of commodity fuel prices. Such volatility 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.
The spread of COVID-19 and the 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. We began resuming cruises voyages in July 2021 on a limited basis and as of the date hereof eleven of our ships were operating with guests on board as part of our phased return to service. 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 could potentially be reinstated, and the total length of time the majority of our fleet is out of cruise voyage operations or operating at significantly reduced occupancy levels may be prolonged. 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, each of which has impacted, and is expected to continue to significantly impact, global guest sourcing and our access to various ports of 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, which has been extended through January 15, 2022. We have received conditional sailing certificates for certain ships and are in the process of seeking certifications for additional 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 involves 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 and maintain health-related protocols on our ships, such as controlled capacity and testing, whichdisruptions have had, and may continue to have, a significant effect onadverse consequences to our operations. In addition,business, our suppliers and our customers. If the industry is subject to enhanced healthequity and safety requirements which have been, and may continue to be, costly and take a significant amount of time to implement across our fleet. We have had instances of COVID-19 on our ships and 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 in the future.
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To date, the COVID-19 pandemic has resulted in significant costs and lost revenuecredit markets deteriorate, including as a result of the suspension of 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/political unrest or destinations, costswar, it may make any necessary debt or equity financing more difficult to return our passengers to their home destinations and expenses to transport our crew to and from our ships and to assist some of our crew that were unable to return homeobtain in an optimal time frame with food and housing.
Our ability to transport crew to and from our ships is dependenta timely manner or 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 has created logistical challenges due to 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 has impacted and could continue to impact our ability to staff our ships as operations continue to resume.
Between March 12, 2020 and April 30, 2020, three class action lawsuits were filed against us 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 we made false and misleading statements to the market and customers about 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 our marketing during the COVID-19 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 numberfavorable terms, more costly 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 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.
Due 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 our full fleet will be back in service at historical occupancy levels. Moreover, 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-pandemic demand or 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. 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. The global supply chain has also been negatively impacted by COVID-19, which has had an effect on our operations and our ability to source supplies. 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 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 timing for bringing our full fleet back in service and number of cancellations, we may be required to provide cash refunds for a substantial
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portion of the balance of our advanced ticket sales. Accordingly, as a result of these unprecedented circumstances, we cannot predict the full impact of COVID-19 on ourmore dilutive. Our business, financial condition and results of operations.
Moreover, our ability to attractoperations may be materially 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 effectadversely affected by any negative impact on the public’s perception ofglobal economy, capital markets or commodity fuel prices resulting from 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, provisionsconflict in our credit card processing andUkraine or any 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 would 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. As of September 30, 2021, we had cash reserves of approximately $1.2 billion with credit card processors recognized in accounts receivable, net or other long-term assets. Subsequent to September 30, 2021, $388.3 million in cash reserves have been released to the Company. We may be required to pledge additional collateral and/or post additional 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 will report a net loss for the three months and year ending December 31, 2021 and expect to report a net loss until we are able to resume regular voyages. 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. Since March 2020, Moody’s has downgraded our long-term issuer rating to B2, our senior secured rating to B1 and our senior unsecured rating to Caa1. Since April 2020, S&P Global has downgraded our issuer credit rating to B, lowered our issue-level rating on our $875 million Revolving Loan Facility and $1.5 billion Term Loan A Facility to BB-, our issue-level rating on our $675 million 2024 Senior Secured Notes and $750 million 2026 Senior Secured Notes to B+ and our senior unsecured rating to 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. Accordingly, 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.geopolitical tensions.
The agreements governing our indebtedness contain, and any instruments governing future indebtednessongoing invasion 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 our subsidiaries to pay dividends or make distributions to 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 business activities or finance future operations or capital needs. The terms of any instruments governing future indebtednessUkraine may also require us to provide incremental collateral, which may further restrict our business operations.
The extent of the effects of the pandemic 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 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 government orders and restrictions, the extent of the impact of COVID-19 on overall demand for cruise vacations and
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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 hadhave the effect of heightening many of the other risks described herein, such as those relating todisclosed in our need to generate sufficient cash flows to service our indebtedness,Annual Report on Form 10-K, any of which could materially and our ability to comply with the covenants contained in the agreements that govern our indebtedness.
Additionally, epidemics, pandemics and viral outbreaks or other wide-ranging health scares in the future would likely also adversely affect our business financial condition and results of operations.
operations.
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31.1* |
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31.2* |
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32.1** |
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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 September 30, |
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| | (i) the Consolidated Statements of Operations for the three and nine months ended September 30, |
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| | (ii) the Consolidated Statements of Comprehensive Loss for the three and nine months ended September 30, |
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| | (iii) the Consolidated Balance Sheets as of September 30, |
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| | (iv) the Consolidated Statements of Cash Flows for the nine months ended September 30, |
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| | (v) the Consolidated Statements of Changes in Shareholders’ Equity for the three and nine months ended September 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 September 30, |
*Filed herewith.
** Furnished herewith.
# Certain portions of this document that constitute confidential information have been redacted in accordance with Regulation S-K Item 601(b)(10).
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| NCL CORPORATION LTD. | |
| (Registrant) | |
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| By: | /s/ FRANK J. DEL RIO |
| Name: | Frank J. Del Rio |
| Title: | President and Chief Executive Officer |
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| (Principal Executive Officer) |
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| By: | /s/ MARK A. KEMPA |
| Name: | Mark A. Kempa |
| Title: | Executive Vice President and Chief Financial Officer |
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| (Principal Financial Officer) |
Dated: November 9, 20218, 2022
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