UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM 10-Q

 

 

 

(Mark One)

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

 

For the quarterly period ended September 30, 2017

 

OR

 

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

 

For the transition period from                      to                     

 

Commission File Number: 001-35784

 

 

 

NORWEGIAN CRUISE LINE HOLDINGS LTD.

(Exact name of registrant as specified in its charter)

 

 

 

Bermuda   98-0691007

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

7665 Corporate Center Drive, Miami, Florida 33126

(Address of principal executive offices) (zip code)

 

(305) 436-4000

(Registrant’s telephone number, including area code)

 

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 x Accelerated filer ¨
Non-accelerated filer ¨  (Do not check if a smaller reporting company) Smaller reporting company ¨
Emerging growth company ¨    

 

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

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

 

There were 228,463,930 ordinary shares outstanding as of October 31, 2017.

 

 

 

 

 

 

TABLE OF CONTENTS

 

    Page
PART I. FINANCIAL INFORMATION  
     
Item 1. Financial Statements 1
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 16
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 27
     
Item 4. Controls and Procedures 28
   
PART II. OTHER INFORMATION  
     
Item 1. Legal Proceedings 29
     
Item 1A. Risk Factors 29
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 29
     
Item 5. Other Information 29
     
Item 6. Exhibits 29
   
SIGNATURES 31

 

 

Table of Contents

 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Norwegian Cruise Line Holdings Ltd.

Consolidated Statements of Operations

(Unaudited)

(in thousands, except share and per share data)

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2017   2016   2017   2016 
Revenue                
Passenger ticket  $1,192,023   $1,071,815   $2,916,731   $2,630,405 
Onboard and other   459,715    412,921    1,229,891    1,118,798 
Total revenue   1,651,738    1,484,736    4,146,622    3,749,203 
Cruise operating expense                    
Commissions, transportation and other   266,173    249,519    683,628    618,492 
Onboard and other   98,476    90,661    250,254    230,416 
Payroll and related   206,142    193,122    593,502    554,741 
Fuel   91,231    86,250    266,780    248,529 
Food   53,883    50,902    147,401    151,674 
Other   122,260    114,280    368,640    351,263 
Total cruise operating expense   838,165    784,734    2,310,205    2,155,115 
Other operating expense                    
Marketing, general and administrative   202,221    174,813    587,914    504,694 
Depreciation and amortization   134,532    111,575    376,878    317,480 
Total other operating expense   336,753    286,388    964,792    822,174 
Operating income   476,820    413,614    871,625    771,914 
Non-operating income (expense)                    
Interest expense, net   (66,339)   (60,662)   (183,495)   (188,836)
Other income (expense), net   (3,262)   (5,333)   (11,686)   (13,281)
Total non-operating income (expense)   (69,601)   (65,995)   (195,181)   (202,117)
Net income before income taxes   407,219    347,619    676,444    569,797 
Income tax expense   (6,527)   (5,241)   (15,369)   (8,944)
Net income  $400,692   $342,378   $661,075   $560,853 
Weighted-average shares outstanding                    
Basic   228,267,307    227,096,142    227,891,916    227,102,560 
Diluted   229,816,956    227,598,607    229,157,257    227,859,617 
Earnings per share                    
Basic  $1.76   $1.51   $2.90   $2.47 
Diluted  $1.74   $1.50   $2.88   $2.46 

 

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

 

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Norwegian Cruise Line Holdings Ltd.

Consolidated Statements of Comprehensive Income

(Unaudited)

(in thousands)

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2017   2016   2017   2016 
Net income  $400,692   $342,378   $661,075   $560,853 
Other comprehensive income:                    
Shipboard Retirement Plan   104    107    313    323 
Cash flow hedges:                    
Net unrealized gain   97,276    37,051    221,512    112,508 
Amount realized and reclassified into earnings   11,644    18,327    31,593    76,658 
Total other comprehensive income   109,024    55,485    253,418    189,489 
Total comprehensive income  $509,716   $397,863   $914,493   $750,342 

 

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

 

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Norwegian Cruise Line Holdings Ltd.

Consolidated Balance Sheets

(Unaudited)

(in thousands, except share data)

 

   September 30,
2017
   December 31,
2016
 
Assets          
Current assets:          
Cash and cash equivalents  $522,904   $128,347 
Accounts receivable, net   56,764    63,215 
Inventories   78,915    66,255 
Prepaid expenses and other assets   206,251    153,276 
Total current assets   864,834    411,093 
Property and equipment, net   10,916,824    10,117,689 
Goodwill   1,388,931    1,388,931 
Tradenames   817,525    817,525 
Other long-term assets   277,003    238,673 
Total assets  $14,265,117   $12,973,911 
Liabilities and shareholders’ equity          
Current liabilities:          
Current portion of long-term debt  $605,827   $560,193 
Accounts payable   45,059    38,002 
Accrued expenses and other liabilities   550,774    541,753 
Advance ticket sales   1,327,002    1,172,870 
Total current liabilities   2,528,662    2,312,818 
Long-term debt   6,002,877    5,838,494 
Other long-term liabilities   195,974    284,873 
Total liabilities   8,727,513    8,436,185 
Commitments and contingencies (Note 8)          
Shareholders’ equity:          
Ordinary shares, $.001 par value; 490,000,000 shares authorized; 233,770,580 shares issued and 228,458,619 shares outstanding at September 30, 2017 and 232,555,937 shares issued and 227,243,976 shares outstanding at December 31, 2016   233    232 
Additional paid-in capital   3,973,350    3,890,119 
Accumulated other comprehensive income (loss)   (61,055)   (314,473)
Retained earnings   1,864,331    1,201,103 
Treasury shares (5,311,961 ordinary shares at September 30, 2017 and December 31, 2016, at cost)   (239,255)   (239,255)
Total shareholders’ equity   5,537,604    4,537,726 
Total liabilities and shareholders’ equity  $14,265,117   $12,973,911 

 

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

 

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Norwegian Cruise Line Holdings Ltd.

Consolidated Statements of Cash Flows

(Unaudited)

(in thousands)

 

   Nine Months Ended
September 30,
 
   2017   2016 
Cash flows from operating activities          
Net income  $661,075   $560,853 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation and amortization expense   385,957    327,366 
(Gain) loss on derivatives   (71)   1,007 
Deferred income taxes, net   16,035    707 
Write-off of deferred financing fees       11,537 
Provision for bad debts and inventory   1,592    1,767 
Share-based compensation expense   63,664    48,289 
Changes in operating assets and liabilities:          
Accounts receivable, net   571    (11,286)
Inventories   (13,923)   (9,133)
Prepaid expenses and other assets   (14,774)   (16,197)
Accounts payable   3,956    2,551 
Accrued expenses and other liabilities   68,425    (9,149)
Advance ticket sales   187,131    180,447 
Net cash provided by operating activities   1,359,638    1,088,759 
Cash flows from investing activities          
Additions to property and equipment, net   (1,129,514)   (915,936)
Settlement of derivatives   (35,255)   (34,300)
Net cash used in investing activities   (1,164,769)   (950,236)
Cash flows from financing activities          
Repayments of long-term debt   (1,006,620)   (2,687,621)
Repayments to Affiliate       (18,522)
Proceeds from long-term debt   1,217,060    2,687,355 
Proceeds from employee related plans   28,063    7,215 
Net share settlement of restricted share units   (6,342)    
Purchases of treasury shares       (49,999)
Deferred financing fees and other   (32,473)   (37,457)
Net cash provided by (used in) financing activities   199,688    (99,029)
Net increase in cash and cash equivalents   394,557    39,494 
Cash and cash equivalents at beginning of period   128,347    115,937 
Cash and cash equivalents at end of period  $522,904   $155,431 

 

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

 

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Norwegian Cruise Line Holdings Ltd.

Consolidated Statements of Changes in Shareholders’ Equity

(Unaudited)

(in thousands)

 

   Ordinary
Shares
   Additional
Paid-in
Capital
   Accumulated
Other
Comprehensive
Income (Loss)
   Retained
Earnings
   Treasury
Shares
   Total
Shareholders’
Equity
 
Balance, December 31, 2015  $232   $3,814,536   $(412,650)  $568,018   $(189,256)  $3,780,880 
Share-based compensation       48,289                48,289 
Issuance of shares under employee related plans       7,215                7,215 
Treasury shares                   (49,999)   (49,999)
Other comprehensive income, net           189,489            189,489 
Net income               560,853        560,853 
Balance, September 30, 2016  $232   $3,870,040   $(223,161)  $1,128,871   $(239,255)  $4,536,727 
Balance, December 31, 2016  $232   $3,890,119   $(314,473)  $1,201,103   $(239,255)  $4,537,726 
Share-based compensation       63,664                63,664 
Issuance of shares under employee related plans   1    28,062                28,063 
Change in accounting policy (share-based forfeitures)       (2,153)       2,153         
Net share settlement of restricted share units       (6,342)               (6,342)
Other comprehensive income, net           253,418            253,418 
Net income               661,075        661,075 
Balance, September 30, 2017  $233   $3,973,350   $(61,055)  $1,864,331   $(239,255)  $5,537,604 

  

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

 

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Norwegian Cruise Line Holdings Ltd.

Notes to Consolidated Financial Statements

(Unaudited)

 

Unless otherwise indicated or the context otherwise requires, references in this report to (i) the “Company,” “we,” “our” and “us” refer to NCLH (as defined below) and its subsidiaries (including Prestige (as defined below), except for periods prior to the consummation of the Acquisition of Prestige (as defined below)), (ii) “NCLC” refers to NCL Corporation Ltd., (iii) “NCLH” refers to Norwegian Cruise Line Holdings Ltd., (iv) “Norwegian Cruise Line” or “Norwegian” refers to the Norwegian Cruise Line brand and its predecessors, (v) “Prestige” refers to Prestige Cruises International, Inc., together with its consolidated subsidiaries, and (vi) “PCH” refers to Prestige Cruise Holdings, Inc., Prestige’s direct wholly-owned subsidiary, which in turn is the parent of Oceania Cruises, Inc. (“Oceania Cruises”) and Seven Seas Cruises S. DE R.L. (“Regent”) (Oceania Cruises also refers to the brand by the same name and Regent also refers to the brand Regent Seven Seas Cruises). References to the “U.S.” are to the United States of America, “dollars” or “$” are to U.S. dollars, the “U.K.” are to the United Kingdom and “euros” or “€” are to the official currency of the Eurozone.

 

1.Description of Business and Organization

 

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, 2017, we had 25 ships with approximately 50,400 Berths. We plan to introduce seven additional ships through 2025 and we have an option to introduce two additional ships for delivery in 2026 and 2027, subject to certain conditions. Norwegian Bliss and an additional Breakaway Plus Class Ship are on order for delivery in the spring of 2018 and fall of 2019, respectively. We have an Explorer Class Ship on order for delivery in the winter of 2020. Project Leonardo will introduce an additional four ships with expected delivery dates through 2025. These additions to our fleet (exclusive of the option for two additional ships) will increase our total Berths to approximately 72,300.

 

2.Summary of Significant Accounting Policies

 

Basis of Presentation

 

The accompanying consolidated financial statements are unaudited and, in our opinion, contain all normal recurring adjustments necessary for a fair statement of the results for the periods presented.

 

Our operations are seasonal and results for interim periods are not necessarily indicative of the results for the entire fiscal year. Historically, demand for cruises has been strongest during the Northern Hemisphere’s summer months. The interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2016, which are included in our most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission.

 

Reclassification

 

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

 

Earnings Per Share

 

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

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2017   2016   2017   2016 
Net income  $400,692   $342,378   $661,075   $560,853 
Basic weighted-average shares outstanding   228,267,307    227,096,142    227,891,916    227,102,560 
Dilutive effect of share awards   1,549,649    502,465    1,265,341    757,057 
Diluted weighted-average shares outstanding   229,816,956    227,598,607    229,157,257    227,859,617 
Basic earnings per share  $1.76   $1.51   $2.90   $2.47 
Diluted earnings per share  $1.74   $1.50   $2.88   $2.46 

 

For the three months ended September 30, 2017 and 2016, a total of 4.8 million and 8.4 million shares, respectively; and for the nine months ended September 30, 2017 and 2016, a total of 5.9 million and 7.4 million shares, respectively, have been excluded from diluted weighted-average shares outstanding because the effect of including them would have been anti-dilutive.

 

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Revenue and Expense Recognition

 

Revenue and expenses include port fees and taxes. The amounts included on a gross basis are $94.8 million and $80.3 million for the three months ended September 30, 2017 and 2016, respectively, and $246.9 million and $214.3 million for the nine months ended September 30, 2017 and 2016, respectively.

 

Foreign Currency

 

The majority of our transactions are settled in U.S. dollars and the functional currency of our foreign subsidiaries is the U.S. dollar. Gains or losses resulting from transactions denominated in other currencies are recognized in income at each balance sheet date. We recognized losses of $4.0 million and $1.4 million for the three months ended September 30, 2017 and 2016, respectively, and losses of $14.8 million and $1.8 million for the nine months ended September 30, 2017 and 2016, respectively.

 

Depreciation and Amortization Expense

 

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

 

Recently Issued Accounting Pronouncements

 

In August 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-12. The objectives of this ASU are to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements and to make certain targeted improvements to simplify the application of the hedge accounting guidance in current GAAP. This ASU is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. We are currently evaluating the effect that the adoption of this ASU will have on our financial statements.

 

In January 2017, the FASB issued ASU No. 2017-04 which simplifies the test for goodwill impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. The guidance is effective for annual or any interim goodwill impairment tests in years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We do not expect to early adopt this guidance. We are currently evaluating the impact of the adoption of this guidance to our consolidated financial statements.

 

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

 

In February 2016, the FASB issued ASU No. 2016-02 which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e. lessees and lessors). The ASU requires lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by all leases with terms of more than 12 months. The ASU further modifies lessors’ classification criteria for leases and the accounting for sales-type and direct financing leases. The ASU will also require qualitative and quantitative disclosures designed to give financial statement users additional information on the amount, timing, and uncertainty of cash flows arising from leases. The ASU is effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2018 with early adoption permitted. The ASU is to be applied using a modified retrospective approach. To evaluate the impact of the adoption of this guidance, we are currently reviewing our existing leases and evaluating contracts to determine what might be considered a lease under the new guidance.

 

In May 2014, the FASB issued ASU No. 2014-09 which requires entities to recognize revenue through the application of a five-step model, including identification of the contract, identification of the performance obligations, determination of the transaction price, allocation of the transaction price to the performance obligation and recognition of revenue as the entity satisfies the performance obligations. Entities have the option of using either a full retrospective or a modified approach to adopt the guidance. In August 2015, the FASB issued ASU No. 2015-14 deferring the effective date for one year. We expect to adopt a modified retrospective application for annual periods beginning after December 15, 2017. In April 2016, the FASB issued ASU No. 2016-10 which does not change the core principle of the guidance in ASU No. 2014-09 but clarifies two aspects: identifying performance obligations and the licensing implementation guidance, while retaining the related principles for those areas. In May 2016, the FASB issued ASU No. 2016-11 which is a rescission of Securities and Exchange Commission guidance related to the issuance of ASU No. 2014-09. In May 2016, the FASB issued ASU No. 2016-12 which addresses improvements to the guidance on revenue from contracts from customers regarding collectability, noncash consideration, and completed contracts at transition. Additionally, it provides a practical expedient for contract modifications at transition and an accounting policy election related to the presentation of sales taxes and other similar taxes collected from customers. The effective date of ASU No. 2016-10, ASU No. 2016-11 and ASU No. 2016-12 is upon adoption of ASU No. 2014-09. We have initiated an assessment of our systems, data and processes related to the implementation of these ASUs. This assessment is expected to be completed during 2017. Additionally, we are currently evaluating our performance obligations and believe that our application of the guidance could result in changes in classification and will result in additional disclosures. We also are evaluating other criteria such as the timing of contract terms, gross and net presentation and other items that the guidance addresses.

 

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3.Intangible Assets

 

The carrying amounts of intangible assets subject to amortization are included within other long-term assets. As of September 30, 2017, the carrying amount of the indefinite-lived license is included in prepaid expenses and other assets as it is held for sale. The gross carrying amounts of intangible assets, the related accumulated amortization, the net carrying amounts and the weighted-average amortization periods of the Company’s intangible assets are listed in the following tables (in thousands, except amortization period):

 

   September 30, 2017 
   Gross Carrying
Amount
   Accumulated
Amortization
   Net Carrying
Amount
   Weighted-
Average
Amortization
Period (Years)
 
Customer relationships  $120,000   $(59,298)  $60,702    6.0 
Licenses   3,368    (1,382)   1,986    5.6 
Non-compete agreements   660    (660)       1.0 
Total intangible assets subject to amortization  $124,028   $(61,340)  $62,688      
License (Indefinite-lived)  $4,427                

 

   December 31, 2016 
   Gross Carrying
Amount
   Accumulated
Amortization
   Net Carrying
Amount
   Weighted-
Average
Amortization
Period (Years)
 
Customer relationships  $120,000   $(36,593)  $83,407    6.0 
Licenses   3,368    (807)   2,561    5.6 
Non-compete agreements   660    (495)   165    1.0 
Total intangible assets subject to amortization  $124,028   $(37,895)  $86,133      
License (Indefinite-lived)  $4,427                

 

The aggregate amortization expense is as follows (in thousands):

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2017   2016   2017   2016 
Amortization expense  $7,780   $5,601   $23,445   $16,552 

 

The following table sets forth the Company’s estimated aggregate amortization expense for each of the five years below (in thousands):

 

Year ended December 31,  Amortization
Expense
 
2018  $26,163 
2019   18,489 
2020   9,906 
2021   75 
2022   75 

 

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4.Accumulated Other Comprehensive Income (Loss)

 

Accumulated other comprehensive income (loss) for the nine months ended September 30, 2017 was as follows (in thousands):

 

   Accumulated
Other
Comprehensive
Income (Loss)
   Change
Related to
Cash Flow
Hedges
   Change
Related to
Shipboard
Retirement
Plan
 
Accumulated other comprehensive income (loss) at beginning of period  $(314,473)  $(307,618)  $(6,855)
Current period other comprehensive income before reclassifications   221,512    221,512     
Amounts reclassified into earnings   31,906    31,593(1)   313(2)
Accumulated other comprehensive income (loss) at end of period  $(61,055)  $(54,513)(3)  $(6,542)

 

(1)We refer you to Note 6— “Fair Value Measurements and Derivatives” for the affected line items in the consolidated statements of operations.
(2)Amortization of prior-service cost and actuarial loss reclassified to payroll and related expense.
(3)Includes $23.6 million of loss expected to be reclassified into earnings in the next 12 months.

 

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

 

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

 

(1)We refer you to Note 6— “Fair Value Measurements and Derivatives” for the affected line items in the consolidated statements of operations.
(2)Amortization of prior-service cost and actuarial loss reclassified to payroll and related expense.

  

5.Property and Equipment, net

 

Property and equipment, net increased $799.1 million for the nine months ended September 30, 2017 primarily due to the delivery of Norwegian Joy, ships under construction and ship improvement projects. As of September 30, 2017, in connection with the pending sale of our Hawaii land-based operations, we had $21.5 million of assets included in prepaid expenses and other, which are primarily related to property and equipment, and $7.7 million of liabilities included in accrued expenses and other liabilities. These assets and liabilities are classified as held for sale. Accordingly, for the three months ended September 30, 2017, these assets were measured at fair value less costs to sell which resulted in an impairment on assets of $2.9 million which was included in property and equipment and depreciation and amortization. The fair value was based on the purchase price which represents the observable market value of these operations which are level 2 within the fair value hierarchy. The sale was consummated on October 31, 2017. Upon the closing of the transaction, we accepted a promissory note from the buyer for approximately $9.7 million.

 

6.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.

 

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Level 3 Significant unobservable inputs we believe market participants would use in pricing the asset or liability based on the best information available.

 

Derivatives

 

We are exposed to market risk attributable to changes in interest rates, foreign currency exchange rates and fuel prices. We attempt to minimize these risks through a combination of our normal operating and financing activities and through the use of derivatives. We assess whether derivatives used in hedging transactions are “highly effective” in offsetting changes in the cash flow of our hedged forecasted transactions. We use regression analysis for this hedge relationship and high effectiveness is achieved when a statistically valid relationship reflects a high degree of offset and correlation between the fair values of the derivative and the hedged forecasted transaction. Cash flows from the derivatives are classified in the same category as the cash flows from the underlying hedged transaction. The determination of ineffectiveness is based on the amount of dollar offset between the cumulative change in fair value of the derivative and the cumulative change in fair value of the hedged transaction at the end of the reporting period. If it is determined that a derivative is not highly effective as a hedge, or if the hedged forecasted transaction is no longer probable of occurring, then the amount recognized in accumulated other comprehensive income (loss) is released to earnings. In addition, the ineffective portion of our highly effective hedges is recognized in earnings immediately and reported in other income (expense), net in our consolidated statements of operations. There are no amounts excluded from the assessment of hedge effectiveness and there are no credit-risk-related contingent features in our derivative agreements.

 

We monitor concentrations of credit risk associated with financial and other institutions with which we conduct significant business. Credit risk, including but not limited to counterparty non-performance under derivatives and our New Revolving Loan Facility (as defined in Note 12— “Subsequent Events”, is not considered significant, as we primarily conduct business with large, well-established financial institutions that we have established relationships with and that have credit risks acceptable to us or the credit risk is spread out among a large number of creditors. We do not anticipate non-performance by any of our significant counterparties.

 

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

 

        Asset     Liability  
    Balance Sheet location   September 30,
2017
    December 31,
2016
    September 30,
2017
    December 31,
2016
 
Fuel swaps designated as hedging instruments                                    
    Prepaid expenses and other assets   $ 5,796     $ 20,288     $     $  
    Other long-term assets     4,636             1,903        
    Accrued expenses and other liabilities     4,237             26,069       44,271  
    Other long-term liabilities     7,724       13,237       17,578       38,608  
Foreign currency forward contracts designated as hedging instruments                                    
    Prepaid expenses and other assets     41,983             1,354        
    Other long-term assets     65,780       14              
    Accrued expenses and other liabilities                       61,788  
    Other long-term liabilities                       88,920  
Interest rate swaps designated as hedging instruments                                    
    Accrued expenses and other liabilities                 1,876       3,331  
    Other long-term liabilities                       1,151  

 

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

 

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

  

September 30, 2017  Gross Amounts   Gross
Amounts
Offset
   Total Net
Amounts
   Gross
Amounts Not
Offset
   Net Amounts 
Assets  $118,195   $(3,257)  $114,938   $(100,582)  $14,356 
Liabilities   45,523    (11,961)   33,562    (1,876)   31,686 

  

December 31, 2016  Gross Amounts   Gross
Amounts
Offset
   Total Net
Amounts
   Gross
Amounts Not
Offset
   Net Amounts 
Assets  $20,302   $   $20,302   $(14)  $20,288 
Liabilities   238,069    (13,237)   224,832    (155,190)   69,642 

 

Fuel Swaps

 

As of September 30, 2017, we had fuel swaps maturing through December 31, 2020 which are used to mitigate the financial impact of volatility in fuel prices pertaining to approximately 1.4 million metric tons of our projected fuel purchases.

 

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

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2017   2016   2017   2016 
Gain (loss) recognized in other comprehensive income  – effective portion  $30,452   $(157)  $(635)  $76,145 
Gain (loss) recognized in other income (expense), net – ineffective portion   496    (2,602)   (305)   (11,353)
Amount reclassified from accumulated other comprehensive income (loss) into fuel expense   9,795    16,427    26,382    68,004 

 

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

 

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

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2017   2016   2017   2016 
Loss recognized in other income (expense), net  $   $(179)  $   $(271)
Amount reclassified from accumulated other comprehensive income (loss) into other income (expense), net               2,994 

 

Foreign Currency Options

 

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

 

The effects on the consolidated financial statements of the foreign currency options which were designated as cash flow hedges were as follows (in thousands):

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2017   2016   2017   2016 
Amount reclassified from accumulated other comprehensive income (loss) into depreciation and amortization expense  $330   $330   $990   $990 

 

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Foreign Currency Forward Contracts

 

As of September 30, 2017, we had foreign currency forward contracts which are used to mitigate the financial impact of volatility in foreign currency exchange rates related to our ship construction contracts denominated in euros. The notional amount of our foreign currency forward contracts was €1.8 billion, or $2.1 billion based on the euro/U.S. dollar exchange rate as of September 30, 2017.

 

The effects on the consolidated financial statements of the foreign currency forward contracts which were designated as cash flow hedges were as follows (in thousands): 

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2017   2016   2017   2016 
Gain recognized in other comprehensive income – effective portion  $66,849   $36,390   $221,913   $39,001 
Loss recognized in other income (expense), net – ineffective portion       (190)   (66)   (181)
Amount reclassified from accumulated other comprehensive income (loss) into depreciation and amortization expense   918    665    2,192    1,966 

 

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

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2017   2016   2017   2016 
Loss recognized in other income (expense), net  $   $   $   $(6,133)

 

Foreign Currency Collar

 

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

 

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

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2017   2016   2017   2016 
Amount reclassified from accumulated other comprehensive income (loss) into depreciation and amortization expense  $(91)  $(91)  $(273)  $(273)

 

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

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2017   2016   2017   2016 
Gain recognized in other income (expense), net  $   $   $   $10,312 

 

Interest Rate Swaps

 

As of September 30, 2017, we had interest rate swap agreements to hedge our exposure to interest rate movements and to manage our interest expense. The notional amount of outstanding debt associated with the interest rate swap agreements was $237.2 million as of September 30, 2017.

 

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

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2017   2016   2017   2016 
Gain (loss) recognized in other comprehensive income – effective portion  $(25)  $818   $234   $(2,638)
Gain recognized in other income (expense), net – ineffective portion               3 
Amount reclassified from accumulated other comprehensive income (loss) into interest expense, net   691    996    2,301    2,977 

 

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Long-Term Debt

 

As of September 30, 2017 and December 31, 2016, the fair value of our long-term debt, including the current portion, was $6,796.4 million and $6,525.7 million, respectively, which was $62.0 million and $11.6 million higher, respectively, than the carrying values. The difference between the fair value and carrying value of our long-term debt is due to our fixed and variable rate debt obligations carrying interest rates that are above or below market rates at the measurement dates. The fair value of our long-term debt was calculated based on estimated rates for the same or similar instruments with similar terms and remaining maturities resulting in Level 2 inputs in the fair value hierarchy. Market risk associated with our long-term variable rate debt is the potential increase in interest expense from an increase in interest rates. The calculation of the fair value of our long-term debt is considered a Level 2 input. We refer you to Note 12— “Subsequent Events” for further information about our long-term debt.

 

Other

 

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

 

7.Employee Benefits and Compensation Plans

 

Share-Based Compensation

 

As a result of NCLH’s adoption of ASU No. 2016-09, beginning in the first quarter of 2017, NCLH began accounting for forfeitures as they occur, rather than estimating expected forfeitures. Pursuant to the modified-retrospective application, the net cumulative effect of this change was recognized as a $2.2 million increase to retained earnings as of January 1, 2017 (we refer you to our consolidated statements of changes in shareholders’ equity).

 

Share Option Awards

 

The following is a summary of option activity under NCLH’s Amended and Restated 2013 Performance Incentive Plan for the nine months ended September 30, 2017 (excludes the impact of 208,335 previously awarded performance-based options as no grant date has been established):

 

    Number of Share Option
Awards
    Weighted-Average Exercise
Price
    Weighted-
Average
Contractual Term
   

Aggregate
Intrinsic Value

 
    Time-
Based
Awards
    Performance-
Based
Awards
    Market-
Based
Awards
    Time-
Based
Awards
    Performance-
Based
Awards
    Market-
Based
Awards
    (years)     (in thousands)  
Outstanding as of January 1, 2017     7,775,058       432,978       208,333     $ 48.04     $ 23.86     $ 59.43       7.81     $ 35,429  
Granted           156,249                   59.43                    
Exercised     (704,339 )     (83,288 )           33.92       19.00                    
Forfeited and cancelled     (385,070 )     (93,749 )           54.42       59.43                    
Outstanding as of September 30, 2017     6,685,649       412,190       208,333     $ 49.16     $ 30.24     $ 59.43       7.22     $ 54,689  

 

Restricted Ordinary Share Awards

 

The following is a summary of restricted NCLH ordinary share activity for the nine months ended September 30, 2017:

 

   Number of
Time-Based
Awards
   Weighted-
Average Grant
Date Fair
Value
 
Non-vested as of January 1, 2017   16,872   $7.63 
Granted        
Vested   (15,702)   4.94 
Forfeited or expired        
Non-vested and expected to vest as of September 30, 2017   1,170   $43.70 

 

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Restricted Share Unit Awards

 

On March 1, 2017, NCLH granted 1.7 million time-based restricted share unit awards to our employees which vest equally over three years. Additionally, on March 1, 2017, NCLH awarded 121,000 performance-based restricted share units to certain members of our management team which vest upon the achievement of certain pre-established performance targets.

 

The following is a summary of restricted share unit activity for the nine months ended September 30, 2017 (excludes the impact of 329,146 previously awarded performance-based restricted share units as no grant date was established):

 

   Number of
Time-Based
Awards
   Weighted-
Average Grant
Date Fair
Value
   Number of
Performance-
Based
Awards
   Weighted-
Average Grant
Date Fair Value
   Number of
Market-
Based
Awards
   Weighted-
Average Grant
Date Fair Value
 
Non-vested as of January 1, 2017   1,305,335   $50.38       $    50,000   $59.43 
Granted   1,803,327    51.13    37,500    49.76         
Vested   (447,503)   50.55    (15,000)   49.76         
Forfeited or expired   (70,179)   50.71    (22,500)   49.76         
Non-vested and expected to vest as of September 30, 2017   2,590,980    50.86            50,000    59.43 

 

The share-based compensation expense for the three months ended September 30, 2017 was $21.5 million of which $18.6 million was recorded in marketing, general and administrative expense and $2.9 million was recorded in payroll and related expense. The share-based compensation expense for the nine months ended September 30, 2017 was $63.7 million of which $57.1 million was recorded in marketing, general and administrative expense and $6.6 million was recorded in payroll and related expense.

 

8.Commitments and Contingencies

 

Ship Construction Contracts

 

Project Leonardo will introduce an additional four ships with expected delivery dates through 2025 and we have an option to introduce two additional ships for delivery in 2026 and 2027, subject to certain conditions. These four ships are each approximately 140,000 Gross Tons with approximately 3,300 Berths. We have an Explorer Class Ship on order for delivery in the winter of 2020. This ship is approximately 55,000 Gross Tons and 750 Berths. We have two Breakaway Plus Class Ships on order for delivery in the spring of 2018 and fall of 2019, respectively. These ships are approximately 168,000 Gross Tons each with approximately 4,000 Berths each. The combined contract price of these seven ships was approximately €5.5 billion, or $6.5 billion based on the euro/U.S. dollar exchange rate as of September 30, 2017. We have export credit financing in place that provides financing for 80% of each ship’s contract price. For ships expected to be delivered after 2023, the contract price is subject to adjustment under certain circumstances.

 

In connection with the contracts to build the ships, we do not anticipate any contractual breach or cancellation to occur. However, if any would occur, it could result in, among other things, the forfeiture of prior deposits or payments made by us and potential claims and impairment losses which may materially impact our business, financial condition and results of operations.

 

Litigation

 

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

 

Nonetheless, the ultimate outcome of the 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.

 

9.Other Income (Expense), Net

 

For the three months ended September 30, 2017, other income (expense), net was a $3.3 million expense, primarily due to foreign currency exchange losses. For the three months ended September 30, 2016, the $5.3 million expense was due to foreign currency exchange and fuel swap derivative losses. For the nine months ended September 30, 2017, the $11.7 million expense included foreign currency exchange losses partially offset by a gain from an insurance claim. For the nine months ended September 30, 2016, the $13.3 million expense included losses on fuel swap derivatives partially offset by gains on foreign exchange forward derivatives.

 

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10.Income Tax Expense

 

Income tax expense for 2017 reflects a tax benefit of $11.6 million associated with the reversal of prior years’ tax contingency reserves due to the expiration of the statute of limitations.

 

11.Supplemental Cash Flow Information

 

For the nine months ended September 30, 2017 and 2016, we had non-cash investing activities in connection with property and equipment of $15.2 million and $22.3 million, respectively. For the nine months ended September 30, 2017, we had non-cash investing activities in connection with capital leases of $13.3 million.

 

12.Subsequent Events

 

NCLC, a subsidiary of NCLH, entered into a Third Amended and Restated Credit Agreement, dated as of October 10, 2017, with a subsidiary of NCLC, as co-borrower, JPMorgan Chase Bank, N.A. (“JPM”), as administrative agent and as collateral agent, and a syndicate of other banks party thereto as joint bookrunners, arrangers, codocumentation agents and lenders (the “Amended Senior Secured Credit Facility”), which amends and restates that certain Second Amended and Restated Credit Agreement, dated as of June 6, 2016, by and among NCLC, JPM, as administrative agent and as collateral agent, and a syndicate of other banks party thereto as joint bookrunners, arrangers, co-documentation agents and lenders (the “Existing Senior Secured Credit Facility”). The Amended Senior Secured Credit Facility amends the Existing Senior Secured Credit Facility to, among other things, (a) reprice and increase the existing $750 million revolving credit facility with a new $875 million revolving credit facility (the “New Revolving Loan Facility”), (b) reprice the approximately $1,412 million principal amount outstanding under the existing senior secured term A facility (the “New Term A Loan Facility”), and (c) add a new $375 million term B loan facility due 2021 (the “New Term B Loan Facility”). The applicable margin under the New Term A Loan Facility and New Revolving Loan Facility is determined by reference to a total leverage ratio, with an applicable margin of between 2.00% and 1.25% with respect to Eurocurrency loans and between 1.00% and 0.25% with respect to base rate loans. The margin for borrowings under the New Term A Loan Facility and New Revolving Loan Facility is 1.75% with respect to Eurocurrency borrowings and 0.75% with respect to base rate borrowings. The applicable margin under the New Term B Loan Facility is 1.75% with respect to Eurocurrency loans and 0.75% with respect to base rate loans. NCLC used proceeds from the New Term B Loan Facility and cash on hand for the Redemption (as defined below).

 

On October 10, 2017, NCLC completed the redemption of all its outstanding 4.625% Senior Notes due 2020 (“Notes”), at a price including accrued and unpaid interest, of $1,044.41 per $1,000 of outstanding principal amount of Notes so redeemed (the “Redemption”). No Notes remained outstanding after the redemption.

 

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

 

Cautionary Statement Concerning Forward-Looking Statements

 

Certain statements in this report constitute forward-looking statements within the meaning of the U.S. federal securities laws intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical facts contained, or incorporated by reference, in this report, including, without limitation, those regarding our business strategy, financial position, results of operations, plans, prospects and objectives of management for future operations (including development plans and objectives relating to our activities), are forward-looking statements. Many, but not all, of these statements can be found by looking for words like “expect,” “anticipate,” “goal,” “project,” “plan,” “believe,” “seek,” “will,” “may,” “forecast,” “estimate,” “intend” and “future” and similar words. Forward-looking statements do not guarantee future performance and may involve risks, uncertainties and other factors which could cause our actual results, performance or achievements to differ materially from the future results, performance or achievements expressed or implied in those forward-looking statements. Examples of these risks, uncertainties and other factors include, but are not limited to the impact of:

 

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

 

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.

 

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Terminology

 

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

 

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

 

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

 

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

 

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

 

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

 

Adjusted Net Income. Net income adjusted for supplemental adjustments.

 

Adjusted Net Revenue. Net Revenue adjusted for supplemental adjustments.

 

Adjusted Net Yield. Net Yield adjusted for supplemental adjustments.

 

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

 

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

 

Breakaway Class Ships. Norwegian Breakaway and Norwegian Getaway.

 

Breakaway Four Loan Facility. €729.9 million Breakaway four loan due 2029.

 

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

 

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

 

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

 

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

 

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

 

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

 

EPS. Earnings per share.

 

Existing Revolving Loan Facility. $750.0 million senior secured revolving credit facility that was amended and restated by the New Revolving Loan Facility on October 10, 2017.

 

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

 

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

 

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

 

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

 

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Gross Yield. Total revenue per Capacity Day.

 

Merger Agreement. Agreement and Plan of Merger, dated as of September 2, 2014, by and among Prestige, NCLH, Portland Merger Sub, Inc. and Apollo Management, L.P., as amended, for the Acquisition of Prestige.

 

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

 

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

 

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

 

Net Yield. Net Revenue per Capacity Day.

 

 • New Revolving Loan Facility. $875.0 million senior secured revolving credit facility which amends the Existing Revolving Loan Facility, maturing on June 6, 2021.

 

Occupancy Percentage. The ratio of Passenger Cruise Days to Capacity Days. A percentage in excess of 100% indicates that three or more passengers occupied some cabins.

 

Passenger Cruise Days. The number of passengers carried for the period, multiplied by the number of days in their respective cruises.

 

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

 

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

 

Secondary Equity Offering(s). Secondary public offering(s) of NCLH’s ordinary shares in August 2017, December 2015, August 2015, May 2015, March 2015, March 2014, December 2013 and August 2013.

 

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

 

Non-GAAP Financial Measures

 

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

 

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

 

We believe that Adjusted EBITDA is appropriate as a supplemental financial measure as it is used by management to assess operating performance. We also believe that Adjusted EBITDA is a useful measure in determining our performance as it reflects certain operating drivers of our business, such as sales growth, operating costs, marketing, general and administrative expense and other operating income and expense. Adjusted EBITDA is not a defined term under GAAP nor is it intended to be a measure of liquidity or cash flows from operations or a measure comparable to net income as it does not take into account certain requirements such as capital expenditures and related depreciation, principal and interest payments and tax payments and it includes other supplemental adjustments.

 

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In addition, Adjusted Net Revenue and Adjusted Net Yield, which exclude certain business combination accounting entries, are non-GAAP financial measures that we believe are useful as supplemental measures in evaluating the performance of our operating business and provide greater transparency into our results of operations. Adjusted Net Income and Adjusted EPS are non-GAAP financial measures that exclude certain amounts and are used to supplement GAAP net income and EPS. We use Adjusted Net Income and Adjusted EPS as key performance measures of our earnings performance. We believe that both management and investors benefit from referring to these non-GAAP financial measures in assessing our performance and when planning, forecasting and analyzing future periods. These non-GAAP financial measures also facilitate management’s internal comparison to our historical performance. In addition, management uses Adjusted EPS as a performance measure for our incentive compensation. The amounts excluded in the presentation of these non-GAAP financial measures may vary from period to period; accordingly, our presentation of Adjusted Net Revenue, Adjusted Net Yield, Adjusted Net Income and Adjusted EPS may not be indicative of future adjustments or results. For example, for the year ended December 31, 2016, we incurred $28.0 million related to the extinguishment of debt due to the refinancing of certain credit facilities. We included this as an adjustment in the reconciliation of Adjusted Net Income since the extinguishment of debt is not representative of our day-to-day operations and we have included similar adjustments in prior periods; however, this adjustment did not occur and is not included in the periods 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

 

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

 

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

 

Our cruise operating expense is classified as follows:

 

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

 

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

 

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

 

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

 

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

 

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

 

Critical Accounting Policies

 

For a discussion of our critical accounting policies and estimates, see “Critical Accounting Policies” included in our Annual Report on Form 10-K for the year ended December 31, 2016 under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” We have made no significant changes to our critical accounting policies and estimates from those described in our Annual Report on Form 10-K for the year ended December 31, 2016.

 

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However, in accordance with Item 303(a)(3)(ii) of Regulation S-K and Section V of SEC Release No. 33-8350, we are including additional disclosure which is presented below:

 

Asset Impairment

 

We review our long-lived assets, principally ships, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Assets are grouped and evaluated at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other groups of assets. We consider historical performance and future estimated results in our evaluation of potential impairment and then compare the carrying amount of the asset to the estimated future cash flows expected to result from the use of the asset. If the carrying amount of the asset exceeds the estimated expected undiscounted future cash flows, we measure the amount of the impairment by comparing the carrying amount of the asset to its fair value. We estimate fair value based on the best information available making whatever estimates, judgments and projections we considered necessary. The estimation of fair value is generally measured by discounting expected future cash flows at discount rates commensurate with the risk involved.

 

We evaluate goodwill for impairment annually or more frequently when an event occurs or circumstances change that indicates the carrying value of a reporting unit may not be recoverable. For our evaluation of goodwill and tradenames we use the Step 0 Test which allows us to first assess qualitative factors to determine whether it is more likely than not (i.e., more than 50%) that the fair value of a reporting unit is less than its carrying value. In order to make this evaluation, we consider the following circumstances:

 

General macroeconomic conditions such as a deterioration in general economic conditions; limitations on accessing capital; fluctuations in foreign exchange rates; or other developments in equity and credit markets;
Industry and market conditions such as a deterioration in the environment in which an entity operates; an increased competitive environment; a decline in market-dependent multiples or metrics (in both absolute terms and relative to peers); a change in the market for an entity’s products or services; or a regulatory or political development;
Changes in cost factors that have a negative effect on earnings and cash flows;
Overall financial performance (for both actual and expected performance);
Entity and reporting unit-specific events such as changes in management, key personnel, strategy, or customers; litigation; or a change in the composition or carrying amount of net assets; and
Share price (in both absolute terms and relative to peers).

 

We believe our estimates and judgments with respect to our long-lived assets, principally ships, and goodwill and other indefinite-lived intangible assets are reasonable. Nonetheless, if there was a material change in assumptions used in the determination of such fair values or if there is a material change in the conditions or circumstances that influence such assets, we could be required to record an impairment charge. If a material change occurred, we may conduct a quantitative assessment comparing the fair value of each reporting unit to its carrying value, including goodwill. This is called the Step I Test which consists of a combined approach using the expected future cash flows and market multiples to determine the fair value of the reporting units.

 

In the third quarter of 2016, based on the performance of the Oceania Cruises reporting unit, we performed an interim goodwill impairment evaluation consisting of a Step I Test. Based on that evaluation, we determined that there was no impairment of goodwill because its fair value exceeded its carrying value. For our annual impairment evaluation, we performed a Step 0 Test for the Norwegian reporting unit and Step I Tests for the Regent Seven Seas and the Oceania Cruises reporting units. As a result of the Step 0 Test for the Norwegian reporting unit, we determined there were no factors indicating it was more likely than not (i.e., more than 50%) that the fair value of the reporting unit was less than its carrying value. Based on the results of the Step 1 Tests, we determined there was no impairment of goodwill because the fair value of the Oceania Cruises and Regent Seven Seas reporting units exceeded their carrying values by 24% and 81%, respectively. However, if the fair value of any reporting unit declines in future periods, its goodwill may become impaired at that time. As of December 31, 2016 and September 30, 2017, there was $523.0 million, $462.1 million and $403.8 million of goodwill for the Oceania Cruises, Regent Seven Seas and Norwegian reporting units, respectively. As of December 31, 2016, our annual review consisting of the Step 0 and Step I Tests supported the carrying values of these assets. Subsequent to December 31, 2016, the Company has continued to monitor the results of each of these reporting units and will perform the necessary tests should events occur or circumstances change that indicate the carrying value of a reporting unit may not be recoverable.

 

Quarterly Overview

 

Three months ended September 30, 2017 (“2017”) compared to three months ended September 30, 2016 (“2016”)

 

Total revenue increased 11.2% to $1.7 billion compared to $1.5 billion.

 

Net Revenue increased 12.5% to $1.3 billion compared to $1.1 billion.

 

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Net income and diluted EPS was $400.7 million and $1.74, respectively, compared to $342.4 million and $1.50, respectively.

 

Operating income was $476.8 million compared to $413.6 million.

 

Adjusted Net Income and Adjusted EPS were $427.0 million and $1.86, respectively, in 2017, which included $26.3 million of adjustments primarily consisting of expenses related to non-cash compensation and certain other adjustments. Adjusted Net Income and Adjusted EPS were $369.3 million and $1.62, respectively, in 2016, which included $26.9 million of adjustments primarily consisting of expenses related to non-cash compensation, amortization of intangible assets and certain other adjustments.

 

Adjusted EBITDA improved 16.0% to $635.1 million compared to $547.4 million.

 

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

 

Results of Operations

 

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

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2017   2016   2017   2016 
Revenue                
Passenger ticket   72.2%   72.2%   70.3%   70.2%
Onboard and other   27.8%   27.8%   29.7%   29.8%
Total revenue   100.0%   100.0%   100.0%   100.0%
Cruise operating expense                    
Commissions, transportation and other   16.1%   16.8%   16.5%   16.5%
Onboard and other   6.0%   6.1%   6.0%   6.1%
Payroll and related   12.5%   13.0%   14.3%   14.8%
Fuel   5.5%   5.8%   6.4%   6.6%
Food   3.3%   3.4%   3.6%   4.0%
Other   7.4%   7.7%   8.9%   9.4%
Total cruise operating expense   50.8%   52.8%   55.7%   57.4%
Other operating expense                    
Marketing, general and administrative   12.2%   11.8%   14.2%   13.5%
Depreciation and amortization   8.1%   7.5%   9.1%   8.5%
Total other operating expense   20.3%   19.3%   23.3%   22.0%
Operating income   28.9%   27.9%   21.0%   20.6%
Non-operating income (expense)                    
Interest expense, net   (4.0)%   (4.1)%   (4.4)%   (5.0)%
Other income (expense), net   (0.2)%   (0.4)%   (0.3)%   (0.4)%
Total non-operating income (expense)   (4.2)%   (4.5)%   (4.7)%   (5.4)%
Net income before income taxes   24.7%   23.4%   16.3%   15.2%
Income tax expense   (0.4)%   (0.3)%   (0.4)%   (0.2)%
Net income   24.3%   23.1%   15.9%   15.0%

 

The following table sets forth selected statistical information:

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2017   2016   2017   2016 
Passengers carried   658,139    635,654    1,756,350    1,761,967 
Passenger Cruise Days   5,071,115    4,674,286    13,819,421    13,196,600 
Capacity Days   4,590,789    4,209,562    12,811,155    12,175,012 
Occupancy Percentage   110.5%   111.0%   107.9%   108.4%

 

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

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2017   2017
Constant
Currency
   2016   2017   2017
Constant
Currency
   2016 
Passenger ticket revenue  $1,192,023   $1,190,650   $1,071,815   $2,916,731   $2,933,448   $2,630,405 
Onboard and other revenue   459,715    459,715    412,921    1,229,891    1,229,891    1,118,798 
Total revenue   1,651,738    1,650,365    1,484,736    4,146,622    4,163,339    3,749,203 
Less:                              
Commissions, transportation and other expense   266,173    265,718    249,519    683,628    687,665    618,492 
Onboard and other expense   98,476    98,476    90,661    250,254    250,254    230,416 
Net Revenue   1,287,089    1,286,171    1,144,556    3,212,740    3,225,420    2,900,295 
Non-GAAP Adjustment:                              
Deferred revenue (1)           300            1,057 
Adjusted Net Revenue  $1,287,089   $1,286,171   $1,144,856   $3,212,740   $3,225,420   $2,901,352 
Capacity Days   4,590,789    4,590,789    4,209,562    12,811,155    12,811,155    12,175,012 
Gross Yield  $359.79   $359.49   $352.71   $323.67   $324.98   $307.94 
Net Yield  $280.36   $280.16   $271.89   $250.78   $251.77   $238.22 
Adjusted Net Yield  $280.36   $280.16   $271.97   $250.78   $251.77   $238.30 

 

(1)  Reflects deferred revenue fair value adjustments related to the Acquisition of Prestige that were made pursuant to business combination accounting rules.

 

Gross Cruise Cost, Net Cruise Cost, Net Cruise Cost Excluding Fuel and Adjusted Net Cruise Cost Excluding Fuel were calculated as follows (in thousands, except Capacity Days and per Capacity Day data):

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2017   2017
Constant
Currency
   2016   2017   2017
Constant
Currency
   2016 
Total cruise operating expense  $838,165   $837,839   $784,734   $2,310,205   $2,314,015   $2,155,115 
Marketing, general and administrative expense   202,221    201,603    174,813    587,914    588,183    504,694 
Gross Cruise Cost   1,040,386    1,039,442    959,547    2,898,119    2,902,198    2,659,809 
Less:                              
Commissions, transportation and other expense   266,173    265,718    249,519    683,628    687,665    618,492 
Onboard and other expense   98,476    98,476    90,661    250,254    250,254    230,416 
Net Cruise Cost   675,737    675,248    619,367    1,964,237    1,964,279    1,810,901 
Less: Fuel expense   91,231    91,231    86,250    266,780    266,780    248,529 
Net Cruise Cost Excluding Fuel   584,506    584,017    533,117    1,697,457    1,697,499    1,562,372 
Less Non-GAAP Adjustments:                              
Non-cash deferred compensation (1)   878    878    792    2,524    2,524    2,375 
Non-cash share-based compensation (2)   21,444    21,444    16,840    63,664    63,664    48,289 
Secondary Equity Offering expenses (3)   462    462        462    462     
Severance payments and other expenses (4)           2,587    2,399    2,399    5,486 
Acquisition of Prestige expenses (5)           1,696    500    500    4,710 
Other (6)   999    999        2,605    2,605     
Adjusted Net Cruise Cost Excluding Fuel  $560,723   $560,234   $511,202   $1,625,303   $1,625,345   $1,501,512 
                               
Capacity Days   4,590,789    4,590,789    4,209,562    12,811,155    12,811,155    12,175,012 
Gross Cruise Cost per Capacity Day  $226.62   $226.42   $227.94   $226.22   $226.54   $218.46 
Net Cruise Cost per Capacity Day  $147.19   $147.09   $147.13   $153.32   $153.33   $148.74 
Net Cruise Cost Excluding Fuel per Capacity Day  $127.32   $127.21   $126.64   $132.50   $132.50   $128.33 
Adjusted Net Cruise Cost Excluding Fuel per Capacity Day  $122.14   $122.03   $121.44   $126.87   $126.87   $123.33 

 

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(1)Non-cash deferred compensation expenses related to the crew pension plan and other crew expenses, which are included in payroll and related expense.
(2)Non-cash share-based compensation expenses related to equity awards, which are included in marketing, general and administrative expense and payroll and related expense.
(3)Expenses related to a Secondary Equity Offering, which are included in marketing, general and administrative expense.
(4)Severance payments and other expenses related to restructuring costs and other severance arrangements, which are included in marketing, general and administrative expense.
(5)Expenses related to the Acquisition of Prestige, which are included in marketing, general and administrative expense.
(6)Expenses primarily related to certain legal costs, which are included in marketing, general and administrative expense.

 

Adjusted Net Income and Adjusted EPS were calculated as follows (in thousands, except share and per share data):

 

  

Three Months Ended

September 30,

  

Nine Months Ended

September 30,

 
   2017   2016   2017   2016 
Net income   400,692    342,378    661,075    560,853 
Non-GAAP Adjustments:                    
Non-cash deferred compensation (1)   878    792    2,524    2,375 
Non-cash share-based compensation (2)   21,444    16,840    63,664    48,289 
Secondary Equity Offering expenses (3)   462        462     
Severance payments and other expenses (4)       2,587    2,399    5,486 
Acquisition of Prestige expenses (5)       1,696    500    4,710 
Deferred revenue (6)       300        1,057 
Amortization of intangible assets (7)   7,568    5,267    22,704    15,802 
Derivative adjustment (8)               (1,185)
Deferred financing fees and other (9)               11,714 
Impairment on assets held for sale (10)   2,935        2,935     
Tax benefit (11)   (7,950)   (558)   (7,950)   (558)
Other (12)   999        2,605     
Adjusted Net Income  $427,028   $369,302   $750,918   $648,543 
Diluted weighted–average shares outstanding   229,816,956    227,598,607    229,157,257    227,859,617 
Diluted earnings per share  $1.74   $1.50   $2.88   $2.46 
Adjusted EPS  $1.86   $1.62   $3.28   $2.85 

 

(1)Non-cash deferred compensation expenses related to the crew pension plan and other crew expenses, which are included in payroll and related expense.
(2)Non-cash share-based compensation expenses related to equity awards, which are included in marketing, general and administrative expense and payroll and related expense.
(3)Expenses related to a Secondary Equity Offering, which are included in marketing, general and administrative expense.
(4)Severance payments and other expenses related to restructuring costs and other severance arrangements, which are included in marketing, general and administrative expense.
(5)Expenses related to the Acquisition of Prestige, which are included in marketing, general and administrative expense.
(6)Deferred revenue fair value adjustments related to the Acquisition of Prestige that were made pursuant to business combination accounting rules, which are primarily included in passenger ticket revenue.
(7)Amortization of intangible assets related to the Acquisition of Prestige, which are included in depreciation and amortization expense.
(8)Losses and net gains for the fair value adjustment of a foreign exchange collar which does not receive hedge accounting and losses due to the dedesignation of certain fuel swaps. These adjustments are included in other income (expense), net.
(9)Expenses primarily related to the write-off of deferred financing fees related to the refinancing of certain credit facilities, which are included in interest expense, net.
(10)Loss on planned sale of Hawaii land-based operations.
(11)Tax benefits primarily due to reversal of prior years’ tax contingency reserves.
(12)Expenses primarily related to certain legal costs, which are included in marketing, general and administrative expense.

 

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

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2017   2016   2017   2016 
Net income  $400,692   $342,378   $661,075   $560,853 
Interest expense, net   66,339    60,662    183,495    188,836 
Income tax expense   6,527    5,241    15,369    8,944 
Depreciation and amortization expense   134,532    111,575    376,878    317,480 
EBITDA   608,090    519,856    1,236,817    1,076,113 
Other expense (1)   3,262    5,333    11,686    13,281 
Non-GAAP Adjustments:                    
Non-cash deferred compensation (2)   878    792    2,524    2,375 
Non-cash share-based compensation (3)   21,444    16,840    63,664    48,289 
Secondary Equity Offering expenses (4)   462        462     
Severance payments and other expenses (5)       2,587    2,399    5,486 
Acquisition of Prestige expenses (6)       1,696    500    4,710 
Deferred revenue (7)       300        1,057 
Other (8)   999        2,605     
Adjusted EBITDA  $635,135   $547,404   $1,320,657   $1,151,311 

 

(1)Primarily consists of gains and losses, net for derivative contracts and foreign currency exchanges.
(2)Non-cash deferred compensation expenses related to the crew pension plan and other crew expenses, which are included in payroll and related expense.
(3)Non-cash share-based compensation expenses related to equity awards, which are included in marketing, general and administrative expense and payroll and related expense.
(4)Expenses related to a Secondary Equity Offering, which are included in marketing, general and administrative expense.
(5)Severance payments and other expenses related to restructuring costs and other severance arrangements, which are included in marketing, general and administrative expense.
(6)Expenses related to the Acquisition of Prestige, which are included in marketing, general and administrative expense.
(7)Deferred revenue fair value adjustments related to the Acquisition of Prestige that were made pursuant to business combination accounting rules, which are primarily included in passenger ticket revenue.
(8)Expenses primarily related to certain legal costs, which are included in marketing, general and administrative expense.

 

Three months ended September 30, 2017 (“2017”) compared to three months ended September 30, 2016 (“2016”)

 

Revenue

 

Total revenue increased 11.2% to $1.7 billion in 2017 compared to $1.5 billion in 2016 primarily due to an increase in Capacity Days. Gross Yield increased 2.0%. Net Revenue increased 12.5% in 2017 to $1.3 billion from $1.1 billion in 2016 due to an increase in Capacity Days of 9.1% and an increase in Net Yield of 3.1%. The increase in Capacity Days was primarily due to the delivery of Norwegian Joy in April 2017. The increase in Gross Yield and Net Yield was primarily due to an increase in passenger ticket pricing and higher onboard and other revenue. Adjusted Net Revenue in 2016 includes a deferred revenue fair value adjustment of $0.3 million related to the Acquisition of Prestige. On a Constant Currency basis, Net Yield and Adjusted Net Yield increased 3.0% in 2017 compared to 2016.

 

Expense

 

Gross Cruise Cost increased 8.4% in 2017 compared to 2016 due to an increase in total cruise operating expense and marketing, general and administrative expenses. Total cruise operating expense increased 6.8% in 2017 compared to 2016 primarily due to the increase in Capacity Days as discussed above and crew payroll and related costs. Total other operating expense increased 17.6% in 2017 compared to 2016 due to an increase in marketing, general and administrative expenses and an increase in depreciation and amortization expense. The increase in marketing, general and administrative expense was primarily due to pay for performance incentive expenses. Depreciation and amortization expense increased primarily due to the ship additions and ship improvement projects. On a Capacity Day basis, Net Cruise Cost and Adjusted Net Cruise Cost Excluding Fuel was relatively unchanged on an actual and constant currency basis primarily due to an increase in marketing, general and administrative expenses, primarily offset by decreases in cruise operating expenses.

 

Interest expense, net was $66.3 million in 2017 compared to $60.7 million in 2016. Interest expense for 2017 reflects an increase in average debt balances outstanding primarily associated with the delivery of new ships and newbuild installments, as well as higher interest rates due to an increase in LIBOR.

 

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Other income (expense), net was an expense of $3.3 million in 2017 compared to an expense of $5.3 million in 2016. In 2017, the expense was primarily related to losses on foreign currency exchange. In 2016, the expense was primarily related to unrealized and realized losses on fuel swap derivative hedge contracts and foreign exchange derivative contracts and losses on foreign currency exchange.

 

In 2017, we had an income tax expense of $6.5 million compared to $5.2 million in 2016. Income tax in 2017 reflects a tax benefit of $11.6 million associated with the reversal of prior years’ tax contingency reserves due to the expiration of the statute of limitations.

 

Nine months ended September 30, 2017 (“2017”) compared to nine months ended September 30, 2016 (“2016”)

 

Revenue

 

Total revenue increased 10.6% to $4.1 billion in 2017 compared to $3.7 billion in 2016 primarily due to an increase in Capacity Days. Gross Yield increased 5.1%. Net Revenue increased 10.8% in 2017 to $3.2 billion from $2.9 billion in 2016 due to an increase in Capacity Days of 5.2% and an increase in Net Yield of 5.3%. The increase in Capacity Days was primarily due to the delivery of Norwegian Joy in April 2017, Seven Seas Explorer in June 2016, Sirena joining our fleet in April 2016 and a reduction in the amount of lost days due to Dry-docks in 2017 compared to 2016. The increase in Gross Yield and Net Yield was primarily due to an increase in passenger ticket pricing and higher onboard and other revenue. Adjusted Net Revenue in 2016 includes a deferred revenue fair value adjustment of $1.1 million related to the Acquisition of Prestige. On a Constant Currency basis, Net Yield and Adjusted Net Yield increased 5.7% compared to 2016.

 

Expense

 

Gross Cruise Cost increased 9.0% in 2017 compared to 2016 due to an increase in total cruise operating expense and marketing, general and administrative expenses. Total cruise operating expense increased 7.2% in 2017 compared to 2016 primarily due to the increase in Capacity Days as discussed above and crew payroll and related costs. Total other operating expense increased 17.3% in 2017 compared to 2016 due to an increase in marketing, general and administrative expenses and depreciation and amortization expense. The increase in marketing, general and administrative expense was primarily due to pay for performance incentive expenses. Depreciation and amortization expense increased primarily due to the ship additions and the ship improvement projects. On a Capacity Day basis, Net Cruise Cost increased 3.1% (on an actual and a Constant Currency basis) due to an increase in marketing, general and administrative expenses and crew payroll and related costs. Adjusted Net Cruise Cost Excluding Fuel per Capacity Day increased 2.9% (on an actual and a Constant Currency basis) primarily due to the increase in expenses discussed above.

 

Interest expense, net was $183.5 million in 2017 compared to $188.8 million in 2016. Interest expense for 2017 reflects higher interest rates driven by an increase in LIBOR, as well as an increase in average debt balances outstanding primarily associated with the delivery of new ships and newbuild installments. Interest expense for 2016 included a write-off of $11.5 million of deferred financing fees related to the refinancing of certain of our credit facilities in 2016.

 

Other income (expense), net was an expense of $11.7 million in 2017 compared to an expense of $13.3 million in 2016. In 2017, the expense was primarily related to losses on foreign currency exchange partially offset by income from an insurance settlement. In 2016, the expense was primarily related to unrealized and realized losses on fuel swap derivative hedge contracts and losses on foreign exchange partially offset by gains on foreign exchange derivative hedge contracts.

 

In 2017, we had an income tax expense of $15.4 million compared to $8.9 million in 2016. Income tax in 2017 reflects a tax benefit of $11.6 million associated with the reversal of prior years’ tax contingency reserves due to the expiration of the statute of limitations. 

 

Liquidity and Capital Resources

 

General

 

As of September 30, 2017, our liquidity was $1.3 billion consisting of $522.9 million in cash and cash equivalents and $750.0 million under our Existing Revolving Loan Facility. In October 2017, we entered into a Third Amended and Restated Credit Agreement, which amended our Existing Revolving Loan Facility by, among other things, increasing the existing $750 million revolving credit facility with a new $875 million revolving credit facility. We refer you to our notes to consolidated financial statements, Note 12— “Subsequent Events” for further information about our long-term debt. Our primary ongoing liquidity requirements are to finance working capital, capital expenditures and debt service.

 

As of September 30, 2017, we had a working capital deficit of $1.7 billion. This deficit included $1.3 billion of advance ticket sales, which represents the revenue we collect in advance of sailing dates, and accordingly, are substantially more like deferred revenue balances rather than actual current cash liabilities. Our business model, along with our New Revolving Loan Facility, allows us to operate with a working capital deficit and still meet our operating, investing and financing needs.

 

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

 

Sources and Uses of Cash

 

In this section, references to “2017” refer to the nine months ended September 30, 2017 and references to “2016” refer to the nine months ended September 30, 2016.

 

Net cash provided by operating activities was $1.4 billion in 2017 as compared to $1.1 billion in 2016. The net cash provided by operating activities included timing differences in cash receipts and payments relating to operating assets and liabilities. Net income increased to $661.1 million in 2017 from $560.9 million in 2016.

 

Net cash used in investing activities was $1.2 billion in 2017 primarily related to payments for the delivery of Norwegian Joy, ship improvements and shoreside projects. Net cash used in investing activities was $1.0 billion in 2016 primarily related to payments for the delivery of Seven Seas Explorer, ship improvements, ships under construction and shoreside projects.

 

Net cash provided by financing activities was $200.0 million in 2017 primarily due to the proceeds from our Breakaway Four Loan Facility partially offset by the repayments of other loan facilities, our net repayment of our Existing Revolving Loan Facility and deferred financing fees and other. Net cash used in financing activities was $99.0 million in 2016 primarily due to net repayments of our Existing Revolving Loan Facility and other loan facilities and the repurchase of our ordinary shares and deferred financing fees and other.

 

Future Capital Commitments

 

Future capital commitments consist of contracted commitments, including ship construction contracts, and future expected capital expenditures necessary for operations. As of September 30, 2017, our anticipated capital expenditures were $0.3 billion for the remainder of 2017, $1.4 billion for the year ending December 31, 2018 and $1.2 billion for the year ending December 31, 2019, of which we have export credit financing in place for the expenditures related to ship construction contracts of $48 million for the remainder of 2017, $0.8 billion for 2018 and $0.6 billion for 2019.

 

Project Leonardo will introduce an additional four ships with expected delivery dates through 2025 and we have an option to introduce two additional ships for delivery in 2026 and 2027, subject to certain conditions. These four ships are each approximately 140,000 Gross Tons with approximately 3,300 Berths. We have an Explorer Class Ship on order for delivery in the winter of 2020. This ship is approximately 55,000 Gross Tons and 750 Berths. We have two Breakaway Plus Class Ships on order for delivery in the spring of 2018 and fall of 2019, respectively. These ships are approximately 168,000 Gross Tons each with approximately 4,000 Berths each. The combined contract price of these seven ships was approximately €5.5 billion, or $6.5 billion based on the euro/U.S. dollar exchange rate as of September 30, 2017. We have export credit financing in place that provides financing for 80% of each ship’s contract price. For ships expected to be delivered after 2023, the contract price is subject to adjustment under certain circumstances.

 

In connection with the contracts to build the ships, we do not anticipate any contractual breaches or cancellation to occur. However, if any would occur, it could result in, among other things, the forfeiture of prior deposits or payments made by us and potential claims and impairment losses which may materially impact our business, financial condition and results of operations.

 

Capitalized interest for the three and nine months ended September 30, 2017 was $6.2 million and $21.8 million, respectively, and for the three and nine months ended September 30, 2016 was $8.9 million and $24.9 million, respectively, primarily associated with the construction of our newbuild ships.

 

Off-Balance Sheet Transactions

 

None.

 

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Contractual Obligations

 

As of September 30, 2017, our contractual obligations with initial or remaining terms in excess of one year, including interest payments on long-term debt obligations, were as follows (in thousands): 

 

   Total   Less than
1 year
   1-3 years   3-5 years   More than
5 years
 
Long-term debt (1)  $6,734,832    605,827    1,240,277    3,229,750    1,658,978 
Operating leases (2)   140,525    15,927    30,532    28,044    66,022 
Ship construction contracts (3)   6,193,555    1,111,116    1,358,988    1,115,161    2,608,290 
Port facilities (4)   144,822    32,647    43,656    27,424    41,095 
Interest (5)   1,022,705    226,295    400,423    231,596    164,391 
Other (6)   166,255    52,697    69,510    26,168    17,880 
Total  $14,402,694   $2,044,509   $3,143,386   $4,658,143   $4,556,656 

 

(1)Includes premiums aggregating $0.4 million. Also includes capital leases. The amount excludes deferred financing fees which are included in the consolidated balance sheets as an offset to long-term debt.
(2)Primarily for offices, motor vehicles and office equipment.
(3)For our newbuild ships based on the euro/U.S. dollar exchange rate as of September 30, 2017. Export credit financing is in place from syndicates of banks.
(4)Primarily for our usage of certain port facilities.
(5)Includes fixed and variable rates with LIBOR held constant as of September 30, 2017.
(6)Future commitments for service, maintenance and other Business Enhancement Capital Expenditure contracts.

 

The table above does not include $0.5 million of unrecognized tax benefits.

 

Other

 

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

 

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

 

Funding Sources

 

Certain of our debt agreements contain covenants that, among other things, require us to maintain a minimum level of liquidity, as well as limit our net funded debt-to-capital ratio, maintain certain other ratios and restrict our ability to pay dividends. Substantially all of our ships and other property and equipment are pledged as collateral for certain of our debt. We believe we were in compliance with these covenants as of September 30, 2017.

 

The impact of changes in world economies and especially the global credit markets can create a challenging environment and may reduce future consumer demand for cruises and adversely affect our counterparty credit risks. In the event this environment deteriorates, our business, financial condition and results of operations could be adversely impacted.

 

We believe our cash on hand, expected future operating cash inflows, additional available borrowings under our New Revolving Loan Facility and our ability to issue debt securities or additional equity securities, will be sufficient to fund operations, debt payment requirements, capital expenditures and maintain compliance with covenants under our debt agreements over the next twelve-month period. There is no assurance that cash flows from operations and additional financings will be available in the future to fund our future obligations.

 

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.

 

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Interest Rate Risk

 

As of September 30, 2017, we had interest rate swap agreements to hedge our exposure to interest rate movements and to manage our interest expense. As of September 30, 2017, 61% of our debt was fixed and 39% was variable, which includes the effects of the interest rate swaps. The notional amount of outstanding debt associated with the interest rate swap agreements as of September 30, 2017 was $237.2 million. Based on our September 30, 2017 outstanding variable rate debt balance, a one percentage point increase in annual LIBOR interest rates would increase our annual interest expense by approximately $25.9 million excluding the effects of capitalization of interest.

 

Foreign Currency Exchange Rate Risk

 

As of September 30, 2017, we had foreign currency derivatives to hedge the exposure to volatility in foreign currency exchange rates related to our ship construction contracts denominated in euros. These derivatives hedge the foreign currency exchange rate risk on a portion of the payments on our ship construction contracts. The payments not hedged aggregate €3.5 billion, or $4.1 billion based on the euro/U.S. dollar exchange rate as of September 30, 2017. We estimate that a 10% change in the euro as of September 30, 2017 would result in a $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 10.9% and 11.0% for the three months ended September 30, 2017 and 2016, respectively, and 11.5% for each of the nine months ended September 30, 2017 and 2016. We use fuel derivative agreements to mitigate the financial impact of fluctuations in fuel prices and as of September 30, 2017, we had hedged approximately 75%, 65%, 48% and 26% of our remaining 2017, 2018, 2019 and 2020, respectively, projected metric tons of fuel purchases. We estimate that a 10% increase in our weighted-average fuel price would increase our anticipated 2017 fuel expense by $8.7 million. This increase would be partially offset by an increase in the fair value of our fuel swap agreements of $5.2 million. Fair value of our derivative contracts is derived using valuation models that utilize the income valuation approach. These valuation models take into account the contract terms such as maturity, as well as other inputs such as fuel types, fuel curves, creditworthiness of the counterparty and the Company, as well as other data points.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Our management has evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures, as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended, as of September 30, 2017. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon management’s evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2017 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, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Limitations on the Effectiveness of Controls

 

It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system will be met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there is only the reasonable assurance that our controls will succeed in achieving their goals under all potential future conditions.

 

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PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

 

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

 

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

 

Item 1A. Risk Factors

 

We refer you to our 2016 Annual Report on Form 10-K for a discussion of the risk factors that affect our business and financial results. We wish to caution the reader that the risk factors discussed in “Item 1A. Risk Factors” in our 2016 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.

 

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

 

Purchases of Equity Securities by the Issuer

 

On April 29, 2014, NCLH’s Board of Directors authorized, and NCLH announced, a three-year share repurchase program for up to $500.0 million. The share repurchase program was scheduled to expire on April 29, 2017, but was extended through April 29, 2020. Under this program, NCLH may make repurchases in the open market, in privately negotiated transactions, in accelerated repurchase programs or in structured share repurchase programs, and any repurchases may be made pursuant to Rule 10b5-1 plans. There was no share repurchase activity during the three months ended September 30, 2017, and as of September 30, 2017, $263.5 million remained available for repurchases of our outstanding ordinary shares under the share repurchase program.

 

Item 5. Other Information

 

None.

 

Item 6. Exhibits

 

2.1 Agreement and Plan of Merger, dated as of September 2, 2014, by and among Prestige Cruises International, Inc., Norwegian Cruise Line Holdings Ltd., Portland Merger Sub, Inc. and Apollo Management, L.P. (incorporated herein by reference to Exhibit 2.1 to Norwegian Cruise Line Holdings Ltd.’s Form 8-K filed on September 4, 2014 (File No. 001-35784))
   
2.2 Amendment No. 1 to the Agreement and Plan of Merger, dated as of October 6, 2014, by and among Prestige Cruises International, Inc., Norwegian Cruise Line Holdings Ltd., Portland Merger Sub, Inc. and Apollo Management, L.P. (incorporated herein by reference to Exhibit 2.1 to Norwegian Cruise Line Holdings Ltd.’s Form 8-K filed on October 8, 2014 (File No. 001-35784))
   
10.1* Letter Regarding Amendment to Frank J. Del Rio’s Executive Employment Agreement, dated August 1, 2017†
   
10.2* Form of Norwegian Cruise Line Holdings Ltd. Performance-based Restricted Share Unit Award Agreement (August 2017)†
   
10.3* Amendment No. 12, dated August 24, 2017, to Office Lease Agreement, dated December 1, 2006, as amended, by and between SPUS7 Miami ACC, LP and NCL (Bahamas) Ltd.
   
31.1* Certification of the President and Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934
   
31.2* Certification of the Executive Vice President and Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934
   
32.1** Certifications of the President and Chief Executive Officer and the Executive Vice President and Chief Financial Officer pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934 and Section 1350 of Chapter 63 of Title 18 of the United States Code

 

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101* The following unaudited consolidated financial statements are from Norwegian Cruise Line Holdings Ltd.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2017, formatted in Extensible Business Reporting Language (XBRL), as follows:

 

  (i) the Consolidated Statements of Operations for the three and nine months ended September 30, 2017 and 2016;
     
  (ii) the Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2017 and 2016;
     
  (iii) the Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016;
     
  (iv) the Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and 2016;
     
  (v) the Consolidated Statements of Changes in Shareholders’ Equity for the nine months ended September 30, 2017 and 2016; and
     
  (vi) the Notes to the Consolidated Financial Statements, tagged in summary and detail.
     
  * Filed herewith.
  ** Furnished herewith.
  Management contract or compensatory plan.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  NORWEGIAN CRUISE LINE HOLDINGS LTD.
  (Registrant)
     
  By: /s/ FRANK J. DEL RIO 
  Name:  Frank J. Del Rio
  Title: President and Chief Executive Officer
    (Principal Executive Officer)
     
  By: /s/ WENDY A. BECK 
  Name: Wendy A. Beck
  Title: Executive Vice President and Chief Financial
    Officer
    (Principal Financial Officer)

 

Dated: November 9, 2017

 

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Exhibit 10.1

 

As of August 1, 2017

 

Frank J. Del Rio

President and Chief Executive Officer

Norwegian Cruise Line Holdings Ltd.

7665 Corporate Center Drive

Miami, Florida 33126

 

Re:Amendment to Executive Employment Agreement

 

Dear Frank:

 

You are a party to an Amended and Restated Executive Employment Agreement dated as of June 5, 2014 by and among you, Oceania Cruises, Inc. (“Oceania”) and Prestige Cruises International, Inc. (“PCI”) (the “Employment Agreement”), a letter agreement dated September 2, 2014 among you, Oceania, and Norwegian Cruise Line Holdings Ltd. (“Norwegian” or the “Company”) (the “September 2014 Letter Agreement”), and a letter agreement dated as of August 4, 2015 by and between you and Norwegian (the “August 2015 Letter Agreement”). The Employment Agreement, the September 2014 Letter Agreement, and the August 2015 Letter Agreement are collectively referred to herein as the “Prior Agreements.” This letter agreement (this “Agreement”), effective as of the date hereof, constitutes an amendment of the Prior Agreements. Unless otherwise stated, all capitalized terms used in this Agreement shall be as defined in the Prior Agreements.

 

1.Continuation of Employment

 

The Period of Employment is extended through and, unless otherwise agreed by the parties and subject to earlier termination pursuant to Section 2 of this Agreement, will end on December 31, 2020.

 

2.Severance

 

Your right to severance benefits under Section 6 of the Employment Agreement, Section 2 of the September 2014 Letter Agreement and Section 1 of the August 2015 Letter Agreement shall be deleted and replaced in their entirety by the below. Your employment hereunder and the Period of Employment may be terminated without any breach of this Agreement at any time and for any reason by either you or Employer without the provision of notice. Employer and Executive intend for Executive to be an “employee at will,” and the Period of Employment specified in Section 1 of this Agreement shall not be construed under any circumstances to alter such “at will” employment relationship. Nothing in this paragraph, however, limits your rights to the severance benefits provided below if your employment terminates in circumstances (as set forth below) that entitle you to such benefits.

 

In connection with any termination of your employment, you will be entitled to payment of your accrued and unpaid Base Salary through the date of termination of employment. In addition, if your employment is terminated during the Period of Employment by Employer without Cause or by Executive for Good Reason, or if your employment is terminated at the expiration of your Period of Employment without it being extended, you will be entitled to any benefits under Section 4.2 of the Employment Agreement as modified by Section 3 of the August 2015 Letter Agreement subject to you signing a release of claims (in the form attached as Exhibit B to the August 2015 Letter Agreement, as modified by Section 5 of this Agreement (the “Release”)) within twenty-one days following such termination and you not revoking such release. For clarity, Section 4.3 of the Employment Agreement is deleted and will not apply.

 

 

 

 

In addition, you will be entitled to a lump sum cash payment equal to 2.25 times the sum of: (a) your annualized base salary as in effect on the date of this Agreement, (b) your target annual cash bonus as in effect on the date of this Agreement and (c) your country club dues and fees ($20,000), annual automobile allowance ($24,000) and tax advice and income preparation benefit ($20,000) (subject to applicable withholding) on the first to occur of: (a) December 31, 2020, provided that you remain employed by the Company through such date; or (b) if your employment by the Company terminates prior to December 31, 2020 due to a termination by the Company without Cause, by you for Good Reason, or due to your death or Disability, the 30th day following the date of employment termination, subject to the provisions of Section 15 of the Employment Agreement and further subject (other than if the termination of employment is the result of your death) to you signing a Release within twenty-one days following such termination and you not revoking such Release. This lump sum cash payment is equal to 2.25 times your base salary and target cash bonus as of the date of this Agreement plus benefits in the amounts listed above and is not subject to future adjustments in the event that your base salary, cash bonus or benefits are adjusted after the date hereof. For clarity, you will not be entitled to such lump sum cash payment if your employment ends prior to December 31, 2020 due a termination of your employment by the Company for Cause or by you without Good Reason (and other than due to your death or Disability). For clarity, if you continue to be employed following December 31, 2020 (and the payment of the lump sum cash payment referred to above) you will not be entitled to additional severance (except as expressly provided in the next paragraph) in connection with any termination of your employment (regardless of the reason for such termination) after December 31, 2020.

 

You will (to the extent such continued coverage may be provided consistent with applicable law) be entitled to continued health/medical plan benefits for you and your eligible dependents as provided for in Section 4.6 of the Employment Agreement for two years following the first to occur of: (a) a termination of your employment on December 31, 2020 as a result of the expiration of the Period of Employment without it being extended; or (b) if your employment by the Company terminates prior to December 31, 2020 due to a termination by the Company without Cause or by you for Good Reason, the date of employment termination; in each case subject to the provisions of Section 15 of the Employment Agreement and further subject to you signing a Release within twenty-one days following such date and you not revoking such Release. You will make arrangements reasonably satisfactory to the Company to provide for any tax withholding required in connection with such benefit.

 

You are not entitled to severance under any other severance plan, policy or arrangement of the Company in connection with any termination of your employment (except as described above).

 

  2 

 

 

The foregoing provisions of this Section 2 shall not affect: (i) the Executive’s receipt of benefits otherwise due terminated employees under group insurance coverage consistent with the terms of the applicable Employer welfare benefit plan as then in effect; (ii) the Executive’s rights under COBRA to continue participation in medical, dental, hospitalization and life insurance coverage; or (iii) the Executive’s receipt of vested benefits otherwise due in accordance with the terms of Employer’s 401(k) plan, or the Company’s Amended and Restated 2013 Performance Incentive Plan (or any successor plan). Executive shall, however, not be entitled to participate in any other plan or arrangement of Employer or any of its affiliates providing payments or benefits in the nature of severance (notwithstanding anything in Section 4.6 of the Employment Agreement to the contrary).

 

3.Equity Awards

 

You are being granted Norwegian Restricted Share Units (“Norwegian RSUs”) in connection with entering into this Agreement (“2017 RSUs”).

 

In addition, in or about March 2018, March 2019, and March 2020, subject in each case to your continued employment with the Company through the applicable grant date, you will be granted additional Norwegian RSUs that have a grant date fair value (determined by multiplying the number of Norwegian RSUs granted (the “target” number of Norwegian RSUs in the case of an award with performance-based vesting conditions) by the closing price of an ordinary share of the Company on the applicable grant date) of not less than Seven Million Five Hundred Thousand dollars ($7,500,000). At least sixty percent (60%) (or such greater amount as may be determined by the Company’s Board of Directors or a committee thereof) of each such grant date fair value will be awarded in Norwegian RSUs that are subject to performance-based vesting requirements (and potentially additional vesting requirements based on continued employment) (“Performance RSUs”), and the balance of the award will be in Norwegian RSUs that are subject to vesting requirements based on continued employment but not performance-based vesting requirements (“Time-Based RSUs”).

 

Each award of Norwegian RSUs will be subject to vesting and other terms established by the Company’s Board of Directors or a committee thereof and will be granted pursuant to and subject to the terms and conditions of a restricted share unit award agreement and equity plan, each of which will be provided to you in conjunction with the grant of such award.

 

Your Norwegian RSUs and stock options granted by the Company prior to the date of this Agreement shall continue in effect in accordance with their applicable terms and conditions (including applicable provisions of the Prior Agreements). Except as provided above, you are not and you shall not be entitled to any additional stock options or other equity awards from the Company.

 

  3 

 

 

Your 2017 RSUs and any additional Norwegian RSUs awarded after the date of this Agreement will be subject to accelerated vesting as provided in this paragraph. Upon a termination of your employment with the Company by the Company without Cause or by you for Good Reason, or by the Company due to your death or Disability, or in the event that your employment terminates on December 31, 2020 (or such other date as may be agreed to by both parties) as a result of the expiration of the Period of Employment, all such Norwegian RSUs that are then outstanding and unvested shall: (a) in the case of such Norwegian RSUs that are Time-Based RSUs (but including any Performance RSUs as to which the applicable performance conditions have been satisfied and remain outstanding subject to only time-based vesting conditions), vest, and (b) in the case of such Norwegian RSUs that are Performance RSUs that remain subject to performance-based vesting conditions, remain outstanding and be paid (subject to the applicable performance conditions) as though your employment had not terminated (with any time-based vesting conditions that would otherwise extend beyond the end of the applicable performance period deemed satisfied as of the end of the applicable performance period). Any acceleration of vesting pursuant to this paragraph (other than as a result of your death) shall be subject to the condition that you sign a Release within twenty-one days following the termination of your employment with the Company and you not revoking such Release, and the Section 409A timing of payment rules of Section 15(c) of the Employment Agreement shall apply.

 

Other than as explicitly set forth herein, unvested Norwegian RSUs shall be forfeited upon your employment termination. For clarity, Section 4.3 of the Employment Agreement and Section 3 of the September 2014 Letter Agreement were superseded by the August 2015 Letter Agreement and you are not entitled to any awards pursuant to Section 4.3 of the Employment Agreement or Section 3 of the September 2014 Letter Agreement. Sections 4 and 5 of the August 2015 Letter Agreement will remain in full force and effect as to outstanding awards previously granted under such provisions. For clarity, you are not entitled to any new award pursuant to Section 4 or pursuant to Section 5 of the August 2015 Letter Agreement.

 

4.Impact of Section 280G of the I.R.C.

 

The current provisions of Section 7 of the Employment Agreement are deleted and replaced in their entirety by the following paragraph.

 

Notwithstanding anything else to the contrary (in this Agreement, in the Prior Agreements or otherwise), if following a change in ownership or effective control or in the ownership of a substantial portion of assets (in each case, within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (“Code”)), the tax imposed by Section 4999 of the Code or any similar or successor tax (the “Excise Tax”) applies to any payments, benefits and/or amounts received by the Executive pursuant to this Agreement or otherwise, including, without limitation, any acceleration of the vesting of outstanding stock options or other equity awards (collectively, the “Total Payments”), then the Total Payments shall be reduced (but not below zero) so that the maximum amount of the Total Payments (after reduction) shall be one dollar ($1.00) less than the amount which would cause the Total Payments to be subject to the Excise Tax; provided that such reduction to the Total Payments shall be made only if the total after-tax benefit to the Executive is greater after giving effect to such reduction than if no such reduction had been made. If such a reduction is required, the Company shall reduce or eliminate the Total Payments by first reducing or eliminating any cash payments under this Agreement or the Prior Agreements, then by reducing or eliminating any accelerated vesting of stock options, then by reducing or eliminating any accelerated vesting of other equity awards, then by reducing or eliminating any other remaining Total Payments, in each case in reverse order beginning with the payments which are to be paid the farthest in time from the date of the transaction triggering the Excise Tax. The provisions of this paragraph shall take precedence over the provisions of any other plan, arrangement or agreement governing the Executive’s rights and entitlements to any benefits or compensation.

 

  4 

 

 

5.Legal Updates

 

Nothing in the Prior Agreements, the Confidential Disclosure Agreement, or in the Release (the “Aggregated Documents”) prohibits you from filing a charge with or participating in an investigation conducted by any state or federal government agencies. Any waiver of your right to any relief arising from any Proceeding (as defined in the Release) is subject to compliance with law and, for clarity, does not prevent you from accepting a whistleblower award from the Securities and Exchange Commission pursuant to Section 21F of the Securities Exchange Act of 1934, as amended.

 

Notwithstanding any confidentiality provision in the Aggregated Documents, you may truthfully respond to a lawful and valid subpoena or other legal process, but shall give the Company the earliest possible notice thereof, shall, as much in advance of the return date as possible, make available to the Company and its counsel the documents and other information sought, and shall assist the Company and such counsel in resisting or otherwise responding to such process. You understand that nothing in the Aggregated Documents is intended to limit your right (i) to discuss the terms, wages, and working conditions of your employment to the extent permitted and/or protected by applicable labor laws, (ii) to report confidential information in a confidential manner either to a federal, state or local government official or to an attorney where such disclosure is solely for the purpose of reporting or investigating a suspected violation of law, or (iii) to disclose confidential information in an anti-retaliation lawsuit or other legal proceeding, so long as that disclosure or filing is made under seal and you do not otherwise disclose such confidential information, except pursuant to court order. The Company encourages you, to the extent legally permitted, to give the Company the earliest possible notice of any such report or disclosure. Pursuant to the Defend Trade Secrets Act of 2016, you acknowledge that you may not be held criminally or civilly liable under any federal or state trade secret law for the disclosure of confidential information that: (a) is made in confidence to a federal, state, or local government official, either directly or indirectly, or to an attorney solely for the purpose of reporting or investigating a suspected violation of law; or (b) is made in a complaint or other document that is filed in a lawsuit or other proceeding, provided that such filing is made under seal. Further, you understand that the Company will not retaliate against you in any way for any such disclosure made in accordance with the law. In the event a disclosure is made, and you file any type of proceeding against the Company alleging that the Company retaliated against you because of your disclosure, you may disclose the relevant confidential information to your attorney and may use the confidential information in the proceeding if (x) you file any document containing the confidential information under seal, and (y) you do not otherwise disclose the confidential information except pursuant to court order.

 

To the extent possible, this Agreement and the Prior Agreements are to be construed and interpreted in accordance with, and to avoid any tax, penalty, or interest under, Section 409A of the Code.

 

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The addresses for notices pursuant to Section 8 of the Employment Agreement are amended to be as follows (subject to future updates in accordance with such section):

 

If to the Executive: If to the Company:
   
to the Executive’s last address as Chairman of the Board
reflected in the Company’s payroll Norwegian Cruise Line Holdings Ltd.
records 7665 Corporate Center Drive
  Miami, Florida  33126
   
  and to:
   
  General Counsel
  Norwegian Cruise Line Holdings Ltd.
  7665 Corporate Center Drive
  Miami, Florida  33126

 

6.Effect on the Prior Agreements

 

Except as modified pursuant to this Agreement, the Prior Agreements shall remain in full force and effect. On and after the date hereof, each reference in the Prior Agreements to “this Agreement,” “herein,” “hereof,” “hereunder” or words of similar import shall mean and be a reference to the Prior Agreements as amended hereby. To the extent that a provision of this Agreement conflicts with or differs from a provision of the Prior Agreements, such provision of this Agreement shall prevail and govern for all purposes and in all respects.

 

7.Counterparts

 

This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. This Agreement shall become binding when one or more counterparts hereof, individually or taken together, shall bear the signatures of all of the parties reflected hereon as the signatories. Photographic copies of such signed counterparts may be used in lieu of the originals for any purpose.

 

[The remainder of this page has intentionally been left blank.]

 

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Sincerely,

 

NORWEGIAN CRUISE LINE HOLDINGS LTD.  
   
By: /s/John W. Chidsey  
  Chairman, Compensation Committee of the  
  Board of Directors  
     
     
AGREED AND ACCEPTED:  
     
     
/s/Frank J. Del Rio  
Frank J. Del Rio  

 

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Exhibit 10.2

 

FORM OF NORWEGIAN CRUISE LINE HOLDINGS LTD.

AMENDED AND RESTATED 2013 PERFORMANCE INCENTIVE PLAN

RESTRICTED SHARE UNIT AWARD AGREEMENT

 

THIS RESTRICTED SHARE UNIT AWARD AGREEMENT (this “Agreement”) is dated as of [_____________] by and between Norwegian Cruise Line Holdings Ltd., a company organized under the laws of Bermuda (the “Company”), and [Name] (the “Participant”).

 

W I T N E S S E T H

 

WHEREAS, pursuant to the Norwegian Cruise Line Holdings Ltd. Amended and Restated 2013 Performance Incentive Plan (the “Plan”), the Company has granted to the Participant effective as of the date hereof (the “Award Date”), a credit of restricted share units under the Plan (the “Award”), upon the terms and conditions set forth herein and in the Plan.

 

NOW THEREFORE, in consideration of services rendered and to be rendered by the Participant, and the mutual promises made herein and the mutual benefits to be derived therefrom, the parties agree as follows:

 

1.      Defined Terms. Capitalized terms used herein and not otherwise defined herein shall have the meaning assigned to such terms in the Plan.

 

2.      Grant. Subject to the terms of this Agreement, the Company hereby grants to the Participant an Award with respect to an aggregate target number of [__________] restricted share units (subject to adjustment as provided in Section 7.1 of the Plan) (the “Share Units”). As used herein, the term “share unit” shall mean a non-voting unit of measurement which is deemed for bookkeeping purposes to be equivalent to one outstanding Ordinary Share of the Company (subject to adjustment as provided in Section 7.1 of the Plan) solely for purposes of the Plan and this Agreement. The Share Units shall be used solely as a device for the determination of the payment to eventually be made to the Participant if such Share Units vest pursuant to Section 3. The Share Units shall not be treated as property or as a trust fund of any kind.

 

3.      Vesting. Subject to Section 8 below and further subject to any accelerated vesting that may be provided for pursuant to [insert employment agreement reference, if applicable], the Award shall vest and become nonforfeitable upon, and subject to, the achievement of the performance hurdles and applicable time-based vesting requirements described in Annex A. The Administrator shall determine whether the applicable performance hurdles have been achieved, and the vesting of the Share Units is subject to the Administrator’s determination. Any portion of the Award that is not considered eligible to vest following the end of the applicable Performance Period as a result of performance results for the Performance Period, all as determined in accordance with Annex A, shall terminate and be forfeited effective as of the end of the Performance Period.

 

4.      Continuance of Employment/Service. Except as provided in Section 3 or in the [insert employment agreement reference, if applicable], the vesting schedule requires continued employment or service through each applicable vesting date as a condition to the vesting of the applicable installment of the Award and the rights and benefits under this Agreement. Except as provided in Section 3 or in the [insert employment agreement reference, if applicable], employment or service for only a portion of the vesting period, even if a substantial portion, will not entitle the Participant to any proportionate vesting or avoid or mitigate a termination of rights and benefits upon or following a termination of employment or services as provided in Section 8 below or under the Plan.

 

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Nothing contained in this Agreement or the Plan constitutes an employment or service commitment by the Company, affects the Participant’s status as an employee at will who is subject to termination without cause, confers upon the Participant any right to remain employed by or in service to the Company or any Subsidiary, interferes in any way with the right of the Company or any Subsidiary at any time to terminate such employment or services, or affects the right of the Company or any Subsidiary to increase or decrease the Participant’s other compensation or benefits. Nothing in this Agreement, however, is intended to adversely affect any independent contractual right of the Participant without his or her consent thereto.

 

5.      Dividend and Voting Rights.

 

(a)   Limitations on Rights Associated with Units. The Participant shall have no rights as a shareholder of the Company, no dividend rights (except as expressly provided in Section 5(b) with respect to Dividend Equivalent Rights) and no voting rights, with respect to the Share Units and any Ordinary Shares underlying or issuable in respect of such Share Units until such Ordinary Shares are actually issued to and held of record by the Participant. No adjustments will be made for dividends or other rights of a holder for which the record date is prior to the date of issuance of such Ordinary Shares underlying or issuable in respect of such Share Units.

 

(b)   Dividend Equivalent Rights Distributions. As of any date that the Company pays an ordinary cash dividend on its Ordinary Shares, the Company shall credit the Participant with an additional number of Share Units equal to (i) the per share cash dividend paid by the Company on its Ordinary Shares on such date, multiplied by (ii) the total number of Share Units (including any dividend equivalents previously credited hereunder) (with such total number adjusted pursuant to Section 7.1 of the Plan) subject to the Award as of the related dividend payment record date, divided by (iii) the fair market value of an Ordinary Share on the date of payment of such dividend. Any Share Units credited pursuant to the foregoing provisions of this Section 5(b) shall be subject to the same vesting, payment and other terms, conditions and restrictions as the original Share Units to which they relate. No crediting of Share Units shall be made pursuant to this Section 5(b) with respect to any Share Units which, as of such record date, have either been paid pursuant to Section 7 or terminated pursuant to Section 3 or Section 8.

 

6.      Restrictions on Transfer. Neither the Award, nor any interest therein or amount or shares payable in respect thereof (until such shares underlying the Award have been issued) may be sold, assigned, transferred, pledged or otherwise disposed of, alienated or encumbered, either voluntarily or involuntarily. The transfer restrictions in the preceding sentence shall not apply to (a) transfers to the Company, or (b) transfers by will or the laws of descent and distribution.

 

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7.      Timing and Manner of Payment of Share Units. On or as soon as administratively practical following each vesting of the applicable portion of the total Award pursuant to Section 3 hereof or Section 7 of the Plan (and in all events not later than two and one-half months after the applicable vesting date), the Company shall deliver to the Participant a number of whole Ordinary Shares (with any fractional shares rounded down),either by delivering one or more certificates for such shares or by entering such shares in book entry form, as determined by the Company in its discretion, equal to the number of Share Units subject to this Award that vest on the applicable vesting date, unless such Share Units terminate prior to the given vesting date pursuant to Section 3 or Section 8. To the extent required to comply with the short-term deferral exception under Section 457A of the Code, in the event the Participant becomes entitled to vest in any Share Units pursuant to the [insert employment agreement reference, if applicable] following a qualifying termination of employment that occurs in the [year] calendar year, the Company shall deliver a number of Ordinary Shares equal to its best estimate of the number of vested Share Units prior to the end of the [year] calendar year. The Company’s obligation to deliver Ordinary Shares or otherwise make payment with respect to vested Share Units is subject to the condition precedent that the Participant or other person entitled under the Plan to receive any shares with respect to the vested Share Units deliver to the Company any representations or other documents or assurances required pursuant to Section 8.1 of the Plan. The Participant shall have no further rights with respect to any Share Units that are paid or that terminate pursuant to Section 3 or Section 8.

 

8.      Effect of Termination of Employment or Service. Except as provided in Section 3, the Participant’s Share Units shall terminate and be forfeited to the extent such units have not become vested prior to the first date the Participant is no longer employed by or in service to the Company or one of its Subsidiaries, regardless of the reason for the termination of the Participant’s employment or service with the Company or a Subsidiary, whether voluntarily or involuntarily. If any unvested Share Units are terminated hereunder, such Share Units shall automatically terminate and be forfeited as of the applicable termination date without payment of any consideration by the Company and without any other action by the Participant, or the Participant’s beneficiary or personal representative, as the case may be.

 

9.      Adjustments Upon Specified Events. Upon the occurrence of certain events relating to the Company’s shares contemplated by Section 7.1 of the Plan (including, without limitation, an extraordinary cash dividend on such Ordinary Share), the Administrator shall make adjustments in accordance with such section in the number of Share Units then outstanding and the number and kind of securities that may be issued in respect of the Award. No such adjustment shall be made with respect to any ordinary cash dividend for which dividend equivalents are credited pursuant to Section 5(b). Each of the performance hurdles referred to in Section 3 shall also be subject to equitable and proportionate adjustment under Section 7.1 of the Plan.

 

10.  Tax Withholding. Subject to Section 8.1 of the Plan, upon any distribution of Ordinary Shares in respect of the Share Units, the Company shall automatically reduce the number of shares to be delivered by (or otherwise reacquire) the appropriate number of whole shares, valued at their then fair market value (with the “fair market value” of such shares determined in accordance with the applicable provisions of the Plan, to satisfy any applicable withholding obligations of the Company or its Subsidiaries with respect to such distribution of shares at any applicable withholding rates. In the event that the Company cannot legally satisfy such withholding obligations by such reduction of shares, or in the event of a cash payment or any other withholding event in respect of the Share Units, the Company (or a Subsidiary) shall be entitled to require a cash payment by or on behalf of the Participant and/or to deduct from other compensation payable to the Participant any sums required by federal, state or local tax law to be withheld with respect to such distribution or payment.

 

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11.  Notices. Any notice to be given under the terms of this Agreement shall be in writing or any electronic form approved by the General Counsel and addressed to the Company at its principal office to the attention of the General Counsel or to any designee approved by the General Counsel, and to the Participant at the Participant’s last address reflected on the Company’s records, or at such other address as either party may hereafter properly designate to the other. Any such notice shall be given only when received, but if the Participant is no longer an employee of or in service to the Company, shall be deemed to have been duly given by the Company when sent to the last physical or email address reflected on the Company’s records.

 

12.  Plan. The Award and all rights of the Participant under this Agreement are subject to the terms and conditions of the provisions of the Plan, incorporated herein by reference. The Participant agrees to be bound by the terms of the Plan and this Agreement. The Participant acknowledges having read and understanding the Plan, the Prospectus for the Plan, and this Agreement. Unless otherwise expressly provided in other sections of this Agreement, provisions of the Plan that confer discretionary authority on the Board or the Administrator do not (and shall not be deemed to) create any rights in the Participant unless such rights are expressly set forth herein or are otherwise in the sole discretion of the Board or the Administrator so conferred by appropriate action of the Board or the Administrator under the Plan after the date hereof.

 

13.  Entire Agreement. This Agreement and the Plan together constitute the entire agreement and supersede all prior understandings and agreements, written or oral, of the parties hereto with respect to the subject matter hereof. The Plan and this Agreement may be amended pursuant to Section 8.6 of the Plan. Such amendment must be in writing and signed by the Company. The Company may, however, unilaterally waive any provision hereof in writing to the extent such waiver does not adversely affect the interests of the Participant hereunder, but no such waiver shall operate as or be construed to be a subsequent waiver of the same provision or a waiver of any other provision hereof.

 

14.  Limitation on Participant’s Rights. Participation in the Plan confers no rights or interests other than as herein provided. This Agreement creates only a contractual obligation on the part of the Company as to amounts payable and shall not be construed as creating a trust. Neither the Plan nor any underlying program, in and of itself, has any assets. The Participant shall have only the rights of a general unsecured creditor of the Company with respect to amounts credited and benefits payable, if any, with respect to the Share Units, and rights no greater than the right to receive the Ordinary Shares as a general unsecured creditor with respect to Share Units, as and when payable hereunder.

 

15.  Counterparts. This Agreement may be executed simultaneously in any number of counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument.

 

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16.  Section Headings. The section headings of this Agreement are for convenience of reference only and shall not be deemed to alter or affect any provision hereof.

 

17.  Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of Bermuda without regard to conflict of law principles thereunder.

 

18.  Section 409A and 457A. It is intended that the terms of the Award will not result in the imposition of any tax liability pursuant to Section 409A or 457A of the Code. This Agreement shall be construed and interpreted consistent with that intent. If the Participant is a “specified employee” within the meaning of Treasury Regulation Section 1.409A-1(i) as of the date of the Participant’s “separation from service” (within the meaning of Section 409A of the Code), the Participant shall not be entitled to any payment pursuant to Section 7 until the earlier of (i) the date which is six (6) months after the Participant’s separation from service for any reason other than death, or (ii) the date of the Participant’s death. The provisions of this Section shall only apply if, and to the extent, required to avoid the imputation of any tax, penalty or interest pursuant to Section 409A of the Code.

 

19.  Clawback Policy. The Share Units are subject to the terms of the Company’s recoupment, clawback or similar policy as it may be in effect from time to time, as well as any similar provisions of applicable law, any of which could in certain circumstances require repayment or forfeiture of the Share Units or any Ordinary Shares or other cash or property received with respect to the Share Units (including any value received from a disposition of the shares acquired upon payment of the Share Units).

 

20.  No Advice Regarding Grant. The Participant is hereby advised to consult with his or her own tax, legal and/or investment advisors with respect to any advice the Participant may determine is needed or appropriate with respect to the Share Units (including, without limitation, to determine the foreign, state, local, estate and/or gift tax consequences with respect to the Award). Neither the Company nor any of its officers, directors, affiliates or advisors makes any representation (except for the terms and conditions expressly set forth in this Award Agreement) or recommendation with respect to the Award. Except for the withholding rights set forth in Section 10 above, the Participant is solely responsible for any and all tax liability that may arise with respect to the Award.

 

 

 

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IN WITNESS WHEREOF, the Company has caused this Agreement to be executed on its behalf by a duly authorized officer and the Participant has hereunto set his or her hand as of the date and year first above written.

 

NORWEGIAN CRUISE LINE HOLDINGS LTD.,   PARTICIPANT    
a Bermuda Company        
           
By:        
    Signature    
Print Name:          
         
Its:     Print Name    
         
         

 

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Annex A

 

Performance Hurdles

 

[Insert performance vesting terms.]

 

 

 

 

  7 

 

Exhibit 10.3

 

TWELFTH AMENDMENT TO LEASE

 

(Norwegian Cruise Line – The Landing at MIA)

 

THIS TWELFTH AMENDMENT TO LEASE ("Amendment") is dated effective and for identification purposes as of August 24, 2017 (“Effective Date”), and is made by and between SPUS7 MIAMI ACC, LP, a Delaware limited partnership ("Landlord"), and NCL (BAHAMAS) LTD., a Bermuda company, d/b/a Norwegian Cruise Line ("Tenant").

 

RECITALS:

 

WHEREAS, Landlord’s predecessor-in-interest (Hines REIT Airport Corporate Center LLC) and Tenant entered into that certain Airport Corporate Center Office Lease Agreement dated December 1, 2006 ("Original Lease"), as amended by that certain First Amendment to Airport Corporate Center Office Lease dated November 27, 2006, Second Amendment to Airport Corporate Center Office Lease dated March 22, 2007, Third Amendment to Airport Corporate Center Office Lease dated July 31, 2007, Letter Agreement dated August 1, 2007, Fourth Amendment to Airport Corporate Center Office Lease dated December 10, 2007, Fifth Amendment to Airport Corporate Center Office Lease dated February 2, 2010, Sixth Amendment to Airport Corporate Center Office Lease dated April 1, 2012, Seventh Amendment to Airport Corporate Center Office Lease dated June 29, 2012, Eighth Amendment to Lease dated January 28, 2015 (“Eighth Amendment”), Ninth Amendment to Lease dated June 30, 2015 (“Ninth Amendment”), Tenth Amendment to Lease dated March 31, 2016, and Eleventh Amendment to Lease dated February 8, 2017 (collectively, the "Lease"), pertaining to the premises located at 7665 Corporate Center Drive (“Building 11”), 7650 Corporate Center Drive (“Building 10”), 7245 Corporate Center Drive (“Building 3”), and 7300 Corporate Center Drive (“Building 8”), Miami, Florida;

 

WHEREAS, Landlord and Tenant desire to enter into this Amendment to modify Tenant’s exterior signage rights on Building 8, Building 10 and Building 11, and provide for certain other matters as more fully set forth herein;

 

NOW, THEREFORE, in consideration of the foregoing and the mutual covenants contained herein, the parties agree that the Lease shall be amended in accordance with the terms and conditions set forth below.

 

1.       Definitions. The capitalized terms used herein shall have the same definitions as set forth in the Lease, unless otherwise defined herein.

 

2.       Amendment to Building 8 Façade Signage. Landlord and Tenant each acknowledge and agree that (a) Section 9 of the Eighth Amendment is hereby amended so that the Building 8 Façade Sign shall be located on the top exterior of the south side of Building 8, as depicted on Exhibit A, attached hereto and incorporated herein by reference, and in no other location on the exterior of Building 8, and (b) Section 6 of the Ninth Amendment is hereby amended so that the Building 8 Façade Sign may also include, at Tenant’s option, Tenant’s logos.

 

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3.       Building 10 and Building 11 Signage.

 

(a)       Commencing on the Effective Date, in addition to all other signage rights granted to Tenant pursuant to the Lease, Tenant shall have the exclusive right to install and maintain in a first class manner: (i) one (1) exterior sign on the south side of Building 10 (the “Building 10 Façade Sign”); and (ii) one (1) exterior sign on the north side of Building 11 (the “Building 11 Façade Sign”), using any, a combination of any, or all of Tenant’s and its related companies’ brand names and logos, including, but not limited to, Norwegian, Oceania, Regent, and any others pursuant to the same terms and conditions of Section 9 of the Eighth Amendment. In addition to the foregoing, Tenant shall have the right to replace the building wraps currently existing on the west side of Building 10 and the west side of Building 11 (together, the “Current Wraps”) with new building wraps (“New Wraps”) in the same location, subject to Landlord’s prior written approval of the New Wraps, and provided that (i) the New Wraps are substantially similar in size to the Current Wraps, (ii) Landlord shall have the right to be present when the Current Wraps are removed and perform an inspection of the exterior walls of Building 10 and Building 11 to ensure the Current Wraps have not caused any damage thereto, and (iii) in the event the Current Wraps have caused damage to Building 10 or Building 11, Tenant shall repair such damage to Landlord’s reasonable satisfaction. The signage rights granted herein shall be deemed to be personal to Tenant and its Affiliates, and if Tenant subleases any portion of the Premises or otherwise assigns or transfers any interest thereof to another party, such signage rights shall lapse. All costs associated with the fabrication, installation, maintenance, removal and replacement of the Building 10 Façade Sign, the Building 11 Façade Sign, and the New Wraps shall be the sole responsibility of Tenant. Tenant shall maintain such signage in good condition and repair. Tenant shall remove such signage and repair any damage caused thereby, at its sole cost and expense, upon the expiration or sooner termination of the Lease. The color, content, size and other specifications of any such signage shall be in accordance with the terms and conditions of the Lease, and shall be subject to Landlord's prior approval, which approval shall not be unreasonably withheld, conditioned or delayed. Further, Tenant shall ensure that all signage complies with any and all applicable local zoning codes and building regulations.

 

(b)        Tenant hereby acknowledges and agrees that Tenant shall remove all abandoned signage brackets located on the exterior of Building 10 and Building 11 prior to Tenant’s installation of the new Building 10 and Building 11 Façade Signs, and Tenant shall repair any damage caused by such removal to Landlord’s reasonable satisfaction.

 

(c)       Notwithstanding the foregoing or anything to the contrary in the Lease, Landlord hereby approves the color, content, size, and other specifications for the Building 10 Façade Sign and Building 11 Façade Sign, both as depicted on Exhibit B, attached hereto and incorporated herein by this reference, with such changes from time to time desired by Tenant to reflect its current brand names and logos so long as such changes to the brand names and logos on the signage are substantially similar to the color, size, and other specifications set forth on Exhibit B.

 

4.       Counterparts; Electronic Signatures.  This Amendment may be executed in counterparts, including both counterparts that are executed on paper and counterparts that are in the form of electronic records and are executed electronically.  An electronic signature means any electronic sound, symbol or process attached to or logically associated with a record and executed and adopted by a party with the intent to sign such record, including facsimile or e-mail electronic signatures.  All executed counterparts shall constitute one agreement, and each counterpart shall be deemed an original.  The parties hereby acknowledge and agree that electronic records and electronic signatures, as well as facsimile signatures, may be used in connection with the execution of this Amendment and electronic signatures, facsimile signatures or signatures transmitted by electronic mail in so-called pdf format shall be legal and binding and shall have the same full force and effect as if a paper original of this Amendment had been delivered and had been signed using a handwritten signature.  Landlord and Tenant (i) agree that an electronic signature, whether digital or encrypted, of a party to this Amendment is intended to authenticate this writing and to have the same force and effect as a manual signature, (ii) intend to be bound by the signatures (whether original, faxed or electronic) on any document sent or delivered by facsimile or, electronic mail, or other electronic means, (iii) are aware that the other party will rely on such signatures, and (iv) hereby waive any defenses to the enforcement of the terms of this Amendment based on the foregoing forms of signature.  If this Amendment has been executed by electronic signature, all parties executing this document are expressly consenting under the Electronic Signatures in Global and National Commerce Act ("E-SIGN"), and Uniform Electronic Transactions Act ("UETA"), that a signature by fax, email or other electronic means shall constitute an Electronic Signature to an Electronic Record under both E-SIGN and UETA with respect to this specific transaction.

 

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5.       Miscellaneous. With the exception of those matters set forth in this Amendment, Tenant's leasing of the Premises shall be subject to all terms, covenants and conditions of the Lease. In the event of any express conflict or inconsistency between the terms of this Amendment and the terms of the Lease, the terms of this Amendment shall control and govern. Except as expressly modified by this Amendment, all other terms and conditions of the Lease are hereby ratified and affirmed. The parties acknowledge that the Lease is a valid and enforceable agreement and that, as of the date hereof to the best of Tenant’s actual knowledge, Tenant holds no claims against Landlord or its agents which might serve as the basis of any other set-off against accruing rent and other charges or any other remedy at law or in equity.

 

 

 

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IN WITNESS WHEREOF, the foregoing Twelfth Amendment to Lease is dated effective as of the date and year first written above.

 

WITNESS:     LANDLORD  
           
      SPUS7 MIAMI ACC, LP,  
    a Delaware limited partnership  
           
By: /s/David Withman   By: /s/Ming Lee
Name: David Withman   Name: Ming Lee  
      Title: Vice President  
By: /s/Desiree Ammons   Date: 8/29/17  
Name: Desiree Ammons        
           
           
           
By: /s/David Withman   By: /s/Mark Zikakis  
Name: David Withman   Name: Mark Zikakis  
  Title: Vice President  
By: /s/Desiree Ammons   Date: 8/29/17  
Name: Desiree Ammons    
       
         

      TENANT:    
           
      NCL (BAHAMAS) LTD.,  
    a Bermuda company, d/b/a Norwegian Cruise Line
           
           
By:     By: /s/Wendy Beck
Name:     Name: Wendy Beck  
    Title:

Executive Vice President and

Chief Financial Officer

 
By:     Date: 8/29/17  
Name:      
           

 

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CONSENT OF GUARANTOR

 

The undersigned Guarantor under the original Guaranty of Lease dated November 27, 2006 (the "Guaranty"), does hereby consent to the foregoing Amendment. Guarantor acknowledges and agrees that the Guaranty is in full force and effect and shall continue to apply to the Lease, as amended by this Amendment.

 

NCL CORPORATION LTD.,  
a Bermuda company  
     
By:    
Name: Wendy Beck  
Title: Executive Vice President and  
  Chief Financial Officer  

 

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EXHIBIT A

 

Location of Building 8 Façade Sign

 

 

 

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EXHIBIT B

 

 

  7 

 

  


 

  8 

 

 

 

 

 

 

  9 

 

Exhibit 31.1

 

CERTIFICATION

 

I, Frank J. Del Rio, certify that:

 

1.I have reviewed this quarterly report on Form 10-Q of Norwegian Cruise Line Holdings Ltd.;

 

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c.Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;

 

d.Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

 

  /s/ Frank J. Del Rio


Dated: November 9, 2017

Name: Frank J. Del Rio
Title: President and Chief Executive Officer

  

 

 

Exhibit 31.2

 

CERTIFICATION

 

I, Wendy A. Beck, certify that:

 

1.I have reviewed this quarterly report on Form 10-Q of Norwegian Cruise Line Holdings Ltd.;

 

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c.Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;

 

d.Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

 

  /s/ Wendy A. Beck


Dated: November 9, 2017

Name: Wendy A. Beck
Title: Executive Vice President and Chief Financial Officer

 

 

 

 

Exhibit 32.1

 

CERTIFICATIONS OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, each of Frank J. Del Rio, the President and Chief Executive Officer, and Wendy A. Beck, the Executive Vice President and Chief Financial Officer, of Norwegian Cruise Line Holdings Ltd. (the "Company"), does hereby certify, that, to such officer’s knowledge:

 

The Quarterly Report on Form 10-Q of the Company, for the quarter ended September 30, 2017 (the “Form 10-Q”), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Dated: November 9, 2017

 

  By: /s/ Frank J. Del Rio
  Name: Frank J. Del Rio
  Title: President and Chief Executive Officer
     
     
  By: /s/ Wendy A. Beck
  Name: Wendy A. Beck
  Title: Executive Vice President and Chief Financial Officer