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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2019

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

33126

(Address of principal executive offices)

(zip code)

(305) 436-4000

(Registrant’s telephone number, including area code)

N/A

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

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

    

Trading Symbol(s)

    

Name of each exchange on which registered

Ordinary shares, par value $0.001 per share

 

NCLH

 

The New York Stock Exchange

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   Yes  ⌧    No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ⌧

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

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

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

There were 215,597,324 ordinary shares outstanding as of July 31, 2019.

Table of Contents

TABLE OF CONTENTS

  

    

Page

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

3

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

24

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

38

Item 4.

Controls and Procedures

39

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

40

Item 1A.

Risk Factors

40

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

42

Item 6.

Exhibits

44

SIGNATURES

45

2

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

Six Months Ended

June 30, 

June 30, 

    

2019

    

2018

    

2019

    

2018

 

Revenue

 

  

 

  

 

  

 

  

 

Passenger ticket

$

1,179,404

$

1,077,046

$

2,152,677

$

1,966,912

Onboard and other

 

484,873

 

445,128

 

915,230

 

848,665

Total revenue

 

1,664,277

 

1,522,174

 

3,067,907

 

2,815,577

Cruise operating expense

 

  

 

  

 

  

 

  

Commissions, transportation and other

 

297,691

 

249,875

 

526,955

 

468,215

Onboard and other

 

107,063

 

92,797

 

186,476

 

163,485

Payroll and related

 

229,385

 

219,337

 

452,492

 

429,161

Fuel

 

100,531

 

95,212

 

198,784

 

188,643

Food

 

54,347

 

54,091

 

109,392

 

104,747

Other

 

169,407

 

151,471

 

310,976

 

276,623

Total cruise operating expense

 

958,424

 

862,783

 

1,785,075

 

1,630,874

Other operating expense

 

  

 

  

 

  

 

  

Marketing, general and administrative

 

240,901

 

226,535

 

489,843

 

453,550

Depreciation and amortization

 

156,271

 

140,704

 

326,012

 

271,948

Total other operating expense

 

397,172

 

367,239

 

815,855

 

725,498

Operating income

 

308,681

 

292,152

 

466,977

 

459,205

Non-operating income (expense)

 

 

  

 

  

 

  

Interest expense, net

 

(65,969)

 

(72,988)

 

(139,472)

 

(132,686)

Other income, net

 

3,616

 

12,922

 

3,182

 

11,256

Total non-operating income (expense)

 

(62,353)

 

(60,066)

 

(136,290)

 

(121,430)

Net income before income taxes

 

246,328

 

232,086

 

330,687

 

337,775

Income tax benefit (expense)

 

(6,138)

 

(5,410)

 

27,660

 

(7,944)

Net income

$

240,190

$

226,676

$

358,347

$

329,831

Weighted-average shares outstanding

 

  

 

  

 

  

 

  

Basic

 

215,426,441

 

223,308,350

 

216,328,943

 

225,314,816

Diluted

 

216,810,766

 

224,390,879

 

217,837,005

 

226,778,106

Earnings per share

 

  

 

  

 

  

 

  

Basic

$

1.11

$

1.02

$

1.66

$

1.46

Diluted

$

1.11

$

1.01

$

1.65

$

1.45

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

Six Months Ended

June 30, 

June 30, 

    

2019

    

2018

    

2019

    

2018

 

Net income

$

240,190

$

226,676

$

358,347

$

329,831

Other comprehensive income (loss):

 

  

 

  

 

  

 

  

Shipboard Retirement Plan

 

94

 

107

 

189

 

212

Cash flow hedges:

 

 

  

 

  

 

  

Net unrealized gain (loss)

 

(17,189)

 

(15,894)

 

(2,037)

 

32,682

Amount realized and reclassified into earnings

 

(9,274)

 

(6,723)

 

(16,274)

 

(8,508)

Total other comprehensive income (loss)

 

(26,369)

 

(22,510)

 

(18,122)

 

24,386

Total comprehensive income

$

213,821

$

204,166

$

340,225

$

354,217

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)

June 30, 

December 31, 

    

2019

    

2018

Assets

 

  

 

  

Current assets:

 

  

 

  

Cash and cash equivalents

$

419,925

$

163,851

Accounts receivable, net

 

75,134

 

55,249

Inventories

 

90,956

 

90,202

Prepaid expenses and other assets

 

317,549

 

241,011

Total current assets

 

903,564

 

550,313

Property and equipment, net

 

12,252,055

 

12,119,253

Goodwill

 

1,388,931

 

1,388,931

Tradenames

 

817,525

 

817,525

Other long-term assets

 

603,902

 

329,948

Total assets

$

15,965,977

$

15,205,970

Liabilities and shareholders’ equity

 

  

 

  

Current liabilities:

 

  

 

  

Current portion of long-term debt

$

605,141

$

681,218

Accounts payable

 

75,776

 

159,564

Accrued expenses and other liabilities

 

734,363

 

716,499

Advance ticket sales

 

2,167,271

 

1,593,219

Total current liabilities

 

3,582,551

 

3,150,500

Long-term debt

 

5,743,927

 

5,810,873

Other long-term liabilities

 

489,156

 

281,596

Total liabilities

 

9,815,634

 

9,242,969

Commitments and contingencies (Note 11)

 

  

 

  

Shareholders’ equity:

 

  

 

  

Ordinary shares, $.001 par value; 490,000,000 shares authorized; 236,963,843 shares issued and 215,504,364 shares outstanding at June 30, 2019 and 235,484,613 shares issued and 217,650,644 shares outstanding at December 31, 2018

 

237

 

235

Additional paid-in capital

 

4,176,825

 

4,129,639

Accumulated other comprehensive income (loss)

 

(179,769)

 

(161,647)

Retained earnings

 

3,257,187

 

2,898,840

Treasury shares (21,459,479 and 17,833,969 ordinary shares at June 30, 2019 and December 31, 2018, respectively, at cost)

 

(1,104,137)

 

(904,066)

Total shareholders’ equity

 

6,150,343

 

5,963,001

Total liabilities and shareholders’ equity

$

15,965,977

$

15,205,970

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)

Six Months Ended

June 30, 

    

2019

    

2018

Cash flows from operating activities

 

  

 

  

Net income

$

358,347

$

329,831

Adjustments to reconcile net income to net cash provided by operating activities:

 

  

 

  

Depreciation and amortization expense

 

326,471

 

274,842

Deferred income taxes, net

 

(29,793)

 

2,180

Loss on extinguishment of debt

 

3,988

 

6,346

Provision for bad debts and inventory

 

1,057

 

2,197

Gain on involuntary conversion of assets

(2,810)

Share-based compensation expense

 

56,650

 

59,835

Net foreign currency adjustments

 

(716)

 

(3,884)

Changes in operating assets and liabilities:

 

  

 

Accounts receivable, net

 

(15,121)

 

(2,087)

Inventories

 

(1,342)

 

(11,422)

Prepaid expenses and other assets

 

(39,376)

 

(74,976)

Accounts payable

 

(81,690)

 

3,645

Accrued expenses and other liabilities

 

(74,470)

 

54,962

Advance ticket sales

 

558,579

 

612,332

Net cash provided by operating activities

 

1,059,774

 

1,253,801

Cash flows from investing activities

 

  

 

  

Additions to property and equipment, net

 

(413,888)

 

(1,251,434)

Issuance of promissory note

(18,553)

Cash received on settlement of derivatives

 

289

 

64,796

Other

4,047

501

Net cash used in investing activities

 

(428,105)

 

(1,186,137)

Cash flows from financing activities

 

  

 

  

Repayments of long-term debt

 

(2,808,615)

 

(906,897)

Proceeds from long-term debt

 

2,652,000

 

1,445,352

Proceeds from employee related plans

 

11,368

 

19,026

Net share settlement of restricted share units

 

(20,830)

 

(13,415)

Purchases of treasury shares

 

(200,071)

 

(463,505)

Early redemption premium

 

(117)

 

(5,154)

Deferred financing fees

 

(9,330)

 

(114,254)

Net cash used in financing activities

 

(375,595)

 

(38,847)

Net increase in cash and cash equivalents

 

256,074

 

28,817

Cash and cash equivalents at beginning of period

 

163,851

 

176,190

Cash and cash equivalents at end of period

$

419,925

$

205,007

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)

Three Months Ended June 30, 2019

Accumulated 

Additional

Other

Total

Ordinary 

Paid-in 

Comprehensive

Retained

Treasury

Shareholders’

Shares

    

Capital

    

Income (Loss)

    

Earnings

    

Shares

    

Equity

Balance, March 31, 2019

 

$

237

 

$

4,145,530

 

$

(153,400)

 

$

3,016,997

 

$

(1,104,062)

 

$

5,905,302

Share-based compensation

 

 

29,651

 

 

 

 

29,651

Issuance of shares under employee related plans

 

 

3,624

 

 

 

 

3,624

Treasury shares

(75)

(75)

Net share settlement of restricted share units

 

 

(1,980)

 

 

 

 

(1,980)

Other comprehensive loss, net

 

 

 

(26,369)

 

 

 

(26,369)

Net income

 

 

 

 

240,190

 

 

240,190

Balance, June 30, 2019

$

237

$

4,176,825

$

(179,769)

$

3,257,187

$

(1,104,137)

$

6,150,343

Six Months Ended June 30, 2019

Accumulated 

Additional

Other

Total

Ordinary 

Paid-in 

Comprehensive

Retained

Treasury

Shareholders’

    

Shares

    

Capital

    

Income (Loss)

    

Earnings

    

Shares

    

Equity

Balance, December 31, 2018

 

$

235

 

$

4,129,639

 

$

(161,647)

 

$

2,898,840

 

$

(904,066)

 

$

5,963,001

Share-based compensation

 

 

56,650

 

 

 

 

56,650

Issuance of shares under employee related plans

 

2

 

11,366

 

 

 

 

11,368

Treasury shares

(200,071)

(200,071)

Net share settlement of restricted share units

 

 

(20,830)

 

 

 

 

(20,830)

Other comprehensive loss, net

 

 

 

(18,122)

 

 

 

(18,122)

Net income

 

 

 

 

358,347

 

 

358,347

Balance, June 30, 2019

$

237

$

4,176,825

$

(179,769)

$

3,257,187

$

(1,104,137)

$

6,150,343

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 - Continued

(Unaudited)

(in thousands)

Three Months Ended June 30, 2018

Accumulated 

    

    

    

Additional

Other

Total

Ordinary 

Paid-in 

Comprehensive

Retained

Treasury

Shareholders’

Shares

    

Capital

    

Income (Loss)

    

Earnings

    

Shares

Equity

Balance, March 31, 2018

 

$

235

 

$

4,020,584

 

$

73,862

 

$

2,047,152

 

$

(502,760)

 

$

5,639,073

Share-based compensation

 

 

31,733

 

 

 

 

31,733

Issuance of shares under employee related plans

 

 

13,065

 

 

 

 

13,065

Treasury shares

(200,000)

(200,000)

Net share settlement of restricted share units

 

 

(1,244)

 

 

 

 

(1,244)

Other comprehensive loss, net

 

 

 

(22,510)

 

 

 

(22,510)

Net income

 

 

 

 

226,676

 

 

226,676

Balance, June 30, 2018

$

235

$

4,064,138

$

51,352

$

2,273,828

$

(702,760)

$

5,686,793

Six Months Ended June 30, 2018

    

Accumulated 

    

    

    

Additional

Other

Total

Ordinary 

Paid-in 

Comprehensive

Retained

Treasury

Shareholders’

    

Shares

    

Capital

    

Income (Loss)

    

Earnings

    

Shares

Equity

Balance, December 31, 2017

 

$

233

 

$

3,998,694

 

$

26,966

 

$

1,963,128

 

$

(239,255)

 

$

5,749,766

Share-based compensation

 

 

59,835

 

 

 

 

59,835

Issuance of shares under employee related plans

 

2

 

19,024

 

 

 

 

19,026

Treasury shares

(463,505)

(463,505)

Net share settlement of restricted share units

 

 

(13,415)

 

 

 

 

(13,415)

Cumulative change in accounting policy

 

 

 

(12)

 

(19,131)

 

 

(19,143)

Other comprehensive income, net

 

 

 

24,398

 

 

 

24,398

Net income

 

 

 

 

329,831

 

 

329,831

Balance, June 30, 2018

$

235

$

4,064,138

$

51,352

$

2,273,828

$

(702,760)

$

5,686,793

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, and (v) “Prestige” refers to Prestige Cruises International S. de R.L. (formerly Prestige Cruises International, Inc.), together with its consolidated subsidiaries, including Prestige Cruise Holdings S. de R.L. (formerly Prestige Cruise Holdings, Inc.), Prestige’s direct wholly-owned subsidiary, which in turn is the parent of Oceania Cruises S. de R.L. (formerly Oceania Cruises, Inc.) (“Oceania Cruises”) and Seven Seas Cruises S. de R.L. (“Regent”) (Oceania Cruises also refers to the brand by the same name and Regent also refers to the brand Regent Seven Seas Cruises).

References to the “U.S.” are to the United States of America, and “dollar(s)” or “$” are to U.S. dollars, the “U.K.” are to the United Kingdom and “euro(s)” or “€” are to the official currency of the Eurozone. We refer you to “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations— “Terminology” for the capitalized terms used and not otherwise defined throughout these notes to consolidated financial statements.

1.   Description of Business and Organization

We are a leading global cruise company which operates the Norwegian Cruise Line, Oceania Cruises and Regent Seven Seas Cruises brands. As of June 30, 2019, we had 26 ships with approximately 54,400 Berths and had orders for 11 additional ships to be delivered through 2027, subject to certain conditions.

Norwegian Encore is on order for delivery in the fall of 2019. We have two Explorer Class Ships, Seven Seas Splendor and one additional ship, on order for delivery in the winter of 2020 and fall of 2023, respectively. We have two Allura Class Ships on order for delivery in the winter of 2022 and spring of 2025. Project Leonardo will introduce an additional six ships with expected delivery dates from 2022 through 2027. These additions to our fleet will increase our total Berths to approximately 82,000.

2.   Summary of Significant Accounting Policies

Basis of Presentation

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

Our operations are seasonal and results for interim periods are not necessarily indicative of the results for the entire fiscal year. Historically, demand for cruises has been strongest during the Northern Hemisphere’s summer months. The interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2018, which are included in our most recent Annual Report on Form 10-K filed with the SEC.

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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

Six Months Ended

June 30, 

June 30, 

    

2019

    

2018

    

2019

    

2018

 

Net income

$

240,190

$

226,676

$

358,347

$

329,831

Basic weighted-average shares outstanding

 

215,426,441

 

223,308,350

 

216,328,943

 

225,314,816

Dilutive effect of share awards

 

1,384,325

 

1,082,529

 

1,508,062

 

1,463,290

Diluted weighted-average shares outstanding

 

216,810,766

 

224,390,879

 

217,837,005

 

226,778,106

Basic earnings per share

$

1.11

$

1.02

$

1.66

$

1.46

Diluted earnings per share

$

1.11

$

1.01

$

1.65

$

1.45

For the three months ended June 30, 2019 and 2018, a total of 3.6 million and 5.9 million shares, respectively, and for the six months ended June 30, 2019 and 2018, a total of 4.5 million and 4.6 million shares, respectively, have been excluded from diluted weighted-average shares outstanding because the effect of including them would have been anti-dilutive.

Foreign Currency

The majority of our transactions are settled in U.S. dollars. We remeasure assets and liabilities denominated in foreign currencies at exchange rates in effect at the balance sheet date. Gains or losses resulting from transactions denominated in other currencies are recognized in our consolidated statements of operations within other income, net. We recognized a loss of $3.3 million and a gain of $12.7 million for the three months ended June 30, 2019 and 2018, respectively, and a loss of $4.3 million and a gain of $10.9 million for the six months ended June 30, 2019 and 2018, respectively, related to transactions denominated in other currencies.

Depreciation and Amortization Expense

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

Recently Adopted Accounting Guidance

In August 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FAS Emerging Issues Task Force), which is designed to align the accounting for costs of implementing a cloud computing service arrangement, regardless of whether the hosting arrangement conveys a license to the hosted software. For hosting arrangements considered to be a service contract, the update requires that the criteria for capitalization of developing or obtaining internal-use software shall be applied.

On April 1, 2019, we adopted ASU 2018-15 and elected the prospective transition approach. The impact of adopting this accounting policy was not material to the Company’s consolidated financial statements.

Recently Issued Accounting Guidance

In January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350) — Simplifying the Test for Goodwill Impairment, which simplifies the test for goodwill impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. The guidance is effective for annual or any interim goodwill impairment tests in years beginning after December 15, 2019, with early adoption permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company does not expect to early adopt

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this guidance. The Company will evaluate, upon adoption of this guidance, the impact of this guidance on the Company’s consolidated financial statements.

3.   Revenue Recognition

Disaggregation of Revenue

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

Three Months Ended

Six Months Ended

June 30, 

June 30, 

    

2019

    

2018

    

2019

    

2018

 

North America

$

968,466

$

851,569

$

1,951,455

$

1,726,748

Europe

 

508,435

 

432,296

 

542,187

 

463,366

Asia-Pacific

 

67,239

 

153,673

 

290,006

 

421,391

Other

 

120,137

 

84,636

 

284,259

 

204,072

Total revenue

$

1,664,277

$

1,522,174

$

3,067,907

$

2,815,577

North America includes the U.S., the Caribbean, Canada and Mexico. Europe includes the Baltic region, Canary Islands and Mediterranean. Asia-Pacific includes Australia, New Zealand and Asia. Other includes all other international territories.

Segment Reporting

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

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

Contract Balances

Receivables from customers are included within accounts receivables, net. As of June 30, 2019 and December 31, 2018, our receivables from customers were $19.4 million and $17.3 million, respectively.

Our contract liabilities are included within advance ticket sales. As of June 30, 2019 and December 31, 2018, our contract liabilities were $1.7 billion and $1.2 billion, respectively. Of the amounts included within contract liabilities, approximately 50% were refundable in accordance with our cancellation policies. For the six months ended June 30, 2019, $1.2 billion of revenue recognized was included in the contract liability balance at the beginning of the period.

4.   Intangible Assets

The carrying amounts of intangible assets subject to amortization are included within other long-term assets. The gross carrying amounts of intangible assets, the related accumulated amortization, the net carrying amounts and the weighted-

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average amortization periods of the Company’s intangible assets are listed in the following tables (in thousands, except amortization period):

June 30, 2019

Weighted-

Average

Gross Carrying 

Accumulated

Net Carrying

 Amortization

    

Amount

    

Amortization

    

Amount

    

Period (Years)

Customer relationships

$

120,000

$

(100,962)

$

19,038

 

6.0

License

 

750

 

(294)

 

456

 

10.0

Total intangible assets subject to amortization

$

120,750

$

(101,256)

$

19,494

 

  

December 31, 2018

    

    

    

Weighted-

Average

Gross Carrying

Accumulated

Net Carrying 

Amortization

    

Amount

    

Amortization

    

Amount

    

Period (Years)

Customer relationships

$

120,000

$

(91,756)

$

28,244

 

6.0

Licenses

 

3,368

 

(2,874)

 

494

 

5.6

Total intangible assets subject to amortization

$

123,368

$

(94,630)

$

28,738

 

  

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

Three Months Ended

Six Months Ended

June 30, 

June 30, 

    

2019

    

2018

    

2019

    

2018

 

Amortization expense

$

4,622

$

6,553

$

9,244

$

13,057

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

    

Amortization

Year ended December 31, 

Expense

2020

$

9,906

2021

75

2022

75

2023

75

2024

75

5.   Leases

On January 1, 2019, we adopted ASU No. 2016-02, Leases (“Topic 842”). Topic 842 supersedes the lease accounting requirements in Accounting Standards Codification (“ASC”) 840—Leases. In August 2018, the FASB issued ASU 2018-11, Targeted Improvements to Topic 842, which included an option to apply the new leases standard at the adoption date using a modified retrospective approach, which the Company elected.

Nature of Leases

We have finance leases for certain ship equipment and a corporate office. We have operating leases for port facilities, corporate offices, warehouses, and certain equipment. Many of our leases include both lease and non-lease components. We have adopted the practical expedient which allows us to combine lease and non-lease components by class of asset. We have applied this expedient for office leases, port facilities, and certain equipment.

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Significant Assumptions and Judgments in Applying Topic 842 and Practical Expedients Elected

Our leases contain both fixed and variable payments. Fixed payments and variable lease payments that depend on a rate or index are included in the calculation of the right-of-use asset. Other variable payments are excluded from the calculation unless there is an unavoidable fixed minimum cost related to those payments such as a minimum annual guarantee. Our lease assets are amortized on a straight-line basis except for our rights to use port facilities. The expenses related to port facilities are amortized based on passenger counts as this basis represents the pattern in which the economic benefit is derived from the right to use the underlying asset.

For non-consecutive lease terms, which relate to our rights to use certain port facilities, the term of the lease is based on the number of days on which we have the right to use a specified asset. We have adopted the practical expedient to exclude leases with terms of less than one year from being included on the balance sheet. Lease expense for agreements that are short-term are disclosed below and include both fixed and variable payments.

Certain leases include one or more options to extend or terminate and are primarily in five-year increments. Lease extensions and terminations, including auto-renewing lease terms, were only included in the calculation of the right-of-use asset to the extent that the right to renew or terminate was at the option of the lessor only or where there was a more than insignificant penalty for termination.

As our leases do not have a readily determinable implicit rate, we used our weighted average cost of debt to determine the net present value of the lease payments at the adoption date. Our weighted average cost of debt is similar to the incremental borrowing rate we would have obtained if we had borrowed collateralized debt over the lease term to purchase the asset, and the rate was adjusted for longer term leases.

We have also adopted the practical expedient which allows us, by class of asset, to not separate lease and non-lease components when we are the lessor in the underlying transaction, the transactions would otherwise be accounted for under ASC 606–Revenue Recognition and the non-lease components are the predominant components of the agreements. We have applied this practical expedient to transactions with cruise passengers and concession service providers related to the use of our ships. We refer you to Note 3 – “Revenue Recognition.”

Impacts on Financial Statements

As a result of the adoption of Topic 842 on January 1, 2019, we recorded operating lease right-of-use assets of $235.0 million and operating lease liabilities of $243.8 million. Another $8.8 million was reclassified to the operating right-of-use assets from other asset and liability accounts relating to the existing leases. The adoption of Topic 842 did not result in the identification of new finance leases. The adoption does not significantly change the timing, classification or amount of expense recognized in our consolidated financial statements nor does it change the timing, classification or amount of cash payments included within the consolidated statement of cash flows.

The components of lease expense and revenue were as follows (in thousands):

    

Three Months

    

Six Months

Ended

Ended

June 30, 2019

June 30, 2019

Operating lease expense

$

10,090

 

$

18,449

Variable lease expense

$

1,778

 

$

4,483

Short-term lease expense

$

15,405

 

$

25,481

Finance lease cost:

 

  

Amortization of right-to-use assets

$

586

 

$

830

Interest on lease liabilities

$

326

 

$

668

Operating lease revenue

$

81

 

$

246

Sublease income

$

404

 

$

808

Lease balances were as follows (in thousands):

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