Norwegian Cruise Line Holdings Ltd.

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2019

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


Large accelerated filer ⌧	Accelerated filer ◻
Non-accelerated filer ◻	Smaller reporting company ☐
Emerging growth company ☐

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

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

There were 212,757,530 ordinary shares outstanding as of October 31, 2019.

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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	41

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	43

Item 6.	Exhibits	44

SIGNATURES		45

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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				Nine Months Ended
	September 30,				September 30,
	2019		2018		2019		2018
Revenue
Passenger ticket	$	1,373,779	$	1,334,460	$	3,526,456	$	3,301,372
Onboard and other		540,072		523,896		1,455,302		1,372,561
Total revenue		1,913,851		1,858,356		4,981,758		4,673,933
Cruise operating expense
Commissions, transportation and other		330,893		301,349		857,848		769,564
Onboard and other		122,971		117,747		309,447		281,232
Payroll and related		235,833		227,707		688,325		656,868
Fuel		98,943		99,643		297,727		288,286
Food		56,913		56,038		166,305		160,785
Other		145,211		126,460		456,187		403,083
Total cruise operating expense		990,764		928,944		2,775,839		2,559,818
Other operating expense
Marketing, general and administrative		255,148		235,436		744,991		688,986
Depreciation and amortization		156,215		143,700		482,227		415,648
Total other operating expense		411,363		379,136		1,227,218		1,104,634
Operating income		511,724		550,276		978,701		1,009,481
Non-operating income (expense)
Interest expense, net		(60,188)		(69,540)		(199,660)		(202,226)
Other income, net		10,251		98		13,433		11,354
Total non-operating income (expense)		(49,937)		(69,442)		(186,227)		(190,872)
Net income before income taxes		461,787		480,834		792,474		818,609
Income tax benefit (expense)		(11,203)		(10,456)		16,457		(18,400)
Net income	$	450,584	$	470,378	$	808,931	$	800,209
Weighted-average shares outstanding
Basic		214,207,716		221,511,630		215,614,098		224,033,156
Diluted		215,499,462		222,752,738		217,050,055		225,422,385
Earnings per share
Basic	$	2.10	$	2.12	$	3.75	$	3.57
Diluted	$	2.09	$	2.11	$	3.73	$	3.55

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				Nine Months Ended
	September 30,				September 30,
	2019		2018		2019		2018
Net income	$	450,584	$	470,378	$	808,931	$	800,209
Other comprehensive income (loss):
Shipboard Retirement Plan		95		107		284		319
Cash flow hedges:
Net unrealized gain (loss)		(209,511)		15,365		(211,548)		48,047
Amount realized and reclassified into earnings		(448)		(10,706)		(16,722)		(19,214)
Total other comprehensive income (loss)		(209,864)		4,766		(227,986)		29,152
Total comprehensive income	$	240,720	$	475,144	$	580,945	$	829,361

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,		December 31,
	2019		2018
Assets
Current assets:
Cash and cash equivalents	$	407,258	$	163,851
Accounts receivable, net		67,698		55,249
Inventories		94,254		90,202
Prepaid expenses and other assets		273,506		241,011
Total current assets		842,716		550,313
Property and equipment, net		12,288,897		12,119,253
Goodwill		1,388,931		1,388,931
Tradenames		817,525		817,525
Other long-term assets		600,827		329,948
Total assets	$	15,938,896	$	15,205,970
Liabilities and shareholders’ equity
Current liabilities:
Current portion of long-term debt	$	605,106	$	681,218
Accounts payable		72,151		159,564
Accrued expenses and other liabilities		860,698		716,499
Advance ticket sales		1,861,636		1,593,219
Total current liabilities		3,399,591		3,150,500
Long-term debt		5,672,626		5,810,873
Other long-term liabilities		593,255		281,596
Total liabilities		9,665,472		9,242,969
Commitments and contingencies (Note 11)
Shareholders’ equity:
Ordinary shares, $.001 par value; 490,000,000 shares authorized; 237,208,389 shares issued and 212,757,530 shares outstanding at September 30, 2019 and 235,484,613 shares issued and 217,650,644 shares outstanding at December 31, 2018		237		235
Additional paid-in capital		4,208,975		4,129,639
Accumulated other comprehensive income (loss)		(389,633)		(161,647)
Retained earnings		3,707,771		2,898,840
Treasury shares (24,450,859 and 17,833,969 ordinary shares at September 30, 2019 and December 31, 2018, respectively, at cost)		(1,253,926)		(904,066)
Total shareholders’ equity		6,273,424		5,963,001
Total liabilities and shareholders’ equity	$	15,938,896	$	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)


	Nine Months Ended
	September 30,
	2019		2018
Cash flows from operating activities
Net income	$	808,931	$	800,209
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense		482,497		420,154
Deferred income taxes, net		(25,731)		3,998
Loss on extinguishment of debt		3,988		6,346
Provision for bad debts and inventory obsolescence		2,852		3,420
Gain on involuntary conversion of assets		(2,800)		—
Share-based compensation expense		82,070		88,797
Net foreign currency adjustments		(4,326)		(4,494)
Changes in operating assets and liabilities:
Accounts receivable, net		(12,741)		(5,649)
Inventories		(4,681)		(14,237)
Prepaid expenses and other assets		1,786		(34,668)
Accounts payable		(86,525)		3,003
Accrued expenses and other liabilities		(27,504)		136,954
Advance ticket sales		262,938		316,268
Net cash provided by operating activities		1,480,754		1,720,101
Cash flows from investing activities
Additions to property and equipment, net		(615,985)		(1,361,678)
Issuance of loans		(36,392)		—
Cash received on settlement of derivatives		289		64,796
Cash paid on settlement of derivatives		(556)		—
Other		7,719		755
Net cash used in investing activities		(644,925)		(1,296,127)
Cash flows from financing activities
Repayments of long-term debt		(2,882,354)		(1,233,499)
Proceeds from long-term debt		2,652,000		1,491,352
Proceeds from employee related plans		18,203		26,642
Net share settlement of restricted share units		(20,935)		(13,840)
Purchases of treasury shares		(349,860)		(463,505)
Early redemption premium		(117)		(5,154)
Deferred financing fees		(9,359)		(115,699)
Net cash used in financing activities		(592,422)		(313,703)
Net increase in cash and cash equivalents		243,407		110,271
Cash and cash equivalents at beginning of period		163,851		176,190
Cash and cash equivalents at end of period	$	407,258	$	286,461

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 September 30, 2019
					Accumulated
			Additional		Other						Total
	Ordinary		Paid-in		Comprehensive		Retained		Treasury		Shareholders’
	Shares		Capital		Income (Loss)		Earnings		Shares		Equity
Balance, June 30, 2019	$	237	$	4,176,825	$	(179,769)	$	3,257,187	$	(1,104,137)	$	6,150,343
Share-based compensation		—		25,420		—		—		—		25,420
Issuance of shares under employee related plans		—		6,835		—		—		—		6,835
Treasury shares		—		—		—		—		(149,789)		(149,789)
Net share settlement of restricted share units		—		(105)		—		—		—		(105)
Other comprehensive loss, net		—		—		(209,864)		—		—		(209,864)
Net income		—		—		—		450,584		—		450,584
Balance, September 30, 2019	$	237	$	4,208,975	$	(389,633)	$	3,707,771	$	(1,253,926)	$	6,273,424

	Nine Months Ended September 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		—		82,070		—		—		—		82,070
Issuance of shares under employee related plans		2		18,201		—		—		—		18,203
Treasury shares		—		—		—		—		(349,860)		(349,860)
Net share settlement of restricted share units		—		(20,935)		—		—		—		(20,935)
Other comprehensive loss, net		—		—		(227,986)		—		—		(227,986)
Net income		—		—		—		808,931		—		808,931
Balance, September 30, 2019	$	237	$	4,208,975	$	(389,633)	$	3,707,771	$	(1,253,926)	$	6,273,424

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 September 30, 2018
					Accumulated
			Additional		Other						Total
	Ordinary		Paid-in		Comprehensive		Retained		Treasury		Shareholders’
	Shares		Capital		Income (Loss)		Earnings		Shares		Equity
Balance, June 30, 2018	$	235	$	4,064,138	$	51,352	$	2,273,828	$	(702,760)	$	5,686,793
Share-based compensation		—		28,962		—		—		—		28,962
Issuance of shares under employee related plans		—		7,616		—		—		—		7,616
Net share settlement of restricted share units		—		(425)		—		—		—		(425)
Other comprehensive income, net		—		—		4,766		—		—		4,766
Net income		—		—		—		470,378		—		470,378
Balance, September 30, 2018	$	235	$	4,100,291	$	56,118	$	2,744,206	$	(702,760)	$	6,198,090

	Nine Months Ended September 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		—		88,797		—		—		—		88,797
Issuance of shares under employee related plans		2		26,640		—		—		—		26,642
Treasury shares		—		—		—		—		(463,505)		(463,505)
Net share settlement of restricted share units		—		(13,840)		—		—		—		(13,840)
Cumulative change in accounting policy		—		—		(12)		(19,131)		—		(19,143)
Other comprehensive income, net		—		—		29,164		—		—		29,164
Net income		—		—		—		800,209		—		800,209
Balance, September 30, 2018	$	235	$	4,100,291	$	56,118	$	2,744,206	$	(702,760)	$	6,198,090

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 September 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 was delivered in October 2019. We refer you to Note 15 – “Subsequent Events” for additional information. 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				Nine Months Ended
	September 30,				September 30,
	2019		2018		2019		2018
Net income	$	450,584	$	470,378	$	808,931	$	800,209
Basic weighted-average shares outstanding		214,207,716		221,511,630		215,614,098		224,033,156
Dilutive effect of share awards		1,291,746		1,241,108		1,435,957		1,389,229
Diluted weighted-average shares outstanding		215,499,462		222,752,738		217,050,055		225,422,385
Basic earnings per share	$	2.10	$	2.12	$	3.75	$	3.57
Diluted earnings per share	$	2.09	$	2.11	$	3.73	$	3.55

For the three months ended September 30, 2019 and 2018, a total of 3.5 million and 4.5 million shares, respectively, and for the nine months ended September 30, 2019 and 2018, a total of 4.2 million and 4.8 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 gain of $9.9 million and a loss of $0.2 million for the three months ended September 30, 2019 and 2018, respectively, and a gain of $5.6 million and a gain of $10.7 million for the nine months ended September 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 FASB 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 June 2016, FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which will require an entity to present the net amount expected to be collected for certain financial assets, including trade receivables. Under this update, on initial recognition and at each reporting period, an entity will be required to recognize an allowance that reflects the entity’s current estimate of credit losses expected to be incurred over the life of the financial instrument. The update will be applied prospectively with a cumulative-effect adjustment to retained earnings. This update will be effective for the Company for fiscal years

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beginning after December 15, 2019 and interim periods within those fiscal years. The adoption of this standard will not have a material impact on the Company’s consolidated financial statements.

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 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				Nine Months Ended
	September 30,				September 30,
	2019		2018		2019		2018
North America	$	930,151	$	997,550	$	2,881,606	$	2,724,298
Europe		831,814		763,680		1,374,001		1,227,046
Asia-Pacific		128,415		77,986		418,421		499,377
Other		23,471		19,140		307,730		223,212
Total revenue	$	1,913,851	$	1,858,356	$	4,981,758	$	4,673,933

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 receivable, net. As of September 30, 2019 and December 31, 2018, our receivables from customers were $15.9 million and $17.3 million, respectively.

Our contract liabilities are included within advance ticket sales. As of September 30, 2019 and December 31, 2018, our contract liabilities were $1.4 billion and $1.2 billion, respectively. Of the amounts included within contract liabilities, approximately 55% were refundable in accordance with our cancellation policies. For the nine months ended September 30, 2019, $1.2 billion of revenue recognized was included in the contract liability balance at the beginning of the period.

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


	September 30, 2019
							Weighted-
							Average
	Gross Carrying		Accumulated		Net Carrying		Amortization
	Amount		Amortization		Amount		Period (Years)
Customer relationships	$	120,000	$	(105,566)	$	14,434	6.0
License		750		(312)		438	10.0
Total intangible assets subject to amortization	$	120,750	$	(105,878)	$	14,872


	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 for intangible assets is as follows (in thousands):


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2019		2018		2019		2018
Amortization expense	$	4,622	$	6,553	$	13,866	$	19,610

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.

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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.

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.

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


	Three Months		Nine Months
	Ended		Ended
	September 30, 2019		September 30, 2019
Operating lease expense	$	7,738	$	26,187
Variable lease expense		3,141