What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-08-10 compared with 2020-05-15 · 168 added, 88 removed, 342 unchanged (43% of the section changed)

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● changes involving the tax and environmental regulatory regimes in which we operate;

● other factors set forth under “Risk Factors” herein and in our Annual Report on Form 10-K for the year ended December 31, 2019 , filed with the SEC on February 27, 2020 , as updated by our Current Report on Form 8-K filed on May 5, 2020 (“Annual Report on Form 10-K”).

Additionally, many of these risks and uncertainties are currently amplified by and will continue to be amplified by, or in the future may be amplified by, the COVID-19 outbreak.

● other factors set forth under “Risk Factors” herein and in our Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on February 27, 2020, as updated by our Current Report on Form 8-K filed on July 8, 2020 (“Annual Report on Form 10-K”).

Additionally, many of these risks and uncertainties are currently amplified by and will continue to be amplified by, or in the future may be amplified by, the COVID-19 pandemic.

It is not possible to predict or identify all such risks.

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Earnings before interest, taxes, and depreciation and amortization.

● Epic Credit Facility.

$675.0 million senior secured revolving credit facility.

Earnings (loss) per share.

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Securities and Exchange Commission.

● Secondary Equity Offering(s).

Secondary public offering(s) of NCLH’s ordinary shares in December 2018, March 2018, November 2017, August 2017, December 2015, August 2015, May 2015, March 2015, March 2014, December 2013 and August 2013.

● Shipboard Retirement Plan .

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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.

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.

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 a result of our voluntary suspension of sailings during the second quarter of 2020, we did not have any Capacity Days.

Accordingly, we have not presented herein Gross Yield, Net Yield or per Capacity Day data for the three or six months ended June 30, 2020.

As our business includes the sourcing of passengers and deployment of vessels outside of the U.S., a portion of our revenue and expenses are denominated in foreign currencies, particularly British pound, Canadian dollar, Euro and Australian dollar which are subject to fluctuations in currency exchange rates versus our reporting currency, the U.S.

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accordingly, our presentation of Adjusted Net Income and Adjusted EPS may not be indicative of future adjustments or results.

For example, for the three months ended March 31, 2019, we incurred $25.0 million related to the redeployment of Norwegian Joy from Asia to the U.S.

For example, for the six months ended June 30, 2019, we incurred $30.6 million related to the redeployment of Norwegian Joy from Asia to the U.S.

We included this as an adjustment in the reconciliation of Adjusted Net Income since the expenses are not representative of our day-to-day operations;

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Our revenue is seasonal based on demand for cruises, which has historically been strongest during the Northern Hemisphere’s summer months ;

however, demand for cruises during the summer months of 2020 has been materially adversely impacted by the COVID-19 pandemic.

Passenger ticket revenue primarily consists of revenue for accommodations, meals in certain restaurants on the ship, certain onboard entertainment, and includes revenue for service charges and air and land transportation to and from the ship to the extent guests purchase these items from us.

Onboard and other revenue primarily consists of revenue from gaming, beverage sales, shore excursions, specialty dining, retail sales, spa services and photo services.

revenue is derived from onboard activities we perform directly or that are performed by independent concessionaires, from which we receive a share of their revenue.

onboard revenue is derived from onboard activities we perform directly or that are performed by independent concessionaires, from which we receive a share of their revenue.

Our cruise operating expense is classified as follows:

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

The cost of crew repatriation, including charters, housing, testing and other costs related to COVID-19 are also included.

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

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Critical Accounting Policies

For a discussion of our critical accounting policies and estimates, see “Critical Accounting Policies” included in our Annual Report on Form 10-K for the year ended December 31, 2019 under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” We have updated our critical accounting policies and estimates from those described in our Annual Report on Form 10-K for the year ended December 31, 2019 as follows:

For a discussion of our critical accounting policies and estimates, see “Critical Accounting Policies” included in our Annual Report on Form 10-K under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” We have updated our critical accounting policies and estimates from those described in our Annual Report on Form 10-K as follows:

Asset Impairment

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Each brand, Oceania Cruises, Regent Seven Seas Cruises and Norwegian, constitutes a business for which discrete financial information is available and management regularly reviews the operating results and, therefore, each brand is considered an operating segment.

During the three months ended March 31, 2020, we recognized a goodwill impairment loss of $1.3 billion.

During the six months ended June 30, 2020, we recognized a goodwill impairment loss of $1.3 billion.

See Note 4 – “Intangible Assets” for additional information.

As of March 31, 2020, there was $98.1 million of goodwill for the Regent Seven Seas Cruises reporting unit after impairment.

We also recognized an impairment loss for our Oceania Cruises and Regent Seven Seas Cruises tradenames during the three months in an aggregate amount of $317.0 million, with $500.5 million remaining as of March 31, 2020.

As of June 30, 2020, there was $98.1 million of goodwill for the Regent Seven Seas Cruises reporting unit after impairment.

We also recognized an impairment loss for our Oceania Cruises and Regent Seven Seas Cruises tradenames during the six months in an aggregate amount of $317.0 million, with $500.5 million remaining as of June 30, 2020.

We believe that we have made reasonable estimates and judgments.

However, a change in our estimated future operating cash flows may result in a decline in fair value in future periods, which may result in a need to recognize additional impairment charges.

Quarterly Overview

Three months ended March 31, 2020 (“ 2020 ”) compared to three months ended March 31, 2019 (“ 2019 ”)

● Total revenue decreased 11.2% to $1.2 billion compared to $1.4 billion.

● Net Revenue decreased 23.3% to $0.8 billion compared to $1.1 billion.

● Net income (loss) and diluted EPS were $(1.9) billion and $(8.80), respectively, compared to $118.2 million and $0.54, respectively.

● Operating loss was $(1.8) billion compared to operating income of $158.3 million.

● Adjusted Net Loss and Adjusted EPS were $(211.3) million and $(0.99), respectively, in 2020, which included $1.7 billion of adjustments primarily consisting of expenses related to impairment losses, non-cash compensation and amortization of intangible assets.

Adjusted Net Income and Adjusted EPS were $181.8 million and $0.83, respectively, in 2019, which included $63.6 million of adjustments primarily consisting of expenses related to non-cash compensation and amortization of intangible assets.

● Adjusted EBITDA decreased 95.7% to $15.4 million compared to $360.6 million.

● In March 2020, the Company temporarily suspended cruise voyages as a result of the COVID-19 pandemic.

This suspension has been extended through June 30, 2020.

As a result, we do not expect to have revenue for the three months ended June 30, 2020.

COVID-19, including the temporary suspension of cruise voyages and the impairment of our goodwill and tradenames, has had a negative impact on earnings and we expect the negative impact to continue through 2020 and 2021.

Update Regarding COVID-19 Pandemic

Suspension of Cruise Voyages

Due to the continued spread of COVID-19, growing travel restrictions and limited access to ports around the world, in March 2020, we implemented a voluntary suspension of all cruise voyages across our three brands.

As a result of continued travel and port restrictions in certain geographies and in an effort to protect the health, safety and security of guests, crew and communities visited, we subsequently extended this suspension several times, including most recently through October 31, 2020.

See Note 2 – “Summary of Significant Accounting Policies – Liquidity and Management’s Plan” for additional information.

This is the first time we have completely suspended our cruise voyages, and as a result

of these unprecedented circumstances, we are not able to predict the full impact of such a suspension on our Company.

The duration of any voluntary suspensions we have implemented and the resumption of operations outside of the United States will be dependent, in part, on the severity and duration of the COVID-19 pandemic, the status of the CDC’s No Sail Order, various travel restrictions and travel bans issued by various countries around the world, as well as the availability of ports around the world.

Preparation for the Safe Resumption of Operations

Prior to the suspension of cruise voyages, we had begun developing a comprehensive and multi-faceted strategy to enhance our already rigorous health and safety protocols to address the unique public health challenges posed by COVID-19, including enhanced screenings, upgraded cleaning and disinfection protocols and plans for social distancing.

Several of these protocols were put in place prior to the voyage suspension.

In July 2020, we announced a collaboration with Royal Caribbean Group to form a group of experts called the “Healthy Sail Panel” to develop enhanced cruise health and safety standards in response to the global COVID-19 pandemic.

The panel is co-chaired by Dr.

Scott Gottlieb, former commissioner of the U.S.

Food and Drug Administration, and Governor Mike Leavitt, former Secretary of the U.S.

Department Health and Human Services.

The panel’s members are globally recognized experts from various disciplines, including public health, infectious disease, biosecurity, hospitality and maritime operations.

The panel is tasked with collaboratively developing recommendations for cruise lines to advance their public health response to COVID-19, improve safety, and achieve readiness for the safe resumption of operations.

The panel will also help the companies assure the plans they will submit to the CDC and other regulators apply the best available public health, science and engineering insights.

The Company will continue to work with the CDC and other federal agencies, public health authorities and national and local governments in areas where it operates to take all necessary measures to protect its guests, crew and the communities visited once operations resume.

Modified Policies

On or around March 6, 2020, the Company’s brands launched new cancellation policies to permit its guests to cancel cruises which are not part of the Company’s temporary suspension of voyages up to 48 hours or 15 days, depending on the brand, prior to embarkation and receive a refund in the form of a credit to be applied toward a future cruise.

These programs are currently in place for cruises booked through specific time periods specified by brand, and for cruises scheduled to embark through specified time periods, depending on the brand.

The future cruise credit is valid for any sailing through December 31, 2022, and the Company may extend this offer.

The use of such credits may prevent us from future cash collections as staterooms booked by guests with such credits will not be available for sale, resulting in less cash collected from bookings to new guests.

The Company may incur incremental commission expense for the use of these future cruise credits.

In addition, to provide more flexibility to its guests, the Company has also introduced a new final payment schedule for all 2020 voyages which requires payment 60 days prior to embarkation versus the standard 120 days.

Update on Bookings

The extended suspension of cruise voyages has significantly impacted advanced bookings for the remainder of 2020, which are meaningfully lower than the prior year and at lower prices.

Despite limited marketing efforts, there continues to be demand for future cruise vacations.

While booking volumes since the emergence of COVID-19 remain below historical levels, the Company’s overall cumulative booked position and pricing for 2021 are within historical ranges including bookings made with future cruise credits.

Our operations may be suspended beyond our announced suspensions depending on the status of the CDC No Sail Order, the development of the COVID-19 outbreak, global travel restrictions and port availability and any additional voluntary suspensions we may determine appropriate.

As a result, current booking data for 2020 may not be informative.

In addition, because of our updated cancellation policies, bookings may not be representative of actual cruise revenues.

The ongoing effects of COVID-19 on our operations and global bookings have had, and we believe they will continue to have, a significant impact on our financial results and liquidity, and such negative impact may continue well beyond the

containment of the pandemic.

Significant events affecting travel, including COVID-19, typically have an impact on the demand for cruise vacations, with the full extent of the impact generally determined by the length of time the event influences travel decisions.

Due to the unknown duration and extent of the COVID-19 pandemic, travel restrictions and advisories, the potential unavailability of ports and/or destinations, unknown cancellations and timing of redeployments and a general impact on consumer sentiment regarding cruise travel, we cannot estimate the impact on our business, financial condition or near- or longer-term financial or operational results with certainty, but we expect to report a net loss on both a GAAP and adjusted basis for the year ending December 31, 2020.

Crew Repatriation Efforts

The Company has successfully completed the safe repatriation of the majority of its shipboard team members to their homes around the globe.

The Company has worked to repatriate over 21,000 shipboard team members, to over 75 countries, through a combination of chartered and commercial air flights as well as the use of certain of the Company’s ships.

The Company expects the repatriation efforts to be largely completed within 45 days.

Financing Transactions and Cost Containment Measures

Since March 2020, we have taken several actions to bolster our financial condition while our global cruise voyages are currently suspended, including a series of debt and equity financing transactions completed in May and July 2020.

● In May 2020, NCLH and NCLC launched a series of capital markets transactions to raise approximately $2.0 billion.

As a result of significant demand, including the full exercise of options to purchase additional ordinary shares and exchangeable notes, the total amount of gross proceeds increased to approximately $2.4 billion.

● In July 2020, NCLH and NCLC launched a series of capital markets transactions to raise approximately $1.2 billion.

As a result of significant demand, including the full exercise of the option to purchase additional ordinary shares and partial exercise of the option to purchase additional exchangeable notes, the total amount of gross proceeds increased to approximately $1.5 billion.

From the proceeds, approximately $675 million was used to repay the Epic Credit Facility.

We have also undertaken several proactive cost reduction and cash conservation measures to mitigate the financial and operational impacts of COVID-19, through the reduction of capital expenditures described under “Liquidity and Capital Resources” below as well as a reduction in operating expenses, including ship operating expenses and selling, general and administrative expenses.

Cost savings initiatives to reduce selling, general and administrative expenses already implemented include the significant reduction or deferral of marketing expenditures, the implementation of a company-wide hiring freeze, the introduction of a temporary shortened work week and reduced work hours with a commensurate 20% salary reduction for shoreside team members, a pause in the Company’s 401(k) matching contributions and corporate travel freezes for shoreside employees.

Further, as part of the Company’s ongoing strategy to improve its ability to sustain the long-term health of the business and to preserve financial flexibility during the COVID-19 crisis, the Company has furloughed approximately 20% of the Company’s shoreside employees through October 25, 2020, subject to change based on business needs.

While on furlough, employees will not receive salary or hourly wages, but will continue to receive health benefit coverage if they currently participate in a Company sponsored plan.

See “—Liquidity and Capital Resources” below for more information.

Quarterly Overview

Three months ended June 30, 2020 (“2020”) compared to three months ended June 30, 2019 (“2019”)

● Total revenue decreased 99.0% to $16.9 million compared to $1.7 billion.

● Net Revenue decreased 101.7% to $(20.9) million compared to $1.3 billion.

● Net income (loss) and diluted EPS were $(715.2) million and $ (2.99), respectively, compared to $240.2 million and $1.11, respectively.

● Operating loss was $(595.4) million compared to operating income of $308.7 million.

● Adjusted Net Loss and Adjusted EPS were $(666.4) million and $ (2.78), respectively, in 2020, which included $48.8 million of adjustments primarily consisting of expenses related to non-cash compensation and losses on extinguishment and modifications of debt.

Adjusted Net Income and Adjusted EPS were $282.1 million and $1.30, respectively, in 2019, which included $41.9 million of adjustments primarily consisting of expenses related to non-cash compensation and the redeployment of Norwegian Joy.

● Adjusted EBITDA decreased 179.1% to $(393.1) million compared to $497.2 million.

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

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Three Months Ended

Six Months Ended

Passenger ticket

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Net income (loss) before income taxes

Income tax benefit

Income tax benefit (expense)

Net income (loss)

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Three Months Ended

Six Months Ended

Passengers carried

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Three Months Ended

Six Months Ended

Passenger ticket revenue

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Three Months Ended

Six Months Ended

Total cruise operating expense

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Three Months Ended

Six Months Ended

Net income (loss)

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Impairment loss (6)

Non-cash interest on beneficial conversion feature (7)

Adjusted Net Income (Loss)

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The impairments of goodwill and tradenames are included in impairment loss and the impairment of property and equipment is included in depreciation and amortization expense.

(7) Non-cash interest expense related to a beneficial conversion feature recognized on our exchangeable notes, which is recognized in interest expense, net.

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

Three Months Ended

Six Months Ended

Net income (loss)

Interest expense, net

Income tax benefit

Income tax (benefit) expense

Depreciation and amortization expense

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(5) Impairment loss consists of goodwill and tradename impairments.

Three months ended March 31, 2020 (“ 2020 ”) compared to three months ended March 31, 2019 (“ 2019 ”)

Three months ended June 30, 2020 (“2020”) compared to three months ended June 30, 2019 (“2019”)

Total revenue decreased 99.0% to $16.9 million in 2020 compared to $1.7 billion in 2019.

Net Revenue decreased 101.7% to $(20.9) million in 2020 from $1.3 billion in 2019.

In 2020, our total revenue was insignificant.

The adverse impact on revenue and Net Revenue was due to the cancellation of sailings in 2020 as a result of the COVID-19 pandemic.

All guests were disembarked from the 28 ships in the Company’s fleet by March 28, 2020.

Total cruise operating expense decreased 68.5% in 2020 compared to 2019.

In 2020, our cruise operating expenses were primarily related to the continued payment of protected commissions as additional sailings were cancelled;

crew costs, including salaries, food and other repatriation costs;

The Company has repatriated the majority of its crew.

To repatriate crew as soon as possible, the Company is leveraging certain ships in its fleet to assist with the repatriation efforts along with utilizing scheduled chartered flights.

Gross Cruise Cost decreased 63.9% in 2020 compared to 2019 primarily related to the costs described above in addition to a decrease in marketing, general and administrative expenses from cost savings initiatives in connection with the COVID-19 pandemic and as described under “Update Regarding COVID-19 Pandemic—Financing Transactions and Cost Containment Measures.” Total other operating expense decreased 21.8% in 2020 compared to 2019 primarily due to the cost savings described above in marketing, general and administrative expenses offset by an increase in depreciation and amortization expense.

Depreciation and amortization expense increased primarily due to the delivery of Norwegian Encore in the fourth quarter of 2019 and Seven Seas Splendor in the first quarter of 2020 as well as ship improvement projects.

Interest expense, net was $114.5 million in 2020 compared to $66.0 million in 2019.

The change in interest expense reflects additional debt outstanding, partially offset by lower LIBOR.

Included in 2020 were losses on extinguishment of debt and debt modification costs of $21.2 million compared to $1.2 million in 2019.

Other income (expense), net was expense of $14.4 million in 2020 compared to income of $3.6 million in 2019.

In 2020, the expense primarily related to losses on foreign currency exchange and losses on fuel hedges released into earnings as a result of the forecasted transactions no longer being probable.

In 2020, we had an income tax benefit of $9.1 million compared to expense of $6.1 million in 2019.

In 2020, the tax benefit is due to operating losses.

Six months ended June 30, 2020 (“2020”) compared to six months ended June 30, 2019 (“2019”)

Total revenue decreased 58.8% to $1.3 billion in 2020 compared to $3.1 billion in 2019.

Gross Yield increased 1.6%.

Net Revenue decreased 23.3% to $0.8 billion in 2020 from $1.1 billion in 2019 due to a decrease in Net Yield of 12.3% and a decrease in Capacity Days of 12.6%.

The increase in Gross Yield was primarily due to an increase in onboard spending.

The decrease in Net Yield was primarily due to an increase in protected commissions and credit card fees recognized in earnings as a result of cancelled sailings.

The decrease in Capacity Days was primarily due to the cancellation of sailings in 2020, partially offset by the addition of Norwegian Encore and Seven Seas Splendor to the fleet.

On a Constant Currency basis, Net Yield decreased 12.3%.

Total cruise operating expense increased 20.3% in 2020 compared to 2019 primarily due to costs associated with the suspension of cruise voyages, including the cost of the related protected commissions, a 27.2% increase in fuel expense associated with the IMO 2020 regulations and the addition of Norwegian Encore and Seven Seas Splendor to the fleet.

Gross Cruise Cost increased 17.6% in 2020 compared to 2019 primarily due to the cost described above in addition to an increase in marketing, general and administrative expenses primarily from various costs related to COVID-19.

Net Revenue decreased 65.2% to $0.8 billion in 2020 from $2.4 billion in 2019.

The adverse impact on revenue and Net Revenue was due to the cancellation of sailings in 2020 as a result of the COVID-19 pandemic, which resulted in a 55.9% decrease in Capacity Days.

All guests were disembarked from the 28 ships in the Company’s fleet by March 28, 2020.

Total cruise operating expense decreased 27.4% in 2020 compared to 2019.

In 2020, our expenses subsequent to the suspension of cruise voyages primarily includes the cost of protected commissions and crew costs as discussed above.

Additionally, during the first quarter of 2020, there was a notable increase from 2019 in fuel expense associated with the International Maritime Organization’s 2020 regulations, and cruise operating expense increased due to the addition of Norwegian Encore and Seven Seas Splendor to the fleet.

Gross Cruise Cost decreased 25.4% in 2020 compared to 2019 primarily due to the changes in cruise operating costs described above in addition to a decrease in marketing, general and administrative expenses, which is primarily due to the cost reductions in marketing and salaries described above.

Total other operating expense increased 192.6% in 2020 compared to 2019 primarily due to the impairment of goodwill and tradenames triggered by the COVID-19 pandemic.

Depreciation and amortization expense increased primarily due to the delivery of Norwegian Encore and Seven Seas Splendor and ship improvement projects.

On a Capacity Day basis, Net Cruise Cost increased 27.9% (28.2% on a Constant Currency basis) primarily due to the increases in costs described above in addition to the 12.6% reduction in Capacity Days.

Adjusted Net Cruise Cost Excluding Fuel per Capacity Day increased 25.7% (26.1% on a Constant Currency basis).

Interest expense, net was $183.4 million in 2020 compared to $139.5 million in 2019.

The change in interest expense reflects additional debt in connection with the delivery of Norwegian Encore and Seven Seas Splendor, partially offset by lower margins associated with recent refinancings prior to the draw on our revolving credit facilities and lower LIBOR.

Included in 2019 were losses on extinguishment of debt and debt modification costs of $6.1 million.

Other income (expense), net was income of $5.8 million in 2020 compared to expense of $0.4 million in 2019.

In 2020, the income primarily related to gains on foreign currency exchange offset by losses on fuel hedges released into earnings as a result of the forecasted transactions no longer being probable.

The change in interest expense reflects additional debt outstanding, partially offset by lower LIBOR.

Included in 2020 were losses on extinguishment of debt and debt modification costs of $21.2 million compared to $7.3 million in 2019.

Other income (expense), net was expense of $8.6 million in 2020 compared to income of $3.2 million in 2019.

In 2020, the expense was primarily due to losses on fuel hedges released into earnings as a result of the forecasted transactions no longer being probable offset by gains from foreign currency exchange.

In 2019, the income was primarily due to gains from insurance proceeds and a litigation settlement partially offset by foreign currency exchange losses.

In 2020, we had an income tax benefit of $15.3 million compared to $27.7 million in 2019.

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Liquidity and Capital Resources

As of March 31, 2020, our liquidity was $1.4 billion consisting of cash and cash equivalents.

Due to the continued spread of COVID-19, growing travel restrictions and limited access to ports around the world, in March 2020, the Company implemented a voluntary suspension of all cruise voyages across its three brands, which has subsequently been extended through June 30, 2020.

On March 14, 2020, concurrent with our and the broader cruise industry’s suspension, the U.S.

Centers for Disease Control and Prevention (“CDC”) issued a No Sail Order through April 13, 2020.

On April 9, 2020, the CDC modified its existing No Sail Order to extend it until the earliest of (a) the expiration of the Secretary of Health and Human Services’ declaration that COVID-19 constitutes a public health emergency, (b) the date the Director of the CDC rescinds or modifies the No Sail Order or (c) 100 days after the order appears on the Federal Register, which would be July 24, 2020.

In addition, the duration of any voluntary suspensions we have implemented and resumption of operations outside of the United States will be dependent, in part, on various travel restrictions and travel bans issued by various countries around the world, as well as the availability of ports around the world.

We believe the ongoing effects of COVID-19 on our operations and global bookings have had, and will continue to have, a significant impact on our financial results and liquidity, and such negative impact may continue well beyond the containment of such an outbreak.

In March 2020, NCLC borrowed the full amount of $1.55 billion under its $875 million Revolving Credit Facility and its $675 million revolving credit facility, dated as of March 5, 2020.

Subsequent to March 31, 2020, we have taken steps to improve our liquidity through securing deferrals of existing debt amortization, including through available export credit agencies and related governments, as discussed more fully under Note 8 – “Long-Term Debt”.

The Company has received additional financing through debt and equity transactions totaling $1.95 billion in proceeds after underwriting fees.

The Company expects to receive another $400.0 million from the transaction with L Catterton upon the satisfaction of certain customary closing conditions.

Refer to Note 15 – “Subsequent Events” for further information on the equity financing.

The Company has also undertaken several proactive measures to mitigate the financial and operational

impacts of COVID-19, through the reduction of capital expenditures and operating expenses.

After giving effect to the debt deferrals and cash conservation measures implemented, including the potential deferral of near-term newbuild related payments, the Company now estimates its liquidity requirements to be on average in the range of approximately $110 million to $150 million per month during the suspension of operations or approximately $3.9 million to $5.4 million of cash expenditures per month per ship.

This includes ongoing ship operating expenses, administrative operating costs, interest expense (based upon originally scheduled amortization as of March 31, 2020) and expected necessary capital expenditures.

The deferrals of debt and new financing transactions will result in additional cash interest expense of approximately $12 million per month over the next 12 months.

As of June 30, 2020, our liquidity was $2.3 billion consisting of cash and cash equivalents.

This does not include additional proceeds received in the July capital raise discussed below.

Since March 2020, we have taken several actions to bolster our financial condition while our global cruise voyages are suspended.

In March 2020, NCLC borrowed the full amount of $1.55 billion under its $875 million Revolving Loan Facility and its $675 million Epic Credit Facility, dated as of March 5, 2020.

We have taken additional measures to improve our liquidity by refinancing existing debt amortization, including under our agreements with export credit agencies and related governments, and extending the maturities and refinancing amortization under other agreements, which has resulted in approximately $1.6 billion of payment deferrals.

See Note 8 – “Long-Term Debt” for further information.

Through June 30, 2020, the Company received additional financing through various debt financings and an equity offering totaling $2.4 billion in gross proceeds.

The equity offering resulted in 41,818,181 shares being issued in exchange for gross proceeds of $460 million.

See Note 8 – “Long-Term Debt” for further information on the debt financings.

Subsequent to June 30, 2020, the Company received another $1.5 billion in gross proceeds from additional debt financings and an additional equity offering, of which approximately $675 million was used to repay in full and terminate the Epic Credit Facility.

Refer to Note 8 – “Long-Term Debt” for further information on the debt financings and Note 16 – “Subsequent Events” for further information on the equity financing.

The Company has also undertaken several proactive cost reduction and cash conservation measures to mitigate the financial and operational impacts of COVID-19, through the reduction of capital expenditures and operating expenses, including food, fuel, insurance, port charges and reduced crew manning of vessels during the suspension, resulting in lower crew payroll expense.

See “—Update Regarding COVID-19 Pandemic—Financing Transactions and Cost Containment Measures” above for further information.

After giving effect to the debt deferrals and cash conservation measures implemented, including the potential deferral of or loans for near-term newbuild related payments, the Company’s targeted cash burn is on average approximately $160 million per month during the suspension of operations.

This includes ongoing ship operating expenses, administrative operating costs, interest expense (including additional expense per month from the capital markets transactions completed in July 2020), taxes and expected necessary capital expenditures.

This excludes cash refunds of customer deposits, which are estimated to be, based on behavior to date, approximately 60% of the Company’s balance of advance ticket sales during the suspension of cruise voyages, as well as incoming cash from new bookings and payments on existing bookings.

There can be no assurance that the percentage of passengers that accept future cruise certificates over cash refunds will remain in this range as the number of cancelled voyages increases.

This also excludes expenses and costs associated with restarting operations and assumes deferral of newbuild capital expenditures and debt amortization through March 31, 2021.

The liquidity requirements presented are an estimate and do not include unforeseen expenses.

Based on the liquidity needs described above and our current resources, the Company has sufficient liquidity to satisfy our obligations over the next twelve months and maintain minimum levels of liquidity as required by certain of our debt agreements.

At March 31, 2020, we were in compliance with all of our debt covenants.

Subsequent to March 31, 2020, as part of the Hermes debt holiday we have obtained lender consents to waive financial covenants for the Deferral Period.

At June 30, 2020, we were in compliance with all of our debt covenants.

As part of the Hermes debt holiday and the Supplemental Agreements we have obtained lender consents to waive compliance with financial covenants for a deferral period from April 1, 2020 to March 31, 2021.

If we do not continue to remain in compliance with our covenants, we would have to seek to amend the covenants.

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In March 2020, Moody’s downgraded the long-term issuer and senior unsecured debt ratings of NCLC to Ba2 from Ba1, including its corporate family rating and senior secured bank facility, and to B1 from Ba2 on its senior unsecured rating;

In April 2020, S&P Global downgraded the issuer credit rating of NCLC to BB- from BB+.

W e believe the credit ratings assigned to NCLC’s unsecured debt securities by S&P may be downgraded from BB- to B+ in connection with our recent debt offering.

If our credit ratings were to be further downgraded, our access to, and cost of, debt financing may be further negatively impacted.

As of March 31, 2020, the company has advanced ticket sales of $1.8 billion, including the long-term portion, which includes approximately $340 million of future cruise credits.

The Company also has agreements with its credit card processors that govern approximately $1.3 billion at March 31, 2020 in advance ticket sales that have been received by the Company relating to future voyages.

and in July 2020, Moody’s placed our ratings on review for potential downgrade.

In April 2020, S&P Global downgraded the issuer credit rating of NCLC to BB- from BB+ and, in May 2020, based on our recent debt offering, lowered the issuer-level rating on NCLC’s senior unsecured notes to B+ from BB- and placed our issuer rating on credit watch with negative implications.

If our credit ratings were to be further downgraded, or general market conditions were to ascribe higher risk to our rating levels, our industry, or us, our access to capital and the cost of any debt or equity financing will be further negatively impacted.

There is no guarantee that debt or equity financings will be available in the future to fund our obligations, or that they will be available on terms consistent with our expectations.

As of June 30, 2020, the Company has advanced ticket sales of $1.2 billion, including the long-term portion, which includes approximately $0.8 billion of future cruise credits.

The Company also has agreements with its credit card processors that govern approximately $0.9 billion at June 30, 2020 in advance ticket sales that have been received by the Company relating to future voyages.

These agreements allow the credit card processors to require under certain circumstances, including the existence of a material adverse change, excessive chargebacks and other triggering events, that the Company maintain a reserve which could be satisfied by posting collateral.

The Company is in discussions regarding the nature of collateral, if any, relating to these agreements.

Currently, we have agreed to provide a reserve consisting of $70 million of cash and preliminarily agreed to provide second priority liens on certain ships with a collective equity value of approximately $700 million based on appraisals as of December 31, 2019, which could be increased or decreased based on certain conditions.

If we do not meet an agreed upon minimum liquidity in the future, we may be required to pledge additional collateral and/or post cash reserves or take other actions that may reduce our liquidity.

Collateral may be released upon satisfaction of certain financial metrics.

Sources and Uses of Cash

In this section, references to “ 2020 ” refer to the three months ended March 31, 2020 and references to “ 2019 ” refer to the three months ended March 31, 2019 .

In this section, references to “2020” refer to the six months ended June 30, 2020 and references to “2019” refer to the six months ended June 30, 2019.

Net cash used in operating activities was $1.3 billion in 2020 as compared to net cash provided by operating activities of $1.0 billion in 2019.

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Net cash used in investing activities was $0.8 billion in 2020 and $0.4 billion in 2019, primarily related to payments for Seven Seas Splendor and ship improvement projects.

Net cash provided by financing activities was $1.8 billion in 2020 primarily due to the proceeds of $2.0 billion from our revolving credit facilities and newbuild loans partially offset by debt repayments.

Net cash provided by financing activities was $4.1 billion in 2020 primarily due to the proceeds of $4.0 billion from our revolving credit facilities, various notes, and newbuild loans partially offset by debt repayments.

Additionally, we received net proceeds of $441.9 million from an equity offering.

Net cash used in financing activities was $375.6 million in 2019 primarily due to the repurchase of $200.1 million of our ordinary shares, net repayments of our Revolving Loan Facility and the net refinancing of term loans offset by the issuance of new debt.

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Future capital commitments consist of contracted commitments, including ship construction contracts, and future expected capital expenditures necessary for operations as well as our ship refurbishment projects.

As of March 31, 2020, our anticipated capital expenditures were $0.4 billion for the remainder of 2020, of which we have $0.1 billion of export credit financing in place related to ship construction contracts.

Additionally, the Company is finalizing the documentation to defer another approximately $0.1 billion of the payments related to ship construction contracts.

As of June 30, 2020,

our anticipated capital expenditures, including capitalized interest, were $263.5 million for the remainder of 2020, of which we have $47.6 million of export credit financing in place related to ship construction contracts.

Additionally, the Company is finalizing the documentation to defer another approximately $38.5 million of the 2020 contractual payments related to ship construction.

These future expected capital expenditures will increase our depreciation and amortization expense.

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Each of the Allura Class Ships will be approximately 67,000 Gross Tons and 1,200 Berths.

We expect that the effects of COVID-19 on the shipyards where our ships are under construction (or will be constructed) will result in delays in ship deliveries and such delays may be prolonged.

The impacts of COVID-19 on the shipyards where our ships are under construction (or will be constructed) have resulted in some delays in expected ship deliveries, and the impacts of COVID-19 could result in additional delays in ship deliveries in the future, which may be prolonged.

The combined contract prices of the nine ships on order for delivery was approximately €7.1 billion, or $8.0 billion based on the euro/U.S.

dollar exchange rate as of March 31, 2020.

dollar exchange rate as of June 30, 2020.

We have obtained export credit financing which is expected to fund approximately 80% of the contract price of each ship, subject to certain conditions.

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However, if any such events were to occur, it could result in, among other things, the forfeiture of prior deposits or payments made by us and potential claims and impairment losses which may materially impact our business, financial condition and results of operations.

Capitalized interest for the three months ended March 31, 2020 and 2019 was $5.7 million and $7.8 million, respectively, primarily associated with the construction of our newbuild ships.

Capitalized interest for the three months ended June 30, 2020 and 2019 was $5.6 million and $8.5 million, respectively, and for the six months ended June 30, 2020 and 2019 was $11.3 million and $16.3 million, respectively, primarily associated with the construction of our newbuild ships.

Off-Balance Sheet Arrangements

Contractual Obligations

As of March 31, 2020 our contractual obligations (prior to giving effect to the debt deferrals discussed more fully in Note 8 – “Long-Term Debt”) with initial or remaining terms in excess of one year, including interest payments on long-term debt obligations, included the following (in thousands):

As of June 30, 2020 our contractual obligations with initial or remaining terms in excess of one year, including interest payments on long-term debt obligations, included the following (in thousands):

Long-term debt (1)

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Port facilities (4)

(1) Long-term debt includes premiums aggregating $0.2 million and finance leases.

Long-term debt excludes deferred financing fees which are a direct deduction from the carrying value of the related debt liability in the consolidated balance sheets.

After giving effect to the debt deferrals discussed more fully in Note 8 – “Long-Term Debt”, which were finalized after March 31, 2020, our obligations for the payment of long-term debt are as follows (in thousands):

Long-term debt

(1) Long-term debt excludes discounts, premiums, deferred financing fees and a beneficial conversion feature, which are a direct addition or deduction from the carrying value of the related debt liability in the consolidated balance sheets.

(2) Operating leases are primarily for offices, motor vehicles and office equipment.

(3) Ship construction contracts are for our newbuild ships based on the euro/U.S.

dollar exchange rate as of March 31, 2020.

dollar exchange rate as of June 30, 2020.

Export credit financing is in place from syndicates of banks.

Approximately $0.1 billion of the ship construction contracts due in less than one year are financed under export credit financing, and the Company is finalizing the documentation to defer the remainder of the ship construction contracts that are due in less than one year to increase its near-term liquidity.

The amount does not include the two Project Leonardo ships and one Allura Class Ship which were still subject to certain Italian government approvals as of March 31, 2020.

Approximately $147.5 million of the ship construction contracts due in less than one year are financed under export credit financing, and the Company is finalizing the documentation to defer or finance approximately $83.8 million of the ship construction contracts that are due in less than one year to increase its near-term liquidity.

The amount does not include the two Project Leonardo ships and one Allura Class Ship which were still subject to certain Italian government approvals as of June 30, 2020.

(4) Port facilities represent our usage of certain port facilities.

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A portion of our port fees may be waived as a result of these provisions, including those ports that are presented within operating leases in the table above.

(5) Interest includes fixed and variable rates with LIBOR held constant as of March 31, 2020.

Due to the subsequent deferrals of scheduled amortization as more fully discussed in Note 8 – “Long-Term Debt”, interest obligations for debt outstanding as of March 31, 2020 are as follows (in thousands):

(5) Interest includes fixed and variable rates with LIBOR held constant as of June 30, 2020.

(6) Other includes future commitments for service, maintenance and other business enhancement capital expenditures contracts.

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These reasonable costs are currently being negotiated.

(7) $0.7 million of unrecognized tax benefits were excluded from the “Total” contractual obligations as of March 31, 2020 because an estimate of the timing of future tax settlements cannot be reasonably determined.

(7) $0.7 million of unrecognized tax benefits were excluded from the “Total” contractual obligations as of June 30, 2020 because an estimate of the timing of future tax settlements cannot be reasonably determined.

Certain service providers may require collateral in the normal course of our business.

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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 March 31, 2020.

We believe we were in compliance with these covenants as of June 30, 2020.

In addition, our existing debt agreements restrict, and any of our future debt arrangements may restrict, among other things, the ability of our subsidiaries, including NCLC, to make distributions and/or pay dividends to NCLH and NCLH’s ability to pay cash dividends to its shareholders.

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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 and our ability to issue debt securities or additional equity securities, will be sufficient to fund operations, debt payment requirements, capital expenditures and maintain compliance with covenants under our debt agreements over the next 12-month period.

In light of the measures described under "Update Regarding COVID-19 -- Financing Transactions and Cost Containment Measures", we believe our cash on hand, expected future operating cash inflows and our ability to issue debt securities or additional equity securities, will be sufficient to fund operations, debt payment requirements, capital expenditures and maintain compliance with covenants under our debt agreements over the next 12-month period.

There is no assurance that cash flows from operations and additional financings will be available in the future to fund our future obligations.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis