What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-11-09 compared with 2020-08-10 · 141 added, 132 removed, 378 unchanged (42% of the section changed)

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federal securities laws intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995.

All statements other than statements of historical facts contained, or incorporated by reference, in this report, including, without limitation, those regarding our business strategy, financial position, results of operations, plans, prospects, actions taken or strategies being considered with respect to our liquidity position, valuation and appraisals of our assets and objectives of management for future operations (including those regarding expected fleet additions, our voluntary suspension, our ability to weather the impacts of the COVID-19 pandemic, operational position, demand for voyages, financing opportunities and extensions, and future cost mitigation and cash conservation efforts and efforts to reduce operating expenses and capital expenditures) are forward-looking statements.

All statements other than statements of historical facts contained, or incorporated by reference, in this report, including, without limitation, those regarding our business strategy, financial position, results of operations, plans, prospects, actions taken or strategies being considered with respect to our liquidity position, valuation and appraisals of our assets and objectives of management for future operations (including those regarding expected fleet additions, our voluntary suspension, our ability to weather the impacts of the COVID-19 pandemic, our expectations regarding the resumption of cruise voyages and the timing for such resumption of cruise voyages, the implementation of and effectiveness of our health and safety protocols, operational position, demand for voyages, financing opportunities and extensions, and future cost mitigation and cash conservation efforts and efforts to reduce operating expenses and capital expenditures) are forward-looking statements.

Many, but not all, of these statements can be found by looking for words like “expect,” “anticipate,” “goal,” “project,” “plan,” “believe,” “seek,” “will,” “may,” “forecast,” “estimate,” “intend,” “future” and similar words.

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Examples of these risks, uncertainties and other factors include, but are not limited to the impact of:

● the spread of epidemics, pandemics and viral outbreaks and specifically, the COVID-19 outbreak, including its effect on the ability or desire of people to travel (including on cruises), which are expected to continue to adversely impact our results, operations, outlook, plans, goals, growth, reputation, cash flows, liquidity, demand for voyages and share price;

● our ability to develop strategies to enhance our health and safety protocols to adapt to the current pandemic environment’s unique challenges once operations resume and to otherwise safely resume our operations when conditions allow;

● the spread of epidemics, pandemics and viral outbreaks and specifically, the COVID-19 pandemic, including its effect on the ability or desire of people to travel (including on cruises), which are expected to continue to adversely impact our results, operations, outlook, plans, goals, growth, reputation, cash flows, liquidity, demand for voyages and share price;

● our ability to comply with the CDC’s Framework for Conditional Sailing Order and to otherwise develop enhanced health and safety protocols to adapt to the current pandemic environment’s unique challenges once operations resume and to otherwise safely resume our operations when conditions allow;

● coordination and cooperation with the CDC, the federal government and global public health authorities to take precautions to protect the health, safety and security of guests, crew and the communities visited and the implementation of any such precautions;

● our ability to work with lenders and others or otherwise pursue options to defer, renegotiate or refinance our existing debt profile, near-term debt amortization, newbuild related payments and other obligations and to work with credit card processors to satisfy current or potential future demands for collateral on cash advanced from customers relating to future cruises;

● our potential future need for additional financing, which may not be available on favorable terms, or at all, and may be dilutive to existing shareholders;

● our indebtedness and restrictions in the agreements governing our indebtedness that require us to maintain minimum levels of liquidity and otherwise limit our flexibility in operating our business, including the significant portion of assets that are collateral under these agreements;

● the accuracy of any appraisals of our assets as a result of the impact of COVID-19 or otherwise;

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● future increases in the price of, or major changes or reduction in, commercial airline services;

● our ability to work with lenders and others or otherwise pursue options to defer or refinance our existing debt profile, near-term debt amortization, newbuild related payments and other obligations and to work with credit card processors to satisfy current or potential future demands for collateral on cash advanced from customers relating to future cruises;

● adverse events impacting the security of travel, such as terrorist acts, armed conflict and threats thereof, acts of piracy, and other international events;

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● adverse general economic and related factors, such as fluctuating or increasing levels of unemployment, underemployment and the volatility of fuel prices, declines in the securities and real estate markets, and perceptions of these conditions that decrease the level of disposable income of consumers or consumer confidence;

● our potential future need for additional financing, which may not be available on favorable terms, or at all, and may be dilutive to existing shareholders;

● any further impairment of our trademarks, trade names or goodwill;

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● our inability to obtain adequate insurance coverage;

● pending or threatened litigation, investigations and enforcement actions;

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We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statement to reflect any change in our expectations with regard thereto or any change of events, conditions or circumstances on which any such statement was based, except as required by law.

This report includes certain non-GAAP financial measures, such as Net Revenue, Net Yield, Net Cruise Cost, Adjusted Net Cruise Cost Excluding Fuel, Adjusted EBITDA, Adjusted Net Income and Adjusted EPS.

This report includes certain non-GAAP financial measures, such as Net Cruise Cost, Adjusted Net Cruise Cost Excluding Fuel, Adjusted EBITDA, Adjusted Net Income and Adjusted EPS.

Definitions of these non- GAAP financial measures are included below.

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

● Gross Yield.

Total revenue per Capacity Day.

● Net Cruise Cost.

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Net Cruise Cost less fuel expense.

● Net Revenue.

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

Net Revenue per Capacity Day.

● Occupancy Percentage .

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Non-GAAP Financial Measures

We use certain non-GAAP financial measures, such as Net Revenue, Net Yield, Net Cruise Cost, Adjusted Net Cruise Cost Excluding Fuel, Adjusted EBITDA, Adjusted Net Income and Adjusted EPS, to enable us to analyze our performance.

We use certain non-GAAP financial measures, such as Net Cruise Cost, Adjusted Net Cruise Cost Excluding Fuel, Adjusted EBITDA, Adjusted Net Income and Adjusted EPS, to enable us to analyze our performance.

See “Terminology” for the definitions of these and other non-GAAP financial measures.

We utilize Net Revenue and Net Yield to manage our business on a day-to-day basis and believe that they are the most relevant measures of our revenue performance because they reflect the revenue earned by us net of significant variable costs.

We utilize Net Cruise Cost and Adjusted Net Cruise Cost Excluding Fuel to manage our business on a day-to-day basis.

In measuring our ability to control costs in a manner that positively impacts net income, 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 a result of our voluntary suspension of sailings during the second and third quarters of 2020, we did not have any Capacity Days.

Accordingly, we have not presented herein per Capacity Day data for the three or nine months ended September 30, 2020.

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

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dollars using currency exchange rates of the comparable period.

We believe that presenting these non-GAAP measures on both a reported and Constant Currency basis is useful in providing a more comprehensive view of trends in our business.

We believe that presenting these non-GAAP measures

on both a reported and Constant Currency basis is useful in providing a more comprehensive view of trends in our business.

We believe that Adjusted EBITDA is appropriate as a supplemental financial measure as it is used by management to assess operating performance.

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

For example, for the nine months ended September 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.

however, our cruise voyages were completely suspended during the summer months of 2020 due to 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.

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 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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Our estimate of fair value is generally measured by discounting expected future cash flows at discount rates commensurate with the associated risk.

We evaluate goodwill and tradenames for impairment annually or more frequently when an event occurs or circumstances change that indicates the carrying value of a reporting unit may not be recoverable.

We evaluate goodwill and trade names for impairment annually or more frequently when an event occurs or circumstances change that indicates the carrying value of a reporting unit may not be recoverable.

For our evaluation of goodwill, we use the Step 0 Test which allows us to first assess qualitative factors to determine whether it is more likely than not (i.e., more than 50%) that the fair value of a reporting unit is less than its carrying value.

For tradenames we also provide a qualitative assessment to determine if there is any indication of impairment.

For trade names we also provide a qualitative assessment to determine if there is any indication of impairment.

In order to make this evaluation, we consider whether any of the following factors or conditions exist:

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We believe that this approach is the most representative method to assess fair value as it utilizes expectations of long-term growth as well as current market conditions.

For the tradenames, we use the relief from royalty method, which uses the same forecasts and discount rates from the discounted cash flow valuation in the goodwill assessment along with a tradename royalty rate assumption.

For the trade names, we use the relief from royalty method, which uses the same forecasts and discount rates from the discounted cash flow valuation in the goodwill assessment along with a trade name royalty rate assumption.

We have concluded that our business has three reporting units.

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

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

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

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.

As of September 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 trade names during the nine months ended September 30, 2020 in an aggregate amount of $317.0 million, with $500.5 million remaining as of September 30, 2020.

We believe that we have made reasonable estimates and judgments.

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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.

Additionally, Regent has suspended its 2021 World Cruise along with voyages departing through April 2021 on one ship and voyages in Australia through February 2021, Oceania Cruises has cancelled its World Cruise through May 18, 2021 and voyages in Australia through February 2021, and Norwegian has cancelled all voyages aboard three of its ships through March 30, 2021.

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.

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 both inside and outside of the United States will be dependent, in part, on our ability to comply with the Conditional Order, the severity and duration of the COVID-19 pandemic, the lifting of various travel restrictions and travel bans issued by various countries and communities around the world, as well as the availability of ports.

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.

We have developed a comprehensive and multi-faceted health and safety strategy to enhance our already rigorous protocols and address the unique public health challenges posed by COVID-19.

In July 2020, we announced a collaboration with Royal Caribbean Group to form a group of experts called the “Healthy Sail Panel” to guide the industry in the development of new and enhanced cruise health and safety standards.

The panel is co-chaired by Dr.

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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.

Department Health and Human Services, and consists of globally recognized experts from various disciplines, including public health, infectious disease, biosecurity, hospitality and maritime operations.

On September 21, 2020, the expert panel published a report, which includes 74 detailed best practices across five key areas of focus to protect the public health and safety of guests, crew and the communities where cruise ships visit.

The panel also submitted its recommendations to the CDC, in response to a CDC request for public comment to inform future public health guidance and preventative measures relating to travel on cruise ships.

The panel’s recommendations are informing new detailed health and safety protocols for our return-to-service plan.

On October 30, 2020, the CDC issued a Conditional Order that introduces a phased approach for the resumption of passenger cruises.

These phases include:

a) the establishment of laboratory testing of crew onboard cruise ships in U.S.

b) simulated voyages designed to test a cruise ship operator’s ability to mitigate COVID-19 on cruise ships;

c) a certification process;

and d) a return to passenger voyages in a manner that mitigates the risk of COVID-19 introduction, transmission or spread among passenger and crew onboard ships and ashore to communities.

The Conditional Order replaces the CDC’s No Sail Order that expired on October 31, 2020 and will remain in effect until the earlier of a) the expiration of the Secretary of Health and Human Services’ declaration that COVID-19 constitutes a public health emergency, b) the CDC Director rescinds or modifies the Conditional Order based on specific public health or other considerations, or c) November 1, 2021.

While the Conditional Order is an important step on the path to the safer and healthier resumption of cruising in the U.S., many uncertainties remain as to the specifics and timing of implementation, administration and costs of the requirements of the Conditional Order, some of which may be significant.

Additionally, pursuant to the Conditional Order, the CDC may issue additional requirements through technical instructions or orders as needed and the phases described above may be subject to change based on public health considerations, including the trajectory of the pandemic and the ability of cruise ship operators to successfully employ measures that mitigate the risk of COVID-19.

We are currently reviewing the requirements of the Conditional Order, and we will also continue to work with the CDC, the White House Coronavirus Task Force, and other federal agencies, public health authorities and national and local governments in areas where we operate to take all necessary measures to protect our guests, crew and the communities visited once operations resume.

We have begun the planning process to implement some of these recommendations, including purchasing related equipment and supplies.

We expect a gradual phased relaunch of our ships after the voyage suspension period, with our ships initially operating at reduced occupancy levels.

The timing for bringing our ships back to service and percentage of fleet in service will depend on a number of factors including, but not limited to, the duration and extent of the COVID-19 pandemic, including further resurgences of COVID-19, our ability to comply with the Conditional Order, port availability, travel restrictions and advisories and our ability to re-staff our ships and implement new health and safety protocols.

Modified Policies

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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.

In addition, to provide more flexibility to its guests, the Company has also extended its modified final payment schedule for all voyages through April 30, 2021 which requires payment 60 days prior to embarkation versus the standard 120 days.

As a result of the change to our final payment schedule, the Norwegian Cruise Line brand now expects to provide cash refunds for sailings we cancel.

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.

While booking volumes since the emergence of the COVID-19 global pandemic have remained below historical levels, there continues to be demand for future cruise vacations, particularly beginning for sailings operating in the second half of 2021 and beyond, despite limited marketing efforts.

Our overall cumulative booked position for the first half of 2021 remains below historical ranges as expected due to the current uncertain environment, however, for the second half of 2021 it is in line with historical ranges.

Pricing for full year 2021 is in line with pre-pandemic levels, even after including the dilutive impact of future cruise credits.

Our operations may be suspended beyond our announced suspensions and as a result, current booking data may not be informative.

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

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.

Due to the unknown duration and extent of the COVID-19 pandemic, travel restrictions and advisories, uncertainties around our ability to comply with the Conditional Order, the potential unavailability of ports and/or destinations, unknown cancellations and timing of redeployments and a general impact on consumer sentiment regarding cruise travel, there are remaining uncertainties about when our full fleet will be back in service at historical occupancy levels and, accordingly, we cannot estimate the impact on our business, financial condition or near- or longer-term financial or operational results with certainty;

however, we will report a net loss on both a GAAP and adjusted basis for the year ending December 31, 2020.

Crew Repatriation

We have successfully completed the safe repatriation of the vast majority of our shipboard team members to their homes around the globe.

We have repatriated shipboard team members, to over 120 countries, through a combination of chartered and commercial air flights as well as the use of certain of our ships.

We expect to re-staff a limited number of our ships in the near future as we prepare to resume cruise operations.

Financing Transactions and Cost Containment Measures

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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.

From the proceeds, approximately $675 million was used to repay the Epic Credit Facility, which was terminated in July 2020.

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.

Cost savings initiatives to reduce selling, general and administrative expenses already

implemented include the significant reduction or deferral of marketing expenditures, the implementation of hiring freezes, a 20% salary or hours 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 certain shoreside employees through at least November 9, 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.

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Quarterly Overview

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

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

● Total revenue decreased 99.7% to $6.5 million compared to $1.9 billion.

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

● Net income (loss) and diluted EPS were $(677.4) million and $(2.50), respectively, compared to $450.6 million and $2.09, respectively.

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● Adjusted Net Loss and Adjusted EPS were $(638.7) million and $(2.35), respectively, in 2020, which included $38.6 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 Net Income and Adjusted EPS were $481.5 million and $2.23, respectively, in 2019, which included $30.9 million of adjustments primarily consisting of expenses related to non-cash compensation.

● Adjusted EBITDA decreased 145.2% to $(313.8) million compared to $693.9 million.

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

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

Results of Operations

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Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Passenger ticket

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Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Passengers carried

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Occupancy Percentage

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

Three Months Ended

Six Months Ended

Passenger ticket revenue

Onboard and other revenue

Total revenue

Commissions, transportation and other expense

Onboard and other expense

Capacity Days

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

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Total cruise operating expense

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Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Net income (loss)

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and the closing of the Shanghai office, which are included in other cruise operating expense, marketing, general and administrative expense and depreciation and amortization expense.

(6) Impairment loss consists of goodwill, tradename and property and equipment impairments.

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.

(6) Impairment loss consists of goodwill, trade name and property and equipment impairments.

The impairments of goodwill and trade names 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.

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Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Net income (loss)

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and the closing of the Shanghai office, which are included in other cruise operating expense and marketing, general and administrative expense.

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

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

(5) Impairment loss consists of goodwill and trade name impairments.

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

Total revenue decreased 99.7% to $6.5 million in 2020 compared to $1.9 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.

The adverse impact on 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 80.8% 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.

In 2020, our cruise operating expenses were primarily related to crew costs, including salaries, food and other repatriation costs;

and other ongoing costs such as insurance and ship maintenance.

The Company has repatriated the vast majority of its crew.

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

Gross Cruise Cost decreased 72.2% 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 18.8% 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.

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Interest expense, net was $139.7 million in 2020 compared to $60.2 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.

The change in interest expense is driven by additional debt outstanding at higher interest rates, partially offset by lower LIBOR.

Included in 2020 were losses on extinguishment of debt and debt modification costs of $6.6 million.

Other income (expense), net was expense of $23.7 million in 2020 compared to income of $10.3 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, the expense primarily related to losses on foreign currency exchange and losses on fuel hedges recognized in earnings as a result of the forecasted transactions no longer being probable.

In 2019, the income was primarily related to gains on foreign currency exchange.

In 2020, we had an income tax benefit of $3.8 million compared to expense of $11.2 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”)

Nine months ended September 30, 2020 (“2020”) compared to nine months ended September 30, 2019 (“2019”)

Total revenue decreased 74.5% to $1.3 billion in 2020 compared to $5.0 billion in 2019.

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.

The adverse impact on revenue was due to the cancellation of sailings in 2020 as a result of the COVID-19 pandemic, which resulted in a 71.0% decrease in Capacity Days.

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

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Gross Cruise Cost decreased 41.9% 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.

Total other operating expense increased 121.8% in 2020 compared to 2019 primarily due to the impairment of goodwill and trade names triggered by the COVID-19 pandemic.

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 $323.1 million in 2020 compared to $199.7 million in 2019.

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

The change in interest expense is driven by additional debt outstanding at higher interest rates, partially offset by lower LIBOR.

Included in 2020 were losses on extinguishment of debt and debt modification costs of $27.8 million compared to $7.3 million in 2019.

Other income (expense), net was expense of $32.3 million in 2020 compared to income of $13.4 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, the expense was primarily due to losses on fuel hedges recognized in earnings as a result of the forecasted transactions no longer being probable and losses from foreign currency exchange.

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

In 2020, we had an income tax benefit of $19.1 million compared to $16.5 million in 2019.

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Liquidity and Capital Resources

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.

As of September 30, 2020, our liquidity was $2.4 billion consisting of cash and cash equivalents.

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.

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.

Through September 30, 2020, the Company received additional financing through various debt financings and equity offerings in May and July 2020 totaling $3.9 billion in gross proceeds.

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 equity offerings resulted in 60,984,848 shares being issued in exchange for gross proceeds of $747.5 million.

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.

After giving effect to the debt deferrals and cash conservation measures implemented, including the loans for and deferral of near-term newbuild related payments, the Company’s monthly average cash burn rate for the third quarter 2020 was approximately $150 million.

For comparative purposes, assuming vessels remain at minimum manning status, fourth quarter 2020 average cash burn rate would be higher at approximately $175 million per month, primarily driven by the timing of interest expense.

For the second half of 2020, this would result in an average monthly cash burn rate of approximately $160 million, in line with the Company’s previously disclosed target rate during voyage suspensions.

This cash burn rate and estimate includes ongoing ship operating expenses, administrative operating expenses, interest expense, taxes and expected capital expenditures and excludes cash refunds of customer deposits as well as cash inflows from new and existing bookings, other working capital changes, voyage resumption preparation costs and unforeseen expenses.

This cash burn rate and estimate also reflects the deferral of debt amortization and newbuild related payments through March 31, 2021.

Due to the fluidity of the voyage resumption schedule and associated expenses, the Company estimates its actual cash burn rate for the fourth quarter 2020 will be higher than the comparative number referenced above.

Average monthly cash burn is expected to increase as vessels are prepared to return to service due to additional costs associated with re-staffing, re-positioning and provisioning of vessels, implementation of new health and safety protocols and a disciplined ramp-up of demand-generating marketing investments.

There can be no assurance that the accuracy of the assumptions used to estimate our liquidity requirements will be correct, and our ability to be predictive is uncertain due to the unknown magnitude and duration of the COVID-19 pandemic.

The liquidity analysis reflects management’s principal assumptions related to (i) the Company’s ability to operate and redeployment of the fleet not currently in service, (ii) forecasted cash collections for future voyages and (iii) forecasted liquidity requirements for ongoing operations.

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

At September 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.

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Generally, if an event of default under any debt agreement occurs, then pursuant to cross default and/or cross acceleration clauses, substantially all of our outstanding debt and derivative contract payables could become due, and all debt and derivative contracts could be terminated, which could have a material adverse impact to our operations and liquidity.

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;

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.

Since March 2020, Moody’s has downgraded the long-term issuer rating of NCLC to B2, its senior secured rating to B1 and its senior unsecured rating to Caa1.

Since April 2020, S&P Global has downgraded the issuer credit rating of NCLC to B+, lowered its issuer-level rating on NCLC’s $875 million senior secured revolving loan facility and $1.5 billion term loan A to BB, its issuer-level rating on NCLC’s $675 million senior secured notes due 2024 and $750 million senior secured notes due 2026 to BB- and its senior unsecured rating to B.

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

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.

There is no guarantee that debt

or equity financings will be available in the future to fund our obligations, or that they will be available on terms consistent with our expectations.

As of September 30, 2020, the Company has advance ticket sales of $1.2 billion, including the long-term portion, which includes approximately $0.85 billion of future cruise credits.

The Company also has agreements with its credit card processors that govern approximately $1.0 billion at September 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.

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.

Currently, we have had approximately $40 million of advanced ticket deposits withheld to satisfy these requirements and have provided a reserve consisting of $70 million of cash.

We have also discussed providing second priority liens on certain ships with a collective equity value of approximately $700 million based on appraisals as of December 31, 2019.

Until these discussions are finalized, a significant portion of incoming advance ticket deposits are being withheld and will be released upon satisfactory perfection of the liens.

These discussions are ongoing, and any cash reserve or collateral requested could be increased or decreased.

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

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

Net cash used in operating activities was $1.9 billion in 2020 as compared to net cash provided by operating activities of $1.4 billion in 2019.

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Net cash provided by financing activities was $4.9 billion in 2020 primarily due to the proceeds of $5.2 billion from our revolving credit facilities, various notes, and newbuild loans partially offset by debt repayments.

Additionally, we received 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.

Additionally, we received net proceeds of $719.1 million from equity offerings.

Net cash used in financing activities was $592.4 million in 2019 primarily due to the repurchase of $349.9 million of our ordinary shares, net repayments of our Revolving Loan Facility and the net refinancing of term loans partially offset by the issuance of new debt.

Future Capital Commitments

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 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.

Project Leonardo will introduce an additional six ships, each approximately 140,000 Gross Tons with approximately 3,300 Berths, with expected delivery dates from 2022 through 2027, subject to certain conditions.

Our anticipated capital expenditures, including capitalized interest and additional health and safety investments, are approximately $150 million for the remainder of 2020.

Future expected capital expenditures will increase our depreciation and amortization expense.

Project Leonardo will introduce an additional six ships, each ranging from approximately 140,000 to 156,300 Gross Tons with approximately 3,300 to 3,550 Berths, with expected delivery dates from 2022 through 2027.

For the Regent brand, we have an order for one Explorer Class Ship to be delivered in 2023, which will be approximately 55,000 Gross Tons and 750 Berths.

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The combined contract prices of the nine ships on order for delivery was approximately €7.1 billion, or $8.3 billion based on the euro/U.S.

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.

dollar exchange rate as of September 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.

We do not anticipate any contractual breaches or cancellations to occur.

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

Capitalized interest for the three months ended 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.

Capitalized interest for the three months ended September 30, 2020 and 2019 was $6.8 million and $8.9 million, respectively, and for the nine months ended September 30, 2020 and 2019 was $18.1 million and $25.3 million, respectively, primarily associated with the construction of our newbuild ships.

Off-Balance Sheet Arrangements

Contractual Obligations

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):

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

dollar exchange rate as of June 30, 2020.

dollar exchange rate as of September 30, 2020.

Export credit financing is in place from syndicates of banks.

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.

Approximately $232.8 million of the ship construction contracts due in less than one year are financed under export credit financing.

The amount includes the two Project Leonardo ships and one Allura Class Ship which became effective.

(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 June 30, 2020.

(5) Interest includes fixed and variable rates with LIBOR held constant as of September 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 June 30, 2020 because an estimate of the timing of future tax settlements cannot be reasonably determined.

(7) $1.1 million of unrecognized tax benefits were excluded from the “Total” contractual obligations as of September 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 June 30, 2020.

We believe we were in compliance with these covenants as of September 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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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