Item 9A. Controls and Procedures
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management has evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures, as such term is defined in Exchange Act Rule 13a-15(e), as of December 31, 2020. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon management’s evaluation, our Chief Executive Officer and Chief Financial Officer
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concluded that our disclosure controls and procedures were effective as of December 31, 2020, to provide reasonable assurance that the information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that it is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO Framework”). Based on this evaluation under the COSO Framework, management concluded that our internal control over financial reporting was effective as of December 31, 2020.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2020 has been audited by PricewaterhouseCoopers LLP, the independent registered public accounting firm that audited the financial statements included in this Annual Report on Form 10-K, as stated in their report, which is included on page F-1.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting during the quarter ended December 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on the Effectiveness of Controls
It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system will be met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there is only the reasonable assurance that our controls will succeed in achieving their goals under all potential future conditions.
Item 9B. Other Information
None.
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PART III
Item 10. Directors, Executive Officers and Corporate Governance
Except for information concerning executive officers (called for by Item 401(b) of Regulation S-K), which is included in Part I of this Annual Report and except as disclosed below with respect to our Code of Ethical Business Conduct, the information required under Item 10 is incorporated herein by reference to our definitive proxy statement to be filed with the SEC within 120 days after the end of our fiscal year ended December 31, 2020 in connection with our 2021 Annual General Meeting of Shareholders.
Code of Ethical Business Conduct
We have adopted a Code of Ethical Business Conduct that applies to all of our employees, including our principal executive officer, principal financial officer, principal accounting officer or controller and persons performing similar functions, and our directors. This document is posted on our website at www.nclhltdinvestor.com . We intend to disclose waivers from, and amendments to, our Code of Ethical Business Conduct that apply to our directors and executive officers, including our principal executive officer, principal financial officer, principal accounting officers or controller and persons performing similar functions, by posting such information on our website www.nclhltdinvestor.com to the extent required by applicable rules of the SEC and the NYSE. None of the websites referenced in this Annual Report or the information contained therein is incorporated herein by reference.
Item 11. Executive Compensation
The information required under Item 11 is incorporated herein by reference to our definitive proxy statement to be filed with the SEC within 120 days after the end of our fiscal year ended December 31, 2020 in connection with our 2021 Annual General Meeting of Shareholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required under Item 12 is incorporated herein by reference to our definitive proxy statement to be filed with the SEC within 120 days after the end of our fiscal year ended December 31, 2020 in connection with our 2021 Annual General Meeting of Shareholders.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required under Item 13 is incorporated herein by reference to our definitive proxy statement to be filed with the SEC within 120 days after the end of our fiscal year ended December 31, 2020 in connection with our 2021 Annual General Meeting of Shareholders.
Item 14. Principal Accounting Fees and Services
The information required under Item 14 is incorporated herein by reference to our definitive proxy statement to be filed with the SEC within 120 days after the end of our fiscal year ended December 31, 2020 in connection with our 2021 Annual General Meeting of Shareholders.
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PART IV
Item 15. Exhibits, Financial Statement Schedules
(1) Financial Statements
Our Consolidated Financial Statements have been prepared in accordance with Item 8. Financial Statements and Supplementary Data and are included beginning on page F-1 of this report.
(2) Financial Statement Schedules
Schedule II: Valuation and Qualifying Accounts for the three years ended December 31, 2020 are included on page 79.
(3) Exhibits
The exhibits listed below are filed or incorporated by reference as part of this annual report on Form 10-K.
INDEX TO EXHIBITS
Exhibit
Number
Description of Exhibit
3.1
Memorandum of Association of Norwegian Cruise Line Holdings Ltd. (incorporated herein by reference to Exhibit 3.1 to amendment no. 5 to Norwegian Cruise Line Holdings Ltd.’s registration statement on Form S-1 filed on January 8, 2013 (File No. 333-175579))
3.2
Amended and Restated Bye-Laws of Norwegian Cruise Line Holdings Ltd., effective as of June 13, 2019 (incorporated herein by reference to Exhibit 3.2 to Norwegian Cruise Line Holdings Ltd.’s Form 8-K filed on June 14, 2019 (File No. 001-35784))
4.1
Indenture, dated as of December 16, 2019, between NCL Corporation Ltd. and U.S. Bank National Association, as trustee, with respect to $565.0 million aggregate principal amount of 3.625% senior unsecured notes due 2024 (incorporated herein by reference to Exhibit 4.1 to Norwegian Cruise Line Holdings Ltd.’s Form 8-K filed on December 16, 2019 (File No. 001-35784))
4.2
Indenture, dated May 8, 2020, by and among NCL Corporation Ltd., as issuer, Norwegian Cruise Line Holdings Ltd., as guarantor, and U.S. Bank National Association, as trustee (incorporated herein by reference to Exhibit 4.1 to Norwegian Cruise Line Holdings Ltd.’s Form 8-K filed on May 11, 2020 (File No. 001-35784))
4.3
Indenture, dated May 14, 2020, by and among NCL Corporation Ltd., as issuer, the guarantors party thereto and U.S. Bank National Association, as trustee, principal paying agent, transfer agent, registrar and security agent (incorporated herein by reference to Exhibit 4.1 to Norwegian Cruise Line Holdings Ltd.’s Form 8-K filed on May 15, 2020 (File No. 001-35784))
4.4
Indenture, dated May 28, 2020, by and among NCL Corporation Ltd., as issuer, Norwegian Cruise Line Holdings Ltd., as guarantor, and U.S. Bank National Association, as trustee (incorporated herein by reference to Exhibit 4.1 to Norwegian Cruise Line Holdings Ltd.’s Form 8-K filed on May 28, 2020 (File No. 001-35784))
4.5
Indenture, dated July 21, 2020, by and among NCL Corporation Ltd., as issuer, Norwegian Cruise Line Holdings Ltd., as guarantor, and U.S. Bank National Association, as trustee (incorporated herein by reference to Exhibit 4.1 to Norwegian Cruise Line Holdings Ltd.’s Form 8-K filed on July 21, 2020 (File No. 001-35784))
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4.6
Indenture, dated July 21, 2020, by and among NCL Corporation Ltd., as issuer, the guarantors party thereto and U.S. Bank National Association, as trustee, principal paying agent, transfer agent, registrar and security agent (incorporated herein by reference to Exhibit 4.2 to Norwegian Cruise Line Holdings Ltd.’s Form 8-K filed on July 21, 2020 (File No. 001-35784))
4.7
Indenture, dated December 18, 2020, by and among NCL Corporation Ltd., as issuer, the guarantors named therein and U.S. Bank National Association, as trustee, principal paying agent, transfer agent and registrar (incorporated herein by reference to Exhibit 4.1 to Norwegian Cruise Line Holdings Ltd.’s Form 8-K filed on December 18, 2020 (File No. 001-35784))
4.8
Form of Certificate of Ordinary Shares (incorporated herein by reference to Exhibit 4.7 to amendment no. 5 to Norwegian Cruise Line Holdings Ltd.’s registration statement on Form S-1 filed on January 8, 2013 (File No. 333-175579))
4.9**
Description of Securities of Norwegian Cruise Line Holdings Ltd.
9.1
Deed of Trust, dated January 24, 2013, by and between Norwegian Cruise Line Holdings Ltd. and State House Trust Company Limited (incorporated herein by reference to Exhibit 9.1 to Norwegian Cruise Line Holdings Ltd.’s Form 8-K filed on January 30, 2013 (File No. 001-35784))
10.1
Third Amendment Agreement, dated February 18, 2021, to Breakaway One Credit Agreement, dated November 18, 2010, by and among Breakaway One, Ltd., as borrower, NCL Corporation Ltd., as guarantor, NCL International, Ltd., as shareholder, the lenders party thereto, KfW IPEX-Bank GmbH, as facility agent, collateral agent and CIRR agent, Nordea Bank Abp, filial i Norge, as documentation agent, Commerzbank Aktiengesellschaft, as Hermes agent, and the other parties thereto (incorporated herein by reference to Exhibit 10.16 to Norwegian Cruise Line Holdings Ltd.’s Form 8-K filed on February 23, 2021 (File No. 001-35784))#†
10.2
Fourth Amendment Agreement, dated February 18, 2021, to Breakaway Two Credit Agreement, dated November 18, 2010, by and among Breakaway Two, Ltd., as borrower, NCL Corporation Ltd., as guarantor, NCL International, Ltd., as shareholder, the lenders party thereto, KfW IPEX-Bank GmbH, as facility agent, collateral agent and CIRR agent, Nordea Bank Abp, filial i Norge, as documentation agent, Commerzbank Aktiengesellschaft, as Hermes agent, and the other parties thereto (incorporated herein by reference to Exhibit 10.17 to Norwegian Cruise Line Holdings Ltd.’s Form 8-K filed on February 23, 2021 (File No. 001-35784))#†
10.3
Second Supplemental Agreement, dated February 18, 2021, to Breakaway Three Credit Agreement, dated October 12, 2012, by and among Breakaway Three, Ltd., as borrower, NCL Corporation Ltd., as guarantor, NCL International, Ltd., as shareholder, the lenders thereto and KfW IPEX-Bank GmbH, as facility agent, Hermes agent, bookrunner, initial mandated lead arranger, collateral agent and CIRR agent (incorporated herein by reference to Exhibit 10.18 to Norwegian Cruise Line Holdings Ltd.’s Form 8-K filed on February 23, 2021 (File No. 001-35784))#†
10.4
Third Supplemental Agreement, dated February 18, 2021, to Breakaway Four Credit Agreement, dated October 12, 2012, by and among Breakaway Four, Ltd., as borrower, NCL Corporation Ltd., as guarantor, NCL International, Ltd., as shareholder, the lenders therein defined and KfW IPEX-Bank GmbH, as facility agent, Hermes agent, bookrunner, initial mandated lead arranger, collateral agent and CIRR agent (incorporated herein by reference to Exhibit 10.19 to Norwegian Cruise Line Holdings Ltd.’s Form 8-K filed on February 23, 2021 (File No. 001-35784))#†
10.5
Fifth Amended and Restated Credit Agreement, dated May 8, 2020, by and among NCL Corporation Ltd., as borrower, Voyager Vessel Company, LLC, as co-borrower, the subsidiary guarantors party thereto, the lenders party thereto, JPMorgan Chase Bank, N.A., as administrative agent and collateral agent, and the joint book runners and arrangers and co-documentation agents named thereto (incorporated herein by
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reference to Exhibit 10.2 to Norwegian Cruise Line Holdings Ltd.’s Form 8-K filed on May 11, 2020 (File No. 001-35784))#
10.6
Amendment Agreement, dated January 29, 2021, by and among NCL Corporation Ltd., as borrower, Voyager Vessel Company, LLC, as co-borrower, the subsidiary guarantors party thereto, the lenders party thereto, JPMorgan Chase Bank, N.A., as administrative agent and collateral agent, and the joint book runners and arrangers and co-documentation agents named therein, which amends the Fifth Amended and Restated Credit Agreement, dated May 8, 2020 (incorporated herein by reference to Exhibit 10.3 to Norwegian Cruise Line Holdings Ltd.’s Form 8-K filed on February 4, 2021 (File No. 001-35784))#
10.7
Third Supplemental Agreement, dated February 18, 2021, to Seahawk One Credit Agreement, dated July 14, 2014, by and among Seahawk One, Ltd., as borrower, NCL Corporation Ltd., as guarantor, NCL International, Ltd., as shareholder, the lenders party thereto and KfW IPEX-Bank GmbH, as facility agent, Hermes agent, bookrunner, initial mandated lead arranger, collateral agent and CIRR Agent (incorporated herein by reference to Exhibit 10.14 to Norwegian Cruise Line Holdings Ltd.’s Form 8-K filed on February 23, 2021 (File No. 001-35784))#†
10.8
Fourth Supplemental Agreement, dated February 18, 2021, to Seahawk Two Credit Agreement, dated July 14, 2014, by and among Seahawk Two, Ltd., as borrower, NCL Corporation Ltd., as guarantor, NCL International, Ltd., as shareholder, the lenders party thereto and KfW IPEX-Bank GmbH, as facility agent, Hermes agent, bookrunner, initial mandated lead arranger, collateral agent and CIRR Agent (incorporated herein by reference to Exhibit 10.15 to Norwegian Cruise Line Holdings Ltd.’s Form 8-K filed on February 23, 2021 (File No. 001-35784))#†
10.9
Amendment and Restatement Agreement, dated as of February 17, 2021, among Riviera New Build, LLC, as borrower, NCL Corporation Ltd., as guarantor, Oceania Cruises S. de R.L., as charterer and shareholder, Norwegian Cruise Line Holdings Ltd., the lenders party thereto, Crédit Agricole Corporate and Investment Bank and Société Générale, as mandated lead arrangers, and the other parties thereto, which amends and restates the Loan Agreement, originally dated as of July 18, 2008 (incorporated herein by reference to Exhibit 10.3 to Norwegian Cruise Line Holdings Ltd.’s Form 8-K filed on February 23, 2021 (File No. 001-35784))#†
10.10
Amendment and Restatement Agreement, dated as of February 17, 2021, among Marina New Build, LLC, as borrower, NCL Corporation Ltd., as guarantor, Oceania Cruises S. de R.L., as charterer and shareholder, Norwegian Cruise Line Holdings Ltd., the lenders party thereto, Crédit Agricole Corporate and Investment Bank and Société Générale, as mandated lead arrangers, and the other parties thereto, which amends and restates the Loan Agreement, originally dated as of July 18, 2008 (incorporated herein by reference to Exhibit 10.4 to Norwegian Cruise Line Holdings Ltd.’s Form 8-K filed on February 23, 2021 (File No. 001-35784))#†
10.11
Amendment and Restatement Agreement, dated as of February 17, 2021, among Explorer New Build, LLC, as borrower, NCL Corporation Ltd., as guarantor, Seven Seas Cruises S. de R.L., as charterer and shareholder, Norwegian Cruise Line Holdings Ltd., the lenders party thereto, Crédit Agricole Corporate and Investment Bank, Société Générale, HSBC Bank PLC, and KfW IPEX-Bank GmbH, as joint mandated lead arrangers, and the other parties thereto, which amends and restates the Loan Agreement, originally dated as of July 31, 2013 (incorporated herein by reference to Exhibit 10.1 to Norwegian Cruise Line Holdings Ltd.’s Form 8-K filed on February 23, 2021 (File No. 001-35784))#†
10.12
Amendment and Restatement Agreement, dated as of February 17, 2021, among Explorer II New Build, LLC, as borrower, NCL Corporation Ltd., as guarantor, Seven Seas Cruises S. de R.L., as charterer and shareholder, Norwegian Cruise Line Holdings Ltd., the lenders party thereto, Crédit Agricole Corporate and Investment Bank, Société Générale, HSBC Bank PLC, and KfW Ipex-Bank GmbH, as joint mandated lead arrangers, and the other parties thereto, which amends and restates the Loan Agreement, originally dated as of March 30, 2016 (incorporated herein by reference to Exhibit 10.2 to Norwegian Cruise Line Holdings Ltd.’s Form 8-K filed on February 23, 2021 (File No. 001-35784))#†
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10.13
Amendment and Restatement Agreement, dated as of February 17, 2021, among Leonardo One, Ltd., as borrower, NCL Corporation Ltd., as guarantor, NCL International, Ltd., as shareholder, Norwegian Cruise Line Holdings Ltd., the lenders party thereto, Crédit Agricole Corporate and Investment Bank, BNP Paribas Fortis S.A./N.V., KfW IPEX-Bank GmbH, HSBC Bank PLC and Cassa Depositi e Prestiti S.P.A., as joint mandated lead arrangers, and the other parties thereto, which amends and restates the Loan Agreement, originally dated as of April 12, 2017 (incorporated herein by reference to Exhibit 10.5 to Norwegian Cruise Line Holdings Ltd.’s Form 8-K filed on February 23, 2021 (File No. 001-35784))#†
10.14
Amendment and Restatement Agreement, dated as of February 17, 2021, among Leonardo Two, Ltd., as borrower, NCL Corporation Ltd., as guarantor, NCL International, Ltd., as shareholder, Norwegian Cruise Line Holdings Ltd., the lenders party thereto, Crédit Agricole Corporate and Investment Bank, BNP Paribas Fortis S.A./N.V., HSBC Bank PLC and Cassa Depositi e Prestiti S.P.A., as joint mandated lead arrangers, and the other parties thereto, which amends and restates the Loan Agreement, originally dated as of April 12, 2017 (incorporated herein by reference to Exhibit 10.6 to Norwegian Cruise Line Holdings Ltd.’s Form 8-K filed on February 23, 2021 (File No. 001-35784))#†
10.15
Amendment and Restatement Agreement, dated as of February 17, 2021, among Leonardo Three, Ltd., as borrower, NCL Corporation Ltd., as guarantor, NCL International, Ltd., as shareholder, Norwegian Cruise Line Holdings Ltd., the lenders party thereto, HSBC Bank PLC, BNP Paribas Fortis S.A./N.V., KfW IPEX-Bank GmbH and Cassa Depositi e Prestiti S.P.A., as joint mandated lead arrangers, and the other parties thereto, which amends and restates the Loan Agreement, originally dated as of April 12, 2017 (incorporated herein by reference to Exhibit 10.7 to Norwegian Cruise Line Holdings Ltd.’s Form 8-K filed on February 23, 2021 (File No. 001-35784))#†
10.16
Amendment and Restatement Agreement, dated as of February 17, 2021, among Leonardo Four, Ltd., as borrower, NCL Corporation Ltd., as guarantor, NCL International, Ltd., as shareholder, Norwegian Cruise Line Holdings Ltd., the lenders party thereto, KfW IPEX-Bank GmbH, BNP Paribas Fortis S.A./N.V., HSBC Bank PLC and Cassa Depositi e Prestiti S.P.A., as joint mandated lead arrangers, and the other parties thereto, which amends and restates the Loan Agreement, originally dated as of April 12, 2017 (incorporated herein by reference to Exhibit 10.8 to Norwegian Cruise Line Holdings Ltd.’s Form 8-K filed on February 23, 2021 (File No. 001-35784))#†
10.17
Amendment and Restatement Agreement, dated as of February 17, 2021, among Leonardo Five, Ltd., as borrower, NCL Corporation Ltd., as guarantor, NCL International, Ltd., as shareholder, Norwegian Cruise Line Holdings Ltd., the lenders party thereto, Crédit Agricole Corporate and Investment Bank, BNP Paribas Fortis S.A./N.V., HSBC Bank PLC, KfW IPEX-Bank GmbH, Cassa Depositi e Prestiti S.P.A., Banco Santander, S.A. and Société Générale, as joint mandated lead arrangers, and the other parties thereto, which amends and restates the Loan Agreement, originally dated as of December 19, 2018 (incorporated herein by reference to Exhibit 10.9 to Norwegian Cruise Line Holdings Ltd.’s Form 8-K filed on February 23, 2021 (File No. 001-35784))#†
10.18
Amendment and Restatement Agreement, dated as of February 17, 2021, among Leonardo Six, Ltd., as borrower, NCL Corporation Ltd., as guarantor, NCL International, Ltd., as shareholder, Norwegian Cruise Line Holdings Ltd., the lenders party thereto, Crédit Agricole Corporate and Investment Bank, BNP Paribas Fortis S.A./N.V., HSBC Bank PLC, KfW IPEX-Bank GmbH, Cassa Depositi e Prestiti S.P.A., Banco Santander, S.A. and Société Générale, as joint mandated lead arrangers, and the other parties thereto, which amends and restates the Loan Agreement, originally dated as of December 19, 2018 (incorporated herein by reference to Exhibit 10.10 to Norwegian Cruise Line Holdings Ltd.’s Form 8-K filed on February 23, 2021 (File No. 001-35784))#†
10.19
Amendment and Restatement Agreement, dated as of February 17, 2021, among O Class Plus One, LLC, as borrower, NCL Corporation Ltd., as guarantor, Oceania Cruises S. de R.L., as shareholder, Norwegian Cruise Line Holdings Ltd., the lenders party thereto, Crédit Agricole Corporate and Investment Bank, BNP Paribas Fortis S.A./N.V., HSBC Bank PLC, KfW IPEX-Bank GmbH, Cassa Depositi e Prestiti S.P.A., Banco Santander, S.A. and Société Générale., as joint mandated lead arrangers, and the other
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parties thereto, which amends and restates the Loan Agreement, originally dated as of December 19, 2018 (incorporated herein by reference to Exhibit 10.12 to Norwegian Cruise Line Holdings Ltd.’s Form 8-K filed on February 23, 2021 (File No. 001-35784))#†
10.20
Amendment and Restatement Agreement, dated as of February 17, 2021, among O Class Plus Two, LLC, as borrower, NCL Corporation Ltd., as guarantor, Oceania Cruises S. de R.L., as shareholder, Norwegian Cruise Line Holdings Ltd., the lenders party thereto, Crédit Agricole Corporate and Investment Bank, BNP Paribas Fortis S.A./N.V., HSBC Bank PLC, KfW IPEX-Bank GmbH, Cassa Depositi e Prestiti S.P.A., Banco Santander, S.A. and Société Générale., as joint mandated lead arrangers, and the other parties thereto, which amends and restates the Loan Agreement, originally dated as of December 19, 2018 (incorporated herein by reference to Exhibit 10.13 to Norwegian Cruise Line Holdings Ltd.’s Form 8-K filed on February 23, 2021 (File No. 001-35784))#†
10.21
$230 million Credit Agreement, dated January 10, 2019, among NCL Corporation Ltd., as borrower, Nordea Bank ABP, New York Branch, as administrative agent and collateral agent and the other lenders party thereto as joint bookrunners, arrangers, co-documentation agents and lenders (incorporated herein by reference to Exhibit 10.52 to Norwegian Cruise Line Holdings Ltd.’s Form 10-K filed on February 27, 2019 (File No. 001-35784))+
10.22
Amendment Agreement, dated as of April 28, 2020, among NCL Corporation Ltd., as borrower, Pride of America Ship Holding, LLC, as subsidiary guarantor, Nordea Bank Abp, New York Branch, as administrative agent, and the other parties thereto, which supplements the Credit Agreement, dated as of January 10, 2019 (incorporated herein by reference to Exhibit 10.1 to Norwegian Cruise Line Holdings Ltd.’s Form 8-K filed on May 4, 2020 (File No. 001-35784))#
10.23
Amendment Agreement, dated January 29, 2021, by and among NCL Corporation Ltd., as borrower, Pride of America Ship Holding, LLC, as subsidiary guarantor, Nordea Bank Abp, New York Branch, as administrative agent, and the other parties thereto, which amends the Credit Agreement, dated as of January 10, 2019 (incorporated herein by reference to Exhibit 10.1 to Norwegian Cruise Line Holdings Ltd.’s Form 8-K filed on February 4, 2021 (File No. 001-35784))#
10.24
Amendment and Restatement Agreement, dated as of February 17, 2021, among Explorer III New Build, LLC, as borrower, NCL Corporation Ltd., as guarantor, Seven Seas Cruises S. de R.L., as shareholder, Norwegian Cruise Line Holdings Ltd., the lenders party thereto, Crédit Agricole Corporate and Investment Bank, BNP Paribas Fortis S.A./N.V., HSBC Bank PLC, KfW IPEX-Bank GmbH, Cassa Depositi e Prestiti S.P.A., Banco Santander, S.A. and Société Générale., as joint mandated lead arrangers, and the other parties thereto, which amends and restates the Loan Agreement, originally dated as of December 19, 2018 (incorporated herein by reference to Exhibit 10.11 to Norwegian Cruise Line Holdings Ltd.’s Form 8-K filed on February 23, 2021 (File No. 001-35784))#†
10.25
$260 million Credit Agreement, dated May 15, 2019, among NCL Corporation Ltd., as borrower, Bank of America, N.A., as administrative agent and collateral agent and the other lenders party thereto as joint bookrunners, arrangers, co-documentation agents and lenders (incorporated herein by reference to Exhibit 10.1 to Norwegian Cruise Line Holdings Ltd.’s Form 10-Q filed on August 8, 2019 (File No. 001-35784))#
10.26
Amendment Agreement, dated as of May 1, 2020, among NCL Corporation Ltd., as borrower, Norwegian Jewel Limited, as subsidiary guarantor, the lenders party thereto and Bank of America, N.A., as administrative agent, which amends the Credit Agreement, dated as of May 15, 2019 (incorporated herein by reference to Exhibit 10.3 to Norwegian Cruise Line Holdings Ltd.’s Form 8-K filed on May 4, 2020 (File No. 001-35784))#
10.27
Amendment Agreement, dated January 29, 2021, by and among NCL Corporation Ltd., as borrower, Norwegian Jewel Limited, as subsidiary guarantor, the lenders party thereto and Bank of America, N.A., as administrative agent, which amends the Credit Agreement, dated as of May 15, 2019 (incorporated
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herein by reference to Exhibit 10.2 to Norwegian Cruise Line Holdings Ltd.’s Form 8-K filed on February 4, 2021 (File No. 001-35784))#
10.28
Investment Agreement, dated May 5, 2020, by and among Norwegian Cruise Line Holdings Ltd., NCL Corporation Ltd. and LC9 Skipper, L.P. (incorporated herein by reference to Exhibit 10.1 to Norwegian Cruise Line Holdings Ltd.’s Form 8-K filed on May 11, 2020 (File No. 001-35784))
10.29
Investor Rights Agreement, dated May 28, 2020, by and among Norwegian Cruise Line Holdings Ltd., NCL Corporation Ltd. and LC9 Skipper, L.P. (incorporated herein by reference to Exhibit 10.1 to Norwegian Cruise Line Holdings Ltd.’s Form 8-K filed on May 28, 2020 (File No. 001-35784))
10.30
Amended and Restated Regent Trademark License Agreement, dated February 21, 2011, by and between Regent Hospitality Worldwide, LLC and Seven Seas Cruises, S. DE R.L. (incorporated herein by reference to Exhibit 10.17 to Prestige Cruises International, Inc.’s Amendment No. 1 to Form S-1 filed on March 24, 2014 (File No. 333-193479))
10.31
Employment Agreement by and between NCL (Bahamas) Ltd. and T. Robin Lindsay, entered into on October 18, 2015 (incorporated herein by reference to Exhibit 10.2 to Norwegian Cruise Line Holdings Ltd.’s Form 10-Q filed on May 10, 2017 (File No. 001-35784))*
10.32
Employment Agreement by and between Prestige Cruise Services, LLC and Jason Montague, entered into on September 16, 2016 (incorporated herein by reference to Exhibit 10.3 to Norwegian Cruise Line Holdings Ltd.’s Form 8-K filed on September 19, 2016 (File No. 001-35784))*
10.33
Employment Agreement by and between NCL (Bahamas) Ltd. and Frank J. Del Rio, entered into on October 1, 2020 (incorporated herein by reference to Exhibit 10.1 to Norwegian Cruise Line Holdings Ltd.’s Form 8-K filed on October 5, 2020 (File No. 001-35784))*
10.34
Employment Agreement by and between NCL (Bahamas) Ltd. and Mark Kempa, entered into on September 10, 2018 (incorporated herein by reference to Exhibit 10.1 to Norwegian Cruise Line Holdings Ltd.’s Form 8-K filed on September 11, 2018 (File No. 001-35784))*
10.35
Employment Agreement by and between Prestige Cruise Services, LLC and Robert J. Binder, entered into on September 16, 2016 (incorporated herein by reference to Exhibit 10.1 to Norwegian Cruise Line Holdings Ltd.’s Form 8-K filed on September 19, 2016 (File No. 001-35784))*
10.36
Amendment to Employment Agreement by and between Prestige Cruise Services, LLC and Robert J. Binder, entered into on May 7, 2019 (incorporated herein by reference to Exhibit 10.64 to Norwegian Cruise Line Holdings Ltd.’s annual report on Form 10-K filed on February 27, 2020 (File No. 001-35784))*
10.37
Amendment to Employment Agreement by and between Prestige Cruise Services, LLC and Robert J. Binder, entered into on September 19, 2020 (incorporated herein by reference to Exhibit 10.1 to Norwegian Cruise Line Holdings Ltd.’s Form 8-K filed on September 22, 2020 (File No. 001-35784))*
10.38
Form of Indemnification Agreement by and between Norwegian Cruise Line Holdings Ltd. and each of its directors, executive officers and certain other officers (effective July 14, 2020) (incorporated herein by reference to Exhibit 10.2 to Norwegian Cruise Line Holdings Ltd.’s Form 10-Q filed on August 10, 2020 (File No. 001-35784))*
10.39
Norwegian Cruise Line Holdings Ltd. Amended and Restated 2013 Performance Incentive Plan (incorporated herein by reference to Exhibit 10.1 to Norwegian Cruise Line Holdings Ltd.’s Form 8-K filed on May 24, 2016 (File No. 001-35784))*
10.40
Form of Notice of Grant of Option and Terms and Conditions of Option (incorporated herein by reference to Exhibit 10.1 to Norwegian Cruise Line Holdings Ltd.’s Form 10-Q filed on May 8, 2013 (File No. 001-35784))*
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10.41
Norwegian Cruise Line Holdings Ltd. Employee Stock Purchase Plan (incorporated herein by reference to Exhibit 10.3 to Norwegian Cruise Line Holdings Ltd.’s Form 10-Q filed on July 31, 2014 (File No. 001-35784))*
10.42
Directors’ Compensation Policy (effective July 14, 2020) (incorporated herein by reference to Exhibit 10.1 to Norwegian Cruise Line Holdings Ltd.’s Form 10-Q filed on August 10, 2020 (File No. 001-35784))*
10.43
Form of Director Restricted Share Unit Award Agreement (incorporated herein by reference to Exhibit 10.62 to Norwegian Cruise Line Holdings Ltd.’s Form 10-K filed on February 29, 2016 (File No. 001-35784))*
10.44
Form of Norwegian Cruise Line Holdings Ltd. Time and Performance-based Restricted Share Unit Award Agreement (incorporated herein by reference to Exhibit 10.2 to Norwegian Cruise Line Holdings Ltd.’s Form 10-Q filed on November 4, 2015 (File No. 001-35784))*
10.45
Form of Notice of Grant of Norwegian Cruise Line Holdings Ltd. Time and Performance-based Option and Terms and Conditions (incorporated herein by reference to Exhibit 10.3 to Norwegian Cruise Line Holdings Ltd.’s Form 10-Q filed on November 4, 2015 (File No. 001-35784))*
10.46
Form of Norwegian Cruise Line Holdings Ltd. Time-based Restricted Share Unit Award Agreement (2017) (incorporated herein by reference to Exhibit 10.52 to Norwegian Cruise Line Holdings Ltd.’s Form 10-K filed on February 27, 2017 (File No. 001-35784))*
10.47
Form of Norwegian Cruise Line Holdings Ltd. Performance-based Restricted Share Unit Award Agreement (2017) (incorporated herein by reference to Exhibit 10.53 to Norwegian Cruise Line Holdings Ltd.’s Form 10-K filed on February 27, 2017 (File No. 001-35784))*
10.48
Form of Norwegian Cruise Line Holdings Ltd. Performance-based Restricted Share Unit Award Agreement (August 2017) (incorporated herein by reference to Exhibit 10.2 to Norwegian Cruise Line Holdings Ltd.’s Form 10-Q filed on November 9, 2017 (File No. 001-35784))*
10.49
Form of Norwegian Cruise Line Holdings Ltd. Time-based Restricted Share Unit Award Agreement (2020) (incorporated by reference to Exhibit 10.77 to Norwegian Cruise Line Holdings Ltd.’s annual report on Form 10-K filed on February 27, 2020 (File No. 001-35784))*
10.50
Form of Norwegian Cruise Line Holdings Ltd. Performance-based Restricted Share Unit Award Agreement (2020) (incorporated by reference to Exhibit 10.78 to Norwegian Cruise Line Holdings Ltd.’s annual report on Form 10-K filed on February 27, 2020 (File No. 001-35784))*
10.51
Form of Base Salary Reduction Agreement Letter (incorporated herein by reference to Exhibit 10.2 to Norwegian Cruise Line Holdings Ltd.’s Form 10-Q filed on May 15, 2020 (File No. 001-35784))*
10.52
Form of Retention Bonus Letter Agreement (incorporated herein by reference to Exhibit 10.5 to Norwegian Cruise Line Holdings Ltd.’s Form 10-Q filed on November 9, 2020 (File No. 001-35784))*
21.1**
List of Subsidiaries of Norwegian Cruise Line Holdings Ltd.
23.1**
Consent of PricewaterhouseCoopers LLP, independent registered public accounting firm
24.1**
Power of Attorney (included on Signatures page of this Annual Report on Form 10-K)
31.1**
Certification of the Annual Report Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the President and Chief Executive Officer
31.2**
Certification of the Annual Report Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Executive Vice President and Chief Financial Officer
32.1***
Certification of the Annual Report Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by the Chief Executive Officer and Chief Financial Officer
78
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101**
The following materials from Norwegian Cruise Line Holdings Ltd.’s Annual Report on Form 10‑K formatted in Inline XBRL:
(i) the Consolidated Statements of Operations of NCLH for the years ended December 31, 2020, 2019 and 2018;
(ii) the Consolidated Statements of Comprehensive Income (Loss) of NCLH for the years ended December 31, 2020, 2019 and 2018;
(iii) the Consolidated Balance Sheets of NCLH as of December 31, 2020 and 2019;
(iv) the Consolidated Statements of Cash Flows of NCLH for the years ended December 31, 2020, 2019 and 2018;
(v) the Consolidated Statements of Changes in Shareholders’ Equity of NCLH for the years ended December 31, 2020, 2019 and 2018;
(vi) the Notes to the Consolidated Financial Statements; and
(vii) Schedule II Valuation and Qualifying Accounts.
104**
Cover Page Interactive Data File - the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
+ Confidential treatment has been granted with respect to certain portions of this exhibit. Omitted portions have been filed separately with the SEC.
# Certain portions of this document that constitute confidential information have been redacted in accordance with Regulation S-K Item 601(b)(10).
†
Agreement restates previous versions of agreement.
* Management contract or compensatory plan.
** Filed herewith.
*** Furnished herewith.
Item 16. Form 10-K Summary
None.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this annual report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, in Miami, Florida, on February 26, 2021.
NORWEGIAN CRUISE LINE HOLDINGS LTD.
By:
/s/ Frank J. Del Rio
Name:
Frank J. Del Rio
Title:
Director, President and Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Frank J. Del Rio, Mark A. Kempa, Daniel S. Farkas and Faye L. Ashby, and each of them, his or her true and lawful attorneys-in-fact and agents, each with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this annual report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the SEC, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that each of said attorneys-in-fact and agents or their substitute or substitutes may lawfully so or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this annual report on Form 10-K has been signed below by the following persons in the capacities and on the date indicated.
Signature
Title
Date
/s/ Frank J. Del Rio
Director, President and Chief Executive Officer
February 26, 2021
Frank J. Del Rio
(Principal Executive Officer)
/s/ Mark A. Kempa
Executive Vice President and Chief Financial Officer
February 26, 2021
Mark A. Kempa
(Principal Financial Officer)
/s/ Faye L. Ashby
Senior Vice President and Chief Accounting Officer
February 26, 2021
Faye L. Ashby
(Principal Accounting Officer)
/s/ Adam M. Aron
Director
February 26, 2021
Adam M. Aron
/s/ John Chidsey
Director
February 26, 2021
John Chidsey
/s/ Chad A. Leat
Director
February 26, 2021
Chad A. Leat
/s/ Scott A. Dahnke
Director
February 26, 2021
Scott A. Dahnke
/s/ David M. Abrams
Director
February 26, 2021
David M. Abrams
/s/ Stella David
Director
February 26, 2021
Stella David
/s/ Russell W. Galbut
Director
February 26, 2021
Russell W. Galbut
/s/ Mary E. Landry
Director
February 26, 2021
Mary E. Landry
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Norwegian Cruise Line Holdings Ltd.
Schedule II Valuation and Qualifying Accounts (in thousands)
Additions
Charged to
Balance
costs and
Charged to
Balance
Description
12/31/17
expenses
other accounts
Deductions (a)
12/31/18
Valuation allowance on deferred tax assets
$
42,154
$
—
$
276
$
( 506 )
$
41,924
Charged to
Balance
costs and
Charged to
Balance
Description
12/31/18
expenses
other accounts
Deductions (a)
12/31/19
Valuation allowance on deferred tax assets
$
41,924
$
—
$
—
$
( 36,077 )
$
5,847
Charged to
Charged to
Balance
costs and
other
Balance
Description
12/31/19
expenses
accounts (b)
Deductions (a)
12/31/20
Valuation allowance on deferred tax assets
$
5,847
$
—
$
38,150
$
( 1,121 )
$
42,876
(a) Amount relates to (i) utilization of deferred tax assets, (ii) revaluation of deferred tax assets from their functional currency to U.S. dollars and (iii) reversal of valuation allowances.
(b) Amount relates to a valuation allowance on net U.S. deferred tax assets.
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Index to Consolidated Financial Statements
Page
Report of Independent Registered Public Accounting Firm
F-1
Consolidated Statements of Operations for the years ended December 31, 2020, 2019 and 2018
F-5
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2020, 2019 and 2018
F-6
Consolidated Balance Sheets as of December 31, 2020 and 2019
F-7
Consolidated Statements of Cash Flows for the years ended December 31, 2020, 2019 and 2018
F-8
Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2020, 2019 and 2018
F-9
Notes to the Consolidated Financial Statements
F-10
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Norwegian Cruise Line Holdings Ltd.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Norwegian Cruise Line Holdings Ltd. and its subsidiaries (the “Company”) as of December 31, 2020 and 2019, and the related consolidated statements of operations, of comprehensive income (loss), of changes in shareholders’ equity and of cash flows for each of the three years in the period ended December 31, 2020, including the related notes and financial statement schedule listed in the index appearing under Item 15(2) (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019 , and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Change in Accounting Principle
As discussed in Note 5 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Annual Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
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Emphasis of Matter
As discussed in Note 2 to the consolidated financial statements, the ongoing effects of COVID-19 on the Company's operations and global bookings have had, and will continue to have a significant impact on the Company’s financial results and liquidity. Further, subsequent to February 2022, the Company will require additional liquidity to meet ongoing obligations, including debt amortization payments and ship milestone payments that are due in April 2022, in order to maintain minimum liquidity covenant requirements. Management’s evaluation of the events and conditions and management’s plans to mitigate these matters are also described in Note 2.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Interim Impairment Assessments - Regent Seven Seas Cruises Goodwill and Regent Seven Seas Cruises and Oceania Cruises Trade Names
As described in Notes 2, 4 and 10 to the consolidated financial statements, the Company’s goodwill balance was $98.1 million and trade names balance was $500.5 million as of December 31, 2020. The Regent Seven Seas Cruises reporting unit goodwill was $98.1 million, and the indefinite-lived trade name intangible assets in the Regent Seven Seas Cruises and Oceania Cruises reporting units was $153.0 million and $140.0 million, respectively. For the year ended December 31, 2020, management recorded a $364.0 million goodwill impairment charge associated with the Regent Seven Seas Cruises reporting unit and impairment charges of $147.0 million and $170.0 million related to the Regent Seven Seas Cruises and Oceania Cruises indefinite-lived trade name intangible assets, respectively. Management evaluates 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. Due to the continued spread of COVID-19, growing travel restrictions and limited access to ports around the world, in March 2020, management implemented a voluntary suspension of all cruise voyages across its three brands. As of the date of this filing and through at least May 31, 2021, all cruise voyages remain suspended. As a result of the temporary suspension of voyages and decline in the Company’s stock price, management performed interim goodwill and trade name impairment tests as of March 31, 2020. The interim goodwill assessment consists of an approach using discounted future cash flows and other market data to
F-2
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determine the estimated fair value of the reporting units. The discounted cash flow valuation reflects management’s principal assumptions of (i) forecasted future operating results and growth rates, which have been prepared under multiple scenarios and are probability weighted, (ii) forecasted capital expenditures for fleet growth and ship improvements and (iii) a weighted average cost of capital of market participants. For trade names, management used 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.
The principal considerations for our determination that performing procedures relating to the interim impairment assessment of the Regent Seven Seas Cruises goodwill and the Regent Seven Seas Cruises and Oceania Cruises trade names is a critical audit matter are (i) the significant judgment by management when determining the fair value estimates; (ii) a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating management’s significant assumptions related to forecasted future operating results and growth rates prepared under multiple scenarios and probability weighted for goodwill and trade names, forecasted capital expenditures for fleet growth and ship improvements for goodwill and the weighted average cost of capital of market participants for goodwill and trade names as well as the royalty rate assumption for trade names; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s interim goodwill impairment assessment of the Regent Seven Seas Cruises reporting unit and the interim trade name impairment assessment of the Regent Seven Seas Cruises trade name and the Oceania Cruises trade name. These procedures also included, among others, (i) testing management’s process for determining the fair value estimates related to the interim impairment assessments; (ii) evaluating the appropriateness of the discounted future cash flow approach and the relief from royalty method; (iii) testing the completeness and accuracy of underlying data used in the fair value estimates; and (iv) evaluating the reasonableness of the significant assumptions used by management, including forecasted future operating results and growth rates prepared under multiple scenarios and probability weighted for goodwill and trade names, forecasted capital expenditures for fleet growth and ship improvements for goodwill, the weighted average cost of capital of market participants for goodwill and trade names, and trade name royalty rates. Evaluating management’s assumptions related to forecasted future operating results and growth rates prepared under multiple scenarios and probability weighted for goodwill and trade names and forecasted capital expenditures for fleet growth and ship improvements for goodwill involved evaluating whether the assumptions used by management were reasonable considering (i) the current and past performance of the reporting unit (ii) the consistency with external market and industry data; and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in the evaluation of the Company’s discounted future cash flow approach and relief from royalty method, the weighted average cost of capital of market participants and trade name royalty rates assumptions.
Liquidity - Impact of COVID-19
As described in Note 2 to the consolidated financial statements, due to the continued spread of COVID-19, growing travel restrictions and limited access to ports around the world, in March 2020, management implemented a voluntary suspension of all cruise voyages across its three brands. As of the date of this filing and through at least May 31, 2021, all cruise voyages remain suspended. 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. Management believes the ongoing effects of COVID-19 on the Company’s operations and global bookings have had, and will continue to have, a significant impact on the Company’s financial results and liquidity, and such negative impact may continue well beyond the containment of the pandemic. Due to the unknown duration and extent of the COVID-19 pandemic, travel restrictions, bans and advisories, uncertainties around the Company’s ability to comply with governmental regulations, the potential unavailability of ports and/or destinations, voyage cancellations and timing of redeployments, and a general impact on consumer sentiment regarding cruise travel, management cannot predict when they will relaunch voyages or when the Company’s full fleet will be back in service at historical occupancy levels. Until management is able to begin their phased relaunch, the projected liquidity requirements reflect management’s principal assumptions surrounding ongoing operating costs during the suspension of cruise voyages, as well as liquidity requirements for financing costs and necessary capital expenditures, and their ability
F-3
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to continue to implement cash conservation strategies, including, but not limited to (i) moving their ships to minimum manning levels; (ii) further reductions in general operating expenses; and (iii) further reductions in discretionary capital expenditures. Based on these actions and assumptions regarding the impact of COVID-19, and considering the Company’s available liquidity including cash and cash equivalents of $3.3 billion at December 31, 2020, management has concluded that after implementing the above cash conservation strategies, the Company has sufficient liquidity to satisfy its obligations for at least the next twelve months from the issuance of the financial statements even in the event the Company does not resume cruise voyages during that period.
The principal considerations for our determination that performing procedures relating to the impact of COVID-19 on the Company’s liquidity is a critical audit matter are the significant judgment by management when developing their liquidity analysis; this in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating management’s liquidity analysis, including the assumptions related to (i) ongoing operating costs during the suspension of cruise voyages; (ii) liquidity requirements for financing costs; (iii) capital expenditures and (iv) management’s ability to implement cash conservation strategies.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s liquidity analysis. These procedures also included, among others, (i) testing management’s process for projecting liquidity requirements for the twelve months after the date the financial statements are issued; (ii) testing the completeness and accuracy of underlying data and assumptions used in the projected liquidity analysis; and (iii) evaluation of management’s liquidity analysis and their disclosure in the consolidated financial statements regarding having sufficient liquidity to satisfy its obligations for at least the next twelve months.
/s/ PricewaterhouseCoopers LLP
Miami, Florida
February 26, 2021
We have served as the Company’s auditor since at least 1988. We have not been able to determine the specific year we began serving as auditor of the Company.
F-4
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Norwegian Cruise Line Holdings Ltd.
Consolidated Statements of Operations
(in thousands, except share and per share data)
Year Ended December 31,
2020
2019
2018
Revenue
Passenger ticket
$
867,110
$
4,517,393
$
4,259,815
Onboard and other
412,798
1,944,983
1,795,311
Total revenue
1,279,908
6,462,376
6,055,126
Cruise operating expense
Commissions, transportation and other
380,710
1,120,886
998,948
Onboard and other
85,678
394,673
348,656
Payroll and related
521,301
924,157
881,606
Fuel
264,712
409,602
392,685
Food
65,369
222,602
216,031
Other
375,291
591,341
539,150
Total cruise operating expense
1,693,061
3,663,261
3,377,076
Other operating expense
Marketing, general and administrative
745,345
974,850
897,929
Depreciation and amortization
717,840
646,188
561,060
Impairment loss
1,607,797
—
—
Total other operating expense
3,070,982
1,621,038
1,458,989
Operating income (loss)
( 3,484,135 )
1,178,077
1,219,061
Non-operating income (expense)
Interest expense, net
( 482,313 )
( 272,867 )
( 270,404 )
Other income (expense), net
( 33,599 )
6,155
20,653
Total non-operating income (expense)
( 515,912 )
( 266,712 )
( 249,751 )
Net income (loss) before income taxes
( 4,000,047 )
911,365
969,310
Income tax benefit (expense)
( 12,467 )
18,863
( 14,467 )
Net income (loss)
$
( 4,012,514 )
$
930,228
$
954,843
Weighted-average shares outstanding
Basic
254,728,932
214,929,977
223,001,739
Diluted
254,728,932
216,475,076
224,419,205
Earnings (loss) per share
Basic
$
( 15.75 )
$
4.33
$
4.28
Diluted
$
( 15.75 )
$
4.30
$
4.25
The accompanying notes are an integral part of these consolidated financial statements.
F-5
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Norwegian Cruise Line Holdings Ltd.
Consolidated Statements of Comprehensive Income (Loss)
(in thousands)
Year Ended December 31,
2020
2019
2018
Net income (loss)
$
( 4,012,514 )
$
930,228
$
954,843
Other comprehensive income (loss):
Shipboard Retirement Plan
345
( 1,930 )
2,697
Cash flow hedges:
Net unrealized loss
( 51,642 )
( 123,015 )
( 161,214 )
Amount realized and reclassified into earnings
106,670
( 8,898 )
( 30,096 )
Total other comprehensive income (loss)
55,373
( 133,843 )
( 188,613 )
Total comprehensive income (loss)
$
( 3,957,141 )
$
796,385
$
766,230
The accompanying notes are an integral part of these consolidated financial statements.
F-6
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Norwegian Cruise Line Holdings Ltd.
Consolidated Balance Sheets
(in thousands, except share data)
December 31,
2020
2019
Assets
Current assets:
Cash and cash equivalents
$
3,300,482
$
252,876
Accounts receivable, net
20,578
75,109
Inventories
82,381
95,427
Prepaid expenses and other assets
154,103
306,733
Total current assets
3,557,544
730,145
Property and equipment, net
13,411,226
13,135,337
Goodwill
98,134
1,388,931
Trade names
500,525
817,525
Other long-term assets
831,888
612,661
Total assets
$
18,399,317
$
16,684,599
Liabilities and shareholders’ equity
Current liabilities:
Current portion of long-term debt
$
124,885
$
746,358
Accounts payable
83,136
100,777
Accrued expenses and other liabilities
596,056
782,275
Advance ticket sales
1,109,826
1,954,980
Total current liabilities
1,913,903
3,584,390
Long-term debt
11,681,234
6,055,335
Other long-term liabilities
450,075
529,295
Total liabilities
14,045,212
10,169,020
Commitments and contingencies (Note 13)
Shareholders’ equity:
Ordinary shares, $ 0.001 par value; 490,000,000 shares authorized; 315,636,032 shares issued and outstanding at December 31, 2020 and 237,533,270 shares issued and 213,082,411 shares outstanding at December 31, 2019
316
237
Additional paid-in capital
4,889,355
4,235,690
Accumulated other comprehensive income (loss)
( 240,117 )
( 295,490 )
Retained earnings (deficit)
( 295,449 )
3,829,068
Treasury shares ( 0 and 24,450,859 ordinary shares at December 31, 2020 and December 31, 2019, respectively, at cost)
—
( 1,253,926 )
Total shareholders’ equity
4,354,105
6,515,579
Total liabilities and shareholders’ equity
$
18,399,317
$
16,684,599
The accompanying notes are an integral part of these consolidated financial statements.
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Norwegian Cruise Line Holdings Ltd.
Consolidated Statements of Cash Flows
(in thousands)
Year Ended December 31,
2020
2019
2018
Cash flows from operating activities
Net income (loss)
$
( 4,012,514 )
$
930,228
$
954,843
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization expense
739,619
647,102
566,972
Impairment loss
1,607,797
—
—
Deferred income taxes, net
12,765
( 26,134 )
1,508
Gain on derivatives
( 8,501 )
—
—
Loss on extinguishment of debt
10,480
13,397
6,346
Provision for bad debts and inventory obsolescence
31,756
3,884
5,570
Gain on involuntary conversion of assets
( 1,496 )
( 4,152 )
—
Share-based compensation expense
111,297
95,055
115,983
Payment-in-kind interest premium
19,349
—
—
Net foreign currency adjustments
8,584
( 1,934 )
( 5,537 )
Changes in operating assets and liabilities:
Accounts receivable, net
30,797
( 14,104 )
( 15,886 )
Inventories
10,555
( 6,155 )
( 9,052 )
Prepaid expenses and other assets
( 89,528 )
( 74,295 )
( 29,519 )
Accounts payable
( 21,419 )
( 58,635 )
106,387
Accrued expenses and other liabilities
( 193,938 )
( 29,028 )
114,953
Advance ticket sales
( 811,846 )
347,376
262,603
Net cash provided by (used in) operating activities
( 2,556,243 )
1,822,605
2,075,171
Cash flows from investing activities
Additions to property and equipment, net
( 946,545 )
( 1,637,170 )
( 1,566,796 )
Cash received on settlement of derivatives
—
289
64,796
Cash paid on settlement of derivatives
( 31,520 )
( 47,085 )
( 1,719 )
Other
2,703
3,774
1,011
Net cash used in investing activities
( 975,362 )
( 1,680,192 )
( 1,502,708 )
Cash flows from financing activities
Repayments of long-term debt
( 892,481 )
( 3,806,732 )
( 1,716,244 )
Proceeds from long-term debt
6,075,090
4,122,297
1,904,865
Common share issuance proceeds, net
1,541,708
—
—
Proceeds from employee related plans
5,557
31,937
28,819
Net share settlement of restricted share units
( 15,407 )
( 20,939 )
( 13,855 )
Purchases of treasury shares
—
( 349,860 )
( 664,811 )
Early redemption premium
( 1,376 )
( 6,829 )
( 5,154 )
Deferred financing fees
( 133,880 )
( 23,262 )
( 118,422 )
Net cash provided by (used in) financing activities
6,579,211
( 53,388 )
( 584,802 )
Net increase (decrease) in cash and cash equivalents
3,047,606
89,025
( 12,339 )
Cash and cash equivalents at beginning of period
252,876
163,851
176,190
Cash and cash equivalents at end of period
$
3,300,482
$
252,876
$
163,851
The accompanying notes are an integral part of these consolidated financial statements.
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Norwegian Cruise Line Holdings Ltd.
Consolidated Statements of Changes in Shareholders’ Equity
(in thousands)
Accumulated
Additional
Other
Retained
Total
Ordinary
Paid-in
Comprehensive
Earnings
Treasury
Shareholders’
Shares
Capital
Income (Loss)
(Deficit)
Shares
Equity
Balance, December 31, 2017
$
233
3,998,694
26,966
1,963,128
( 239,255 )
$
5,749,766
Share-based compensation
—
115,983
—
—
115,983
Issuance of shares under employee related plans
2
28,817
—
—
—
28,819
Treasury shares
—
—
—
—
( 664,811 )
( 664,811 )
Net share settlement of restricted share units
—
( 13,855 )
—
—
—
( 13,855 )
Cumulative change in accounting policy
—
—
( 12 )
( 19,131 )
—
( 19,143 )
Other comprehensive loss, net
—
—
( 188,601 )
—
—
( 188,601 )
Net income
—
—
—
954,843
—
954,843
Balance, December 31, 2018
235
4,129,639
( 161,647 )
2,898,840
( 904,066 )
5,963,001
Share-based compensation
—
95,055
—
—
—
95,055
Issuance of shares under employee related plans
2
31,935
—
—
—
31,937
Treasury shares
—
—
—
—
( 349,860 )
( 349,860 )
Net share settlement of restricted share units
—
( 20,939 )
—
—
—
( 20,939 )
Other comprehensive loss, net
—
—
( 133,843 )
—
—
( 133,843 )
Net income
—
—
—
930,228
—
930,228
Balance, December 31, 2019
237
4,235,690
( 295,490 )
3,829,068
( 1,253,926 )
6,515,579
Share-based compensation
—
111,297
—
—
—
111,297
Issuance of shares under employee related plans
2
5,555
—
—
—
5,557
Common share issuance proceeds, net
77
401,631
—
( 113,926 )
1,253,926
1,541,708
Net share settlement of restricted share units
—
( 15,407 )
—
—
—
( 15,407 )
Cumulative change in accounting policy
—
—
—
1,923
—
1,923
Beneficial conversion feature
—
131,240
—
—
—
131,240
Payment-in-kind premium
—
19,349
—
—
—
19,349
Other comprehensive income, net
—
—
55,373
—
—
55,373
Net loss
—
—
—
( 4,012,514 )
—
( 4,012,514 )
Balance, December 31, 2020
$
316
$
4,889,355
$
( 240,117 )
$
( 295,449 )
$
—
$
4,354,105
The accompanying notes are an integral part of these consolidated financial statements.
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Norwegian Cruise Line Holdings Ltd.
Notes to the Consolidated Financial Statements
1.
Description of Business
We are a leading global cruise company which operates the Norwegian Cruise Line, Oceania Cruises and Regent Seven Seas Cruises brands. As of December 31, 2020, we had 28 ships with approximately 59,150 Berths and had orders for nine additional ships to be delivered through 2027.
We have one Explorer Class Ship on order for delivery in 2023. We have two Allura Class Ships on order for delivery in 2023 and 2025. Project Leonardo will introduce six additional ships with expected delivery dates through 2027. The addition of these nine ships to our fleet will increase our total Berths to approximately 83,000 .
2.
Summary of Significant Accounting Policies
Liquidity and Management’s Plan
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. As of the date of this filing and through at least May 31, 2021, all cruise voyages remain suspended. Significant events affecting travel, including COVID-19, typically have an impact on demand for cruise vacations, with the full extent of the impact generally determined by the length of time the event influences travel decisions. 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 the pandemic.
We continue to 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 the percentage of our fleet in service will depend on a number of factors including, but not limited to, the duration and extent of the COVID-19 pandemic, further resurgences and new variants of COVID-19, the availability, distribution, and efficacy of vaccines and therapeutics for COVID-19, our ability to comply with governmental regulations, port availability, travel restrictions, bans and advisories, and our ability to re-staff our ships and implement new health and safety protocols.
The estimation of our future cash flow projections includes numerous assumptions that are subject to various risks and uncertainties. Upon the relaunch of cruise voyages, our principal assumptions for future cash flow projections include:
● Expected gradual phased relaunch at reduced occupancy levels;
● Forecasted cash collections primarily upon completion of future voyages and the payment of cash refunds for any further cancellations, in accordance with the terms of our credit card processing agreements (see Note 13 - “Commitments and Contingencies”); and
● Expected incremental expenses for resumption of cruise voyages, including the maintenance of and compliance with additional health and safety protocols.
Due to the unknown duration and extent of the COVID-19 pandemic, travel restrictions, bans and advisories, uncertainties around our ability to comply with governmental regulations, the potential unavailability of ports and/or destinations, voyage cancellations and timing of redeployments, and a general impact on consumer sentiment regarding cruise travel, we cannot predict when we will relaunch voyages or when our full fleet will be back in service at historical occupancy levels. Until we are able to begin our phased relaunch, our projected liquidity requirements reflect our principal assumptions surrounding ongoing operating costs during the suspension of cruise voyages, as well as liquidity requirements for financing costs and necessary capital expenditures, and our ability to continue to implement cash conservation strategies, including, but not limited to:
● Moving our ships to minimum manning levels, which we expect would result in further reductions in crew payroll costs, fuel consumption, and maintenance costs;
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● Further reductions in general operating expenses; and
● Further reductions in discretionary capital expenditures including cancellation or reduction in scope of certain Dry-docks.
Subsequent to December 31, 2020 further actions, including debt principal payment deferrals and deferral of ship milestone payments, were taken to bolster our financial condition. See Note 8 – “Long-Term Debt” and Note 13 - “Commitments and Contingencies” disclosure for further information.
We cannot make assurances that our assumptions used to estimate our liquidity requirements may not change because we have never experienced a complete cessation of our cruise voyages. Accordingly, the full effect of our suspension of cruise voyages on our financial performance and financial condition cannot be quantified at this time. We have made reasonable estimates and judgments of the impact of COVID-19 within our financial statements and there may be material changes to those estimates in future periods. We expect to report a net loss for at least the quarter ending March 31, 2021, and likely expect to report a net loss until we are able to resume voyages, including for the year ending December 31, 2021.
Based on these actions and assumptions regarding the impact of COVID-19, and considering our available liquidity including cash and cash equivalents of $ 3.3 billion at December 31, 2020, we have concluded that after implementing the above cash conservation strategies, we have sufficient liquidity to satisfy our obligations for at least the next twelve months even in the event we do not resume cruise voyages during that period.
Subsequent to the liquidity assessment period (twelve months from the issuance of these financial statements), the Company will require additional liquidity to meet ongoing obligations, including debt amortization payments and ship milestone payments, of approximately $ 560 million that are due in April 2022, in order to maintain its minimum liquidity covenant requirements. The Company plans to take additional steps following the issuance of these financial statements to increase its liquidity, which may include additional debt and/or equity financing and potential further renegotiations of its debt amortization payments, newbuild payments and covenants. The extent of these actions to increase the Company’s liquidity will be dependent in part on the timing of the resumption of cruise voyages, which is uncertain. There can be no assurances that the Company will be successful in generating the additional liquidity necessary to meet its obligations beyond twelve months from the issuance of these financial statements on terms acceptable to the Company or at all. If the Company is unable to maintain or renegotiate its minimum liquidity covenant requirements, it could have a significant adverse effect on the Company’s business, financial condition and operating results.
Basis of Presentation
Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and contain all normal recurring adjustments necessary for a fair presentation of the results for the periods presented. Estimates are required for the preparation of consolidated financial statements in accordance with generally accepted accounting principles and actual results could differ from these estimates. All significant intercompany accounts and transactions are eliminated in consolidation.
Cash and Cash Equivalents
Cash and cash equivalents are stated at cost and include cash and investments with original maturities of three months or less at acquisition and also include amounts due from credit card processors that are not subject to holdbacks.
Accounts Receivable, Net
Accounts receivable are shown net of an allowance for credit losses of $ 35.4 million and $ 10.6 million as of December 31, 2020 and 2019, respectively.
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Inventories
Inventories mainly consist of provisions, supplies and fuel and are carried at the lower of cost or net realizable value using the first-in, first-out method of accounting.
Advertising Costs
Advertising costs are expensed as incurred except for those that result in tangible assets, including brochures, which are treated as prepaid expenses and charged to expense as consumed. Advertising costs of $ 0.9 million and $ 5.9 million as of December 31, 2020 and 2019, respectively, are included in prepaid expenses and other assets. Expenses related to advertising costs totaled $ 216.5 million, $ 400.6 million and $ 327.3 million for the years ended December 31, 2020, 2019 and 2018, respectively.
Earnings Per Share
Basic earnings per share is computed by dividing net income by the basic weighted-average number of shares outstanding during each period. Diluted earnings per share is computed by dividing net income by diluted weighted-average shares outstanding.
A reconciliation between basic and diluted earnings per share was as follows (in thousands, except share and per share data):
Year Ended December 31,
2020
2019
2018
Net income (loss)
$
( 4,012,514 )
$
930,228
$
954,843
Basic weighted-average shares outstanding
254,728,932
214,929,977
223,001,739
Dilutive effect of share awards
—
1,545,099
1,417,466
Diluted weighted-average shares outstanding
254,728,932
216,475,076
224,419,205
Basic earnings (loss) per share
$
( 15.75 )
$
4.33
$
4.28
Diluted earnings (loss) per share
$
( 15.75 )
$
4.30
$
4.25
For the years ended December 31, 2020, 2019 and 2018, a total of 80.0 million, 4.0 million and 4.7 million shares, respectively, have been excluded from diluted weighted-average shares outstanding because the effect of including them would have been anti-dilutive.
Property and Equipment, Net
Property and equipment are recorded at cost. Ship improvement costs that we believe add value to our ships are capitalized to the ship and depreciated over the shorter of the improvements’ estimated useful lives or the remaining useful life of the ship while costs of repairs and maintenance, including Dry-dock costs, are charged to expense as incurred. During ship construction, certain interest is capitalized as a cost of the ship. Gains or losses on the sale of property and equipment are recorded as a component of operating income (expense) in our consolidated statements of operations. The useful lives of ship improvements are estimated based on the economic lives of the new components. In addition, to determine the useful lives of the ship or ship components, we consider the impact of the historical useful lives of similar assets, manufacturer recommended lives and anticipated changes in technological conditions.
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Depreciation is computed on a straight-line basis over the estimated useful lives of the assets, after a 15 % reduction for the estimated residual values of ships as follows:
Useful Life
Ships
30 years
Computer hardware and software
3 ‑ 10 years
Other property and equipment
3 ‑ 40 years
Leasehold improvements
Shorter of lease term or asset life
Ship improvements
Shorter of asset life or life of the ship
Long-lived assets are reviewed for impairment, based on estimated future undiscounted cash flows, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Assets are grouped and evaluated at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other groups of assets. For ship impairment analyses, the lowest level for which identifiable cash flows are largely independent of other assets and liabilities is each individual ship. We consider historical performance and future estimated results in our evaluation of potential impairment and then compare the carrying amount of the asset to the estimated future cash flows expected to result from the use of the asset. If the carrying amount of the asset exceeds estimated expected undiscounted future cash flows, we measure the amount of the impairment by comparing the carrying amount of the asset to its estimated fair value. We estimate fair value based on the best information available utilizing estimates, judgments and projections as necessary. Our estimate of fair value is generally measured by discounting expected future cash flows at discount rates commensurate with the associated risk.
Goodwill and Trade Names
Goodwill represents the excess of cost over the estimated fair value of net assets acquired. Goodwill and other indefinite-lived assets, principally trade names, are reviewed for impairment on December 31 or earlier if there is an event or change in circumstances that would indicate that the carrying value of these assets may not be fully recoverable. 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 estimated fair value of a reporting unit is less than its carrying value. 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 the following circumstances as well as others:
● Changes in general macroeconomic conditions such as a deterioration in general economic conditions; limitations on accessing capital; fluctuations in foreign exchange rates; or other developments in equity and credit markets;
● Changes in industry and market conditions such as a deterioration in the environment in which an entity operates; an increased competitive environment; a decline in market-dependent multiples or metrics (in both absolute terms and relative to peers); a change in the market for an entity’s products or services; or a regulatory or political development;
● Changes in cost factors that have a negative effect on earnings and cash flows;
● Decline in overall financial performance (for both actual and expected performance);
● Entity and reporting unit specific events such as changes in management, key personnel, strategy, or customers; litigation; or a change in the composition or carrying amount of net assets; and
● Decline in share price (in both absolute terms and relative to peers).
We also may conduct a quantitative assessment comparing the estimated fair value of each reporting unit to its carrying value, including goodwill. This is called the Step 1 Test which uses discounted future cash flows and other market data to determine the estimated fair value of the reporting units. Our discounted cash flow valuation reflects our principal
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assumptions of 1) forecasted future operating results and growth rates, which have been prepared under multiple scenarios and are probability weighted, 2) forecasted capital expenditures for fleet growth and ship improvements and 3) a weighted average cost of capital of market participants. Historically, our Step 1 Test consisted of a combined approach using discounted future cash flows and market multiples to determine the estimated fair value of the reporting units. However, beginning with the Step 1 Test performed as of March 31, 2020 as a result of triggering events, the market multiples were used solely as a corroboratory approach given the impact of COVID-19 on the current year’s results, as of the valuation date, as well as prospective results including the lack of any guidance provided, which were not available for our peers. We believe that this approach is the most representative method to estimate fair value as it utilizes expectations of long-term growth as well as current market conditions. 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 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 year ended December 31, 2020, we recognized a goodwill impairment loss of $ 1.3 billion based on the impairment test performed as of March 31, 2020. See Note 4 – “Goodwill and Intangible Assets” for additional information. As of December 31, 2020, there was $ 98.1 million of goodwill remaining for the Regent Seven Seas reporting unit. We also recognized an impairment loss for our Oceania Cruises and Regent Seven Seas Cruises trade names in an aggregate amount of $ 317.0 million based on the March 31, 2020 impairment test, with $ 500.5 million remaining as of December 31, 2020. For our 2020 annual goodwill and trade name impairment evaluations, we elected to perform quantitative testing. Based on the results of the Step 1 Tests at December 31, 2020, we determined there was no further impairment of goodwill because the estimated fair value of the Regent Seven Seas reporting unit substantially exceeded the carrying value. We also determined there was no impairment to our trade names. 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 estimated fair value in future periods, which may result in a need to recognize additional impairment charges.
Revenue and Expense Recognition
Deposits on advance ticket sales are deferred when received and are subsequently recognized as revenue ratably during the voyage sailing days as services are rendered over time on the ship. Cancellation fees are recognized in passenger ticket revenue in the month of the cancellation. Goods and services associated with onboard revenue are generally provided at a point in time and revenue is recognized when the performance obligation is satisfied. A receivable is recognized for onboard goods and services rendered when the voyage is not completed before the end of the period. All associated direct costs of a voyage are recognized as incurred in cruise operating expenses.
Disaggregation of Revenue
Revenue and cash flows are affected by economic factors in various geographical regions.
Revenues by destination consisted of the following (in thousands):
Year Ended December 31,
2020
2019
2018
North America
$
960,258
$
3,807,576
$
3,543,282
Europe
27,602
1,666,751
1,462,698
Asia-Pacific
152,976
500,842
721,404
Other
139,072
487,207
327,742
Total revenue
$
1,279,908
$
6,462,376
$
6,055,126
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Segment Reporting
We have concluded that our business has a single reportable segment. Each brand, Norwegian, Oceania Cruises and Regent, constitutes a business for which discrete financial information is available and management regularly reviews the brand level operating results and, therefore, each brand is considered an operating segment. Our operating segments have similar economic and qualitative characteristics, including similar long-term margins and similar products and services; therefore, we aggregate all of the operating segments into one reportable segment.
Although we sell cruises on an international basis, our passenger ticket revenue is primarily attributed to U.S.-sourced guests who make reservations in the U.S. Revenue attributable to U.S.-sourced guests was 83 %, 81 % and 77 % for the years ended December 31, 2020, 2019 and 2018, respectively. No other individual country’s revenues exceeded 10% in any of our last three years.
Substantially all of our long-lived assets are located outside of the U.S. and consist primarily of our ships. We had 19 ships with Bahamas registry with a carrying value of $ 9.9 billion as of December 31, 2020 and $ 10.2 billion as of December 31, 2019. We had eight ships with Marshall Island registry with a carrying value of $ 2.4 billion as of December 31, 2020 and seven ships with Marshall Island registry with a carrying value of $ 1.9 billion as of December 31, 2019. We also had one ship with U.S. registry with a carrying value of $ 0.3 billion as of December 31, 2020 and 2019.
Debt Issuance Costs
Debt issuance costs related to a recognized debt liability are presented in the consolidated balance sheets as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. For line of credit arrangements and for those debt facilities not fully drawn we defer and present debt issuance costs as an asset. These deferred issuance costs are amortized over the life of the loan. The amortization of deferred financing fees is included in depreciation and amortization expense in the consolidated statements of cash flows; however, for purposes of the consolidated statements of operations it is included in interest expense, net.
Payment-in-Kind Interest
Payment-in-kind interest is recognized at the stated rate. On the contractual interest payment date, the related par value is recognized at its fair value with any difference between the carrying amount of the accrued interest and the fair value of the new debt recognized as an adjustment in interest expense, net. To the extent that the new debt is issued at a substantial premium, the premium will be recognized as additional paid-in capital. In December 2020, we recognized a $ 19.3 million premium for payment-in-kind interest.
Foreign Currency
The majority of our transactions are settled in U.S. dollars. Gains or losses resulting from transactions denominated in other currencies are recognized in other income (expense), net at each balance sheet date. We recognized a loss of $ 15.9 million, a loss of $ 7.0 million and a gain of $ 19.8 million for the years ended December 31, 2020, 2019 and 2018, respectively.
Derivative Instruments and Hedging Activity
We enter into derivative contracts to reduce our exposure to fluctuations in foreign currency exchange rates, interest rates and fuel prices. The criteria used to determine whether a transaction qualifies for hedge accounting treatment includes the correlation between fluctuations in the fair value of the hedged item and the fair value of the related derivative instrument and its effectiveness as a hedge. As the derivative is marked to fair value, we elected an accounting policy to net the fair value of our derivatives when a master netting arrangement exists with our counterparties.
A derivative instrument that hedges a forecasted transaction or the variability of cash flows related to a recognized asset or liability may be designated as a cash flow hedge. Changes in fair value of derivative instruments that are designated as
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cash flow hedges are recorded as a component of accumulated other comprehensive income (loss) until the underlying hedged transactions are recognized in earnings. To the extent that an instrument is not effective as a hedge or is no longer probable of occurring, gains and losses are recognized in other income (expense), net in our consolidated statements of operations. Realized gains and losses related to our effective fuel hedges are recognized in fuel expense. For presentation in our consolidated statements of cash flows, we have elected to classify the cash flows from our cash flow hedges in the same category as the cash flows from the items being hedged.
Concentrations of Credit Risk
We monitor concentrations of credit risk associated with financial and other institutions with which we conduct significant business. Credit risk, including but not limited to counterparty non-performance under derivative instruments, our Revolving Loan Facility and new ship progress payment guarantees, is not considered significant, as we primarily conduct business with large, well-established financial institutions and insurance companies that we have well-established relationships with and that have credit risks acceptable to us or the credit risk is spread out among a large number of creditors. We do not anticipate non-performance by any of our significant counterparties.
Insurance
We use a combination of insurance and self-insurance for a number of risks including claims related to crew and guests, hull and machinery, war risk, workers’ compensation, property damage, employee healthcare and general liability. Liabilities associated with certain of these risks, including crew and passenger claims, are estimated actuarially based upon known facts, historical trends and a reasonable estimate of future expenses. While we believe these accruals are adequate, the ultimate losses incurred may differ from those recorded.
Income Taxes
Deferred tax assets and liabilities are calculated in accordance with the liability method. Deferred taxes are recorded using the currently enacted tax rates that apply in the periods that the differences are expected to reverse. Deferred taxes are not discounted.
We provide a valuation allowance on deferred tax assets when it is more likely than not that such assets will not be realized. With respect to acquired deferred tax assets, changes within the measurement period that result from new information about facts and circumstances that existed at the acquisition date shall be recognized through a corresponding adjustment to goodwill. Subsequent to the measurement period, all other changes shall be reported as a reduction or increase to income tax expense in our consolidated statements of operations.
Share-Based Compensation
We recognize expense for our share-based compensation awards using a fair-value-based method. Share-based compensation expense is recognized over the requisite service period for awards that are based on a service period and not contingent upon any future performance. We refer you to Note 11 – “Employee Benefits and Share-Based Compensation.”
Recently Issued Accounting Guidance
In August 2020, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40) Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”), which reduces the number of accounting models for convertible debt instruments and enhances transparency in disclosures. One model which is being eliminated is the bifurcation of embedded conversion features that are not accounted for separately as derivatives. A convertible debt instrument previously accounted for under this model will be accounted for as a single liability measured at its amortized cost. Adoption of the provisions of ASU 2020-06 are required for fiscal years beginning after December 15, 2021; however, early adoption is permitted. We will early adopt this guidance on January 1, 2021 on a modified retrospective basis. As a result of the adoption, the beneficial conversion
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feature on the Private Exchangeable Notes (as defined and discussed in Note 8 – “Long-Term Debt”) which is included in additional paid-in-capital will be reclassified to long-term debt. Any related interest which has been recognized will be adjusted through retained earnings. Additional disclosures will be added as necessary.
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”), which provided guidance to alleviate the burden in accounting for reference rate reform by allowing certain expedients and exceptions in applying GAAP to contracts, hedging relationships and other transactions impacted by reference rate reform. The provisions apply only to those transactions that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. Adoption of the provisions of ASU 2020-04 are optional and are effective from March 12, 2020 through December 31, 2022. We are currently evaluating the impact of ASU 2020-04 on our consolidated financial statements.
3.
Revenue and Expense from Contracts with Customers
Nature of Goods and Services
We offer our guests a multitude of cruise fare options when booking a cruise. Our cruise ticket prices generally include cruise fare and a wide variety of onboard activities and amenities, meals, entertainment and port fees and taxes. In some instances, cruise ticket prices include round-trip airfare to and from the port of embarkation, complimentary beverages, unlimited shore excursions, free internet, pre-cruise hotel packages, and on some of the exotic itineraries, pre- or post-land packages. Prices vary depending on the particular cruise itinerary, stateroom category selected and the time of year that the voyage takes place. Passenger ticket revenue also includes full ship charters as well as port fees and taxes.
During the voyage, we generate onboard and other revenue for additional products and services which are not included in the cruise fare, including casino operations, certain food and beverage, gift shop purchases, spa services, photo services, Wi-Fi services and other similar items. Food and beverage, casino operations, photo services and shore excursions are generally managed directly by us while retail shops, spa services, art auctions and internet services may be managed through contracts with third-party concessionaires. These contracts generally entitle us to a percentage of the gross sales derived from these concessions, which is recognized on a net basis. While some onboard goods and services may be prepaid prior to the voyage, we utilize point-of-sale systems for discrete purchases made onboard. Certain of our product offerings are bundled and we allocate the value of the bundled goods and services between passenger ticket revenue and onboard and other revenue based upon the relative standalone selling prices of those goods and services.
Timing of Satisfaction of Performance Obligations and Significant Payment Terms
The payment terms and cancellation policies vary by brand, stateroom category, length of voyage, and country of purchase. A deposit for a future booking is required at or soon after the time of booking. Final payment is generally due between 120 days and 180 days before the voyage; however, the Company has modified its final payment schedule for all voyages on Regent Seven Seas Cruises through July 31, 2021 and for all voyages on Oceania Cruises and the majority of bookings for voyages on Norwegian Cruise Line through October 31, 2021 which requires payment 60 days prior to embarkation. Deposits on advance ticket sales are deferred when received and include amounts that are refundable. Deferred amounts are subsequently recognized as revenue ratably during the voyage sailing days as services are rendered over time on the ship. Deposits are generally cancellable and refundable prior to sailing, but may be subject to penalties, depending on the timing of cancellation. Historically, the inception of substantive cancellation penalties generally coincided with the dates that final payment is due, and penalties generally increased as the voyage sail date approaches. In 2020, the Company’s brands launched new cancellation policies to permit its guests to cancel cruises booked within certain windows for specified time periods which are not part of the Company’s temporary suspension of voyages up to 15 days prior to departure. Cancellation fees are recognized in passenger ticket revenue in the month of the cancellation.
Goods and services associated with onboard revenue are generally provided at a point in time and revenue is recognized when the performance obligation is satisfied. Onboard goods and services rendered may be paid at disembarkation. A
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receivable is recognized for onboard goods and services rendered when the voyage is not completed before the end of the period.
Cruises that are reserved under full ship charter agreements are subject to the payment terms of the specific agreement and may be either cancelable or non-cancelable. Deposits received on charter voyages are deferred when received and included in advance ticket sales. Deferred amounts are subsequently recognized as revenue ratably over the voyage sailing dates.
Contract Balances
Receivables from customers are included within accounts receivables, net. As of December 31, 2020 and 2019, our receivables from customers were $ 1.0 million and $ 15.3 million, respectively.
Contract liabilities represent the Company’s obligation to transfer goods and services to a customer. A customer deposit held for a future cruise is generally considered a contract liability only when final payment is both due and paid by the customer and is usually recognized in earnings within 180 days of becoming a contract. Other deposits held and included within advance ticket sales or other long-term liabilities are not considered contract liabilities as they are largely cancelable and refundable. Additionally, future cruise credits are not considered contract liabilities. Our contract liabilities are included within advance ticket sales. As of December 31, 2020, our contract liabilities were $ 23.1 million. Of the amounts included within advance ticket sales, the vast majority of deposits held was refundable in accordance with our cancellation policies and it is uncertain to what extent guests may request refunds. Refunds payable to guests are included in accounts payable. As of December 31, 2019, our contract liabilities were $ 1.4 billion. Approximately $ 0.9 billion of the December 31, 2019 contract liability balance has been recognized in revenue for the year ended December 31, 2020. The revenue recognized in the years ended December 31, 2019 and 2018 that was included in contract liabilities as of the beginning of each respective period was $ 1.2 billion and $ 1.0 billion, respectively.
Our revenue is seasonal based on demand for cruises, which has historically been strongest during the Northern Hemisphere’s summer months; however, our cruise voyages were completely suspended during the last nine months of 2020 due to the COVID-19 pandemic and such suspension has been extended through May 31, 2021. As a result of COVID-19, including the issuance of future cruise credits for suspended voyages in 2020, the suspension of voyages through May 31, 2021 and modifications to our payment and cancellation policies, there has been a significant decline in the contract liability balance as of December 31, 2020.
Practical Expedients and Exemptions
We do not disclose information about remaining performance obligations that have original expected durations of one year or less. We recognize revenue in an amount that corresponds directly with the value to the customer of our performance completed to date. Variable consideration, which will be determined based on a future rate and passenger count, is excluded from the disclosure and these amounts are not material. These variable non-disclosed contractual amounts relate to non-cancelable charter agreements and a leasing arrangement with a certain port, both of which are long-term in nature. Amounts that are fixed in nature due to the application of minimum guarantees are also not material and are not disclosed.
Contract Costs
Management generally expects that incremental commissions and credit card fees paid as a result of obtaining ticket contracts are recoverable; therefore, we recognize these amounts as assets when they are paid prior to the voyage. Costs of air tickets, port taxes and other fees that fulfill future performance obligations are also considered recoverable and are recorded as assets. Costs incurred to obtain customers were $ 41.3 million and $ 143.5 million as of December 31, 2020 and 2019, respectively. Costs to fulfill contracts with customers were $ 5.5 million and $ 49.7 million as of December 31, 2020 and 2019, respectively. Both costs to obtain and fulfill contracts with customers are recognized within prepaid expenses and other assets. Incremental commissions, credit card fees, air ticket costs, and port taxes and fees are recognized ratably over the voyage sailing dates, concurrent with associated revenue, and are primarily in commissions, transportation and other expense.
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For cruise vacations that had been cancelled by us due to COVID-19, approximately $ 171.5 million in costs to obtain these contracts, consisting of protected commissions, including those paid to employees, and credit card fees, were recognized in earnings during the year ended December 31, 2020.
4.
Goodwill and Intangible Assets
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. In March 2020, the Company announced a voluntary suspension of all cruise voyages for its three brands, which has subsequently been extended through May 31, 2021. Due to the temporary suspension of voyages and decline in our stock price, we performed interim goodwill and trade name impairment tests as of March 31, 2020. We refer you to Note 10 – “Fair Value Measurements and Derivatives” for information on our valuation assumptions.
The changes in the carrying amount of goodwill for each reporting unit for the year ended December 31, 2020 are as follows (in thousands):
Reporting Unit
Norwegian
Regent
Cruise
Oceania
Seven Seas
Total
Line
Cruises
Cruises
Goodwill
Balance, December 31, 2019
$
403,805
$
523,026
$
462,100
$
1,388,931
Impairment loss
( 403,805 )
( 523,026 )
( 363,966 )
( 1,290,797 )
Balance, December 31, 2020
$
—
$
—
$
98,134
$
98,134
We also impaired our trade names for Oceania Cruises and Regent Seven Seas Cruises by $ 170.0 million and $ 147.0 million, respectively. Following these impairments, the carrying value of our trade names was $ 500.5 million, which consists of $ 207.5 million for Norwegian Cruise Line, $ 140.0 million for Oceania Cruises and $ 153.0 million for Regent Seven Seas Cruises.
The gross carrying amounts of intangible assets included within other long-term assets, the related accumulated amortization, the net carrying amounts and the weighted-average amortization periods of the Company’s intangible assets are listed in the following tables (in thousands, except amortization period):
December 31, 2020
Weighted-
Average
Gross Carrying
Accumulated
Net Carrying
Amortization
Amount
Amortization
Amount
Period (Years)
Customer relationships
$
120,000
$
( 120,000 )
$
—
6.0
License
750
( 406 )
344
10.0
Total intangible assets subject to amortization
$
120,750
$
( 120,406 )
$
344
December 31, 2019
Weighted-
Average
Gross Carrying
Accumulated
Net Carrying
Amortization
Amount
Amortization
Amount
Period (Years)
Customer relationships
$
120,000
$
( 110,169 )
$
9,831
6.0
Licenses
750
( 331 )
419
10.0
Total intangible assets subject to amortization
$
120,750
$
( 110,500 )
$
10,250
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The aggregate amortization expense is as follows (in thousands):
Year Ended December 31,
2020
2019
2018
Amortization expense
$
9,906
$
18,488
$
26,163
The following table sets forth the Company’s estimated aggregate amortization expense for each of the five years below (in thousands):
Amortization
Year ended December 31,
Expense
2021
$
75
2022
75
2023
75
2024
75
2025
44
5. Leases
On January 1, 2019, we adopted ASU No. 2016-02, Leases (“Topic 842”). Topic 842 supersedes the lease accounting
requirements in Accounting Standards Codification (“ASC”) 840—Leases. In August 2018, the FASB issued ASU
2018-11, Targeted Improvements to Topic 842, which included an option to apply the new leases standard at the
adoption date using a modified retrospective approach, which the Company elected.
Nature of Leases
We have finance leases for certain ship equipment and a corporate office. We have operating leases for port facilities, corporate offices, warehouses, and certain equipment. Many of our leases include both lease and non-lease components. We have adopted the practical expedient which allows us to combine lease and non-lease components by class of asset. We have applied this expedient for office leases, port facilities, and certain equipment.
The components of lease expense and revenue were as follows (in thousands):
Year Ended
Year Ended
December 31, 2020
December 31, 2019
Operating lease expense
$
19,406
$
31,596
Variable lease expense
9,705
14,284
Short-term lease expense
11,076
50,832
Finance lease cost:
Amortization of right-of-use assets
1,924
1,765
Interest on lease liabilities
1,072
1,239
Operating lease revenue
173
446
Sublease income
1,616
1,615
Total expense under non-cancelable operating leases, primarily for offices, motor vehicles and office equipment was $ 16.9 million for the year ended December 31, 2018 under the previous lease accounting standard (ASC 840).
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Lease balances were as follows (in thousands):
Balance Sheet location
December 31, 2020
December 31, 2019
Operating leases
Right-of-use assets
Other long-term assets
$
209,037
$
236,604
Current operating lease liabilities
Accrued expenses and other liabilities
17,700
39,126
Non-current operating lease liabilities
Other long-term liabilities
185,414
207,243
Finance leases
Right-of-use assets
Property and equipment, net
11,948
13,873
Current finance lease liabilities
Current portion of long-term debt
5,143
6,419
Non-current finance lease liabilities
Long-term debt
4,648
8,812
Supplemental cash flow and non-cash information related to leases was as follows (in thousands):
Year Ended
Year Ended
December 31, 2020
December 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash outflows from operating leases
$
70,555
$
75,539
Operating cash outflows from finance leases
898
1,051
Financing cash outflows from finance leases
4,078
2,826
Right-of-use assets obtained in exchange for lease obligations:
Operating leases
823
24,834
Finance leases
—
705
Other supplemental information related to leases was as follows:
Year Ended
Year Ended
December 31, 2020
December 31, 2019
Weighted average remaining lease term (years) - operating leases
7.36
8.30
Weighted average remaining lease term (years) - finance leases
2.89
3.65
Weighted average discount rate - operating leases
3.96
%
3.76
%
Weighted average discount rate - finance leases
7.75
%
7.47
%
As of December 31, 2020, maturities of lease liabilities were as follows (in thousands):
Operating
Finance
leases
leases
2021
$
27,371
$
4,891
2022
32,105
3,910
2023
31,866
683
2024
32,065
630
2025
31,827
544
Thereafter
80,951
38
Total
236,185
10,696
Less: Present value discount
( 33,071 )
( 905 )
Present value of lease liabilities
$
203,114
$
9,791
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Significant Assumptions and Judgments in Applying Topic 842 and Practical Expedients Elected
Our leases contain both fixed and variable payments. Fixed payments and variable lease payments that depend on a rate or index are included in the calculation of the right-of-use asset. Other variable payments are excluded from the calculation unless there is an unavoidable fixed minimum cost related to those payments such as a minimum annual guarantee. Our lease assets are amortized on a straight-line basis except for our rights to use port facilities. The expenses related to port facilities are amortized based on passenger counts as this basis represents the pattern in which the economic benefit is derived from the right to use the underlying asset.
For non-consecutive lease terms, which relate to our rights to use certain port facilities, the term of the lease is based on the number of days on which we have the right to use a specified asset. We have adopted the practical expedient to exclude leases with terms of less than one year from being included on the balance sheet. Lease expense for agreements that are short-term are disclosed below and include both fixed and variable payments.
Certain leases include one or more options to extend or terminate and are primarily in five-year increments. Lease extensions and terminations, including auto-renewing lease terms, were only included in the calculation of the right-of-use asset to the extent that the right to renew or terminate was at the option of the lessor only or where there was a more than insignificant penalty for termination.
As our leases do not have a readily determinable implicit rate, we used our weighted average cost of debt to determine the net present value of the lease payments at the adoption date. Our weighted average cost of debt is similar to the incremental borrowing rate we would have obtained if we had borrowed collateralized debt over the lease term to purchase the asset, and the rate was adjusted for longer term leases.
We have also adopted the practical expedient which allows us, by class of asset, to not separate lease and non-lease components when we are the lessor in the underlying transaction, the transactions would otherwise be accounted for under ASC 606–Revenue Recognition and the non-lease components are the predominant components of the agreements. We have applied this practical expedient to transactions with cruise passengers and concession service providers related to the use of our ships. We refer you to Note 3 – “Revenue and Expense from Contracts with Customers.”
Impact of COVID-19
In April 2020, the FASB issued interpretive guidance relating to the accounting for lease concessions provided as a result of COVID-19. In this guidance, entities can elect not to apply lease modification accounting with respect to such lease concessions and instead, treat the concession as if it was a part of the existing contract. The Company has elected to not evaluate leases under the lease modification accounting framework for concessions that result from effects of the COVID-19 pandemic. In relation to our rights to use port facilities, we have elected the approach consistent with resolving a contingency, which allows us to remeasure the lease liability and recognize the amount of change in the lease liability as an adjustment to the carrying amount of the associated right-of-use asset. As of December 31, 2020, our port facilities were remeasured with a downward adjustment of $ 17.7 million to both other long-term assets and accrued expenses and other liabilities. Another $ 2.1 million was reclassified from accrued expenses and other liabilities to other long-term assets as a result of contractual extensions. As the full amount of the concession will not be determinable until the force majeure period under the related arrangements has ended, further remeasurements will be required. During the contingency period, we are recognizing lease expense for these port facilities as incurred.
Leases That Have Not Yet Commenced
We have multiple agreements that have been executed where the lease term has not commenced as of December 31, 2020. These are primarily related to our rights to use certain port facilities which were under construction during 2020. Although we may have provided design input, construction management services, or advances related to these assets, we have determined that we did not control these assets during the period of construction. As of December 31, 2020, these agreements are under force majeure and are now not expected to commence until the second or third
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quarter of 2021. These port facilities have undiscounted minimum annual guarantees of approximately $ 1.2 billion of passenger fees.
6.
Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) was as follows (in thousands):
Year Ended December 31, 2020
Change
Accumulated
Change
Related to
Other
Related to
Shipboard
Comprehensive
Cash Flow
Retirement
Income (Loss)
Hedges
Plan
Accumulated other comprehensive income (loss) at beginning of period
$
( 295,490 )
$
( 289,362 )
$
( 6,128 )
Current period other comprehensive loss before reclassifications
( 51,704 )
( 51,642 )
( 62 )
Amounts reclassified into earnings
107,077
106,670
(1)
407
(2)
Accumulated other comprehensive income (loss) at end of period
$
( 240,117 )
$
( 234,334 )
(3)
$
( 5,783 )
Year Ended December 31, 2019
Change
Accumulated
Change
Related to
Other
Related to
Shipboard
Comprehensive
Cash Flow
Retirement
Income (Loss)
Hedges
Plan
Accumulated other comprehensive income (loss) at beginning of period
$
( 161,647 )
$
( 157,449 )
$
( 4,198 )
Current period other comprehensive loss before reclassifications
( 125,323 )
( 123,015 )
( 2,308 )
Amounts reclassified into earnings
( 8,520 )
( 8,898 )
(1)
378
(2)
Accumulated other comprehensive income (loss) at end of period
$
( 295,490 )
$
( 289,362 )
$
( 6,128 )
Year Ended December 31, 2018
Change
Accumulated
Change
Related to
Other
Related to
Shipboard
Comprehensive
Cash Flow
Retirement
Income (Loss)
Hedges
Plan
Accumulated other comprehensive income (loss) at beginning of period
$
26,966
$
33,861
$
( 6,895 )
Current period other comprehensive income (loss) before reclassifications
( 158,943 )
( 161,214 )
2,271
Amounts reclassified into earnings
( 29,670 )
( 30,096 )
(1)
426
(2)
Accumulated other comprehensive income (loss) at end of period
$
( 161,647 )
$
( 157,449 )
$
( 4,198 )
(1) We refer you to Note 10 – “Fair Value Measurements and Derivatives” in these notes to consolidated financial statements for the affected line items in the consolidated statements of operations.
(2) Amortization of prior-service cost and actuarial loss reclassified to other income (expense), net.
(3) Includes $ 62.7 million of loss expected to be reclassified into earnings in the next 12 months.
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7.
Property and Equipment, Net
Property and equipment, net consisted of the following (in thousands):
December 31,
2020
2019
Ships
$
14,528,133
$
14,154,578
Ships improvements
2,109,015
1,865,272
Ships under construction
376,062
387,749
Land and land improvements
58,370
38,375
Other
765,739
672,975
17,837,319
17,118,949
Less: accumulated depreciation
( 4,426,093 )
( 3,983,612 )
Property and equipment, net
$
13,411,226
$
13,135,337
The increase in ships was primarily due to the addition of Seven Seas Splendor. The Company capitalized approximately $ 341.5 million of costs associated with ship improvements. In 2020, one ship had significant improvements that extended the weighted average useful life of the vessel. Accordingly, we have updated our estimate of both its useful life and residual value based on the new weighted average useful life of its current components. The impact of the change in estimate is accounted for on a prospective basis and is not material. Fully depreciated assets on the vessel were also removed from the ship and ship improvement’s cost and accumulated depreciation. Depreciation expense for the years ended December 31, 2020, 2019 and 2018 was $ 707.9 million, $ 627.7 million and $ 534.9 million, respectively. Repairs and maintenance expenses including Dry-dock expenses were $ 129.9 million, $ 199.7 million and $ 199.5 million for the years ended December 31, 2020, 2019 and 2018, respectively, and were recorded within other cruise operating expense.
Ships under construction include progress payments to the shipyard, planning and design fees and other associated costs. Capitalized interest costs which were primarily associated with the construction or revitalization of ships amounted to $ 25.2 million, $ 32.9 million and $ 30.4 million for the years ended December 31, 2020, 2019 and 2018, respectively.
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8.
Long-Term Debt
Long-term debt consisted of the following:
Interest Rate
Balance
December 31,
Maturities
December 31,
2020
2019
Through
2020
2019
(in thousands)
$ 875.0 million senior secured Revolving Loan Facility
1.90
%
—
2024
$
875,000
$
—
$ 75.0 million revolving credit line
—
2.75
%
2020
—
75,000
Term Loan A Facility
1.93
%
3.06
%
2024
1,536,417
1,565,512
$ 400.0 million L. Catterton exchangeable notes (1)
7.00
%
—
2026
278,148
—
$ 862.5 million 6.000 % exchangeable notes
6.00
%
—
2024
834,941
—
$ 450.0 million 5.375 % exchangeable notes
5.38
%
—
2025
439,390
—
$ 675.0 million 12.25 % senior secured notes (2)
12.25
%
—
2024
650,178
—
$ 750.0 million 10.25 % senior secured notes
10.25
%
—
2026
739,295
—
$ 850.0 million 5.875 % senior unsecured notes
5.88
%
—
2026
837,659
—
$ 565.0 million 3.625 % senior unsecured notes
3.63
%
3.63
%
2024
560,019
558,781
$ 260 million Norwegian Jewel term loan
1.52
%
2.54
%
2022
221,718
221,860
$ 230 million Pride of America term loan
1.15
%
2.81
%
2022
229,558
229,621
€ 529.8 million Breakaway one loan (3)
1.15
%
2.84
%
2025
307,529
305,969
€ 529.8 million Breakaway two loan (3)
3.90
%
4.10
%
2026
343,214
370,531
€ 590.5 million Breakaway three loan (3)
2.83
%
2.98
%
2027
481,085
478,665
€ 729.9 million Breakaway four loan (3)
2.85
%
2.98
%
2029
633,699
630,088
€ 710.8 million Seahawk 1 term loan (3)
3.69
%
3.92
%
2030
695,843
692,150
€ 748.7 million Seahawk 2 term loan (3)
3.71
%
3.92
%
2031
860,212
856,188
Leonardo newbuild one loan
2.68
%
2.68
%
2034
95,563
48,009
Leonardo newbuild two loan
2.77
%
2.77
%
2035
48,009
48,009
Leonardo newbuild three loan
1.22
%
1.22
%
2036
46,519
42,700
Leonardo newbuild four loan
1.31
%
1.31
%
2037
46,519
42,700
Splendor newbuild loan
2.97
%
—
2032
402,177
—
Explorer newbuild loan
3.39
%
3.43
%
2028
251,634
242,449
Marina newbuild loan
1.03
%
2.75
%
2025
134,821
156,319
Riviera newbuild loan
0.96
%
2.48
%
2024
203,038
202,233
Term loan - newbuild related
2.50
%
—
2021
26,387
—
Finance lease and license obligations
Various
Various
2028
27,547
34,909
Total debt
11,806,119
6,801,693
Less: current portion of long-term debt
( 124,885 )
( 746,358 )
Total long-term debt
$
11,681,234
$
6,055,335
(1) Includes discount related to a beneficial conversion feature of $ 124.5 million as of December 31, 2020.
(2) Includes original issue discount of $ 5.9 million as of December 31, 2020.
(3) Currently U.S. dollar-denominated.
Credit Facilities
In March 2020, NCLC had borrowed the full amount of $ 875 million under its existing Revolving Loan Facility maturing on January 2, 2024.
In March 2020, NCLC entered into a $ 675 million revolving credit facility maturing on March 4, 2021, with JPMorgan Chase Bank, N.A., as administrative agent and as collateral agent, and certain other lenders party thereto. NCLC borrowed $ 675 million under the Epic Credit Facility, which bore interest at LIBOR plus a margin of 0.80 % . The facility was secured by Norwegian Epic, Ltd. In April 2020, NCLC entered into an incremental assumption agreement which extended the maturity date of the revolving facility commitments under the Epic Credit Facility to March 3, 2022. The
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revolving facility loans accrued interest at a per annum rate based on LIBOR plus a margin of 1.75 % in the case of Eurocurrency loans or at a per annum rate based on the base rate plus a margin of 0.75 % in the case of base rate loans. The Epic Credit Facility was repaid in July 2020 and terminated as discussed below.
In July 2020, NCLC entered into a EUR 31.2 million loan facility for newbuild related payments. The facility bears interest at a rate of 2.5 % per annum. As of December 31, 2020, EUR 21.6 million was drawn under this facility and now matures on April 15, 2022.
Modifications
In April 2020, NCLC amended an aggregate amount of $ 386 million of export credit backed facilities that finance Norwegian Breakaway, Norwegian Getaway, Norwegian Escape, Norwegian Joy, Norwegian Bliss and Norwegian Encore to incorporate the terms of a 12 -month debt holiday initiative offered to the cruise industry by Euler Hermes Aktiengesellschaft (“Hermes”), the official export credit agency of Germany. The debt holiday was initiated to provide interim debt service and financial covenant relief for borrowers during the current global COVID-19 pandemic with respect to their Hermes guaranteed financings. The amended agreements provide that, among other things, (a) amortization payments due from April 1, 2020 to March 31, 2021 (the “Deferral Period”) on the loans will be deferred and (b) the principal amounts so deferred will constitute separate tranches of loans under the facilities. The separate tranches of loans will accrue interest at a floating rate per annum based on six-month LIBOR plus a margin as follows:
Margin
€ 529.8 million Breakaway one loan (Norwegian Breakaway)
0.90
%
€ 529.8 million Breakaway two loan (Norwegian Getaway)
1.20
%
€ 590.5 million Breakaway three loan (Norwegian Escape)
1.50
%
€ 729.9 million Breakaway four loan (Norwegian Joy)
1.50
%
€ 710.8 million Seahawk 1 term loan (Norwegian Bliss)
1.00
%
€ 748.7 million Seahawk 2 term loan (Norwegian Encore)
1.00
%
After the end of the Deferral Period, the deferred amounts will amortize in eight equal semiannual installments. See “—2021 Debt Modifications” below for amendments to these facilities subsequent to December 31, 2020.
Also, in April 2020, NCLC amended its $ 230 million credit agreement, dated as of January 10, 2019, with Nordea Bank ABP, New York Branch, as administrative agent, and certain other lenders. The amendment extends the maturity date of the term loan to January 10, 2022. From January 10, 2021 to January 10, 2022, the loan shall accrue interest at a per annum rate based on LIBOR plus a margin of 1.75 % in the case of Eurocurrency loans or at a per annum rate based on the base rate plus a margin of 0.75 % in the case of base rate loans.
In May 2020, NCLC amended its $ 260 million credit agreement, dated as of May 15, 2019, with Bank of America, N.A., as administrative agent and collateral agent, and certain other lenders. The amendment provides that (a) amortization payments due through May 1, 2021 will be deferred following the consummation of certain debt and equity financings, which resulted in aggregate gross proceeds greater than the amount required for the extension and (b) the principal amount so deferred will constitute a separate tranche of loans under the facility (the “Deferred Jewel Loans”). The Deferred Jewel Loans will accrue interest at a per annum rate based on LIBOR plus a margin of 2.50 % in the case of Eurocurrency loans or at a per annum rate based on the base rate plus a margin of 1.50 % in the case of base rate loans. After the end of the deferral period, the deferred loan payments will amortize in an aggregate principal amount equal to 25 % per annum in semiannual installments, and in the case of such payment due on the maturity date, an amount equal to the then unpaid principal amount of the Deferred Jewel Loans outstanding.
NCLC entered into a Fifth Amended and Restated Credit Agreement, dated as of May 8, 2020 (the “Fifth ARCA”), with a subsidiary of NCLC, as co-borrower and JPMorgan Chase Bank, N.A., as administrative agent, and lenders holding 87.57 % of the term loans outstanding (the “Fifth ARCA Deferring Lenders”). This revised facility provides that, among other things, (a) amortization payments due within the first year after effectiveness on the loans under the Term Loan A Facility held by the Fifth ARCA Deferring Lenders will be deferred and (b) the principal amount so deferred will constitute a separate tranche of loans (the “Deferred Term Loan A”). The Deferred Term Loan A will accrue interest (x) in the case of Eurocurrency loans, at a per annum rate based on LIBOR plus a margin of 2.50 % or (y) in the case of base
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rate loans, at a per annum rate based on the base rate plus a margin of 1.50 %. After the end of the deferral period, the Deferred Term Loan A will amortize in an aggregate principal amount equal to 25 % per annum of the Deferred Term Loan A, in quarterly installments, and in the case of such payment due on the maturity date, an amount equal to the then unpaid principal amount of the Deferred Term Loan A outstanding. The Term Loan A Facility (other than the Deferred Term Loan A) that is held by the Fifth ARCA Deferring Lenders shall constitute a separate class of loans (the “Term Loan A-1”), with the same terms as the Term Loan A Facility under the Fourth Amended and Restated Credit Agreement, except that the amortization payments on the Term Loan A-1 shall be deferred during the deferral period. The portion of the Term Loan A Facility that is held by lenders other than the Fifth ARCA Deferring Lenders shall constitute a separate class of loans (the “Legacy Term Loan A”) with the same terms as the Term Loan A Facility under the Fourth Amended and Restated Credit Agreement. See “—2021 Debt Modifications” below for amendments to this facility subsequent to December 31, 2020.
In June 2020, NCLC amended the credit facilities secured by Seven Seas Explorer, Seven Seas Splendor, Riviera, Marina, Leonardo One and Leonardo Two to defer amortization with respect to certain of the debt outstanding under the agreements (the “Supplemental Agreements”). The amendments for the Seven Seas Explorer, Seven Seas Splendor, Riviera, Marina, Leonardo One and Leonardo Two facilities summarized below provide $ 156 million of incremental liquidity to the Company through March 2021 and are subject to certain customary conditions.
The Supplemental Agreements of Seven Seas Explorer, Seven Seas Splendor, Riviera, and Marina provide that, among other things, (a) amortization payments due during the Deferral Period on the loans will be deferred and (b) the principal amount so deferred will constitute a separate tranche of loans (the “Deferred Loans”). The Deferred Loans will accrue interest at a floating rate per annum based on six-month LIBOR plus a margin as follows:
Margin
Explorer newbuild loan
2.80
%
Splendor newbuild loan
1.75
%
Marina newbuild loan
0.55
%
Riviera newbuild loan
0.55
%
After the end of the Deferral Period, the Deferred Loans will amortize in an aggregate principal amount equal to 25 % per annum of the Deferred Loans, in semiannual installments. Consistent with our amendments to our Hermes-backed credit facilities described above, the Supplemental Agreements provide financial covenant relief and additional restrictions on restricted payments and certain other covenants were added. See “—2021 Debt Modifications” below for amendments to these facilities subsequent to December 31, 2020.
The above modifications resulted in aggregate modification costs of $ 17.3 million and a loss on extinguishment of debt of $ 5.0 million, which are recognized in interest expense, net for the year ended December 31, 2020.
Secured Notes
In May 2020, NCLC conducted a private offering of $ 675.0 million aggregate principal amount of 12.25 % senior secured notes due May 15, 2024 (the “2024 Senior Secured Notes”) at 99 % original issue discount. The 2024 Senior Secured Notes pay interest at 12.25 % per annum, semiannually on May 15 and November 15 of each year, to holders of record at the close of business on the immediately preceding May 1 and November 1, respectively. NCLC may redeem the 2024 Senior Secured Notes, in whole or part, at any time prior to February 15, 2024, at a price equal to 100 % of the principal amount of the notes redeemed plus accrued and unpaid interest to, but excluding, the redemption date and a “make-whole premium.” NCLC may redeem the 2024 Senior Secured Notes, in whole or in part, on or after February 15, 2024, at a price equal to 100 % of the principal amount of the notes redeemed plus accrued and unpaid interest to, but excluding, the redemption date. At any time and from time to time prior to February 15, 2022, NCLC may choose to redeem up to 35 % of the aggregate principal amount of the 2024 Senior Secured Notes with the net proceeds of certain equity offerings, subject to certain restrictions, at a redemption price equal to 112.25 % of the principal amount of the 2024 Senior Secured Notes redeemed plus accrued and unpaid interest to, but excluding, the redemption date, so long as at least 65 % of the aggregate principal amount of the 2024 Senior Secured Notes issued remains outstanding following such redemption.
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The 2024 Senior Secured Notes are secured by first-priority interests in, among other things and subject to certain agreed security principles, shares of capital stock in certain subsidiary guarantors, two of our vessels, our material intellectual property and two islands that we use in the operations of our cruise business. The 2024 Senior Secured Notes are also guaranteed by our subsidiaries that own the property that secures the 2024 Senior Secured Notes as well as certain additional subsidiaries whose assets do not secure the 2024 Senior Secured Notes.
In July 2020, NCLC conducted a private offering of $ 750.0 million aggregate principal amount of 10.25 % senior secured notes due February 1, 2026 (the “2026 Senior Secured Notes”). The 2026 Senior Secured Notes pay interest at 10.25 % per annum, semiannually on February 1 and August 1 of each year, to holders of record at the close of business on the immediately preceding January 15 and July 15, respectively. NCLC may redeem the 2026 Senior Secured Notes, in whole or part, at any time prior to August 1, 2023, at a price equal to 100 % of the principal amount of the notes redeemed plus accrued and unpaid interest to, but excluding, the redemption date and a “make-whole premium.” NCLC may redeem the 2026 Senior Secured Notes, in whole or in part, on or after August 1, 2023, at the redemption prices set forth in the indenture for the 2026 Senior Secures Notes plus accrued and unpaid interest to, but excluding, the redemption date. At any time and from time to time prior to August 1, 2023, NCLC may choose to redeem up to 35 % of the aggregate principal amount of the 2026 Senior Secured Notes with the net proceeds of certain equity offerings, subject to certain restrictions, at a redemption price equal to 110.25 % of the principal amount of the 2026 Senior Secured Notes redeemed plus accrued and unpaid interest to, but excluding, the redemption date, so long as at least 65 % of the aggregate principal amount of the 2026 Senior Secured Notes issued remains outstanding following such redemption.
NCLC used a portion of the proceeds from the offering of the 2026 Senior Secured Notes to repay the $ 675 million principal amount plus accrued and unpaid interest outstanding under the Epic Credit Facility, which was secured by the Norwegian Epic. Following the termination of the Epic Credit Facility, the vessel owned and operated by Norwegian Epic, Ltd. was released as collateral, thereby enabling the 2026 Senior Secured Notes and certain of the related guarantees to be secured by a first-priority security interest in, among other things and subject to certain agreed security principles, the Norwegian Epic. The repayment and termination of the Epic Credit Facility resulted in a loss on extinguishment of $ 5.5 million, which was recognized in interest expense, net for the year ended December 31, 2020.
The indentures governing the 2024 Senior Secured Notes and 2026 Senior Secured Notes include requirements that, among other things and subject to a number of qualifications and exceptions, restrict the ability of NCLC and its restricted subsidiaries, as applicable, to (i) incur or guarantee additional indebtedness; (ii) pay dividends or distributions on, or redeem or repurchase, equity interests and make other restricted payments; (iii) make investments; (iv) consummate certain asset sales; (v) engage in certain transactions with affiliates; (vi) grant or assume certain liens; and (vii) consolidate, merge or transfer all or substantially all of their assets.
Exchangeable Notes
In May 2020, NCLC conducted a private offering of $ 862.5 million aggregate principal amount of 6.00 % exchangeable senior notes due May 15, 2024 (the “2024 Exchangeable Notes”). The 2024 Exchangeable Notes are guaranteed by NCLH on a senior basis. Holders may exchange their 2024 Exchangeable Notes at their option into redeemable preference shares of NCLC. Upon exchange, the preference shares will be immediately and automatically exchanged, for each $ 1,000 principal amount of exchanged 2024 Exchangeable Notes, into a number of NCLH’s ordinary shares based on the exchange rate. The exchange rate will initially be 72.7273 ordinary shares per $ 1,000 principal amount of 2024 Exchangeable Notes (equivalent to an initial exchange price of approximately $ 13.75 per ordinary share). The maximum exchange rate is 89.4454 and reflects potential adjustments to the initial exchange rate, which would only be made in the event of certain make-whole fundamental changes or tax redemption events. The exchange rate referred to above is also subject to adjustment for any stock split, stock dividend or similar transaction. The 2024 Exchangeable Notes pay interest at 6.00 % per annum, semiannually on May 15 and November 15 of each year, to holders of record at the close of business on the immediately preceding May 1 and November 1, respectively.
Also in May 2020, NCLH and NCLC entered into an investment agreement with an affiliate of L Catterton (the “Private Investor”), pursuant to which NCLC agreed to sell and issue to the Private Investor (the “Private Exchangeable Notes Transaction”) up to $ 400 million in aggregate principal amount of exchangeable senior notes due June 1, 2026 (the “Private Exchangeable Notes”). The Private Exchangeable Notes Transaction closed on May 28, 2020. The Private Exchangeable Notes accrue interest at a rate of 7.0 % per annum for the first year post-issuance (which will accrete to the
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principal amount), 4.5 % per annum interest (which will accrete to the principal amount) plus 3.0 % per annum cash interest for the following four years and 7.5 % per annum in cash interest for the final year prior to maturity. The Private Investor has certain registration rights in respect of NCLH’s ordinary shares underlying the Private Exchangeable Notes and is subject to certain customary transfer, voting and standstill restrictions.
The Private Exchangeable Notes are guaranteed by NCLH on a senior basis. Holders may exchange their Private Exchangeable Notes at their option into redeemable preference shares of NCLC. Upon exchange, the preference shares will be immediately and automatically exchanged, for each $ 1,000 principal amount of exchanged Private Exchangeable Notes, into a number of NCLH’s ordinary shares based on the exchange rate. The exchange rate will initially be approximately 82.6446 ordinary shares per $ 1,000 principal amount of Private Exchangeable Notes (equivalent to an initial exchange price of $ 12.10 per ordinary share). The maximum exchange rate is 90.9090 and reflects potential adjustments to the initial exchange rate, which would only be made in the event of certain make-whole fundamental changes or tax redemption events. The exchange rate referred to above is also subject to adjustment for any stock split, stock dividend or similar transaction. NCLC has the right to redeem all or a portion of the Private Exchange Notes at any time after the third anniversary of the issuance date at a price equal to 100 % of the accreted principal amount thereof if the market closing price of NCLH’s ordinary shares has been at least 250 % of the per share price implied by the exchange rate then in effect for at least 20 trading days during any 30 consecutive trading day period.
The Private Exchangeable Notes contain a beneficial conversion feature, which resulted from a significant increase in our share price between the execution of the agreement and the issuance of the notes. A beneficial conversion feature is a nondetachable conversion feature that is “in-the-money” at the commitment date. The in-the-money portion, also known as the intrinsic value of the option, is recorded in equity, with an offsetting discount to the carrying amount of convertible debt to which it is attached. The discount is amortized to interest expense over the life of the debt with adjustments to amortization upon full or partial conversions of the debt. The beneficial conversion feature for the Private Exchangeable Notes is $ 131.2 million and is recognized within additional paid-in capital.
In July 2020, NCLC conducted a private offering of $ 450.0 million aggregate principal amount of 5.375 % exchangeable senior notes due August 1, 2025 (the “2025 Exchangeable Notes”). The 2025 Exchangeable Notes are guaranteed by NCLH on a senior basis. Holders may exchange their 2025 Exchangeable Notes at their option into redeemable preference shares of NCLC. Upon exchange, the preference shares will be immediately and automatically exchanged, for each $ 1,000 principal amount of exchanged 2025 Exchangeable Notes, into a number of NCLH’s ordinary shares based on the exchange rate. The exchange rate will initially be 53.3333 ordinary shares per $ 1,000 principal amount of 2025 Exchangeable Notes (equivalent to an initial exchange price of approximately $ 18.75 per ordinary share). The maximum exchange rate is 66.6666 and reflects potential adjustments to the initial exchange rate, which would only be made in the event of certain make-whole fundamental changes or tax redemption events. The exchange rate referred to above is also subject to adjustment for any stock split, stock dividend or similar transaction. The 2025 Exchangeable Notes pay interest at 5.375 % per annum, semiannually on February 1 and August 1 of each year, to holders of record at the close of business on the immediately preceding January 15 and July 15, respectively.
The net carrying amounts of the liability components of our exchangeable notes consist of the following (in thousands):
December 31,
2020
Principal amount
$
1,726,811
Less: Unamortized debt discount, including deferred financing fees
( 174,331 )
Net carrying value
$
1,552,480
The remaining period over which the unamortized debt discount will be recognized as non-cash interest expense is 3.4 years, 4.6 years and 5.4 years for the 2024 Exchangeable Notes, 2025 Exchangeable Notes and Private Exchangeable Notes, respectively.
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The following table presents the interest expense recognized related to the exchangeable notes (in thousands):
Year Ended
December 31, 2020
Interest expense, including amortization of debt discounts and coupon interest
$
93,199
The effective interest rate is 7.07 %, 5.97 % and 15.54 % for the 2024 Exchangeable Notes, 2025 Exchangeable Notes and the Private Exchangeable Notes, respectively.
As of December 31, 2020, the if-converted value above par was $ 732.7 million on available shares of 62.7 million, $ 160.3 million on available shares of 24.0 million and $ 456.4 million on available shares of 34.2 million for the 2024 Exchangeable Notes, 2025 Exchangeable Notes and the Private Exchangeable Notes, respectively.
Unsecured Notes
In December 2020, NCLC conducted a private offering of $ 850.0 million aggregate principal amount of 5.875 % senior secured notes due March 15, 2026 (the “2026 Senior Unsecured Notes”). The 2026 Senior Unsecured Notes pay interest at 5.875 % per annum, semiannually on March 15 and September 15 of each year, commencing on March 15, 2021, to holders of record at the close of business on the immediately preceding March 1 and September 1, respectively. NCLC may redeem the 2026 Senior Unsecured Notes, in whole or part, at any time prior to December 15, 2025, at a price equal to 100 % of the principal amount of the notes redeemed plus accrued and unpaid interest to, but excluding, the redemption date and a “make-whole premium.” NCLC may redeem the 2026 Senior Unsecured Notes, in whole or in part, on or after December 15, 2025, at a price equal to 100 % of the principal amount of the notes plus accrued and unpaid interest to, but excluding, the redemption date. At any time and from time to time prior to December 15, 2022, NCLC may choose to redeem up to 40 % of the aggregate principal amount of the 2026 Senior Unsecured Notes with the net proceeds of certain equity offerings, subject to certain restrictions, at a redemption price equal to 105.875 % of the principal amount of the 2026 Senior Unsecured Notes redeemed plus accrued and unpaid interest to, but excluding, the redemption date, so long as at least 60 % of the aggregate principal amount of the 2026 Senior Unsecured Notes issued remains outstanding following such redemption.
The indenture governing the 2026 Senior Unsecured Notes includes requirements that, among other things and subject to a number of qualifications and exceptions, restrict the ability of NCLC and its restricted subsidiaries, as applicable, to (i) incur or guarantee additional indebtedness; (ii) pay dividends or distributions on, or redeem or repurchase, equity interests and make other restricted payments; (iii) make investments; (iv) consummate certain asset sales; (v) engage in certain transactions with affiliates; (vi) grant or assume certain liens; and (vii) consolidate, merge or transfer all or substantially all of their assets.
2021 Modifications
On January 29, 2021, NCLC entered into an amendment agreement (the “First Amendment”), which amends the Fifth ARCA (as amended by the First Amendment, the “Senior Secured Credit Facility”). The First Amendment provides that, among other things, (a) amortization payments due between the First Amendment effective date and prior to June 30, 2022 (the “First Amendment Deferral Period”) on the Legacy Term Loan A and Term Loan A-1 held by lenders that have consented to such deferral (the “First Amendment Deferring Lenders”) are deferred and such deferred principal amount constitutes a separate tranche of loans (the “Deferred Term Loan A-1”) and (b) the Deferred Term Loan A loans of First Amendment Deferring Lenders were converted into Deferred Term Loan A-1 loans. The Legacy Term Loan A and Term Loan A-1 that were held by the First Amendment Deferring Lenders (other than amounts converted into the Deferred Term Loan A-1) constitute a separate tranche of loans (the “Term Loan A-2”), with the same terms as the Legacy Term Loan A and Term Loan A-1 under the Fifth ARCA, except that amortization payments on the Term Loan A-2 shall be deferred during the First Amendment Deferral Period and thereafter such Term Loan A-2 will amortize in an aggregate principal amount equal to approximately 5.88 % per annum and the interest rate for Term Loan A-2 shall be modified as described below. The Deferred Term Loan A-1 will accrue interest (x) in the case of Eurocurrency loans, at a per annum rate based on LIBOR plus a margin of 2.50 % or (y) in the case of base rate loans, at a per annum rate based on the base rate plus a margin of 1.50 %. After the end of the First Amendment Deferral Period, the Deferred Term Loan
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A-1 will amortize in an aggregate principal amount equal to 25 % per annum of the Deferred Term Loan A-1 outstanding immediately after the consummation of the First Amendment, in quarterly installments, and in the case of such payment due on the maturity date, an amount equal to the then unpaid principal amount of the Deferred Term Loan A-1 outstanding. The Legacy Term Loan A, Term Loan A-1 and Deferred Term Loan A that were held by lenders other than the First Amendment Deferring Lenders constitute separate classes of loans and were unchanged. The First Amendment resulted in deferred amortization payments aggregating approximately $ 70 million prior to June 30, 2022.
The First Amendment provides that, (a) from the First Amendment effective date to and including December 31, 2022 (the “Covenant Relief Period”) the testing of the loan to value, debt to capitalization and EBITDA to debt service covenants under the Senior Secured Credit Facility will be suspended and the free liquidity test will be replaced by a covenant to maintain at least $ 200 million in free liquidity, certified on a monthly basis. During the Covenant Relief Period the interest rate for Term Loan A-2 and revolving loans held by Lenders that consented to the First Amendment will be LIBOR plus 2.00 % (or base rate plus 1.00 %) with decreases subject to a leverage-based pricing grid. The First Amendment also makes certain other changes to the Senior Secured Credit Facility, including tightening certain of the baskets applicable to our ability make certain asset dispositions, investments and restricted payments.
In addition, in February 2021, NCLC amended all of its export-credit backed facilities to defer amortization payments aggregating approximately $ 680 million through March 31, 2022 and/or make certain changes in respect of covenants and undertakings contained therein.
The facilities that finance Norwegian Breakaway, Norwegian Getaway, Norwegian Escape, Norwegian Joy, Norwegian Bliss, Norwegian Encore, Seven Seas Explorer, Seven Seas Splendor, Riviera and Marina were amended to provide that, among other things, (a) amortization payments due from April 1, 2021 to March 31, 2022 (the “Second Deferral Period”) on the loans will be deferred and (b) the principal amounts so deferred will constitute separate tranches of loans under the facilities. The separate tranches of loans will accrue interest at a floating rate per annum based on six-month LIBOR plus a margin as follows:
Margin
€ 529.8 million Breakaway one loan (Norwegian Breakaway)
1.10
%
€ 529.8 million Breakaway two loan (Norwegian Getaway)
1.40
%
€ 590.5 million Breakaway three loan (Norwegian Escape)
1.50
%
€ 729.9 million Breakaway four loan (Norwegian Joy)
1.50
%
€ 710.8 million Seahawk 1 term loan (Norwegian Bliss)
1.20
%
€ 748.7 million Seahawk 2 term loan (Norwegian Encore)
1.20
%
Explorer newbuild loan
3.00
%
Splendor newbuild loan
1.95
%
Marina newbuild loan
0.75
%
Riviera newbuild loan
0.75
%
After the end of the Second Deferral Period, the deferred loans will amortize in an aggregate principal amount equal to 20 % per annum of the deferred loans, in semiannual installments.
In addition, all of NCLC’s export-credit backed facilities were amended to provide that, from the effective date of the amendments to and including December 31, 2022, certain of the financial covenants under such facilities will be suspended and the free liquidity test will be replaced by a covenant to maintain at least $ 200 million in free liquidity. The amendments also made certain other changes to the facilities, including imposing further restrictions on NCLC’s ability to incur debt, create security, issue equity and make dividends and other distributions.
Interest Expense
Interest expense, net for the year ended December 31, 2020 was $ 482.3 million which included $ 42.2 million of amortization of deferred financing fees and a $ 27.8 million loss on extinguishment and modification of debt. Interest expense, net for the year ended December 31, 2019 was $ 272.9 million which included $ 27.5 million of amortization of deferred financing fees and a $ 16.7 million loss on extinguishment of debt. Interest expense, net for the year ended
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December 31, 2018 was $ 270.4 million which included $ 31.4 million of amortization of deferred financing fees and a $ 6.3 million loss on extinguishment and modification of debt.
Debt Repayments
As a result of the aforementioned executed amendments, we have reclassified $ 671.1 million of debt which was originally classified as a current liability based on the contractual maturities outstanding at December 31, 2020 to long-term debt. The following are scheduled principal repayments on long-term debt including finance lease obligations as of December 31, 2020 for each of the next five years (in thousands):
Year
Amount
2021
$
124,829
2022
1,192,923
2023
917,893
2024
5,051,867
2025
1,045,773
Thereafter
3,818,798
Total
$
12,152,083
We had an accrued interest liability of $ 101.9 million and $ 33.3 million as of December 31, 2020 and 2019, respectively.
Debt Covenants
At December 31, 2020, we were in compliance with all of our debt covenants. Subsequent to December 31, 2020, we have received certain financial and other debt covenant waivers through December 31, 2022 and added new free liquidity requirements. If we do not continue to remain in compliance with our covenants, including following the expiration of any current waivers, we would have to seek additional amendments to our covenants. However, no assurances can be made that such amendments would be approved by our lenders. 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 would have a material adverse impact on our operations and liquidity.
9.
Related Party Disclosures
NCLC, as issuer, NCLH, as guarantor, and U.S. Bank National Association, as trustee are all parties to an indenture, dated May 28, 2020 (the “Indenture”) related to the Private Exchangeable Notes, which are currently held by the Private Investor. The terms of the Indenture are more fully described under Note 8 — “Long-Term Debt”. Based on the initial exchange rate, the Private Investor beneficially owned over 10 % of NCLH’s outstanding ordinary shares as of December 31, 2020. The initial exchange rate in the Private Exchangeable Notes may be adjusted in the event of certain make-whole fundamental changes or tax redemption events (each, as described in the Indenture), but the maximum number of NCLH ordinary shares issuable upon an exchange in the event of such an adjustment would not exceed 46,577,947 . The Private Exchangeable Notes also contain certain anti-dilution provisions that could subject the exchange rate to additional adjustment if certain events occur.
NCLH, NCLC and the Private Investor also entered into an investor rights agreement dated May 28, 2020 (the “Investor Rights Agreement”) which provides that, among other things, the Private Investor is entitled to nominate one person who will be appointed to the board of directors of NCLH until the first date on which the Private Investor no longer beneficially owns in the aggregate at least 50 % of the number of NCLH’s ordinary shares issuable upon exchange of the Private Exchangeable Notes beneficially owned by the Private Investor in the aggregate as of May 28, 2020 (subject to certain adjustments).
The Investor Rights Agreement also provides for customary registration rights for the Private Investor and its affiliates, including demand and piggyback registration rights, contains customary transfer restrictions and provides that the
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Private Investor and its affiliates are subject to a voting agreement with respect to certain matters during a specified period of time.
10.
Fair Value Measurements and Derivatives
Fair value is defined as the price at which an orderly transaction to sell an asset or to transfer a liability would take place between market participants at the measurement date under current market conditions (that is, an exit price at the measurement date from the perspective of a market participant that holds the asset or owes the liability).
Fair Value Hierarchy
The following hierarchy for inputs used in measuring fair value should maximize the use of observable inputs and minimize the use of unobservable inputs by requiring that the most observable inputs be used when available:
Level 1 — Quoted prices in active markets for identical assets or liabilities that are accessible at the measurement dates.
Level 2 — Significant other observable inputs that are used by market participants in pricing the asset or liability based on market data obtained from independent sources.
Level 3 — Significant unobservable inputs we believe market participants would use in pricing the asset or liability based on the best information available.
Derivatives
We are exposed to market risk attributable to changes in interest rates, foreign currency exchange rates and fuel prices. We attempt to minimize these risks through a combination of our normal operating and financing activities and through the use of derivatives. We assess whether derivatives used in hedging transactions are “highly effective” in offsetting changes in the cash flow of our hedged forecasted transactions. We use regression analysis for this hedge relationship and high effectiveness is achieved when a statistically valid relationship reflects a high degree of offset and correlation between the fair values of the derivative and the hedged forecasted transaction. Cash flows from the derivatives are classified in the same category as the cash flows from the underlying hedged transaction. If it is determined that the hedged forecasted transaction is no longer probable of occurring, then the amount recognized in accumulated other comprehensive income (loss) is released to earnings. There are no amounts excluded from the assessment of hedge effectiveness and there are no credit-risk-related contingent features in our derivative agreements. We monitor concentrations of credit risk associated with financial and other institutions with which we conduct significant business. Credit risk, including but not limited to counterparty non-performance under derivatives, is not considered significant, as we primarily conduct business with large, well-established financial institutions with which we have established relationships, and which have credit risks acceptable to us, or the credit risk is spread out among many creditors. We do not anticipate non-performance by any of our significant counterparties.
As of December 31, 2020, we had fuel swaps, which are used to mitigate the financial impact of volatility of fuel prices pertaining to approximately 596 thousand metric tons of our projected fuel purchases, maturing through December 31, 2023 . Beginning in July 2020, our fuel swaps designated as hedges for heavy fuel oil failed the effectiveness tests required for recognition within accumulated other comprehensive income (loss). As a result, the change in fair value related to these fuel swaps have been recognized in other income (expense), net for July through September of 2020. On November 1, 2020, the approximately 197 thousand metric tons of fuel hedges for heavy fuel oil maturing through December 31, 2022 were dedesignated as cash flow hedges.
As of December 31, 2020, we had fuel swaps which were not designated as cash flow hedges. Due to a decrease in forecasted fuel consumption resulting from voyage cancellations due to COVID-19, we released into earnings fuel hedges of approximately 89 thousand metric tons of fuel as these forecasted transactions were no longer probable of occurring. The agreements mature through September 30, 2021 .
As of December 31, 2020, we had foreign currency forward contracts, matured foreign currency options and matured foreign currency collars which are used to mitigate the financial impact of volatility in foreign currency exchange rates
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related to our ship construction contracts denominated in euros. The notional amount of our foreign currency forward contracts was € 1.9 billion, or $ 2.3 billion based on the euro/U.S. dollar exchange rate as of December 31, 2020.
As of December 31, 2020, we had interest rate swaps and collars, which are used to hedge our exposure to interest rate movements and manage our interest expense. The notional amount of our outstanding debt associated with the interest rate swaps and collars was $ 0.7 billion as of December 31, 2020.
The derivatives measured at fair value and the respective location in the consolidated balance sheets includes the following (in thousands):
Assets
Liabilities
December 31,
December 31,
December 31,
December 31,
Balance Sheet Location
2020
2019
2020
2019
Derivative Contracts Designated as Hedging Instruments
Fuel contracts
Other long-term assets
$
—
$
277
$
—
$
—
Accrued expenses and other liabilities
—
2,300
35,973
18,257
Other long-term liabilities
—
683
28,947
17,763
Foreign currency contracts
Prepaid expenses and other assets
5,779
—
—
—
Other long-term assets
43,250
—
—
—
Accrued expenses and other liabilities
—
—
14,778
33,475
Other long-term liabilities
6,821
169
44,938
118,500
Interest rate contracts
Accrued expenses and other liabilities
—
—
6,776
2,178
Other long-term liabilities
—
—
452
1,861
Total derivatives designated as hedging instruments
$
55,850
$
3,429
$
131,864
$
192,034
Derivative Contracts Not Designated as Hedging Instruments
Fuel contracts
Accrued expenses and other liabilities
$
546
$
—
$
6,732
$
—
Other long-term liabilities
—
—
3,534
—
Total derivatives not designated as hedging instruments
$
546
$
—
$
10,266
$
—
Total derivatives
$
56,396
$
3,429
$
142,130
$
192,034
The fair values of swap and forward contracts are determined based on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets. The Company determines the value of options and collars utilizing an option pricing model based on inputs that are either readily available in public markets or can be derived from information available in publicly quoted markets. The option pricing model used by the Company is an industry standard model for valuing options and is used by the broker/dealer community. The inputs to this option pricing model are the option strike price, underlying price, risk-free rate of interest, time to expiration, and volatility. The fair value of option contracts considers both the intrinsic value and any remaining time value associated with those derivatives that have not yet settled. The Company also considers counterparty credit risk and its own credit risk in its determination of all estimated fair values.
Our derivatives and financial instruments were categorized as Level 2 in the fair value hierarchy, and we had no derivatives or financial instruments categorized as Level 1 or Level 3. Our derivative contracts include rights of offset with our counterparties. We have elected to net certain assets and liabilities within counterparties when the rights of offset exist. We are not required to post cash collateral related to our derivative instruments.
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The gross and net amounts recognized within assets and liabilities include the following (in thousands):
Gross
Gross
Gross
Amounts
Total Net
Amounts
December 31, 2020
Amounts
Offset
Amounts
Not Offset
Net Amounts
Assets
$
49,029
$
—
$
49,029
$
( 49,029 )
$
—
Liabilities
142,130
( 7,367 )
134,763
( 57,351 )
77,412
Gross
Gross
Gross
Amounts
Total Net
Amounts
December 31, 2019
Amounts
Offset
Amounts
Not Offset
Net Amounts
Assets
$
277
$
—
$
277
$
—
$
277
Liabilities
192,034
( 3,152 )
188,882
( 149,863 )
39,019
The effects of cash flow hedge accounting on accumulated other comprehensive income (loss) include the following (in thousands):
Location of Gain
(Loss) Reclassified
from Accumulated
Amount of Gain (Loss) Reclassified
Amount of Gain (Loss)
Other Comprehensive
from Accumulated Other
Recognized in Other
Income (Loss) into
Comprehensive
Derivatives
Comprehensive Income
Income
Income (Loss) into Income
Year Ended December 31,
Year Ended December 31,
2020
2019
2018
2020
2019
2018
Fuel contracts
$
( 157,669 )
$
46,154
$
( 52,949 )
Fuel
$
( 45,488 )
$
14,093
$
34,410
Fuel contracts
—
—
—
Other income (expense), net
( 49,653 )
—
—
Foreign currency contracts
116,496
( 163,197 )
( 108,911 )
Depreciation and amortization
( 4,929 )
( 3,062 )
( 3,463 )
Interest rate contracts
( 10,469 )
( 5,972 )
646
Interest expense, net
( 6,600 )
( 2,133 )
( 851 )
Total gain (loss) recognized in other comprehensive income
$
( 51,642 )
$
( 123,015 )
$
( 161,214 )
$
( 106,670 )
$
8,898
$
30,096
The effects of cash flow hedge accounting on the consolidated statements of operations include the following (in thousands):
Year Ended December 31, 2020
Depreciation
and
Interest
Other Income
Fuel
Amortization
Expense, net
( Expense), net
Total amounts of income and expense line items presented in the consolidated statements of operations in which the effects of cash flow hedges are recorded
$
264,712
$
717,840
$
482,313
( 33,599 )
Amount of gain (loss) reclassified from accumulated other comprehensive income (loss) into income
Fuel contracts
( 45,488 )
—
—
—
Foreign currency contracts
—
( 4,929 )
—
—
Interest rate contracts
—
—
( 6,600 )
—
Amount of loss reclassified from accumulated other comprehensive income (loss) into income as a result that a forecasted transaction is no longer probable of occurring
Fuel contracts
—
—
—
( 49,653 )
Amount of gain recognized in income as a result of failing effectiveness tests
Fuel contracts
—
—
—
5,507
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The effects of cash flow hedge accounting on the consolidated statements of operations include the following (in thousands):
Year Ended December 31, 2019
Year Ended December 31, 2018
Depreciation
Depreciation
and
Interest
and
Interest
Fuel
Amortization
Expense, net
Fuel
Amortization
Expense, net
Total amounts of income and expense line items presented in the consolidated statements of operations in which the effects of cash flow hedges are recorded
$
409,602
$
646,188
$
272,867
$
392,685
$
561,060
$
270,404
Amount of gain (loss) reclassified from accumulated other comprehensive income (loss) into income
Fuel contracts
14,093
—
—
34,410
—
—
Foreign currency contracts
—
( 3,062 )
—
—
( 3,463 )
—
Interest rate contracts
—
—
( 2,133 )
—
—
( 851 )
The effects of derivatives not designated as hedging instruments on the consolidated statements of operations include the following (in thousands):
Amount of Gain (Loss) Recognized in Income
Year Ended December 31,
Location of Gain (Loss)
2020
2019
2018
Derivatives not designated as hedging instruments
Fuel contracts
Other income (expense), net
$
20,932
$
—
$
—
Long-Term Debt
As of December 31, 2020 and 2019, the fair value of our long-term debt, including the current portion, was $ 14,197.8 million and $ 6,957.8 million, respectively, which was $ 2,176.1 million higher and $ 31.3 million higher, respectively, than the carrying values, excluding deferred financing costs. The difference between the fair value and carrying value of our long-term debt is due to our fixed and variable rate debt obligations carrying interest rates that are above or below market rates at the measurement dates as well as the beneficial conversion feature recognized on the Private Exchangeable Notes. The fair value of our long-term revolving and term loan facilities was calculated based on estimated rates for the same or similar instruments with similar terms and remaining maturities. The fair value of our exchangeable notes considers observable risk-free rates; credit spreads of the same or similar instruments; and share prices, tenors, and historical and implied volatilities which are sourced from observable market data. The inputs are considered to be Level 2 in the fair value hierarchy. Market risk associated with our long-term variable rate debt is the potential increase in interest expense from an increase in interest rates or from an increase in share values.
Non-Recurring Measurements of Non-Financial Assets
Goodwill and trade names are nonfinancial instruments that are measured at fair value on a non-recurring basis. In January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350) — Simplifying the Test for Goodwill Impairment, which simplifies the test for goodwill impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measured a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. The guidance was adopted with an effective date of January 1, 2020, and therefore, our interim goodwill impairment tests as of March 31, 2020 were performed using only a Step 1 test.
The Step 1 Test used discounted future cash flows and other market data to determine the estimated fair value of the reporting units at March 31, 2020, which are all considered Level 3 inputs. Our discounted cash flow valuation reflected our principal assumptions of 1) forecasted future operating results and growth rates, which have been prepared under multiple scenarios and are probability weighted, 2) forecasted capital expenditures for fleet growth and ship improvements and 3) a weighted average cost of capital of market participants. Historically, our Step 1 Test consisted of a combined approach using discounted future cash flows and market multiples to determine the estimated fair value of
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the reporting units. However, beginning with the Step 1 Test performed as of March 31, 2020 as a result of triggering events, the market multiples were used solely as a corroboratory approach given the impact of COVID-19 on the current year’s results, as of the valuation date, as well as prospective results including the lack of any guidance provided, which were not available for our peers. We concluded that this approach is the most representative method to estimate fair value as it utilizes expectations of long-term growth as well as current market conditions. For the trade names, we used 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 believe that we made reasonable estimates and judgments. As of December 31, 2020, our annual review supports the carrying value of these assets; however, a change in our estimated future operating cash flows may result in a decline in estimated fair value in future periods, which may result in a need to recognize additional impairment charges.
Other
The carrying amounts reported in the consolidated balance sheets of all other financial assets and liabilities approximate fair value.
11.
Employee Benefits and Share-Based Compensation
Amended and Restated 2013 Performance Incentive Plan
In January 2013, NCLH adopted the 2013 Performance Incentive Plan, which provided for the issuance of up to 15,035,106 of NCLH’s ordinary shares pursuant to awards granted under the plan, with no more than 5,000,000 shares being granted to one individual in any calendar year. In May 2016, the plan was amended and restated (“Restated 2013 Plan”) pursuant to approval from the Board of Directors and NCLH’s shareholders. Among other things, under the Restated 2013 Plan, the number of NCLH’s ordinary shares that may be delivered pursuant to all awards granted under the plan was increased by an additional 12,430,000 shares to a new maximum aggregate limit of 27,465,106 shares. Additionally, the expiration date of the Restated 2013 Plan was extended to March 30, 2026. Share options under the plan are granted with an exercise price equal to the closing market price of NCLH shares at the date of grant. The vesting period for time-based options is typically set at three , four or five years with a contractual life ranging from seven to 10 years . The vesting period for time-based and performance-based restricted share units is generally three years . Forfeited awards will be available for subsequent awards under the Restated 2013 Plan.
Share Option Awards
There were no time-based share option awards granted for the years ended December 31, 2020, 2019 and 2018 or performance-based share option awards granted for the year ended December 31, 2020 and 2019. The performance-based options awarded to our President and Chief Executive Officer in August 2015 were subject to performance conditions such that the number of awards that ultimately vested depended on the adjusted earnings per share (“Adjusted EPS”) and adjusted return on invested capital (“Adjusted ROIC”) achieved by the Company during the performance period compared to targets established at the award date. Although the terms of the performance-based awards provide the compensation committee with the discretion to make certain adjustments to the performance calculation, it was determined that a mutual understanding of the key terms and conditions of these awards had been ascertained in 2018. In 2018, the grant date was therefore established for performance-based awards granted in prior years. The fair value of each performance-based option award is estimated on the date of grant using the Black-Scholes option-pricing model. The estimated fair value of the share options is amortized over the requisite service period using the straight-line method. The assumptions used within the option-pricing model for the performance-based awards are as follows:
2018
Dividend yield
—%
Expected share price volatility
31.50 % - 32.20 %
Risk-free interest rate
2.48 % - 2.58 %
Expected term
3.72 - 4.22 years
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Expected volatility was determined based on the historical share prices in our industry. The risk-free rate was based on U.S. Treasury zero coupon issues with a remaining term equal to the expected option term at grant date. The expected term was calculated under the simplified method.
The following table sets forth a summary of option activity under NCLH’s Restated 2013 Plan for the period presented:
Weighted-
Number of Share Option Awards
Weighted-Average Exercise Price
Average
Aggregate
Time-
Performance-
Market-
Time-
Performance-
Market-
Contractual
Intrinsic
Based
Based
Based
Based
Based
Based
Term
Value
Awards
Awards
Awards
Awards
Awards
Awards
(years)
(in thousands)
Outstanding as of January 1, 2020
4,918,554
115,489
208,333
$
51.84
$
59.11
$
59.43
5.42
$
33,413
Exercised
( 48,221 )
( 906 )
—
44.38
19.00
—
Forfeited and cancelled
( 345,126 )
—
—
51.24
—
—
Outstanding as of December 31, 2020
4,525,207
114,583
208,333
$
51.96
$
59.43
$
59.43
4.42
$
—
Vested and expected to vest as of December 31, 2020
4,525,207
114,583
—
$
51.96
$
59.43
$
—
4.42
$
—
Exercisable as of December 31, 2020
4,525,207
114,583
—
$
51.96
$
59.43
$
—
4.42
$
—
The weighted-average grant-date fair value of performance-based options granted (or where a grant date had not been previously established, the fair value recognized) during the year ended December 31, 2018 was $ 15.20 . The total intrinsic value of share options exercised during 2020, 2019 and 2018 was $ 0.6 million, $ 13.3 million and $ 16.7 million, respectively, and total cash received by the Company from exercises was $ 2.2 million, $ 28.3 million and $ 25.8 million, respectively. As of December 31, 2020, there was no unrecognized compensation cost, related to options granted under our share-based incentive plans.
Restricted Share Unit (“RSU”) Awards
On July 27, 2020, NCLH granted 2.5 million time-based RSU awards to our employees, which vest on July 27, 2022. Additionally, on July 27, 2020, NCLH granted 0.3 million performance-based RSU awards to certain members of our management team, which vest upon the achievement of certain non-financial performance hurdles and generally require continued employment through July 27, 2022.
On March 2, 2020, NCLH granted to certain employees 2.4 million time-based RSU awards which vest equally over three years . Also, on March 2, 2020, NCLH granted to certain members of our management team 0.6 million performance-based RSU awards, which vest upon the achievement of certain pre-established performance targets and which amount assumes the maximum level of achievement.
The fair value of the time-based and performance-based RSUs is equal to the closing market price of NCLH shares at the date of grant. The performance-based RSUs awarded to certain members of our management team are subject to performance conditions such that the number of shares that ultimately vest depends on the Adjusted EPS and Adjusted ROIC achieved by the Company during the performance period compared to targets established at the award date or other non-financial targets. Although the terms of the performance-based RSU awards provide the compensation committee with the discretion to make certain adjustments to the performance calculation, a mutual understanding of the key terms and conditions of these awards has been ascertained. The Company remeasures the probability and the cumulative share-based compensation expense of the awards each reporting period until vesting or forfeiture occurs.
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The following table sets forth a summary of RSU activity for the period presented:
Number of
Weighted-
Number of
Weighted-
Number of
Weighted-
Time-Based
Average Grant
Performance-
Average Grant
Market-
Average Grant
Awards
Date Fair Value
Based Awards
Date Fair Value
Based Awards
Date Fair Value
Non-vested as of January 1, 2020
3,245,625
$
54.94
1,129,396
$
56.09
50,000
$
59.43
Granted
5,380,123
23.69
945,598
(1)
27.75
—
—
Vested
( 1,610,315 )
54.01
( 192,523 )
56.27
—
—
Forfeited or expired
( 351,508 )
43.53
( 317,287 )
53.72
—
—
Non-vested as of December 31, 2020
6,663,925
$
30.54
1,565,184
$
39.42
50,000
$
59.43
Non-vested and expected to vest as of December 31, 2020
6,663,925
$
30.54
981,098
$
41.71
—
$
—
(1) Number of performance-based RSU awards included assumes maximum achievement of performance targets.
As of December 31, 2020, there were total unrecognized compensation costs related to non-vested time-based, non-vested performance-based and market-based RSUs of $ 127.8 million, $ 6.1 million and $ 0 , respectively. The costs are expected to be recognized over a weighted-average period of 1.7 years, 1.0 years and 0 years, respectively, for the time-based, performance-based and market-based RSUs. Taxes paid pursuant to net share settlements in 2020, 2019 and 2018 were $ 15.4 million, $ 20.9 million and $ 13.9 million, respectively.
Employee Stock Purchase Plan (“ESPP”)
In April 2014, NCLH’s shareholders approved the ESPP. The purpose of the ESPP is to provide eligible employees with an opportunity to purchase NCLH’s ordinary shares at a favorable price and upon favorable terms in consideration of the participating employees’ continued services. A maximum of 2,000,000 of NCLH’s ordinary shares may be purchased under the ESPP. To be eligible to participate in an offering period, on the grant date of that period, an individual must be customarily employed by the Company or a participating subsidiary for more than twenty hours per week and for more than five months per calendar year. Participation in the ESPP is also subject to certain limitations. The ESPP is considered to be compensatory based on: a) the 15 % purchase price discount and b) the look-back purchase price feature. Since the plan is compensatory, compensation expense must be recorded in the consolidated statements of operations on a straight-line basis over the six-month withholding period. As of December 31, 2020 and 2019, we had a liability for payroll withholdings received of $ 1.4 million and $ 2.1 million, respectively.
The compensation expense recognized for share-based compensation for the periods presented include the following (in thousands):
Year Ended December 31,
Classification of expense
2020
2019
2018
Payroll and related (1)
$
21,190
$
17,597
$
15,629
Marketing, general and administrative (2)
90,107
77,458
100,354
Total share-based compensation expense
$
111,297
$
95,055
$
115,983
(1) Amounts relate to equity granted to certain of our shipboard officers.
(2) Amounts relate to equity granted to certain of our corporate employees.
Employee Benefit Plans
We offer annual incentive bonuses pursuant to our Restated 2013 Plan for our executive officers and other key employees. Bonuses under the plan become earned and payable based on the Company’s performance during the applicable performance period and the individual’s continued employment. Company performance criteria include the attainment of certain financial targets and other strategic objectives.
Certain employees are employed pursuant to agreements that provide for severance payments. Severance is generally only payable upon an involuntary termination of the employment by us without cause or a termination by the employee
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for good reason. Severance generally includes a series of cash payments based on the employee’s base salary, and our payment of the employee’s continued medical benefits for the applicable severance period.
We maintain a 401(k) Plan for our shoreside employees, including our executive officers. Participants may contribute up to 100 % of eligible compensation each pay period, subject to certain limitations. In the past, we made matching contributions equal to 100 % of the first 3 % and 50 % of amounts greater than 3 % to and including 10 % of each participant’s contributions subject to certain limitations. In addition, we may make discretionary supplemental contributions to the 401(k) Plan, which shall be allocated pro rata to each eligible participant based on the compensation of the participant relative to the total compensation of all participants. Our matching contributions are vested according to a five-year schedule. Due to the COVID-19 pandemic, we paused our matching contributions under the 401(k) Plan until further notice. The 401(k) Plan is subject to the provisions of ERISA and is intended to be qualified under section 401(a) of the U.S. Internal Revenue Code (the “Code”).
Our matching contributions are reduced by amounts forfeited by those employees who leave the 401(k) Plan prior to vesting fully in the matching contributions. Forfeited contributions of $ 0.2 million, $ 0.2 million and $ 0.3 million were utilized in the years ended December 31, 2020, 2019 and 2018, respectively.
We recorded total expenses related to the above 401(k) Plan of $ 2.8 million, $ 9.1 million and $ 9.3 million for the years ended December 31, 2020, 2019 and 2018, respectively.
Effective January 2009, we implemented the Shipboard Retirement Plan which computes benefits based on years of service, subject to eligibility requirements. The Shipboard Retirement Plan is unfunded with no plan assets. The current portion of the projected benefit obligation of $ 0.9 million was included in accrued expenses and other liabilities as of December 31, 2020 and 2019, and $ 30.7 million and $ 27.8 million was included in other long-term liabilities in our consolidated balance sheets as of December 31, 2020 and 2019, respectively.
The amounts related to the Shipboard Retirement Plan were as follows (in thousands):
As of or for the Year Ended December 31,
2020
2019
2018
Pension expense:
Service cost
$
2,665
$
2,135
$
2,167
Interest cost
895
1,001
857
Amortization of prior service cost
378
378
378
Amortization of actuarial loss
29
—
51
Total pension expense
$
3,967
$
3,514
$
3,453
Change in projected benefit obligation:
Projected benefit obligation at beginning of year
$
28,695
$
24,318
$
24,587
Service cost
2,665
2,135
2,167
Interest cost
895
1,001
857
Actuarial (gain) loss
62
2,308
( 2,271 )
Direct benefit payments
( 698 )
( 1,067 )
( 1,022 )
Projected benefit obligation at end of year
$
31,619
$
28,695
$
24,318
Amounts recognized in the consolidated balance sheets:
Projected benefit obligation
$
31,619
$
28,695
$
24,318
For the Year Ended December 31,
2020
2019
2018
Amounts recognized in accumulated other comprehensive income (loss):
Prior service cost
$
( 3,403 )
$
( 3,781 )
$
( 4,159 )
Accumulated actuarial loss
( 3,446 )
( 3,413 )
( 1,105 )
Accumulated other comprehensive income (loss)
$
( 6,849 )
$
( 7,194 )
$
( 5,264 )
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The discount rates used in the net periodic benefit cost calculation for the years ended December 31, 2020, 2019 and 2018 were 3.2 %, 4.2 % and 3.6 %, respectively, and the actuarial loss is amortized over 18.57 years. The discount rate is used to measure and recognize obligations, including adjustments to other comprehensive income (loss), and to determine expense during the periods. It is determined by using bond indices which reflect yields on a broad maturity and industry universe of high-quality corporate bonds.
The pension benefits expected to be paid in each of the next five years and in aggregate for the five years thereafter are as follows (in thousands):
Year
Amount
2021
$
918
2022
989
2023
1,118
2024
1,224
2025
1,339
Next five years
11,004
12.
Income Taxes
We are incorporated in Bermuda. Under current Bermuda law, we are not subject to tax on income and capital gains. We have received from the Minister of Finance under The Exempted Undertakings Tax Protection Act 1966, as amended, an assurance that, in the event that Bermuda enacts legislation imposing tax computed on profits, income, any capital asset, gain or appreciation, or any tax in the nature of estate duty or inheritance, then the imposition of any such tax shall not be applicable to us or to any of our operations or shares, debentures or other obligations, until March 31, 2035.
The components of net income before income taxes consist of the following (in thousands):
Year Ended December 31,
2020
2019
2018
Bermuda
$
—
$
—
$
—
Foreign - Other
( 4,000,047 )
911,365
969,310
Net income (loss) before income taxes
$
( 4,000,047 )
$
911,365
$
969,310
The components of the provision for income taxes consisted of the following benefit (expense) (in thousands):
Year Ended December 31,
2020
2019
2018
Current:
Bermuda
$
—
$
—
$
—
United States
5,853
( 975 )
( 7,409 )
Foreign - Other
( 5,502 )
( 6,294 )
( 5,371 )
Total current:
351
( 7,269 )
( 12,780 )
Deferred:
Bermuda
—
—
—
United States
( 12,690 )
25,785
( 1,912 )
Foreign - Other
( 128 )
347
225
Total deferred:
( 12,818 )
26,132
( 1,687 )
Income tax benefit (expense)
$
( 12,467 )
$
18,863
$
( 14,467 )
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Our reconciliation of income tax expense computed by applying our Bermuda statutory rate and reported income tax benefit (expense) was as follows (in thousands):
Year Ended December 31,
2020
2019
2018
Tax at Bermuda statutory rate
$
—
$
—
$
—
Foreign income taxes at different rates
24,479
( 18,630 )
( 17,540 )
Tax contingencies
( 626 )
( 206 )
( 5 )
Return to provision adjustments
1,684
2,014
2,961
Benefit (expense) from change in tax rate
—
( 14 )
117
Valuation allowance
( 38,004 )
35,699
—
Income tax benefit (expense)
$
( 12,467 )
$
18,863
$
( 14,467 )
Deferred tax assets and liabilities were as follows (in thousands):
As of December 31,
2020
2019
Deferred tax assets:
Loss carryforwards
$
77,411
$
54,342
Other
7,090
3,573
Valuation allowance
( 42,876 )
( 5,847 )
Total net deferred assets
41,625
52,068
Deferred tax liabilities:
Property and equipment
( 41,893 )
( 39,571 )
Total deferred tax liabilities
( 41,893 )
( 39,571 )
Net deferred tax asset (liability)
$
( 268 )
$
12,497
We have U.S. net operating loss carryforwards of $ 352.9 million and $ 238.8 million for the years ended December 31, 2020 and 2019, respectively, which begin to expire in 2030 , a portion of which relate to Prestige discussed further below. We have state net operating loss carryforwards of $ 5.4 million and $ 3.4 million for the years ended December 31, 2020 and 2019, respectively, which expire between 2026 through 2040 . We evaluate our deferred tax assets each period to determine if a valuation allowance is required based on whether it is more likely than not that some portion of the deferred tax assets would not be realized. The ultimate realization of these deferred tax assets is dependent upon the generation of sufficient taxable income during future periods. We conduct our evaluation by considering all available positive and negative evidence. This evaluation considers, among other factors, historical operating results, forecasts of future profitability, the duration of statutory carryforward periods, and the outlooks for the cruise industry and broader economy. Based on the weight of available evidence, we have recorded a valuation allowance during the fourth quarter of 2020 in the amount of $ 39.6 million with respect to the U.S. net deferred tax assets in one of our U.S. and several of our foreign subsidiaries.
Included above are deferred tax assets associated with our operations in Norway for which we have provided a full valuation allowance. We have Norway net operating loss carryforwards of $ 13.4 million and $ 13.3 million for the years ended December 31, 2020 and 2019, respectively, which can be carried forward indefinitely.
Included above are deferred tax assets associated with our branch operations in the U.K. for which we have provided a full valuation allowance. We had U.K. net operating loss carryforwards of $ 5.5 million for the year ended December 31, 2019; however, there are no outstanding net loss carryforwards as of December 31, 2020.
Included above are deferred tax assets associated with Prestige. We have U.S. net operating loss carryforwards of $ 155.0 million and $ 145.0 million for the years ended December 31, 2020 and 2019, respectively, which begin to expire in 2030 . Utilization of the Prestige net operating loss carryforwards may be subject to a substantial annual limitation due to ownership change limitations that have occurred previously and/or that could occur in the future, as provided by Section 382 of the Internal Revenue Code of 1986 (“Section 382”). Ownership changes may limit the amount of net operating loss carryforwards that can be utilized to offset future taxable income and tax, respectively. In general, an
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ownership change, as defined by Section 382, results from transactions increasing the ownership of certain shareholders or public groups in the stock of a corporation by more than 50 percentage points over a three-year period. If we have experienced an ownership change, utilization of Prestige’s net operating loss carryforwards would be subject to an annual limitation under Section 382. Any limitation may result in expiration of a portion of the net operating loss carryforwards before utilization. Subsequent ownership changes could further impact the limitation in future years. We implemented certain tax restructuring strategies that created our ability to utilize the net operating loss carryforwards of Prestige, for which we had previously provided a full valuation allowance. During the first quarter of 2019, we completed a Section 382 study that determined the amount of the Prestige net operations loss carryforwards that could be utilized against future taxable income resulting in a tax benefit of $ 35.7 million in connection with the reversal of substantially all of the Prestige valuation allowance. In the fourth quarter of 2020, the valuation allowance recognized includes $ 30.0 million on the Prestige U.S. net operating loss carryforwards.
The following is a tabular reconciliation of the total amounts of unrecognized tax benefits (in thousands):
As of December 31,
2020
2019
Unrecognized tax benefits, beginning of the year
$
732
$
532
Gross increases in tax positions from prior periods
620
200
Unrecognized tax benefits, end of year
$
1,352
$
732
If the $ 1.4 million of unrecognized tax benefits at December 31, 2020 were recognized, our effective tax rate would be minimally affected. We believe that there will not be a significant increase or decrease to the tax positions within 12 months of the reporting date. We recognize interest and penalties related to unrecognized tax benefits in income tax benefit (expense).
We file income tax returns in the U.S. federal jurisdiction, various U.S. state jurisdictions and foreign jurisdictions. We are generally no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by authorities for years prior to 2017, except for years in which NOLs generated prior to 2017 are utilized.
Due to our international structure as well as the existence of international tax treaties that exempt taxation on certain activities, the repatriation of earnings from our subsidiaries would have no tax impact.
We derive our income from the international operation of ships. We are engaged in a trade or business in the U.S. and receive income from sources within the U.S. Under Section 883, certain foreign corporations are exempt from U. S. federal income or branch profits tax on U.S.-source income derived from or incidental to the international operation of ships. Applicable U.S. treasury regulations provide that a foreign corporation will qualify for the benefits of Section 883 if, in relevant part: (i) the foreign country in which the corporation is organized grants an equivalent exemption for income from the international operation of ships to corporations organized in the U.S., and (ii) the foreign corporation has one or more classes of stock that are “primarily and regularly traded on an established securities market” in the U.S. or another qualifying country. We believe that we qualify for the benefits of Section 883 because we are incorporated in qualifying countries and our ordinary shares are primarily and regularly traded on an established securities market in the U.S.
13.
Commitments and Contingencies
Ship Construction Contracts
For the Norwegian brand, Project Leonardo will introduce six additional 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 one Explorer Class Ship on order to be delivered in 2023, which will be approximately 55,000 Gross Tons and 750 Berths. For the Oceania Cruises brand, we have orders for two Allura Class Ships to be delivered in 2023 and 2025. Each of the Allura Class Ships will be approximately 67,000 Gross Tons and 1,200 Berths. The impacts of COVID-19 on the shipyards where our ships are under construction (or will be
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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 $ 8.7 billion based on the euro/U.S. dollar exchange rate as of December 31, 2020. We have obtained export credit financing for the ships on order which is expected to fund approximately 80 % of each contract price, subject to certain conditions. We do not anticipate any contractual breaches or cancellation 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.
As of December 31, 2020, minimum annual payments for non-cancelable ship construction contracts with initial or remaining terms in excess of one year were as follows (in thousands):
Year
Amount
2021
$
463,549
2022
1,118,430
2023
2,168,127
2024
1,092,766
2025
1,758,314
Thereafter
1,870,807
Total minimum annual payments
$
8,471,993
Subsequent to December 31, 2020, $ 194.1 million of payments anticipated in 2021 have been deferred and we have a memorandum of agreement in place to finance another $ 35.2 million.
Port Facility Commitments
As of December 31, 2020, future commitments to pay for usage of certain port facilities were as follows (in thousands):
Year
Amount
2021
$
71,691
2022
71,296
2023
71,460
2024
75,822
2025
70,132
Thereafter
1,707,376
Total port facility future commitments
$
2,067,777
Our port facilities agreements generally include force majeure provisions that may alleviate an unspecified amount of obligations under minimum guarantees during the COVID-19 pandemic. In 2020, the Company provided the required notice that such provisions were being enacted. Customary practice is to prorate these obligations for the annual period impacted.
Other Commitments
The FMC requires evidence of financial responsibility for those offering transportation on passenger ships operating out of U.S. ports to indemnify passengers in the event of non-performance of the transportation. Accordingly, each of our three brands are required to maintain a $ 32.0 million third-party performance guarantee in respect of liabilities for non-performance of transportation and other obligations to passengers. The guarantee requirements are subject to additional consumer price index-based adjustments.
In addition, our brands have a legal requirement to maintain security guarantees based on cruise business originated from the U.K., and we are required to establish financial responsibility by certain jurisdictions to meet liability in the event of non-performance of our obligations to passengers from those jurisdictions. As of December 31, 2020, we have in place
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approximately £ 39.3 million of security guarantees for our brands as well as a consumer protection policy covering up to £ 48.3 million. The Company has provided approximately $ 30.5 million in cash to secure all the financial security guarantees required.
From time to time, various other regulatory and legislative changes have been or may in the future be proposed that may have an effect on our operations in the U.S. and the cruise industry in general.
Litigation
Class Actions
On March 12, 2020, a class action complaint, Eric Douglas v. Norwegian Cruise Lines, Frank J. Del Rio and Mark A. Kempa, Case No. 1:20-CV-21107, was filed in the United States District Court for the Southern District of Florida, naming the Company, Frank J. Del Rio, the Company’s President and Chief Executive Officer, and Mark A. Kempa, the Company’s Executive Vice President and Chief Financial Officer, as defendants. Subsequently, two similar class action complaints were also filed in the United States District Court for the Southern District of Florida naming the same defendants. On July 31, 2020, a consolidated amended class action complaint was filed by lead plaintiff’s counsel. The complaint asserts claims, purportedly brought on behalf of a class of shareholders, under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder, and allege that the Company made false and misleading statements to the market and customers about COVID-19. The complaint seeks unspecified damages and an award of costs and expenses, including reasonable attorneys’ fees, on behalf of a purported class of purchasers of our ordinary shares between February 20, 2020 and March 10, 2020. We believe that the allegations contained in the complaint are without merit and intend to defend the complaint vigorously. We cannot predict at this point the length of time that this action will be ongoing or the liability, if any, which may arise therefrom.
In addition, in March 2020 the Florida Attorney General announced an investigation related to the Company’s marketing during the COVID-19 pandemic. Following the announcement of the investigation by the Florida Attorney General, we received notifications from other attorneys general and governmental agencies that they are conducting similar investigations. The Company is cooperating with these ongoing investigations, the outcomes of which cannot be predicted at this time.
Helms-Burton Act
On August 27, 2019, two lawsuits were filed against Norwegian Cruise Line Holdings Ltd. in the United States District Court for the Southern District of Florida under Title III of the Cuban Liberty and Solidarity (Libertad) Act of 1996, also known as the Helms-Burton Act. The complaint filed by Havana Docks Corporation alleges it holds an interest in the Havana Cruise Port Terminal and the complaint filed by Javier Garcia-Bengochea alleges that he holds an interest in the Port of Santiago, Cuba, both of which were expropriated by the Cuban Government. The complaints further allege that the Company “trafficked” in those properties by embarking and disembarking passengers at these facilities. The plaintiffs seek all available statutory remedies, including the value of the expropriated property, plus interest, treble damages, attorneys’ fees and costs. On January 7, 2020, the United States District Court for the Southern District of Florida dismissed the claim by Havana Docks Corporation. On April 14, 2020, the district court granted Havana Docks Corporation’s motion to reconsider and vacated its order dismissing the claim, allowing Havana Docks Corporation to file an amended complaint on April 16, 2020. On April 24, 2020, we filed a motion seeking permission to appeal the district court’s order which was subsequently denied. On September 1, 2020, the Court entered an order staying all case deadlines and administratively closed the Garcia-Bengochea matter pending the outcome of the appeal in a related case brought by the same plaintiff. We believe we have meritorious defenses to the claims and intend to vigorously defend these matters. As of December 31, 2020, we are unable to reasonably estimate any potential contingent loss from these matters.
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Other
In the normal course of our business, various other claims and lawsuits have been filed or are pending against us. Most of these claims and lawsuits are covered by insurance and, accordingly, the maximum amount of our liability is typically limited to our deductible amount.
Nonetheless, the ultimate outcome of these claims and lawsuits that are not covered by insurance cannot be determined at this time. We have evaluated our overall exposure with respect to all of our threatened and pending litigation and, to the extent required, we have accrued amounts for all estimable probable losses associated with our deemed exposure. We are currently unable to estimate any other potential contingent losses beyond those accrued, as discovery is not complete nor is adequate information available to estimate such range of loss or potential recovery. However, based on our current knowledge, we do not believe that the aggregate amount or range of reasonably possible losses with respect to these matters will be material to our consolidated results of operations, financial condition or cash flows. We intend to vigorously defend our legal position on all claims and, to the extent necessary, seek recovery.
Other Contingencies
The Company also has agreements with its credit card processors that govern approximately $ 1.0 billion at December 31, 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 would be satisfied by posting collateral. Although the agreements vary, these requirements may generally be satisfied either through a percentage of customer payments withheld or providing cash funds directly to the card processor. Any cash reserve or collateral requested could be increased or decreased.
As of December 31, 2020, we had a reserve of approximately $ 200 million with a credit card processor recognized in other long-term assets, and in January 2021, we provided additional cash collateral of $ 250 million. Additionally, we are required to fund all refunds until further notice and 100 % of incoming advance ticket sales deposits with this credit card processor will be withheld and are not expected to be released until the credit card processor’s exposure is fully collateralized. As of December 31, 2020, the exposure was approximately $ 780 million. The reserve shortfall of approximately $ 330 million, after taking into effect the January additional collateral provided, will decrease as refunds are funded, cruises are provided and amounts withheld by the credit card processor are allocated to the reserve rather than remitted to the Company. We may be required to find new credit card processors, pledge additional collateral and/or post cash reserves or take other actions that may further reduce our liquidity.
14.
Other Income (Expense), Net
Other income (expense), net was expense of $ 33.6 million, income of $ 6.2 million, and income of $ 20.7 million for the years ended December 31, 2020, 2019 and 2018, respectively. In 2020, the expense was primarily due to losses from foreign currency exchange and fuel hedges recognized in earnings as a result of the forecasted transactions no longer being probable or that are no longer designated as hedges . In 2019, the income was primarily due to gains from insurance proceeds and a litigation settlement partially offset by losses on foreign currency exchange. In 2018, the income was primarily related to foreign currency exchange gains.
15.
Concentration Risk
We contract with a single vendor to provide many of our hotel and restaurant services including both food and labor costs. We incurred expenses of $ 59.0 million, $ 153.6 million and $ 153.7 million for the years ended December 31, 2020, 2019 and 2018, respectively, which are recorded in payroll and related in our consolidated statements of operations.
16.
Supplemental Cash Flow Information
For the year ended December 31, 2020, we had non-cash investing activities related to property and equipment of $ 17.7 million. Additionally, we received seller financing related to the acquisition of property and equipment resulting in both
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non-cash investing and financing activities of $ 11.9 million. For the year ended December 31, 2020, we paid income taxes of $ 3.5 million and interest and related fees, net of capitalized interest, of $ 447.9 million.
For the year ended December 31, 2019, we had non-cash investing activities related to property and equipment of $ 8.2 million. For the year ended December 31, 2019, we paid income taxes of $ 13.4 million and interest and related fees, net of capitalized interest, of $ 291.2 million.
For the year ended December 31, 2018, we had non-cash investing activities in connection with property and equipment of $ 39.7 million and net foreign currency adjustments of $ 5.5 million related to euro-denominated debt related to the financing of two of our Project Leonardo ships. For the year ended December 31, 2018, we paid income taxes of $ 10.0 million and interest and related fees, net of capitalized interest, of $ 350.4 million.
17.
Quarterly Selected Financial Data (Unaudited) (in thousands, except per share data)
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2020
2019
2020
2019
2020
2019
2020
2019
Total revenue
$
1,246,882
$
1,403,630
$
16,929
$
1,664,277
$
6,518
$
1,913,851
$
9,579
$
1,480,618
Operating income (loss)
$
( 1,824,061 )
$
158,296
$
( 595,411 )
$
308,681
$
( 517,783 )
$
511,724
$
( 546,880 )
$
199,376
Net income (loss)
$
( 1,880,972 )
$
118,157
$
( 715,243 )
$
240,190
$
( 677,366 )
$
450,584
$
( 738,933 )
$
121,297
Earnings (loss) per share:
Basic
$
( 8.80 )
$
0.54
$
( 2.99 )
$
1.11
$
( 2.50 )
$
2.10
$
( 2.51 )
$
0.57
Diluted
$
( 8.80 )
$
0.54
$
( 2.99 )
$
1.11
$
( 2.50 )
$
2.09
$
( 2.51 )
$
0.56
The seasonality of the North American cruise industry generally results in the greatest demand for cruises during the Northern Hemisphere’s summer months; however, our cruise voyages were completely suspended during the last nine months of 2020 due to the COVID-19 pandemic.
18.
Subsequent Events
In January and February 2021, both NCLH and NCLC undertook a number of actions related to debt financing, which resulted in a reclassification of debt from short-term to long-term as of December 31, 2020, and are described in Note 8 – “Long-Term Debt”.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.