Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Financial Presentation

Revenue from our cruise and cruise-related activities are categorized by us as “passenger ticket revenue” and “onboard and other revenue.” Passenger ticket revenue and onboard and other revenue vary according to product offering, the size of the ship in operation, the length of cruises operated and the markets in which the ship operates. Our revenue is seasonal based on demand for cruises, which has historically been strongest during the Northern Hemisphere’s summer months.

Passenger ticket revenue primarily consists of revenue for accommodations, meals in certain restaurants on the ship, certain onboard entertainment, and includes revenue for service charges and air and land transportation to and from the ship to the extent guests purchase these items from us. Onboard and other revenue primarily consists of revenue from gaming, beverage sales, shore excursions, specialty dining, retail sales, spa services, photo services as well as certain Bareboat Charter revenue. We record onboard revenue from onboard activities we perform directly or that are performed by independent concessionaires, from which we receive a share of their revenue.

Our cruise operating expense is classified as follows:

	·	Commissions, transportation and other primarily consists of direct costs associated with passenger ticket revenue. These costs include travel agent commissions, air and land transportation expenses, related credit card fees, costs associated with service charges, certain port expenses and the costs associated with shore excursions and hotel accommodations included as part of the overall cruise purchase price.

	·	Onboard and other primarily consists of direct costs that are incurred in connection with onboard and other revenue. These include costs incurred in connection with gaming, beverage sales and shore excursions.

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

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

	·	Food consists of food costs for passengers and crew on certain ships.

	·	Other consists of repairs and maintenance (including Dry-dock costs), ship insurance and other ship expenses.

Critical Accounting Policies

Our consolidated financial statements have been prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of our consolidated financial statements and the reported amounts of revenue and expenses during the periods presented. We rely on historical experience and on various other assumptions that we believe to be reasonable under the circumstances to make these estimates and judgments. Actual results could differ materially from these estimates. We believe that the following critical accounting policies reflect the significant estimates and assumptions used in the preparation of our consolidated financial statements. These critical accounting policies, which are presented in detail in our notes to our audited consolidated financial statements, relate to ship accounting, asset impairment and contingencies.

Ship Accounting

Ships represent our most significant assets, and we record them at cost less accumulated depreciation. Depreciation of ships is computed on a straight-line basis over the estimated service lives of primarily 30 years after a 15% reduction for the estimated residual value of the ship. Improvement costs that we believe add value to our ships are capitalized to the ship and depreciated over the improvements’ estimated useful lives. Repairs and maintenance activities are charged to expense as incurred. We account for Dry-dock costs under the direct expense method which requires us to expense all Dry-dock costs as incurred.

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We determine the useful life of our ships based primarily on our estimates of the average useful life of the ships’ major component systems, such as cabins, main diesels, main electric, superstructure and hull. In addition, we consider the impact of anticipated changes in the vacation market and technological conditions and historical useful lives of similarly-built ships. Given the large and complex nature of our ships, our accounting estimates related to ships and determinations of ship improvement costs to be capitalized require considerable judgment and are inherently uncertain. Should certain factors or circumstances cause us to revise our estimate of ship service lives or projected residual values, depreciation expense could be materially lower or higher. If circumstances cause us to change our assumptions in making determinations as to whether ship improvements should be capitalized, the amounts we expense each year as repairs and maintenance costs could increase, partially offset by a decrease in depreciation expense. If we reduced our estimated average 30-year ship service life by one year, depreciation expense for the year ended December 31, 2016 would have increased by $11.2 million. In addition, if our ships were estimated to have no residual value, depreciation expense for the same period would have increased by $62.2 million. We believe our estimates for ship accounting are reasonable and our methods are consistently applied. We believe that depreciation expense is based on a rational and systematic method to allocate our ships’ costs to the periods that benefit from the ships’ usage.

Asset Impairment

We review our long-lived assets, principally ships, for impairment 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. 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 the estimated expected undiscounted future cash flows, we measure the amount of the impairment by comparing the carrying amount of the asset to its fair value. We estimate fair value based on the best information available making whatever estimates, judgments and projections considered necessary. The estimation of fair value is generally measured by discounting expected future cash flows at discount rates commensurate with the risk involved.

We evaluate goodwill for impairment annually or more frequently when an event occurs or circumstances change that indicates the carrying value of a reporting unit may not be recoverable. For our evaluation of goodwill and tradenames we use the Step 0 Test which allows us to first assess qualitative factors to determine whether it is more likely than not (i.e., more than 50%) that the fair value of a reporting unit is less than its carrying value. In order to make this evaluation, we consider the following circumstances:

	·	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;

	·	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;

	·	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

	·	Share price (in both absolute terms and relative to peers).

We believe our estimates and judgments with respect to our long-lived assets, principally ships, and goodwill and other indefinite-lived intangible assets are reasonable. Nonetheless, if there was a material change in assumptions used in the determination of such fair values or if there is a material change in the conditions or circumstances that influence such assets, we could be required to record an impairment charge. If a material change occurred, we may conduct a quantitative assessment comparing the fair value of each reporting unit to its carrying value, including goodwill. This is called the Step I Test which consists of a combined approach using the expected future cash flows and market multiples to determine the fair value of the reporting units.

In the third quarter of 2016, based on the performance of the Oceania Cruises reporting unit, we performed an interim goodwill impairment evaluation consisting of a Step I Test. Based on that evaluation, we determined that there was no impairment of goodwill because its fair value exceeded its carrying value. For our annual impairment evaluation, we performed a Step 0 Test for the Norwegian reporting unit and Step I Tests for the Regent Seven Seas and the Oceania Cruises reporting units. Based on those evaluations, we determined that there was no impairment of goodwill because the fair value of each reporting unit exceeded its carrying value. However, if the fair value of any reporting unit declines in future periods, its goodwill may become impaired at that time. As of December 31, 2016, there was $523.0 million, $462.1 million and $403.8 million of goodwill for the Oceania Cruises, Regent Seven Seas and Norwegian reporting units, respectively. As of December 31, 2016, our annual review consisting of the Step 0 and Step I Tests supports the carrying value of these assets.

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Contingencies

Periodically, we assess potential liabilities related to any lawsuits or claims brought against us or any asserted claims, including tax, legal and/or environmental matters. Although it is typically very difficult to determine the timing and ultimate outcome of such actions, we use our best judgment to determine if it is probable that we will incur an expense related to the settlement or final adjudication of such matters and whether a reasonable estimation of such probable loss, if any, can be made. In assessing probable losses, we take into consideration estimates of the amount of insurance recoveries, if any. In accordance with the guidance on accounting for contingencies, we accrue a liability when we believe a loss is probable and the amount of loss can be reasonably estimated. Due to the inherent uncertainties related to the eventual outcome of litigation and potential insurance recoveries, although we believe that our estimates and judgments are reasonable, it is possible that certain matters may be resolved for amounts materially different from any estimated provisions or previous disclosures.

Non-GAAP Financial Measures

We use certain non-GAAP financial measures, such as Net Revenue, Adjusted Net Revenue, Net Yield, Adjusted Net Yield, Net Cruise Cost, Adjusted Net Cruise Cost Excluding Fuel, Adjusted EBITDA, Adjusted Net Income and Adjusted EPS, to enable us to analyze our performance. See “Terms Used in this Annual Report” for the definitions of these non-GAAP financial measures. We utilize Net Revenue and Net Yield to manage our business on a day-to-day basis and believe that they are the most relevant measures of our revenue performance because they reflect the revenue earned by us net of significant variable costs. In measuring our ability to control costs in a manner that positively impacts net income, we believe changes in Net Cruise Cost and Adjusted Net Cruise Cost Excluding Fuel to be the most relevant indicators of our performance.

As our business includes the sourcing of passengers and deployment of vessels outside of the U.S., a portion of our revenue and expenses are denominated in foreign currencies, particularly British pound, Canadian dollar, euro and Australian dollar which are subject to fluctuations in currency exchange rates versus our reporting currency, the U.S. dollar. In order to monitor results excluding these fluctuations, we calculate certain non-GAAP measures on a Constant Currency basis whereby current period revenue and expenses denominated in foreign currencies are converted to U.S. dollars using currency exchange rates of the comparable period. We believe that presenting these non-GAAP measures on both a reported and Constant Currency basis is useful in providing a more comprehensive view of trends in our business. We believe that Adjusted EBITDA is appropriate as a supplemental financial measure as it is used by management to assess operating performance.

We believe that Adjusted EBITDA is a useful measure in determining our performance as it reflects certain operating drivers of our business, such as sales growth, operating costs, marketing, general and administrative expense and other operating income and expense. Adjusted EBITDA is not a defined term under GAAP. Adjusted EBITDA is not intended to be a measure of liquidity or cash flows from operations or a measure comparable to net income as it does not take into account certain requirements such as capital expenditures and related depreciation, principal and interest payments and tax payments and it includes other supplemental adjustments.

In addition, Adjusted Net Revenue and Adjusted Net Yield, which exclude certain business combination accounting entries, are non-GAAP financial measures that we believe are useful as supplemental measures in evaluating the performance of our operating business and provide greater transparency into our results of operations. Adjusted Net Income and Adjusted EPS are non-GAAP financial measures that exclude certain amounts and are used to supplement GAAP net income and EPS. We use Adjusted Net Income and Adjusted EPS as key performance measures of our earnings performance. We believe that both management and investors benefit from referring to these non-GAAP financial measures in assessing our performance and when planning, forecasting and analyzing future periods. These non-GAAP financial measures also facilitate management’s internal comparison to our historical performance. In addition, management uses Adjusted EPS as a performance measure for our incentive compensation. The amounts excluded in the presentation of these non-GAAP financial measures may vary from period to period; accordingly, our presentation of Adjusted Net Revenue, Adjusted Net Yield, Adjusted Net Income and Adjusted EPS may not be indicative of future adjustments or results. For example, for the year ended December 31, 2016, we incurred $28.0 million of amounts related to the extinguishment of debt and $11.2 million of deferred financing fees due to the refinancing of certain credit facilities. We included these as adjustments in the reconciliation of Adjusted Net Income since these amounts are not representative of our day-to-day operations and we have included similar adjustments in prior periods.

You are encouraged to evaluate each adjustment used in calculating our non-GAAP financial measures and the reasons we consider our non-GAAP financial measures appropriate for supplemental analysis. In evaluating our non-GAAP financial measures, you should be aware that in the future we may incur expenses similar to the adjustments in our presentation. Our non-GAAP financial measures have limitations as analytical tools, and you should not consider these measures in isolation or as a substitute for analysis of our results as reported under GAAP. Our presentation of our non-GAAP financial measures should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. Our non-GAAP financial measures may not be comparable to other companies. Please see a historical reconciliation of these measures to the most comparable GAAP measure presented in our consolidated financial statements below in the “Results of Operations” section.

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Summary of Significant 2016 Events

Sirena, previously under a Bareboat Charter, joined our Oceania Cruises fleet in April 2016. This ship is approximately 30,000 Gross Tons with approximately 684 Berths.

Seven Seas Explorer was delivered in June 2016 to our Regent fleet. This ship is approximately 55,000 Gross Tons with 750 Berths. We placed an order to build a second Explorer Class Ship for delivery in the winter of 2020.

We introduced a new destination, Harvest Caye, in November 2016. This destination in Southern Belize features Belize’s only cruise ship pier, expansive seven acre white sand beach, 15,000 sq. ft. pool with swim up bar, multiple dining options and a nature center with wildlife experiences plus adventure tours.

We repurchased approximately $50 million of NCLH’s outstanding ordinary shares under our previously authorized three-year, $500 million share repurchase program.

In February 2017, we announced that we plan to introduce an additional four ships with expected delivery dates through 2025 and we have an option to introduce two additional ships for delivery in 2026 and 2027, subject to certain conditions. These four ships are each 140,000 gross tons with approximately 3,300 Berths. The contract price for each of the four ships is approximately €800.0 million, subject to certain conditions, or $841.4 million based on the exchange rate as of December 31, 2016. We have obtained export credit financing for the four ships to fund approximately 80% of the contract price of each ship expected to be delivered through 2025, subject to certain conditions.

Executive Overview

Total revenue increased 12.2% to $4.9 billion for the year ended December 31, 2016 compared to $4.3 billion for the year ended December 31, 2015. Net Revenue for the year ended December 31, 2016 increased 13.8% to $3.8 billion from $3.3 billion in the same period in 2015 with an improvement in Net Yield of 2.1% and an increase in Capacity Days of 11.4%.

For the year ended December 31, 2016, we had net income and diluted EPS of $633.1 million and $2.78, respectively. For the year ended December 31, 2015, we had net income and diluted EPS of $427.1 million and $1.86, respectively. Operating income increased 31.7% to $925.5 million for the year ended December 31, 2016 from $702.5 million for the year ended December 31, 2015.

We had Adjusted Net Income and Adjusted EPS of $776.3 million and $3.41, respectively, for the year ended December 31, 2016, which includes $143.2 million of adjustments primarily consisting of expenses related to non-cash compensation, write-offs of fees related to extinguishment of debt and refinancing of certain credit facilities and certain other adjustments. A 17.7% improvement in Adjusted EBITDA was achieved for the same period primarily due to the increase in net income and EBITDA. We refer you to our “Results of Operations” below for a calculation of Net Revenue, Net Yield, Adjusted Net Income, Adjusted EPS and Adjusted EBITDA.

Results of Operations

We reported total revenue, total cruise operating expense, operating income and net income as follows (in thousands, except per share data):

		Year Ended December 31,
		2016				2015				2014
Total revenue		$	4,874,340			$	4,345,048			$	3,125,881
Total cruise operating expense		$	2,850,225			$	2,655,449			$	1,946,624
Operating income		$	925,464			$	702,486			$	502,941
Net income attributable to Norwegian Cruise Line Holdings Ltd.		$	633,085			$	427,137			$	338,352
EPS:
Basic		$	2.79			$	1.89			$	1.64
Diluted		$	2.78			$	1.86			$	1.62

The following table sets forth operating data as a percentage of total revenue:

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		Year Ended December 31,
		2016				2015				2014
Revenue
Passenger ticket			69.5	%			72.0	%			69.6	%
Onboard and other			30.5	%			28.0	%			30.4	%
Total revenue			100.0	%			100.0	%			100.0	%
Cruise operating expense
Commissions, transportation and other			16.7	%			17.6	%			16.1	%
Onboard and other			6.1	%			6.3	%			7.2	%
Payroll and related			15.3	%			15.3	%			14.5	%
Fuel			6.9	%			8.3	%			10.4	%
Food			4.1	%			4.1	%			5.4	%
Other			9.4	%			9.5	%			8.7	%
Total cruise operating expense			58.5	%			61.1	%			62.3	%
Other operating expense
Marketing, general and administrative			13.7	%			12.8	%			12.9	%
Depreciation and amortization			8.9	%			9.9	%			8.7	%
Total other operating expense			22.6	%			22.7	%			21.6	%
Operating income			18.9	%			16.2	%			16.1	%
Non-operating income (expense)
Interest expense, net			(5.7	)%			(5.1	)%			(4.9	)%
Other income (expense), net			(0.1	)%			(1.1	)%			(0.3	)%
Total non-operating income (expense)			(5.8	)%			(6.2	)%			(5.2	)%
Net income before income taxes			13.1	%			10.0	%			10.9	%
Income tax benefit (expense)			(0.1	)%			(0.2	)%			0.1	%
Net income			13.0	%			9.8	%			11.0	%
Net income attributable to non-controlling interest			—	%			—	%			0.1	%
Net income attributable to Norwegian Cruise Line Holdings Ltd.			13.0	%			9.8	%			10.9	%

The following table sets forth selected statistical information:

		Year Ended December 31,
		2016				2015				2014
Passengers carried			2,337,311				2,164,404				1,933,044
Passenger Cruise Days			17,588,707				16,027,743				13,634,200
Capacity Days			16,376,063				14,700,990				12,512,459
Occupancy Percentage			107.4	%			109.0	%			109.0	%

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

		Year Ended December 31,
		2016				2016 Constant Currency				2015				2015 Constant Currency				2014
Passenger ticket revenue		$	3,388,954			$	3,420,959			$	3,129,075			$	3,203,661			$	2,176,153
Onboard and other revenue			1,485,386				1,485,386				1,215,973				1,215,973				949,728
Total revenue			4,874,340				4,906,345				4,345,048				4,419,634				3,125,881
Less:
Commissions, transportation and other expense			813,559				821,608				765,298				783,891				503,722
Onboard and other expense			298,886				298,886				272,802				272,802				224,000
Net Revenue			3,761,895				3,785,851				3,306,948				3,362,941				2,398,159
Non-GAAP Adjustment:
Deferred revenue (1)			1,057				1,057				32,431				32,431				10,052
Adjusted Net Revenue		$	3,762,952			$	3,786,908			$	3,339,379			$	3,395,372			$	2,408,211
Capacity Days			16,376,063				16,376,063				14,700,990				14,700,990				12,512,459
Gross Yield		$	297.65			$	299.60			$	295.56			$	300.64			$	249.82
Net Yield		$	229.72			$	231.18			$	224.95			$	228.76			$	191.66
Adjusted Net Yield		$	229.78			$	231.25			$	227.15			$	230.96			$	192.47

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	(1)	Reflects deferred revenue fair value adjustments related to the Acquisition of Prestige that were made pursuant to business combination accounting rules.

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

		Year Ended December 31,
						2016								2015
		2016				Constant Currency				2015				Constant Currency				2014
Total cruise operating expense		$	2,850,225			$	2,859,037			$	2,655,449			$	2,683,776			$	1,946,624
Marketing, general and administrative expense			666,156				667,913				554,999				560,376				403,169
Gross Cruise Cost			3,516,381				3,526,950				3,210,448				3,244,152				2,349,793
Less:
Commissions, transportation and other expense			813,559				821,608				765,298				783,891				503,722
Onboard and other expense			298,886				298,886				272,802				272,802				224,000
Net Cruise Cost			2,403,936				2,406,456				2,172,348				2,187,459				1,622,071
Less: Fuel expense			335,174				335,174				358,650				358,650				326,231
Net Cruise Cost Excluding Fuel			2,068,762				2,071,282				1,813,698				1,828,809				1,295,840
Less Non-GAAP Adjustments:
Non-cash deferred compensation (1)			3,167				3,167				10,154				10,154				7,693
Non-cash share-based compensation (2)			66,414				66,414				42,211				42,211				20,627
Secondary Equity Offerings’ expenses (3)			—				—				2,226				2,226				2,075
Severance payments and other fees (4)			8,223				8,223				17,580				17,580				—
Management NCL Corporation Units exchange expenses (5)			—				—				624				624				—
Acquisition of Prestige expenses (6)			6,395				6,395				27,170				27,170				57,513
Contingent consideration adjustment (7)			—				—				(43,400	)			(43,400	)			—
Contract renegotiation and termination expenses (8)			1,000				1,000				3,319				3,319				—
Other (9)			217				217				—				—				3,804
Adjusted Net Cruise Cost Excluding Fuel		$	1,983,346			$	1,985,866			$	1,753,814			$	1,768,925			$	1,204,128
Capacity Days			16,376,063				16,376,063				14,700,990				14,700,990				12,512,459
Gross Cruise Cost per Capacity Day		$	214.73			$	215.37			$	218.38			$	220.68			$	187.80
Net Cruise Cost per Capacity Day		$	146.80			$	146.95			$	147.77			$	148.80			$	129.64
Net Cruise Cost Excluding Fuel per Capacity Day		$	126.33			$	126.48			$	123.37			$	124.40			$	103.56
Adjusted Net Cruise Cost Excluding Fuel per Capacity Day		$	121.11				121.27			$	119.30			$	120.33			$	96.23

(1)	Non-cash deferred compensation expenses related to the crew pension plan and other crew expenses, which are included in payroll and related expense.
(2)	Non-cash share-based compensation expense related to equity awards, which are included in marketing, general and administrative expense and payroll and related expense.
(3)	Expenses related to the Secondary Equity Offerings, which are included in marketing, general and administrative expense.
(4)	Severance payments and other expenses related to restructuring costs and other severance arrangements, which are included in marketing, general and administrative expense.
(5)	Expenses related to the exchange of Management NCL Corporation Units for ordinary shares, which are included in marketing, general and administrative expense.
(6)	Expenses related to the Acquisition of Prestige, which are included in marketing, general and administrative expense.
(7)	Contingent consideration fair value adjustment related to the Acquisition of Prestige, which is included in marketing, general and administrative expense.
(8)	Contract renegotiation and termination expenses, net related to the Acquisition of Prestige, which are included in other cruise operating expense and marketing, general and administrative expense.
(9)	The year ended December 31, 2016 includes legal expenses related to the extinguishment of senior unsecured notes and the year ended December 31, 2014 includes expenses primarily related to the tax restructuring and costs related to the settlement of a 2007 breach of contract claim, which are included in marketing, general and administrative expense.

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Adjusted Net Income and Adjusted EPS were calculated as follows (in thousands, except share and per share data):

		Year Ended December 31,
		2016				2015				2014
Net income attributable to Norwegian Cruise Line Holdings Ltd.		$	633,085			$	427,137			$	338,352
Net income attributable to non-controlling interest			—				—				4,249
Net income			633,085				427,137				342,601
Non-GAAP Adjustments:
Non-cash deferred compensation (1)			3,167				10,154				7,693
Non-cash share-based compensation (2)			66,414				42,384				20,627
Secondary Equity Offerings’ expenses (3)			—				2,226				2,075
Taxes (4)			(3,594	)			—				5,247
Severance payments and other fees (5)			8,223				17,580				—
Management NCL Corporation Units exchange expenses (6)			—				624				—
Acquisition of Prestige expenses (7)			6,395				27,170				57,513
Deferred revenue (8)			1,057				32,431				13,004
Amortization of intangible assets (9)			21,069				72,917				12,600
Contingent consideration adjustment (10)			—				(43,400	)			—
Loss on extinguishment of debt (11)			27,962				12,624				—
Derivative adjustment (12)			(1,185	)			40,971				—
Contract renegotiation and termination expenses (13)			2,502				6,848				—
Information technology write-off (14)			—				12,988				—
Deferred financing fees and other (15)			11,156				—				15,397
Other (16)			—				—				3,804
Adjusted Net Income		$	776,251			$	662,654			$	480,561
Diluted weighted-average shares outstanding-Net income and Adjusted Net Income			227,850,286				230,040,132				212,017,784
Diluted EPS		$	2.78			$	1.86			$	1.62
Adjusted EPS		$	3.41			$	2.88			$	2.27

(1)	Non-cash deferred compensation expenses related to the crew pension plan and other crew expenses, which are included in payroll and related expense.
(2)	Non-cash share-based compensation expenses related to equity awards, which are included in marketing, general and administrative expense and payroll and related expense.
(3)	Expenses related to the Secondary Equity Offerings, which are included in marketing, general and administrative expense.
(4)	The year ended December 31, 2016 includes an adjustment due to a release of a valuation allowance on deferred tax assets and the year ended December 31, 2014 includes an adjustment due to the change in our corporate entity structure. Both amounts are included in income tax benefit (expense).
(5)	Severance payments and other expenses related to restructuring costs and other severance arrangements, which are included in marketing, general and administrative expense.
(6)	Expenses related to the exchange of Management NCL Corporation Units for ordinary shares, which are included in marketing, general and administrative expense.
(7)	Expenses related to the Acquisition of Prestige, which are included in marketing, general and administrative expense.
(8)	Deferred revenue fair value adjustments related to the Acquisition of Prestige that were made pursuant to business combination accounting rules, which are primarily included in passenger ticket revenue.
(9)	Amortization of intangible assets related to the Acquisition of Prestige, which are included in depreciation and amortization expense.
(10)	Contingent consideration fair value adjustment related to the Acquisition of Prestige, which is included in marketing, general and administrative expense.
(11)	Loss on extinguishment of senior unsecured notes, which is included in interest expense, net, and legal expenses related to the extinguishment which are included in marketing, general and administrative expense.
(12)	Losses and net gains for the fair value adjustment of a foreign exchange collar which did not receive hedge accounting treatment and losses due to the dedesignation of certain fuel swaps. These adjustments are included in other income (expense), net.
(13)	Contract renegotiation and termination expenses, net related to the Acquisition of Prestige, which are included in other cruise operating expense, marketing, general and administrative expense and depreciation and amortization expense.
(14)	Expenses related to the write-off of certain information technology items, which are included in depreciation and amortization expense.
(15)	Expenses related to the write-off of deferred financing fees and other fees related to the refinancing of certain credit facilities, which is included in interest expense, net. The year ended December 31, 2016 also includes a tax benefit adjustment.

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(16)	Expenses primarily related with the tax restructuring and costs related to the settlement of a 2007 breach of contract claim, which are included in marketing, general and administrative expense.

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

		Year Ended December 31,
		2016				2015				2014
Net income attributable to Norwegian Cruise Line Holdings Ltd.		$	633,085			$	427,137			$	338,352
Interest expense, net			276,859				221,909				151,754
Income tax expense (benefit)			7,218				6,772				(2,267	)
Depreciation and amortization expense			432,495				432,114				273,147
EBITDA			1,349,657				1,087,932				760,986
Net income attributable to non-controlling interest			—				—				4,249
Other expense, net (1)			8,302				46,668				10,853
Non-cash deferred compensation (2)			3,167				10,154				7,693
Non-cash share-based compensation (3)			66,414				42,211				20,627
Secondary Equity Offerings’ expenses (4)			—				2,226				2,075
Severance payments and other fees (5)			8,223				17,580				—
Management NCL Corporation Units exchange expenses (6)			—				624				—
Acquisition of Prestige expenses (7)			6,395				27,170				57,513
Deferred revenue (8)			1,057				32,431				10,052
Contingent consideration adjustment (9)			—				(43,400	)			—
Contract renegotiation and termination expenses (10)			1,000				3,319				—
Other (11)			217				—				3,804
Adjusted EBITDA		$	1,444,432			$	1,226,915			$	877,852

(1)	Primarily consists of gains and losses, net for derivative contracts and forward currency exchanges.
(2)	Non-cash deferred compensation expenses related to the crew pension plan and other crew expenses, which are included in payroll and related expense.
(3)	Non-cash share-based compensation expense related to equity awards, which are included in marketing, general and administrative expense and payroll and related expense.
(4)	Expenses related to the Secondary Equity Offerings, which are included in marketing, general and administrative expense.
(5)	Severance payments and other expenses related to restructuring costs and other severance arrangements, which are included in marketing, general and administrative expense.
(6)	Expenses related to the exchange of Management NCL Corporation Units for ordinary shares, which are included in marketing, general and administrative expense.
(7)	Expenses related to the Acquisition of Prestige, which are included in marketing, general and administrative expense.
(8)	Deferred revenue fair value adjustments related to the Acquisition of Prestige that were made pursuant to business combination accounting rules, which are primarily included in passenger ticket revenue.
(9)	Contingent consideration fair value adjustment related to the Acquisition of Prestige, which is included in marketing, general and administrative expense.
(10)	Contract renegotiation and termination expenses, net related to the Acquisition of Prestige, which are included in other cruise operating expense and marketing, general and administrative expense.
(11)	The year ended December 31, 2016 includes legal expenses related to the extinguishment of senior unsecured notes and the year ended December 31, 2014 includes expenses primarily related to the tax restructuring and costs related to the settlement of a 2007 breach of contract claim, which are included in marketing, general and administrative expense.

Year Ended December 31, 2016 (“2016”) Compared to Year Ended December 31, 2015 (“2015”)

Revenue

Total revenue increased 12.2% to $4.9 billion in 2016 compared to $4.3 billion in 2015 primarily due to an increase in Capacity Days and improved pricing. Gross Yield increased 0.7%. Net Revenue in 2016 increased 13.8% to $3.8 billion from $3.3 billion in 2015 due to an increase in Capacity Days of 11.4% and an increase in Net Yield of 2.1%. The increase in Capacity Days was primarily due to the delivery of Norwegian Escape in October 2015, Sirena joining our fleet in April 2016 and the delivery of Seven Seas Explorer in June 2016. The increase in Net Yield was primarily due to improved pricing. Adjusted Net Revenue includes a deferred revenue fair value adjustment of $32.4 million in 2015 related to the Acquisition of Prestige. On a Constant Currency basis, Net Yield and Adjusted Net Yield increased 2.8% and 1.8%, respectively, in 2016 compared to 2015.

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Expense

Gross Cruise Cost increased 9.5% in 2016 compared to 2015 due to an increase in total cruise operating expense and marketing, general and administrative expenses. Total cruise operating expense increased 7.3% in 2016 compared to 2015 primarily due to the increase in Capacity Days as discussed above and an increase in marketing, general and administrative expenses. Total other operating expense increased 11.3% in 2016 compared to 2015 primarily due to an increase in marketing, general and administrative expenses which included an increase in marketing expenses of $38.3 million and share-based compensation of $16.4 million. The increase was also due to income of $43.4 million related to a contingent consideration adjustment on the Acquisition of Prestige in 2015 which did not occur in 2016. Depreciation and amortization expense was relatively unchanged as the increase due to the addition of Norwegian Escape and ship improvement projects in 2016 was offset by the recognition in 2015 of an incremental $51.6 million of amortization of intangible assets due to the Acquisition of Prestige. On a Capacity Day basis, Net Cruise Cost decreased slightly on an actual and a Constant Currency basis, due to a decrease in fuel expense partially offset by the increases in expenses discussed above. The average fuel price decreased 13.5% to $466 per metric ton in 2016 from $539 per metric ton in 2015. Adjusted Net Cruise Cost Excluding Fuel per Capacity Day increased 1.5% primarily due to the expenses discussed above (1.7% on a Constant Currency basis). We refer you to the “Results of Operations” above for a reconciliation of Gross Cruise Cost to Adjusted Net Cruise Cost Excluding Fuel.

Interest expense, net increased to $276.9 million in 2016 from $221.9 million in 2015 primarily due to an increase in average debt balances outstanding primarily associated with the delivery of new ships and newbuild installments as well as from higher interest rates due to an increase in LIBOR. Additionally, in connection with refinancings of our senior notes and certain of our credit facilities, interest expense, net included losses on extinguishment of debt and debt modification costs of $39.2 million in 2016 and losses on extinguishment of debt of $12.6 million in 2015.

Other income (expense), net was an expense of $8.3 million in 2016 compared to an expense of $46.7 million in 2015. In 2016, the expense was primarily related to $16.1 million of unrealized and realized losses on fuel swap derivative hedge contracts partially offset by $4.5 million of gains on foreign currency exchange and $3.9 million of gains on foreign currency exchange derivative hedge contracts. In 2015, the expense was primarily related to $30.7 million of losses from the dedesignation of certain fuel swap derivative hedge contracts and the ineffectiveness of settled fuel swaps in 2015. Also included in 2015 was an expense of $26.2 million related to the fair value adjustment of a foreign exchange collar which does not receive hedge accounting treatment partially offset by $11.0 million of foreign currency transaction gains.

In 2016, we had an income tax expense of $7.2 million compared to $6.8 million in 2015.

Year Ended December 31, 2015 (“2015”) Compared to Year Ended December 31, 2014 (“2014”)

Revenue

Total revenue increased 39.0% to $4.3 billion in 2015 compared to $3.1 billion in 2014. Gross Yield increased 18.3%. Net Revenue increased 37.9% in 2015, primarily due to an increase in Capacity Days of 17.5% and Net Yield of 17.4%. The increase in Capacity Days was primarily due to the Acquisition of Prestige, the delivery of Norwegian Escape and the operation of Norwegian Getaway for the full year of 2015. The increase in Net Yield was primarily due to an increase in passenger ticket pricing and higher onboard and other revenue. Adjusted Net Revenue for 2015 includes a deferred revenue fair value adjustment of $32.4 million related to the Acquisition of Prestige. On a Constant Currency basis, Net Yield and Adjusted Net Yield increased 19.4% and 20.0%, respectively, in 2015 compared to 2014.

Expense

Gross Cruise Cost increased 36.6% in 2015 compared to 2014 due to an increase in total cruise operating expense and marketing, general and administrative expenses. Total cruise operating expense increased 36.4% in 2015 compared to 2014 primarily due to the increase in Capacity Days as discussed above. Total other operating expense increased 46.0% in 2015 compared to 2014 primarily due to an increase in marketing, general and administrative expenses primarily related to the Acquisition of Prestige including certain restructuring and severance costs, as well as amortization expense related to the Prestige intangible assets and depreciation expense related to the Prestige ships. These increases were partially offset by the $43.4 million fair value adjustment for the contingent consideration related to the Acquisition of Prestige. On a Capacity Day basis, Net Cruise Cost increased 14.0% (14.8% on a Constant Currency basis) due to an increase in marketing, general and administrative expenses as discussed above and certain crew related expenses, partially offset by a decrease in fuel expense which was primarily the result of a 13.8% decrease in the average fuel price to $539 per metric ton in 2015 from $625 per metric ton in 2014. Adjusted Net Cruise Cost Excluding Fuel per Capacity Day increased 24.0% (25.0% on a Constant Currency basis) primarily due to the increase in expenses discussed above.

Interest expense, net increased to $221.9 million in 2015 from $151.8 million in 2014 primarily due to an increase in average debt outstanding in connection with the Acquisition of Prestige.

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Other income (expense), net was an expense of $46.7 million in 2015 compared to an expense of $10.9 million in 2014. This increase was primarily related to an expense of $30.7 million from the dedesignation of certain fuel swap derivative hedge contracts and the ineffectiveness of settled fuel swaps in 2015. Also included in 2015 was an expense of $26.2 million related to the fair value adjustment of a foreign exchange collar which does not receive hedge accounting treatment partially offset by $11.0 million of foreign currency transaction gains.

We had an income tax expense of $6.8 million in 2015 compared to an income tax benefit of $2.3 million in 2014. During the fourth quarter of 2013, we completed the implementation of a tax restructuring which had a favorable impact on the amount of income subject to U.S. corporate tax which continued through calendar year 2014 and 2015. In addition, during the first quarter of 2014, we received information which allowed us to elect a tax method to calculate deductible interest expense resulting in a tax benefit of $11.1 million including a $5.3 million non-recurring benefit that has been excluded from Adjusted Net Income and Adjusted EPS for the year ended December 31, 2014.

Liquidity and Capital Resources

General

As of December 31, 2016, our liquidity was $749.3 million consisting of $128.3 million in cash and cash equivalents and $621.0 million available under our New Revolving Loan Facility. Our primary ongoing liquidity requirements are to finance working capital, capital expenditures and debt service.

As of December 31, 2016, we had a working capital deficit of $1.9 billion. This deficit included $1.2 billion of advance ticket sales, which represents the total revenue we collect in advance of sailing dates and accordingly are substantially more like deferred revenue balances rather than actual current cash liabilities. Our business model, along with our New Revolving Loan Facility, allows us to operate with a working capital deficit and still meet our operating, investing and financing needs.

Our existing debt agreements restrict, and any of our future debt arrangements may restrict, among other things, the ability of our subsidiaries, including NCLC, to make distributions and/or to pay dividends to NCLH and our ability to pay cash dividends to our shareholders. We are a holding company and depend upon our subsidiaries for their ability to pay distributions to us to finance any dividend or pay any other obligations of NCLH. However, we do not believe that these restrictions have had or are expected to have an impact on our ability to meet any cash obligations.

Sources and Uses of Cash

In this section, references to 2016 refer to the year ended December 31, 2016, references to 2015 refer to the year ended December 31, 2015 and references to 2014 refer to the year ended December 31, 2014.

Net cash provided by operating activities was $1.2 billion in 2016 compared to $1.0 billion in 2015 and $635.6 million in 2014. The change in net cash provided by operating activities in 2016 reflects net income of $633.1 million, as well as timing differences in cash receipts and payments relating to operating assets and liabilities and advance ticket sales of $135.0 million. The change in net cash provided by operating activities in 2015 reflects net income of $427.1 million compared to net income of $342.6 million in 2014, as well as timing differences in cash receipts and payments relating to operating assets and liabilities and advance ticket sales of $218.3 million in 2015 compared to $(23.9) million in 2014.

Net cash used in investing activities was $1.1 billion in 2016, primarily related to payments for the delivery of Seven Seas Explorer, ship improvements, ships under construction and shoreside projects. Net cash used in investing activities was $1.2 billion in 2015, primarily related to payments for our newbuild ships, the delivery of Norwegian Escape, ship improvements and shoreside projects. Net cash used in investing activities was $1.8 billion in 2014, primarily due to payments related to the Acquisition of Prestige, the delivery of Norwegian Getaway, and our Breakaway Plus Class Ships and other ship improvements and shoreside projects.

Net cash used in financing activities was $98.3 million in 2016, primarily from the repayments of our 5.25% senior unsecured notes, net repayments of our New Revolving Loan Facility and other loan facilities, the repurchase of our ordinary shares and deferred financing fees and other, partially offset by issuance of our $700.0 million 4.750% senior unsecured notes. Net cash provided by financing activities was $195.2 million in 2015, primarily from the issuance of our $600.0 million 4.625% senior unsecured notes, borrowings related to our Revolving Loan Facility and our Breakaway three loan facility for the delivery of Norwegian Escape, partially offset by redemption of our $300.0 million 5.00% senior unsecured notes due 2018 and repayments on our Revolving Loan Facility and other loan facilities. Net cash provided by financing activities was $1.2 billion in 2014, primarily due to borrowings of an incremental $700.0 million under our $1.4 billion term loan facility, our $350.0 million senior secured term loan facility and borrowings under the Breakaway two loan and credit facilities related to our Breakaway Plus Class Ships partially offset by repayments of our Revolving Loan Facility and other borrowings. In November 2014, we also issued the $680.0 million 5.25% senior unsecured notes which have been redeemed.

Future Capital Commitments

Future capital commitments consist of contracted commitments, including ship construction contracts, and future expected capital expenditures necessary for operations as well as our ship refurbishment projects. As of December 31, 2016, anticipated capital

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expenditures were $1.3 billion for each of the years ending December 31, 2017 and 2018 and $1.2 billion for 2019. We have export credit financing in place for the expenditures related to ship construction contracts of $0.8 billion for 2017, $0.7 billion for 2018 and $0.6 billion for 2019. These future expected capital expenditures will significantly increase our depreciation and amortization expense.

We have Norwegian Joy, Norwegian Bliss and one additional Breakaway Plus Class Ship on order for delivery in the spring of 2017, spring of 2018 and the fall of 2019, respectively. These ships will be amongst the largest in our fleet, each reaching approximately 164,600 Gross Tons. The combined contract price of these three ships is approximately €2.6 billion, or $2.7 billion based on the euro/U.S. dollar exchange rate as of December 31, 2016. We have export credit financing in place that provides financing for 80% of their contract prices. We have an Explorer Class Ship on order with an original contract price of approximately €422.0 million, or approximately $443.8 million based on the euro/U.S. dollar exchange rate as of December 31, 2016. We have export credit financing in place that provides financing for 80% of the contract price. The Explorer Class Ship is expected to be delivered in the winter of 2020.

In February 2017, we announced that we plan to introduce an additional four ships with expected delivery dates through 2025 and we have an option to introduce two additional ships for delivery in 2026 and 2027, subject to certain conditions. These four ships are each 140,000 gross tons with approximately 3,300 Berths. The contract price for each of the four ships is approximately €800.0 million, subject to certain conditions, or $841.4 million based on the exchange rate as of December 31, 2016. We have obtained export credit financing for the four ships to fund approximately 80% of the contract price of each ship expected to be delivered through 2025, subject to certain conditions.

In connection with the contracts to build these ships, we do not anticipate any contractual breaches or cancellation to occur. However, if any would occur, it could result in, among other things, the forfeiture of prior deposits or payments made by us, subject to certain refund guarantees, and potential claims and impairment losses which may materially impact our business, financial condition and results of operations.

Capitalized interest for the years ended December 31, 2016, 2015 and 2014 was $33.7 million, $31.9 million and $22.0 million, respectively, primarily associated with the construction of our newbuild ships.

Off-Balance Sheet Transactions

None.

Contractual Obligations

As of December 31, 2016, our contractual obligations, with initial or remaining terms in excess of one year, including interest payments on long-term debt obligations, were as follows (in thousands):

		Total				Less than 1 year				1-3 years				3-5 years				More than 5 years
Long-term debt(1)		$	6,514,604			$	560,193			$	1,116,533			$	3,347,556			$	1,490,322
Operating leases(2)			151,591				15,759				30,704				28,849				76,279
Ship construction contracts(3)			3,153,995				976,005				1,851,279				326,711				—
Port facilities(4)			286,993				54,301				66,479				61,198				105,015
Interest(5)			1,009,071				213,455				382,079				270,373				143,164
Other(6)			190,646				58,150				70,011				39,029				23,456
Total		$	11,306,900			$	1,877,863			$	3,517,085			$	4,073,716			$	1,838,236

(1)	Includes premiums aggregating $0.5 million. Also includes capital leases. The amount excludes deferred financing fees which are included in the consolidated balance sheets as an offset to long-term debt.
(2)	Primarily for offices, motor vehicles and office equipment.
(3)	For our newbuild ships based on the euro/U.S. dollar exchange rate as of December 31, 2016. Export credit financing is in place from syndicates of banks.
(4)	Primarily for our usage of certain port facilities.
(5)	Includes fixed and variable rates with LIBOR held constant as of December 31, 2016.
(6)	Future commitments for service, maintenance and other Business Enhancement Capital Expenditure contracts.

The table above does not include the ships on order after December 31, 2016 as part of Project Leonardo.

The table above does not include $11.1 million of unrecognized tax benefits (we refer you to the Notes to the Consolidated Financial Statements Note—11 “Income Tax”).

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Other

Certain service providers may require collateral in the normal course of our business. The amount of collateral may change based on certain terms and conditions.

As a routine part of our business, depending on market conditions, exchange rates, pricing and our strategy for growth, we regularly consider opportunities to enter into contracts for the building of additional ships. We may also consider the sale of ships, potential acquisitions and strategic alliances. If any of these were to occur, they may be financed through the incurrence of additional permitted indebtedness, through cash flows from operations, or through the issuance of debt, equity or equity-related securities.

Funding Sources

Certain of our debt agreements contain covenants that, among other things, require us to maintain a minimum level of liquidity, as well as limit our net funded debt-to-capital ratio, maintain certain other ratios and restrict our ability to pay dividends. Substantially all of our ships and other property and equipment are pledged as collateral for certain of our debt. We believe we were in compliance with these covenants as of December 31, 2016.

The impact of changes in world economies and especially the global credit markets can create a challenging environment and may reduce future consumer demand for cruises and adversely affect our counterparty credit risks. In the event this environment deteriorates, our business, financial condition and results of operations could be adversely impacted.

We believe our cash on hand, expected future operating cash inflows, additional available borrowings under our existing credit facility and our ability to issue debt securities or raise additional equity, will be sufficient to fund operations, debt payment requirements, capital expenditures and maintain compliance with covenants under our debt agreements over the next twelve-month period. There is no assurance that cash flows from operations and additional financings will be available in the future to fund our future obligations.