filings.toolsItem 16. Form 10-K Summary
140K characters. Original on sec.gov · Markdown
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 27, 2019.
| 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 27, 2019 | ||
| Frank J. Del Rio | (Principal Executive Officer) | |||
| /s/ Mark A. Kempa | Executive Vice President and Chief Financial Officer | February 27, 2019 | ||
| Mark A. Kempa | (Principal Financial Officer) | |||
| /s/ Faye L. Ashby | Senior Vice President and Chief Accounting Officer | February 27, 2019 | ||
| Faye L. Ashby | (Principal Accounting Officer) | |||
| /s/ Adam M. Aron | Director | February 27, 2019 | ||
| Adam M. Aron | ||||
| /s/ John Chidsey | Director | February 27, 2019 | ||
| John Chidsey | ||||
| /s/ Chad A. Leat | Director | February 27, 2019 | ||
| Chad A. Leat | ||||
| /s/ Steve Martinez | Director | February 27, 2019 | ||
| Steve Martinez | ||||
| /s/ David M. Abrams | Director | February 27, 2019 | ||
| David M. Abrams | ||||
| /s/ Stella David | Director | February 27, 2019 | ||
| Stella David | ||||
| /s/ Russell W. Galbut | Director | February 27, 2019 | ||
| Russell W. Galbut | ||||
| /s/ Pamela Thomas-Graham | Director | February 27, 2019 | ||
| Pamela Thomas-Graham | ||||
| /s/ Mary E. Landry | Director | February 27, 2019 | ||
| Mary E. Landry |
| 60 |
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Norwegian Cruise Line Holdings Ltd.
Schedule II Valuation and Qualifying Accounts (in thousands)
| Additions | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Description | Balance 12/31/15 | Charged to costs and expenses | Charged to other accounts | Deductions (a) | Balance 12/31/16 | |||||||||||||||
| Valuation allowance on deferred tax assets | $ | 61,437 | $ | — | $ | 9,382 | $ | (6,246 | ) | $ | 64,573 |
| Description | Balance 12/31/16 | Charged to costs and expenses | Charged to other accounts | Deductions (a) | Balance 12/31/17 | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Valuation allowance on deferred tax assets | $ | 64,573 | $ | — | $ | — | $ | (22,419 | ) | $ | 42,154 |
| Description | Balance 12/31/17 | Charged to costs and expenses | Charged to other accounts | Deductions (a) | Balance 12/31/18 | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Valuation allowance on deferred tax assets | $ | 42,154 | $ | — | $ | 276 | $ | (506 | ) | $ | 41,924 |
| (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. |
|---|---|
| 61 |
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Index to Consolidated Financial Statements
| 62 |
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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, 2018 and 2017, and the related consolidated statements of operations, comprehensive income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2018, 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, 2018, 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, 2018 and 2017**,** and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018 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, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
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 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.
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.
| /s/ PricewaterhouseCoopers LLP |
|---|
Miami, Florida
February 27, 2019
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-1 |
|---|
Norwegian Cruise Line Holdings Ltd.
Consolidated Statements of Operations
(in thousands, except share and per share data)
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2018 | 2017 | 2016 | ||||||||||
| Revenue | ||||||||||||
| Passenger ticket | $ | 4,259,815 | $ | 3,750,030 | $ | 3,388,954 | ||||||
| Onboard and other | 1,795,311 | 1,646,145 | 1,485,386 | |||||||||
| Total revenue | 6,055,126 | 5,396,175 | 4,874,340 | |||||||||
| Cruise operating expense | ||||||||||||
| Commissions, transportation and other | 998,948 | 894,406 | 813,559 | |||||||||
| Onboard and other | 348,656 | 319,293 | 298,886 | |||||||||
| Payroll and related | 881,606 | 803,632 | 746,142 | |||||||||
| Fuel | 392,685 | 361,032 | 335,174 | |||||||||
| Food | 216,031 | 198,357 | 200,071 | |||||||||
| Other | 539,150 | 486,924 | 456,393 | |||||||||
| Total cruise operating expense | 3,377,076 | 3,063,644 | 2,850,225 | |||||||||
| Other operating expense | ||||||||||||
| Marketing, general and administrative | 897,929 | 773,755 | 666,156 | |||||||||
| Depreciation and amortization | 561,060 | 509,957 | 432,495 | |||||||||
| Total other operating expense | 1,458,989 | 1,283,712 | 1,098,651 | |||||||||
| Operating income | 1,219,061 | 1,048,819 | 925,464 | |||||||||
| Non-operating income (expense) | ||||||||||||
| Interest expense, net | (270,404 | ) | (267,804 | ) | (276,859 | ) | ||||||
| Other income (expense), net | 20,653 | (10,401 | ) | (8,302 | ) | |||||||
| Total non-operating income (expense) | (249,751 | ) | (278,205 | ) | (285,161 | ) | ||||||
| Net income before income taxes | 969,310 | 770,614 | 640,303 | |||||||||
| Income tax expense | (14,467 | ) | (10,742 | ) | (7,218 | ) | ||||||
| Net income | $ | 954,843 | $ | 759,872 | $ | 633,085 | ||||||
| Weighted-average shares outstanding | ||||||||||||
| Basic | 223,001,739 | 228,040,825 | 227,121,875 | |||||||||
| Diluted | 224,419,205 | 229,418,326 | 227,850,286 | |||||||||
| Earnings per share | ||||||||||||
| Basic | $ | 4.28 | $ | 3.33 | $ | 2.79 | ||||||
| Diluted | $ | 4.25 | $ | 3.31 | $ | 2.78 |
The accompanying notes are an integral part of these consolidated financial statements.
| F-2 |
|---|
Norwegian Cruise Line Holdings Ltd.
Consolidated Statements of Comprehensive Income
(in thousands)
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2018 | 2017 | 2016 | ||||||||||
| Net income | $ | 954,843 | $ | 759,872 | $ | 633,085 | ||||||
| Other comprehensive income (loss): | ||||||||||||
| Shipboard Retirement Plan | 2,697 | (40 | ) | 497 | ||||||||
| Cash flow hedges: | ||||||||||||
| Net unrealized gain (loss) related to cash flow hedges | (161,214 | ) | 304,684 | 1,711 | ||||||||
| Amount realized and reclassified into earnings | (30,096 | ) | 36,795 | 95,969 | ||||||||
| Total other comprehensive income (loss) | (188,613 | ) | 341,439 | 98,177 | ||||||||
| Total comprehensive income | $ | 766,230 | $ | 1,101,311 | $ | 731,262 |
The accompanying notes are an integral part of these consolidated financial statements.
| F-3 |
|---|
Norwegian Cruise Line Holdings Ltd.
Consolidated Balance Sheets
(in thousands, except share data)
| December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2018 | 2017 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 163,851 | $ | 176,190 | ||||
| Accounts receivable, net | 55,249 | 43,961 | ||||||
| Inventories | 90,202 | 82,121 | ||||||
| Prepaid expenses and other assets | 241,011 | 216,065 | ||||||
| Total current assets | 550,313 | 518,337 | ||||||
| Property and equipment, net | 12,119,253 | 11,040,488 | ||||||
| Goodwill | 1,388,931 | 1,388,931 | ||||||
| Tradenames | 817,525 | 817,525 | ||||||
| Other long-term assets | 329,948 | 329,588 | ||||||
| Total assets | $ | 15,205,970 | $ | 14,094,869 | ||||
| Liabilities and shareholders’ equity | ||||||||
| Current liabilities: | ||||||||
| Current portion of long-term debt | $ | 681,218 | $ | 619,373 | ||||
| Accounts payable | 159,564 | 53,433 | ||||||
| Accrued expenses and other liabilities | 716,499 | 513,717 | ||||||
| Advance ticket sales | 1,593,219 | 1,303,498 | ||||||
| Total current liabilities | 3,150,500 | 2,490,021 | ||||||
| Long-term debt | 5,810,873 | 5,688,392 | ||||||
| Other long-term liabilities | 281,596 | 166,690 | ||||||
| Total liabilities | 9,242,969 | 8,345,103 | ||||||
| Commitments and contingencies (Note 12) | ||||||||
| Shareholders’ equity: | ||||||||
| Ordinary shares, $.001 par value; 490,000,000 shares authorized; 235,484,613 shares issued and 217,650,644 shares outstanding at December 31, 2018 and 233,840,523 shares issued and 228,528,562 shares outstanding at December 31, 2017 | 235 | 233 | ||||||
| Additional paid-in capital | 4,129,639 | 3,998,694 | ||||||
| Accumulated other comprehensive income (loss) | (161,647 | ) | 26,966 | |||||
| Retained earnings | 2,898,840 | 1,963,128 | ||||||
| Treasury shares (17,833,969 ordinary shares at December 31, 2018 and 5,311,961 ordinary shares at December 31, 2017 at cost) | (904,066 | ) | (239,255 | ) | ||||
| Total shareholders’ equity | 5,963,001 | 5,749,766 | ||||||
| Total liabilities and shareholders’ equity | $ | 15,205,970 | $ | 14,094,869 |
The accompanying notes are an integral part of these consolidated financial statements.
| F-4 |
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Norwegian Cruise Line Holdings Ltd.
Consolidated Statements of Cash Flows
(in thousands)
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2018 | 2017 | 2016 | ||||||||||
| Cash flows from operating activities | ||||||||||||
| Net income | $ | 954,843 | $ | 759,872 | $ | 633,085 | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
| Depreciation and amortization | 566,972 | 521,484 | 445,635 | |||||||||
| (Gain) loss on derivatives | — | (103 | ) | 79 | ||||||||
| Deferred income taxes, net | 1,508 | 9,153 | (2,448 | ) | ||||||||
| Loss on extinguishment of debt | 6,346 | 22,211 | 38,180 | |||||||||
| Provision for bad debts and inventory | 5,570 | 2,431 | 3,866 | |||||||||
| Share-based compensation expense | 115,983 | 87,039 | 66,414 | |||||||||
| Net foreign currency adjustments | (5,537 | ) | — | — | ||||||||
| Changes in operating assets and liabilities: | ||||||||||||
| Accounts receivable, net | (15,886 | ) | 15,050 | (20,983 | ) | |||||||
| Inventories | (9,052 | ) | (17,129 | ) | (9,184 | ) | ||||||
| Prepaid expenses and other assets | (29,519 | ) | (22,714 | ) | (13,363 | ) | ||||||
| Accounts payable | 106,387 | 14,047 | (5,755 | ) | ||||||||
| Accrued expenses and other liabilities | 114,953 | 55,894 | (6,410 | ) | ||||||||
| Advance ticket sales | 262,603 | 154,012 | 134,971 | |||||||||
| Net cash provided by operating activities | 2,075,171 | 1,601,247 | 1,264,087 | |||||||||
| Cash flows from investing activities | ||||||||||||
| Additions to property and equipment, net | (1,566,796 | ) | (1,372,214 | ) | (1,092,091 | ) | ||||||
| Net proceeds from sale of Hawaii land-based operations | — | 499 | — | |||||||||
| Promissory note receipts | 1,011 | 165 | — | |||||||||
| Cash received on settlement of derivatives | 64,796 | 2,346 | 131 | |||||||||
| Cash paid on settlement of derivatives | (1,719 | ) | (35,694 | ) | (36,954 | ) | ||||||
| Net cash used in investing activities | (1,502,708 | ) | (1,404,898 | ) | (1,128,914 | ) | ||||||
| Cash flows from financing activities | ||||||||||||
| Repayments of long-term debt | (1,716,244 | ) | (1,916,885 | ) | (3,744,029 | ) | ||||||
| Repayments to Affiliate | — | — | (18,522 | ) | ||||||||
| Proceeds from long-term debt | 1,904,865 | 1,816,390 | 3,753,928 | |||||||||
| Proceeds from employee related plans | 28,819 | 30,032 | 9,169 | |||||||||
| Net share settlement of restricted share units | (13,855 | ) | (6,342 | ) | — | |||||||
| Purchases of treasury shares | (664,811 | ) | — | (49,999 | ) | |||||||
| Early redemption premium | (5,154 | ) | (15,506 | ) | (19,250 | ) | ||||||
| Deferred financing fees and other | (118,422 | ) | (56,195 | ) | (54,060 | ) | ||||||
| Net cash used in financing activities | (584,802 | ) | (148,506 | ) | (122,763 | ) | ||||||
| Net increase (decrease) in cash and cash equivalents | (12,339 | ) | 47,843 | 12,410 | ||||||||
| Cash and cash equivalents at beginning of year | 176,190 | 128,347 | 115,937 | |||||||||
| Cash and cash equivalents at end of year | $ | 163,851 | $ | 176,190 | $ | 128,347 |
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 Changes in Shareholders’ Equity
(in thousands)
| Ordinary Shares | Additional Paid-in Capital | Accumulated Other Comprehensive Income (Loss) | Retained Earnings | Treasury Shares | Total Shareholders’ Equity | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Balance, December 31, 2015 | $ | 232 | $ | 3,814,536 | $ | (412,650 | ) | $ | 568,018 | $ | (189,256 | ) | $ | 3,780,880 | ||||||||||
| Share-based compensation | — | 66,414 | — | — | — | 66,414 | ||||||||||||||||||
| Issuance of shares under employee related plans | — | 9,169 | — | — | — | 9,169 | ||||||||||||||||||
| Treasury shares | — | — | — | — | (49,999 | ) | (49,999 | ) | ||||||||||||||||
| Other comprehensive income, net | — | — | 98,177 | — | — | 98,177 | ||||||||||||||||||
| Net income | — | — | — | 633,085 | — | 633,085 | ||||||||||||||||||
| Balance, December 31, 2016 | 232 | 3,890,119 | (314,473 | ) | 1,201,103 | (239,255 | ) | 4,537,726 | ||||||||||||||||
| Share-based compensation | — | 87,039 | — | — | — | 87,039 | ||||||||||||||||||
| Issuance of shares under employee related plans | 1 | 30,031 | — | — | — | 30,032 | ||||||||||||||||||
| Net share settlement of restricted share units | — | (6,342 | ) | — | — | — | (6,342 | ) | ||||||||||||||||
| Cumulative change in accounting policy | — | (2,153 | ) | — | 2,153 | — | — | |||||||||||||||||
| Other comprehensive income, net | — | — | 341,439 | — | — | 341,439 | ||||||||||||||||||
| Net income | — | — | — | 759,872 | — | 759,872 | ||||||||||||||||||
| 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 | ||||||||||||||||||
| Repurchase of 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 income, 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 |
The accompanying notes are an integral part of these consolidated financial statements.
| F-6 |
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Norwegian Cruise Line Holdings Ltd.
Notes to the Consolidated Financial Statements
| 1. | Description of Business and Organization |
|---|
We are a leading global cruise company which operates the Norwegian Cruise Line, Oceania Cruises and Regent Seven Seas Cruises brands. As of December 31, 2018, we had 26 ships with approximately 54,400 Berths and had orders for eight additional ships to be delivered through 2027, subject to certain conditions. These eight orders consist of Norwegian Encore, a Breakaway Plus Class Ship, for delivery in the fall of 2019; Seven Seas Splendor, an Explorer Class Ship, for delivery in the winter of 2020; and Project Leonardo, which will introduce an additional six ships with expected delivery dates through 2027. We also plan to introduce three additional ships (we refer you to Note 17— “Subsequent Events”). The addition of these 11 ships to our fleet will increase our total Berths to approximately 82,000.
Norwegian commenced operations from Miami in 1966. In February 2011, NCLH, a Bermuda limited company, was formed with the issuance to the Sponsors of, in aggregate, 10,000 ordinary shares, with a par value of $.001 per share. In January 2013, NCLH completed its IPO and the ordinary shares of NCLC, all of which were owned by the Sponsors, were exchanged for the ordinary shares of NCLH, and NCLH became the owner of 100% of the ordinary shares and parent company of NCLC (the “Corporate Reorganization”). At the same time, NCLH contributed $460.0 million to NCLC and the historical financial statements of NCLC became those of NCLH. The Corporate Reorganization was affected solely for the purpose of reorganizing our corporate structure.
In November 2014, we completed the Acquisition of Prestige. We believe that the combination of Norwegian and Prestige creates a cruise operating company with a rich product portfolio and strong market presence.
The Sponsors have completed numerous Secondary Equity Offerings of NCLH’s ordinary shares. As of December 2018, the Sponsors no longer own any NCLH ordinary shares.
| 2. | Summary of Significant Accounting Policies |
|---|
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.
Reclassifications
Certain amounts in prior periods have been reclassified to conform to the current period presentation.
In August 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-15, Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments, to eliminate discrepancies in presenting and classifying certain cash receipts and payments in the statement of cash flows. Effective January 1, 2018, the Company adopted the update using a retrospective transition method, which required an adjustment to cash flows from operating activities and financing activities in our consolidated statements of cash flows for the years ended December 31, 2017 and 2016. Cash payments for debt prepayment or debt extinguishment costs, including third-party costs, other fees paid to lenders and premiums paid that are directly related to debt prepayment or debt extinguishment, excluding accrued interest, are required to be classified as cash outflows from financing activities.
| F-7 |
|---|
The effects of the change on our consolidated statements of cash flows were as follows (in thousands):
| Year Ended December 31, | ||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2017 | 2016 | |||||||||||||||||||||||
| As Reported | Previously Reported | Effect of Change | As Reported | Previously Reported | Effect of Change | |||||||||||||||||||
| Cash flows from operating activities | ||||||||||||||||||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||||||||||
| Loss on extinguishment of debt (previously write-off of financing fees) | $ | 22,211 | $ | 6,705 | $ | 15,506 | $ | 38,180 | $ | 18,930 | $ | 19,250 | ||||||||||||
| Changes in operating assets and liabilities: | ||||||||||||||||||||||||
| Prepaid expenses and other assets | $ | (22,714 | ) | $ | (22,714 | ) | $ | — | $ | (13,363 | ) | $ | (18,534 | ) | $ | 5,171 | ||||||||
| Net cash provided by operating activities | $ | 1,601,247 | $ | 1,585,741 | $ | 15,506 | $ | 1,264,087 | $ | 1,239,666 | $ | 24,421 | ||||||||||||
| Cash flows from financing activities | ||||||||||||||||||||||||
| Early redemption premium | $ | (15,506 | ) | $ | — | $ | (15,506 | ) | $ | (19,250 | ) | $ | — | $ | (19,250 | ) | ||||||||
| Deferred financing fees and other | $ | (56,195 | ) | $ | (56,195 | ) | $ | — | $ | (54,060 | ) | $ | (48,889 | ) | $ | (5,171 | ) | |||||||
| Net cash used in financing activities | $ | (148,506 | ) | $ | (133,000 | ) | $ | (15,506 | ) | $ | (122,763 | ) | $ | (98,342 | ) | $ | (24,421 | ) |
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.
Accounts Receivable, Net
Accounts receivable are shown net of an allowance for doubtful accounts of $9.6 million and $5.9 million as of December 31, 2018 and 2017, respectively.
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 $0.8 million and $2.4 million as of December 31, 2018 and 2017, respectively, are included in prepaid expenses and other assets. Expenses related to advertising costs totaled $327.3 million, $289.1 million and $270.5 million for the years ended December 31, 2018, 2017 and 2016, 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, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2018 | 2017 | 2016 | ||||||||||
| Net income | $ | 954,843 | $ | 759,872 | $ | 633,085 | ||||||
| Basic weighted-average shares outstanding | 223,001,739 | 228,040,825 | 227,121,875 | |||||||||
| Dilutive effect of share awards | 1,417,466 | 1,377,501 | 728,411 | |||||||||
| Diluted weighted-average shares outstanding | 224,419,205 | 229,418,326 | 227,850,286 | |||||||||
| Basic earnings per share | $ | 4.28 | $ | 3.33 | $ | 2.79 | ||||||
| Diluted earnings per share | $ | 4.25 | $ | 3.31 | $ | 2.78 |
| F-8 |
|---|
For the years ended December 31, 2018, 2017 and 2016, a total of 4.7 million, 5.6 million and 7.1 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. Major renewals and improvements that we believe add value to our ships are capitalized as a cost 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.
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. 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 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 Tradenames
Goodwill represents the excess of cost over the fair value of net assets acquired. Goodwill and other indefinite-lived assets, principally tradenames, are reviewed for impairment on an annual basis 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 fair value of a reporting unit is less than its carrying value. For tradenames we also provide a qualitative assessment to determine if there is any indication of impairment.
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; |
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| · | Changes in cost factors that have a negative effect on earnings and cash flows; |
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| · | Decline in overall financial performance (for both actual and expected performance); |
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| · | 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 |
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| · | Decline in share price (in both absolute terms and relative to peers). |
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We have concluded that our business has three reporting units. Each brand, Norwegian, Regent and Oceania Cruises, 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.
| F-9 |
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For our annual impairment evaluation, we performed a Step 0 Test for the Norwegian, Regent Seven Seas and Oceania Cruises reporting units. As of December 31, 2018, 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, 2018, our annual review consisting of the Step 0 Test supports the carrying value of these assets.
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, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2018 | 2017 | 2016 | ||||||||||
| North America | $ | 3,543,282 | $ | 3,285,903 | $ | 3,132,208 | ||||||
| Europe | 1,462,698 | 1,347,381 | 1,148,403 | |||||||||
| Asia-Pacific | 721,404 | 394,631 | 196,978 | |||||||||
| Other | 327,742 | 368,260 | 396,751 | |||||||||
| Total Revenues | $ | 6,055,126 | $ | 5,396,175 | $ | 4,874,340 |
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 77%, 77% and 81% for the years ended December 31, 2018, 2017 and 2016, 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 18 ships with Bahamas registry with a carrying value of $9.1 billion as of December 31, 2018 and 17 ships with Bahamas registry with a carrying value of $8.0 billion as of December 31, 2017. We had seven ships with Marshall Island registry with a carrying value of $1.9 billion as of December 31, 2018 and 2017. We also had one ship with U.S. registry with a carrying value of $0.3 billion as of December 31, 2018 and 2017.
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 agreement. 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.
| F-10 |
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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 income at each balance sheet date. We recognized (gains) losses of $(19.8) million, $14.2 million and $(4.5) million for the years ended December 31, 2018, 2017 and 2016, 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 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, 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 10— “Employee Benefits and Share-Based Compensation.”
| F-11 |
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Recently Issued and Adopted Accounting Guidance
In August 2018, the FASB issued ASU No. 2018-15, Intangibles_—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract (a consensus of the FAS Emerging Issues Task Force),_ which is designed to align the accounting for costs of implementing a cloud computing service arrangement, regardless of whether the hosting arrangement conveys a license to the hosted software. The update requires that for hosting arrangements considered to be a service contract, the criteria for capitalization of developing or obtaining internal-use software shall be applied. The update is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2020, with early adoption permitted, including adoption in any interim period. A prospective or retrospective transition approach must be elected. The Company is evaluating the impact of this guidance on the Company’s consolidated financial statements.
On January 1, 2018, the Company adopted ASU No. 2017-12, Derivatives and Hedging (Topic 815) — Targeted Improvements to Accounting for Hedging Activities, which simplifies the accounting for derivatives. For derivative instruments that are designated and qualify as cash flow hedges, the gain or loss on the derivative instrument is reported as a component of other comprehensive income (loss), reclassified into earnings in the same period or periods during which the hedged transaction affects earnings and presented in the same income statement line item as the earnings effect of the hedged item. The Company recorded a cumulative effect adjustment to accumulated other comprehensive income (loss) with a corresponding adjustment to the opening balance of retained earnings related to the elimination of the separate measurement of ineffectiveness for its cash flow hedges, upon adoption. The adjustments were not material to the Company’s consolidated financial statements. We refer you to Note 9— “Fair Value Measurements and Derivatives” in these notes to consolidated financial statements.
On January 1, 2018, the Company adopted ASU No. 2016-16, Income Taxes (Topic 740) — Intra-Entity Transfers of Assets Other Than Inventory, which requires companies to recognize the income-tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs, rather than when the asset has been sold to an outside party. The Company recorded, upon adoption, a cumulative-effect adjustment to retained earnings of $19.1 million, which captures the write-off of previously unamortized deferred income tax expense from past intra-entity transfers involving assets other than inventory not previously recognized under accounting principles generally accepted in the U.S.
In December 2017, the Act was enacted, and among other provisions, reduced the U.S. federal corporate income tax rate from 35% to 21%. Also in December 2017, the SEC staff issued Staff Accounting Bulletin (“SAB”) No. 118, which addresses the recognition of provisional amounts when a company does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete its accounting for the effect of the changes by the Act. The measurement period ends when a company has obtained, prepared and analyzed the information necessary to finalize its accounting, but cannot extend beyond one year. The Company completed the accounting for the tax effects of enactment of the Act. There was no material change to the $7.4 million reduction of the value of net deferred tax liabilities (which represent future tax expenses) recorded in 2017 as a discrete tax benefit resulting from the lower U.S. federal corporate income tax rate under the Act. Other aspects of the Act were either not applicable or did not have a material impact on the Company’s consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350) — Simplifying the Test for Goodwill Impairment, which simplifies the test for goodwill impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. The guidance is effective for annual or any interim goodwill impairment tests in years beginning after December 15, 2019, with early adoption permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company does not expect to early adopt this guidance. The Company will evaluate, upon adoption of this guidance, the impact of this guidance on the Company’s consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which sets out the principles for the recognition, measurement, presentation and disclosure of leases. The update was issued to increase transparency and comparability among organizations by recognizing rights and obligations resulting from leases as lease assets and liabilities on the balance sheet and disclosing key information about leasing arrangements for leases with a term of 12 months or more. The update modifies lessors’ classification criteria for leases and the accounting for sales-type and direct financing leases. The update requires qualitative and quantitative disclosures designed to give financial statement users additional information on the amount, timing, and uncertainty of cash flows arising from leases. The update is effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2018. The Company has engaged a third party to assist in reviewing the Company’s existing leases and evaluating the Company’s existing contracts to identify those that are considered to be leases under the new guidance. The Company will elect to combine lease and non-lease components as a lessee, to keep leases with an initial term of 12 months or less off the balance sheet, and, if any non-lease component associated with the lease component is the predominant component, the Company will account for the combined component in accordance with FASB ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“Topic 606”), as the lessor. The update is to be applied retrospectively with a cumulative-effect adjustment on January 1, 2019. The Company continues to evaluate the effect that the update will have on the Company’s consolidated financial statements. The Company expects the update to have a material effect on the Company’s assets and liabilities, which will result in a balance sheet presentation that is not comparable to the prior period in the first year of adoption. The Company does not expect the update to have a material impact on the Company’s annual results of operations and/or cash flows.
| F-12 |
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| 3. | Revenue and Expense from Contracts with Customers |
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On January 1, 2018, we adopted Topic 606, which supersedes the revenue recognition requirements in Accounting Standards Codification 605—Revenue Recognition (Topic 605) (“Topic 605”). Using the modified retrospective method, we applied the new requirements to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented below under “— Financial Statement Presentation” and “— Impacts on Financial Statements,” while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under Topic 605.
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, as well as meals and entertainment. 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 and other similar items. Food and beverage, casino operations 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 fixed 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. 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. The inception of substantive cancellation penalties generally coincides with the dates that final payment is due, and penalties generally increase as the voyage sail date approaches. 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 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.
| F-13 |
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Contract Balances
Receivables from customers are included within accounts receivables, net. As of December 31, 2018 and January 1, 2018, our receivables from customers were $17.3 million and $13.8 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. Our contract liabilities are included within advance ticket sales. As of December 31, 2018 and January 1, 2018, our contract liabilities were $1.2 billion and $1.0 billion, respectively. Of the amounts included within contract liabilities, approximately 50% were refundable in accordance with our cancellation policies. Approximately $1.0 billion of the January 1, 2018 contract liability balance has been recognized in revenue for the year ended December 31, 2018.
Our revenue is seasonal and based on the demand for cruises. Historically, the seasonality of the North American cruise industry generally results in the greatest demand for cruises during the Northern Hemisphere’s summer months. This predictable seasonality in demand has resulted in fluctuations by quarter in our revenue and results of operations. The seasonality of our results is increased due to ships being taken out of service for regularly scheduled Dry-docks, which we typically schedule during non-peak demand periods. This seasonality will result in higher contract liability balances as a result of an increased number of reservations preceding these peak demand periods. The addition of new ships also increases the contract liability balances prior to a new ship’s delivery, as staterooms are usually made available for reservation prior to the inaugural cruise. Norwegian Bliss, with approximately 4,000 Berths, was delivered on April 19, 2018 and added 8% capacity to our fleet.
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 our 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 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 and port taxes and fees that fulfill future performance obligations are also considered recoverable and are recorded as assets. As of December 31, 2018, $116.3 million of costs incurred to obtain customers and $32.5 million of costs to fulfill contracts with customers are recognized as assets 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.
Financial Statement Presentation
As of January 1, 2018, in connection with the adoption of Topic 606, we reclassified $51.6 million of deferred costs associated with obtaining customer contracts to prepaid expenses and other assets from advance ticket sales.
Impacts on Financial Statements
The adoption of Topic 606 does not change the timing, classification or amount of revenue recognized from customers in our consolidated financial statements nor does it change the timing, classification or amount of incremental costs to obtain and fulfill those contracts with customers. Therefore, the adoption had no impact on our consolidated statement of operations or consolidated statement of comprehensive income.
| F-14 |
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The following table summarizes the impact of the adoption of Topic 606 on our consolidated balance sheet, which has been adjusted for deferred contract costs that would have been included, net, in advance ticket sales, as of December 31, 2018 (in thousands):
| As Reported | Adjustments | Balances Without Adoption of Topic 606 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Prepaid expenses and other assets | $ | 241,011 | $ | (63,628 | ) | $ | 177,383 | |||||
| Total assets | $ | 15,205,970 | $ | (63,628 | ) | $ | 15,142,342 | |||||
| Advance ticket sales | $ | 1,593,219 | $ | (63,628 | ) | $ | 1,529,591 | |||||
| Total liabilities and shareholders’ equity | $ | 15,205,970 | $ | (63,628 | ) | $ | 15,142,342 |
The following table summarizes the impact of the adoption of Topic 606 on our consolidated statement of cash flows for the year ended December 31, 2018 (in thousands):
| As Reported | Adjustments | Balances Without Adoption of Topic 606 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Changes in operating assets and liabilities: | ||||||||||||
| Prepaid expenses and other assets | $ | (29,519 | ) | $ | 12,029 | $ | (17,490 | ) | ||||
| Advance ticket sales | $ | 262,603 | $ | (12,029 | ) | $ | 250,574 | |||||
| Net cash provided by operating activities | $ | 2,075,171 | $ | — | $ | 2,075,171 |
| 4. | Goodwill and Intangible Assets |
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Goodwill and tradenames are not subject to amortization. As of December 31, 2018 and 2017, the carrying values were $1.4 billion for goodwill and $0.8 billion for tradenames.
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, 2018 | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Weighted- Average Amortization Period (in years) | |||||||||||||
| Customer relationship | $ | 120,000 | $ | (91,756 | ) | $ | 28,244 | 6.0 | ||||||||
| Licenses | 3,368 | (2,874 | ) | 494 | 5.6 | |||||||||||
| Total intangible assets subject to amortization | $ | 123,368 | $ | (94,630 | ) | $ | 28,738 |
| December 31, 2017 | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Weighted- Average Amortization Period (in years) | |||||||||||||
| Customer relationship | $ | 120,000 | $ | (66,866 | ) | $ | 53,134 | 6.0 | ||||||||
| Licenses | 3,368 | (1,601 | ) | 1,767 | 5.6 | |||||||||||
| Non-compete agreements | 660 | (660 | ) | — | 1.0 | |||||||||||
| Total intangible assets subject to amortization | $ | 124,028 | $ | (69,127 | ) | $ | 54,901 |
| F-15 |
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The aggregate amortization expense is as follows (in thousands):
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2018 | 2017 | 2016 | ||||||||||
| Amortization expense | $ | 26,163 | $ | 31,232 | $ | 22,160 |
The following table sets forth the Company’s estimated aggregate amortization expense for each of the five years below (in thousands):
| Year Ended December 31, | Amortization Expense | |||
|---|---|---|---|---|
| 2019 | $ | 18,489 | ||
| 2020 | $ | 9,906 | ||
| 2021 | $ | 75 | ||
| 2022 | $ | 75 | ||
| 2023 | $ | 75 |
| 5. | Accumulated Other Comprehensive Income (Loss) |
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Accumulated other comprehensive income (loss) was as follows (in thousands):
| Year Ended December 31, 2018 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Accumulated Other Comprehensive Income (Loss) | Change Related to Cash Flow Hedges | Change Related to Shipboard Retirement 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 | )(3) | $ | (4,198 | ) |
| Year Ended December 31, 2017 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Accumulated Other Comprehensive Income (Loss) | Change Related to Cash Flow Hedges | Change Related to Shipboard Retirement Plan | ||||||||||
| Accumulated other comprehensive income (loss) at beginning of period | $ | (314,473 | ) | $ | (307,618 | ) | $ | (6,855 | ) | |||
| Current period other comprehensive income (loss) before reclassifications | 304,226 | 304,684 | (458 | ) | ||||||||
| Amounts reclassified into earnings | 37,213 | 36,795 | (1) | 418 | (4) | |||||||
| Accumulated other comprehensive income (loss) at end of period | $ | 26,966 | $ | 33,861 | $ | (6,895 | ) |
| Year Ended December 31, 2016 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Accumulated Other Comprehensive Income (Loss) | Change Related to Cash Flow Hedges | Change Related to Shipboard Retirement Plan | ||||||||||
| Accumulated other comprehensive income (loss) at beginning of period | $ | (412,650 | ) | $ | (405,298 | ) | $ | (7,352 | ) | |||
| Current period other comprehensive income before reclassifications | 1,776 | 1,711 | 65 | |||||||||
| Amounts reclassified into earnings | 96,401 | 95,969 | (1) | 432 | (4) | |||||||
| Accumulated other comprehensive income (loss) at end of period | $ | (314,473 | ) | $ | (307,618 | ) | $ | (6,855 | ) |
| (1) | We refer you to Note 9— “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 $21.1 million of loss expected to be reclassified into earnings in the next 12 months. |
| (4) | Amortization of prior-service cost and actuarial loss reclassified to payroll and related expense. |
| F-16 |
|---|
| 6. | Property and Equipment, Net |
|---|
Property and equipment, net consisted of the following (in thousands):
| December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2018 | 2017 | |||||||
| Ships | $ | 13,032,555 | $ | 11,814,409 | ||||
| Ships improvements | 1,407,989 | 1,060,049 | ||||||
| Ships under construction | 491,632 | 521,597 | ||||||
| Land and land improvements | 34,936 | 37,535 | ||||||
| Other | 558,052 | 487,921 | ||||||
| 15,525,164 | 13,921,511 | |||||||
| Less: accumulated depreciation | (3,405,911 | ) | (2,881,023 | ) | ||||
| Property and equipment, net | $ | 12,119,253 | $ | 11,040,488 |
The increase in ships was primarily due to the addition of Norwegian Bliss. Depreciation expense for the years ended December 31, 2018, 2017 and 2016 was $534.9 million, $478.7 million and $411.4 million, respectively. Repairs and maintenance expenses including Dry-dock expenses were $199.5 million, $157.2 million and $155.4 million for the years ended December 31, 2018, 2017 and 2016, 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 $30.4 million, $29.0 million and $33.7 million for the years ended December 31, 2018, 2017 and 2016, respectively.
| 7. | Long-Term Debt |
|---|
Long-term debt consisted of the following:
| Interest Rate December 31, | Maturities | Balance December 31, | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2018 | 2017 | Through | 2018 | 2017 | ||||||||||||||||
| (in thousands) | ||||||||||||||||||||
| $875.0 million senior secured revolving credit facility | 3.96 | % | 3.27 | % | 2021 | $ | 130,000 | $ | 78,000 | |||||||||||
| Term Loan A | 4.01 | % | 3.32 | % | 2021 | 1,256,167 | 1,385,196 | |||||||||||||
| $375.0 million Term Loan B (1) | 4.26 | % | 3.18 | % | 2021 | 368,982 | 371,914 | |||||||||||||
| $700.0 million 4.750% senior unsecured notes | 4.75 | % | 4.75 | % | 2021 | 561,021 | 693,413 | |||||||||||||
| €662.9 million Norwegian Epic term loan (2) | 4.58 | % | 3.44 | % | 2022 | 259,394 | 328,646 | |||||||||||||
| €308.1 million Pride of Hawai’i loan (2) | — | 2.31 | % | 2018 | — | 18,438 | ||||||||||||||
| €529.8 million Breakaway one loan (2) | 4.09 | % | 2.97 | % | 2025 | 360,680 | 415,039 | |||||||||||||
| €529.8 million Breakaway two loan (2) | 4.50 | % | 4.50 | % | 2026 | 426,503 | 482,133 | |||||||||||||
| €590.5 million Breakaway three loan (2) | 2.98 | % | 2.98 | % | 2027 | 537,223 | 595,494 | |||||||||||||
| €729.9 million Breakaway four loan (2) | 2.98 | % | 2.98 | % | 2029 | 694,536 | 758,595 | |||||||||||||
| €666 million Seahawk 1 term loan (2) | 3.92 | % | 3.92 | % | 2030 | 756,061 | 184,837 | |||||||||||||
| €666 million Seahawk 2 term loan (2) | 3.92 | % | 3.92 | % | 2031 | 187,612 | 90,351 | |||||||||||||
| Leonardo newbuild one loan | 2.68 | % | — | 2034 | 48,009 | — | ||||||||||||||
| Leonardo newbuild two loan | 2.77 | % | — | 2035 | 48,009 | — | ||||||||||||||
| Leonardo newbuild three loan | 1.22 | % | — | 2036 | 43,667 | — | ||||||||||||||
| Leonardo newbuild four loan | 1.31 | % | — | 2037 | 43,667 | — | ||||||||||||||
| Sirena loan | 2.75 | % | 2.75 | % | 2019 | 13,856 | 27,344 | |||||||||||||
| Explorer newbuild loan | 3.43 | % | 3.43 | % | 2028 | 268,970 | 295,093 | |||||||||||||
| Marina newbuild loan (3) | 3.07 | % | 2.00 | % | 2023 | 201,007 | 245,706 | |||||||||||||
| Riviera newbuild loan (4) | 3.32 | % | 2.11 | % | 2024 | 247,203 | 292,183 | |||||||||||||
| Capital lease and license obligations | Various | Various | 2028 | 39,524 | 45,383 | |||||||||||||||
| Total debt | 6,492,091 | 6,307,765 | ||||||||||||||||||
| Less: current portion of long-term debt | (681,218 | ) | (619,373 | ) | ||||||||||||||||
| Total long-term debt | $ | 5,810,873 | $ | 5,688,392 |
| (1) | Includes original issue discount of $0.7 million and $0.9 million as of December 31, 2018 and 2017, respectively. | |
|---|---|---|
| (2) | Currently U.S. dollar-denominated. | |
| (3) | Includes premium of $0.1 million and $0.2 million as of December 31, 2018 and 2017, respectively. | |
| (4) | Includes premium of $0.2 million as of December 31, 2018 and 2017. |
| F-17 |
|---|
On April 19, 2018, we took delivery of Norwegian Bliss. To finance the payment due upon delivery, we had export financing in place for 80% of the contract price. The associated $850.0 million term loan bears interest at a fixed rate of 3.92% with a maturity date of April 19, 2030. Principal and interest payments are payable semiannually.
On April 4, 2018, we redeemed $135.0 million principal amount of the $700.0 million aggregate principal amount of outstanding 4.75% Senior Notes due 2021 (the “Notes”) at a price equal to 100% of the principal amount of the Notes being redeemed and paid the premium of $5.1 million and accrued interest of $1.9 million. The redemption also resulted in a write off of $1.2 million of certain fees. Following the partial redemption, $565.0 million aggregate principal amount of Notes remained outstanding.
Interest expense, net for the year ended 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 of debt. Interest expense, net for the year ended December 31, 2017 was $267.8 million which included $32.5 million of amortization of deferred financing fees and a $23.9 million loss on extinguishment of debt. Interest expense, net for the year ended December 31, 2016 was $276.9 million which included $34.7 million of amortization of deferred financing fees and a $27.7 million loss on extinguishment of debt.
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, and 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 our covenants as of December 31, 2018.
The following are scheduled principal repayments on long-term debt including capital lease obligations as of December 31, 2018 for each of the next five years (in thousands):
| Year | Amount | |||
|---|---|---|---|---|
| 2019 | $ | 681,218 | ||
| 2020 | 682,556 | |||
| 2021 | 2,549,621 | |||
| 2022 | 494,186 | |||
| 2023 | 434,902 | |||
| Thereafter | 1,767,383 | |||
| Total | $ | 6,609,866 |
We had an accrued interest liability of $37.2 million and $31.9 million as of December 31, 2018 and 2017, respectively.
| 8. | Related Party Disclosures |
|---|
Transactions with Genting HK and Apollo
In December 2018, as part of a public equity offering of NCLH’s ordinary shares owned by Apollo and Genting HK, NCLH repurchased 1,683,168 of its ordinary shares sold in the offering for approximately $85.0 million pursuant to its new Repurchase Program.
In March 2018, as part of a public equity offering of NCLH’s ordinary shares owned by Apollo and Genting HK, NCLH repurchased 4,722,312 of its ordinary shares sold in the offering for approximately $263.5 million pursuant to its then existing share repurchase program.
In June 2012, we exercised our option with Genting HK to purchase Norwegian Sky. We paid the total amount of $259.3 million to Genting HK in connection with the Norwegian Sky Purchase Agreement as of December 31, 2016 and no further payments are due.
| F-18 |
|---|
| 9. | 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, 2018, we had fuel swaps, which are used to mitigate the financial impact of volatility of fuel prices pertaining to approximately 1.3 million metric tons of our projected fuel purchases, maturing through December 31, 2021.
As of December 31, 2018, 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 related to our ship construction contracts denominated in euros. The notional amount of our foreign currency forward contracts was €2.1 billion, or $2.4 billion based on the euro/U.S. dollar exchange rate as of December 31, 2018.
As of December 31, 2018, we had interest rate swap agreements 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 swap agreements was $1.0 billion as of December 31, 2018.
| F-19 |
|---|
The derivatives measured at fair value and the respective location in the consolidated balance sheets includes the following (in thousands):
| Assets | Liabilities | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Derivative Contracts Designated as | December 31, | December 31, | ||||||||||||||||
| Hedging Instruments | Balance Sheet Location | 2018 | 2017 | 2018 | 2017 | |||||||||||||
| Fuel contracts | ||||||||||||||||||
| Prepaid expenses and other assets | $ | 2,583 | $ | 19,220 | $ | 1 | $ | 2,406 | ||||||||||
| Other long-term assets | 197 | 19,854 | 29 | 3,469 | ||||||||||||||
| Accrued expenses and other liabilities | 1,173 | — | 19,547 | 3,348 | ||||||||||||||
| Other long-term liabilities | 933 | 576 | 51,184 | 2,148 | ||||||||||||||
| Foreign currency contracts | ||||||||||||||||||
| Prepaid expenses and other assets | 5,285 | 52,300 | 1,497 | 730 | ||||||||||||||
| Other long-term assets | 3,514 | 85,081 | — | — | ||||||||||||||
| Accrued expenses and other liabilities | 112 | — | 5,145 | — | ||||||||||||||
| Other long-term liabilities | 2,874 | — | 40,476 | — | ||||||||||||||
| Interest rate contracts | ||||||||||||||||||
| Prepaid expenses and other assets | 519 | — | — | — | ||||||||||||||
| Other long-term assets | 27 | — | — | — | ||||||||||||||
| Accrued expenses and other liabilities | — | — | — | 1,020 | ||||||||||||||
| Total derivative contracts designated as hedging instruments | $ | 17,217 | $ | 177,031 | $ | 117,879 | $ | 13,121 |
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.
The gross and net amounts recognized within assets and liabilities include the following (in thousands):
| December 31, 2018 | Gross Amounts | Gross Amounts Offset | Total Net Amounts | Gross Amounts Not Offset | Net Amounts | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Assets | $ | 12,125 | $ | (1,527 | ) | $ | 10,598 | $ | (6,872 | ) | $ | 3,726 | ||||||||
| Liabilities | $ | 116,352 | $ | (5,092 | ) | $ | 111,260 | $ | (35,718 | ) | $ | 75,542 |
| December 31, 2017 | Gross Amounts | Gross Amounts Offset | Total Net Amounts | Gross Amounts Not Offset | Net Amounts | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Assets | $ | 176,455 | $ | (6,605 | ) | $ | 169,850 | $ | (127,924 | ) | $ | 41,926 | ||||||||
| Liabilities | $ | 6,516 | $ | (576 | ) | $ | 5,940 | $ | (1,020 | ) | $ | 4,920 |
| F-20 |
|---|
The effects of cash flow hedge accounting on accumulated other comprehensive income (loss) include the following (in thousands):
| Derivatives | Amount of Gain (Loss) Recognized in Other Comprehensive Income | Location of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income (Loss) into Income | Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income (Loss) into Income | |||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||||
| 2018 | 2017 | 2016 | 2018 | 2017 | 2016 | |||||||||||||||||||||
| Fuel contracts | $ | (52,949 | ) | $ | 50,263 | $ | 127,470 | Fuel | $ | 34,410 | $ | (29,721 | ) | $ | (88,442 | ) | ||||||||||
| Foreign currency contracts | (108,911 | ) | 254,070 | (124,058 | ) | Depreciation and amortization | (3,463 | ) | (4,077 | ) | (3,581 | ) | ||||||||||||||
| Interest rate contracts | 646 | 351 | (1,701 | ) | Interest expense, net | (851 | ) | (2,997 | ) | (3,946 | ) | |||||||||||||||
| Total gain (loss) recognized in other comprehensive income | $ | (161,214 | ) | $ | 304,684 | $ | 1,711 | $ | 30,096 | $ | (36,795 | ) | $ | (95,969 | ) |
The effects of cash flow hedge accounting on the consolidated statements of operations include the following (in thousands):
| Year Ended December 31, 2018 | Year Ended December 31, 2017 | |||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Fuel | Depreciation and Amortization | Interest Expense, net | Fuel | Depreciation and Amortization | Interest 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 | $ | 392,685 | $ | 561,060 | $ | 270,404 | $ | 361,032 | $ | 509,957 | $ | 267,804 | ||||||||||||
| Amount of gain (loss) reclassified from accumulated other comprehensive income (loss) into income | ||||||||||||||||||||||||
| Fuel contracts | $ | 34,410 | $ | — | $ | — | $ | (29,721 | ) | $ | — | $ | — | |||||||||||
| Foreign currency contracts | $ | — | $ | (3,463 | ) | $ | — | $ | — | $ | (4,077 | ) | $ | — | ||||||||||
| Interest rate contracts | $ | — | $ | — | $ | (851 | ) | $ | — | $ | — | $ | (2,997 | ) |
The effects of cash flow hedge accounting on the consolidated statements of operations include the following (in thousands):
| Year Ended December 31, 2016 | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Fuel | Depreciation and Amortization | Interest Expense, net | Other (Income) 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 | $ | 335,174 | $ | 432,495 | $ | 276,859 | $ | 8,302 | ||||||||
| Amount of loss reclassified from accumulated other comprehensive income (loss) into income | ||||||||||||||||
| Fuel contracts | $ | (85,448 | ) | $ | — | $ | — | $ | — | |||||||
| Foreign currency contracts | $ | — | $ | (3,581 | ) | $ | — | $ | — | |||||||
| Interest rate contracts | $ | — | $ | — | $ | (3,946 | ) | $ | — | |||||||
| 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 | $ | — | $ | — | $ | — | $ | (2,994 | ) |
| F-21 |
|---|
The effects on the consolidated financial statements of the foreign currency contracts which were not designated as hedging instruments were as follows (in thousands):
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2018 | 2017 | 2016 | ||||||||||
| Gain recognized in other income (expense), net | $ | — | $ | — | $ | 4,179 |
Other
The carrying amounts reported in the consolidated balance sheets of all other financial assets and liabilities approximate fair value.
Long-Term Debt
As of December 31, 2018 and 2017, the fair value of our long-term debt, including the current portion, was $6,601.9 million and $6,448.6 million, respectively, which was $8.4 million higher and $23.5 million higher, respectively, than the carrying values. 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. Market risk associated with our long-term variable rate debt is the potential increase in interest expense from an increase in interest rates. The fair value of our long-term debt was calculated based on estimated rates for the same or similar instruments with similar terms and remaining maturities, which represent Level 2 inputs in the fair value hierarchy.
Non-Recurring Measurements of Non-Financial Assets
Goodwill and other indefinite-lived assets, principally tradenames, are reviewed for impairment on an annual basis 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 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. We estimate fair value based on the best information available utilizing estimates, judgments and projections as necessary. As of December 31, 2018, our annual review supports the carrying value of these assets.
| 10. | Employee Benefits and Share-Based Compensation |
|---|
Share-Based Compensation
As a result of NCLH’s adoption of ASU No. 2016-09, beginning in the first quarter of 2017, NCLH began accounting for forfeitures as they occur, rather than estimating expected forfeitures. Pursuant to the modified-retrospective application, the net cumulative effect of this change was recognized as a $2.2 million increase to retained earnings as of January 1, 2017. We refer you to our consolidated statements of changes in shareholders’ equity.
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.
| F-22 |
|---|
Share Option Awards
No time-based share option awards were granted for the years ended December 31, 2018 or 2017. The fair value of each time-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 vesting period using the straight-line method. The assumptions used within the option-pricing model for the time-based awards are as follows:
| 2016 | ||||
|---|---|---|---|---|
| Dividend yield | —% | |||
| Expected share price volatility | 30.36%-33.01% | |||
| Risk-free interest rate | 1.20%-1.48% | |||
| Expected term | 6.00 years |
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 performance-based options awarded to our President and Chief Executive Officer in August 2015 are subject to performance conditions such that the number of awards that ultimately vest depends 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 the awards has been ascertained. 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 | 2017 | 2016 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Dividend yield | —% | —% | —% | |||||||||
| Expected share price volatility | 31.50%-32.20% | 25.97% | 25.97%-30.21% | |||||||||
| Risk-free interest rate | 2.48-2.58% | 1.81% | 1.01%-1.93% | |||||||||
| Expected term | 3.72-4.22 years | 4.20 years | 4.38-5.13 years |
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.
| F-23 |
|---|
The following table sets forth a summary of option activity under NCLH’s Restated 2013 Plan, including 208,335 previously awarded performance-based share option awards, for which a grant date was established in 2018, for the period presented:
| Number of Share Option Awards | Weighted-Average Exercise Price | Weighted- Average Contractual Term | Aggregate Intrinsic Value | |||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Time- Based Awards | Performance- Based Awards | Market- Based Awards | Time- Based Awards | Performance- Based Awards | Market- Based Awards | (in years) | (in thousands) | |||||||||||||||||||||||||
| Outstanding as of January 1, 2018 | 6,580,898 | 373,969 | 208,333 | $ | 49.18 | $ | 31.39 | $ | 59.43 | 6.99 | $ | 50,021 | ||||||||||||||||||||
| Granted | — | 208,335 | — | $ | — | $ | 59.43 | $ | — | |||||||||||||||||||||||
| Exercised | (674,272 | ) | (115,785 | ) | — | $ | 35.00 | $ | 19.00 | $ | — | |||||||||||||||||||||
| Forfeited and cancelled | (219,833 | ) | (56,020 | ) | — | $ | 54.76 | $ | 56.59 | $ | — | |||||||||||||||||||||
| Outstanding as of December 31, 2018 | 5,686,793 | 410,499 | 208,333 | $ | 50.65 | $ | 45.67 | $ | 59.43 | 6.22 | $ | 13,946 | ||||||||||||||||||||
| Vested and Expected to vest of December 31, 2018 | 5,686,793 | 254,249 | — | $ | 50.65 | $ | 37.22 | $ | — | 6.19 | 13,946 | |||||||||||||||||||||
| Exercisable as of December 31, 2018 | 5,022,818 | 254,249 | — | $ | 50.18 | $ | 37.22 | $ | — | 6.11 | 13,928 |
The weighted-average grant-date fair value of time-based options granted during 2016 was $17.11. 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 years ended December 31, 2018, 2017 and 2016 was $15.20, $8.55 and $8.67, respectively. The total intrinsic value of share options exercised during 2018, 2017 and 2016 was $16.7 million, $18.9 million and $5.2 million and total cash received by the Company from exercises was $25.8 million, $27.4 million and $7.6 million, respectively. As of December 31, 2018, there was approximately $2.9 million, $0 and $0 of total unrecognized compensation cost, related to time-based, performance-based and market-based options, respectively, granted under our share-based incentive plans which is expected to be recognized over a weighted-average period of 0.4 years, 0 years and 0 years, respectively.
Restricted Ordinary Share Awards
The following is a summary of NCLH’s restricted ordinary share activity for the period presented:
| Number of Time- Based Awards | Weighted- Average Grant Date Fair Value | |||||||
|---|---|---|---|---|---|---|---|---|
| Non-vested as of January 1, 2018 | 858 | $ | 58.33 | |||||
| Vested | (429 | ) | $ | 58.25 | ||||
| Non-vested as of December 31, 2018 | 429 | $ | 58.41 |
The restricted shares vest in substantially equal installments over four years and are expected to vest on January 1, 2019. The total fair value of shares vested during the years ended December 31, 2017 and 2016 was $0.1 million and $1.1 million, respectively.
Restricted Share Unit (“RSU”) Awards
On March 1, 2018, NCLH granted to certain employees 1.6 million time-based RSU awards which vest equally over three years. Also on March 1, 2018, NCLH granted to certain members of our management team 0.5 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.
| F-24 |
|---|
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. Although the terms of the performance-based RSU 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 the awards has been ascertained. In 2018, the grant date was therefore established for performance-based RSU awards granted in prior years. The Company remeasures the probability and the cumulative share-based compensation expense of the awards each reporting period until vesting or forfeiture occurs.
The following table sets forth a summary of RSU activity and includes 0.3 million previously awarded performance-based RSU awards for which the grant date was established in 2018 (the number of RSUs reported assumes the maximum level of achievement), for the period presented:
| Number of Time-Based Awards | Weighted- Average Grant Date Fair Value | Number of Performance- Based Awards | Weighted- Average Grant Date Fair Value | Number of Market- Based Awards | Weighted- Average Grant Date Fair Value | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Non-vested as of January 1, 2018 | 2,555,477 | $ | 50.86 | — | $ | — | 50,000 | $ | 59.43 | |||||||||||||||
| Granted | 1,613,077 | $ | 56.73 | 843,998 | $ | 56.58 | — | $ | — | |||||||||||||||
| Vested | (1,032,927 | ) | $ | 50.66 | — | $ | — | — | $ | — | ||||||||||||||
| Forfeited or expired | (162,595 | ) | $ | 53.40 | (18,384 | ) | $ | 56.43 | — | $ | — | |||||||||||||
| Non-vested as of December 31, 2018 | 2,973,032 | $ | 53.98 | 825,614 | $ | 56.58 | 50,000 | $ | 59.43 | |||||||||||||||
| Non-vested and expected to vest as of December 31, 2018 | 2,973,032 | $ | 53.98 | 788,114 | $ | 56.59 | — | $ | — |
As of December 31, 2018, there was total unrecognized compensation costs related to non-vested time-based, non-vested performance-based and market-based RSUs of $97.7 million, $25.8 million and $0, respectively. The costs are expected to be recognized over a weighted-average period of 1.8 years, 1.9 years and 0 years, respectively, for the time-based, performance-based and market-based RSUs. Taxes paid pursuant to net share settlements in 2018 and 2017 were $13.9 million and $6.3 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, 2018 and 2017, we had a liability for payroll withholdings received of $1.9 million and $1.5 million, respectively.
The compensation expense recognized for share-based compensation for the periods presented include the following (in thousands):
| Share-Based Compensation Expense | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Classification of expense | 2018 | 2017 | 2016 | |||||||||
| Payroll and related (1) | $ | 15,629 | $ | 9,455 | $ | 7,793 | ||||||
| Marketing, general and administrative (2) | 100,354 | 77,584 | 58,621 | |||||||||
| Total share-based compensation expense | $ | 115,983 | $ | 87,039 | $ | 66,414 |
| (1) (2) | Amounts relate to equity granted to certain of our shipboard officers. Amounts relate to equity granted to certain of our corporate employees. |
|---|
| F-25 |
|---|
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 for good reason. Severance generally includes a series of cash payments based on the employee’s base salary (and in some cases, bonus), 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. We make 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. 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 $0.3 million, $0.3 million and $0.1 million were utilized in the years ended December 31, 2018, 2017 and 2016, respectively.
We maintained a Supplemental Executive Retirement Plan (“SERP”), which is a legacy unfunded defined contribution plan for certain executives who were employed by the Company in an executive capacity prior to 2008. The SERP was frozen to future participation following that date. The SERP provided for Company contributions on behalf of the participants to compensate them for the benefits that are limited under the 401(k) Plan. We credited participants under the SERP for amounts that would have been contributed by us to the Company’s previous Defined Contribution Retirement Plan and the former 401(k) Plan without regard to any limitations imposed by the Code. Participants did not make any elective contributions under this plan. We discontinued this plan following the 2015 contributions and paid the previously deferred contributions to participants in early 2017 following the expiration of the required 12 month waiting period.
We recorded combined total expenses related to the above 401(k) Plan and SERP of $9.3 million, $7.3 million and $6.4 million for the years ended December 31, 2018, 2017 and 2016, 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 $1.0 million and $1.1 million was included in accrued expenses and other liabilities as of December 31, 2018 and 2017, respectively, and $23.3 million and $23.5 million was included in other long-term liabilities in our consolidated balance sheets as of December 31, 2018 and 2017, respectively.
| F-26 |
|---|
The amounts related to the Shipboard Retirement Plan were as follows (in thousands):
| As of or for the Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2018 | 2017 | 2016 | ||||||||||
| Pension expense: | ||||||||||||
| Service cost | $ | 2,167 | $ | 1,987 | $ | 1,863 | ||||||
| Interest cost | 857 | 887 | 874 | |||||||||
| Amortization of prior service cost | 378 | 378 | 378 | |||||||||
| Amortization of actuarial loss | 51 | 40 | 54 | |||||||||
| Total pension expense | $ | 3,453 | $ | 3,292 | $ | 3,169 | ||||||
| Change in projected benefit obligation: | ||||||||||||
| Projected benefit obligation at beginning of year | $ | 24,587 | $ | 22,605 | $ | 21,078 | ||||||
| Service cost | 2,167 | 1,987 | 1,863 | |||||||||
| Interest cost | 857 | 887 | 874 | |||||||||
| Actuarial gain (loss) | (2,271 | ) | 458 | (65 | ) | |||||||
| Direct benefit payments | (1,022 | ) | (1,350 | ) | (1,145 | ) | ||||||
| Projected benefit obligation at end of year | $ | 24,318 | $ | 24,587 | $ | 22,605 | ||||||
| Amounts recognized in the consolidated balance sheets: | ||||||||||||
| Projected benefit obligation | $ | 24,318 | $ | 24,587 | $ | 22,605 |
| For the Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2018 | 2017 | 2016 | ||||||||||
| Amounts recognized in accumulated other comprehensive income (loss): | ||||||||||||
| Prior service cost | $ | (4,159 | ) | $ | (4,537 | ) | $ | (4,915 | ) | |||
| Accumulated actuarial loss | (1,105 | ) | (3,426 | ) | (3,008 | ) | ||||||
| Accumulated other comprehensive income (loss) | $ | (5,264 | ) | $ | (7,963 | ) | $ | (7,923 | ) |
The discount rates used in the net periodic benefit cost calculation for the years ended December 31, 2018, 2017 and 2016 were 3.6%, 4.0% and 4.3%, respectively, and the actuarial loss is amortized over 18.93 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.
On January 1, 2018, NCLH adopted ASU No. 2017-07, Compensation – Retirement Benefits (Topic 715), which requires the components of pension expense not associated with service costs to be recognized separately from the service cost component and outside operating income. For the year ended December 31, 2018, services costs are recognized in payroll and related expense while non-service cost components are recognized in other income (expense), net. For the years ended December 31, 2017 and 2016, services costs and non-service cost components are both recognized in payroll and related expense.
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 | |||
|---|---|---|---|---|
| 2019 | $ | 986 | ||
| 2020 | $ | 971 | ||
| 2021 | $ | 1,076 | ||
| 2022 | $ | 1,179 | ||
| 2023 | $ | 1,333 | ||
| Next five years | $ | 9,810 |
| F-27 |
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| 11. | 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, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2018 | 2017 | 2016 | ||||||||||
| Bermuda | $ | — | $ | — | $ | — | ||||||
| Foreign - Other | 969,310 | 770,614 | 640,303 | |||||||||
| Net income before income taxes | $ | 969,310 | $ | 770,614 | $ | 640,303 |
The components of the provision for income taxes consisted of the following (expense) benefit (in thousands):
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2018 | 2017 | 2016 | ||||||||||
| Current: | ||||||||||||
| Bermuda | $ | — | $ | — | $ | — | ||||||
| United States | (7,409 | ) | 1,828 | (8,736 | ) | |||||||
| Foreign - Other | (5,371 | ) | (4,617 | ) | (2,166 | ) | ||||||
| Total current: | (12,780 | ) | (2,789 | ) | (10,902 | ) | ||||||
| Deferred: | ||||||||||||
| Bermuda | — | — | — | |||||||||
| United States | (1,912 | ) | (8,439 | ) | 3,684 | |||||||
| Foreign - Other | 225 | 486 | — | |||||||||
| Total deferred: | (1,687 | ) | (7,953 | ) | 3,684 | |||||||
| Income tax expense | $ | (14,467 | ) | $ | (10,742 | ) | $ | (7,218 | ) |
Our reconciliation of income tax expense computed by applying our Bermuda statutory rate and reported income tax expense was as follows (in thousands):
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2018 | 2017 | 2016 | ||||||||||
| Tax at Bermuda statutory rate | $ | — | $ | — | $ | — | ||||||
| Foreign income taxes at different rates | (17,540 | ) | (28,188 | ) | (10,721 | ) | ||||||
| Tax contingencies | (5 | ) | 11,184 | (533 | ) | |||||||
| Return to provision adjustments | 2,961 | (1,397 | ) | 418 | ||||||||
| Benefit from change in tax rate | 117 | 7,659 | 24 | |||||||||
| Valuation allowance | — | — | 3,594 | |||||||||
| Income tax expense | $ | (14,467 | ) | $ | (10,742 | ) | $ | (7,218 | ) |
Deferred tax assets and liabilities were as follows (in thousands):
| As of December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2018 | 2017 | |||||||
| Deferred tax assets: | ||||||||
| Loss carryforwards | $ | 63,201 | $ | 58,789 | ||||
| Other | 2,535 | 2,106 | ||||||
| Valuation allowance | (41,924 | ) | (42,154 | ) | ||||
| Total net deferred assets | 23,812 | 18,741 | ||||||
| Deferred tax liabilities: | ||||||||
| Property and equipment | (37,448 | ) | (30,869 | ) | ||||
| Total deferred tax liabilities | (37,448 | ) | (30,869 | ) | ||||
| Net deferred tax liability | $ | (13,636 | ) | $ | (12,128 | ) |
| F-28 |
|---|
We have U.S. net operating loss carryforwards of $278.3 million and $254.8 million for the years ended December 31, 2018 and 2017, respectively, which begin to expire in 2023. We have state net operating loss carryforwards of $4.8 million and $8.9 million for the years ended December 31, 2018 and 2017, respectively, which expire between 2025 through 2035.
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 $13.9 million for the years ended December 31, 2018 and 2017, 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 have U.K. net operating loss carryforwards of $7.5 million and $8.3 million for the years ended December 31, 2018 and 2017, respectively, which can be carried forward indefinitely.
Included above are deferred tax assets associated with Prestige for which we have provided a full valuation allowance. We have U.S. net operating loss carryforwards of $177.5 million and $177.8 million for the years ended December 31, 2018 and 2017, respectively, which begin to expire in 2023. 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 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. During 2018, we implemented certain tax restructuring that created the potential to utilize the net operating loss carryforwards referred to above. We are currently undergoing a Section 382 study to determine the amount of the Prestige net operating loss carryforwards that can be utilized against future taxable income, the result of which could potentially result in the reversal of all or a portion of the valuation allowance. We expect the study to be complete in the first half of 2019.
In December 2017, the Act was enacted, and among other provisions, reduced the U.S. federal corporate income tax rate from 35% to 21%. Also in December 2017, the SEC staff issued SAB No. 118, which addresses the recognition of provisional amounts when a company does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete its accounting for the effect of the changes in the Act. The measurement period ends when a company has obtained, prepared and analyzed the information necessary to finalize its accounting, but cannot extend beyond one year. The Company completed the accounting for the tax effects of enactment of the Act. There is no material change to the $7.4 million reduction of the value of net deferred tax liabilities (which represents future tax expenses) recorded in 2017 as a discrete tax benefit resulting from the federal corporate income tax rate reduction. Other aspects of the Act were either not applicable or did not have a material impact on the Company’s consolidated financial statements.
The following is a tabular reconciliation of the total amounts of unrecognized tax benefits (in thousands):
| As of December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2018 | 2017 | |||||||
| Unrecognized tax benefits, beginning of the year | $ | 532 | $ | 11,144 | ||||
| Gross increases in tax positions from prior periods | — | 300 | ||||||
| Settlement of tax positions | — | (250 | ) | |||||
| Lapse of statute of limitations | — | (10,662 | ) | |||||
| Unrecognized tax benefits, end of year | $ | 532 | $ | 532 |
In 2017, $10.7 million of unrecognized tax benefits were reversed due to the expiration of the statute of limitations. If the $0.5 million of unrecognized tax benefits at December 31, 2018 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 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 2015, except for years in which NOLs generated prior to 2015 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.
| F-29 |
|---|
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.
| 12. | Commitments and Contingencies |
|---|
Operating Leases
Total expense under non-cancelable operating lease commitments, primarily for offices, motor vehicles and office equipment was $16.9 million, $17.0 million and $15.0 million for the years ended December 31, 2018, 2017 and 2016, respectively. As of December 31, 2018, minimum annual rentals for non-cancelable leases with initial or remaining terms in excess of one year were as follows (in thousands):
| Year | Amount | |||
|---|---|---|---|---|
| 2019 | $ | 16,651 | ||
| 2020 | 16,105 | |||
| 2021 | 15,315 | |||
| 2022 | 14,391 | |||
| 2023 | 13,462 | |||
| Thereafter | 52,626 | |||
| Total minimum annual rentals | $ | 128,550 |
Rental payments applicable to such operating leases are recognized on a straight-line basis over the term of the lease.
Ship Construction Contracts
Project Leonardo will introduce an additional six ships, each approximately 140,000 Gross Tons with approximately 3,300 Berths, with expected delivery dates from 2022 through 2027, subject to certain conditions. The effectiveness of the contracts to construct two of the ships, expected to be delivered in 2026 and 2027, is contingent upon certain Italian government approvals. We have a Breakaway Plus Class Ship, Norwegian Encore, with approximately 168,000 Gross Tons with 4,000 Berths, on order for delivery in the fall of 2019, and an Explorer Class Ship, Seven Seas Splendor, with approximately 55,000 Gross Tons and 750 Berth, on order for delivery in the winter of 2020. We also plan to introduce three additional ships, one for Regent and two for Oceania Cruises (we refer you to Note 17— “Subsequent Events”).
The combined contract prices of the eight ships on order for delivery was approximately €6.3 billion, or $7.2 billion based on the euro/U.S. dollar exchange rate as of December 31, 2018.
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 refer you to Note 17— “Subsequent Events” for details regarding the financing for certain ships. 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, 2018, 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 | |||
|---|---|---|---|---|
| 2019 | $ | 912,858 | ||
| 2020 | 474,869 | |||
| 2021 | 187,818 | |||
| 2022 | 1,029,328 | |||
| 2023 | 946,895 | |||
| Thereafter | 1,589,673 | |||
| Total minimum annual payments | $ | 5,141,441 |
| F-30 |
|---|
Port Facility Commitments
As of December 31, 2018, future commitments to pay for usage of certain port facilities were as follows (in thousands):
| Year | Amount | |||
|---|---|---|---|---|
| 2019 | $ | 62,388 | ||
| 2020 | 73,853 | |||
| 2021 | 77,829 | |||
| 2022 | 77,546 | |||
| 2023 | 79,784 | |||
| Thereafter | 1,366,636 | |||
| Total port facility future commitments | $ | 1,738,036 |
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 $30.0 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. Also, each of our brands have a legal requirement to maintain a security guarantee based on cruise business originated from the U.K. As of December 31, 2018, approximately British Pound Sterling 30.5 million was in place to support our security guarantees. We also are required by other jurisdictions to establish financial responsibility to meet liability in the event of non-performance of our obligations to passengers from those jurisdictions.
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
In the normal course of our business, various 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.
| 13. | Other Income (Expense), Net |
|---|
Other income (expense), net was a gain of $20.7 million, loss of $10.4 million, and loss of $8.3 million for the years ended December 31, 2018, 2017 and 2016, respectively. In 2018, the income was primarily due to foreign currency exchange gains. In 2017, the expense was primarily due to foreign currency exchange losses. 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.
| 14. | 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 $153.7 million, $152.3 million and $137.2 million for the years ended December 31, 2018, 2017 and 2016, respectively, which are recorded in payroll and related in our consolidated statements of operations.
| F-31 |
|---|
| 15. | Supplemental Cash Flow Information |
|---|
For the year ended December 31, 2018, we had non-cash investing activities related to 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.
For the year ended December 31, 2017, we had non-cash investing activities related to property and equipment of $20.0 million and non-cash investing activities related to capital leases of $13.3 million. For the year ended December 31, 2017, we paid income taxes of $11.7 million and interest and related fees, net of capitalized interest, of $284.9 million.
For the year ended December 31, 2016, we had non-cash investing activities in connection with property and equipment of $26.7 million. For the year ended December 31, 2016, we paid income taxes of $8.8 million and interest and related fees, net of capitalized interest, of $269.5 million.
| 16. | Quarterly Selected Financial Data (Unaudited) (in thousands, except per share data) |
|---|
| First Quarter | Second Quarter | Third Quarter | Fourth Quarter | |||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||||||||
| Total revenue | $ | 1,293,403 | $ | 1,150,781 | $ | 1,522,174 | $ | 1,344,103 | $ | 1,858,356 | $ | 1,651,738 | $ | 1,381,193 | $ | 1,249,553 | ||||||||||||||||
| Operating income | $ | 167,053 | $ | 119,734 | $ | 292,152 | $ | 275,071 | $ | 550,276 | $ | 476,820 | $ | 209,580 | $ | 177,194 | ||||||||||||||||
| Net income | $ | 103,155 | $ | 61,910 | $ | 226,676 | $ | 198,473 | $ | 470,378 | $ | 400,692 | $ | 154,634 | $ | 98,797 | ||||||||||||||||
| Earnings per share: | ||||||||||||||||||||||||||||||||
| Basic | $ | 0.45 | $ | 0.27 | $ | 1.02 | $ | 0.87 | $ | 2.12 | $ | 1.76 | $ | 0.70 | $ | 0.43 | ||||||||||||||||
| Diluted | $ | 0.45 | $ | 0.27 | $ | 1.01 | $ | 0.87 | $ | 2.11 | $ | 1.74 | $ | 0.70 | $ | 0.43 |
The seasonality of the North American cruise industry generally results in the greatest demand for cruises during the Northern Hemisphere’s summer months. This predictable seasonality in demand has resulted in fluctuations in our revenue and results of operations. The seasonality of our results is increased due to ships being taken out of service for regularly scheduled Dry-docks, which we typically scheduled during non-peak demand periods.
| 17. | Subsequent Events |
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In January 2019, we (a) reduced the pricing of our existing $875.0 million Revolving Loan Facility, (b) reduced the pricing and increased the approximately $1.3 billion principal amount outstanding under the term loan A facility to $1.6 billion, and (c) extended the maturity dates for our Revolving Loan Facility and our term loan A facility to 2024, subject to certain conditions. The applicable margin under the Revolving Loan Facility and term loan A facility and was reduced by 25 basis points from the prior facility. We used the proceeds from the increase in our term loan A facility to prepay all of the then outstanding amounts under the term loan B facility.
In January 2019, we obtained financing for five additional ships with expected delivery dates through 2027, subject to certain Italian government approvals. Two of such ships are Project Leonardo ships which were ordered for delivery in 2026 and 2027 and each have a contract price which is approximately €800.0 million, or $917.4 million based on the exchange rate as of December 31, 2018. We have ordered an additional Explorer Class Ship to be delivered in 2023. The contract price for this ship is approximately €473.5 million, or $543.0 million based on the exchange rate as of December 31, 2018. We also have ordered two Allura Class Ships to be delivered in 2022 and 2025. The contract price for each of these ships is approximately €578.7 million, or $663.6 million based on the exchange rate as of December 31, 2018. We have obtained export credit financing which is expected to fund approximately 80% of the contract price of each ship expected to be delivered through 2027, subject to certain conditions.
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