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

Financial Presentation

The following discussion and analysis contains forward-looking statements within the meaning of the federal securities laws, and should be read in conjunction with the disclosures we make concerning risks and other factors that may affect our business and operating results. You should read this information in conjunction with the consolidated financial statements and the notes thereto included in this annual report. See also “Cautionary Statement Concerning Forward-Looking Statements” immediately prior to Part I, Item 1 in this annual report.

We categorize revenue from our cruise and cruise-related activities as either “passenger ticket” revenue or “onboard and other” revenue. Passenger ticket revenue and onboard and other revenue vary according to product offering, the size of the ship in operation, the length of cruises operated and the markets in which the ship operates. Our revenue is seasonal based on demand for cruises, which has historically been strongest during the Northern Hemisphere’s summer months. Passenger ticket revenue primarily consists of revenue for accommodations, meals in certain restaurants on the ship, certain onboard entertainment, port fees and taxes and includes revenue for service charges and air and land transportation to and from the ship to the extent guests purchase these items from us. Onboard and other revenue primarily consists of revenue from casino, beverage sales, shore excursions, specialty dining, retail sales, spa services and photo services. Our onboard revenue is derived from onboard activities we perform directly or that are performed by independent concessionaires, from which we receive a share of their revenue.

Our cruise operating expense is classified as follows:

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

	●	Onboard and other primarily consists of direct costs incurred in connection with onboard and other revenue, including casino, beverage sales and shore excursions.

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

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

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

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

Critical Accounting Policies

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

Ship Accounting

Ships represent our most significant assets, and we record them at cost less accumulated depreciation. Depreciation of ships is computed on a straight-line basis over the weighted average useful lives of primarily 30 years after a 15% reduction for the estimated residual value of the ship. Ship improvement costs that we believe add value to our ships are capitalized to the ship and depreciated over the shorter of the improvements’ estimated useful lives or the remaining useful life of the ship. When we record the retirement of a ship component included within the ship’s cost basis, we estimate the net book value of the component being retired and remove it from the ship’s cost basis. Repairs and maintenance activities are charged to expense as incurred. We account for Dry-dock costs under the direct expense method which requires us to expense all Dry-dock costs as incurred.

We determine the weighted average useful lives of our ships based primarily on our estimates of the useful lives of the ships’ major component systems on the date of acquisition, such as cabins, main diesels, main electric, superstructure and hull. The useful lives of ship improvements are estimated based on the economic lives of the new components. In addition, to determine the useful lives of the ship or ship components, we consider the impact of the historical useful lives of similar assets, manufacturer recommended lives and anticipated changes in technological conditions. Given the large and complex nature of our ships, our accounting estimates related to ships and determinations of ship improvement costs to be capitalized require judgment and are uncertain. Should certain factors or circumstances cause us to revise our estimate of ship service lives or projected residual values, depreciation expense could be materially lower or higher. If circumstances cause us to change our assumptions in making determinations as to whether ship improvements should be capitalized, the amounts we expense each year as repairs and maintenance costs could increase, partially offset by a decrease in depreciation expense. If we reduced our estimated weighted average 30-year ship service life by one year, depreciation expense for the year ended December 31, 2019 would have increased by $12.9 million. In addition, if our ships were estimated to have no residual value, depreciation expense for the same period would have increased by $66.4 million. We believe our estimates for ship accounting are reasonable and our methods are consistently applied. We believe that depreciation expense is based on a rational and systematic method to allocate our ships’ costs to the periods that benefit from the ships’ usage.

Asset Impairment

We review our long-lived assets, principally ships, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Assets are grouped and evaluated at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other groups of assets. We consider historical performance and future estimated results in our evaluation of potential impairment and then compare the carrying amount of the asset to the estimated future cash flows expected to result from the use of the asset. If the carrying amount of the asset exceeds the estimated expected undiscounted future cash flows, we measure the amount of the impairment by comparing the carrying amount of the asset to its fair value. We estimate fair value based on the best information available 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.

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

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

	●	Changes in general macroeconomic conditions such as a deterioration in general economic conditions; limitations on accessing capital; fluctuations in foreign exchange rates; or other developments in equity and credit markets;

	●	Changes in industry and market conditions such as a deterioration in the environment in which an entity operates; an increased competitive environment; a decline in market-dependent multiples or metrics (in both

		absolute terms and relative to peers); a change in the market for an entity’s products or services; or a regulatory or political development;

	●	Changes in cost factors that have a negative effect on earnings and cash flows;

	●	Decline in overall financial performance (for both actual and expected performance);

	●	Entity and reporting unit specific negative events such as changes in management, key personnel, strategy, or customers; litigation; or a change in the composition or carrying amount of net assets; and

	●	Decline in share price (in both absolute terms and relative to peers).

We also may conduct a quantitative assessment comparing the fair value of each reporting unit to its carrying value, including goodwill. This is called the Step I Test which consists of a combined approach using discounted future cash flows and market multiples to determine the fair value of the reporting units. The market approach considers revenue and EBITDA multiples from an appropriate peer group. Our discounted cash flow valuation reflects our principal assumptions of 1) forecasted future operating results and growth rates, 2) forecasted capital expenditures for fleet growth and ship improvements and 3) a weighted average cost of capital of market participants, adjusted for an optimal capital structure.We believe that the combined approach is the most representative method to assess fair value as it utilizes expectations of long-term growth as well as current market conditions. For the tradenames, we may also use a quantitative assessment, which utilizes the relief from royalty method and includes the same forecasts and discount rates from the discounted cash flow valuation in the goodwill assessment along with a tradename royalty rate assumption.

​

We have concluded that our business has three reporting units. Each brand, Oceania Cruises, Regent Seven Seas and Norwegian, constitutes a business for which discrete financial information is available and management regularly reviews the operating results and, therefore, each brand is considered an operating segment.

As of December 31, 2019, 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. For our 2019 annual goodwill impairment evaluation, we elected to perform quantitative tests for the each of the reporting units. Based on the results of the Step 1 Tests, we determined there was no impairment of goodwill because the fair value of the Regent Seven Seas and Norwegian reporting units substantially exceeded their carrying values. The fair value of the Oceania Cruises reporting unit exceeded the carrying value by 24%. However, a change in the conditions of any reporting unit may result in a decline in fair value in future periods. As of December 31, 2019, our tests supported the carrying values of these assets and we believe that we have made reasonable estimates and judgments.

Non-GAAP Financial Measures

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

As our business includes the sourcing of passengers and deployment of vessels outside of the U.S., a portion of our revenue and expenses are denominated in foreign currencies, particularly British pound, Canadian dollar, euro and Australian dollar which are subject to fluctuations in currency exchange rates versus our reporting currency, the U.S. dollar. In order to monitor results excluding these fluctuations, we calculate certain non-GAAP measures on a Constant Currency basis, whereby current period revenue and expenses denominated in foreign currencies are converted to U.S. dollars using currency exchange rates of the comparable period. We believe that presenting these non-GAAP measures

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

We believe that Adjusted EBITDA is appropriate as a supplemental financial measure as it is used by management to assess operating performance. We also believe that Adjusted EBITDA is a useful measure in determining our performance as it reflects certain operating drivers of our business, such as sales growth, operating costs, marketing, general and administrative expense and other operating income and expense. Adjusted EBITDA is not a defined term under GAAP nor is it intended to be a measure of liquidity or cash flows from operations or a measure comparable to net income, as it does not take into account certain requirements such as capital expenditures and related depreciation, principal and interest payments and tax payments and it includes other supplemental adjustments.

In addition, Adjusted Net Income and Adjusted EPS are non-GAAP financial measures that exclude certain amounts and are used to supplement GAAP net income and EPS. We use Adjusted Net Income and Adjusted EPS as key performance measures of our earnings performance. We believe that both management and investors benefit from referring to these non-GAAP financial measures in assessing our performance and when planning, forecasting and analyzing future periods. These non-GAAP financial measures also facilitate management’s internal comparison to our historical performance. In addition, management uses Adjusted EPS as a performance measure for our incentive compensation. The amounts excluded in the presentation of these non-GAAP financial measures may vary from period to period; accordingly, our presentation of Adjusted Net Income and Adjusted EPS may not be indicative of future adjustments or results. For example, for the year ended December 31, 2018, we incurred Secondary Equity Offering expenses of $0.9 million. Similar expenses were not incurred in the year ended December 31, 2019. We included this as an adjustment in the reconciliation of Adjusted Net Income since these expenses were not representative of our day-to-day operations and we have included similar non-representative adjustments in prior periods.

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

Summary of Significant 2019 Events

In January 2019, we (a) reduced the pricing of our existing $875 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.

In June 2019, the Office of Foreign Assets Control of the United States Department of the Treasury removed the authorization for group people-to-people educational travel by U.S. persons to Cuba. As a result, we have stopped sailings to Cuba effective June 5, 2019 and revised the affected itineraries. The estimated negative impact resulting from this regulatory change was approximately $0.45 to both diluted EPS and Adjusted EPS for the year ended December 31, 2019. We expect the negative impact to diluted EPS and Adjusted EPS to continue into 2020 as a result of the cessation of cruises to Cuba.

In October 2019, Norwegian Encore was delivered.

In December 2019, we redeemed $565.0 million principal amount of the outstanding 4.75% Senior Notes due 2021 and issued $565.0 million of 3.625% Senior Notes due 2024.

Throughout 2019, we repurchased approximately $349.9 million of NCLH’s outstanding ordinary shares under our previously authorized three-year, $1.0 billion share repurchase program. As of December 31, 2019, $248.8 million of authorized repurchases remained.

​

Executive Overview

Total revenue increased 6.7% to $6.5 billion for the year ended December 31, 2019 compared to $6.1 billion for the year ended December 31, 2018. Gross Yield increased 4.6%. Net Revenue for the year ended December 31, 2019 increased 5.1% to $4.9 billion from $4.7 billion in the same period in 2018 with an increase in Net Yield of 2.9% and an increase in Capacity Days of 2.1%.

For the year ended December 31, 2019, we had net income and diluted EPS of $930.2 million and $4.30, respectively. For the year ended December 31, 2018, we had net income and diluted EPS of $954.8 million and $4.25, respectively. Operating income decreased 3.4% to slightly below $1.2 billion for the year ended December 31, 2019 from slightly above $1.2 billion for the year ended December 31, 2018.

We had Adjusted Net Income and Adjusted EPS of $1.1 billion and $5.09, respectively, for the year ended December 31, 2019, including $170.8 million of adjustments primarily consisting of expenses related to non-cash share-based compensation, amortization of intangible assets, losses on the extinguishment and modification of debt and the redeployment of Norwegian Joy, compared to Adjusted Net Income and Adjusted EPS of $1.1 billion and $4.92, respectively, for the year ended December 31, 2018. A 2.0% improvement in Adjusted EBITDA was achieved for the same period. We refer you to our “Results of Operations” below for a calculation of Net Revenue, Net Yield, Adjusted Net Income, Adjusted EPS and Adjusted EBITDA.

In late January 2020, the COVID-19 coronavirus outbreak began impacting the Company’s financial performance and operations. The Company has experienced costs and lost revenue related to itinerary modifications, travel restrictions and advisories, the unavailability of ports and/or destinations, cancellations and redeployments. The COVID-19 coronavirus is also impacting consumer sentiment regarding cruise travel generally, and the full impact of this indirect effect cannot be quantified at this time. See “Epidemics and viral outbreaks could have an adverse effect on our business, financial condition and results of operations” in Part I Item 1A-Risk Factors for further information related to this risk.

Results of Operations

The discussion below compares the results of operations for the year ended December 31, 2019 to the year ended December 31, 2018. For a comparison of the Company’s results of operations for the fiscal years ended December 31, 2017 to the year ended December 31, 2018, see “Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, which was filed with the U.S. Securities and Exchange Commission on February 27, 2019.

​

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

​

​	​	​	​	​	​	​
​	​	Year Ended December 31,
​		2019			2018
Total revenue	​	$	6,462,376	​	$	6,055,126
Total cruise operating expense	​	$	3,663,261	​	$	3,377,076
Operating income	​	$	1,178,077	​	$	1,219,061
Net income	​	$	930,228	​	$	954,843
EPS:	​			​
Basic	​	$	4.33	​	$	4.28
Diluted	​	$	4.30	​	$	4.25

​

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

​

​	​	​	​	​	​
​	​	Year Ended December 31,			​
​		2019		2018
Revenue	​	​	​	​	​
Passenger ticket		69.9	%	70.4	%
Onboard and other		30.1	%	29.6	%
Total revenue		100.0	%	100.0	%
Cruise operating expense
Commissions, transportation and other		17.4	%	16.5	%
Onboard and other		6.1	%	5.8	%
Payroll and related		14.3	%	14.6	%
Fuel		6.3	%	6.5	%
Food		3.4	%	3.5	%
Other		9.2	%	8.9	%
Total cruise operating expense		56.7	%	55.8	%
Other operating expense
Marketing, general and administrative		15.1	%	14.8	%
Depreciation and amortization		10.0	%	9.3	%
Total other operating expense		25.1	%	24.1	%
Operating income		18.2	%	20.1	%
Non-operating income (expense)
Interest expense, net		(4.2)	%	(4.4)	%
Other income (expense), net		0.1	%	0.3	%
Total non-operating income (expense)		(4.1)	%	(4.1)	%
Net income before income taxes		14.1	%	16.0	%
Income tax benefit (expense)		0.3	%	(0.2)	%
Net income		14.4	%	15.8	%

​

The following table sets forth selected statistical information:

​

​	​	​	​	​
​	Year Ended December 31,			​
​	2019		2018	​
Passengers carried	2,695,718		2,795,101	​
Passenger Cruise Days	20,637,949		20,276,568	​
Capacity Days	19,233,459		18,841,678	​
Occupancy Percentage	107.3	%	107.6	%

​

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

​

​	​	​	​	​	​	​	​	​	​
​	​	Year Ended December 31,
​		​	​		2019			​	​
​	​	​	​		Constant		​	​	​
​	​	​	2019		Currency		​	2018
Passenger ticket revenue	​	$	4,517,393	​	$	4,559,023	​	$	4,259,815
Onboard and other revenue	​		1,944,983	​		1,944,983	​		1,795,311
Total revenue	​		6,462,376	​		6,504,006	​		6,055,126
Less:	​			​			​
Commissions, transportation and other expense	​		1,120,886	​		1,129,491	​		998,948
Onboard and other expense	​		394,673	​		394,673	​		348,656
Net Revenue	​	$	4,946,817	​	$	4,979,842	​	$	4,707,522
Capacity Days	​		19,233,459	​		19,233,459	​		18,841,678
Gross Yield	​	$	336.00	​	$	338.16	​	$	321.37
Net Yield	​	$	257.20	​	$	258.92	​	$	249.85

​

​

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

​

​	​	​	​	​	​	​	​	​	​
​	​	Year Ended December 31,
​	​	​	​		2019		​	​	​
​		​	​		Constant			​	​
​	​	2019			Currency		​	2018
Total cruise operating expense	​	$	3,663,261	​	$	3,684,318	​	$	3,377,076
Marketing, general and administrative expense	​		974,850	​		980,047	​		897,929
Gross Cruise Cost	​		4,638,111	​		4,664,365	​		4,275,005
Less:	​			​			​
Commissions, transportation and other expense	​		1,120,886	​		1,129,491	​		998,948
Onboard and other expense	​		394,673	​		394,673	​		348,656
Net Cruise Cost	​		3,122,552	​		3,140,201	​		2,927,401
Less: Fuel expense	​		409,602	​		409,602	​		392,685
Net Cruise Cost Excluding Fuel	​		2,712,950	​		2,730,599	​		2,534,716
Less Non-GAAP Adjustments:	​			​			​
Non-cash deferred compensation (1)	​		2,135	​		2,135	​		2,167
Non-cash share-based compensation (2)	​		95,055	​		95,055	​		115,983
Secondary Equity Offering expenses (3)	​		—	​		—	​		883
Severance payments and other fees (4)	​	​	6,514	​	​	6,514	​	​	—
Redeployment of Norwegian Joy (5)	​	​	7,051	​	​	7,051	​	​	—
Other (6)	​		—	​		—	​		(1,412)
Adjusted Net Cruise Cost Excluding Fuel	​	$	2,602,195	​	$	2,619,844	​	$	2,417,095
Capacity Days	​		19,233,459	​		19,233,459	​		18,841,678
Gross Cruise Cost per Capacity Day	​	$	241.15	​	$	242.51	​	$	226.89
Net Cruise Cost per Capacity Day	​	$	162.35	​	$	163.27	​	$	155.37
Net Cruise Cost Excluding Fuel per Capacity Day	​	$	141.05	​	$	141.97	​	$	134.53
Adjusted Net Cruise Cost Excluding Fuel per Capacity Day	​	$	135.30	​	$	136.21	​	$	128.28

(1)	Non-cash deferred compensation expenses related to the crew pension plan and other crew expenses, which are included in payroll and related expense.

(2)	Non-cash share-based compensation expense related to equity awards, which are included in marketing, general and administrative expense and payroll and related expense.

(3)	Secondary Equity Offering expenses are included in marketing, general and administrative expense.

(4)	Severance payments related to restructuring costs are included in marketing, general and administrative expense.

(5)	Expenses related to the redeployment of Norwegian Joy from Asia to the U.S. and the closing of the Shanghai office, which are included in other cruise operating expense and marketing, general and administrative expense.

(6)	Other primarily related to expenses and reimbursements for certain legal costs included in marketing, general and administrative expense.

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

​

​	​	​	​	​	​	​
​	​	Year Ended December 31,
​		2019			2018
Net income	​	$	930,228	​	$	954,843
Non-GAAP Adjustments:	​			​
Non-cash deferred compensation (1)	​		3,514	​		3,453
Non-cash share-based compensation (2)	​		95,055	​		115,983
Secondary Equity Offering expenses (3)	​		—	​		883
Severance payments and other fees (4)	​		6,514	​		—
Extinguishment and modification of debt (5)	​		16,676	​		6,346
Amortization of intangible assets (6)	​		18,414	​		24,890
Redeployment of Norwegian Joy (7)	​	​	30,629	​	​	—
Other (8)	​		—	​		(1,412)
Adjusted Net Income	​	$	1,101,030	​	$	1,104,986
Diluted weighted-average shares outstanding - Net income and Adjusted Net Income	​		216,475,076	​		224,419,205
Diluted earnings per share	​	$	4.30	​	$	4.25
Adjusted EPS	​	$	5.09	​	$	4.92

(1)	Non-cash deferred compensation expenses related to the crew pension plan and other crew expenses are included in payroll and related expense and other income (expense), net.

(2)	Non-cash share-based compensation expenses related to equity awards are included in marketing, general and administrative expense and payroll and related expense.

(3)	Secondary Equity Offering expenses are included in marketing, general and administrative expense.

(4)	Severance payments related to restructuring costs are included in marketing, general and administrative expense.

(5)	Losses on extinguishments and modifications of debt are included in interest expense, net.

(6)	Amortization of intangible assets related to the Acquisition of Prestige are included in depreciation and amortization expense.

(7)	Expenses related to the redeployment of Norwegian Joy from Asia to the U.S. and the closing of the Shanghai office, which are included in other cruise operating expense, marketing, general and administrative expense and depreciation and amortization expense.

(8)	Other primarily related to expenses and reimbursements for certain legal costs included in marketing, general and administrative expense.

​

​

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

​	​	​	​	​	​	​
​	​	Year Ended December 31,
​		2019			2018
Net income	​	$	930,228	​	$	954,843
Interest expense, net	​		272,867	​		270,404
Income tax (benefit) expense	​		(18,863)	​		14,467
Depreciation and amortization expense	​		646,188	​		561,060
EBITDA	​		1,830,420	​		1,800,774
Other (income) expense, net (1)	​		(6,155)	​		(20,653)
Non-GAAP Adjustments:	​			​
Non-cash deferred compensation (2)	​		2,135	​		2,167
Non-cash share-based compensation (3)	​		95,055	​		115,983
Secondary Equity Offering expenses (4)	​		—	​		883
Severance payments and other fees (5)	​	​	6,514	​	​	—
Redeployment of Norwegian Joy (6)	​	​	7,051	​	​	—
Other (7)	​		—	​		(1,412)
Adjusted EBITDA	​	$	1,935,020	​	$	1,897,742

(1)	Primarily consists of gains and losses, net for forward currency exchanges and proceeds from insurance and litigation settlements.

(2)	Non-cash deferred compensation expenses related to the crew pension plan and other crew expenses are included in payroll and related expense.

(3)	Non-cash share-based compensation expense related to equity awards are included in marketing, general and administrative expense and payroll and related expense.

(4)	Secondary Equity Offering expenses are included in marketing, general and administrative expense.

(5)	Severance payments related to restructuring costs are included in marketing, general and administrative expense.

(6)	Expenses related to the redeployment of Norwegian Joy from Asia to the U.S. and the closing of the Shanghai office, which are included in other cruise operating expense and marketing, general and administrative expense.

(7)	Other primarily related to expenses and reimbursement for certain legal costs included in marketing, general and administrative expense.

Year Ended December 31, 2019 (“2019”) Compared to Year Ended December 31, 2018 (“2018”)

Revenue

Total revenue increased 6.7% to $6.5 billion in 2019 compared to $6.1 billion in 2018 primarily due to an increase in Capacity Days and improved pricing. Gross Yield increased 4.6%. Net Revenue increased 5.1% to $4.9 billion in 2019, from $4.7 billion in 2018, due to an increase in Capacity Days of 2.1% and an increase in Net Yield of 2.9%. The increase in Capacity Days was primarily due to a full year of Norwegian Bliss in 2019 and the introduction of Norwegian Encore to the fleet during the fourth quarter of 2019, partially offset by a reduction in Capacity Days while Norwegian Joy was undergoing revitalization and other repairs and maintenance for our fleet including scheduled Dry-docks. The increase in Gross Yield and Net Yield was primarily due to an increase in passenger ticket pricing and onboard spending. On a Constant Currency basis, Net Yield increased 3.6%.

Expense

Total cruise operating expense increased 8.5% in 2019 compared to 2018, primarily due to the increase in Capacity Days, the redeployment of Norwegian Joy during the second quarter of 2019 and incremental direct costs related to air promotions. Gross Cruise Cost increased 8.5% in 2019 compared to 2018, due to an increase in total cruise operating expense and marketing, general and administrative expenses. Total other operating expense increased 11.1% in 2019 compared to 2018. Marketing, general and administrative expenses increased primarily due to higher advertising expenses. Depreciation and amortization expense increased primarily due to the additions of Norwegian Encore and Norwegian Bliss and ship improvement projects. Net Cruise Cost per Capacity Day increased 4.5% (5.1% on a Constant

Currency basis) due to an increase in marketing, general and administrative expenses, costs associated with the cessation of cruises to Cuba and other ship operating costs. Adjusted Net Cruise Cost Excluding Fuel per Capacity Day increased 5.5% (6.2% on a Constant Currency basis). We refer you to the “Results of Operations” above for a reconciliation of total cruise operating expense to Adjusted Net Cruise Cost Excluding Fuel.

Interest expense, net was $272.9 million in 2019 compared to $270.4 million in 2018. The increase in 2019 includes $16.7 million of losses on extinguishment of debt and debt modification costs. In 2019, interest expense also reflects lower outstanding debt balances and lower margins associated with recent refinancings, partially offset by newbuild financings and an increase in LIBOR. 2018 included losses on extinguishment of debt and debt modification costs of $6.3 million.

Other income (expense), net was income of $6.2 million in 2019 compared to income of $20.7 million in 2018. Other income in 2019 was primarily due to gains from insurance proceeds and a litigation settlement partially offset by losses on foreign currency exchange. Other income in 2018 was primarily due to gains on foreign currency exchange.

Income tax benefit (expense) was a benefit of $18.9 million in 2019 compared to an expense of $14.5 million in 2018. During 2018, we implemented certain tax restructuring strategies that created our ability to utilize the net operating loss carryforwards of Prestige, for which we had previously provided a full valuation allowance. As a result, in 2019 we recorded a tax benefit of $35.7 million in connection with the reversal of substantially all of the valuation allowance.

Liquidity and Capital Resources

General

As of December 31, 2019, our liquidity was $1.1 billion consisting of $252.9 million in cash and cash equivalents and $875.0 million available under our Revolving Loan Facility. Our primary ongoing liquidity requirements are to finance working capital, capital expenditures and debt service.

As of December 31, 2019, we had a working capital deficit of $2.9 billion. This deficit included $2.0 billion of advance ticket sales, which represents the total revenue we collect in advance of sailing dates and accordingly are substantially more like deferred revenue balances rather than actual current cash liabilities. Our business model, along with our Revolving Loan Facility, allows us to operate with a working capital deficit and still meet our operating, investing and financing needs.

We evaluate potential sources of additional liquidity, including the capital markets, in the ordinary course of business. We will continue to evaluate opportunities to optimize our capital structure, taking into consideration our current and expected capital requirements, our assessment of prevailing market conditions and expectations regarding future conditions, and the contractual and other restrictions to which we are subject.

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

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. 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 addition, in December 2019, we redeemed $565.0 million principal amount of the then outstanding 4.75% Senior Notes due 2021 and issued $565.0 million of 3.625% Senior Notes due 2024. See Note 8, Long-Term Debt, to the Notes to the Consolidated Financial Statements included herein for additional information about these refinancing activities as well as our other debt agreements.

Sources and Uses of Cash

In this section, references to 2019 refer to the year ended December 31, 2019 and references to 2018 refer to the year ended December 31, 2018.

Net cash provided by operating activities was $1.8 billion in 2019 compared to $2.1 billion in 2018. The net cash provided by operating activities in 2019 included net income of $930.2 million, an increase in advance ticket sales of $347.4 million and timing differences in cash receipts and payments relating to various operating assets and liabilities. The change in net cash provided by operating activities in 2018 includes net income of $954.8 million as well as timing differences in cash receipts and payments relating to various operating assets and liabilities, including an increase in advance ticket sales of $262.6 million.

Net cash used in investing activities was $1.7 billion in 2019, primarily related to payments for the delivery of Norwegian Encore, ships under construction, ship improvement projects and shoreside projects. Net cash used in investing activities was $1.5 billion in 2018, primarily related to payments for the delivery of Norwegian Bliss, ship improvements, ships under construction and shoreside projects.

Net cash used in financing activities was $53.4 million in 2019, primarily due to the repurchase of $349.9 million of NCLH’s ordinary shares, net repayments of our Revolving Loan Facility and the net refinancing of term loans partially offset by the issuance of new debt. Net cash used in financing activities was $584.8 million in 2018, reflecting the net repayment of our Revolving Loan Facility, repayments on other loan facilities, the repurchase of NCLH’s ordinary shares and deferred financing fees and other, partially offset by the proceeds from borrowings on newbuild loan facilities.

For the Company’s cash flow activities for the fiscal year ended December 31, 2017, see “Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, which was filed with the U.S. Securities and Exchange Commission on February 27, 2019.

Future Capital Commitments

Future capital commitments consist of contracted commitments, including ship construction contracts, and future expected capital expenditures necessary for operations as well as our ship refurbishment projects. As of December 31, 2019, anticipated capital expenditures were $1.4 billion, $1.2 billion and $2.6 billion for the years ending December 31, 2020, 2021 and 2022, respectively. We have export credit financing in place for the anticipated expenditures related to ship construction contracts of $0.5 billion, $0.2 billion and $1.3 billion for the years ending December 31, 2020, 2021 and 2022, respectively. These future expected capital expenditures will significantly increase our depreciation and amortization expense as we take delivery of the ships.

For the Norwegian Brand, 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. For the Regent brand, Seven Seas Splendor was delivered in January 2020. We have an order for one additional Explorer Class Ship to be delivered in 2023. Each of the Explorer Class Ships will be approximately 55,000 Gross Tons and 750 Berths. For the Oceania Cruises brand, we have orders for two Allura Class Ships to be delivered in 2022 and 2025. Each of the Allura Class Ships will be approximately 67,000 Gross Tons and 1,200 Berths.

The combined contract prices of the 10 ships on order for delivery as of December 31, 2019, including Seven Seas Splendor, which was delivered in January 2020, was approximately €7.4 billion, or $8.3 billion based on the euro/U.S. dollar exchange rate as of December 31, 2019. We have obtained export credit financing which is expected to fund approximately 80% of the contract price of each ship, subject to certain conditions. We do not anticipate any contractual breaches or cancellations to occur. However, if any such events were to occur, it could result in, among other things, the forfeiture of prior deposits or payments made by us and potential claims and impairment losses which may materially impact our business, financial condition and results of operations.

Capitalized interest for the years ended December 31, 2019 and 2018 was $32.9 million and $30.4 million, respectively, primarily associated with the construction of our newbuild ships.

Off-Balance Sheet Transactions

None.

Contractual Obligations

As of December 31, 2019, our contractual obligations with initial or remaining terms in excess of one year, including interest payments on long-term debt obligations, were as follows (in thousands):

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​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​		​	​		Less than			​	​		​	​		More than
​	​	Total			1 year		​	1-3 years		​	3-5 years			5 years
Long-term debt (1)	​	$	6,926,677	​	$	746,358	​	$	1,566,662	​	$	2,834,787	​	$	1,778,870
Operating leases (2)	​		287,995	​		47,796	​	​	63,988	​	​	63,493	​	​	112,718
Ship construction contracts (3)	​		5,588,490	​		556,784	​		1,874,516	​		2,327,887	​		829,303
Port facilities (4)	​		2,086,925	​		79,418	​		135,720	​		145,212	​		1,726,575
Interest (5)	​		1,008,378	​		218,243	​	​	361,982	​		244,247	​		183,906
Other (6)	​		1,362,172	​		311,047	​		456,938	​		395,599	​		198,588
Total (7)	​	$	17,260,637	​	$	1,959,646	​	$	4,459,806	​	$	6,011,225	​	$	4,829,960

(1)	Long-term debt includes premiums aggregating $0.2 million and capital leases. Long-term debt excludes deferred financing fees which are a direct deduction from the carrying value of the related debt liability in the consolidated balance sheets.

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

(3)	Ship construction contracts are for our newbuild ships based on the euro/U.S. dollar exchange rate as of December 31, 2019. Export credit financing is in place from syndicates of banks. The amount does not include the two Project Leonardo ships and one Allura Class Ship which were still subject to financing and certain Italian government approvals as of December 31, 2019.

(4)	Port facilities are for our usage of certain port facilities.

(5)	Interest includes fixed and variable rates with LIBOR held constant as of December 31, 2019.

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

(7)	Total excludes $0.7 million of unrecognized tax benefits as of December 31, 2019, because an estimate of the timing of future tax settlements cannot be reasonably determined.

Other

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

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

Funding Sources

Certain of our debt agreements contain covenants that, among other things, require us to maintain a minimum level of liquidity, as well as limit our net funded debt-to-capital ratio, 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 these covenants as of December 31, 2019.

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

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

We believe our cash on hand, expected future operating cash inflows, additional available borrowings under our Revolving Loan Facility and our ability to issue debt securities or additional equity securities, will be sufficient to fund operations, debt payment requirements, capital expenditures and maintain compliance with covenants under our debt agreements over the next 12-month period. There is no assurance that cash flows from operations and additional financings will be available in the future to fund our future obligations.

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