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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2022

OR

    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number: 001-35784

NORWEGIAN CRUISE LINE HOLDINGS LTD.

(Exact name of registrant as specified in its charter)

Bermuda

    

98-0691007

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

7665 Corporate Center Drive, Miami, Florida 33126

33126

(Address of principal executive offices)

(zip code)

(305) 436-4000

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

    

Trading Symbol(s)

    

Name of each exchange on which registered

Ordinary shares, par value $0.001 per share

 

NCLH

 

The New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer 

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes      No  

There were 419,101,117 ordinary shares outstanding as of April 30, 2022.

Table of Contents

TABLE OF CONTENTS

  

    

Page

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

3

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

23

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

37

Item 4.

Controls and Procedures

38

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

38

Item 1A.

Risk Factors

38

Item 6.

Exhibits

39

SIGNATURES

41

2

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Norwegian Cruise Line Holdings Ltd.

Consolidated Statements of Operations

(Unaudited)

(in thousands, except share and per share data)

Three Months Ended

March 31, 

    

2022

    

2021

Revenue

 

  

 

  

Passenger ticket

$

342,455

$

166

Onboard and other

 

179,485

 

2,934

Total revenue

 

521,940

 

3,100

Cruise operating expense

 

  

 

  

Commissions, transportation and other

 

87,958

 

9,033

Onboard and other

 

32,550

 

1,259

Payroll and related

 

240,727

 

82,138

Fuel

 

135,509

 

42,603

Food

 

39,516

 

6,308

Other

 

199,153

 

59,514

Total cruise operating expense

 

735,413

 

200,855

Other operating expense

 

  

 

  

Marketing, general and administrative

 

296,207

 

203,195

Depreciation and amortization

 

179,076

 

170,316

Total other operating expense

 

475,283

 

373,511

Operating loss

 

(688,756)

 

(571,266)

Non-operating income (expense)

 

 

Interest expense, net

 

(327,685)

 

(824,441)

Other income (expense), net

 

38,120

 

27,243

Total non-operating income (expense)

 

(289,565)

 

(797,198)

Net loss before income taxes

 

(978,321)

 

(1,368,464)

Income tax expense

 

(4,393)

 

(1,728)

Net loss

$

(982,714)

$

(1,370,192)

Weighted-average shares outstanding

 

  

 

  

Basic

 

417,734,591

 

329,377,207

Diluted

 

417,734,591

 

329,377,207

Loss per share

 

  

 

  

Basic

$

(2.35)

$

(4.16)

Diluted

$

(2.35)

$

(4.16)

The accompanying notes are an integral part of these consolidated financial statements.

3

Table of Contents

Norwegian Cruise Line Holdings Ltd.

Consolidated Statements of Comprehensive Loss

(Unaudited)

(in thousands)

Three Months Ended

March 31, 

    

2022

    

2021

Net loss

$

(982,714)

$

(1,370,192)

Other comprehensive income (loss):

 

  

 

  

Shipboard Retirement Plan

 

2,476

 

98

Cash flow hedges:

 

 

Net unrealized gain (loss)

 

39,304

 

(73,037)

Amount realized and reclassified into earnings

 

(7,502)

 

21,838

Total other comprehensive income (loss)

 

34,278

 

(51,101)

Total comprehensive loss

$

(948,436)

$

(1,421,293)

The accompanying notes are an integral part of these consolidated financial statements.

4

Table of Contents

Norwegian Cruise Line Holdings Ltd.

Consolidated Balance Sheets

(Unaudited)

(in thousands, except share data)

March 31, 

December 31, 

    

2022

    

2021

Assets

 

  

 

  

Current assets:

 

  

 

  

Cash and cash equivalents

$

2,136,840

$

1,506,647

Short-term investments

240,000

Accounts receivable, net

 

544,961

 

1,167,473

Inventories

 

141,956

 

118,205

Prepaid expenses and other assets

 

390,753

 

269,243

Total current assets

 

3,214,510

 

3,301,568

Property and equipment, net

 

13,532,399

 

13,528,806

Goodwill

 

98,134

 

98,134

Trade names

 

500,525

 

500,525

Other long-term assets

 

1,909,924

 

1,300,804

Total assets

$

19,255,492

$

18,729,837

Liabilities and shareholders’ equity

 

  

 

  

Current liabilities:

 

  

 

  

Current portion of long-term debt

$

1,009,741

$

876,890

Accounts payable

 

91,786

 

233,172

Accrued expenses and other liabilities

 

1,097,828

 

1,059,034

Advance ticket sales

 

1,977,325

 

1,561,336

Total current liabilities

 

4,176,680

 

3,730,432

Long-term debt

 

12,563,518

 

11,569,700

Other long-term liabilities

 

1,007,692

 

997,055

Total liabilities

 

17,747,890

 

16,297,187

Commitments and contingencies (Note 9)

 

  

 

  

Shareholders’ equity:

 

  

 

  

Ordinary shares, $0.001 par value; 980,000,000 shares authorized; 419,100,690 shares issued and outstanding at March 31, 2022 and 416,891,915 shares issued and outstanding at December 31, 2021

 

419

 

417

Additional paid-in capital

 

7,537,111

 

7,513,725

Accumulated other comprehensive income (loss)

 

(250,808)

 

(285,086)

Accumulated deficit

 

(5,779,120)

 

(4,796,406)

Total shareholders’ equity

 

1,507,602

 

2,432,650

Total liabilities and shareholders’ equity

$

19,255,492

$

18,729,837

The accompanying notes are an integral part of these consolidated financial statements.

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Norwegian Cruise Line Holdings Ltd.

Consolidated Statements of Cash Flows

(Unaudited)

(in thousands)

Three Months Ended

March 31, 

    

2022

    

2021

Cash flows from operating activities

 

  

 

  

Net loss

$

(982,714)

$

(1,370,192)

Adjustments to reconcile net loss to net cash used in operating activities:

 

  

 

  

Depreciation and amortization expense

195,464

 

183,808

Gain on derivatives

(19,779)

(18,687)

Loss on extinguishment of debt

 

188,433

 

621,894

Provision for bad debts and inventory obsolescence

 

1,294

 

4,329

Gain on involuntary conversion of assets

(418)

Share-based compensation expense

 

32,792

 

26,601

Net foreign currency adjustments

 

(4,126)

 

(5,141)

Changes in operating assets and liabilities:

 

 

Accounts receivable, net

 

618,853

 

(2,648)

Inventories

 

(24,141)

 

(2,351)

Prepaid expenses and other assets

 

(632,610)

 

(406,807)

Accounts payable

 

(136,767)

 

6,626

Accrued expenses and other liabilities

 

(25,587)

 

35,341

Advance ticket sales

 

417,877

 

75,634

Net cash used in operating activities

 

(371,011)

 

(852,011)

Cash flows from investing activities

 

  

 

  

Additions to property and equipment, net

 

(165,284)

 

(136,350)

Purchases of short-term investments

(205,000)

Proceeds from maturities of short-term investments

240,000

Cash paid on settlement of derivatives

(4,642)

Other

4,940

2,726

Net cash provided by (used in) investing activities

 

79,656

 

(343,266)

Cash flows from financing activities

 

  

 

  

Repayments of long-term debt

 

(935,444)

 

(870,396)

Proceeds from long-term debt

 

2,073,175

 

1,161,672

Common share issuance proceeds, net

1,558,412

Proceeds from employee related plans

 

2,557

 

1,089

Net share settlement of restricted share units

 

(11,961)

 

(16,043)

Early redemption premium

 

(172,012)

 

(611,164)

Deferred financing fees

 

(34,767)

 

(25,742)

Net cash provided by financing activities

 

921,548

 

1,197,828

Net increase in cash and cash equivalents

 

630,193

 

2,551

Cash and cash equivalents at beginning of period

 

1,506,647

 

3,300,482

Cash and cash equivalents at end of period

$

2,136,840

$

3,303,033

The accompanying notes are an integral part of these consolidated financial statements.

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Norwegian Cruise Line Holdings Ltd.

Consolidated Statements of Changes in Shareholders’ Equity

(Unaudited)

(in thousands)

Three Months Ended March 31, 2022

Accumulated 

Additional

Other

Total

Ordinary 

Paid-in 

Comprehensive

Accumulated

Shareholders’

    

Shares

    

Capital

    

Income (Loss)

    

Deficit

    

Equity

Balance, December 31, 2021

 

$

417

$

7,513,725

$

(285,086)

$

(4,796,406)

$

2,432,650

Share-based compensation

 

 

32,792

 

 

 

32,792

Issuance of shares under employee related plans

 

2

 

2,555

 

 

 

2,557

Net share settlement of restricted share units

 

 

(11,961)

 

 

 

(11,961)

Other comprehensive income, net

 

 

 

34,278

 

 

34,278

Net loss

 

 

 

 

(982,714)

 

(982,714)

Balance, March 31, 2022

$

419

$

7,537,111

$

(250,808)

$

(5,779,120)

$

1,507,602

Three Months Ended March 31, 2021

    

Accumulated 

    

    

Additional

Other

Total

Ordinary 

Paid-in 

Comprehensive

Accumulated

Shareholders’

    

Shares

    

Capital

    

Income (Loss)

    

Deficit

    

Equity

Balance, December 31, 2020

 

$

316

$

4,889,355

$

(240,117)

$

(295,449)

$

4,354,105

Share-based compensation

 

 

26,601

 

 

 

26,601

Issuance of shares under employee related plans

 

 

1,089

 

 

 

1,089

Common share issuance proceeds, net

 

54

1,558,358

1,558,412

Net share settlement of restricted share units

 

 

(16,043)

 

 

 

(16,043)

Cumulative change in accounting policy

(131,240)

5,630

(125,610)

Other comprehensive loss, net

 

 

(51,101)

 

 

(51,101)

Net loss

 

(1,370,192)

(1,370,192)

Balance, March 31, 2021

$

370

$

6,328,120

$

(291,218)

$

(1,660,011)

$

4,377,261

The accompanying notes are an integral part of these consolidated financial statements.

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Norwegian Cruise Line Holdings Ltd.

Notes to Consolidated Financial Statements

(Unaudited)

Unless otherwise indicated or the context otherwise requires, references in this report to (i) the “Company,” “we,” “our” and “us” refer to NCLH (as defined below) and its subsidiaries (including Prestige (as defined below), (ii) “NCLC” refers to NCL Corporation Ltd., (iii) “NCLH” refers to Norwegian Cruise Line Holdings Ltd., (iv) “Norwegian Cruise Line” or “Norwegian” refers to the Norwegian Cruise Line brand and its predecessors, and (v) “Prestige” refers to Prestige Cruises International S. de R.L. (formerly Prestige Cruises International, Inc.), together with its consolidated subsidiaries, including Prestige Cruise Holdings S. de R.L. (formerly Prestige Cruise Holdings, Inc.), Prestige’s direct wholly-owned subsidiary, which in turn is the parent of Oceania Cruises S. de R.L. (formerly Oceania Cruises, Inc.) (“Oceania Cruises”) and Seven Seas Cruises S. de R.L. (“Regent”) (Oceania Cruises also refers to the brand by the same name and Regent also refers to the brand Regent Seven Seas Cruises).

References to the “U.S.” are to the United States of America, and “dollar(s)” or “$” are to U.S. dollars, the “U.K.” are to the United Kingdom and “euro(s)” or “€” are to the official currency of the Eurozone. We refer you to “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations— Terminology” for the capitalized terms used and not otherwise defined throughout these notes to 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 March 31, 2022, we had 28 ships with approximately 59,150 Berths and had orders for nine additional ships to be delivered through 2027. Due to COVID-19, we temporarily suspended all global cruise voyages from March 2020 until July 2021, when we resumed cruise voyages on a limited basis. We refer you to Note 2 – “Summary of Significant Accounting Policies” for further information.

We have six Prima Class Ships on order with expected delivery dates from 2022 through 2027. We have one Explorer Class Ship on order for delivery in 2023. We have two Allura Class Ships on order for delivery in 2023 and 2025. These additions to our fleet will increase our total Berths to approximately 83,000.

2.   Summary of Significant Accounting Policies

Liquidity and Management’s Plan

Due to the impact of COVID-19, travel restrictions and limited access to ports around the world, in March 2020, the Company implemented a voluntary suspension of all cruise voyages across its three brands. In the third quarter of 2021, we began a phased relaunch of certain cruise voyages with our ships initially operating at reduced occupancy levels. As of May 7, 2022, all of our ships were operating with guests on board.

Significant events affecting travel typically have an impact on demand for cruise vacations, with the full extent of the impact determined by the length of time the event influences travel decisions. The level of occupancy on our ships and the percentage of our fleet in service will depend on a number of factors including, but not limited to, the duration and extent of the COVID-19 pandemic, further resurgences and new more contagious and/or vaccine-resistant variants of COVID-19, the availability, distribution, rate of public acceptance and efficacy of vaccines and therapeutics for COVID-19, our ability to comply with governmental regulations and implement new health and safety protocols, port availability, travel restrictions, bans and advisories, our ability to staff our ships, and the impact of other events impacting travel or consumer discretionary spending, such as inflation, the price of fuel, or Russia’s recent invasion of Ukraine and the actions taken by the United States and other governments in response to the invasion. We believe the ongoing effects of these events on our operations and global bookings have had, and will continue to have, a significant impact on our financial results and liquidity.

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The estimation of our future cash flow projections includes numerous assumptions that are subject to various risks and uncertainties. Our principal assumptions for future cash flow projections include:

Expected gradual return to historical occupancy levels;
Expected increase in revenue per passenger cruise day through a combination of both passenger ticket and onboard revenue as compared to 2019;
Forecasted cash collections in accordance with the terms of our credit card processing agreements (see Note 9 - “Commitments and Contingencies”);
Expected continued expenses to maintain and comply with additional health and safety protocols; and
Expected increases in fuel prices and the impact of inflation.

We cannot make assurances that our assumptions used to estimate our liquidity requirements will not change due to the unique and ongoing unpredictable nature of the events, including the magnitude and duration. Accordingly, the full effect of the COVID-19 pandemic and other events impacting travel and consumer discretionary spending, including Russia’s recent invasion of Ukraine, on our financial performance and financial condition cannot be quantified at this time. We have made reasonable estimates and judgments of the impact of these events within our financial statements and there may be material changes to those estimates in future periods. We have taken actions to improve our liquidity, including completing various capital market transactions and making capital expenditure and operating expense reductions, and we expect to continue to pursue other opportunities to improve our liquidity.

Based on these actions and assumptions regarding the impact of COVID-19 and other events impacting travel and consumer discretionary spending, including Russia’s recent invasion of Ukraine, and considering our available liquidity of $3.1 billion as of March 31, 2022, including cash and cash equivalents and our $1 billion undrawn commitment, we have concluded that we have sufficient liquidity to satisfy our obligations for at least the next twelve months.

Basis of Presentation

The accompanying consolidated financial statements are unaudited and, in our opinion, contain all normal recurring adjustments necessary for a fair statement of the results for the periods presented.

Our operations are seasonal and results for interim periods are not necessarily indicative of the results for the entire fiscal year. Historically, demand for cruises has been strongest during the Northern Hemisphere’s summer months; however, our cruise voyages were completely suspended from March 2020 until July 2021 due to the COVID-19 pandemic and our resumption of cruise voyages was phased in gradually. The interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2021, which are included in our most recent Annual Report on Form 10-K filed with the SEC on March 1, 2022.

Revisions to Previously Reported Quarterly Financial Statements

During the fourth quarter of 2021, the Company identified an error in its Consolidated Balance Sheet as of March 31, 2021 and Consolidated Statement of Cash Flows for the three months ended March 31, 2021. Based on their nature, certain amounts shown as cash and cash equivalents should have been classified as short-term investments. We have determined that these errors were not material to the previously issued interim financial statements for the period ended March 31, 2021. 

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As a result of the error, the amounts previously reported as cash and cash equivalents have been reclassified to cash flows from investing activities in the Consolidated Statement of Cash Flows for the three months ended March 31, 2021 as follows (in thousands):

Three months ended March 31, 2021

Previously

    

    

As

Reported

Adjustments

Reported

Cash flows from investing activities

 

  

  

 

  

Purchases of short-term investments

$

$

(205,000)

$

(205,000)

Net cash used in investing activities

(138,266)

(205,000)

(343,266)

Net increase (decrease) in cash and cash equivalents

207,551

(205,000)

2,551

Cash and cash equivalents at end of period

3,508,033

(205,000)

3,303,033

Loss Per Share

A reconciliation between basic and diluted loss per share was as follows (in thousands, except share and per share data):

Three Months Ended

March 31, 

    

2022

    

2021

Net loss

$

(982,714)

$

(1,370,192)

Basic weighted-average shares outstanding

 

417,734,591

 

329,377,207

Dilutive effect of share awards

 

 

Diluted weighted-average shares outstanding

 

417,734,591

 

329,377,207

Basic loss per share

$

(2.35)

$

(4.16)

Diluted loss per share

$

(2.35)

$

(4.16)

For the three months ended March 31, 2022 and 2021, a total of 86.4 million and 120.8 million, respectively, shares have been excluded from diluted weighted-average shares outstanding because the effect of including them would have been anti-dilutive.

Foreign Currency

The majority of our transactions are settled in U.S. dollars. We remeasure assets and liabilities denominated in foreign currencies at exchange rates in effect at the balance sheet date. Gains or losses resulting from transactions denominated in other currencies are recognized in our consolidated statements of operations within other income (expense), net. We recognized a gain of $8.4 million and $4.8 million for the three months ended March 31, 2022 and 2021, respectively, related to transactions denominated in other currencies.

Depreciation and Amortization Expense

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 they are included in interest expense, net.

Accounts Receivable, Net

Accounts receivable, net included $426.2 million and $1.1 billion due from credit card processors as of March 31, 2022 and December 31, 2021, respectively.

Recently Issued Accounting Guidance

In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”), which provided guidance to alleviate the burden in accounting for reference rate reform by allowing certain expedients and exceptions in applying GAAP to contracts, hedging relationships and other transactions

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impacted by reference rate reform. The provisions apply only to those transactions that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. Adoption of the provisions of ASU 2020-04 are optional and are effective from March 12, 2020 through December 31, 2022. As of March 31, 2022, we have not adopted any expedients and exceptions under ASU 2020-04. We will continue to evaluate the impact of ASU 2020-04 on our consolidated financial statements.

3.   Revenue Recognition

Disaggregation of Revenue

Revenue and cash flows are affected by economic factors in various geographical regions. Revenues by destination were as follows (in thousands):

Three Months Ended

March 31, 

    

2022

North America

$

487,435

Europe

 

24,797

Asia-Pacific

 

8,292

South America

1,416

Total revenue

$

521,940

Amounts for the comparative three months ended March 31, 2021 are excluded as the information is not meaningful. North America includes the U.S., the Caribbean, Canada and Mexico. Europe includes the Baltic region, Canary Islands and Mediterranean. Asia-Pacific includes Australia, New Zealand and Asia. Other includes all other international territories.

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 has approximated 80-87% of total revenue over the preceding three fiscal years. No other individual country’s revenues exceed 10% in any given period.

Contract Balances

Receivables from customers are included within accounts receivable, net. As of March 31, 2022, our receivables from customers were $53.3 million.

Our cancellation policies permit guests to cancel cruises booked within certain windows for specified time periods up to 15 days prior to departure, and the guests will receive future cruise credits. Certain cruises booked for certain periods will be permitted a 60-day or 75-day cancellation window for refunds. Future cruise credits that have been issued are generally valid for any sailing through December 31, 2022, and we may extend this offer. The future cruise credits are not contracts, and therefore, guests who elected this option are excluded from our contract liability balance; however, the credit for the original amount paid is included in advance ticket sales.

Our contract liabilities are included within advance ticket sales. As of March 31, 2022 and December 31, 2021, our contract liabilities were $1.0 billion and $161.8 million, respectively. Of the amounts included within contract liabilities,

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approximately 40% were refundable in accordance with our cancellation policies. Of the deposits included within advance ticket sales, the vast majority are refundable in accordance with our cancellation policies and it is uncertain to what extent guests may request refunds. Refunds payable to guests are included in accounts payable. For the three months ended March 31, 2022, $97.0 million of revenue recognized was included in the contract liability balance at the beginning of the period.

For cruise vacations that had been cancelled by us due to COVID-19, during the three months ended March 31, 2022 and 2021, approximately $0.3 million and $14.8 million, respectively, in costs to obtain these contracts, consisting of protected commissions, including those paid to employees, and credit card fees, were recognized in earnings.

4.   Leases

Operating lease balances were as follows (in thousands):

    

Balance Sheet location

    

March 31, 2022

 

December 31, 2021

Operating leases

 

  

 

  

  

Right-of-use assets

 

Other long-term assets

$

798,885

$

794,187

Current operating lease liabilities

 

Accrued expenses and other liabilities

36,487

34,407

Non-current operating lease liabilities

 

Other long-term liabilities

671,082

670,688

5.   Accumulated Other Comprehensive Income (Loss)

Accumulated other comprehensive income (loss) for the three months ended March 31, 2022 was as follows (in thousands):

Three Months Ended March 31, 2022

    

    

Change

Accumulated

Change

Related to

Other

Related to

Shipboard

Comprehensive

Cash Flow

Retirement

    

Income (Loss)

    

Hedges

 Plan

Accumulated other comprehensive income (loss) at beginning of period

$

(285,086)

$

(279,696)

$

(5,390)

  

Current period other comprehensive income before reclassifications

 

41,685

 

39,304

  

 

2,381

  

Amounts reclassified into earnings

 

(7,407)

 

(7,502)

(1)

 

95

(2)

Accumulated other comprehensive income (loss) at end of period

$

(250,808)

$

(247,894)

(3)

$

(2,914)

  

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Accumulated other comprehensive income (loss) for the three months ended March 31, 2021 was as follows (in thousands):

Three Months Ended March 31, 2021

    

    

Change

 

Accumulated

Change

Related to

Other

Related to

Shipboard

Comprehensive

Cash Flow

Retirement

    

Income (Loss)

    

Hedges

 Plan

Accumulated other comprehensive income (loss) at beginning of period

 

$

(240,117)

$

(234,334)

$

(5,783)

 

Current period other comprehensive loss before reclassifications

 

 

(73,037)

 

 

(73,037)

  

 

 

Amounts reclassified into earnings

 

 

21,936

 

 

21,838

(1)

 

98

(2)

Accumulated other comprehensive income (loss) at end of period

 

$

(291,218)

 

$

(285,533)

$

(5,685)

 

(1)We refer you to Note 7 “Fair Value Measurements and Derivatives” 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 $72.9 million of gain expected to be reclassified into earnings in the next 12 months.

6.   Long-Term Debt

In February 2022, NCLC conducted a private offering (the “Notes Offering”) of $1,000 million in aggregate principal amount of 5.875% senior secured notes due 2027 (the “2027 Secured Notes”) and $600 million in aggregate principal amount of 7.750% senior notes due 2029 (the “2029 Unsecured Notes”).

The 2027 Secured Notes are jointly and severally guaranteed on a senior secured basis by Pride of Hawaii, LLC, Norwegian Epic, Ltd. and Sirena Acquisition. The 2027 Secured Notes and the related guarantees are secured by a first-priority interest in, among other things and subject to certain agreed security principles, three of our vessels, namely the Norwegian Jade vessel, the Norwegian Epic vessel and the Sirena vessel.

NCLC may redeem the 2027 Secured Notes at its option, in whole or in part, at any time and from time to time prior to February 15, 2024, at a “make-whole” redemption price, plus accrued and unpaid interest and additional amounts, if any, to, but excluding, the redemption date. NCLC may redeem the 2027 Secured Notes at its option, in whole or in part, at any time and from time to time on or after February 15, 2024, at the redemption prices set forth in the indenture governing the 2027 Secured Notes, plus accrued and unpaid interest and additional amounts, if any, to, but excluding, the redemption date. At any time and from time to time prior to February 15, 2024, NCLC may choose to redeem up to 40% of the aggregate principal amount of the 2027 Secured Notes with the net proceeds of certain equity offerings, subject to certain restrictions, at a redemption price equal to 105.875% of the principal amount of the 2027 Secured Notes redeemed plus accrued and unpaid interest to, but excluding, the redemption date, so long as at least 60% of the aggregate principal amount of the 2027 Secured Notes issued remains outstanding following such redemption.

NCLC may redeem the 2029 Unsecured Notes at its option, in whole or in part, at any time and from time to time prior to November 15, 2028, at a “make-whole” redemption price, plus accrued and unpaid interest and additional amounts, if any, to, but excluding, the redemption date. NCLC may redeem the 2029 Unsecured Notes at its option, in whole or in part, at any time and from time to time on or after November 15, 2028, at a redemption price equal to 100% of the principal amount of 2029 Unsecured Notes redeemed, plus accrued and unpaid interest and additional amounts, if any, to, but excluding, the redemption date. At any time and from time to time prior to February 15, 2025, NCLC may choose to redeem up to 40% of the aggregate principal amount of the 2029 Unsecured Notes with the net proceeds of certain equity offerings, subject to certain restrictions, at a redemption price equal to 107.750% of the principal amount of the 2029 Unsecured Notes redeemed plus accrued and unpaid interest to, but excluding, the redemption date, so long as at least 60% of the aggregate principal amount of the 2029 Unsecured Notes issued remains outstanding following such redemption.

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The indentures governing the 2027 Secured Notes and the 2029 Unsecured Notes include requirements that, among other things and subject to a number of qualifications and exceptions, restrict the ability of NCLC and its restricted subsidiaries, as applicable, to (i) incur or guarantee additional indebtedness; (ii) pay dividends or distributions on, or redeem or repurchase, equity interests and make other restricted payments; (iii) make investments; (iv) consummate certain asset sales; (v) engage in certain transactions with affiliates; (vi) grant or assume certain liens; and (vii) consolidate, merge or transfer all or substantially all of their assets.

In February 2022, NCLC also conducted a private offering (the “Exchangeable Notes Offering”) of $473.2 million in aggregate principal amount of 2.5% exchangeable senior notes due 2027 (the “2027 2.5% Exchangeable Notes”). The 2027 2.5% Exchangeable Notes are guaranteed by NCLH on a senior basis. Holders may exchange their 2027 2.5% Exchangeable Notes at their option into redeemable preference shares of NCLC. Upon exchange, the preference shares will be immediately and automatically exchanged, for each $1,000 principal amount of exchanged 2027 2.5% Exchangeable Notes, into a number of NCLH’s ordinary shares based on the exchange rate. The exchange rate will initially be 28.9765 ordinary shares per $1,000 principal amount of 2027 2.5% Exchangeable Notes (equivalent to an initial exchange price of approximately $34.51 per ordinary share). The maximum exchange rate is 44.1891 and reflects potential adjustments to the initial exchange rate, which would only be made in the event of certain make-whole fundamental changes or tax redemption events. The exchange rate referred to above is also subject to adjustment for any stock split, stock dividend or similar transaction. The 2027 2.5% Exchangeable Notes pay interest at 2.5% per annum, semiannually on February 15 and August 15 of each year, to holders of record at the close of business on the immediately preceding February 1 and August 1, respectively.

NCLC has used, or will use, the net proceeds from the Notes Offering and the Exchangeable Notes Offering to redeem (the “Redemption”) all of the outstanding 2024 Senior Secured Notes and 2026 Senior Secured Notes and to make scheduled principal payments on debt maturing in 2022, including, in each case, to pay any accrued and unpaid interest thereon, as well as related premiums, fees and expenses. Simultaneously with the Redemption, and pursuant to certain provisions contained in the indentures governing the 2026 Senior Unsecured Notes and the 2028 Senior Unsecured Notes, each of the guarantors party to such indentures were released from their obligations thereunder. The resulting losses on extinguishments, which are recognized in interest expense, net, were $188.4 million for the three months ended March 31, 2022.

Exchangeable Notes

The following is a summary of NCLC’s exchangeable notes as of March 31, 2022 (in thousands):

Unamortized

Principal

Deferred

Net Carrying

Fair Value

    

Amount

    

Financing Fees

    

Amount

    

Amount

    

Leveling

2024 Exchangeable Notes

$

146,601

$

(3,110)

$

143,491

$

258,692

Level 2

2025 Exchangeable Notes

450,000

(8,074)

441,926

654,773

Level 2

2027 1.125% Exchangeable Notes

1,150,000

(27,647)

1,122,353

1,082,840

Level 2

2027 2.5% Exchangeable Notes

473,175

(11,982)

461,193

465,112

Level 2

The following is a summary of NCLC’s exchangeable notes as of December 31, 2021 (in thousands):

Unamortized Debt

Discount,

Principal

including Deferred

Net Carrying

Fair Value

    

Amount

    

Financing Fees

    

Amount

    

Amount

    

Leveling

2024 Exchangeable Notes

$

146,601

$

(3,408)

$

143,193

$

249,358

Level 2

2025 Exchangeable Notes

450,000

(8,525)

441,475

642,591

Level 2

2027 1.125% Exchangeable Notes

1,150,000

(28,948)

1,121,052

1,088,510

Level 2

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The following provides a summary of the interest expense of NCLC’s exchangeable notes (in thousands):

Three Months Ended

March 31, 

2022

    

2021

Coupon interest

$

12,992

$

24,140

Amortization of deferred financing fees

2,275

2,893

Total

$

15,267

$

27,033

The effective interest rate is 7.07%, 5.97%, 1.64% and 3.06% for the 2024 Exchangeable Notes, 2025 Exchangeable Notes, 2027 1.125% Exchangeable Notes and 2027 2.5% Exchangeable Notes, respectively.

Debt Repayments

The following are scheduled principal repayments on our long-term debt including finance lease obligations as of March 31, 2022 for each of the following periods (in thousands):

Year

    

Amount

Remainder of 2022

$

865,990

2023

 

937,406

2024

 

3,686,473

2025

 

1,070,923

2026

 

1,974,309

2027

3,025,297

Thereafter

 

2,205,433

Total

$

13,765,831

Debt Covenants

During the year ended December 31, 2021, we received certain financial and other debt covenant waivers, added new free liquidity requirements and modified other financial covenants. As of March 31, 2022, taking into account such waivers, we were in compliance with all of our debt covenants. If we do not continue to remain in compliance with our covenants, including following the expiration of any current waivers, we would have to seek additional amendments to our covenants. However, no assurances can be made that such amendments would be approved by our lenders. Generally, if an event of default under any debt agreement occurs, then pursuant to cross default and/or cross acceleration clauses, substantially all of our outstanding debt and derivative contract payables could become due, and all debt and derivative contracts could be terminated, which would have a material adverse impact on our operations and liquidity.

7.   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.

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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 March 31, 2022, we had fuel swaps, which are used to mitigate the financial impact of volatility of fuel prices pertaining to approximately 347 thousand metric tons of our projected fuel purchases, maturing through December 31, 2023.

As of March 31, 2022, we had approximately 164 thousand metric tons which were not designated as cash flow hedges maturing through December 31, 2023.

As of March 31, 2022, 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 €2.4 billion, or $2.7 billion based on the euro/U.S. dollar exchange rate as of March 31, 2022.

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The derivatives measured at fair value and the respective location in the consolidated balance sheets include the following (in thousands):

Assets

Liabilities

March 31, 

December 31, 

March 31, 

December 31, 

    

Balance Sheet Location

    

2022

    

2021

    

2022

    

2021

Derivative Contracts Designated as Hedging Instruments

Fuel contracts

Prepaid expenses and other assets

$

81,704

$

29,349

$

$

Other long-term assets

36,764

19,554

Foreign currency contracts

Prepaid expenses and other assets

 

1,478

 

4,898

 

 

Accrued expenses and other liabilities

 

558

 

 

134,845

 

98,592

Other long-term liabilities

 

 

 

87,560

 

73,496

Interest rate contracts

Accrued expenses and other liabilities

 

 

 

 

469

Total derivatives designated as hedging instruments

$

120,504

$

53,801

$

222,405

$

172,557

Derivative Contracts Not Designated as Hedging Instruments

Fuel contracts

Prepaid expenses and other assets

$

26,743

$

10,836

$

$

Other long-term assets

9,146

3,476

Total derivatives not designated as hedging instruments

$

35,889

$

14,312

$

$

Total derivatives

$

156,393

$

68,113

$

222,405

$

172,557

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 following table discloses the gross and net amounts recognized within assets and liabilities (in thousands):

Gross 

Gross

Gross 

Amounts 

Total Net

Amounts 

March 31, 2022

    

Amounts

    

Offset

    

Amounts

    

Not Offset

    

Net Amounts

Assets

$

155,835

$

$

155,835

$

(155,835)

$

Liabilities

222,405

(558)

221,847

(196,068)

25,779

Gross

Gross

Gross

Amounts

Total Net

Amounts

December 31, 2021

    

Amounts

    

Offset

    

Amounts

    

Not Offset

    

Net Amounts

Assets

$

68,113

$

$

68,113

$

(68,113)

$

Liabilities

172,557

172,557

(172,557)

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The effects of cash flow hedge accounting on accumulated other comprehensive income (loss) were as follows (in thousands):

Location of Gain