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.

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:

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:

Expected volatility was determined based on the historical share prices in our industry. The risk-free rate was based on U.S. Treasury zero coupon issues with a remaining term equal to the expected option term at grant date. The expected term was calculated under the simplified method.

The following table sets forth a summary of option activity under NCLH’s Restated 2013 Plan, including 208,335 previously awarded performance-based share option awards, for which a grant date was established in 2018, for the period presented:

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:

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.

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:

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):

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.

The amounts related to the Shipboard Retirement Plan were as follows (in thousands):

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):