NATIONAL VISION HOLDINGS, INC. The following contains management's discussion and analysis of our financial condition and results of operations and should be read together with the unaudited condensed consolidated financial statements and the related notes thereto included elsewhere in this Form 10-Q (this "Form 10-Q") and the audited consolidated financial statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K filed with theSecurities and Exchange Commission (the "SEC") onFebruary 26, 2020 (the "2019 Annual Report on Form 10-K"). This discussion contains forward-looking statements that reflect our plans, estimates and beliefs and involve numerous risks and uncertainties, including, but not limited to, those described in the "Risk Factors" section of the 2019 Annual Report on Form 10-K and in the "Risk Factors" section of this Form 10-Q, as such risk factors may be updated from time to time in our periodic filings with theSEC . Actual results may differ materially from those contained in any forward-looking statements. You should carefully read "Special Note Regarding Forward-Looking Statements" in this Form 10-Q. Overview We are one of the largest and fastest growing optical retailers inthe United States and a leader in the attractive value segment of theU.S. optical retail industry. We believe that vision is central to quality of life and that people deserve to see their best to live their best, no matter what their budget. Our mission is to make quality eye care and eyewear affordable and accessible to all Americans. We achieve this by providing eye exams, eyeglasses and contact lenses to value seeking and lower income consumers. We deliver exceptional value and convenience to our customers, with an opening price point that strives to be among the lowest in the industry, enabled by our low-cost operating platform. We reach our customers through a diverse portfolio of 1,185 retail stores across five brands and 19 consumer websites as ofJune 27, 2020 . Recent Developments - COVID-19 The unprecedented and rapid spread of the COVID-19 pandemic and the related federal, state and local governmental and healthcare authority guidelines have caused business disruption globally and in theU.S. As of the date of filing of this Quarterly Report on Form 10-Q, there remain many uncertainties regarding the COVID-19 pandemic and its resurgence, including the anticipated duration of the pandemic and the extent of national and global social and economic disruption it may cause. To date, the COVID-19 pandemic and government and healthcare authority actions to curb the spread of the virus have had far-reaching impacts, directly and indirectly, on our operations, including the temporary closure of our stores to the public between March andJune 2020 , and on consumer behavior, comparable store sales, our employees and optometrists, and the overall market. The scope and nature of these impacts continue to evolve on a daily basis. The COVID-19 pandemic has resulted in, and may continue to result in, state, city or local quarantines, labor stoppages and shortages, changes in consumer purchasing patterns, mandatory or voluntary shut-downs of retail locations, severe market volatility, liquidity disruptions, and overall economic instability, which, in many cases, have had, and we expect will continue to have, material adverse impacts on our business, financial condition and results of operations. This situation is rapidly changing, and additional impacts may arise that we are not aware of currently. In response to the evolving and uncertain situation, we have taken aggressive and prudent actions to minimize the risk to our Company, employees, customers and the communities in which we operate, along with reducing expenses and deferring discretionary capital expenditures. Some of our actions taken include: Operational •OnMarch 19, 2020 , we temporarily closed all of our stores to the public acrossthe United States ; onApril 23, 2020 , we announced plans to reopen stores selectively over the coming weeks; and onJune 8, 2020 , we announced that we had successfully completed the reopening process with enhanced safety and cleaning protocols. •During April andMay 2020 , we temporarily furloughed a significant portion of our employees, bringing most back when we reopened in early June. •While our stores were closed to the public, our retail locations continued to provide services as associates remained available by phone for patients and customers in need, and where possible, we shipped eyeglasses and contact lenses from our labs and distribution centers directly to customers who had placed orders in our stores and otherwise would have picked them up in our stores. In addition, the Company's e-commerce websites remained fully operational. •We have suspended all non-essential travel for our employees. 29 -------------------------------------------------------------------------------- Table of Contents •Following the successful reopening of our stores, we continually assess the evolving COVID-19 situation and, where appropriate, have taken, or may take in the future, actions such as reducing store hours, reducing patient appointments or temporarily closing stores. Financial •OnMarch 17, 2020 , as a precautionary measure to preserve financial flexibility during the COVID-19 pandemic, we borrowed the remaining$146.3 million in available funds under our revolving credit facility; and, as described below, onMay 12, 2020 , we repaid the full amount outstanding under our revolving credit facility. •EffectiveMay 5, 2020 , we entered into an amendment ("Credit Agreement Amendment") of our Amended and Restated Credit Agreement, dated as ofJuly 18, 2019 facility ("Credit Agreement,") which is intended to prevent the effects of the COVID-19 pandemic, including the temporary closure of our stores, from creating uncertainty relative to our ability to comply with certain financial covenants and allow the Company to focus on prudent management of the business over the quarters ahead. The Credit Agreement Amendment suspends certain financial maintenance covenants contained in the facility until testing at the end of the second fiscal quarter of 2021. As part of the Credit Agreement Amendment, the Company among other things agreed to modify the rate of interest paid under the facility and to limit its ability to engage in certain transactions during the covenant suspension period, including the ability to declare or pay dividends, incur additional debt and make investments and dispositions. •OnMay 12, 2020 , we completed the issuance of 2.50% convertible senior notes due onMay 15, 2025 (the "2025 Notes"), pursuant to an indenture (the "Indenture"), and we used the net proceeds of this offering to repay our outstanding borrowings on our term loan and revolving credit facility. We continue to prioritize cash conservation and prudent use of cash, while positioning the Company to safely conduct normal operations. •Beginning inMarch 2020 , we implemented capital spending and expense reduction initiatives including a temporary pause in new store openings, reduced near term marketing spend, reduced compensation and work hours across the organization and working with a base of vendors and landlords to extend payment terms and modify existing contracts; in the second quarter of 2020 we resumed store openings concurrent with the reopening of existing stores and suspended compensation reductions. The COVID-19 pandemic and responsive measures taken by the Company have had, and may continue to have, material adverse impacts on our current business, financial condition and results of operations, and may create additional risks for our Company. While we anticipate that these measures are temporary, their specific duration has a high degree of uncertainty and we may elect or need to take additional measures as the situation continues to evolve, including with respect to our store operations, employees, store leases and relationships with third-party vendors. We continue to assess the evolving COVID-19 pandemic and its impact on our customers, employees, optometrists, supply chain and operations and will adjust our responsive measures accordingly. However, the extent to which the COVID-19 pandemic and our precautionary measures in response thereto may impact our business, financial condition and results of operations will depend on how the pandemic and its impacts continue to develop, which are highly uncertain. We are continuing to evaluate additional operational and financial measures that we may elect to take as we continue to respond to the impact of COVID-19 on our business. There can be no assurance whether or when any such measures will be adopted. The disclosures contained in this Form 10-Q are made only as of the date hereof, and we undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as required by law. For further information, please see "Risk Factors" and "Forward-Looking Statements." 30 -------------------------------------------------------------------------------- Table of Contents Brand and Segment Information Our operations consist of two reportable segments: •Owned & Host - As ofJune 27, 2020 , our owned brands consisted of 753America's Best Contacts and Eyeglasses ("America's Best") retail stores and 118Eyeglass World retail stores. In America's Best stores, vision care services are provided by optometrists employed by us or by independent professional corporations or similar entities. America's Best stores are primarily located in high-traffic strip centers next to value-focused retailers.Eyeglass World locations primarily feature vision care services provided by independent optometrists and optometrists employed by independent professional corporations or similar entities and on-site optical laboratories that enable stores to quickly fulfill many customer orders and make repairs on site.Eyeglass World stores are primarily located in freestanding or in-line locations near high-foot-traffic shopping centers. Our host brands consisted of 54 Vista Optical locations on military bases and 29 Vista Optical locations within Fred Meyer stores as ofJune 27, 2020 . We have strong, long-standing relationships with our host partners and have maintained each partnership for over 20 years. These brands provide eye exams primarily by independent optometrists. All brands utilize our centralized laboratories. This segment also includes sales from our America's Best,Eyeglass World , and Military omni-channel websites. •Legacy - We manage the operations of, and supply inventory and laboratory processing services to, 231 Vision Centers in Walmart retail locations as ofJune 27, 2020 . This strategic relationship with Walmart is in its 30th year. Pursuant to aJanuary 2020 amendment to our management & services agreement with Walmart, we added five additional Vision Centers in Walmart stores in fiscal year 2020. Refer to Note 14. "Subsequent Events" included in Part I. Item 1. of this Form 10-Q for further information on the contract amendment to extend the current term and economics of the management and services agreement by three years toFebruary 23, 2024 . Under the management & services agreement, our responsibilities include ordering and maintaining merchandise inventory; arranging the provision of optometry services; providing managers and staff at each location; training personnel; providing sales receipts to customers; maintaining necessary insurance; obtaining and holding required licenses, permits and accreditations; owning and maintaining store furniture, fixtures and equipment; and developing annual operating budgets and reporting. We earn management fees as a result of providing such services and therefore we record revenue related to sales of products and product protection plans to our legacy partner's customers on a net basis. Our management & services agreement also allows our legacy partner to collect penalties if the Vision Centers do not generate a requisite amount of revenues. No such penalties have been assessed under our current arrangement, which began in 2012. We also sell to our legacy partner merchandise that is stocked in retail locations we manage pursuant to a separate supplier agreement, and provide centralized laboratory services for the finished eyeglasses for our legacy partner's customers in stores that we manage. We lease space from Walmart within or adjacent to each of the locations we manage and use this space for vision care services provided by independent optometrists or optometrists employed by us or by independent professional corporations or similar entities. During the six months endedJune 27, 2020 , sales associated with our legacy partner arrangement represented 8.5% of consolidated net revenue. This exposes us to concentration of customer risk. 31 -------------------------------------------------------------------------------- Table of Contents Our consolidated results also include the following activity recorded in our Corporate/Other category: •Our e-commerce platform of 15 dedicated websites managed byAC Lens . Our e-commerce business consists of six proprietary branded websites, including aclens.com, discountglasses.com and discountcontactlenses.com, and nine third-party websites with established retailers, such as Walmart,Sam's Club and Giant Eagle as well as mid-sized vision insurance providers.AC Lens handles site management, customer relationship management and order fulfillment and also sells a wide variety of contact lenses, eyeglasses and eye care accessories. •AC Lens also distributes contact lenses wholesale to Walmart andSam's Club . We incur costs at a higher percentage of sales than other product categories.AC Lens sales associated with Walmart andSam's Club contact lenses distribution arrangements represented 8.6% of consolidated net revenue. •Managed care business conducted by FirstSight, our wholly-owned subsidiary that is licensed as a single-service health plan underCalifornia law, which arranges for the provision of optometric services at the offices next to certain Walmart stores throughoutCalifornia , and also issues individual vision care benefit plans in connection with our America's Best operations inCalifornia . •Unallocated corporate overhead expenses, which are a component of selling, general and administrative expenses and are comprised of various home office expenses such as payroll, occupancy costs, and consulting and professional fees. Corporate overhead expenses also include field services for our five retail brands. Reportable segment information is presented on the same basis as our consolidated financial statements, except reportable segment sales which are presented on a cash basis including point of sales for managed care payors and excluding the effects of unearned and deferred revenue, consistent with what our chief operating decision maker ("CODM") regularly reviews. Reconciliations of segment results to consolidated results include financial information necessary to adjust reportable segment revenues to a consolidated basis in accordance withU.S. GAAP, specifically the change in unearned and deferred revenues during the period. There are no revenue transactions between reportable segments, and there are no other items in the reconciliations other than the effects of unearned and deferred revenue. See Note 10. "Segment Reporting" in our consolidated financial statements included in Part I. Item 1. of this Form 10-Q. Deferred revenue represents the timing difference of when we collect the cash from the customer and when services related to product protection plans and eye care club memberships are performed. Increases or decreases in deferred revenue during the reporting period represent cash collections in excess of or below the recognition of previous deferrals. Unearned revenue represents the timing difference of when we collect cash from the customer and delivery/customer acceptance, and includes sales of prescription eyewear during approximately the last seven to 10 days of the reporting period. Trends and Other Factors Affecting Our Business COVID-19 Impact The COVID-19 pandemic has had far-reaching impacts, directly and indirectly, on our operations. We are continuing to monitor the impacts COVID-19 has had, and continues to have, on our outsourced third party optical laboratories inChina andMexico , including potential disruptions of product deliveries. To date, we have been able to meet customer demand with operations at our laboratories. We source merchandise from suppliers located inChina and a significant amount of domestically-purchased merchandise is manufactured inChina . We have partnered with our suppliers and third party laboratories to mitigate any potential significant delays in delivery of merchandise upon store operations resuming. Our e-commerce business remained open to serve our customers during the unprecedented period of temporary store closures. We incurred$2.5 million and$3.1 million of costs in the three and six months endedJune 27, 2020 , respectively, primarily for personal protective equipment and other supplies needed to operate our stores safely, as well as for professional fees associated with adapting our operations to the COVID-19 pandemic. Incremental expenses related to the COVID-19 pandemic are not allocated to the reportable segments, but are included in the Corporate/Other category. 32 -------------------------------------------------------------------------------- Table of Contents We have seen, and may continue to see, material reductions in sales across brands and regions as a result of the COVID-19 pandemic. In addition, these reductions in revenue have not been offset by proportional decreases in expense, as we continued to incur store occupancy costs even while stores were temporarily closed, incremental costs directly related to adapting the Company's operations to the COVID-19 pandemic and certain other costs such as compensation and administrative expenses, resulting in a negative effect on profitability. In addition, we could experience further material impacts as a result of COVID-19, including, but not limited to, charges from additional asset impairment, deferred tax valuation allowances and further changes in the effectiveness of our hedging instruments. The current circumstances are dynamic and the impacts of COVID-19 on our business operations, including the duration and impact on overall customer demand, are highly uncertain, although COVID-19 has had, and may continue to have, a material adverse impact on our business, results of operations, financial condition and cash flows in fiscal 2020 to date and beyond. The Company recorded a credit totaling$10.8 million as a result of the employee retention credits made available under the CARES Act for US employees during the three and six months endedJune 27, 2020 , recognizing$0.4 million as a reduction to costs of products,$6.2 million as a reduction to costs of services and plans, and$4.2 million as a reduction to SG&A. It is possible that our preparations for the events listed above are not adequate to mitigate their impact, and that these events could further adversely affect our business and results of operations. For a discussion of significant risks that have the potential to cause our actual results to differ materially from our expectations, refer to "Item 1A. Risk Factors," included in our 2019 Annual Report on Form 10-K and in this Form 10-Q. Other developments As a result of theU.S. government's temporary reduction of tariff rates affecting certain of our products that originate inChina , we recognized an immaterial reduction in costs of products for the three and six months endedJune 27, 2020 . We currently expect this tariff reduction to be partial and temporary. Additionally, we are monitoring ongoing political developments betweenChina andthe United States . A worsening of relations could lead to the early reinstatement of existing tariffs, or the imposition of additional tariffs, or may cause other disruptions in our supply of products fromChina . Long-term trends and factors We remain committed to our long-term vision and continue to position ourselves to make progress against our key initiatives while balancing the near-term challenges and unprecedented uncertainty presented by the COVID-19 pandemic. As a result of the COVID-19 pandemic, we implemented capital spending and expense reduction initiatives including a temporary pause in new store openings, reduced near term marketing spend, and reduced compensation and work hours across the organization and are working with a base of vendors and landlords to extend payment terms and modify existing contracts. We have also incurred incremental costs directly related to adapting the Company's operations to the COVID-19 pandemic. We experienced negative comparable store sales growth in the first half of 2020 as a result of the closure of our stores in response to the COVID-19 pandemic, and anticipate that comparable store sales growth figures for the fiscal years 2020 and 2021 will be impacted by the pandemic. We believe that the following areas will continue to be affected and relevant risk exposures may be exacerbated by the immediate and ongoing threat of the COVID-19 pandemic: •New store openings; •Comparable store sales growth; •Managed care and insurance; •Vision care professional recruitment and coverage; •Overall economic trends; •Consumer preferences and demand; •Infrastructure and investment; •Pricing strategy; •Inflation; •Interim results and seasonality; •Competition; and •Consolidation in the industry 33 -------------------------------------------------------------------------------- Table of Contents How We Assess the Performance of Our Business While we have historically attempted to exercise prudence in our use of cash, the COVID-19 pandemic has required us to closely monitor various items related to cash flow including, but not limited to, cash receipts, cash disbursements, payment terms and alternative sources of funding. We will continue to be focused on these items in addition to the other key measures we use to determine how our consolidated business and operating segments are performing, including: net revenue, costs applicable to revenue, and selling, general, and administrative expenses. In addition, we also review store growth,Adjusted Comparable Store Sales Growth, Adjusted Operating Income, Adjusted Operating Margin, Adjusted EBITDA, Adjusted EBITDA Margin and Adjusted Diluted EPS. Net Revenue We report as net revenue amounts generated in transactions with retail customers who are the end users of our products, services, and plans. Net product sales include sales of prescription and non-prescription eyewear, contact lenses, and related accessories as well as eye exam services associated with our America's Best brand's signature offer of two pairs of eyeglasses and a free eye exam for one low price ("two-pair offer") to retail customers and sales of inventory in which our customer is another retail entity. Net sales of services and plans include sales of eye exams, eye care club memberships, product protection plans (i.e., warranties), and single service eye care plans inCalifornia . Net sales of services and plans also include fees we earn for managing certain Vision Centers located in Walmart stores and for laboratory services provided to Walmart. Costs Applicable to Revenue Costs applicable to revenue include both costs of net product sales and costs of net sales of services and plans. Costs of net product sales include (i) costs to procure non-prescription eyewear, contact lenses, and accessories, which we purchase and sell in finished form, (ii) costs to manufacture finished prescription eyeglasses, including direct materials, labor, and overhead, and (iii) remake costs, warehousing and distribution expenses, and internal transfer costs. Costs of services and plans include costs associated with product protection plan programs, eye care club memberships, single service eye care plans inCalifornia , eye care practitioner and eye exam technician payroll, taxes and benefits and optometric and other service costs. Customer tastes and preferences, product mix, changes in technology, significant increases or slowdowns in production, and other factors impact costs applicable to revenue. The components of our costs applicable to revenue may not be comparable to other retailers. Selling, General and Administrative Selling, general and administrative expenses, or SG&A, include store associate (including optician) payroll, taxes and benefits, occupancy, advertising and promotion, field services, corporate support and other costs associated with the provision of vision care services. Non-capital expenditures associated with opening new stores, including rent, store maintenance, marketing expenses, travel and relocation costs, and training costs, are recorded in SG&A as incurred. SG&A generally fluctuates consistently with revenue due to the variable store, field office and corporate support costs; however, some fixed costs slightly improve as a percentage of net revenue as our net revenues grow over time. New Store Openings The total number of new stores per year and the timing of store openings has, and will continue to have, an impact on our results. In an effort to conserve cash during the COVID-19 pandemic, we temporarily paused new store openings during a portion of the six months endedJune 27, 2020 . We expect to open approximately 50 to 55 stores in the current year. We will continue to monitor and determine our plans for future new store openings based on based on health, safety and economic conditions. 34 -------------------------------------------------------------------------------- Table of Contents Adjusted Comparable Store Sales Growth We measure Adjusted Comparable Store Sales Growth as the increase or decrease in sales recorded by the comparable store base in any reporting period, compared to sales recorded by the comparable store base in the prior reporting period, which we calculate as follows: (i) sales are recorded on a cash basis (i.e., when the order is placed and paid for or submitted to a managed care payor, compared to when the order is delivered), utilizing cash basis point of sale information from stores; (ii) stores are added to the calculation during the 13th full fiscal month following the store's opening; (iii) closed stores are removed from the calculation for time periods that are not comparable; (iv) sales from partial months of operation are excluded when stores do not open or close on the first day of the month; and (v) when applicable, we adjust for the effect of the 53rd week. Quarterly, year-to-date and annual adjusted comparable store sales are aggregated using only sales from all whole months of operation included in both the current reporting period and the prior reporting period. When a partial month is excluded from the calculation, the corresponding month in the subsequent period is also excluded from the calculation. There may be variations in the way in which some of our competitors and other retailers calculate comparable store sales. As a result, our adjusted comparable store sales may not be comparable to similar data made available by other retailers. We did not adjust our calculation of Adjusted Comparable Store Sales Growth for the temporary closure of our stores to the public as a result of the COVID-19 pandemic. Adjusted Comparable Store Sales Growth is a non-GAAP financial measure, which we believe is useful because it provides timely and accurate information relating to the two core metrics of retail sales: number of transactions and value of transactions. We use Adjusted Comparable Store Sales Growth as the basis for key operating decisions, such as allocation of advertising to particular markets and implementation of special marketing programs. Accordingly, we believe that Adjusted Comparable Store Sales Growth provides timely and accurate information relating to the operational health and overall performance of each brand. We also believe that, for the same reasons, investors find our calculation of Adjusted Comparable Stores Sales Growth to be meaningful. Adjusted EBITDA, Adjusted EBITDA Margin Adjusted Operating Income, Adjusted Operating Margin, and Adjusted Diluted EPS (collectively, the "Company Non-GAAP Measures") The Company Non-GAAP Measures are key measures used by management to assess our financial performance. The Company Non-GAAP Measures are also frequently used by analysts, investors and other interested parties. We use The Company Non-GAAP Measures to supplementU.S. GAAP measures of performance to evaluate the effectiveness of our business strategies, to make budgeting decisions, to establish discretionary annual incentive compensation and to compare our performance against that of other peer companies using similar measures. See "Non-GAAP Financial Measures" for definitions of the Company Non-GAAP Measures and for additional information. 35 -------------------------------------------------------------------------------- Table of Contents Results of Operations The following table summarizes key components of our results of operations for the periods indicated, both in dollars and as a percentage of our net revenue. Three Months Ended Six Months Ended In thousands, except store data June 27, 2020 June 29, 2019 June 27, 2020 June 29, 2019
Revenue:
Net product sales$ 209,707
50,300 71,918 127,163 149,973
Total net revenue 260,007 429,451 729,711 890,666
Costs applicable to revenue (exclusive of depreciation
and amortization):
Products 97,635 145,654 254,005 299,658
Services and plans 43,145 56,852 105,329 114,817
Total costs applicable to revenue 140,780 202,506 359,334 414,475
Operating expenses:
Selling, general and administrative expenses 136,582 182,278 330,323 376,154
Depreciation and amortization 21,924 20,819 46,734 41,234
Asset impairment 2,411 1,790 13,766 3,872
Litigation settlement - - 4,395 -
Other expense (income), net (92) 356 (158) 829
Total operating expenses 160,825 205,243 395,060 422,089
Income (loss) from operations (41,598) 21,702 (24,683) 54,102
Interest expense, net 15,502 8,968 22,957 18,029
Debt issuance costs 136 - 136 -
Earnings (loss) before income taxes (57,236) 12,734 (47,776) 36,073
Income tax provision (benefit) (13,403) 2,477 (13,685) 8,387
Net income (loss) $ (43,833) $ 10,257 $ (34,091) $ 27,686
Operating data:
Number of stores open at end of period 1,185 1,128 1,185 1,128
New stores opened 17 24 40 50
Adjusted Operating Income $ (34,427) $ 29,088 $ 3,638 $ 71,737
Diluted EPS $ (0.55) $ 0.13 $ (0.42) $ 0.34
Adjusted Diluted EPS $ (0.41) $ 0.18 $ (0.13) $ 0.49
Adjusted EBITDA $ (14,354) $ 48,056 $ 46,670 $ 109,269
Percentage of net revenue:
Total costs applicable to revenue 54.1 % 47.2 % 49.2 % 46.5 %
Selling, general and administrative 52.5 % 42.4 % 45.3 % 42.2 %
Total operating expenses 61.9 % 47.8 % 54.1 % 47.4 %
Income (loss) from operations (16.0) % 5.1 % (3.4) % 6.1 %
Net income (loss) (16.9) % 2.4 % (4.7) % 3.1 %
Adjusted Operating Income (13.2) % 6.8 % 0.5 % 8.1 %
Adjusted EBITDA (5.5) % 11.2 % 6.4 % 12.3 %
36-------------------------------------------------------------------------------- Table of Contents Three Months EndedJune 27, 2020 compared to Three Months EndedJune 29, 2019 As a result of the COVID-19 pandemic, our retail stores closed to the public beginning onMarch 19, 2020 . We began reopening our stores to the public onApril 27, 2020 , and onJune 8, 2020 , we announced the successful completion of the reopening process. Net revenue The following presents, by segment and by brand, comparable store sales growth, stores open at the end of the period and net revenue for the three months endedJune 27, 2020 compared to the three months endedJune 29, 2019 . Comparable store sales growth(1) Stores open at end of period Net revenue(2) Three Months Three Months Ended In thousands, except Ended June 29, Three Months Ended Three Months Ended percentage and store data June 27, 2020 2019 June 27, 2020 June 29, 2019 June 27, 2020 June 29, 2019 Owned & Host segment America's Best (37.1) % 4.5 % 753 702$ 176,196 67.8 %$ 266,781 62.1 % Eyeglass World (31.6) % 5.2 % 118 117 30,357 11.7 % 44,059 10.3 % Military (44.6) % 0.3 % 54 54 3,328 1.3 % 6,021 1.4 % Fred Meyer (48.6) % (5.3) % 29 29 1,824 0.7 % 3,555 0.8 % Owned & Host segment total 954 902$ 211,705 81.4 %$ 320,416 74.6 % Legacy segment (35.8) % 0.4 % 231 226 25,413 9.8 % 39,264 9.1 % Corporate/Other - % - % - - 50,472 19.4 % 62,346 14.6 % Reconciliations - % - % - - (27,583) (10.6) % 7,425 1.7 % Total (44.7) % 4.4 % 1,185 1,128$ 260,007 100.0 %$ 429,451 100.0 % Adjusted comparable store sales growth(3) (36.5) % 3.8 % (1)We calculate total comparable store sales based on consolidated net revenue excluding the impact of (i) corporate/other segment net revenue, (ii) sales from stores opened less than 13 months, (iii) stores closed in the periods presented, (iv) sales from partial months of operation when stores do not open or close on the first day of the month and (v) if applicable, the impact of a 53rd week in a fiscal year. Brand-level comparable store sales growth is calculated based on cash basis revenues consistent with what the CODM reviews, and consistent with reportable segment revenues presented in Note 10. "Segment Reporting" in our unaudited condensed consolidated financial statements included in Part I. Item 1. of this Form 10-Q, with the exception of the legacy segment, which is adjusted as noted in clause (ii) of footnote (3) below. (2)Percentages reflect line item as a percentage of net revenue, adjusted for rounding. (3)There are two differences between total comparable store sales growth based on consolidated net revenue and Adjusted Comparable Store Sales Growth: (i) Adjusted Comparable Store Sales Growth includes the effect of deferred and unearned revenue as if such revenues were earned at the point of sale, resulting in an increase of 8.1% and a decrease of 0.4% from total comparable store sales growth based on consolidated net revenue for the three months endedJune 27, 2020 andJune 29, 2019 , respectively, and (ii) Adjusted Comparable Store Sales Growth includes retail sales to the legacy partner's customers (rather than the revenues recognized consistent with the management & services agreement with the legacy partner), resulting in an increase of 0.1% and a decrease of 0.2% from total comparable store sales growth based on consolidated net revenue for each of the three months endedJune 27, 2020 andJune 29, 2019 . Total net revenue of$260.0 million for the three months endedJune 27, 2020 decreased$169.4 million , or 39.5%, from$429.5 million for the three months endedJune 29, 2019 . This decrease was driven by the closure of our stores to the public for a portion of the three months endedJune 27, 2020 and was partially offset by new store sales. Total net revenue was also negatively impacted by changes in unearned revenue. In the three months endedJune 27, 2020 , we opened 11 America's Best stores and oneEyeglass World store and closed five America's Best stores; we also transitioned five additional Legacy stores to our management. Overall, store count grew 5.1% fromJune 29, 2019 toJune 27, 2020 (51, one and five net new America's Best,Eyeglass World and Legacy stores were added, respectively). 37 -------------------------------------------------------------------------------- Table of Contents Comparable store sales growth and Adjusted Comparable Store Sales Growth for the three months endedJune 27, 2020 were (44.7)% and (36.5)%, respectively. The decreases in comparable store sales growth and Adjusted Comparable Store Sales Growth were primarily driven by the temporary closure of our stores to the public in response to the COVID-19 pandemic. Comparable store sales growth and Adjusted Comparable Store Sales Growth for the one month endedApril 25, 2020 were (83.9)% and (86.6)%, respectively. Comparable store sales growth and Adjusted Comparable Store Sales Growth for the one month endedMay 30, 2020 were (56.6)% and (38.5)%, respectively. Comparable store sales growth and Adjusted Comparable Store Sales Growth for the one month endedJune 27, 2020 were 14.3% and 19.3%, respectively. Adjusted Comparable Store Sales Growth includes the effect of deferred and unearned revenue as if such revenues were earned at the point of sale, resulting in a decrease of 3.3%, an increase of 17.7% and an increase of 6.0% for the one month periods endedApril 25, 2020 ,May 30, 2020 andJune 27, 2020 , respectively. Adjusted Comparable Store Sales Growth includes retail sales to the legacy partner's customers (rather than the revenues recognized consistent with the management & services agreement with the legacy partner), resulting in an increase of 0.6%, an increase of 0.4% and a decrease of 1.0% for the one month periods endedApril 25, 2020 ,May 30, 2020 andJune 27, 2020 , respectively. Net product sales comprised 80.7% and 83.3% of total net revenue for the three months endedJune 27, 2020 andJune 29, 2019 , respectively. Net product sales decreased$147.8 million , or 41.3%, in the three months endedJune 27, 2020 compared to the three months endedJune 29, 2019 , driven primarily by the temporary closure of our stores to the public in response to the COVID-19 pandemic. Net sales of services and plans decreased$21.6 million , or 30.1%, driven primarily by the temporary closure of our stores to the public in response to the COVID-19 pandemic. Owned & Host segment net revenue. Net revenue decreased$108.7 million , or 33.9%, due to the temporary closure of our stores to the public in response to the COVID-19 pandemic. Legacy segment net revenue. Net revenue decreased$13.9 million , or 35.3% due to the temporary closure of our stores to the public in response to the COVID-19 pandemic. Corporate/Other segment net revenue. Net revenue decreased$11.9 million , or 19.0%, driven by reductions in wholesale fulfillment that was partially offset by increases in our online retail business. Net revenue reconciliations. The impact of reconciliations decreased net revenue by$35.0 million for the three months endedJune 27, 2020 compared to the three months endedJune 29, 2019 . Reconciliations include an increase in unearned revenue of$34.4 million compared to a decrease in unearned revenue of$8.5 million for the three months endedJune 27, 2020 andJune 29, 2019 , respectively, as well as a decrease in deferred revenue of$6.9 million and an increase of$1.1 million for the three months endedJune 27, 2020 andJune 29, 2019 , respectively. The increase in unearned revenue for the three months endedJune 27, 2020 resulted from the temporary closure of our stores to the public at the end of the first quarter of 2020 as well as stronger sales at the end of the second quarter of 2020. Costs applicable to revenue Costs applicable to revenue of$140.8 million for the three months endedJune 27, 2020 decreased$61.7 million , or 30.5%, from$202.5 million for the three months endedJune 29, 2019 . As a percentage of net revenue, costs applicable to revenue increased from 47.2% for the three months endedJune 29, 2019 to 54.1% for the three months endedJune 27, 2020 . This increase as a percentage of net revenue was primarily driven by optometrist costs incurred during temporary store closures and increased contact lens mix. Costs of products as a percentage of net product sales increased from 40.7% for the three months endedJune 29, 2019 to 46.6% for the three months endedJune 27, 2020 , primarily driven by increased contact lens mix. Owned & Host segment costs of products. Costs of products as a percentage of net product sales increased from 29.5% for the three months endedJune 29, 2019 to 30.9% for the three months endedJune 27, 2020 . The increase was primarily driven by increased contact lens mix in the three months endedJune 27, 2020 . Legacy segment costs of products. Costs of products as a percentage of net product sales increased from 47.7% for the three months endedJune 29, 2019 to 55.9% for the three months endedJune 27, 2020 . The increase was primarily driven by increased contact lens mix and by a higher mix of non-managed care customer transactions versus managed care customer transactions. Legacy segment managed care net product revenue is recorded in net product sales while revenue associated with servicing non-managed care customers is recorded in net sales of services and plans. Eyeglass and contact lens product costs for both managed care and non-managed care net revenue are recorded in costs of products. Decreases in managed care mix increase costs of products as a percentage of net product sales and have a corresponding positive impact on costs of services as a percentage of net sales of services and plans in our Legacy segment. 38 -------------------------------------------------------------------------------- Table of Contents Costs of services and plans as a percentage of net sales of services and plans increased from 79.1% for the three months endedJune 29, 2019 to 85.8% for the three months endedJune 27, 2020 . The increase was primarily driven by optometrist costs incurred while our stores were temporarily closed to the public in response to the COVID-19 pandemic. Owned & Host segment costs of services and plans. Costs of services and plans as a percentage of net sales of services and plans in the owned & host segment increased from 84.9% for the three months endedJune 29, 2019 to 112.5% for the three months endedJune 27, 2020 . The increase was driven primarily by optometrist costs incurred while our stores were temporarily closed to the public in response to the COVID-19 pandemic. Legacy segment costs of services and plans. Costs of services and plans as a percentage of net sales of services and plans increased from 46.5% for the three months endedJune 29, 2019 to 49.9% for the three months endedJune 27, 2020 . The increase was primarily driven by optometrist costs incurred while our stores were temporarily closed to the public in response to the COVID-19 pandemic. Selling, general and administrative SG&A of$136.6 million for the three months endedJune 27, 2020 decreased$45.7 million , or 25.1%, from the three months endedJune 29, 2019 . As a percentage of net revenue, SG&A increased from 42.4% for the three months endedJune 29, 2019 to 52.5% for the three months endedJune 27, 2020 . The increase in SG&A as a percentage of net revenue was primarily driven by store and corporate payroll and occupancy expenses incurred while our stores were temporarily closed to the public in response to the COVID-19 pandemic, partially offset by lower advertising expense. SG&A for the three months endedJune 27, 2020 includes$2.5 million of incremental costs directly related to adapting the Company's operations during the COVID-19 pandemic; these costs were not reflected as adjustments for the Company's presentation of non-GAAP measures below. Owned & Host SG&A. SG&A as a percentage of net revenue increased from 39.3% for the three months endedJune 29, 2019 to 41.0% for the three months endedJune 27, 2020 , driven primarily by store payroll and occupancy costs incurred while our stores were temporarily closed to the public in response to the COVID-19 pandemic, partially offset by lower advertising expense. Legacy segment SG&A. SG&A as a percentage of net revenue increased from 35.4% for the three months endedJune 29, 2019 to 41.6% for the three months endedJune 27, 2020 , driven primarily by store payroll costs incurred while our stores were temporarily closed to the public in response to the COVID-19 pandemic. Depreciation and amortization Depreciation and amortization expense of$21.9 million for the three months endedJune 27, 2020 increased$1.1 million , or 5.3%, from$20.8 million for the three months endedJune 29, 2019 primarily driven by new store openings. Our property and equipment balance, net, decreased$9.9 million , or 2.8%, during the three months endedJune 27, 2020 , reflective of$11.8 million in purchases of property and equipment less$20.1 million in depreciation expense and$1.6 million in impairment and other adjustments. Asset Impairment We recognized$2.4 million for impairment primarily of tangible long-lived assets and ROU assets associated with our retail stores during the three months endedJune 27, 2020 , compared to$1.8 million recognized during the three months endedJune 29, 2019 . The impairment charges were primarily related to our Owned & Host segment, caused by lower than projected customer sales volume in certain stores, and were determined using entity-specific assumptions related to our anticipated use of store assets. We considered multiple factors including, but not limited to: forecasted scenarios related to store performance and likelihood that these scenarios would be ultimately realized; the historical performance of the stores before the temporary store closures in response to the COVID-19 pandemic; and the remaining useful lives of the assets. The asset impairment expense for the three months endedJune 27, 2020 also includes$1.1 million related to a write-off of certain software assets that were deemed to be obsolete. Asset impairment expenses were recognized in Corporate/Other. Interest expense, net Interest expense, net, of$15.5 million for the three months endedJune 27, 2020 increased$6.5 million , or 72.9%, from$9.0 million for the three months endedJune 29, 2019 . The increase was primarily driven by losses related to changes in fair value of derivatives due to ineffectiveness of$4.9 million and charges related to interest payments and amortization of debt discounts related to the 2025 Notes of$2.3 million that were partially offset by a reduction in our term loan and revolving credit facility utilization. 39 -------------------------------------------------------------------------------- Table of Contents Income tax provision Our income tax expense for the three months endedJune 27, 2020 reflected our statutory federal and state rate of 25.5%, offset by a discrete benefit of$0.3 million associated primarily with the exercise of stock options. In comparison, the income tax rate associated with the three months endedJune 29, 2019 reflected income tax expense at our statutory federal and state rate of 25.6% and was reduced by a$1.1 million income tax benefit resulting from stock option exercises. Six Months EndedJune 27, 2020 compared to Six Months EndedJune 29, 2019 As a result of the COVID-19 pandemic, our retail stores closed to the public beginning onMarch 19, 2020 . We began reopening our stores to the public onApril 27, 2020 , and onJune 8, 2020 , we announced the successful completion of the reopening process. Net revenue The following presents, by segment and by brand, comparable store sales growth, stores open at the end of the period and net revenue for the six months endedJune 27, 2020 compared to the six months endedJune 29, 2019 . Comparable store sales growth(1) Stores open at end of period Net revenue(2) Six Months In thousands, except Six Months Ended Ended Six Months Ended Six Months Ended percentage and store data June 27, 2020 June 29, 2019 June 27, 2020 June 29, 2019 June 27, 2020 June 29, 2019 Owned & Host segment America's Best (22.2) % 6.4 % 753 702$ 470,366 64.5 %$ 571,877 64.2 % Eyeglass World (21.2) % 5.9 % 118 117 74,843 10.3 % 94,273 10.6 % Military (27.8) % (2.2) % 54 54 8,970 1.2 % 12,442 1.4 % Fred Meyer (32.5) % (7.5) % 29 29 4,753 0.7 % 7,044 0.8 % Owned & Host segment total 954 902$ 558,932 76.6 %$ 685,636 77.0 % Legacy segment (24.4) % 1.1 % 231 226 61,870 8.5 % 83,842 9.4 % Corporate/Other - - - - 117,044 16.0 % 126,227 14.2 % Reconciliations - - - - (8,135) (1.1) % (5,039) (0.6) % Total (23.0) % 5.4 % 1,185 1,128$ 729,711 100.0 %$ 890,666 100.0 %Adjusted Comparable Store Sales Growth(3) (22.6) % 5.3 % (1)We calculate total comparable store sales based on consolidated net revenue excluding the impact of (i) Corporate/Other segment net revenue, (ii) sales from stores opened less than 13 months, (iii) stores closed in the periods presented, (iv) sales from partial months of operation when stores do not open or close on the first day of the month and (v) if applicable, the impact of a 53rd week in a fiscal year. Brand-level comparable store sales growth is calculated based on cash basis revenues consistent with what the CODM reviews, and consistent with reportable segment revenues presented in Note 10. "Segment Reporting" in our unaudited condensed consolidated financial statements included in Part I. Item 1. of this Form 10-Q, with the exception of the Legacy segment, which is adjusted as noted in clause (ii) of footnote (3) below. (2)Percentages reflect line item as a percentage of net revenue, adjusted for rounding. (3)There are two differences between total comparable store sales growth based on consolidated net revenue and Adjusted Comparable Store Sales Growth: (i) Adjusted Comparable Store Sales Growth includes the effect of deferred and unearned revenue as if such revenues were earned at the point of sale, resulting in an increase of 0.3% and an increase of 0.2% from total comparable store sales growth based on consolidated net revenue for the six months endedJune 27, 2020 andJune 29, 2019 , respectively, and (ii) Adjusted Comparable Store Sales Growth includes retail sales to the legacy partner's customers (rather than the revenues recognized consistent with the management & services agreement with the legacy partner), resulting in an increase of 0.1% and a decrease of 0.3% from total comparable store sales growth based on consolidated net revenue for the six months endedJune 27, 2020 andJune 29, 2019 , respectively. Total net revenue of$729.7 million for the six months endedJune 27, 2020 decreased$161.0 million , or 18.1%, from$890.7 million for the six months endedJune 29, 2019 . This decrease was driven by the closure of our stores to the public for a portion of the six months endedJune 27, 2020 and was partially offset by new store sales. Total net revenue was also negatively impacted by changes in unearned revenue. In the six months endedJune 27, 2020 , we opened 34 new America's Best stores and oneEyeglass World store and closed six America's Best stores; we also transitioned five additional Legacy stores to our management. Overall, store count grew 5.1% fromJune 29, 2019 toJune 27, 2020 (51, one and five net new America's Best,Eyeglass World and Legacy stores, respectively, were added during the same period). 40 -------------------------------------------------------------------------------- Table of Contents Comparable store sales growth and Adjusted Comparable Store Sales Growth for the six months endedJune 27, 2020 were (23.0)% and (22.6)%, respectively. The decreases in comparable store sales growth and Adjusted Comparable Store Sales Growth were primarily driven by the temporary closure of our stores to the public in response to the COVID-19 pandemic. Net product sales comprised 82.6% and 83.2% of total net revenue for the six months endedJune 27, 2020 andJune 29, 2019 , respectively. Net product sales decreased$138.1 million , or 18.7%, in the six months endedJune 27, 2020 compared to the six months endedJune 29, 2019 , driven primarily by decreased eyeglass sales. Net sales of services and plans decreased$22.8 million , or 15.2%, primarily due to the temporary closure of stores to the public in response to the COVID-19 pandemic. Owned & Host segment net revenue. Net revenue decreased$126.7 million , or 18.5%, due to the temporary closure of our stores to the public in response to the COVID-19 pandemic. Legacy segment net revenue. Net revenue decreased$22.0 million , or 26.2%, due to the temporary closure of our stores to the public in response to the COVID-19 pandemic. Corporate/Other segment net revenue. Net revenue decreased$9.2 million , or 7.3%, driven by lower wholesale fulfillment, partially offset by growth in our online retail business. Net revenue reconciliations. The impact of reconciliations decreased net revenue by$3.1 million in the six months endedJune 27, 2020 compared to the six months endedJune 29, 2019 . Reconciliations include an increase in unearned revenue of$14.5 million for the six months endedJune 27, 2020 compared to a decrease in unearned revenue of$0.8 million for the six months endedJune 29, 2019 , and a decrease in deferred revenue of$6.4 million compared to an increase of$5.8 million , for the six months endedJune 27, 2020 andJune 29, 2019 , respectively. We believe that the increase in unearned revenue reflects the effects of our store closures that began onMarch 19, 2020 and continued through a portion of the second quarter of 2020, as customers were unable to make eyeglass purchases during the last seven to 10 days of the first quarter of 2020, but then returned to the stores once they had reopened and made purchases reflective of demand that was not met during the temporary closure period. Costs applicable to revenue Costs applicable to revenue of$359.3 million for the six months endedJune 27, 2020 decreased$55.1 million , or 13.3%, from$414.5 million for the six months endedJune 29, 2019 . As a percentage of net revenue, costs applicable to revenue increased from 46.5% for the six months endedJune 29, 2019 to 49.2% for the six months endedJune 27, 2020 . This increase as a percentage of net revenue was primarily driven by optometrist costs incurred during the temporary closure of our stores to the public in response to the COVID-19 pandemic as well as increased contact lens mix that was partially offset by higher eyeglass margin. Costs of products as a percentage of net product sales increased from 40.5% for the six months endedJune 29, 2019 to 42.2% for the six months endedJune 27, 2020 , driven primarily by increased contact lens mix that was partially offset by higher eyeglass margin. Owned & Host segment costs of products. Costs of products as a percentage of net product sales increased from 29.1% for the six months endedJune 29, 2019 to 29.8% for the six months endedJune 27, 2020 driven by increased contact lens mix that was partially offset by higher eyeglass margin. Legacy segment costs of products. Costs of products as a percentage of net product sales increased from 47.3% for the six months endedJune 29, 2019 to 50.4% for the six months endedJune 27, 2020 . The increase was primarily driven by increased contact lens mix and by a higher mix of non-managed care customer transactions. Decreases in managed care mix increase costs of products as a percentage of net product sales and have a corresponding positive impact on costs of services as a percentage of net sales of services and plans in our Legacy segment. Legacy segment managed care net product revenue is recorded in net product sales while revenue associated with servicing non-managed care customers is recorded in net sales of services and plans. Eyeglass and contact lens product costs for both managed care and non-managed care net revenue are recorded in costs of products. Costs of services and plans as a percentage of net sales of services and plans increased from 76.6% for the six months endedJune 29, 2019 to 82.8% for the six months endedJune 27, 2020 . The increase was primarily driven by optometrist costs incurred during the temporary closure of our stores to the public in response to the COVID-19 pandemic. 41 -------------------------------------------------------------------------------- Table of Contents Owned & Host segment costs of services and plans. Costs of services and plans as a percentage of net sales of services and plans increased from 80.0% for the six months endedJune 29, 2019 to 94.6% for the six months endedJune 27, 2020 . The increase was driven by optometrist and technician costs incurred during the temporary closure of our stores to the public in response to the COVID-19 pandemic. Legacy segment costs of services and plans. Costs of services and plans as a percentage of net sales of services and plans increased from 45.0% for the six months endedJune 29, 2019 to 52.7% for the six months endedJune 27, 2020 . The increase was primarily driven by optometrist costs incurred during the temporary closure of our stores to the public in response to the COVID-19 pandemic. Selling, general and administrative SG&A of$330.3 million for the six months endedJune 27, 2020 decreased$45.8 million , or 12.2%, from the six months endedJune 29, 2019 . As a percentage of net revenue, SG&A increased from 42.2% for the six months endedJune 29, 2019 to 45.3% for the six months endedJune 27, 2020 . The increase in SG&A as a percentage of net revenue was primarily due to store and corporate payroll and occupancy costs incurred during the temporary closure of our stores to the public in response to the COVID-19 pandemic, partially offset by lower advertising expense. SG&A for the six months endedJune 27, 2020 includes$3.1 million of incremental costs directly related to adapting the Company's operations during the COVID-19 pandemic; of these costs,$0.6 million were reflected as adjustments for the Company's presentation of non-GAAP measures below. Owned & Host SG&A. SG&A as a percentage of net revenue increased from 37.8% for the six months endedJune 29, 2019 to 39.6% for the six months endedJune 27, 2020 , driven primarily by store payroll and occupancy costs incurred during the temporary closure of our stores to the public in response to the COVID-19 pandemic, which were partially offset by reduced advertising expense. Legacy segment SG&A. SG&A as a percentage of net revenue increased from 33.5% for the six months endedJune 29, 2019 to 39.1% for the six months endedJune 27, 2020 primarily driven by store payroll costs incurred during the temporary closure of our stores to the public in response to the COVID-19 pandemic. Depreciation and amortization Depreciation and amortization expense of$46.7 million for the six months endedJune 27, 2020 increased$5.5 million , or 13.3%, from$41.2 million for the six months endedJune 29, 2019 primarily driven by new store openings and investments in new lab equipment. Our property and equipment balance, net, decreased$26.9 million , or 7.3%, during the six months endedJune 27, 2020 , reflective of$28.0 million in purchases of property and equipment,$1.3 million in new finance leases, less$43.0 million in depreciation expense, and$13.2 million in impairment expense and other adjustments. Asset Impairment We recognized$13.8 million for impairment primarily of tangible long-lived assets and ROU assets associated with our retail stores during the six months endedJune 27, 2020 compared to$3.9 million recognized during the six months endedJune 29, 2019 . The impairment charges were primarily related to our Owned & Host segment and were driven by lower than projected customer sales volume in certain stores, and were determined using entity-specific assumptions related to our anticipated use of store assets. We considered multiple factors including, but not limited to: forecasted scenarios related to store performance and likelihood that these scenarios would be ultimately realized; the historical performance of the stores before the temporary store closures in response to the COVID-19 pandemic; and the remaining useful lives of the assets. The asset impairment expense for the six months endedJune 27, 2020 also includes$1.1 million related to a write-off of certain software assets that were deemed to be obsolete. Asset impairment expenses were recognized in Corporate/Other. Interest expense, net Interest expense, net, of$23.0 million for the six months endedJune 27, 2020 increased$4.9 million , or 27.3%, from$18.0 million for the six months endedJune 29, 2019 . The increase was primarily driven by losses related to changes in fair value of derivatives due to ineffectiveness of$4.9 million and charges related to interest payments and amortization of debt discounts related to the 2025 Notes of$2.3 million that were partially offset by a reduction in our term loan and revolving credit facility utilization. Income tax provision 42 -------------------------------------------------------------------------------- Table of Contents Our income tax expense for the six months endedJune 27, 2020 reflected our statutory federal and state rate of 25.5%, offset by a discrete benefit of$3.0 million associated primarily with the exercise of stock options. In comparison, the income tax rate associated with the six months endedJune 29, 2019 reflected income tax expense at our statutory federal and state rate of 25.6% and was reduced by a$1.4 million income tax benefit resulting from stock option exercises. Non-GAAP Financial Measures EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Operating Income, Adjusted Operating Margin and Adjusted Diluted EPS We define EBITDA as net income (loss), plus interest expense, income tax provision (benefit) and depreciation and amortization. We define Adjusted EBITDA as net income (loss), plus interest expense, income tax provision (benefit) and depreciation and amortization, further adjusted to exclude stock compensation expense, asset impairment, litigation settlement, management realignment expenses, long-term incentive plan expenses, and other expenses. We define Adjusted EBITDA Margin as Adjusted EBITDA as a percentage of net revenue. We define Adjusted Operating Income as net income (loss), plus interest expense and income tax provision (benefit), further adjusted to exclude stock compensation expense, asset impairment, litigation settlement, management realignment expenses, long-term incentive plan expenses, amortization of acquisition intangibles, and other expenses. We define Adjusted Operating Margin as Adjusted Operating Income as a percentage of net revenue. We define Adjusted Diluted EPS as diluted earnings (loss) per share, adjusted for the per share impact of stock compensation expense, asset impairment, litigation settlement, management realignment expenses, long-term incentive plan expenses, amortization of acquisition intangibles, amortization of debt discount and deferred financing costs, losses (gains) on change in fair value of derivatives, other expenses, and tax benefit of stock option exercises, less the tax effect of these adjustments. In the first quarter of 2020, we introduced Adjusted Operating Income and Adjusted Operating Margin as measures of performance we will use in connection with Adjusted EBITDA, Adjusted EBITDA Margin and Adjusted Diluted EPS. Further, consistent with our presentation of Adjusted Operating Income, we no longer exclude new store pre-opening expenses and non-cash rent from our presentation of Adjusted EBITDA and Adjusted Diluted EPS. New store pre-opening expenses totaled$0.4 million and$1.1 million for the three months endedJune 27, 2020 andJune 29, 2019 , respectively;$1.3 million and$2.0 million for the six months endedJune 27, 2020 andJune 29, 2019 , respectively; and non-cash rent totaled$0.9 million and$0.7 million for the three months endedJune 27, 2020 andJune 29, 2019 , respectively; and$1.5 million and$1.8 million for the six months endedJune 27, 2020 andJune 29, 2019 , respectively. The presentation of Adjusted EBITDA and Adjusted Diluted EPS for the three and six months endedJune 29, 2019 has been recast to reflect these changes. See our Form 8-K filed with theSEC onFebruary 26, 2020 , which is incorporated herein by reference, for more information. EBITDA and the Company Non-GAAP Measures can vary substantially in size from one period to the next, and certain types of expenses are non-recurring in nature and consequently may not have been incurred in any of the periods presented below. EBITDA and the Company Non-GAAP Measures have been presented as supplemental measures of financial performance that are not required by, or presented in accordance withU.S. GAAP, because we believe they assist investors and analysts in comparing our operating performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. Management believes EBITDA and the Company Non-GAAP Measures are useful to investors in highlighting trends in our operating performance, while other measures can differ significantly depending on long-term strategic decisions regarding capital structure, the tax jurisdictions in which we operate and capital investments. We also use EBITDA and the Company Non-GAAP Measures to supplementU.S. GAAP measures of performance in the evaluation of the effectiveness of our business strategies, to make budgeting decisions, to establish discretionary annual incentive compensation and to compare our performance against that of other peer companies using similar measures. Management supplementsU.S. GAAP results with Non-GAAP financial measures to provide a more complete understanding of the factors and trends affecting the business thanU.S. GAAP results alone. 43 -------------------------------------------------------------------------------- Table of Contents EBITDA and the Company Non-GAAP Measures are not recognized terms underU.S. GAAP and should not be considered as an alternative to net income or income from operations as a measure of financial performance or cash flows provided by operating activities as a measure of liquidity, or any other performance measure derived in accordance withU.S. GAAP. Additionally, these measures are not intended to be a measure of free cash flow available for management's discretionary use as they do not consider certain cash requirements such as interest payments, tax payments and debt service requirements. EBITDA and the Company Non-GAAP Measures should not be construed to imply that our future results will be unaffected by unusual or non-recurring items. In evaluating EBITDA and the Company Non-GAAP Measures you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in this presentation. Our presentation of EBITDA and the Company Non-GAAP Measures should not be construed to imply that our future results will be unaffected by any such adjustments. Management compensates for these limitations by primarily relying on ourU.S. GAAP results in addition to using EBITDA and the Company Non-GAAP Measures. The presentations of these measures have limitations as analytical tools and should not be considered in isolation, or as a substitute for analysis of our results as reported underU.S. GAAP. Some of these limitations are: •they do not reflect costs or cash outlays for capital expenditures or contractual commitments; •they do not reflect changes in, or cash requirements for, our working capital needs; •EBITDA and Adjusted EBITDA do not reflect the interest expense, or the cash requirements necessary to service interest or principal payments, on our debt; •EBITDA and Adjusted EBITDA do not reflect period to period changes in taxes, income tax expense or the cash necessary to pay income taxes; •they do not reflect the impact of earnings or charges resulting from matters we consider not to be indicative of our ongoing operations; •although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect cash requirements for such replacements; and •other companies in our industry may calculate these measures differently than we do, limiting their usefulness as comparative measures. Because of these limitations, EBITDA and the Company Non-GAAP Measures should not be considered as measures of discretionary cash available to invest in business growth or to reduce indebtedness. The following table reconciles our Adjusted Operating Income and Adjusted Operating Margin to net income; and EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin and Adjusted Diluted EPS for the periods presented: Three Months Ended Six Months Ended June 29, In thousands June 27, 2020 June 29, 2019 June 27, 2020 2019 Net income (loss)$ (43,833) (16.9)%$ 10,257 2.4%$ (34,091) (4.7)%$ 27,686 3.1% Interest expense 15,502 6.0% 8,968 2.1% 22,957 3.1% 18,029 2.0% Income tax provision (benefit) (13,403) (5.2)% 2,477 0.6% (13,685) (1.9)% 8,387
0.9%
Stock compensation expense (a) 3,352 1.3% 1,741 0.4% 5,445 0.7% 4,717 0.5% Asset impairment (b) 2,411 0.9% 1,790 0.4% 13,766 1.9% 3,872 0.4% Litigation settlement (c) - -% - -% 4,395 0.6% - -% Management realignment expenses (d) - -% - -% - -% 2,155 0.2% Long-term incentive plan (e) - -% 781 0.2% - -% 722 0.1% Amortization of acquisition intangibles (f) 1,851 0.7% 1,851 0.4% 3,702 0.5% 3,702 0.4% Other (i) (307) (0.1)% 1,223 0.3% 1,149 0.2% 2,467 0.3% Adjusted Operating Income / Adjusted Operating Margin$ (34,427) (13.2)%$ 29,088 6.8%$ 3,638 0.5%$ 71,737 8.1%
Note: Percentages reflect line item as a percentage of net revenue, adjusted for rounding.
Some of the percentage totals in the table above do not foot due to rounding differences.
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Table of Contents
Three Months Ended Six Months Ended
June 29,
In thousands June 27, 2020 June 29, 2019 June 27, 2020 2019
Net income (loss) $ (43,833) (16.9) % $ 10,257 2.4 % $ (34,091) (4.7)% $ 27,686 3.1%
Interest expense 15,502 6.0 % 8,968 2.1 % 22,957 3.1% 18,029 2.0%Income tax provision (benefit) (13,403) (5.2) % 2,477
0.6 % (13,685) (1.9)% 8,387 0.9%
Depreciation and amortization 21,924 8.4 % 20,819
4.8 % 46,734 6.4% 41,234 4.6%
EBITDA (19,810) (7.6) % 42,521 9.9 % 21,915 3.0% 95,336 10.7%
Stock compensation expense (a) 3,352 1.3 % 1,741
0.4 % 5,445 0.7% 4,717 0.5%
Asset impairment (b) 2,411 0.9 % 1,790 0.4 % 13,766 1.9% 3,872 0.4%
Litigation settlement (c) - - % - - % 4,395 0.6% - -%
Management realignment expenses
(d) - - % - - % - -% 2,155 0.2%
Long-term incentive plan (e) - - % 781 0.2 % - -% 722 0.1%
Other (i) (307) (0.1) % 1,223 0.3 % 1,149 0.2% 2,467 0.3%
Adjusted EBITDA / Adjusted
EBITDA Margin $ (14,354) (5.5) % $ 48,056 11.2 % $ 46,670 6.4% $ 109,269 12.3%Note: Percentages reflect line item as a percentage of net revenue, adjusted for rounding. Some of the percentage totals in the table above do not foot due to rounding differences
Three Months Ended Six Months Ended
In thousands, except per share amounts
$ (0.55) $
0.13
0.04 0.02 0.07 0.06
Asset impairment (b) 0.03 0.02 0.17 0.05
Litigation settlement (c) - - 0.05 -
Management realignment expenses (d) - - - 0.03
Long-term incentive plan (e) - 0.01 - 0.01
Amortization of acquisition intangibles (f) 0.02 0.02 0.05 0.05
Amortization of debt discount and deferred
financing costs (g) 0.03 0.01 0.03 0.01
Losses (gains) on change in fair value of
derivatives (h) 0.06 - 0.06 -
Other (i) - 0.02 0.01 0.03
Tax benefit of stock option exercises (j) - (0.01) (0.04) (0.02)
Tax effect of total adjustments (k) (0.05) (0.02) (0.12) (0.06)
Adjusted Diluted EPS $ (0.41) $
0.18
Weighted average diluted shares outstanding 80,325 81,424 80,226 81,437
Note: Some of the totals in the table above do not foot due to rounding differences
(a)Non-cash charges related to stock-based compensation programs, which vary from period to period depending on the timing of awards and performance vesting conditions. (b)Reflects write-off of property, equipment and lease related assets on closed or underperforming stores for the three and six months endedJune 27, 2020 andJune 29, 2019 . (c)Expenses associated with settlement of litigation. See Note 9. "Commitments and Contingencies" for further details. (d)Expenses related to a non-recurring management realignment described in our Current Report on Form 8-K filed with theSEC onJanuary 10, 2019 . (e)Expenses pursuant to a long-term incentive plan for non-executive employees who were not participants in the management equity plan for fiscal year 2019. This plan was effective in 2014 following the acquisition of the Company by affiliates of KKR & Co. Inc. (the "KKR Acquisition"). (f)Amortization of the increase in carrying values of finite-lived intangible assets resulting from the application of purchase accounting to the KKR Acquisition. 45 -------------------------------------------------------------------------------- Table of Contents (g)Amortization of debt discount is associated with the amortization of the conversion feature related to the convertible note and amortization of deferred financing costs relate to the convertible notes, term loan and revolving credit facility borrowings. Amortization of debt discount and deferred financing costs in aggregate total$2.5 million and$0.5 million for the three months endedJune 27, 2020 andJune 29, 2019 , respectively, and$2.7 million and$0.9 million for the six months endedJune 27, 2020 andJune 29, 2019 , respectively. (h)Reflects$4.9 million of losses recognized in interest expense on change in fair value of de-designated hedges for the three and six months endedJune 27, 2020 . (i)Other adjustments include amounts that management believes are not representative of our operating performance (amounts in brackets represent reductions in Adjusted Operating Income, Adjusted Diluted EPS and Adjusted EBITDA), including our share of losses on equity method investments of$0.4 million for the three months endedJune 29, 2019 and$1.0 million for the six months endedJune 29, 2019 ; the amortization impact of adjustments related to the KKR Acquisition, (e.g., fair value of leasehold interests) of$0.1 million for each of the three months endedJune 27, 2020 andJune 29, 2019 , respectively and$0.2 million for each of the six months endedJune 27, 2020 andJune 29, 2019 , respectively; costs of severance and relocation of$0.2 million and$0.6 million for the three months endedJune 27, 2020 andJune 29, 2019 , respectively, and$0.5 million and$0.8 million for the six months endedJune 27, 2020 andJune 29, 2019 , respectively; excess payroll taxes related to stock option exercises of$0.1 million for the three months endedJune 29, 2019 , and$0.3 million and$0.1 million for the six months endedJune 27, 2020 andJune 29, 2019 , respectively; incremental costs directly related to adapting the Company's operations during the COVID-19 pandemic of$0.6 million for the six months endedJune 27, 2020 ; and other expenses and adjustments totaling$(0.7) million and$(31) thousand for the three months endedJune 27, 2020 andJune 29, 2019 , respectively, and$(0.5) million and$0.3 million for the six months endedJune 27, 2020 andJune 29, 2019 , respectively. (j)Tax benefit associated with accounting guidance requiring excess tax benefits related to stock option exercises to be recorded in earnings as discrete items in the reporting period in which they occur. (k)Represents the income tax effect of the total adjustments at our combined statutory federal and state income tax rates. Liquidity and Capital Resources As described in more detail below, onMay 5, 2020 , we entered into the Credit Agreement Amendment with the lenders under our credit facility in order to prevent the effects of the COVID-19 pandemic, including the temporary closure of our stores, from creating uncertainty relative to our ability to comply with certain financial covenants and allow the Company to focus on prudent management of the business over the quarters ahead. In addition, onMay 12, 2020 , we completed the issuance of the 2025 Notes and we used the net proceeds of this offering to repay a portion of the outstanding borrowings on our term loan and revolving credit facility. Our primary cash needs are for inventory, payroll, store rent, capital expenditures associated with new stores and updating existing stores, as well as information technology and infrastructure, including our corporate office, distribution centers, and laboratories. We continue to prioritize cash conservation and prudent use of cash, while safely conducting normal operations. The most significant components of our operating assets and liabilities are inventories, accounts receivable, prepaid expenses and other assets, accounts payable, deferred and unearned revenue and other payables and accrued expenses. We believe that cash on hand, cash expected to be generated from operations and the cash available through our revolving credit facility will be sufficient to fund our working capital requirements, liquidity obligations, anticipated capital expenditures, and payments due under our existing credit facilities for at least the next 12 months. The Company is continuing to evaluate additional operational and financial measures that it may elect to take as it continues to respond to the impact of COVID-19 on its business. There can be no assurance whether or when any such measures will be adopted. As ofJune 27, 2020 , we had$256.3 million in cash and cash equivalents and$294.3 million of availability under our revolving credit facility, which includes$5.7 million in outstanding letters of credit. We purchased$25.8 million in capital items in the six months endedJune 27, 2020 . Approximately 80% of our capital spend is related to our expected growth (i.e., new stores, optometric equipment, additional capacity in our optical laboratories and distribution centers, and our IT infrastructure, including omni-channel platform related investments). Our working capital requirements for inventory will increase as we continue to open additional stores. We primarily fund our working capital needs using cash provided by operations. 46
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The following table summarizes cash flows provided by (used for) operating
activities, investing activities and financing activities for the periods
indicated:
Six Months Ended
In thousands June 27, 2020 June 29, 2019
Cash flows provided by (used for):
Operating activities $ 71,420 $ 119,279
Investing activities (25,531) (51,788)
Financing activities 171,437 (1,624)
Net increase in cash, cash equivalents and restricted cash
Net Cash Provided by Operating Activities Cash flows provided by operating activities decreased$47.9 million from$119.3 million during the six months endedJune 29, 2019 to$71.4 million for the six months endedJune 27, 2020 . The decrease in cash provided by operating activities consisted of a decrease in net income of$61.8 million and a decrease of non-cash expense items of$1.9 million driven by decreases in deferred income tax expense of$21.9 million and credit loss expense of$3.4 million offset by increases in non-cash expense items including depreciation and amortization of$5.5 million , asset impairment charges of$9.9 million , losses recognized for the changes in the fair values of derivatives of$4.9 million and amortization of loan costs of$1.8 million . Changes in net working capital and other assets and liabilities contributed$15.8 million in cash compared to the six months endedJune 29, 2019 . Increases in accounts payable during the six months endedJune 27, 2020 contributed$8.2 million in year-over-year cash, primarily due to timing of payments. Increases in other liabilities during the six months endedJune 27, 2020 contributed$33.1 million in year-over-year cash, which was driven by a$15.2 million increase in year-over-year cash due to timing of unearned revenue during the six months endedJune 27, 2020 , as well as increases in miscellaneous vendor accruals of$6.1 million as a result of timing of payments, increases in reserves for settlements of$4.4 million due to legal proceedings, and increases of$4.2 million due to lease concessions and deferrals. Offsetting these items was a$3.8 million reduction in year-over-year cash related to increases in accounts receivable balances, primarily due to the$10.8 million receivable recorded as a result of the employee retention credits made available under the CARES Act for US employees during the six months endedJune 27, 2020 , and was partially offset by an$8.6 million increase in year-over-year cash due to declines in receivables as a result of lower second quarter sales. Decreases in deferred revenue used$12.1 million in year-over-year cash driven by declines in our eye care club membership and purchase protection plan sales. Increases in inventory used$1.5 million in year-over-year cash, due to timing of forward buys and store closures. Increases in other assets used$7.9 million in year-over-year cash driven by smaller decreases in prepaid advertising and rent-related items during the six months endedJune 27, 2020 when compared with the six months endedJune 29, 2019 .Net Cash Used for Investing Activities Net cash used for investing activities decreased by$26.3 million , to$25.5 million , during the six months endedJune 27, 2020 from$51.8 million during the six months endedJune 29, 2019 . The decrease was primarily due to timing of new store capital investments. Net Cash Provided By (Used For) Financing Activities Net cash provided by (used for) financing activities increased$173.1 million , from$1.6 million use of cash during the six months endedJune 29, 2019 to$171.4 million provision of cash during the six months endedJune 27, 2020 . The increase in cash provided by financing activities was primarily related to proceeds of$548.8 million from the issuance of the 2025 Notes and borrowings on our revolving credit facility, partially offset by principal payments on long-term debt of$369.3 million , including repayments on our revolving credit facility of$294.3 million during the six months endedJune 27, 2020 . Term Loan and Revolving Credit Facility As ofJune 27, 2020 , we had$317.4 million of first lien term loan outstanding under our credit agreement. As ofJune 27, 2020 , we also had$294.3 million of availability under our$300.0 million Revolving Credit Facility which includes$5.7 million in outstanding letters of credit. 47 -------------------------------------------------------------------------------- Table of Contents The interest rate payable on the first lien term loan is based on either LIBOR or an alternative borrowing rate plus an additional margin that varies dependent on NVI's consolidated first lien leverage ratio. The first lien term loan will amortize in quarterly installments equal to 2.50% per annum in the first three years of the loan and 5.00% per annum thereafter. As a result of the$75.0 million pay down of the term loan and the$25.0 million principal prepayment in 2019; we have no additional mandatory principal payments on the term loan until maturity onJuly 18, 2024 . In addition, under our credit agreement we must maintain certain covenants based on our financial results. Our credit agreement also contains covenants that, among other things, limit NVI's ability to incur additional debt, create liens against assets, make acquisitions, pay dividends or distributions on its stock, merge or consolidate with another entity and transfer or sell assets. As ofJune 27, 2020 , we were in compliance with all of our debt covenants under our credit agreement.May 2020 Amendment to Credit Agreement OnMay 5, 2020 , we entered into the Credit Agreement Amendment with the lenders under our credit facility in order to amend certain provisions of the credit agreement. As set forth in greater detail below, the principal purpose of the Credit Agreement Amendment was to suspend certain financial maintenance covenants contained in the credit agreement until testing at the end of the second fiscal quarter of 2021. Capitalized terms used but not defined herein shall have the meanings assigned to such terms in the credit agreement and Amendment, as applicable. Pursuant to the Credit Agreement Amendment, the financial covenants relating to maintenance of a maximum Consolidated Total Debt to Consolidated EBITDA Ratio and a minimum Consolidated Interest Coverage Ratio are suspended until testing at the end of the second fiscal quarter of 2021. From and after such time, such covenants will be reinstated on a modified basis so that, subject to certain exceptions and limitations as described in the Credit Agreement Amendment, (i) with respect to the second and third fiscal quarters of 2021, the Consolidated Total Debt to Consolidated EBITDA Ratio shall not exceed 4.50 to 1.00 and, with respect to the fourth fiscal quarter of fiscal 2021 and thereafter, the Consolidated Total Debt to Consolidated EBITDA Ratio shall not exceed 4.00 to 1.00, in each case with NVI being able to elect to annualize certain quarterly periods so that quarterly performance from fiscal 2020 is excluded and (ii) with respect to the second fiscal quarter of 2021 and thereafter, the Consolidated Interest Coverage Ratio shall not be less than 3.00 to 1.00. In lieu of such financial covenants, pursuant to the Amendment NVI has agreed during the suspension period, (i) not to have Consolidated EBITDA for any six fiscal quarter period be less than$0 , with the second fiscal quarter of 2020 permitted to be excluded in certain circumstances, and (ii) to have a minimum level of liquidity (defined as cash and cash equivalents plus the unused portion of the revolving credit facility) equal to the lesser of (x)$100,000,000 and (y)$40,000,000 plus the amount of any net proceeds from capital markets financings during such period in excess of$75,000,000 . In addition, the Credit Agreement Amendment was amended pursuant to the Amendment to, among other things, (i) limit the flexibility of NVI and Holdings with respect to certain transactions during the covenant suspension period, including the ability to declare or pay dividends, incur debt and make investments and dispositions, (ii) require prepayments of the term loans under certain circumstances during the covenant suspension period from the net proceeds from debt or equity capital markets transactions by the Company (with the amount of the term loans to be paid down equal to$75 million from the first$400 million of capital raised and 50% of any proceeds above such amount) and (iii) restrict NVI's ability to borrow under the revolving credit facility if unrestricted cash and cash equivalents exceeds$50 million (and, in the event of any such excess, to require a mandatory prepayment of such amount). Also pursuant to the Amendment, the margins upon which interest is calculated for the term loans were amended to a range of 1.75% to 2.75% (for LIBOR Loans) and 0.75% to 1.75% (for ABR Loans), in each case based on NVI's Consolidated First Lien Secured Debt to Consolidated EBITDA Ratio at such time, with such margins subject to an increase of 50 basis points in the event that either (i) the Company has not raised at least$135 million in additional proceeds from certain capital markets transactions within 30 days of the date of the Credit Agreement Amendment or (ii) Consolidated EBITDA for the most recently ended four quarters is less than$0 . 48 -------------------------------------------------------------------------------- Table of Contents 2025 Notes InMay 2020 , we completed the issuance of the 2025 Notes. The 2025 Notes were sold only to persons reasonably believed to be qualified institutional buyers in reliance on Rule 144A under the Securities Act of 1933, as amended (the "Securities Act"). The 2025 Notes will pay interest semi-annually in arrears onMay 15 andNovember 15 of each year, commencing onNovember 15, 2020 , at an annual rate of 2.50% and will be convertible into cash, shares of common stock or a combination of cash and shares of common stock, at our election, based on the applicable conversion rate at such time. The 2025 Notes have a maturity date ofMay 15, 2025 . Refer to Note 4. "Long-term Debt" for more information. We received proceeds from the offering of$390.9 million , net of$11.6 million in underwriter fees and other issuance costs. Future cash requirements and sources of cash The Company's capital allocation strategy, priorities and investments are reviewed by the Company's Board of Directors considering both liquidity and severity of impacts to the business resulting from COVID-19. Primary sources of cash The Company's primary source of cash to execute its growth strategy is its operating cash flows, used to fund operations throughout the fiscal year and to support future growth. The Company continues to operate in this period of COVID-19 uncertainty with a healthy liquidity position and remains focused on taking immediate, aggressive and prudent actions, including reevaluating all expenditures, to enhance the Company's ability to meet the business' short-term liquidity needs, in order to best position the business for its key stakeholders, including the Company's associates, customers and shareholders. Primary uses of cash The Company's current capital allocation strategy is to prioritize navigating the near-term challenges that COVID-19 presents and continuing to fund operating activities. In response to COVID-19, the Company is taking immediate, aggressive and prudent actions, including reevaluating all expenditures, to enhance the Company's ability to meet the business' short-term liquidity needs and has reduced the pace of new store openings in fiscal year 2020. As a result, over the next twelve months, the Company expects its primary cash requirements to be towards funding operating activities, including the acquisition of inventory, and obligations related to compensation, leases and any lease modifications it may exercise, taxes and other operating activities. The Company also evaluates opportunities for investments in line with our key initiatives that position the business for sustainable long-term growth. These improvements may include opening new stores, improving store experiences or investments in its omni-channel initiatives or other technology opportunities. In addition, the Company evaluates store closures, including options to terminate store leases early at certain underperforming locations. Historically, the Company has utilized free cash flow generated from operations to fund any discretionary capital expenditures, which have been prioritized towards new store openings, as well as digital and omni-channel investments, information technology, and other projects. When appropriate, the Company may utilize excess liquidity, towards debt service requirements, including voluntary debt prepayments, or required interest and principal payments, if any, based on excess cash flows. Off-balance Sheet Arrangements We followU.S. GAAP in making the determination as to whether or not to record an asset or liability related to our arrangements with third parties. Consistent with current accounting guidance, we do not record an asset or liability associated with long-term purchase, marketing and promotional commitments, or commitments to philanthropic endeavors. We have disclosed the amount of future commitments associated with these items in our fiscal year 2019 annual consolidated financial statements filed on the Form 10-K. We were not a party to any other off-balance sheet arrangements. Contractual Obligations As a result of the$75 million prepayment of debt principal this quarter, the Company does not owe principal payments on its term loan until 2024. There were no other material changes outside the ordinary course of business in our contractual obligations and commercial commitments from those reported as ofDecember 28, 2019 in the 2019 Annual Report on Form 10-K, except for the 2025 Notes issued in the second quarter of 2020 and due onMay 15, 2025 . 49 -------------------------------------------------------------------------------- Table of Contents Critical Accounting Policies and Estimates Management has evaluated the accounting policies used in the preparation of the Company's unaudited condensed consolidated financial statements and related notes and believes those policies to be reasonable and appropriate. Certain of these accounting policies require the application of significant judgment by management in selecting appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. These judgments are based on historical experience, trends in the industry, information provided by customers and information available from other outside sources, as appropriate. The most significant areas involving management judgments and estimates may be found in the 2019 Annual Report on Form 10-K, in the "Critical Accounting Policies and Estimates" section of "Management's Discussion and Analysis of Financial Condition and Results of Operations." There have been no material changes to our critical accounting policies as compared to the critical accounting policies described in the 2019 Annual Report on Form 10-K, except for the adoption of Accounting Standards Update ("ASU") No. 2016-13, Measurement of Credit Losses on Financial Instruments, and ASU No. 2018-15, Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. These changes are discussed in Note 1. "Description of Business and Basis of Presentation" of our unaudited condensed consolidated financial statements included in Part I. Item 1. of this Form 10-Q. Adoption of New Accounting Pronouncements The information set forth in Note 1. "Description of Business and Basis of Presentation" to our unaudited condensed consolidated financial statements under Part I. Item 1. under the heading "Adoption of New Accounting Pronouncements" of this Form 10-Q is incorporated herein by reference. 50
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