NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS
GNC Holdings, Inc., a Delaware corporation (“Holdings,” and collectively with its subsidiaries and, unless the context requires otherwise, its and their respective predecessors, the “Company”), is a global health and wellness brand with a diversified, multi-channel business. The Company's assortment of performance and nutritional supplements, vitamins, herbs and greens, health and beauty, food and drink and other general merchandise features innovative private-label products as well as nationally recognized third-party brands, many of which are exclusive to GNC.
The Company is vertically integrated as its operations consist of purchasing raw materials, formulating and manufacturing products and selling the finished products through its
three
reportable segments, which effective in the second quarter of 2016 include U.S. and Canada, International, and Manufacturing / Wholesale (refer to Note 18, "Segments" for more information). Corporate retail store operations are located in the United States, Canada, Puerto Rico, China and Ireland. In addition, the Company offers products on the internet through GNC.com, third-party websites, and prior to the sale of its assets on September 30, 2017, LuckyVitamin.com (see Note 6, "Goodwill and Intangible Assets" for more information.) Franchise locations exist in the United States and approximately
50
other countries. The Company operates its primary manufacturing facility in South Carolina and operates distribution centers in Arizona, Indiana, Pennsylvania and South Carolina. The Company manufactures approximately half of its branded products and merchandises various third-party products. In February 2019, the Company contributed the net assets of its Nutra manufacturing and Anderson facility in the formation of a joint venture with International Vitamin Corporation (refer to Note 20, "Subsequent Events" for more information.) Additionally, the Company licenses the use of its trademarks and trade names.
The processing, formulation, packaging, labeling and advertising of the Company's products are subject to regulation by various federal agencies, including the Food and Drug Administration, the Federal Trade Commission, the Consumer Product Safety Commission, the United States Department of Agriculture and the Environmental Protection Agency. These activities are also regulated by various agencies of the states and localities in which the Company's products are sold.
NOTE 2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying Consolidated Financial Statements and Footnotes have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America ("GAAP") and with the instructions to Annual Report on Form 10-K and Regulation S-X. The Company's annual reporting period is based on a calendar year.
Summary of Significant Accounting Policies
Principles of Consolidation.
The Consolidated Financial Statements include the accounts of Holdings and all of its subsidiaries. All intercompany transactions have been eliminated in consolidation.
Use of Estimates.
The preparation of financial statements in conformity with GAAP requires management to make estimates that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management bases these estimates on assumptions that it believes to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
Cash and Cash Equivalents.
The Company considers cash and cash equivalents to include all cash and liquid deposits and investments with an original maturity of three months or less. Payments due from banks for third-party credit and debit cards generally process within
24
to
72
hours, and are classified as cash equivalents.
Receivables, net.
The Company extends credit terms for sales of product to its franchisees, wholesale partners and contract manufacturing customers. Receivables consist principally of unpaid invoices for product sales, franchisee royalties and sublease payments. The Company also has notes receivables with certain of its franchisees that were $
3.5 million
and $
6.8 million
at December 31,
2018
and
2017
, respectively, and are primarily recorded within other long-term assets on the Consolidated Balance Sheets. As of the first quarter of 2016, the Company discontinued offering franchisees loans. Franchisees secure financing from lending institutions, which include but are not limited to the small business administration and national banks with franchise programs. These loans generally require the Company to subordinate its first lien position on inventory and furniture and fixtures at predetermined amounts.
GNC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company monitors the financial condition of its customers and establishes an allowance for doubtful accounts for balances estimated to be uncollectible. In addition to considering the aging of receivable balances and assessing the financial condition, the Company considers collateral including inventory and fixed assets for domestic franchisees and letters of credit for international franchisees. The allowance for doubtful accounts was
$6.6 million
and
$3.9 million
at December 31,
2018
and
2017
, respectively.
Inventory.
Inventory components consist of raw materials, work-in-process, finished product and packaging supplies. Inventories are stated at the lower of cost or net realizable value on a first in/first out basis ("FIFO"). Inventory includes costs associated with distribution and transportation, as well as manufacturing overhead, which are capitalized and expensed as merchandise is sold. Inventory is recorded net of obsolescence, shrinkage and vendor allowances for product costs. The Company regularly reviews its inventory levels in order to identify slow moving and short dated products, using factors such as amount of inventory on hand, remaining shelf life, current and expected market conditions, historical trends and the likelihood of recovering the inventory costs based on anticipated demand.
Property, Plant and Equipment.
Property, plant and equipment expenditures are recorded at cost. Depreciation and amortization are recognized using the straight-line method over the estimated useful life of the assets. The estimated useful lives are as follows:
|
|
|
Building
|
30 yrs
|
Machinery and equipment
|
3-7 yrs
|
Building and leasehold improvements
|
3-15 yrs
|
Furniture and fixtures
|
5-8 yrs
|
Software
|
3-5 yrs
|
Building improvements are depreciated over their estimated useful life or the remaining useful life of the related building, whichever period is shorter. Improvements to leased premises are depreciated over the estimated useful life of the improvements or the related leases including renewals that are reasonably assured, whichever period is shorter. Expenditures that materially increase the value or clearly extend the useful life of property, plant and equipment are capitalized while repair and maintenance costs incurred in the normal course of operations are expensed as incurred.
Goodwill and Indefinite-Lived Intangible Asset.
The Company was acquired by Ares Corporate Opportunities Fund II L.P. and Ontario Teachers’ Pension Plan Board in March 2007 and subsequently completed an initial public offering in 2011 of its common stock. In connection with this acquisition, the Company recorded approximately $
600 million
of goodwill and a $
720 million
indefinite-lived intangible asset related to its brand name.
Goodwill is allocated to the Company's reporting units, which are at or below the level of an operating segment as defined by Accounting Standards Codification ("ASC") 280 "Segment Reporting." The Company formally evaluates the carrying amount of goodwill for each of its reporting units in the fourth quarter. In addition, the Company performs an evaluation on an interim basis if it determines that recent events or prevailing conditions indicate a potential impairment of goodwill. A significant amount of judgment is involved in determining whether an indicator of impairment has occurred between annual impairment tests. These indicators include, but are not limited to, overall financial performance such as adverse changes in recent forecasts of operating results, industry and market considerations, a sustained decrease in the share price of the Company's common stock, updated business plans and regulatory and legal developments.
When the carrying value of a reporting unit exceeds its fair value, an impairment charge is recorded for the difference as an operating expense in the period incurred. During the year ended December 31, 2018,
no
goodwill impairment was recorded.
The Company's indefinite-lived intangible brand asset is also evaluated annually in the fourth quarter for impairment and on an interim basis if events or changes in circumstances between annual tests indicate that the asset might be impaired. If the carrying value of the intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to the difference. Refer to Note 6, "Goodwill and Intangible Assets" for a description of impairment charges recorded.
Impairment of Definite-Long-lived Assets.
The Company evaluates whether the carrying values of property, plant and equipment and definite-lived intangible assets have been impaired whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable based on estimated undiscounted future cash flows. Factors that may trigger an impairment review include significant changes in the intended use of assets, significant negative industry or economic trends, underperforming
GNC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
stores and anticipated store closings. If it is determined that the carrying value of the applicable asset group is not recoverable, an impairment loss is recognized for the amount the carrying value of the long-lived asset exceeds its estimated fair value. Refer to Note 7, "Property, Plant and Equipment, Net" for a description of impairment charges recorded.
Revenue Recognition.
Within the U.S. and Canada segment, retail sales in company-owned stores are recognized at the point of sale, net of sales tax. Revenue related to e-commerce sales is recognized upon shipment based on meeting the transfer of control criteria. The Company has made a policy election to treat shipping and handling as costs to fulfill the contract, and as a result, any fees from customers are included in the transaction price allocated to the performance obligation of providing goods with a corresponding amount accrued within cost of sales for amounts paid to applicable carriers. Taxes collected from customers relating to product sales and remitted to governmental authorities are excluded from revenue. A provision for anticipated returns is recorded through a reduction of sales and cost of sales (for product that can be resold or returned to vendors) in the period that the related sales are recorded.
Revenue is deferred on sales of the Company's Gold Cards and subsequently recognized over the one year membership period. The Gold Card Member Pricing program which provided members product discounts was discontinued in all domestic company-owned and franchise stores on December 28, 2016 in connection with the introduction of the One New GNC program. As a part of this launch, the Company provided former Gold Card customers that were within the membership period of generally one year with a coupon equivalent to a reimbursement of the unexpired portion of their Gold Card membership fee. As of December 31, 2016, the Company had $
24.4 million
of deferred Gold Card revenue which was recognized in the first quarter of 2017 over the coupon redemption period which expired in March 2017, net of
$1.4 million
of applicable redemptions.
Effective with the launch of the One New GNC program on December 29, 2016, the Company introduced myGNC Rewards, a free points-based loyalty program system-wide in the U.S. The program enables customers to earn points based on their purchases. Points earned by members are valid for
one
year and may be redeemed for cash discounts on any product the Company sells at both company-owned or franchise locations. The Company defers the estimated standalone selling price of points related to this program as a reduction to revenue as points are earned by allocating a portion of the transaction price the customer pays to a loyalty program liability within deferred revenue and other current liabilities on the Consolidated Balance Sheet. The estimated selling price of each point is based on the estimated value of product for which the point is expected to be redeemed, net of points not expected to be redeemed, based on historical redemption. When a customer redeems earned points, revenue is recognized with a corresponding reduction to the program liability.
Also effective with the launch of the One New GNC program, the Company introduced a paid membership program, PRO Access, for $
39.99
per year, which provides members with the delivery of sample boxes throughout the membership year, as well as the offering of certain other benefits including the opportunity to earn triple points on a periodic basis. The boxes include sample merchandise and other materials. The Company allocates the transaction price of the membership to the sample boxes and other benefits based on the estimated stand-alone prices. The membership price paid is recorded within deferred revenue and other current liabilities on the Consolidated Balance Sheet and subsequently recognized revenue as the underlying performance obligations are satisfied.
Revenue from gift cards is recognized when the gift card is redeemed. Gift cards do not have expiration dates and are not required to be escheated to government authorities. Utilizing historical redemption rates, the Company recognizes revenue for amounts not expected to be redeemed proportionately as other gift card balances are redeemed.
Revenues from domestic and international franchisees include wholesale product sales, franchise fees and royalties, as well as cooperative advertising and other franchise support fees specific to domestic franchisees. Revenues are recorded within the U.S. and Canada segment for domestic franchisees and the International segment for international franchisees. The Company's franchisees purchase a significant amount of the products they sell in their retail stores from the Company at wholesale prices. Revenue on product sales to franchisees and other franchise support fees (including construction, equipment and other administrative fees) are recognized upon transfer of control to the franchisee, net of estimated returns and allowances. Franchise license fees, royalties and continuing services, such as cooperative advertising, are not separate and distinct performance obligations as they are highly dependent on each other in supporting the overall brand. Franchise fees for the license are paid in advance, and are deferred and recognized over the applicable license term as the Company satisfies the performance obligation of granting the customer access to the rights of its intellectual property. Franchise royalties and cooperative advertising contributions are variable consideration based on a percentage of the franchisees' retail sales, which are recognized in the period the franchisees' underlying sales occur, and are not included in the upfront transaction price for the overall performance obligation relating to providing access to the Company's intellectual property.
GNC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Manufacturing / Wholesale segment sells product to the Company's other segments, which is eliminated in consolidation, and third-party customers. Revenue is recognized over time, net of estimated returns and allowances, as manufacturing occurs if the customized goods have no alternative use (specially made for the end customer) and the Company has an enforceable right to payment for performance completed to date (even if such right is not enforced in practice). The selection of the method to measure progress towards completion requires judgment and is based on the nature of the products or services to be provided. The Company uses the cost-to-cost measure of progress for its contracts because it best depicts the transfer of control to the customer which occurs as the Company incurs costs on its contracts. Under the cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. Revenues, including estimated fees or profits, are recorded proportionally as costs are incurred. Costs to fulfill include labor, materials, other direct costs and an allocation of indirect costs, which are recognized as cost of sales as revenue is recognized. Services for specialty manufacturing contracts typically have an expected duration of less than one year.
Refer to "Adoption of New Revenue Recognition Standard" below for the impact of ASU 2014-09 on the Company effective in the first quarter of 2018.
Cost of Sales.
The Company purchases products directly from third-party vendors and manufactures its own products. Cost of sales includes product costs, vendor allowances, inventory obsolescence, shrinkage, manufacturing overhead, warehousing, distribution, shipping and store occupancy costs. Store occupancy costs include rent, common area maintenance charges, real estate and other asset-based taxes, general maintenance, utilities, depreciation, lease incentives and certain insurance expenses.
Vendor Allowances.
The Company receives allowances/credits from various vendors based on either sales or purchase volumes, right of return for expired product and non-saleable customer returns, and cooperative advertising. As the right of offset exists under these arrangements, credit earned under these arrangements are recorded as a reduction in the vendors' accounts payable balances on the Consolidated Balance Sheet and represent the estimated amounts due to the Company under the provisions of such contracts. Amounts expected to be received from vendors relating to the purchase of merchandise inventories are recognized as a reduction to cost of sales as the merchandise is sold. Amounts that represent a reimbursement of costs incurred, such as advertising, are recorded as a reduction to the related expense in the period that the expense is incurred. The Company recorded a reduction to cost of sales of $
74.0 million
,
$86.7 million
and
$94.9 million
for the years ended December 31,
2018
,
2017
and
2016
, respectively, for vendor allowances associated with the purchase and sale of merchandise.
Research and Development.
Research and development costs arising from internally generated projects are expensed as incurred. The Company recognized approximately
$7 million
to
$10 million
in each of the years ended December 31,
2018
,
2017
and
2016
, respectively, relating to research and development.
Advertising Expenditures.
The Company recognizes the costs of advertising, promotion and marketing programs the first time the communication takes place. The Company recognized advertising expense of
$95.6 million
,
$104.5 million
and
$89.8 million
for the years ended December 31,
2018
,
2017
and
2016
, respectively.
Leases.
The Company has various operating leases for company-owned and franchise store locations, distribution centers, and equipment generally with an initial term of
five
years, which may include renewal options for varying terms thereafter. Leases for franchise store locations are subleased to franchisees. The Company is the primary lessee for the majority of the franchise store locations and makes rental payments to the landlord directly, and then bills the franchisee for reimbursement. The Company records rental income received from franchisees as revenue. If a franchisee defaults on its sublease, the Company has in the past converted any such franchise store into a company-owned store and fulfilled the remaining lease obligation.
Leases generally include amounts relating to base rent, percent rent and other charges such as common area maintenance and real estate taxes. Periodically, the Company receives varying amounts of reimbursements from landlords to compensate the Company for costs incurred in the construction of stores. These reimbursements are recorded as deferred rent within other long-term liabilities on the Consolidated Balance Sheet and are amortized as a reduction to rent expense over the life of the related lease. The expenditures made by the Company are recorded as an increase to leasehold improvements within property, plant and equipment, net. Many of the Company’s lease agreements contain escalation clauses under which, if fixed and determinable, rent expense and rent income is recognized on a straight-line basis over the lives of the leases, including renewal periods that are reasonably assured. Certain of the Company's leases also contain clauses for rent to be paid as a percentage of sales, which are based on a percentage of retail sales or a percentage of retail sales in excess of stipulated amounts (contingent rent). Contingent rent is recorded as rent expense when attainment of the target is considered probable and is recognized in proportion to the retail sales contributing to the achievement of the target.
GNC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Contingencies.
The Company records accruals for outstanding legal matters when it believes it is probable that a loss will be incurred and the amount of such loss can be reasonably estimated. The Company evaluates, on a quarterly basis, developments in legal matters that could affect the amount of any accrual and developments that would make a loss contingency both probable and reasonably estimable. If both of the conditions above are not met, disclosure is made when there is at least a reasonable possibility that a loss contingency has been incurred. As facts concerning contingencies evolve and become known, management reassesses the likelihood of a probable loss and makes appropriate adjustments to its financial statements.
Pre-Opening Expenditures.
The Company recognizes the cost associated with the opening of new stores, which consist primarily of rent, marketing, payroll and recruiting costs, as incurred.
Income Taxes
.
The Company accounts for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities result from (i) the future tax impact of temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and (ii) differences between the recorded value of assets acquired in business combinations accounted for as purchases for financial reporting purposes and their corresponding tax bases. Deferred income tax assets are reduced by a valuation allowance if it is more likely than not that some portion of the deferred income tax asset will not be realized.
The Company recognizes the tax benefit from an uncertain tax position only if it is at least more likely than not that the tax position will be sustained upon examination by the taxing authorities based on the technical merits of the position. The amount of the tax benefit that is recognized is measured as the largest amount of benefit that is more likely than not to be realized upon effective settlement. The Company classifies interest and penalties accrued in connection with unrecognized tax benefits as income tax expense in its Consolidated Statements of Operations.
Refer to Note 5, "Income Taxes," for more information.
Self-Insurance.
The Company is self-insured for certain losses related to workers' compensation and general liability insurance and maintains stop-loss coverage with third-party insurers to limit its liability exposure. Liabilities associated with these losses are estimated by considering historical claims experience, estimated lag time to report and pay claims, average cost per claim and other actuarial factors.
Stock-Based Compensation.
The Company utilizes the Black-Scholes model to calculate the fair value of time-based stock option awards. The Company utilizes a Monte Carlo simulation for its performance awards with a market condition, which requires various inputs and assumptions, including the Company's own stock price. The grant-date fair value of all other stock-based compensation, including time-based and performance-based restricted stock awards, is based on the closing price for a share of the Company's common stock on the New York Stock Exchange (the "NYSE") on the grant date.
Compensation expense for time-based stock options and restricted stock awards is recognized over the applicable vesting period, net of expected forfeitures. Compensation expense for performance-based shares with a market condition is recognized over the applicable vesting period, net of expected forfeitures, regardless of whether the market condition is achieved. Compensation expense related to the performance-based units is recognized over the applicable vesting period, net of expected forfeitures, and adjusted as necessary to reflect changes in the probability that the vesting criteria will be achieved. The Company regularly reviews the probability of achieving the performance condition on these awards.
Refer to Note 16, "Stock-Based Compensation" for more information.
Earnings Per Share.
Basic earnings per share ("EPS") is computed by dividing net income, net of cumulative undeclared dividends, by the weighted average number of shares of common stock outstanding for the period. The Company uses the treasury stock method to compute diluted EPS for its stock-based compensation to the extent that awards with performance and market conditions are probable of being achieved and stock options are in-the-money, which assumes that outstanding stock awards were converted into common stock, and the resulting proceeds (which includes unrecognized compensation expense for all awards and the exercise price associated with stock options) were used to acquire shares of common stock at the average market price during the reporting period. The Company applies the if-converted method to calculate dilution impact of the convertible debt and the convertible preferred stock. Refer to Note 15, "Earnings Per Share" for information on the Company's underlying shares of its convertible debt and convertible preferred stock in the computation of EPS.
Foreign Currency.
For all active foreign operations, the functional currency is generally the local currency. Assets and liabilities of foreign operations are translated into the Company's reporting currency, the U.S. dollar, using period-end exchange rates, while income and expenses are translated using the average exchange rates for the reporting period. Translation gains and
GNC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
losses are recorded as part of accumulated other comprehensive loss on the Consolidated Balance Sheet. The Company has intercompany balances with its foreign entities that are routinely settled primarily relating to product sales and management fees. Gains or losses resulting from these foreign currency transactions, included in the Consolidated Statements of Operations, were not material in the fiscal years ended December 31,
2018
,
2017
and
2016
.
Recently Adopted Accounting Pronouncements
In December 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2017-12, which simplifies the application of certain hedge accounting guidance to better align hedge accounting with an organization’s risk management activities in the financial statements. This standard eliminated the separate measurement and reporting of hedge ineffectiveness. Mismatches between changes in value of the hedged item and hedging instrument may still occur but they will no longer be separately reported. For cash flow and net investment hedges, all changes in value of the hedging instrument included in the assessment of effectiveness will be deferred in other comprehensive income and recognized in earnings at the same time that the hedged item affects earnings. The standard is effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2018. Early adoption is permitted. The Company adopted this standard during the second quarter of fiscal 2018, which was applied to the interest rate swaps entered into described below in Note 8 "Long-Term Debt / Interest Expense." The adoption of this standard did not have a material effect on the Company's Consolidated Financial Statements.
In May 2017, the FASB issued ASU 2017-09, which amends the scope of modification accounting for share-based payment arrangements. This standard states that an entity should account for the effects of a modification unless all of the following are met: 1) the fair value of the modified award is the same as the fair value of the original award immediately before the original award is modified (if the modification does not affect any of the inputs to the valuation technique that the entity uses to value the award, the entity is not required to estimate the value immediately before and after the modification); 2) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; and 3) the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. The standard is effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. The Company adopted this standard during the first quarter of fiscal 2018 which did not have an impact on the Company's Consolidated Financial Statements.
In August 2016, the FASB issued ASU 2016-15, which addresses changes to the classification of certain cash receipts and cash payments within the statement of cash flows in order to address diversity in practice. In connection with the adoption of this ASU, the Company presented the third-party fees relating to the term loan refinancing as an operating cash flow on the Consolidated Statement of Cash Flows. In November 2016, the FASB issued ASU 2016-18, which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash and restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The adoption of ASU 2016-18 did not have an impact to the Consolidated Statement of Cash Flows. Both standards were effective for annual reporting periods, and interim periods therein, beginning after December 15, 2017.
Adoption of New Revenue Recognition Standard
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which updates revenue recognition guidance relating to contracts with customers. This standard states that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This standard is effective for annual reporting periods, and interim periods therein, beginning after December 15, 2017. The Company adopted ASU 2014-09 and its related amendments (collectively known as "ASC 606") during the first quarter of fiscal 2018 using the full retrospective method.
The adoption of ASC 606 does not impact recognition of point-of-sale revenue in company-owned stores, most wholesale sales, royalties and sublease revenue, together which account for approximately
90%
of the Company’s revenue. The new standard has no impact on the timing or classification of the Company’s cash flows as reported in the Consolidated Statement of Cash Flows and is not expected to have a significant impact on the Company’s Consolidated Statement of Operations in future periods. The Company recorded a reduction to retained earnings, net of tax, at January 1, 2016 (opening balance) and December 31, 2016 of approximately
$23 million
primarily relating to an increase in deferred franchise fees. Below is a description of the changes that resulted from the new standard.
GNC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Franchise fees.
The Company's previous accounting policy for franchise and license fees received for new store openings and renewals was to recognize these fees when earned per the contract terms, which is when a new store opened or at the start of a new term. In accordance with the new guidance, these fees are now deferred and recognized over the applicable license term as the Company satisfies the performance obligation of granting the customer access to the rights of the Company’s intellectual property. This change impacted all of the Company’s reportable segments. In addition, franchise fees received as part of a sale of a company-owned store to a franchisee are now recorded as described above as part of revenue and will no longer be presented as part of gains on refranchising.
Cooperative advertising and other franchise support fees.
The Company previously classified advertising and other franchise support fees received from domestic franchisees as a reduction to selling, general and administrative expense and cost of sales on the Consolidated Statement of Operations. In accordance with the new guidance, these fees are now required to be classified as revenue within the U.S. and Canada segment. The new standard does not impact the timing of recognition of this income or the Consolidated Balance Sheet.
Specialty manufacturing.
The Company previously recognized revenue for products manufactured and sold to customers at a point in time when risk of loss, title and insurable risks have transferred to the customer, net of estimated returns and allowances. Under the new standard, revenue is required to be recognized over time as manufacturing occurs if the customized goods have no alternative use to the manufacturer, and the manufacturer has an enforceable right to payment for performance completed to date. This change impacts contract manufacturing sales to third-parties recorded in the Manufacturing / Wholesale segment. The Company is now recording a reduction to inventory as applicable custom manufacturing services are completed with a corresponding contract asset including the applicable markup, recorded within prepaid and other current assets on the Consolidated Balance Sheet.
E-commerce revenues.
The Company previously recorded revenue to its e-commerce customers upon delivery. Under the new guidance, the Company is now recognizing revenue upon shipment based on meeting the transfer of control criteria. The Company has made a policy election to treat shipping and handling as costs to fulfill the contract, and as a result, any fees received from customers are included in the transaction price allocated to the performance obligation of providing goods with a corresponding amount accrued within cost of sales for amounts paid to applicable carriers. The Company has not revised prior period balances for e-commerce revenues because the changes are not material.
Loyalty.
Effective with the launch of the One New GNC program on December 29, 2016, the Company introduced a free points-based myGNC Rewards loyalty program system-wide in the U.S. The Company has not revised prior period balances for e-commerce revenues because the changes are not material.
Refer to Note 3 "Revenue" for additional information relating to the impact of adopting ASC 606.
Revisions to Prior Periods
As a result of adopting ASC 606 on January 1, 2018, the Company has revised its comparative financial statements for the years ended December 31, 2017 and 2016, and applicable interim periods within those years, as if ASC 606 had been effective for those periods. Additionally, the cumulative effect of applying the new guidance to all contracts with customers that were not completed was recorded as an adjustment to retained earnings as of January 1, 2016.
The impact of the adoption of ASC 606 on the Company's Consolidated Balance Sheet as of December 31, 2017 was as follows:
GNC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
As Previously Reported
|
|
Franchise Fees
|
Specialty Manufacturing
|
Total Adjustments
|
|
As Revised
|
|
(in thousands)
|
Inventory
|
$
|
506,858
|
|
|
$
|
—
|
|
$
|
(21,126
|
)
|
$
|
(21,126
|
)
|
|
$
|
485,732
|
|
Prepaid and other current assets
|
42,320
|
|
|
—
|
|
24,328
|
|
24,328
|
|
|
66,648
|
|
Total current assets
|
739,829
|
|
|
—
|
|
3,202
|
|
3,202
|
|
|
743,031
|
|
Total assets
|
$
|
1,516,561
|
|
|
$
|
—
|
|
$
|
3,202
|
|
$
|
3,202
|
|
|
$
|
1,519,763
|
|
|
|
|
|
|
|
|
|
Deferred revenue and other current liabilities
|
$
|
108,672
|
|
|
$
|
5,409
|
|
$
|
—
|
|
$
|
5,409
|
|
|
$
|
114,081
|
|
Total current liabilities
|
261,690
|
|
|
5,409
|
|
—
|
|
5,409
|
|
|
267,099
|
|
Deferred income taxes
|
64,121
|
|
|
(8,868
|
)
|
807
|
|
(8,061
|
)
|
|
56,060
|
|
Other long-term liabilities
|
55,721
|
|
|
29,781
|
|
—
|
|
29,781
|
|
|
85,502
|
|
Total long-term liabilities
|
1,416,865
|
|
|
20,913
|
|
807
|
|
21,720
|
|
|
1,438,585
|
|
Total liabilities
|
1,678,555
|
|
|
26,322
|
|
807
|
|
27,129
|
|
|
1,705,684
|
|
Retained earnings
|
567,741
|
|
|
(26,322
|
)
|
2,395
|
|
(23,927
|
)
|
|
543,814
|
|
Total stockholders' deficit
|
(161,994
|
)
|
|
(26,322
|
)
|
2,395
|
|
(23,927
|
)
|
|
(185,921
|
)
|
Total liabilities and stockholders' deficit
|
$
|
1,516,561
|
|
|
$
|
—
|
|
$
|
3,202
|
|
$
|
3,202
|
|
|
$
|
1,519,763
|
|
The impact of the adoption of ASC 606 on the Consolidated Statements of Operations for the year ended December 31, 2017 and 2016 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2017
|
|
As Previously Reported
|
|
Franchise Fees
|
Specialty Manufacturing
|
Cooperative Advertising and Other Franchise Support Fees
|
Total Adjustments
|
|
As Revised
|
|
(in thousands, except per share amounts)
|
Revenue
|
$
|
2,453,038
|
|
|
$
|
3,469
|
|
$
|
1,031
|
|
$
|
23,424
|
|
$
|
27,924
|
|
|
$
|
2,480,962
|
|
Cost of sales
(1)
|
1,652,991
|
|
|
—
|
|
833
|
|
2,716
|
|
3,549
|
|
|
1,656,540
|
|
Gross profit
|
800,047
|
|
|
3,469
|
|
198
|
|
20,708
|
|
24,375
|
|
|
824,422
|
|
SG&A
(2)
|
603,561
|
|
|
—
|
|
—
|
|
20,708
|
|
20,708
|
|
|
624,269
|
|
Gains on refranchising
|
(384
|
)
|
|
70
|
|
—
|
|
—
|
|
70
|
|
|
(314
|
)
|
Long-lived asset impairments
|
457,794
|
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
457,794
|
|
Other income, net
|
(511
|
)
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
(511
|
)
|
Operating loss
|
(260,413
|
)
|
|
3,399
|
|
198
|
|
—
|
|
3,597
|
|
|
(256,816
|
)
|
Interest expense, net
|
64,221
|
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
64,221
|
|
Gain on convertible debt and debt refinancing costs
|
(10,996
|
)
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
(10,996
|
)
|
Loss before income taxes
|
(313,638
|
)
|
|
3,399
|
|
198
|
|
—
|
|
3,597
|
|
|
(310,041
|
)
|
Income tax benefit
(3)
|
(164,787
|
)
|
|
5,307
|
|
(299
|
)
|
—
|
|
5,008
|
|
|
(159,779
|
)
|
Net loss
|
$
|
(148,851
|
)
|
|
$
|
(1,908
|
)
|
$
|
497
|
|
$
|
—
|
|
$
|
(1,411
|
)
|
|
$
|
(150,262
|
)
|
Loss per share:
|
|
|
|
|
|
|
|
|
Basic
|
$
|
(2.16
|
)
|
|
$
|
(0.03
|
)
|
$
|
0.01
|
|
$
|
—
|
|
$
|
(0.02
|
)
|
|
$
|
(2.18
|
)
|
Diluted
|
$
|
(2.16
|
)
|
|
$
|
(0.03
|
)
|
$
|
0.01
|
|
$
|
—
|
|
$
|
(0.02
|
)
|
|
$
|
(2.18
|
)
|
GNC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2016
|
|
As Previously Reported
|
|
Franchise Fees
|
Specialty Manufacturing
|
Cooperative Advertising and Other Franchise Support Fees
|
Total Adjustments
|
|
As Revised
|
|
(in thousands, except per share amounts)
|
Revenue
|
$
|
2,540,016
|
|
|
$
|
4,557
|
|
$
|
917
|
|
$
|
24,517
|
|
$
|
29,991
|
|
|
$
|
2,570,007
|
|
Cost of sales
(1)
|
1,679,897
|
|
|
—
|
|
774
|
|
2,745
|
|
3,519
|
|
|
1,683,416
|
|
Gross profit
|
860,119
|
|
|
4,557
|
|
143
|
|
21,772
|
|
26,472
|
|
|
886,591
|
|
SG&A
(2)
|
575,218
|
|
|
—
|
|
—
|
|
21,772
|
|
21,772
|
|
|
596,990
|
|
Gains on refranchising
|
(19,112
|
)
|
|
3,070
|
|
—
|
|
—
|
|
3,070
|
|
|
(16,042
|
)
|
Long-lived asset impairments
|
476,553
|
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
476,553
|
|
Other income, net
|
407
|
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
407
|
|
Operating loss
|
(172,947
|
)
|
|
1,487
|
|
143
|
|
—
|
|
1,630
|
|
|
(171,317
|
)
|
Interest expense, net
|
60,443
|
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
60,443
|
|
Loss before income taxes
|
(233,390
|
)
|
|
1,487
|
|
143
|
|
—
|
|
1,630
|
|
|
(231,760
|
)
|
Income tax benefit
|
52,860
|
|
|
546
|
|
53
|
|
—
|
|
599
|
|
|
53,459
|
|
Net loss
|
$
|
(286,250
|
)
|
|
$
|
941
|
|
$
|
90
|
|
$
|
—
|
|
$
|
1,031
|
|
|
$
|
(285,219
|
)
|
Loss per share:
|
|
|
|
|
|
|
|
|
Basic
|
$
|
(4.12
|
)
|
|
$
|
0.01
|
|
$
|
—
|
|
$
|
—
|
|
$
|
0.01
|
|
|
$
|
(4.11
|
)
|
Diluted
|
$
|
(4.12
|
)
|
|
$
|
0.01
|
|
$
|
—
|
|
$
|
—
|
|
$
|
0.01
|
|
|
$
|
(4.11
|
)
|
(1) Includes warehousing, distribution and occupancy.
(2) Defined as selling, general and administrative expense.
(3) Adjustments include
$3.7 million
non-cash tax expense related to the remeasurement of the applicable net deferred tax assets in connection with the 2017 Tax Act.
GNC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The impact of adoption of ASC 606 on the Company's reportable segments was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2017
|
|
As Previously Reported
|
|
Franchise Fees
|
Specialty Manufacturing
|
Cooperative Advertising and Other Franchise Support Fees
|
Total Adjustments
|
|
As Revised
|
|
(in thousands)
|
Revenue:
|
|
|
|
|
|
|
|
|
|
U.S. and Canada
|
$
|
1,993,444
|
|
|
$
|
2,063
|
|
$
|
—
|
|
$
|
23,424
|
|
$
|
25,487
|
|
|
$
|
2,018,931
|
|
International
|
177,359
|
|
|
419
|
|
—
|
|
—
|
|
419
|
|
|
177,778
|
|
Manufacturing / Wholesale:
|
|
|
|
|
|
|
|
|
Intersegment revenues
|
231,495
|
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
231,495
|
|
Third party
|
216,053
|
|
|
987
|
|
1,031
|
|
—
|
|
2,018
|
|
|
218,071
|
|
Subtotal Manufacturing / Wholesale
|
447,548
|
|
|
987
|
|
1,031
|
|
—
|
|
2,018
|
|
|
449,566
|
|
Total reportable segment revenues
|
2,618,351
|
|
|
3,469
|
|
1,031
|
|
23,424
|
|
27,924
|
|
|
2,646,275
|
|
Other
|
66,182
|
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
66,182
|
|
Elimination of intersegment revenues
|
(231,495
|
)
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
(231,495
|
)
|
Total revenue
|
$
|
2,453,038
|
|
|
$
|
3,469
|
|
$
|
1,031
|
|
$
|
23,424
|
|
$
|
27,924
|
|
|
$
|
2,480,962
|
|
Operating loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. and Canada
|
$
|
(246,097
|
)
|
|
$
|
1,993
|
|
$
|
—
|
|
$
|
—
|
|
$
|
1,993
|
|
|
$
|
(244,104
|
)
|
International
|
60,568
|
|
|
419
|
|
—
|
|
—
|
|
419
|
|
|
60,987
|
|
Manufacturing / Wholesale
|
47,990
|
|
|
987
|
|
198
|
|
—
|
|
1,185
|
|
|
49,175
|
|
Total reportable segment operating loss
|
(137,539
|
)
|
|
3,399
|
|
198
|
|
—
|
|
3,597
|
|
|
(133,942
|
)
|
Corporate costs
|
(102,114
|
)
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
(102,114
|
)
|
Other
|
(20,760
|
)
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
(20,760
|
)
|
Unallocated corporate and other
|
(122,874
|
)
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
(122,874
|
)
|
Total operating loss
|
$
|
(260,413
|
)
|
|
$
|
3,399
|
|
$
|
198
|
|
$
|
—
|
|
$
|
3,597
|
|
|
$
|
(256,816
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2016
|
|
As Previously Reported
|
|
Franchise Fees
|
Specialty Manufacturing
|
Cooperative Advertising and Other Franchise Support Fees
|
Total Adjustments
|
|
As Revised
|
|
(in thousands)
|
Revenue:
|
|
|
|
|
|
|
|
|
|
U.S. and Canada
|
$
|
2,058,011
|
|
|
$
|
924
|
|
$
|
—
|
|
$
|
24,517
|
|
$
|
25,441
|
|
|
$
|
2,083,452
|
|
International
|
160,691
|
|
|
1,627
|
|
—
|
|
—
|
|
1,627
|
|
|
162,318
|
|
Manufacturing / Wholesale:
|
|
|
|
|
|
|
|
|
Intersegment revenues
|
218,761
|
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
218,761
|
|
Third party
|
235,678
|
|
|
2,006
|
|
917
|
|
—
|
|
2,923
|
|
|
238,601
|
|
Subtotal Manufacturing / Wholesale
|
454,439
|
|
|
2,006
|
|
917
|
|
—
|
|
2,923
|
|
|
457,362
|
|
Total reportable segment revenues
|
2,673,141
|
|
|
4,557
|
|
917
|
|
24,517
|
|
29,991
|
|
|
2,703,132
|
|
Other
|
85,636
|
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
85,636
|
|
Elimination of intersegment revenues
|
(218,761
|
)
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
(218,761
|
)
|
Total revenue
|
$
|
2,540,016
|
|
|
$
|
4,557
|
|
$
|
917
|
|
$
|
24,517
|
|
$
|
29,991
|
|
|
$
|
2,570,007
|
|
Operating loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. and Canada
|
$
|
(104,943
|
)
|
|
$
|
(2,146
|
)
|
$
|
—
|
|
$
|
—
|
|
$
|
(2,146
|
)
|
|
$
|
(107,089
|
)
|
International
|
55,404
|
|
|
1,627
|
|
—
|
|
—
|
|
1,627
|
|
|
57,031
|
|
Manufacturing / Wholesale
|
(19,961
|
)
|
|
2,006
|
|
143
|
|
—
|
|
2,149
|
|
|
(17,812
|
)
|
Total reportable segment operating loss
|
(69,500
|
)
|
|
1,487
|
|
143
|
|
—
|
|
1,630
|
|
|
(67,870
|
)
|
Corporate costs
|
(103,362
|
)
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
(103,362
|
)
|
Other
|
(85
|
)
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
(85
|
)
|
Unallocated corporate and other
|
(103,447
|
)
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
(103,447
|
)
|
Total operating loss
|
$
|
(172,947
|
)
|
|
$
|
1,487
|
|
$
|
143
|
|
$
|
—
|
|
$
|
1,630
|
|
|
$
|
(171,317
|
)
|
GNC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Recently Issued Accounting Pronouncements
In August 2018, the FASB issued ASU 2018-15, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-used software. This standard is effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the adoption of the new standard to have a material impact on its Consolidated Financial Statements.
In February 2016, the FASB issued ASU 2016-02, which requires lessees to recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments for all leases with a term greater than 12 months. This standard is effective for annual reporting periods, and interim periods therein, beginning after December 15, 2018 and is required to be applied using a modified retrospective approach. In July 2018, the FASB issued ASU 2018-11, which provides companies with the option to apply the new lease standard either at the beginning of the earliest comparative period presented or in the period of adoption. The Company will elect this optional transition relief amendment that allows for a cumulative-effect adjustment in the period of adoption and will not restate prior periods. The Company is not yet complete with determining all elements associated with the new lease standard; however the Company has completed scoping of its lease portfolio and has developed accounting policies and policy elections for the adoption of the new lease standard. In addition, the Company has implemented a new lease management and accounting software and is updating its processes and internal controls to comply with the new standard. The Company has a significant number of leases, and as a result, expects to recognize a lease liability of approximately
$525 million
to
$575 million
. A right-of use asset will be recognized based on the lease liability, adjusted for the reclassification of certain balance sheet amounts such as deferred rent and prepaid rent. Additionally, the Company expects to recognize approximately
$70
million to
$90 million
of right-of-use asset impairment charges for certain of the Company's stores which was previously determined that the carrying value of the applicable stores' assets were not recoverable. The right-of-use asset impairment charges will be recorded as a reduction to January 1, 2019 (opening day) retained earnings and are expected to have a significant impact on rent expense recognized in the Consolidated Statements of Operations in future periods. The new lease standard will have no impact of the timing or classification of the Company's cash flows as reported in the Consolidated Statement of Cash Flows.
GNC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 3. REVENUE
Revenue is recognized when obligations under the terms of a contract with the customer are satisfied; generally, this occurs with the transfer of control of products or services. The Company satisfies performance obligations either over time or at a point in time as discussed in further detail below. Revenue is measured as the amount of consideration expected to be received in exchange for transferring goods or providing services. Applicable sales tax collected concurrent with revenue-producing activities are excluded from revenue.
U.S. and Canada Revenue
The following is a summary of revenue disaggregated by major source in the U.S. and Canada segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
U.S. company-owned product sales:
(1)
|
(in thousands)
|
Protein
|
$
|
320,751
|
|
|
$
|
338,773
|
|
|
$
|
369,150
|
|
Performance supplements
|
280,835
|
|
|
281,532
|
|
|
254,753
|
|
Weight management
|
128,723
|
|
|
140,148
|
|
|
154,195
|
|
Vitamins
|
195,853
|
|
|
203,569
|
|
|
218,908
|
|
Herbs / Greens
|
66,025
|
|
|
66,324
|
|
|
63,356
|
|
Wellness
|
191,995
|
|
|
196,942
|
|
|
200,914
|
|
Health / Beauty
|
181,185
|
|
|
190,977
|
|
|
164,510
|
|
Food / Drink
|
109,094
|
|
|
94,390
|
|
|
105,134
|
|
General merchandise
|
24,019
|
|
|
28,931
|
|
|
28,786
|
|
Total U.S. company-owned product sales
|
$
|
1,498,480
|
|
|
$
|
1,541,586
|
|
|
$
|
1,559,706
|
|
Wholesale sales to franchisees
|
225,106
|
|
|
242,521
|
|
|
250,779
|
|
Royalties and franchise fees
|
32,733
|
|
|
35,212
|
|
|
35,393
|
|
Sublease income
|
45,506
|
|
|
48,972
|
|
|
47,555
|
|
Cooperative advertising and other franchise support fees
|
20,815
|
|
|
23,424
|
|
|
24,517
|
|
Gold Card revenue recognized in U.S.
(2)
|
—
|
|
|
24,399
|
|
|
62,211
|
|
Other
(3)
|
128,580
|
|
|
102,817
|
|
|
103,291
|
|
Total U.S. and Canada revenue
|
$
|
1,951,220
|
|
|
$
|
2,018,931
|
|
|
$
|
2,083,452
|
|
|
|
(1)
|
Includes GNC.com sales.
|
|
|
(2)
|
The Gold Card Member Pricing program in the U.S. was discontinued in December 2016 in connection with the launch of the One New GNC program which resulted in
$24.4 million
of deferred Gold Card revenue being recognized in the first quarter of 2017, net of
$1.4 million
in applicable coupon redemptions.
|
|
|
(3)
|
Includes revenue primarily related to Canada operations and loyalty programs, myGNC Rewards and PRO Access. The increase compared with prior years primarily relates to the Company's loyalty programs.
|
GNC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
International Revenue
The following is a summary of the revenue disaggregated by major source in the International reportable segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
|
(in thousands)
|
Wholesale sales to franchisees
|
$
|
107,627
|
|
|
$
|
104,384
|
|
|
$
|
104,405
|
|
Royalties and franchise fees
|
26,503
|
|
|
26,609
|
|
|
27,112
|
|
Other
(*)
|
57,279
|
|
|
46,785
|
|
|
30,801
|
|
Total International revenue
|
$
|
191,409
|
|
|
$
|
177,778
|
|
|
$
|
162,318
|
|
(*) Includes revenue primarily related to China operations and company-owned stores located in Ireland.
Manufacturing / Wholesale Revenue
The following is a summary of the revenue disaggregated by major source in the Manufacturing / Wholesale reportable segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
|
(in thousands)
|
Third-party contract manufacturing
|
$
|
123,322
|
|
|
$
|
128,914
|
|
|
$
|
135,459
|
|
Intersegment sales
|
264,211
|
|
|
231,495
|
|
|
218,761
|
|
Wholesale partner sales
|
87,572
|
|
|
89,157
|
|
|
103,142
|
|
Total Manufacturing / Wholesale revenue
|
$
|
475,105
|
|
|
$
|
449,566
|
|
|
$
|
457,362
|
|
Revenue by Geography
The following is a summary of the revenue by geography:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Total revenues by geographic areas
(1)
:
|
(in thousands)
|
United States
|
$
|
2,205,669
|
|
|
$
|
2,332,880
|
|
|
$
|
2,431,013
|
|
Foreign
|
147,854
|
|
|
148,082
|
|
|
138,994
|
|
Total revenues
(2)
|
$
|
2,353,523
|
|
|
$
|
2,480,962
|
|
|
$
|
2,570,007
|
|
(1) Geographic areas are defined based on legal entity jurisdiction.
(2) Prior year revenue includes revenue from Lucky Vitamin, which was sold on September 30, 2017.
Balances from Contracts with Customers
Contract assets represent amounts related to the Company's contractual right to consideration for completed performance obligations not yet invoiced. The Company's contract assets for specialty manufacturing are recorded within prepaid and other current assets on the Consolidated Balance Sheets (with a corresponding reduction to inventory at cost), and were
$25.5 million
and
$24.3 million
at December 31, 2018 and December 31, 2017, respectively,
Contract liabilities include payments received in advance of performance under the contract. The Company's PRO Access and loyalty program points are recorded within deferred revenue and other current liabilities on the Consolidated Balance Sheets. Deferred franchise and license fees are recorded within deferred revenue and other current liabilities and other long-term liabilities on the Consolidated Balance Sheets.
GNC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table presents changes in the Company’s contract liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2018
|
|
Balance at beginning of period
|
|
Recognition of revenue included in beginning balance
|
|
Contract liability, net of revenue, recognized during the period
|
|
Balance at end of period
|
|
(in thousands)
|
Deferred franchise and license fees
|
$
|
38,011
|
|
|
$
|
(7,745
|
)
|
|
$
|
3,198
|
|
|
$
|
33,464
|
|
PRO Access and loyalty program points
|
24,464
|
|
|
(24,464
|
)
|
|
24,836
|
|
|
24,836
|
|
Gift card liability
(*)
|
4,172
|
|
|
(2,562
|
)
|
|
1,806
|
|
|
3,416
|
|
(*) Net of estimated breakage
As of December 31, 2018, the Company had deferred franchise and license fees with unsatisfied performance obligations extending throughout 2028 of
$33.5 million
, of which
$7.3 million
is expected to be recognized over the next 12 months. The Company has elected to use the practical expedient allowed under the rules of adoption to not disclose the duration of the remaining unsatisfied performance obligations for contracts with an original expected length of one year or less.
NOTE 4. INVENTORY
The net realizable value of inventory consisted of the following:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2018
|
|
2017
*
|
|
(in thousands)
|
Finished product ready for sale
|
$
|
416,113
|
|
|
$
|
432,092
|
|
Work-in-process, bulk product and raw materials
|
46,520
|
|
|
51,225
|
|
Packaging supplies
|
2,939
|
|
|
2,415
|
|
Inventory
|
$
|
465,572
|
|
|
$
|
485,732
|
|
(*) The balances as of December 31, 2017 have been revised in connection with the adoption of ASC 606 to include a reduction to inventory as applicable custom manufacturing services are completed. Refer to Note 2, "Basis of Presentation and summary of significant accounting policies" for more information.
NOTE 5. INCOME TAXES
Income (loss) before income taxes consisted of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
|
(in thousands)
|
Domestic
|
$
|
38,918
|
|
|
$
|
(298,351
|
)
|
|
$
|
(210,465
|
)
|
Foreign
|
18,557
|
|
|
(11,690
|
)
|
|
(21,295
|
)
|
Income (loss) before income taxes
|
$
|
57,475
|
|
|
$
|
(310,041
|
)
|
|
$
|
(231,760
|
)
|
GNC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Income tax (benefit) expense consisted of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
|
(in thousands)
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
$
|
277
|
|
|
$
|
23,965
|
|
|
$
|
67,326
|
|
State
|
4,646
|
|
|
4,458
|
|
|
9,928
|
|
Foreign
|
6,037
|
|
|
3,376
|
|
|
6,632
|
|
Total current income tax expense
|
10,960
|
|
|
31,799
|
|
|
83,886
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
(11,069
|
)
|
|
(177,272
|
)
|
|
(31,827
|
)
|
State
|
(11,284
|
)
|
|
(13,710
|
)
|
|
(1,081
|
)
|
Foreign
|
(912
|
)
|
|
(596
|
)
|
|
2,481
|
|
Total deferred income tax benefit
|
(23,265
|
)
|
|
(191,578
|
)
|
|
(30,427
|
)
|
Total income tax (benefit) expense
|
$
|
(12,305
|
)
|
|
$
|
(159,779
|
)
|
|
$
|
53,459
|
|
Income tax (benefit) expense reflected in the accompanying Consolidated Statements of Operations varies from the amounts that would have been provided by applying the United States federal statutory income tax rate of 21% to income (loss) before income taxes as shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
|
(in thousands)
|
U.S. federal statutory income tax
|
$
|
12,070
|
|
|
$
|
(108,532
|
)
|
|
$
|
(81,116
|
)
|
Increase (reduction) resulting from:
|
|
|
|
|
|
State income tax, net of federal tax benefit
|
(6,057
|
)
|
|
(6,615
|
)
|
|
6,345
|
|
Nondeductible goodwill
|
—
|
|
|
6,219
|
|
|
132,800
|
|
Brand name impairment
|
—
|
|
|
50,957
|
|
|
—
|
|
Exchange of convertible senior notes
|
—
|
|
|
(9,526
|
)
|
|
—
|
|
Gain on forward contracts for the issuance of convertible preferred stock
|
(18,678
|
)
|
|
—
|
|
|
—
|
|
Other permanent differences
|
4,712
|
|
|
2,513
|
|
|
633
|
|
International operations, net of foreign tax credits
|
(1,437
|
)
|
|
(1,087
|
)
|
|
3,454
|
|
Federal tax credits and income deductions
|
(2,013
|
)
|
|
(2,698
|
)
|
|
(6,030
|
)
|
Tax impact of uncertain tax positions and other
|
2,682
|
|
|
(4,224
|
)
|
|
(2,627
|
)
|
Impact of 2017 Tax Act
|
(3,584
|
)
|
|
(86,786
|
)
|
|
—
|
|
Income tax (benefit) expense
|
$
|
(12,305
|
)
|
|
$
|
(159,779
|
)
|
|
$
|
53,459
|
|
On December 22, 2017, tax reform legislation known as The Tax Cuts and Jobs Act of 2017 (“2017 Tax Act”) was enacted. The 2017 Tax Act made significant changes to the Internal Revenue Code.
During the year ended December 31, 2018, the Company finalized estimates of income tax impacts of the 2017 Tax Act based upon the regulations and other relevant guidance issued through December 31, 2018. The Company's 2018 income tax provision includes a discrete tax benefit of
$3.6 million
relating to the finalization of the remeasurement of its deferred tax assets and liabilities upon filing of the Company's 2017 federal income tax return.
During the year ended December 31, 2017, upon enactment of the 2017 Tax Act, the Company recorded a non-cash income tax benefit of
$86.8 million
, related to the remeasurement of its deferred tax assets and liabilities to reflect the effects of these temporary differences at enacted tax rates expected to be in effect when taxes are actually paid or recovered.
GNC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Deferred tax assets and liabilities consisted of the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
Assets
|
|
Liabilities
|
|
Net
|
|
Assets
|
|
Liabilities
|
|
Net
|
|
(in thousands)
|
Deferred tax assets (liabilities):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating reserves
|
$
|
5,787
|
|
|
$
|
—
|
|
|
$
|
5,787
|
|
|
$
|
6,213
|
|
|
$
|
—
|
|
|
$
|
6,213
|
|
Deferred revenue
|
9,118
|
|
|
—
|
|
|
9,118
|
|
|
9,958
|
|
|
—
|
|
|
9,958
|
|
Prepaid expenses
|
—
|
|
|
(3,820
|
)
|
|
(3,820
|
)
|
|
—
|
|
|
(3,873
|
)
|
|
(3,873
|
)
|
Intangible assets
|
—
|
|
|
(100,709
|
)
|
|
(100,709
|
)
|
|
—
|
|
|
(102,602
|
)
|
|
(102,602
|
)
|
Fixed assets
|
12,632
|
|
|
—
|
|
|
12,632
|
|
|
15,420
|
|
|
—
|
|
|
15,420
|
|
Stock-based compensation
|
3,479
|
|
|
—
|
|
|
3,479
|
|
|
4,586
|
|
|
—
|
|
|
4,586
|
|
Net operating loss and credit carryforwards
|
35,243
|
|
|
—
|
|
|
35,243
|
|
|
28,244
|
|
|
—
|
|
|
28,244
|
|
Long-term rent liabilities
|
6,842
|
|
|
—
|
|
|
6,842
|
|
|
6,946
|
|
|
—
|
|
|
6,946
|
|
Convertible senior notes
|
—
|
|
|
(3,616
|
)
|
|
(3,616
|
)
|
|
—
|
|
|
(5,755
|
)
|
|
(5,755
|
)
|
Interest limitation
|
20,073
|
|
|
—
|
|
|
20,073
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Valuation allowance
|
(20,025
|
)
|
|
—
|
|
|
(20,025
|
)
|
|
(17,478
|
)
|
|
—
|
|
|
(17,478
|
)
|
Other
|
3,938
|
|
|
—
|
|
|
3,938
|
|
|
4,018
|
|
|
—
|
|
|
4,018
|
|
Total net deferred taxes
|
$
|
77,087
|
|
|
$
|
(108,145
|
)
|
|
$
|
(31,058
|
)
|
|
$
|
57,907
|
|
|
$
|
(112,230
|
)
|
|
$
|
(54,323
|
)
|
At December 31,
2018
and
2017
, the Company had deferred tax assets relating to foreign and state NOLs with lives ranging from
5
to
20
years. As of December 31,
2018
and
2017
, a valuation allowance was provided for certain NOLs, as the Company currently believes that these NOLs may not be realizable prior to their expiration. In 2018, the Company increased its valuation allowance by
$2.5 million
for additional NOLs generated in jurisdictions for which a valuation allowance was historically recorded. During 2017, the Company reduced its valuation allowance by
$3.8 million
.
The Company does not have any material undistributed earnings of international subsidiaries at December 31,
2018
as these subsidiaries are considered to be branches for United States tax purposes, to have incurred cumulative NOLs, or to have only minimal undistributed earnings.
GNC Holdings, Inc. files a consolidated federal tax return and various consolidated and separate tax returns as prescribed by the tax laws of the state, local and international jurisdictions in which it and its subsidiaries operate. The statutes of limitation for the Company’s U.S. federal income tax returns are closed for years through 2013. The Company has various state and local jurisdiction tax years open to possible examination (the earliest open period is generally 2011), and the Company also has certain state and local tax filings currently under audit.
A reconciliation of the beginning and ending amount of unrecognized tax benefits, excluding penalties and interest, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2018
|
|
2017
|
|
2016
|
|
(in thousands)
|
Balance of unrecognized tax benefits at beginning of period
|
$
|
5,774
|
|
|
$
|
6,456
|
|
|
$
|
7,282
|
|
Additions for tax positions taken during current period
|
882
|
|
|
748
|
|
|
289
|
|
Additions for tax positions taken during prior periods
|
715
|
|
|
192
|
|
|
1,031
|
|
Reductions for tax positions taken during prior periods
|
(421
|
)
|
|
(675
|
)
|
|
(1,378
|
)
|
Settlements
|
—
|
|
|
(947
|
)
|
|
(768
|
)
|
Balance of unrecognized tax benefits at end of period
|
$
|
6,950
|
|
|
$
|
5,774
|
|
|
$
|
6,456
|
|
GNC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company's liability for uncertain tax positions, excluding penalties and interest, increased by
$1.2 million
during the current year due in part to the finalization of audits in several states resulting in final tax assessments from the jurisdictions.
As of December 31,
2018
, the Company is not aware of any positions for which it is reasonably possible that the total amount of unrecognized tax benefits will significantly increase or decrease within the next 12 months. Accrued interest and penalties were $
2.0 million
at both December 31,
2018
and
2017
. At December 31,
2018
, the amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was
$8.9 million
, including the impact of accrued interest and penalties. While it is often difficult to predict the final outcome or the timing of resolution of any particular uncertain tax position, the Company believes that its unrecognized tax benefits reflect the most likely outcome. The Company adjusts these unrecognized tax benefits, as well as the related interest, in light of changing facts and circumstances. Settlement of any particular position could require the use of cash. Favorable resolution would be recognized as a reduction to the effective income tax rate in the period of resolution.
NOTE 6. GOODWILL AND INTANGIBLE ASSETS
Impairment Charges
The Company recorded the following impairment charges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
|
(in thousands)
|
Brand name
|
$
|
23,680
|
|
|
$
|
395,600
|
|
|
$
|
—
|
|
Goodwill
|
—
|
|
|
24,283
|
|
|
471,132
|
|
Property and equipment
(1)
|
9,521
|
|
|
18,555
|
|
|
5,421
|
|
Lucky Vitamin
(2)
|
—
|
|
|
19,356
|
|
|
—
|
|
Other store closing costs
|
5,035
|
|
|
—
|
|
|
—
|
|
Total long-lived asset impairment charges
|
$
|
38,236
|
|
|
$
|
457,794
|
|
|
$
|
476,553
|
|
(1) Refer to Note 7, "Property, Plant and Equipment, Net" for more information on the property and equipment charges.
(2) Includes goodwill, intangible assets and property and equipment as explained below.
Brand Name
The Company had previously recognized a
$395.6 million
impairment charge on its
$720.0 million
indefinite-lived brand intangible asset during 2017, which was allocated to the U.S. and Canada and International segments for
$394.0 million
and
$1.6 million
, respectively. During the fourth quarter of 2018, management performed its annual impairment test of the indefinite-lived brand intangible asset and concluded that the estimated fair value under the relief from royalty method (income approach) was less than its carrying value, which resulted in an impairment charge of
$23.7 million
for year ended December 31, 2018. The brand name impairment test was performed in totality as it represents a single unit of account and the charge was allocated to the U.S. and Canada and International segments for
$21.6 million
and
$2.1 million
, respectively. The methodology utilized for the impairment test of the indefinite-lived brand intangible asset has not changed materially from the prior year. Key assumptions included in the estimation of the fair value include the following:
|
|
•
|
Future cash flow assumptions
- Future cash flow assumptions include retail sales from the Company’s corporate retail store operations, GNC.com retail sales, wholesale partner sales, China sales, and retail sales from domestic and international franchisees. Sales were based on organic growth and were derived from historical experience and assumptions regarding future growth. The Company's analysis incorporated an assumed period of cash flows of
10
years with a terminal value.
|
|
|
•
|
Royalty rate
- The royalty rates utilized consider external market evidence and internal financial metrics including a review of available returns after the consideration of property, plant and equipment, working capital and other intangible assets.
|
GNC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
•
|
Discount rate
- The discount rate was based on the measure used in the goodwill impairment test described below adjusted for the risk associated with the specific brand name asset. The discount rate used in the analysis was
18.5%
.
|
Goodwill
Management performed its annual impairment test of goodwill during the fourth quarter of 2018. Results of the impairment test indicated
no
impairment for the year ended December 31, 2018. The GNC.com, International Franchise, and Wholesale reporting units had fair values which were substantially in excess of their respective carrying values. The Manufacturing and The Health Store reporting units, which have goodwill balances of
$61.5 million
and
$5.7 million
, respectively, had fair values that exceeded their carrying values by less than 5%.
The Company estimated the fair values of its reporting units in the fourth quarter of 2018 using a discounted cash flow method (income approach) weighted
50%
and a guideline company method (market approach) weighted
50%
. The methodology utilized for the goodwill impairment test has not changed materially from the prior year. The key assumptions used under the income approach include the following:
|
|
•
|
Future cash flow assumptions
- The Company's projections for its reporting units were based on organic growth and were derived from historical experience and assumptions regarding future growth and profitability trends. The Company's analysis incorporated an assumed period of cash flows of
10 years
with a terminal value.
|
|
|
•
|
Discount rate
- The discount rate was based on an estimated weighted average cost of capital ("WACC") for each reporting unit. The components of WACC are the cost of equity and the cost of debt, each of which requires judgment by management to estimate. The Company developed its cost of equity estimate based on perceived risks and predictability of future cash flows. The WACC used to estimate the fair values of the Company's reporting units was within a range of
17%
to
22%
. Any difference between the WACC among reporting units is primarily due to the precision with which management expects to be able to predict the future cash flows of each reporting unit.
|
The guideline company method involves analyzing transaction and financial data of publicly-traded companies to develop multiples, which are adjusted to account for differences in growth prospects and risk profiles of the reporting unit and the comparable.
For the year ended December 31, 2017, the Company recorded a goodwill impairment charge of
$24.3 million
impairment charge related to the Wholesale reporting unit in the fourth quarter as a result of a triggering event based on a decline in the Company's share price and previous challenges associated with the Company's efforts to refinance its long-term debt. For the year ended December 31, 2016, the Company recorded
$471.1 million
of goodwill impairment charges during the fourth quarter as a result of a triggering event based on a decline in the Company's share price coupled with the strategic changes around the One New GNC, of which
$366.4 million
related to Domestic Stores,
$90.5 million
related to Manufacturing and
$14.2 million
related to Canada. The Domestic Stores and Canada reporting units had no remaining goodwill balance after the impairment charge recognized during the year ended December 31, 2016.
Lucky Vitamin
During the second quarter of 2017, in order for the Company to focus on strategic changes around the One New GNC program, the Company considered strategic alternatives for the Lucky Vitamin e-commerce business, which was considered a triggering event requiring an interim goodwill impairment review of the Lucky Vitamin reporting unit as of June 30, 2017. The Company estimated the fair value of the Lucky Vitamin reporting unit using a discounted cash flow method (income approach) and a guideline company method (market approach), each of which took into account the expectations regarding the potential strategic alternatives for the Lucky Vitamin business being explored in the second quarter of 2017. As a result of the review, the Company concluded that the carrying value of the Lucky Vitamin reporting unit exceeded its fair value, which resulted in a goodwill impairment charge of
$11.5 million
being recorded in the second quarter of 2017. There was
no
remaining goodwill balance on the Lucky Vitamin reporting unit after the impact of this charge.
As a result of the impairment indicator described above, the Company also performed an impairment analysis with respect to its definite-long-lived assets on the Lucky Vitamin reporting unit, consisting of a trade name and property and equipment. The fair value of the trade name was determined using a relief from royalty method (income approach) and the fair value of the property and equipment was determined using an income approach. Based on the results of the analyses, the Company concluded that the carrying value of the Lucky Vitamin trade name and property and equipment exceeded their fair values resulting in an impairment
GNC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
charge of
$4.2 million
and
$3.7 million
, respectively. All of the aforementioned non-cash charges totaling
$19.4 million
were recorded in long-lived asset impairments in the Consolidated Statement of Operations within the U.S. and Canada segment during the year ended December 31, 2017.
The Company completed an asset sale of Lucky Vitamin on September 30, 2017, resulting in a loss of
$1.7 million
recorded within other (income) loss, net on the Consolidated Statement of Operations consisting of the net assets sold subtracted from the purchase price of
$6.4 million
, which includes fees paid to a third-party. The proceeds were received in October 2017
.
Goodwill Roll-Forward
The following table summarizes the Company's goodwill activity by reportable segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. and Canada
|
|
International
|
|
Manufacturing / Wholesale
|
|
Other
(*)
|
|
Total
|
|
(in thousands)
|
Goodwill at December 31, 2016
|
$
|
9,251
|
|
|
$
|
42,994
|
|
|
$
|
112,353
|
|
|
$
|
11,464
|
|
|
$
|
176,062
|
|
2017 Activity:
|
|
|
|
|
|
|
|
|
|
Impairments
|
—
|
|
|
—
|
|
|
(24,283
|
)
|
|
(11,464
|
)
|
|
(35,747
|
)
|
Translation effect of exchange rates
|
—
|
|
|
714
|
|
|
—
|
|
|
—
|
|
|
714
|
|
Total 2017 activity
|
—
|
|
|
714
|
|
|
(24,283
|
)
|
|
(11,464
|
)
|
|
(35,033
|
)
|
Balance at December 31, 2017:
|
|
|
|
|
|
|
|
|
|
Gross
|
389,895
|
|
|
43,708
|
|
|
202,841
|
|
|
—
|
|
|
636,444
|
|
Accumulated impairments
|
(380,644
|
)
|
|
—
|
|
|
(114,771
|
)
|
|
—
|
|
|
(495,415
|
)
|
Goodwill
|
$
|
9,251
|
|
|
$
|
43,708
|
|
|
$
|
88,070
|
|
|
$
|
—
|
|
|
$
|
141,029
|
|
2018 Activity:
|
|
|
|
|
|
|
|
|
|
Translation effect of exchange rates
|
—
|
|
|
(265
|
)
|
|
—
|
|
|
—
|
|
|
(265
|
)
|
Total 2018 activity
|
—
|
|
|
(265
|
)
|
|
—
|
|
|
—
|
|
|
(265
|
)
|
Balance at December 31, 2018:
|
|
|
|
|
|
|
|
|
|
Gross
|
389,895
|
|
|
43,443
|
|
|
202,841
|
|
|
—
|
|
|
636,179
|
|
Accumulated impairments
|
(380,644
|
)
|
|
—
|
|
|
(114,771
|
)
|
|
—
|
|
|
(495,415
|
)
|
Goodwill
|
$
|
9,251
|
|
|
$
|
43,443
|
|
|
$
|
88,070
|
|
|
$
|
—
|
|
|
$
|
140,764
|
|
(*) In connection with the sale of the assets of Lucky Vitamin in the third quarter of 2017, as described above, the gross goodwill and accumulated impairment was derecognized.
Intangible Assets
The following table reflects the gross carrying amount and accumulated amortization for each major intangible asset:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
December 31, 2017
|
|
Weighted-
Average
Life
|
|
Gross
|
|
Accumulated Amortization/ Impairment
|
|
Carrying Amount
|
|
Gross
|
|
Accumulated Amortization/ Impairment
|
|
Carrying Amount
|
|
|
|
(in thousands)
|
Brand name
|
Indefinite
|
|
$
|
720,000
|
|
|
$
|
(419,280
|
)
|
|
$
|
300,720
|
|
|
$
|
720,000
|
|
|
$
|
(395,600
|
)
|
|
$
|
324,400
|
|
Retail agreements
|
30.3
|
|
31,000
|
|
|
(12,566
|
)
|
|
18,434
|
|
|
31,000
|
|
|
(11,513
|
)
|
|
$
|
19,487
|
|
Franchise agreements
|
25.0
|
|
70,000
|
|
|
(33,017
|
)
|
|
36,983
|
|
|
70,000
|
|
|
(30,217
|
)
|
|
39,783
|
|
Manufacturing agreements
|
25.0
|
|
70,000
|
|
|
(33,017
|
)
|
|
36,983
|
|
|
70,000
|
|
|
(30,217
|
)
|
|
39,783
|
|
Other intangibles
(*)
|
6.8
|
|
652
|
|
|
(449
|
)
|
|
203
|
|
|
683
|
|
|
(377
|
)
|
|
306
|
|
Franchise rights
|
3.0
|
|
7,486
|
|
|
(7,362
|
)
|
|
124
|
|
|
7,486
|
|
|
(7,130
|
)
|
|
356
|
|
Total
|
|
|
$
|
899,138
|
|
|
$
|
(505,691
|
)
|
|
$
|
393,447
|
|
|
$
|
899,169
|
|
|
$
|
(475,054
|
)
|
|
$
|
424,115
|
|
(*) In connection with the sale of the assets of Lucky Vitamin in the third quarter of 2017, as described above, the gross trade name and accumulated amortization/impairment was derecognized.
Amortization expense during the years ended December 31, 2018, 2017 and 2016 was $
7.0 million
, $
7.4 million
and $
8.2 million
, respectively.
GNC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table represents future amortization expense of definite-lived intangible assets at December 31,
2018
:
|
|
|
|
|
Years ending December 31,
|
Amortization expense
|
|
(in thousands)
|
2019
|
$
|
6,837
|
|
2020
|
6,774
|
|
2021
|
6,672
|
|
2022
|
6,653
|
|
2023
|
6,653
|
|
Thereafter
|
59,138
|
|
Total future amortization expense
|
$
|
92,727
|
|
Store Acquisitions
For the years ended December 31,
2018
,
2017
and
2016
, the Company acquired
25
,
60
and
21
franchise stores, respectively. These acquisitions are accounted for utilizing the acquisition method of accounting, and the Company allocated the purchase price by recognizing acquired inventory, fixed assets, franchise rights and other net assets at fair value with any excess being recorded as goodwill. For the years ended December 31,
2018
,
2017
and
2016
, the impact of these store acquisitions was not material.
NOTE 7. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net, consisted of the following:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2018
|
|
2017
|
|
(in thousands)
|
Land, buildings and improvements
|
$
|
74,062
|
|
|
$
|
73,287
|
|
Machinery and equipment
|
159,563
|
|
|
170,107
|
|
Leasehold improvements
|
107,089
|
|
|
146,830
|
|
Furniture and fixtures
|
108,196
|
|
|
108,085
|
|
Software
|
52,970
|
|
|
50,098
|
|
Construction in progress
|
2,896
|
|
|
1,710
|
|
Total property, plant and equipment
|
504,776
|
|
|
550,117
|
|
Less: accumulated depreciation
|
(340,160
|
)
|
|
(341,267
|
)
|
Less: current year impairment
|
(9,521
|
)
|
|
(22,288
|
)
|
Net property, plant and equipment
|
$
|
155,095
|
|
|
$
|
186,562
|
|
The Company recognized depreciation expense on property, plant and equipment of
$40.1 million
,
$49.4 million
, and
$51.8 million
for the years ended December 31,
2018
,
2017
and
2016
, respectively, which is included in occupancy expense as part of cost of sales and SG&A expense on the Consolidated Statements of Operations.
Fixed Assets Impairments and Other Store Closing Costs
During the third quarter of 2018, the Company performed a detailed review of its store portfolio and identified stores in the U.S. and Canada that will be closed within the next three years at the end of their lease terms. This review also identified other stores in which the Company is considering alternatives such as seeking lower rent or a shorter term. In connection with the review of the store portfolio, the Company recorded
$14.6 million
of impairment charges within the U.S. and Canada segment, of which $
9.5 million
related to its property, plant and equipment for certain underperforming stores and
$5.1 million
related to other store closing costs, presented as long-lived asset impairments in the accompanying Consolidated Statement of Operations.
GNC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
During the year ended December 31, 2017, the Company recorded
$18.6 million
of impairment charges within the U.S. and Canada segment primarily relate to certain of the Company's underperforming stores and the impact of Hurricane Maria on the Company's stores located in Puerto Rico.
The impairment tests were performed at the individual store level as this is the lowest level which identifiable cash flows are largely independent of other groups of assets and liabilities. Underperforming stores were generally comprised of stores with historical and expected future losses or stores that management intends on closing in the near term. If the undiscounted estimated future cash flows were less than the carrying value of the individual store, an impairment charge was calculated by subtracting the estimated fair value of property and equipment from its carrying value. Fair value was estimated using a discounted cash flow method (income approach) utilizing the undiscounted cash flows estimated in the first step of the test.
Refer to Note 6, "Goodwill and Intangible Assets" for fixed asset impairments related to Lucky Vitamin in 2017.
NOTE 8. LONG-TERM DEBT / INTEREST EXPENSE
Long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2018
|
|
2017
|
|
(in thousands)
|
Tranche B-1 Term Loan (net of $0.0 million and $0.9 million discount)
|
$
|
147,289
|
|
|
$
|
1,130,320
|
|
Tranche B-2 Term Loan (net of $17.5 million discount)
|
554,760
|
|
|
—
|
|
FILO Term Loan (net of $10.9 million discount)
|
264,086
|
|
|
—
|
|
Unpaid original issuance discount
|
11,445
|
|
|
—
|
|
Notes
|
175,504
|
|
|
167,988
|
|
Debt issuance costs
|
(762
|
)
|
|
(1,285
|
)
|
Total debt
|
$
|
1,152,322
|
|
|
$
|
1,297,023
|
|
Less: current maturities
|
(158,756
|
)
|
|
—
|
|
Long-term debt
|
$
|
993,566
|
|
|
$
|
1,297,023
|
|
At December 31,
2018
, the Company's future annual contractual obligations on long-term debt are detailed below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ending
December 31,
|
Tranche B-1 Term Loan
(1)
|
|
Tranche B-2 Term Loan
(2)
|
|
Unpaid original issuance discount
|
|
FILO Term Loan
(3)
|
|
Convertible Notes
(4)
|
|
Total
|
|
(in thousands)
|
2019
|
$
|
147,311
|
|
|
$
|
—
|
|
|
$
|
11,445
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
158,756
|
|
2020
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
188,565
|
|
|
188,565
|
|
2021
|
—
|
|
|
572,236
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
572,236
|
|
2022
|
—
|
|
|
—
|
|
|
—
|
|
|
275,000
|
|
|
—
|
|
|
275,000
|
|
Total
|
$
|
147,311
|
|
|
$
|
572,236
|
|
|
$
|
11,445
|
|
|
$
|
275,000
|
|
|
$
|
188,565
|
|
|
$
|
1,194,557
|
|
(1) Includes the unamortized original issuance discount of
$0.0 million
.
(2) Includes the unamortized original issuance discount of
$17.5 million
(3) Includes the unamortized original issuance discount of
$10.9 million
(4) Includes unamortized conversion feature of
$11.5 million
and original issuance discount of
$1.6 million
.
GNC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Senior Credit Facility
Issuance
In March 2011, General Nutrition Centers, Inc. ("Centers"), a wholly owned subsidiary of Holdings, entered into the Senior Credit Facility, consisting of the Term Loan Facility and the Revolving Credit Facility. The Senior Credit Facility permits the Company to prepay a portion or all of the outstanding balance without incurring penalties (except London Interbank Offering Rate ("LIBOR") breakage costs). GNC Corporation, the Company's indirect wholly owned subsidiary, and Centers' existing and future domestic subsidiaries have guaranteed Centers' obligations under the Senior Credit Facility. In addition, the Senior Credit Facility is collateralized by first priority pledges (subject to permitted liens) of substantially all of Centers' assets, including its equity interests and the equity interests of its domestic subsidiaries.
The Company amended the Revolving Credit Facility on March 4, 2016, to extend its maturity from March 2017 to September 2018 and increase total availability from $
130.0 million
to $
300.0 million
. In December 2017, the Company reduced the amount available under the Revolving Credit Facility from
$300.0 million
to
$225.0 million
.
Refinancing
On February 28, 2018, the Company amended and restated its Senior Credit Facility (the “Amendment”, and the Senior Credit Facility as so amended, the "Term Loan Agreement") formerly consisting of a
$1,131.2 million
term loan facility due in March 2019 and a
$225.0 million
revolving credit facility that was scheduled to mature in September 2018. The Amendment included an extension of the maturity date for
$704.3 million
of the
$1,131.2 million
term loan facility from March 2019 to March 2021 (the “Tranche B-2 Term Loan"). Provided that all outstanding amounts under the convertible senior notes exceeding
$50.0 million
have not been repaid, refinanced, converted or effectively discharged prior to May 2020 ("Springing Maturity Date"), the maturity date becomes the Springing Maturity Date, subject to certain adjustments. The Amendment also terminated the
$225.0 million
revolving credit facility.
After the effectiveness of the Amendment, the remaining term loan of
$151.9 million
as of February 28, 2018 continues to have a maturity date of March 2019 (the "Tranche B-1 Term Loan"). The Tranche B-2 Term Loan requires annual aggregate principal payments of at least
$43 million
and bears interest at a rate of, at the Company's option, LIBOR plus a margin of
9.25%
per annum subject to change under certain circumstances (with a minimum and maximum margin of
8.25%
and
9.25%
, respectively, per annum), or prime plus a margin of
8.25%
per annum subject to change under certain circumstances (with a minimum and maximum of
7.25%
and
8.25%
, respectively, per annum). Any mandatory repayments as defined in the credit agreement shall be applied to the remaining annual aggregate principle payments in direct order of maturity. As discussed in further detail below, in November 2018, the Company paid
$100 million
on the Tranche B-2 Term Loan and elected to use the payment to satisfy the scheduled amortization payments on the Term Loan Facility through December 2020. The interest rate under the Tranche B-1 Term Loan is at a rate of, at the Company's option, LIBOR plus a margin of
2.5%
or prime plus a margin of
1.5%
. The Term Loan Agreement is secured by a (i) first lien on certain assets of the Company primarily consisting of capital stock issued by General Nutrition Centers, Inc. ("Centers") and its subsidiaries, intellectual property and equipment (“Term Priority Collateral”) and (ii) second lien on certain assets of the Company primarily consisting of inventory and accounts receivable (“ABL Priority Collateral”). The Term Loan Agreement is guaranteed by all material, wholly-owned domestic subsidiaries of the Company (the “U.S. Guarantors”) and by General Nutrition Centres Company, an unlimited liability company organized under the laws of Nova Scotia (together with the U.S. Guarantors, the “Guarantors”).
On February 28 2018, the Company also entered into a new asset-based credit agreement (the "ABL Credit Agreement"), consisting of:
•
a new
$100 million
asset-based Revolving Credit Facility (the "Revolving Credit Facility") with a maturity date of August 2022 (which maturity date will become May 2020, subject to certain adjustments, should the Springing Maturity Date be triggered); and
•
a
$275.0 million
asset-based Term Loan Facility advanced on a “first-in, last-out” basis (the "FILO Term Loan") with a maturity date of December 2022 (which maturity date will become May 2020, subject to certain adjustments, should the Springing Maturity Date be triggered).
There are no scheduled amortization payments associated with the FILO Term Loan, which bears interest at a rate of LIBOR plus a margin of
7.00%
per annum subject to decrease under certain circumstances (with a minimum possible interest rate of LIBOR plus a margin of
6.50%
per annum). Outstanding borrowings under the Revolving Credit Facility bear interest at a rate
GNC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
of LIBOR plus
1.50%
or prime plus
0.50%
(both subject to an increase of
0.25%
to
0.50%
based on the amount available to be drawn under the Revolving Credit Facility). The Company is also required to pay an annual fee fronting fee of
0.125%
to the applicable Issuing Bank and a fee to revolving lenders equal to a maximum of
2.0%
(subject to adjustment based on the amount available to be drawn under the Revolving Credit Facility with a minimum of
1.5%
) on outstanding letters of credit and an annual commitment fee of
0.375%
on the undrawn portion of the Revolving Credit Facility subject to an increase to
0.5%
based on the amount available to draw under the Revolving Credit Facility. The FILO Term Loan and Revolving Credit Facility are secured by a (i) first lien on ABL Priority Collateral and (ii) second lien on Term Priority Collateral. The FILO Term Loan and Revolving Credit Facility are guaranteed by the Guarantors.
In connection with the debt refinancing, the Company recognized a loss of
$16.7 million
in the first quarter of 2018, which primarily includes third-party fees relating to the Tranche B-2 Term Loan and the FILO Term Loan, and is presented as an operating outflow on the accompanying Consolidated Statement of Cash Flows. In addition, the Company paid
$30.2 million
consisting of an original issuance discount (“OID”) to the Tranche B-2 Term Loan and the FILO Term Loan lenders. The remaining unpaid OID of
$11.4 million
, which is subject to change based on the timing and amount of the outstanding balance, is due to the Tranche B-2 Term Loan lenders at
2%
of the outstanding balance the earlier of March 2019 or after a qualifying event in which the Company receives net cash proceeds as defined in the credit agreement. The OID together with
$5.1 million
in fees incurred relating to the Revolving Credit Facility (included within other long-term assets on the Consolidated Balance Sheet) will be amortized through the applicable maturity dates as an increase to interest expense. The
$30.2 million
portion of OID paid together with the Revolving Credit Facility fees resulted in
$35.2 million
presented as a financing outflow on the accompanying Consolidated Statement of Cash Flows. Included within the current debt above is the Tranche B-1 Term Loan balance and the
2%
OID that is due to the Tranche B-2 Term Loan lenders by March 2019.
Under the Company’s Term Loan Agreement and ABL Credit Agreement (collectively, the "Credit Facilities"), the Company is required to make certain mandatory prepayments, including a requirement to prepay first the Tranche B-2 Term Loan (until repaid in full), second the FILO Term Loan (until repaid in full, but only if such prepayment is permitted under the ABL Credit Agreement), and third the Tranche B-1 Term Loan, in each case annually with amounts based on excess cash flow, as defined in the Company’s Credit Facilities, based on the results of the Company for the prior fiscal year. The first such payment will be due with respect to the year ending December 31, 2018. The payment will be either
75%
or
50%
of excess cash flow for each such fiscal year, as determined by the Consolidated Net First Lien Leverage Ratio, and will be reduced by scheduled debt amortization payments and debt maturity payments that occur during the fiscal year and in the subsequent year up to the date the excess cash flow payment is required to be paid. The Company estimates the amount of excess cash flow payment to be between
$0
and
$10 million
.
As of December 31, 2018, the Company's contractual interest rates under the Tranche B-1 Term Loan, Tranche B-2 Term Loan, and the FILO Term Loan were
5.7%
,
11.8%
and
9.5%
, respectively, which consist of LIBOR plus the applicable margin rate. At December 31, 2017, the contractual interest rate under the Tranche B-1 Term Loan was
4.1%
. The Revolving Credit Facility had a weighted average interest rate of
2.7%
at December 31, 2017. At December 31, 2018, the Company had
$94.2 million
available under the Revolving Credit Facility, after giving effect to
$5.8 million
utilized to secure letters of credit. See below under "Interest Rate Swaps" for discussion of the interest rate swap.
The Company’s Credit Facilities contain customary covenants, including limitations on the ability of GNC Corporation, Centers, and Centers' subsidiaries to, among other things, incur debt, grant liens on their assets, enter into mergers or liquidations, sell assets, make investments or acquisitions, make optional payments in respect of, or modify, certain other debt instruments, pay dividends or other payments on capital stock, or enter into arrangements that restrict their ability to pay dividends or grant liens. In addition, the Term Loan Agreement requires compliance, as of the end of each fiscal quarter of the Company, with a maximum Consolidated Net First Lien Leverage Ratio initially set at
5.50
to 1.00 through December 31, 2018 and decreasing to
5.00
to 1.00 from March 31, 2019 to December 31, 2019 and
4.25
to 1.00 thereafter. Depending on the amount available to be drawn under the Revolving Credit Facility, the ABL Credit Agreement requires compliance as of the end of each fiscal quarter of the Company with a minimum Fixed Charge Coverage Ratio of
1.00
to 1.00. The Company is currently in compliance, and expects to remain in compliance over the next twelve months, with the terms of its Credit Facilities.
Investment from Harbin and International Vitamin Corporation ("IVC")
On November 7, 2018, The Company entered into an Amendment to the Securities Purchase Agreement with Harbin Pharmaceutical Group Holdings Co., Ltd. (the "Investor") for the purchase of
299,950
shares of convertible preferred stock. Pursuant to the terms of the Securities Purchase Agreement, the Investor assigned its interest in the Securities Purchase Agreement to Harbin Pharmaceutical Group Co., Ltd. ("Harbin"). Harbin's
$300 million
investment was funded in three separate tranches.
GNC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On November 8, 2018, the Company received the initial
$100 million
investment for the purchase of
100,000
shares of convertible preferred stock. The Company utilized the
$100 million
to pay a portion of the Tranche B-2 Term Loan due in March 2021 pursuant to the Amendment to its Senior Credit Facility and elected to use the payment to satisfy the scheduled amortization payments on the Term Loan Facility through December 2020. On January 2, 2019, the Company received
$50 million
investment for the second purchase of
50,000
shares of convertible preferred stock, and on February 13, 2019, the Company received the remaining
$150 million
for the final purchase of
149,950
shares of convertible preferred stock.
In March 2019, the Company announced the formation of a strategic partnership with IVC. Under the terms of the agreement, GNC received
$101 million
from IVC in the first quarter of 2019 and contributed its Nutra manufacturing and Anderson facility net assets in exchange for an initial
43%
ownership in the joint venture.
In connection with the receipt of the investments in 2019 as mentioned above, the Company paid down the remaining balance of the Tranche B-1 Term Loan of
$147.3 million
. The remaining proceeds together with cash generated from operating activities were utilized to pay a portion of the Tranche B-2 of
$114.0 million
and the original issuance discount due to the Tranche B-2 Term Loan lenders at
2%
of the outstanding balance.
Convertible Debt
Issuance and Terms
On August 10, 2015, the Company issued $
287.5 million
principal amount of
1.5%
convertible senior notes due 2020 in a private offering (the "Notes"). The Notes are governed by the terms of an indenture between the Company and BNY Mellon Trust Company, N.A., as the Trustee (the "Indenture"). The Notes mature on August 15, 2020, unless earlier repaid, discharged, refinanced or converted by the holders subject to restrictions through May 15, 2020. The Notes bear interest at a rate of
1.5%
per annum, and additionally are subject to special interest in connection with any failure of the Company to perform certain of its obligations under the Indenture.
The Notes are unsecured obligations and do not contain any financial covenants or restrictions on the payments of dividends, the incurrence of indebtedness or the issuance or repurchase of securities by the Company or any of its subsidiaries. Certain events are considered “events of default” under the Notes, which may result in the acceleration of the maturity of the Notes, as described in the indenture governing the Notes. The Notes are fully and unconditionally guaranteed by certain operating subsidiaries of the Company (“Subsidiary Guarantors”) and are subordinated to the Subsidiary Guarantors obligations from time to time with respect to the Senior Credit Facility and ranks equal in right of payment with respect to the Subsidiary Guarantor’s other obligations.
The initial conversion rate applicable to the Notes is
15.1156
shares of common stock per
$1,000
principal amount of Notes, which is equivalent to an initial conversion price of
$66.16
per share. The conversion rate is subject to adjustment upon the occurrence of certain specified events, but will not be adjusted for any accrued and unpaid special interest. In addition, upon the occurrence of a “make-whole fundamental change" as defined in the Indenture, the Company will, in certain circumstances, increase the conversion rate by a number of additional shares for a holder that elects to convert its Notes in connection with such make-whole fundamental change.
Prior to May 15, 2020, the Notes are convertible only under the following circumstances: (1) during any calendar quarter commencing after September 30, 2015, if, for at least
20
trading days (whether or not consecutive) during the
30
consecutive trading day period ending on the last trading day of the immediately preceding calendar quarter, the last reported sale price of the Company’s common stock on such trading day is greater than or equal to
130%
of the applicable conversion price on such trading day; (2) during the
5
consecutive business day period after any
ten
consecutive trading day period in which, for each day of that period, the trading price per $
1,000
principal amount of Notes for such trading day was less than
98%
of the product of the last reported sale price of the Company’s common stock and the applicable conversion rate on such trading day; or (3) upon the occurrence of specified corporate transactions. On and after May 15, 2020, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or a portion of their Notes at any time, regardless of the foregoing circumstances. Upon conversion, the Notes will be settled, at the Company’s election, in cash, shares of the Company’s common stock, or a combination of cash and shares of the Company’s common stock. If the Company has not delivered a notice of its election of settlement method prior to the final conversion period, it will be deemed to have elected combination settlement with a dollar amount per note to be received upon conversion of $
1,000
.
GNC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Exchange
On December 20, 2017, the Company exchanged in privately negotiated transactions
$98.9 million
in aggregate principal amount of the Notes for an aggregate of
14.6 million
newly issued shares of the Company’s Class A common stock, which had a value of
$71.7 million
at the time of the exchange. The Company accounted for the transaction as a troubled debt restructuring as a result of satisfying the below criteria.
|
|
•
|
Previous challenges associated with the Company’s refinancing efforts of its long term debt at the time of the convertible debt exchange.
|
|
|
•
|
The holders of the convertible debt completed the exchange for a value lower than the face amount of the notes. As a result, management concluded a concession was granted to the Company.
|
The convertible debt exchange resulted in a gain of
$15.0 million
, which includes the unamortized conversion feature of
$9.6 million
, unamortized discount of
$1.4 million
and other third party fees of
$1.2 million
and together with legal, investment banking and rating agency fees associated with the Company’s refinancing efforts, the Company recorded a net gain of
$11.0 million
in the fourth quarter of 2017.
Notes by Component
The Notes consist of the following components:
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2018
|
|
2017
|
|
(in thousands)
|
Liability component
|
|
|
|
Principal
|
$
|
188,565
|
|
|
$
|
188,565
|
|
Conversion feature
|
(11,489
|
)
|
|
(18,065
|
)
|
Discount related to debt issuance costs
|
(1,572
|
)
|
|
(2,512
|
)
|
Net carrying amount
|
$
|
175,504
|
|
|
$
|
167,988
|
|
|
|
|
|
Equity component
|
|
|
|
Conversion feature
|
$
|
49,680
|
|
|
$
|
49,680
|
|
Debt issuance costs
|
(1,421
|
)
|
|
(1,421
|
)
|
Deferred taxes
|
(16,620
|
)
|
|
(16,620
|
)
|
Net amount recorded in additional paid-in capital
|
$
|
31,639
|
|
|
$
|
31,639
|
|
Interest Rate Swaps
On June 13, 2018, the Company entered into
two
interest rate swaps with notional amounts of
$275 million
and
$225 million
to limit the exposure to its variable interest rate debt by effectively converting it to a fixed interest rate. The Company receives payments based on the one-month LIBOR and makes payments based on a fixed rate. The Company receives payments with a floor of
0.00%
and
0.75%
, respectively, on the
$275 million
and
$225 million
interest rate swaps, which aligns with the related debt instruments. The interest rate swap agreements had an effective date of June 29, 2018. The
$225 million
interest rate swap expires on February 28, 2021, and the
$275 million
interest rate swap expires on June 30, 2021. The notional amount of the
$225 million
interest rate swap is scheduled to decrease to
$175 million
on June 30, 2019,
$125 million
on June 30, 2020 and
$75 million
on December 31, 2020. The Company designated these instruments as cash flow hedges and deemed effective upon initiation. The interest rate swaps are recognized on the balance sheet at fair value. Changes in fair value are recorded within other comprehensive income (loss) on the Consolidated Balance Sheet and reclassified into the Consolidated Statement of Operations as interest expense in the period in which the underlying transaction affects earnings.
GNC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The fair values of the derivative financial instruments included in the Consolidated Balance Sheets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except percentages)
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at
|
|
Notional Amount
|
|
Fixed Rate
|
|
Balance Sheet Classification
|
|
December 31, 2018
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
Accounting cash flow hedges:
|
|
|
|
|
|
|
|
|
Interest rate swap
|
$
|
275,000
|
|
|
2.82
|
%
|
|
Other long-term liabilities
|
|
$
|
2,371
|
|
|
$
|
—
|
|
Interest rate swap
|
225,000
|
|
|
2.74
|
%
|
|
Other long-term liabilities
|
|
839
|
|
|
—
|
|
Net carrying amount
|
$
|
500,000
|
|
|
|
|
Total liabilities
|
|
$
|
3,210
|
|
|
$
|
—
|
|
At December 31, 2018, there was a cumulative unrealized loss of
$2.2 million
, net of tax, related to these interest rate swaps included in accumulated other comprehensive income (loss). This loss would be immediately recognized in the Consolidated Statement of Operations if these instruments fail to meet certain cash flow hedge requirements. As of December 31, 2018, the amount included in accumulated other comprehensive loss related to the interest rate swaps to be reclassified into earnings during the next 12 months is not material. Refer to Note 10, "Fair Value Measurements of Financial Instruments" for more information on how the interest rate swaps are valued.
Interest Expense
Interest expense consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended
December 31,
|
|
2018
|
|
2017
|
|
2016
|
|
(in thousands)
|
Senior Credit Facility:
|
|
|
|
|
|
|
|
|
Tranche B-1 Term Loan coupon
|
$
|
13,322
|
|
|
$
|
41,477
|
|
|
$
|
38,821
|
|
Tranche B-2 Term Loan coupon
|
64,417
|
|
|
—
|
|
|
—
|
|
FILO Term Loan coupon
|
22,143
|
|
|
—
|
|
|
—
|
|
Revolving Credit Facility
|
1,022
|
|
|
—
|
|
|
—
|
|
Terminated revolving credit facility
|
316
|
|
|
4,685
|
|
|
4,689
|
|
Amortization of discount and debt issuance costs
|
15,648
|
|
|
2,413
|
|
|
2,444
|
|
Total Senior Credit Facility
|
116,868
|
|
|
48,575
|
|
|
45,954
|
|
Notes:
|
|
|
|
|
|
Coupon
|
2,828
|
|
|
4,272
|
|
|
4,313
|
|
Amortization of conversion feature
|
6,576
|
|
|
9,496
|
|
|
9,092
|
|
Amortization of discount and debt issuance costs
|
974
|
|
|
1,251
|
|
|
1,140
|
|
Total Notes
|
10,378
|
|
|
15,019
|
|
|
14,545
|
|
Interest income and other
|
(166
|
)
|
|
627
|
|
|
(56
|
)
|
Interest expense, net
|
$
|
127,080
|
|
|
$
|
64,221
|
|
|
$
|
60,443
|
|
GNC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 9. DEFERRED REVENUE AND OTHER CURRENT LIABILITIES
Deferred revenue and other current liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2018
|
|
2017
|
|
(in thousands)
|
Deferred revenue
|
$
|
37,629
|
|
|
$
|
40,211
|
|
Accrued compensation and related benefits
|
38,866
|
|
|
32,177
|
|
Accrued occupancy
|
9,106
|
|
|
8,732
|
|
Accrued sales tax
|
2,571
|
|
|
3,022
|
|
Accrued interest
|
1,828
|
|
|
2,124
|
|
Other current liabilities
|
30,169
|
|
|
27,815
|
|
Total deferred revenue and other current liabilities
|
$
|
120,169
|
|
|
$
|
114,081
|
|
NOTE 10. FAIR VALUE MEASUREMENTS AND FINANCIAL INSTRUMENTS
ASC 820, "Fair Value Measurements and Disclosures" defines fair value as a market-based measurement that should be determined based on the assumptions that marketplace participants would use in pricing an asset or liability. As a basis for considering such assumptions, the standard establishes a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value as follows:
|
|
Level 1 — observable inputs such as quoted prices in active markets for identical assets and liabilities;
|
Level 2 — observable inputs such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, other inputs that are observable, or can be corroborated by observable market data; and
|
Level 3 — unobservable inputs for which there are little or no market data, which require the reporting entity to develop its own assumptions.
|
The carrying amounts of cash and cash equivalents, receivables, accounts payable, accrued liabilities and the Revolving Credit Facility approximate their respective fair values. Based on the interest rates currently available and their underlying risk, the carrying value of franchise notes receivable recorded primarily in Other long-term assets approximates its fair value.
The carrying value and estimated fair value of the forward contracts for the issuance of convertible preferred stock, the Term Loan Facility, net of discount, Notes (net of the equity component classified in stockholders' equity and discount) and the interest rate swaps were as follows:
GNC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
December 31, 2017
|
|
Carrying
Amount
|
|
Fair
Value
|
|
Carrying
Amount
|
|
Fair
Value
|
|
(in thousands)
|
Assets:
|
|
|
|
|
|
|
|
Forward contracts for the issuance of convertible preferred stock
|
$
|
88,942
|
|
|
$
|
88,942
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
Tranche B-1 Term Loan
|
$
|
147,289
|
|
|
$
|
145,080
|
|
|
$
|
1,130,320
|
|
|
$
|
930,592
|
|
Tranche B-2 Term Loan
|
554,760
|
|
|
511,766
|
|
|
—
|
|
|
—
|
|
FILO Term Loan
|
264,086
|
|
|
260,125
|
|
|
—
|
|
|
—
|
|
Notes
|
175,504
|
|
|
131,628
|
|
|
167,988
|
|
|
85,044
|
|
Interest rate swaps
|
3,210
|
|
|
3,210
|
|
|
—
|
|
|
—
|
|
The forward contracts for the issuance of convertible preferred stock are measured at fair value, as of the valuation date, using a single factor binomial lattice model ("Lattice Model") which incorporates the terms and conditions of the convertible preferred stock and is based on changes in the prices of the underlying common share price over successive periods of time. Key assumptions of the Lattice Model include the current price of the underlying stock and its historical and expected volatility, risk-neutral interest rates and the instruments remaining term. These assumptions require significant management judgment and are considered Level 3 inputs. The forward contract is revalued at each reporting period and changes in fair value are recognized in the Consolidated Statements of Operations. Refer to Note 13, "Mezzanine Equity" for discussion of the Securities Purchase Agreement.
The fair values of the term loans were determined using the instrument’s trading value in markets that are not active, which are considered Level 2 inputs. The fair value of the Notes was determined based on quoted market prices and bond terms and conditions, which are considered Level 2 inputs. The Company's interest rate swaps are carried at fair value, which is based primarily on Level 2 inputs utilizing readily observable market data, such as LIBOR forward rates, for all substantial terms of the interest rate swap contracts and the assessment of nonperformance risk.
As described in Note 6, "Goodwill and Intangible Assets, Net," and Note 7, "Property, Plant and Equipment, Net," the Company recorded long-lived asset impairments in the years ended December 31, 2018, 2017 and 2016. This resulted in the following assets being measured at fair value on a non-recurring basis using Level 3 inputs:
•
the indefinite-lived brand name intangible asset at December 31, 2018 and 2017;
•
goodwill at December 31, 2017 for the Wholesale reporting unit;
•
goodwill at December 31, 2016 for the Domestic Stores, Canada and Manufacturing reporting units; and
•
property and equipment at certain of the Company's stores at December 31, 2018, 2017 and 2016.
GNC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 11. LONG-TERM LEASE OBLIGATIONS
The Company's rent expense, which is recorded within cost of sales on the Consolidated Statements of Operations, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
|
(in thousands)
|
Company-owned and franchise stores:
|
|
|
|
|
|
|
|
|
Rent on operating leases
|
$
|
184,875
|
|
|
$
|
193,398
|
|
|
$
|
193,830
|
|
Landlord related taxes
|
27,191
|
|
|
27,872
|
|
|
27,747
|
|
Common operating expenses
|
44,120
|
|
|
45,866
|
|
|
45,375
|
|
Percent and contingent rent
|
17,177
|
|
|
17,870
|
|
|
19,435
|
|
Total company-owned and franchise stores
|
273,363
|
|
|
285,006
|
|
|
286,387
|
|
Other
|
20,932
|
|
|
22,446
|
|
|
19,905
|
|
Total rent expense
|
$
|
294,295
|
|
|
$
|
307,452
|
|
|
$
|
306,292
|
|
The Company recorded sublease revenue, within revenue on the Consolidated Statements of Operations, of $
45.5 million
, $
49.0 million
and $
47.6 million
in the years ended December 31, 2018, 2017 and 2016, respectively, relating to subleases with its franchisees, which includes rental income and other occupancy related items.
Minimum future rent obligations for non-cancelable operating leases, excluding optional renewal periods, were as follows for the years ending December 31 and exclude landlord related taxes, common operating expenses, and percent and contingent rent.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-Owned and Franchise Stores
|
|
Sublease
Income from Franchisees
|
|
Other *
|
|
Rent on Operating Leases, net of Sublease Revenue
|
|
(in thousands)
|
2019
|
$
|
162,910
|
|
|
$
|
(29,867
|
)
|
|
$
|
6,071
|
|
|
$
|
139,114
|
|
2020
|
126,312
|
|
|
(23,631
|
)
|
|
5,574
|
|
|
108,255
|
|
2021
|
95,000
|
|
|
(16,782
|
)
|
|
4,185
|
|
|
82,403
|
|
2022
|
64,735
|
|
|
(10,285
|
)
|
|
2,479
|
|
|
56,929
|
|
2023
|
39,798
|
|
|
(4,717
|
)
|
|
1,290
|
|
|
36,371
|
|
Thereafter
|
56,200
|
|
|
(4,238
|
)
|
|
6,703
|
|
|
58,665
|
|
Total future obligations
|
$
|
544,955
|
|
|
$
|
(89,520
|
)
|
|
$
|
26,302
|
|
|
$
|
481,737
|
|
* Includes various leases for warehouses, vehicles, and various equipment at our facility
GNC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 12. COMMITMENTS AND CONTINGENCIES
The Company is engaged in various legal actions, claims and proceedings arising in the normal course of business, including claims related to breach of contracts, products liabilities, intellectual property matters and employment-related matters resulting from the Company's business activities.
The Company's contingencies are subject to substantial uncertainties, including for each such contingency the following, among other factors: (i) the procedural status of the case; (ii) whether the case has or may be certified as a class action suit; (iii) the outcome of preliminary motions; (iv) the impact of discovery; (v) whether there are significant factual issues to be determined or resolved; (vi) whether the proceedings involve a large number of parties and/or parties and claims in multiple jurisdictions or jurisdictions in which the relevant laws are complex or unclear; (vii) the extent of potential damages, which are often unspecified or indeterminate; and (viii) the status of settlement discussions, if any, and the settlement posture of the parties. Consequently, except as otherwise noted below with regard to a particular matter, the Company cannot predict with any reasonable certainty the timing or outcome of the legal matters described below, and the Company is unable to estimate a possible loss or range of loss. If the Company ultimately is required to make a payment in connection with an adverse outcome in any of the matters discussed below, it is possible that it could have a material adverse effect on the Company's business, financial condition, results of operations or cash flows.
As a manufacturer and retailer of nutritional supplements and other consumer products that are ingested by consumers or applied to their bodies, the Company has been and is currently subjected to various product liability claims. Although the effects of these claims to date have not been material to the Company, it is possible that current and future product liability claims could have a material adverse effect on its business or financial condition, results of operations or cash flows. The Company currently maintains product liability insurance with a deductible/retention of
$4.0 million
per claim with an aggregate cap on retained loss of
$10.0 million
per policy year. The Company typically seeks and has obtained contractual indemnification from most parties that supply raw materials for its products or that manufacture or market products it sells. The Company also typically seeks to be added, and has been added, as an additional insured under most of such parties' insurance policies. However, any such indemnification or insurance is limited by its terms and any such indemnification, as a practical matter, is limited to the creditworthiness of the indemnifying party and its insurer, and the absence of significant defenses by the insurers. Consequently, the Company may incur material product liability claims, which could increase its costs and adversely affect its reputation, revenue and operating income.
Litigation
DMAA / Aegeline Claims.
Prior to December 2013, the Company sold products manufactured by third parties that contained derivatives from geranium known as 1.3-dimethylpentylamine/ dimethylamylamine/13-dimethylamylamine, or "DMAA," which were recalled from the Company's stores in November 2013, and/or Aegeline, a compound extracted from bael trees. As of December 31, 2018, the Company was named in
27
personal injury lawsuits involving products containing DMAA and/or Aegeline.
As a general matter, the proceedings associated with these personal injury cases, which generally seek indeterminate money damages, are in the early stages, and any losses that may arise from these matters are not probable or reasonably estimable at this time.
The Company is contractually entitled to indemnification by its third-party vendors with regard to these matters, although the Company’s ability to obtain full recovery in respect of any such claims against it is dependent upon the creditworthiness of the vendors and/or their insurance coverage and the absence of any significant defenses available to its insurer.
California Wage and Break Claims.
On February 29, 2012, former Senior Store Manager, Elizabeth Naranjo, individually and on behalf of all others similarly situated, sued General Nutrition Corporation in the Superior Court of the State of California for the County of Alameda. The class action complaint contains
eight
causes of action, alleging, among other matters, meal, rest break and overtime violations for which indeterminate money damages for wages, penalties, interest, and legal fees are sought. In June 2018, the Court granted in part and denied in part the Company's Motion for Decertification. In August 2018, the plaintiff voluntarily dismissed the class action claims alleging overtime violations. As of December 31, 2018, an immaterial liability has been accrued in the accompanying financial statements. The Company intends to vigorously defend against the remaining class action claims asserted in this action. Trial is currently scheduled for September 2019.
Pennsylvania Fluctuating Workweek.
On September 18, 2013, Tawny Chevalier and Andrew Hiller commenced a class action in the Court of Common Pleas of Allegheny County, Pennsylvania. Plaintiff asserted a claim against the Company for
GNC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
a purported violation of the Pennsylvania Minimum Wage Act ("PMWA"), challenging the Company's utilization of the "fluctuating workweek" method to calculate overtime compensation, on behalf of all employees who worked for the Company in Pennsylvania and who were paid according to the fluctuating workweek method. In October 2014, the Court entered an order holding that the use of the fluctuating workweek method violated the PMWA. In September 2016, the Court entered judgment in favor of Plaintiffs and the class in an immaterial amount, which has been recorded as a charge in the accompanying Consolidated Financial Statements. Plaintiffs subsequently filed a petition for an award of attorney's fees, costs and incentive payment. The court awarded an immaterial amount in legal fees. The Company appealed from the adverse judgment and the award of attorney's fees. On December 22, 2017, the Pennsylvania Superior Court held that the Company correctly determined the "regular rate" by dividing weekly compensation by all hours worked (rather than 40), but held that the regular rate must be multiplied by 1.5 (rather than 0.5) to determine the amount of overtime owed. Taking accumulated interest into account, the net result of the Superior Court's decision was to reduce the Company's liability by an immaterial amount, which has been reflected in the accompanying Consolidated Financial Statements. The Company filed a petition for appeal to the Pennsylvania Supreme Court on January 22, 2018. The Pennsylvania Supreme Court accepted the Company's petition for appeal and the Company filed its appellant’s brief on August 27, 2018. The appellees filed their brief on September 26, 2018. Oral argument is scheduled for April 2019.
Jason Olive v. General Nutrition Corp.
In April 2012, Jason Olive filed a complaint in the Superior Court of California, County of Los Angeles, for misappropriation of likeness in which he alleges that the Company continued to use his image in stores after the expiration of the license to do so in violation of common law and California statutes. Mr. Olive is seeking compensatory, punitive and statutory damages and attorneys’ fees and costs. The trial in this matter began on July 20, 2016 and concluded on August 8, 2016. The jury awarded plaintiff immaterial amounts for actual damages and emotional distress damages, which are accrued in the accompanying Consolidated Financial Statements. The jury refused to award plaintiff any of the profits he sought to disgorge, or punitive damages. The court entered judgment in the case on October 14, 2016. In addition to the verdict, the Company and Mr. Olive sought attorneys' fees and other costs from the Court. The Court refused to award attorney's fees to either side but awarded plaintiff an immaterial amount for costs. Plaintiff has appealed the judgment, and separately, the order denying attorney's fees. The Company has cross-appealed the judgment and the Court's denial of attorney fees. Argument occurred in October 2018. On November 2, 2018, the Court affirmed the trial court's decision in part and reversed in part, reversing the denial of Mr. Olive's motion for attorneys' fees and remanding the matter to the trial court for further proceedings regarding his attorneys' fees and costs. On November 16, 2018, the Company filed a motion for reconsideration of the Court’s decision. On December 27, 2018, the Court reversed, in part, its November 2, 2018 ruling and held that there was no prevailing party for the purposes of the attorneys’ fee award. Olive has filed a petition for review with the Supreme Court of the State of California and the Company has opposed that petition. The parties await the Supreme Court’s ruling regarding whether the petition will be accepted.
Oregon Attorney General.
On October 22, 2015, the Attorney General for the State of Oregon sued GNC in Multnomah County Circuit Court for alleged violations of Oregon’s Unlawful Trade Practices Act, in connection with its sale in Oregon of certain third-party products. The Company is vigorously defending itself against these allegations. Along with its Amended Answer and Affirmative Defenses, the Company filed a counterclaim for declaratory relief, asking the court to make certain rulings in favor of the Company, and adding USPlabs, LLC and SK Laboratories as counterclaim defendants. In March 2018, the Oregon Attorney General filed a motion for summary judgment relating to its first claim for relief, which the Company contested. The Company filed a cross motion for summary judgment on the first claim for relief, which the Oregon Attorney General contested. Following oral argument in August 2018, the Court denied the State’s motion for summary judgment and granted in part and denied in part the Company’s motion for summary judgment. The parties are in the process of exchanging discovery. Trial is currently scheduled to begin in September 2019.
As any losses that may arise from this matter are not probable or reasonably estimable at this time, no liability has been accrued in the accompanying Consolidated Financial Statements. Moreover, the Company does not anticipate that any such losses are likely to have a material impact on the Company, its business or results of operations. The Company is contractually entitled to indemnification and defense by its third-party vendors. Ultimately, however, the Company's ability to obtain full recovery in respect of any such claims against it is dependent upon the creditworthiness of its vendors and/or their insurance coverage and the absence of any significant defenses available to their insurers.
E-Commerce Pricing Matters
. In April 2016, Jenna Kaskorkis, et al. filed a complaint against General Nutrition Centers, Inc. followed by similar cases brought forth by Ashley Gennock in May 2016 and Kenneth Harrison in December 2016. Plaintiffs allege that the Company's promotional pricing on its website was misleading and did not fairly represent promotions based on average retail prices over a trended period of time being consistent with prices advertised as promotional. The Company attended a mediation with counsel for all plaintiffs and reached a tentative agreement in the third quarter of 2017 on many of the key terms of a settlement. The matters have been effectively stayed while the parties remain in discussions. The Company currently expects
GNC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
any settlement to be in a form that does not require the recording of a contingent liability, except an immaterial amount the Company has accrued in the accompanying Consolidated Financial Statements.
Government Regulation
In November 2013, the Company received a subpoena from the U.S. Department of Justice ("DOJ") for information related to its investigation of a third party product vendor, USPlabs, LLC. The Company fully cooperated with the investigation of the vendor and the related products, all of which were discontinued in 2013. In December 2016, the Company reached agreement with the DOJ in connection with the Company's cooperation, which agreement acknowledges the Company relied on the representations and written guarantees of USPlabs and the Company's representation that it did not knowingly sell products not in compliance with the FDCA. Under the agreement, which includes an immaterial payment to the federal government, the Company will take a number of actions to broaden industry-wide knowledge of prohibited ingredients and improve compliance by vendors of third party products. These actions are in keeping with the leadership role the Company has taken in setting industry quality and compliance standards, and the Company's commitment over the course of the agreement (
60 months
) to support a combination of its and the industry's initiatives. Some of these actions include maintaining and continuously updating a list of restricted ingredients that will be prohibited from inclusion in any products that are sold by the Company. Vendors selling products to the Company for the sale of such products by the Company will be required to warrant that the products sold do not contain any of these restricted ingredients. In addition, the Company will develop and maintain a list of ingredients that the Company believes comply with the applicable provisions of the FDCA.
Environmental Compliance
In March 2008, the South Carolina Department of Health and Environmental Control (the "DHEC") requested that the Company investigate contamination associated with historical activities at its South Carolina manufacturing facility. These investigations have identified chlorinated solvent impacts in soils and groundwater that extend offsite from the facility. The Company entered into a Voluntary Cleanup Contract with the DHEC regarding the matter on September 24, 2012. Pursuant to such contract, the Company has completed additional investigations with the DHEC's approval. The Company installed and began operating a pilot vapor extraction system under a portion of the facility in the second half of 2016, which was an immaterial cost to the Company, with DHEC's approval to assess the effectiveness of such a remedial system. After an initial period of monitoring, in October of 2017, the DHEC approved a work plan for extended monitoring of such system and the contamination into 2021. At this stage of the investigation, however, it is not possible to estimate the timing and extent of any additional remedial action that may be required, the ultimate cost of remediation, or the amount of the Company's potential liability. Therefore,
no
liability has been recorded in the Company's Consolidated Financial Statements. As further described in Note 20, "Subsequent Events," the Company entered into a joint venture arrangement regarding the Company's manufacturing business. The joint venture will continue to consult with the DHEC on the next steps in the work after their review of the results of the extended monitoring is complete.
In addition to the foregoing, the Company is subject to numerous federal, state, local and foreign environmental and health and safety laws and regulations governing its operations, including the handling, transportation and disposal of the Company's non-hazardous and hazardous substances and wastes, as well as emissions and discharges from its operations into the environment, including discharges to air, surface water and groundwater. Failure to comply with such laws and regulations could result in costs for remedial actions, penalties or the imposition of other liabilities. New laws, changes in existing laws or the interpretation thereof, or the development of new facts or changes in their processes could also cause the Company to incur additional capital and operating expenditures to maintain compliance with environmental laws and regulations and environmental permits. The Company is also subject to laws and regulations that impose liability and cleanup responsibility for releases of hazardous substances into the environment without regard to fault or knowledge about the condition or action causing the liability. Under certain of these laws and regulations, such liabilities can be imposed for cleanup of previously owned or operated properties, or for properties to which substances or wastes that were sent in connection with current or former operations at its facilities. The presence of contamination from such substances or wastes could also adversely affect the Company's ability to sell or lease its properties, or to use them as collateral for financing. From time to time, the Company has incurred costs and obligations for correcting environmental and health and safety noncompliance matters and for remediation at or relating to certain of the Company's properties or properties at which the Company's waste has been disposed. However, compliance with the provisions of national, state and local environmental laws and regulations has not had a material effect upon the Company's capital expenditures, earnings, financial position, liquidity or competitive position. The Company believes it has complied with, and is currently complying with, its environmental obligations pursuant to environmental and health and safety laws and regulations and that any liabilities for noncompliance will not have a material adverse effect on its business, financial performance or cash flows. However, it is difficult to predict future liabilities and obligations, which could be material.
GNC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Commitments
In addition to operating leases obtained in the normal course of business, the Company maintains certain purchase commitments with various vendors to ensure its operational needs are fulfilled. As of December 31,
2018
, such future purchase commitments were
$33.1 million
. Other commitments related to the Company's business operations cover varying periods of time and are not significant. All of these commitments are expected to be fulfilled with no adverse consequences to the Company's operations or financial condition.
NOTE 13. MEZZANINE EQUITY
Holdings is authorized to issue up to
60.0 million
shares of preferred stock, par value
$0.001
per share. On February 13, 2018, the Company entered into a Securities Purchase Agreement (as amended from time to time, the “Securities Purchase Agreement”) by and between the Company and Harbin Pharmaceutical Group Holdings Co., Ltd. (the “Investor”), pursuant to which the Company agreed to issue and sell to the Investor, and the Investor agreed to purchase from the Company,
299,950
shares of a newly created series of convertible preferred stock of the Company, designed the “Series A Convertible Preferred Stock” (the “Convertible Preferred Stock”), for a purchase price of
$1,000
per share, or an aggregate of approximately
$300 million
(the “Securities Purchase”). The Convertible Preferred Stock is convertible into
56.1 million
shares of the Company's Common Stock at an initial conversion price of
$5.35
per share, subject to customary anti-dilution adjustments. Pursuant to the terms of the Securities Purchase Agreement, Investor assigned its interest in the Securities Purchase Agreement to Harbin Pharmaceutical Group Co., Ltd. ("Harbin").
On November 7, 2018, the Company and the Investor entered into an Amendment to the Securities Purchase Agreement (the “SPA Amendment”) for the funding of the Convertible Preferred Stock purchase and entered into definitive documentation (the "JV Framework Agreement") with respect to joint ventures in Hong Kong and China.
Pursuant to the SPA Amendment, the Company and the Investor agreed to complete the securities purchase as follows: (i)
100,000
shares of Convertible Preferred Stock issued on November 8, 2018 for a total purchase price of
$100 million
(the "Initial Issuance"), (ii)
50,000
shares of Convertible Preferred Stock issued on January 2, 2019 for a total purchase price of
$50 million
(the "Second Issuance") and (iii)
149,950
shares of Convertible Preferred Stock issued on February 13, 2019 for a total purchase price of approximately
$150 million
(the “Third Issuance”). Holders of shares of Convertible Preferred Stock are entitled to receive cumulative preferential dividends, payable quarterly in arrears, at an annual rate of
6.5%
of the stated value of
$1,000
per share, subject to increase in connection with the payment of dividends in kind. Dividends are payable, at the Company's option, in cash from legally available funds or in kind by issuing additional shares of Convertible Preferred Stock with such stated value equal to the amount of payment being made or by increasing the stated value of the outstanding Convertible Preferred Stock by the amount per share of the dividend or in a combination thereof.
At December 31, 2018, the
100,000
shares of Convertible Preferred Stock issued in November 2018 were recorded as Mezzanine Equity, net of issuance cost, on the Consolidated Balance Sheets because they are redeemable at the option of the holder if a fundamental change occurs, which includes change in control or delisting. The guaranteed Second Issuance and Third Issuance are considered forward contracts that represent an obligation to both parties. The forward contracts are recorded at fair value on the Consolidated Balance Sheets at December 31, 2018, with any changes in fair value recorded in earnings in the Consolidated Statements of Operations. The Company recorded an
$88.9 million
gain on forward contracts for the issuance of Convertible Preferred Stock during the year ended December 31, 2018. Refer to Note 10, "Fair Value Measurement and Financial Instruments" for more information.
As of December 31, 2018, there were
$1.0 million
cumulative undeclared dividends related to the issued Convertible Preferred Stock. The cumulative undeclared dividends will not be recorded on the Consolidated Balance Sheets until being declared but are deducted from earnings available to common stockholders when computing earnings per share. Refer to Note 15, "Earnings Per Share" for more information.
NOTE 14. TREASURY STOCK
In August 2015, the Board approved a $
500.0 million
multi-year repurchase program in addition to the $
500.0 million
multi-year program approved in August 2014, bringing the aggregate share repurchase program to $
1.0 billion
of Holdings' common stock.
No
shares were repurchased in 2018 and 2017. Holdings repurchased $
229.2 million
of common stock during 2016. As of December 31,
2018
, $
197.8 million
remains available for purchase under the program.
GNC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 15. EARNINGS PER SHARE
The following table represents the Company's basic and dilutive weighted average shares:
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
|
(in thousands)
|
Basic weighted average common shares outstanding
|
83,364
|
|
|
68,789
|
|
|
69,409
|
|
Effect of dilutive stock-based compensation awards
|
115
|
|
|
—
|
|
|
—
|
|
Effect of dilutive underlying shares of the convertible preferred stock
|
2,692
|
|
|
—
|
|
|
—
|
|
Diluted weighted averages common shares outstanding
|
86,171
|
|
|
68,789
|
|
|
69,409
|
|
For the year ended December 31, 2017 and December 31, 2016, all
4.0 million
and
1.5 million
outstanding stock-based awards, respectively, were excluded from the computation of diluted EPS because the Company was in a net loss position and as a result, inclusion of the awards would have been anti-dilutive. For the year ended December 31, 2018, the following awards were not included in the computation of diluted EPS because the impact of applying the treasury stock method was anti-dilutive or because certain conditions have not been met with respect to the Company's performance awards.
|
|
|
|
|
Anti-dilutive:
|
|
|
Time-based options and restricted stock awards
|
|
2,944
|
|
Performance-based restricted stock units
|
|
321
|
|
Contingently issuable:
|
|
|
Performance-based restricted stock awards with a market condition
|
|
281
|
|
Total stock-based awards excluded from diluted EPS
|
|
3,546
|
|
In connection with the issuance of the Convertible Preferred Stock as described in Note 13, "Mezzanine Equity", the Company had
100,000
convertible preferred shares outstanding as of December 31, 2018. The Company applied the if-converted method to calculate dilution on the Convertible Preferred Stock, which resulted in all
2.7 million
underlying weighted average convertible shares being dilutive.
In connection with the exchange of the Company's Notes as described in Note 8, "Long-Term Debt / Interest Expense," the Company issued
14.6 million
shares, which are included in basic and diluted earnings per share for the weighted average days they were outstanding in 2017. The remaining underlying convertible shares were anti-dilutive in all periods presented. The Company no longer has the intent to settle the principal portion of Notes in cash, and as such, applied the if-converted method to calculate dilution on the Notes in 2018, which has resulted in all
2.9 million
underlying convertible shares being anti-dilutive.
GNC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The computations for basic and diluted earnings per common share are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
|
(in thousands, except per share data)
|
Earnings (loss) per common share - Basic
|
|
|
|
|
|
Net income (loss)
|
$
|
69,780
|
|
|
$
|
(150,262
|
)
|
|
$
|
(285,219
|
)
|
Cumulative undeclared convertible preferred stock dividend
|
957
|
|
|
—
|
|
|
—
|
|
Net income (loss) attributable to common shareholders
|
68,823
|
|
|
(150,262
|
)
|
|
(285,219
|
)
|
Weighted average common shares outstanding - basic
|
83,364
|
|
|
68,789
|
|
|
69,409
|
|
Earnings (loss) per common share - basic
|
$
|
0.83
|
|
|
$
|
(2.18
|
)
|
|
$
|
(4.11
|
)
|
Earnings (loss) per common share - Diluted
|
|
|
|
|
|
Net income (loss)
|
$
|
69,780
|
|
|
$
|
(150,262
|
)
|
|
$
|
(285,219
|
)
|
Weighted average common shares outstanding - diluted
|
86,171
|
|
|
68,789
|
|
|
69,409
|
|
Earnings (loss) per common share - diluted
|
$
|
0.81
|
|
|
$
|
(2.18
|
)
|
|
$
|
(4.11
|
)
|
NOTE 16. STOCK-BASED COMPENSATION
Stock and Incentive Plans
The Company has outstanding stock-based compensation awards that were granted by the compensation committee of Holdings' Board of Directors (the "Compensation Committee") under the following
three
stock-based employee compensation plans:
•
the GNC Holdings, Inc. 2018 Stock and Incentive Plan (the "2018 Stock Plan") amended adopted in May 2018, formerly the GNC Holdings, Inc. 2015 Stock and Incentive Plan adopted in May 2015;
•
the GNC Holdings, Inc. 2015 Stock and Incentive Plan (the "2015 Stock Plan") amended and adopted in May 2015, formerly the GNC Holdings, Inc. 2011 Stock and Incentive Plan adopted in March 2011; and
•
the GNC Acquisition Holdings Inc. 2007 Stock Incentive Plan adopted in March 2007 (as amended, the "2007 Stock Plan").
All plans have provisions that allow for the granting of stock options, restricted stock and other stock-based awards and are available to eligible employees, directors, consultants or advisors as determined by the Compensation Committee. The Company will not grant any additional awards under either the 2007 Stock Plan or 2015 Stock Plan. Up to
20.2 million
shares of common stock may be issued under the 2018 Stock Plan (subject to adjustment to reflect certain transactions and events specified in the 2018 Stock Plan for any award grant), of which
11.1 million
shares remain available for issuance as of December 31, 2018, which has been reduced by
2.2 million
shares (which includes the allocation factor and performance multiplier) performance-based restricted stock units committed but not granted. See below "restricted stock awards" for more information.
Non-Plan Inducement Awards
On September 11, 2017, in connection with the appointment of the Company's new Chief Executive Officer, the Company made the following non-plan inducement awards:
|
|
•
|
"make-whole" restricted stock awards consisting of the following:
|
|
|
◦
|
$600,000
, which are
67,000
fully vested restricted shares with transfer restrictions that lapse on the earliest to occur of a Change in Control of the Company, the third anniversary of grant or death, disability or other separation from service for any reason;
|
|
|
◦
|
$950,000
, which are
106,000
restricted shares that vested on December 29, 2017; and
|
GNC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
◦
|
$1,200,000
, which are
134,000
unvested restricted shares scheduled to vest in
three
equal installments on each of the first three anniversaries of grant subject to acceleration to cover any applicable income and payroll tax withholding resulting from the recognition of ordinary income pursuant to a Section 83(b) election ("Section 83(b) Tax Liability"); and
|
|
|
•
|
time-vested awards consisting of
212,000
restricted shares and
519,000
stock options in the amount of
$1,900,000
each, which are scheduled to vest in
three
equal installments on each of the first three anniversaries of grant.
|
The Company recognized
$1.5 million
and
$2.6 million
in stock-based compensation in 2018 and 2017, respectively. 2017 expense was primarily related to the make-whole awards, which includes the impact of acceleration of vesting associated with the Section 83(b) Tax Liability that together with executive recruitment and other expenses resulted in
$3.3 million
of charges for the year ended December 31, 2017 recorded within SG&A expense on the accompanying Consolidated Statement of Operations.
Stock-Based Compensation Activity
The following table sets forth a summary of all stock-based compensation awards outstanding under all plans:
|
|
|
|
|
|
|
|
December 31, 2018
|
|
December 31, 2017
|
Time-based stock options
|
2,173,488
|
|
|
2,605,167
|
|
Time-based restricted stock awards
|
817,696
|
|
|
1,039,380
|
|
Performance-based restricted stock units
|
277,817
|
|
|
—
|
|
Performance-based restricted stock awards with a market condition
|
199,028
|
|
|
367,150
|
|
Total share awards outstanding
|
3,468,029
|
|
|
4,011,697
|
|
The Company recognized $
6.8 million
, $
8.4 million
and $
8.8 million
of total non-cash stock-based compensation expense for the years ended December 31,
2018
,
2017
and
2016
, respectively, net of estimated forfeitures based on the Company's historical experience and future expectations. At December 31,
2018
, there was
$12.3 million
of total unrecognized compensation cost related to non-vested stock-based compensation, net of expected forfeitures, for all awards previously made that are expected to be recognized over a weighted-average period of
1.3
years. In 2018 and 2017, there were
no
stock options exercised. Cash received from the exercise of options was
$0.4 million
in 2016, which was recorded as additional paid-in capital on the accompanying Consolidated Balance Sheets and presented as a cash inflow from financing activities on the accompanying Consolidated Statements of Cash Flows.
On July 28, 2016, the Company announced the departure from the Company and resignation from the Board of Michael G.Archbold, its former Chief Executive Officer. During the year ended December 31, 2016 in connection with Mr. Archbold's departure, the company recognized
$4.5 million
in severance expense of which
$2.3 million
related to the acceleration of non-cash stock-based compensation.
GNC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Stock Options
Time-based stock options were granted using the Black-Scholes model with exercise prices at the Company's stock price on the date of grant which typically vest at
25%
per year over a
four
-year period except for the non-plan inducement awards as explained above.
No
stock options were granted during the year ended December 31, 2018. The following table sets forth a summary of stock options under all plans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Options
|
|
Weighted
Average
Exercise Price
|
|
Weighted Average
Remaining
Contractual Term
(in years)
|
|
Aggregate
Intrinsic Value
(in thousands)
|
Outstanding at December 31, 2017
|
2,605,167
|
|
|
$
|
11.84
|
|
|
|
|
$
|
—
|
|
Granted
|
—
|
|
|
$
|
—
|
|
|
|
|
|
Exercised
|
—
|
|
|
$
|
—
|
|
|
|
|
$
|
—
|
|
Forfeited and expired
|
(431,679
|
)
|
|
$
|
17.29
|
|
|
|
|
|
Outstanding at December 31, 2018
|
2,173,488
|
|
|
$
|
10.76
|
|
|
7.9
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2018
|
734,880
|
|
|
$
|
12.81
|
|
|
7.0
|
|
$
|
—
|
|
The assumptions used in the Company's Black Scholes valuation during the year ended December 31, 2017 and 2016 were as follows:
|
|
|
|
|
|
Year ended December 31,
|
|
2017
|
|
2016
|
Dividend yield
|
0%
|
|
2.3% - 3.8%
|
Expected term
|
6 - 6.3 years
|
|
6.3 years
|
Volatility
|
38.2% - 40.8%
|
|
30.1% - 30.7%
|
Risk free rate
|
1.8% - 2.1%
|
|
1.3% - 1.9%
|
The option term has been estimated by considering both the vesting period and the contractual term. Volatility was estimated giving consideration to a peer group and the Company's own volatility. The Black Scholes valuation resulted in a weighted average grant date fair value in 2017 and 2016 of $
3.50
and
$6.23
, respectively.
Restricted Stock Awards
Under the 2015 Stock Plan, the Company granted time-based and performance-based restricted stock and restricted stock units as well as, performance restricted shares with a market condition. Time-based awards vest in equal annual installments over a period of
three years
.
Performance-based restricted stock units vest after a period of
three
years and the achievement of performance targets; based on the extent to which the targets are achieved, vested shares may range from
0%
to
150%
of the original share amount. Performance targets are not determined until the beginning of each of the three fiscal years. Therefore, although the shares related to the second and third tranches are committed, they are not granted until performance targets are communicated to the participants. At December 31, 2018, the Company had
2.2 million
shares (which includes the allocation factor and performance multiplier) performance-based restricted stock units committed to be granted over the next two years.
Performance restricted shares with a market condition vest after a period of
three years
and the achievement of total shareholder return compared with that of a selected group of peer companies. Total shareholder return is defined as share price appreciation plus the value of dividends paid during the three year vesting period. Vested shares may range from
0%
to
200%
of the original target. Key assumptions used in the Monte Carlo simulation for the performance restricted shares with a market condition granted during the year ended December 31, 2017 includes a volatility of
34.6%
for the applicable peer group and a risk-free rate of
1.46%
. Key assumptions used in the Monte Carlo simulation for awards granted in 2016 include peer group volatility of
34.2%
and a risk-free rate of
0.89%
.
GNC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table sets forth a summary of restricted stock awards granted under all plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time-Based
|
|
Performance-Based
|
|
Performance Restricted Shares with a Market Condition
|
|
Shares
|
|
Wtd Avg Grant Date Fair Value
|
|
Shares
|
|
Wtd Avg Grant Date Fair Value
|
|
Shares
|
|
Wtd Avg Grant Date Fair Value
|
Outstanding at December 31, 2017
|
1,039,380
|
|
|
$
|
10.01
|
|
|
—
|
|
|
$
|
—
|
|
|
367,150
|
|
|
$
|
15.42
|
|
Granted
|
299,388
|
|
|
$
|
3.41
|
|
|
451,660
|
|
|
$
|
4.13
|
|
|
—
|
|
|
$
|
—
|
|
Vested
|
(368,941
|
)
|
|
$
|
11.59
|
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
Forfeited
|
(152,131
|
)
|
|
$
|
6.63
|
|
|
(173,843
|
)
|
|
$
|
4.04
|
|
|
(168,122
|
)
|
|
$
|
24.16
|
|
Outstanding at December 31, 2018
|
817,696
|
|
|
$
|
7.74
|
|
|
277,817
|
|
|
$
|
4.18
|
|
|
199,028
|
|
|
$
|
8.03
|
|
The total intrinsic value of time-based restricted stock awards vested was $
1.3
million, $
3.0 million
and $
3.1 million
for the years ended December 31, 2018, 2017 and 2016, respectively. The total intrinsic value of time-based restricted stock awards outstanding at December 31, 2018 was $
1.9 million
. The total intrinsic value of performance-based restricted stock units outstanding at December 31, 2018 was
$0.7 million
. The total intrinsic value of performance restricted shares with a market condition outstanding at December 31, 2018 assuming vesting at 100% was $
0.5 million
. In 2016, the weighted average grant date fair value of time-based and performance restricted shares with a market condition granted was $
30.81
and $
34.28
, respectively.
NOTE 17. RETIREMENT PLANS
The Company sponsors a 401(k) defined contribution savings plan covering substantially all employees who have attained age 21. Full time employees who have completed
30 days
of service and part time employees who have completed
1,000
hours of service are eligible to participate in the plan. The plan provides for employee contributions of
1%
to
80%
of individual compensation into deferred savings, subject to IRS limitations. The plan provides for Company contributions upon the employee meeting the eligibility requirements. The Company match consists of both a fixed and a discretionary match. The fixed match is
50%
on the first
3%
of employee contributions and the discretionary match could be up to an additional
50%
match on the
3%
deferral. A discretionary match can be approved at any time by the Company.
An employee becomes vested in the Company match portion as follows:
|
|
|
|
Years of Service
|
Percent
Vested
|
0-1
|
0
|
%
|
1-2
|
33
|
%
|
2-3
|
66
|
%
|
3+
|
100
|
%
|
The Company made cash contributions to the 401(k) plan of
$1.9 million
,
$2.1 million
and
$1.9 million
for the years ended December 31,
2018
,
2017
and
2016
, respectively.
The Company has a Non-qualified Deferred Compensation Plan that provides benefits payable to certain eligible employees upon scheduled in-service distribution, termination, or retirement. This plan allows participants the opportunity to defer pretax amounts ranging from
3%
to
80%
of their base compensation and up to
100%
of bonuses. During 2018, 2017 and 2016, the Company elected to match a percentage of the contributions from employees. For years ended December 31, 2018, 2017 and 2016 this contribution was
$0.2 million
,
$0.3 million
and
$0.3 million
, respectively.
GNC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 18. SEGMENTS
The Company aggregates its operating segments into
three
reportable segments, which include U.S. and Canada, International and Manufacturing / Wholesale. Warehousing and distribution costs have been allocated to each reportable segment based on estimated utilization and benefit. The Company's chief operating decision maker (its chief executive officer) evaluates segment operating results based primarily on performance indicators, including revenue and operating income. Operating income of each reportable segment excludes certain items that are managed at the consolidated level, such as corporate costs. The Manufacturing / Wholesale segment manufactures and sells product to the U.S. and Canada and International segments at cost with a markup, which is eliminated at consolidation. In connection with the asset sales of Lucky Vitamin as described in Note 6, "Goodwill and Intangible Assets," its results are now included within Other for applicable prior periods to ensure comparability.
The following table presents key financial information for each of the Company's reportable segments. The Company recorded
$38.2 million
and
$457.8 million
in long-lived asset impairments in the years ended December 31, 2018 and 2017, respectively, which significantly impacted the U.S. and Canada segment by
$36.1 million
and
$412.5 million
, and the International segment by $
2.1 million
for the year ended December 31, 2018 and the Manufacturing / Wholesale segment by
$24.3 million
for the year ended December 31, 2017. Refer to Note 6, "Goodwill and Intangible Assets" and Note 7, "Property, Plant and Equipment, Net" for more information.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
|
(in thousands)
|
Revenue:
|
|
|
|
|
|
|
|
|
U.S. and Canada
|
$
|
1,951,220
|
|
|
$
|
2,018,931
|
|
|
$
|
2,083,452
|
|
International
|
191,409
|
|
|
177,778
|
|
|
162,318
|
|
Manufacturing / Wholesale
|
|
|
|
|
|
Intersegment revenues
|
264,211
|
|
|
231,495
|
|
|
218,761
|
|
Third party
|
210,894
|
|
|
218,071
|
|
|
238,601
|
|
Subtotal Manufacturing / Wholesale
|
475,105
|
|
|
449,566
|
|
|
457,362
|
|
Total reportable segment revenues
|
2,617,734
|
|
|
2,646,275
|
|
|
2,703,132
|
|
Other
|
—
|
|
|
66,182
|
|
|
85,636
|
|
Elimination of intersegment revenues
|
(264,211
|
)
|
|
(231,495
|
)
|
|
(218,761
|
)
|
Total revenue
|
$
|
2,353,523
|
|
|
$
|
2,480,962
|
|
|
$
|
2,570,007
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
U.S. and Canada
|
$
|
94,663
|
|
|
$
|
(244,104
|
)
|
|
$
|
(107,089
|
)
|
International
|
60,367
|
|
|
60,987
|
|
|
57,031
|
|
Manufacturing / Wholesale
|
62,861
|
|
|
49,175
|
|
|
(17,812
|
)
|
Total reportable segment operating (loss) income
|
217,891
|
|
|
(133,942
|
)
|
|
(67,870
|
)
|
Unallocated corporate and other costs
|
|
|
|
|
|
Corporate costs
|
(105,378
|
)
|
|
(102,114
|
)
|
|
(103,362
|
)
|
Other
|
(160
|
)
|
|
(20,760
|
)
|
|
(85
|
)
|
Unallocated corporate costs and other
|
(105,538
|
)
|
|
(122,874
|
)
|
|
(103,447
|
)
|
Total operating income (loss)
|
112,353
|
|
|
(256,816
|
)
|
|
(171,317
|
)
|
Interest expense, net
|
127,080
|
|
|
64,221
|
|
|
60,443
|
|
Gain on convertible debt and debt refinancing costs
|
—
|
|
|
(10,996
|
)
|
|
—
|
|
Loss on debt refinancing
|
16,740
|
|
|
—
|
|
|
—
|
|
Gain on forward contracts for the issuance of convertible preferred stock
|
(88,942
|
)
|
|
—
|
|
|
—
|
|
Income (loss) before income taxes
|
$
|
57,475
|
|
|
$
|
(310,041
|
)
|
|
$
|
(231,760
|
)
|
GNC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Depreciation and amortization:
|
(in thousands)
|
U.S. and Canada
|
$
|
27,685
|
|
|
$
|
35,571
|
|
|
$
|
37,979
|
|
International
|
2,487
|
|
|
2,455
|
|
|
2,475
|
|
Manufacturing / Wholesale
|
9,790
|
|
|
10,238
|
|
|
10,793
|
|
Corporate and other
|
7,143
|
|
|
8,545
|
|
|
8,791
|
|
Total depreciation and amortization
|
$
|
47,105
|
|
|
$
|
56,809
|
|
|
$
|
60,038
|
|
Capital expenditures:
|
|
|
|
|
|
|
|
|
U.S. and Canada
|
$
|
10,705
|
|
|
$
|
20,614
|
|
|
$
|
40,417
|
|
International
|
759
|
|
|
277
|
|
|
518
|
|
Manufacturing / Wholesale
|
3,459
|
|
|
2,862
|
|
|
7,467
|
|
Corporate and Other
|
4,058
|
|
|
8,370
|
|
|
11,177
|
|
Total capital expenditures
|
$
|
18,981
|
|
|
$
|
32,123
|
|
|
$
|
59,579
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31
|
|
2018
|
|
2017
|
Total assets:
|
(in thousands)
|
U.S. and Canada
|
$
|
867,977
|
|
|
$
|
916,263
|
|
International
|
200,128
|
|
|
202,624
|
|
Manufacturing / Wholesale
|
288,163
|
|
|
305,974
|
|
Corporate and other
|
171,582
|
|
|
94,902
|
|
Total assets
|
$
|
1,527,850
|
|
|
$
|
1,519,763
|
|
Property, plant, and equipment, net:
|
|
|
|
|
|
United States
|
$
|
150,689
|
|
|
$
|
181,118
|
|
Foreign
|
4,406
|
|
|
5,444
|
|
Total property, plant and equipment, net
|
$
|
155,095
|
|
|
$
|
186,562
|
|
GNC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 19. QUARTERLY FINANCIAL INFORMATION
The results of operations for the three month ended December 31, 2018 were impacted significantly by the gain related to the forward contracts for the issuance of convertible preferred stock of
$88.9 million
and long-lived asset impairment charges of
$23.7 million
. Additionally, during the fourth quarter of 2018, the Company recorded an out-of-period adjustment to correct previously recorded specialty manufacturing revenue in the amount of $2.5 million to reduce contract manufacturing sales to third parties recorded in the Manufacturing/Wholesale segment as well as the corresponding contract asset included in Prepaid and other current assets. The impacts to the previously reported revenue and contract asset amounts were immaterial to the previously issued interim financial statements, and the adjustment was not material to the current quarter. The results of operations for the three months ended September 30, 2018 includes long-lived asset impairment charges and other store closing costs of
$14.6 million
. The results of operation for the three months ended March 31, 2018 includes
$16.7 million
loss on debt refinancing. For more information on these items, refer to Note 6, "Goodwill and Intangible Assets", Note 8, "Long-Term Debt / Interest Expense" and Note 13, "Mezzanine Equity."
The results of operations for the three months ended December 31, 2017 were impacted significantly by long-lived asset impairment charges of
$434.6 million
, consisting of
$395.6 million
related to the brand name,
$24.3 million
related to goodwill and
$14.7 million
related to property, plant and equipment, a convertible debt exchange and other debt refinancing costs which resulted in a gain of
$11.0 million
, and the enacted tax reform legislation resulting in an income tax benefit of
$90.5 million
related to the remeasurement of the Company's net deferred tax assets and liabilities. The results of operations, during three months ended June 30, 2017, includes long-lived asset impairment charges of
$19.4 million
related to Lucky Vitamin, the assets of which were sold on September 30, 2017.
The following table summarizes the Company's
2018
and
2017
quarterly results:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended (unaudited)
|
|
Year ended
|
|
March 31,
|
|
June 30,
|
|
September 30,
|
|
December 31,
|
|
December 31,
|
|
2018
|
|
2018
|
|
2018
|
|
2018
|
|
2018
|
|
(In thousands, except per share amounts)
|
Total revenue
|
$
|
607,533
|
|
|
$
|
617,944
|
|
|
$
|
580,185
|
|
|
$
|
547,861
|
|
|
$
|
2,353,523
|
|
Gross profit
|
206,874
|
|
|
207,735
|
|
|
184,702
|
|
|
172,434
|
|
|
771,745
|
|
Operating income (loss)
|
46,389
|
|
|
48,884
|
|
|
19,961
|
|
|
(2,881
|
)
|
|
112,353
|
|
Net income (loss)
|
6,190
|
|
|
13,341
|
|
|
(8,590
|
)
|
|
58,839
|
|
|
69,780
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
83,232
|
|
|
83,332
|
|
|
83,412
|
|
|
83,476
|
|
|
83,364
|
|
Diluted
|
83,368
|
|
|
83,409
|
|
|
83,412
|
|
|
94,388
|
|
|
86,171
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
(1)
|
$
|
0.07
|
|
|
$
|
0.16
|
|
|
$
|
(0.10
|
)
|
|
$
|
0.69
|
|
|
$
|
0.83
|
|
Diluted
(1)
|
$
|
0.07
|
|
|
$
|
0.16
|
|
|
$
|
(0.10
|
)
|
|
$
|
0.62
|
|
|
$
|
0.81
|
|
GNC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended (unaudited)
|
|
Year ended
|
|
March 31,
|
|
June 30,
|
|
September 30,
|
|
December 31,
|
|
December 31,
|
|
2017
|
|
2017
|
|
2017
|
|
2017
|
|
2017
|
|
(In thousands, except per share amounts)
|
Total revenue
|
$
|
654,948
|
|
|
$
|
650,238
|
|
|
$
|
612,953
|
|
|
$
|
562,823
|
|
|
$
|
2,480,962
|
|
Gross profit
|
219,862
|
|
|
219,783
|
|
|
201,292
|
|
|
183,485
|
|
|
824,422
|
|
Operating income (loss)
|
54,968
|
|
|
41,373
|
|
|
39,801
|
|
|
(392,958
|
)
|
|
(256,816
|
)
|
Net income (loss)
|
24,744
|
|
|
16,644
|
|
|
21,056
|
|
|
(212,706
|
)
|
|
(150,262
|
)
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
68,246
|
|
|
68,287
|
|
|
68,354
|
|
|
70,251
|
|
|
68,789
|
|
Diluted
|
68,300
|
|
|
68,362
|
|
|
68,569
|
|
|
70,251
|
|
|
68,789
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
Basic
(1)
|
$
|
0.36
|
|
|
$
|
0.24
|
|
|
$
|
0.31
|
|
|
$
|
(3.03
|
)
|
|
$
|
(2.18
|
)
|
Diluted
(1)
|
$
|
0.36
|
|
|
$
|
0.24
|
|
|
$
|
0.31
|
|
|
$
|
(3.03
|
)
|
|
$
|
(2.18
|
)
|
(1) Quarterly results for earnings per share may not add to full year results due to rounding.
GNC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 20. SUBSEQUENT EVENTS
Harbin Investment and China Joint Ventures
The Company received the Second Issuance of the Harbin investment of
$50 million
on January 2, 2019, and the Third Issuance of approximately
$150 million
on February 13, 2019, pursuant to the terms of the Securities Purchase Agreement. In connection with the Third Issuance and to set forth the rights and obligations of Harbin upon the Third Issuance, the Company and Harbin entered into an Amended and Restated Stockholders Agreement, dated as of February 13, 2019 (the “Stockholders Agreement”).
In connection with the consummation of the Third Issuance, on February 13, 2019, the Company and Harbin entered into an Amendment to the Master Reorganization and Subscription Agreement, pursuant to which the Company and Harbin agreed to close on the commercial joint venture in Hong Kong with respect to our e-commerce business in China (the “HK JV”) concurrently with the Amendment. The HK JV includes the operation of the existing profitable, growing cross border China e-commerce business, and it has an exclusive right to use the Company's trademarks and manufacture and distribute the Company's products in China (excluding Hong Kong, Taiwan and Macau) via e-commerce channels. The HK JV is controlled
65%
by Harbin and
35%
by the Company. In addition, the Company is in the process of forming a second retail-focused joint venture with Harbin located in China (the “China JV”) to operate GNC’s retail business in China. The China JV will have an exclusive right to use the Company's trademarks and manufacture and distribute the Company's products in China (excluding Hong Kong, Taiwan and Macau) via retail stores and pharmacies. The China JV is controlled
65%
by Harbin and
35%
by the Company. Harbin will invest
$20.0 million
in the China JV. The China JV is anticipated to be closed in the second or third quarter of 2019 following the completion of certain routine regulatory and legal requirements. The Company paid Goldman Sachs an advisory fee of
$15 million
related to the completion of the Harbin investment and joint ventures in China. The Company does not expect the closing of the HJ JV and China JV to have a material effect on its Consolidated Financial Statements in 2019.
Manufacturing Joint Venture
In March 2019, the Company announced a strategic joint venture arrangement with International Vitamin Corporation ("IVC") regarding the Company's manufacturing business (the "Manufacturing JV"), which will enable the Company to increase focus on product innovation while IVC manages manufacturing and integrates with the Company's supply chain thereby driving more efficient usage of capital. Under the terms of the agreement, GNC received
$101 million
in 2019 and contributed its Nutra manufacturing and Anderson facility net assets of approximately
$200 million
in exchange for an initial
43%
interest in the new joint venture. In addition, the Company made a capital contribution of
$10.7 million
to the joint venture for its share of short-term working capital needs. Over the next four years, GNC will receive an additional
$75 million
from IVC as their ownership of the joint venture increases to
100%
. The Company expects the closing of the Manufacturing JV to have a material effect on its Consolidated Financial Statements in 2019.
Paydown of Debt
In connection with the closing of the Second Issuance and Third Issuance of Harbin investment and the IVC joint venture in the first quarter of 2019, the Company utilized the proceeds and cash from operating activities to pay down the
$147.3 million
Tranche B-1 Term Loan outstanding as of December 31, 2018, a portion of the Tranche B-2 Term Loan of
$114.0 million
and the original issuance discount due to the Tranche B-2 Term Loan lenders at
2%
of the outstanding balance, reducing total debt from
$1,152.3 million
as of December 31, 2018 to
$887.0 million
as of March 4, 2019. In addition, in connection with the contribution of Nutra manufacturing and Anderson facility net assets to IVC, the Revolving Credit Facility availability decreased from
$100 million
to
$81 million
effective in March 2019.