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Item 7. Management’s Discussion and Analysis

2021-03-03 compared with 2020-02-26 · 474 added, 389 removed, 479 unchanged (64% of the section changed)

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

The following discussion contains management’s discussion and analysis of our financial condition and results of operations and should be read together with the consolidated financial statements and the related notes thereto included elsewhere in this Form 10-K.

This discussion contains forward-looking statements that reflect our plans, estimates and beliefs and involve numerous risks and uncertainties, including, but not limited to, those described in the “Risk Factors” section included in Part I.

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You should carefully read “Special Note Regarding Forward-Looking Statements” in this Form 10-K.

We conduct substantially all of our activities through our direct wholly-owned subsidiary, NVI, and its subsidiaries.

We conduct substantially all of our activities through our indirect wholly-owned subsidiary, NVI, and its subsidiaries.

We operate on a retail fiscal calendar that results in a given fiscal year consisting of a 52- or 53-week period ending on the Saturday closest to December 31.

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in a 53-week fiscal year, each of the first, second and third quarters includes 13 weeks of operations and the fourth quarter includes 14 weeks of operations.

References herein to “fiscal year 2019 ” relate to the 52 weeks ended December 28, 2019 , references herein to “fiscal year 2018 ” relate to the 52 weeks ended December 29, 2018 and references herein to “fiscal year 2017 ” relate to the 52 weeks ended December 30, 2017 .

References herein to “fiscal year 2020” relate to the 53 weeks ended January 2, 2021, references herein to “fiscal year 2019” relate to the 52 weeks ended December 28, 2019 and references herein to “fiscal year 2018” relate to the 52 weeks ended December 29, 2018.

The disclosures contained in this Form 10-K are made only as of the date hereof, and we undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as required by law.

For further information, please see “Risk Factors” and “Forward-Looking Statements.”

We are one of the largest and fastest growing optical retailers in the United States and a leader in the attractive value segment of the U.S.

optical retail industry.

We believe that vision is central to quality of life and that people deserve to see their best to live their best, no matter what their budget.

We believe that vision is central to quality of life and that people deserve to see their best to live their best, regardless of their budget.

Our mission is to make quality eye care and eyewear affordable and accessible to all Americans.

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We reach our customers through a diverse portfolio of 1,205 retail stores across five brands and 19 consumer websites as of fiscal year end 2020.

Brand and Segment Information

Our operations consist of two reportable segments:

Owned & Host – As of fiscal year end 2019 , our owned brands consisted of 725 America’s Best Contacts and Eyeglasses (“America’s Best”) retail stores and 117 Eyeglass World retail stores.

• Owned & Host – As of fiscal ye ar end 2020, our owned brands consisted of 773 America’s Best Contacts and Eyeglasses (“America’s Best”) retail stores and 119 Eyeglass World retail stores.

In America’s Best stores, vision care services are provided by optometrists employed by us or by independent professional corporations or similar entities.

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Eyeglass World stores are primarily located in freestanding or in-line locations near high-foot-traffic shopping centers.

Our host brands consisted of 54 Vista Optical locations on military bases and 29 Vista Optical locations within Fred Meyer stores as of fiscal year end 2019 .

Our host brands consisted of 54 Vista Optical locations on select military bases and 29 Vista Optical locations within select Fred Meyer stores as of fiscal year end 2020.

We have strong, long-standing relationships with our host partners and have maintained each partnership for over 20 years.

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• Legacy – We manage the operations of, and supply inventory and laboratory processing services to, 230 Vision Centers in Walmart retail locations as of fiscal year end 2020.

This strategic relationship with Walmart is in its 30 th year.

Pursuant to a recent amendment to our management & services agreement with Walmart, we will be adding five additional Vision Centers in Walmart stores in fiscal year 2020.

In addition, the amendment also extended the current term of the management & services agreement by six months, to February 23, 2021 , and such term will automatically renew for an additional three-year term unless, no later than July 23, 2020, one party provides the other party written notice of non-renewal.

This strategic relationship with Walmart is in its 31 st year.

Pursuant to a January 2020 amendment to our management & services agreement with Walmart, we added five additional Vision Centers in Walmart stores in fiscal year 2020.

On July 17, 2020, NVI and Walmart extended the current term and economics of the management & services agreement by three years to February 23, 2024;

refer to Note 16.

“Segment Reporting” included in Part II.

of this Form 10-K for further information.

Under the management & services agreement, our responsibilities include ordering and maintaining merchandise inventory;

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We lease space from Walmart within or adjacent to each of the locations we manage and use this space for vision care services provided by independent optometrists or optometrists employed by us or by independent professional corporations or similar entities.

During the fiscal year 2019 , sales associated with our legacy partner arrangement represented 9.3% of consolidated net revenue.

During the fiscal year 2020, sales associated with this arrangement represented 8.3% of consolidated net revenue.

This exposes us to concentration of customer risk.

Our consolidated results also include the following activity recorded in our Corporate/Other category:

Our e-commerce platform of 15 dedicated websites managed by our wholly-owned subsidiary, Arlington Contact Lens Service, Inc.

Our e-commerce business consists of six proprietary branded websites, including aclens.com, discountglasses.com and discountcontactlenses.com, and nine third-party websites with established retailers, such as Walmart, Sam’s Club and Giant Eagle as well as mid-sized vision insurance providers.

• Our e-commerce platform of 15 dedicated websites managed by AC Lens.

Our e-commerce business consists of six proprietary branded websites, including aclens.com, discountglasses.com and discountcontactlenses.com, and nine th ird-party websites with established retailers, such as Walmart, Sam’s Club and Giant Eagle as well as mid-sized vision insurance providers.

AC Lens handles site management, customer relationship management and order fulfillment and also sells a wide variety of contact lenses, eyeglasses and eye care accessories.

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We incur costs at a higher percentage of sales than other product categories.

AC Lens sales associated with Walmart and Sam’s Club contact lenses distribution arrangements represented 8.7% of consolidated net revenue.

Managed care business conducted by FirstSight Vision Services, Inc.

(“FirstSight”), our wholly-owned subsidiary that is licensed as a single-service health plan under California law, which arranges for the provision of optometric services at the offices next to certain Walmart stores throughout California, and also issues individual vision care benefit plans in connection with our America’s Best operations in California.

AC Lens sales associated with Walmart and Sam’s Club contact lenses distribution arrangements represen ted 7.4% of c onsolidated net revenue.

• Managed care business conducted by FirstSight, our wholly-owned subsidiary that is licensed as a single-service health plan under California law, which arranges for the provision of optometric services at the offices next to certain Walmart stores throughout California, and also issues individual vision plans in connection with our America’s Best operations in California.

• Unallocated corporate overhead expenses, which are a component of selling, general and administrative expenses and are comprised of various home office expenses such as payroll, occupancy costs and consulting and professional fees.

Corporate overhead expenses also include field services for our five retail brands.

Reportable segment information is presented on the same basis as our consolidated financial statements, except reportable segment sales are presented on a cash basis, including point of sales for managed care payors and excluding the effects of unearned and deferred revenue, consistent with what our chief operating decision maker (“CODM”) regularly reviews.

Reconciliations of segment results to consolidated results include financial information necessary to adjust reportable segment revenues to a consolidated basis in accordance with accounting principles generally accepted in the United States of America (“GAAP”), specifically the change in unearned and deferred revenues during the period.

Reportable segment information is presented on the same basis as our consolidated financial statements, except reportable segment sales which are presented on a cash basis, including point of sales for managed care payors and excluding the effects of unearned and deferred revenue, consistent with what our chief operating decision maker (“CODM”) regularly reviews.

GAAP”), specifically the change in unearned and deferred revenues during the period.

There are no revenue transactions between reportable segments, and there are no other items in the reconciliations other than the effects of unearned and deferred revenue.

See Note 16 .

“Segment Reporting” in our consolidated financial statements included in Part II.

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Various trends and other factors will affect or have affected our operating results, including:

Impact of COVID-19

The COVID-19 pandemic and related federal, state and local governmental and healthcare authority guidelines continue to impact our business results and cause business disruption in the U.S.

and globally.

To date, the COVID-19 pandemic and related healthcare authority actions have directly and indirectly impacted our operations, including the temporary closure of our stores to the public between March and June 2020, consumer behavior, comparable store sales, our associates and optometrists and the overall market.

While we experienced stronger comparable store sales growth in the third and fourth qua rters of 2020, the comparable store sales growth figure for the fiscal year 2020 reflect the effects of store closures and the pandemic.

The COVID-19 pandemic has resulted in, and may continue to result in, state, city or local quarantines, labor stoppages and shortages, changes in consumer purchasing patterns, mandatory or voluntary shut-downs of retail locations, severe market volatility, liquidity disruptions, and overall economic instability, which, in many cases, have had, and could continue to have, material adverse impacts on our business, financial condition and results of operations.

The scope and nature of these impacts continue to evolve on a daily basis, including with a resurgence in COVID-19 cases during the latter portion of this fiscal year.

Since the onset of the COVID-19 pandemic, we have focused on ensuring the health and safety of our associates and customers, securing liquidity, reducing expenses and deferring discretionary capital expenditures.

In response to the pandemic, we temporarily closed all of our stores to the public across the U.S.

on March 19, 2020 and successfully re-opened all stores with enhanced safety and cleaning protocols by June 8, 2020.

We also suspended all non-essential travel for our associates and have implemented a remote work policy for certain corporate associates.

The decrease in revenue from our temporary store closures was not offset by proportional decreases in expense, as we continued to incur store occupancy costs even while stores were temporarily closed, costs directly related to adapting the Company’s operations to the COVID-19 pandemic such as personal protective equipment and other supplies needed to operate our stores safely and certain other costs such as compensation, a tangible appreciation bonus paid to our customer-facing doctors and associates, and other administrative expenses, resulting in a negative effect on profitability.

Since the beginning of the pandemic, we have also implemented capital spending and expense reduction initiatives , including a temporary pause in new store openings between March and June 2020, reduced near term marketing, a temporary reduction in compensation across the organization until the second quarter of 2020, and worked with a base of vendors and landlords to extend payment terms and modify existing contracts.

On March 17, 2020, as a precautionary measure to preserve financial flexibility during the COVID-19 pandemic, we borrowed the remaining $146.3 million in available funds under our $300.0 million revolving credit facility (the “Revolving Credit Facility”).

On May 12, 2020, we completed the issuance of $402.5 million principal amount of 2.50% convertible senior notes due on May 15, 2025 (the “2025 Notes”) and used the net proceeds to repay the full amount outstanding under our Revolving Credit Facility and part of our outstanding borrowings under our Term Loan.

We also entered into an amendment (the “Credit Agreement Amendment”) to our Amended and Restated Credit Agreement, dated as of July 18, 2019 (the “Credit Agreement”) to suspend certain financial maintenance covenants until testing at the end of the second fiscal quarter of 2021, allowing us to focus on the prudent management of the business.

We also recorded income totaling $11.0 million as a result of the employee retention credits made available under the CARES Act for U.S.

associates during fiscal year 2020;

recognizing $6.2 million as a reduction to costs of services and plans, $0.4 million as a reduction to costs of products and $4.4 million as a reduction to SG&A during fiscal year 2020.

We continue to monitor the evolving situation as there remain many uncertainties regarding the pandemic and its resurgence through new variants, including its anticipated duration, related healthcare authority guidelines and efficacy of vaccination initiatives, impacts on our domestic labs and our outsourced third party optical laboratories in China and Mexico, and potential disruptions of product deliveries.

To date, we have been able to meet customer demand with operations at our laboratories.

We source merchandise from suppliers located in China and a significant amount of domestically-purchased merchandise is manufactured in China.

We have partnered with our suppliers and third party laboratories to mitigate any potential significant delays in delivery of merchandise.

Our e-commerce business remained open to serve our customers during the unprecedented period of temporary store closures.

We could experience further material impacts as a result of COVID-19, including, but not limited to, charges from additional asset impairment, deferred tax valuation allowances and further changes in the effectiveness of our hedging instruments.

We will continue to evaluate additional measures that we may elect to take as a response to the pandemic, including, where appropriate, future action to reduce store hours and patient appointments or temporarily close stores.

There can be no assurance whether or when any such measures will be adopted.

It is possible that our preparations for the events listed above are not adequate to mitigate their impact, and that these events could further adversely affect our business and results of operations.

For a discussion of significant risks that have the potential to cause our actual results to differ materially from our expectations, refer to “Item 1A.

Risk Factors.”

New Store Openings

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The performance of new stores is dependent upon factors such as the time of year of a particular opening, the amount of store pre-opening costs, labor and occupancy costs in the specified market, level of participation in managed care plans, and location, including whether they are in new or existing markets.

We typically incur higher than normal employee costs at the time of a new store opening associated with set-up and other opening costs, including training and development of our store associates.

We typically incur higher than normal associate costs at the time of a new store opening associated with set-up and other opening costs, including training and development of our store associates.

The multi-year maturation process of our stores is influenced by customer purchasing behavior in our industry.

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We will also be required to hire, train and retain optometric professionals, store management and store personnel, which, together with increased marketing costs, may affect our operating margins.

The impact of the COVID-19 pandemic on our multi-year maturation process of our stores, customer purchasing behaviors and patterns remain uncertain and affects and relevant risk exposures may be exacerbated by the immediate and ongoing threat of the COVID-19 pandemic.

Comparable Store Sales Growth

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• impact and timing of weather related store closures;

• affects and relevant risk exposures may be exacerbated by the immediate and ongoing threat of the COVID-19 pandemic

A new store is included in the comparable store sales calculation during the 13th full fiscal month following the store’s opening.

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An increasing percentage of our customers receive vision care insurance coverage through managed care payors.

Our participation in these programs represent an increasingly significant portion of our overall revenues and our revenue growth.

While we have relationships with almost all vision care insurers in the United States and with all of the major carriers, currently, a relatively small number of payors comprise the majority of our managed care revenues, subjecting us to concentration risk.

Our participation in these programs represent an increasingly significant portion of our overall revenues and represented approximately one third of our overall revenues in fiscal year 2020.

While we have relationships with almost all vision care insurers in the United States and with all of the major carriers, currently, a relatively small

number of payors comprise the majority of our managed care revenues, subjecting us to concentration risk.

As our participation in managed care programs continues to expand, we have incurred and expect to incur additional costs related to this area of our business.

Our future operational success could depend on our ability to negotiate, maintain and extend contracts with managed vision care companies, vision insurance providers and other third-party payors, several of whom have significant market share.

Coverage and payment levels are determined at each third-party payor’s discretion, and we have no direct control over third-party payor’s decision-making with respect to coverage and payment levels.

Coverage and payment levels are determined at each third-party payor’s discretion, and we have limited control over third-party payor’s decision-making with respect to coverage and payment levels.

Coverage restrictions and reductions in reimbursement levels or payment methodologies may negatively impact our sales and profits.

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Our ability to continue to attract and retain qualified vision care professionals is key to store operations, as well as maintaining our relationships with independent optometrists and professional corporations owned by eye care practitioners that provide vision care services in our stores;

however the affects and relevant risk exposures may be exacerbated by the immediate and ongoing threat of the COVID-19 pandemic.

Overall Economic Trends

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During periods of economic downturn and uncertainty, our customers especially benefit from our low prices.

However, eye care purchases are predominantly a medical necessity and are considered non-discretionary in nature.

Additionally, eye care purchases are predominantly a medical necessity and are considered non-discretionary in nature.

Therefore, the overall economic environment and related changes in consumer behavior may have less of an impact on our business than for retailers in other industries;

however, the long-term effects of the COVID-19 pandemic on overall economic trends and consumer spending patterns remain uncertain.

Consumer Preferences and Demand

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We estimate that optical consumers typically replace their eyeglasses every two to three years, and contact lens customers order new lenses every six to 12 months, reflecting the predictability of these recurring purchase behaviors;

however, the long-term effects of the COVID-19 pandemic on consumer preferences and recurring purchase behaviors remain uncertain.

Infrastructure Investment

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Our revenue and operating income are affected by our ability to purchase our products in sufficient quantities at competitive prices.

While we believe our vendors have adequate capacity to meet our current and anticipated demand, our level of revenue could be adversely affected in the event we face constraints in our supply chain, including the inability of our vendors to produce sufficient quantities of merchandise in a manner that is able to match market demand from our customers.

We rely on a small number of vendors to supply the majority of our eyeglass frames, eyeglass lenses and contact lenses, and are thus exposed to supplier concentration risk.

We rely on a small number of vendors to supply the majority of our eyeglass lenses and contact lenses, and are thus exposed to supplier concentration risk.

In particular, we have agreed to exclusively purchase almost all of our spectacle lenses from one supplier.

During fiscal year 2019 , 88% of spectacle lens expenditures were from this vendor, 92% of contact lens expenditures were with three vendors and 51% of frame expenditures were with two vendors.

During fiscal year 2020 , 89% of spectacle lens expenditures were from this vendor and 93% of contact lens expenditures were with three vendors.

We are less exposed to a supplier risk for our eyeglass frames as only 52% of frame expenditures were with two vendors.

We source merchandise from suppliers located in China, a significant amount of our domestically-purchased merchandise is manufactured in China, and one of our outsourced third-party laboratories is located in China.

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from China and effective February 14, 2020, the 15% tariff was reduced to 7.5%.

The temporary reduction of tariff rates expired in September, 2020.

We continue to monitor ongoing political relations between China and the United States.

While we have implemented mitigation plans and continue to focus on additional mitigation strategies to offset the impact of tariffs, costs with respect to products subject to these tariffs have increased.

If we are unable to mitigate the full impact of the enacted tariffs or if there is a further escalation of tariffs, costs on a significant portion of our products may increase further and our financial results may be negatively affected.

In addition, the ongoing coronavirus outbreak in China could impact our product sourcing if the travel restrictions and shutdown of certain businesses in China continues for an extended period of time.

In addition, the COVID-19 pandemic could impact our product sourcing if travel restrictions an d a shutdown of businesses in China arises due to a resurgence in cases.

While it is too early to predict how the China tariffs or the coronavirus will impact our business, our financial results may also be impacted by consumers’ fear of a prolonged trade war with China, a slowdown in sourcing and an economic slowdown.

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With respect to our fourth quarter results, compared to other retailers, our products and services are less likely to be included in consumer’s holiday spending budgets, therefore reducing spending on personal vision correction during the weeks preceding December 25th of each year.

Additionally, although the period between December 25th and the end of our fiscal year is typically a high-volume period, the net revenue associated with substantially all orders of prescription eyeglasses and contact lenses during that period is deferred until January due to our policy of recognizing revenue only after the product has been accepted by the customer.

Additionally, although the period between December 25th and the end of our fiscal year is typically a high-volume period, the net revenue associated with substantially all orders of prescription eyeglasses and contact lenses during that period is deferred until the following fiscal period due to our policy of recognizing revenue only after the product has been accepted by the customer.

Consumer behavior driven by the COVID-19 pandemic has resulted in a departure from seasonal norms we have experienced in recent years and may continue to disrupt the historical quarterly cadence of our results of operations for an unknown period of time.

For fiscal years 2019 and 2018, approximately 23% of our revenues were recorded in the fourth quarter, but approximately 24% of annual SG&A costs were also recorded in the fourth quarter for those years, due to certain SG&A costs being more fixed in nature.

In addition to lower revenues in the fourth quarter compared to the other quarters, our fourth quarter operating income may include impairment charges, which may further reduce operating income relative to other quarters.

For fiscal year 2020, approximately 29% of our revenue was recorded in the fourth quarter, but approximately 28% of annual SG&A costs were recorded in the fourth quarter.

Compared to prior fiscal years, in fiscal year 2020 we experienced stronger comparable store sales growth in the fourth quarter from strong customer demand, including the effect of our stores being temporarily closed to the public earlier in the year.

Additionally, SG&A costs, primarily advertising expense, during the second and third quarters of fiscal year 2020 were lower than in the corresponding quarters prior fiscal years due to impacts of the COVID-19 pandemic.

Our quarterly results may also be affected by the timing of new store openings and store closings, the amount of sales contributed by new and existing stores, as well as the timing of certain holidays.

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We also compete with large national retailers such as, in alphabetical order, LensCrafters, Pearle Vision and Visionworks.

The COVID-19 pandemic may lead to changes in both the number and positioning of our competitors.

Consolidation in the Industry

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Other trends include an increase in private equity-backed consolidation of smaller and mid-size independent practices and the formation of buying groups and similar forms of practice affiliations.

The COVID-19 pandemic may lead to increases in consolidation activity and trends.

How We Assess the Performance of Our Business

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The key measures we use to determine how our consolidated business and operating segments are performing are net revenue, costs applicable to revenue, and selling, general, and administrative expenses.

In addition, we also review store growth, Adjusted Comparable Store Sales Growth, Adjusted EBITDA, Adjusted EBITDA Margin and Adjusted Net Income.

In addition, we also review store growth, Adjusted Comparable Store Sales Growth, Adjusted Operating Income, Adjusted Operating Margin, Adjusted EBITDA, Adjusted EBITDA Margin and Adjusted Diluted EPS.

We report as net revenue amounts generated in transactions with retail customers who are the end users of our products, services, and plans.

Net product sales include sales of prescription and non-prescription eyewear, contact lenses, and related accessories as well as eye exam services associated with our Americas Best brand’s signature offer of two pairs of eyeglasses and a free eye exam for one low price (“two-pair offer”) to retail customers and sales of inventory in which our customer is another retail entity.

Net product sales include sales of prescription and non-prescription eyewear, contact lenses, and related accessories as well as eye exam services associated with our America’s Best brand’s signature offer of two pairs of eyeglasses and a free eye exam for one low price (“two-pair offer”) to retail customers and sales of inventory in which our customer is another retail entity.

Net sales of services and plans include sales of eye exams, eye care club memberships, product protection plans (i.e., warranties), and single service eye care plans in California.

Net sales of services and plans also includes fees we earn for managing certain Vision Centers located in Walmart stores and for laboratory services provided to Walmart.

Net sales of services and plans also include fees we earn for managing certain Vision Centers located in Walmart stores and for laboratory services provided to Walmart.

Costs Applicable to Revenue

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New Store Openings

The total number of new stores per year and the timing of store openings has, and will continue to have, an impact on our results as described above in “—Trends and Other Factors Affecting Our Business.”

The total number of new stores per year and the timing of store openings has, and will continue to have, an impact on our results.

In an effort to conserve cash early in the COVID-19 pandemic, we temporarily paused new store openings during a portion of fiscal year 2020.

We open ed 57 st ores and transitioned five additional Legacy stores to our management during fiscal year 2020.

We will continue to monitor and determine our plans for future new store openings based on health, safety and economic conditions.

Adjusted Comparable Store Sales Growth

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As a result, our adjusted comparable store sales may not be comparable to similar data made available by other retailers.

We did not revise our calculation of Adjusted Comparable Store Sales Growth for the temporary closure of our stores to the public as a result of the COVID-19 pandemic.

Adjusted Comparable Store Sales Growth is a non-GAAP financial measure, which we believe is useful because it provides timely and accurate information relating to the two core metrics of retail sales:

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We also believe that, for the same reasons, investors find our calculation of Adjusted Comparable Stores Sales Growth to be meaningful.

Adjusted EBITDA, Adjusted EBITDA Margin and Adjusted Net Income

We define Adjusted EBITDA as net income, plus interest expense, income tax provision (benefit) and depreciation and amortization, as further adjusted to exclude stock compensation expense, debt issuance costs, loss on the extinguishment of debt, asset impairment, new store pre-opening expenses, non-cash rent, secondary offering expenses, management realignment expenses, long-term incentive plan expenses, and other expenses.

We define Adjusted EBITDA Margin as Adjusted EBITDA as a percentage of total net revenue.

We define Adjusted Net Income as net income, adjusted to exclude stock compensation expense, debt issuance costs, loss on extinguishment of debt, asset impairment, new store pre-opening expenses, non-cash rent, secondary offering expenses, management realignment expenses, long-term incentive plan expenses, other expenses, amortization of acquisition intangibles and deferred financing costs, tax benefit of stock option exercises, less the tax effect of these adjustments.

Adjusted EBITDA, Adjusted EBITDA Margin and Adjusted Net Income are key measures used by management to assess our financial performance.

Adjusted EBITDA, Adjusted EBITDA Margin and Adjusted Net Income are also frequently used by analysts, investors and other interested parties.

We use Adjusted EBITDA, Adjusted EBITDA Margin and Adjusted Net Income to supplement GAAP measures of performance to evaluate the effectiveness of our business strategies, to make budgeting decisions, to establish discretionary annual incentive compensation and to compare our performance against that of other peer companies using similar measures.

See “Non-GAAP Financial Measures” for additional information.

Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Operating Income, Adjusted Operating Margin, and Adjusted Diluted EPS (collectively, the “Company Non-GAAP Measures”)

The Company Non-GAAP Measures are key measures used by management to assess our financial performance.

The Company Non-GAAP Measures are also frequently used by analysts, investors and other interested parties.

We use the Company Non-GAAP Measures to supplement U.S.

GAAP measures of performance to evaluate the effectiveness of our business strategies, to make budgeting decisions, to establish discretionary annual incentive compensation and to compare our performance against that of other peer companies using similar measures.

See “Non-GAAP Financial Measures” for definitions of the Company Non-GAAP Measures and for additional information.

Results of Operations

The following table summarizes key components of our results of operations for the periods indicated, both in dollars and as a percentage of our net revenue.

In thousands, except percentage and store data

In thousands, except earnings per share, percentage and store data Fiscal Year 2020 Fiscal Year 2019 Fiscal Year 2018

Net product sales $ 1,418,283 $ 1,426,136 $ 1,269,612

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Costs applicable to revenue (exclusive of depreciation and amortization):

Products 551,783 574,351 511,406

Services and plans 234,841 232,168 202,165

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Litigation settlement 4,395 — —

Other expense, net

Other expense (income), net (445) 3,611 1,487

Total operating expenses 838,129 844,237 780,932

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Income tax provision (benefit) 2,403 (2,309) (18,785)

Net income $ 36,277 $ 32,798 $ 23,653

Operating data:

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New stores opened during the period 62 75 74

Adjusted Operating Income $ 134,148 $ 114,300 $ 102,401

Diluted EPS $ 0.44 $ 0.40 $ 0.30

Adjusted Diluted EPS $ 0.91 $ 0.75 $ 0.61

Adjusted EBITDA 1

$ 218,307 $ 194,139 $ 169,335

Fiscal year 2020 includes 53 weeks.

Fiscal years 2019 and 2018 include 52 weeks.

1 Adjusted EBITDA no longer excludes new store pre-opening expenses and non-cash rent.

Refer to Non-GAAP Financial Measures section below for our presentation of Adjusted EBITDA.

Fiscal Year 2020 Fiscal Year 2019 Fiscal Year 2018

Percentage of net revenue:

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Income from operations 5.1 % 4.3 % 2.8 %

Net income 2.1 % 1.9 % 1.5 %

Adjusted Operating Income 7.8 % 6.6 % 6.7 %

Adjusted EBITDA 12.8 % 11.3 % 11.0 %

Fiscal Year 2020 compared to Fiscal Year 2019

As a result of the COVID-19 pandemic, our retail stores closed to the public beginning on March 19, 2020.

We began reopening our stores to the public on April 27, 2020 and on June 8, 2020, we announced the successful completion of the reopening process.

Fiscal year 2020 consists of 53 weeks compared to 52 weeks in fiscal year 2019.

The following presents, by segment and by brand, comparable store sales growth, stores open at the end of the period and net revenue for fiscal year 2020 compared to fiscal year 2019.

Comparable store sales growth (1)

Stores open at end of period

Net revenue (2)

In thousands, except percentage and store data

Fiscal Year 2019

Fiscal Year 2018

Fiscal Year 2019

Fiscal Year 2018

Fiscal Year 2019

Fiscal Year 2018

Stores open at end of period Net revenue (2)

In thousands, except percentage and store data Fiscal Year 2020 Fiscal Year 2019 Fiscal Year 2020 Fiscal Year 2019 Fiscal Year 2020 Fiscal Year 2019

Owned & Host segment

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Eyeglass World (2.7) % 5.8 % 119 117 179,934 10.5 % 178,841 10.4 %

Military (15.5) % 1.4 % 54 54 20,428 1.2 % 23,694 1.4 %

Fred Meyer (21.6) % (4.4) % 29 29 11,021 0.6 % 13,705 0.8 %

Owned & Host segment total 975 925 $ 1,342,399 78.4 % $ 1,325,000 76.9 %

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Reconciliations — — — — (7,059) (0.4) % (5,936) (0.4) %

Total (5.6) % 6.5 % 1,205 1,151 $ 1,711,760 100.0 % $ 1,724,331 100.0 %

Adjusted Comparable Store Sales Growth (3)

(6.1) % 6.2 %

Fiscal year 2020 includes 53 weeks.

Fiscal year 2019 includes 52 weeks.

(1) We calculate total comparable store sales based on consolidated net revenue excluding the impact of (i) Corporate/Other segment net revenue, (ii) sales from stores opened less than 13 months, (iii) stores closed in the periods presented, (iv) sales from partial months of operation when stores do not open or close on the first day of the month and (v) if applicable, the impact of a 53rd week in a fiscal year.

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(3) There are two differences between total comparable store sales growth based on consolidated net revenue and Adjusted Comparable Store Sales Growth:

(i) Adjusted Comparable Store Sales Growth includes the effect of deferred and unearned revenue as if such revenues were earned at the point of sale, resulting in a decrease of 0.4% and a decrease of 0.1% from total comparable store sales growth based on consolidated net revenue for fiscal year 2020 and fiscal year 2019, respectively, and (ii) Adjusted Comparable Store Sales Growth includes retail sales to the legacy partner’s customers (rather than the revenues recognized consistent with the management & services agreement with the legacy partner), resulting in a decrease of 0.1% and a decrease of 0.2% from total comparable store sales growth based on consolidated net revenue for the fiscal years 2020 and 2019, respectively.

Total net revenue of $1,711.8 million for fiscal year 2020 decreased $12.5 million, or 0.7%, from $1,724.3 million for fiscal year 2019.

This decrease was driven by the temporary closure of our stores to the public for a portion of fiscal year 2020 due to the COVID-19 pandemic, and was partially offset by new store sales as well as $32.2 million of net revenue attributable to the 53rd week in fiscal year 2020.

Total net revenue was also negatively impacted by changes in unearned revenue.

During fiscal year 2020, we opened 55 new America’s Best stores, two new Eyeglass World stores, and transitioned five additional Legacy stores to our management.

During fiscal year 2020, we closed seven America’s Best stores and one Legacy store as a result of our Legacy partner’s decision to cease its overall operations at the location.

The total net new locations in fiscal year 2020 for America’s Best, Eyeglass Word, and Legacy are 48, two and four, respectively.

Overall, store count grew 4.7% from the end of fiscal year 2019 to the end of fiscal year 2020.

Comparable store sales growth and Adjusted Comparable Store Sales Growth for fiscal year 2020 were (5.6)% and (6.1)%, respectively.

The decreases in comparable store sales growth and Adjusted Comparable Store Sales Growth were driven by the temporary closure of our stores to the public.

Net product sales comprised 82.9% and 82.7% of total net revenue for fiscal years 2020 and 2019, respectively.

Net product sales decreased $7.9 million, or 0.6% during fiscal year 2020 compared to fiscal year 2019, primarily due to the temporary closure of our stores to the public and lower wholesale fulfillment that was partially offset by additional revenue from the 53 rd week and increased sales of contact lenses.

Net sales of services and plans decreased $4.7 million, or 1.6%, primarily due to the temporary closure of our stores to the public.

Owned & Host segment net revenue.

Net revenue increased $17.4 million, or 1.3% as stronger sales in fiscal year 2020, and in the 53 rd week, were partially offset by declines due to the temporary closure of our stores to the public.

Legacy segment net revenue.

Net revenue declined $18.0 million, or 11.3%, due to the temporary closure of our stores to the public.

Corporate/Other segment net revenue.

Net revenue declined $10.8 million, or 4.4%, due to lower wholesale fulfillment, partially offset by growth in our online retail business.

Net revenue reconciliations.

Reconciliations for fiscal year 2020 and fiscal year 2019 include increases in deferred revenue of $2.3 million and $5.1 million, respectively and increases in unearned revenue of $4.8 million and $0.8 million, respectively.

The increase in deferred revenue for fiscal year 2020 was driven by growth in eye care club membership sales;

we believe that the increases in deferred revenue were limited somewhat by the temporary closure of our stores to the public.

The increase in unearned revenue compared to the prior period is due to higher sales in the 53 rd week of the fiscal year.

In 53-week fiscal years we have historically experienced higher volumes in the 53 rd week compared to the 52 nd week.

Costs applicable to revenue

Costs applicable to revenue of $786.6 million for fiscal year 2020 decreased $19.9 million, or 2.5%, from $806.5 million for fiscal year 2019.

As a percentage of net revenue, costs applicable to revenue decreased from 46.8% for fiscal year 2019 to 46.0% for fiscal year 2020.

This decrease as a percentage of net revenue was driven by higher eyeglass margin, partially offset by increased contact lens mix and optometrist costs while our stores were temporarily closed to the public.

Costs of products as a percentage of net product sales decreased from 40.3% for fiscal year 2019 to 38.9% for fiscal year 2020, driven by higher eyeglass margin, partially offset by increased contact lens mix.

Owned & Host segment costs of products.

Costs of products as a percentage of net product sales decreased from 28.9% for fiscal year 2019 to 28.0% for fiscal year 2020 driven by higher eyeglass margin, partially offset by increased contact lens mix.

Legacy segment costs of products.

Costs of products as a percentage of net product sales increased from 46.2% for fiscal year 2019 to 47.8% for fiscal year 2020.

The increase was primarily driven by increased contact lens mix and a higher mix of non-managed care customer transactions versus managed care customer transactions.

Legacy segment managed care net product revenue is recorded in net product sales while revenue associated with servicing non-managed care customers is recorded in net sales of services and plans.

Eyeglass and contact lens product costs for both managed care and non-managed care net revenue are recorded in costs of products.

Decreases in managed care mix increase costs of products as a percentage of net product sales and have a corresponding positive impact on costs of services as a percentage of net sales of services and plans in our Legacy segment.

Costs of services and plans as a percentage of net sales of services and plans increased from 77.9% for fiscal year 2019 to 80.0% for fiscal year 2020.

The increase was primarily driven by optometrist costs incurred during the temporary closure of our stores to the public.

Owned & Host segment costs of services and plans.

Costs of services and plans as a percentage of net sales of services and plans increased from 83.2% for fiscal year 2019 to 86.0% for fiscal year 2020.

The increase was driven by optometrist and technician costs incurred during the temporary closure of our stores to the public.

Legacy segment costs of services and plans.

Costs of services and plans as a percentage of net sales of services and plans increased from 46.3% for fiscal year 2019 to 46.5% for fiscal year 2020.

The increase was primarily driven by optometrist costs incurred during the temporary closure of our stores to the public.

Selling, general and administrative

SG&A of $720.6 million for fiscal year 2020 decreased $23.9 million, or 3.2%, from fiscal year 2019.

As a percentage of net revenue, SG&A decreased from 43.2% for fiscal year 2019 to 42.1% for fiscal year 2020.

This decrease as a percentage of net revenue was primarily driven by lower advertising investment partially offset by store and corporate payroll and occupancy costs incurred during the temporary closure of our stores to the public.

SG&A for fiscal year 2020 includes $8.6 million of incremental costs directly related to adapting the Company’s operations during the COVID-19 pandemic;

of these costs, $0.6 million were reflected as adjustments for the Company’s presentation of non-GAAP measures below.

Owned & Host segment SG&A.

SG&A as a percentage of net revenue decreased from 38.4% for fiscal year 2019 to 36.5% for fiscal year 2020.

This decrease as a percentage of net revenue was primarily driven by lower advertising investment partially offset by store payroll and occupancy costs incurred during the temporary closure of our stores to the public.

Legacy segment SG&A.

SG&A as a percentage of net revenue increased from 35.1% for fiscal year 2019 to 36.5% for fiscal year 2020 primarily driven by store payroll costs incurred during the temporary closure of our stores to the public.

Depreciation and amortization

Depreciation and amortization expense of $91.6 million for fiscal year 2020 increased $4.3 million, or 5.0%, from $87.2 million for fiscal year 2019 primarily driven by new store openings and investments in information technology and doctor equipment.

Our property and equipment balance, net, decreased $25.5 million, or 6.9%, during fiscal year 2020, reflective of $76.2 million in purchases of property and equipment, $1.1 million in new finance leases, less $84.2 million in depreciation expense and $18.6 million in impairment and other adjustments.

Asset impairment

We recognized $22.0 million for impairment primarily of tangible long-lived assets and ROU assets associated with our retail stores in fiscal year 2020 compared to $8.9 million recognized in fiscal year 2019.

Expenses recognized in fiscal year 2020 were related to impairments of long-lived tangible assets at our retail stores and right of use (“ROU”) assets related to our retail stores.

The increase in store asset impairment charges during fiscal year 2020 was primarily related to our Owned & Host segment and was driven by lower than projected customer sales volume in certain stores and other entity-specific assumptions.

We considered multiple factors including, but not limited to:

forecasted scenarios related to store performance and the likelihood that these scenarios would be ultimately realized;

the historical performance of the stores before the temporary closure of our stores to the public;

the effect of store closures and uncertainty in store revenues over the remaining useful life of the asset group as a result of the COVID-19 pandemic;

and the remaining useful lives of the assets.

The asset impairment expense for fiscal year 2020 also includes $1.1 million related to a write-off of certain software assets that were deemed to be obsolete.

Asset impairment expenses were recognized in Corporate/Other.

Interest expense, net

Interest expense, net, of $48.2 million for fiscal year 2020 increased $14.9 million, or 44.7%, from $33.3 million for fiscal year 2019.

The increase was primarily driven by losses related to immediate recognition of changes in fair value of ineffective hedges of $4.0 million and charges related to interest payments and amortization of debt discounts related to the 2025 Notes of $17.3 million that were partially offset by a reduction in our Term Loan and Revolving Credit Facility utilization.

Income tax provision

Our income tax provision for fiscal year 2020 reflected our statutory federal and state rate of 25.5%, combined with a discrete benefit of $8.0 million associated primarily with the exercise of stock options.

In comparison, the income tax benefit associated with fiscal year 2019, reflected income tax expense at our statutory federal and state rate of 25.5% offset by a $10.1 million income tax benefit resulting from stock option exercises.

Fiscal Year 2019 compared to Fiscal Year 2018

The following presents, by segment and by brand, comparable store sales growth, stores open at the end of the period and net revenue for fiscal year 2019 compared to fiscal year 2018.

Comparable store sales growth (1)

Stores open at end of period Net revenue (2)

In thousands, except percentage and store data Fiscal Year 2019 Fiscal Year 2018 Fiscal Year 2019 Fiscal Year 2018 Fiscal Year 2019 Fiscal Year 2018

Owned & Host segment

America’s Best 7.1 % 7.2 % 725 657 $ 1,108,760 64.3 % $ 971,384 63.2 %

Eyeglass World 5.8 % 6.8 % 117 115 178,841 10.4 % 163,932 10.7 %

Military 1.4 % (5.7) % 54 54 23,694 1.4 % 23,748 1.5 %

Fred Meyer (4.4) % (2.2) % 29 29 13,705 0.8 % 14,338 0.9 %

Owned & Host segment total 925 855 $ 1,325,000 76.9 % $ 1,173,402 76.3 %

Legacy segment 3.1 % 0.6 % 226 227 160,049 9.3 % 154,412 10.0 %

Corporate/Other — — — — 245,218 14.2 % 212,427 13.8 %

Reconciliations — — — — (5,936) (0.4) % (3,387) (0.1) %

Total 6.5 % 6.7 % 1,151 1,082 $ 1,724,331 100.0 % $ 1,536,854 100.0 %

Adjusted Comparable Store Sales Growth (3)

Brand-level comparable store sales growth is calculated based on cash basis revenues consistent with what the CODM reviews, and consistent with reportable segment revenues presented in Note 16.

“Segment Reporting” in our consolidated financial statements included in Part II.

of this Form 10-K, with the exception of the Legacy segment, which is adjusted as noted in clause (ii) of footnote (3) below.

(2) Percentages reflect line item as a percentage of net revenue.

(3) There are two differences between total comparable store sales growth based on consolidated net revenue and Adjusted Comparable Store Sales Growth:

(i) Adjusted Comparable Store Sales Growth includes the effect of deferred and unearned revenue as if such revenues were earned at the point of sale, resulting in a decrease of 0.1% and a decrease of 0.8% from total comparable store sales growth based on consolidated net revenue for fiscal year 2019 and fiscal year 2018, respectively, and (ii) Adjusted Comparable Store Sales Growth includes retail sales to the legacy partner’s customers (rather than the revenues recognized consistent with the management & services agreement with the legacy partner), resulting in a decrease of 0.2% from total comparable store sales growth based on consolidated net revenue for each of the fiscal years 2019 and 2018.

28 unchanged sentences

The increase in deferred revenue for fiscal year 2019 was driven by growth in eye care club membership sales.

Differences between the changes in unearned revenue for fiscal year 2019 and fiscal year 2018 were primarily the result of calendar influences on sales of prescription eyewear in our stores during approximately the last seven to 10 days of the current quarters compared to the preceding years.

Unearned revenue was higher at the end of fiscal year 2017 compared to the end of fiscal year 2018 due to sales volume differences caused by shifts in the number of selling days after December 25th.

31 unchanged sentences

The decrease in SG&A as a percentage of net revenue was primarily due to increased net revenue from our AC Lens contact lens distribution business, store payroll leverage and lower stock-based compensation expense.

Owned & Host SG&A.

Owned & Host segment SG&A.

SG&A as a percentage of net revenue decreased from 39.0% for fiscal year 2018 to 38.4% for fiscal year 2019, driven primarily by store payroll leverage.

18 unchanged sentences

During fiscal year 2018, our expected combined statutory federal and state rate was reduced by a $25.5 million income tax benefit resulting from stock option exercises.

Fiscal Year 2018 compared to Fiscal Year 2017

The following presents, by segment and by brand, comparable store sales growth, stores open at the end of the period and net revenue for fiscal year 2018 compared to fiscal year 2017 .

Comparable store sales growth (1)

Stores open at end of period

Net revenue (2)

In thousands, except percentage and store data

Fiscal Year 2018

Fiscal Year 2017

Fiscal Year 2018

Fiscal Year 2017

Fiscal Year 2018

Fiscal Year 2017

Owned & Host segment

America’s Best

Eyeglass World

Owned & Host segment total

Legacy segment

Corporate/Other

Reconciliations

Adjusted Comparable Store Sales Growth (3)

We calculate total comparable store sales based on consolidated net revenue excluding the impact of (i) Corporate/Other segment net revenue, (ii) sales from stores opened less than 13 months, (iii) stores closed in the periods presented, (iv) sales from partial months of operation when stores do not open or close on the first day of the month and (v) if applicable, the impact of a 53rd week in a fiscal year.

Brand-level comparable store sales growth is calculated based on cash basis revenues consistent with what the CODM reviews, and consistent with reportable segment revenues presented in Note 16 .

"Segment Reporting" in our consolidated financial statements included in Part II.

of this Form 10-K, with the exception of the Legacy segment, which is adjusted as noted in clause (ii) of footnote (3) below.

Percentages reflect line item as a percentage of net revenue.

There are two differences between total comparable store sales growth based on consolidated net revenue and Adjusted Comparable Store Sales Growth:

(i) Adjusted Comparable Store Sales Growth includes the effect of deferred and unearned revenue as if such revenues were earned at the point of sale, resulting in a decrease of 0.8% and 0.7% from total comparable store sales growth based on consolidated net revenue for fiscal year 2018 and fiscal year 2017, respectively, and (ii) Adjusted Comparable Store Sales Growth includes retail sales to the legacy partner’s customers (rather than the revenues recognized consistent with the management & services agreement), resulting in a decrease of 0.2% from total comparable store sales growth based on consolidated net revenue for each of the fiscal years 2018 and 2017.

Total net revenue of $1,536.9 million for fiscal year 2018 increased $161.5 million, or 11.7%, from $1,375.3 million for fiscal year 2017.

This increase was driven approximately 45% by comparable store sales growth, approximately 40% by new stores and approximately 15% by order volume in our AC Lens business within the Corporate/Other segment.

During fiscal year 2018, we opened 74 new stores, including 65 new America’s Best stores and nine new Eyeglass World stores.

Additionally, we closed two America’s Best stores, one Eyeglass World store and two Military locations.

Overall, store count grew 6.8% from the end of fiscal year 2017 to the end of fiscal year 2018.

Comparable store sales growth and Adjusted Comparable Store Sales Growth was 6.7% and 5.7% for fiscal year 2018, respectively.

Comparable store sales growth and Adjusted Comparable Store Sales Growth were driven by increases in customer transactions and, to a lesser extent, average ticket.

We believe the increases in net revenue and customer transactions were primarily due to execution of our key strategies, including new store openings and maturation, advertising and expansion of our participation in managed care programs.

Net product sales comprised 82.6% and 82.1% of total net revenue for fiscal years 2018 and 2017, respectively.

Net product sales increased $140.3 million, or 12.4% during fiscal year 2018 compared to fiscal year 2017, driven primarily by eyeglass sales and, to a lesser extent, contact lens sales.

Net sales of services and plans increased $21.2 million, or 8.6%, driven primarily by eye exam sales in our Owned & Host segment.

The eye exam increase was driven primarily by expanding participation in managed care programs and our store growth.

To a lesser extent, product protection program sales and Eyecare Club membership sales also contributed to the increase.

The increase in product protection program sales was driven by our America’s Best brand.

The increase in Eyecare Club membership revenue was primarily driven by the $1.3 million deferred revenue accounting change in fiscal year 2018 discussed in Note 1.

“Business and Significant Accounting Policies” of our audited consolidated financial statements included in Part II.

of this Form 10-K.

As a result of changes in applicable California law, optometrists employed by FirstSight were transferred to a professional corporation that contracts directly with our Legacy segment in part during the third quarter of fiscal year 2017 and the remainder in the fourth quarter of 2018.

This change led to an increase in Legacy segment eye exam revenue and optometrist payroll costs of $2.2 million and $1.9 million, respectively, in fiscal year 2018.

A corresponding decrease was recorded in our FirstSight subsidiary within the Corporate/Other segment.

Therefore, the change had no impact on consolidated operating income.

As of fiscal year end 2018, all of the applicable optometrists have been transferred.

Additionally, in connection with these changes in California law, effective October 1, 2017, FirstSight ceased the sale of vision managed care products in Walmart locations in California that are not operated by the Company.

As a result, FirstSight net revenue and associated costs in fiscal year 2018 were both approximately $5.4 million lower than fiscal year 2017.

Owned & Host segment net revenue.

Net revenue for our Owned & Host segment increased $134.8 million, or 13.0%, due to comparable store sales growth and new store openings which increased sales across our key product categories.

The growth was predominantly driven by performance in America’s Best and Eyeglass World.

Legacy segment net revenue.

Net revenue for our Legacy segment grew $0.6 million, or 0.4%, primarily driven by higher eye exam sales, partially offset by lower service fee income from our legacy partner resulting from lower customer transactions.

The increased eye exam sales were primarily the result of changes to our FirstSight operations required by changes in applicable California law discussed above.

The FirstSight operations changes resulted in a favorable impact of approximately 115 basis points in comparable store sales growth in the Legacy segment.

Corporate/Other segment net revenue.

Net revenue in the Corporate/Other segment increased $20.5 million, or 10.7%, driven by unit growth in our AC Lens business from the recently expanded role in the contact lens distribution relationship with Walmart and our online retail business, which was partially offset by a $7.6 million reduction in sales as a result of the combined FirstSight operations changes discussed above.

Net revenue reconciliations.

Reconciliations include increases in deferred revenue of $3.9 million and $6.8 million, and a decrease in unearned revenue of $0.5 million and an increase in unearned revenue of $2.2 million for fiscal year 2018 and fiscal year 2017, respectively.

The accounting change described in Note 1.

“Business and Significant Accounting Policies” of our audited consolidated financial statements included in Part II.

of this Form 10-K contributed to the lower increase in deferred revenue for fiscal year 2018 compared to fiscal year 2017, due to acceleration of deferred revenue amortization in fiscal year 2018.

Deferred revenue was also driven by slower growth in our product protection plan sales and Eyecare Club membership sales than other product categories.

Differences between the change in unearned revenue for fiscal year 2018 and fiscal year 2017 were primarily the result of calendar influences on cash basis sales of prescription eyewear in our stores during approximately the last seven to 10 days of the respective year.

Unearned revenue was higher in December 2017 compared to December 2018 due to the sales volume during the last week of the fiscal year.

Sales during the last week of fiscal year 2017 slightly exceeded the sales during last week of fiscal year 2018 impacted by shifts in selling days.

These factors resulted in an overall decrease in unearned revenue in fiscal year 2018 when compared to fiscal year 2017.

Costs applicable to revenue

Costs applicable to revenue of $713.6 million for fiscal year 2018 increased $76.6 million, or 12.0%, from $637.0 million for fiscal year 2017.

As a percentage of net revenue, costs applicable to revenue increased from 46.3% for fiscal year 2017 to 46.4% for fiscal year 2018.

The increase was primarily driven by increased optometrist costs and the growing AC Lens business described below, partially offset by a higher mix of eye exam sales as a result of our growing managed care business, higher vendor rebates primarily based on purchase volume, and a $2.3 million inventory write-off in the second half of fiscal year 2017, not recurring in 2018.

Costs of products as a percentage of net product sales decreased from 40.4% for fiscal year 2017 to 40.3% for fiscal year 2018, driven by higher rebates from vendors, $2.3 million inventory write-off in fiscal year 2017 not recurring in fiscal year 2018 and the impact of Legacy managed care business as further described below, partially offset by our growing AC Lens business.

Our AC Lens net revenue grew faster than our store brands during fiscal year 2018, and AC Lens had a higher cost of products as a percentage of net revenue than our other businesses.

Owned & Host segment costs of products.

Costs of products as a percentage of net product sales in the Owned & Host segment increased from 29.3% for fiscal year 2017 to 29.4% for fiscal year 2018.

Legacy segment costs of products.

Costs of products as a percentage of net product sales in the Legacy segment decreased from 46.5% for fiscal year 2017 to 45.2% for fiscal year 2018.

The decrease was primarily driven by increased eyeglass net revenue in fiscal year 2018 as a result of increased managed care business.

Legacy segment managed care net product revenue is recorded in net product sales while revenue associated with servicing non-managed care customers is recorded in net sales of services and plans.

Eyeglass and contact lens product costs for both managed care and non-managed care net revenue are recorded in costs of products.

Increases in managed care mix will improve product margins and have a corresponding negative impact on service margins in our Legacy segment.

Costs of services and plans as a percentage of net sales of services and plans increased from 73.5% for fiscal year 2017 to 75.6% for fiscal year 2018.

The increase was primarily driven by higher optometrist costs, partially offset by increased eye exam sales as a result of our growing managed care business.

Optometrist costs increased as a result of store coverage in new markets and wage inflation in certain geographic markets.

Owned & Host segment costs of services and plans.

Costs of services and plans as a percentage of net sales of services and plans in the Owned & Host segment increased from 80.6% for fiscal year 2017 to 82.2% for fiscal year 2018.

The increase was driven by higher optometrist costs as described above, partially offset by increased eye exam sales as a result of our growing managed care business.

Managed care customers are generally not eligible for the signature two-pair offer at our America’s Best brand.

Revenues related to managed care customer eye exams are therefore presented as services revenue, however the revenues associated with the exams included in the two-pair offer are reported as product revenues.

“Business and Significant Accounting Policies” in Part II.

of this Form 10-K for additional information regarding our revenue recognition accounting policy.

Legacy segment costs of services and plans.

Costs of services and plans as a percentage of net sales of services and plans in the Legacy segment increased from 33.3% for fiscal year 2017 to 40.1% for fiscal year 2018.

The increase was primarily driven by increased optometrist costs and lower management fees, partially offset by increased eye exam sales.

The higher optometrist costs and increased eye exam sales were both primarily the result of the FirstSight operations changes discussed in “Net revenue” above.

Management fees from our Legacy segment declined due to the corresponding impact of the increased managed care business as described above.

Selling, general and administrative

SG&A of $687.5 million for fiscal year 2018 increased $87.5 million, or 14.6%, from fiscal year 2017.

As a percentage of net revenue, SG&A increased from 43.6% for fiscal year 2017 to 44.7% for fiscal year 2018.

The increase as a percentage of net revenue was primarily due to stock compensation expense, cash expenses pursuant to a long-term incentive plan for non-executive employees, advertising expenses and incremental corporate expenses as a result of becoming a public company in the fourth quarter of fiscal year 2017, partially offset by a monitoring agreement termination fee paid to KKR and Berkshire in connection with the completion of our initial public offering (“IPO”) in the fourth quarter of fiscal year 2017 that did not recur.

Owned & Host segment SG&A.

SG&A as a percentage of net revenue increased from 38.9% for fiscal year 2017 to 39.0% for fiscal year 2018 in the Owned & Host segment.

Legacy segment SG&A.

SG&A as a percentage of net revenue increased from 34.3% for fiscal year 2017 to 35.0% for fiscal year 2018 in the Legacy segment driven primarily by higher store payroll as a percentage of net revenue.

Depreciation and amortization

Depreciation and amortization expense of $74.3 million for fiscal year 2018 increased $12.4 million, or 20.0%, from $62.0 million for fiscal year 2017 primarily driven by new store openings, as well as investments in optical laboratories, distribution centers and information technology infrastructure, including omni-channel platform related investments.

Beginning in 2015, we accelerated our unit growth to approximately 75 new stores annually.

We also invested in more efficient lab and information technology to support our growth.

Many of these incremental investments have depreciable lives in the five to eight year categories;

therefore, we expect depreciation expense to continue to outpace revenue growth over the next few years.

In recent years, a higher percentage of our new store leases were deemed capital leases, further incurring depreciation expense.

Our property and equipment balance, net increased $52.8 million, or 17.5%, during fiscal year 2018, and included $107.8 million in purchases of property and equipment, $14.3 million in new capital leases, less $66.0 million in depreciation expense and $3.3 million in impairment and other adjustments.

Impairment of goodwill and other long-lived assets

Impairment expenses of $17.6 million were recorded for fiscal year 2018 compared to $4.1 million for fiscal year 2017.

See “Critical Accounting Policies and Estimates” below for details regarding specific testing performed on various long-lived assets.

During fiscal year 2018, $11.4 million and $3.7 million of goodwill impairment was identified at our Fred Meyer and Military brands, respectively.

These impairment charges were primarily caused by sales underperformance resulting from decreases in projected customer transaction volume.

For certain brands, including Fred Meyer and Military, the number of locations in which we operate has not increased.

Further, the Company has limited control over advertising and traffic.

As such, small changes in the revenue growth assumptions at such brands can result in goodwill impairment.

The remaining fiscal year 2018 impairment charges of $2.5 million related to our retail store long-lived assets resulting from decreased cash flow projections at individual stores.

Interest expense, net

Interest expense, net, of $37.3 million for fiscal year 2018 decreased $18.2 million, or 32.8%, from $55.5 million for fiscal year 2017.

As a result of the payoff of our $125.0 million second lien term loans and $235.0 million in outstanding amount of our Term Loan B, during the fourth quarter of fiscal year 2017, interest expense decreased $14.9 million from lower debt balances and $5.2 million from a reduction of deferred debt cost amortization and corresponding reduction of discounts.

An additional decrease of $2.2 million resulted from applicable margin reductions from refinancing the Term Loan B during the fourth quarter of fiscal year 2017 and from a Moody's credit rating upgrade received during the third quarter of 2018.

These reductions were partially offset by approximately $2.2 million in interest paid to counterparties associated with our derivative cash flow hedges which became effective in March 2017, but were in effect for the full fiscal year 2018 and $1.3 million in additional interest expense relating to capital lease obligations during fiscal year 2018.

Income tax provision

Income tax benefit decreased $20.1 million to $18.8 million during fiscal year 2018 compared to $38.9 million during fiscal year 2017, with the 2017 amount primarily resulting from a one-time tax benefit of $42.1 million from re-measurement of deferred tax assets and liabilities as a result of the Tax Legislation.

Income tax benefit of $18.8 million during fiscal year 2018 related to an income tax provision on current year pre-tax net income at the Company's statutory federal and state rate, and $25.5 million income tax benefit primarily resulting from stock option exercises.

Non-GAAP Financial Measures

EBITDA, Adjusted EBITDA , Adjusted EBITDA Margin and Adjusted Net Income

EBITDA, Adjusted EBITDA , Adjusted EBITDA Margin, Adjusted Operating Income, Adjusted Operating Margin and Adjusted Diluted EPS

We define EBITDA as net income, plus interest expense, income tax provision (benefit) and depreciation and amortization.

We define Adjusted EBITDA as EBITDA, further adjusted to exclude stock compensation expense, debt issuance costs, loss on the extinguishment of debt, asset impairment, new store pre-opening expenses, non-cash rent, secondary offering expenses, management realignment expenses, long-term incentive plan expenses, and other expenses.

We describe these adjustments reconciling net income to EBITDA and Adjusted EBITDA in the tables below.

We define Adjusted EBITDA Margin as Adjusted EBITDA as a percentage of total net revenue.

We define Adjusted Net Income as net income, further adjusted to exclude stock compensation expense, debt issuance costs, loss on extinguishment of debt, asset impairment, new store pre-opening expenses, non-cash rent, secondary offering expenses, management realignment expenses, long-term incentive plan expenses, amortization of acquisition intangibles and deferred financing costs, tax benefit of stock option exercises, less the tax effect of these adjustments.

We describe these adjustments reconciling net income to Adjusted Net Income in the tables below.

EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin and Adjusted Net Income have been presented as supplemental measures of financial performance that are not required by, or presented in accordance with GAAP, because we believe they assist investors and analysts in comparing our operating performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance.

Management believes EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin and Adjusted Net Income are useful to investors in highlighting trends in our operating performance, while other measures can differ significantly depending on long-term strategic decisions regarding capital structure, the tax jurisdictions in which we operate and capital investments.

We also use EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin and Adjusted Net Income to supplement GAAP measures of performance in the evaluation of the effectiveness of our business strategies, to make budgeting decisions, to establish discretionary annual incentive compensation and to compare our performance against that of other peer companies using similar measures.

Management supplements GAAP results with non-GAAP financial measures to provide a more complete understanding of the factors and trends affecting the business than GAAP results alone.

EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin and Adjusted Net Income are not recognized terms under GAAP and should not be considered as an alternative to net income or income from operations as a measure of financial performance or cash flows provided by operating activities as a measure of liquidity, or any other performance measure derived in accordance with GAAP.

We define Adjusted EBITDA as net income, plus interest expense, income tax provision (benefit) and depreciation and amortization, further adjusted to exclude stock compensation expense, debt issuance costs, loss on the extinguishment of debt, asset impairment, litigation settlement, secondary offering expenses, management realignment expenses, long-term incentive plan expenses, and other expenses.

We define Adjusted EBITDA Margin as Adjusted EBITDA as a percentage of net revenue.

We define Adjusted Operating Income as net income, plus interest expense and income tax provision (benefit), further adjusted to exclude stock compensation expense, debt issuance costs, loss on extinguishment of debt, asset impairment, litigation settlement, secondary offering expenses, management realignment expenses, long-term incentive plan expenses, amortization of acquisition intangibles and other expenses.

We define Operating Margin as Adjusted Operating Income as a percentage of net revenue.

We define Adjusted Diluted EPS as diluted earnings per share, adjusted for the per share impact of stock compensation expense, debt issuance costs, loss on extinguishment of debt, asset impairment, litigation settlement, secondary offering expenses, management realignment expenses, long-term incentive plan expenses, amortization of acquisition intangibles, amortization of debt discounts and deferred financing costs of our Term Loan borrowings, amortization of the conversion feature and deferred financing costs of our 2025 N otes when not required under U.S.

GAAP to be added back for diluted earnings per share, losses (gains) on change in fair value of derivatives, other expenses, and tax benefit of stock option exercises, less the tax effect of these adjustments.

In 2020, we introduced Adjusted Operating Income and Adjusted Operating Margin as measures of performance we planned to use in addition to Adjusted EBITDA, Adjusted EBITDA Margin and Adjusted Diluted EPS.

We believe Adjusted Operating Income and Adjusted Operating Margin enhance an understanding of our performance by highlighting the results from ongoing operations and the profitability of our business.

We continue to evaluate our use of the Company Non-GAAP measures in the context of the development of our business, and may introduce or discontinue certain measures in the future as we deem appropriate.

Further, consistent with our presentation of Adjusted Operating Income, we no longer exclude new store pre-opening expenses and non-cash rent from our presentation of Adjusted EBITDA and Adjusted Diluted EPS.

New store pre-opening expenses totaled $2.6 million, $3.3 million and $2.2 million for the fiscal years 2020, 2019 and 2018, respectively;

and non-cash rent totaled $2.6 million, $3.2 million and $2.8 million for fiscal years 2020, 2019 and 2018, respectively.

The presentation of Adjusted EBITDA and Adjusted Diluted EPS for the fiscal year end 2019 has been recast to reflect these changes.

See our Form 8-K filed with the SEC on February 26, 2020, which is incorporated herein by reference, for more information.

EBITDA and the Company Non-GAAP Measures can vary substantially in size from one period to the next, and certain types of expenses are non-recurring in nature and consequently may not have been incurred in any of the periods presented below.

EBITDA and the Company Non-GAAP Measures have been presented as supplemental measures of financial performance that are not required by, or presented in accordance with U.S.

GAAP, because we believe they assist investors and analysts in comparing our operating performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance.

Management believes EBITDA, and the Company Non-GAAP Measures are useful to investors in highlighting trends in our operating performance, while other measures can differ significantly depending on long-term strategic decisions regarding capital structure, the tax jurisdictions in which we operate and capital investments.

We also use EBITDA and the Company Non-GAAP Measures to supplement U.S.

GAAP measures of performance in the evaluation of the effectiveness of our business strategies, to make budgeting decisions, to establish discretionary annual incentive compensation and to compare our performance against that of other peer companies using similar measures.

Management supplements U.S.

GAAP results with Non-GAAP financial measures to provide a more complete understanding of the factors and trends affecting the business than U.S.

GAAP results alone.

EBITDA and the Company Non-GAAP Measures are not recognized terms under U.S.

GAAP and should not be considered as an alternative to net income or income from operations as a measure of financial performance or cash flows provided by operating activities as a measure of liquidity, or any other performance measure derived in accordance with U.S.

Additionally, these measures are not intended to be a measure of free cash flow available for management’s discretionary use as they do not consider certain cash requirements such as interest payments, tax payments and debt service requirements.

EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin and Adjusted Net Income should not be construed to imply that our future results will be unaffected by unusual or non-recurring items.

In evaluating EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin and Adjusted Net Income, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in this presentation.

Our presentation of EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin and Adjusted Net Income should not be construed to imply that our future results will be unaffected by any such adjustments.

Management compensates for these limitations by primarily relying on our GAAP results in addition to using EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin and Adjusted Net Income.

The presentations of these measures have limitations as analytical tools and should not be considered in isolation, or as a substitute for analysis of our results as reported under GAAP.

In evaluating EBITDA and the Company Non-GAAP Measures we may incur expenses in the future that are the same as or similar to some of the adjustments in this presentation.

Our presentation of EBITDA and the Company Non-GAAP Measures should not be construed to imply that our future results will be unaffected by any such adjustments.

Management compensates for these limitations by primarily relying on our U.S.

GAAP results in addition to using EBITDA and the Company Non-GAAP Measures.

The presentations of these measures have limitations as analytical tools and should not be considered in isolation, or as a substitute for analysis of our results as reported under U.S.

Some of these limitations are:

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• they do not reflect changes in, or cash requirements for, our working capital needs;

EBITDA and Adjusted EBITDA do not reflect the interest expense, or the cash requirements necessary to service interest or principal payments, on our debt;

EBITDA and Adjusted EBITDA do not reflect period to period changes in taxes, income tax expense or the cash necessary to pay income taxes;

they do not reflect the impact of earnings or charges resulting from matters we consider not to be indicative of our ongoing operations, including costs related to new store openings, which are incurred on a non-recurring basis with respect to any particular store when opened;

• EBITDA, Adjusted EBITDA and Adjusted Operating Income do not reflect the interest expense, or the cash requirements necessary to service interest or principal payments, on our debt;

• EBITDA, Adjusted EBITDA and Adjusted Operating Income do not reflect period to period changes in taxes, income tax expense or the cash necessary to pay income taxes;

• they do not reflect the impact of earnings or charges resulting from matters we consider not to be indicative of our ongoing operations;

• although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect cash requirements for such replacements;

• other companies in our industry may calculate these measures differently than we do, limiting their usefulness as comparative measures.

Because of these limitations, EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin and Adjusted Net Income should not be considered as measures of discretionary cash available to invest in business growth or to reduce indebtedness.

The following table reconciles our net income to EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin and Adjusted Net Income for the periods presented:

Because of these limitations, EBITDA and the Company Non-GAAP Measures should not be considered as measures of discretionary cash available to invest in business growth or to reduce indebtedness.

The following table reconciles our Adjusted Operating Income, Adjusted Operating Margin, EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin to net income;

and Adjusted Diluted EPS for the periods presented:

In thousands Fiscal Year 2020 Fiscal Year 2019 Fiscal Year 2018

Net income $ 36,277 2.1 % $ 32,798 1.9 % $ 23,653 1.5 %

Interest expense 48,171 2.8 % 33,300 1.9 % 37,283 2.4 %

Income tax provision (benefit) 2,403 0.1 % (2,309) (0.1) % (18,785) (1.2) %

Stock compensation expense (a)

10,740 0.6 % 12,670 0.7 % 20,939 1.4 %

Loss on extinguishment of debt (b)

— — % 9,786 0.6 % — — %

Asset impairment (c)

22,004 1.3 % 8,894 0.5 % 17,630 1.1 %

Litigation settlement (d)

4,395 0.3 % — — % — — %

Secondary offering expenses (e)

— — % 401 — % 2,451 0.2 %

Management realignment expenses (f)

— — % 2,155 0.1 % — — %

Long-term incentive plan (g)

— — % 2,830 0.2 % 7,040 0.5 %

Amortization of acquisition intangibles (h)

7,426 0.4 % 7,405 0.4 % 7,405 0.5 %

2,732 0.2 % 6,370 0.4 % 4,785 0.3 %

Adjusted Operating Income / Adjusted Operating Margin $ 134,148 7.8 % $ 114,300 6.6 % $ 102,401 6.7 %

Fiscal year 2020 includes 53 weeks.

Fiscal years 2019 and 2018 include 52 weeks.

Percentages reflect line item as a percentage of net revenue, adjusted for rounding.

Some of the percentage totals in the table above do not foot due to rounding differences.

In thousands Fiscal Year 2020 Fiscal Year 2019 Fiscal Year 2018

Net income $ 36,277 2.1 % $ 32,798 1.9 % $ 23,653 1.5 %

Interest expense 48,171 2.8 % 33,300 1.9 % 37,283 2.4 %

Income tax provision (benefit) 2,403 0.1 % (2,309) (0.1) % (18,785) (1.2) %

Depreciation and amortization 91,585 5.4 % 87,244 5.1 % 74,339 4.8 %

EBITDA 178,436 10.4 % 151,033 8.8 % 116,490 7.6 %

Stock compensation expense (a)

Debt issuance costs (b)

Loss on extinguishment of debt (c)

Asset impairment (d)

Non-cash inventory write-offs (e)

Management fees (f)

New store pre-opening expenses (g)

Non-cash rent (h)

Litigation settlement (i)

Secondary offering expenses (j)

Management realignment expenses (k)

Long-term incentive plan (l)

10,740 0.6 % 12,670 0.7 % 20,939 1.4 %

Loss on extinguishment of debt (b)

— — % 9,786 0.6 % — — %

Asset impairment (c)

22,004 1.3 % 8,894 0.5 % 17,630 1.1 %

Litigation settlement (d)

4,395 0.3 % — — % — — %

Secondary offering expenses (e)

— — % 401 — % 2,451 0.2 %

Management realignment expenses (f)

— — % 2,155 0.1 % — — %

Long-term incentive plan (g)

— — % 2,830 0.2 % 7,040 0.5 %

2,732 0.2 % 6,370 0.4 % 4,785 0.3 %

Adjusted EBITDA / Adjusted EBITDA Margin $ 218,307 12.8 % $ 194,139 11.3 % $ 169,335 11.0 %

Percentages reflect line item as a percentage of net revenue

Fiscal year 2020 includes 53 weeks.

Fiscal years 2019 and 2018 include 52 weeks.

Percentages reflect line item as a percentage of net revenue, adjusted for rounding.

Some of the percentage totals in the table above do not foot due to rounding differences.

In thousands Fiscal Year 2020 Fiscal Year 2019 Fiscal Year 2018

Diluted EPS $ 0.44 $ 0.40 $ 0.30

Stock compensation expense (a)

Debt issuance costs (b)

Loss on extinguishment of debt (c)

Asset impairment (d)

Non-cash inventory write-offs (e)

Management fees (f)

New store pre-opening expenses (g)

Non-cash rent (h)

Litigation settlement (i)

Secondary offering expenses (j)

Management realignment expenses (k)

Long-term incentive plan expense (l)

Amortization of acquisition intangibles and deferred financing costs (n)

Tax benefit of stock option exercises (o)

Tax legislation adjustment (p)

Tax effect of total adjustments (q)

Adjusted Net Income

Non-cash charges related to stock-based compensation programs, which vary from period to period depending on the timing of awards and performance vesting conditions.

For fiscal year 2018 , fees associated with the issuance of new term loans during the fourth quarter of fiscal year 2018 .

For fiscal year 2017 , includes $2.7 million of fees associated with the borrowing of $175.0 million in additional principal under our first lien credit agreement and $1.8 million of fees associated with the refinancing of our first lien credit agreement.

For fiscal year 2019 , reflects write-off of deferred financing fees related to the extinguishment of debt.

Reflects write-off of property and equipment on closed or underperforming stores for fiscal year 2019 ;

0.13 0.16 0.26

Loss on extinguishment of debt (b)

Asset impairment (c)

0.27 0.11 0.22

Litigation settlement (d)

Secondary offering expenses (e)

Management realignment expenses (f)

Long-term incentive plan expense (g)

Amortization of acquisition intangibles (h)

0.09 0.09 0.09

Amortization of debt discounts and deferred financing costs (i)

0.14 0.02 0.02

Losses (gains) on change in fair value of derivatives (j)

0.03 0.08 0.06

Tax benefit of stock option exercises (l)

(0.10) (0.12) (0.32)

Tax effect of total adjustments (m)

(0.19) (0.16) (0.15)

Adjusted Diluted EPS $ 0.91 $ 0.75 $ 0.61

Weighted average diluted shares outstanding 82,793 81,683 79,041

Fiscal year 2020 includes 53 weeks.

Fiscal years 2019 and 2018 include 52 weeks.

Some of the totals in the table above do not foot due to rounding differences.

(a) Non-cash charges related to stock-based compensation programs, which vary from period to period depending on the timing of awards and performance vesting conditions.

(b) For fiscal year 2019, reflects write-off of deferred financing fees related to the extinguishment of debt.

(c) Reflects write-off of property, equipment and lease related assets on closed or underperforming stores for fiscal years 2019 and 2020;

non-cash charges related to impairment of long-lived assets, primarily goodwill in our Military and Fred Meyer brands for fiscal year 2018.

and write-off of a cost basis investment, and impairment of capitalized software and property and equipment for fiscal year 2017 .

Reflects write-offs of inventory relating to the expiration of a specific type of contact lens that could not be sold and required disposal.

Reflects management fees paid to KKR and Berkshire in accordance with our monitoring agreement with them.

The monitoring agreement was terminated automatically in accordance with its terms upon the consummation of the IPO in October 2017 .

Pre-opening expenses, which include marketing and advertising, labor and occupancy expenses incurred prior to opening a new store, are generally higher than comparable expenses incurred once such store is open and generating revenue.

We believe that such higher pre-opening expenses are specific in nature, are not indicative of ongoing core operating performance.

We adjust for these costs to facilitate comparisons of store operating performance from period to period.

Consists of the non-cash portion of rent expense, which reflects the extent to which our straight-line rent expense recognized under GAAP exceeds or is less than our cash rent payments.

Expenses associated with settlement of litigation.

“Legal Proceedings” and Note 13 .

(d) Expenses associated with settlement of litigation.

“Commitments and Contingencies” in our consolidated financial statements included in Part II.

of this Form 10-K for further details.

Expenses related to our secondary public offerings during fiscal years 2018 and 2019 .

Expenses related to a non-recurring management realignment described in our Current Report on Form 8-K filed with the SEC on January 10, 2019 .

Expenses pursuant to a long-term incentive plan for non-executive employees who were not participants in the management equity plan for fiscal year 2019 .

(e) Expenses related to our secondary public offerings during fiscal years 2018 and 2019.

(f) Expenses related to a non-recurring management realignment described on Form 8-K filed with the SEC on January 10, 2019.

(g) Expenses pursuant to a long-term incentive plan for non-executive associates who were not participants in the management equity plan for fiscal year 2019.

This plan was effective in 2014 following the acquisition of the Company by affiliates of KKR & Co.

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The remaining $2.4 million relates to the third secondary offering and was accrued but not paid as of fiscal year end 2018.

Other adjustments include amounts that management believes are not representative of our operating performance (amounts in brackets represent reductions in Adjusted EBITDA and Adjusted Net Income) including our share of losses on equity method investments of $1.8 million , $1.3 million and $1.0 million for the fiscal years 2019 , 2018 and 2017 , respectively;

the amortization impact of the KKR Acquisition-related adjustments (e.g., fair value of leasehold interests) of $0.5 million , $0.4 million and $(0.3) million for the fiscal years 2019 , 2018 and 2017 , respectively;

expenses related to preparation for being an SEC registrant that were not directly attributable to our IPO and therefore not charged to equity of $1.8 million for the fiscal year 2017 ;

differences between the timing of expense versus cash payments related to contributions to charitable organizations of $(1.0) million for each of the fiscal years 2018 and 2017 ;

(h) Amortization of the increase in carrying values of finite-lived intangible assets resulting from the application of purchase accounting to the KKR Acquisition.

(i) Amortization of debt discounts is associated with the amortization of the conversion feature related to the 2025 Notes and amortization of deferred financing costs related to the 2025 Notes, Term Loan and Revolving Credit Facility borrowings.

Amortization of debt discount and deferred financing costs in aggregate total $11.9 million, $1.3 million and $1.9 million for the fiscal years 2020, 2019 and 2018, respectively.

(j) Reflects losses (gains) recognized in interest expense on change in fair value of de-designated hedges of $4.0 million for fiscal year end 2020.

(k) Other adjustments include amounts that management believes are not representative of our operating performance (amounts in brackets represent reductions in Adjusted Operating Income, Adjusted Diluted EPS and Adjusted EBITDA) including our share of losses on equity method investments of $1.8 million and $1.3 million for the fiscal years 2019 and 2018, respectively;

the amortization impact adjustments related to the KKR Acquisition, (e.g., fair value of leasehold interests) of $0.4 million, $0.5 million and $0.4 million for the fiscal years 2020, 2019 and 2018, respectively;

differences between the timing of expense versus cash payments related to contributions to charitable organizations of $(1.0) million for the fiscal year 2018;

costs of severance and relocation of $1.3 million, $2.3 million and $1.0 million, for the fiscal years 2020, 2019 and 2018, respectively;

excess payroll taxes related to stock option exercises of $0.8 million and $1.8 million for fiscal year 2019 and 2018, respectively;

excess payroll taxes related to stock option exercises of $0.7 million, $0.8 million and $1.8 million for fiscal years 2020, 2019 and 2018, respectively;

incremental costs directly related to adapting the Company’s operations during the COVID-19 pandemic of $0.6 million for the fiscal year 2020;

and other expenses and adjustments totaling $(0.3) million, $1.0 million and $1.3 million for fiscal years 2020, 2019 and 2018, respectively.

Amortization of the increase in carrying values of finite-lived intangible assets resulting from the application of purchase accounting to the KKR Acquisition of $7.4 million for each of the fiscal years 2019 , 2018 and 2017 ;

and 2) Amortization of debt discounts associated with the March 2014 term loan borrowings in connection with the KKR Acquisition and, to a lesser extent, amortization of debt discounts associated with the May 2015 and February 2017 incremental First Lien - Term Loan B and the November 2017 First Lien - Term Loan B refinancing, aggregating to $1.3 million , $1.9 million and $7.1 million of additional expense for fiscal years 2019 , 2018 and 2017 , respectively.

The $7.1 million additional expense for fiscal year 2017 includes a $3.3 million write-off of debt discounts associated with the repayment of the entire $125.0 million second lien term loan balance.

Tax benefit associated with accounting guidance adopted at the beginning of fiscal year 2017 (Accounting Standards Update 2016-09, Compensation - Stock Compensation), requiring excess tax benefits related to stock option exercises to be recorded in earnings as discrete items in the reporting period in which they occur.

The adjustment represents re-measuring and reassessing the net realizability of our deferred tax assets and liabilities during fiscal year 2017.

“Income Taxes” in Part II.

of this Form 10-K for additional information regarding the Tax Legislation.

Represents the income tax effect of the total adjustments, at our combined statutory federal and state income tax rates.

(l) Tax benefit associated with accounting guidance requiring excess tax benefits related to stock option exercises to be recorded in earnings as discrete items in the reporting period in which they occur.

(m) Represents the income tax effect of the total adjustments at our combined statutory federal and state income tax rates.

Liquidity and Capital Resources

We principally rely on cash flows from operations as our primary source of liquidity and, if needed, up to $300.0 million in revolving loans under our Revolving Credit Facility (as defined below).

Our primary cash needs are for inventory, payroll, store rent, capital expenditures associated with new stores and updating existing stores, as well as information technology and infrastructure, including our corporate office, distribution centers and laboratories.

As described in more detail below, on May 5, 2020, we entered into the Credit Agreement Amendment with the lenders under our credit facility in order to prevent the effects of the COVID-19 pandemic, including the temporary closure of our stores, from creating uncertainty relative to our ability to comply with certain financial covenants and allow the Company to focus on prudent management of the business over the quarters ahead.

In addition, on May 12, 2020, we completed the issuance of the 2025 Notes and we used the net proceeds of this offering to repay the full amount outstanding under our Revolving Credit Facility and part of our outstanding borrowings under our Term Loan.

Our primary cash needs are for inventory, payroll, store rent, advertising, capital expenditures associated with new stores and updating existing stores, as well as information technology and infrastructure, including our corporate office, distribution centers and laboratories.

When appropriate, the Company may utilize excess liquidity towards debt service requirements, including voluntary debt prepayments, or required interest and principal payments, if any, as well as repurchases of common stock, based on excess cash flows.

We continue to prioritize cash conservation and prudent use of cash, while safely conducting normal operations.

The most significant components of our operating assets and liabilities are inventories, accounts receivable, prepaid expenses and other assets, accounts payable, deferred and unearned revenue and other payables and accrued expenses.

Due to the seasonality of our business, any borrowings would generally occur in the fourth or first quarters as we prepare for our peak season, which is the first half of the fiscal year.

We believe that cash expected to be generated from operations and the availability of borrowings under the Revolving Credit Facility will be sufficient for our working capital requirements, liquidity obligations, anticipated capital expenditures and payments due under our existing credit facilities for at least the next 12 months.

While we have historically exercised prudence in our use of cash, the COVID-19 pandemic has required us to closely monitor various items related to cash flow including, but not limited to, cash receipts, cash disbursements, payment terms and alternative sources of funding.

We continue to be focused on these items in addition to other key measures we use to determine how our consolidated business and operating segments are performing.

We believe that cash on hand, cash expected to be generated from operations and the availability of borrowings under the Revolving Credit Facility will be sufficient to fund our working capital requirements, liquidity obligations, anticipated capital expenditures and payments due under our existing debt for at least the next 12 months.

Depending on our liquidity levels, conditions in the capital markets and other factors, we may from time to time consider the refinancing or issuance of debt, issuance of equity or other securities, the proceeds of which could provide additional liquidity for our operations, as well as modifications to our Term Loan where possible.

However, our ability to maintain sufficient liquidity may be affected by numerous factors, many of which are outside of our control.

As of January 2, 2021, we have outstanding a total of $402.5 million aggregate principal of 2025 Notes.

The 2025 Notes are senior unsecured obligations, and interest on the 2025 Notes is paid semi-annually.

The Company can choose to settle upon conversion in cash, shares or a combination, at a conversion rate of 32.0783 shares of common stock per $1,000 principal amount.

Based on the initial conversion rate, the 2025 Notes are convertible into 12.9 million shares of our common stock and we reserved for the possible issuance of 16.5 million shares, which is the maximum amount that could be issued upon conversion.

As of January 2, 2021, the “if-converted value” exceeded the principal amount of the 2025 Notes by $182.3 million.

“Earnings Per Share” for the treatment of earnings per share in relation to the 2025 Notes.

As of fiscal year end 2020, we had $373.9 million in cash and cash equivalents and $293.6 million of availability under our Revolving Credit Facility, which includes $6.4 million in outstanding letters of credit.

We purchased $101.3 million in capital items during fiscal year 2019 .

Approximately 80% of our capital spend is related to our expected growth (i.e., new stores, optometric equipment, additional capacity in our optical laboratories and distribution centers, and our IT infrastructure, including omni-channel platform related investments).

We pu rchased $76.8 million in capital items during fiscal year 2020.

Approximately 80% of o ur capital spend is related to our expected growth (i.e., new stores, optometric equipment, additional capacity in our optical laboratories and distribution centers, and our IT infrastructure, including omni-channel platform related investments).

Our working capital requirements for inventory will increase as we continue to open additional stores.

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The following table summarizes cash flows provided by (used for) operating activities, investing activities and financing activities for the periods indicated:

In thousands Fiscal Year 2020 Fiscal Year 2019 Fiscal Year 2018

Cash flows provided by (used for):

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Net increase (decrease) in cash, cash equivalents and restricted cash $ 334,852 $ 22,309 $ 12,804

Fiscal year 2020 includes 53 weeks.

Fiscal years 2019 and 2018 include 52 weeks.

Net Cash Provided by Operating Activities

Cash flows provided by operating activities increased by $69.9 million to $235.0 million, or 42.3%, during fiscal year 2020 from $165.1 million during fiscal year 2019.

The increase in net cash provided by operating activities consisted of an increase in net income of $3.5 million, and an increase in non-cash expense items of $12.0 million including asset impairment charges of $13.1 million, amortization of debt discount and deferred financing costs of $10.6 million, depreciation and amortization of $4.3 million, deferred income tax expense of $2.1 million and losses recognized for the changes in fair value of derivatives of $4.0 million partially offset by a decrease in loss on extinguishment of debt of $9.8 million, decrease of stock compensation expense of $1.9 million, and decrease of $10.5 million in other non-cash expenses.

Changes in net working capital and other assets and liabilities contributed an additional $54.5 million in cash compared to fiscal year 2019.

Increases in other liabilities contributed $24.3 million in year-over-year cash primarily due to an increase in deferral of employer payroll taxes of $12.8 million as a result of the CARES Act, a $3.9 million increase in year-over-year cash due to timing of unearned revenue, increases in compensation related accruals of $2.2 million due primarily to timing, increases of $3.1 million due to lease concessions and deferrals and other increases in miscellaneous accruals due to timing, partially offset by decreases in accrued advertising and payments of litigation settlements during the year.

Increases in accounts payabl e contributed $26.9 million i n year-over-year cash, primarily as a result of increased purchases and replenishing activity due to both store growth and increased sales in December of 2020 as compared to the same period of 2019 and increases in advertising.

Decreases in inventory contributed $27.3 million in year-over-year cash, primarily due to no forward buys occurring after the first quarter of 2020.

Offsetting these items were increases in other assets which used $14.5 million in year-over-year cash, consisting of $8.9 million of cloud hosted software asset development costs, $6.2 million in rent-related items and other prepaid balances.

Additionally, accounts receivable balances used $6.8 million in year-over-year cash, primarily reflective of year-over-year increases in outstanding credit card receivables due to higher sales in the last week of 2020 as compared to the same period of 2019 and timing of credit card processing.

Changes in deferred revenue contributed $2.8 million less cash when compared to 2019 driven by decreased sales of our eye care club membership and product protection plans.

Cash flows provided by operating activities increased by $58.5 million to $165.1 million, or 54.8%, during the fiscal year 2019 from $106.6 million during fiscal year 2018.

The increase in net cash provided by operating activities consisted of an increase in net income by $9.1 million and an increase in non-cash expense items of $26.4 million including loss on extinguishment of debt of $9.8 million , deferred income tax expense of $17.0 million , depreciation and amortization of $12.3 million , and $4.3 million in other non-cash expenses, partially offset by a decrease of asset impairment charges of $8.7 million and a decrease of stock compensation expense of $8.3 million .

The increase in net cash provided by operating activities consisted of an increase in net income of $9.1 million and an increase in non-cash expense items of $26.4 million including loss on extinguishment of debt of $9.8 million, deferred income tax expense of $17.0 million, depreciation and amortization of $12.3 million, and $4.3 million in other non-cash expenses, partially offset by a decrease of asset impairment charges of $8.7 million and a decrease of stock compensation expense of $8.3 million.

In addition, decreases in net working capital and other assets and liabilities contributed an additional $22.9 million in cash compared to fiscal year 2018.

Decreases in other assets contributed $17.1 million in year-over-year cash, primarily from decreases in prepaid advertising and rent-related items.

Decreases in other assets contributed $17.1 million in year-over-year cash, primarily due to decreases in prepaid advertising and rent-related items.

The year-over-year cash contribution of $12.9 million from inventories in fiscal year 2019 was primarily a result of decreased year-over-year inventory expenditures.

The Company commenced a forward inventory purchase program in fiscal year 2018 and continued this program to a lesser extent in fiscal year 2019.

The Company commenced a forward inventory purchase program in fiscal year 2018 and continued

this program to a lesser extent in fiscal year 2019.

Additionally, accounts receivable balances contributed $7.7 million in year-over-year cash, reflective of year-over-year decreases in outstanding credit card receivables, partially offset by increases in our managed care receivables as a result of increased participation in managed care programs which historically have a longer collection cycle than trade and credit card receivables.

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In addition, decreases in other liabilities used $5.2 million in year-over-year cash, primarily related to decreases in accrued liabilities related to capital expenditures after the completion of our Texas lab partially offset by increases in payroll related accruals due to timing.

Net cash provided by operating activities increased $16.4 million , or 18.1% , during the fiscal year 2018 compared to fiscal year 2017 .

Net cash provided by operating activities was $106.6 million for the fiscal year 2018 , as non-cash items of $109.0 million and $23.7 million of net income were partially offset by an increase in net working capital and other assets and liabilities of $26.1 million .

Net cash provided by operating activities was $90.3 million for fiscal year 2017 , which consisted of non-cash items of $57.6 million , $43.1 million of net income and an increase in net working capital and other assets and liabilities of $10.4 million .

The increase in net working capital and other assets and liabilities during the fiscal year 2018 was primarily due to increases in inventories of $28.7 million , accounts receivable of $14.6 million , and other assets of $7.0 million .

Increases in inventory are generally expected each period, and reflect our growth in sales of products, including product replenishment needs at existing stores and inventory needed to outfit new stores.

The increase in inventory also reflects an opportunistic forward buy of approximately $10.0 million during the fourth quarter of 2018 .

Increases in accounts receivable generally reflect overall revenue growth, but primarily reflect an increase in credit card transactions the last week of fiscal year 2018 .

The increase in other assets is also reflective of overall store count growth such as prepaid advertising, prepaid rent, and prepaid store supplies.

These changes were partially offset by increases in accounts payable of $7.9 million , deferred revenues of $3.8 million and accrued expenses and other liabilities of $12.6 million .

Increases in accounts payable reflect the timing of payments to vendors.

Increases in deferred revenues are consistent with increases in cash basis sales of product protection plans and eyecare club memberships.

Increases in accrued expenses and other liabilities were primarily due to new store growth.

We opened 74 new stores during fiscal year 2018 , with five closures.

With limited exception, due to overall store count growth and increases in the scale of our business, on an annual basis increases in working capital and other assets and liabilities are expected, with the net impact being overall use of cash.

We opened 76 new stores during fiscal year 2017 , with six closures.

The increase in net working capital and other assets and liabilities during the fiscal year 2017 was primarily due to an increase in inventories of $9.6 million , accounts receivable of $16.9 million , other assets of $2.1 million and a decrease in accounts payable of $3.7 million .

These changes were partially offset by an increase in accrued expenses and other liabilities of $15.0 million and deferred revenues of $6.8 million .

Increases in accrued expenses and other liabilities included a $7.0 million litigation settlement discussed in Note 13 .

“Commitments and Contingencies” in in our consolidated financial statements included in Part II.

of this Form 10-K.

Net Cash Used for Investing Activities

Net cash used for investing activities decreased by $24.2 million, to $76.4 million, during fiscal year 2020 from $100.6 million during fiscal year 2019.

The decrease was primarily due to capital investments made in the prior year for our Texas lab not recurring in the current year as well as timing of new store capital investments.

Net cash used for investing activities increased by $9.6 million , to $104.2 million , during fiscal year 2018 from $94.6 million during fiscal year 2017 .

The change in cash used for investing activities included an increase of $11.3 million in purchases of property and equipment to support our store growth, including new stores, improvements to our optical laboratories and distribution centers and continued development of our IT infrastructure.

During fiscal year 2017 , we made an investment of $1.5 million in a secured convertible promissory note to our equity method investee as discussed in Note 10 .

“Equity in Net Assets of Non-Consolidated Investee” in our consolidated financial statements included in Part II.

of this Form 10-K.

No investments were made during fiscal year 2018 .

The decrease was primarily due to cash conservation measures during the temporary store closure period, which resulted in reduced store openings and lower IT investment for the full year.

Net cash used for investing activities decreased by $3.6 million, to $100.6 million, during fiscal year 2019 from $104.2 million during fiscal year 2018.

The decrease was primarily due to capital investments made in fiscal year 2018 for our Texas lab not recurring in fiscal year 2019 as well as timing of new store capital investments.

Net Cash Provided by (Used for) Financing Activities

Net cash provided by (used fo r) financing activities increased $218.4 million, from $42.1 million use of cash to $176.3 million provision of cash during fiscal year 2020.

The increase in cash provided by financing activities was primarily due to lower repayments on long-term debt of $222.6 million and decreased purchases of treasury stock of $25 million, offset by decreases in cash provided by borrowings on long-term debt of $17.8 million and an increase in cash used for payments of debt issuance costs of $9.5 million.

Net cash provided by (used for) financing activities decreased $52.5 million, from $10.4 million provision of cash to $42.1 million use of cash during fiscal year 2019.

The change in cash provided by (used for) financing activities was due to the repurchase of shares of common stock of the Company of $25.6 million during fiscal year 2019, a $25.0 million voluntary prepayment of outstanding principal under the Term Loan of its Credit Agreement and lower proceeds from the issuance of common stock as compared to fiscal year 2018.

Net cash provided by financing activities was $10.4 million and $3.8 million during fiscal years 2018 and 2017 , respectively.

The change in cash provided by financing activities was primarily due to an increase of $18.7 million in proceeds primarily related to exercise of stock options during fiscal year 2018 .

Other drivers were quarterly principal payments required under our long-term credit agreements.

Fiscal years 2018 and 2017 included material debt and equity transactions.

In 2017 , we used IPO proceeds of $370.9 million to pay down debt of $367.7 million .

Prior to the IPO, we used debt proceeds of $174.9 million (net of debt issuance costs of $4.5 million ) to pay a recapitalization dividend of $171.0 million .

Additionally, proceeds from exercise of stock options of $1.1 million were offset by $0.9 million of payments on capital lease obligations.

The net cash impact of all of these transactions was $3.8 million in cash proceeds.

Fiscal year 2018 included material debt and equity transactions.

In fiscal year 2018, we refinanced our first lien credit agreement, resulting in debt issuance costs of $1.4 million and $200.0 million in proceeds which were used to make $200.0 million in principal payments.

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Long-term Debt

The following table sets forth the amounts owed under our first lien Credit Agreement and the interest rate on such outstanding amounts, and the amount available for additional borrowing thereunder, as of the end of fiscal year 2019 :

In thousands, except percentage data

Interest Rate (2)

Amount Outstanding

Amount Available for Additional Borrowing

Term Loan, due July 18, 2024

The following table sets forth the amounts owed under our Term Loan and the 2025 Notes and the interest rate on such outstanding amounts, and the amount available for additional borrowing thereunder, as of the end of fiscal year 2020:

In thousands, except percentage data Interest Rate (2)

Amount Outstanding Amount Available for Additional Borrowing

2025 Notes, due May 15, 2025 Fixed $ 402,500 $ —

Term Loan, due July 18, 2024 Variable 317,375 —

Revolving Credit Facility, due July 18, 2024 (1)

At December 28, 2019 , the amount available under our Revolving Credit Facility reflected a reduction of $5.7 million of letters of credit outstanding.

The interest rate on the Term Loan and Revolving Credit Facility pursuant to the Credit Agreement is at an Applicable Margin of 1.50% for LIBOR Loans, and an Applicable Margin of 0.50% for the new term loans that are ABR Loans, as of fiscal year end 2019 .

Term Loan and Revolving Credit Facility - Joinder and Amendment and Restatement Agreement

On July 18, 2019 (the “Closing Date”), the credit agreement, dated as of October 9, 2018 (the “Existing Credit Agreement”), by and among Nautilus Acquisition Holdings, Inc.

(“Holdings”), a Delaware corporation and a wholly-owned subsidiary of the Company, NVI, Goldman Sachs Bank USA, as administrative agent and collateral agent, and the lenders from time to time party thereto and the other parties thereto, was amended and restated pursuant to that certain Joinder and Amendment and Restatement Agreement, dated as of July 18, 2019 (the “Restatement Agreement”) by and among Holdings, NVI, as borrower, certain subsidiaries of NVI, as guarantors, Goldman Sachs Bank USA, as former administrative agent and collateral agent, Bank of America, N.A., as new administrative agent and collateral agent, and the lenders from time to time party thereto (the Existing Credit Agreement, as amended and restated by the Restatement Agreement, the “Credit Agreement”).

The Existing Credit Agreement was amended and restated to, among other things, (i) establish new first lien term loans in an aggregate principal amount of $420.0 million (the “Term Loan”) to repay all principal, interest fees and other amounts outstanding under the Existing Credit Agreement immediately prior to the Closing Date, (ii) establish a new revolving credit facility in an aggregate principal amount of $300.0 million (the “Revolving Credit Facility”), of which $148.0 million was drawn as of closing and (iii) replace Goldman Sachs Bank USA with Bank of America, N.A.

as administrative agent and collateral agent under the Credit Agreement and related documentation.

In connection with the principal repayments of our existing debt, the Company wrote off associated deferred debt issuance costs of $6.0 million and associated unamortized debt discount of $3.8 million in 2019 .

Pursuant to the Restatement Agreement, the initial new Applicable Margins, as defined in the Credit Agreement, are (i) 1.50% for the new first lien term loans that are London Inter-bank Offered Rate (“LIBOR”) Loans and (ii) 0.50% for the new first lien term loans that are Alternative Base Rate (“ABR”) Loans.

The Restatement Agreement further provides that following the Closing Date, the above Applicable Margins for the new first lien term loans will be based on NVI’s consolidated first lien leverage ratio as follows:

(a) if NVI’s consolidated first lien leverage ratio is greater than 3.75 to 1.00 , the Applicable Margin will be 2.00% for LIBOR Loans and 1.00% for ABR Loans, (b) if NVI’s consolidated first lien leverage ratio is less than or equal to 3.75 to 1.00 , but greater than 2.75 to 1.00 , the Applicable Margin will be 1.75% for LIBOR Loans and 0.75% for ABR Loans, (c) if NVI’s consolidated first lien leverage ratio is less than or equal to 2.75 to 1.00 but greater than 1.75 to 1.00 , the Applicable Margin will be 1.50% for LIBOR Loans and 0.50% for ABR Loans, (d) if NVI’s consolidated first lien leverage ratio is less than or equal to 1.75 to 1.00 but greater than 0.75 to 1.00 , the Applicable Margin will be 1.25% for LIBOR Loans and 0.25% for ABR Loans and (e) if NVI’s consolidated first lien leverage ratio is less than or equal to 0.75 to 1.00 , the Applicable Margin will be 1.00% for LIBOR Loans and 0.00% for ABR Loans.

The new first lien term loans will amortize in quarterly installments equal to 2.50% per annum in the first three years of the loan and 5.00% per annum thereafter.

In addition, pursuant to the Restatement Agreement, solely with respect to the Term Loan, commencing on the fiscal quarter ending on December 28, 2019 , Holdings will not permit (i) the Consolidated Total Debt to Consolidated EBITDA Ratio, as defined in the Credit Agreement, as of the last day of any fiscal quarter of Holdings to be greater than 4.75 to 1.00 for the first two years, and 4.50 to 1.00 thereafter, subject to certain step-ups after the consummation of a Material Acquisition, as defined in the Credit Agreement, or (ii) the Consolidated Interest Coverage Ratio of Holdings, as defined in the Credit Agreement, as of the last day of any fiscal quarter of Holdings to be less than 3.00 to 1.00 .

We were in compliance with all covenants related to the Credit Agreement as of December 28, 2019.

Variable — 293,600

Total $ 719,875 $ 293,600

(1) At January 2, 2021, the amount available under our Revolving Credit Facility reflected a reduction of $6.4 million of letters of credit outstanding.

(2) The interest rate on the Term Loan and Revolving Credit Facility pursuant to the Credit Agreement is at an Applicable Margin of 1.75% for LIBOR Loans with LIBOR to not be lower than 1.00% in any period, and an Applicable Margin of 0.75% for the new term loans that are ABR Loans, as of fiscal year end 2020.

The 2025 Notes will pay interest semi-annually in arrears on May 15 and November 15 of each year, commencing on November 15, 2020, at an annual rate of 2.50%.

Term Loan and Revolving Credit Facility

As of fiscal year end 2020, we had $317.4 million of Term Loan outstanding under our credit agreement.

As of fiscal year end 2020, we also had $293.6 million of availability under our $300.0 million Revolving Credit Facility, which includes $6.4 million in outstanding letters of credit.

The interest rate payable on the Term Loan is based on either LIBOR or an alternative borrowing rate plus an additional margin that varies dependent on NVI’s consolidated first lien leverage ratio.

The Term Loan will amortize in quarterly installments equal to 2.50% per annum in the first three years of the loan and 5.00% per annum thereafter.

As a result of the $75.0 million pay down of the Term Loan and the $25.0 million principal prepayment in 2019;

we have no additional mandatory principal payments on the Term Loan until maturity on July 18, 2024.

In addition, under our Credit Agreement we must maintain certain covenants based on our financial results.

The Credit Agreement also contains covenants that, among other things, limit NVI’s ability to incur additional debt, create liens against assets, make acquisitions, pay dividends or distributions on its stock, merge or consolidate with another entity and transfer or sell assets.

We were in compliance with all covenants related to the Credit Agreement as of January 2, 2021.

Credit Agreement Amendment

On May 5, 2020, we entered into the Credit Agreement Amendment with the lenders under our credit facility in order to amend certain provisions of the Credit Agreement.

As set forth in greater detail below, the principal purpose of the Credit Agreement Amendment was to suspend certain financial maintenance covenants contained in the Credit Agreement until testing at the end of the second fiscal quarter of 2021.

Capitalized terms used but not defined herein shall have the meanings assigned to such terms in the Credit Agreement and Amendment, as applicable.

Pursuant to the Credit Agreement Amendment, the financial covenants relating to maintenance of a maximum Consolidated Total Debt to Consolidated EBITDA Ratio and a minimum Consolidated Interest Coverage Ratio are suspended until testing at the end of the second fiscal quarter of 2021.

From and after such time, such covenants will be reinstated on a modified basis so that, subject to certain exceptions and limitations as described in the Credit Agreement Amendment, (i) with respect to the second and third fiscal quarters of 2021, the Consolidated Total Debt to Consolidated EBITDA Ratio shall not exceed 4.50 to 1.00 and, with respect to the fourth fiscal quarter of fiscal 2021 and thereafter, the Consolidated Total Debt to Consolidated EBITDA Ratio shall not exceed 4.00 to 1.00, in each case with NVI being able to elect to annualize certain quarterly periods so that quarterly performance from fiscal 2020 is excluded and (ii) with respect to the second fiscal quarter of 2021 and thereafter, the Consolidated Interest Coverage Ratio shall not be less than 3.00 to 1.00.

In lieu of such financial covenants, pursuant to the Credit Agreement Amendment NVI has agreed during the suspension period, (i) not to have Consolidated EBITDA for any six fiscal quarter period be less than $0, with the second fiscal quarter of 2020 permitted to be excluded in certain circumstances, and (ii) to have a minimum level of liquidity (defined as cash and cash equivalents plus the unused portion of the Revolving Credit Facility) equal to the lesser of (x) $100,000,000 and (y) $40,000,000 plus the amount of any net proceeds from capital markets financings during such period in excess of $75,000,000.

In addition, the Credit Agreement was amended pursuant to the Credit Agreement Amendment to, among other things, (i) limit the flexibility of NVI and Holdings with respect to certain transactions during the covenant suspension period, including the ability to declare or pay dividends, incur debt and make investments and dispositions, (ii) require prepayments of the term loans under certain circumstances during the covenant suspension period from the net proceeds from debt or equity capital markets transactions by the Company (with the amount of the term loans to be paid down equal to $75 million from the first $400 million of capital raised and 50% of any proceeds above such amount) and (iii) restrict NVI’s ability to borrow under the Revolving Credit Facility if unrestricted cash and cash equivalents exceeds $50 million (and, in the event of any such excess, to require a mandatory prepayment of such amount).

Also pursuant to the Credit Agreement Amendment, the margins upon which interest is calculated for the term loans were amended to a range of 1.75% to 2.75% (for LIBOR Loans) and 0.75% to 1.75% (for ABR Loans), in each case based on NVI’s Consolidated First Lien Secured Debt to Consolidated EBITDA Ratio at such time, with such margins subject to an increase of 50 basis points in the event that either (i) the Company has not raised at least $135 million in additional proceeds from certain capital markets transactions within 30 days of the date of the Credit Agreement Amendment or (ii) Consolidated EBITDA for the most recently ended four quarters is less than $0.

In May 2020, we completed the issuance of the 2025 Notes.

The 2025 Notes were sold only to persons reasonably believed to be qualified institutional buyers in reliance on Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”).

The 2025 Notes will pay interest semi-annually in arrears on May 15 and November 15 of each year, commencing on November 15, 2020, at an annual rate of 2.50% and will be convertible into cash, shares

of common stock or a combination of cash and shares of common stock, at our election, based on the applicable conversion rate at such time.

The 2025 Notes have a maturity date of May 15, 2025.

Refer to Note 4.

“Long-term Debt” for more information.

We received proceeds from the offering of $390.9 million, net of $11.6 million in underwriter fees and other issuance costs.

Capital Expenditures

In thousands Fiscal Year 2020 Fiscal Year 2019 Fiscal Year 2018

New stores (owned brands) $ 27,865 $ 37,734 $ 47,389

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Information technology and other 29,076 43,901 33,275

Total $ 76,823 $ 101,325 $ 104,493

Fiscal year 2020 includes 53 weeks.

Fiscal years 2019 and 2018 include 52 weeks.

We expect capital expenditures in fiscal year 2021 to be approximately between $100 million and $105 million and to be used primarily in supporting the Company’s growth through investments in new stores and information technology improvements.

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As of fiscal year end 2020, our lease commitments and contractual obligations are as follows:

In thousands 2021 2022 2023 2024 2025 Thereafter Total

Term Loan (a)

Revolving Credit Facility (b)

Estimated interest (c)

Noncancelable operating leases (d)

Finance leases (e)

Other commitments (f)

Principal under the Term Loan is payable in equal quarterly installments of $2.625 million through the third quarter of 2022 and $5.25 million each quarter through the second quarter of 2024 when the outstanding principal balance of $326.75 million is due.

No principal payments are required on the Revolving Credit Facility until the third quarter of 2024 when the outstanding principal balance of $148.0 million is due.

As of fiscal year 2019 we had $5.7 million in outstanding letters of credit under our Revolving Credit Facility.

We have estimated our interest payments on our Term Loan based on our current interest elections described in “Liquidity and Capital Resources.” Amounts and timing may be different from our estimated interest payments due to potential voluntary prepayments, borrowings and interest rate fluctuations.

$ — $ — $ — $ 317,375 $ — $ — $ 317,375

2025 Notes (b)

— — — — 402,500 — 402,500

Revolving Credit Facility (c)

— — — — — — —

Estimated interest (d)

20,377 20,377 20,377 15,793 3,773 — 80,697

Noncancelable operating leases (e)

73,867 77,874 70,103 60,998 51,974 116,272 451,088

Finance leases (f)

6,676 7,215 6,241 4,673 4,451 12,008 41,264

Other commitments (g)

41,827 13,935 5,934 454 404 317 62,871

Total $ 142,747 $ 119,401 $ 102,655 $ 399,293 $ 463,102 $ 128,597 $ 1,355,795

(a) As a result of $75.0 million prepayment of debt principal during 2020, the Company does not owe principal payments on its Term Loan until the July 18, 2024 when the outstanding principal balance of $317.4 million is due.

(b) The principal payment on the 2025 Notes are due on May 15, 2025.

(c) No principal payments are required on the Revolving Credit Facility as we have $293.6 million of availability under our $300.0 million Revolving Credit Facility, which includes $6.4 million in outstanding letters of credit .

(d) We have estimated our interest payments on our Term Loan based on our current interest elections described in “Liquidity and Capital Resources.” Amounts and timing may be different from our estimated interest payments due to potential voluntary prepayments, borrowings and interest rate fluctuations.

Expected obligations on our hedging instruments are excluded from estimated interest presented in the table above.

We lease our retail stores, optometric examination offices, distribution centers, office space and all of our optical laboratories with the exception of our St.

(e) We lease our retail stores, optometric examination offices, distribution centers, office space and all of our optical laboratories with the exception of our St.

Cloud, Minnesota lab, which we own.

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These expenses are generally variable, not included above, and were approximately $28.2 million during fiscal year ended 2020.

For leases classified as finance leases, the finance lease asset is recorded as property and equipment and a corresponding amount is recorded as a long-term debt obligation in the consolidated balance sheets to the lesser of the net present value of minimum lease payments to be made over the lease term or the fair value of the property for leases in existence as of fiscal year end 2018 and at the net present value of the minimum lease payments to be made over the lease term for new finance leases entered into subsequent to fiscal year end 2018 .

(f) For leases classified as finance leases, the finance lease asset is recorded as property and equipment and a corresponding amount is recorded as a long-term debt obligation in the consolidated balance sheets to the lesser of the net present value of minimum lease payments to be made over the lease term or the fair value of the property for leases in existence as of fiscal year end 2019 and at the net present value of the minimum lease payments to be made over the lease term for new finance leases entered into subsequent to fiscal year end 2019.

We allocate each lease payment between a reduction of the lease obligation and interest expense using the effective interest method.

Finance lease amounts above represent required contractual cash payments in the periods presented.

Other commitments include minimum purchase commitments with certain trade vendors and contributions made to our philanthropic endeavors.

(g) Other commitments include minimum purchase commitments with certain trade vendors and contractual agreements to purchase goods or services in the ordinary course of business.

Off-balance Sheet Arrangements

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Actual results may differ from these estimates under different assumptions and conditions.

Management has evaluated the accounting policies used in the preparation of the Company’s consolidated financial statements and related notes and believe those policies to be reasonable and appropriate.

Management has evaluated the accounting policies used in the preparation of the Company’s consolidated financial statements and related notes and believes those policies to be reasonable and appropriate.

Certain of these accounting policies require the application of significant judgment by management in selecting appropriate assumptions for calculating financial estimates.

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Impairment of P&E and ROU assets

We evaluate the impairment of long-lived tangible and ROU store assets at the store level, which is the lowest level at which independent cash flows can be identified, when events or conditions indicate the carrying value of such assets may not be recoverable.

We evaluate impairment of long-lived tangible and ROU store assets at the store level, which is the lowest level at which independent cash flows can be identified, when events or conditions indicate the carrying value of such assets may not be recoverable.

In making this evaluation, we may consider multiple factors including financial performance of the stores, regional and local business climates, future plans for the store operations and other qualitative factors.

If the store's projected undiscounted net cash flows expected to be generated by the related assets over the life of the primary asset within the asset group (generally leasehold improvements) are less than the carrying value of the subject assets, we determine an estimate of the fair value of the asset group using an income approach based on discounted cash flows, which require estimates and assumptions to forecasted store revenue growth rates and store profitability.

The cash flows used in estimating fair value were discounted using a market rate of approximately 8% .

If the store’s projected undiscounted net cash flows expected to be generated by the related assets over the life of the primary asset within the asset group are less than the carrying value of the subject assets, we determine an estimate of the fair value of the asset group using an income approach based on discounted cash flows, which require estimates and assumptions of forecasted store revenue growth rates and store profitability.

The cash flows used in estimating fair value were discounted using market rates from 6.3% to 8%.

If the fair value of the asset group is less than its carrying value, the loss is allocated to the long-lived assets of the group on a pro rata basis using the relative carrying amounts of those assets, except that the loss allocated to an individual long lived asset of the group shall not reduce the carrying amount of that asset below its fair value.

A significant decrease in the estimated cash flows would lead to a lower fair value measurement, as would a significant increase in the discount rate.

We assess non-store tangible assets, including capitalized software costs in use or under development, for impairment if events or changes in circumstances indicate that the carrying value of those assets may not be recoverable.

We had $366.8 million of property and equipment, net, and ROU assets of $376.2 million as of December 28, 2019 .

We consider market-based indications of prevailing rental rates, lease incentives and discount rates for retail space when estimating the fair value of ROU assets.

A decrease in the estimated cash flows would lead to a lower fair value measurement, as would a significant increase in the discount rate.

These non-recurring fair value measurements are classified as Level 3 measurements in the fair value hierarchy.

We assess non-store tangible assets, as well as capitalized software costs in use or under development, for impairment if events or changes in circumstances indicate that the carrying value of those assets may not be recoverable.

We had $341.3 million of property and equipment, net, and ROU assets of $340.1 million as of January 2, 2021.

Changes in estimates and assumptions used in our impairment testing of property and equipment could result in future impairment losses, which could be material.

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of this Form 10-K for further detail on goodwill impairment.

As of December 28, 2019 , we had $777.6 million of goodwill, $240.5 million of non-amortizing intangible assets, and $56.9 million of other intangible assets, net of accumulated amortization.

As of January 2, 2021, we had $777.6 million of goodwill, $240.5 million of non-amortizing intangible assets, and $49.5 million of other intangible assets, net of accumulated amortization.

Changes in estimates and assumptions used in our impairment testing could result in future impairment losses, which could be material.

Significant judgments and assumptions are required in our impairment evaluations.

In the impairment analysis for goodwill, fair value exceeded carrying value by a substantial margin for America’s Best and Eyeglass World.

Legacy fair value exceeded carrying value by 28% and represents 8% of consolidated goodwill.

Future changes in Legacy reporting unit’s business profitability, expected cash flows, changes in business strategy and external market conditions, among other factors, could require us to record an impairment charge for Legacy goodwill.

In the impairment analysis for goodwill, fair value exceeded carrying value by a substantial margin for all of our reporting units.

Future changes in reporting unit’s business profitability, expected cash flows, changes in business strategy and external market conditions, among other factors, could require us to record an impairment charge for goodwill.

Revenue Recognition

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Revenues from services and plans include eye exams, eyecare club membership fees, product protection plans (i.e.

warranties), and HMO membership fees.

warranties), and HMO vision plan fees.

Service revenue also includes fees we earn for managing certain Vision Centers and performing laboratory processing services for our legacy partner.

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Since an eye exam is a key component in the ability for acceptable prescription eyewear to be delivered to a customer, we concluded that the eye exam service, while capable of being distinct from the eyeglass product delivery, was not distinct in the context of the two-pair offer.

As a result, we do not allocate revenue to the eye exam associated with the two-pair offer, and we record all revenue associated with the offer in Owned & Host net product sales when the customer has received and accepted the merchandise.

As a result, we do not allocate revenue to the eye exam associated with the two-pair offer, and we record all revenue associated with the offer in net product sales when the customer has received and accepted the merchandise.

We offer product protection plans for our eyeglasses and three- or five-year eyecare club memberships in our Owned & Host segment to our contact lens customers.

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We lease our stores, laboratories, distribution centers, and corporate offices.

These leases generally have noncancelable lease terms of between five and 10 years , with an option to renew for additional terms of one to 10 years or more.

These leases generally have noncancelable lease terms of between 5 years and 10 years, with an option to renew for additional terms of 1 year to 10 years or more.

The lease term includes renewal option periods when the renewal is deemed reasonably certain after considering the value of the leasehold improvements at the end of the noncancelable lease period.

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Factors incorporated into the calculation of the lease incremental borrowing rate include lease term, borrowing rates on the Company’s long-term debt, fixed rates on the Company’s interest rate swaps, LIBOR margins for issuers of similar credit rating to NVI and effect of collateralization.

For finance leases, a lease ROU asset is recorded as property and equipment and corresponding amounts are recorded as finance lease debt obligations at an amount equal to the lesser of the net present value of minimum lease payments to be made over the lease term or the fair value of the property for leases in existence as of fiscal year end 2018 and at the net present value of the minimum lease payments to be made over the lease term for new finance leases entered into subsequent to fiscal year end 2018 .

“Leases” to our consolidated financial statements included in Part II.

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These calculations and assessments involve estimates and complex judgments because the ultimate tax outcomes are uncertain and future events are unpredictable.

Our net deferred liability balance as of December 28, 2019 was $60.1 million .

Our net deferred liability balance as of January 2, 2021 was $80.9 million.

Changes in assumptions in our estimates could result in material changes to these balances.

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Actual shrinkage is recorded throughout the year based upon periodic physical counts.

As of December 28, 2019 , our total inventory balance was $127.6 million .

As of January 2, 2021, our total inventory balance was $111.3 million.

Changes in our assessment of the inventory carrying value could have a material impact on our financial position.

Derivative Financial Instruments

The Company uses interest rate swaps to manage its exposure to adverse fluctuations in interest rates by converting a portion of our debt portfolio from a floating rate to a fixed rate.

We designate our interest rate swaps as cash flow hedges and formally document our hedge relationships, including identification of the hedging instruments and the hedged items, as well as our risk management objectives and strategies for undertaking the hedge transactions.

We record all interest rate swaps in our consolidated balance sheets on a gross basis at fair value.

Fair value represents estimated amounts we would receive or pay upon a termination of interest rate swaps prior to their scheduled expiration dates.

The fair value was based on information that is model-driven and whose inputs were observable (Level 2 inputs).

We do not hold or enter into financial instruments for trading or speculative purposes.

The gain or loss resulting from fair value adjustments on cash flow hedges are recorded in accumulated other comprehensive loss in the accompanying consolidated balance sheets until the hedged item is recognized as interest expense in the consolidated statements of operations.

We perform periodic assessments of the effectiveness of our derivative contracts designated as hedges, including the possibility of counterparty default.

To manage credit risk associated with our interest rate hedging program, we select counterparties based on their credit ratings and limit our exposure to any single counterparty.

The counterparties to our derivative contracts are major domestic financial institutions with investment grade credit ratings.

The impact of credit risk, as well as the ability of each party to fulfill its obligations under our derivative financial instruments, is considered in determining the fair value of the contracts.

Credit risk has not had a significant effect on the fair value of our derivative instruments.

We do not have any credit risk-related contingent features or collateral requirements associated with our derivative contracts.

As of December 28, 2019 , the notional amount of our hedges was $430.0 million .

Any potential changes in hedge designations assumptions on instrument fair values could have a material impact on our results and our balance sheet.

In May 2020, the Company issued $402.5 million principal amount of 2.50% convertible senior notes due 2025.

In accordance with accounting guidanc e on embedded conversion features indexed to and settled in equity, t he Company valued and bifurcated the conversion option associated with the 2025 Notes from the respective host debt instrument.

The carrying amount of the equity component is recorded as a debt discount and represents the difference between the proceeds from the issuance of the Notes and the fair value of the liability component of the Notes.

The significant assumptions used in the fair value of the liability component of the Notes were risk-free rate, discount rate based on the Company’s implied credit spread and term of the 2025 Notes, expected volatility of Company’s stock price and dividend yield.

The resulting debt discount on the 2025 Notes is amortized to interest expense using the effective interest rate method over the contractual term of the 2025 Notes.

In addition, the debt issuance costs related to the issuance of the 2025 Notes were allocated between the liability and equity components based on their relative values.

Debt issuance costs attributable to the liability component were recorded as a contra-liability and are presented net against the 2025 Notes balance on the Company’s consolidated balance sheets.

These costs are amortized to interest expense using the effective interest method over the term of the 2025 Notes.

Recently Issued Accounting Pronouncements

In August 2018 , the FASB issued ASU No.

2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40):

Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force).

This new guidance 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-use software (and hosting arrangements that include an internal-use software license).

This new guidance is effective for fiscal years beginning after December 15, 2019 , and for interim periods within those fiscal years, with early adoption permitted.

The amendments in this new guidance may be applied either retrospectively or prospectively.

The Company is in the process of assessing the new guidance, but does not expect adoption to have a material effect on the Company’s financial condition, results of operations, or cash flows.

In June 2016 , the FASB issued ASU No.

2016-13, Measurement of Credit Losses on Financial Instruments.

This new guidance requires an entity to assess impairment of its financial instruments based on its estimate of expected credit losses.

Initial adoption of ASU 2016-13 is required to be reported on a modified retrospective basis, with a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption, except for certain provisions that are required to be applied prospectively.

This guidance is effective for fiscal years beginning after December 15, 2019 , and for interim reporting periods within those fiscal years.

The Company is in the process of assessing the new guidance, but does not expect adoption to have a material effect on the Company’s financial condition, results of operations, or cash flows.

For additional information on recently issued accounting pronouncements, see Note 1 .

For information on recently issued accounting pronouncements, see Note 1.

“Business and Significant Accounting Policies” to our consolidated financial statements included in Part II.

4 unchanged sentences

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What changed 10-K

Item 7. Management’s Discussion and Analysis