What changed in this filing

/stocks — the workspaceLOADING

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

2021-03-03 compared with 2020-02-26 · 619 added, 617 removed, 889 unchanged (58% of the section changed)

3 unchanged sentences

A discussion of our accounting policies for derivative financial instruments is included in Note 11.

“Fair Value Measurement of Financial Assets and Liabilities” and Note 14 “Interest Rate Derivative” to our consolidated financial statements included in Part II.

“Fair Value Measurement of Financial Assets and Liabilities” and Note 14 “Interest Rate Derivatives” to our consolidated financial statements included in Part II.

Item 8 of this Form 10-K.

3 unchanged sentences

The general levels of LIBOR affect interest expense.

We periodically use interest rate swaps to manage such risk.

The net amounts to be paid or received under interest rate swap agreements are accrued as interest rates change, and are recognized over the life of the swap agreements as an adjustment to interest expense from the underlying debt to which the swap is designated.

We periodically use interest rate derivative contracts to manage such risk.

For contracts that are designated, and highly effective, as cash flow hedges, the net amounts to be paid or received are accrued as interest rates change, and are recognized over the life of the contracts as an adjustment to interest expense from the underlying debt to which the contracts are designated.

For contracts that are not designated as cash flow hedges, the gains or losses from changes in fair value are recognized in interest expense, net.

The related amounts payable to, or receivable from, the contract counterparties are included in accrued liabilities or accounts receivable in the consolidated balance sheets.

As of fiscal year 2019 , all of our $540.4 million in Term Loan debt was subject to variable interest rates, with a weighted average borrowing rate of 4.5% .

As of fiscal year 2020, all of our $317.4 million of Term Loan borrowings was subject to variable interest rates, with a weighted average borrowing rate of 5.7%.

After inclusion of the notional amount of $317.0 million of interest rate swaps fixing a portion of the variable rate debt, $0.4 million, or 0.1% of our debt, is subject to variable rates.

Assuming an increase to market rates of 1.0% as of December 28, 2019 , we would incur an annual increase to interest expense of approximately $1.1 million related to debt subject to variable rates.

Assuming an increase to market rates of 1.0% as of January 2, 2021, the resulting impact to interest expense related to debt subject to variable rates would be immaterial.

Assuming a decrease to market rates of 1.0%, the resulting impact to interest expense related to the interest rate collar would be approximately $11.7 million.

Consolidated Financial Statements and Supplementary Data

1 unchanged sentence

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets as of December 28, 2019 and December 29, 2018

Consolidated Statements of Operations and Comprehensive Income for the Fiscal Years Ended December 28, 2019, December 29, 2018 and December 30, 2017

Consolidated Statements of Stockholders’ Equity for the Fiscal Years Ended December 28, 2019, December 29, 2018 and December 30, 2017

Consolidated Statements of Cash Flows for the Fiscal Years Ended December 28, 2019, December 29, 2018, and December 30, 2017

Consolidated Balance Sheets as of January 2, 2021 and December 28, 2019

Consolidated Statements of Operations and Comprehensive Income for the Fiscal Years Ended January 2, 2021 , December 28, 2019 and December 29, 2018

Consolidated Statements of Stockholders’ Equity for the Fiscal Years Ended January 2, 2021, December 28, 2019 and December 29, 2018

Consolidated Statements of Cash Flows for the Fiscal Years Ended January 2, 2021, December 28, 2019 and December 29, 2018

Notes to Consolidated Financial Statements

5 unchanged sentences

We have audited the accompanying consolidated balance sheets of National Vision Holdings, Inc.

and subsidiaries (the "Company") as of December 28, 2019 and December 29, 2018, the related consolidated statements of operations and comprehensive income, stockholders' equity, and cash flows, for each of the three years in the period ended December 28, 2019, and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the "financial statements").

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 28, 2019 and December 29, 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 28, 2019, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 28, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 25, 2020, expressed an unqualified opinion on the Company's internal control over financial reporting.

and subsidiaries (the “Company”) as of January 2, 2021 and December 28, 2019, the related consolidated statements of operations and comprehensive income, stockholders’ equity, and cash flows, for each of the three years in the period ended January 2, 2021, and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the “financial statements”).

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of January 2, 2021 and December 28, 2019, and the results of its operations and its cash flows for each of the three years in the period ended January 2, 2021, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of January 2, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 2, 2021, expressed an unqualified opinion on the Company’s internal control over financial reporting.

Change in Accounting Principle

15 unchanged sentences

The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Asset Impairment - Store Assets Impairment - Refer to Notes 1, 2 and 8 to the financial statements

Long-term Debt – 2025 Notes - Refer to Note 4 to the financial statements

Critical Audit Matter Description

The Company’s evaluation of long-lived tangible and right of use (ROU) store assets for impairment involves an initial assessment of each store asset group to determine whether events or conditions indicate that the carrying amounts of such assets may not be recoverable.

Possible indications of impairment may include events or changes in circumstances regarding the financial performance of the stores, regional and local business climates, future plans for the store operations and other qualitative factors.

When events or changes in circumstances exist, the Company evaluates its store assets for impairment by comparing projected undiscounted net cash flows expected to be generated over the life of the primary asset within the asset group (generally leasehold improvements) to the carrying value of the subject assets.

If the carrying value exceeds the undiscounted net cash flows, an analysis is performed to determine the fair value of the store asset group.

For those store assets where indications of impairment have been identified, the Company makes significant estimates and assumptions to determine whether the asset group is impaired using undiscounted net cash flows expected to be generated over the life of the primary asset within the store asset group, including estimates and assumptions related to forecasted store revenue growth rates.

As of December 28, 2019, total net property and equipment, which includes store assets, was $366.8 million;

and total ROU assets, which includes store ROU assets, were $376.2 million.

Impairment losses recorded on store assets in 2019 were $8.9 million.

For those store assets where indications of impairment have been identified, we identified the forecasted store revenue growth rates for new markets where the Company has limited historical experience to be a critical audit matter.

This required a high degree of auditor judgment and an increased extent of effort when performing audit procedures to evaluate the reasonableness of management’s forecasted store revenue growth rates.

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

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 the discount rate based on the Company’s implied credit spread and term of the 2025 Notes and the expected volatility of Company’s stock price.

Application of the accounting framework for the 2025 Notes is complex, and the determination of the fair value of the liability component requires the Company to make significant estimates and assumptions relating to the implied credit spread and expected volatility.

Therefore, performing audit procedures to evaluate the appropriateness of the

accounting framework and the reasonableness of the significant estimates and assumptions required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to the assessment of forecasted store revenue growth rates for those stores with indicators of impairment included the following, among others:

We tested the effectiveness of controls over management’s estimates of undiscounted net cash flows used to test the store asset group for recoverability, including controls over management’s selection of forecasted store revenue growth rates.

We evaluated the Company’s forecasted store revenue growth rates by:

Comparing management’s estimate of forecasted store revenue growth rates to:

the trend of recent store revenue growth rates within the respective regional or local market,

external market sources of regional and local optical retail saturation data,

third party estimates of the impact of regional and local marketing strategies, and

regional and local doctor recruiting and retention activities.

Comparing the estimate of forecasted store revenue growth rates to the Company’s financial forecasts communicated to investors and used to measure management performance.

Discussing with management the forecasted store revenue growth rates used in the Company’s undiscounted net cash flows and evaluating the consistency of the assumptions used with evidence obtained in other areas of the audit.

Our audit procedures related to the accounting for the 2025 Notes, including the Company’s judgments and calculations related to the fair value of the liability component, included the following procedures, among others:

• We tested the effectiveness of internal controls over the Company’s accounting treatment for the recording of the 2025 Notes and the internal controls over the determination of the fair value of the liability component.

• With the assistance of professionals in our firm having expertise in debt issuance accounting, we evaluated the Company’s conclusions regarding the accounting treatment applied to the recording of the 2025 Notes.

• With the assistance of our fair value specialists, we evaluated the reasonableness of the valuation methodology and the significant assumptions used to determine the fair value of the liability component, by:

◦ Testing the source information underlying the fair value of the liability component and the mathematical accuracy of the calculation.

◦ Developing an independent expectation of certain significant assumptions, including the implied credit spread and expected volatility, and comparing our independent expectation to the Company’s estimate.

/s/ Deloitte & Touche LLP

Atlanta, Georgia

February 25, 2020

March 2, 2021

We have served as the Company’s auditor since 2002.

2 unchanged sentences

Consolidated Balance Sheets

As of December 28, 2019 and December 29, 2018

As of January 2, 2021 and December 28, 2019

In Thousands, Except Par Value

December 28, 2019

January 2, 2021 As of

December 28, 2019

2 unchanged sentences

Accounts receivable, net 57,989 44,475

Inventories 111,274 127,556

Prepaid expenses and other current assets 23,484 23,266

2 unchanged sentences

Other assets:

Goodwill 777,613 777,613

Trademarks and trade names 240,547 240,547

1 unchanged sentence

Right of use assets 340,141 348,090

Other assets 17,743 8,129

Total non-current assets 1,766,848 1,798,086

Total assets $ 2,333,498 $ 2,032,725

LIABILITIES AND STOCKHOLDERS’ EQUITY

18 unchanged sentences

200,000 shares authorized;

80,603 and 78,246 shares issued as of December 28, 2019 and December 29, 2018, respectively;

79,678 and 78,167 shares outstanding as of December 28, 2019 and December 29, 2018, respectively

82,183 and 80,603 shares issued as of January 2, 2021 and December 28, 2019, respectively;

81,239 and 79,678 shares outstanding as of January 2, 2021 and December 28, 2019, respectively

Additional paid-in capital 795,697 700,121

2 unchanged sentences

Treasury stock, at cost;

925 and 79 shares as of December 28, 2019 and December 29, 2018, respectively

944 and 925 shares as of January 2, 2021 and December 28, 2019, respectively

( 28,496 ) ( 27,807 )

Total stockholders’ equity 906,502 776,437

Total liabilities and stockholders’ equity $ 2,333,498 $ 2,032,725

Fiscal year 2020 includes 53 weeks.

Fiscal year 2019 includes 52 weeks.

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

2 unchanged sentences

Consolidated Statements of Operations and Comprehensive Income

For the Years Ended December 28, 2019 , December 29, 2018 and December 30, 2017

For the Years Ended January 2, 2021, December 28, 2019 and December 29, 2018

In Thousands, Except Earnings Per Share

Fiscal Year 2020 Fiscal Year 2019 Fiscal Year 2018

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

2 unchanged sentences

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

5 unchanged sentences

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

5 unchanged sentences

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

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

Earnings per share:

Basic $ 0.45 $ 0.42 $ 0.31

Diluted $ 0.44 $ 0.40 $ 0.30

Weighted average shares outstanding:

Basic 80,565 78,608 75,899

Diluted 82,793 81,683 79,041

Comprehensive income:

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

Unrealized gain (loss) on hedge instruments ( 780 ) ( 1,350 ) 9,488

1 unchanged sentence

Comprehensive income $ 35,691 $ 31,794 $ 30,711

Fiscal year 2020 includes 53 weeks.

Fiscal years 2019 and 2018 include 52 weeks.

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

2 unchanged sentences

Consolidated Statements of Stockholders’ Equity

For the Years Ended December 28, 2019 , December 29, 2018 and December 30, 2017

For the Years Ended January 2, 2021, December 28, 2019 and December 29, 2018

Common Stock Additional

Capital Accumulated

Comprehensive

Loss Retained

Earnings Treasury

Stockholders’

Shares Amount

Balances at December 30, 2017 74,654 $ 746 $ 631,798 $ ( 9,868 ) $ 32,157 $ ( 233 ) $ 654,600

Dividends to stockholders

Issuance of common stock, net

Cumulative effect of change in accounting principle — — — — 19,030 — 19,030

Balances at December 31, 2017 - as adjusted 74,654 746 631,798 ( 9,868 ) 51,187 ( 233 ) 673,630

Issuance of common stock 3,564 36 19,766 — — — 19,802

Stock based compensation — — 20,939 — — — 20,939

Purchase of treasury stock ( 51 ) — — — — ( 1,928 ) ( 1,928 )

Unrealized gain (loss) on hedge instruments, net of tax — — — 7,058 — — 7,058

Net income — — — — 23,653 — 23,653

Balances at December 29, 2018 78,167 782 672,503 ( 2,810 ) 74,840 ( 2,161 ) 743,154

5 unchanged sentences

Unrealized gain (loss) on hedge instruments, net of tax — — — ( 1,004 ) — — ( 1,004 )

Net income — — — — 32,798 — 32,798

Balances at December 28, 2019 79,678 805 700,121 ( 3,814 ) 107,132 ( 27,807 ) 776,437

4 unchanged sentences

Purchase of treasury stock ( 19 ) — — — — ( 689 ) ( 689 )

Conversion option related to convertible senior notes, net of allocated costs and tax — — 71,385 — — — 71,385

Unrealized gain (loss) on hedge instruments, net of tax — — — ( 586 ) — — ( 586 )

Balances at December 28, 2019

Net income — — — — 36,277 — 36,277

Balances at January 2, 2021 81,239 $ 821 $ 795,697 $ ( 4,400 ) $ 142,880 $ ( 28,496 ) $ 906,502

Fiscal year 2020 includes 53 weeks.

Fiscal years 2019 and 2018 include 52 weeks.

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

2 unchanged sentences

Consolidated Statements of Cash Flows

For the Years Ended December 28, 2019 , December 29, 2018 and December 30, 2017

For the Years Ended January 2, 2021, December 28, 2019 and December 29, 2018

Fiscal Year 2020 Fiscal Year 2019 Fiscal Year 2018

Cash flows from operating activities:

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

Adjustments to reconcile net income to cash provided by operating activities:

Depreciation and amortization 91,585 87,244 74,339

Amortization of loan costs

Amortization of debt discount and deferred financing costs 11,895 1,289 1,848

Asset impairment 22,004 8,894 17,630

1 unchanged sentence

Stock based compensation expense 10,740 12,670 20,939

Losses (gains) on change in fair value of derivatives 4,014 — —

Inventory adjustments 4,852 4,352 3,868

Bad debt expense

Debt issuance costs

Credit loss expense 671 8,210 7,107

Loss on extinguishment of debt — 9,786 —

Other 1,813 5,309 2,613

Changes in operating assets and liabilities:

Accounts receivable, net ( 13,697 ) ( 6,925 ) ( 14,649 )

Inventories 11,430 ( 15,886 ) ( 28,739 )

Other assets ( 4,422 ) 10,103 ( 7,011 )

Accounts payable 24,079 ( 2,860 ) 7,934

4 unchanged sentences

Purchase of property and equipment ( 76,823 ) ( 101,325 ) ( 104,493 )

Purchase of investments

Other 413 694 272

Net cash used for investing activities ( 76,410 ) ( 100,631 ) ( 104,221 )

Cash flows from financing activities:

Proceeds from issuance of long-term debt, net of discounts

Proceeds from issuance of common stock

Principal payments on long-term debt

Borrowings on long-term debt, net of discounts 548,769 566,550 200,000

Repayments on long-term debt ( 369,269 ) ( 591,925 ) ( 204,275 )

Proceeds from exercise of stock options 13,105 14,767 19,802

Purchase of treasury stock ( 689 ) ( 25,646 ) ( 1,928 )

Payments on finance lease obligations

Payments of debt issuance costs ( 12,439 ) ( 2,930 ) ( 1,400 )

Dividend to stockholders

Payments on finance lease obligations ( 3,196 ) ( 2,957 ) ( 1,802 )

Net cash provided by (used for) financing activities 176,281 ( 42,141 ) 10,397

10 unchanged sentences

Non-cash purchase of treasury stock — — ( 446 )

Fiscal year 2020 includes 53 weeks.

Fiscal years 2019 and 2018 include 52 weeks.

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

6 unchanged sentences

(“NVHI,” the “Company,” “we,” “our,” or “us”) is a holding company whose operating subsidiaries include its indirect wholly owned subsidiary, National Vision, Inc.

(“NVI”) and NVI’s direct wholly owned subsidiaries.

(“NVI”) and NVI’s wholly owned subsidiaries.

We are a leading value retailer of eyeglasses and contact lenses in the United States.

We operated 1,151 and 1,082 retail optical locations in the United States and its territories as of the fiscal years ended December 28, 2019 and December 29, 2018 , respectively, through our five store brands, including America’s Best Contacts and Eyeglasses (“America’s Best”), Eyeglass World, Vista Optical locations on U.S.

Army/Air Force military bases (“Military”) and within Fred Meyer (“Fred Meyer”) stores, and our management & services arrangement with Walmart (“Legacy”).

We operated 1,205 and 1,151 retail optical locations in the United States and its territories as of the fiscal years ended January 2, 2021 and December 28, 2019, respectively, through our five store brands, including America’s Best Contacts and Eyeglasses (“America’s Best”), Eyeglass World, Vista Optical locations on select U.S.

Army/Air Force military bases (“Military”) and within select Fred Meyer (“Fred Meyer”) stores, and our management & services arrangement with Walmart (“Legacy”).

We sell contact lenses and optical accessory products to retail customers through proprietary retail web sites and web sites on behalf of certain independent retailers and insurance companies.

1 unchanged sentence

We also operate a specialized health maintenance organization (“HMO”) that is licensed as a single-service health plan under California law.

The HMO issues individual vision care benefit plans in connection with our America’s Best operations in California, and provides, or arranges for the provision of, optometric services at the offices next to certain Walmart stores throughout California.

The HMO issues individual vision plans in connection with our America’s Best operations in California, and provides, or arranges for the provision of, optometric services at the offices next to certain Walmart stores throughout California.

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.

In a 52-week fiscal year, each quarter contains 13 weeks of operations;

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

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

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

Unless otherwise stated, references to years in this report relate to fiscal years rather than calendar years.

7 unchanged sentences

Actual results could differ from those estimates.

Initial and Secondary Public Offerings

On October 30, 2017 , we completed an initial public offering of our common stock (“IPO”) in which we issued and sold 18,170,000 shares, including 2,370,000 shares pursuant to the exercise in full of the underwriters’ option to purchase additional shares.

The shares sold in the offering were registered under the Securities Act pursuant to our Registration Statement on Form S-1 (File No.

333-220719), which was declared effective by the Securities and Exchange Commission on October 25, 2017 .

The shares were sold at an initial offering price of $ 22.00 per share, which generated net proceeds of approximately $ 375.8 million to the Company, after deducting underwriting discounts and commissions of approximately $ 24.0 million which included $ 0.7 million paid to KKR Capital Markets LLC (“KCM”), an affiliate of KKR, for underwriting services in connection with the IPO.

We primarily used the proceeds from the IPO to repay $ 125.0 million in outstanding aggregate principal amount of our second lien term loans and approximately $ 235.0 million of the outstanding principal amount of our Term Loan B under our first lien credit agreement and accrued and unpaid interest thereon.

The repayment resulted in a retirement of debt in the amount of $ 353.3 million .

Additionally, we paid $ 4.8 million of transaction related costs which are recorded as a charge against additional paid-in capital included in the consolidated balance sheets.

The remaining $ 11.0 million of the proceeds was used for general corporate purposes, and payment of the termination fees described below.

National Vision Holdings, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

Business and Significant Accounting Policies (continued)

NVI was party to a Monitoring Agreement, dated as of March 14, 2014 , with KKR and Berkshire Partners LLC (“Berkshire”), which was terminated automatically in accordance with its terms upon the completion of the IPO.

The Company paid termination fees of approximately $ 3.6 million and $ 0.8 million to KKR and Berkshire, respectively, recorded in selling, general and administrative (“SG&A”) in the consolidated statements of operations.

Affiliates of KKR and Berkshire retained 58.2 % and 13.6 % ownership interest, respectively, in the Company after the IPO.

Secondary Public Offerings

During fiscal year 2018, we completed three underwritten public offerings in which KKR, Berkshire and certain management stockholders (“selling stockholders”) sold an aggregate of 42,914,852 shares of the Company’s common stock.

1 unchanged sentence

However, the second and third offerings resulted in certain incentive compensation expenses relating to vesting of performance-based stock options and a payout under a non-executive long-term incentive plan.

“Stock Incentive Plan” for details.

On August 7, 2019, the Company entered into an Underwriting Agreement by and among the Company, KKR Vision Aggregator L.P.

6 unchanged sentences

The secondary offering constituted a vesting event whereby a final portion of the performance-based options vested and the remaining portion of unvested performance options awarded under the 2014 Stock Incentive Plan was forfeited.

Refer to Note 5 .

“Stock Incentive Plans” for further information on stock based compensation activity as of fiscal year end 2019 .

As a result of the offering, we incurred $ 4.2 million of non-cash stock-based compensation expense and additionally recorded $ 2.8 million in long-term cash incentive compensation expense and $ 0.4 million in offering related SG&A expenses for fiscal year end 2019.

Second Amended and Restated Certificate of Incorporation and Bylaws

The Company’s Second Amended and Restated Certificate of Incorporation became effective in connection with the completion of the IPO on October 30, 2017 , which among other things, provides that the Company’s authorized capital stock consists of 200,000,000 shares of common stock and 50,000,000 shares of preferred stock, par value $ 0.01 per share.

The Company’s bylaws were also amended and restated as of October 30, 2017 .

On October 12, 2017 , the Company’s Board of Directors approved a 1.96627 -for-one reverse stock split of the Company’s common stock, effective October 24, 2017 .

The accompanying consolidated financial statements and notes thereto give retroactive effect to the reverse stock split for all periods presented.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was enacted in response to the COVID-19 pandemic.

The CARES Act, among other things, accelerates a company’s ability to recover Alternative Minimum Tax (“AMT”) refundable credits that otherwise could have been claimed in 2020 and 2021, to 2018 and 2019, with an option to elect recovery of the full credit amount for 2018.

The Company has elected to apply the AMT refundable credit provision of the CARES Act and has reclassified $ 1.3 million of AMT credits from Deferred income taxes, net as of December 28, 2019 to Prepaid expenses and other assets as of January 2, 2021.

The CARES Act also includes a technical correction wherein qualified improvement property placed in service in 2018 and after is eligible for 100% bonus depreciation.

This provision of the CARES Act resulted in an increase in our NOL carry-forwards with an offsetting increase in our gross deferred tax liability relating to property and equipment of approximately $ 25.0 million ($ 6.4 million tax impact) as of January 2, 2021.

In addition, as a result of the employee retention credits made available under the CARES Act for U.S.

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

The Company recognizes government grants for which there is a reasonable assurance of compliance with grant conditions and receipt of credits.

We believe there is a reasonable assurance that the Company will comply with the relevant conditions of the employee retention credit provision of the CARES Act, and that we will receive the credits for which we have applied.

We elected to offset credits recognized under the CARES against payroll taxes that would otherwise be payable.

We will continue to assess our treatment of the CARES Act to the extent additional guidance and regulations are issued, the further applicability of the CARES Act to the Company, and the potential impacts on our business.

In addition to the CARES Act, the Consolidated Appropriations Act, 2021, H.R.

133 was signed into law on December 27, 2020 and, among other things, allows for 100% deductibility of meals and entertainment expenses for the tax years ending in 2021 and 2022.

Cash and Cash Equivalents

Cash consists of currency and demand deposits with financial institutions.

Cash consists of currency and demand deposits with financial institutions and money market funds.

We consider all highly liquid investments with an original maturity of three months or less at the date of purchase to be cash equivalents.

We maintain the majority of our cash and cash equivalents in one large national banking institution.

Such amounts are in excess of federally insured limits.

We also review cash balances on a bank by bank basis to identify book overdrafts.

5 unchanged sentences

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.

Accounts receivable are reduced by allowances for amounts that may become uncollectible.

Estimates of our allowance for uncollectible accounts are based on our historical and current operating, billing and collection trends .

Accounts receivable are reduced by allowances for credit losses.

Estimates of our allowance for credit losses are based on our historical and current operating, billing, and collection trends, as well as current conditions and reasonable and supportable forecasts about the future.

Accounts receivable are written off after all collection attempts have been exhausted.

Bad debt expense recognized on our receivables was approximately $ 8.2 million , $ 7.1 million and $ 8.0 million for the fiscal years 2019 , 2018 and 2017 , respectively.

National Vision Holdings, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

Business and Significant Accounting Policies (continued)

Credit loss expense recognized on our receivables, which is presented in SG&A expenses in the Company’s consolidated statements of operations, were approximately $ 0.7 million, $ 8.2 million and $ 7.1 million for the fiscal years 2020, 2019 and 2018, respectively.

See Note 7 “Revenues from Contracts with Customers” for further details on the allowance for expected credit losses.

The cost of inventory is determined using the weighted average cost method.

7 unchanged sentences

A significant portion of our inventory is supplied by a small number of key vendors.

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

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

This exposes us to vendor concentration risk.

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets primarily include prepaid software maintenance and licensing fees, prepaid rent, prepaid advertising, prepaid insurance, supplies and income taxes receivable.

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

Property and Equipment

4 unchanged sentences

We depreciate P&E for financial accounting purposes using the straight-line method over the following estimated useful lives:

Buildings 34 years

Equipment 3 - 7 years

Information technology hardware and software (a)

Furniture and fixtures

Furniture and fixtures 6 years

Leasehold improvements (b)

P&E under capital leases (b)

Costs of developing or obtaining software for internal use, such as direct costs of materials or services and internal payroll costs related to the software development projects, are capitalized to information technology hardware and software.

Depreciation of leasehold improvements is recognized over the shorter of the estimated useful life of the asset or the term of the lease.

(a) Costs of developing or obtaining software for internal use, such as direct costs of materials or services and internal payroll costs related to the software development projects, are capitalized to information technology hardware and software.

(b) Depreciation of leasehold improvements is recognized over the shorter of the estimated useful life of the asset or the term of the lease.

The term of the lease includes renewal options for additional periods if the exercise of the renewal is considered to be reasonably assured.

6 unchanged sentences

Amortization expense associated with finite-lived intangible assets is included in depreciation and amortization in the accompanying consolidated statements of operations.

National Vision Holdings, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

Business and Significant Accounting Policies (continued)

Goodwill is impaired if a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying value of goodwill.

7 unchanged sentences

If the projected net undiscounted cash flows are less than the carrying value of the related assets, we then measure impairment based on a discounted cash flow model and record an impairment charge as the excess of carrying value and estimated fair value.

We use the relief-from-royalty method to estimate fair value, which involves estimating a royalty rate based on comparable licensing arrangements, applying that rate to the revenue projections for the subject asset, and then estimating fair value using a discounted cash flow analysis.

We use the relief-from-royalty method to estimate fair value of our trademarks and tradenames, which involves estimating a royalty rate based on comparable licensing arrangements, applying that rate to the revenue projections for the subject asset, and then estimating fair value using a discounted cash flow analysis.

We record an impairment charge as the excess of carrying value over estimated fair value.

“Goodwill and Intangible Assets” for further detail on impairment of goodwill and intangible assets.

Other non-current assets consist primarily of our investment in and loans to our equity method investee, below market leases, self-insurance recoveries and technology support service contracts.

Equity Method Investment

The Company has an investment in a private start-up company whose principal business is licensing software to eyeglass retailers.

We evaluate the recoverability of our investment by first reviewing the investment for any indicators of impairment.

If indicators are present, we estimate the fair value of the investment.

If the carrying value of the investment exceeds the estimated fair value, we assess whether the impairment is other-than-temporary (“OTTI”).

In making this assessment, we consider the length of time and the extent to which fair value has been less than cost and our intent and ability to retain our interest long enough for a recovery in market value.

Based on our current year assessment, we did not identify OTTI in our equity method investment.

See Note 10 .

The carrying value of our equity method investment is $ 0 as of the end of the fiscal year 2020.

“Equity in Net Assets of Non-Consolidated Investee,” for further discussion relating to this investment.

Fair Value Measurement of Assets and Liabilities (Non-Recurring Basis)

Non-financial assets such as P&E and intangible assets are subject to nonrecurring fair value measurements if impairment indicators are present.

Non-financial assets such as P&E, ROU assets and intangible assets are subject to nonrecurring fair value measurements if impairment indicators are present.

Factors we consider important that could trigger an impairment review include a significant under-performance compared to expected operating results, a significant or adverse change in customer business climate, and a significant negative industry or economic trend.

Deferred Financing Costs and Loan Discounts

Costs incurred in connection with long-term debt which are paid directly to the Company’s lenders and to third parties are treated as debt discounts.

Loan discounts are amortized over the term of the related financing agreement and included in interest expense in the accompanying consolidated statements of operations.

Costs incurred in connection with long-term debt which are paid directly to the Company’s lenders and to third parties are presented as reductions to our long-term debt balance, except for the costs related to our revolving credit facility (the “Revolving Credit Facility”) which are presented as assets.

These costs are amortized over the term of the related financing agreement and included in interest expense in the accompanying consolidated statements of operations.

Self-Insurance Liabilities

We are primarily self-insured for workers’ compensation, employee health benefits and general liability claims.

We are primarily self-insured for workers’ compensation, associate health benefits and general liability claims.

We record self-insurance liabilities based on claims filed, including the development of those claims and an estimate of claims incurred but not yet reported.

1 unchanged sentence

We periodically update our estimates and record such adjustments in the period in which such determination is made.

Self-insurance liabilities are recorded in other payables and accrued expenses (current portion) and other non-current liabilities on an undiscounted basis in the accompanying consolidated balance sheets.

National Vision Holdings, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

Business and Significant Accounting Policies (continued)

We reinsure worker’s compensation and medical claims above our retention levels of $ 0.3 million per claim and $ 0.2 million per individual, respectively, with a highly rated financial institution that can be expected to fully perform under the terms of the arrangement.

Estimated recoveries from reinsurance are included in prepaid expenses and other current assets in the amounts of $ 1.1 million and $ 0.8 million (current portion) as of fiscal year end 2019 and fiscal year end 2018 , respectively, and other assets in the amounts of $ 2.4 million and $ 1.1 million (non-current portion) as of fiscal year end 2019 and fiscal year end 2018 , respectively, in the accompanying consolidated balance sheets.

Self-insurance liabilities are recorded in Other payables and accrued expenses (current portion) and Other liabilities (non-current portion) on an undiscounted basis in the accompanying consolidated balance sheets.

We reinsure worker’s compensation and medical claims above our retention levels with a highly rated financial institution that can be expected to fully perform under the terms of the arrangement.

Estimated recoveries from reinsurance in the amount of $ 1.1 million (current portion) are included in Prepaid expenses and other current assets for both fiscal year end 2020 and fiscal year end 2019, and Other assets in the amounts of $ 2.3 million and $ 2.4 million (non-current portion) as of fiscal year end 2020 and fiscal year end 2019, respectively, in the accompanying consolidated balance sheets.

The accrued obligation for self-insurance programs was $ 8.7 million and $ 8.4 million (current portion) and $ 7.0 million and $ 7.3 million (non-current portion) as of fiscal year end 2020 and fiscal year end 2019, respectively.

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 Company uses interest rate derivatives to manage the exposure of its LIBOR-based debt to fluctuations in interest rates.

We designate certain of our interest rate derivatives 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 derivatives 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 derivatives 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 is recorded in accumulated other comprehensive loss (“AOCL”) in the accompanying consolidated balance sheets until the hedged item is recognized as interest expense in the consolidated statements of operations.

The gain or loss res ulting from fair value adjustments for highly effective cash flow hedges is recorded in Accumulated other comprehensive loss (“AOCL”) in the accompanying consolidated balance sheets until the hedged item is recognized as interest expense in the consolidated statements of operations.

The gain or loss resulting from fair value adjustments of derivatives not deemed to be highly effective cash flow hedges is recognized in interest expense immediately.

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 financial institutions with investment grade credit ratings.

To manage credit risk associated with our interest rate hedging program, we select as counterparties major 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.

See Note 14 .

“Interest Rate Derivatives” for further details.

2 unchanged sentences

Accumulated other comprehensive loss, net of income tax, is entirely composed of the cumulative unrealized loss on our hedging instruments.

See Note 18 .

“Accumulated Other Comprehensive Loss” for details of reclassifications out of AOCL.

2 unchanged sentences

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.

4 unchanged sentences

Amounts we collect in advance for undelivered merchandise are reported as unearned revenue in the accompanying consolidated balance sheets.

Unearned revenue at the end of a reporting period is estimated based on processing and delivery times throughout the current month and generally ranges from approximately seven to 10 days .

Unearned revenue at the end of a reporting period is estimated based on processing and delivery times throughout the current month which generally range from approximately seven to 10 days;

all unearned revenue at the end of a reporting period is recognized in the next fiscal period.

National Vision Holdings, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

Business and Significant Accounting Policies (continued)

Revenue is recognized net of sales taxes and returns and include amounts billed to customers related to shipping and handling costs.

2 unchanged sentences

Shipping and handling costs are accounted for as fulfillment costs and are included in costs applicable to revenue.

We record reductions in revenue for estimated price concessions granted to managed care providers.

The Company considers its revenue from managed care customers to include variable consideration and estimates such amounts associated with managed care customer revenues using the history of concessions provided and cash receipts from managed care providers;

we reduced our net revenue for variable considerations of $ 7.5 million during the fiscal year 2020.

Refer to Note 7.

3 unchanged sentences

Costs of products sold include (i) costs to procure non-prescription eyewear, contacts and accessories which we purchase and sell in their finished form, (ii) costs to manufacture finished prescription eyeglasses, including direct materials, labor and overhead and (iii) remake costs, warehousing and distribution expenses and internal transfer costs.

Costs of services and plans include costs associated with warranty programs, eyecare club memberships, HMO memberships, eyecare practitioner and eye exam technician payroll, taxes and benefits and optometric and other service costs.

Costs of services and plans include costs associated with warranty programs, eyecare club memberships, HMO vision plan fees, eyecare practitioner and eye exam technician payroll, taxes and benefits and optometric and other service costs.

Depreciation and amortization are excluded from costs applicable to revenue and are presented separately on the accompanying consolidated statements of operations.

1 unchanged sentence

These vendor payments are reflected in the carrying value of the inventory when earned or as progress is made toward earning the rebate or allowance and as a component of cost of products as the inventory is sold.

Rebates that have been earned but not yet received are recognized as an increase to Accounts receivable, net or a reduction to Accounts payable, depending on the nature of the agreement with the vendor, until the rebate has been received.

Selling, General and Administrative

SG&A includes store associate payroll, taxes and benefits, occupancy and other store expenses, advertising and promotion, field services, and corporate support.

SG&A includes store associate (including optician) payroll, taxes and benefits, occupancy and other store expenses, advertising and promotion, field services, and corporate support.

Advertising and promotion costs, including online marketing arrangements, newspaper, direct mail, television and radio, are recorded in SG&A and expensed at the time the advertising first occurs.

3 unchanged sentences

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.

2 unchanged sentences

The Company’s leases generally require us to pay insurance, real estate taxes and common area maintenance expenses, substantially all of which are variable and not included in the measurement of the lease liability.

Our lease arrangements include tenant improvement allowances (TIAs), which are contractual amounts received or receivable from a lessor for improvements made to leased properties by the Company.

Our lease arrangements frequently include tenant improvement allowances (TIAs), which are contractual amounts received or receivable from a lessor for improvements made to leased properties by the Company.

Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.

The Company does not consider its management & services agreement with its legacy partner to contain a lease arrangement.

With respect to lease accounting guidance, the Company’s management & services agreement with its legacy partner does not contain a lease arrangement.

The lease liability is measured at the present value of future lease payments over the lease term less TIAs receivable, and the ROU asset is measured at the lease liability amount, adjusted for prepaid lease payments, TIAs received and the lessee’s initial direct costs.

1 unchanged sentence

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.

National Vision Holdings, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

Business and Significant Accounting Policies (continued)

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.

Stock-Based Compensation

We measure stock-based compensation cost, which consists of grants of stock options, restricted stock units and restricted shares to employees, consultants and non-employee directors, based on the estimated grant date fair value of the awards.

We recognize compensation expense for service-based vesting awards over the requisite service period using a straight-line recognition method.

For awards that are subject to performance conditions, we recognize compensation expense once achievement of the conditions is considered to be probable.

We measure stock-based compensation cost, which consists of grants of stock options, restricted stock units (“RSUs”), performance stock units (“PSUs”), performance stock options and restricted stock awards (“RSAs”) to associates and non-associate directors, based on the estimated grant date fair value of the awards.

We recognize compensation expense for all awards over the requisite service period using a straight-line recognition method.

Additionally, for awards that are subject to performance conditions, we recognize compensation expense once achievement of the conditions is considered to be probable.

We account for forfeitures as they occur.

“Stock Incentive Plan” for further details related to our stock-based compensation plans.

Asset Impairment

We evaluate impairment of long-lived tangible and right of use (“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.

Long-lived Asset Impairment

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

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

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

As a result of our tests for impairment of our long-lived tangible store assets classified as held and used, an impairment of $ 8.9 million , $ 2.5 million and $ 1.6 million was recorded for fiscal years 2019 , 2018 and 2017 , respectively.

These impairment charges were primarily driven by lower than projected customer sales volume in certain stores.

The estimated remaining fair value of the impaired assets was $ 16.6 million during fiscal year 2019 and $ 0.1 million remaining fair value of the assets that were impaired during fiscal year 2018 .

Substantially all of the remaining fair value of the impaired store assets in fiscal year 2019 represent the fair value of ROU assets recorded upon adoption of ASU 2016-02, Leases ;

the remaining fair value estimated in fiscal year 2019 includes amounts estimated at various dates during fiscal year 2019.

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.

During fiscal years 2019 and 2018 there was no impairment of capitalized software.

There was $ 1.5 million in impairment of capitalized software during fiscal year 2017 .

We recognized impairments of $ 22.0 million, $ 8.9 million and $ 2.5 million in fiscal years 2020, 2019 and 2018, respectively.

These impairment charges were primarily related to our long-lived tangible store assets classified as held and used, and were primarily driven by lower than projected customer sales volume in certain stores;

we also considered the historical performance of the stores before the temporary store closures in response to the COVID-19 pandemic, 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.

The estimated remaining fair value of the assets impaired during fiscal year 2020 was $ 30.6 million and the estimated remaining fair value of the assets impaired during fiscal year 2019 was $ 16.6 million;

the estimated remaining fair values include amounts estimated at various dates during the related fiscal years.

Substantially all of the remaining fair value of the impaired store assets in fiscal year 2020 represent the fair value of ROU assets.

We assess non-store long-lived 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.

The asset impairments recognized in fiscal year 2020 includes $ 1.1 million related to a write-off of certain capitalized software costs that were deemed to be obsolete due to a decision to cease further development.

During fiscal years 2019 and 2018 there was no impairment of non-store long-lived assets or capitalized software costs.

We account for deferred income taxes based on the asset and liability method.

4 unchanged sentences

The net carrying amount of deferred income tax assets and liabilities is recorded in non-current deferred income tax liabilities in the accompanying consolidated balance sheets.

National Vision Holdings, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

Business and Significant Accounting Policies (continued)

Deferred income taxes are measured using enacted tax rates in effect for the years in which those differences are expected to be recovered or settled.

7 unchanged sentences

“Income Taxes” for further details.

On December 22, 2017 , the 2017 Tax Cuts and Jobs Act (the “Tax Legislation”) was enacted into law.

We are required to recognize the effect of tax law changes in the period of enactment, such as re-measuring and reassessing the net realizability of our deferred tax assets and liabilities.

Pursuant to SEC Staff Accounting Bulletin No.

118, Income Tax Accounting Implications of the Tax Legislation, the Company recognized provisional effects of the enactment of the Tax Legislation for which measurement could be reasonably estimated as of fiscal year end 2017 .

For fiscal year 2018 , the Company recorded adjustments to the provisional estimates related to depreciation expense.

The adjustments to the provisional estimates of fiscal year end 2017 did not materially impact the effective tax rate of the Company during fiscal year 2018 .

“Income Taxes” for additional information.

Adoption of New Accounting Pronouncements

Revenue from Contracts with Customers.

In May 2014 , the Financial Accounting Standards Board (“FASB”) issued ASU No.

2014-09, Revenue from Contracts with Customers.

2014-09 provides new guidance related to the core principle that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

It also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments.

Under the new guidance, there is a five-step model to apply to revenue recognition, consisting of:

(1) determination of whether a contract, an agreement between two or more parties that creates legally enforceable rights and obligations, exists;

(2) identification of the performance obligations in the contract;

(3) determination of the transaction price;

(4) allocation of the transaction price to the performance obligations in the contract;

and (5) recognition of revenue when (or as) the performance obligation is satisfied.

The Company adopted this new guidance in the first quarter of 2018 using the modified retrospective transition method.

The adoption resulted in a $ 14.0 million and $ 11.8 million decrease in current and non-current deferred revenue, respectively, for certain contracts where we satisfy performance obligations over time and a related $ 6.8 million increase in deferred income tax liability, resulting in a net $ 19.0 million increase to retained earnings on the consolidated balance sheet as of December 30, 2017 .

Under previous guidance, we recognized revenue for eyecare club memberships on a ratable basis over the service period.

Currently, we have selected the portfolio approach because our historical club membership data demonstrated that our club customers behave similarly, such that the difference between the portfolio approach and applying ASC 606 to each contract is not material.

This change did not have a significant impact on our ongoing consolidated results of operations and the cumulative effect and the impact on revenues is described in Note 7 .

“Revenue From Contracts with Customers”.

Our results of operations for the reported periods after December 30, 2017 are presented under this amended guidance, while prior period amounts are not adjusted and continue to be reported in accordance with historical accounting guidance.

Adoption of this new guidance did not result in significant changes to our business processes, systems or controls, or have a material impact on our results of operations and cash flows.

The impact of adopting the amended guidance primarily relates to the timing of revenue recognition for our eyecare club memberships, which comprised approximately 3 % of our consolidated net revenue during each of the most recent three fiscal years.

“Revenue From Contracts with Customers” for additional information.

National Vision Holdings, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

Business and Significant Accounting Policies (continued)

Restricted Cash.

In November 2016 , the FASB issued ASU No.

2016-18, Restricted Cash .

This new guidance requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents.

The Company adopted this new guidance during the first quarter of 2018 using full retrospective application to each period presented.

The adoption of this new guidance did not have a material impact on the Company’s financial condition, results of operations, or cash flows.

Share Based Payment Accounting.

In June 2018 , the FASB issued ASU No.

2018-07, Compensation - Stock Compensation (Topic 718):

Improvements to Nonemployee Share-Based Payment Accounting .

This new guidance expands the scope of Topic 718 to include share-based payments issued to nonemployees for goods or services.

Consequently, the accounting for share-based payments to nonemployees and employees will be substantially aligned.

The Company adopted this new guidance effective beginning of fiscal year 2018.

The adoption of this new guidance did not have a material impact on Company’s financial condition, results of operations, or cash flows.

In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No.

8 unchanged sentences

Upon adoption, we recorded operating lease liabilities of approximately $ 339.6 million as of December 30, 2018.

The Company treated TIAs and deferred rent of $ 24.3 million and $ 11.9 million , respectively, as of December 30, 2018 as reductions of lease payments and prepaid rent of $ 5.8 million as of December 30, 2018 as an increase in lease payments used to measure ROU assets and recorded $ 308.5 million of lease ROU assets upon adoption.

The Company treated TIAs and deferred rent of $ 24.3 million and $ 11.9 million, respectively, as of December 30,

2018 as reductions of lease payments and prepaid rent of $ 5.8 million as of December 30, 2018 as an increase in lease payments used to measure ROU assets and recorded $ 308.5 million of lease ROU assets upon adoption.

The difference between the additional lease assets and lease liabilities net of the deferred tax impact was $ 0.5 million, which was recorded as an adjustment to fiscal year 2019 opening retained earnings.

4 unchanged sentences

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (“ASU 2018-02”) .

This guidance allows for an optional reclassification from accumulated other comprehensive income or loss to retained earnings for stranded tax effects as a result of the newly enacted federal corporate income tax rate under the Tax Legislation.

This guidance is effective for interim and annual periods beginning after December 15, 2018, with early adoption permitted.

1 unchanged sentence

There were no other impacts to the Company’s financial condition, result of operations, or cash flows.

Future Adoption of Accounting Pronouncements

Cloud Computing.

2 unchanged sentences

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).

We obtain a variety of software solutions and tools through cloud computing arrangements.

This new guidance is effective for fiscal years beginning after December 15, 2019, and for interim periods within those fiscal years and may be adopted on a prospective or retrospective basis.

We will adopt the accounting standard on a prospective basis and do not expect adoption to have a material effect on the Company’s financial condition, results of operations, or cash flows.

National Vision Holdings, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

Business and Significant Accounting Policies (continued)

We adopted the accounting standard on a prospective basis in the first quarter of 2020.

The adoption of this guidance did not have a material impact on the Company’s financial condition, results of operations, or cash flows.

Credit Losses .

In June 2016, the FASB issued ASU No.

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

2016-13, Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”) .

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

1 unchanged sentence

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

We will adopt the accounting standard on a modified retrospective basis and do not expect adoption to have a material effect on the Company’s financial condition, results of operations, or cash flows.

We adopted ASU No.

2016-13 as of December 29, 2019 (the first day of fiscal year 2020), using the modified retrospective approach without adjusting the comparative periods presented.

Upon adoption, the Company recorded a $ 0.7 million increase to the allowance for credit losses as a result of increases in our allowance for credit losses of notes receivable.

Refer to Note 11.

“Equity in Assets of Non-Consolidated Investee” for more information on our non-consolidated investee’s secured convertible promissory note.

After adjusting for deferred taxes, we recorded a $ 0.5 million decrease in Retained earnings through a cumulative-effect adjustment.

Adoption of this new guidance did not have a material impact on the Company’s financial condition, results of operations or cash flows.

Future Adoption of Accounting Pronouncements

Reference Rate Reform.

In March 2020, the FASB issued ASU No.

2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”).

This guidance provides optional expedients and exceptions for applying U.S.

GAAP to contracts, hedging relationships, and other transactions that may be affected by the cessation of the London Inter-bank Offered Rate (“LIBOR.”) An entity may elect to apply the amendments for contract modifications as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020 through December 31, 2022.

A substantial portion of our debt is subject to interest payments that are indexed to LIBOR;

additionally, we are party to multiple interest rate derivatives based on LIBOR.

We are currently evaluating the effect of this guidance and have not applied the provisions of this guidance during the current fiscal year.

Convertible Instruments and Contracts in an Entity’s Own Equity.

In August 2020, the FASB issued ASU No.

2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40):

Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”).

This new guidance simplifies and adds disclosure requirements for the accounting and measurement of convertible instruments and the settlement assessment for contracts in an entity’s own equity.

The guidance also requires the application of the if-converted method to calculate the impact of convertible instruments on diluted earnings per share.

ASU 2020-06 is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2021, with early adoption possible for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2020.

We plan to early adopt the accounting standard in the first quarter of 2021.

Upon adoption we expect this guidance to result in a reclassification of conversion feature balances from additional paid-in capital to debt and to decrease reported non-cash interest expense for the convertible senior notes (the “2025 Notes”).

We currently expect the net impact of the reclassification will be an increase to long term debt of approximately $ 83 million, a decrease to deferred tax liabilities of approximately $ 19 million, a decrease to additional paid-in capital of $ 71 million and an increase to retained earnings of approximately $ 7 million on the consolidated balance sheet as of January 3, 2021.

We also expect incremental reductions to interest expense in post-adoption periods compared pre-adoption periods.

Ultimate decisions regarding the timing of adoption, as well as the quantification of the effects of adoption on the financial statements, are subject to further evaluation.

Details of Certain Balance Sheet Accounts

December 28, 2019

In thousands As of

January 2, 2021 As of

December 28, 2019

2 unchanged sentences

Credit card receivables 21,557 14,173

Tenant improvement allowances receivable (1)

Other receivables 8,460 4,707

Allowance for uncollectible accounts

(1) TIA receivable is used to measure current operating lease obligations on the balance sheet under new lease accounting guidance effective in fiscal year 2019.

“Leases” for further details.

December 28, 2019

Allowance for credit losses ( 433 ) ( 3,040 )

$ 57,989 $ 44,475

In thousands As of

January 2, 2021 As of

December 28, 2019

Raw materials and work in process (1)

$ 55,473 $ 65,179

Finished goods 55,801 62,377

$ 111,274 $ 127,556

(1) Due to the immaterial amount of estimated work in process and the short lead times for the conversion of raw materials to finished goods, the Company does not separately present raw materials and work in process.

December 28, 2019

In thousands As of

January 2, 2021 As of

December 28, 2019

1 unchanged sentence

Land and building $ 3,624 $ 3,632

Equipment 207,265 188,593

Information technology hardware and software 129,008 115,283

3 unchanged sentences

Right of use assets under finance leases 36,757 36,437

677,510 638,732

Accumulated depreciation ( 336,217 ) ( 271,965 )

National Vision Holdings, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

Details of Certain Balance Sheet Accounts (continued)

December 28, 2019

$ 341,293 $ 366,767

In thousands As of

January 2, 2021 As of

December 28, 2019

Other payables and accrued expenses:

Employee compensation and benefits

Associate compensation and benefits (1)

$ 51,081 $ 28,347

Self-insurance liabilities 8,650 8,403

Capital expenditures 8,455 6,782

Advertising 2,173 2,919

Reserves for customer returns and remakes 8,084 7,158

3 unchanged sentences

Litigation settlements 1,107 3,840

December 28, 2019

Lease concessions 3,142 —

Other 13,654 11,611

$ 110,309 $ 82,829

(1) Includes CARES Act deferred employer payroll taxes in the amount of $ 12.8 million as of January 2, 2021.

In thousands As of

January 2, 2021 As of

December 28, 2019

1 unchanged sentence

Fair value of derivative liabilities $ 7,663 $ 1,603

Tenant improvements (1)

Deferred rental expenses (1)

Self-insurance liabilities 7,046 7,283

(1) Tenant improvements and deferred rental expenses are used to measure ROU assets on the balance sheet under new lease accounting guidance effective in fiscal year 2019.

“Leases” for further details.

Other 2,706 4,845

$ 17,415 $ 13,731

Goodwill and Intangible Assets

3 unchanged sentences

The gross carrying amount and accumulated impairment of the Company’s goodwill balances for 2020 and 2019 are as follows:

December 28, 2019

January 2, 2021 As of

December 28, 2019

Gross Carrying

In thousands Gross Carrying

Amount Accumulated

Impairment Gross Carrying

Amount Accumulated

Owned & Host Segment $ 736,901 $ ( 19,357 ) $ 736,901 $ ( 19,357 )

1 unchanged sentence

Corporate/Other 8,107 ( 8,107 ) 8,107 ( 8,107 )

$ 805,077 $ ( 27,464 ) $ 805,077 $ ( 27,464 )

Besides the goodwill impairments noted above, no other intangible asset impairment was identified during fiscal years 2020, 2019 and 2018.

National Vision Holdings, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

Goodwill and Intangible Assets (continued)

Indefinite-lived intangible assets by major asset class are as follows:

December 28, 2019

In thousands As of

January 2, 2021 As of

December 28, 2019

2 unchanged sentences

Eyeglass World 40,000 40,000

$ 240,547 $ 240,547

We intend to maintain our trademarks;

1 unchanged sentence

Finite-lived, amortizing intangible assets by major asset class are as follows:

December 28, 2019

December 29, 2018

Gross Carrying

Remaining Life

Gross Carrying

Remaining Life

As of January 2, 2021 As of December 28, 2019

In thousands Gross Carrying

Amount Accumulated

Amortization Remaining Life

(Years) Gross Carrying

Amount Accumulated

Amortization Remaining Life

Contracts and relationships:

Legacy $ 65,000 $ 40,154 4 $ 65,000 $ 34,247 5

Fred Meyer 35,000 10,339 16 35,000 8,820 17

Customer database 4,400 4,400 — 4,400 4,400 —

Other 746 742 — 746 739 —

$ 105,146 $ 55,635 $ 105,146 $ 48,206

We extended our relationship with Walmart in fiscal year 2020.

Refer to Note 16.

“Segment Reporting” for more information.

Our current agreement with Fred Meyer expires on December 31, 2021;

we intend to maintain our intangible assets and renewals will take place as needed.

Aggregate amortization expense is included in depreciation and amortization in the accompanying consolidated statements of operations.

Aggregate future estimated amortization expense is shown in the following table:

National Vision Holdings, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

Fiscal Year In thousands

Thereafter 17,035

Long-term Debt

Long-term debt consists of the following:

December 28, 2019

In thousands As of

January 2, 2021 As of

December 28, 2019

First Lien - Term Loan B

First Lien - Term Loan A

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

Term Loan, due July 18, 2024 317,375 392,375

Revolving Credit Facility, due July 18, 2024 — 148,000

Total term loans before unamortized discount

Unamortized discount

Total term loans

Long-term debt before debt discount 719,875 540,375

Unamortized discount and issuance costs - 2025 Notes ( 93,123 ) —

Unamortized discount and issuance costs - term loan ( 2,141 ) ( 3,979 )

Long-term debt less debt discount 624,611 536,396

Less current maturities — ( 10,500 )

Term loans - non-current portion

Long-term debt - non-current portion 624,611 525,896

Finance lease obligations 30,750 33,296

Less current maturities ( 3,598 ) ( 3,259 )

Long-term debt, less current portion and unamortized debt discount

The dividend discussed in Note 9 .

“Related Party Transactions” was funded with $ 175.0 million in borrowed funds under the Company’s first lien credit agreement, which were then repaid with IPO proceeds, as discussed in Note 1 .

"Business and Significant Accounting Policies".

Scheduled annual maturities of debt are as follows:

Term Loan - 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.

Long-term debt and finance lease obligations, less current portion and debt discount $ 651,763 $ 555,933

In May 2020, we completed the issuance of the 2025 Notes, pursuant to an indenture between the Company and U.S.

Bank, dated as of May 12, 2020 (the “Indenture”).

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.

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

We used $ 294.3 million of the net proceeds from the offering to repay all outstanding amounts under the Revolving Credit Facility and $ 75.0 million to partially repay the first lien term loan in an aggregate principal amount of $ 420.0 million (the “Term Loan”).

We intend to use the remainder of the net proceeds for general corporate purposes.

Prior to February 15, 2025, the 2025 Notes will be convertible at the option of the holder only under the following circumstances:

(i) during any calendar quarter commencing after the calendar quarter ending on September 30, 2020 (and only during such calendar quarter), if the Last Reported Sale Price (as defined in the Indenture) per share of the Company’s common stock exceeds 130 % of the Conversion Price (as defined in the Indenture) for each of at least 20 Trading Days (as defined in the Indenture), whether or not consecutive, during the 30 consecutive Trading Days ending on, and including, the last Trading Day of the immediately preceding calendar quarter;

(ii) during the five consecutive business days immediately after any ten consecutive Trading Day period (such ten consecutive trading day period, the “measurement period”) in which the Trading Price (as defined in the Indenture) per $ 1,000 principal amount of the 2025 Notes for each Trading Day of the measurement period was less than 98 % of the product of the Last Reported Sale Price per share of the Company’s common stock on such Trading Day and the conversion rate (as described below) on such Trading Day;

(iii) upon the occurrence of certain corporate events or distributions on the Company’s common stock, as described in the Indenture;

(iv) if the Company calls such Notes for redemption.

On or after February 15, 2025 until 5:00 p.m., New York City time, on the second Scheduled Trading Day (as defined in the Indenture) immediately before the maturity date, the 2025 Notes will be convertible at the option of the holder at any time.

The 2025 Notes will initially be convertible at a conversion rate of 32.0783 shares of common stock per $ 1,000 principal amount of 2025 Notes, which is equivalent to an initial conversion price of approximately $ 31.17 per share

of common stock.

The conversion rate is subject to adjustment upon certain events.

The Company can choose to settle upon conversion in cash, shares or a combination.

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 2025 Notes can be converted by holders based on condition (i) above.

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.

In accordance with accounting guidance on embedded conversion features indexed to and settled in equity, the Company valued and bifurcated the conversion option associated with the 2025 Notes from the respective host debt instrument, which is referred to as debt discount, and initially recorded the post-tax conversion option of $ 73.5 million ($ 95.2 million pre-tax) for the 2025 Notes in stockholders’ equity.

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.

The Company allocated post-tax debt issuance costs of $ 2.2 million ($ 2.7 million pre-tax) to the equity component and the remaining debt issuance costs of $ 8.9 million are amortized to interest expense under the effective interest rate method at 9.1 % over the contractual term of the 2025 Notes.

We recognized $ 17.3 million in interest expense for the interest coupon and amortization of debt discount and issuance costs during fiscal 2020.

As of January 2, 2021, the remaining period for the unamortized debt discount balance was approximately four and a half years.

Credit Agreement

On July 18, 2019, the credit agreement, dated as of October 9, 2018 (the “Existing Credit Agreement”) was amended and restated to establish a new Term Loan of $ 420.0 million to repay all principal, interest fees and other amounts outstanding under the Existing Credit Agreement immediately and establish a new Revolving Credit Facility in an aggregate principal amount of $ 300.0 million, including a $ 20.0 million letter of credit sublimit.

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 the third quarter of 2019.

National Vision Holdings, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

Long-term Debt (continued)

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.

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.

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 Revolving Credit Facility.

On May 5, 2020, certain of the Company’s subsidiaries entered into an agreement (the “Credit Agreement Amendment”) with the lenders to amend certain provisions of the Amended and Restated Credit Agreement, dated as of July 18, 2019 (as amended by the Credit Agreement Amendment, the “Credit Agreement”), by and among Nautilus Acquisition Holdings, Inc.

(“Holdings”), National Vision, Inc.

(“NVI”), the other subsidiaries of the Company party thereto, as guarantors, each lender party thereto and Bank of America, N.A., in its capacity as administrative agent and as collateral agent.

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

This Credit Agreement Amendment is intended to prevent the effects of the COVID-19 pandemic, including the temporary closure of our stores, from creating uncertainty relative to our ability to comply with certain financial covenants and allow the Company to focus on prudent management of the business over the quarters ahead.

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

Based on our current plans and management operational assumptions, we anticipate we will be in compliance with these amended covenants.

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 .

On May 12, 2020, we fully repaid the $ 294.3 million outstanding under our Revolving Credit Facility and partially repaid $ 75 million on the Term Loan.

As a result of the repayments made in 2020 and the $ 25.0 million principal prepayment in 2019, the Company has no additional mandatory principal payments on the Term Loan until maturity on July 18, 2024 and no amounts outstanding under the Revolving Credit Facility.

The borrowing capacity remaining as of January 2, 2021 was $ 293.6 million due to a reduction of $ 6.4 million for letters of credit outstanding.

As a result of the repayment of the outstanding balance on our Revolving Credit Facility, the Company reclassified a proportionate share of unamortized debt issuance costs to Other assets.

The Credit Agreement Amendment 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 our long-term debt as of January 2, 2021.

Scheduled annual maturities of debt are as follows:

Fiscal Year In thousands

Stock Incentive Plans

The Company has provided equity-based compensation awards to its employees under three plans.

The Company has provided equity-based compensation awards to its associates under three plans.

In connection with the initial public offering of our common stock (the “IPO”), on October 23, 2017, the Company’s Board of Directors adopted, and its stockholders approved, the National Vision Holdings, Inc.

2017 Omnibus Incentive Plan (the “2017 Omnibus Incentive Plan”).

The total number of shares of common stock that may be issued under the plan is 4,000,000 .

The plan authorizes the grant of stock options, stock appreciation rights, RSAs, RSUs, PSUs, other equity-based awards and other cash-based awards to our associates, directors, officers, consultants and advisers.

The Vision Holding Corp.

2013 Amended and Restated Stock Incentive Plans provided for the issuance of stock options to directors, certain employees and consultants of Vision Holding Corp., its subsidiaries and affiliates.

2013 Amended and Restated Stock Incentive Plans provided for the issuance of stock options to directors, certain associates and consultants of Vision Holding Corp., its subsidiaries and affiliates.

In 2014, our Board of Directors and stockholders of the Company approved the 2014 Stock Incentive Plan for Key Employees of National Vision Holdings, Inc.

1 unchanged sentence

There were 10,988,827 stock options authorized for issuance pursuant to the 2014 Stock Incentive Plan.

In connection with the IPO, on October 23, 2017, the Company’s Board of Directors adopted, and its stockholders approved, the National Vision Holdings, Inc.

2017 Omnibus Incentive Plan (the “2017 Omnibus Incentive Plan”).

The total number of shares of common stock that may be issued under the plan is 4,000,000 .

The plan authorizes the grant of stock options, stock appreciation rights, restricted stock awards (“RSAs”), restricted stock units (“RSUs”), performance stock units (“PSUs”), other equity-based awards and other cash-based awards to our employees, directors, officers, consultants and advisers.

All awards under these plans have a contractual life of 10 years.

1 unchanged sentence

The ASPP provides that up to 850,000 shares of common stock, at par value of $ 0.01 per share, may be offered and issued under the ASPP.

National Vision Holdings, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

Stock Incentive Plans (continued)

The following table summarizes stock compensation expense under the Company’s plans, which is included in SG&A in the accompanying statements of operations:

Fiscal Year 2019

Fiscal Year 2018

Fiscal Year 2017

In thousands Fiscal Year 2020 Fiscal Year 2019 Fiscal Year 2018

Stock options $ 2,827 $ 8,562 $ 19,397

RSUs and PSUs 7,201 3,655 1,386

RSAs 588 334 108

Associate stock purchase plan 124 119 48

Total stock based compensation expense

Pre-tax stock based compensation expense $ 10,740 $ 12,670 $ 20,939

Income tax benefit ( 2,743 ) ( 3,237 ) ( 5,367 )

After-tax share based compensation expense $ 7,997 $ 9,433 $ 15,572

Stock options

RSUs and PSUs

Stock options RSUs and PSUs RSAs

Unrecognized compensation cost ( in thousands )

$ 3,248 $ 14,156 $ 366

Expected remaining weighted-average period of expense recognition (in years) 1.69 2.20 0.58

2 unchanged sentences

Amended and Restated 2013 Equity Incentive Plan, the 2014 Stock Incentive Plan, and the 2017 Omnibus Incentive Plan.

Amounts also reflect the effects of modifications to exercise prices resulting from the recapitalization dividend discussed in Note 9 .

“Related Party Transactions”.

Number of Options Outstanding

Weighted Average Exercise Price ($)

Weighted Average Remaining Contractual Life (Years)

Aggregate Intrinsic Value (In Thousands) ($)

Outstanding options at December 29, 2018

Number of Options Outstanding Weighted Average Exercise Price ($) Weighted Average Remaining Contractual Life (Years) Aggregate Intrinsic Value (In Thousands) ($)

Outstanding options at December 28, 2019 1,906,158 13.37

Vested and exercisable at December 28, 2019

There were no grants of service-based options during fiscal year 2018 .

Granted 160,574 34.47

Exercised ( 823,685 ) 8.83

Forfeited ( 49,061 ) 23.54

Outstanding options at January 2, 2021 1,193,986 18.92 6.19 31,490

Vested and exercisable at January 2, 2021 665,781 12.94 4.94 21,540

The weighted average grant date fair value of service-based options granted during fiscal years 2020 and 2019 was $ 13.71 and $ 13.67 , respectively.

There were no grants of service-based options during fiscal year 2018.

The fair value of service-based options vested during fiscal years 2020, 2019 and 2018 was $ 3.3 million, $ 5.7 million, and $ 5.9 million respectively.

2 unchanged sentences

The following is a summary of the assumptions used in this model for service-based options:

Expected volatility

Expected volatility 39.54 % to 55.81 %

34.50 % to 37.10 %

Expected term range (in years) 6.00

Expected risk-free interest rate

1.68% to 2.94%

Expected risk-free interest rate 0.47 % to 1.13 %

1.68 % to 2.94 %

National Vision Holdings, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

Stock Incentive Plans (continued)

The expected term was based on the mid-point between the weighted average time to vesting and the contractual time to maturity.

6 unchanged sentences

The following table summarizes performance-based stock option activity:

Number of Options Outstanding

Weighted Average Exercise Price ($)

Weighted Average Remaining Contractual Life (Years)

Aggregate Intrinsic Value (In Thousands) ($)

Outstanding options at December 29, 2018

Number of Options Outstanding Weighted Average Exercise Price ($) Weighted Average Remaining Contractual Life (Years) Aggregate Intrinsic Value (In Thousands) ($)

Outstanding options at December 28, 2019 1,603,848 6.60

Vested and exercisable at December 28, 2019

Exercised ( 705,414 ) 7.37

Forfeited ( 43,478 ) 15.74

Outstanding options at January 2, 2021 854,956 5.50 3.42 34,018

Vested and exercisable at January 2, 2021 854,956 5.50 3.42 34,018

There were no grants of performance-based options during fiscal years 2020, 2019, and 2018.

The weighted average grant date fair value of performance-based options granted during fiscal year 2017 was $ 3.68 .

The fair value of performance-based options vested during fiscal years 2020, 2019 and 2018 was $ 1.4 million, $ 4.4 million and $ 16.1 million, respectively.

The aggregate intrinsic value of performance-based options exercised during fiscal year 2019 and 2018 was $ 29.9 million and $ 70.2 million , respectively.

No performance-based options were exercised during fiscal year 2017 .

The fair value of performance-based options was estimated using a Monte Carlo simulation.

The following is a summary of the assumptions used in this model for performance options granted in 2017 :

Expected volatility range

48.2% to 54.0%

Expected term range (in years)

Expected risk-free interest rate

1.38% to 1.51%

The aggregate intrinsic value of performance-based options exercised during fiscal years 2020, 2019, and 2018 was $ 20.0 million, $ 29.9 million, and $ 70.2 million, respectively.

The following summarizes RSU, PSU and RSA awards activity:

Service-based restricted stock unit (RSU) awards

Weighted average grant date fair value ($)

Performance-based restricted stock unit (PSU) awards

Weighted average grant date fair value ($)

Restricted stock (RSA) awards

Weighted average grant date fair value ($)

Outstanding at December 29, 2018

RSUs Weighted average grant date fair value ($) PSUs Weighted average grant date fair value ($) RSAs Weighted average grant date fair value ($)

Outstanding at December 28, 2019 376,145 28.45 113,014 34.49 20,628 30.71

National Vision Holdings, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

Stock Incentive Plans (continued)

Granted 162,468 34.73 125,387 34.34 19,583 30.65

Vested ( 52,466 ) 25.65 — — ( 18,229 ) 29.27

Forfeited ( 31,656 ) 30.62 ( 18,217 ) 34.98 — —

Outstanding at January 2, 2021 454,491 30.85 220,184 34.36 21,982 31.85

Restricted stock units (RSUs)

During fiscal year 2017 , we granted an aggregate of 182,138 RSUs, net of forfeitures, at a weighted average grant date fair value of $ 22.00 , to certain employees.

During fiscal year 2019 , we granted an additional 373,082 shares of RSUs.

During fiscal years 2020 and 2019, we granted 162,468 and 373,082 shares of RSUs, respectively.

RSUs include 11,233 RSUs that vest in two equal installments on the first and second anniversaries of the grant date, 216,400 RSUs that vest in three equal installments on the first, second and third anniversaries of the grant date, and 226,858 RSUs that vest in three installments on the second, third and fourth anniversaries of the grant date.

The RSUs outstanding as of December 28, 2019 have $ 12.5 million intrinsic value and remaining weighted average requisite service period of 3.17 years .

The RSUs outstanding as of January 2, 2021 have $ 20.6 million intrinsic value and remaining weighted average requisite service period of 2.36 years.

Performance stock units (PSUs)

During fiscal year 2019 , we granted an aggregate of 116,046 PSUs.

The PSUs granted in fiscal 2019 are settled after the end of the performance period (i.e., cliff vesting), which begins on the first day of our 2019 fiscal year and ends on the last day of our 2021 fiscal year, and are based on the Company’s achievement of certain performance targets.

The performance stock units outstanding as of December 28, 2019 have $ 3.7 million intrinsic value and remaining weighted average requisite service period of 2.21 years .

During fiscal year 2020 and 2019, we granted an aggregate of 125,387 and 116,046 PSUs, respectively.

The PSUs granted in fiscal 2020 and 2019 are settled after the end of the performance period (i.e., cliff vesting), which begins on the first day of the grant year and ends on the last day of our fiscal years 2022 and 2021, respectively and are based on the Company’s achievement of certain performance targets.

The performance stock units outstanding as of January 2, 2021 have $ 10.0 million intrinsic value and remaining weighted average requisite service period of 1.75 years.

Restricted stock awards (RSAs)

3 unchanged sentences

Associate Stock Purchase Plan (ASPP)

Under the ASPP, eligible employees receive a 10 % discount from the market trading value of common stock of the Company at the time of purchase.

Under the ASPP, eligible associates receive a 10 % discount from the market trading value of common stock of the Company at the time of purchase.

Participants may contribute to the ASPP, not to exceed $ 25,000 under the ASPP in any calendar year.

As of December 28, 2019 , the amount of shares held by eligible participants through the ASPP was not material.

As of January 2, 2021, the amount of shares held by eligible participants through the ASPP was not material.

The income tax provision (benefit) consists of:

In thousands Fiscal Year 2020 Fiscal Year 2019 Fiscal Year 2018

Current income tax:

Federal $ 86 $ 443 $ 174

State 2,550 864 381

Deferred income tax:

Federal ( 219 ) ( 2,972 ) ( 15,687 )

State ( 14 ) ( 644 ) ( 3,653 )

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

National Vision Holdings, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

Income Taxes (continued)

Our income tax provision (benefit) differs from the amounts computed by multiplying earnings before income taxes by the statutory federal income tax rate as shown in the following table:

In thousands Fiscal Year 2020 Fiscal Year 2019 Fiscal Year 2018

Federal income tax provision at statutory rate $ 8,123 $ 6,403 $ 1,022

2 unchanged sentences

Goodwill impairment — — 3,879

Benefit of tax legislation

Tax benefit of equity-based compensation deductions ( 7,996 ) ( 10,089 ) ( 25,544 )

Other, net 737 376 1,314

Net income tax provision (benefit) $ 2,403 $ ( 2,309 ) $ ( 18,785 )

7 unchanged sentences

(4) changing rules related to limitations of net operating loss (“NOL”) carryforwards, and (5) enhancing and extending through 2026 the option to claim accelerated depreciation deductions on qualified property.

The effects of new legislation are required to be recognized upon enactment.

Accordingly, recognition of the tax effects of the legislation is required in the annual period that includes December 22, 2017 .

The Company recorded a tax benefit of $ 42.1 million due to a re-measurement of deferred tax assets and liabilities in fiscal year 2017 .

Pursuant to SEC Staff Accounting Bulletin No.

2 unchanged sentences

The adjustments to the provisional estimates of December 30, 2017 did not materially impact the effective tax rate of the Company during fiscal year 2018.

National Vision Holdings, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

Income Taxes (continued)

The sources of the differences between the financial accounting and tax bases of our assets and liabilities that give rise to the deferred tax assets and deferred tax liabilities and the tax effects of each are as follows:

December 28, 2019

In thousands As of

January 2, 2021 As of

December 28, 2019

8 unchanged sentences

Unrealized losses on hedging instruments 2,237 2,039

Other 15,842 942

Subtotal 54,770 48,027

Valuation allowances ( 3,486 ) ( 3,705 )

3 unchanged sentences

Amortization of intangible assets ( 73,590 ) ( 74,529 )

Convertible debt discount ( 18,819 ) —

Other ( 2,222 ) ( 1,986 )

Total deferred tax liabilities ( 132,223 ) ( 104,468 )

5 unchanged sentences

We believe it is more likely than not that we will realize a tax benefit for these NOL’s in the future except for $ 4.2 million of NOL carry-forwards on our professional corporations where we recognized a full valuation allowance as of fiscal year end 2020.

As of fiscal year end 2019 , we also have non-expiring federal and state AMT carry-forward credits and employment credits net of valuation allowance, totaling $ 3.8 million available to offset certain future taxes.

As of fiscal year end 2020, the Company has gross deferred tax assets of $ 100.8 million related to operating lease liabilities and gross deferred tax liabilities of $ 86.3 million related to ROU assets.

These amounts are presented net in Other deferred tax assets as of fiscal year end 2020.

As of fiscal year end 2020, previously reported Federal AMT carry-forward credits of $ 1.3 million were requested to be refunded in accordance with the CARES Act.

Non-expiring federal and state AMT carry-forward credits and employment credits totaling $ 3.5 million are available to offset certain future taxes.

We have a $ 1.9 million deferred income tax asset on losses associated with our equity method non-consolidated investee and a $ 0.2 million deferred income tax asset for capital losses associated with the impairment of an investment recorded during fiscal year 2018.

4 unchanged sentences

The Company evaluates uncertain tax positions on a quarterly basis and considers various factors, including, but not limited to, changes in tax law, the measurement of tax positions taken or expected to be taken in tax returns, the effective settlement of matters subject to audit, information obtained during in-process audit activities and changes in facts or circumstances related to a tax position.

National Vision Holdings, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

Revenue From Contracts With Customers

16 unchanged sentences

Corporate/Other

Revenues from our non-reportable Corporate/Other segment are attributable to wholly owned subsidiaries AC Lens and FirstSight.

AC Lens sells contact lenses and optical accessory products to retail customers through e-commerce.

Revenues from our non-reportable Corporate/Other segment are attributable to wholly owned subsidiaries AC Lens and FirstSight Vision Services Inc.

(“FirstSight”).

AC Lens sells contact lenses and optical accessory products to retail customers through e-commerce, and recognizes revenue when products have been delivered to the customer.

AC Lens also distributes contact lenses at its cost to Walmart and Sam’s Club under fee for services arrangements.

This revenue is recorded on a gross basis as AC Lens is the principal in the arrangement since AC Lens controls the products in those transactions before the products are transferred to the customer.

FirstSight issues individual vision care benefit plans in connection with our America’s Best operations in California, and provides or arranges for the provision of optometric services at certain optometric offices next to Walmart and Sam’s Club stores in California.

National Vision Holdings, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

Revenue From Contracts With Customers (continued)

FirstSight issues individual vision plans in connection with our America’s Best operations in California, and provides or arranges for the provision of optometric services at certain optometric offices next to Walmart and Sam’s Club stores in California.

Revenues Recognized Over Time

Within our Owned & Host segment, services and plans revenues include revenues from product protection plans (i.e.

warranties), eyecare club memberships and HMO membership fees.

warranties), eyecare club memberships and HMO vision plan fees.

We offer extended warranty plans in our Owned & Host segment that generally provide for repair and replacement of eyeglasses for primarily a one-year term after purchase.

11 unchanged sentences

The following disaggregation of revenues depicts our revenues based on the timing of revenue recognition:

In thousands Fiscal Year 2020 Fiscal Year 2019 Fiscal Year 2018

Revenues recognized at a point in time $ 1,569,757 $ 1,578,379 $ 1,397,801

4 unchanged sentences

As the reportable segments are aligned by similar economic factors, trends and customers, the reportable segment disaggregation view best depicts how the nature, amount and uncertainty of revenue and cash flows are affected by economic factors.

The following table summarizes the activity of allowance for expected credit losses for the fiscal year end 2020.

In thousands Fiscal Year 2020

Beginning balance as of December 28, 2019

Current-period provision for expected credit losses ( 671 )

Write-offs charged against the allowance 1,071

Other adjustments (1)

Ending balance as of January 2, 2021

(1) As part of our adoption of ASU 2016-13, we adjusted the allowance for certain amounts recognized in prior periods that no longer represented an allowance for credit losses.

The adjustment was immaterial to the financial results of current and prior periods.

“Details of Certain Balance Sheet Accounts” for further details.

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

1 unchanged sentence

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.

Most leases for our stores provide for a minimum rent and typically include escalating rent over time with the exception of Military for which lease payments are variable and based on a percentage of sales.

Most leases for

our stores provide for a minimum rent and typically include escalating rent over time with the exception of Military for which lease payments are variable and based on a percentage of sales.

For Vista Optical locations in Fred Meyer stores, we pay fixed rent plus a percentage of sales after certain minimum thresholds are achieved.

1 unchanged sentence

Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.

The Company does not consider its management & services agreement with its legacy partner to contain a lease arrangement.

Our lease arrangements include TIAs, which are contractual amounts received from a lessor for improvements made to leased properties by the Company.

For operating leases, TIAs are treated as a reduction of the lease payments used to measure the ROU assets in the accompanying consolidated balance sheet as of fiscal year 2019 (non-current liabilities as of fiscal year 2018 ), and are amortized as a reduction in rental expense over the life of the respective leases.

National Vision Holdings, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

Leases (continued)

With respect to lease accounting guidance, the Company’s management & services agreement with its legacy partner does not contain a lease arrangement.

Our lease arrangements frequently include TIAs, which are contractual amounts received from a lessor for improvements made to leased properties by the Company.

For operating leases, TIAs are treated as a reduction of the lease payments used to measure the ROU assets in the accompanying consolidated balance sheet as of fiscal year 2020 and are amortized as a reduction in rental expense over the life of the respective leases.

We rent or sublease certain parts of our stores to third parties.

Our sublease portfolio consists mainly of operating leases with our ophthalmologists and optometrists within our stores.

In response to the COVID-19 pandemic, we began seeking relief from our landlords while our stores were temporarily closed to the public.

On April 10, 2020, the Financial Accounting Standards Board staff issued a question-and-answer document providing guidance for lease concessions provided to lessees in response to the effects of COVID-19.

Such guidance allows lessees to make an election to account for lease concessions as though the enforceable rights and obligations existed in the original lease.

This election is only available when the concessions do not result in a substantial increase in the obligations of the lessee.

During the second quarter of 2020, we reached rent concession agreements where certain of these concession arrangements included lease payment and term extensions between three and 12 months.

The Company has elected to account for lease concessions and deferrals resulting directly from the COVID-19 pandemic as though the enforceable rights and obligations to the deferrals existed in the respective contracts at lease inception and will not account for the concessions as lease modifications, unless the concession results in a substantial increase in the Company’s obligations.

The majority of leases where we received a concession did not result in a substantial increase in our obligations.

Lease concessions of $ 3.1 million were recorded in Other payables and accrued expenses as of January 2, 2021.

“Details of Certain Balance Sheet Accounts” for further details.

In thousands As of

January 2, 2021 As of

December 28, 2019

Classification

Property and equipment, net (a)

Right of use assets (b)

Type Classification

Finance Property and equipment, net (a)

$ 24,373 $ 28,128

Operating Right of use assets (b)

340,141 348,090

Total leased assets $ 364,514 $ 376,218

Current Liabilities:

Current maturities of long-term debt and finance lease obligations

Current operating lease obligations (c)

Finance Current maturities of long-term debt and finance lease obligations $ 3,598 $ 3,259

Operating Current operating lease obligations (c)

58,356 51,937

Other non-current liabilities:

Long-term debt and finance lease obligations, less current portion and debt discount

Non-current operating lease obligations

Finance Long-term debt and finance lease obligations, less current portion and debt discount 27,152 30,037

Operating Non-current operating lease obligations 327,371 331,769

Total lease liabilities $ 416,477 $ 417,002

1 unchanged sentence

We used the incremental borrowing rate on December 30, 2018 for operating leases that commenced prior to that date.

(a) Finance lease assets are recorded net of accumulated amortization of $ 8.3 million as of December 28, 2019 .

(b) TIA of $ 35.2 million and deferred rent of $ 15.0 million are treated as reductions of lease payments used to measure ROU assets as of December 28, 2019 .

(a) Finance lease assets are recorded net of accumulated amortization of $ 12.4 million and $ 8.3 million as of January 2, 2021 and December 28, 2019, respectively.

(b) TIA of $ 36.0 million and $ 35.2 million are treated as reductions of lease payments used to measure ROU assets as of January 2, 2021 and December 28, 2019, respectively.

Deferred rent of $ 17.5 million and $ 15.0 million are treated as reductions of lease payments used to measure ROU assets as of January 2, 2021 and December 28, 2019, respectively.

(c) Current operating lease liabilities are measured net of TIA receivables of $ 3.8 million and $ 5.9 million as of January 2, 2021 and December 28, 2019, respectively.

In thousands Fiscal Year 2020 Fiscal Year 2019

Operating lease cost

Fixed lease cost (a)

$ 79,387 $ 73,971

Variable lease cost (b)

28,158 26,466

Sublease income (c)

( 2,700 ) ( 2,930 )

Finance lease cost

Amortization of finance lease assets 4,561 4,418

Interest expense, net:

Interest on finance lease liabilities 3,656 3,573

Net lease cost $ 113,062 $ 105,498

Includes short-term leases, which are immaterial.

Includes costs for insurance, real estate taxes and common area maintenance expenses, which are variable as well as lease costs above minimum thresholds for Fred Meyer stores and lease costs for Military stores.

Income from sub-leasing of stores includes rental income from operating lease properties to ophthalmologists and optometrists who are independent contractors.

National Vision Holdings, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

Leases (continued)

Lease Term and Discount Rate

(a) Includes short-term leases, which are immaterial.

(b) Includes costs for insurance, real estate taxes and common area maintenance expenses, which are variable as well as lease costs above minimum thresholds for Fred Meyer stores and lease costs for Military stores.

(c) Income from sub-leasing of stores includes rental income from operating lease properties to ophthalmologists and optometrists who are independent contractors.

Lease Term and Discount Rate As of

January 2, 2021 As of

December 28, 2019

Weighted average remaining lease term (months)

4 unchanged sentences

Finance leases (b)

The discount rate used to determine the lease assets and lease liabilities was derived upon considering (i) incremental borrowing rates on our long-term debt;

12.3 % 13.1 %

(a) The discount rate used to determine the lease assets and lease liabilities was derived upon considering (i) incremental borrowing rates on our term loan and revolving credit facility;

(ii) fixed rates we pay on our interest rate swaps;

2 unchanged sentences

As a majority of our leases are five-year and 10-year leases, we determined a lease discount rate for such tenors and determined this discount rate is reasonable for leases that were entered into during the period.

The discount rate on finance leases is higher than operating leases because the present value of minimum lease payments was higher than the fair value of leased properties for certain leases entered into prior to adoption of ASC 842.

(b) The discount rate on finance leases is higher than operating leases because the present value of minimum lease payments was higher than the fair value of leased properties for certain leases entered into prior to adoption of ASC 842.

The discount rate differential for those leases is not material to our results of operations.

In thousands Fiscal Year 2020 Fiscal Year 2019

Other Information

1 unchanged sentence

Operating cash outflows - operating leases $ 84,913 $ 75,330

The following table summarizes the maturity of our lease liabilities as of December 28, 2019 :

Operating Leases (a)

The following table summarizes the maturity of our lease liabilities as of January 2, 2021:

In thousands Operating Leases (a)

Finance Leases (b)

2021 $ 73,867 $ 6,676

2022 77,874 7,215

2023 70,103 6,241

2024 60,998 4,673

2025 51,974 4,451

Thereafter 116,272 12,008

Total lease liabilities 451,088 41,264

Interest 65,361 10,514

Present value of lease liabilities (c)

$ 385,727 $ 30,750

(a) Operating lease payments include $ 60.8 million related to options to extend lease terms that are reasonably certain of being exercised.

1 unchanged sentence

(c) The present value of lease liabilities excludes $ 26.4 million of legally binding minimum lease payments for leases signed but not yet commenced.

As of fiscal year end 2018, aggregate future minimum rental payments under our operating leases were as follows:

National Vision Holdings, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

Leases (continued)

The future minimum rental payments above do not include amounts for variable executory costs such as insurance, real estate taxes and the common area maintenance.

These costs were approximately $ 18.0 million and $ 14.9 million during the fiscal years ended 2018 and 2017, respectively.

Related Party Transactions

Transactions with KKR

During fiscal year 2019 , KKR Capital Markets LLC acted as a lead arranger with respect to the refinancing of our Credit Agreement, and received $ 1.0 million in fees in connection therewith.

“Long-term Debt” for additional information on the refinancing.

During fiscal year 2019 , the Company completed a secondary offering pursuant to which KKR Vision Aggregator L.P.

sold 9,149,908 shares of the Company’s common stock in an underwritten offering.

“Description of Business and Basis of Presentation-Secondary Offering and Common Stock Repurchase” for further details.

Transactions with KKR and Berkshire

During fiscal year 2018 , KCM acted as a lead arranger with respect to the joinder and amendment agreement, dated as of October 9, 2018 , relating to the first lien credit agreement, and received $ 1.2 million in fees in connection therewith.

Under certain agreements we have entered into with KKR and Berkshire, we recorded the following expenses:

Fees paid to KKR and Berkshire include retainer fees and certain other on-going project-oriented initiatives and are presented in SG&A in the accompanying consolidated statements of operations, except KKR fees during the fiscal year 2017 include $ 2.3 million presented in debt issuance costs.

Fiscal year 2017 expenses also include the monitoring agreement termination fee discussed in Note 1 .

“Business and Significant Accounting Policies.”

Dividend & Stockholders’ Equity

On February 2, 2017 , the Company declared a recapitalization dividend to its stockholders.

Common stockholders received a dividend per common share of $ 1.51 .

There were 110.5 million common shares outstanding and eligible for the dividend.

Vested and roll-over option holders received an additional cash payment of $ 1.51 per option, for an aggregate payment of $ 3.7 million .

The income tax benefit of the additional cash payment was $ 1.4 million .

The exercise price of unvested options was reduced by $ 1.51 per option.

Since the Company was in an accumulated deficit position on the date of declaration, according to our accounting policy the combined total cash payment of $ 171.0 million was recorded as a reduction to additional paid-in capital in the accompanying consolidated balance sheet.

During fiscal years 2019 and 2018, KKR Capital Markets LLC acted as a lead arranger with respect to debt issuance and refinancing transactions, and received $ 1.0 million and $ 1.2 million in fees, respectively, in connection therewith.

“Description of Business and Basis of Presentation-Secondary Public Offerings” for details on a common stock offering in 2019 through which KKR ceased to be a related party.

Equity in Net Assets of Non-Consolidated Investee

3 unchanged sentences

Revenues and expenses of the investee are not consolidated into our financial statements;

rather, our proportionate share of the earnings or losses of the investee is reflected as equity income or loss in other expense, net in our consolidated statements of operations.

rather, our proportionate share of the earnings or losses of the investee is reflected as equity income or loss in Other expense (income), net in the Company’s consolidated statements of operations.

We have determined that we should not consolidate our investee because, although it is a variable interest entity, we are not the primary beneficiary.

After adjusting the carrying value of our interest in the investee’s reported net losses, there is no remaining investment balance associated with this investee as of December 28, 2019 .

Our investment balance in the business was $ 1.0 million at the end of fiscal year 2018 , which is included in other assets in the accompanying consolidated balance sheets.

After adjusting the carrying value of our interest in the investee’s reported net losses, there is no remaining equity investment balance associated with this investee as of January 2, 2021.

Our investee’s fiscal year ends on December 31 of each year.

The investee recognized no material transactions on the days between its fiscal year end and our fiscal year end for all periods presented below.

National Vision Holdings, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

Equity in Net Assets of Non-Consolidated Investee (continued)

Summarized balance sheet information for our investee is as follows:

December 28, 2019

December 29, 2018

In thousands As of January 2, 2021 As of December 28, 2019

Current assets $ 1,815 $ 1,351

Non-current assets 387 450

Total assets 2,202 1,801

Current liabilities 3,464 3,821

1 unchanged sentence

Total liabilities 7,885 12,021

Net assets $ ( 5,683 ) $ ( 10,220 )

Summarized income statement information for our investee is as follows:

National Vision’s share of net loss

In thousands Fiscal Year 2020 Fiscal Year 2019 Fiscal Year 2018

Revenues $ 6,771 $ 6,046 $ 3,871

Net loss $ ( 5,739 ) $ ( 5,481 ) $ ( 5,632 )

Our share of net loss (1)

$ ( 1,383 ) $ ( 1,804 ) $ ( 1,304 )

(1) We did not record our share of the 2020 net loss as there is no obligation to absorb losses in excess of the equity investment.

In the ordinary course of business we are a licensee of our investee.

Additionally, on August 29, 2017 , the investee issued a secured convertible promissory note to the Company, in the principal amount of $ 1.5 million , due on August 29, 2020 .

The note bears interest at a fixed rate of 5.00 % with an additional variable interest component based on the base rate of the Bank of England, as published each calendar year, which is 0.75 % as of December 28, 2019 and is included in other assets in the accompanying consolidated balance sheets.

Interest income associated with the note was immaterial for the fiscal year end 2019 .

The net carrying amount of the convertible promissory note after applying our share of the investee’s net losses of $ 0.8 million was $ 0.7 million , and is included in other assets in the accompanying condensed consolidated balance sheets for the fiscal year end 2019 .

Upon adoption of ASU 2016-13 in 2020, the Company wrote-off the carrying value of the secured convertible promissory note held by the Company for estimated credit losses.

In April 2020, the Company converted the promissory note to an equity investment.

equity investment has a carrying value of zero as of January 2, 2021.

Interest income associated with the note was immaterial for the 2019 fiscal year.

Balances and transactions related to our non-consolidated investee included in our consolidated balance sheets and statements of operations were as follows:

December 31, 2019

In thousands As of

January 2, 2021 As of

December 28, 2019

2 unchanged sentences

(1) Other assets represent a loan receivable from our investee.

In thousands Fiscal Year 2020 Fiscal Year 2019 Fiscal Year 2018

Statements of operations

4 unchanged sentences

Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a reporting entity’s own market assumptions.

National Vision Holdings, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

Fair Value Measurement of Financial Assets and Liabilities (continued)

The Company is required to measure certain assets and liabilities at fair value or disclose the fair values of certain assets and liabilities recorded at cost.

13 unchanged sentences

Accounts Receivable, Net

The carrying amount of accounts receivable approximates fair value due to the short-term nature of those items and the effect of related allowances for doubtful accounts.

The carrying amount of accounts receivable approximates fair value due to the short-term nature of those items and the effect of related allowances for doubtful credit losses.

Accounts Payable and Other Payables and Accrued Expenses

The carrying amounts of accounts payable and other payables and accrued expenses approximate fair value due to the short-term nature of those items.

Tangible Long-lived and Right of Use (“ROU”) Store Assets

The non-recurring fair value measurements associated with these tangible long-lived and ROU store assets are classified as Level 3 measurements in the fair value hierarchy.

Refer to Note 1.

“Description of Business and Basis of Presentation”.

Long-term Debt - Term Loan and Revolving Credit Facility

Since the borrowings under the Term Loan and Revolving Credit Facility utilize variable interest rate setting mechanisms such as LIBOR, the fair values of these borrowings are deemed to approximate the carrying values.

We also considered the effect of our own credit risk on the fair values of our Term Loan and Revolving Credit Facility.

Refer to Note 4.

“Long-term Debt” for additional information on the Term Loan and Revolving Credit Facility.

Finance Lease Obligations

The fair value of finance lease obligations is based on estimated future contractual cash flows discounted at an appropriate market rate of interest (Level 2 inputs).

The estimated fair values of our finance leases were $ 38.2 million and $ 30.7 million as of fiscal year end 2019 and 2018 , respectively, compared to carrying values of $ 33.3 million and $ 24.5 million , respectively.

“Long-term Debt”.

Long-term Debt - 2025 Notes

The Company has $ 402.5 million in aggregate principal amount of 2.50 % convertible senior notes due on May 15, 2025 issued and outstanding as of January 2, 2021.

The estimated fair value of the 2025 Notes was approximately $ 655.3 million as of January 2, 2021.

The estimated fair value of the 2025 Notes is based on the prices the 2025 Notes have traded in the market as of January 2, 2021, as well as overall market conditions on the date of valuation, stated coupon rates, the number of coupon payments each year and the maturity dates, and represents a Level 2 measurement.

Refer to Note 4.

“Long-term Debt” for more information on the 2025 Notes.

Interest Rate Derivatives

We recognize as assets or liabilities at fair value the 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).

See Note 14 .

We recognize as assets or liabilities at fair value the estimated amounts we would receive or pay upon a termination of interest rate derivatives prior to their scheduled expiration dates.

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

“Interest Rate Derivatives” for further details.

National Vision Holdings, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

Deferred Revenue

1 unchanged sentence

Fiscal Year 2020

Product Protection Plans

HMO Memberships

In thousands Product Protection Plans Eye Care

Clubs HMO Memberships Total

Beginning of the year $ 30,911 $ 46,486 $ 3 $ 77,400

Sold 63,535 47,445 — 110,980

Revenue recognized ( 60,299 ) ( 48,351 ) ( 3 ) ( 108,653 )

End of year $ 34,147 $ 45,580 $ — $ 79,727

Current $ 33,810 $ 25,089 $ — $ 58,899

Non-current 337 20,491 — 20,828

$ 34,147 $ 45,580 $ — $ 79,727

Fiscal Year 2019

Product Protection Plans

HMO Memberships

In thousands Product Protection Plans Eye Care

Clubs HMO Memberships Total

Beginning of the year $ 28,775 $ 43,488 $ 15 $ 72,278

Adjustment for adoption of ASU 2014-09

Beginning of the year - As Adjusted

Sold 63,105 52,438 — 115,543

Revenue recognized ( 60,969 ) ( 49,440 ) ( 12 ) ( 110,421 )

End of year $ 30,911 $ 46,486 $ 3 $ 77,400

Current $ 30,547 $ 25,320 $ 3 $ 55,870

Non-current 364 21,166 — 21,530

$ 30,911 $ 46,486 $ 3 $ 77,400

Deferred revenue recorded as of fiscal year end 2020 is expected to be reflected in future operating results as follows:

Fiscal Year In thousands

2021 $ 58,899

Commitments and Contingencies

In 2018 , the Company renewed an eyeglass lenses supply agreement with a trade vendor effective June 2019 .

The Company also renewed certain other agreements with the same eyeglass vendor, including a cloud computing service arrangement.

Additionally, during the fiscal year of 2019 , we entered into other minimum purchase commitments with our trade vendors.

As a result of these arrangements, the Company has minimum purchase commitments of approximately $ 23.5 million , $ 24.9 million , $ 8.4 million and $ 3.7 million in fiscal years 2020, 2021, 2022 and 2023, respectively.

National Vision Holdings, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

Commitments and Contingencies (continued)

Contractual Commitments

As of January 2, 2021, the Company had contractual commitments of approximately $ 62.9 million consisting of agreements for merchandise purchases, technology and advertising.

Warranty Costs

4 unchanged sentences

The following details the activity in our product warranty liability accounts:

In thousands Fiscal Year 2020 Fiscal Year 2019

Beginning of year balance $ 1,881 $ 1,742

Accrued obligation 28,415 33,014

Claims paid ( 28,067 ) ( 32,875 )

End of year balance $ 2,229 $ 1,881

The Company sponsors a 401(k) plan into which employees may defer a portion of their wages.

The Company sponsors a 401(k) plan into which associates may defer a portion of their wages.

We match a portion of such deferred wages.

19 unchanged sentences

In October 2018, the plaintiffs filed a second amended complaint with the district court, and, in November 2018, FirstSight filed a motion to dismiss.

On March 23, 2020, the district court granted FirstSight’s motion to dismiss the second amended complaint.

On April 24, 2020, the plaintiffs filed a third amended complaint.

FirstSight filed a motion to dismiss the third amended complaint on May 8, 2020.

O n February 4, 2021, the district court granted FirstSight’s motion in part and denied it in part.

FirstSight’s answer to the remaining claims was filed February 18, 2021.

We believe that the claims alleged are without merit and intend to continue to defend the litigation vigorously.

National Vision Holdings, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

Commitments and Contingencies (continued)

In May 2017, a complaint was filed against us and other defendants alleging, on behalf of a proposed class of consumers who purchased contact lenses online, that 1-800 Contacts, Inc.

entered into a series of agreements with the other defendants, including AC Lens, to suppress certain online advertising and that each defendant thereby engaged in anticompetitive conduct in violation of the Sherman Antitrust Act.

entered into a series of agreements with the other defendants, including our wholly-owned subsidiary, Arlington Contact Lens Service, Inc.

(“AC Lens”), to suppress certain online advertising and that each defendant thereby engaged in anticompetitive conduct in violation of the Sherman Antitrust Act.

We have settled this litigation for $ 7.0 million, without admitting liability.

2 unchanged sentences

Pursuant to this order, we deposited 50 % of the settlement amount, or $ 3.5 million, into an escrow account, to be distributed subject to and in accordance the terms of the settlement agreement and any further order of the court.

In February 2019, we were served with a lawsuit by a former employee who alleges, on behalf of himself and a proposed class, several violations of California wage and hour laws and seeks unspecified alleged unpaid wages, monetary damages, injunctive relief and attorneys’ fees.

On May 15, 2020, the plaintiffs filed a motion seeking preliminary approval of their settlement with the remaining defendant, 1-800 Contacts, Inc., as well as conditional certification of the class and approval of the plan of distribution of settlement funds.

This motion was granted by the court on June 3, 2020.

The court held a hearing on plaintiffs’ motion for final approval of class action settlements, approval of the plan of distribution, and final certification of the settlement classes on October 20, 2020.

There were no objections and the court entered final judgment and order of dismissal following the hearing.

Based on that order, we deposited the final 50 % of the settlement amount, $ 3.5 million, into the designated escrow account to be distributed subject to and in accordance with the settlement agreement.

In February 2019, we were served with a lawsuit by a former associate who alleged, on behalf of himself and a proposed class, several violations of California wage and hour laws and sought unspecified alleged unpaid wages, monetary damages, injunctive relief and attorneys’ fees.

On March 21, 2019, we removed the lawsuit from state court to the United States District Court for the Northern District of California.

3 unchanged sentences

The parties participated in mediation on February 19, 2020, but a resolution of the matter was not reached at that time.

The Company continues to believe that the plaintiff’s amended complaint lacks merit and will vigorously defend the litigation.

In November 2019, the Company agreed to enter into a pre-litigation settlement with six former employees who asserted, on behalf of themselves and a proposed class, violations of the Fair Labor Standards Act and of California wage and hour laws.

On February 27, 2020, following mediation, the parties agreed to a settlement of all claims alleged by the named claimant on behalf of himself and all putative class members and other aggrieved associates.

The Company will pay $ 3.5 million as the gross settlement fund in connection with this settlement.

This settlement was preliminarily approved by the court on April 29, 2020.

A final approval hearing was conducted by the court on October 27, 2020.

The court approved the settlement according to the terms of the parties’ agreement and final judgment and order of dismissal was then entered.

The Company deposited the settlement amount, or $ 3.5 million, into the designated account pursuant to the terms of the settlement agreement.

In November 2019, the Company agreed to enter into a pre-litigation settlement with six former associates who asserted, on behalf of themselves and a proposed class, violations of the Fair Labor Standards Act and of California wage and hour laws.

In order to avoid the burden, expense and uncertainty of litigation, and without admitting liability, the Company agreed to a settlement with the named claimants and all participating class members for a maximum settlement amount of $ 895,000 .

2 unchanged sentences

The Company is party to pay-fixed and receive-floating interest rate swap agreements to offset the variability of cash flows in LIBOR-indexed debt interest payments, subject to a 1.0 % floor, attributable to changes in the benchmark interest rate from March 13, 2017 to March 13, 2021 related to its credit agreement.

During 2019 , in accordance with the original agreements with the counterparties, the notional amount of the first derivative decreased from $ 140.0 million to $ 105.0 million .

There were no other changes in the terms of the arrangements.

The fixed rates associated with the first derivative (“Derivative 1”) notional amount of $ 105.0 million and the second derivative (“Derivative 2”) notional amount of $ 225.0 million were 3.4063 % and 3.5125 % , respectively.

The fixed rate associated with the third derivative (“Derivative 3”) notional amount of $ 100.0 million was 2.6000 % .

Derivative 1 will hedge the first amount of LIBOR-based interest payments up to its applicable notional amount and Derivative 2 will hedge the next amount (i.e., the first amount not already hedged by Derivative 1) up to its applicable notional amount.

Derivative 3 will hedge interest payments not already hedged by Derivatives 1 and 2.

Changes in the cash flows of each derivative are expected to be highly effective in offsetting the changes in interest payments on a principal balance equal to the derivative’s notional amount, attributable to the hedged risk.

Our hedges have been deemed highly effective since inception as a result of our quarterly hedge effectiveness testing.

During the first quarter of 2020, in accordance with the original agreements with the counterparties, the notional amount of one swap decreased from $ 105.0 million to $ 70.0 million.

The aggregate notional amount of the interest rate swaps was $ 395.0 million and $ 430.0 million for the year ended January 2, 2021 and December 28, 2019, respectively.

There were no other changes in the terms of the agreements.

Also, during the first quarter of 2020, the Company entered into a forward-starting interest rate collar that will hedge variability of cash flows of LIBOR-indexed debt interest payments from March 13, 2021 to July 18, 2024, following the maturity of the interest rate swap agreements, with an aggregate notional amount of $ 375 million.

“Fair Value Measurement of Financial Assets and Liabilities” for further details.

During the second quarter of 2020, as a result of the partial repayment of the Company’s LIBOR based debt balances, certain forecasted hedged transactions were deemed not probable of occurring.

The Company subsequently discontinued hedge accounting on $ 78.0 million of interest rate swap notional and $ 58.0 million of interest rate collar notional, reclassifying net unrealized losses of approximately $ 2.5 million from AOCL to interest expense, net during fiscal year 2020.

Additionally, due to changes in the interest rates applicable to the Company’s Term Loan and Revolving Credit Facility, the interest rate collar ceased to be a highly effective hedge.

Losses on the change in fair value of the interest rate collar of approximately $ 2.6 million were recorded in interest expense, net during fiscal year 2020.

Interest expense, net related to derivatives considered to be highly effective hedges for fiscal year 2020 was $ 7.7 million.

Changes in the cash flows of interest rate swap derivatives designated as hedges are expected to be highly effective in offsetting the changes in interest payments on a principal balance equal to the designated derivative’s notional amount, attributable to the hedged risk.

Cash flows related to derivatives qualifying as hedges are included in the same section of the Consolidated Statements of Cash Flows as the underlying assets and liabilities being hedged.

Cash flows during fiscal year 2020 related to derivatives not qualifying as hedges were included in the operating section of the Consolidated Statements of Cash Flows and were immaterial.

As of January 2, 2021, the Company expects to reclassify approximately $ 2.5 million of unrealized losses on derivative instruments, net of tax, from AOCL into earnings in the next 12 months as the derivative instruments mature.

“Accumulated Other Comprehensive Loss” for further details.

Our cash flow hedge position related to interest rate derivative contracts is as follows:

Notional Amount

Maturity Date

Other Payables and Accrued Expenses

Other Liabilities

AOCL, Net of Tax (1)

December 28, 2019

In thousands Balance Sheet Classification As of

January 2, 2021 As of

December 28, 2019

Includes stranded income tax benefit of $2.1 million within AOCL from adopting provisions of the Tax Cuts and Jobs Act of 2017 during the year ended December 30, 2017.

National Vision Holdings, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

Interest Rate Derivatives (continued)

As of December 28, 2019 , the Company expects to reclassify $ 4.7 million of unrealized losses on derivative instruments from AOCL into earnings in the next 12 months as the derivative instruments mature.

See Note 18 .

“Accumulated Other Comprehensive Loss” for further detail regarding AOCL.

Derivatives designated as hedging instruments under ASC 815

Interest rate swaps Other Payables and Accrued Expenses $ 1,528 $ 6,382

Interest rate swaps Other Liabilities — 1,603

Total derivative liabilities designated as hedging instruments $ 1,528 $ 7,985

Derivatives not designated as hedging instruments under ASC 815

Interest rate swap Other Payables and Accrued Expenses $ 248 $ —

Interest rate collar Other Payables and Accrued Expenses 3,340 —

Interest rate collar Other Liabilities 7,663 —

Total derivative liabilities not designated as hedging instruments $ 11,251 $ —

Earnings Per Share

Basic earnings per share (“EPS”) is computed by dividing net income by the weighted average number of common shares outstanding for the period.

Diluted EPS is computed by dividing net income by the weighted average shares outstanding for the period and includes the dilutive impact of potential new shares issuable upon vesting and exercise of stock options and vesting of restricted stock units.

Potential shares of common stock are excluded from the computation of diluted EPS if their effect is anti-dilutive.

Prior to the fourth quarter of the fiscal year 2020, we intended to settle the principal amount of the outstanding 2025 Notes in cash and, therefore, used the treasury stock method for calculating any potential dilutive effect of the conversion spread on diluted net income per share, if applicable.

Under the treasury stock method, the shares underlying the conversion option of the 2025 Notes will have an impact on our diluted EPS when net income is reported and when the average market price of our common stock for the period exceeds the conversion price of $ 31.17 per share.

Beginning with the fourth quarter of the current fiscal year, we are no longer asserting cash settlement of the principal amount of the outstanding 2025 Notes, therefore share settlement is now presumed.

Thus, on a prospective basis we will apply the if-converted method for calculating any potential dilutive effect of the conversion of the outstanding 2025 Notes on Diluted EPS, if applicable.

If the if-converted method is anti-dilutive, the anti-dilutive share count for the 2025 notes will represent the maximum number of shares of common stock issuable upon conversion.

“Long-term Debt” for more information on the 2025 Notes.

A reconciliation of the numerators and denominators of the basic and diluted EPS calculations is as follows:

In thousands, except EPS

In thousands, except EPS Fiscal Year 2020 Fiscal Year 2019 Fiscal Year 2018

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

Weighted average shares outstanding for basic EPS 80,565 78,608 75,899

2 unchanged sentences

Restricted Stock 183 56 13

2025 Notes 308 — —

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

Anti-dilutive options, RSUs outstanding excluded from EPS

Basic EPS $ 0.45 $ 0.42 $ 0.31

Diluted EPS $ 0.44 $ 0.40 $ 0.30

Anti-dilutive options, RSUs outstanding, and 2025 Notes excluded from EPS 13,325 294 —

Segment Reporting

11 unchanged sentences

We lease space from our Legacy partner within or adjacent to each of the locations we manage and use this space for providing optometric examination services.

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

This exposes us to concentration of customer risk.

Sales of services and plans in our Legacy segment consist of fees earned for managing the operations of our Legacy partner and revenues associated with the provision of eye exams for our managed care customers.

2 unchanged sentences

No such penalties have been assessed under our current arrangement.

National Vision Holdings, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

Segment Reporting (continued)

On January 22, 2020, we entered into an amendment to our management & services agreement with Walmart.

The amendment 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.

Pursuant to the amendment, we will also be adding five additional Vision Centers in Walmart stores in fiscal year 2020.

On January 22, 2020, we entered into an amendment to our management & services agreement with Walmart which provided for a six month extension of the term and added five additional Vision Centers in Walmart stores to the agreement in fiscal year 2020.

On July 17, 2020, NVI and Walmart entered into a further amendment to the management & services agreement, to extend the current term and economics of the agreement by three years , to February 23, 2024, and provide that the agreement will automatically renew for an additional three year term unless, no later than seven months prior to the end of the term, one party gives the other party written notice of non-renewal.

In addition, the amendment deleted certain provisions that are no longer applicable and updated certain administrative provisions.

All other terms and conditions of the agreement remain in effect.

The “Corporate/Other” category includes the results of operations of our other operating segments and corporate overhead support.

Revenues from the Corporate/Other segments are attributable to the AC Lens and FirstSight operating segments.

AC Lens primarily sells contact lenses and optical accessory products to retail customers through e-commerce.

AC Lens also distributes contact lenses to certain Walmart and Sam’s Club under fee for services arrangements.

FirstSight sells single service health plans in connection with the operations of America’s Best operations in California, and arranges for the provision of optometric services at the offices next to Walmart and Sam’s Club stores throughout California.

None of those segments met the quantitative thresholds for determining reportable segments for any of the periods presented.

The “Reconciliations” category represents other adjustments to reportable segment results necessary for the presentation of consolidated financial results in accordance with U.S.

5 unchanged sentences

Each operating segment is responsible for implementing defined strategic initiatives and achieving certain financial objectives, and has a general manager responsible for the sales and marketing initiatives and financial results for product lines within the segment.

Revenues from the Corporate/Other segments are attributable to the AC Lens and FirstSight operating segments.

AC Lens primarily sells contact lenses and optical accessory products to retail customers through e-commerce.

AC Lens also distributes contact lenses to certain Walmart and Sam’s Club under fee for services arrangements.

During fiscal year 2019 , AC Lens sales associated with Walmart and Sam’s Club contact lenses distribution arrangements represented 8.7 % of consolidated net revenue.

None of those segments met the quantitative thresholds for determining reportable segments for any of the periods presented.

Our reportable segment profit measure is earnings before interest, tax, depreciation and amortization (“EBITDA”), or net revenue, less costs applicable to revenue, less selling, general and administrative costs.

Depreciation and amortization, asset impairment, litigation settlement and other corporate costs that are not allocated to the reportable segments, including interest expense and debt issuance costs are excluded from segment EBITDA.

There are no transactions between our reportable segments.

Our reportable segment profit measure is earnings before interest, tax, depreciation and amortization (“EBITDA”), or net revenue, less costs applicable to revenue, less SG&A expenses.

Depreciation and amortization, asset impairment, litigation settlement and other corporate costs that are not allocated to the reportable segments (including interest expense) are excluded from segment EBITDA.

There are no revenue transactions between our reportable segments.

There are no differences between the measurement of our reportable segments’ assets and consolidated assets.

There have been no changes from prior periods in the measurement methods used to determine reportable segment profit or loss, and there have been no asymmetrical allocations to segments.

In fiscal year 2020, revenues from Walmart, recognized in our Legacy segment and Corporate/Other category, represent $ 268.6 million of our total net revenue, subjecting us to customer concentration risk.

We incurred $ 8.6 million of costs during fiscal year 2020, 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.

These incremental expenses related to the COVID-19 pandemic are not allocated to the reportable segments, but are included in the Corporate/Other category.

The following is a summary of certain financial data for each of our segments.

Reportable segment information is presented on the same basis as our consolidated financial statements, except for net revenue, which is 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 the CODM regularly reviews.

Reportable segment information is presented on the same basis as our consolidated financial statements, except for net revenue and associated costs applicable to revenue, 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 the CODM regularly reviews.

Asset information is not included in the following summary since the CODM does not regularly review such information for the reportable segments.

National Vision Holdings, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

Segment Reporting (continued)

Fiscal Year 2020

Corporate/Other

Reconciliations

In thousands Owned & Host Legacy Corporate/Other Reconciliations Total

Segment product revenues $ 1,097,749 $ 90,909 $ 234,403 $ ( 4,778 ) $ 1,418,283

4 unchanged sentences

Total costs applicable to revenue 518,126 67,229 202,631 ( 1,362 ) 786,624

SG&A 489,449 51,809 179,332 — 720,590

Asset impairment — — 22,004 — 22,004

Other expense, net

Loss on extinguishment of debt

Litigation settlement — — 4,395 — 4,395

Other expense (income), net — — ( 445 ) — ( 445 )

Debt issuance costs — — 156 — 156

EBITDA $ 334,824 $ 22,979 $ ( 173,670 ) $ ( 5,697 )

Depreciation and amortization 91,585

2 unchanged sentences

Fiscal Year 2019

Corporate/Other

Reconciliations

In thousands Owned & Host Legacy Corporate/Other Reconciliations Total

Segment product revenues $ 1,076,315 $ 105,450 $ 245,206 $ ( 835 ) $ 1,426,136

4 unchanged sentences

Total costs applicable to revenue 517,668 74,001 215,053 ( 203 ) 806,519

SG&A 508,239 56,235 180,014 — 744,488

Asset impairment — — 8,894 — 8,894

Other expense, net

Debt issuance cost

Other expense (income), net — — 3,611 — 3,611

Loss on extinguishment of debt — — 9,786 — 9,786

EBITDA $ 299,093 $ 29,813 $ ( 172,140 ) $ ( 5,733 )

Depreciation and amortization 87,244

1 unchanged sentence

Income before income taxes $ 30,489

National Vision Holdings, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

Segment Reporting (continued)

Fiscal Year 2018

Corporate/Other

Reconciliations

In thousands Owned & Host Legacy Corporate/Other Reconciliations Total

Segment product revenues $ 956,355 $ 103,890 $ 208,875 $ 492 $ 1,269,612

4 unchanged sentences

Total costs applicable to revenue 459,082 67,258 186,990 241 713,571

SG&A 457,618 54,091 175,767 — 687,476

Asset impairment — — 17,630 — 17,630

Other expense (income), net — — 1,487 — 1,487

Debt issuance cost — — 200 — 200

Litigation settlement

Other expense, net

EBITDA $ 256,702 $ 33,063 $ ( 169,647 ) $ ( 3,628 )

Depreciation and amortization 74,339

3 unchanged sentences

The following table presents our consolidated net product revenue information:

In thousands Fiscal Year 2020 Fiscal Year 2019 Fiscal Year 2018

Net Product Sales

5 unchanged sentences

The following table provides a reconciliation of cash and cash equivalents reported within the consolidated balance sheets to the total of cash, cash equivalents and restricted cash shown in the consolidated statement of cash flows:

In thousands Fiscal Year 2020 Fiscal Year 2019 Fiscal Year 2018

Cash and cash equivalents $ 373,903 $ 39,342 $ 17,132

1 unchanged sentence

Total cash, cash equivalents and restricted cash $ 375,159 $ 40,307 $ 17,998

National Vision Holdings, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

Accumulated Other Comprehensive Loss

Cas h flow hedge derivative instruments are recorded in AOCL.

Changes in the fair value of the Company’s cash flow hedge derivative instruments from their inception are recorded in AOCL if the instruments are deemed to be highly effective as cash flow hedges.

The following table presents the changes in AOCL, net of tax during the fiscal years 2020, 2019 and 2018, respectively:

In thousands Fiscal Year 2020 Fiscal Year 2019 Fiscal Year 2018

Cash flow hedging activity

6 unchanged sentences

Balance at end of fiscal year $ ( 4,400 ) $ ( 3,814 ) $ ( 2,810 )

Quarterly Financial Information (Unaudited)

The unaudited quarterly financial information reflects all normal and recurring accruals and adjustments necessary for a fair presentation of net income for interim periods.

Quarterly results are not necessarily indicative of a full year’s operations because of various factors.

The following tables present unaudited quarterly financial information:

Fiscal Year 2019

In thousands, except EPS

Fourth Quarter

Third Quarter

September 28,

Second Quarter

First Quarter

Total net revenue

Total costs applicable to revenue

Income from operations

Weighted-average shares used in computing basic EPS

Weighted-average shares used in computing diluted EPS

Anti-dilutive options, RSUs outstanding excluded from EPS

National Vision Holdings, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

Quarterly Financial Information (Unaudited) (continued)

Fiscal Year 2018

In thousands, except EPS

Fourth Quarter

Third Quarter

September 29,

Second Quarter

First Quarter

Total net revenue

Total costs applicable to revenue

Income (loss) from operations

Net income (loss)

Weighted-average shares used in computing basic EPS

Weighted-average shares used in computing diluted EPS

Anti-dilutive options outstanding excluded from EPS

Subsequent Events

On January 22, 2020, we entered into an amendment to our management & services agreement with Walmart.

The amendment 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.

Pursuant to the amendment, we will also be adding five additional Vision Centers in Walmart stores in fiscal year 2020.

“Interest Rate Derivatives” for a description of the Company’s use of cash flow hedging derivatives.

Schedule I - Condensed Financial Information of Registrant

3 unchanged sentences

In Thousands, Except Par Value

December 28, 2019

December 29, 2018

As of January 2, 2021 As of December 28, 2019

Current assets:

1 unchanged sentence

Accounts Receivable, net 1,409 534

Prepaid expenses and other current assets 5 —

Total current assets 1,424 589

2 unchanged sentences

Total non-current assets 1,268,846 804,763

Total assets $ 1,270,270 $ 805,352

LIABILITIES AND STOCKHOLDERS’ EQUITY

1 unchanged sentence

Other current liabilities $ 1,341 $ 50

Long-term debt, less current portion and debt discount 309,377 —

Non-current liabilities:

Other non-current liabilities 36,308 28,865

Deferred income taxes 16,742 —

Total other non-current liabilities 53,050 28,865

Stockholders’ equity:

1 unchanged sentence

200,000 shares authorized;

80,603 and 78,246 shares issued as of December 28, 2019 and December 29, 2018, respectively;

79,678 and 78,167 shares outstanding as of December 28, 2019 and December 29, 2018, respectively

82,183 and 80,603 shares issued as of January 2, 2021 and December 28, 2019, respectively;

81,239 and 79,678 shares outstanding as of January 2, 2021 and December 28, 2019, respectively

Additional paid-in capital 795,697 700,121

2 unchanged sentences

Treasury stock, at cost;

925 and 79 shares as of December 28, 2019 and December 29, 2018, respectively

944 and 925 shares as of January 2, 2021 and December 28, 2019, respectively

( 28,496 ) ( 27,807 )

Total stockholders’ equity 906,502 776,437

Total liabilities and stockholders’ equity $ 1,270,270 $ 805,352

Fiscal year 2020 includes 53 weeks.

Fiscal year 2019 includes 52 weeks.

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

3 unchanged sentences

Condensed Statements of Operations and Comprehensive Income

Fiscal Year 2020 Fiscal Year 2019 Fiscal Year 2018

Total net revenue $ — $ — $ —

1 unchanged sentence

Operating expenses 264 256 265

Interest expense, net 17,296 — —

Income (Loss) before income taxes ( 17,560 ) ( 256 ) ( 265 )

2 unchanged sentences

Net income of subsidiaries 49,878 33,125 23,827

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

Comprehensive income:

Net income 36,277 32,798 23,653

Unrealized gain (loss) on hedge instruments ( 780 ) ( 1,350 ) 9,488

1 unchanged sentence

Comprehensive income $ 35,691 $ 31,794 $ 30,711

Fiscal year 2020 includes 53 weeks.

Fiscal years 2019 and 2018 include 52 weeks.

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

3 unchanged sentences

Condensed Statements of Cash Flows

Fiscal Year 2020 Fiscal Year 2019 Fiscal Year 2018

Operating Activities

1 unchanged sentence

Investing Activities

Dividend from subsidiary

Investment in subsidiary ( 404,537 ) ( 15,090 ) ( 19,802 )

1 unchanged sentence

Financing Activities

Proceeds from stock option exercises and employee stock purchase plan

Proceeds from sale of common stock

Dividend to stockholders

Purchase of common stock

Proceeds from stock option exercises and associate stock purchase plan 13,105 15,090 19,802

Proceeds from issuance of convertible notes 402,500 — —

Payments of debt issuance costs ( 11,613 ) — —

Purchase of treasury stock ( 689 ) ( 25,646 ) —

Net cash provided by (used for) financing activities 403,303 ( 10,556 ) 19,802

2 unchanged sentences

Cash and cash equivalents, end of year $ 10 $ 55 $ 246

Fiscal year 2020 includes 53 weeks.

Fiscal years 2019 and 2018 include 52 weeks.

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

11 unchanged sentences

The parent-company-only financial statements should be read in conjunction with the NVHI consolidated financial statements.

The increase in other non-current liabilities on the Condensed Balance Sheets was primarily due to funds provided by NVI to facilitate the Company’s repurchase of common stock in 2019.

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

NVHI contributed the proceeds from of the 2025 Notes to NVI as additional investments during the fiscal year 2020.

“Long-term Debt” to the NVHI consolidated financial statements for details of the 2025 Notes.

Guarantees and Restrictions

On February 2, 2017 , the Company declared a recapitalization dividend to its stockholders.

The dividend was funded with $ 175.0 million in new term loans under NVI’s first lien credit agreement.

As described in the Initial and Secondary Public Offerings section included in Note 1 .

“Business and Significant Accounting Policies,” to the NVHI consolidated financial statements, NVI used proceeds from the NVHI IPO to repay all $ 125.0 million outstanding aggregate amount of its second lien term loans and approximately $ 235.0 million of the outstanding amount of its First Lien - Term Loan B and accrued and unpaid interest thereon.

As of December 28, 2019 , NVI had $ 540.4 million of principal amount of long-term debt outstanding under its Term Loan and Revolving Credit Facility (as defined below).

Pursuant to the Restatement Agreement, as described in Note 4 .

“Long-term Debt,” to the NVHI consolidated financial statements, the credit agreement also provides for up to $ 300.0 million in revolving loans (“Revolving Credit Facility”).

As of fiscal year end 2019 , NVI had $ 148.0 million outstanding revolving loan obligations and had $ 5.7 million in outstanding letters of credit related to the Revolving Credit Facility.

Under the agreement, provided no event of default has occurred and is continuing, NVI is permitted to pay dividends to NVHI with certain restrictions as stated in the credit agreement.

As described in the Credit Agreement section included in Note 4.

“Long-term Debt” to the NVHI consolidated financial statements, NVI used proceeds from the 2025 Notes to fully repay the outstanding amount on its Revolving Credit Facility of $ 294.3 million and partially repaid $ 75 million on the Term Loan.

As of January 2, 2021, NVI had $ 317.4 million of principal amount of long-term debt outstanding under its Term Loan and no outstanding balance under its $ 300.0 million Revolving Credit Facility, which includes $ 6.4 million in outstanding letters of credit.

Under the Credit Agreement Amendment, provided no event of default has occurred and is continuing, NVI is permitted to pay dividends to NVHI with certain restrictions as stated in the Credit Agreement Amendment.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7A. Quantitative and Qualitative Disclosures About Market Risk