National Vision Holdings, Inc. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion contains management’s discussion and analysis of our financial condition and results of operations and should be read together with the consolidated financial statements and the related notes thereto included elsewhere in this Form 10-K (this “Form 10-K”). This discussion contains forward-looking statements that reflect our plans, estimates and beliefs and involve numerous risks and uncertainties, including, but not limited to, those described in the “Risk Factors” section included in Part I. Item 1A. in this Form 10-K, as such risk factors may be updated from time to time in our periodic filings with the SEC. Actual results may differ materially from those contained in any forward-looking statements. You should carefully read “Special Note Regarding Forward-Looking Statements” in this Form 10-K. We conduct substantially all of our activities through our indirect wholly-owned subsidiary, NVI, and its subsidiaries. We operate on a retail fiscal calendar that results in a given fiscal year consisting of a 52- or 53-week period ending on the Saturday closest to December 31. 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 2020” relate to the 53 weeks ended January 2, 2021, references herein to “fiscal year 2019” relate to the 52 weeks ended December 28, 2019 and references herein to “fiscal year 2018” relate to the 52 weeks ended December 29, 2018. The disclosures contained in this Form 10-K are made only as of the date hereof, and we undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as required by law. For further information, please see “Risk Factors” and “Forward-Looking Statements.” Overview We are one of the largest and fastest growing optical retailers in the United States and a leader in the attractive value segment of the U.S. optical retail industry. We believe that vision is central to quality of life and that people deserve to see their best to live their best, regardless of their budget. Our mission is to make quality eye care and eyewear affordable and accessible to all Americans. We achieve this by providing eye exams, eyeglasses and contact lenses to value seeking and lower income consumers. We deliver exceptional value and convenience to our customers, with an opening price point that strives to be among the lowest in the industry, enabled by our low-cost operating platform. We reach our customers through a diverse portfolio of 1,205 retail stores across five brands and 19 consumer websites as of fiscal year end 2020. Brand and Segment Information Our operations consist of two reportable segments: • Owned & Host – As of fiscal ye ar end 2020, our owned brands consisted of 773 America’s Best Contacts and Eyeglasses (“America’s Best”) retail stores and 119 Eyeglass World retail stores. In America’s Best stores, vision care services are provided by optometrists employed by us or by independent professional corporations or similar entities. America’s Best stores are primarily located in high-traffic strip centers next to value-focused retailers. Eyeglass World locations primarily feature eye care services provided by independent optometrists and optometrists employed by independent professional corporations or similar entities and on-site optical laboratories that enable stores to quickly fulfill many customer orders and make repairs on site. Eyeglass World stores are primarily located in freestanding or in-line locations near high-foot-traffic shopping centers. Our host brands consisted of 54 Vista Optical locations on select military bases and 29 Vista Optical locations within select Fred Meyer stores as of fiscal year end 2020. We have strong, long-standing relationships with our host partners and have maintained each partnership for over 20 years. These brands provide eye exams primarily by independent optometrists. All brands utilize our centralized laboratories. This segment also includes sales from our America’s Best, Eyeglass World, and Military omni-channel websites. 44 Table of Contents • Legacy – We manage the operations of, and supply inventory and laboratory processing services to, 230 Vision Centers in Walmart retail locations as of fiscal year end 2020. This strategic relationship with Walmart is in its 31 st year. Pursuant to a January 2020 amendment to our management & services agreement with Walmart, we added five additional Vision Centers in Walmart stores in fiscal year 2020. On July 17, 2020, NVI and Walmart extended the current term and economics of the management & services agreement by three years to February 23, 2024; refer to Note 16. “Segment Reporting” included in Part II. Item 8. of this Form 10-K for further information. Under the management & services agreement, our responsibilities include ordering and maintaining merchandise inventory; arranging the provision of optometry services; providing managers and staff at each location; training personnel; providing sales receipts to customers; maintaining necessary insurance; obtaining and holding required licenses, permits and accreditations; owning and maintaining store furniture, fixtures and equipment; and developing annual operating budgets and reporting. We earn management fees as a result of providing such services and therefore we record revenue related to sales of products and product protection plans to our legacy partner’s customers on a net basis. Our management & services agreement also allows our legacy partner to collect penalties if the Vision Centers do not generate a requisite amount of revenues. No such penalties have been assessed under our current arrangement, which began in 2012. We also sell to our legacy partner merchandise that is stocked in retail locations we manage pursuant to a separate supplier agreement, and provide centralized laboratory services for the finished eyeglasses for our legacy partner’s customers in stores that we manage. We lease space from Walmart within or adjacent to each of the locations we manage and use this space for vision care services provided by independent optometrists or optometrists employed by us or by independent professional corporations or similar entities. During the fiscal year 2020, sales associated with this arrangement represented 8.3% of consolidated net revenue. This exposes us to concentration of customer risk. Our consolidated results also include the following activity recorded in our Corporate/Other category: • Our e-commerce platform of 15 dedicated websites managed by AC Lens. Our e-commerce business consists of six proprietary branded websites, including aclens.com, discountglasses.com and discountcontactlenses.com, and nine th ird-party websites with established retailers, such as Walmart, Sam’s Club and Giant Eagle as well as mid-sized vision insurance providers. AC Lens handles site management, customer relationship management and order fulfillment and also sells a wide variety of contact lenses, eyeglasses and eye care accessories. • AC Lens also distributes contact lenses wholesale to Walmart and Sam’s Club. We incur costs at a higher percentage of sales than other product categories. AC Lens sales associated with Walmart and Sam’s Club contact lenses distribution arrangements represen ted 7.4% of c onsolidated net revenue. • Managed care business conducted by FirstSight, our wholly-owned subsidiary that is licensed as a single-service health plan under California law, which arranges for the provision of optometric services at the offices next to certain Walmart stores throughout California, and also issues individual vision plans in connection with our America’s Best operations in California. • Unallocated corporate overhead expenses, which are a component of selling, general and administrative expenses and are comprised of various home office expenses such as payroll, occupancy costs and consulting and professional fees. Corporate overhead expenses also include field services for our five retail brands. Reportable segment information is presented on the same basis as our consolidated financial statements, except reportable segment sales which are presented on a cash basis, including point of sales for managed care payors and excluding the effects of unearned and deferred revenue, consistent with what our chief operating decision maker (“CODM”) regularly reviews. Reconciliations of segment results to consolidated results include financial information necessary to adjust reportable segment revenues to a consolidated basis in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), specifically the change in unearned and deferred revenues during the period. There are no revenue transactions between reportable segments, and there are no other items in the reconciliations other than the effects of unearned and deferred revenue. See Note 16. “Segment Reporting” in our consolidated financial statements included in Part II. Item 8. of this Form 10-K. Deferred revenue represents the timing difference of when we collect the cash from the customer and when services related to product protection plans and eye care club memberships are performed. Increases or decreases in deferred revenue during the reporting period represent cash collections in excess of or below the recognition of previous deferrals. Unearned revenue represents the timing difference of when we collect cash from the customer and delivery/customer acceptance, and includes sales of prescription eyewear during approximately the last seven to 10 days of the reporting period. 45 Table of Contents Trends and Other Factors Affecting Our Business Various trends and other factors will affect or have affected our operating results, including: Impact of COVID-19 The COVID-19 pandemic and related federal, state and local governmental and healthcare authority guidelines continue to impact our business results and cause business disruption in the U.S. and globally. To date, the COVID-19 pandemic and related healthcare authority actions have directly and indirectly impacted our operations, including the temporary closure of our stores to the public between March and June 2020, consumer behavior, comparable store sales, our associates and optometrists and the overall market. While we experienced stronger comparable store sales growth in the third and fourth qua rters of 2020, the comparable store sales growth figure for the fiscal year 2020 reflect the effects of store closures and the pandemic. The COVID-19 pandemic has resulted in, and may continue to result in, state, city or local quarantines, labor stoppages and shortages, changes in consumer purchasing patterns, mandatory or voluntary shut-downs of retail locations, severe market volatility, liquidity disruptions, and overall economic instability, which, in many cases, have had, and could continue to have, material adverse impacts on our business, financial condition and results of operations. The scope and nature of these impacts continue to evolve on a daily basis, including with a resurgence in COVID-19 cases during the latter portion of this fiscal year. Since the onset of the COVID-19 pandemic, we have focused on ensuring the health and safety of our associates and customers, securing liquidity, reducing expenses and deferring discretionary capital expenditures. In response to the pandemic, we temporarily closed all of our stores to the public across the U.S. on March 19, 2020 and successfully re-opened all stores with enhanced safety and cleaning protocols by June 8, 2020. We also suspended all non-essential travel for our associates and have implemented a remote work policy for certain corporate associates. The decrease in revenue from our temporary store closures was not offset by proportional decreases in expense, as we continued to incur store occupancy costs even while stores were temporarily closed, costs directly related to adapting the Company’s operations to the COVID-19 pandemic such as personal protective equipment and other supplies needed to operate our stores safely and certain other costs such as compensation, a tangible appreciation bonus paid to our customer-facing doctors and associates, and other administrative expenses, resulting in a negative effect on profitability. Since the beginning of the pandemic, we have also implemented capital spending and expense reduction initiatives , including a temporary pause in new store openings between March and June 2020, reduced near term marketing, a temporary reduction in compensation across the organization until the second quarter of 2020, and worked with a base of vendors and landlords to extend payment terms and modify existing contracts. On March 17, 2020, as a precautionary measure to preserve financial flexibility during the COVID-19 pandemic, we borrowed the remaining $146.3 million in available funds under our $300.0 million revolving credit facility (the “Revolving Credit Facility”). On May 12, 2020, we completed the issuance of $402.5 million principal amount of 2.50% convertible senior notes due on May 15, 2025 (the “2025 Notes”) and used the net proceeds to repay the full amount outstanding under our Revolving Credit Facility and part of our outstanding borrowings under our Term Loan. We also entered into an amendment (the “Credit Agreement Amendment”) to our Amended and Restated Credit Agreement, dated as of July 18, 2019 (the “Credit Agreement”) to suspend certain financial maintenance covenants until testing at the end of the second fiscal quarter of 2021, allowing us to focus on the prudent management of the business. We also recorded income totaling $11.0 million as a result of the employee retention credits made available under the CARES Act for U.S. associates during fiscal year 2020; recognizing $6.2 million as a reduction to costs of services and plans, $0.4 million as a reduction to costs of products and $4.4 million as a reduction to SG&A during fiscal year 2020. We continue to monitor the evolving situation as there remain many uncertainties regarding the pandemic and its resurgence through new variants, including its anticipated duration, related healthcare authority guidelines and efficacy of vaccination initiatives, impacts on our domestic labs and our outsourced third party optical laboratories in China and Mexico, and potential disruptions of product deliveries. To date, we have been able to meet customer demand with operations at our laboratories. We source merchandise from suppliers located in China and a significant amount of domestically-purchased merchandise is manufactured in China. We have partnered with our suppliers and third party laboratories to mitigate any potential significant delays in delivery of merchandise. Our e-commerce business remained open to serve our customers during the unprecedented period of temporary store closures. We could experience further material impacts as a result of COVID-19, including, but not limited to, charges from additional asset impairment, deferred tax valuation allowances and further changes in the effectiveness of our hedging instruments. We will continue to evaluate additional measures that we may elect to take as a response to the pandemic, including, where appropriate, future action to reduce store hours and patient appointments or temporarily close stores. There can be no assurance whether or when any such measures will be adopted. 46 Table of Contents It is possible that our preparations for the events listed above are not adequate to mitigate their impact, and that these events could further adversely affect our business and results of operations. For a discussion of significant risks that have the potential to cause our actual results to differ materially from our expectations, refer to “Item 1A. Risk Factors.” New Store Openings We expect that new stores will be a key driver of growth in our net revenue and operating profit in the future. Our results of operations have been and will continue to be materially affected by the timing and number of new store openings. As stores mature, profitability typically increases significantly. The performance of new stores is dependent upon factors such as the time of year of a particular opening, the amount of store pre-opening costs, labor and occupancy costs in the specified market, level of participation in managed care plans, and location, including whether they are in new or existing markets. We typically incur higher than normal associate costs at the time of a new store opening associated with set-up and other opening costs, including training and development of our store associates. The multi-year maturation process of our stores is influenced by customer purchasing behavior in our industry. Consumers return for eye exams every 20 months on average and a considerable majority of our customers are repeat buyers. Our planned store expansion will place increased demands on our operational, managerial, administrative and other resources. Managing our growth effectively will require us to continue to enhance our store management systems, financial and management controls and information technology. We will also be required to hire, train and retain optometric professionals, store management and store personnel, which, together with increased marketing costs, may affect our operating margins. The impact of the COVID-19 pandemic on our multi-year maturation process of our stores, customer purchasing behaviors and patterns remain uncertain and affects and relevant risk exposures may be exacerbated by the immediate and ongoing threat of the COVID-19 pandemic. Comparable Store Sales Growth Comparable store sales growth is a key driver of our business. Many factors affect comparable store sales, including: • consumer preferences, buying trends and overall economic trends including amount and timing of tax refunds; • advertising strategies • participation in managed care programs; • the recurring nature of eye care purchases; • our ability to identify and respond effectively to customer preferences and trends; • our ability to provide an assortment of high quality/low cost product offerings that generate new and repeat visits to our stores; • foot traffic in retail shopping centers where our stores are predominantly located; • the customer experience we provide in our stores; • the availability of optometrists and other vision care professionals; • our ability to source and receive products accurately and timely; • changes in product pricing, including promotional activities; • the number of items purchased per store visit; • the number of stores that have been in operation for more than 12 months; • impact and timing of weather related store closures; and • affects and relevant risk exposures may be exacerbated by the immediate and ongoing threat of the COVID-19 pandemic A new store is included in the comparable store sales calculation during the 13th full fiscal month following the store’s opening. Closed stores are removed from the calculation for time periods that are not comparable. In the past, we have closed stores as a result of poor store performance, lease expiration or non-renewal and/or the terms of our arrangements with our host and legacy partners. Managed Care and Insurance Our managed care business relates to vision care programs and associated benefits which are either: (i) sponsored by employers or other groups, (ii) provided by insurers and managed care entities, such as health maintenance organizations to individuals, and (iii) delivered, typically on a fee-for-service or capitated basis, by health care providers, such as ophthalmologists, optometrists and opticians. Managed care has become increasingly important to the optical retail industry. An increasing percentage of our customers receive vision care insurance coverage through managed care payors. Our participation in these programs represent an increasingly significant portion of our overall revenues and represented approximately one third of our overall revenues in fiscal year 2020. While we have relationships with almost all vision care insurers in the United States and with all of the major carriers, currently, a relatively small 47 Table of Contents number of payors comprise the majority of our managed care revenues, subjecting us to concentration risk. As our participation in managed care programs continues to expand, we have incurred and expect to incur additional costs related to this area of our business. Our future operational success could depend on our ability to negotiate, maintain and extend contracts with managed vision care companies, vision insurance providers and other third-party payors, several of whom have significant market share. Coverage and payment levels are determined at each third-party payor’s discretion, and we have limited control over third-party payor’s decision-making with respect to coverage and payment levels. Coverage restrictions and reductions in reimbursement levels or payment methodologies may negatively impact our sales and profits. In addition, as our participation in managed care programs continues to approach overall industry penetration levels, we expect our associated managed care revenue growth rate to slow over time. Vision Care Professional Recruitment and Coverage Our ability to continue to attract and retain qualified vision care professionals is key to store operations, as well as maintaining our relationships with independent optometrists and professional corporations owned by eye care practitioners that provide vision care services in our stores; however the affects and relevant risk exposures may be exacerbated by the immediate and ongoing threat of the COVID-19 pandemic. Overall Economic Trends Macroeconomic factors that may affect customer spending patterns, and thereby our results of operations, include employment rates, business conditions, changes in the housing market, the availability of credit, interest rates, tax rates and fuel and energy costs. During periods of economic downturn and uncertainty, our customers especially benefit from our low prices. Additionally, eye care purchases are predominantly a medical necessity and are considered non-discretionary in nature. Therefore, the overall economic environment and related changes in consumer behavior may have less of an impact on our business than for retailers in other industries; however, the long-term effects of the COVID-19 pandemic on overall economic trends and consumer spending patterns remain uncertain. Consumer Preferences and Demand Our ability to maintain our appeal to existing customers and attract new customers depends on our ability to originate, develop and offer a compelling product assortment responsive to customer preferences and design trends. We estimate that optical consumers typically replace their eyeglasses every two to three years, and contact lens customers order new lenses every six to 12 months, reflecting the predictability of these recurring purchase behaviors; however, the long-term effects of the COVID-19 pandemic on consumer preferences and recurring purchase behaviors remain uncertain. Infrastructure Investment Our historical results of operations reflect the impact of our ongoing investments in infrastructure to support our growth. We have made significant investments in information technology systems, supply chain systems, marketing, and personnel, including experienced industry executives, and management and merchandising teams to support our long-term growth objectives. We intend to continue to make targeted investments in our infrastructure to support our growth. Pricing Strategy We are committed to providing our products to our customers at low prices. We generally employ a simple low price/high value strategy that consistently delivers savings to our customers without the need for extensive promotions. Our Ability to Source and Distribute Products Effectively Our revenue and operating income are affected by our ability to purchase our products in sufficient quantities at competitive prices. While we believe our vendors have adequate capacity to meet our current and anticipated demand, our level of revenue could be adversely affected in the event we face constraints in our supply chain, including the inability of our vendors to produce sufficient quantities of merchandise in a manner that is able to match market demand from our customers due to a worsening COVID-19 pandemic or other factors. We rely on a small number of vendors to supply the majority of our eyeglass lenses and contact lenses, and are thus exposed to supplier concentration risk. In particular, we have agreed to exclusively purchase almost all of our spectacle lenses from one supplier. During fiscal year 2020 , 89% of spectacle lens expenditures were from this vendor and 93% of contact lens expenditures were with three vendors. We are less exposed to a supplier risk for our eyeglass frames as only 52% of frame expenditures were with two vendors. 48 Table of Contents We source merchandise from suppliers located in China, a significant amount of our domestically-purchased merchandise is manufactured in China, and one of our outsourced third-party laboratories is located in China. Historically, tariffs have not materially affected our financial results, and we believe that less than 15% of costs applicable to revenue are subject to tariffs on Chinese imports. Effective September 1, 2019, the U.S. government implemented a 15% tariff on specified products imported into the U.S. from China and effective February 14, 2020, the 15% tariff was reduced to 7.5%. The temporary reduction of tariff rates expired in September, 2020. We continue to monitor ongoing political relations between China and the United States. While we have implemented mitigation plans and continue to focus on additional mitigation strategies to offset the impact of tariffs, costs with respect to products subject to these tariffs have increased. If we are unable to mitigate the full impact of the enacted tariffs or if there is a further escalation of tariffs, costs on a significant portion of our products may increase further and our financial results may be negatively affected. In addition, the COVID-19 pandemic could impact our product sourcing if travel restrictions an d a shutdown of businesses in China arises due to a resurgence in cases. While it is too early to predict how the China tariffs or the coronavirus will impact our business, our financial results may also be impacted by consumers’ fear of a prolonged trade war with China, a slowdown in sourcing and an economic slowdown. Inflation Substantial increases in product costs due to increases in materials cost or general inflation could lead to greater profitability pressure as we may not be able to pass costs on to consumers. To date, changes in materials prices and general inflation have not materially impacted our business. Interim Results and Seasonality Historically, our business has realized a higher portion of net revenue, operating income, and cash flows from operations in the first half of the fiscal year, and a lower portion of net revenue, operating income, and cash flows from operations in the fourth fiscal quarter. The seasonally larger first half of the fiscal year is attributable primarily to the timing of our customers’ income tax refunds and annual health insurance program start/reset periods. Because our target market consists of value seeking and lower income consumers, a delay in the issuance of tax refunds or changes in the amount of tax refunds can have a negative impact on our financial results. Consumers could also alter how they utilize tax refund proceeds. With respect to our fourth quarter results, compared to other retailers, our products and services are less likely to be included in consumer’s holiday spending budgets, therefore reducing spending on personal vision correction during the weeks preceding December 25th of each year. Additionally, although the period between December 25th and the end of our fiscal year is typically a high-volume period, the net revenue associated with substantially all orders of prescription eyeglasses and contact lenses during that period is deferred until the following fiscal period due to our policy of recognizing revenue only after the product has been accepted by the customer. Consumer behavior driven by the COVID-19 pandemic has resulted in a departure from seasonal norms we have experienced in recent years and may continue to disrupt the historical quarterly cadence of our results of operations for an unknown period of time. For fiscal years 2019 and 2018, approximately 23% of our revenues were recorded in the fourth quarter, but approximately 24% of annual SG&A costs were also recorded in the fourth quarter for those years, due to certain SG&A costs being more fixed in nature. For fiscal year 2020, approximately 29% of our revenue was recorded in the fourth quarter, but approximately 28% of annual SG&A costs were recorded in the fourth quarter. Compared to prior fiscal years, in fiscal year 2020 we experienced stronger comparable store sales growth in the fourth quarter from strong customer demand, including the effect of our stores being temporarily closed to the public earlier in the year. Additionally, SG&A costs, primarily advertising expense, during the second and third quarters of fiscal year 2020 were lower than in the corresponding quarters prior fiscal years due to impacts of the COVID-19 pandemic. Our quarterly results may also be affected by the timing of new store openings and store closings, the amount of sales contributed by new and existing stores, as well as the timing of certain holidays. As a result of these factors, our working capital requirements and demands on our product distribution and delivery network may fluctuate during the year. Competition The U.S. optical retail industry is highly competitive and fragmented. Competition is generally based upon brand name recognition, price, convenience, selection, service and product quality. We operate within the value segment of the U.S. optical retail industry, which emphasizes price and value. We compete with mass merchants, specialty retail chains, online retailers and independent eye practitioners and opticians. We also compete with large national retailers such as, in alphabetical order, LensCrafters, Pearle Vision and Visionworks. The COVID-19 pandemic may lead to changes in both the number and positioning of our competitors. Consolidation in the Industry 49 Table of Contents Ongoing consolidation activity has created, and further consolidation activity may create, organizations that are involved in virtually every sector of the optical industry, from retail and wholesale to frames, spectacle lenses, and managed vision care. This increased consolidation activity may enable these companies to benefit from purchasing advantages and the ability to leverage management capabilities across a larger business base. Other trends include an increase in private equity-backed consolidation of smaller and mid-size independent practices and the formation of buying groups and similar forms of practice affiliations. The COVID-19 pandemic may lead to increases in consolidation activity and trends. How We Assess the Performance of Our Business We consider a variety of financial and operating measures in assessing the performance of our business. The key measures we use to determine how our consolidated business and operating segments are performing are net revenue, costs applicable to revenue, and selling, general, and administrative expenses. In addition, we also review store growth, Adjusted Comparable Store Sales Growth, Adjusted Operating Income, Adjusted Operating Margin, Adjusted EBITDA, Adjusted EBITDA Margin and Adjusted Diluted EPS. Net Revenue We report as net revenue amounts generated in transactions with retail customers who are the end users of our products, services, and plans. Net product sales include sales of prescription and non-prescription eyewear, contact lenses, and related accessories as well as eye exam services associated with our America’s Best brand’s signature offer of two pairs of eyeglasses and a free eye exam for one low price (“two-pair offer”) to retail customers and sales of inventory in which our customer is another retail entity. Net sales of services and plans include sales of eye exams, eye care club memberships, product protection plans (i.e., warranties), and single service eye care plans in California. Net sales of services and plans also include fees we earn for managing certain Vision Centers located in Walmart stores and for laboratory services provided to Walmart. Costs Applicable to Revenue Costs applicable to revenue include both costs of net product sales and costs of net sales of services and plans. Costs of net product sales include (i) costs to procure non-prescription eyewear, contact lenses, and accessories, which we purchase and sell in finished form, (ii) costs to manufacture finished prescription eyeglasses, including direct materials, labor, and overhead, and (iii) remake costs, warehousing and distribution expenses, and internal transfer costs. Costs of services and plans include costs associated with product protection plan programs, eye care club memberships, single service eye care plans in California, eye care practitioner and eye exam technician payroll, taxes and benefits and optometric service costs. Customer tastes and preferences, product mix, changes in technology, significant increases or slowdowns in production, and other factors impact costs applicable to revenue. The components of our costs applicable to revenue may not be comparable to other retailers. Selling, General and Administrative Selling, general and administrative expenses, or SG&A, include store associate (including optician) payroll, taxes and benefits, occupancy, advertising and promotion, field services, corporate support and other costs associated with the provision of vision care services. Non-capital expenditures associated with opening new stores, including rent, store maintenance, marketing expenses, travel and relocation costs, and training costs, are recorded in SG&A as incurred. SG&A generally fluctuates consistently with revenue due to the variable store, field office and corporate support costs; however, some fixed costs slightly improve as a percentage of net revenue as our net revenues grow over time. New Store Openings The total number of new stores per year and the timing of store openings has, and will continue to have, an impact on our results. In an effort to conserve cash early in the COVID-19 pandemic, we temporarily paused new store openings during a portion of fiscal year 2020. We open ed 57 st ores and transitioned five additional Legacy stores to our management during fiscal year 2020. We will continue to monitor and determine our plans for future new store openings based on health, safety and economic conditions. 50 Table of Contents Adjusted Comparable Store Sales Growth We measure Adjusted Comparable Store Sales Growth as the increase or decrease in sales recorded by the comparable store base in any reporting period, compared to sales recorded by the comparable store base in the prior reporting period, which we calculate as follows: (i) sales are recorded on a cash basis (i.e., when the order is placed and paid for or submitted to a managed care payor, compared to when the order is delivered), utilizing cash basis point of sale information from stores; (ii) stores are added to the calculation during the 13th full fiscal month following the store’s opening; (iii) closed stores are removed from the calculation for time periods that are not comparable; (iv) sales from partial months of operation are excluded when stores do not open or close on the first day of the month; and (v) when applicable, we adjust for the effect of the 53rd week. Quarterly, year-to-date and annual adjusted comparable store sales are aggregated using only sales from all whole months of operation included in both the current reporting period and the prior reporting period. When a partial month is excluded from the calculation, the corresponding month in the subsequent period is also excluded from the calculation. There may be variations in the way in which some of our competitors and other retailers calculate comparable store sales. As a result, our adjusted comparable store sales may not be comparable to similar data made available by other retailers. We did not revise our calculation of Adjusted Comparable Store Sales Growth for the temporary closure of our stores to the public as a result of the COVID-19 pandemic. Adjusted Comparable Store Sales Growth is a non-GAAP financial measure, which we believe is useful because it provides timely and accurate information relating to the two core metrics of retail sales: number of transactions and value of transactions. We use Adjusted Comparable Store Sales Growth as the basis for key operating decisions, such as allocation of advertising to particular markets and implementation of special marketing programs. Accordingly, we believe that Adjusted Comparable Store Sales Growth provides timely and accurate information relating to the operational health and overall performance of each brand. We also believe that, for the same reasons, investors find our calculation of Adjusted Comparable Stores Sales Growth to be meaningful. Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Operating Income, Adjusted Operating Margin, and Adjusted Diluted EPS (collectively, the “Company Non-GAAP Measures”) The Company Non-GAAP Measures are key measures used by management to assess our financial performance. The Company Non-GAAP Measures are also frequently used by analysts, investors and other interested parties. We use the Company Non-GAAP Measures to supplement U.S. GAAP measures of performance to evaluate the effectiveness of our business strategies, to make budgeting decisions, to establish discretionary annual incentive compensation and to compare our performance against that of other peer companies using similar measures. See “Non-GAAP Financial Measures” for definitions of the Company Non-GAAP Measures and for additional information. 51 Table of Contents Results of Operations The following table summarizes key components of our results of operations for the periods indicated, both in dollars and as a percentage of our net revenue. In thousands, except earnings per share, percentage and store data Fiscal Year 2020 Fiscal Year 2019 Fiscal Year 2018 Revenue: Net product sales $ 1,418,283 $ 1,426,136 $ 1,269,612 Net sales of services and plans 293,477 298,195 267,242 Total net revenue 1,711,760 1,724,331 1,536,854 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 Total costs applicable to revenue 786,624 806,519 713,571 Operating expenses: Selling, general and administrative expenses 720,590 744,488 687,476 Depreciation and amortization 91,585 87,244 74,339 Asset impairment 22,004 8,894 17,630 Litigation settlement 4,395 — — Other expense (income), net (445) 3,611 1,487 Total operating expenses 838,129 844,237 780,932 Income from operations 87,007 73,575 42,351 Interest expense, net 48,171 33,300 37,283 Debt issuance costs 156 — 200 Loss on extinguishment of debt — 9,786 — Earnings before income taxes 38,680 30,489 4,868 Income tax provision (benefit) 2,403 (2,309) (18,785) Net income $ 36,277 $ 32,798 $ 23,653 Operating data: Number of stores open at end of period 1,205 1,151 1,082 New stores opened during the period 62 75 74 Adjusted Operating Income $ 134,148 $ 114,300 $ 102,401 Diluted EPS $ 0.44 $ 0.40 $ 0.30 Adjusted Diluted EPS $ 0.91 $ 0.75 $ 0.61 Adjusted EBITDA 1 $ 218,307 $ 194,139 $ 169,335 Note: Fiscal year 2020 includes 53 weeks. Fiscal years 2019 and 2018 include 52 weeks. 1 Adjusted EBITDA no longer excludes new store pre-opening expenses and non-cash rent. Refer to Non-GAAP Financial Measures section below for our presentation of Adjusted EBITDA. Fiscal Year 2020 Fiscal Year 2019 Fiscal Year 2018 Percentage of net revenue: Total costs applicable to revenue 46.0 % 46.8 % 46.4 % Selling, general and administrative 42.1 % 43.2 % 44.7 % Total operating expenses 49.0 % 49.0 % 50.8 % Income from operations 5.1 % 4.3 % 2.8 % Net income 2.1 % 1.9 % 1.5 % Adjusted Operating Income 7.8 % 6.6 % 6.7 % Adjusted EBITDA 12.8 % 11.3 % 11.0 % 52 Table of Contents Fiscal Year 2020 compared to Fiscal Year 2019 As a result of the COVID-19 pandemic, our retail stores closed to the public beginning on March 19, 2020. We began reopening our stores to the public on April 27, 2020 and on June 8, 2020, we announced the successful completion of the reopening process. Fiscal year 2020 consists of 53 weeks compared to 52 weeks in fiscal year 2019. Net revenue The following presents, by segment and by brand, comparable store sales growth, stores open at the end of the period and net revenue for fiscal year 2020 compared to fiscal year 2019. Comparable store sales growth (1) Stores open at end of period Net revenue (2) In thousands, except percentage and store data Fiscal Year 2020 Fiscal Year 2019 Fiscal Year 2020 Fiscal Year 2019 Fiscal Year 2020 Fiscal Year 2019 Owned & Host segment America’s Best (5.2) % 7.1 % 773 725 $ 1,131,016 66.1 % $ 1,108,760 64.3 % Eyeglass World (2.7) % 5.8 % 119 117 179,934 10.5 % 178,841 10.4 % Military (15.5) % 1.4 % 54 54 20,428 1.2 % 23,694 1.4 % Fred Meyer (21.6) % (4.4) % 29 29 11,021 0.6 % 13,705 0.8 % Owned & Host segment total 975 925 $ 1,342,399 78.4 % $ 1,325,000 76.9 % Legacy segment (12.3) % 3.1 % 230 226 142,017 8.3 % 160,049 9.3 % Corporate/Other — — — — 234,403 13.7 % 245,218 14.2 % Reconciliations — — — — (7,059) (0.4) % (5,936) (0.4) % Total (5.6) % 6.5 % 1,205 1,151 $ 1,711,760 100.0 % $ 1,724,331 100.0 % Adjusted Comparable Store Sales Growth (3) (6.1) % 6.2 % _________ Note: Fiscal year 2020 includes 53 weeks. Fiscal year 2019 includes 52 weeks. (1) We calculate total comparable store sales based on consolidated net revenue excluding the impact of (i) Corporate/Other segment net revenue, (ii) sales from stores opened less than 13 months, (iii) stores closed in the periods presented, (iv) sales from partial months of operation when stores do not open or close on the first day of the month and (v) if applicable, the impact of a 53rd week in a fiscal year. Brand-level comparable store sales growth is calculated based on cash basis revenues consistent with what the CODM reviews, and consistent with reportable segment revenues presented in Note 16. “Segment Reporting” in our consolidated financial statements included in Part II. Item 8. of this Form 10-K, with the exception of the Legacy segment, which is adjusted as noted in clause (ii) of footnote (3) below. (2) Percentages reflect line item as a percentage of net revenue, adjusted for rounding. (3) There are two differences between total comparable store sales growth based on consolidated net revenue and Adjusted Comparable Store Sales Growth: (i) Adjusted Comparable Store Sales Growth includes the effect of deferred and unearned revenue as if such revenues were earned at the point of sale, resulting in a decrease of 0.4% and a decrease of 0.1% from total comparable store sales growth based on consolidated net revenue for fiscal year 2020 and fiscal year 2019, respectively, and (ii) Adjusted Comparable Store Sales Growth includes retail sales to the legacy partner’s customers (rather than the revenues recognized consistent with the management & services agreement with the legacy partner), resulting in a decrease of 0.1% and a decrease of 0.2% from total comparable store sales growth based on consolidated net revenue for the fiscal years 2020 and 2019, respectively. Total net revenue of $1,711.8 million for fiscal year 2020 decreased $12.5 million, or 0.7%, from $1,724.3 million for fiscal year 2019. This decrease was driven by the temporary closure of our stores to the public for a portion of fiscal year 2020 due to the COVID-19 pandemic, and was partially offset by new store sales as well as $32.2 million of net revenue attributable to the 53rd week in fiscal year 2020. Total net revenue was also negatively impacted by changes in unearned revenue. During fiscal year 2020, we opened 55 new America’s Best stores, two new Eyeglass World stores, and transitioned five additional Legacy stores to our management. During fiscal year 2020, we closed seven America’s Best stores and one Legacy store as a result of our Legacy partner’s decision to cease its overall operations at the location. The total net new locations in fiscal year 2020 for America’s Best, Eyeglass Word, and Legacy are 48, two and four, respectively. Overall, store count grew 4.7% from the end of fiscal year 2019 to the end of fiscal year 2020. Comparable store sales growth and Adjusted Comparable Store Sales Growth for fiscal year 2020 were (5.6)% and (6.1)%, respectively. The decreases in comparable store sales growth and Adjusted Comparable Store Sales Growth were driven by the temporary closure of our stores to the public. 53 Table of Contents Net product sales comprised 82.9% and 82.7% of total net revenue for fiscal years 2020 and 2019, respectively. Net product sales decreased $7.9 million, or 0.6% during fiscal year 2020 compared to fiscal year 2019, primarily due to the temporary closure of our stores to the public and lower wholesale fulfillment that was partially offset by additional revenue from the 53 rd week and increased sales of contact lenses. Net sales of services and plans decreased $4.7 million, or 1.6%, primarily due to the temporary closure of our stores to the public. Owned & Host segment net revenue. Net revenue increased $17.4 million, or 1.3% as stronger sales in fiscal year 2020, and in the 53 rd week, were partially offset by declines due to the temporary closure of our stores to the public. Legacy segment net revenue. Net revenue declined $18.0 million, or 11.3%, due to the temporary closure of our stores to the public. Corporate/Other segment net revenue. Net revenue declined $10.8 million, or 4.4%, due to lower wholesale fulfillment, partially offset by growth in our online retail business. Net revenue reconciliations. Reconciliations for fiscal year 2020 and fiscal year 2019 include increases in deferred revenue of $2.3 million and $5.1 million, respectively and increases in unearned revenue of $4.8 million and $0.8 million, respectively. The increase in deferred revenue for fiscal year 2020 was driven by growth in eye care club membership sales; we believe that the increases in deferred revenue were limited somewhat by the temporary closure of our stores to the public. The increase in unearned revenue compared to the prior period is due to higher sales in the 53 rd week of the fiscal year. In 53-week fiscal years we have historically experienced higher volumes in the 53 rd week compared to the 52 nd week. Costs applicable to revenue Costs applicable to revenue of $786.6 million for fiscal year 2020 decreased $19.9 million, or 2.5%, from $806.5 million for fiscal year 2019. As a percentage of net revenue, costs applicable to revenue decreased from 46.8% for fiscal year 2019 to 46.0% for fiscal year 2020. This decrease as a percentage of net revenue was driven by higher eyeglass margin, partially offset by increased contact lens mix and optometrist costs while our stores were temporarily closed to the public. Costs of products as a percentage of net product sales decreased from 40.3% for fiscal year 2019 to 38.9% for fiscal year 2020, driven by higher eyeglass margin, partially offset by increased contact lens mix. Owned & Host segment costs of products. Costs of products as a percentage of net product sales decreased from 28.9% for fiscal year 2019 to 28.0% for fiscal year 2020 driven by higher eyeglass margin, partially offset by increased contact lens mix. Legacy segment costs of products. Costs of products as a percentage of net product sales increased from 46.2% for fiscal year 2019 to 47.8% for fiscal year 2020. The increase was primarily driven by increased contact lens mix and a higher mix of non-managed care customer transactions versus managed care customer transactions. Legacy segment managed care net product revenue is recorded in net product sales while revenue associated with servicing non-managed care customers is recorded in net sales of services and plans. Eyeglass and contact lens product costs for both managed care and non-managed care net revenue are recorded in costs of products. Decreases in managed care mix increase costs of products as a percentage of net product sales and have a corresponding positive impact on costs of services as a percentage of net sales of services and plans in our Legacy segment. Costs of services and plans as a percentage of net sales of services and plans increased from 77.9% for fiscal year 2019 to 80.0% for fiscal year 2020. The increase was primarily driven by optometrist costs incurred during the temporary closure of our stores to the public. Owned & Host segment costs of services and plans. Costs of services and plans as a percentage of net sales of services and plans increased from 83.2% for fiscal year 2019 to 86.0% for fiscal year 2020. The increase was driven by optometrist and technician costs incurred during the temporary closure of our stores to the public. Legacy segment costs of services and plans. Costs of services and plans as a percentage of net sales of services and plans increased from 46.3% for fiscal year 2019 to 46.5% for fiscal year 2020. The increase was primarily driven by optometrist costs incurred during the temporary closure of our stores to the public. 54 Table of Contents Selling, general and administrative SG&A of $720.6 million for fiscal year 2020 decreased $23.9 million, or 3.2%, from fiscal year 2019. As a percentage of net revenue, SG&A decreased from 43.2% for fiscal year 2019 to 42.1% for fiscal year 2020. This decrease as a percentage of net revenue was primarily driven by lower advertising investment partially offset by store and corporate payroll and occupancy costs incurred during the temporary closure of our stores to the public. SG&A for fiscal year 2020 includes $8.6 million of incremental costs directly related to adapting the Company’s operations during the COVID-19 pandemic; of these costs, $0.6 million were reflected as adjustments for the Company’s presentation of non-GAAP measures below. Owned & Host segment SG&A. SG&A as a percentage of net revenue decreased from 38.4% for fiscal year 2019 to 36.5% for fiscal year 2020. This decrease as a percentage of net revenue was primarily driven by lower advertising investment partially offset by store payroll and occupancy costs incurred during the temporary closure of our stores to the public. Legacy segment SG&A. SG&A as a percentage of net revenue increased from 35.1% for fiscal year 2019 to 36.5% for fiscal year 2020 primarily driven by store payroll costs incurred during the temporary closure of our stores to the public. Depreciation and amortization Depreciation and amortization expense of $91.6 million for fiscal year 2020 increased $4.3 million, or 5.0%, from $87.2 million for fiscal year 2019 primarily driven by new store openings and investments in information technology and doctor equipment. Our property and equipment balance, net, decreased $25.5 million, or 6.9%, during fiscal year 2020, reflective of $76.2 million in purchases of property and equipment, $1.1 million in new finance leases, less $84.2 million in depreciation expense and $18.6 million in impairment and other adjustments. Asset impairment We recognized $22.0 million for impairment primarily of tangible long-lived assets and ROU assets associated with our retail stores in fiscal year 2020 compared to $8.9 million recognized in fiscal year 2019. Expenses recognized in fiscal year 2020 were related to impairments of long-lived tangible assets at our retail stores and right of use (“ROU”) assets related to our retail stores. The increase in store asset impairment charges during fiscal year 2020 was primarily related to our Owned & Host segment and was driven by lower than projected customer sales volume in certain stores and other entity-specific assumptions. We considered multiple factors including, but not limited to: forecasted scenarios related to store performance and the likelihood that these scenarios would be ultimately realized; the historical performance of the stores before the temporary closure of our stores to the public; the effect of store closures and uncertainty in store revenues over the remaining useful life of the asset group as a result of the COVID-19 pandemic; and the remaining useful lives of the assets. The asset impairment expense for fiscal year 2020 also includes $1.1 million related to a write-off of certain software assets that were deemed to be obsolete. Asset impairment expenses were recognized in Corporate/Other. Interest expense, net Interest expense, net, of $48.2 million for fiscal year 2020 increased $14.9 million, or 44.7%, from $33.3 million for fiscal year 2019. The increase was primarily driven by losses related to immediate recognition of changes in fair value of ineffective hedges of $4.0 million and charges related to interest payments and amortization of debt discounts related to the 2025 Notes of $17.3 million that were partially offset by a reduction in our Term Loan and Revolving Credit Facility utilization. Income tax provision Our income tax provision for fiscal year 2020 reflected our statutory federal and state rate of 25.5%, combined with a discrete benefit of $8.0 million associated primarily with the exercise of stock options. In comparison, the income tax benefit associated with fiscal year 2019, reflected income tax expense at our statutory federal and state rate of 25.5% offset by a $10.1 million income tax benefit resulting from stock option exercises. 55 Table of Contents Fiscal Year 2019 compared to Fiscal Year 2018 Net revenue The following presents, by segment and by brand, comparable store sales growth, stores open at the end of the period and net revenue for fiscal year 2019 compared to fiscal year 2018. Comparable store sales growth (1) Stores open at end of period Net revenue (2) In thousands, except percentage and store data Fiscal Year 2019 Fiscal Year 2018 Fiscal Year 2019 Fiscal Year 2018 Fiscal Year 2019 Fiscal Year 2018 Owned & Host segment America’s Best 7.1 % 7.2 % 725 657 $ 1,108,760 64.3 % $ 971,384 63.2 % Eyeglass World 5.8 % 6.8 % 117 115 178,841 10.4 % 163,932 10.7 % Military 1.4 % (5.7) % 54 54 23,694 1.4 % 23,748 1.5 % Fred Meyer (4.4) % (2.2) % 29 29 13,705 0.8 % 14,338 0.9 % Owned & Host segment total 925 855 $ 1,325,000 76.9 % $ 1,173,402 76.3 % Legacy segment 3.1 % 0.6 % 226 227 160,049 9.3 % 154,412 10.0 % Corporate/Other — — — — 245,218 14.2 % 212,427 13.8 % Reconciliations — — — — (5,936) (0.4) % (3,387) (0.1) % Total 6.5 % 6.7 % 1,151 1,082 $ 1,724,331 100.0 % $ 1,536,854 100.0 % Adjusted Comparable Store Sales Growth (3) 6.2 % 5.7 % _________ (1) We calculate total comparable store sales based on consolidated net revenue excluding the impact of (i) Corporate/Other segment net revenue, (ii) sales from stores opened less than 13 months, (iii) stores closed in the periods presented, (iv) sales from partial months of operation when stores do not open or close on the first day of the month and (v) if applicable, the impact of a 53rd week in a fiscal year. Brand-level comparable store sales growth is calculated based on cash basis revenues consistent with what the CODM reviews, and consistent with reportable segment revenues presented in Note 16. “Segment Reporting” in our consolidated financial statements included in Part II. Item 8. of this Form 10-K, with the exception of the Legacy segment, which is adjusted as noted in clause (ii) of footnote (3) below. (2) Percentages reflect line item as a percentage of net revenue. (3) There are two differences between total comparable store sales growth based on consolidated net revenue and Adjusted Comparable Store Sales Growth: (i) Adjusted Comparable Store Sales Growth includes the effect of deferred and unearned revenue as if such revenues were earned at the point of sale, resulting in a decrease of 0.1% and a decrease of 0.8% from total comparable store sales growth based on consolidated net revenue for fiscal year 2019 and fiscal year 2018, respectively, and (ii) Adjusted Comparable Store Sales Growth includes retail sales to the legacy partner’s customers (rather than the revenues recognized consistent with the management & services agreement with the legacy partner), resulting in a decrease of 0.2% from total comparable store sales growth based on consolidated net revenue for each of the fiscal years 2019 and 2018. Total net revenue of $1,724.3 million for fiscal year 2019 increased $187.4 million, or 12.2%, from $1,536.9 million for fiscal year 2018. This increase was driven approximately 41% by new stores, approximately 45% by comparable store sales growth and approximately 14% by order volume in our AC Lens business within the Corporate/Other segment. During fiscal year 2019, we opened 75 new stores, including 71 new America’s Best stores and four new Eyeglass World stores. Additionally, we closed three America’s Best stores and two Eyeglass World stores, for a total of 68 and two net new America’s Best and Eyeglass World stores, respectively. We closed one Legacy store during fiscal year 2019 as a result of our Legacy partner’s decision to cease its overall operations at the location. Overall, store count grew 6.4% from the end of fiscal year 2018 to the end of fiscal year 2019. Comparable store sales growth and Adjusted Comparable Store Sales Growth were 6.5% and 6.2%, respectively, for fiscal year 2019. Comparable store sales growth and Adjusted Comparable Store Sales Growth were driven primarily by increases in average ticket and customer transactions. We believe the increases in net revenue were primarily due to execution of our key strategies, including new store openings and maturation, advertising and expansion of our participation in managed care programs as well as our expanded contact lens distribution business with Walmart. 56 Table of Contents Net product sales comprised 82.7% and 82.6% of total net revenue for fiscal years 2019 and 2018, respectively. Net product sales increased $156.5 million, or 12.3% during fiscal year 2019 compared to fiscal year 2018, driven primarily by eyeglass sales and, to a lesser extent, unit growth in our AC Lens contact lens distribution business and contact lens sales. Net sales of services and plans increased $31.0 million, or 11.6%, driven primarily by eye exam sales in our Owned & Host segment, resulting from expanded participation in managed care programs and our store count growth. As a result of changes in applicable California law, certain optometrists employed by FirstSight were transferred to a professional corporation that contracts directly with our Legacy segment in the fourth quarter of fiscal year 2018, similar to optometrist transfers that occurred in the third quarter of 2017. This completed the transfer of optometrists from FirstSight to our Legacy segment. This change led to an increase in Legacy segment eye exam revenue and optometrist payroll costs of $3.3 million and $3.6 million, respectively, in fiscal year 2019. A corresponding decrease was recorded in our FirstSight subsidiary within the Corporate/Other segment. Therefore, the change had no impact on consolidated income from operations. Owned & Host segment net revenue. Net revenue increased $151.6 million, or 12.9%, due to new store openings and comparable store sales growth, which increased sales across our product categories. The growth was predominantly driven by performance in America’s Best and Eyeglass World. Legacy segment net revenue. Net revenue grew $5.6 million, or 3.7%, primarily driven by higher eye exam sales and an increase in average ticket, partially offset by a decline in customer transactions. The increased eye exam sales were the result of changes to our FirstSight operations required by changes in applicable California law discussed above. The FirstSight operations changes resulted in a favorable impact of approximately 180 basis points in comparable store sales growth in this segment. Corporate/Other segment net revenue. Net revenue increased $32.8 million, or 15.4%, driven by unit growth in our AC Lens contact lens distribution business and our online retail business, which was partially offset by a $3.3 million reduction in sales as a result of the FirstSight operations changes discussed above. Net revenue reconciliations. Reconciliations for fiscal year 2019 and fiscal year 2018 include increases in deferred revenue of $5.1 million and $3.9 million, respectively and an increase in unearned revenue of $0.8 million and a decrease in unearned revenue of $0.5 million, respectively. The increase in deferred revenue for fiscal year 2019 was driven by growth in eye care club membership sales. Differences between the changes in unearned revenue for fiscal year 2019 and fiscal year 2018 were primarily the result of calendar influences on sales of prescription eyewear in our stores during approximately the last seven to 10 days of 2019 compared to the preceding years. Unearned revenue was higher at the end of fiscal year 2017 compared to the end of fiscal year 2018 due to sales volume differences caused by shifts in the number of selling days after December 25th. The higher balance of unearned revenue at the beginning of fiscal year 2018 compared to the beginning of fiscal year 2019 resulted in more unearned revenue being recognized during fiscal year 2018 than for fiscal year 2019. Costs applicable to revenue Costs applicable to revenue of $806.5 million for fiscal year 2019 increased $92.9 million, or 13.0%, from $713.6 million for fiscal year 2018. As a percentage of net revenue, costs applicable to revenue increased from 46.4% for fiscal year 2018 to 46.8% for fiscal year 2019. This increase as a percentage of net revenue was primarily driven by increased net revenue from AC Lens contact lens distribution business growth. Additionally, higher eyeglass margin and higher mix of exam sales as a result of the Company’s growing managed care business were partially offset by higher optometrist costs due to planned increases in store coverage and to a lesser extent wage pressure in certain geographic markets. Costs of products as a percentage of net product sales was 40.3% for fiscal year 2018 and fiscal year 2019, as costs related to our growing AC Lens business offset higher eyeglass margin. Our AC Lens net revenue grew faster than our store brands revenue during fiscal year 2019, and AC Lens had a higher cost of products as a percentage of net revenue than our other store brands. Owned & Host segment costs of products. Costs of products as a percentage of net product sales decreased from 29.4% for fiscal year 2018 to 28.9% for fiscal year 2019 driven by higher eyeglass margin. 57 Table of Contents Legacy segment costs of products. Costs of products as a percentage of net product sales increased from 45.2% for fiscal year 2018 to 46.2% for fiscal year 2019. The increase was primarily driven by a higher mix of non-managed care customer transactions. Decreases in managed care mix increase costs of products as a percentage of net product sales and have a corresponding positive impact on costs of services as a percentage of net sales of services and plans in our Legacy segment. Legacy segment managed care net product revenue is recorded in net product sales while revenue associated with servicing non-managed care customers is recorded in net sales of services and plans. Eyeglass and contact lens product costs for both managed care and non-managed care net revenue are recorded in costs of products. Costs of services and plans as a percentage of net sales of services and plans increased from 75.6% for fiscal year 2018 to 77.9% for fiscal year 2019. The increase was primarily driven by higher optometrist costs as described above, partially offset by increased eye exam sales as a result of increased managed care transactions. Owned & Host segment costs of services and plans. Costs of services and plans as a percentage of net sales of services and plans increased from 82.2% for fiscal year 2018 to 83.2% for fiscal year 2019. The increase was driven by higher optometrist costs as described above, partially offset by increased eye exam sales as a result of increased managed care transactions. Eye exams purchased by managed care customers are excluded from our signature two-pair offer at our America’s Best brand, and are therefore recorded as services revenue. See Note 1. “Business and Significant Accounting Policies” in Part II. Item 8. of this Form 10-K for additional information regarding our revenue recognition accounting policy. Legacy segment costs of services and plans. Costs of services and plans as a percentage of net sales of services and plans increased from 40.1% for fiscal year 2018 to 46.3% for fiscal year 2019. The increase was primarily driven by increased optometrist costs, partially offset by increased eye exam sales. The higher optometrist costs and increased eye exam sales were both primarily the result of the FirstSight operations changes discussed above. Selling, general and administrative SG&A of $744.5 million for fiscal year 2019 increased $57.0 million, or 8.3%, from fiscal year 2018. As a percentage of net revenue, SG&A decreased from 44.7% for fiscal year 2018 to 43.2% for fiscal year 2019. The decrease in SG&A as a percentage of net revenue was primarily due to increased net revenue from our AC Lens contact lens distribution business, store payroll leverage and lower stock-based compensation expense. Owned & Host segment SG&A. SG&A as a percentage of net revenue decreased from 39.0% for fiscal year 2018 to 38.4% for fiscal year 2019, driven primarily by store payroll leverage. Legacy segment SG&A. SG&A as a percentage of net revenue increased from 35.0% for fiscal year 2018 to 35.1% for fiscal year 2019. Depreciation and amortization Depreciation and amortization expense of $87.2 million for fiscal year 2019 increased $12.9 million, or 17.4%, from $74.3 million for fiscal year 2018 primarily driven by new store openings, as well as investments in optical laboratories, distribution centers and information technology infrastructure, including omni-channel platform related investments. Our property and equipment balance, net, increased $11.7 million, or 3.3%, during fiscal year 2019, reflective of $96.3 million in purchases of property and equipment, $9.7 million in new finance leases, less $79.6 million in depreciation expense and $14.7 million in impairment and other adjustments. Asset impairment We recognized asset impairment expenses of $8.9 million in fiscal year 2019 compared to $17.6 million recognized in fiscal year 2018. Expenses recognized in fiscal year 2019 were related to impairments of long-lived tangible assets at our retail stores and right of use (“ROU”) assets related to our retail stores. During fiscal year 2018, we recognized $11.4 million and $3.7 million of goodwill impairment at our Fred Meyer and Military brands, respectively, which did not recur in the current year, as well as $2.5 million for impairment of tangible long-lived assets at our retail stores. The increase in store asset impairment charges during fiscal year 2019 was primarily related to our Owned & Host segment. Long-lived and ROU asset impairments were driven by lower than projected customer sales volume in certain stores, and were determined using entity-specific assumptions related to our anticipated use of store assets. Asset impairment expenses were recognized in Corporate/Other. See “Critical Accounting Policies and Estimates” below for details regarding specific testing performed on various long-lived assets. 58 Table of Contents Interest expense, net Interest expense, net, of $33.3 million for fiscal year 2019 decreased $4.0 million, or 10.7%, from $37.3 million for fiscal year 2018. Interest expense, net decreased $5.3 million primarily as a result of term loan refinancings and credit rating upgrades in 2019 and 2018, partially offset by $1.3 million in additional interest expense relating to finance lease obligations during the fiscal year 2019. Income tax provision Our income tax expense for fiscal year 2019 reflected income tax expense at our statutory federal and state rate of 25.5%, offset by a discrete benefit of $10.1 million associated primarily with the exercise of stock options. During fiscal year 2018, our expected combined statutory federal and state rate was reduced by a $25.5 million income tax benefit resulting from stock option exercises. 59 Table of Contents Non-GAAP Financial Measures EBITDA, Adjusted EBITDA , Adjusted EBITDA Margin, Adjusted Operating Income, Adjusted Operating Margin and Adjusted Diluted EPS We define EBITDA as net income, plus interest expense, income tax provision (benefit) and depreciation and amortization. We define Adjusted EBITDA as net income, plus interest expense, income tax provision (benefit) and depreciation and amortization, further adjusted to exclude stock compensation expense, debt issuance costs, loss on the extinguishment of debt, asset impairment, litigation settlement, secondary offering expenses, management realignment expenses, long-term incentive plan expenses, and other expenses. We define Adjusted EBITDA Margin as Adjusted EBITDA as a percentage of net revenue. We define Adjusted Operating Income as net income, plus interest expense and income tax provision (benefit), further adjusted to exclude stock compensation expense, debt issuance costs, loss on extinguishment of debt, asset impairment, litigation settlement, secondary offering expenses, management realignment expenses, long-term incentive plan expenses, amortization of acquisition intangibles and other expenses. We define Operating Margin as Adjusted Operating Income as a percentage of net revenue. We define Adjusted Diluted EPS as diluted earnings per share, adjusted for the per share impact of stock compensation expense, debt issuance costs, loss on extinguishment of debt, asset impairment, litigation settlement, secondary offering expenses, management realignment expenses, long-term incentive plan expenses, amortization of acquisition intangibles, amortization of debt discounts and deferred financing costs of our Term Loan borrowings, amortization of the conversion feature and deferred financing costs of our 2025 N otes when not required under U.S. GAAP to be added back for diluted earnings per share, losses (gains) on change in fair value of derivatives, other expenses, and tax benefit of stock option exercises, less the tax effect of these adjustments. In 2020, we introduced Adjusted Operating Income and Adjusted Operating Margin as measures of performance we planned to use in addition to Adjusted EBITDA, Adjusted EBITDA Margin and Adjusted Diluted EPS. We believe Adjusted Operating Income and Adjusted Operating Margin enhance an understanding of our performance by highlighting the results from ongoing operations and the profitability of our business. We continue to evaluate our use of the Company Non-GAAP measures in the context of the development of our business, and may introduce or discontinue certain measures in the future as we deem appropriate. Further, consistent with our presentation of Adjusted Operating Income, we no longer exclude new store pre-opening expenses and non-cash rent from our presentation of Adjusted EBITDA and Adjusted Diluted EPS. New store pre-opening expenses totaled $2.6 million, $3.3 million and $2.2 million for the fiscal years 2020, 2019 and 2018, respectively; and non-cash rent totaled $2.6 million, $3.2 million and $2.8 million for fiscal years 2020, 2019 and 2018, respectively. The presentation of Adjusted EBITDA and Adjusted Diluted EPS for the fiscal year end 2019 has been recast to reflect these changes. See our Form 8-K filed with the SEC on February 26, 2020, which is incorporated herein by reference, for more information. EBITDA and the Company Non-GAAP Measures can vary substantially in size from one period to the next, and certain types of expenses are non-recurring in nature and consequently may not have been incurred in any of the periods presented below. EBITDA and the Company Non-GAAP Measures have been presented as supplemental measures of financial performance that are not required by, or presented in accordance with U.S. GAAP, because we believe they assist investors and analysts in comparing our operating performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. Management believes EBITDA, and the Company Non-GAAP Measures are useful to investors in highlighting trends in our operating performance, while other measures can differ significantly depending on long-term strategic decisions regarding capital structure, the tax jurisdictions in which we operate and capital investments. We also use EBITDA and the Company Non-GAAP Measures to supplement U.S. GAAP measures of performance in the evaluation of the effectiveness of our business strategies, to make budgeting decisions, to establish discretionary annual incentive compensation and to compare our performance against that of other peer companies using similar measures. Management supplements U.S. GAAP results with Non-GAAP financial measures to provide a more complete understanding of the factors and trends affecting the business than U.S. GAAP results alone. 60 Table of Contents EBITDA and the Company Non-GAAP Measures are not recognized terms under U.S. GAAP and should not be considered as an alternative to net income or income from operations as a measure of financial performance or cash flows provided by operating activities as a measure of liquidity, or any other performance measure derived in accordance with U.S. GAAP. Additionally, these measures are not intended to be a measure of free cash flow available for management’s discretionary use as they do not consider certain cash requirements such as interest payments, tax payments and debt service requirements. In evaluating EBITDA and the Company Non-GAAP Measures we may incur expenses in the future that are the same as or similar to some of the adjustments in this presentation. Our presentation of EBITDA and the Company Non-GAAP Measures should not be construed to imply that our future results will be unaffected by any such adjustments. Management compensates for these limitations by primarily relying on our U.S. GAAP results in addition to using EBITDA and the Company Non-GAAP Measures. The presentations of these measures have limitations as analytical tools and should not be considered in isolation, or as a substitute for analysis of our results as reported under U.S. GAAP. Some of these limitations are: • they do not reflect costs or cash outlays for capital expenditures or contractual commitments; • they do not reflect changes in, or cash requirements for, our working capital needs; • EBITDA, Adjusted EBITDA and Adjusted Operating Income do not reflect the interest expense, or the cash requirements necessary to service interest or principal payments, on our debt; • EBITDA, Adjusted EBITDA and Adjusted Operating Income do not reflect period to period changes in taxes, income tax expense or the cash necessary to pay income taxes; • they do not reflect the impact of earnings or charges resulting from matters we consider not to be indicative of our ongoing operations; • although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect cash requirements for such replacements; and • other companies in our industry may calculate these measures differently than we do, limiting their usefulness as comparative measures. Because of these limitations, EBITDA and the Company Non-GAAP Measures should not be considered as measures of discretionary cash available to invest in business growth or to reduce indebtedness. The following table reconciles our Adjusted Operating Income, Adjusted Operating Margin, EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin to net income; and Adjusted Diluted EPS for the periods presented: In thousands Fiscal Year 2020 Fiscal Year 2019 Fiscal Year 2018 Net income $ 36,277 2.1 % $ 32,798 1.9 % $ 23,653 1.5 % Interest expense 48,171 2.8 % 33,300 1.9 % 37,283 2.4 % Income tax provision (benefit) 2,403 0.1 % (2,309) (0.1) % (18,785) (1.2) % Stock compensation expense (a) 10,740 0.6 % 12,670 0.7 % 20,939 1.4 % Loss on extinguishment of debt (b) — — % 9,786 0.6 % — — % Asset impairment (c) 22,004 1.3 % 8,894 0.5 % 17,630 1.1 % Litigation settlement (d) 4,395 0.3 % — — % — — % Secondary offering expenses (e) — — % 401 — % 2,451 0.2 % Management realignment expenses (f) — — % 2,155 0.1 % — — % Long-term incentive plan (g) — — % 2,830 0.2 % 7,040 0.5 % Amortization of acquisition intangibles (h) 7,426 0.4 % 7,405 0.4 % 7,405 0.5 % Other (k) 2,732 0.2 % 6,370 0.4 % 4,785 0.3 % Adjusted Operating Income / Adjusted Operating Margin $ 134,148 7.8 % $ 114,300 6.6 % $ 102,401 6.7 % Note: Fiscal year 2020 includes 53 weeks. Fiscal years 2019 and 2018 include 52 weeks. Percentages reflect line item as a percentage of net revenue, adjusted for rounding. Some of the percentage totals in the table above do not foot due to rounding differences. 61 Table of Contents In thousands Fiscal Year 2020 Fiscal Year 2019 Fiscal Year 2018 Net income $ 36,277 2.1 % $ 32,798 1.9 % $ 23,653 1.5 % Interest expense 48,171 2.8 % 33,300 1.9 % 37,283 2.4 % Income tax provision (benefit) 2,403 0.1 % (2,309) (0.1) % (18,785) (1.2) % Depreciation and amortization 91,585 5.4 % 87,244 5.1 % 74,339 4.8 % EBITDA 178,436 10.4 % 151,033 8.8 % 116,490 7.6 % Stock compensation expense (a) 10,740 0.6 % 12,670 0.7 % 20,939 1.4 % Loss on extinguishment of debt (b) — — % 9,786 0.6 % — — % Asset impairment (c) 22,004 1.3 % 8,894 0.5 % 17,630 1.1 % Litigation settlement (d) 4,395 0.3 % — — % — — % Secondary offering expenses (e) — — % 401 — % 2,451 0.2 % Management realignment expenses (f) — — % 2,155 0.1 % — — % Long-term incentive plan (g) — — % 2,830 0.2 % 7,040 0.5 % Other (k) 2,732 0.2 % 6,370 0.4 % 4,785 0.3 % Adjusted EBITDA / Adjusted EBITDA Margin $ 218,307 12.8 % $ 194,139 11.3 % $ 169,335 11.0 % Note: Fiscal year 2020 includes 53 weeks. Fiscal years 2019 and 2018 include 52 weeks. Percentages reflect line item as a percentage of net revenue, adjusted for rounding. Some of the percentage totals in the table above do not foot due to rounding differences. In thousands Fiscal Year 2020 Fiscal Year 2019 Fiscal Year 2018 Diluted EPS $ 0.44 $ 0.40 $ 0.30 Stock compensation expense (a) 0.13 0.16 0.26 Loss on extinguishment of debt (b) — 0.12 — Asset impairment (c) 0.27 0.11 0.22 Litigation settlement (d) 0.05 — — Secondary offering expenses (e) — — 0.03 Management realignment expenses (f) — 0.03 — Long-term incentive plan expense (g) — 0.03 0.09 Amortization of acquisition intangibles (h) 0.09 0.09 0.09 Amortization of debt discounts and deferred financing costs (i) 0.14 0.02 0.02 Losses (gains) on change in fair value of derivatives (j) 0.05 — — Other (k) 0.03 0.08 0.06 Tax benefit of stock option exercises (l) (0.10) (0.12) (0.32) Tax effect of total adjustments (m) (0.19) (0.16) (0.15) Adjusted Diluted EPS $ 0.91 $ 0.75 $ 0.61 Weighted average diluted shares outstanding 82,793 81,683 79,041 Note: Fiscal year 2020 includes 53 weeks. Fiscal years 2019 and 2018 include 52 weeks. Some of the totals in the table above do not foot due to rounding differences. ____________ (a) Non-cash charges related to stock-based compensation programs, which vary from period to period depending on the timing of awards and performance vesting conditions. (b) For fiscal year 2019, reflects write-off of deferred financing fees related to the extinguishment of debt. (c) Reflects write-off of property, equipment and lease related assets on closed or underperforming stores for fiscal years 2019 and 2020; non-cash charges related to impairment of long-lived assets, primarily goodwill in our Military and Fred Meyer brands for fiscal year 2018. (d) Expenses associated with settlement of litigation. See Note 13. “Commitments and Contingencies” in our consolidated financial statements included in Part II. Item 8. of this Form 10-K for further details. (e) Expenses related to our secondary public offerings during fiscal years 2018 and 2019. (f) Expenses related to a non-recurring management realignment described on Form 8-K filed with the SEC on January 10, 2019. 62 Table of Contents (g) Expenses pursuant to a long-term incentive plan for non-executive associates who were not participants in the management equity plan for fiscal year 2019. This plan was effective in 2014 following the acquisition of the Company by affiliates of KKR & Co. Inc. (the “KKR Acquisition”). During fiscal year 2018, a $4.6 million cash payout was triggered as a result of the second secondary offering of common stock by KKR and other selling shareholders. The remaining $2.4 million relates to the third secondary offering and was accrued but not paid as of fiscal year end 2018. (h) Amortization of the increase in carrying values of finite-lived intangible assets resulting from the application of purchase accounting to the KKR Acquisition. (i) Amortization of debt discounts is associated with the amortization of the conversion feature related to the 2025 Notes and amortization of deferred financing costs related to the 2025 Notes, Term Loan and Revolving Credit Facility borrowings. Amortization of debt discount and deferred financing costs in aggregate total $11.9 million, $1.3 million and $1.9 million for the fiscal years 2020, 2019 and 2018, respectively. (j) Reflects losses (gains) recognized in interest expense on change in fair value of de-designated hedges of $4.0 million for fiscal year end 2020. (k) Other adjustments include amounts that management believes are not representative of our operating performance (amounts in brackets represent reductions in Adjusted Operating Income, Adjusted Diluted EPS and Adjusted EBITDA) including our share of losses on equity method investments of $1.8 million and $1.3 million for the fiscal years 2019 and 2018, respectively; the amortization impact adjustments related to the KKR Acquisition, (e.g., fair value of leasehold interests) of $0.4 million, $0.5 million and $0.4 million for the fiscal years 2020, 2019 and 2018, respectively; differences between the timing of expense versus cash payments related to contributions to charitable organizations of $(1.0) million for the fiscal year 2018; costs of severance and relocation of $1.3 million, $2.3 million and $1.0 million, for the fiscal years 2020, 2019 and 2018, respectively; excess payroll taxes related to stock option exercises of $0.7 million, $0.8 million and $1.8 million for fiscal years 2020, 2019 and 2018, respectively; incremental costs directly related to adapting the Company’s operations during the COVID-19 pandemic of $0.6 million for the fiscal year 2020; and other expenses and adjustments totaling $(0.3) million, $1.0 million and $1.3 million for fiscal years 2020, 2019 and 2018, respectively. (l) Tax benefit associated with accounting guidance requiring excess tax benefits related to stock option exercises to be recorded in earnings as discrete items in the reporting period in which they occur. (m) Represents the income tax effect of the total adjustments at our combined statutory federal and state income tax rates. Liquidity and Capital Resources As described in more detail below, on May 5, 2020, we entered into the Credit Agreement Amendment with the lenders under our credit facility in order to prevent the effects of the COVID-19 pandemic, including the temporary closure of our stores, from creating uncertainty relative to our ability to comply with certain financial covenants and allow the Company to focus on prudent management of the business over the quarters ahead. In addition, on May 12, 2020, we completed the issuance of the 2025 Notes and we used the net proceeds of this offering to repay the full amount outstanding under our Revolving Credit Facility and part of our outstanding borrowings under our Term Loan. Our primary cash needs are for inventory, payroll, store rent, advertising, capital expenditures associated with new stores and updating existing stores, as well as information technology and infrastructure, including our corporate office, distribution centers and laboratories. When appropriate, the Company may utilize excess liquidity towards debt service requirements, including voluntary debt prepayments, or required interest and principal payments, if any, as well as repurchases of common stock, based on excess cash flows. We continue to prioritize cash conservation and prudent use of cash, while safely conducting normal operations. The most significant components of our operating assets and liabilities are inventories, accounts receivable, prepaid expenses and other assets, accounts payable, deferred and unearned revenue and other payables and accrued expenses. While we have historically exercised prudence in our use of cash, the COVID-19 pandemic has required us to closely monitor various items related to cash flow including, but not limited to, cash receipts, cash disbursements, payment terms and alternative sources of funding. We continue to be focused on these items in addition to other key measures we use to determine how our consolidated business and operating segments are performing. We believe that cash on hand, cash expected to be generated from operations and the availability of borrowings under the Revolving Credit Facility will be sufficient to fund our working capital requirements, liquidity obligations, anticipated capital expenditures and payments due under our existing debt for at least the next 12 months. Depending on our liquidity levels, conditions in the capital markets and other factors, we may from time to time consider the refinancing or issuance of debt, issuance of equity or other securities, the proceeds of which could provide additional liquidity for our operations, as well as modifications to our Term Loan where possible. However, our ability to maintain sufficient liquidity may be affected by numerous factors, many of which are outside of our control. As of January 2, 2021, we have outstanding a total of $402.5 million aggregate principal of 2025 Notes. The 2025 Notes are senior unsecured obligations, and interest on the 2025 Notes is paid semi-annually. The Company can choose to settle upon conversion in cash, shares or a combination, at a conversion rate of 32.0783 shares of common stock per $1,000 principal amount. Based on the initial conversion rate, the 2025 Notes are convertible into 12.9 million shares of our common stock and we reserved for the possible issuance of 16.5 million shares, which is the maximum amount that could be issued upon conversion. As of January 2, 2021, the “if-converted value” exceeded the principal amount of the 2025 Notes by $182.3 million. See Note 15. “Earnings Per Share” for the treatment of earnings per share in relation to the 2025 Notes. As of fiscal year end 2020, we had $373.9 million in cash and cash equivalents and $293.6 million of availability under our Revolving Credit Facility, which includes $6.4 million in outstanding letters of credit. 63 Table of Contents We pu rchased $76.8 million in capital items during fiscal year 2020. Approximately 80% of o ur capital spend is related to our expected growth (i.e., new stores, optometric equipment, additional capacity in our optical laboratories and distribution centers, and our IT infrastructure, including omni-channel platform related investments). Our working capital requirements for inventory will increase as we continue to open additional stores. We primarily fund our working capital needs using cash provided by operations. The following table summarizes cash flows provided by (used for) operating activities, investing activities and financing activities for the periods indicated: In thousands Fiscal Year 2020 Fiscal Year 2019 Fiscal Year 2018 Cash flows provided by (used for): Operating activities $ 234,981 $ 165,081 $ 106,628 Investing activities (76,410) (100,631) (104,221) Financing activities 176,281 (42,141) 10,397 Net increase (decrease) in cash, cash equivalents and restricted cash $ 334,852 $ 22,309 $ 12,804 Note: Fiscal year 2020 includes 53 weeks. Fiscal years 2019 and 2018 include 52 weeks. Net Cash Provided by Operating Activities Cash flows provided by operating activities increased by $69.9 million to $235.0 million, or 42.3%, during fiscal year 2020 from $165.1 million during fiscal year 2019. The increase in net cash provided by operating activities consisted of an increase in net income of $3.5 million, and an increase in non-cash expense items of $12.0 million including asset impairment charges of $13.1 million, amortization of debt discount and deferred financing costs of $10.6 million, depreciation and amortization of $4.3 million, deferred income tax expense of $2.1 million and losses recognized for the changes in fair value of derivatives of $4.0 million partially offset by a decrease in loss on extinguishment of debt of $9.8 million, decrease of stock compensation expense of $1.9 million, and decrease of $10.5 million in other non-cash expenses. Changes in net working capital and other assets and liabilities contributed an additional $54.5 million in cash compared to fiscal year 2019. Increases in other liabilities contributed $24.3 million in year-over-year cash primarily due to an increase in deferral of employer payroll taxes of $12.8 million as a result of the CARES Act, a $3.9 million increase in year-over-year cash due to timing of unearned revenue, increases in compensation related accruals of $2.2 million due primarily to timing, increases of $3.1 million due to lease concessions and deferrals and other increases in miscellaneous accruals due to timing, partially offset by decreases in accrued advertising and payments of litigation settlements during the year. Increases in accounts payabl e contributed $26.9 million i n year-over-year cash, primarily as a result of increased purchases and replenishing activity due to both store growth and increased sales in December of 2020 as compared to the same period of 2019 and increases in advertising. Decreases in inventory contributed $27.3 million in year-over-year cash, primarily due to no forward buys occurring after the first quarter of 2020. Offsetting these items were increases in other assets which used $14.5 million in year-over-year cash, consisting of $8.9 million of cloud hosted software asset development costs, $6.2 million in rent-related items and other prepaid balances. Additionally, accounts receivable balances used $6.8 million in year-over-year cash, primarily reflective of year-over-year increases in outstanding credit card receivables due to higher sales in the last week of 2020 as compared to the same period of 2019 and timing of credit card processing. Changes in deferred revenue contributed $2.8 million less cash when compared to 2019 driven by decreased sales of our eye care club membership and product protection plans. Cash flows provided by operating activities increased by $58.5 million to $165.1 million, or 54.8%, during the fiscal year 2019 from $106.6 million during fiscal year 2018. The increase in net cash provided by operating activities consisted of an increase in net income of $9.1 million and an increase in non-cash expense items of $26.4 million including loss on extinguishment of debt of $9.8 million, deferred income tax expense of $17.0 million, depreciation and amortization of $12.3 million, and $4.3 million in other non-cash expenses, partially offset by a decrease of asset impairment charges of $8.7 million and a decrease of stock compensation expense of $8.3 million. In addition, decreases in net working capital and other assets and liabilities contributed an additional $22.9 million in cash compared to fiscal year 2018. Decreases in other assets contributed $17.1 million in year-over-year cash, primarily due to decreases in prepaid advertising and rent-related items. The year-over-year cash contribution of $12.9 million from inventories in fiscal year 2019 was primarily a result of decreased year-over-year inventory expenditures. The Company commenced a forward inventory purchase program in fiscal year 2018 and continued 64 Table of Contents this program to a lesser extent in fiscal year 2019. Additionally, accounts receivable balances contributed $7.7 million in year-over-year cash, reflective of year-over-year decreases in outstanding credit card receivables, partially offset by increases in our managed care receivables as a result of increased participation in managed care programs which historically have a longer collection cycle than trade and credit card receivables. Increases in deferred revenue contributed an additional $1.3 million in year over-year-cash. Offsetting these items were decreases in accounts payable during fiscal year 2019 which used $10.8 million in year-over-year cash, primarily due to timing of payments. In addition, decreases in other liabilities used $5.2 million in year-over-year cash, primarily related to decreases in accrued liabilities related to capital expenditures after the completion of our Texas lab partially offset by increases in payroll related accruals due to timing. Net Cash Used for Investing Activities Net cash used for investing activities decreased by $24.2 million, to $76.4 million, during fiscal year 2020 from $100.6 million during fiscal year 2019. The decrease was primarily due to cash conservation measures during the temporary store closure period, which resulted in reduced store openings and lower IT investment for the full year. Net cash used for investing activities decreased by $3.6 million, to $100.6 million, during fiscal year 2019 from $104.2 million during fiscal year 2018. The decrease was primarily due to capital investments made in fiscal year 2018 for our Texas lab not recurring in fiscal year 2019 as well as timing of new store capital investments. Net Cash Provided by (Used for) Financing Activities Net cash provided by (used fo r) financing activities increased $218.4 million, from $42.1 million use of cash to $176.3 million provision of cash during fiscal year 2020. The increase in cash provided by financing activities was primarily due to lower repayments on long-term debt of $222.6 million and decreased purchases of treasury stock of $25 million, offset by decreases in cash provided by borrowings on long-term debt of $17.8 million and an increase in cash used for payments of debt issuance costs of $9.5 million. Net cash provided by (used for) financing activities decreased $52.5 million, from $10.4 million provision of cash to $42.1 million use of cash during fiscal year 2019. The change in cash provided by (used for) financing activities was due to the repurchase of shares of common stock of the Company of $25.6 million during fiscal year 2019, a $25.0 million voluntary prepayment of outstanding principal under the Term Loan of its Credit Agreement and lower proceeds from the issuance of common stock as compared to fiscal year 2018. Fiscal year 2018 included material debt and equity transactions. In fiscal year 2018, we refinanced our first lien credit agreement, resulting in debt issuance costs of $1.4 million and $200.0 million in proceeds which were used to make $200.0 million in principal payments. Principal payments of $4.3 million, purchases of treasury stock of $1.9 million and payments on capital lease obligations of $1.8 million were offset by $19.8 million in proceeds from exercises of stock options. Long-term Debt The following table sets forth the amounts owed under our Term Loan and the 2025 Notes and the interest rate on such outstanding amounts, and the amount available for additional borrowing thereunder, as of the end of fiscal year 2020: In thousands, except percentage data Interest Rate (2) Amount Outstanding Amount Available for Additional Borrowing 2025 Notes, due May 15, 2025 Fixed $ 402,500 $ — Term Loan, due July 18, 2024 Variable 317,375 — Revolving Credit Facility, due July 18, 2024 (1) Variable — 293,600 Total $ 719,875 $ 293,600 ____________ (1) At January 2, 2021, the amount available under our Revolving Credit Facility reflected a reduction of $6.4 million of letters of credit outstanding. (2) The interest rate on the Term Loan and Revolving Credit Facility pursuant to the Credit Agreement is at an Applicable Margin of 1.75% for LIBOR Loans with LIBOR to not be lower than 1.00% in any period, and an Applicable Margin of 0.75% for the new term loans that are ABR Loans, as of fiscal year end 2020. The 2025 Notes will pay interest semi-annually in arrears on May 15 and November 15 of each year, commencing on November 15, 2020, at an annual rate of 2.50%. 65 Table of Contents Term Loan and Revolving Credit Facility As of fiscal year end 2020, we had $317.4 million of Term Loan outstanding under our credit agreement. As of fiscal year end 2020, we also had $293.6 million of availability under our $300.0 million Revolving Credit Facility, which includes $6.4 million in outstanding letters of credit. The interest rate payable on the Term Loan is based on either LIBOR or an alternative borrowing rate plus an additional margin that varies dependent on NVI’s consolidated first lien leverage ratio. The Term Loan will amortize in quarterly installments equal to 2.50% per annum in the first three years of the loan and 5.00% per annum thereafter. As a result of the $75.0 million pay down of the Term Loan and the $25.0 million principal prepayment in 2019; we have no additional mandatory principal payments on the Term Loan until maturity on July 18, 2024. In addition, under our Credit Agreement we must maintain certain covenants based on our financial results. The Credit Agreement also contains covenants that, among other things, limit NVI’s ability to incur additional debt, create liens against assets, make acquisitions, pay dividends or distributions on its stock, merge or consolidate with another entity and transfer or sell assets. We were in compliance with all covenants related to the Credit Agreement as of January 2, 2021. Credit Agreement Amendment On May 5, 2020, we entered into the Credit Agreement Amendment with the lenders under our credit facility in order to amend certain provisions of the Credit Agreement. As set forth in greater detail below, the principal purpose of the Credit Agreement Amendment was to suspend certain financial maintenance covenants contained in the Credit Agreement until testing at the end of the second fiscal quarter of 2021. Capitalized terms used but not defined herein shall have the meanings assigned to such terms in the Credit Agreement and Amendment, as applicable. Pursuant to the Credit Agreement Amendment, the financial covenants relating to maintenance of a maximum Consolidated Total Debt to Consolidated EBITDA Ratio and a minimum Consolidated Interest Coverage Ratio are suspended until testing at the end of the second fiscal quarter of 2021. From and after such time, such covenants will be reinstated on a modified basis so that, subject to certain exceptions and limitations as described in the Credit Agreement Amendment, (i) with respect to the second and third fiscal quarters of 2021, the Consolidated Total Debt to Consolidated EBITDA Ratio shall not exceed 4.50 to 1.00 and, with respect to the fourth fiscal quarter of fiscal 2021 and thereafter, the Consolidated Total Debt to Consolidated EBITDA Ratio shall not exceed 4.00 to 1.00, in each case with NVI being able to elect to annualize certain quarterly periods so that quarterly performance from fiscal 2020 is excluded and (ii) with respect to the second fiscal quarter of 2021 and thereafter, the Consolidated Interest Coverage Ratio shall not be less than 3.00 to 1.00. In lieu of such financial covenants, pursuant to the Credit Agreement Amendment NVI has agreed during the suspension period, (i) not to have Consolidated EBITDA for any six fiscal quarter period be less than $0, with the second fiscal quarter of 2020 permitted to be excluded in certain circumstances, and (ii) to have a minimum level of liquidity (defined as cash and cash equivalents plus the unused portion of the Revolving Credit Facility) equal to the lesser of (x) $100,000,000 and (y) $40,000,000 plus the amount of any net proceeds from capital markets financings during such period in excess of $75,000,000. In addition, the Credit Agreement was amended pursuant to the Credit Agreement Amendment to, among other things, (i) limit the flexibility of NVI and Holdings with respect to certain transactions during the covenant suspension period, including the ability to declare or pay dividends, incur debt and make investments and dispositions, (ii) require prepayments of the term loans under certain circumstances during the covenant suspension period from the net proceeds from debt or equity capital markets transactions by the Company (with the amount of the term loans to be paid down equal to $75 million from the first $400 million of capital raised and 50% of any proceeds above such amount) and (iii) restrict NVI’s ability to borrow under the Revolving Credit Facility if unrestricted cash and cash equivalents exceeds $50 million (and, in the event of any such excess, to require a mandatory prepayment of such amount). Also pursuant to the Credit Agreement Amendment, the margins upon which interest is calculated for the term loans were amended to a range of 1.75% to 2.75% (for LIBOR Loans) and 0.75% to 1.75% (for ABR Loans), in each case based on NVI’s Consolidated First Lien Secured Debt to Consolidated EBITDA Ratio at such time, with such margins subject to an increase of 50 basis points in the event that either (i) the Company has not raised at least $135 million in additional proceeds from certain capital markets transactions within 30 days of the date of the Credit Agreement Amendment or (ii) Consolidated EBITDA for the most recently ended four quarters is less than $0. 2025 Notes In May 2020, we completed the issuance of the 2025 Notes. The 2025 Notes were sold only to persons reasonably believed to be qualified institutional buyers in reliance on Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”). The 2025 Notes will pay interest semi-annually in arrears on May 15 and November 15 of each year, commencing on November 15, 2020, at an annual rate of 2.50% and will be convertible into cash, shares 66 Table of Contents of common stock or a combination of cash and shares of common stock, at our election, based on the applicable conversion rate at such time. The 2025 Notes have a maturity date of May 15, 2025. Refer to Note 4. “Long-term Debt” for more information. We received proceeds from the offering of $390.9 million, net of $11.6 million in underwriter fees and other issuance costs. Capital Expenditures In thousands Fiscal Year 2020 Fiscal Year 2019 Fiscal Year 2018 New stores (owned brands) $ 27,865 $ 37,734 $ 47,389 Laboratories, distribution centers and optometric equipment 19,882 19,690 23,829 Information technology and other 29,076 43,901 33,275 Total $ 76,823 $ 101,325 $ 104,493 Note: Fiscal year 2020 includes 53 weeks. Fiscal years 2019 and 2018 include 52 weeks. We expect capital expenditures in fiscal year 2021 to be approximately between $100 million and $105 million and to be used primarily in supporting the Company’s growth through investments in new stores and information technology improvements. We expect to fund capital expenditures with cash flows from operations, but may also use existing cash balances or funds available through our Revolving Credit Facility. Contractual Obligations and Commercial Commitments As of fiscal year end 2020, our lease commitments and contractual obligations are as follows: In thousands 2021 2022 2023 2024 2025 Thereafter Total Term Loan (a) $ — $ — $ — $ 317,375 $ — $ — $ 317,375 2025 Notes (b) — — — — 402,500 — 402,500 Revolving Credit Facility (c) — — — — — — — Estimated interest (d) 20,377 20,377 20,377 15,793 3,773 — 80,697 Noncancelable operating leases (e) 73,867 77,874 70,103 60,998 51,974 116,272 451,088 Finance leases (f) 6,676 7,215 6,241 4,673 4,451 12,008 41,264 Other commitments (g) 41,827 13,935 5,934 454 404 317 62,871 Total $ 142,747 $ 119,401 $ 102,655 $ 399,293 $ 463,102 $ 128,597 $ 1,355,795 ____________ (a) As a result of $75.0 million prepayment of debt principal during 2020, the Company does not owe principal payments on its Term Loan until the July 18, 2024 when the outstanding principal balance of $317.4 million is due. (b) The principal payment on the 2025 Notes are due on May 15, 2025. (c) No principal payments are required on the Revolving Credit Facility as we have $293.6 million of availability under our $300.0 million Revolving Credit Facility, which includes $6.4 million in outstanding letters of credit . (d) We have estimated our interest payments on our Term Loan based on our current interest elections described in “Liquidity and Capital Resources.” Amounts and timing may be different from our estimated interest payments due to potential voluntary prepayments, borrowings and interest rate fluctuations. Expected obligations on our hedging instruments are excluded from estimated interest presented in the table above. (e) We lease our retail stores, optometric examination offices, distribution centers, office space and all of our optical laboratories with the exception of our St. Cloud, Minnesota lab, which we own. The vast majority of our leases are classified as operating leases under current accounting guidance. Although rent expense on operating leases is recorded in SG&A on a straight-line basis over the term of the lease, contractual obligations above represent required cash payments. Our lease arrangements require us to pay executory costs such as insurance, real estate taxes and common area maintenance and some of our leases are based on a percentage of sales. These expenses are generally variable, not included above, and were approximately $28.2 million during fiscal year ended 2020. (f) For leases classified as finance leases, the finance lease asset is recorded as property and equipment and a corresponding amount is recorded as a long-term debt obligation in the consolidated balance sheets to the lesser of the net present value of minimum lease payments to be made over the lease term or the fair value of the property for leases in existence as of fiscal year end 2019 and at the net present value of the minimum lease payments to be made over the lease term for new finance leases entered into subsequent to fiscal year end 2019. We allocate each lease payment between a reduction of the lease obligation and interest expense using the effective interest method. Finance lease amounts above represent required contractual cash payments in the periods presented. (g) Other commitments include minimum purchase commitments with certain trade vendors and contractual agreements to purchase goods or services in the ordinary course of business. 67 Table of Contents Off-balance Sheet Arrangements We follow U.S. GAAP in making the determination as to whether or not to record an asset or liability related to our arrangements with third parties. Consistent with current accounting guidance, we do not record an asset or liability associated with long-term purchase, marketing and promotional commitments, or commitments to philanthropic endeavors. We have disclosed the amount of future commitments associated with these items in our consolidated financial statements. We are not a party to any other off-balance sheet arrangements. Critical Accounting Policies and Estimates The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions about future events that affect amounts reported in our consolidated financial statements and related notes, as well as the related disclosure of contingent assets and liabilities at the date of the financial statements. Management evaluates the accounting policies, estimates and judgments on an ongoing basis. Management bases its estimates and judgments on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions and conditions. Management has evaluated the accounting policies used in the preparation of the Company’s consolidated financial statements and related notes and believes those policies to be reasonable and appropriate. Certain of these accounting policies require the application of significant judgment by management in selecting appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. These judgments are based on historical experience, trends in the industry, information provided by customers and information available from other outside sources, as appropriate. More information on all of our significant accounting policies can be found in Note 1. “Business and Significant Accounting Policies,” to our consolidated financial statements included in Part II. Item 8. of this Form 10-K. Impairment of P&E and ROU assets We evaluate impairment of long-lived tangible and ROU store assets at the store level, which is the lowest level at which independent cash flows can be identified, when events or conditions indicate the carrying value of such assets may not be recoverable. In making this evaluation, we may consider multiple factors including financial performance of the stores, regional and local business climates, future plans for the store operations and other qualitative factors. If the store’s projected undiscounted net cash flows expected to be generated by the related assets over the life of the primary asset within the asset group are less than the carrying value of the subject assets, we determine an estimate of the fair value of the asset group using an income approach based on discounted cash flows, which require estimates and assumptions of forecasted store revenue growth rates and store profitability. The cash flows used in estimating fair value were discounted using market rates from 6.3% to 8%. If the fair value of the asset group is less than its carrying value, the loss is allocated to the long-lived assets of the group on a pro rata basis using the relative carrying amounts of those assets, except that the loss allocated to an individual long lived asset of the group shall not reduce the carrying amount of that asset below its fair value. We consider market-based indications of prevailing rental rates, lease incentives and discount rates for retail space when estimating the fair value of ROU assets. A decrease in the estimated cash flows would lead to a lower fair value measurement, as would a significant increase in the discount rate. These non-recurring fair value measurements are classified as Level 3 measurements in the fair value hierarchy. We assess non-store tangible assets, as well as capitalized software costs in use or under development, for impairment if events or changes in circumstances indicate that the carrying value of those assets may not be recoverable. We had $341.3 million of property and equipment, net, and ROU assets of $340.1 million as of January 2, 2021. Changes in estimates and assumptions used in our impairment testing of property and equipment could result in future impairment losses, which could be material. Significant judgments and assumptions are required in our impairment evaluations. Impairment of Goodwill and Intangible Assets If impairment indicators related to amortizing intangible assets are present, we estimate cash flows expected to be generated over the remaining useful lives of the related assets based on current projections. 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. 68 Table of Contents We evaluate indefinite-lived, non-amortizing trademarks and trade names for impairment annually or whenever events or changes in circumstances indicate that those assets may be impaired. We use the relief-from-royalty method to estimate fair value, whereby an estimated royalty rate is determined based on comparable licensing arrangements, which is then applied to the revenue projections for the subject asset. The estimated fair value is calculated using a discounted cash flow analysis. We record an impairment charge as the excess of carrying value over estimated fair value. Goodwill impairment is present if a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying value of goodwill. We consider each of our operating segments to be reporting units. We calculate the fair value of our reporting units using the income approach, which is based on a discounted cash flow analysis and calculates the fair value of reporting units by estimating after-tax cash flows discounted using the Company’s consolidated weighted average cost of capital. The cash flows used in the analysis are based on financial forecasts developed internally by management and require significant judgment. The significant unobservable inputs used in the fair value measurement of the reporting units are revenue growth rate, payroll expense growth rate and other store expenses growth rate. These assumptions are sensitive to future changes in the business profitability, changes in our business strategy and external market conditions, among other factors. See Note 1. “Business and Significant Accounting Policies” and Note 3. “Goodwill and Intangible Assets” to our consolidated financial statements included in Part II. Item 8. of this Form 10-K for further detail on goodwill impairment. As of January 2, 2021, we had $777.6 million of goodwill, $240.5 million of non-amortizing intangible assets, and $49.5 million of other intangible assets, net of accumulated amortization. Changes in estimates and assumptions used in our impairment testing could result in future impairment losses, which could be material. Significant judgments and assumptions are required in our impairment evaluations. In the impairment analysis for goodwill, fair value exceeded carrying value by a substantial margin for all of our reporting units. Future changes in reporting unit’s business profitability, expected cash flows, changes in business strategy and external market conditions, among other factors, could require us to record an impairment charge for goodwill. Revenue Recognition Product revenues include sales of prescription and non-prescription eyewear, contact lenses, related accessories to retail customers (including those covered by managed care) and sales of inventory in which our customer is another retail entity. Revenues from services and plans include eye exams, eyecare club membership fees, product protection plans (i.e. 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. At our America’s Best brand, our signature offer is two pairs of eyeglasses and a free eye exam for one low price. Since an eye exam is a key component in the ability for acceptable prescription eyewear to be delivered to a customer, we concluded that the eye exam service, while capable of being distinct from the eyeglass product delivery, was not distinct in the context of the two-pair offer. As a result, we do not allocate revenue to the eye exam associated with the two-pair offer, and we record all revenue associated with the offer in net product sales when the customer has received and accepted the merchandise. We offer product protection plans for our eyeglasses and three- or five-year eyecare club memberships in our Owned & Host segment to our contact lens customers. The unamortized portion of amounts we collect in advance for these services and plans are reported as deferred revenue (current and non-current portions). For these programs we apply the portfolio approach of recognizing revenues of contracts with similar characteristics and use estimates and assumptions that reflect the size and composition of the portfolio of contracts. We selected the portfolio approach because our historical club membership data demonstrate that our club customers behave similarly, such that the difference between the portfolio approach and calculating revenue of each individual contract is not material. We recognize revenue across the contract portfolio based on the value delivered to the customers relative to the remaining services promised under the programs. We determine the value delivered based on the expected timing and amount of customer usage of benefits over the terms of the contracts. Our retail customers generally make payments for prescription eyewear products at the time they place an order. 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. All unearned revenue at the end of a reporting period is recognized in the next fiscal period. Revenue is recognized net of sales taxes and returns. The returns allowance is based on historical return patterns. Provisions for estimated returns are established and the expected costs continue to be recognized as contra-revenue when the products are sold. 69 Table of Contents See Note 1. “Business and Significant Accounting Policies” and Note 7. “Revenue from Contracts With Customers” in our audited consolidated financial statements included in Part II. Item 8. of this Form 10-K for additional information. Leases We lease our stores, laboratories, distribution centers, and corporate offices. 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. 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. 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 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. 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. As the rate implicit in the Company’s leases is not easily determinable, the Company’s incremental borrowing rate is used in calculating the present value of the sum of the lease payments. 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. See Note 8. “Leases” to our consolidated financial statements included in Part II. Item 8 of this Form 10-K for additional information. Income Taxes We account for deferred income taxes based on the asset and liability method. The Company must make certain estimates and judgments in determining income tax expense. Judgment is required in determining our provision for income taxes. We are required to determine the aggregate amount of income tax expense to accrue and the amount which will be currently payable or refundable based upon tax statutes of each jurisdiction in which the Company does business. Deferred income taxes are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets also include future tax benefits to be derived from the utilization of tax loss carry-forwards and application of certain carry-forward credits. 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. 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. The effect on deferred taxes from a change in the tax rate is recognized through continuing operations in the period that includes the enactment of the change. Changes in tax laws and rates could affect recorded deferred tax assets and liabilities in the future. A valuation allowance is recorded if it is more likely than not that some portion of a deferred tax asset will not be realized. Valuation allowances are released as positive evidence of future taxable income sufficient to realize the underlying deferred tax assets becomes available. We establish a liability for tax positions for which there is uncertainty as to whether the position will ultimately be sustained. We assess our tax positions by determining whether it is more likely than not that the position will be sustained upon examination by the appropriate taxing authorities, including resolution of any related appeals or litigation, based solely on the technical merits of the position. These calculations and assessments involve estimates and complex judgments because the ultimate tax outcomes are uncertain and future events are unpredictable. Our net deferred liability balance as of January 2, 2021 was $80.9 million. Changes in assumptions in our estimates could result in material changes to these balances. See Note 6. “Income Taxes” to our consolidated financial statements included in Part II. Item 8 of this Form 10-K. 70 Table of Contents Inventories The cost of inventory is determined using the weighted average cost method. Inventories at retail stores are comprised of finished goods and are valued at the lower of cost or estimated net realizable value (“NRV”). Manufactured inventories are valued using absorption accounting, which includes material, labor, other variable costs and other applicable manufacturing overhead. Inventory values are adjusted for estimated obsolescence and written down to NRV based on estimates of current and anticipated demand, customer preference, merchandise age, planned promotional activities, compliance with contact lens vendor return policies, and estimates of future retail sales prices. Shrinkage is estimated and recorded throughout the period as a percentage of cost of sales based on historical results and current inventory levels. Actual shrinkage is recorded throughout the year based upon periodic physical counts. As of January 2, 2021, our total inventory balance was $111.3 million. Changes in our assessment of the inventory carrying value could have a material impact on our financial position. 2025 Notes In May 2020, the Company issued $402.5 million principal amount of 2.50% convertible senior notes due 2025. In accordance with accounting guidanc e on embedded conversion features indexed to and settled in equity, t he Company valued and bifurcated the conversion option associated with the 2025 Notes from the respective host debt instrument. The carrying amount of the equity component is recorded as a debt discount and represents the difference between the proceeds from the issuance of the Notes and the fair value of the liability component of the Notes. The significant assumptions used in the fair value of the liability component of the Notes were risk-free rate, discount rate based on the Company’s implied credit spread and term of the 2025 Notes, expected volatility of Company’s stock price and dividend yield. The resulting debt discount on the 2025 Notes is amortized to interest expense using the effective interest rate method over the contractual term of the 2025 Notes. In addition, the debt issuance costs related to the issuance of the 2025 Notes were allocated between the liability and equity components based on their relative values. Debt issuance costs attributable to the liability component were recorded as a contra-liability and are presented net against the 2025 Notes balance on the Company’s consolidated balance sheets. These costs are amortized to interest expense using the effective interest method over the term of the 2025 Notes. Recently Issued Accounting Pronouncements For information on recently issued accounting pronouncements, see Note 1. “Business and Significant Accounting Policies” to our consolidated financial statements included in Part II. Item 8 of this Form 10-K. Impact of Inflation Our results of operations and financial condition are presented based on historical cost. While it is difficult to accurately measure the impact of inflation due to the imprecise nature of the estimates required, we believe the effects of inflation, if any, on our results of operations and financial condition have been immaterial.