NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS
GNC Holdings, Inc., a Delaware corporation ("Holdings," and collectively with its subsidiaries and, unless the context requires otherwise, its and their respective predecessors, the "Company"), is a global specialty retailer of health, wellness and performance products, including protein, performance supplements, weight management supplements, vitamins, herbs and greens, wellness supplements, health and beauty, food and drink and other general merchandise.
The Company is vertically integrated as its operations consist of purchasing raw materials, formulating and manufacturing products and selling the finished products through its
three
reportable segments, which effective in the second quarter of 2016 include U.S. and Canada, International, and Manufacturing / Wholesale (refer to Note 17, "Segments" for more information). Corporate retail store operations are located in the United States, Canada, Puerto Rico, China and Ireland. In addition, the Company offers products on the internet primarily through GNC.com and LuckyVitamin.com. The Company also offered product on the internet through A1 Sports Limited d/b/a Discount Supplements (“Discount Supplements”) up to and including December 31, 2015 when the assets of Discount Supplements were sold and operations were ceased. Franchise locations exist in the United States and approximately
50
other countries. The Company operates its primary manufacturing facility in South Carolina and distribution centers in Arizona, Indiana, Pennsylvania and South Carolina. The Company manufactures approximately half of its branded products and merchandises various third-party products. Additionally, the Company licenses the use of its trademarks and trade names.
The processing, formulation, packaging, labeling and advertising of the Company's products are subject to regulation by various federal agencies, including the Food and Drug Administration, the Federal Trade Commission, the Consumer Product Safety Commission, the United States Department of Agriculture and the Environmental Protection Agency. These activities are also regulated by various agencies of the states and localities in which the Company's products are sold.
NOTE 2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements and footnotes have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America ("GAAP") and with the instructions to Form 10-K and Regulation S-X. The Company's annual reporting period is based on a calendar year.
Summary of Significant Accounting Policies
Principles of Consolidation.
The consolidated financial statements include the accounts of Holdings and all of its subsidiaries. All intercompany transactions have been eliminated in consolidation.
Use of Estimates.
The preparation of financial statements in conformity with GAAP requires management to make estimates that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management bases these estimates on assumptions that it believes to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
Cash and Cash Equivalents.
The Company considers cash and cash equivalents to include all cash and liquid deposits and investments with an original maturity of three months or less. Payments due from banks for third-party credit and debit cards generally process within
24
to
72
hours, and are classified as cash equivalents.
Receivables, net.
The Company extends credit terms for sales of product to its franchisees, wholesale partners and contract manufacturing customers. Receivables consist principally of unpaid invoices for product sales, franchisee royalties and sublease payments. The Company also has notes receivables with certain of its franchisees that were $
12.1 million
and $
17.8 million
at December 31,
2016
and
2015
, respectively, and are primarily recorded within other long-term assets on the consolidated balance sheets. As of the first quarter of 2016, the Company discontinued offering franchisees loans. Franchisees secure financing from lending institutions, which include but are not limited to the small business administration and national banks with franchise programs. These loans typically require the Company to subordinate its first lien position on inventory and furniture and fixtures at predetermined amounts.
The Company monitors the financial condition of its customers and establishes an allowance for doubtful accounts for balances estimated to be uncollectible. In addition to considering the aging of receivable balances and assessing the financial
GNC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
condition, the Company considers collateral including inventory and fixed assets for domestic franchisees and letters of credit for international franchisees. The allowance for doubtful accounts was
$4.6 million
and
$4.1 million
at December 31,
2016
and
2015
, respectively.
Inventory.
Inventory components consist of raw materials, work-in-process, finished product and packaging supplies. Inventories are stated at the lower of cost or market on a first in/first out basis ("FIFO"). Inventory includes costs associated with distribution and transportation costs, as well as manufacturing overhead, which are capitalized and expensed as merchandise is sold. Inventory is recorded at net realizable value, net of obsolescence, shrinkage and vendor allowances for product costs. The Company regularly reviews its inventory levels in order to identify slow moving and short dated products, using factors such as amount of inventory on hand, remaining shelf life, current and expected market conditions, historical trends and the likelihood of recovering the inventory costs based on anticipated demand.
Property, Plant and Equipment.
Property, plant and equipment expenditures are recorded at cost. Depreciation and amortization are recognized using the straight-line method over the estimated useful life of the assets. The estimated useful lives are as follows:
|
|
|
Building
|
30 yrs
|
Machinery and equipment
|
3-10 yrs
|
Building and leasehold improvements
|
3-15 yrs
|
Furniture and fixtures
|
5-8 yrs
|
Software
|
3-5 yrs
|
Building improvements are depreciated over their estimated useful life or the remaining useful life of the related building, whichever period is shorter. Improvements to leased premises are depreciated over the estimated useful life of the improvements or the related leases including renewals that are reasonably assured, whichever period is shorter. Expenditures that materially increase the value or clearly extend the useful life of property, plant and equipment are capitalized while repair and maintenance costs incurred in the normal course of operations are expensed as incurred.
Goodwill and Intangible Assets.
The Company was acquired by Ares Corporate Opportunities Fund II L.P. and Ontario Teachers’ Pension Plan Board in March 2007 and subsequently completed an initial public offering in 2011 of its common stock. In connection with this acquisition, the Company recorded approximately $
600 million
of goodwill and a $
720 million
indefinite-lived intangible asset related to its brand name.
Goodwill is allocated to the Company's reporting units, which are at or below the level of an operating segment as defined by Accounting Standards Codification ("ASC") 280 "Segment Reporting." The Company formally evaluates the carrying amount of goodwill for each of its reporting units in the fourth quarter. In addition, the Company performs an evaluation on an interim basis if it determines that recent events or prevailing conditions indicate a potential impairment of goodwill. A significant amount of judgment is involved in determining whether an indicator of impairment has occurred between annual impairment tests. These indicators include, but are not limited to, overall financial performance such as adverse changes in recent forecasts of operating results, industry and market considerations, a sustained decrease in the share price of the Company's common stock, updated business plans and regulatory and legal developments.
Goodwill is impaired when the carrying amount of a reporting unit’s goodwill exceeds its implied fair value based upon a two-step process. In step one of the analysis, the fair value of the reporting unit is compared with its carrying value. If the carrying value of the reporting unit exceeds its fair value, step two of the test must be performed, which requires the Company to determine the implied fair value of goodwill in the same manner as if it had acquired the reporting unit in an arm’s length transaction as of the testing date. This second step is performed by deducting the estimated fair value of all tangible and identifiable intangible net assets of the reporting unit from the estimated fair value of the reporting unit. If the recorded amount of goodwill exceeds this implied fair value, an impairment charge is recorded for the difference as an operating expense in the period incurred. During the year ended December 31, 2016, the Company recorded $
471.1 million
of goodwill impairment charges. See Note 6, "Goodwill and Intangible Assets" for more information.
The Company's indefinite-lived intangible brand asset is also evaluated annually in the fourth quarter for impairment and on an interim basis if events or changes in circumstances between annual tests indicate that the assets might be impaired. If the carrying value of the intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to the difference.
GNC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Impairment of Definite-Long-lived Assets.
The Company evaluates whether the carrying values of property and equipment and definite-lived intangible assets have been impaired whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable based on estimated undiscounted future cash flows. Factors that may trigger an impairment review include significant changes in the intended use of assets, significant negative industry or economic trends, under-performing stores and anticipated store closings. If it is determined that the carrying value of the applicable asset group is not recoverable, an impairment loss is recognized for the amount the carrying value of the long-lived asset exceeds its estimated fair value. During the year ended December 31, 2016, the Company recorded $
5.4 million
in long-lived asset impairment related to property and equipment. Refer to Note 7, "Property, Plant and Equipment, Net" for more information.
Revenue Recognition.
Within the U.S. and Canada segment, retail sales in company-owned stores are recognized at the point of sale, net of sales tax. Revenue related to e-commerce sales is recognized upon delivery to customers and includes shipping charges. A provision for anticipated returns is recorded through a reduction of sales and cost of sales (for product that can be resold or returned to vendors) in the period that the related sales are recorded.
Revenue is deferred on sales of the Company's Gold Cards and subsequently recognized over the one year membership period. The Gold Card Member Pricing program which provided members product discounts was discontinued in all domestic company-owned and franchise stores on December 28, 2016 in connection with the introduction of the One New GNC. As a part of this launch, the Company provided former Gold Card customers that were within the membership period of generally one year with a coupon which was equivalent to a reimbursement of the unexpired portion of their Gold Card membership fee. During the fourth quarter, the Company recognized $
4.0 million
of Gold Card deferred revenue, as the coupons were redeemed in the pilot markets and system-wide after the launch of the One New GNC. As of December 31, 2016, the Company has $
24.4 million
of deferred Gold Card revenue which will be recognized in the first quarter of 2017 over the coupon redemption period which expires in March 2017.
Effective with the launch of the One New GNC on December 29, 2016, the Company introduced a free points-based loyalty program myGNC Rewards; system-wide in the U.S. The program enables customers to earn points based on their purchases. Points earned by members are valid for
one
year and may be redeemed for cash discounts on any product the Company sells at both company-owned or franchise locations. The Company defers the estimated standalone selling price of points related to this program as a reduction to revenue as points are earned by allocating a portion of the transaction price the customer pays to a loyalty program liability on the consolidated balance sheet. The estimated selling price of each point is based on the estimated value of product for which the point is expected to be redeemed, net of points not expected to be redeemed, based on historical redemption. When a customer redeems earned points, revenue is recognized with a corresponding reduction to the program liability. The program liability and impact to revenue related to this program was not material to 2016 results but is expected to be material in 2017 and beyond.
Also effective with the launch of the One New GNC, the Company began offering a paid membership program, PRO Access, for $
39.99
per year, which provides members with the delivery of
three
boxes throughout the membership year, as well as the periodic offering of product discounts and opportunities to earn triple points among other benefits. The boxes include sample merchandise and other materials. The Company recognizes revenue under the PRO Access program as the underlying performance obligations are satisfied. Revenue under this program was not material in 2016 but is expected to be material in 2017 and beyond.
Revenue from gift cards is recognized when the gift card is redeemed. Gift cards do not have expiration dates and are not required to be escheated to government authorities. Utilizing historical redemption rates, the Company recognizes revenue for amounts not expected to be redeemed proportionately as other gift card balances are redeemed.
Revenues from domestic and international franchisees include product sales, royalties and franchise fees and are recorded within the U.S. and Canada segment for domestic franchisees and the International segment for international franchisees. The Company's franchisees purchase a significant amount of the products they sell in their retail stores from the Company at wholesale prices. Revenue on product sales to franchisees is recognized when risk of loss, title and insurable risks have transferred to the franchisee, net of estimated returns and allowances. Franchise fees are paid in advance, deferred and recognized by the Company at the time of a franchise store opening. Franchise royalties are recognized as a percentage of the franchisees' retail sales in the period the franchisees' sales occur.
The Manufacturing / Wholesale segment sells product to the Company's other segments, which is eliminated in consolidation, and third-party customers. Revenue is recognized when risk of loss, title and insurable risks have transferred to the customer, net of estimated returns and allowances.
GNC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Cost of Sales.
The Company purchases products directly from third-party vendors and manufactures its own products. Cost of sales includes product costs, vendor allowances, inventory obsolescence, shrinkage, manufacturing overhead, warehousing, distribution, shipping and store occupancy costs. Store occupancy costs include rent, common area maintenance charges, real estate and other asset-based taxes, general maintenance, utilities, depreciation, lease incentives and certain insurance expenses.
Vendor Allowances.
The Company receives allowances/credits from various vendors based on either sales or purchase volumes, right of return for expired product and non-saleable customer returns, and cooperative advertising. As the right of offset exists under these arrangements, credit earned under these arrangements are recorded as a reduction in the vendors' accounts payable balances on the balance sheet and represent the estimated amounts due to the Company under the provisions of such contracts. Amounts expected to be received from vendors relating to the purchase of merchandise inventories are recognized as a reduction to cost of sales as the merchandise is sold. Amounts that represent a reimbursement of costs incurred, such as advertising, are recorded as a reduction to the related expense in the period that the expense is incurred. The Company recorded a reduction to cost of sales of $
94.9 million
,
$98.7 million
and
$89.5 million
for the years ended December 31,
2016
,
2015
and
2014
, respectively, for vendor allowances associated with the purchase and sale of merchandise.
Research and Development.
Research and development costs arising from internally generated projects are expensed as incurred. The Company recognized approximately $
6 million
in each of the years ended December 31,
2016
,
2015
and
2014
.
Advertising Expenditures.
The Company recognizes the costs of advertising, promotion and marketing programs the first time the communication takes place. The Company administers national advertising funds on behalf of its franchisees. In accordance with the franchisee contracts, the Company collects advertising fees from the franchisees and utilizes the proceeds to coordinate various advertising and marketing campaigns. The Company recognized advertising expense of
$74.1 million
,
$69.5 million
and
$76.7 million
for the years ended December 31,
2016
,
2015
and
2014
, respectively, net of
$15.7 million
,
$16.0 million
and
$15.9 million
received from the Company's franchisees.
Leases.
The Company has various operating leases for company-owned and franchise store locations, distribution centers, and equipment generally with an initial term of
five
years, which may include renewal options for varying terms thereafter. Leases for franchise store locations are subleased to franchisees. The Company is the primary lessee for the majority of the franchise store locations and makes rental payments to the landlord directly, and then bills the franchisee for reimbursement. The Company records rental income received from franchisees as revenue. If a franchisee defaults on its sublease, the Company has in the past converted, any such franchise store into a company-owned store and fulfilled the remaining lease obligation.
Leases generally include amounts relating to base rent, percent rent and other charges such as common area maintenance and real estate taxes. Periodically, the Company receives varying amounts of reimbursements from landlords to compensate the Company for costs incurred in the construction of stores. These reimbursements are recorded as deferred rent within other long-term liabilities on the consolidated balance sheet and are amortized as a reduction to rent expense over the life of the related lease. The expenditures made by the Company are recorded as an increase to leasehold improvements within property, plant and equipment, net. Many of the Company’s lease agreements contain escalation clauses under which, if fixed and determinable, rent expense and rent income is recognized on a straight-line basis over the lives of the leases, including renewal periods that are reasonably assured. Certain of the Company's leases also contain clauses for rent to be paid as a percentage of sales, which are based on a percentage of retail sales or a percentage of retail sales in excess of stipulated amounts (contingent rent). Contingent rent is recorded as rent expense when attainment of the target is considered probable and is recognized in proportion to the retail sales contributing to the achievement of the target.
Contingencies.
The Company records accruals for outstanding legal matters when it believes it is probable that a loss will be incurred and the amount of such loss can be reasonably estimated. The Company evaluates, on a quarterly basis, developments in legal matters that could affect the amount of any accrual and developments that would make a loss contingency both probable and reasonably estimable. If both of the conditions above are not met, disclosure is made when there is at least a reasonable possibility that a loss contingency has been incurred. As facts concerning contingencies evolve and become known, management reassesses the likelihood of a probable loss and makes appropriate adjustments to its financial statements.
Pre-Opening Expenditures.
The Company recognizes the cost associated with the opening of new stores, which consist primarily of rent, marketing, payroll and recruiting costs, as incurred.
Income Taxes
.
The Company accounts for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities result from (i) the future tax impact of temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and (ii) differences between the recorded value of assets
GNC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
acquired in business combinations accounted for as purchases for financial reporting purposes and their corresponding tax bases. Deferred income tax assets are reduced by a valuation allowance if it is more likely than not that some portion of the deferred income tax asset will not be realized.
The Company recognizes the tax benefit from an uncertain tax position only if it is at least more likely than not that the tax position will be sustained upon examination by the taxing authorities based on the technical merits of the position. The amount of the tax benefit that is recognized is measured as the largest amount of benefit that is more likely than not to be realized upon effective settlement. The Company classifies interest and penalties accrued in connection with unrecognized tax benefits as income tax expense in its consolidated statements of operations.
Refer to Note 4, "Income Taxes," for more information.
Self-Insurance.
T
he Company is self-insured for certain losses related to health, workers' compensation and general liability insurance and maintains stop-loss coverage with third-party insurers to limit its liability exposure. Liabilities associated with these losses are estimated by considering historical claims experience, estimated lag time to report and pay claims, average cost per claim and other actuarial factors.
Stock-Based Compensation.
The Company utilizes the Black-Scholes model to calculate the fair value of time-based stock option awards. The Company utilizes a Monte Carlo simulation for its market-based awards, which requires various inputs and assumptions, including the Company's own stock price. The grant-date fair value of the Company's time-based restricted stock, performance-based restricted stock, time-based restricted stock units, and performance-based restricted stock units (collectively herein referred to as "restricted stock awards") are based on the closing price for a share of the Company's common stock on the New York Stock Exchange (the "NYSE") on the grant date. Compensation expense for time and market-based awards is recognized over the applicable vesting period, net of expected forfeitures. Performance-based awards also include a service condition and compensation expense is recognized over the applicable vesting period if the performance condition is probable of being achieved, net of expected forfeitures. The Company regularly reviews the probability of achieving the performance condition on these awards.
Earnings Per Share.
Basic earnings per share ("EPS") is computed by dividing net income by the weighted average number of shares of common stock outstanding for the period. The Company uses the treasury stock method to compute diluted EPS, which assumes that outstanding stock awards were converted into common stock and that outstanding stock options that are in-the-money were exercised, and the resulting proceeds (which includes unrecognized compensation expense and excess tax benefits) were used to acquire shares of common stock at its average market price during the reporting period.
Foreign Currency.
For all active foreign operations, the functional currency is the local currency. Assets and liabilities of foreign operations are translated into the Company's reporting currency, the U.S. dollar, using period-end exchange rates, while income and expenses are translated using the average exchange rates for the reporting period. Translation gains and losses are recorded as part of other comprehensive (loss) income on the consolidated balance sheet. The Company has intercompany balances with its foreign entities that are routinely settled primarily relating to product sales and management fees. Gains or losses resulting from these foreign currency transactions are included in the consolidated statements of operations and were not material in the fiscal years ended December 31,
2016
,
2015
and
2014
.
Revision for Sublease Rent Income
The Company revised its presentation of sublease income received from its franchisees for prior year periods to conform to the current period's presentation with no impact on previously reported gross profit, operating income, net income, shareholders' equity or cash flow from operations. The Company is the primary obligor of the leases for the majority of its franchise store locations and makes rental payments directly to the landlord and separately bills the franchisee for reimbursement. Accordingly, beginning in the first quarter of 2016, sublease rental income received from franchisees is appropriately presented as "Revenue" compared with the previous presentation as a reduction to occupancy expense in "Cost of sales, including warehousing, distribution, and occupancy" on the consolidated statements of operations. In addition, the deferred rent asset associated with recognizing sublease rental income for lease agreements that contain escalation clauses, which are fixed and determinable, on a straight-line basis is now appropriately presented in "Other long-term assets" compared with the previous presentation as a reduction to the deferred rent liability in "Other long-term liabilities" on the consolidated balance sheets. This revision is not material to prior periods.
GNC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table includes the revisions to the 2015 and 2014 consolidated statements of operations:
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2015
|
|
2014
|
Revenue:
|
(in thousands)
|
Prior to revision
|
$
|
2,639,212
|
|
|
$
|
2,613,154
|
|
Revision
|
44,086
|
|
|
41,852
|
|
As Revised
|
$
|
2,683,298
|
|
|
$
|
2,655,006
|
|
Cost of sales, including warehousing, distribution and occupancy:
|
|
|
|
Prior to revision
|
$
|
1,654,569
|
|
|
$
|
1,632,914
|
|
Revision
|
44,086
|
|
|
41,852
|
|
As Revised
|
$
|
1,698,655
|
|
|
$
|
1,674,766
|
|
The following table includes the revision to the consolidated balance sheet:
|
|
|
|
|
|
December 31, 2015
|
Other long-term assets:
|
(in thousands)
|
Prior to revision
(*)
|
$
|
32,891
|
|
Revision
|
5,664
|
|
As Revised
|
$
|
38,555
|
|
Other long-term liabilities:
|
|
Prior to revision
|
$
|
53,352
|
|
Revision
|
5,664
|
|
As Revised
|
$
|
59,016
|
|
(*) Includes the adoption of ASU 2015-03 and 2015-15 relating to the presentation of deferred financing fees as described below, which reclassified $
3.3 million
of debt issuance costs from "Other long-term assets" to "Long-term debt" at December 31, 2015 on the consolidated balance sheet.
Correction of Immaterial Error
During the quarter ended March 31, 2015, the Company identified a $
2.8 million
error relating to prior periods in the calculation of the portion of the accrued payroll liability relating to certain amounts paid to store employees. The impact of this error was not material to any prior period. In addition, the cumulative impact of the correction was not material to the Company's consolidated financial statements for the quarter ended March 31, 2015 or the year ended December 31, 2015. Consequently, the Company corrected the error in the first quarter of 2015 by increasing selling, general and administrative expense on the consolidated statement of operations and "Deferred revenue and other current liabilities" on the consolidated balance sheet by $
2.8 million
. The impact to net income was a decrease of $
1.8 million
for the year ended December 31, 2015. This correction had no impact on cash flows from operations in the prior year.
Other Loss (Income), Net
Other loss (income), net, in the year ended December 31, 2016 includes $
0.4 million
of foreign currency losses. The year ended December 31, 2015 includes a loss of $
2.7 million
attributable to the closure and related asset sale of Discount Supplements. The year ended December 31, 2014 include the reversal of $
4.4 million
in a contingent purchase price liability associated with the Discount Supplements acquisition.
Recently Adopted Accounting Pronouncements
In April 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") 2015-03, which requires an entity to present debt issuance costs related to a recognized debt liability as a direct reduction from the carrying
GNC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
amount of that debt liability, consistent with the treatment of debt discounts. This standard does not affect the recognition and measurement guidance for debt issuance costs. In August 2015, the FASB subsequently issued ASU 2015-15, which clarifies that ASU 2015-03 does not address the presentation of debt issuance costs related to line-of-credit arrangements. This standard is effective for fiscal years beginning after December 15, 2015. Accordingly, the Company adopted this change in accounting principle during the first quarter of fiscal 2016, with retrospective application. Net debt issuance costs in the amount of $
3.3 million
, which were previously classified as "Other long-term assets" at December 31, 2015, were reclassified as a reduction to "Long-term debt" on the Company's consolidated balance sheet to conform to the current year presentation.
In August 2014, the FASB issued ASU 2014-15, which requires management to assess an entity’s ability to continue as a going concern and to provide related footnote disclosures in certain circumstances. The standard is effective for annual reporting periods, and interim periods therein, ending after December 15, 2016. Accordingly, the Company has adopted this ASU and evaluated the Company’s ability to continue as a going concern as well as the need for related footnote disclosure. The Company has concluded no disclosure is necessary regarding the entity’s ability to continue as a going concern.
Recently Issued Accounting Pronouncements
In January 2017, the FASB issued ASU 2017-04, which simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Under the new guidance, an entity will recognize an impairment charge for the amount by which the carrying value exceeds the fair value. This standard is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.
In August 2016, the FASB issued ASU 2016-15, which addresses changes to the classification of certain cash receipts and cash payments within the statement of cash flows in order to address diversity in practice. In November 2016, the FASB issued ASU 2016-18, which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. Both standards are effective for annual reporting periods, and interim periods therein, beginning after December 15, 2017. The Company is currently evaluating the potential impact of these changes on the consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, which includes multiple provisions intended to simplify various aspects of accounting and reporting for share-based payments. Currently, the difference between the deduction for tax purposes and the compensation cost of a share-based payment award results in either an excess tax benefit or deficiency. These excess tax benefits are recognized in additional paid-in capital and tax deficiencies (to the extent there are previous tax benefits) are recognized as an offset to accumulated excess tax benefits. If no previous tax benefit exists, the deficiencies are recognized in the income statement as an increase to income tax expense. The changes require all excess tax benefits and tax deficiencies related to share-based payments be recognized as income tax expense or benefit in the income statement. Gross excess tax benefits in the cash flow statement will also change from the current presentation as a financing activity to being classified as an operating activity. This standard is effective for annual reporting periods, and interim periods therein, beginning after December 15, 2016. The Company does not expect the impact of this guidance to have a material impact on the consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, which requires lessees to recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments for all leases with a term greater than 12 months. This standard is effective for annual reporting periods, and interim periods therein, beginning after December 15, 2018 and is required to be applied using a modified retrospective approach for all leases existing at, or entered into after, the beginning of the earliest comparative period presented. The Company has a significant number of leases, and as a result, expects this guidance to have a material impact on its consolidated balance sheet, the impact of which is currently being evaluated.
In November 2015, the FASB issued ASU 2015-17, which requires an entity to classify deferred tax assets and liabilities as noncurrent on the balance sheet. This standard is effective for annual reporting periods, and interim periods therein, beginning after December 15, 2016. The Company does not believe the adoption of this guidance will have a material effect on the consolidated financial statements.
GNC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In July 2015, the FASB issued ASU 2015-11, which requires an entity that determines the cost of inventory by methods other than last-in, first-out and the retail inventory method to measure inventory at the lower of cost and net realizable value. This standard is effective for annual reporting periods, and interim periods therein, beginning after December 15, 2016. The Company does not believe the adoption of this guidance will have a material effect on the Company’s consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, which updates revenue recognition guidance relating to contracts with customers. This standard states that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This standard is in effect for annual reporting periods, and interim periods therein, beginning after December 15, 2017. The Company is in the process of evaluating this guidance and expects it to have a material impact on the consolidated financial statements.
Other Revisions
In addition to the sublease rent revision and the adoption of ASU 2015-03 as explained above, certain amounts in the consolidated financial statements for prior year periods have been revised to conform to the current period's presentation. The impact to prior periods of these revisions was not significant with no impact on previously reported operating income, net income, cash flows from operations or stockholders' equity.
NOTE 3. INVENTORY
The net realizable value of inventory consisted of the following:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
|
(in thousands)
|
Finished product ready for sale
|
$
|
527,238
|
|
|
$
|
487,075
|
|
Work-in-process, bulk product and raw materials
|
49,246
|
|
|
62,242
|
|
Packaging supplies
|
6,728
|
|
|
6,568
|
|
Inventory
|
$
|
583,212
|
|
|
$
|
555,885
|
|
NOTE 4. INCOME TAXES
(Loss) income before income taxes consisted of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
|
(in thousands)
|
Domestic
|
$
|
(212,095
|
)
|
|
$
|
365,362
|
|
|
$
|
373,122
|
|
Foreign
|
(21,295
|
)
|
|
(23,191
|
)
|
|
19,682
|
|
(Loss) income before income taxes
|
$
|
(233,390
|
)
|
|
$
|
342,171
|
|
|
$
|
392,804
|
|
GNC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Income tax expense consisted of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
|
(in thousands)
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
$
|
67,326
|
|
|
$
|
104,711
|
|
|
$
|
120,086
|
|
State
|
9,928
|
|
|
13,414
|
|
|
16,968
|
|
Foreign
|
6,632
|
|
|
4,297
|
|
|
6,296
|
|
Total current income tax expense
|
83,886
|
|
|
122,422
|
|
|
143,350
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
(32,397
|
)
|
|
3,193
|
|
|
(3,785
|
)
|
State
|
(1,110
|
)
|
|
(1,412
|
)
|
|
1,042
|
|
Foreign
|
2,481
|
|
|
(1,331
|
)
|
|
(3,675
|
)
|
Total deferred income tax (benefit) expense
|
(31,026
|
)
|
|
450
|
|
|
(6,418
|
)
|
Total income tax expense
|
$
|
52,860
|
|
|
$
|
122,872
|
|
|
$
|
136,932
|
|
Income tax expense reflected in the accompanying consolidated statements of operations varies from the amounts that would have been provided by applying the United States federal statutory income tax rate to (loss) earnings before income taxes as shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
|
(in thousands)
|
U.S. federal statutory income tax
|
$
|
(81,686
|
)
|
|
$
|
119,760
|
|
|
$
|
137,481
|
|
Increase (reduction) resulting from:
|
|
|
|
|
|
State income tax, net of federal tax benefit
|
6,316
|
|
|
11,976
|
|
|
12,570
|
|
Nondeductible goodwill
|
132,800
|
|
|
—
|
|
|
—
|
|
Other permanent differences
|
633
|
|
|
1,369
|
|
|
393
|
|
International operations, net of foreign tax credits
|
3,454
|
|
|
13,035
|
|
|
(2,121
|
)
|
Worthless stock tax benefit
|
—
|
|
|
(11,634
|
)
|
|
—
|
|
Federal tax credits and income deductions
|
(6,030
|
)
|
|
(8,554
|
)
|
|
(9,034
|
)
|
Tax impact of uncertain tax positions and other
|
(2,627
|
)
|
|
(3,080
|
)
|
|
(2,357
|
)
|
Income tax expense
|
$
|
52,860
|
|
|
$
|
122,872
|
|
|
$
|
136,932
|
|
The effective tax rate in the current fiscal year was significantly impacted by goodwill impairment charges totaling $
471.1 million
as described in Note 6, "Goodwill and Intangible Assets," the significant majority of which is not deductible for income tax purposes. The portion of the impairment charge associated with goodwill that had tax basis resulted in a deferred tax benefit of
$34.3 million
in the current year.
GNC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Significant components of the Company's deferred tax assets and liabilities consisted of the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
Assets
|
|
Liabilities
|
|
Net
|
|
Assets
|
|
Liabilities
|
|
Net
|
|
(in thousands)
|
Current assets (liabilities):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating reserves
|
$
|
9,774
|
|
|
$
|
—
|
|
|
$
|
9,774
|
|
|
$
|
10,050
|
|
|
$
|
—
|
|
|
$
|
10,050
|
|
Deferred revenue
|
3,242
|
|
|
—
|
|
|
3,242
|
|
|
2,976
|
|
|
—
|
|
|
2,976
|
|
Prepaid expenses
|
—
|
|
|
(4,556
|
)
|
|
(4,556
|
)
|
|
—
|
|
|
(3,936
|
)
|
|
(3,936
|
)
|
Other
|
4,415
|
|
|
—
|
|
|
4,415
|
|
|
1,826
|
|
|
—
|
|
|
1,826
|
|
Total current
|
$
|
17,431
|
|
|
$
|
(4,556
|
)
|
|
$
|
12,875
|
|
|
$
|
14,852
|
|
|
$
|
(3,936
|
)
|
|
$
|
10,916
|
|
Non-current assets (liabilities):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangibles
|
$
|
—
|
|
|
$
|
(300,253
|
)
|
|
$
|
(300,253
|
)
|
|
$
|
—
|
|
|
$
|
(331,157
|
)
|
|
$
|
(331,157
|
)
|
Fixed assets
|
16,006
|
|
|
—
|
|
|
16,006
|
|
|
16,900
|
|
|
—
|
|
|
16,900
|
|
Stock compensation
|
4,597
|
|
|
—
|
|
|
4,597
|
|
|
3,344
|
|
|
—
|
|
|
3,344
|
|
Net operating loss and credit carryforwards
|
26,628
|
|
|
—
|
|
|
26,628
|
|
|
25,829
|
|
|
—
|
|
|
25,829
|
|
Long-term rent liabilities
|
8,604
|
|
|
—
|
|
|
8,604
|
|
|
8,438
|
|
|
—
|
|
|
8,438
|
|
Deferred Revenue
|
1,197
|
|
|
—
|
|
|
1,197
|
|
|
3,775
|
|
|
—
|
|
|
3,775
|
|
Convertible senior notes
|
—
|
|
|
(12,581
|
)
|
|
(12,581
|
)
|
|
—
|
|
|
(16,599
|
)
|
|
(16,599
|
)
|
Other
|
5,126
|
|
|
—
|
|
|
5,126
|
|
|
5,256
|
|
|
—
|
|
|
5,256
|
|
Valuation allowance
|
(21,324
|
)
|
|
—
|
|
|
(21,324
|
)
|
|
(16,919
|
)
|
|
—
|
|
|
(16,919
|
)
|
Total non-current
|
$
|
40,834
|
|
|
$
|
(312,834
|
)
|
|
$
|
(272,000
|
)
|
|
$
|
46,623
|
|
|
$
|
(347,756
|
)
|
|
$
|
(301,133
|
)
|
Total net deferred taxes
|
$
|
58,265
|
|
|
$
|
(317,390
|
)
|
|
$
|
(259,125
|
)
|
|
$
|
61,475
|
|
|
$
|
(351,692
|
)
|
|
$
|
(290,217
|
)
|
At December 31,
2016
and
2015
, the Company had deferred tax assets relating to foreign and state NOLs with lives ranging from
5
to
20
years. As of December 31,
2016
and
2015
, a valuation allowance was provided for certain NOLs, as the Company currently believes that these NOLs may not be realizable prior to their expiration. During
2016
and 2015, the Company increased its valuation allowance by
$4.4 million
and
$2.3 million
, respectively. In 2014, the Company reduced its valuation allowance by $
1.6 million
. The valuation allowance was adjusted in 2016 based on a change in circumstances, including anticipated future earnings, which caused a change in judgment about the realizability of certain deferred tax assets related to NOLs.
The Company does not have any material undistributed earnings of international subsidiaries at December 31,
2016
and
2015
as these subsidiaries are considered to be branches for United States tax purposes, to have incurred cumulative NOLs, or to have only minimal undistributed earnings.
GNC Holdings, Inc. files a consolidated federal tax return and various consolidated and separate tax returns as prescribed by the tax laws of the state, local and international jurisdictions in which it and its subsidiaries operate. The statutes of limitation for the Company’s U.S. federal income tax returns are closed for years through 2012. The Company has various state and local jurisdiction tax years open to possible examination (the earliest open period is generally 2011), and the Company also has certain state and local tax filings currently under audit.
GNC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A reconciliation of the beginning and ending amount of unrecognized tax benefits, excluding penalties and interest, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
|
2014
|
|
(in thousands)
|
Balance of unrecognized tax benefits at beginning of period
|
$
|
7,282
|
|
|
$
|
11,652
|
|
|
$
|
10,848
|
|
Additions for tax positions taken during current period
|
289
|
|
|
1,345
|
|
|
1,524
|
|
Additions for tax positions taken during prior periods
|
1,031
|
|
|
543
|
|
|
116
|
|
Reductions for tax positions taken during prior periods
|
(1,378
|
)
|
|
(6,258
|
)
|
|
(527
|
)
|
Settlements
|
(768
|
)
|
|
—
|
|
|
(309
|
)
|
Balance of unrecognized tax benefits at end of period
|
$
|
6,456
|
|
|
$
|
7,282
|
|
|
$
|
11,652
|
|
The Company's liability for uncertain tax positions, excluding penalties and interest, decreased by $
0.8 million
during the current year due in part to the expiration of certain statutes of limitation with respect to the 2012 fiscal year and the payment of settlements to satisfy open audits.
As of December 31,
2016
, the Company is not aware of any positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease within the next 12 months. Accrued interest and penalties were $
1.9 million
and
$1.8 million
at December 31,
2016
and
2015
, respectively. At December 31,
2016
, the amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was
$8.4 million
, including the impact of accrued interest and penalties. While it is often difficult to predict the final outcome or the timing of resolution of any particular uncertain tax position, the Company believes that its unrecognized tax benefits reflect the most likely outcome. The Company adjusts these unrecognized tax benefits, as well as the related interest, in light of changing facts and circumstances. Settlement of any particular position could require the use of cash. Favorable resolution would be recognized as a reduction to the effective income tax rate in the period of resolution.
NOTE 5. REFRANCHISING
Gains on Refranchising
During the year ended December 31, 2016, the Company refranchised
102
of its company-owned stores, of which
84
were refranchised to one franchisee, and recorded refranchising gains of
$19.1 million
. The Company’s actions were consistent with a previously announced refranchising strategy, which sought to increase the proportion of its domestic stores that are franchise locations. The Company refranchised
33
and
25
stores, respectively, during the years ended December 31, 2015 and 2014 and recorded refranchising gains of
$7.6 million
and
$9.9 million
.
Refranchising gains are calculated by subtracting the carrying value of applicable assets disposed of from the sale proceeds. In addition, the initial franchise fee received is included in the gain along with any other costs incurred by the Company to get the underlying assets ready for sale. The Company recognizes gains on refranchising after the asset purchase agreement is signed, the franchisee has taken possession of the store and management is satisfied that the franchisee can meet its financial obligations.
Held for Sale
The Company classifies assets as held for sale when it commits to a plan to dispose of the assets by refranchising specific stores in their current condition at a price that is reasonable and the Company believes completing the sale within one year is probable without significant changes. Assets held for sale are recorded at the lower of their carrying value or fair value, less costs to sell and depreciation is ceased on assets at the time they are classified as held for sale. As of December 31, 2016, there are no assets that qualify as held for sale.
GNC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 6. GOODWILL AND INTANGIBLE ASSETS
Goodwill
Impairment Charge
Based on the significant decline in the Company's share price in the fourth quarter of 2016 coupled with the short-term expected decline in future projected operating results associated with the Company's strategic changes around the One New GNC, management concluded a triggering event occurred in the fourth quarter requiring a goodwill impairment test for all of its reporting units as of December 31, 2016. The results of the first step indicated
no
impairment for the GNC.com, Lucky Vitamin, International Franchise, The Health Store and Wholesale reporting units. However, the Domestic Stores, Manufacturing and Canada reporting units had fair values below their respective carrying values. Therefore, the Company performed the second step of the impairment testing for these reporting units. Because the carrying value of goodwill for these reporting units exceeded the amount that would be recorded at December 31, 2016 under a hypothetical purchase price allocation, a non-cash impairment was recorded for the difference resulting in charges of $
366.4 million
, $
90.5 million
and $
14.2 million
for Domestic Stores, Manufacturing and Canada reporting units, respectively. The total non-cash goodwill impairments recorded were $
471.1 million
of which $
380.6 million
relates to the U.S and Canada segment and $
90.5 million
relates to the Manufacturing / Wholesale segment, and together with impairments recorded on property and equipment, resulted in $
476.6 million
of total non-cash long lived asset impairment charges in 2016. Refer to Note 7, "Property, Plant and Equipment, Net" for more information on the property and equipment charges. The goodwill impairment test performed as of December 31, 2016 satisfies the Company's annual testing requirement.
As a result of the impairment charges described above, there is
no
remaining goodwill balance on the Domestic Stores and Canada reporting units at December 31, 2016. The results of the impairment testing indicated that the Wholesale reporting unit, which has a goodwill balance of $
50.8 million
, had a fair value that exceeded its carrying value by less than
10%
. In addition, the Manufacturing (after current year impairment charge) and Lucky Vitamin reporting units had fair values, which have goodwill balances of $
61.5 million
and $
11.5 million
, respectively, that exceeded their carrying values by less than
20%
. The results for Lucky Vitamin were generally consistent with testing performed at September 30, 2016 and December 31, 2015. If actual market conditions are less favorable than those projected, or if events occur or circumstances change that would reduce the fair values of the Wholesale, Manufacturing and Lucky Vitamin reporting units below their respective carrying values, management may be required to conduct an interim test and possibly recognize impairment charges in future periods.
The Company determined the fair values of its reporting units at December 31, 2016 using a discounted cash flow method (income approach) weighted
50%
and a guideline company method (market approach) weighted
50%
. The key assumptions used under the income approach were, but not limited to, the following:
|
|
•
|
Future cash flow assumptions
- The Company's projections for its reporting units were based on organic growth and were derived from historical experience and assumptions regarding future growth and profitability trends. These projections also took into account the current expectations regarding the adoption of the One New GNC which will significantly impact the Domestic Stores and GNC.com reporting units as well as the Manufacturing reporting unit the operations of which heavily depend on supplying the Company's reporting units with proprietary product. The Company's analysis incorporated an assumed period of cash flows of
8
years with a terminal value.
|
|
|
•
|
Discount rate
- The discount rate was based on an estimated weighted average cost of capital ("WACC") for each reporting unit. The components of WACC are the cost of equity and the cost of debt, each of which requires judgment by management to estimate. The Company developed its cost of equity estimate based on perceived risks and predictability of future cash flows. At December 31, 2016, the WACC used to estimate the fair values of the Company's reporting units was generally within a range of
15.0%
to
16.5%
. Any difference between the WACC among reporting units is primarily due to the precision with which management expects to be able to predict the future cash flows of each reporting unit.
|
The guideline company method involves analyzing transaction and financial data of publicly-traded companies to develop multiples, which are adjusted to account for differences in growth prospects and risk profiles of the reporting unit and the comparable.
GNC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Change in Reporting Units
In connection with the Company's change in reportable segments described in Note 17, "Segments," the Company's Domestic Retail and Domestic Franchise reporting units were combined into one Domestic Stores reporting unit, consistent with how the segment manager now reviews this business effective in the second quarter of 2016.
Goodwill Roll-Forward
The following table summarizes the Company's goodwill activity by reportable segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. and Canada
|
|
International
|
|
Manufacturing / Wholesale
|
|
Other
(2)
|
|
Total
|
|
(in thousands)
|
Goodwill at December 31, 2014
(1)
|
$
|
402,105
|
|
|
$
|
43,796
|
|
|
$
|
202,841
|
|
|
$
|
23,551
|
|
|
$
|
672,293
|
|
2015 Activity:
|
|
|
|
|
|
|
|
|
|
Acquired franchise stores
|
1,935
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,935
|
|
Translation effect of exchange rates
|
(166
|
)
|
|
(619
|
)
|
|
—
|
|
|
(292
|
)
|
|
(1,077
|
)
|
Impairment - Discount Supplements
|
—
|
|
|
—
|
|
|
—
|
|
|
(23,259
|
)
|
|
(23,259
|
)
|
Total 2015 activity
|
1,769
|
|
|
(619
|
)
|
|
—
|
|
|
(23,551
|
)
|
|
(22,401
|
)
|
Balance at December 31, 2015:
|
|
|
|
|
|
|
|
|
|
Gross
|
403,874
|
|
|
43,177
|
|
|
202,841
|
|
|
—
|
|
|
649,892
|
|
Accumulated impairments
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Goodwill
|
$
|
403,874
|
|
|
$
|
43,177
|
|
|
$
|
202,841
|
|
|
$
|
—
|
|
|
$
|
649,892
|
|
2016 Activity:
|
|
|
|
|
|
|
|
|
|
Impairments
|
(380,644
|
)
|
|
—
|
|
|
(90,488
|
)
|
|
—
|
|
|
(471,132
|
)
|
Acquired franchise stores
|
1,372
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,372
|
|
Translation effect of exchange rates
|
12
|
|
|
(183
|
)
|
|
—
|
|
|
—
|
|
|
(171
|
)
|
Derecognition associated with refranchising
|
(3,899
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3,899
|
)
|
Total 2016 activity
|
(383,159
|
)
|
|
(183
|
)
|
|
(90,488
|
)
|
|
—
|
|
|
(473,830
|
)
|
Balance at December 31, 2016:
|
|
|
|
|
|
|
|
|
|
Gross
|
401,359
|
|
|
42,994
|
|
|
202,841
|
|
|
—
|
|
|
647,194
|
|
Accumulated impairments
|
(380,644
|
)
|
|
—
|
|
|
(90,488
|
)
|
|
—
|
|
|
(471,132
|
)
|
Goodwill
|
$
|
20,715
|
|
|
$
|
42,994
|
|
|
$
|
112,353
|
|
|
$
|
—
|
|
|
$
|
176,062
|
|
(1) Because no impairments were recorded prior to and during the year ended December 31, 2014, accumulated impairments were $0 at December 31, 2014.
(2) In connection with the sale of the assets of Discount Supplements in the fourth quarter of 2015, as further described below, the gross goodwill and accumulated impairment was derecognized.
Intangible Assets
Management performed a quantitative impairment test for its $
720.0 million
indefinite-lived brand intangible asset, and concluded that the estimated fair value under the relief from royalty method (an income approach) exceeded its respective carrying value by less than
25%
. Key assumptions included in the estimation of the fair value include but are not limited to projected future revenues, the royalty rate and the discount rate. If actual market conditions are less favorable than those projected, or if events occur or circumstances change that would reduce the fair value below its carrying value, management may be required to conduct an interim test and possibly recognize an impairment charge in future periods. Management also evaluated its definite-lived intangible assets primarily consisting of operating agreements and concluded that the fair values of these assets exceeded their carrying values.
GNC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table reflects the gross carrying amount and accumulated amortization for each major intangible asset:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
|
Weighted-
Average
Life
|
|
Gross
|
|
Accumulated Amortization
|
|
Carrying Amount
|
|
Gross
|
|
Accumulated Amortization
|
|
Carrying Amount
|
|
|
|
(in thousands)
|
Retail agreements
|
30.3
|
|
$
|
31,000
|
|
|
$
|
(10,460
|
)
|
|
$
|
20,540
|
|
|
$
|
31,000
|
|
|
$
|
(9,407
|
)
|
|
$
|
21,593
|
|
Franchise agreements
|
25.0
|
|
70,000
|
|
|
(27,417
|
)
|
|
42,583
|
|
|
70,000
|
|
|
(24,617
|
)
|
|
45,383
|
|
Manufacturing agreements
|
25.0
|
|
70,000
|
|
|
(27,417
|
)
|
|
42,583
|
|
|
70,000
|
|
|
(24,617
|
)
|
|
45,383
|
|
Other intangibles
|
11.8
|
|
10,201
|
|
|
(5,467
|
)
|
|
4,734
|
|
|
10,222
|
|
|
(4,560
|
)
|
|
5,662
|
|
Franchise rights
|
3.0
|
|
7,486
|
|
|
(6,697
|
)
|
|
789
|
|
|
7,206
|
|
|
(6,023
|
)
|
|
1,183
|
|
Total
|
|
|
$
|
188,687
|
|
|
$
|
(77,458
|
)
|
|
$
|
111,229
|
|
|
$
|
188,428
|
|
|
$
|
(69,224
|
)
|
|
$
|
119,204
|
|
Amortization expense during the years ended December 31, 2016, 2015 and 2014 was $
8.2 million
, $
10.3 million
and $
10.9 million
, respectively.
The following table represents future amortization expense of definite-lived intangible assets at December 31,
2016
:
|
|
|
|
|
Years ending December 31,
|
Amortization expense
|
|
(in thousands)
|
2017
|
$
|
7,626
|
|
2018
|
7,425
|
|
2019
|
7,285
|
|
2020
|
7,222
|
|
2021
|
7,113
|
|
Thereafter
|
74,558
|
|
Total future amortization expense
|
$
|
111,229
|
|
Acquisitions
For the years ended December 31,
2016
,
2015
and
2014
, the Company acquired
21
,
44
and
25
franchise stores, respectively. These acquisitions are accounted for utilizing the acquisition method of accounting, and the Company allocated the purchase price by recognizing acquired inventory, fixed assets, franchise rights and other net assets at fair value with any excess being recorded as goodwill. For the years ended December 31,
2016
,
2015
and
2014
, the total purchase prices associated with these acquisitions was $
3.4 million
, $
6.2 million
, and $
3.7 million
, respectively.
On April 17, 2014, the Company acquired the assets and assumed the liabilities of The Health Store, which was accounted for as a business combination. The total purchase price for this acquisition was approximately $
8.9 million
, of which $
6.9 million
, $
0.8 million
, and $
1.2 million
was allocated to goodwill, definite-lived intangible assets and other net assets, respectively.
Discount Supplements Prior Year Charges
During the third quarter of 2015, due to the declining financial performance and the Company’s decision to review strategic options for the business a triggering event occurred requiring an interim goodwill impairment review of the Discount Supplements reporting unit as of September 30, 2015. The Company determined the fair value of the Discount Supplements reporting unit at September 30, 2015 using a discounted cash flow method (income approach).
As a result of the review, the Company concluded that the carrying value of the Discount Supplements reporting unit exceeded its fair value and proceeded to step two of the impairment analysis. Based on the results of step two, the Company concluded that this reporting unit's goodwill was fully impaired; as a result, a goodwill impairment charge of $
23.3 million
was recorded in the third quarter of 2015.
GNC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As a result of the impairment indicators, the Company also performed an impairment analysis with respect to the definite-long-lived assets of Discount Supplements, consisting of trade name and website intangibles and property and equipment. The fair value of these assets were determined using various income approaches. Based on the results of the analyses, the Company recorded impairment charges of $
4.4 million
on the trade name and website intangible assets and $
0.6 million
on property and equipment. All of the aforementioned charges totaling $
28.3 million
were recorded in "Long-lived asset impairments" in the consolidated statement of operations for the year ended December 31, 2015.
The Company sold substantially all of the assets of Discount Supplements in the fourth quarter of 2015 and recorded a $
2.7 million
loss recorded within Other Loss (income) net on the consolidated statement of operations.
NOTE 7. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net, consisted of the following:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
|
(in thousands)
|
Land, buildings and improvements
|
$
|
72,119
|
|
|
$
|
70,487
|
|
Machinery and equipment
|
172,261
|
|
|
150,809
|
|
Leasehold improvements
|
144,667
|
|
|
139,448
|
|
Furniture and fixtures
|
108,998
|
|
|
106,722
|
|
Software
|
64,264
|
|
|
54,506
|
|
Construction in progress
|
6,346
|
|
|
6,340
|
|
Total property, plant and equipment
|
568,655
|
|
|
528,312
|
|
Less: accumulated depreciation
|
(330,942
|
)
|
|
(297,164
|
)
|
Less: impairment
|
(5,421
|
)
|
|
(613
|
)
|
Net property, plant and equipment
|
$
|
232,292
|
|
|
$
|
230,535
|
|
The Company recognized depreciation expense on property, plant and equipment of
$51.8 million
,
$47.0 million
, and
$45.5 million
for the years ended December 31,
2016
,
2015
and
2014
, respectively, which is included in occupancy expense as part of cost of sales and selling, general and administrative expense on the consolidated statements of operations.
Impairment
Management evaluated its property, plant, and equipment and recorded a $
5.4 million
impairment charge within the U.S. and Canada segment for the year ended December 31, 2016, presented as "Long-lived asset impairments" in the accompanying consolidated statement of operations. For individual under-performing stores, the impairment test was performed at the individual store level as this is the lowest level which identifiable cash flows are largely independent of other groups of assets and liabilities. Under-performing stores were generally defined as those with historical and expected future losses or stores that management intends on closing in the near term. If the undiscounted estimated cash flows were less than the carrying value of the asset group, an impairment charge was calculated by subtracting the estimated fair value of property and equipment from its carrying value. Fair value was estimated using a discounted cash flow method (income approach) utilizing the undiscounted cash flows estimated in the first step of the test.
GNC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 8. LONG-TERM DEBT / INTEREST EXPENSE
Long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
|
(in thousands)
|
Term Loan Facility (net of $1.6 million and $2.2 million discount)
|
$
|
1,170,486
|
|
|
$
|
1,174,369
|
|
Revolving Credit Facility
|
127,000
|
|
|
43,000
|
|
Notes
|
245,273
|
|
|
235,085
|
|
Debt issuance costs
|
(2,306
|
)
|
|
(3,276
|
)
|
Total debt
|
$
|
1,540,453
|
|
|
$
|
1,449,178
|
|
Less: current maturities
|
(12,562
|
)
|
|
(4,550
|
)
|
Long-term debt
|
$
|
1,527,891
|
|
|
$
|
1,444,628
|
|
At December 31,
2016
, the Company's future annual contractual principal payments on long-term debt were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ending
December 31,
|
Term Loan Facility
(1)
|
|
Revolving Credit Facility
|
|
Convertible Notes
(2)
|
|
Total
|
|
(in thousands)
|
2017
|
$
|
12,562
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
12,562
|
|
2018
|
3,392
|
|
|
127,000
|
|
|
—
|
|
|
130,392
|
|
2019
|
1,156,096
|
|
|
—
|
|
|
—
|
|
|
1,156,096
|
|
2020
|
—
|
|
|
—
|
|
|
287,500
|
|
|
287,500
|
|
Total future principal payments
|
$
|
1,172,050
|
|
|
$
|
127,000
|
|
|
$
|
287,500
|
|
|
$
|
1,586,550
|
|
(1) Includes the unamortized original issuance discount of
$1.6 million
.
(2) Includes unamortized conversion feature of
$37.2 million
and original issuance discount of
$5.0 million
.
Senior Credit Facility
In March 2011, General Nutrition Centers, Inc. ("Centers"), a wholly owned subsidiary of Holdings, entered into the Senior Credit Facility, consisting of the Term Loan Facility and the Revolving Credit Facility. The Senior Credit Facility permits the Company to prepay a portion or all of the outstanding balance without incurring penalties (except London Interbank Offering Rate ("LIBOR") breakage costs). GNC Corporation, the Company's indirect wholly owned subsidiary, and Centers' existing and future domestic subsidiaries have guaranteed Centers' obligations under the Senior Credit Facility. In addition, the Senior Credit Facility is collateralized by first priority pledges (subject to permitted liens) of substantially all of Centers' assets, including its equity interests and the equity interests of its domestic subsidiaries.
The Company amended the Revolving Credit Facility on March 4, 2016, to extend its maturity from March 2017 to September 2018 and increase total availability from $
130.0 million
to $
300.0 million
. In connection with this transaction, the Company incurred $
1.7 million
of costs, which were capitalized as deferred financing fees within "Other long-term assets" and will be amortized to interest expense over the new term of the Revolving Credit Facility. As of December 31,
2016
, the Company had $
167.2 million
available under the Revolving Credit Facility, after giving effect to $
127.0 million
of borrowings outstanding and $
5.8 million
utilized to secure letters of credit.
As of December 31,
2016
and
2015
, the Company's interest rate on its Term Loan Facility was
3.27%
and
3.25%
, respectively. The Revolving Credit Facility had a weighted average interest rate of
2.7%
and
2.6%
at December 31,
2016
and
2015
, respectively. The Company is also required to pay an annual fee of
2.5%
on outstanding letters of credit and an annual commitment fee of
0.5%
on the undrawn portion of the Revolving Credit Facility.
The Senior Credit Facility contains customary covenants, including incurrence covenants and certain other limitations on the ability of GNC Corporation, Centers, and Centers' subsidiaries to, among other things, make optional payments in respect of other debt instruments, pay dividends or other payments on capital stock, and enter into arrangements that restrict their ability to
GNC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
pay dividends or grant liens. As of December 31,
2016
, the ratio on the Consolidated Net Senior Secured Leverage Ratio will require an excess cash flow payment on the outstanding term loan debt of $
11.4 million
in the second quarter of 2017. The Company is currently in compliance, and expects to remain in compliance over the next twelve months, with the terms of its Senior Credit Facility.
Convertible Debt
On August 10, 2015, the Company issued $
287.5 million
principal amount of
1.5%
convertible senior notes due 2020 (the “Notes”) in a private offering. The Notes are governed by the terms of an indenture between the Company and BNY Mellon Trust Company, N.A., as the Trustee (the "Indenture"). The Notes will mature on August 15, 2020, unless earlier purchased by the Company or converted. The Notes will bear interest at a rate of
1.5%
per annum, and additionally will be subject to special interest in connection with any failure of the Company to perform certain of its obligations under the Indenture.
The Notes are unsecured obligations and do not contain any financial covenants or restrictions on the payments of dividends, the incurrence of indebtedness or the issuance or repurchase of securities by the Company or any of its subsidiaries. Certain events are considered “events of default” under the Notes, which may result in the acceleration of the maturity of the Notes, as described in the indenture governing the Notes. The Notes are fully and unconditionally guaranteed by certain operating subsidiaries of the Company (“Subsidiary Guarantors”) and are subordinated to the Subsidiary Guarantors obligations from time to time with respect to the Senior Credit Facility and ranks equal in right of payment with respect to the Subsidiary Guarantor’s other obligations.
The initial conversion rate applicable to the Notes is
15.1156
shares of common stock per
$1,000
principal amount of Notes, which is equivalent to an initial conversion price of approximately
$66.16
per share. The conversion rate will be subject to adjustment upon the occurrence of certain specified events, but will not be adjusted for any accrued and unpaid special interest. In addition, upon the occurrence of a “make-whole fundamental change" as defined in the Indenture, the Company will, in certain circumstances, increase the conversion rate by a number of additional shares for a holder that elects to convert its Notes in connection with such make-whole fundamental change.
Prior to May 15, 2020, the Notes will be convertible only under the following circumstances: (1) during any calendar quarter commencing after September 30, 2015, if, for at least
20
trading days (whether or not consecutive) during the
30
consecutive trading day period ending on the last trading day of the immediately preceding calendar quarter, the last reported sale price of the Company’s common stock on such trading day is greater than or equal to
130%
of the applicable conversion price on such trading day; (2) during the
5
consecutive business day period after any
10
consecutive trading day period in which, for each day of that period, the trading price per $
1,000
principal amount of Notes for such trading day was less than
98%
of the product of the last reported sale price of the Company’s common stock and the applicable conversion rate on such trading day; or (3) upon the occurrence of specified corporate transactions. On and after May 15, 2020, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or a portion of their Notes at any time, regardless of the foregoing circumstances. Upon conversion, the Notes will be settled, at the Company’s election, in cash, shares of the Company’s common stock, or a combination of cash and shares of the Company’s common stock. If the Company has not delivered a notice of its election of settlement method prior to the final conversion period it will be deemed to have elected combination settlement with a dollar amount per note to be received upon conversion of $
1,000
.
GNC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Notes consist of the following components:
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
2016
|
|
2015
|
|
(in thousands)
|
Liability component
|
|
|
|
Principal
|
$
|
287,500
|
|
|
$
|
287,500
|
|
Conversion feature
|
(37,179
|
)
|
|
(46,271
|
)
|
Discount related to debt issuance costs
|
(5,048
|
)
|
|
(6,144
|
)
|
Net carrying amount
|
$
|
245,273
|
|
|
$
|
235,085
|
|
|
|
|
|
Equity component
|
|
|
|
Conversion feature
|
$
|
49,680
|
|
|
$
|
49,680
|
|
Debt issuance costs
|
(1,421
|
)
|
|
(1,421
|
)
|
Deferred taxes
|
(17,750
|
)
|
|
(17,750
|
)
|
Net amount recorded in additional paid-in capital
|
$
|
30,509
|
|
|
$
|
30,509
|
|
Interest Expense
Interest expense consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended
December 31,
|
|
2016
|
|
2015
|
|
2014
|
|
(in thousands)
|
Senior Credit Facility:
|
|
|
|
|
|
|
|
|
Term Loan Facility coupon
|
$
|
38,821
|
|
|
$
|
42,147
|
|
|
$
|
44,427
|
|
Revolving Credit Facility
|
4,689
|
|
|
805
|
|
|
682
|
|
Amortization of discount and debt issuance costs
|
2,444
|
|
|
2,583
|
|
|
1,729
|
|
Total Senior Credit Facility
|
45,954
|
|
|
45,535
|
|
|
46,838
|
|
Notes:
|
|
|
|
|
|
Coupon
|
4,313
|
|
|
1,702
|
|
|
—
|
|
Amortization of conversion feature
|
9,092
|
|
|
3,410
|
|
|
—
|
|
Amortization of discount and debt issuance costs
|
1,140
|
|
|
412
|
|
|
—
|
|
Total Notes
|
14,545
|
|
|
5,524
|
|
|
—
|
|
Interest income and other
|
(56
|
)
|
|
(123
|
)
|
|
(130
|
)
|
Interest expense, net
|
$
|
60,443
|
|
|
$
|
50,936
|
|
|
$
|
46,708
|
|
GNC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 9. DEFERRED REVENUE AND OTHER CURRENT LIABILITIES
Deferred revenue and other current liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
|
(in thousands)
|
Deferred revenue
|
$
|
40,338
|
|
|
$
|
45,018
|
|
Accrued compensation and related benefits
|
34,700
|
|
|
31,091
|
|
Accrued real estate taxes, utilities and other occupancy
|
4,932
|
|
|
3,352
|
|
Accrued sales tax
|
2,626
|
|
|
3,659
|
|
Accrued interest
|
2,383
|
|
|
2,210
|
|
Accrued income taxes
|
1,454
|
|
|
1,181
|
|
Dividends payable
|
586
|
|
|
222
|
|
Other current liabilities
|
28,152
|
|
|
34,329
|
|
Total deferred revenue and other current liabilities
|
$
|
115,171
|
|
|
$
|
121,062
|
|
Deferred revenue includes $
24.4 million
associated with the domestic company-owned Gold Card Member Pricing program, which was discontinued on December 28, 2016 in connection with the introduction of the One New GNC and replaced with a points-based loyalty program. Refer to Note 2, "Basis of Presentation and Summary of Significant Accounting Policies" for more information.
NOTE 10. FAIR VALUE MEASUREMENTS AND FINANCIAL INSTRUMENTS
ASC 820, "Fair Value Measurements and Disclosures" defines fair value as a market-based measurement that should be determined based on the assumptions that marketplace participants would use in pricing an asset or liability. As a basis for considering such assumptions, the standard establishes a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value as follows:
|
|
Level 1 — observable inputs such as quoted prices in active markets for identical assets and liabilities;
|
Level 2 — observable inputs such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, other inputs that are observable, or can be corroborated by observable market data; and
|
Level 3 — unobservable inputs for which there are little or no market data, which require the reporting entity to develop its own assumptions.
|
The carrying amounts of cash and cash equivalents, receivables, accounts payable, accrued liabilities and the Revolving Credit Facility approximate their respective fair values. Based on the interest rates currently available and their underlying risk, the carrying value of franchise notes receivable recorded primarily in Other long-term assets approximates its fair value.
The carrying value and estimated fair value of the Term Loan Facility, net of discount, and Notes (net of the equity component classified in stockholders' equity and discount) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
|
Carrying
Amount
|
|
Fair
Value
|
|
Carrying
Amount
|
|
Fair
Value
|
|
(in thousands)
|
Term Loan Facility
|
$
|
1,170,486
|
|
|
$
|
1,100,257
|
|
|
$
|
1,174,369
|
|
|
$
|
1,145,010
|
|
Notes
|
245,273
|
|
|
185,794
|
|
|
235,085
|
|
|
188,940
|
|
The fair value of the Term Loan Facility was determined using the instrument’s trading value in markets that are not active, which are considered Level 2 inputs. The fair value of the Notes was determined based on quoted market prices and bond terms and conditions, which are considered Level 2 inputs.
GNC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As described in Note 6, "Goodwill and Intangible Assets, Net," and Note 7, "Property, Plant and Equipment, Net," the Company recorded asset impairments in the years ended December 31, 2016 and 2015. This resulted in goodwill and property and equipment assets being measured at fair value on a non-recurring basis using Level 3 inputs as follows:
|
|
•
|
goodwill at December 31, 2016 for the Domestic Stores, Canada and Manufacturing reporting units; and
|
|
|
•
|
property and equipment at certain of the Company's stores at December 31, 2016.
|
NOTE 11. LONG-TERM LEASE OBLIGATIONS
The Company's rent expense, which is recorded within cost of sales on the consolidated statements of operations, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
|
(in thousands)
|
Company-owned and franchise stores:
|
|
|
|
|
|
|
|
|
Rent on operating leases
|
$
|
193,830
|
|
|
$
|
187,346
|
|
|
$
|
179,675
|
|
Landlord related taxes
|
27,747
|
|
|
25,765
|
|
|
24,779
|
|
Common operating expenses
|
45,375
|
|
|
44,184
|
|
|
42,674
|
|
Percent and contingent rent
|
19,435
|
|
|
21,109
|
|
|
22,573
|
|
Total company-owned and franchise stores
|
286,387
|
|
|
278,404
|
|
|
269,701
|
|
Other
|
19,905
|
|
|
16,568
|
|
|
15,716
|
|
Total rent expense
|
$
|
306,292
|
|
|
$
|
294,972
|
|
|
$
|
285,417
|
|
The Company recorded sublease revenue, within Revenue on the consolidated statements of operations, of $
47.6 million
, $
44.1 million
and $
41.9 million
in the years ended December 31, 2016, 2015 and 2014, respectively, relating to subleases with its franchisees, which includes rental income and other occupancy related items.
Minimum future rent obligations for non-cancelable operating leases, excluding optional renewal periods, with initial or remaining terms of at least
one year
in effect at
December 31, 2016
were as follows for the years ending December 31 and exclude taxes, common operating expense, and percent and contingent rent.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-Owned and Franchise Stores
|
|
Sublease
Income from Franchisees
|
|
Other
|
|
Rent on Operating Leases, net of Sublease Revenue
|
|
(in thousands)
|
2017
|
$
|
176,605
|
|
|
$
|
(33,966
|
)
|
|
$
|
5,154
|
|
|
$
|
147,793
|
|
2018
|
138,943
|
|
|
(26,421
|
)
|
|
2,846
|
|
|
115,368
|
|
2019
|
104,525
|
|
|
(19,469
|
)
|
|
2,385
|
|
|
87,441
|
|
2020
|
77,882
|
|
|
(13,678
|
)
|
|
1,809
|
|
|
66,013
|
|
2021
|
54,255
|
|
|
(7,429
|
)
|
|
1,504
|
|
|
48,330
|
|
Thereafter
|
103,123
|
|
|
(7,956
|
)
|
|
18,183
|
|
|
113,350
|
|
Total future obligations
|
$
|
655,333
|
|
|
$
|
(108,919
|
)
|
|
$
|
31,881
|
|
|
$
|
578,295
|
|
NOTE 12. COMMITMENTS AND CONTINGENCIES
Litigation
The Company is engaged in various legal actions, claims and proceedings arising in the normal course of business, including claims related to breach of contracts, products liabilities, intellectual property matters and employment-related matters resulting from the Company's business activities.
GNC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company's contingencies are subject to substantial uncertainties, including for each such contingency the following, among other factors: (i) the procedural status of the case; (ii) whether the case has or may be certified as a class action suit; (iii) the outcome of preliminary motions; (iv) the impact of discovery; (v) whether there are significant factual issues to be determined or resolved; (vi) whether the proceedings involve a large number of parties and/or parties and claims in multiple jurisdictions or jurisdictions in which the relevant laws are complex or unclear; (vii) the extent of potential damages, which are often unspecified or indeterminate; and (viii) the status of settlement discussions, if any, and the settlement posture of the parties. Consequently, except as otherwise noted below with regard to a particular matter, the Company cannot predict with any reasonable certainty the timing or outcome of the legal matters described below, and the Company is unable to estimate a possible loss or range of loss. If the Company ultimately is required to make a payment in connection with an adverse outcome in any of the matters discussed below, it is possible that it could have a material adverse effect on the Company's business, financial condition, results of operations or cash flows.
As a manufacturer and retailer of nutritional supplements and other consumer products that are ingested by consumers or applied to their bodies, the Company has been and is currently subjected to various product liability claims. Although the effects of these claims to date have not been material to the Company, it is possible that current and future product liability claims could have a material adverse effect on its business or financial condition, results of operations or cash flows. The Company currently maintains product liability insurance with a deductible/retention of
$4.0 million
per claim with an aggregate cap on retained loss of
$10.0 million
per policy year. The Company typically seeks and has obtained contractual indemnification from most parties that supply raw materials for its products or that manufacture or market products it sells. The Company also typically seeks to be added, and has been added, as an additional insured under most of such parties' insurance policies. However, any such indemnification or insurance is limited by its terms and any such indemnification, as a practical matter, is limited to the creditworthiness of the indemnifying party and its insurer, and the absence of significant defenses by the insurers. Consequently, the Company may incur material products liability claims, which could increase its costs and adversely affect its reputation, revenue and operating income.
During the year ended December 31, 2016, the Company recorded $
5.1 million
in legal-related charges associated with a Pennsylvania fluctuating workweek wage issue, the Jason Olive case and a government regulation matter, the amounts of which were individually immaterial. These items are explained below in more detail.
DMAA/Aegeline Claims.
Prior to December 2013, the Company sold products manufactured by third parties that contained derivatives from geranium known as 1.3-dimethylpentylamine/ dimethylamylamine/13-dimethylamylamine, or "DMAA," which were recalled from the Company's stores in November 2013, and/or Aegeline, a compound extracted from bael trees. As of December 31, 2015, the Company was named in
28
personal injury lawsuits involving products containing DMAA and/or Aegeline.
As a general matter, the proceedings associated with these personal injury cases, which generally seek indeterminate money damages, are in the early stages, and any losses that may arise from these matters are not probable or reasonably estimable at this time. The case captioned Leanne Sparling and Michael Sparling on behalf of Michael Sparling, deceased v. USPLabs, GNC Corporation et al., which previously was scheduled for trial in February 2016, was dismissed with prejudice.
The Company is contractually entitled to indemnification by its third-party vendors with regard to these matters, although the Company’s ability to obtain full recovery in respect of any such claims against it is dependent upon the creditworthiness of the vendors and/or their insurance coverage and the absence of any significant defenses available to its insurer.
California Wage and Break Claim.
In July 2011, Charles Brewer, on behalf of himself and all others similarly situated, sued General Nutrition Corporation in federal court, alleging state and federal wage and hour claims. In October 2011, plaintiff filed an
eight
-count amended complaint alleging, among other matters, meal, rest break and overtime violations on behalf of sales associates and store managers. In January 2013, the Court conditionally certified a Fair Labor Standards Act ("FLSA") class with respect to one of Plaintiff's claims, and in November 2014, the Court granted in part and denied in part the plaintiff's motion to certify a California class and granted the Company's motion for decertification of the FLSA class. In May 2015, plaintiffs filed a motion for partial summary judgment as to the Company' alleged liability for non-compliant wage statements, which was granted in part and denied in part in September 2015. On February 5, 2016, the Company and attorneys representing the putative class agreed to class-wide settlements of the Brewer case and an additional, immaterial case raising similar claims, pursuant to which the Company agreed to pay up to
$9.5 million
in the aggregate, including attorneys’ fees and costs. Following a hearing on August 23, 2016, the Court approved the settlement agreement and dismissed the case with prejudice. As a result of this settlement, the Company recorded a charge of $
9.5 million
in 2015, which was paid in the fourth quarter of 2016.
GNC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On February 29, 2012, former Senior Store Manager, Elizabeth Naranjo, individually and on behalf of all others similarly situated sued General Nutrition Corporation in the Superior Court of the State of California for the County of Alameda. The complaint contains
eight
causes of action, alleging, among other matters, meal, rest break, and overtime violations. As of December 31, 2015, an
immaterial liability
has been accrued in the accompanying financial statements.
Pennsylvania Fluctuating Workweek.
On September 18, 2013, Tawny Chevalier and Andrew Hiller commenced a class action in the Court of Common Pleas of Allegheny County, Pennsylvania. Plaintiff asserted a claim against the Company for a purported violation of the Pennsylvanian Minimum Wage Act (PMWA), challenging the Company's utilization of the "fluctuating workweek" method to calculate overtime compensation, on behalf of all employees who worked for the Company in Pennsylvania and who were paid according to the fluctuating workweek method. In October 2014, the Court entered an order holding that the use of the fluctuating workweek method violated the PMWA. In September 2016, the Court entered judgment in favor of Plaintiffs and the class in an immaterial amount, which has been recorded as a charge in the accompanying consolidated financial statements. Plaintiffs subsequently filed a petition for an award of attorney's fees, costs and incentive payment. The court awarded an immaterial amount in legal fees. The Company appealed from the adverse judgment; the appeal is pending.
Jason Olive v. General Nutrition Corp.
In April 2012, Jason Olive filed a complaint in the Superior Court of California, County of Los Angeles, for misappropriation of likeness in which he alleges that the Company continued to use his image in stores after the expiration of the license to do so in violation of common law and California statutes. Mr. Olive is seeking compensatory, punitive and statutory damages and attorneys’ fees and costs. The trial in this matter began on July 20, 2016 and concluded on August 8, 2016. The jury awarded plaintiff immaterial amounts for actual damages and emotional distress damages, which are accrued in the Company's accompanying consolidated financial statements. The jury refused to award plaintiff any of the profits he sought to disgorge, or punitive damages. The court entered judgment in the case on October 14, 2016. In addition to the verdict, the Company and Mr. Olive sought attorneys' fees and other costs from the Court. The Court refused to award attorney's fees to either side but awarded plaintiff an immaterial amount for costs. Plaintiff has appealed the judgment, and separately, the order denying attorney's fees. The Company has cross-appealed the judgment and the Court's denial of attorney fees. The appeals are currently pending.
Oregon Attorney General.
On October 22, 2015, the Attorney General for the State of Oregon sued General Nutrition Corporation in Multnomah County Circuit Court for alleged violations of Oregon’s Unlawful Trade Practices Act, in connection with its sale in Oregon of certain third-party products, which was amended on September 19, 2016 to add allegations related to products containing DMAA and oxilofrine. The Company is vigorously defending itself against these allegations. On December 19, 2016, the Company filed an answer, including counterclaims and third party complaints for indemnification. As any losses that may arise from this matter are not probable or reasonably estimable at this time,
no
liability has been accrued in the accompanying consolidated financial statements. Moreover, the Company does not anticipate that any such losses are likely to have a material impact on the Company, its business or results of operations. The Company is contractually entitled to indemnification and defense by its third-party vendors. Ultimately, however, the Company's ability to obtain full recovery in respect of any such claims against it is dependent upon the creditworthiness of its vendors and/or their insurance coverage and the absence of any significant defenses available to their insurers.
Government Regulation
In November 2013, the Company received a subpoena from the U.S. Department of Justice ("DOJ") for information related to its investigation of a third party product vendor, USP Labs, LLC. The Company fully cooperated with the investigation of the vendor and the related products, all of which were discontinued in 2013. In December 2016, the Company reached agreement with the DOJ in connection with the Company's cooperation; which agreement acknowledges the Company relied on the representations and written guarantees of USP Labs and the Company's representation that it did not knowingly sell products not in compliance with the FDCA. Under the agreement, which includes an immaterial payment to the federal government, the Company will take a number of actions to broaden industry-wide knowledge of prohibited ingredients and improve compliance by vendors of third party products. These actions are in keeping with the leadership role the Company has taken in setting industry quality and compliance standards, and the Company's commitment over the course of the agreement (
60 months
) to support a combination of its and the industry's initiatives. Some of these actions include maintaining and continuously updating a list of restricted ingredients that will be prohibited from inclusion in any products that are sold by the Company. Vendors selling product to the Company for the sale of such products by the Company will be required to warrant that the products sold do not contain any of these restricted ingredients. In addition, the Company will develop and maintain a list of ingredients that the Company believes comply with the applicable provisions of the FDCA.
GNC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Environmental Compliance
In March 2008, the South Carolina Department of Health and Environmental Control (the "DHEC") requested that the Company investigate contamination associated with historical activities at its South Carolina facility. These investigations have identified chlorinated solvent impacts in soils and groundwater that extend offsite from the facility. The Company entered into a Voluntary Cleanup Contract with the DHEC regarding the matter on September 24, 2012. Pursuant to such contract, the Company is completing additional investigations with the DHEC's approval. The Company installed and began operating a pilot vapor extraction system under a portion of the facility in the second half of 2016, which was an immaterial cost to the Company, with DHEC's approval to assess the effectiveness of such a remedial system. At this stage of the investigation, however, it is not possible to estimate the timing and extent of any additional remedial action that may be required, the ultimate cost of remediation, or the amount of the Company's potential liability; therefore
no
liability has been recorded in the accompanying consolidated balance sheet.
In addition to the foregoing, the Company is subject to numerous federal, state, local and foreign environmental and health and safety laws and regulations governing its operations, including the handling, transportation and disposal of the Company's non-hazardous and hazardous substances and wastes, as well as emissions and discharges from its operations into the environment, including discharges to air, surface water and groundwater. Failure to comply with such laws and regulations could result in costs for remedial actions, penalties or the imposition of other liabilities. New laws, changes in existing laws or the interpretation thereof, or the development of new facts or changes in their processes could also cause the Company to incur additional capital and operating expenditures to maintain compliance with environmental laws and regulations and environmental permits. The Company is also subject to laws and regulations that impose liability and cleanup responsibility for releases of hazardous substances into the environment without regard to fault or knowledge about the condition or action causing the liability. Under certain of these laws and regulations, such liabilities can be imposed for cleanup of previously owned or operated properties, or for properties to which substances or wastes that were sent in connection with current or former operations at its facilities. The presence of contamination from such substances or wastes could also adversely affect the Company's ability to sell or lease its properties, or to use them as collateral for financing. From time to time, the Company has incurred costs and obligations for correcting environmental and health and safety noncompliance matters and for remediation at or relating to certain of the Company's properties or properties at which the Company's waste has been disposed. However, compliance with the provisions of national, state and local environmental laws and regulations has not had a material effect upon the Company's capital expenditures, earnings, financial position, liquidity or competitive position. The Company believes it has complied with, and is currently complying with, its environmental obligations pursuant to environmental and health and safety laws and regulations and that any liabilities for noncompliance will not have a material adverse effect on its business, financial performance or cash flows. However, it is difficult to predict future liabilities and obligations, which could be material.
Commitments
In addition to operating leases obtained in the normal course of business, the Company maintains certain purchase commitments with various vendors to ensure its operational needs are fulfilled. As of December 31,
2016
, such future purchase commitments consisted of $
37.7 million
. Other commitments related to the Company's business operations cover varying periods of time and are not significant. All of these commitments are expected to be fulfilled with no adverse consequences to the Company's operations or financial condition.
GNC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 13. STOCKHOLDERS' EQUITY
Treasury Stock
In August 2015, the Board approved a $
500.0 million
multi-year repurchase program in addition to the $
500.0 million
multi-year program approved in August 2014, bringing the aggregate share repurchase program to $
1.0 billion
of Holdings' common stock. Holdings repurchased $
229.2 million
of common stock during
2016
. As of December 31,
2016
, $
197.8 million
remains available for purchase under the program and is not expected to be utilized in 2017.
Preferred Stock
Holdings is authorized to issue up to
60.0 million
shares of preferred stock, par value
$0.001
per share.
No
shares of preferred stock were issued to date.
NOTE 14. EARNINGS PER SHARE
The following table represents the Company's basic and dilutive weighted average shares:
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
|
(in thousands)
|
Basic weighted average shares
|
69,409
|
|
|
83,927
|
|
|
90,493
|
|
Effect of dilutive stock-based compensation awards
|
—
|
|
|
259
|
|
|
425
|
|
Diluted weighted averages shares
|
69,409
|
|
|
84,186
|
|
|
90,918
|
|
For the year ended December 31, 2016, all
1.5 million
outstanding stock-based awards were excluded from the computation of diluted EPS because the Company was in a net loss position and as a result inclusion of the awards would have been anti-dilutive. For the years ended December 31, 2015 and 2014, the following awards were not included in the computation of diluted EPS because the impact of applying the treasury stock method was antidilutive or because certain conditions have not been met with respect to the Company's performance-based awards.
|
|
|
|
|
|
|
|
2015
|
|
2014
|
Antidilutive:
|
(in thousands)
|
Time-based
|
161
|
|
|
280
|
|
Contingently issuable:
|
|
|
|
Performance-based
|
139
|
|
|
116
|
|
Total stock-based awards
|
300
|
|
|
396
|
|
The Company has the intent and ability to settle the principal portion of its Notes in cash, and as such, has applied the treasury stock method, which has resulted in all underlying convertible shares being anti-dilutive as the Company's average stock price in the current year is less than the conversion price. Refer to Note 8, "Long-Term Debt / Interest Expense" for more information on the Notes.
NOTE 15. STOCK-BASED COMPENSATION PLANS
Overview
The Company has outstanding stock-based compensation awards that were granted by the compensation committee of Holdings' Board of Directors (the "Compensation Committee") under the following
two
stock-based employee compensation plans:
|
|
•
|
the GNC Holdings, Inc. 2015 Stock and Incentive Plan (the "2015 Stock Plan") amended and adopted in May 2015, formerly the GNC Holdings, Inc. 2011 Stock and Incentive Plan (the "2011 Stock Plan") adopted in March 2011; and
|
|
|
•
|
the GNC Acquisition Holdings Inc. 2007 Stock Incentive Plan adopted in March 2007 (as amended, the "2007 Stock Plan").
|
GNC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Both plans have provisions that allow for the granting of stock options, restricted stock and other stock based awards and are available to eligible employees, directors, consultants or advisors as determined by the Compensation Committee. The Company will not grant any additional awards under the 2007 Stock Plan. Up to
11.5 million
shares of common stock may be issued under the 2015 Stock Plan (subject to adjustment to reflect certain transactions and events specified in the 2015 Stock Plan for any award grant), of which
7.3 million
shares remain available for issuance as of December 31, 2016.
The following table sets forth a summary of all stock-based compensation awards outstanding under all plans:
|
|
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
Time-based stock options
|
913,960
|
|
|
688,083
|
|
Time-based restricted stock awards
|
312,245
|
|
|
194,271
|
|
Performance-based restricted stock awards
|
101,384
|
|
|
140,916
|
|
Market-based restricted stock awards
|
165,635
|
|
|
—
|
|
Total share awards outstanding
|
1,493,224
|
|
|
1,023,270
|
|
The Company recognized $
8.8 million
, $
6.3 million
and $
5.9 million
of total non-cash stock-based compensation expense for the years ended December 31,
2016
,
2015
and
2014
, respectively. At December 31,
2016
, there was approximately
$11.3 million
of total unrecognized compensation cost related to non-vested stock-based compensation, net of expected forfeitures, for all awards previously made that are expected to be recognized over a weighted-average period of approximately
1.6
years.
Cash received from the exercise of options was $
0.4 million
, $
1.7 million
and
$22.2 million
in
2016
,
2015
and
2014
, respectively, which was recorded as additional paid-in capital on the accompanying consolidated balance sheets and presented as a cash inflow from financing activities on the accompanying consolidated statements of cash flows. The total tax benefit associated with stock-based compensation resulted in gross excess tax benefits of
$0.2 million
,
$0.6 million
, and
$3.7 million
in
2016
,
2015
and
2014
, respectively, which were recorded as additional paid-in capital and presented as a financing cash inflow.
On July 28, 2016, the Company announced the departure from the Company and resignation from the Board of Michael G. Archbold, its former Chief Executive Officer. During the year ended December 31, 2016 in connection with Mr. Archbold's departure, the company recognized $
4.5 million
in severance expense of which $
2.3 million
relates to the acceleration of non-cash stock-based compensation.
Stock Options
Time based stock options were granted using the Black-Scholes model with exercise prices at or above fair market value on the date of grant, typically vest at
25%
per year over a
four
- or
five
-year period and expire
seven
or
ten
years from the date of grant. The following table sets forth a summary of stock options under all plans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Options
|
|
Weighted
Average
Exercise Price
|
|
Weighted Average
Remaining
Contractual Term
(in years)
|
|
Aggregate
Intrinsic Value
(in thousands)
|
Outstanding at December 31, 2015
|
688,083
|
|
|
$
|
27.75
|
|
|
|
|
$
|
4,187
|
|
Granted
|
643,692
|
|
|
$
|
27.16
|
|
|
|
|
|
Exercised
|
(24,165
|
)
|
|
$
|
14.62
|
|
|
|
|
$
|
341
|
|
Forfeited and Expired
|
(393,650
|
)
|
|
$
|
30.43
|
|
|
|
|
|
Outstanding at December 31, 2016
|
913,960
|
|
|
$
|
26.53
|
|
|
6.2
|
|
$
|
71
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2016
|
409,212
|
|
|
$
|
23.94
|
|
|
2.8
|
|
$
|
71
|
|
GNC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
During the years ended December 31, 2015, and 2014, the total intrinsic value of options exercised was $
2.0 million
, and
$13.9 million
, respectively. The assumptions used in the Company's Black Scholes valuation were as follows:
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Dividend yield
|
2.3% - 3.8%
|
|
1.5% - 2.4%
|
|
1.5% - 1.9%
|
Expected term
|
6.3 years
|
|
6.3 years
|
|
6.3 years
|
Volatility
|
30.1% - 30.7%
|
|
31.1% - 38.3%
|
|
37.6% - 37.9%
|
Risk free rate
|
1.3% - 1.9%
|
|
1.3% - 1.9%
|
|
1.7% - 1.9%
|
The option term has been estimated by considering both the vesting period and the contractual term. Volatility was estimated utilizing a peer group average. The Black Scholes valuation resulted in a weighted average grant date fair value in 2016, 2015 and 2014 of $
6.23
, $
15.64
and $
11.08
, respectively.
Restricted Stock Awards
Under the 2015 Stock Plan, the Company granted time-based and performance-based restricted stock and restricted stock units, and market-based restricted stock. Time-based awards vest over a period of
three years
. Performance-based awards vest after a period of
three
years and the achievement of performance targets; based on the extent to which the targets are achieved, vested shares may range from
0%
to
200%
of the original share amount. Compensation expense related to the performance-based awards is adjusted as necessary to reflect changes in the probability that the vesting criteria will be achieved. Market-based awards vest after a period of
three years
and the achievement of total shareholder return compared with that of a selected group of peer companies. Total shareholder return is defined as share price appreciation plus the value of dividends paid during the three year vesting period. Fair value of these awards was determined using a Monte Carlo simulation, which requires various inputs and assumptions, including the Company's common stock price. Compensation cost for these awards is recognized regardless of whether the market condition is achieved. Vested shares may range from
0%
to
200%
of the original target. Key assumptions used in the Monte Carlo simulation for the awards granted during the year include peer group volatility of
34.2%
and a risk-free rate of
0.89%
.
The following table sets forth a summary of restricted stock awards granted under the 2015 Stock Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time-Based
|
|
Performance-Based
|
|
Market-Based
|
|
Shares
|
|
Wtd Avg Grant Date Fair Value
|
|
Shares
|
|
Wtd Avg Grant Date Fair Value
|
|
Shares
|
|
Wtd Avg Grant Date Fair Value
|
Outstanding at December 31, 2015
|
194,271
|
|
|
$
|
45.95
|
|
|
140,916
|
|
|
$
|
47.86
|
|
|
—
|
|
|
$
|
—
|
|
Granted
|
277,816
|
|
|
$
|
25.61
|
|
|
—
|
|
|
$
|
—
|
|
|
171,126
|
|
|
$
|
34.28
|
|
Vested
|
(131,462
|
)
|
|
$
|
41.39
|
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
Forfeited
|
(28,380
|
)
|
|
$
|
31.08
|
|
|
(39,532
|
)
|
|
$
|
45.17
|
|
|
(5,491
|
)
|
|
$
|
34.28
|
|
Outstanding at December 31, 2016
|
312,245
|
|
|
$
|
30.81
|
|
|
101,384
|
|
|
$
|
48.99
|
|
|
165,635
|
|
|
$
|
34.28
|
|
The total intrinsic value of time-based restricted stock awards vested was $
3.1
million, $
2.4 million
and $
4.3 million
for the years ended December 31, 2016, 2015 and 2014, respectively. The total intrinsic value of time-based restricted stock awards outstanding at December 31, 2016 was $
3.4 million
. The total intrinsic value of performance-based and market-based awards outstanding at December 31, 2016 assuming vesting at 100% was $
1.1 million
and $
1.8 million
, respectively. The weighted average grant date fair value of time-based and performance-based restricted stock awards granted was $
45.95
and $
47.86
in 2015 and $
43.38
and $
44.62
in 2014, respectively.
NOTE 16. RETIREMENT PLANS
The Company sponsors a 401(k) defined contribution savings plan covering substantially all employees. Full time employees who have completed
30 days
of service and part time employees who have completed
1,000
hours of service are eligible to participate in the plan. The plan provides for employee contributions of
1%
to
80%
of individual compensation into deferred
savings, subject to IRS limitations. The plan provides for Company contributions upon the employee meeting the eligibility requirements. The Company match consists of both a fixed and a discretionary match. The fixed match is
50%
on the first
3%
of employee contributions and the discretionary match could be up to an additional
50%
match on the
3%
deferral. A discretionary match can be approved at any time by the Company.
An employee becomes vested in the Company match portion as follows:
|
|
|
|
Years of Service
|
Percent
Vested
|
0-1
|
0
|
%
|
1-2
|
33
|
%
|
2-3
|
66
|
%
|
3+
|
100
|
%
|
The Company made cash contributions to the 401(k) plan of
$1.9 million
,
$1.5 million
and
$1.5 million
for the years ended December 31,
2016
,
2015
and
2014
, respectively.
The Company has a Non-qualified Deferred Compensation Plan that provides benefits payable to certain eligible employees upon scheduled in-service distribution, termination, or retirement. This plan allows participants the opportunity to defer pretax amounts ranging from
2%
to
100%
of their base compensation plus bonuses. During 2016, 2015 and 2014, the Company elected to match a percentage of the contributions from employees. For each of the years ended December 31, 2016, 2015 and 2014 this contribution was
$0.3 million
.
NOTE 17. SEGMENTS
Based on the refranchising initiatives announced in late 2015, which sought to increase the proportion of domestic stores that are franchise locations in 2016 and beyond, the Company's organizational structure and the financial reporting utilized by the Company's chief operating decision maker (its chief executive officer) to assess performance and allocate resources changed; as a result, the Company's reportable segments were changed effective in the second quarter of 2016. The Company believes that the new segments better present management's new view of the business.
The Company aggregates its operating segments into
three
reportable segments, which effective in the second quarter of 2016, include U.S. and Canada, International and Manufacturing / Wholesale. In connection with the change in the Company's segment reporting, warehousing and distribution costs have been allocated to each reportable segment, as appropriate. The Company's chief operating decision maker evaluates segment operating results based primarily on performance indicators, including revenue and operating (loss) income. Operating (loss) income of each reportable segment exclude certain items that are managed at the consolidated level, such as corporate costs. The Manufacturing / Wholesale segment manufactures and sells product to the U.S. and Canada and International segments at cost with a markup, which is eliminated at consolidation. The following table shows the new reportable segments compared with the previous reporting structure.
GNC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
Old
|
|
New
|
Segment:
Retail
Includes:
Company-owned stores in the U.S., Puerto Rico and Canada, The Health Store and e-commerce including Discount Supplements, which was sold in the fourth quarter of 2015
|
|
Segment:
U.S. and Canada
Includes:
Company-owned stores in the U.S., Puerto Rico and Canada, franchise stores in the U.S. and e-commerce
|
|
|
|
Segment:
Franchise
Includes:
Domestic and international franchise locations and China operations
|
|
Segment:
International
Includes:
Franchise locations in approximately 50 countries, The Health Store and China operations
|
|
|
|
Segment:
Manufacturing / Wholesale
Includes:
Manufactured product sold to our other segments, third-party contract manufacturing and sales to wholesale partners
|
|
Segment:
Manufacturing / Wholesale
Includes:
Manufactured product sold to our other segments, third-party contract manufacturing and sales to wholesale partners (no change from old)
|
|
|
|
|
|
Other
Includes:
Discount Supplements, an e-commerce business which was sold in the fourth quarter of 2015
|
GNC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table represents key financial information for each of the Company's reportable segments. The U.S. and Canada and Manufacturing / Wholesale segments were significantly impacted by $
386.0 million
and $
90.5 million
, respectively, in long-lived asset impairments recorded in the current year. Refer to Note 6, "Goodwill and Intangible Assets" and Note 7, "Property, Plant and Equipment, Net" for more information.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
|
(in thousands)
|
Revenue:
|
|
|
|
|
|
|
|
|
U.S. and Canada
|
$
|
2,143,647
|
|
|
$
|
2,240,515
|
|
|
$
|
2,207,283
|
|
International
|
160,691
|
|
|
183,007
|
|
|
174,934
|
|
Manufacturing / Wholesale:
|
|
|
|
|
|
Intersegment revenues
|
218,761
|
|
|
267,377
|
|
|
291,220
|
|
Third party
|
235,678
|
|
|
235,680
|
|
|
241,176
|
|
Subtotal Manufacturing / Wholesale
|
454,439
|
|
|
503,057
|
|
|
532,396
|
|
Total reportable segment revenues
|
2,758,777
|
|
|
2,926,579
|
|
|
2,914,613
|
|
Other
|
—
|
|
|
24,096
|
|
|
31,613
|
|
Elimination of intersegment revenues
|
(218,761
|
)
|
|
(267,377
|
)
|
|
(291,220
|
)
|
Total revenue
|
$
|
2,540,016
|
|
|
$
|
2,683,298
|
|
|
$
|
2,655,006
|
|
Operating (loss) income:
|
|
|
|
|
|
|
|
|
U.S. and Canada
|
$
|
(105,252
|
)
|
|
$
|
378,233
|
|
|
$
|
382,248
|
|
International
|
55,404
|
|
|
64,486
|
|
|
59,734
|
|
Manufacturing / Wholesale
|
(19,961
|
)
|
|
86,172
|
|
|
85,539
|
|
Total reportable segment operating (loss) income
|
(69,809
|
)
|
|
528,891
|
|
|
527,521
|
|
Unallocated corporate and other costs
|
|
|
|
|
|
Corporate costs
|
(103,362
|
)
|
|
(98,340
|
)
|
|
(88,420
|
)
|
Other
|
224
|
|
|
(37,444
|
)
|
|
411
|
|
Subtotal unallocated corporate and other costs
|
(103,138
|
)
|
|
(135,784
|
)
|
|
(88,009
|
)
|
Total operating (loss) income
|
(172,947
|
)
|
|
393,107
|
|
|
439,512
|
|
Interest expense, net
|
60,443
|
|
|
50,936
|
|
|
46,708
|
|
(Loss) income before income taxes
|
$
|
(233,390
|
)
|
|
$
|
342,171
|
|
|
$
|
392,804
|
|
Note: The presentation of certain immaterial amounts in our consolidated financial statements of prior periods have been revised to conform to the current periods presented. Specifically, sublease rental income received from franchisees is presented as “Revenue” compared with the previous presentation as a reduction to occupancy expense in “Cost of sales, including warehousing, distribution, and occupancy.” This revision has no impact on operating income. For additional information regarding this revision, see Item 8, "Financial Statements and Supplementary Data," Note 2, "Basis of Presentation and Significant Accounting Policies" under "Revision for Sublease Rent Income."
GNC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Depreciation and amortization:
|
(in thousands)
|
U.S. and Canada
|
$
|
36,491
|
|
|
$
|
32,314
|
|
|
$
|
32,804
|
|
International
|
2,256
|
|
|
2,232
|
|
|
2,169
|
|
Manufacturing / Wholesale
|
10,600
|
|
|
10,582
|
|
|
10,725
|
|
Corporate and other
|
10,691
|
|
|
12,109
|
|
|
10,639
|
|
Total depreciation and amortization
|
$
|
60,038
|
|
|
$
|
57,237
|
|
|
$
|
56,337
|
|
Capital expenditures:
|
|
|
|
|
|
|
|
|
U.S. and Canada
|
$
|
42,388
|
|
|
$
|
29,738
|
|
|
$
|
36,377
|
|
International
|
518
|
|
|
716
|
|
|
366
|
|
Manufacturing / Wholesale
|
7,467
|
|
|
5,655
|
|
|
5,903
|
|
Corporate and Other
|
9,206
|
|
|
9,718
|
|
|
27,809
|
|
Total capital expenditures
|
$
|
59,579
|
|
|
$
|
45,827
|
|
|
$
|
70,455
|
|
Total revenues by geographic areas:
|
|
|
|
|
|
|
|
|
United States
|
$
|
2,402,649
|
|
|
$
|
2,522,774
|
|
|
$
|
2,483,689
|
|
Foreign
|
137,367
|
|
|
160,524
|
|
|
171,317
|
|
Total revenues
|
$
|
2,540,016
|
|
|
$
|
2,683,298
|
|
|
$
|
2,655,006
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31
|
|
2016
|
|
2015
|
Total assets:
|
(in thousands)
|
U.S. and Canada
|
$
|
1,457,575
|
|
|
$
|
1,827,311
|
|
International
|
196,060
|
|
|
205,822
|
|
Manufacturing / Wholesale
|
339,663
|
|
|
418,623
|
|
Corporate and other
|
75,341
|
|
|
102,651
|
|
Total assets
|
$
|
2,068,639
|
|
|
$
|
2,554,407
|
|
Property, plant, and equipment, net:
|
|
|
|
|
|
United States
|
$
|
223,107
|
|
|
$
|
221,049
|
|
Foreign
|
9,185
|
|
|
9,486
|
|
Total property, plant and equipment, net
|
$
|
232,292
|
|
|
$
|
230,535
|
|
GNC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
U.S. and Canada Revenue
The following is a summary of revenue in the U.S. and Canada segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
U.S. company-owned product sales:
|
(in thousands)
|
Protein
|
$
|
369,150
|
|
|
$
|
389,917
|
|
|
$
|
386,691
|
|
Performance supplements
|
254,753
|
|
|
246,662
|
|
|
219,005
|
|
Weight management
|
154,195
|
|
|
165,114
|
|
|
178,072
|
|
Vitamins
|
218,908
|
|
|
271,099
|
|
|
319,953
|
|
Herbs / Greens
|
63,356
|
|
|
70,924
|
|
|
64,673
|
|
Wellness
|
200,914
|
|
|
211,377
|
|
|
196,571
|
|
Health / Beauty
|
164,510
|
|
|
149,520
|
|
|
148,009
|
|
Food / Drink
|
105,134
|
|
|
124,865
|
|
|
106,567
|
|
General merchandise
|
28,786
|
|
|
27,384
|
|
|
28,123
|
|
Total U.S. company-owned product sales
|
$
|
1,559,706
|
|
|
$
|
1,656,862
|
|
|
$
|
1,647,664
|
|
Wholesale sales to franchisees
|
250,779
|
|
|
257,497
|
|
|
235,666
|
|
Royalties and franchise fees
|
34,469
|
|
|
35,350
|
|
|
35,585
|
|
Sublease income
|
47,555
|
|
|
44,086
|
|
|
41,853
|
|
Gold card sales in U.S. company-owned stores
|
62,211
|
|
|
59,247
|
|
|
51,181
|
|
Other (*)
|
188,927
|
|
|
187,473
|
|
|
195,334
|
|
Total U.S. and Canada revenue
|
$
|
2,143,647
|
|
|
$
|
2,240,515
|
|
|
$
|
2,207,283
|
|
(*) Includes revenue primarily related to Canada operations and Lucky Vitamin.
International Revenue
The following is a summary of the Company's revenue in the International reportable segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
|
(in thousands)
|
Wholesale sales to franchisees
|
$
|
104,405
|
|
|
$
|
130,719
|
|
|
$
|
123,045
|
|
Royalties and franchise fees
|
25,485
|
|
|
29,085
|
|
|
30,989
|
|
Other
(*)
|
30,801
|
|
|
23,203
|
|
|
20,900
|
|
Total International revenue
|
$
|
160,691
|
|
|
$
|
183,007
|
|
|
$
|
174,934
|
|
(*) Includes revenue primarily related to China operations and The Health Store.
GNC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Manufacturing / Wholesale Revenue
The following is a summary of the Company's revenue in the Manufacturing / Wholesale reportable segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
|
(in thousands)
|
Third-party contract manufacturing
|
$
|
134,542
|
|
|
$
|
118,852
|
|
|
$
|
125,129
|
|
Intersegment sales
|
218,761
|
|
|
267,378
|
|
|
291,221
|
|
Wholesale partner sales
|
101,136
|
|
|
116,827
|
|
|
116,046
|
|
Total Manufacturing / Wholesale revenue
|
$
|
454,439
|
|
|
$
|
503,057
|
|
|
$
|
532,396
|
|
GNC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 18. QUARTERLY FINANCIAL INFORMATION
The following table summarizes the Company's
2016
and
2015
quarterly results:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended (unaudited)
|
|
Year ended
|
|
March 31,
|
|
June 30,
|
|
September 30,
|
|
December 31,
|
|
December 31,
|
|
2016
|
|
2016
|
|
2016
|
|
2016
|
|
2016
|
|
(In thousands, except per share amounts)
|
Total revenue
(1)
|
$
|
668,905
|
|
|
$
|
673,218
|
|
|
$
|
627,964
|
|
|
$
|
569,929
|
|
|
$
|
2,540,016
|
|
Gross profit
|
235,845
|
|
|
238,698
|
|
|
215,408
|
|
|
170,168
|
|
|
860,119
|
|
Operating (loss) income
|
94,065
|
|
|
116,224
|
|
|
64,893
|
|
|
(448,129
|
)
|
|
(172,947
|
)
|
Net (loss) income
|
50,815
|
|
|
64,028
|
|
|
32,354
|
|
|
(433,447
|
)
|
|
(286,250
|
)
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
73,078
|
|
|
68,176
|
|
|
68,190
|
|
|
68,219
|
|
|
69,409
|
|
Diluted
|
73,373
|
|
|
68,303
|
|
|
68,315
|
|
|
68,219
|
|
|
69,409
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
(2)
|
$
|
0.70
|
|
|
$
|
0.94
|
|
|
$
|
0.47
|
|
|
$
|
(6.35
|
)
|
|
$
|
(4.12
|
)
|
Diluted
(2)
|
$
|
0.69
|
|
|
$
|
0.94
|
|
|
$
|
0.47
|
|
|
$
|
(6.35
|
)
|
|
$
|
(4.12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended (unaudited)
|
|
Year ended
|
|
March 31,
|
|
June 30,
|
|
September 30,
|
|
December 31,
|
|
December 31,
|
|
2015
|
|
2015
|
|
2015
|
|
2015
|
|
2015
|
|
(In thousands, except per share amounts)
|
Total revenue
(1)
|
$
|
681,266
|
|
|
$
|
689,564
|
|
|
$
|
683,358
|
|
|
$
|
629,110
|
|
|
$
|
2,683,298
|
|
Gross profit
|
249,433
|
|
|
256,332
|
|
|
250,644
|
|
|
228,234
|
|
|
984,643
|
|
Operating income
|
109,605
|
|
|
117,638
|
|
|
82,150
|
|
|
83,714
|
|
|
393,107
|
|
Net income
|
63,270
|
|
|
67,357
|
|
|
45,750
|
|
|
42,922
|
|
|
219,299
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
87,865
|
|
|
85,501
|
|
|
83,669
|
|
|
78,775
|
|
|
83,927
|
|
Diluted
|
88,105
|
|
|
85,777
|
|
|
83,958
|
|
|
79,008
|
|
|
84,186
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
Basic
(2)
|
$
|
0.72
|
|
|
$
|
0.79
|
|
|
$
|
0.55
|
|
|
$
|
0.54
|
|
|
$
|
2.61
|
|
Diluted
(2)
|
$
|
0.72
|
|
|
$
|
0.79
|
|
|
$
|
0.54
|
|
|
$
|
0.54
|
|
|
$
|
2.60
|
|
(1) Refer to Note 2, "Basis of Presentation and Summary of Significant Accounting Policies" for details with respect to the revision of sublease rental income. Specifically, sublease rental income is presented as "Revenue" compared with the previous presentation as a reduction to occupancy expense in "Cost of sales, including warehousing, distribution, and occupancy," to conform to the current year presentation.
(2) Quarterly results for earnings per share may not add to full year results due to rounding.