Condensed Notes to the Unaudited 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, U.S. and Canada, International, and Manufacturing / Wholesale. Corporate retail store operations are located in the United States, Canada, Puerto Rico, China and Ireland. In addition, the Company offers products on the internet through GNC.com, third-party websites and LuckyVitamin.com, the assets of which were sold on September 30, 2017 (see Note 4, "Goodwill and Other Long-Lived Assets" for more information). Franchise locations exist in the United States and approximately
50
other countries. The Company operates its primary manufacturing facility in South Carolina and 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
The accompanying unaudited Consolidated Financial Statements, which have been prepared in accordance with the applicable rules of the Securities and Exchange Commission, include all adjustments (consisting of a normal and recurring nature) that management considers necessary to fairly state the Company's results of operations, financial position and cash flows. The
December 31, 2016
Consolidated Balance Sheet was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (“U.S. GAAP”). These interim Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes included in the Company’s audited financial statements in its Annual Report on Form 10-K for the year ended
December 31, 2016
("2016 10-K"). Interim results are not necessarily indicative of the results that may be expected for the remainder of the year ending
December 31, 2017
.
Recently Adopted Accounting Pronouncements
In January 2017, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("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. The Company has adopted this ASU in the second quarter of 2017. Refer to Note 4, "Goodwill and Other Long-Lived Assets" for a description of the goodwill impairment recorded within the Company's Lucky Vitamin reporting unit in the second quarter of 2017.
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. 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. Formerly, these excess tax benefits were recognized in additional paid-in capital and tax deficiencies (to the extent there were previous tax benefits) were recognized as an offset to accumulated excess tax benefits. If no previous tax benefit existed, the deficiencies were 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 have also changed from the prior presentation as a financing activity to being classified as an operating activity. Lastly, excess tax benefits are no longer included in the assumed proceeds of the diluted EPS calculation, which results in stock-based awards
being more dilutive. This standard is effective prospectively for annual reporting periods, and interim periods therein, beginning after December 15, 2016. The Company has adopted this ASU in the first quarter of 2017, which did not have a material impact to the Consolidated Financial Statements.
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 has adopted this ASU during the first quarter of fiscal 2017, with retrospective application. The Company reclassified
$12.9 million
of current deferred income tax assets formerly presented within total current assets as a
$12.8 million
reduction to deferred income taxes presented within total long-term liabilities and a
$0.1 million
increase to other long-term assets at December 31, 2016 on the Consolidated Balance Sheet to conform to the current year presentation.
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. Accordingly, the Company has adopted this ASU in the first quarter of 2017, which did not have a material effect on the Company’s Consolidated Financial Statements.
Recently Issued Accounting Pronouncements
In May 2017, the FASB issued ASU 2017-09, which amends the scope of modification accounting for share-based payment arrangements. This standard states that an entity should account for the effects of a modification unless all of the following are met: 1) The fair value of the modified award is the same as the fair value of the original award immediately before the original award is modified. If the modification does not affect any of the inputs to the valuation technique that the entity uses to value the award, the entity is not required to estimate the value immediately before and after the modification; 2) The vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; and 3) The classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. The standard is effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted. The Company does not expect the impact of the new standard to have a material impact to the Consolidated Financial Statements.
In August 2016, the FASB issued ASU 2016-15, which addresses changes to the classification of certain cash receipts and cash payments within the statement of cash flows in order to address diversity in practice. In November 2016, the FASB issued ASU 2016-18, which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash and restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. Both standards are effective for annual reporting periods, and interim periods therein, beginning after December 15, 2017. The Company does not expect the impact of these new standards to have a material impact to the Consolidated Statement of Cash Flows.
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.
Revenue Recognition Update
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 standard may be applied retrospectively to each prior period presented (full retrospective method) or retrospectively with the cumulative effect recognized as of the date of adoption (modified retrospective method). The Company currently expects to apply the full retrospective method upon adoption.
The Company does not believe the standard will impact its recognition of point-of-sale revenue in company-owned stores, most wholesale sales, royalties and sublease revenue, together which account for approximately 90%
of the Company’s revenue. While the Company continues to assess the potential impact of the new standard, management believes the following revenue transactions will be impacted. The new standard is not expected to have any impact on the timing or classification of the Company’s cash flows as reported in the Consolidated Statement of Cash Flows.
Franchise fees.
The Company's current accounting policy for franchise fees and license fees received for new store openings and renewals is to recognize these fees when earned per the contract terms, which is when a new store opens or at the start of a new term. In accordance with the new guidance, these fees will be deferred and recognized over the applicable license term as the Company satisfies the performance obligation of granting the customer access to the rights of the Company’s intellectual property. This change will impact all of the Company’s reportable segments. In addition, franchise fees received as part of a sale of a company-owned store to a franchisee will be recorded as described above as part of revenue and will no longer be presented as part of gains on refranchising. The Company does not anticipate the impact of this change to be material to the Company’s Consolidated Statement of Income. The Company expects to have a larger deferred revenue amount on the Consolidated Balance Sheet in future periods after adoption of the new standard as a result of this change.
Cooperative advertising and other franchise support fees.
The Company currently classifies advertising and other franchise support fees received from domestic franchisees as a reduction to selling, general and administrative expense. In accordance with the new guidance, these fees will be required to be classified as revenue within the U.S. and Canada segment. The new standard is not expected to have an impact on the timing of recognition of this income or on the Company’s Consolidated Balance Sheet.
Specialty manufacturing.
The Company currently recognizes revenue for products manufactured and sold to customers at a point in time when risk of loss, title and insurable risks have transferred to the customer, net of estimated returns and allowances. Under the new standard, revenue is required to be recognized over time as manufacturing occurs if the customized goods have no alternative use to the manufacturer, and the manufacturer has an enforceable right to payment for performance completed to date. This change will impact contract manufacturing sales to third-parties recorded in the Manufacturing / Wholesale segment and to a lesser extent, a portion of sales recorded in the International segment to international franchisees for certain country specific product formulations produced by the Company. The Company does not anticipate the impact of this change will be material to the Company’s Consolidated Statement of Income. The Company will record a reduction to inventory as applicable custom manufacturing services are completed with a corresponding contract asset including the applicable markup recorded within other current assets on the Consolidated Balance Sheet.
E-Commerce revenues.
The Company currently records revenue to its e-commerce customers upon delivery. Under the new guidance, the Company expects to recognize revenue upon shipment based on meeting the transfer of control criteria. The Company expects to make a policy election to treat shipping and handling as costs to fulfill the contract, and as a result, any fees received from customers will be included in the transaction price allocated to the performance obligation of providing goods with a corresponding amount accrued within cost of sales for amounts paid to applicable carriers. The new standard is not expected to have a material impact on the timing of recognition of this income or on the Company’s Consolidated Balance Sheet.
Loyalty.
Effective with the launch of the One New GNC on December 29, 2016, the Company introduced a free points-based myGNC Rewards loyalty program system-wide in the U.S. The program enables customers to earn points based on their purchases. Points earned by members are valid for one year and may be redeemed for cash discounts on any product the Company sells in domestic company-owned or franchise locations. The Company defers the estimated stand-alone 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 points earned are based on the estimated value of product for which the points are 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 Company is utilizing the new revenue recognition standard to account for this program, the difference of which is immaterial relative to the current standard.
NOTE 3. INVENTORY
The net realizable value of inventory consisted of the following:
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
December 31, 2016
|
|
(in thousands)
|
Finished product ready for sale
(*)
|
$
|
454,032
|
|
|
$
|
509,209
|
|
Work-in-process, bulk product and raw materials
(*)
|
73,757
|
|
|
67,275
|
|
Packaging supplies
|
6,638
|
|
|
6,728
|
|
Inventory
|
$
|
534,427
|
|
|
$
|
583,212
|
|
(*) The prior year December 31, 2016 balances have been revised for an
$18.0 million
correction in classification of certain amounts between finished product ready for sale and work-in-process, bulk product and raw materials. The correction had no impact on total inventory.
NOTE 4. GOODWILL AND OTHER LONG-LIVED ASSETS
Lucky Vitamin
Second Quarter 2017 Impairment Charge
The Company’s long-term plan is focused on the strategic changes around the One New GNC, which was launched in December 2016. The focus of the One New GNC includes single-tier pricing and loyalty programs for the Company’s U.S. corporate and franchise stores as well as GNC.com. During the second quarter of 2017, in order for the Company to focus on the aforementioned strategic plan, the Company considered strategic alternatives for the Lucky Vitamin e-commerce business, which was considered a triggering event requiring an interim goodwill impairment review of the Lucky Vitamin reporting unit as of June 30, 2017. As previously disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2016, the estimated fair value for the Lucky Vitamin reporting unit exceeded its carrying value by less than
20%
as of December 31, 2016.
The goodwill impairment test is performed by computing the fair value of the reporting unit and comparing it to the carrying value, including goodwill. If the carrying amount exceeds the fair value, an impairment charge is recorded for the difference. As described in Note 2, “Basis of Presentation,” the Company adopted ASU 2017-04 in the second quarter of 2017, which simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test.
The Company determined the fair value of the Lucky Vitamin reporting unit using a discounted cash flow method (income approach) and a guideline company method (market approach), each of which took into account the expectations regarding the potential strategic alternatives for the Lucky Vitamin business being explored in the second quarter of 2017. The key assumptions used under the income approach included, but were not limited to, the following:
|
|
•
|
Future cash flow assumptions
- The Company's projections for Lucky Vitamin were based on organic growth and were derived from historical experience and assumptions regarding future growth and profitability trends. The Company's analysis incorporated an assumed period of cash flows of
8
years with a terminal value.
|
|
|
•
|
Discount rate
- The discount rate was based on Lucky Vitamin’s estimated weighted average cost of capital ("WACC"). 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 June 30, 2017, the WACC used to estimate the fair value of the Lucky Vitamin reporting unit was
18.0%
.
|
As a result of the review, the Company concluded that the carrying value of the Lucky Vitamin reporting unit exceeded its fair value, which resulted in a non-cash goodwill impairment charge of
$11.5 million
being recorded in the second quarter of 2017. There was
no
remaining goodwill balance on the Lucky Vitamin reporting unit after the impact of this charge.
As a result of the impairment indicator described above, the Company also performed an impairment analysis with respect to its definite-long-lived assets on the Lucky Vitamin reporting unit, consisting of a trade name and property and equipment. The fair value of the trade name was determined using a relief from royalty method (income approach) and the fair value of the property and equipment was determined using an income approach. Based on the results of
the analyses, the Company concluded that the carrying value of the Lucky Vitamin trade name and property and equipment exceed their fair values resulting in an impairment charge of
$4.2 million
and
$3.7 million
, respectively.
All of the aforementioned non-cash charges totaling
$19.4 million
are recorded in long-lived asset impairments in the Consolidated Statement of Income within the U.S. and Canada segment and together with the asset impairment charges described below recorded in the current quarter resulted in total long-lived asset impairments of
$23.2 million
in the nine months ended September 30, 2017.
Asset Sale
The Company completed an asset sale of Lucky Vitamin on September 30, 2017, resulting in a loss of
$1.7 million
recorded within other loss, net on the Consolidated Statement of Income consisting of the net assets sold subtracted from the purchase price of
$7.1 million
and fees paid to a third-party. The proceeds were received in October 2017.
Other Long-Lived Asset Impairments
Management evaluated its property, plant and equipment and recorded
$3.9 million
in long-lived asset impairment charges in the quarter ended September 30, 2017 within the U.S. and Canada segment. This impairment related to certain of the Company's under-performing stores and the impact of Hurricane Maria on the Company's stores located in Puerto Rico. 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 computed in the first step of the test.
Goodwill Roll-Forward
The following table summarizes the Company's goodwill activity by reportable segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. and Canada
|
|
International
|
|
Manufacturing / Wholesale
|
|
Total
|
|
(in thousands)
|
Goodwill 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
|
|
2017 Activity:
|
|
|
|
|
|
|
|
|
Impairment
|
(11,464
|
)
|
|
—
|
|
|
—
|
|
|
(11,464
|
)
|
Translation effect of exchange rates
|
—
|
|
|
633
|
|
|
—
|
|
|
633
|
|
Total 2017 activity
|
(11,464
|
)
|
|
633
|
|
|
—
|
|
|
(10,831
|
)
|
Balance at September 30, 2017:
|
|
|
|
|
|
|
|
Gross
|
401,359
|
|
|
43,627
|
|
|
202,841
|
|
|
647,827
|
|
Accumulated impairments
|
(392,108
|
)
|
|
—
|
|
|
(90,488
|
)
|
|
(482,596
|
)
|
Goodwill
|
$
|
9,251
|
|
|
$
|
43,627
|
|
|
$
|
112,353
|
|
|
$
|
165,231
|
|
Intangible Assets
The following table reflects the gross carrying amount and accumulated amortization for each major definite-lived intangible asset:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
Average
Life
|
|
September 30, 2017
|
|
December 31, 2016
|
|
|
Cost
|
|
Accumulated
Amortization
|
|
Carrying
Amount
|
|
Cost
|
|
Accumulated
Amortization
|
|
Carrying
Amount
|
|
|
|
(in thousands)
|
Retail agreements
|
30.3
|
|
$
|
31,000
|
|
|
$
|
(11,250
|
)
|
|
$
|
19,750
|
|
|
$
|
31,000
|
|
|
$
|
(10,460
|
)
|
|
$
|
20,540
|
|
Franchise agreements
|
25.0
|
|
70,000
|
|
|
(29,517
|
)
|
|
40,483
|
|
|
70,000
|
|
|
(27,417
|
)
|
|
42,583
|
|
Manufacturing agreements
|
25.0
|
|
70,000
|
|
|
(29,517
|
)
|
|
40,483
|
|
|
70,000
|
|
|
(27,417
|
)
|
|
42,583
|
|
Other intangibles
|
6.8
|
|
673
|
|
|
(347
|
)
|
|
326
|
|
|
10,201
|
|
|
(5,467
|
)
|
|
4,734
|
|
Franchise rights
|
3.0
|
|
7,486
|
|
|
(7,043
|
)
|
|
443
|
|
|
7,486
|
|
|
(6,697
|
)
|
|
789
|
|
Total
|
|
|
$
|
179,159
|
|
|
$
|
(77,674
|
)
|
|
$
|
101,485
|
|
|
$
|
188,687
|
|
|
$
|
(77,458
|
)
|
|
$
|
111,229
|
|
The following table represents future amortization expense of definite-lived intangible assets at
September 30, 2017
:
|
|
|
|
|
|
Years ending December 31,
|
|
Estimated
amortization
expense
|
|
|
(in thousands)
|
|
|
|
2017 (remainder)
|
|
$
|
1,770
|
|
2018
|
|
6,964
|
|
2019
|
|
6,823
|
|
2020
|
|
6,760
|
|
2021
|
|
6,726
|
|
Thereafter
|
|
72,442
|
|
Total
|
|
$
|
101,485
|
|
NOTE 5. LONG-TERM DEBT / INTEREST EXPENSE
Long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
December 31,
2016
|
|
(in thousands)
|
Term Loan Facility (net of $1.1 million and $1.6 million discount)
|
$
|
1,130,148
|
|
|
$
|
1,170,486
|
|
Revolving Credit Facility
|
48,000
|
|
|
127,000
|
|
Notes
|
253,330
|
|
|
245,273
|
|
Debt issuance costs
|
(1,572
|
)
|
|
(2,306
|
)
|
Total debt
|
1,429,906
|
|
|
1,540,453
|
|
Less: current maturities
|
(48,000
|
)
|
|
(12,562
|
)
|
Long-term debt
|
$
|
1,381,906
|
|
|
$
|
1,527,891
|
|
Senior Credit Facility
The Company maintains a
$1.1 billion
term loan facility that matures in March 2019 (the "Term Loan Facility") and a
$300.0 million
revolving credit facility that matures in September 2018 (the “Revolving Credit Facility” and, together with the Term Loan Facility, the “Senior Credit Facility”).
At
September 30, 2017
and
December 31, 2016
, the interest rate under the Term Loan Facility was
3.7%
and
3.3%
, respectively. The Revolving Credit Facility had a weighted average interest rate of
3.7%
and
2.7%
at
September 30, 2017
and
December 31, 2016
, respectively. The Company is also required to pay an annual fee of
2.75%
on outstanding letters of credit and an annual commitment fee of
0.5%
on the undrawn portion of the Revolving Credit Facility.
At
September 30, 2017
, the Company had $
246.1 million
available under the Revolving Credit Facility, after giving effect to $
48.0 million
of borrowings outstanding and $
5.9 million
utilized to secure letters of credit. Based on the results for the year ended December 31, 2016, the ratio on the Company's Consolidated Net Senior Secured Leverage Ratio required an excess cash flow payment on the outstanding term loan debt. On April 10, 2017, the Company made the excess cash flow payment totaling $
39.7 million
, of which $
28.2 million
was paid with borrowings on the Revolving Credit Facility and $
11.5 million
was paid with cash on hand.
The Senior Credit Facility contains customary covenants, including incurrence covenants and certain other limitations on the ability of GNC Corporation, General Nutrition Centers, Inc. ("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 pay dividends or grant liens. 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
The Company maintains a $
287.5 million
principal amount of
1.5%
convertible senior notes due in 2020 (the "Notes"). The Notes consisted of the following:
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
December 31, 2016
|
|
(in thousands)
|
Liability component
|
|
|
|
Principal
|
$
|
287,500
|
|
|
$
|
287,500
|
|
Conversion feature
|
(30,023
|
)
|
|
(37,179
|
)
|
Discount related to debt issuance costs
|
(4,147
|
)
|
|
(5,048
|
)
|
Net carrying amount
|
$
|
253,330
|
|
|
$
|
245,273
|
|
Interest Expense
Interest expense consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
(in thousands)
|
Senior Credit Facility:
|
|
|
|
|
|
|
|
Term Loan Facility coupon
|
$
|
10,803
|
|
|
$
|
9,753
|
|
|
$
|
30,509
|
|
|
$
|
29,076
|
|
Revolving Credit Facility
|
1,188
|
|
|
1,359
|
|
|
3,982
|
|
|
3,420
|
|
Amortization of discount and debt issuance costs
|
550
|
|
|
591
|
|
|
1,800
|
|
|
1,775
|
|
Total Senior Credit Facility
|
12,541
|
|
|
11,703
|
|
|
36,291
|
|
|
34,271
|
|
Notes:
|
|
|
|
|
|
|
|
Coupon
|
1,078
|
|
|
1,078
|
|
|
3,210
|
|
|
3,234
|
|
Amortization of conversion feature
|
2,422
|
|
|
2,294
|
|
|
7,156
|
|
|
6,778
|
|
Amortization of discount and debt issuance costs
|
321
|
|
|
290
|
|
|
938
|
|
|
845
|
|
Total Notes
|
3,821
|
|
|
3,662
|
|
|
11,304
|
|
|
10,857
|
|
Other
|
(23
|
)
|
|
(5
|
)
|
|
705
|
|
|
(50
|
)
|
Interest expense, net
|
$
|
16,339
|
|
|
$
|
15,360
|
|
|
$
|
48,300
|
|
|
$
|
45,078
|
|
NOTE 6. FAIR VALUE MEASUREMENTS AND FINANCIAL INSTRUMENTS
Accounting Standards Codification 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 in prepaid and other current assets and 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
December 31, 2016
|
|
Carrying
Amount
|
|
Fair
Value
|
|
Carrying
Amount
|
|
Fair
Value
|
|
(in thousands)
|
Term Loan Facility
|
$
|
1,130,148
|
|
|
$
|
1,084,942
|
|
|
$
|
1,170,486
|
|
|
$
|
1,100,257
|
|
Notes
|
253,330
|
|
|
187,464
|
|
|
245,273
|
|
|
185,794
|
|
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.
As described in Note 4, "Goodwill and Other Long-lived Assets," the Company recorded non-cash long-lived asset impairments in the current year period within its U.S. and Canada segment. These impairments resulted in goodwill, intangible assets and property and equipment for the Lucky Vitamin reporting unit as of June 30, 2017, and property and equipment for certain of the Company's stores as of September 30, 2017, being measured at fair value on a non-recurring basis, which utilized a significant number of unobservable Level 3 inputs, such as future cash flow assumptions.
NOTE 7. CONTINGENCIES
The Company is engaged in various legal actions, claims and proceedings arising in the normal course of business, including claims related to breach of contracts, product liabilities, intellectual property matters and employment-related matters resulting from the Company's business activities.
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 a loss contingency is not both probable and estimable, the Company does not establish an accrued liability.
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 additional payments in connection with an adverse outcome in any of the matters discussed below, it is possible that it could have a material adverse effect on the Company's business, financial condition, results of operations or cash flows.
As a manufacturer and retailer of nutritional supplements and other consumer products that are ingested by consumers or applied to their bodies, the Company has been and is currently subjected to various product liability claims. Although the effects of these claims to date have not been material to the Company, it is possible that current and future product liability claims could have a material adverse effect on its business or financial condition, results of operations or cash flows. The Company currently maintains product liability insurance with a deductible/retention of
$4.0 million
per claim with an aggregate cap on retained loss of
$10.0 million
per policy year. The Company typically seeks and has obtained contractual indemnification from most parties that supply raw materials for its products or that manufacture or market products it sells. The Company also typically seeks to be added, and has been added, as an additional insured under most of such parties’ insurance policies. However, any such indemnification or insurance is limited by its terms and any such indemnification, as a practical matter, is limited to the creditworthiness of the indemnifying party and its insurer, and the absence of significant defenses by the insurers. Consequently, the Company may incur material product liability claims, which could increase its costs and adversely affect its reputation, revenue and operating income.
Litigation
DMAA / Aegeline Claims
.
Prior to December 2013, the Company sold products manufactured by third parties that contained derivatives from geranium known as 1.3-dimethylpentylamine/ dimethylamylamine/ 13-dimethylamylamine, or "DMAA," which were recalled from the Company's stores in November 2013, and/or Aegeline, a compound extracted from bael trees. As of September 30, 2017, the Company was named in
32
personal injury lawsuits involving products containing DMAA and/or Aegeline.
As a general matter, the proceedings associated with these personal injury cases, which generally seek indeterminate money damages, are in the early stages, and any losses that may arise from these matters are not probable or reasonably estimable at this time.
The Company is contractually entitled to indemnification by its third-party vendors with regard to these matters, although the Company’s ability to obtain full recovery in respect of any such claims against it is dependent upon the creditworthiness of the vendors and/or their insurance coverage and the absence of any significant defenses available to their insurers.
California Wage and Break Claims.
On February 29, 2012, former Senior Store Manager, Elizabeth Naranjo, individually and on behalf of all others similarly situated, sued General Nutrition Corporation ("GNC") 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 for which indeterminate money damages for wages, penalties, interest, and legal fees are sought. As of September 30, 2017, an
immaterial
liability has been accrued in the accompanying financial statements. The Company intends to conduct further discovery and file a motion to decertify the class action prior to trial, which is scheduled for July 2018.
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 Pennsylvania Minimum Wage Act (PMWA), challenging the Company’s utilization of the “fluctuating workweek” method to calculate overtime compensation, on behalf of all employees who worked for the Company in Pennsylvania and who were paid according to the fluctuating workweek method. In October 2014, the Court entered an order holding that the use of the fluctuating workweek method violated the PMWA. In September 2016, the Court entered judgment in favor of Plaintiffs and the class related to damages and ultimately legal fees for a combined immaterial amount, which has been accrued in the accompanying interim Consolidated Financial Statements. The Company appealed from the adverse judgment. The Superior Court held oral argument on the appeal in September 2017 but has not announced a decision.
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 GNC in Multnomah County Circuit Court for alleged violations of Oregon’s Unlawful Trade Practices Act, in connection with its sale in Oregon of certain third-party products. The Company is vigorously defending itself against these allegations. Along with its Amended Answer and Affirmative Defenses, the Company filed a counterclaim for declaratory relief, asking the court to make certain rulings in favor of the Company. USPlabs, LLC and SK Laboratories have been joined to the case as defendants to the Company's counterclaim but have yet to enter an appearance. In September 2017, SK Laboratories filed a motion to dismiss for lack of personal jurisdiction. USP Laboratories also filed a motion to dismiss for improper venue or in the alternative motion to stay the litigation pending the criminal trial of USPlabs. The Company is contesting both motions, which are pending. 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.
Holland and Barrett License Litigation.
On September 18, 2014, the Company's wholly-owned affiliate General Nutrition Investment Company ("GNIC") commenced proceedings in the UK High Court to determine if the license agreement from March 2003 between GNIC and Holland & Barrett International Ltd and Health and Diet Centers Ltd. (“Defendants”) was validly terminated. GNIC alleged that termination of the entire agreement was warranted due to several material breaches by Defendants, and that the agreement should be terminated related to
five
licensed GNC trademarks for lack of use for more than
five
years. On April 7, 2017, the Court issued its judgment that found that GNIC's notice of termination was invalid and while there were several breaches of the agreement, none were sufficiently material to justify termination. Under UK procedural rules, GNIC is required to pay some portion of Defendant’s legal costs. As a result, the Company recorded a charge of $
2.1 million
in the first quarter of 2017.
E-Commerce Pricing Matters
.
In April 2016, Jenna Kaskorkis, et al. filed a complaint against General Nutrition Centers, Inc. followed by similar cases brought forth by Ashley Gennock in May 2016 and Kenneth Harrison in December
2016. Plaintiffs allege that the Company's promotional pricing on its website was misleading and did not fairly represent promotions based on average retail prices over a trended period of time being consistent with prices advertised as promotional. The Company attended a mediation with counsel for all plaintiffs and has reached tentative agreement in the third quarter of 2017 on many of the key terms of a settlement. The matters have been effectively stayed while the parties remain in discussions. The Company currently expects any settlement to be in a form that does not require the recording of a contingent liability, except an immaterial amount the Company has accrued in the accompanying financial statements in the third quarter of 2017.
Government Regulation
In November 2013, the Company received a subpoena from the U.S. Department of Justice (“DOJ”) for information related to its investigation of a third-party product vendor, USPlabs, LLC. The Company fully cooperated with the investigation of the vendor and the related products, all of which were discontinued in 2013. In December 2016, the Company reached agreement with the DOJ in connection with the Company’s cooperation; which agreement acknowledges the Company relied on the representations and written guarantees of USPlabs, LLC 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 industry initiatives. Some of these actions include maintaining and continuously updating a list of restricted ingredients that will be prohibited from inclusion in any products that are sold by the Company. Vendors selling products to the Company for the sale of such products by the Company will be required to warrant that the products sold do not contain any of these restricted ingredients. In addition, the Company will develop and maintain a list of ingredients that the Company believes comply with the applicable provisions of the FDCA.
Environmental Compliance
In March 2008, the South Carolina Department of Health and Environmental Control (the "DHEC") requested that the Company investigate contamination associated with historical activities at its South Carolina 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 completed additional investigations with the DHEC's approval. The Company installed and began operating a pilot vapor extraction system under a portion of the facility in the second half of 2016, which was an immaterial cost to the Company, with DHEC’s approval to assess the effectiveness of such a remedial system. The DHEC requested that the Company provide a work plan for continued monitoring of such system and the contamination, which was sent to the DHEC in September 2017 for approval. 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 interim 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.
NOTE 8. EARNINGS PER SHARE
The following table represents the Company's basic and dilutive weighted-average shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
(in thousands)
|
Basic weighted average shares
|
68,354
|
|
|
68,190
|
|
|
68,296
|
|
|
69,808
|
|
Effect of dilutive stock-based compensation awards
|
215
|
|
|
125
|
|
|
115
|
|
|
131
|
|
Diluted weighted average shares
|
68,569
|
|
|
68,315
|
|
|
68,411
|
|
|
69,939
|
|
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 and market-based awards.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
(in thousands)
|
Antidilutive:
|
|
Time-based
|
2,381
|
|
|
1,120
|
|
|
2,179
|
|
|
1,011
|
|
Market-based
|
—
|
|
|
—
|
|
|
—
|
|
|
56
|
|
Contingently issuable:
|
|
|
|
|
|
|
|
Performance-based
|
62
|
|
|
130
|
|
|
67
|
|
|
133
|
|
Market-based
|
387
|
|
|
167
|
|
|
416
|
|
|
112
|
|
Total stock-based awards excluded from diluted EPS
|
2,830
|
|
|
1,417
|
|
|
2,662
|
|
|
1,312
|
|
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 quarter is less than the conversion price.
NOTE 9. STOCK-BASED COMPENSATION PLANS
Stock and Incentive Plans
The Company has outstanding stock-based compensation awards that were granted by the Compensation and Organizational Development Committee (the “Compensation Committee”) of Holdings’ board of directors (the "Board") 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”).
|
Both plans have provisions allowing for the granting of stock options, restricted stock and other stock-based awards and are available to eligible employees, directors, consultants or advisers 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
4.2 million
shares remain available for issuance as of
September 30, 2017
.
Non-Plan Inducement Awards
On September 11, 2017, in connection with the appointment of the Company's new Chief Executive Officer, Kenneth A. Martindale, the Company made the following non-plan inducement awards:
|
|
•
|
"make-whole" restricted stock awards consisting of the following:
|
|
|
◦
|
$600,000
, which are
67,000
fully vested restricted shares with transfer restrictions that lapse on the earliest to occur of a Change in Control of GNC, the third anniversary of grant or death, disability or other separation from service for any reason;
|
|
|
◦
|
$950,000
, which are
106,000
unvested restricted shares scheduled to vest on December 29, 2017 subject to acceleration to cover any applicable income and payroll tax withholding resulting from the recognition of ordinary income pursuant to a Section 83(b) election (“Section 83(b) Tax Liability”); and
|
|
|
◦
|
$1,200,000
, which are
134,000
unvested restricted shares scheduled to vest in
three
equal installments on each of the first three anniversaries of grant subject to acceleration to cover any applicable Section 83(b) Tax Liability; and
|
|
|
•
|
time-vested awards consisting of
212,000
restricted shares and
519,000
stock options in the amount of
$1,900,000
each, which are scheduled to vest in
three
equal installments on each of the first three anniversaries of grant.
|
The Company recorded
$1.8 million
in stock-based compensation in the quarter ended September 30, 2017, primarily relating to the make-whole awards, which includes the impact of acceleration of vesting associated with the Section 83(b) election that together with executive recruitment and other expenses resulted in a
$2.8 million
charge in the current quarter recorded within selling, general and administrative expense on the accompanying Consolidated Statement of Income.
Stock-Based Compensation Activity
The following table sets forth a summary of all stock-based compensation awards outstanding:
|
|
|
|
|
|
|
|
September 30, 2017
|
|
December 31, 2016
|
|
(in thousands)
|
Time-based stock options
|
2,680
|
|
|
914
|
|
Time-based restricted stock awards
|
1,137
|
|
|
312
|
|
Performance-based restricted stock awards
|
62
|
|
|
101
|
|
Market-based restricted stock awards
|
387
|
|
|
166
|
|
Total
|
4,266
|
|
|
1,493
|
|
During the nine months ended
September 30, 2017
, the Company granted the following stock-based compensation awards:
|
|
|
|
|
(in thousands)
|
Time-based stock options
|
2,298
|
|
Time-based restricted stock awards
|
1,295
|
|
Market-based restricted stock awards
|
365
|
|
Total
|
3,958
|
|
Time-based stock options vest
25%
per year over a period of
four years
except for the non-plan inducement awards as explained above and the fair value was determined using the Black-Scholes model. Key assumptions used for the options granted during the current year period include a dividend of
0%
, an expected term of approximately
6 years
, volatility between
38.2%
and
40.8%
, and a risk-free rate between
1.77%
and
2.10%
. Time-based restricted stock awards vest one-third per year over a period of
three years
.
Market-based awards vest at the end of a
three
-year period based upon 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 average peer group volatility of
34.6%
and a risk-free rate of
1.46%
.
The above awards granted during the nine months ended
September 30, 2017
will result in compensation expense of
$19.0 million
, net of expected forfeitures, over the service period from the applicable grant date through the date of vesting.
The Company recognized
$3.3 million
and
$4.2 million
of total non-cash stock-based compensation expense for the three months ended September 30, 2017 and 2016, respectively, and
$6.0 million
and
$7.2 million
for the nine months ended September 30, 2017 and 2016. At September 30, 2017, there was approximately
$19.1 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
1.8 years
.
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, effective July 27, 2016. During the three months ended September 30, 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.
NOTE 10. SEGMENTS
The Company aggregates its operating segments into
three
reportable segments, which include U.S. and Canada, International and Manufacturing / Wholesale. The Company fully allocates warehousing and distribution costs to its reportable segments. The Company's chief operating decision maker evaluates segment operating results based primarily on performance indicators, including revenue and operating income. Operating income of each reportable segment excludes certain items that are managed at the consolidated level, such as corporate costs. The Manufacturing / Wholesale segment manufactures and sells products to the U.S. and Canada and International segments at cost with a markup, which is eliminated at consolidation. Included in the U.S. and Canada segment are non-cash long-lived asset impairments of
$23.2 million
recorded during the nine months ended September 30, 2017, as well as gains on refranchising of
$18.3 million
recorded in the nine months ended September 30, 2016.
The following table represents key financial information for each of the Company's reportable segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
(in thousands)
|
Revenue:
|
|
|
|
|
|
|
|
|
|
U.S. and Canada
|
$
|
507,108
|
|
|
$
|
525,505
|
|
|
$
|
1,603,447
|
|
|
$
|
1,671,048
|
|
International
|
49,057
|
|
|
41,118
|
|
|
132,105
|
|
|
121,037
|
|
Manufacturing / Wholesale:
|
|
|
|
|
|
|
|
|
|
|
Intersegment revenues
|
58,037
|
|
|
53,016
|
|
|
175,335
|
|
|
172,603
|
|
Third party
|
53,304
|
|
|
61,341
|
|
|
159,749
|
|
|
178,002
|
|
Subtotal Manufacturing / Wholesale
|
111,341
|
|
|
114,357
|
|
|
335,084
|
|
|
350,605
|
|
Total reportable segment revenues
|
667,506
|
|
|
680,980
|
|
|
2,070,636
|
|
|
2,142,690
|
|
Elimination of intersegment revenues
|
(58,037
|
)
|
|
(53,016
|
)
|
|
(175,335
|
)
|
|
(172,603
|
)
|
Total revenue
|
$
|
609,469
|
|
|
$
|
627,964
|
|
|
$
|
1,895,301
|
|
|
$
|
1,970,087
|
|
Operating income:
|
|
|
|
|
|
|
|
|
|
U.S. and Canada
|
$
|
29,730
|
|
|
$
|
65,292
|
|
|
$
|
112,336
|
|
|
$
|
256,142
|
|
International
|
16,768
|
|
|
14,676
|
|
|
46,908
|
|
|
41,428
|
|
Manufacturing / Wholesale
|
19,505
|
|
|
17,395
|
|
|
53,989
|
|
|
53,719
|
|
Total reportable segment operating income
|
66,003
|
|
|
97,363
|
|
|
213,233
|
|
|
351,289
|
|
Unallocated corporate costs and other
|
(25,558
|
)
|
|
(32,470
|
)
|
|
(79,415
|
)
|
|
(76,107
|
)
|
Total operating income
|
40,445
|
|
|
64,893
|
|
|
133,818
|
|
|
275,182
|
|
Interest expense, net
|
16,339
|
|
|
15,360
|
|
|
48,300
|
|
|
45,078
|
|
Income before income taxes
|
$
|
24,106
|
|
|
$
|
49,533
|
|
|
$
|
85,518
|
|
|
$
|
230,104
|
|
NOTE 11. INCOME TAXES
The Company recognized
$2.6 million
of income tax expense (or
11.0%
of pre-tax income) during the three months ended
September 30, 2017
compared with
$17.2 million
(or
34.7%
of pre-tax income) in the prior year quarter. The Company recognized
$24.5 million
of income tax expense (or
28.7%
of pre-tax income) during the nine months ended September 30, 2017 compared with
$82.9 million
(or
36.0%
of pre-tax income) for the same period in 2016. The Company's tax rate is based on income, statutory tax rates and tax planning opportunities available in the jurisdictions in which it operates. The effective tax rate in the current quarter was significantly impacted by a reduction to a valuation allowance resulting in a deferred tax benefit of
$6.0 million
. The valuation allowance was adjusted based on a change in circumstances which caused a change in judgment about the realizability of a deferred tax asset related to net operating losses.
At
September 30, 2017
and
December 31, 2016
, the Company had
$5.4 million
and
$6.5 million
of unrecognized tax benefits, respectively, excluding interest and penalties, which if recognized, would affect the effective tax rate. The Company recognizes accrued interest and penalties related to unrecognized tax benefits in income tax expense. The Company accrued
$1.9 million
at
September 30, 2017
and
December 31, 2016
for potential interest and penalties associated with uncertain tax positions. To the extent interest and penalties are not assessed with respect to the ultimate settlement of uncertain tax positions, amounts previously accrued will be reversed as a reduction to income tax expense.
Holdings files a consolidated federal tax return and various consolidated and separate tax returns as prescribed by the tax laws of the state, local and international jurisdictions in which it and its subsidiaries operate. The statutes of limitation for the Company’s U.S. federal income tax returns are closed for years through 2013. The Company has various state and local jurisdiction tax years open to possible examination (the earliest open period is 2011), and the Company also has certain state and local tax filings currently under audit.