SEC Filing | National Vision Holdings, Inc.

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eye-20220702

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_______________________________________________________________________

FORM 10-Q

_______________________________________________________________________

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 2, 2022

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 001-38257

_______________________________________________________________________

National Vision Holdings, Inc.

(Exact name of registrant as specified in its charter)

_______________________________________________________________________


Delaware						46-4841717
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)

2435 Commerce Ave
Building 2200						30096
Duluth, Georgia						(Zip Code)
(Address of principal executive offices)

(770) 822‑3600

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

_______________________________________________________________________

Securities registered pursuant to Section 12(b) of the Act

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.01 per share

EYE

NASDAQ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


Class						Outstanding at July 29, 2022
Common stock, $0.01 par value						78,887,096

NATIONAL VISION HOLDINGS, INC. AND SUBSIDIARIES

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			Page
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS			3
PART I – FINANCIAL INFORMATION			5
	Item 1.	Financial Statements (Unaudited)	5
		Condensed Consolidated Balance Sheets	5
		Condensed Consolidated Statements of Operations and Comprehensive Income	6
		Condensed Consolidated Statements of Stockholders’ Equity	7
		Condensed Consolidated Statements of Cash Flows	8
		Notes to Condensed Consolidated Financial Statements	9
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	38
	Item 4.	Controls and Procedures	39
PART II – OTHER INFORMATION			40
	Item 1.	Legal Proceedings	40
	Item 1A.	Risk Factors	40
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	40
	Item 3.	Defaults Upon Senior Securities	40
	Item 4.	Mine Safety Disclosures	40
	Item 5.	Other Information	40
	Item 6.	Exhibits	41
		Signatures	42

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (this “Form 10-Q”) contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which are subject to the “safe harbor” created by those sections. All statements, other than statements of historical facts included in this Form 10-Q, including statements concerning our plans, objectives, goals, beliefs, business strategies, future events, business conditions, results of operations, financial position, business outlook, business trends and other information, may be forward-looking statements.

Words such as “believes,” “expects,” “may,” “will,” “should,” “seeks,” “intends,” “plans,” “estimates,” or “anticipates,” and variations of such words or similar expressions are intended to identify forward-looking statements. The forward-looking statements are not historical facts or guarantees of future performance and are based upon our current expectations, beliefs, estimates and projections, and various assumptions, many of which, by their nature, are inherently uncertain and beyond our control. Our expectations, beliefs, and projections are expressed in good faith and we believe there is a reasonable basis for them. However, there can be no assurance that management’s expectations, beliefs and projections will result or be achieved and actual results may vary materially from what is expressed in or indicated by the forward-looking statements.

There are a number of risks, uncertainties and other important factors, many of which are beyond our control, that could cause our actual results to differ materially from the forward-looking statements contained in this Form 10-Q. Such risks, uncertainties and other important factors that could cause actual results to differ include, among others, the risks, uncertainties and factors set forth in Part II, Item 1A - “Risk Factors” in this Form 10-Q and Part I, Item 1A - “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended January 1, 2022 (the “2021 Annual Report on Form 10-K”), as filed with the Securities and Exchange Commission (the “SEC”), as such risk factors may be updated from time to time in our periodic filings with the SEC, which are accessible on the SEC’s website at www.sec.gov, and also include the following:

•the COVID-19 pandemic and its resurgence and variants, and the impact of evolving federal, state, and local governmental actions in response thereto, including risks stemming from vaccination and testing programs and mandates;

•customer behavior in response to the continuing pandemic and its more recent outbreaks of variants, including the impact of such behavior on in-store traffic and sales;

•overall decline in the health of the economy and other factors impacting consumer spending, including inflation, rising interest rates and geopolitical instability;

•our ability to open and operate new stores in a timely and cost-effective manner, or keep stores safely open in light of the continuing COVID-19 pandemic, and to successfully enter new markets;

•our ability to recruit and retain vision care professionals for our stores in general and in light of the pandemic;

•our ability to develop, maintain and extend relationships with managed vision care companies, vision insurance providers and other third-party payors;

•our ability to maintain the performance of our Host and Legacy brands and our current operating relationships with our Host and Legacy partners;

•our ability to adhere to extensive state, local and federal vision care and healthcare laws and regulations;

•our compliance with managed vision care laws and regulations;

•our ability to maintain sufficient levels of cash flow from our operations to execute or sustain our growth strategy or obtain additional financing at satisfactory terms or at all;

•the loss of, or disruption in the operations of, one or more of our distribution centers and/or optical laboratories, resulting in the inability to fulfill customer orders and deliver our products in a timely manner;

•risks associated with vendors from whom our products are sourced, including our dependence on a limited number of suppliers;

•our ability to compete successfully;

•our ability to effectively operate our information technology systems and prevent interruption or security breach;

•the impact of wage rate increases, inflation, cost increases and increases in raw material prices and energy prices;

•our growth strategy straining our existing resources and causing the performance of our existing stores to suffer;

•our ability to successfully and efficiently implement our marketing, advertising and promotional efforts;

•risks associated with leasing substantial amounts of space, including future increases in occupancy costs;

•the impact of certain technological advances, and the greater availability of, or increased consumer preferences for, vision correction alternatives to prescription eyeglasses or contact lenses, and future drug development for the correction of vision-related problems;

•our ability to retain our existing senior management team and attract qualified new personnel;

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•our ability to manage our inventory;

•seasonal fluctuations in our operating results and inventory levels;

•our reliance on third-party coverage and reimbursement, including government programs, for an increasing portion of our revenues;

•risks associated with our e-commerce and omni-channel business;

•product liability, product recall or personal injury issues;

•our failure to comply with, or changes in, laws, regulations, enforcement activities and other requirements;

•the impact of any adverse litigation judgments or settlements resulting from legal proceedings relating to our business operations;

•risk of losses arising from our investments in technological innovators in the optical retail industry;

•our ability to adequately protect our intellectual property;

•risks associated with environmental, social and governance issues, including climate change;

•our significant amount of indebtedness and our ability to generate sufficient cash flow to satisfy our debt obligations;

•a change in interest rates as well as changes in benchmark rates and uncertainty related to the foregoing;

•restrictions in our credit agreement that limits our flexibility in operating our business;

•potential dilution to existing stockholders upon the conversion of our convertible notes; and

•risks related to owning our common stock, including our ability to comply with requirements to design and implement and maintain effective internal controls.

We caution you that the risks, uncertainties and other factors referenced above may not contain all of the risks, uncertainties and other factors that are important to you. In addition, we cannot assure you that we will realize the results, benefits or developments that we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our business in the way expected. There can be no assurance that (i) we have correctly measured or identified all of the factors affecting our business or the extent of these factors’ likely impact, (ii) the available information with respect to these factors on which such analysis is based is complete or accurate, (iii) such analysis is correct or (iv) our strategy, which is based in part on this analysis, will be successful. All forward-looking statements in this Form 10-Q apply only as of the date of this Form 10-Q or as of the date they were made and, except as required by applicable law, we undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future developments or otherwise.

All references to “we,” “us,” “our,” or the “Company” in this Form 10-Q mean National Vision Holdings, Inc. and its subsidiaries, unless the context otherwise requires. References to “eye care practitioners” in this Form 10-Q mean optometrists and ophthalmologists and references to “vision care professionals” mean optometrists (including optometrists employed by us or by professional corporations owned by eye care practitioners with which we have arrangements) and opticians.

Website Disclosure

We use our website www.nationalvision.com as a channel of distribution of Company information. Financial and other important information regarding the Company is routinely accessible through and posted on our website. Accordingly, investors should monitor our website, in addition to following our press releases, SEC filings and public conference calls and webcasts. In addition, you may automatically receive e-mail alerts and other information about National Vision Holdings, Inc. when you enroll your e-mail address by visiting the “Email Alerts” page of the Investor Resources section of our website at www.nationalvision.com/investors. The contents of our website are not, however, a part of this Form 10-Q.

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PART I – FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

National Vision Holdings, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

In Thousands, Except Par Value

(Unaudited)


	As of July 2, 2022		As of January 1, 2022
ASSETS
Current assets:
Cash and cash equivalents	$	254,382	$	305,800
Accounts receivable, net	63,774		55,697
Inventories	129,493		123,669
Prepaid expenses and other current assets	32,821		29,410
Total current assets	480,470		514,576

Noncurrent assets:
Property and equipment, net	350,840		346,436
Goodwill	777,613		777,613
Trademarks and trade names	240,547		240,547
Other intangible assets, net	38,275		42,020
Right of use assets	372,121		354,900
Other assets	18,477		16,999
Total non-current assets	1,797,873		1,778,515
Total assets	$	2,278,343	$	2,293,091

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	70,000	$	64,331
Other payables and accrued expenses	107,578		119,323
Unearned revenue	34,329		29,895
Deferred revenue	64,295		65,325
Current maturities of long-term debt and finance lease obligations	4,651		3,999
Current operating lease obligations	72,938		60,930
Total current liabilities	353,791		343,803

Noncurrent liabilities:
Long-term debt and finance lease obligations, less current portion and debt discount	564,152		566,081
Non-current operating lease obligations	350,186		342,241
Deferred revenue	23,015		23,166
Other liabilities	9,043		8,974
Deferred income taxes, net	86,487		82,846
Total non-current liabilities	1,032,883		1,023,308
Commitments and contingencies (See Note 9)
Stockholders’ equity:
Common stock, $0.01 par value; 200,000 shares authorized; 84,147 and 83,840 shares issued as of July 2, 2022 and January 1, 2022, respectively; 78,885 and 81,405 shares outstanding as of July 2, 2022 and January 1, 2022, respectively	841		838
Additional paid-in capital	759,562		750,478
Accumulated other comprehensive loss	(1,562)		(1,940)
Retained earnings	318,276		278,395
Treasury stock, at cost; 5,262 and 2,435 shares as of July 2, 2022 and January 1, 2022, respectively	(185,448)		(101,791)
Total stockholders’ equity	891,669		925,980
Total liabilities and stockholders’ equity	$	2,278,343	$	2,293,091

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

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National Vision Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations and Comprehensive Income

In Thousands, Except Earnings Per Share

(Unaudited)


	Three Months Ended				Six Months Ended
	July 2, 2022		July 3, 2021		July 2, 2022		July 3, 2021
Revenue:
Net product sales	$	421,600	$	458,206	$	854,853	$	901,273
Net sales of services and plans	87,955		91,283		182,413		182,396
Total net revenue	509,555		549,489		1,037,266		1,083,669
Costs applicable to revenue (exclusive of depreciation and amortization):
Products	163,361		167,028		327,580		326,719
Services and plans	71,206		68,918		143,024		133,917
Total costs applicable to revenue	234,567		235,946		470,604		460,636
Operating expenses:
Selling, general and administrative expenses	227,829		234,235		456,383		457,828
Depreciation and amortization	25,245		24,025		50,396		47,580
Asset impairment	3,509		519		3,915		1,478
Other expense (income), net	34		(65)		265		(130)
Total operating expenses	256,617		258,714		510,959		506,756
Income from operations	18,371		54,829		55,703		116,277
Interest expense (income), net	3,963		10,188		(181)		16,518
Earnings before income taxes	14,408		44,641		55,884		99,759
Income tax provision	4,674		7,040		16,003		18,726
Net income	$	9,734	$	37,601	$	39,881	$	81,033

Earnings per share:
Basic	$	0.12	$	0.46	$	0.49	$	0.99
Diluted	$	0.12	$	0.42	$	0.47	$	0.89
Weighted average shares outstanding:
Basic	80,061		81,601		80,744		81,457
Diluted	80,403		96,082		94,109		96,044

Comprehensive income:
Net income	$	9,734	$	37,601	$	39,881	$	81,033
Unrealized gain on hedge instruments	255		2,959		507		4,609
Tax provision of unrealized gain on hedge instruments	65		756		129		3,302
Comprehensive income	$	9,924	$	39,804	$	40,259	$	82,340

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

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National Vision Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders’ Equity

In Thousands

(Unaudited)


	Three and Six Months Ended July 2, 2022
	Common Stock			Additional Paid-In Capital		Accumulated Other Comprehensive Loss		Retained Earnings		Treasury Stock		Total Stockholders’ Equity
	Shares	Amount
Balances at January 1, 2022	81,405	$	838	$	750,478	$	(1,940)	$	278,395	$	(101,791)	$	925,980
Issuance of common stock	289	3		1,366		—		—		—		1,369
Stock based compensation	—	—		3,692		—		—		—		3,692
Purchase of treasury stock	(272)	—		—		—		—		(10,649)		(10,649)
Settlement of 2025 Notes	—	—		(1)		—		—		—		(1)
Unrealized gain (loss) on hedge instruments, net of tax	—	—		—		188		—		—		188
Net income	—	—		—		—		30,147		—		30,147
Balances at April 2, 2022	81,422	$	841	$	755,535	$	(1,752)	$	308,542	$	(112,440)	$	950,726
Issuance of common stock	18	—		421		—		—		—		421
Stock based compensation	—	—		3,606		—		—		—		3,606
Purchase of treasury stock	(2,555)	—				—		—		(73,008)		(73,008)
Unrealized gain (loss) on hedge instruments, net of tax	—	—		—		190		—		—		190
Net income	—	—		—		—		9,734		—		9,734
Balances at July 2, 2022	78,885	$	841	$	759,562	$	(1,562)	$	318,276	$	(185,448)	$	891,669


	Three and Six Months Ended July 3, 2021
	Common Stock			Additional Paid-In Capital		Accumulated Other Comprehensive Loss		Retained Earnings		Treasury Stock		Total Stockholders’ Equity
	Shares	Amount
Balances at January 2, 2021	81,239	$	821	$	795,697	$	(4,400)	$	142,880	$	(28,496)	$	906,502
Cumulative effect of change in accounting principle	—	—		(71,385)		—		7,271		—		(64,114)
Balances at January 3, 2021 - as adjusted	81,239	821		724,312		(4,400)		150,151		(28,496)		842,388
Issuance of common stock	174	2		1,056		—		—		—		1,058
Stock based compensation	—	—		2,971		—		—		—		2,971
Purchase of treasury stock	(28)	—		—		—		—		(1,421)		(1,421)
Unrealized gain (loss) on hedge instruments, net of tax	—	—		—		(896)		—		—		(896)
Net income	—	—		—		—		43,432		—		43,432
Balances at April 3, 2021	81,385	$	823	$	728,339	$	(5,296)	$	193,583	$	(29,917)	$	887,532
Issuance of common stock	471	5		3,863		—		—		—		3,868
Stock based compensation	—	—		7,178		—		—		—		7,178
Purchase of treasury stock	(1)	—		—		—		—		(45)		(45)
Unrealized gain (loss) on hedge instruments, net of tax	—	—		—		2,203		—		—		2,203
Net income	—	—		—		—		37,601		—		37,601
Balances at July 3, 2021	81,855	$	828	$	739,380	$	(3,093)	$	231,184	$	(29,962)	$	938,337

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

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National Vision Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

In Thousands

(Unaudited)


	Six Months Ended
	July 2, 2022		July 3, 2021
Cash flows from operating activities:
Net income	$	39,881	$	81,033
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	50,396		47,580
Amortization of debt discount and deferred financing costs	1,584		2,268
Asset impairment	3,915		1,478
Deferred income tax expense	3,512		14,582
Stock based compensation expense	7,372		10,201
Losses (gains) on change in fair value of derivatives	(10,745)		125
Inventory adjustments	1,429		619
Other	2,455		1,253
Changes in operating assets and liabilities:
Accounts receivable	(8,661)		2,393
Inventories	(7,253)		(10,208)
Operating lease right of use assets and lease liabilities	568		149
Other assets	2,246		(1,148)
Accounts payable	5,669		12,816
Deferred and unearned revenue	3,253		18,782
Other liabilities	(7,590)		7,885
Net cash provided by operating activities	88,031		189,808
Cash flows from investing activities:
Purchase of property and equipment	(55,714)		(38,812)
Other	20		22
Net cash used for investing activities	(55,694)		(38,790)
Cash flows from financing activities:
Repayments on long-term debt	(4)		(117,375)
Proceeds from issuance of common stock	2,246		5,738
Purchase of treasury stock	(83,632)		(1,466)
Payments of debt issuance costs	—		(900)
Payments on finance lease obligations	(2,218)		(2,526)
Net cash used for financing activities	(83,608)		(116,529)
Net change in cash, cash equivalents and restricted cash	(51,271)		34,489
Cash, cash equivalents and restricted cash, beginning of year	306,876		375,159
Cash, cash equivalents and restricted cash, end of period	$	255,605	$	409,648

Supplemental cash flow disclosure information:
Cash paid for interest	$	9,329	$	14,640
Cash paid for taxes	$	5,632	$	6,995
Capital expenditures accrued at the end of the period	$	9,300	$	8,827

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

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National Vision Holdings, Inc. and Subsidiaries

Index to Notes to Condensed Consolidated Financial Statements


			Page

1. Description of Business and Basis of Presentation			10
2. Details of Certain Balance Sheet Accounts			12
3. Fair Value Measurement			13
4. Long-term Debt			14
5. Interest Rate Derivatives			14
6. Stock Incentive Plans			15
7. Revenue From Contracts With Customers			15
8. Leases			16
9. Commitments and Contingencies			17
10. Segment Reporting			17
11. Earnings Per Share			20
12. Accumulated Other Comprehensive Loss			20
13. Subsequent Events			21

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National Vision Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

1. Description of Business and Basis of Presentation

Nature of Operations

National Vision Holdings, Inc. (“NVHI,” the “Company,” “we,” “our,” or “us”) is a holding company whose operating subsidiaries include its indirect wholly-owned subsidiary, National Vision, Inc. (“NVI”) and NVI’s wholly-owned subsidiaries. We are a leading value retailer of eyeglasses and contact lenses in the United States. We operated 1,314 and 1,278 retail optical locations in the United States and its territories as of July 2, 2022 and January 1, 2022, respectively, through our five store brands, including America’s Best Contacts and Eyeglasses (“America’s Best”), Eyeglass World, Vista Optical locations on select U.S. Army/Air Force military bases (“Military”) and within select Fred Meyer stores, and our management & services arrangement with Walmart (“Legacy”).

Basis of Presentation and Principles of Consolidation

We prepare our unaudited interim condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and, therefore, do not include all information and disclosures required by U.S. GAAP for complete consolidated financial statements. The Condensed Consolidated Balance Sheet as of January 1, 2022 has been derived from the audited consolidated balance sheet for the fiscal year then ended. These condensed consolidated financial statements reflect all normal and recurring adjustments which are, in the opinion of management, necessary to present fairly the Company’s consolidated results of the interim period.

Certain information and disclosures normally included in our annual consolidated financial statements have been condensed or omitted; however, we believe that the disclosures included herein are sufficient for a fair presentation of the information presented. These condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and the notes thereto for the fiscal year ended January 1, 2022 included in the 2021 Annual Report on Form 10-K. The Company’s significant accounting policies are set forth in Note 1 within those consolidated financial statements. We use the same accounting policies in preparing interim condensed consolidated financial information and annual consolidated financial statements. There were no changes to our significant accounting policies during the six months ended July 2, 2022.

The condensed consolidated financial statements include our accounts and those of our wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. Certain amounts within the Condensed Consolidated Statements of Operations and Comprehensive Income and footnotes to the condensed consolidated financial statements for fiscal year 2021 have been reclassified to conform to the fiscal year 2022 presentation.

The Company has consolidated certain entities meeting the definition of a variable interest entity (“VIE”) as the Company concluded that it is the primary beneficiary of the entities under the provisions of Accounting Standards Codification 810, Consolidation. At July 2, 2022, the variable interest entities include 31 professional corporations. The total assets of the consolidated VIEs included in the accompanying Condensed Consolidated Balance Sheets as of July 2, 2022 and January 1, 2022, were $5.7 million and $6.0 million, respectively, and the total liabilities of the consolidated VIEs were $6.2 million and $6.8 million, respectively.

Fiscal Year

Our fiscal year consists of 52 or 53 weeks ending on the Saturday closest to December 31. Fiscal year 2022 contains 52 weeks and will end on December 31, 2022. All three and six month periods presented herein contain 13 and 26 weeks, respectively. All references to years and quarters relate to fiscal periods rather than calendar periods.

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Seasonality

The consolidated results of operations for the three and six months ended July 2, 2022 and July 3, 2021, are not necessarily indicative of the results to be expected for the full fiscal year due to seasonality and uncertainty of general economic conditions that may impact our key end markets. Historically, our business has realized a higher portion of net revenue, income from operations, and cash flows from operations in the first half of the year, and a lower portion of net revenue, income from operations, and cash flows from operations in the fourth fiscal quarter. The first half seasonality is attributable primarily to the timing of our customers’ personal income tax refunds and annual health insurance program start/reset periods, although delays in tax refund timing have occurred in 2020 and 2021, and may continue to occur in future years. Seasonality related to fourth quarter holiday spending by retail customers generally does not impact our business. Our quarterly consolidated results generally may also be affected by the timing of new store openings, store closings, and certain holidays.

Consumer behavior driven by the COVID-19 pandemic, shifting macroeconomic trends, consumer preferences and demand have resulted in a departure from seasonal norms we have experienced in recent years. We expect COVID-19 and the current macroeconomic environment to continue to impact the seasonality we have historically experienced.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions 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. Actual results could differ from those estimates.

Income Taxes

Our effective tax rates for the three months ended July 2, 2022 and July 3, 2021 were 32.4% and 15.8%, respectively, reflecting our statutory federal and state rate of 25.5% and effects of other permanent items. Our effective tax rates for the six months ended July 2, 2022 and July 3, 2021 were 28.6% and 18.8%, respectively, reflecting our statutory federal and state rate of 25.5% and effects of other permanent items as well as a stranded tax effect of $2.1 million associated with our matured interest rate swaps during the six months ended July 3, 2021.

Share Repurchases

During the six months ended July 2, 2022, the Company repurchased 2.7 million shares of its common stock for $80.0 million under the share repurchase program. After these repurchases, $50.0 million remains available under the share repurchase authorization.

Future Adoption of Accounting Pronouncements

Reference Rate Reform. In March 2020, the FASB issued ASU No. 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”). This guidance provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions that may be affected by the cessation of the London Inter-bank Offered Rate (“LIBOR.”) An entity may elect to apply the amendments for contract modifications as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020 through December 31, 2022. A portion of our debt is subject to interest payments that are indexed to LIBOR; additionally, we are party to an interest rate derivative based on LIBOR. We are currently evaluating the effect of this guidance and have not applied the provisions of this guidance during the current fiscal year.

The FASB issued other accounting guidance during the period that is not currently applicable or expected to have a material impact on the Company’s condensed consolidated financial statements, and therefore, is not described above.

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2. Details of Certain Balance Sheet Accounts

The following table provides a reconciliation of cash and cash equivalents reported within the Condensed Consolidated Balance sheets to the total of Cash, cash equivalents and restricted cash shown in the Condensed Consolidated Statement of Cash Flows:


	Six Months Ended
In thousands	July 2, 2022		July 3, 2021
Cash, cash equivalents and restricted cash:
Cash and cash equivalents	$	254,382	$	408,301
Restricted cash included in other assets	1,223		1,347
	$	255,605	$	409,648

The following tables provide additional details of certain balance sheet accounts as of the dates shown below:


In thousands	As of July 2, 2022		As of January 1, 2022
Accounts receivable, net:
Trade receivables	$	32,951	$	32,504
Credit card receivables	17,189		17,010
Other receivables (1)	14,336		6,685
Allowance for credit losses	(702)		(502)
	$	63,774	$	55,697
(1) Includes Coronavirus Aid, Relief, and Economic Security (“CARES”) Act receivable in the amount of $6.7 million as of July 2, 2022.


In thousands	As of July 2, 2022		As of January 1, 2022
Inventories:
Raw materials and work in process (1)	$	63,062	$	65,262
Finished goods	66,431		58,407
	$	129,493	$	123,669
(1)Due to the immaterial amount of estimated work in process and the short lead times for the conversion of raw materials to finished goods, the Company does not separately present raw materials and work in process.


In thousands	As of July 2, 2022		As of January 1, 2022
Other payables and accrued expenses:
Associate compensation and benefits (1)	$	47,929	$	55,670
Self-insurance liabilities	9,107		9,034
Capital expenditures	9,300		10,571
Advertising	5,102		6,962
Reserves for customer returns and remakes	7,762		7,556
Legacy management & services agreement	5,129		5,518
Income taxes payable	3,863		310
Supplies and other store support expenses	3,468		5,511
Litigation settlements	321		2,100
Fair value of derivative liabilities	—		2,846
Other	15,597		13,245
	$	107,578	$	119,323
(1) Includes the CARES Act deferred employer payroll taxes in the amount of $6.7 million as of July 2, 2022.

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In thousands	As of July 2, 2022		As of January 1, 2022
Other non-current liabilities:
Fair value of derivative liabilities	$	—	$	488
Self-insurance liabilities	6,274		6,170
Other	2,769		2,316
	$	9,043	$	8,974

3. Fair Value Measurement

Recurring fair value measurements

Interest Rate Derivatives

We recognize as assets or liabilities at fair value the estimated amounts we would receive or pay upon a termination of interest rate derivatives prior to their scheduled expiration dates. The fair value is based on information that is model-driven and whose inputs were observable (Level 2 inputs) such as LIBOR forward rates. See Note 5. “Interest Rate Derivatives” for further details.

Non-recurring fair value measurements

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

We recognized impairments of $3.5 million and $3.9 million during the three and six months ended July 2, 2022, respectively, and $0.5 million and $1.5 million during the three and six months ended July 3, 2021, respectively, related to our long-lived tangible store assets and ROU assets. The impairments were primarily driven by lower than projected customer sales volume in certain stores. The cash flows used in estimating fair value were discounted using market rates from 7.5% to 7.8%. A decrease in the estimated cash flows would lead to a lower fair value measurement, as would an increase in the discount rate. These non-recurring fair value measurements are classified as Level 3 measurements in the fair value hierarchy. The estimated remaining fair value of the assets impaired during the six months ended July 2, 2022 and July 3, 2021 was $4.0 million and $2.9 million, respectively; the estimated remaining fair values include amounts estimated at various dates during the related fiscal years. Substantially all of the remaining fair value of the impaired store assets represents the fair value of ROU assets.

Additional fair value information

Long-term Debt - 2025 Notes

The Company has $402.5 million in aggregate principal amount of 2.50% convertible senior notes due on May 15, 2025 (the “2025 Notes”) issued and outstanding as of July 2, 2022. Refer to Note 4. “Long-term Debt” for more information on the 2025 Notes. The estimated fair value of the 2025 Notes was approximately $453.5 million and $674.9 million as of July 2, 2022 and January 1, 2022, respectively. The estimated fair value of the 2025 Notes is based on the prices the 2025 Notes have traded in the market, as well as overall market conditions on the date of valuation, stated coupon rates, the number of coupon payments each year and the maturity dates, and represents a Level 2 measurement in the fair value hierarchy. Refer to Note 4. “Long-term Debt” for more information on the 2025 Notes.

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4. Long-term Debt

Long-term debt consists of the following:


In thousands	As of July 2, 2022		As of January 1, 2022
2025 Notes, due May 15, 2025	$	402,497	$	402,500
Term loan, due July 18, 2024	150,000		150,000
Revolving credit facility, due July 18, 2024	—		—
Long-term debt before debt discount	552,497		552,500
Unamortized discount and issuance costs - 2025 Notes	(6,913)		(7,986)
Unamortized discount and issuance costs - term loan	(762)		(948)
Long-term debt less debt discount	544,822		543,566
Less current maturities	—		—
Long-term debt - non-current portion	544,822		543,566
Finance lease obligations	23,981		26,514
Less current maturities	(4,651)		(3,999)
Long-term debt and finance lease obligations, less current portion and debt discount	$	564,152	$	566,081

Credit Agreement

We were in compliance with all covenants related to our long-term debt as of July 2, 2022.

2025 Notes

We recognized the following in interest expense (income), net related to the 2025 Notes:


	Three Months Ended				Six Months Ended
In thousands	July 2, 2022		July 3, 2021		July 2, 2022		July 3, 2021
Contractual interest expense	$	2,516	$	2,516	$	5,031	$	5,031
Amortization of issuance costs	$	560	$	542	$	1,080	$	1,046

As of July 2, 2022, the remaining period for the unamortized debt issuance costs balance was approximately three years. An immaterial amount of the principal balance of the 2025 Notes was converted during the six months ended July 2, 2022.

As of July 2, 2022, the stock price conditions under which the 2025 Notes can be converted at the holders’ option were not met.

5. Interest Rate Derivatives

We are party to an interest rate collar to offset the variability of cash flows in LIBOR-indexed debt interest payments. To manage credit risk associated with our interest rate hedging program, we select as counterparties major financial institutions with investment grade credit ratings. The aggregate notional amount of the interest rate collar, which is not designated as a cash flow hedge, was $350.0 million as of July 2, 2022. The fair value of our interest rate collar instrument was an asset of $7.9 million ($4.2 million in Prepaid expenses and other current assets and $3.7 million in Other assets) as of July 2, 2022, and a liability of $3.3 million ($2.8 million in Other payables and accrued expenses and $0.5 million in Other non-current liabilities) as of January 1, 2022. See Note 3. “Fair Value Measurement” for further details.

We recognized (gains) losses on the change in fair value of the interest rate collar of $(0.8) million and $(9.8) million during the three and six months ended July 2, 2022, respectively, and $0.5 million and $(1.5) million during the three and six months ended July 3, 2021, respectively, in interest expense (income), net. We recognized $1.5 million in interest expense (income), net during the six months ended July 3, 2021 related to our interest rate swaps that were considered to be highly effective hedges and that matured during the six months ended July 3, 2021.

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Cash flows related to derivatives qualifying as hedges are included in the same section of the Condensed Consolidated Statements of Cash Flows as the underlying assets and liabilities being hedged. Cash flows during the six months ended July 2, 2022 and July 3, 2021 related to derivatives not qualifying as hedges were included in the operating section of the Condensed Consolidated Statements of Cash Flows and were immaterial.

As of July 2, 2022 we expect to reclassify approximately $0.8 million of unrealized losses on derivative instruments, net of tax, from Accumulated other comprehensive loss (“AOCL”) into earnings in the next 12 months as the derivative instruments mature. See Note 12. “Accumulated Other Comprehensive Loss” for further details.

6. Stock Incentive Plans

During the six months ended July 2, 2022, the Company granted 158,985 performance-based restricted stock units (“PSUs”) and 303,264 time-based restricted stock units (“RSUs”) to eligible employees under the National Vision Holdings, Inc. 2017 Omnibus Incentive Plan (the “2017 Omnibus Incentive Plan”). The PSUs granted in fiscal 2022 are settled after the end of the performance period (i.e., cliff vesting), which begins on the first day of our 2022 fiscal year and ends on the last day of our 2024 fiscal year, and are based on the Company’s achievement of certain performance targets. The RSUs granted in fiscal 2022 vest primarily in three equal installments.

7. Revenue From Contracts With Customers

The majority of our revenues are recognized either at the point of sale or upon delivery and customer acceptance, paid for at the time of sale in cash, credit card, or on account with managed care payors having terms generally between 14 and 120 days, with most paying within 90 days. For sales of in-store non-prescription eyewear and related accessories, and paid eye exams, we recognize revenue at the point of sale. Our point in time revenues include 1) retail sales of prescription and non-prescription eyewear, contact lenses and related accessories to retail customers (including those covered by managed care), 2) eye exams and 3) wholesale sales of inventory in which our customer is another retail entity. Revenues recognized over time primarily include product protection plans (i.e. warranties), eye care club memberships and management fees earned from our Legacy partner.

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


	Three Months Ended				Six Months Ended
In thousands	July 2, 2022		July 3, 2021		July 2, 2022		July 3, 2021
Revenues recognized at a point in time	$	468,245	$	504,969	$	953,330	$	998,407
Revenues recognized over time	41,310		44,520		83,936		85,262
Total net revenue	$	509,555	$	549,489	$	1,037,266	$	1,083,669

Refer to Note 10. “Segment Reporting” for the Company’s disaggregation of net revenue by reportable segment. As the reportable segments are aligned by similar economic factors, trends and customers, the reportable segment disaggregation view best depicts how the nature, amount and uncertainty of revenue and cash flows are affected by economic factors.

We record reductions in revenue for estimated price concessions granted to managed care providers. The Company considers its revenue from managed care customers to include variable consideration and estimates such amounts associated with managed care customer revenues using the history of concessions provided and cash receipts from managed care providers; we reduced our net revenue for variable consideration of $3.0 million and $1.6 million during the three months ended July 2, 2022 and July 3, 2021, respectively, and $5.7 million and $4.4 million during the six months ended July 2, 2022 and July 3, 2021, respectively.

Contract Assets and Liabilities

The Company’s contract assets and contract liabilities primarily result from timing differences between the performance of our obligations and the customer’s payment.

Accounts Receivable

Credit loss expense recognized on our receivables, which is presented in SG&A expenses in the Company’s condensed consolidated statements of operations, were $0.5 million and $0.2 million for the three months ended July 2, 2022 and July 3, 2021, respectively, as compared to $0.6 million and $0.3 million for the six months ended July 2, 2022 and July 3, 2021, respectively.

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Unsatisfied Performance Obligations (Contract Liabilities)

During the three months ended July 2, 2022 and July 3, 2021, we recognized $23.9 million and $23.0 million, respectively, of deferred revenues outstanding at the beginning of each respective period. During the six months ended July 2, 2022 and July 3, 2021, we recognized $43.3 million and $37.3 million, respectively, of deferred revenues outstanding at the beginning of each respective period.

Our deferred revenue balance as of July 2, 2022 was $87.3 million. We expect future revenue recognition of this balance of $41.7 million, $33.0 million, $10.9 million, $1.5 million and $0.2 million in fiscal years 2022, 2023, 2024, 2025 and thereafter, respectively.

8. Leases

Our lease costs for the three and six months ended July 2, 2022 and July 3, 2021 were as follows:


	Three Months Ended				Six Months Ended
In thousands	July 2, 2022		July 3, 2021		July 2, 2022		July 3, 2021
Operating lease cost
Fixed lease cost (a)	$	22,488	$	20,903	$	44,437	$	41,554
Variable lease cost (b)	8,255		7,515		16,353		14,918
Sublease income (c)	(945)		(919)		(1,820)		(1,829)
Finance lease cost
Amortization of finance lease assets	1,080		1,113		2,161		2,236
Interest on finance lease liabilities	611		743		1,258		1,523
Net lease cost	$	31,489	$	29,355	$	62,389	$	58,402

(a) Includes short-term leases, which are immaterial.
(b) Includes costs for insurance, real estate taxes and common area maintenance expenses, which are variable, as are lease costs above minimum thresholds for Fred Meyer stores and lease costs for Military stores.
(c) Income from sub-leasing of stores includes rental income from leasing space to independent optometrists.


Lease Term and Discount Rate	As of July 2, 2022		As of January 1, 2022
Weighted average remaining lease term (months)
Operating leases	76		76
Finance leases	68		72
Weighted average discount rate (a)
Operating leases	4.4	%	4.5	%
Finance leases (b)	11.3	%	11.7	%

(a) The discount rate used to determine the lease assets and lease liabilities was derived upon considering (i) incremental borrowing rates on our term loan and revolving credit facility; (ii) fixed rates on interest rate swaps; (iii) LIBOR margins for issuers of similar credit rating; and (iv) effect of collateralization. As a majority of our leases are five-year and 10-year leases, we determined a lease discount rate for such tenors and determined this discount rate is reasonable for leases that were entered into during the period.
(b) The discount rate on finance leases is higher than operating leases because the present value of minimum lease payments was higher than the fair value of leased properties for certain leases entered into prior to adoption of ASC 842. The discount rate differential for those leases is not material to our results of operations.


In thousands	Six Months Ended
Other Information		July 2, 2022			July 3, 2021

Operating cash outflows - operating leases			$	47,337		$	43,860

Right of use assets acquired under operating leases			$	58,180		$	44,544

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The following table summarizes the maturity of our lease liabilities as of July 2, 2022:


In thousands	Operating Leases (a)		Finance Leases (b)
Fiscal Year
2022	$	34,363	$	3,047
2023	93,577		6,263
2024	82,691		4,734
2025	78,136		4,888
2026	60,037		4,496
Thereafter	138,024		6,886
Total lease liabilities	486,828		30,314
Less: Interest	63,704		6,333
Present value of lease liabilities (c)	$	423,124	$	23,981

(a) Operating lease payments include $43.0 million related to options to extend lease terms that are reasonably certain of being exercised.
(b) Finance lease payments include $1.7 million related to options to extend lease terms that are reasonably certain of being exercised.
(c) The present value of lease liabilities excludes $19.6 million of legally binding minimum lease payments for leases signed but not yet commenced.

9. Commitments and Contingencies

Legal Proceedings

From time to time, the Company is involved in various legal proceedings incidental to its business. Because of the nature and inherent uncertainties of litigation, we cannot predict with certainty the ultimate resolution of these actions and, should the outcome of these actions be unfavorable, the Company’s business, financial position, results of operations or cash flows could be materially and adversely affected.

The Company reviews the status of its legal proceedings and records a provision for a liability when it is considered probable that both a liability has been incurred and the amount of the loss can be reasonably estimated. This review is updated periodically as additional information becomes available. If either or both of the criteria are not met, we reassess whether there is at least a reasonable possibility that a loss, or additional losses, may be incurred. If there is a reasonable possibility that a loss may be incurred, we disclose the estimate of the amount of the loss or range of losses, or that an estimate of loss cannot be made. The Company expenses its legal fees as incurred.

We are currently and may in the future become subject to various claims and pending or threatened lawsuits in the ordinary course of our business.

10. Segment Reporting

The Company provides its principal products and services through two reportable segments: Owned & Host and Legacy. The “Corporate/Other” category includes the results of operations of our other operating segments, AC Lens and FirstSight, as well as corporate overhead support. The “Reconciliations” category represents other adjustments to reportable segment results necessary for the presentation of consolidated financial results in accordance with U.S. GAAP for the two reportable segments. Incremental expenses related to the COVID-19 pandemic are allocated to the reportable segments.

Our reportable segment profit measure is earnings before interest, tax, depreciation and amortization (“EBITDA”) or net revenue, less costs applicable to revenue, less SG&A expenses. Depreciation and amortization, asset impairment, and other corporate costs that are not allocated to the reportable segments, including interest expense (income) are excluded from segment EBITDA. There are no revenue transactions between our reportable segments. There are no differences between the measurement of our reportable segments’ assets and consolidated assets. There have been no changes from prior periods in the measurement methods used to determine reportable segment profit or loss, and there have been no asymmetrical allocations to segments.

The following is a summary of certain financial data for each of our segments. Reportable segment information is presented on the same basis as our consolidated financial statements, except for net revenue and associated costs applicable to revenue, which are presented on a cash basis, including point of sales for managed care payors and excluding the effects of unearned and deferred revenue, consistent with what the Chief Operating Decision Maker (“CODM”) regularly reviews.

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


	Three Months Ended July 2, 2022
In thousands	Owned & Host		Legacy		Corporate/Other		Reconciliations		Total
Net product services	$	326,000	$	24,301	$	61,885	$	9,414	$	421,600
Net sales of services and plans	73,158		13,536		—		1,261		87,955
Total net revenue	399,158		37,837		61,885		10,675		509,555
Cost of products	95,264		11,506		54,499		2,092		163,361
Cost of services and plans	65,314		5,892		—		—		71,206
Total costs applicable to revenue	160,578		17,398		54,499		2,092