Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q
 
(Mark one)
[ X  ]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
For the quarterly period ended June 30, 2018
 
 
[     ]
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:  001-35113
 
GNC Holdings, Inc.
(Exact name of registrant as specified in its charter)
 
Delaware
20-8536244
(State or other jurisdiction of
(I.R.S. Employer
Incorporation or organization)
Identification No.)
 
 
300 Sixth Avenue
15222
Pittsburgh, Pennsylvania
(Zip Code)
(Address of principal executive offices)
 
 
Registrant’s telephone number, including area code:  (412) 288-4600
 
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.     [  X  ] Yes [    ] No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). 
[  X   ] Yes [    ] No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 [ X ]
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
[ X ] No
 
As of July 23, 2018 , there were 83,888,937 outstanding shares of Class A common stock, par value $0.001 per share (the “common stock”), of GNC Holdings, Inc.

Table of Contents

TABLE OF CONTENTS
 
 
 
 
 
PAGE
 
 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


Table of Contents

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements
 
GNC HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(unaudited)
(in thousands)

 
June 30, 2018
 
December 31, 2017
Current assets:
 
 
 
Cash and cash equivalents
$
43,353


$
64,001

Receivables, net
124,178


126,650

Inventory (Note 4)
493,653


485,732

Prepaid and other current assets
73,033


66,648

Total current assets
734,217

 
743,031

Long-term assets:
 

 
 

Goodwill
140,883


141,029

Brand name
324,400


324,400

Other intangible assets, net
96,200


99,715

Property, plant and equipment, net
173,664


186,562

Other long-term assets
29,710


25,026

Total long-term assets
764,857

 
776,732

Total assets
$
1,499,074

 
$
1,519,763

Current liabilities:
 

 
 

Accounts payable
$
159,272


$
153,018

Current debt (Note 5)
205,617


—

Deferred revenue and other current liabilities
119,096


114,081

Total current liabilities
483,985

 
267,099

Long-term liabilities:
 

 
 

Long-term debt (Note 5)
1,046,069


1,297,023

Deferred income taxes
50,279


56,060

Other long-term liabilities
84,799


85,502

Total long-term liabilities
1,181,147

 
1,438,585

Total liabilities
1,665,132

 
1,705,684

Contingencies (Note 7)


 


Stockholders’ deficit:
 

 
 

Common stock
130

 
130

Additional paid-in capital
1,004,563


1,001,315

Retained earnings
563,387


543,814

Treasury stock, at cost
(1,725,349
)

(1,725,349
)
Accumulated other comprehensive loss
(8,789
)

(5,831
)
Total stockholders’ deficit
(166,058
)
 
(185,921
)
Total liabilities and stockholders’ deficit
$
1,499,074

 
$
1,519,763

 
The accompanying notes are an integral part of the Consolidated Financial Statements.

1
Table of Contents

GNC HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited)
(in thousands, except per share amounts)

 
Three months ended June 30,
 
Six months ended June 30,
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
Revenue (Note 3)
$
617,944

 
$
650,238

 
$
1,225,477

 
$
1,305,186

Cost of sales, including warehousing, distribution and occupancy
410,209

 
430,455

 
810,868

 
865,541

Gross profit
207,735

 
219,783

 
414,609

 
439,645

Selling, general, and administrative
158,531

 
159,540

 
319,261

 
325,567

Long-lived asset impairments
—

 
19,356

 
—

 
19,356

Other loss (income), net
320

 
(486
)
 
75

 
(1,619
)
Operating income
48,884

 
41,373

 
95,273

 
96,341

Interest expense, net (Note 5)
32,943

 
16,067

 
54,716

 
31,961

Loss on debt refinancing (Note 5)
—

 
—

 
16,740

 
—

Income before income taxes
15,941

 
25,306

 
23,817

 
64,380

Income tax expense (Note 10)
2,600

 
8,662

 
4,286

 
22,992

Net income
$
13,341

 
$
16,644

 
$
19,531

 
$
41,388

Earnings per share (Note 8) :
 

 
 

 
 
 
 
Basic
$
0.16

 
$
0.24

 
$
0.23

 
$
0.61

Diluted
$
0.16

 
$
0.24

 
$
0.23

 
$
0.61

Weighted average common shares outstanding (Note 8) :
 

 
 

 
 
 
 
Basic
83,332

 
68,287

 
83,282

 
68,267

Diluted
83,409

 
68,362

 
83,389

 
68,331

 
The accompanying notes are an integral part of the Consolidated Financial Statements .


2
Table of Contents

GNC HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(unaudited)
(in thousands)
 
 
Three months ended June 30,
 
Six months ended June 30,
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
Net income
$
13,341

 
$
16,644

 
$
19,531

 
$
41,388

Other comprehensive (loss) income:
 

 
 

 
 
 
 
 Foreign currency translation (loss) gain
(950
)
 
1,048

 
(1,796
)
 
1,600

 Revaluation of interest rate swap, net of tax of $0.5 million
(1,162
)
 
—

 
(1,162
)
 
—

 Total other comprehensive (loss) gain
(2,112
)
 
1,048

 
(2,958
)
 
1,600

Comprehensive income
$
11,229

 
$
17,692

 
$
16,573

 
$
42,988

 
The accompanying notes are an integral part of the Consolidated Financial Statements .


3
Table of Contents

GNC HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Deficit
(unaudited)
(in thousands)

 
Common Stock
 
Treasury Stock
 
Additional Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Total
Stockholders’
Deficit
 
Class A
 
 
 
 
 
 
Shares
 
Dollars
 
 
 
 
 
Balance at December 31, 2017
83,567

 
$
130

 
$
(1,725,349
)
 
$
1,001,315

 
$
543,814

 
$
(5,831
)
 
$
(185,921
)
Comprehensive income
—

 
—

 
—

 
—

 
19,531

 
(2,958
)
 
16,573

Dividend forfeitures on restricted stock

—

 
—

 
—

 
—

 
42

 
—

 
42

Restricted stock awards
378

 
—

 
—

 
—

 
—

 
—

 
—

Minimum tax withholding requirements
(57
)
 
—

 
—

 
(226
)
 
—

 
—

 
(226
)
Stock-based compensation
—

 
—

 
—

 
3,474

 
—

 
—

 
3,474

Balance at June 30, 2018
83,888

 
$
130

 
$
(1,725,349
)
 
$
1,004,563

 
$
563,387

 
$
(8,789
)
 
$
(166,058
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2016
68,399

 
$
114

 
$
(1,725,349
)
 
$
922,687

 
$
693,682

 
$
(8,697
)
 
$
(117,563
)
Comprehensive income
—

 
—

 
—

 
—

 
41,388

 
1,600

 
42,988

Dividend forfeitures on restricted stock
—

 
—

 
—

 
—

 
259

 
—

 
259

Restricted stock awards
101

 
—

 
—

 
—

 
—

 
—

 
—

Minimum tax withholding requirements
(32
)
 
—

 
—

 
(247
)
 
—

 
—

 
(247
)
Stock-based compensation
—

 
—

 
—

 
2,709

 
—

 
—

 
2,709

Balance at June 30, 2017
68,468

 
$
114

 
$
(1,725,349
)
 
$
925,149

 
$
735,329

 
$
(7,097
)
 
$
(71,854
)
 
The accompanying notes are an integral part of the Consolidated Financial Statements.


4
Table of Contents

GNC HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited)
(in thousands)

 
Six months ended June 30,
 
2018
 
2017
Cash flows from operating activities:
 


 

Net income
$
19,531


$
41,388

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


 

Depreciation and amortization expense
24,106


30,854

Amortization of debt costs
9,025


6,602

Stock-based compensation
3,474


2,709

Long-lived asset impairments
—

 
19,356

Gains on refranchising
(208
)

(124
)
Loss on debt refinancing
16,740

 
—

Third-party fees associated with refinancing
(16,322
)
 
—

Changes in assets and liabilities:





Decrease in receivables
2,112


13,227

(Increase) decrease in inventory
(9,201
)

15,039

Increase in prepaid and other current assets
(3,175
)

(1,917
)
Increase (decrease) in accounts payable
6,751


(38,607
)
Decrease in deferred revenue and accrued liabilities
(1,017
)

(16,086
)
Other operating activities
(2,674
)

409

Net cash provided by operating activities
49,142


72,850

 





Cash flows from investing activities:
 


 

Capital expenditures
(8,333
)

(20,397
)
Refranchising proceeds
1,175


2,160

Store acquisition costs
(118
)

(432
)
Net cash used in investing activities
(7,276
)

(18,669
)
 





Cash flows from financing activities:
 


 

Borrowings under revolving credit facility
104,000


151,000

Payments on revolving credit facility
(104,000
)

(147,000
)
Payments on Tranche B-1 Term Loan
(2,275
)
 
(40,853
)
Payments on Tranche B-2 Term Loan
(21,400
)
 
—

Original Issuance Discount and revolving credit facility fees
(35,235
)

—

Deferred fees associated with pending equity transaction
(3,014
)
 
—

Minimum tax withholding requirements
(226
)

(247
)
Net cash used in financing activities
(62,150
)

(37,100
)
 





Effect of exchange rate changes on cash and cash equivalents
(364
)

454

Net (decrease) increase in cash and cash equivalents
(20,648
)

17,535

Beginning balance, cash and cash equivalents
64,001


34,464

Ending balance, cash and cash equivalents
$
43,353


$
51,999

 
The accompanying notes are an integral part of the Consolidated Financial Statements.


5
Table of Contents

GNC HOLDINGS, INC. AND SUBSIDIARIES
Supplemental Cash Flow Information
(unaudited)
(in thousands)



 
As of June 30,
 
2018
 
2017
Non-cash investing activities:
 
 
 
Capital expenditures in current liabilities
$
1,120

 
$
2,141

Non-cash financing activities:
 
 
 
Original issuance discount (Note 5)
$
13,231

 
$
—


The accompanying notes are an integral part of the Consolidated Financial Statements.


6
Table of Contents

GNC HOLDINGS, INC. AND SUBSIDIARIES
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 prior to the sale of its assets on September 30, 2017, LuckyVitamin.com. 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, 2017 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 Footnotes included in the Company’s audited financial statements in its Annual Report on Form 10-K for the year ended December 31, 2017 ("2017 10-K"). Interim results are not necessarily indicative of the results that may be expected for the remainder of the year ending December 31, 2018 .
Recently Adopted Accounting Pronouncements
In December 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2017-12, which simplifies the application of certain hedge accounting guidance to better align hedge accounting with an organization’s risk management activities in the financial statements. This standard eliminated the separate measurement and reporting of hedge ineffectiveness. Mismatches between changes in value of the hedged item and hedging instrument may still occur but they will no longer be separately reported. For cash flow and net investment hedges, all changes in value of the hedging instrument included in the assessment of effectiveness will be deferred in other comprehensive income and recognized in earnings at the same time that the hedged item affects earnings. The standard is effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2018. Early adoption is permitted. The Company adopted this standard during the second quarter of fiscal 2018, which was applied to the interest rate swaps entered into described below in Note 5 "Long-Term Debt / Interest Expense." The adoption of this standard did not have a material effect on the Company's Consolidated Financial Statements.

7

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. The Company adopted this standard during the first quarter of fiscal 2018 which did not have an 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 connection with the adoption of this ASU, the Company presented the third-party fees relating to the term loan refinancing as an operating cash flow on the Consolidated Statement of Cash Flows. 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. The adoption of ASU 2016-18 did not have an impact to the Consolidated Statement of Cash Flows. Both standards were effective for annual reporting periods, and interim periods therein, beginning after December 15, 2017.     
Adoption of New Revenue Recognition Standard
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, 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 effective for annual reporting periods, and interim periods therein, beginning after December 15, 2017. The Company adopted ASU 2014-09 and its related amendments (collectively known as "ASC 606") during the first quarter of fiscal 2018 using the full retrospective method.
The adoption of ASC 606 does not impact 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. The new standard has no impact on the timing or classification of the Company’s cash flows as reported in the Consolidated Statement of Cash Flows and is not expected to have a significant impact on the Company’s Consolidated Statement of Operations in future periods. The Company recorded a reduction to retained earnings, net of tax, at January 1, 2016 (opening balance) and December 31, 2016 of approximately $23 million primarily relating to an increase in deferred franchise fees. Below is a description of the changes that resulted from the new standard.
Franchise fees. The Company's previous accounting policy for franchise and license fees received for new store openings and renewals was 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 are now 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 impacted 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 are now recorded as described above as part of revenue and will no longer be presented as part of gains on refranchising.

Cooperative advertising and other franchise support fees. The Company previously classified advertising and other franchise support fees received from domestic franchisees as a reduction to selling, general and administrative expense and cost of sales on the Consolidated Statement of Operations. In accordance with the new guidance, these fees are now required to be classified as revenue within the U.S. and Canada segment. The new standard does not impact the timing of recognition of this income or the Consolidated Balance Sheet.

Specialty manufacturing. The Company previously recognized 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 impacts contract manufacturing sales

8

to third-parties recorded in the Manufacturing / Wholesale segment. The Company is now recording a reduction to inventory as applicable custom manufacturing services are completed with a corresponding contract asset including the applicable markup, recorded within prepaid and other current assets on the Consolidated Balance Sheet.

E-commerce revenues. The Company previously recorded revenue to its e-commerce customers upon delivery. Under the new guidance, the Company is now recognizing revenue upon shipment based on meeting the transfer of control criteria. The Company has made a policy election to treat shipping and handling as costs to fulfill the contract, and as a result, any fees received from customers are 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 Company has not revised prior period balances for e-commerce revenues because the changes are not material.

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 Company utilized the new revenue recognition standard to account for this program in 2017, the difference of which was immaterial relative to the standard in effect at that time.

Refer to Note 3 "Revenue" for additional information relating to the impact of adopting ASC 606.

Revisions to Prior Periods
As a result of adopting ASC 606 on January 1, 2018, the Company has revised its comparative financial statements for the years ended December 31, 2016 and 2017, and applicable interim periods within those years, as if ASC 606 had been effective for those periods. Additionally, the cumulative effect of applying the new guidance to all contracts with customers that were not completed was recorded as an adjustment to retained earnings as of January 1, 2016.
The impact of the adoption of ASC 606 on the Company's Consolidated Balance Sheet as of December 31, 2017 was as follows:
 
 
 
As Previously Reported
 
Franchise Fees
Specialty Manufacturing
Total Adjustments
 
As Revised
 
(in thousands)

Inventory
$
506,858

 
$
—

$
(21,126
)
$
(21,126
)
 
$
485,732

Prepaid and other current assets
42,320

 
—

24,328

24,328

 
66,648

Total current assets
739,829

 
—

3,202

3,202

 
743,031

Total assets
$
1,516,561

 
$
—

$
3,202

$
3,202

 
$
1,519,763

 
 
 
 
 
 
 
 
Deferred revenue and other current liabilities
$
108,672

 
$
5,409

$
—

$
5,409

 
$
114,081

Total current liabilities
261,690

 
5,409

—

5,409

 
267,099

Deferred income taxes
64,121

 
(8,868
)
807

(8,061
)
 
56,060

Other long-term liabilities
55,721

 
29,781

—

29,781

 
85,502

Total long-term liabilities
1,416,865

 
20,913

807

21,720

 
1,438,585

Total liabilities
1,678,555

 
26,322

807

27,129

 
1,705,684

Retained earnings
567,741

 
(26,322
)
2,395

(23,927
)
 
543,814

Total stockholders' deficit
(161,994
)
 
(26,322
)
2,395

(23,927
)
 
(185,921
)
Total liabilities and stockholders' deficit
$
1,516,561

 
$
—

$
3,202

$
3,202

 
$
1,519,763

    







9

The impact of the adoption of ASC 606 on the Consolidated Statements of Operations for the three and six months ended June 30, 2017 was as follows:
 
Three months ended June 30, 2017
 
As Previously Reported
 
Franchise Fees
Specialty Manufacturing
Cooperative Advertising and Other Franchise Support Fees
Total Adjustments
 
As Revised
 
(in thousands, except per share amounts)
Revenue
$
640,994

 
$
1,353

$
1,542

$
6,349

$
9,244

 
$
650,238

Cost of sales (1)
428,271

 
—

1,342

842

2,184

 
430,455

Gross profit
212,723

 
1,353

200

5,507

7,060

 
219,783

SG&A (2)
154,033

 
—

—

5,507

5,507

 
159,540

Long-lived asset impairments
19,356

 
—

—

—

—

 
19,356

Other income, net
(486
)
 
—

—

—

—

 
(486
)
Operating income
39,820

 
1,353

200

—

1,553

 
41,373

Interest expense, net
16,067

 
—

—

—

—

 
16,067

Income before income taxes
23,753

 
1,353

200

—

1,553

 
25,306

Income tax expense
8,092

 
497

73

—

570

 
8,662

Net income
$
15,661

 
$
856

$
127

$
—

$
983

 
$
16,644

Earnings per share:
 
 
 
 
 
 
 
 
Basic
$
0.23

 
$
0.01

$
—

$
—

$
0.01

 
$
0.24

Diluted
$
0.23

 
$
0.01

$
—

$
—

$
0.01

 
$
0.24

 
Six months ended June 30, 2017
 
As Previously Reported
 
Franchise Fees
Specialty Manufacturing
Cooperative Advertising and Other Franchise Support Fees
Total Adjustments
 
As Revised
 
(in thousands, except per share amounts)
Revenue
$
1,285,832

 
$
2,336

$
4,628

$
12,390

$
19,354

 
$
1,305,186

Cost of sales (1)
860,138

 
—

3,966

1,437

5,403

 
865,541

Gross profit
425,694

 
2,336

662

10,953

13,951

 
439,645

SG&A (2)
314,614

 
—

—

10,953

10,953

 
325,567

Long-lived asset impairments
19,356

 
—

—

—

—

 
19,356

Other income, net
(1,649
)
 
30

—

—

30

 
(1,619
)
Operating income
93,373

 
2,306

662

—

2,968

 
96,341

Interest expense, net
31,961

 
—

—

—

—

 
31,961

Income before income taxes
61,412

 
2,306

662

—

2,968

 
64,380

Income tax expense
21,901

 
847

244

—

1,091

 
22,992

Net income
$
39,511

 
$
1,459

$
418

$
—

$
1,877

 
$
41,388

Earnings per share:
 
 
 
 
 
 
 
 
Basic
$
0.58

 
$
0.02

$
0.01

$
—

$
0.03

 
$
0.61

Diluted
$
0.58

 
$
0.02

$
0.01

$
—

$
0.03

 
$
0.61

(1) Includes warehousing, distribution and occupancy.
(2) Defined as selling, general and administrative expense.




10

The impact of adoption of ASC 606 on the Company's reportable segments for the three and six months ended June 30, 2017 was as follows:
 
Three months ended June 30, 2017
 
As Previously Reported
 
Franchise Fees
Specialty Manufacturing
Cooperative Advertising and Other Franchise Support Fees
Total Adjustments
 
As Revised
 
(in thousands)
Revenue:
 
 
 
 
 
 

 
 
U.S. and Canada
$
520,804

 
$
661

$
—

$
6,349

$
7,010

 
$
527,814

International
43,631

 
182

—

—

182

 
43,813

Manufacturing / Wholesale:
 
 
 
 
 
 
 
 
Intersegment revenues
56,000

 
—

—

—

—

 
56,000

Third party
53,945

 
510

1,542

—

2,052

 
55,997

Subtotal Manufacturing / Wholesale
109,945

 
510

1,542

—

2,052

 
111,997

Total reportable segment revenues
674,380

 
1,353

1,542

6,349

9,244

 
683,624

Other
22,614

 
—

—

—

—

 
22,614

Elimination of intersegment revenues
(56,000
)
 
—

—

—

—

 
(56,000
)
Total revenue
$
640,994

 
$
1,353

$
1,542

$
6,349

$
9,244

 
$
650,238

Operating income:
 

 
 

 
 
 

 
 

U.S. and Canada
$
51,829

 
$
661

$
—

$
—

$
661

 
$
52,490

International
15,605

 
182

—

—

182

 
15,787

Manufacturing / Wholesale
17,927

 
510

200

—

710

 
18,637

Total reportable segment operating income
85,361

 
1,353

200

—

1,553

 
86,914

Corporate costs
(26,207
)
 
—

—

—

—

 
(26,207
)
Other
(19,334
)
 
—

—

—

—

 
(19,334
)
Unallocated corporate and other
(45,541
)
 
—

—

—

—

 
(45,541
)
Total operating income
$
39,820

 
$
1,353

$
200

$
—

$
1,553

 
$
41,373



11

 
Six months ended June 30, 2017
 
As Previously Reported
 
Franchise Fees
Specialty Manufacturing
Cooperative Advertising and Other Franchise Support Fees
Total Adjustments
 
As Revised
 
(in thousands)
Revenue:
 
 
 
 
 
 

 
 
U.S. and Canada
$
1,050,983

 
$
1,062

$
—

$
12,390

$
13,452

 
$
1,064,435

International
83,048

 
516

—

—

516

 
83,564

Manufacturing / Wholesale:
 
 
 
 
 
 
 
 
Intersegment revenues
117,298

 
—

—

—

—

 
117,298

Third party
106,445

 
758

4,628

—

5,386

 
111,831

Subtotal Manufacturing / Wholesale
223,743

 
758

4,628

—

5,386

 
229,129

Total reportable segment revenues
1,357,774

 
2,336

4,628

12,390

19,354

 
1,377,128

Other
45,356

 
—

—

—

—

 
45,356

Elimination of intersegment revenues
(117,298
)
 
—

—

—

—

 
(117,298
)
Total revenue
$
1,285,832

 
$
2,336

$
4,628

$
12,390

$
19,354

 
$
1,305,186

Operating income:
 

 
 

 
 
 

 
 

U.S. and Canada
$
101,948

 
$
1,032

$
—

$
—

$
1,032

 
$
102,980

International
30,140

 
516

—

—

516

 
30,656

Manufacturing / Wholesale
34,484

 
758

662

—

1,420

 
35,904

Total reportable segment operating income
166,572

 
2,306

662

—

2,968

 
169,540

Corporate costs
(54,281
)
 
—

—

—

—

 
(54,281
)
Other
(18,918
)
 
—

—

—

—

 
(18,918
)
Unallocated corporate and other
(73,199
)
 
—

—

 
—

 
(73,199
)
Total operating income
$
93,373

 
$
2,306

$
662

$
—

$
2,968

 
$
96,341


Recently Issued Accounting Pronouncements
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.

12

NOTE 3.  REVENUE  
Revenue is recognized when obligations under the terms of a contract with the customer are satisfied; generally, this occurs with the transfer of control of products or services. The Company satisfies performance obligations either over time or at a point in time as discussed in further detail below. Revenue is measured as the amount of consideration expected to be received in exchange for transferring goods or providing services. Applicable sales tax collected concurrent with revenue-producing activities are excluded from revenue.
U.S. and Canada Revenue
The following is a summary of revenue disaggregated by major source in the U.S. and Canada segment:
 
Three months ended June 30,
 
Six months ended June 30,
 
2018
 
2017
 
2018
 
2017
U.S. company-owned product sales: (1)
(in thousands)
   Protein
$
87,072

 
$
90,706

 
$
174,742

 
$
182,969

   Performance supplements
73,100

 
74,709

 
148,716

 
148,017

   Weight management
38,686

 
39,758

 
78,473

 
80,275

   Vitamins
49,495

 
52,112

 
99,866

 
103,348

   Herbs / Greens
16,945

 
17,018

 
33,103

 
32,735

   Wellness
49,680

 
51,175

 
97,381

 
99,596

   Health / Beauty
47,525

 
48,887

 
95,579

 
97,597

   Food / Drink
28,709

 
25,448

 
54,069

 
49,570

   General merchandise
5,878

 
7,345

 
12,940

 
15,209

Total U.S. company-owned product sales
$
397,090

 
$
407,158

 
$
794,869

 
$
809,316

Wholesale sales to franchisees
60,675

 
66,082

 
117,835

 
130,363

Royalties and franchise fees
8,532

 
9,492

 
17,280

 
18,823

Sublease income
11,633

 
12,362

 
23,398

 
24,958

Cooperative advertising and other franchise support fees
5,973

 
6,349

 
11,506

 
12,390

Gold Card revenue recognized in U.S. (2)
—

 
—

 
—

 
24,399

Other (3)
33,414

 
26,371

 
64,843

 
44,186

Total U.S. and Canada revenue
$
517,317

 
$
527,814

 
$
1,029,731

 
$
1,064,435

(1)
Includes GNC.com sales.
(2)
The Gold Card Member Pricing program in the U.S. was discontinued in December 2016 in connection with the launch of the One New GNC which resulted in $24.4 million of deferred Gold Card revenue being recognized in the first quarter of 2017, net of $1.4 million in applicable coupon redemptions.
(3)
Includes revenue primarily related to Canada operations and loyalty programs, myGNC Rewards and PRO Access. The increase primarily relates to the Company's loyalty programs.

13

International Revenues
The following is a summary of the revenue disaggregated by major source in the International reportable segment:
 
Three months ended June 30,
 
Six months ended June 30,
 
2018
 
2017
 
2018
 
2017
 
(in thousands)
Wholesale sales to franchisees
$
27,185

 
$
26,250

 
$
48,945

 
$
51,806

Royalties and franchise fees
6,576

 
6,280

 
13,197

 
12,851

Other  (*)
14,874

 
11,283

 
26,558

 
18,907

Total International revenue
$
48,635

 
$
43,813

 
$
88,700

 
$
83,564

(*) Includes revenue primarily related to China operations and company-owned stores located in Ireland.
Manufacturing / Wholesale Revenue
The following is a summary of the revenue disaggregated by major source in the Manufacturing / Wholesale reportable segment:
 
Three months ended June 30,
 
Six months ended June 30,
 
2018
 
2017
 
2018
 
2017
 
(in thousands)
Third-party contract manufacturing
$
30,580

 
$
34,220

 
$
63,302

 
$
67,962

Intersegment sales
65,238

 
56,000

 
129,901

 
117,298

Wholesale partner sales
21,412

 
21,777

 
43,744

 
43,869

Total Manufacturing / Wholesale revenue
$
117,230

 
$
111,997

 
$
236,947

 
$
229,129

Revenue by Geography
The following is a summary of the revenue by geography.
 
Three months ended June 30,
 
Six months ended June 30,
 
2018
 
2017
 
2018
 
2017
Total revenues by geographic areas:
(in thousands)
United States
$
579,324

 
$
613,669

 
$
1,151,555

 
$
1,234,692

Foreign
38,620

 
36,569

 
73,922

 
70,494

Total revenues
$
617,944

 
$
650,238

 
$
1,225,477

 
$
1,305,186

Revenue Recognition Policies
Within the U.S. and Canada segment, retail sales in company-owned stores are recognized at the point of sale. Revenue related to e-commerce sales is recognized upon shipment based on meeting the transfer of control criteria. The Company has made a policy election to treat shipping and handling as costs to fulfill the contract, and as a result, any fees received from customers are 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. Taxes collected from customers relating to product sales and remitted to governmental authorities are excluded from revenue. A provision for anticipated returns is recorded through a reduction of sales and cost of sales (for product that can be resold or returned to vendors) in the period that the related sales are recorded.
Effective with the launch of the One New GNC on December 29, 2016, the Company introduced myGNC Rewards, a free points-based loyalty program while discontinuing its Gold Card Member Pricing program system-wide in the U.S. The loyalty program enables customers to earn points based on their purchases. Points earned by members

14

are valid for one year and may be redeemed for cash discounts on any product the Company sells at both company-owned or franchise locations. The Company defers the estimated standalone selling price of points related to this program as a reduction to revenue as points are earned by allocating a portion of the transaction price the customer pays to a loyalty program liability within deferred revenue and other current liabilities on the Consolidated Balance Sheet. The estimated selling price of each point is based on the estimated value of product for which the point is expected to be redeemed, net of points not expected to be redeemed, based on historical redemption rates. When a customer redeems earned points, revenue is recognized with a corresponding reduction to the program liability.
Also effective with the launch of the One New GNC, the Company began offering a paid membership program, PRO Access, for $39.99 per year, which provides members with the delivery of sample boxes throughout the membership year, as well as the offering of certain other benefits including the opportunity to earn triple points on a periodic basis. The boxes include sample merchandise and other materials. The Company allocates the transaction price of the membership to the sample boxes and other benefits based on estimated relative stand-alone prices. The membership price paid is recorded within deferred revenue and other current liabilities on the Consolidated Balance Sheet and recognized as revenue as the underlying performance obligations are satisfied.
Revenue from gift cards is recognized when the gift card is redeemed. Gift cards do not have expiration dates and are not required to be escheated to government authorities. Utilizing historical redemption rates, the Company recognizes revenue for amounts not expected to be redeemed proportionately as other gift card balances are redeemed.
Revenues from domestic and international franchisees include wholesale product sales, franchise fees and royalties, as well as cooperative advertising and other franchise support fees specific to domestic franchisees. Revenues are recorded within the U.S. and Canada segment for domestic franchisees and the International segment for international franchisees. The Company's franchisees purchase a significant amount of the products they sell in their retail stores from the Company at wholesale prices. Revenue on product sales to franchisees and other franchise support fees (including construction, equipment and other administrative fees) are recognized upon transfer of control to the franchisee, net of estimated returns and allowances. Franchise license fees, royalties and continuing services, such as cooperative advertising, are not separate and distinct performance obligations as they are highly dependent on each other in supporting the overall brand. Franchise fees for the license are paid in advance, and are deferred and recognized over the applicable license term as the Company satisfies the performance obligation of granting the customer access to the rights of its intellectual property. Franchise royalties and cooperative advertising contributions are variable consideration based on a percentage of the franchisees' retail sales, which are recognized in the period the franchisees' underlying sales occur, and are not included in the upfront transaction price for the overall performance obligation relating to providing access to the Company's intellectual property.
The Manufacturing / Wholesale segment sells product to the Company's other segments, which is eliminated in consolidation, and third-party customers. Revenue is recognized over time, net of estimated returns and allowances, as manufacturing occurs if the customized goods have no alternative use (specially made for the end customer) and the Company has an enforceable right to payment for performance completed to date (even if such right is not enforced in practice). The selection of the method to measure progress towards completion requires judgment and is based on the nature of the products or services to be provided. The Company uses the cost-to-cost measure of progress for its contracts because it best depicts the transfer of control to the customer which occurs as the Company incurs costs on its contracts. Under the cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. Revenues, including estimated fees or profits, are recorded proportionally as costs are incurred. Costs to fulfill include labor, materials, other direct costs and an allocation of indirect costs, which are recognized as cost of sales as revenue is recognized. Services for specialty manufacturing contracts typically have an expected duration of less than one year.
Balances from Contracts with Customers
Contract assets relating to specialty manufacturing include amounts related to the Company's contractual right to consideration for completed performance obligations not yet invoiced, and were $27.6 million and $24.3 million at June 30, 2018 and December 31, 2017, respectively, recorded within prepaid and other current assets on the accompanying Consolidated Balance Sheets (with a corresponding reduction to inventory at cost). Contract liabilities include payments received in advance of performance under the contract.

15

The following table presents changes in the Company’s contract liabilities:
 
Three months ended June 30, 2018
 
Balance at Beginning of Period
 
Additions
 
Deductions
 
Balance at the End of Period
 
(in thousands)
Deferred franchise and license fees
$
36,896

 
1,341

 
(2,449
)
 
$
35,788

PRO Access and loyalty program points
26,271

 
18,480

 
(17,412
)
 
27,339

Gift card liability
2,641

 
726

 
(1,166
)
 
2,201

 
Six months ended June 30, 2018
 
Balance at Beginning of Period
 
Additions
 
Deductions
 
Balance at the End of Period
 
(in thousands)
Deferred franchise and license fees
$
38,011

 
2,783

 
(5,006
)
 
$
35,788

PRO Access and loyalty program points
24,464

 
35,629

 
(32,754
)
 
27,339

Gift card liability
4,172

 
1,694

 
(3,665
)
 
2,201

The Company's PRO Access and loyalty program points are recorded within deferred revenue and other current liabilities on the Consolidated Balance Sheets. Deferred franchise and license fees are recorded within deferred revenue and other current liabilities and other long-term liabilities on the Consolidated Balance Sheets. As of June 30, 2018 , the Company had deferred franchise and license fees with unsatisfied performance obligations extending throughout 2028 of $35.8 million , of which $7.6 million is expected to be recognized over the next 12 months. The Company has elected to use the practical expedient allowed under the rules of adoption to not disclose the duration of the remaining unsatisfied performance obligations for contracts with an original expected length of one year or less.
NOTE 4.  INVENTORY
The net realizable value of inventory consisted of the following:
 
June 30, 2018
 
December 31, 2017 (*)
 
(in thousands)
Finished product ready for sale
$
429,744

 
$
432,092

Work-in-process, bulk product and raw materials
57,966

 
51,225

Packaging supplies
5,943

 
2,415

Inventory
$
493,653

 
$
485,732

(*) The balances as of December 31, 2017 have been revised in connection with the adoption of ASC 606 to include a reduction to inventory as applicable custom manufacturing services are completed. Refer to Note 2, "Basis of Presentation" for more information.

16

NOTE 5.  LONG-TERM DEBT / INTEREST EXPENSE
Long-term debt consisted of the following: 
 
June 30,
2018
 
December 31,
2017
 
(in thousands)
Tranche B-1 Term Loan (net of $0.1 million and $0.9 million discount)
$
149,516

 
$
1,130,320

Tranche B-2 Term Loan (net of $27.4 million discount)
655,493

 
—

FILO Term Loan (net of $12.3 million discount)
262,721

 
—

Unpaid original issuance discount
13,231

 
—

Notes
171,701

 
167,988

Debt issuance costs
(976
)
 
(1,285
)
Total debt
1,251,686

 
1,297,023

Less: current debt
(205,617
)
 
—

Long-term debt
$
1,046,069

 
$
1,297,023

Refinancing of Senior Credit Facility
On February 28, 2018, the Company amended and restated its Senior Credit Facility (the “Amendment”, and the Senior Credit Facility as so amended, the "Term Loan Agreement") formerly consisting of a $1,131.2 million term loan facility due in March 2019 and a $225.0 million revolving credit facility that was scheduled to mature in September 2018. The Amendment included an extension of the maturity date for $704.3 million of the $1,131.2 million term loan facility from March 2019 to March 2021 (the “Tranche B-2 Term Loan). However, if more than $50.0 million of the Company's Notes have not been repaid, converted or effectively discharged prior to such date (“Existing Indenture Discharge”), the maturity date becomes May 2020, subject to certain adjustments. The Amendment also terminated the existing $225.0 million revolving credit facility.
After the effectiveness of the Amendment, the remaining term loan of $151.9 million as of February 28, 2018 continues to have a maturity date of March 2019 (the "Tranche B-1 Term Loan"). The Tranche B-2 Term Loan requires annual aggregate principal payments of at least $43 million and bears interest at a rate of LIBOR plus a margin of 8.75% per annum subject to change under certain circumstances (with a minimum and maximum possible interest rate of LIBOR plus a margin of 8.25% and 9.25% , respectively, per annum). Payments and interest associated with the Tranche B-1 Term Loan are consistent with past terms. The Term Loan Agreement is secured by a (i) first lien on certain assets of the Company primarily consisting of capital stock issued by General Nutrition Centers, Inc. ("Centers") and its subsidiaries, intellectual property and equipment (“Term Priority Collateral”) and (ii) second lien on certain assets of the Company primarily consisting of inventory and accounts receivable (“ABL Priority Collateral”). The Term Loan Agreement is guaranteed by all material, wholly-owned domestic subsidiaries of the Company (the “U.S. Guarantors”) and by General Nutrition Centres Company, an unlimited liability company organized under the laws of Nova Scotia (together with the U.S. Guarantors, the “Guarantors”).
On February 28 2018, the Company also entered into a new asset-based credit agreement (the "ABL Credit Agreement"), consisting of:
• a new $100 million asset-based Revolving Credit Facility (the "Revolving Credit Facility") with a maturity date of August 2022 (which maturity date will become May 2020, subject to certain adjustments, if the Existing Indenture Discharge has not occurred); and
• a $275.0 million asset-based Term Loan Facility advanced on a “first-in, last-out” basis (the "FILO Term Loan") with a maturity date of December 2022 (which maturity date will become May 2020, subject to certain adjustments, if the Existing Indenture Discharge has not occurred).    
There are no scheduled amortization payments associated with the FILO Term Loan, which bears interest at a rate of LIBOR plus a margin of 7.00% per annum subject to decrease under certain circumstances (with a minimum possible interest rate of LIBOR plus a margin of 6.50% per annum). Outstanding borrowings under the Revolving Credit Facility bear interest at a rate of LIBOR plus 1.75% (subject to an increase or decrease of 0.25% based on the amount available to be drawn under the Revolving Credit Facility). The Company is also required to pay an annual fee to revolving lenders equal to a maximum of 2.0% (subject to adjustment based on the amount available to be drawn under the Revolving Credit Facility) on outstanding letters of credit and an annual commitment fee of 0.375%

17

on the undrawn portion of the Revolving Credit Facility subject to an increase to 0.5% based on the amount available to draw under the Revolving Credit Facility. The FILO Term Loan and Revolving Credit Facility are secured by a (i) first lien on ABL Priority Collateral and (ii) second lien on Term Priority Collateral. The FILO Term Loan and Revolving Credit Facility are guaranteed by the Guarantors.
In connection with the debt refinancing, the Company recognized a loss of $16.7 million in the first quarter of 2018, which primarily includes third-party fees relating to the Tranche B-2 Term Loan and the FILO Term Loan, and is presented as an operating outflow on the accompanying Consolidated Statement of Cash Flows. In addition, the Company incurred $43.4 million consisting of an original issuance discount (“OID”) to the Tranche B-2 Term Loan and the FILO Term Loan lenders, of which $30.2 million has been paid. The remaining $13.2 million is due to the Tranche B-2 Term Loan lenders at 2% of the outstanding balance the earlier of March 2019 or after a qualifying event in which the Company receives net cash proceeds as defined in the credit agreement, the amount of which is subject to change based on the timing and amount of such cash proceeds. The OID together with $5.1 million in fees incurred relating to the Revolving Credit Facility (included within other long-term assets on the Consolidated Balance Sheet) will be amortized through the applicable maturity dates as an increase to interest expense. The $30.2 million portion of OID paid together with the Revolving Credit Facility fees resulted in $35.2 million presented as a financing outflow on the accompanying Consolidated Statement of Cash Flows. Included within the current debt above is the Tranche B-1 Term Loan balance, scheduled amortization payments on the Tranche B-2 Term Loan over the next 12 months and the 2% OID that is due to the Tranche B-2 Term Loan lenders by March 2019.
Under the Company’s Term Loan Agreement and ABL Credit Agreement (collectively, the "Credit Facilities"), the Company is required to make certain mandatory prepayments, including a requirement to prepay first the Tranche B-2 Term Loan (until repaid in full), second the FILO Term Loan (until repaid in full, but only if such prepayment is permitted under the ABL Credit Agreement), and third the Tranche B-1 Term Loan, in each case annually with amounts based on excess cash flow, as defined in the Company’s Credit Facilities, based on the results of the Company for the prior fiscal year. The first such payment will be due with respect to the year ending December 31, 2018. The payment will be either 75% or 50% of excess cash flow for each such fiscal year, as determined by the Consolidated Net First Lien Leverage Ratio, and will be reduced by scheduled debt amortization payments and debt maturity payments that occur during the fiscal year and in the subsequent year up to the date the excess cash flow payment is required to be paid. The Company estimates the amount of excess cash flow payment to be between $0 and $25 million . The proceeds from the Harbin transaction, if received and used to pay down the debt prior to December 31, 2018, is expected to result in the Company's excess cash flow payment being at 50% .
At June 30, 2018, the contractual interest rates under the Tranche B-1 Term Loan, Tranche B-2 Term Loan, and the FILO Term Loan were 4.6% , 10.9% and 9.1% , respectively, which consist of LIBOR plus the applicable margin rate. At December 31, 2017, the contractual interest rate under the Tranche B-1 Term Loan was 4.1% . At June 30, 2018, the Company had $90.9 million available under the Revolving Credit Facility, after giving effect to $9.1 million utilized to secure letters of credit. See below under "Interest Rate Swaps" for discussion of the interest rate swaps, which will impact the Company's interest expense in future periods.
The Company’s Credit Facilities contain customary covenants, including limitations on the ability of GNC Corporation, Centers, and Centers' subsidiaries to, among other things, incur debt, grant liens on their assets, enter into mergers or liquidations, sell assets, make investments or acquisitions, make optional payments in respect of, or modify, certain other debt instruments, pay dividends or other payments on capital stock, or enter into arrangements that restrict their ability to pay dividends or grant liens. In addition, the Term Loan Agreement requires compliance, as of the end of each fiscal quarter of the Company, with a maximum Consolidated Net First Lien Leverage Ratio initially set at 5.50 to 1.00 through December 31, 2018 and decreasing to 5.00 to 1.00 from March 31, 2019 to December 31, 2019 and 4.25 to 1.00 thereafter. Depending on the amount available to be drawn under the Revolving Credit Facility, the ABL Credit Agreement requires compliance as of the end of each fiscal quarter of the Company with a minimum Fixed Charge Coverage Ratio of 1.00 to 1.00. The Company is currently in compliance, and expects to remain in compliance over the next twelve months, with the terms of its Credit Facilities.

18

Convertible Debt
The Company maintains a $ 188.6 million principal amount of 1.5% convertible senior notes due in 2020 (the "Notes"). The Notes consist of the following components:
 
June 30, 2018
 
December 31, 2017
 
(in thousands)
Liability component
 
 
 
Principal
$
188,565

 
$
188,565

Conversion feature
(14,822
)
 
(18,065
)
Discount related to debt issuance costs
(2,042
)
 
(2,512
)
Net carrying amount
$
171,701

 
$
167,988

Interest Rate Swaps
On June 13 2018, the Company entered into two interest rate swaps with notional amounts of $275 million and $225 million to limit the exposure to its variable interest rate debt by effectively converting it to a fixed interest rate. The Company receives payments based on the one-month LIBOR and makes payments based on a fixed rate. The Company receives payments with a floor of 0.00% and 0.75% , respectively, on the $275 million and $225 million interest rate swaps, which aligns with the related debt instruments. The interest rate swap agreements had an effective date of June 29, 2018. The $225 million interest rate swap expires on February 28, 2021, and the $275 million interest rate swap expires on June 30, 2021. The notional amount of the $225 million interest rate swap is scheduled to decrease to $175 million on June 30, 2019, $125 million on June 30, 2020 and $75 million December 31, 2020. The Company designated these instruments as cash flow hedges upon initiation and because they are deemed effective, changes in fair value will be recorded within other comprehensive loss on the Consolidated Balance Sheet.

At June 30, 2018, the fair value of the interest rate swaps was a liability of $1.7 million included within other long-term liabilities in the Company's accompanying Consolidated Balance Sheet with a corresponding cumulative unrealized loss of $1.2 million , net of tax, included in accumulated other comprehensive loss. This loss would be immediately recognized in the Consolidated Statement of Operations if these instruments fail to meet certain cash flow hedge requirements. As of June 30, 2018, the amount included in accumulated other comprehensive loss related to the interest rate swaps to be reclassified into earnings during the next 12 months is not material. Refer to Note 6, "Fair Value Measurements of Financial Instruments" for more information on how the interest rate swaps are valued.


19

Interest Expense
Interest expense consisted of the following:
 
Three months ended June 30,
 
Six months ended June 30,
 
2018
 
2017
 
2018
 
2017
 
(in thousands)
 
 
 
 
 
 
 
 
Tranche B-1 Term Loan coupon
$
1,683

 
$
10,188

 
$
9,741

 
$
19,706

Tranche B-2 Term Loan coupon
18,705

 
—

 
25,529

 
—

FILO Term Loan coupon
6,218

 
—

 
8,340

 
—

Revolving Credit Facility
238

 
—

 
370

 
—

Terminated revolving credit facility
—

 
1,505

 
316

 
2,794

Amortization of discount and debt issuance costs
3,540

 
625

 
5,295

 
1,250

Subtotal
30,384

 
12,318

 
49,591

 
23,750

Notes:
 
 
 
 
 
 
 
Coupon
707

 
1,054

 
1,414

 
2,132

Amortization of conversion feature
1,633

 
2,377

 
3,243

 
4,734

Amortization of discount and debt issuance costs
243

 
311

 
487

 
617

Total Notes
2,583

 
3,742

 
5,144

 
7,483

Other
(24
)
 
7

 
(19
)
 
728

Interest expense, net
$
32,943

 
$
16,067

 
$
54,716

 
$
31,961



20

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 other long-term assets approximates its fair value.
The carrying values and estimated fair values of the term loans, net of discount, Notes (net of the equity component classified in stockholders' equity and discount) and the interest rate swap liabilities were as follows:
 
June 30, 2018
 
December 31, 2017
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
 
(in thousands)
Tranche B-1 Term Loan
$
149,516

 
$
143,535

 
$
1,130,320

 
$
930,592

Tranche B-2 Term Loan
655,493

 
634,189

 
—

 
—

FILO Term Loan
262,721

 
271,916

 
—

 
—

Notes
171,701

 
126,887

 
167,988

 
85,044

Interest rate swaps
1,683

 
1,683

 
—

 
—

The fair values of the term loans were 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. The Company's interest rate swaps are carried at fair value, which is based primarily on Level 2 inputs utilizing readily observable market data, such as LIBOR forward rates, for all substantial terms of the interest rate swap contracts and the assessment of nonperformance risk.
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 liability matters, 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

21

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 any 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 June 30, 2018, the Company was named in 29 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 its insurer.
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 in the Superior Court of the State of California for the County of Alameda. The class action 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. In June 2018, the Court granted in part and denied in part the Company's Motion for Decertification. As of June 30, 2018, an immaterial liability has been accrued in the accompanying financial statements. The Company intends to vigorously defend against the remaining class action claims asserted in this action, and to seek decertification as to some or all of the claims following additional discovery. It is expected that the trial will occur in 2019.
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 in an immaterial amount, which has been recorded as a charge in the accompanying Consolidated Financial Statements. Plaintiffs subsequently filed a petition for an award of attorney's fees, costs and incentive payment. The court awarded an immaterial amount in legal fees. The Company appealed from the adverse judgment and the award of attorney's fees. On December 22, 2017, the Pennsylvania Superior Court held that the Company correctly determined the "regular rate" by dividing weekly compensation by all hours worked (rather than 40), but held that the regular rate must be multiplied by 1.5 (rather than 0.5) to determine the amount of overtime owed. Taking accumulated interest into account, the net result of the Superior Court's decision was to reduce the Company's liability by an immaterial amount, which has been

22

reflected in the accompanying Consolidated Financial Statements. The Company filed a petition for appeal to the Pennsylvania Supreme Court on January 22, 2018. The Pennsylvania Supreme Court accepted the Company's petition for appeal on July 16, 2018 and has issued a briefing schedule to the parties.
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 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, and adding USPlabs, LLC and SK Laboratories as counterclaim defendants.  In March 2018, the Oregon Attorney General filed a motion for summary judgment relating to its first claim for relief, which the Company is contesting.  The Company filed a cross motion for summary judgment on the first claim for relief, which the Oregon Attorney General is contesting.  Both motions are scheduled for argument in August 2018.  The parties are in the process of exchanging discovery.  There is no trial date currently set.
           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 U.K. 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 U.K. 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 and subsequently reached an agreement with the Defendants in relation to costs. The Defendants appealed part of the Court's judgment concerning findings in relation to the licensed GNIC trademarks, and that appeal was heard at the U.K.'s Court of Appeal in June 2018. In July 2018, the Court found in favor of the Defendants and GNIC was ordered to pay an immaterial amount for Defendants' costs related to the appeal.
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 a 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 Consolidated Financial Statements.

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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 and the Company's representation that it did not knowingly sell products not in compliance with the FDCA. Under the agreement, which includes an immaterial payment to the federal government, the Company will take a number of actions to broaden industry-wide knowledge of prohibited ingredients and improve compliance by vendors of third party products. These actions are in keeping with the leadership role the Company has taken in setting industry quality and compliance standards, and the Company's commitment over the course of the agreement ( 60 months) to support a combination of its and the industry's initiatives. Some of these actions include maintaining and continuously updating a list of restricted ingredients that will be prohibited from inclusion in any products that are sold by the Company.  Vendors selling 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 has 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. After an initial period of monitoring, in October of 2017, the DHEC approved a work plan for extended monitoring of such system and the contamination into 2021. The Company will continue to consult with the DHEC on the next steps in the work after their review of the results of the extended monitoring is complete. 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 Company's Consolidated Financial Statements.
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.

24

NOTE 8. EARNINGS PER SHARE
The following table represents the Company's basic and dilutive weighted-average shares:
 
Three months ended June 30,
 
Six months ended June 30,
 
2018
 
2017
 
2018
 
2017
 
(in thousands)
Basic weighted average shares
83,332

 
68,287

 
83,282

 
68,267

Effect of dilutive stock-based compensation awards
77

 
75

 
107

 
64

Diluted weighted average shares
83,409

 
68,362

 
83,389

 
68,331

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 awards.
 
Three months ended June 30,
 
Six months ended June 30,
 
2018
 
2017
 
2018
 
2017
 
(in thousands)
Antidilutive:
 
Time-based options and restricted stock awards
2,934

 
2,540

 
3,070

 
2,078

Performance-based restricted stock awards
1,283

 
—

 
909

 
—

Contingently issuable:
 
 
 
 
 
 
 
Performance-based restricted stock awards
—

 
63

 
—

 
70

Performance-based restricted stock awards with a market condition
315

 
399

 
315

 
431

Total stock-based awards excluded from diluted EPS
4,532

 
3,002

 
4,294

 
2,579

The Company has applied the if-converted method to calculate dilution on the Notes in the three and six months ended June 30, 2018, which has resulted in all 2.9 million underlying convertible shares being anti-dilutive. The treasury stock method was used in the prior year periods, which also resulted in the underlying shares being anti-dilutive.

25

NOTE 9.  SEGMENTS
The Company aggregates its operating segments into three reportable segments, 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 product to the U.S. and Canada and International segments at cost with a markup, which is eliminated at consolidation. In connection with the asset sale of Lucky Vitamin on September 30, 2017, their results are included within Other for applicable prior periods to ensure comparability.
The following table represents key financial information for each of the Company's reportable segments:
 
Three months ended June 30,
 
Six months ended June 30,
 
2018
 
2017
 
2018
 
2017
 
(in thousands)
Revenue:
 

 
 

 
 
 
 
U.S. and Canada
$
517,317


$
527,814


$
1,029,731


$
1,064,435

International
48,635


43,813


88,700


83,564

Manufacturing / Wholesale:






 



Intersegment revenues
65,238


56,000


129,901


117,298

Third party
51,992


55,997


107,046


111,831

Subtotal Manufacturing / Wholesale
117,230


111,997


236,947


229,129

Total reportable segment revenues
683,182


683,624


1,355,378


1,377,128

Other
—

 
22,614

 
—

 
45,356

Elimination of intersegment revenues
(65,238
)

(56,000
)

(129,901
)

(117,298
)
Total revenue
$
617,944


$
650,238


$
1,225,477


$
1,305,186

Operating income:
 

 
 

 
 
 
 
U.S. and Canada
$
45,603


$
52,490


$
89,093


$
102,980

International
15,692


15,787


30,156


30,656

Manufacturing / Wholesale
15,889


18,637


30,853


35,904

Total reportable segment operating income
77,184


86,914


150,102


169,540

Corporate costs
(28,300
)
 
(26,207
)
 
(54,779
)
 
(54,281
)
Other
—

 
(19,334
)
 
(50
)
 
(18,918
)
Unallocated corporate costs and other
(28,300
)

(45,541
)

(54,829
)

(73,199
)
Total operating income
48,884


41,373


95,273


96,341

Interest expense, net
32,943

 
16,067

 
54,716

 
31,961

Loss on debt refinancing
—

 
—

 
16,740

 
—

Income before income taxes
$
15,941

 
$
25,306

 
$
23,817

 
$
64,380


Refer to Note 3, "Revenue," for more information on the Company's reportable segments.

26

NOTE 10.  INCOME TAXES
The Company recognized $2.6 million of income tax expense (or 16.3% of pre-tax income) during the three months ended June 30, 2018 compared with $8.7 million (or 34.2% of pre-tax income) in the prior year quarter. The Company recognized $4.3 million of income tax expense (or 18.0% of pre-tax income) during the six months ended June 30, 2018 compared with $23.0 million (or 35.7% of pre-tax income) in the same period in 2017. 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 reduction to the tax rate was primarily driven by tax reform legislation, enacted on December 22, 2017, known as The Tax Cuts and Jobs Act of 2017 (“2017 Tax Act”).  The 2017 Tax Act resulted in significant changes to the Internal Revenue Code, including a reduction in the corporate tax rate from 35% to 21%, which was effective for tax years beginning after December 31, 2017. 
At June 30, 2018 and December 31, 2017 , the Company had $6.3 million and $5.8 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 June 30, 2018 and December 31, 2017 , 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.
On December 22, 2017, Staff Accounting Bulletin No. 118 was issued to address the application of GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the 2017 Tax Act. The Consolidated Financial Statements for the year ended December 31, 2017 included an immaterial provisional tax impact related to deemed repatriated earnings. The ultimate impact may differ from these provisional amounts, due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made and additional regulatory guidance that may be issued. Any subsequent adjustment will be recorded to current tax expense in the quarter of 2018 when the analysis is complete. 
GNC Holdings, Inc. files a consolidated federal tax return and various consolidated and separate tax returns as prescribed by the tax laws of the state, local and international jurisdictions in which it and its subsidiaries operate. The statutes of limitation for the Company’s U.S. federal income tax returns are closed for years through 2013. The Company has various state and local jurisdiction tax years open to examination (the earliest open period is generally 2011).


27

Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with Item 1, “Financial Statements” of this Quarterly Report on Form 10-Q. The following information presented for the three and six months ended June 30, 2018 and 2017 was prepared by management, is unaudited, and was derived from our unaudited Consolidated Financial Statements and accompanying notes. In the opinion of management, all adjustments necessary for a fair statement of our financial position and operating results for such periods and as of such dates have been included.

Forward-Looking Statements
This Quarterly Report on Form 10-Q and any documents incorporated by reference herein or therein include forward-looking statements within the meaning of federal securities laws. Forward-looking statements include statements that may relate to our plans, objectives, goals, strategies, future events, future revenues or performance, capital expenditures, financing needs and other information that is not historical information. Forward-looking statements can often be identified by the use of terminology such as “subject to,” “believe,” “anticipate,” “plan,” “potential,” “predict,” “expect,” “intend,” “estimate,” “project,” “may,” “will,” “should,” “would,” “continue,” “seek,” “could,” “can,” “think,” the negatives thereof, variations thereon and similar expressions, or by discussions of strategy.
All forward-looking statements, including, without limitation, our examination of historical operating trends, are based upon our current expectations and various assumptions. We believe there is a reasonable basis for our expectations and beliefs, but they are inherently uncertain. We may not realize our expectations, and our beliefs may not prove correct. A detailed discussion of risk and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in the section titled “Risk Factors” in our 2017 10-K.
Consequently, forward-looking statements should be regarded solely as our current plans, estimates and beliefs. You should not place undue reliance on forward-looking statements. We cannot guarantee future results, events, levels of activity, performance or achievements. The forward-looking statements included in this Quarterly Report on Form10-Q are made as of the date of this filing. We do not undertake and specifically decline any obligation to update, republish or revise forward-looking statements to reflect future events or circumstances or to reflect the occurrences of unanticipated events.
Business Overview
We are 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. We derive our revenues principally from: product sales through our company-owned stores; the internet primarily through our websites, GNC.com and prior to the sale of its assets on September 30, 2017, LuckyVitamin.com, as well as third-party websites; domestic and international franchise activities; and sales of products manufactured in our facility to third parties. We sell products through a worldwide network of approximately 8,800 locations operating under the GNC brand name.
We believe the competitive strengths that position us as a leader in the specialty nutritional supplement space include our: well-recognized brand; stable base of long-term customers; geographically diverse store base; vertically integrated operations and differentiated service model designed to enhance the customer experience.
Our Current Strategy
In the first quarter of 2018, we extended our debt maturity and announced a partnership with Harbin Pharmaceutical Group Co., Ltd., which includes the issuance of convertible preferred stock and a commercial joint venture in China. The agreement, subject to closing conditions, will give us the financial flexibility to execute on our strategic growth initiatives described below and gain share in the growing health and wellness industry.
•
Proprietary products and innovation capabilities. We believe that product innovation is critical to our growth, brand image superiority and competitive advantage. Through market research, interactions with customers and partnerships with leading industry vendors, we work to identify shifting consumer trends that can inform our product development process. We believe that our brand portfolio of proprietary products, which are available in our stores, on GNC.com, on our market place on Amazon.com and other third-party websites, advances GNC's brand presence and our general reputation as a leading retailer of health and wellness products.  GNC brand mix for domestic system-wide sales increased to 50% in the second quarter of 2018 compared with 43% in the second quarter of 2017.

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Table of Contents

During the second quarter, we saw strong performance from the re-launch of our Amp sports performance product line and the extension of our Beyond Raw brand. Slimvance, our category defining weight loss product, has successfully attracted new customers and drove incremental margin in the first half of 2018.

•
Loyalty programs. As of June 30, 2018, our loyalty membership increased 14.3% to 14.6 million members compared with March 31, 2018.  Included in our loyalty membership at June 30, 2018 are over 1.0 million members enrolled in PRO Access, an 8.8% increase compared with March 31, 2018. In 2018, we have refreshed the PRO Access program with improved customer touch points, and are seeing increased member sign ups and renewals. 
•
Customer experience . Our goal is to create a consistent and satisfying experience for all our customers, whether they find us in a retail store, online, or on a mobile device, and we are investing in omnichannel capabilities and the in-store experience. Our store base is a competitive advantage over online-only competitors especially as we continue to develop our associates to deliver thoughtful assistance and advice.
•
International . Our international business is a growth opportunity and we are focused on developing partnerships that can grow our reach in attractive global markets.  In February 2018, we announced a partnership with Harbin Pharmaceutical Group Co., Ltd.  This partnership will continue to strengthen our balance sheet and position us to fully leverage the opportunity in China through Harbin’s extensive distribution, marketing and sales infrastructure. 
Key Performance Indicators
The primary key performance indicators that senior management focus on include revenue and operating income for each segment, which are discussed in detail within "Results of Operations", as well as same store sales growth.
The table below presents the key components of U.S Company-owned same store sales:
 
2018
 
2017
 
Q1 3/31
 
Q2 6/30
 
Q1 3/31
 
Q2 6/30
Contribution to same store sales
 
 
 
 
 
 
 
Domestic Retail same store sales
(1.2
)%
 
(4.2
)%
 
(3.6
)%
 
(0.5
)%
GNC.com contribution to same store sales
1.7
 %
 
3.8
 %
 
(0.3
)%
 
(0.4
)%
Total Same Store Sales
0.5
 %
 
(0.4
)%
 
(3.9
)%
 
(0.9
)%
Same store sales for company-owned stores include point-of-sale retail sales from all domestic stores which have been operating for twelve full months following the opening period. We are an omnichannel retailer with capabilities that allow a customer to use more than one channel when making a purchase, including in-store and through e-commerce channels, which include our wholly-owned website GNC.com and third-party websites, including Amazon (the sales from which are included in the GNC.com business unit) where product assortment and price are controlled by us, and the purchases from which are fulfilled by direct shipment to the customer from one of our distribution facilities as well as third-party e-commerce vendors. In-store sales are reduced by sales originally consummated online or through mobile devices and subsequently returned in-store. Sales of membership programs, including the new PRO Access loyalty program and former Gold Card program, which is no longer offered in the U.S., as well as the net change in the deferred points liability associated with the myGNC Rewards program, are excluded from same store sales. Excluding the impact of higher loyalty points redemption in the current year periods compared with the prior year periods as our program matures, same store sales increased 1.3% and 1.9%, respectively, in the three and six months ended June 30, 2018 for U.S. company-owned stores including GNC.com.
Same store sales are calculated on a daily basis for each store and exclude the net sales of a store for any period if the store was not open during the same period of the prior year. When a store’s square footage has been changed as a result of reconfiguration or relocation in the same mall or shopping center, the store continues to be treated as a same store. If, during the period presented, a store was closed, relocated to a different mall or shopping center, or converted to a franchise store or a company-owned store, sales from that store up to and including the closing day or the day immediately preceding the relocation or conversion are included as same store sales as long as the store was open during the same period of the prior year. Corporate stores are included in same store sales after the thirteenth month following a relocation or conversion to a company-owned store.

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We also provide retail comparable same store sales of our franchisees as well as our Canada business if meaningful to current results. While retail sales of franchisees are not included in the Consolidated Financial Statements, the metric serves as a key performance indicator of our franchisees, which ultimately impacts wholesale sales and royalties and fees received from franchisees. We compute same store sales for our franchisees and Canada business consistent with the description of corporate same store sales above. Same store sales for international franchisees and Canada exclude the impact of foreign exchange rate changes relative to the U.S. dollar.
Non-GAAP Measures
                We have included the year-over-year change in segment operating income as a percentage of revenue for our U.S. and Canada segment below under "Results of Operations" adjusted to exclude certain prior year items because we believe it represents an effective supplemental means by which to measure our segment’s operating performance. We believe that this metric is useful to investors as it enables our management and our investors to evaluate and compare our segment’s results from operations in a more meaningful and consistent manner by excluding specific items that are not reflective of ongoing operating results. However, this metric is not a measurement of our segment’s performance under GAAP and should not be considered as an alternative to net income, operating income or any other performance measures derived in accordance with GAAP, or as an alternative to GAAP cash flow from operating activities, or as a measure of our profitability or liquidity. Further, management believes that the presentation of adjusted SG&A, corporate costs, and other non-GAAP measures, presented herein are helpful to investors as they provide for greater comparability of the financial statements between periods.

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Results of Operations
(Calculated as a percentage of consolidated revenue unless indicated otherwise )
 
Three months ended June 30,
 
Six months ended June 30,
 
2018
 
2017
 
2018
 
2017
Revenues:
 
 
 
 
 
 
 
U.S. and Canada
83.7
 %
 
81.2
 %
 
84.0
 %
 
81.6
 %
International
7.9
 %
 
6.7
 %
 
7.2
 %
 
6.4
 %
Manufacturing / Wholesale:
 
 
 
 
 
 
 
Intersegment revenues
10.6
 %
 
8.6
 %
 
10.6
 %
 
9.0
 %
Third party
8.4
 %
 
8.6
 %
 
8.8
 %
 
8.6
 %
Subtotal Manufacturing / Wholesale
19.0
 %
 
17.2
 %
 
19.4
 %
 
17.6
 %
Other
—
 %
 
3.5
 %
 
—
 %
 
3.4
 %
Elimination of intersegment revenue
(10.6
)%
 
(8.6
)%
 
(10.6
)%
 
(9.0
)%
Total net revenues
100.0
 %
 
100.0
 %
 
100.0
 %
 
100.0
 %
Operating expenses:
 
 
 
 
 
 
 
Cost of sales, including warehousing, distribution and occupancy
66.4
 %
 
66.2
 %
 
66.2
 %
 
66.3
 %
Gross profit
33.6
 %
 
33.8
 %
 
33.8
 %
 
33.7
 %
Selling, general and administrative
25.7
 %
 
24.5
 %
 
26.1
 %
 
24.9
 %
Long-lived asset impairments
—
 %
 
3.0
 %
 
—
 %
 
1.5
 %
Other loss (income), net
0.1
 %
 
(0.1
)%
 
—
 %
 
(0.1
)%
Total operating expenses
92.2
 %
 
93.6
 %
 
92.3
 %
 
92.6
 %
Operating income:
 
 
 
 
 
 
 
U.S. and Canada (*)
8.8
 %
 
9.9
 %
 
8.7
 %
 
9.7
 %
International (*)
32.3
 %
 
36.0
 %
 
34.0
 %
 
36.7
 %
Manufacturing / Wholesale (*)
13.6
 %
 
16.6
 %
 
13.0
 %
 
15.7
 %
Unallocated corporate costs and other


 


 
 
 
 
Corporate costs
(4.6
)%
 
(4.0
)%
 
(4.5
)%
 
(4.2
)%
Other
—
 %
 
(3.0
)%
 
—
 %
 
(1.4
)%
Subtotal unallocated corporate and other costs
(4.6
)%
 
(7.0
)%
 
(4.5
)%
 
(5.6
)%
Total operating income
7.9
 %
 
6.4
 %
 
7.8
 %
 
7.4
 %
Interest expense, net
5.3
 %
 
2.5
 %
 
4.5
 %
 
2.4
 %
Loss on debt refinancing
—
 %
 
—
 %
 
1.4
 %
 
—
 %
Income before income taxes
2.6
 %
 
3.9
 %
 
1.9
 %
 
5.0
 %
Income tax expense
0.4
 %
 
1.3
 %
 
0.3
 %
 
1.8
 %
Net income
2.2
 %
 
2.6
 %
 
1.6
 %
 
3.2
 %

(*) Calculated as a percentage of segment revenue.

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The following table summarizes the number of our stores for the periods indicated:
 
Six months ended June 30,
 
2018
 
2017
U.S. & Canada
 
 
 
Company-owned (a) :
 

 
 

Beginning of period balance
3,423

 
3,513

Store openings
11

 
36

Acquired franchise stores (b)
12

 
33

Franchise conversions (c)
(3
)
 
(1
)
Store closings
(115
)
 
(75
)
End of period balance
3,328

 
3,506

Domestic Franchise:
 
 
 
Beginning of period balance
1,099

 
1,178

Store openings
9

 
13

Acquired franchise stores (b)
(12
)
 
(33
)
Franchise conversions (c)
3

 
1

Store closings
(27
)
 
(21
)
End of period balance
1,072

 
1,138

International (d) :
 
 
 
Beginning of period balance
2,015

 
1,973

Store openings
36

 
45

Store closings
(43
)
 
(72
)
End of period balance
2,008

 
1,946

Store-within-a-store (Rite Aid):
 

 
 

Beginning of period balance
2,418

 
2,358

Store openings
21

 
26

Store closings
(78
)
 
(6
)
End of period balance
2,361

 
2,378

Total Stores
8,769

 
8,968

_______________________________________________________________________________
(a) Includes Canada.
(b) Stores that were acquired from franchisees and subsequently converted into company-owned stores.
(c) Company-owned store locations sold to franchisees.
(d) Includes franchise locations in approximately 50 countries (including distribution centers where sales are made) and company-owned stores located in Ireland and China.








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Comparison of the Three Months Ended June 30, 2018 (current quarter) and 2017 (prior year quarter)
Revenues  
Our consolidated net revenues decreased $32.3 million , or 5.0% , to $617.9 million for the three months ended June 30, 2018 compared with $650.2 million for the same period in 2017 . The decrease was primarily the result of the sale of Lucky Vitamin on September 30, 2017, which resulted in a $22.6 million reduction to revenue, and lower sales associated with store closures at the end of their lease term, which is a component of our store portfolio optimization strategy.
U.S. and Canada.  Revenues in our U.S. and Canada segment decreased $10.5 million , or 2.0% , to $517.3 million for the three months ended June 30, 2018 compared with $527.8 million in the prior year quarter. The $10.5 million decrease in revenue in the current quarter as compared with the prior year quarter was primarily due to the following:
•
The net decrease in the number of U.S. corporate stores from June 30, 2017 to June 30, 2018 contributed an approximate $9 million decrease to revenue;
•
A decrease in domestic franchise revenue of $8.2 million to $81.1 million in the current quarter compared with $89.3 million in prior year quarter due to the impact of a decrease in retail same store sales of 4.0% and a decrease in the number of franchise stores from 1,138 at June 30, 2017 to 1,072 at June 30, 2018;
•
A decrease in U.S. company-owned same store sales of 0.4%, which includes GNC.com sales, resulted in a $1.6 million decrease to revenue (excluding the impact of higher loyalty points redemption in the current quarter compared with the prior year quarter as the program matures, same store sales increased 1.3%). E-commerce sales were 8.3% of U.S. and Canada revenue in the current quarter compared with 5.5% in the prior year quarter; and
•
Partially offsetting the above decreases in revenue was an increase of $9.9 million related to our loyalty programs, PRO Access paid membership fees and the myGNC Rewards change in deferred points liability.
International. Revenues in our International segment increased $4.8 million , or 11.0% , to $48.6 million in the current quarter compared with $43.8 million in the prior year quarter. Revenues from our China business increased by $3.7 million in the current quarter compared with the prior year quarter due to higher e-commerce sales. Revenue from our international franchisees increased $0.9 million in the current quarter compared to the prior year quarter despite a decrease in retail same store sales of 0.9%.
Manufacturing / Wholesale. Revenues in our Manufacturing / Wholesale segment, excluding intersegment sales, decreased $4.0 million , or 7.2% , to $52.0 million for the three months ended June 30, 2018 compared with $56.0 million in the prior year quarter. Third-party contract manufacturing sales decreased $3.6 million, or 10.6%, to $30.6 million for the three months ended June 30, 2018 compared with $34.2 million in the prior year quarter. Sales to our wholesale partners decreased $0.4 million, or 1.7% from $21.8 million in the prior year quarter to $21.4 million in the current quarter. Intersegment sales increased $9.2 million from $56.0 million in the prior year quarter to $65.2 million in the current quarter reflecting our increasing focus on proprietary products.
Cost of Sales and Gross Profit
Cost of sales, which includes product costs, warehousing, distribution and occupancy costs, decreased $20.3 million to $410.2 million for the three months ended June 30, 2018 compared with $430.5 million in the prior year quarter. Gross profit decreased $12.1 million from $219.8 million in the prior year quarter to $207.7 million in the current quarter, and as a percentage of revenue, decreased slightly from 33.8% for the quarter ended June 30, 2017 to 33.6% in the current quarter. The decrease in gross profit rate was primarily due to one-time vendor funding support received in the prior year quarter (which had an approximate impact of 100 basis points), partially offset by a higher sales mix of proprietary product which contribute higher margins relative to third-party sales.
Selling, General and Administrative (“SG&A”) Expense
SG&A expense, including compensation and related benefits, advertising and other expenses, decreased $1.0 million , or 0.6% , from $159.5 million in the prior year quarter to $158.5 million in the current quarter. SG&A expense, as a percentage of revenue, was 25.7% and 24.5% for the three months ended June 30, 2018 and 2017 , respectively.

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During the three months ended June 30, 2018, we recognized $2.2 million related to a retention program adopted in the first quarter of 2018 to retain senior executives and certain other key personnel below the executive level who are critical to the execution and success of our strategy. The total amount awarded was approximately $10 million, which vests in four installments of 25% each over the next two years on the earlier of February 2019 or the closing of the Harbin transaction, February 2019, August 2019 and February 2020. We also incurred $0.6 million related to China joint venture start-up costs in the current quarter. Excluding the impact of these items, SG&A expense decreased $3.9 million in the current quarter compared to the prior year quarter and, as a percentage of revenue, was 25.2% and 24.5% for the three months ended June 30, 2018 and 2017 , respectively. The $3.9 million decrease in SG&A expense was primarily due to the sale of the Lucky Vitamin e-commerce business effective September 30, 2017, partially offset by an increase in store commissions associated with a higher sales mix of proprietary product and higher commissions to support e-commerce sales.
Long-lived Asset Impairments
We recorded $19.4 million for non-cash long-lived asset impairments in our Lucky Vitamin e-commerce business in the prior year quarter ended June 30, 2017 consisting of $11.5 million related to goodwill, $4.2 million related to a trade name intangible asset and $3.7 million related to property and equipment.
Other (Loss) Income, net
Other loss, net, of $0.3 million in the current quarter includes a foreign currency loss partially offset by a refranchising gain. Other income, net, of $0.5 million in the prior year quarter includes foreign currency gains.
Operating Income
As a result of the foregoing, consolidated operating income increased $7.5 million , or 18.2% , to $48.9 million for the three months ended June 30, 2018 compared with $41.4 million in the prior year quarter. Operating income, as a percentage of revenue, was 7.9% and 6.4% for the three months ended June 30, 2018 and 2017 , respectively. Operating income in the prior year quarter was significantly impacted by non-cash long-lived asset impairment charges as noted above.
U.S. and Canada. Operating income decreased $6.9 million to $45.6 million for the three months ended June 30, 2018 compared with $52.5 million for the same period in 2017 . Operating income as a percentage of segment revenue was 8.8% in the current quarter compared with 9.9% in the prior year quarter. The decrease compared with the prior year was primarily due to one-time vendor funding support received in the prior year quarter and expense deleverage in occupancy and salaries associated with a decrease in U.S. company-owned same store sales, partially offset by a higher mix of proprietary product.
International . Operating income of $15.7 million for the three months ended June 30, 2018 was relatively flat compared with prior year quarter, and as a percentage of segment revenue was 32.3% in the current quarter compared with 36.0% in the prior year quarter. The decrease in operating income percentage was primarily due to a higher mix of China sales, which contribute lower margins relative to franchise sales. In addition, as we invest to grow the brand in China, marketing expense increased in our China business compared with the prior year quarter.
Manufacturing / Wholesale . Operating income decreased $2.7 million , or 14.7% , to $15.9 million for the three months ended June 30, 2018 compared with $18.6 million in the prior year quarter.  Operating income as a percentage of segment revenue decreased from 16.6% in the prior year quarter to 13.6% in the current quarter primarily due to a lower margin rate from third-party contract manufacturing, partially offset by higher intersegment sales, which contribute higher margins.
Corporate costs. Corporate costs increased $2.1 million to $28.3 million for the three months ended June 30, 2018 compared with $26.2 million in the prior year quarter. Excluding the retention and the joint venture start-up costs as explained above, corporate costs decreased $0.8 million in the current quarter compared with the prior year quarter.
Interest Expense, net
Interest expense was $32.9 million in the three months ended June 30, 2018 compared with $16.1 million in the three months ended June 30, 2017 primarily due to a higher interest rate on the Tranche B-2 Term Loan and the FILO Term Loan in connection with the debt refinancing.

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Income Tax Expense
We recognized $2.6 million of income tax expense (or 16.3% of pre-tax income) during the three months ended June 30, 2018 compared with $8.7 million (or 34.2% of pre-tax income) for the same period in 2017 . The decrease in tax expense as a percentage of pre-tax income is primarily related to the recently enacted tax reform legislation on December 22, 2017, The Tax Cuts and Jobs Act of 2017 (the "2017 Tax Act"), which resulted in significant changes to the Internal Revenue Code, including a reduction in the corporate tax rate from 35% to 21%, and is effective for tax years beginning after December 31, 2017.
Net Income
As a result of the foregoing, consolidated net income decreased $3.3 million to $13.3 million for the three months ended June 30, 2018 compared with $16.6 million for the same period in 2017 .
Diluted Earnings Per Share
Diluted earnings per share decreased from $0.24 for the three months ended June 30, 2017 to $0.16 for the same period in 2018 due to a decrease in net income and an increase in the weighted average diluted shares outstanding resulting from the exchange of the Company's Notes on December 20, 2017 for an aggregate 14.6 million newly issues shares of Class A common stock.
Comparison of the Six Months Ended June 30, 2018 (current year period) and 2017 (prior year period)
Revenues  
Our consolidated net revenues decreased $79.7 million , or 6.1% , to $1,225.5 million for the six months ended June 30, 2018 compared with $1,305.2 million for the same period in 2017 . The decrease was primarily the result of the sale of Lucky Vitamin on September 30, 2017, which resulted in a $45.4 million reduction to revenue, the termination of the U.S. Gold Card Member Pricing program in the prior year, which resulted in a $23.0 million decrease in revenue and lower sales associated with store closures at the end of their lease term, which is a component of our store portfolio optimization strategy.
U.S. and Canada.  Revenues in our U.S. and Canada segment decreased $34.7 million , or 3.3% , to $1,029.7 million for the six months ended June 30, 2018 compared with $1,064.4 million in the prior year period. The $34.7 million decrease in revenue in the current year period as compared with the prior year period was primarily due to the following:
•
A decrease of $23.0 million relating to the termination of the U.S. Gold Card Member Pricing program, which resulted in the recognition of domestic Gold Card deferred revenue of $24.4 million, net of $1.4 million of applicable coupon redemptions in the prior year period;
•
A decrease in domestic franchise revenue of $16.0 million to $157.8 million in the current year period compared with $173.8 million in prior year period due to the impact of a decrease in retail same store sales of 3.0% and a decrease in the number of franchise stores from 1,138 at June 30, 2017 to 1,072 at June 30, 2018; and
•
The net decrease in the number of corporate stores from June 30, 2017 to June 30, 2018 contributed an approximate $15 million decrease to revenue.
Partially offsetting the above decreases in revenue was the following:
•
An increase of $22.8 million related to our loyalty programs, PRO Access paid membership fees and the myGNC Rewards change in deferred points liability; and
•
An increase in U.S. company-owned same store sales of 0.1%, which includes GNC.com sales, resulted in a $0.4 million increase to revenue (excluding the impact of higher loyalty points redemption in the current year period compared with prior year period as the program matures, same store sales increased 1.9%). GNC.com contributed 2.8% to the increase in same store sales. E-commerce sales were 7.7% of U.S. and Canada revenue in the current year period compared with 5.4% in the prior year period.
International. Revenues in our International segment increased $5.1 million , or 6.1% , to $88.7 million in the current year period compared with $83.6 million in the prior year period. Revenues from our China business increased by $7.1 million in the current year period compared with the prior year period due to higher e-commerce sales. Revenue from our international franchisees decreased $2.7 million in the current year period compared to the prior year period with a decrease in retail same store sales of 1.9%.

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Manufacturing / Wholesale. Revenues in our Manufacturing / Wholesale segment, excluding intersegment sales, decreased $4.8 million , or 4.3% , to $107.0 million for the six months ended June 30, 2018 compared with $111.8 million in the prior year period. Third-party contract manufacturing sales decreased $4.7 million, or 6.9%, to $63.3 million for the six months ended June 30, 2018 compared with $68.0 million in the prior year period. Sales to our wholesale partners decreased $0.2 million, or 0.3% from $43.9 million in the prior year period to $43.7 million in the current year period. Intersegment sales increased $12.6 million from $117.3 million in the prior year period to $129.9 million in the current year period primarily reflecting our increasing focus on proprietary products.
Cost of Sales and Gross Profit
Cost of sales decreased $54.6 million to $810.9 million for the six months ended June 30, 2018 compared with $865.5 million in the prior year period. Gross profit decreased $25.0 million from $439.6 million in the prior year period to $414.6 million in the current year period. Gross profit rate as a percentage of revenue increased from 33.7% for the six months ended June 30, 2017 to 33.8% in the current year period. The increase in gross profit rate was primarily due to a higher domestic retail product margin rate reflecting a higher mix of proprietary sales which contribute higher margins relative to third-party sales, partially offset by the comparative effect of the prior year period recognition of $23.0 million in net deferred Gold Card revenue as explained above and one-time vendor funding support received in the prior year period.
Selling, General and Administrative Expense
SG&A expense decreased $6.3 million , or 1.9% , from $325.6 million in the prior year period to $319.3 million in the current year period, and as a percentage of revenue, was 26.1% and 24.9% for the six months ended June 30, 2018 and 2017 , respectively.
During the six months ended June 30, 2018, we recognized $3.0 million related to the aforementioned retention program. We also incurred $0.6 million related to China joint venture start-up costs in the first six months of 2018. In the prior year period, we incurred a legal charge of $2.1 million related to the outcome of litigation we pursued of a potential breach under our UK license agreement. Excluding the impact of these items, SG&A expense decreased $7.9 million, or 2.4%, and was 25.8% and 24.8% as a percentage of revenue in the current year and prior year periods, respectively. The $7.9 million decrease in SG&A expense was primarily due to the sale of our Lucky Vitamin e-commerce business effective September 30, 2017 and lower marketing expense due to the comparative effect of the prior year period media campaign to support the One New GNC, partially offset by store commissions associated with a higher sales mix of proprietary product and higher commissions to support e-commerce sales.
Other Loss (Income), net
Other loss, net, of $0.1 million in the current year period includes a foreign currency loss partially offset by a refranchising gain. Other income, net, of $1.6 million in the prior year period includes immaterial insurance and lease settlements as well as foreign currency gains and a refranchising gain.
Operating Income
As a result of the foregoing, consolidated operating income decreased $1.0 million , or 1.1% , to $95.3 million for the six months ended June 30, 2018 compared with $96.3 million in the prior year period. Operating income, as a percentage of revenue, was 7.8% and 7.4% for the six months ended June 30, 2018 and 2017 , respectively. Operating income in the prior year period was significantly impacted by non-cash long-lived asset impairment charges as noted above.
U.S. and Canada. Operating income decreased $13.9 million to $89.1 million for the six months ended June 30, 2018 compared with $103.0 million for the same period in 2017 . Operating income as a percentage of segment revenue was 8.7% in the current year period compared with 9.7% in the prior year period. Excluding the impact of the prior year period recognition of deferred Gold Card revenue and marketing costs in support of the One New GNC media campaign as described above, operating income as a percentage of segment revenue increased 0.4% due to higher sales mix of proprietary product, partially offset by one-time vendor funding support received in the prior year period.
International. Operating income decreased $0.5 million , or 1.6% , to $30.2 million for the six months ended June 30, 2018 compared with $30.7 million in the prior year period. Operating income was 34.0% of segment revenue in the current year period compared with 36.7% in the prior year period. The decrease in operating income percentage was primarily due to a higher mix of China sales, which contribute lower margins relative to franchise sales. In addition, as we invest to grow the brand in China, marketing expense increased in our China business compared with the prior year period.

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Manufacturing / Wholesale . Operating income decreased $5.0 million , or 14.1% , to 30.9 million for the six months ended June 30, 2018 compared with $35.9 million in the prior year period. Operating income as a percentage of segment revenue decreased from 15.7% in the prior year period to 13.0% in the current year period primarily due to a lower margin rate from third-party contract manufacturing, partially offset by higher intersegment sales, which contributed higher margins.
Corporate costs. Corporate costs increased $0.5 million to $54.8 million for the six months ended June 30, 2018 compared with $54.3 million in the prior year period. Excluding the retention and the joint venture start-up costs in the current year period and the legal charge in the prior year period as explained above, corporate costs decreased $1.1 million in the current year period compared with the prior year period.
Interest Expense, net
Interest expense was $54.7 million in the six months ended June 30, 2018 compared with $32.0 million in the six months ended June 30, 2017 primarily due to a higher interest rate on the Tranche B-2 Term Loan and the FILO Term Loan in connection with the debt refinancing.
Loss on Debt Refinancing
The refinancing of the Senior Credit Facility resulted in a loss of $16.7 million in the current year period, which primarily includes third-party fees relating to the Tranche B-2 Term Loan and the FILO Term Loan. Refer to Item 1, "Financial Statements," Note 5, "Long-Term Debt / Interest Expense" for more information.
Income Tax Expense
We recognized $4.3 million of income tax expense (or 18.0% of pre-tax income) during the six months ended June 30, 2018 compared with $23.0 million (or 35.7% of pre-tax income) for the same period in 2017 . The decrease in tax expense as a percentage of pre-tax income is primarily related to the 2017 Tax Act, which resulted in significant changes to the Internal Revenue Code, including a reduction in the corporate tax rate from 35% to 21%, and is effective for tax years beginning after December 31, 2017.
Net Income
As a result of the foregoing, consolidated net income decreased $21.9 million to $19.5 million for the six months ended June 30, 2018 compared with $41.4 million for the same period in 2017 .
Diluted Earnings Per Share
Diluted earnings per share decreased from $0.61 for the six months ended June 30, 2017 to $0.23 for the same period in 2018 due to a decrease in net income and an increase in the weighted average diluted shares outstanding resulting from the exchange of the Company's Notes on December 20, 2017 for an aggregate 14.6 million newly issues shares of Class A common stock.
Liquidity and Capital Resources
Refer to Item 1, "Financial Statements," Note 5, "Long-Term Debt / Interest Expense" for a description of the Amendment to our Senior Credit Facility and our new Term Loan Agreement and ABL Credit Agreement.
At June 30, 2018 , we had $90.1 million available under the Revolving Credit Facility, after giving effect to $9.1 million utilized to secure letters of credit .  Our ability to make scheduled payments of principal on, to pay interest on or to refinance our debt and to satisfy our other debt obligations will depend on our future operating performance, which will be affected by general economic, financial and other factors beyond our control. We expect to make an excess cash flow payment between $0 and $25 million with respect to the year ending December 31, 2018 in the first quarter of 2019.
We currently anticipate that cash generated from operations, together with amounts available under the Revolving Credit Facility, will be sufficient to service our debt, meet our operating expenses and fund capital expenditures over the next 12 months. We are currently in compliance with our debt covenant reporting and compliance obligations under our Credit Facilities and expect to remain in compliance during 2018.

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Cash Provided by Operating Activities
Cash provided by operating activities decreased by $23.8 million from $72.9 million for the six months ended June 30, 2017 to $49.1 million for the six months ended June 30, 2018 primarily due to the refinancing of our long-term debt, which resulted in $16.3 million in fees paid to third-parties and higher interest payments, partially offset by lower tax payments.
Cash Used in Investing Activities
Cash used in investing activities was $7.3 million and $18.7 million for the six months ended June 30, 2018 and 2017 , respectively, and includes capital expenditures of $8.3 million and $20.4 million .
We expect capital expenditures to be approximately $28 million in 2018, which includes investments for store development, IT infrastructure and maintenance. We anticipate funding our 2018 capital requirements with cash flows from operations and, if necessary, borrowings under the Revolving Credit Facility.
Cash Used in Financing Activities
For the six months ended June 30, 2018 , cash used in financing activities was $62.2 million , primarily consisting of $35.2 million in an OID paid to lenders and fees associated with our new Revolving Credit Facility associated with the debt refinancing. In addition, we made $23.7 million in amortization payments on our term loan balances. The OID on the Tranche B-2 Term Loan includes $13.2 million, which will be paid the earlier of March 2019 or after a qualifying event in which we receive net cash proceeds as defined in the credit agreement, and has been included in Item 1, "Financial Statements," as a non-cash financing activity within the "Supplemental Cash Flow Information" of the Consolidated Statements of Cash Flows.
For the six months ended June 30, 2017 , cash used in financing activities was $37.1 million , primarily consisting of our April 19, 2017 excess cash flow payment on the Tranche B-1 Term Loan and net borrowings under the old revolving credit facility, which was terminated in connection with the Amendment to the Senior Credit Facility in February 2018.
Contractual Obligations
On February 28, 2018, we amended and restated our Senior Credit Facility formerly consisting of a $1,131.2 million term loan facility due in March 2019 and a $225.0 million revolving credit facility that matured in September 2018. The Amendment included an extension of the maturity date for $704.3 million of the $1,131.2 million term loan facility from March 2019 to March 2021 (the "Tranche B-2 Term Loan"). However, if more than $50.0 million of the Company's Notes have not been repaid, converted or effectively discharged prior to such date (“Existing Indenture Discharge”), the maturity date becomes May 2020, subject to certain adjustments. The Amendment also terminated the existing $225.0 million revolving credit facility.
After the effectiveness of the Amendment, the remaining term loan of $151.9 million as of February 28, 2018 continues to have a maturity date of March 2019 (the "Tranche B-1 Term Loan"). The Amendment requires annual aggregate principal payments of at least $43 million related to the Tranche B-2 Term Loan and bears interest at a rate of LIBOR plus a margin of 8.75% per annum subject to change under certain circumstances (with a minimum and maximum possible interest rate of LIBOR plus a margin of 8.25% and 9.25%, respectively, per annum). Payments and interest associated with the Tranche B-1 Term Loan are consistent with past terms.
On February 28, 2018, we also entered into a new asset-based credit agreement, consisting of:
• a new $100 million asset-based Revolving Credit Facility with a maturity date of August 2022 (which maturity date will become May 2020, subject to certain adjustments, if the Existing Indenture Discharge has not occurred); and
• a $275.0 million asset-based Term Loan Facility advanced on a “first-in, last-out” basis (the "FILO Term Loan") with a maturity date of December 2022 (which maturity date will become May 2020, subject to certain adjustments, if the Existing Indenture Discharge has not occurred).    
There are no scheduled amortization payments associated with the FILO Term Loan, which bears interest at a rate of LIBOR plus a margin of 7.00% per annum subject to decrease under certain circumstances (with a minimum and possible interest rate of LIBOR plus a margin of 6.50%, per annum).
On June 13, 2018, we entered into two interest rate swaps with notional amounts of $275 million and $225 million to limit our exposure to our variable interest rate debt. The interest rate swaps effectively converted a portion

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of the variable interest rate on the Tranche B-2 Term Loan and FILO Term Loan to a fixed rate. We receive payments based on the one-month LIBOR and make payments based on a fixed rate. We receive payments with a floor of 0.00% and 0.75%, respectively, on the $275 million and $225 million interest rate swaps, which aligns with the related debt instruments. The interest rate swap agreements had an effective date of June 29, 2018. The $225 million interest rate swap expires on February 28, 2021, and the $275 million interest rate swap expires on June 30, 2021. The notional amount of the $225 million interest rate swap is scheduled to decrease to $175 million on June 30, 2019, $125 million on June 30, 2020 and $75 million December 31, 2020.
There have been no other material changes in our contractual obligations as disclosed in the 2017 10-K.
Critical Accounting Estimates
We adopted ASU 2014-09, Revenue from Contracts with Customers, during the first quarter of fiscal 2018 using the full retrospective method. Refer to Item 1, "Financial Statements," Note 3, "Revenue" for more information.
In addition, we entered into two interest rate swaps in June 2018, which were designated as cash flow hedges. Because the interest rate swap agreements are deemed effective, changes in fair value will be recorded within other comprehensive loss on the Consolidated Balance Sheet. Refer to Item 1, "Financial Statements," Note 5, "Long-Term Debt / Interest Expense" and Note 6, "Fair Value Measurements and Financial Instruments" for more information.
There have been no other material changes to the application of critical accounting policies and significant judgments and estimates since those disclosed in our 2017 10-K.
Recent Accounting Pronouncements
Refer to Item 1, "Financial Statements," Note 2, "Basis of Presentation."  
Item 3.  Quantitative and Qualitative Disclosures about Market Risk

In June 2018, we entered into two interest rate swaps with notional amounts of $275 million and $225 million to limit our exposure to our variable interest rate debt. The interest rate swaps effectively converted a portion of the variable-rate debt to a fixed interest rate. See Part I, Item 1 "Financial Statements," Note 5, "Long-Term Debt / Interest Expense" for additional information.
There have been no other significant changes to our market risk since December 31, 2017 . For a discussion of our exposure to market risk, refer to Part II, Item 7A "Quantitative and Qualitative Disclosures About Market Risk" of our 2017 10-K.
Item 4.  Controls and Procedures  
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer (“CEO”) and our Chief Financial Officer ("CFO"), has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed in the reports that we file or submit under the Exchange Act has been appropriately recorded, processed, summarized and reported on a timely basis and are effective in ensuring that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. Based on such evaluation, our CEO and CFO have concluded that, as of June 30, 2018 , our disclosure controls and procedures are effective.
Changes in Internal Control over Financial Reporting
There have not been any changes in our internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)) that occurred during the last fiscal quarter, which have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II - OTHER INFORMATION  
Item 1.   Legal Proceedings
DMAA / Aegeline Claims. Prior to December 2013, we 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 our stores in November 2013, and/or Aegeline, a compound extracted from bael trees. As of June 30, 2018 we were named in the following 29 personal injury lawsuits involving products containing DMAA and/or Aegeline:
•
Susan Straub individually and as Administratrix of the Estate of Shane Staub v. USPlabs, LLC and General Nutrition Holdings, Inc, Common Pleas Court of Philadelphia County, Pennsylvania (Case No. 140502403), filed May 20, 2014
•
Jeremy Reed, Timothy Anderson, Dan Anderson, Nadia Black, et al. v. USPlabs, LLC, et al., GNC, Superior Court for California, County of San Diego (Case No. 37-2013-00074052-CU-PL-CTL), filed November 1, 2013
•
Kenneth Waikiki v. USPlabs, LLC, Doyle, Geissler, USPlabs OxyElite, LLC, et al. and GNC Corporation, et al., United States District Court for the District of Hawaii (Case No. 3-00639 DMK), filed November 21, 2013
•
Nicholas Akau v. USPlabs, LLC, GNC Corporation, et al., United States District Court for the District of Hawaii (Case No. CV 14-00029), filed January 23, 2014
•
Melissa Igafo v. USPlabs, LLC, GNC Corporation, et al., United States District Court for the District of Hawaii (Case No. CV 14-00030), filed January 23, 2013
•
Calvin Ishihara v. USPlabs, LLC, GNC Corporation, et al., United States District Court for the District of Hawaii (Case No. CV 14-00031), filed January 23, 2014
•
Gaye Anne Mattson v. USPlabs, LLC, GNC Corporation, et al., United States District for the District of Hawaii (Case No. CV 14-00032), filed January 23, 2014
•
Thomas Park v. GNC Holdings, Inc., USPlabs, LLC, Superior Court of California, County of San Diego (Case No. 37-2014-110924), filed September 8, 2014
•
Nicholas Olson, Adrian Chavez, Rebecca Fullerton, Robert Gunter, Davina Maes and Edwin Palm v. GNC Corporation, USPlabs, LLC, Superior Court of California, County of Orange (Case No. 2014-00740258) filed August 18, 2014
•
Mereane Carlisle, Charles Paio, Chanelle Valdez, Janice Favella and Christine Mariano v. USPlabs, LLC et al., United states District Court for the District of Hawaii (Case No. CV14-00029), filed January 23, 2014
•
Nichole Davidson, William Dunlao, Gina Martin, Lee Ann Miranda, Yuka Colescott, Sherine Cortinas, and Shawna Nishimoto v. GNC Corporation and USPlabs, LLC, United States District Court for the District of Hawaii (Case No. 14-cv-00364) filed October 24, 2014
•
Rodney Ofisa, Christine Mosca, Margaret Kawamoto as guardian for Jane Kawamoto (a minor), Ginny Pia, Kimberlynne Tom, Faituitasi Tuioti, Ireneo Rabang, and Tihane Laupola v. GNC Corporation and USPlabs, LLC, United States District Court for the District of Hawaii (Case No. CV14-00365) filed October 24, 2014
•
Palani Pantohan, Deborah Cordiero, J. Royal Kanamu, Brent Pascula, Christie Shiroma, Justan Chun, Kasey Grace and Adam Miyasato v. USPlabs, LLC. et al., United States District Court for the District of Hawaii (Case No. CV14-00366) filed August 15, 2014
•
Keahi Pavao, Derek Kamiya, as personal representative of the Estate of Sonnette Marras, Gary Powell, on behalf of and as conservator for M.P.C.F.S.M., a minor child, R.P.O.C.S.S.M., a minor child, M.P.C.I.H.S.M., a minor child, M.K.C.S.M., a minor child, Michael Soriano, and Lance Taniguchi v. USPlabs, LLC, et al. United States District Court for the District of Hawaii (Case No. 14-cv-00367) filed October 24, 2014
•
Kai Wing Tsui and John McCutchen v. GNC Corporation, USPlabs, LLC, Superior Court of California, County of Los Angeles (Case No. BC559542), filed October 6, 2014
•
Cuong Bahn, Ismael Flores, Chue Xiong, Leilani Groden, Trudy Jenkins, and Mary Hess v. USPlabs, LLC et al., California Superior Court, Orange County (Case No. 30-2015-00776749), filed March 12, 2015

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•
Alexis Billones, Austin Ashworth, Karen Litre, Nancy Murray, Wendy Ortiz, Edward Pullen, and Corazon Vu v. USPlabs, LLC et al., California Superior Court, Los Angeles County (Case No. BC575264), filed March 13, 2015
•
Asofiafia Morales, Richard Ownes, Lynn Campbell, Joseph Silzgy, Delphone Smith-Dean, Nicole Stroud, Barrett Mincey and Amanda Otten v. USPlabs, LLC et al., California Superior Court, Los Angeles County (Case No. BC575262), filed March 13, 2015
•
Laurie Nadura, Angela Abril-Guthmiller, Sarah Rogers, Jennifer Apes, Ellen Beedie, Edmundo Cruz, and Christopher Almanza v. USPlabs, LLC et al., California Superior Court, Monterey County (Case No. M131321), filed March 13, 2015
•
Cynthia Novida, Demetrio Moreno, Mee Yang, Tiffone Parker, Christopher Tortal, David Patton and Raymond Riley v. USPlabs, LLC et al., California Superior Court, San Diego County (Case No. 37-2015-00008404), filed March 13, 2015
•
Johanna Stussy, Lai Uyeno, Gwenda Tuika-Reyes, Zeng Vang, Kevin Williams, and Kristy Williams v. USPlabs, LLC, et al., California Superior Court, Santa Clara County (Case No. 115CV78045), filed March 13, 2015
•
Issam Tnaimou, Benita Rodriguez, Marcia Rouse, Marcel Macy, Joseph Worley, Joanne Zgrezepski, Crystal Franklin, Deanne Fry, and Caron Jones, in her own right, o/b/h Joshua Jones and o/b/o The Estate of James Jones v. USPlabs, LLC et al., California Superior Court, Monterey County (Case No. M131322), filed March 13, 2015
•
Kuulei Hirota v. USPlabs, LLC et al., First Circuit Court, State of Hawaii (Case No. 15-1-0847-05), filed May 1, 2015
•
Roel Vista v. USPlabs, LLC, GNC Corporation et al., California Superior Court, County of Santa Clara (Case No. CV-14-0037), filed January 24, 2014
•
Larry Tufts v. USPlabs, LLC, GNC Corporation et al., Court of Common Pleas for the County of Jasper, South Carolina (Case No. 2016-CP-27-0257), filed June 16, 2016
•
Dominic Little, David Blake Allen, Jeff Ashworth, Naomi Book and Stanley Book as Conservators of the Estate of Justin Book, Martin Sanchez, John Bainter, Rich Wolnik, Brian Norris, Joseph Childs, Jimi Hernandez and Novallie Hill v. USPlabs, LLC, et al., California Superior Court, Los Angeles County (Case No. BC534065), filed January 23, 2014
•
David Ramirez, Michelle Sturgill, Joseph losefa, Yanira Bernal, Jacob Michels, Cynthia Gaona and Tamara Gandara v. USPlabs, LLC, et al., California Superior Court Orange County (Case No. 30-2015-00783256-CU-PL-CXC), filed April 16, 2015
•
Thad Estrada v. USPlabs, LLC, et al., United States District Court for the District of Hawaii (Case No. CV-15-00228), filed June 17, 2016
•
Calwin Williams v. USPlabs, LLC, et al., Circuit Court of Jackson County, State of Missouri at Independence (Case No. 1716-CV-23399), filed September 28, 2017
The proceedings associated with the majority of these personal injury cases, which generally seek indeterminate money damages, are in the early stages, and any liabilities that may arise from these matters are not probable or reasonably estimable at this time.
We are contractually entitled to indemnification by our third-party vendor with regard to these matters, although our ability to obtain full recovery in respect of any such claims against us is dependent upon the creditworthiness of our vendor and/or its insurance coverage and the absence of any significant defenses available to its insurer.
Other Legal Proceedings.     For additional information regarding certain other legal proceedings to which we are a party, see Item 1 "Financial Statements" Note 7, "Contingencies."
Item 1A.   Risk Factors
There have been no material changes to the disclosures relating to this item from those set forth in the 2017 10-K.

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Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
The following table sets forth information regarding Holdings’ purchases of shares of common stock during the quarter ended June 30, 2018 :
Period (1)
Total Number of
Shares Purchased (2)
 
Average
Price Paid
per Share
 
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or Programs (3)
 
Dollar Value of Shares that
May Yet Be Purchased
under the Plans or
Programs
 
 
 
 
 
 
 
 
April 1 to April 30, 2018
118

 
$
3.64

 
—

 
$
197,795,011

May 1 to May 31, 2018
—

 
$
—

 
—

 
$
197,795,011

June 1 to June 30, 2018
104

 
$
4.16

 
—

 
$
197,795,011

Total
222

 
$
3.88

 
—

 
 

 
(1)
Other than as set forth in the table above, we made no purchases of shares of Class A common stock for the quarter ended June 30, 2018 .

(2)
Includes 222 shares withheld from employees to satisfy minimum tax withholding obligations associated with the vesting of restricted stock during the period.

(3)
In August 2015, the Board approved a $500.0 million multi-year repurchase program in addition to the $500.0 million multi-year program approved in August 2014, bringing the aggregate share repurchase program to $1.0 billion of Holdings' common stock. Holdings has utilized $802.2 million of the current repurchase program. As of June 30, 2018 , $197.8 million remains available for purchase under the program.

Item 3.   Defaults Upon Senior Securities
None.
Item 4.   Mine Safety Disclosures
Not applicable. 
Item 5.  Other Information
None.
 

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Item 6.   Exhibits
Exhibit
 
 
No.
 
Description
10.1*
 
10.2*
 
31.1*
 
31.2*
 
32.1*
 
101.INS
 
XBRL Instance Document
101.SCH
 
XBRL Taxonomy Extension Schema
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase
101.LAB
 
XBRL Taxonomy Extension Label Linkbase
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase
 
 
 
*
 
Filed herewith.


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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the persons undersigned thereunto duly authorized.
 
 
 
GNC HOLDINGS, INC.
 
(Registrant)
 
 
 
/s/ Tricia K. Tolivar
Date: July 26, 2018
Tricia K. Tolivar
 
Chief Financial Officer
 
(Principal Financial Officer)


44


Exhibit 10.1

RESTRICTED STOCK AGREEMENT
PURSUANT TO THE
GNC HOLDINGS, INC. 2015 STOCK AND INCENTIVE PLAN
AGREEMENT (the “ Agreement ”), effective as of May 21, 2018, by and between GNC Holdings, Inc., a Delaware corporation (the “ Company ”), and ___________ (the “ Participant ”). Capitalized terms used but not defined herein shall have the meanings ascribed to them in the GNC Holdings, Inc. 2015 Stock and Incentive Plan (the “ Plan ”).
W I T N E S S E T H :
WHEREAS , the Company has adopted the Plan, a copy of which has been delivered to the Participant, which is administered by the Committee;
WHEREAS , pursuant to Section 8.1 of the Plan, the Committee may grant Restricted Stock to Eligible Employees, Consultants and Non-Employee Directors; and
WHEREAS , the Participant is a Non-Employee Director under the Plan.
NOW, THEREFORE , for and in consideration of the mutual promises herein contained, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:
1. Grant of Shares . Subject in all respects to the Plan and the terms and conditions set forth herein and therein, effective on May 21, 2018, (the “ Grant Date ”) the Company hereby awards to the Participant _____ shares of validly issued Common Stock (the “ Shares ”). Pursuant to Section 2 hereof, the Shares are subject to certain restrictions, which restrictions shall lapse at the times provided under Section 3(d) hereof. While such restrictions are in effect, the Shares subject to such restrictions shall be referred to herein as “ Restricted Stock .”

2. Restrictions on Transfer . The Participant shall not sell, transfer, pledge, hypothecate, assign or otherwise dispose of the Shares, except as set forth in the Plan or this Agreement. Any attempted sale, transfer, pledge, hypothecation, assignment or other disposition of the Shares in violation of the Plan or this Agreement shall be void and of no effect and the Company shall have the right to disregard the same on its books and records and to issue “stop transfer” instructions to its transfer agent.

3. Restricted Stock .

(a) Retention of Certificates . Promptly after the Grant Date, the Company shall issue stock certificates representing the Restricted Stock unless it elects to recognize such ownership through uncertificated book entry or another similar method pursuant to Section 7 hereof. The stock certificates shall be registered in the Participant’s name and shall bear any legend required under the Plan or Section 4 hereof. Such stock certificates shall be held in custody by the Company (or its designated agent) until the restrictions thereon shall have lapsed. Upon the Company’s request, the Participant shall deliver to the Company a duly signed stock power, endorsed in blank, relating to the Restricted Stock.

(b) Rights with Regard to Restricted Stock . The Participant will have the right to vote the Restricted Stock, to receive and retain any dividends payable to holders of record of Common Stock on and after the transfer of the Restricted Stock (although such dividends shall be treated, to the extent required by applicable law, as additional compensation for tax purposes if paid on Restricted Stock), and to exercise all other rights, powers and privileges of a holder of Common Stock with respect to the Restricted Stock set forth in the Plan, with the exceptions that: (i) the Participant will not be entitled to delivery of the stock certificate or certificates representing the Restricted Stock until the Restriction Period shall have expired; (ii) the Company (or its designated agent) will retain custody of the stock certificate or certificates representing the Restricted Stock and the other RS Property (as defined below) during the Restriction Period; (iii) no RS Property shall bear interest or be segregated in




separate accounts during the Restriction Period; (iv) any RS Property will be subject to the restrictions provided in Sections 3(c) , 3(d) and 3(e) hereof; and (v) the Participant may not sell, assign, transfer, pledge, exchange, encumber or dispose of the Restricted Stock during the Restriction Period.

(c) Treatment of Dividends and Other RS Property . In the event the Participant receives a dividend on the Restricted Stock or the Shares of Restricted Stock are split or the Participant receives any other shares, securities, moneys or property representing a dividend on the Restricted Stock or representing a distribution or return of capital upon or in respect of the Restricted Stock or any part thereof, or resulting from a split-up, reclassification or other like changes of the Restricted Stock, or otherwise received in exchange therefor, and any warrants, rights or options issued to the Participant in respect of the Restricted Stock (collectively “ RS Property ”), the Participant will also immediately deposit with and deliver to the Company any of such RS Property, including any certificates representing shares duly endorsed in blank or accompanied by stock powers duly executed in blank, and such RS Property shall be subject to the same restrictions, including those of Sections 3(d) and 3(e) hereof, as the Restricted Stock with regard to which they are issued and shall herein be encompassed within the term “Restricted Stock.” Unless otherwise determined by the Committee, any RS Property issued in the form of cash will not be reinvested in Shares and will be held uninvested and without interest until delivered to the Participant within 30 days after the end of the Restriction Period as determined by the Committee, if the related Restricted Stock becomes vested.

(d) Vesting .

(i) The Restricted Stock granted pursuant to Section 1 hereof shall vest and cease to be Restricted Stock in accordance with the following schedule, provided that the Participant has not incurred a Termination of Directorship prior to the applicable vesting date:
Vesting Date
Percent Vested
First Anniversary of Grant Date
100%


(ii) There shall be no proportionate or partial vesting in the periods between the vesting dates and vesting shall occur only on each vesting date; provided that no Termination of Directorship has occurred prior to such date. Notwithstanding the foregoing, if the Participant’s service on the Board is terminated due to the Participant cycling off the Board due to a Company transaction or otherwise at the request of the Company or the Board, or the Participant does not stand for reelection (or is not or will not be nominated for election or reelected) to the Board prior to the vesting date, the Participant’s rights hereunder shall automatically become fully vested on the date his or her term of office expires or terminates.

(iii) When any Shares become vested, the Company shall promptly issue and deliver, unless the Company is using book entry, to the Participant a new stock certificate registered in the name of the Participant for such Shares without the legend set forth in Section 4 hereof and deliver to the Participant any related other RS Property, subject to applicable withholding.

(e) Forfeiture . The Participant shall forfeit to the Company, without compensation, any and all unvested Restricted Stock upon the Participant’s Termination of Directorship for any reason except as provided above.  Additionally, in the event the Participant engages in Detrimental Activity prior to, or during the one year period after, any vesting of Restricted Stock, the Committee may direct that all unvested Restricted Stock shall be immediately forfeited to the Company and the Participant shall pay to the Company an amount equal to the Fair Market Value at the time of vesting of any Restricted Stock which had vested in the period referred to above.

(f) Withholding . The Participant shall pay, or make arrangements to pay, in a manner satisfactory to the Company, an amount equal to the amount of all applicable foreign, federal, state, provincial and local taxes that the Company is required to withhold at any time.  In the absence of such arrangements, any statutorily required withholding obligation may, as determined at the sole discretion of the Committee, be satisfied by delivery to the Company of shares of Common Stock issuable under this Agreement equal to the statutorily required withholding obligation.

(g) Section 83(b) . If the Participant properly elects (as permitted by Section 83(b) of the Code) within 30 days after the issuance of the Restricted Stock to include in gross income for federal income tax




purposes in the year of issuance the fair market value of such Restricted Stock, the Participant shall pay to the Company or make arrangements satisfactory to the Company to pay to the Company upon such election, any federal, state or local taxes required to be withheld with respect to the Restricted Stock. The Participant acknowledges that it is his or her sole responsibility, and not the Company’s, to file timely and properly the election under Section 83(b) of the Code and any corresponding provisions of state tax laws if he or she elects to utilize such election.

(h) Delivery Delay . The delivery of any certificate representing the Restricted Stock or other RS Property may be postponed by the Company for such period as may be required for it to comply with any applicable foreign, federal, state or provincial securities law, or any national securities exchange listing requirements and the Company is not obligated to issue or deliver any securities if, in the opinion of counsel for the Company, the issuance of such Shares shall constitute a violation by the Participant or the Company of any provisions of any applicable foreign, federal, state or provincial law or of any regulations of any governmental authority or any national securities exchange.

4. Legend . All certificates representing the Restricted Stock shall have endorsed thereon the following legends:
(a) “The anticipation, alienation, attachment, sale, transfer, assignment, pledge, encumbrance or charge of the shares of stock represented hereby are subject to the terms and conditions (including forfeiture) of the GNC Holdings, Inc. (the “Company”) 2015 Stock and Incentive Plan (as the same may be amended or supplemented from time to time), and an Award Agreement entered into between the registered owner and the Company dated [ ]. Copies of such Plan and Award Agreement are on file at the principal office of the Company.”
(b) Any legend required to be placed thereon by applicable blue sky laws of any state.

Notwithstanding the foregoing, in no event shall the Company be obligated to deliver a certificate representing the Restricted Stock prior to the vesting date set forth above.
5. No Obligation to Continue Directorship . This Agreement is not an agreement of service. This Agreement does not guarantee that the Company or its Affiliates will employ or retain, or continue to, employ or retain the Participant as a Non-Employee Director during the entire, or any portion of the, term of this Agreement, including but not limited to any period during which the Restricted Stock is outstanding, nor does it modify in any respect the Company or its Affiliate’s right to terminate or modify the Participant’s directorship or compensation or the Company’s stockholders rights with respect to the election or retention of Directors.

6. Power of Attorney . The Company, its successors and assigns, is hereby appointed the attorney-in-fact, with full power of substitution, of the Participant for the purpose of carrying out the provisions of this Agreement and taking any action and executing any instruments which such attorney-in-fact may deem necessary or advisable to accomplish the purposes hereof, which appointment as attorney-in-fact is irrevocable and coupled with an interest. The Company, as attorney-in-fact for the Participant, may in the name and stead of the Participant, make and execute all conveyances, assignments and transfers of the Restricted Stock, Shares and property provided for herein, and the Participant hereby ratifies and confirms all that the Company, as said attorney-in-fact, shall do by virtue hereof. Nevertheless, the Participant shall, if so requested by the Company, execute and deliver to the Company all such instruments as may, in the judgment of the Company, be advisable for the purpose.

7. Uncertificated Shares . Notwithstanding anything else herein, to the extent permitted under applicable foreign, federal, state or provincial law, the Company may issue the Shares in the form of uncertificated shares. Such uncertificated shares of Restricted Stock shall be credited to a book entry account maintained by the Company (or its designee) on behalf of the Participant. If thereafter certificates are issued with respect to the uncertificated shares of Restricted Stock, such issuance and delivery of certificates shall be in accordance with the applicable terms of this Agreement.

8. Rights as a Stockholder . The Participant shall have all rights of a stockholder with respect to any Shares covered by the Restricted Stock, except with respect to the right to Transfer any Shares covered by the Restricted Stock during the Restriction Period or except as otherwise specifically provided for in this Agreement or the Plan.

9. Provisions of Plan Control . This Agreement is subject to all the terms, conditions and provisions of the Plan, including, without limitation, the amendment provisions thereof, and to such rules, regulations and




interpretations relating to the Plan as may be adopted by the Committee and as may be in effect from time to time. The Plan is incorporated herein by reference. By signing and returning this Agreement, the Participant acknowledges having received and read a copy of the Plan and agrees to comply with it, this Agreement and all applicable laws and regulations. If and to the extent that this Agreement conflicts or is inconsistent with the terms, conditions and provisions of the Plan, the Plan shall control, and this Agreement shall be deemed to be modified accordingly. This Agreement contains the entire understanding of the parties with respect to the subject matter hereof and supersedes any prior agreements between the Company and the Participant with respect to the subject matter hereof.

10. Amendment . To the extent applicable, the Board or the Committee may at any time and from time to time amend, in whole or in part, any or all of the provisions of this Agreement to comply with Section 409A of the Code and the regulations thereunder or any other applicable law and may also amend, suspend or terminate this Agreement subject to the terms of the Plan.  Except as otherwise provided in the Plan, no modification or waiver of any of the provisions of this Agreement shall be effective unless in writing by the party against whom it is sought to be enforced.  The award of Restricted Stock pursuant to this Agreement is not intended to be considered “deferred compensation” for purposes of Section 409A of the Code.  With respect to any dividends and other RS Property, however, this Agreement is intended to comply with the applicable requirements of Section 409A of the Code relating to “short-term deferrals” thereunder, and shall be limited, construed and interpreted in a manner so as to comply therewith.

11. Notices . Any notice or communication given hereunder shall be in writing and shall be deemed to have been duly given when delivered in person, or by regular United States mail, first class and prepaid, to the appropriate party at the address set forth below (or such other address as the party shall from time to time specify):

If to the Company, to:
GNC Holdings, Inc.
300 Sixth Avenue
Pittsburgh, Pennsylvania 15222
Attention: Chief Legal Officer
If to the Participant, to the address on file with the Company.
12. Acceptance . As required by Section 8.2 of the Plan, the Participant must accept this award of Restricted Stock by executing this Agreement within a period of 60 days from the date the Participant receives this Agreement (or such other period as the Committee shall provide). In the event that the Restricted Stock is not accepted within such time period, this Agreement shall be null and void ab initio and this award of Restricted Stock shall not be valid.

13. Miscellaneous .

(a) This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, legal representatives, successors and assigns.

(b) This Agreement shall be governed and construed in accordance with the laws of Delaware (regardless of the law that might otherwise govern under applicable Delaware principles of conflict of laws).

(c) This Agreement may be executed in one or more counterparts, all of which taken together shall constitute one contract.

(d) The failure of any party hereto at any time to require performance by another party of any provision of this Agreement shall not affect the right of such party to require performance of that provision, and any waiver by any party of any breach of any provision of this Agreement shall not be construed as a waiver of any continuing or succeeding breach of such provision, a waiver of the provision itself, or a waiver of any right under this Agreement.




IN WITNESS WHEREOF, the parties have executed this Agreement on the date and year first above written.

GNC HOLDINGS, INC.
      
By:
/s/ Kevin Nowe
Name:
Kevin Nowe
Title
Senior Vice President, Chief Legal Officer and Secretary




PARTICIPANT
By:     
Name:






Exhibit 10.2


AMENDMENT TO PERFORMANCE-VESTED RESTRICTED STOCK UNIT AGREEMENT
THIS AMENDMENT is made to that certain Performance-Vested Restricted Stock Unit Agreement (the “PSU Agreement”) dated as of February 21, 2018 and April 16, 2018 and granted to the Participant under the GNC Holdings, Inc. 2015 Stock and Incentive Plan (the “Plan”) by GNC Holdings, Inc. (the “Company”).

WHEREAS, the Company desires to amend certain provisions of the PSU Agreement to clarify and limit the discretion retained by the Company’s Compensation Committee (the “Committee”) and provide certain benefits to the Participant, which amendment is materially consistent with the previously disclosed terms of the Plan and has been approved by the Committee pursuant to their authority under the Plan;
NOW, THEREFORE, intending to be legally bound, the Company hereby amends the PSU Agreement as follows:
1. Section 2(b)(ii) of the PSU Agreement is hereby amended to delete the last sentence thereof, which prior to its deletion read as follows:

The Committee may, in its sole discretion, bank an amount less than the amount determined in Exhibit A , with the remaining PSUs forfeited.
2. Section 7 of the PSU Agreement is hereby amended to add a clause to the end of the fourth sentence thereof, so that, as amended, the sentence shall read as follows:

If and to the extent that this Agreement conflicts or is inconsistent with the terms, conditions and provisions of the Plan, the Plan shall control, and this Agreement shall be deemed to be modified accordingly, except to the extent that this Agreement supersedes the Plan to the extent that the Committee has retained only limited and specific discretion with respect to determining PSU vesting based on the performance criteria as described in Exhibit A.
3. The first paragraph of Exhibit A, titled “Performance Condition” is hereby amended to add two sentences to the end thereof, so that the paragraph, as amended, shall read as follows:

The total number of PSUs that may be banked by a Participant will be based on the Company’s Earnings before Interest, Taxes, Depreciation and Amortization (“EBITDA”) for each calendar year within the Performance Period, and contingent upon the Participant’s continuous employment through the Performance Period. The Committee, in its sole discretion, shall specify how performance is determined by including or excluding from EBITDA items that are deemed to be extraordinary, unusual in nature, infrequent in occurrence, related to the disposal or acquisition of a segment of a business, related to a change in accounting principle, applicable laws or regulations or related to a recapitalization, restructuring, reorganization or sale of assets. Such items may include but are not limited to asset-impairments, certain legal-related charges, gains on refranchising, gains or losses from the sale of a business and any other adjustment approved by the Committee.
4. This amendment is hereby integrated into the PSU Agreement and there are no representations, conditions, promises, or agreements pertaining to the subjects of this amendment that are not set forth in writing herein. The PSU Agreement, as amended by this amendment, together constitute all of the representations, conditions, promises, or agreements that have been made between the parties relating to the subject matter hereof and supersede all other prior agreements. Capitalized terms that are not otherwise defined herein have the same meaning as provided in the PSU Agreement.






INTENDING TO BE LEGALLY BOUND, the Company has executed this amendment on the date(s) set forth below.

GNC HOLDINGS, INC.
    
                                                                                                      
By:
/s/ Kevin Nowe
Name:
Kevin Nowe
Title
Senior Vice President, Chief Legal Officer and Secretary
Date
July 23, 2018

              
            







Exhibit 31.1
 
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
 
I, Kenneth A. Martindale, certify that:
 
1.          I have reviewed this Form 10-Q of GNC Holdings, Inc.;
 
2.          Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.          Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.          The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
(a)                                  Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
(b)                                 Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
(c)                                  Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
(d)                                 Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5.          The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
(a)                                  All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
(b)                                 Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
 
/s/ Kenneth A. Martindale
Date: July 26, 2018
Kenneth A. Martindale

 
Chief Executive Officer
 
(Principal Executive Officer)




Exhibit 31.2
 
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
 
I, Tricia K. Tolivar, certify that:
 
1.          I have reviewed this Form 10-Q of GNC Holdings, Inc.;
 
2.          Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.          Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.          The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
(a)                                  Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
(b)                                 Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
(c)                                  Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
(d)                                 Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5.          The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
(a)                                  All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
(b)                                 Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
 
/s/ Tricia K. Tolivar
Date: July 26, 2018
Tricia K. Tolivar
 
Chief Financial Officer
 
(Principal Financial Officer)




Exhibit 32.1
 
Certification of CEO and CFO Pursuant to
18 U.S.C. Section 1350,
as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
 
In connection with the Quarterly Report on Form 10-Q of GNC Holdings, Inc. (the “Company”), for the quarterly period ended June 30, 2018 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Kenneth A. Martindale, as Chief Executive Officer of the Company, and Tricia K. Tolivar, as Chief Financial Officer of the Company, each hereby certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his or her knowledge:
 
(1)                                  The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
(2)                                  The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
 
 
/s/ Kenneth A. Martindale
 
Name:
Kenneth A. Martindale
 
Title:
Chief Executive Officer
 
 
(Principal Executive Officer)

 
Date: July 26, 2018
 
 
 
/s/ Tricia K. Tolivar
 
Name:
Tricia K. Tolivar

 
Title:
Chief Financial Officer
 
 
(Principal Financial Officer)

 
Date: July 26, 2018
 


This certification accompanies the Report pursuant to § 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.