Basis of Presentation and Recent Developments (Policies)

6 Months Ended

Jun. 30, 2020

Organization Consolidation And Presentation Of Financial Statements [Abstract]

Basis of Presentation and Recent Developments

Our financial statements and accompanying notes are prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”).  In our opinion, the accompanying consolidated financial statements of Tivity Health^®, Inc. and its wholly-owned subsidiaries, including the results of Nutrisystem^®, Inc. (“Nutrisystem”) acquired on March 8, 2019 (collectively, “Tivity Health,” the “Company,” or such terms as “we,” “us,” or “our”) reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement.  In preparing our consolidated financial statements in conformity with U.S. GAAP, management must make estimates and assumptions that affect: (1) the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements; and (2) the reported amounts of revenues and expenses during the reporting period.  By their nature, estimates are subject to an inherent degree of uncertainty.  Due to the significant uncertainty relating to the potential future impacts of the coronavirus pandemic on our business and the overall market, actual results could differ from those estimates, including, but not limited to, estimates of fair value of goodwill and indefinite-lived intangible assets, allowances for doubtful accounts, and valuation allowances on deferred tax assets.  Our consolidated statements of operations include results of Nutrisystem from March 8, 2019 forward.  We have reclassified certain items in prior periods to conform to current classifications.

Following the acquisition of Nutrisystem (the “Merger”), we organize and manage our operations within two reportable segments, based on the types of products and services they offer: Healthcare and Nutrition.  The Healthcare segment is comprised of our legacy business and includes SilverSneakers^® senior fitness, Prime^® Fitness, WholeHealth Living^® and Wisely Well^TM.  The Nutrition segment is comprised of Nutrisystem’s legacy business and includes the Nutrisystem^® and the South Beach Diet^® programs.

We have omitted certain financial information that is normally included in financial statements prepared in accordance with U.S. GAAP but that is not required for interim reporting purposes.  You should read the accompanying consolidated financial statements in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2019.

Recent Developments

In January 2020, the Secretary of the U.S. Department of Health and Human Services (“HHS”) declared a national public health emergency due to a novel strain of coronavirus, which causes the disease known as “COVID-19”.  In March 2020, the World Health Organization characterized the outbreak of COVID-19 as a global pandemic, and COVID-19 continues to spread throughout the United States and other countries.  Many state and local governments, together with public health officials, have recommended and mandated precautions to mitigate the spread of COVID-19, including ordering closure of certain businesses and imposing stay-at-home orders and social distancing guidelines for individuals. Such measures have resulted in significantly reduced demand for many businesses that have continued in operation.  

By March 31, 2020, substantially all of the fitness centers in our national network were temporarily closed, which had an adverse impact on the results of operations in our Healthcare segment for the first quarter of 2020 because a significant portion of our Healthcare segment revenues from our SilverSneakers program is based on member visits to a fitness partner location. A substantial number of our fitness partner locations remained closed through April, with some locations reopening in May and additional locations reopening in June.  For the month of June 2020, approximately 66% of our fitness partner locations reported at least one visit from our SilverSneakers program.  For the second quarter of 2020, the average monthly total participation levels of our SilverSneakers members were significantly below historical levels, and we also experienced a decline in paid subscribers for Prime Fitness, each of which adversely impacted revenues in our Healthcare segment.   

We do not believe that COVID-19-related developments had a material impact on the results of operations or cash flows of our Nutrition segment for the first or second quarters of 2020.  While overall we did not experience any significant disruptions, interruptions, or increased costs related to our supply chain, inventory, or distribution channels as a result of COVID-19, we experienced delays in fulfilling orders for our Nutrition segment’s products at certain of our warehouses due to some employees of our fulfillment provider testing positive for COVID-19.  As a result, we incurred incremental expense of $1.3 million in the second quarter related to increased labor rates and

overtime for employees of our fulfillment provider as well as additional shipping and related charges as we transferred the fulfillment of certain orders to other warehouses that were farther from the customer’s delivery destination.

We have taken a number of actions in response to the pandemic, including the following:

• Given the continued uncertainty surrounding COVID-19, in March 2020, we borrowed $75 million under our Revolving Credit Facility as a precautionary measure to increase our cash position and maintain financial flexibility. We repaid such $75 million in full in June 2020.  As of June 30, 2020, outstanding debt under our credit agreement was $1,012.3 million, and we had $60.3 million of cash and cash equivalents.  In July 2020, we repaid $24.8 million of principal on the term loans under our credit agreement, resulting in our next required quarterly installment being due in December 2021. As of June 30, 2020, we had a working capital deficit of $5.7 million.  While the COVID-19 pandemic has created significant uncertainty as to general economic and market conditions for the remainder of 2020 and beyond, as of the date of this report, we believe our cash on hand, expected cash flows from operations, and anticipated available credit under the Credit Agreement (as defined below) will be sufficient to fund our operations, principal and interest payments, and capital expenditures for the next 12 months.

• We are taking a variety of measures to ensure the availability and functioning of our critical infrastructure, to promote the safety and security of our employees and to support the communities in which we operate. These measures include implementing remote working arrangements for employees where practicable. We are following public and private sector policies and initiatives to reduce the transmission of COVID-19, such as the imposition of travel restrictions, the promotion of social distancing, and the adoption of work-from-home arrangements.

• We are focused on preserving our liquidity and managing our cash flow, including, but not limited to, managing our working capital, optimizing tax savings under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) and other COVID-19-related legislation, curtailing capital expenditures, reducing discretionary spending, and reducing compensation costs.  

o In April 2020, we furloughed 13% of our approximately 1,000 employees. In June 2020, some of these furloughed employees’ positions were eliminated (in addition to other position eliminations, resulting in approximately 8% of our employees being terminated), and we extended the furlough for substantially all of the remaining furloughed employees through the end of 2020. Also in June 2020, we placed an additional 2% of our total employees on furlough through the end of 2020.  

o Also in April 2020, the Compensation Committee of the Company’s Board of Directors (the “Board”) approved a 25% reduction in base salary for the Company’s executive officers and certain other employees for the period from April 20, 2020 through August 23, 2020.  In June 2020, the Compensation Committee determined to extend such reductions in base salary through December 31, 2020.  Additionally, the Board approved a 100% reduction in the annual cash retainer and annual committee retainers payable to non-management members of the Board who stood for reelection at the 2020 Annual Meeting of Stockholders (except for Daniel G. Tully who does not receive compensation for his service on the Board) for a period of four months, beginning May 1, 2020 or as soon thereafter as reasonably practicable.  In June 2020, the Board determined to extend such reduction in cash compensation to the Board through December 31, 2020.

o Effective at the end of July 2020, the Compensation Committee suspended the Company matching contribution to the Company’s 401(k) plan.

As a result of the COVID-19 pandemic, in March 2020, we experienced a significant decline in the Company’s market capitalization and in the actual and forecasted operating results of our Healthcare segment, in addition to the unfavorable change in market conditions.  As a result, management concluded that there were triggering events during the first quarter of 2020 necessitating an impairment evaluation of our goodwill (for each of our reporting units) and indefinite-lived intangible assets (which consist of the Nutrisystem tradename and the SilverSneakers tradename).  Through this evaluation, management concluded that the fair value of goodwill allocated to the

Nutrition business unit as well as the fair value of the Nutrisystem tradename were below their carrying amounts, and we recorded an impairment loss of $199.5 million, including $80.0 million related to the Nutrisystem tradename and $119.5 million related to goodwill allocated to the Nutrition segment. There were no impairment triggers during the second quarter of 2020 related to our goodwill or indefinite-lived intangible assets.

Recent Relevant Accounting Standards

In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-04, “Reference Rate Reform (“ASC 848”): Facilitation of the Effects of Reference Rate Reform on Financial Reporting”.  ASC 848 contains temporary optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform, such as a transition away from the use of LIBOR.  ASC 848 was effective for the Company as of January 1, 2020.  The provisions of ASC 848 are available through December 31, 2022, at which time the reference rate replacement activity is expected to have been completed.  The provisions of ASC 848 must be applied at a Topic, Subtopic or Industry Subtopic level for all transactions other than derivatives, which may be applied at a hedging relationship level.  The accounting relief provided by ASC 848 is applicable only to legacy contracts if the amendments made to the agreements are solely for reference rate reform activities. Modifications that are unrelated to reference rate reform will scope out a given contract.  ASC 848 allows for different elections to be made at different points in time, and the timing of those elections will be documented as applicable.  For the avoidance of doubt, we intend to reassess the elections of optional expedients and exceptions included within ASC 848 related to our hedging activities and will document the election of these items on a quarterly basis.  In March 2020, we elected the expedient that allows us to assume that our hedged interest payments are probable of occurring regardless of any expected modification in their terms related to reference rate reform.  In addition, we have the option to change the method of assessing effectiveness upon a change in the critical terms of the derivative or the hedged transactions and upon the end of relief under ASC 848.  In June 2020, we elected to (i) continue the method of assessing effectiveness as documented in the original hedge documentation and (ii) apply the expedient wherein the reference rate on the hypothetical derivative matches the reference rate on the hedging instrument.  We will also apply the aforementioned elections to any future designated cash flow hedging relationship.

In October 2018, the FASB issued ASU 2018-16, "Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (“SOFR”) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes" (“ASU 2018-16”), which adds the OIS rate based on SOFR as a U.S. benchmark interest rate to facilitate the LIBOR to SOFR transition and provide lead time for entities to prepare for changes to interest rate risk hedging strategies. ASU 2018-16 is effective for fiscal years beginning after December 15, 2018, and interim periods within those years, with early adoption permitted. As of March 31, 2020, the benchmark interest rate in our existing interest rate swap agreements is LIBOR. The adoption of this standard did not have an impact on our financial position, results of operations, or cash flows. 

In January 2017, the FASB issued ASU No. 2017-04, “Intangibles - Goodwill and Other” (“ASU 2017-04”), which simplifies the subsequent measurement of goodwill by eliminating step two from the goodwill impairment test.  ASU 2017-04 is effective for annual and interim impairment tests in fiscal years beginning after December 15, 2019 and is required to be applied prospectively. Early adoption is allowed for annual goodwill impairment tests performed on testing dates after January 1, 2017.  We adopted ASU 2017-04 on October 1, 2019.  As further discussed in Note 12, we recorded impairment losses related to goodwill during the fourth quarter of 2019 and the first quarter of 2020.

In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”), which changes the fair value measurement disclosure requirements of ASC 820.  ASU 2018-13 is effective for fiscal years beginning on or after December 15, 2019, including interim periods therein, and is generally required to be applied retrospectively, except for certain components that are to be applied prospectively.  The adoption of this standard did not have a material impact on our consolidated financial statements and related disclosures.

In August 2018, the FASB issued ASU No. 2018-15, “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract,” which requires implementation costs incurred by customers in cloud computing arrangements to be deferred and recognized over the term of the arrangement, if those costs would be capitalized by the customer in a software licensing arrangement. This standard is effective for annual periods beginning after December 15, 2019, and interim periods within those fiscal

years. The adoption of this standard did not have a material impact on our consolidated financial statements and related disclosures.

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”), which requires companies to measure credit losses for financial assets held at the reporting date utilizing a methodology that reflects current expected credit losses over the lifetime of such assets.  ASU 2016-13 was effective for the Company on January 1, 2020 and is generally required to be applied using the modified retrospective approach, with limited exceptions for specific instruments.  The adoption of this standard did not have a material impact on our consolidated financial statements and related disclosures.