WW International, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended April 1, 2017; comparisons are with the three months ended April 2, 2016. The unaudited filing covers Weight Watchers’ meetings, digital subscription, product and related businesses across North America, the United Kingdom, Continental Europe and other markets.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change / context |
|---|---|---|---|
| Revenue | $329.1 million | $306.9 million | Up 7.2% reported; up 8.7% at constant currency |
| Gross profit / margin | $164.1 million / 49.9% | $149.7 million / 48.8% | Gross profit up 9.6%; margin improved 1.1 percentage points |
| Operating income / margin | $30.2 million / 9.2% | $13.6 million / 4.4% | Operating income more than doubled |
| Interest expense | $28.1 million | $30.0 million | Down 6.3% |
| Net income (loss) attributable to WWI | $10.7 million | $(10.8) million | Includes a material tax benefit related to cessation of Spanish operations |
| Diluted EPS | $0.16 | $(0.17) | Q1 2017 includes approximately $0.18 per share of tax benefit and $0.01 per share of related tax expense |
| Cash from operating activities | $42.3 million | $43.3 million | Down $1.0 million |
| Cash and cash equivalents | $135.2 million at April 1 | $108.7 million at December 31 | Increased $26.5 million during the quarter |
Capital expenditures and capitalized software expenditures totaled $10.5 million; investing cash outflow was $10.5 million. Financing cash outflow was $5.8 million, primarily scheduled debt repayment. Marketing expense was $86.4 million, or 26.3% of revenue, versus 28.2% in the prior-year quarter. SG&A was $47.4 million, or 14.4% of revenue, versus 16.2%.
Business trends and changes
- North America was the primary growth driver: segment revenue rose 11.4%, with management citing higher recruitment, effective promotions and marketing execution, product improvements, and momentum from the Oprah Winfrey collaboration.
- Continental Europe revenue increased 3.1%, supported primarily by online subscriptions. United Kingdom revenue declined 17.0%, driven by lower meeting fees and product sales, including licensing-related weakness.
- Total paid weeks increased 7.2%; incoming subscribers increased 12.8% and end-of-period subscribers increased 16.0%, according to the filing’s operating metrics.
- Management attributed gross-margin expansion to improved leverage in meetings and a greater mix of higher-margin online business, partly offset by lower licensing revenue. Operating income also benefited from lower marketing and SG&A as a share of revenue.
Debt, liquidity and outlook
- Debt principal was $2.016 billion, consisting of the Tranche B-2 term loan due April 2, 2020; $21.0 million is classified as current. The company repaid $5.25 million during Q1.
- The revolving facility had no borrowings, $48.2 million of unused availability and $1.8 million of undrawn letters of credit. The facility matures in April 2018.
- Debt is variable-rate. The company had a $1.5 billion interest-rate swap, with the notional scheduled to decline to $1.25 billion on April 3, 2017. Management estimated that a 50-basis-point rate increase would raise annual interest expense by about $2.6 million, while a 50-basis-point decrease would lower it by about $2.1 million.
- Working capital was negative $33.2 million. Management said the business typically operates with negative working capital because members prepay for subscriptions and meetings, and stated that cash on hand, expected operating cash generation and cost focus should provide sufficient liquidity for the next 12 months.
- Management identified deleveraging as a priority and targeted a year-end 2018 net debt/EBITDAS ratio below 4.5x. At April 1, 2017, trailing-twelve-month EBITDAS was $273.8 million and net debt/EBITDAS was 6.8x. EBITDAS is a non-GAAP measure.
Risks, contingencies and unusual items
- The $11.9 million tax benefit associated with cessation of the Spanish subsidiary’s operations drove the unusually low reported effective tax rate of (629.2%) and materially contributed to the return to net income. The filing also reports a $70,000 write-off of net assets related to the cessation.
- High leverage, variable interest rates, debt-service obligations, restrictive covenants and the need to refinance are key financial risks. The credit agreement is secured by substantially all company assets; it has no financial maintenance covenants but includes customary restrictions.
- The company cited competition, customer demand and recruitment, marketing effectiveness, product innovation, technology and cybersecurity, international and foreign-exchange exposure, seasonality, leadership transition and execution of strategic initiatives among forward-looking risks.
- A putative class action concerning website and app glitches was dismissed, but the plaintiff appealed; the company said it believed the appeal lacked merit. Management did not expect other ordinary-course litigation to have a material effect, while acknowledging outcomes cannot be predicted with certainty.
- The filing states there were no material changes to the risk factors in the 2016 Form 10-K. Disclosure controls were assessed as effective at a reasonable assurance level, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- How much of earnings growth is repeatable operating improvement versus the one-time Spanish-operations tax benefit.
- Whether subscriber, paid-week and recruitment growth—especially in North America and online—continues, and whether UK weakness persists.
- Progress toward the below-4.5x year-end 2018 net debt/EBITDAS target, cash generation, scheduled repayments and refinancing plans for the April 2018 revolver and April 2020 term loan.
- Effects of variable rates and the swap’s scheduled reduction, together with the company’s liquidity under weaker operating or recruitment conditions.
- Developments in the appealed class action and any material changes in other legal, operational or leadership risks.