WW International, Inc. — 2015 Form 10-K
Reporting period: Fiscal year ended January 2, 2016 (52 weeks), with fiscal 2014 comprising 53 weeks. The filing was signed March 2, 2016. This is an annual report, not a standalone fourth-quarter filing.
Business context
WWI generates revenue mainly from meeting fees and digital subscriptions, supplemented by product sales, licensing and franchise royalties. It reports North America, United Kingdom, Continental Europe and Other segments. At year-end, the company reported approximately 1.0 million active meeting subscribers and 1.4 million active Online subscribers.
Financial performance and liquidity
| Metric | Fiscal 2015 | Fiscal 2014 | Change |
|---|---|---|---|
| Revenue | $1,164.4 million | $1,479.9 million | Down 21.3%; down 16.3% constant currency |
| Gross profit / margin | $574.1 million / 49.3% | $802.6 million / 54.2% | Margin contracted |
| Operating income / margin | $168.1 million / 14.4% | $299.3 million / 20.2% | Down 43.9% |
| Net income attributable to WWI | $32.9 million | $117.8 million | Down 72.0% |
| Diluted EPS | $0.56 | $2.08 | Down 73.1% |
| Cash from operating activities | $54.8 million | $231.6 million | Down $176.8 million |
| Cash and cash equivalents | $241.5 million | $301.2 million | Down $59.7 million |
| Total debt | $2,234.6 million | $2,358.0 million | Down $123.4 million |
| Working capital | Deficit of $144.2 million | Deficit of $6.0 million | Deficit increased |
Revenue declined across all segments, led by North America, which generated $755.4 million and represented about 65% of total revenue. Company-wide Total Paid Weeks fell 17.3%; the ending active subscriber base was down 4.8%. Foreign currency reduced fiscal 2015 revenue by $74.4 million and diluted EPS by $0.19. Fiscal 2014’s extra week added $19.2 million of revenue, complicating year-over-year comparison.
Interest expense was $121.8 million. Debt was entirely variable-rate; a $1.5 billion interest-rate swap hedged part of the exposure. Cash used in investing was $40.3 million, including $32.3 million of capitalized software expenditures; cash used in financing was $68.6 million.
Fourth-quarter information
Unaudited fiscal Q4 revenue was $259.2 million, gross profit $120.8 million and operating income $16.3 million. WWI reported a net loss attributable to the company of $11.3 million, or $0.18 per diluted share. The quarter included $13.6 million of Winfrey Transaction expenses and $1.3 million of restructuring charges; quarterly results also reflect the company’s seasonal business pattern.
Material changes and unusual items
- Revenue fell 21.3% and operating margin contracted from 20.2% to 14.4%, reflecting weaker recruitment and subscriber activity, lower attendance and product sales, and fixed-cost deleverage.
- The October 2015 Oprah Winfrey transaction brought in $43.2 million for 6.36 million shares. WWI also granted her a fully vested option for 3.51 million shares at $6.97 per share. The option and related transaction expenses included $12.8 million of stock compensation; total transaction expense was $13.6 million before tax.
- WWI recorded $8.4 million of restructuring charges and an $11.4 million gain on early debt extinguishment. Reported results also included $2.5 million of impairment charges, primarily for internal-use software.
- Management said it had achieved $250 million of annualized gross cost savings versus its fiscal 2012 cost base. The dividend remained suspended; no shares were repurchased during fiscal 2015.
- The company recorded immaterial out-of-period adjustments that reduced net income attributable to WWI by $0.32 million. The auditor reported effective internal control over financial reporting and issued an unqualified opinion on the financial statements.
Outlook, risks and contingencies
Management expected fiscal 2016 revenue to increase versus fiscal 2015, citing anticipated recruitment improvement and the December 2015 launch of Beyond the Scale and its SmartPoints plan. It expected approximately $20 million of revenue pressure from a lower opening active base and $16 million from foreign exchange at then-current rates. Management stated that recruitment gains would precede revenue growth under the subscription model, acknowledged the turnaround was taking longer than expected, and planned to use cash on hand to repay the $144.3 million term-loan maturity due April 2016.
Key risks include continued competition from free digital tools and changing consumer preferences; execution of the turnaround, technology and healthcare initiatives; high debt and variable interest rates; foreign-exchange exposure; privacy, cybersecurity and website reliability; and possible impairment of goodwill or franchise rights. WWI disclosed securities and derivative litigation and a putative class action concerning website and app disruptions; it said it intended to defend the cases and considered them without merit. The company is controlled by Artal and Oprah Winfrey as a voting group and elected controlled-company exemptions under NYSE rules.
Important facts for investors to verify
- Whether recruitments and active subscribers improved after the late-2015 launch, and whether that translated into sustained paid weeks and revenue.
- Progress against fiscal 2016 revenue expectations, including the stated foreign-exchange and opening-base headwinds.
- Repayment of the April 2016 maturity and subsequent liquidity, cash generation, leverage and refinancing capacity; only $0.2 million of revolving commitments was available at year-end.
- Whether cost savings and lower expenses can offset continued revenue pressure without undermining marketing, service quality or growth initiatives.
- Potential financial effects of the disclosed litigation, software impairment, tax uncertainties and the company’s substantial franchise-rights and goodwill balances.
- The dilutive and governance implications of the Winfrey option, voting arrangements and Artal’s effective control.