WW International, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 30, 2013, compared with the three months ended March 31, 2012. Amounts below are in U.S. dollars; financial statement amounts are converted to millions unless stated otherwise.
Business context and results
The company operates through its WWI meetings and products business and WW.com, its internet-based business. Management described the winter diet season as challenging, citing weak recruitment, economic uncertainty and intense competition. Global paid weeks grew 1.4%, as online growth more than offset declines in meeting paid weeks.
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Revenue | $486.9 million | $503.5 million | Down 3.3% |
| Gross profit / margin | $280.2 million / 57.5% | $288.4 million / 57.3% | Profit down 2.8%; margin up 0.2 percentage points |
| Operating income / margin | $103.1 million / 21.2% | $102.8 million / 20.4% | Income up 0.3% |
| Net income | $48.8 million | $54.6 million | Down 10.7% |
| Diluted EPS | $0.87 | $0.74 | Up 17.7% |
| Operating cash flow | $115.2 million | $104.8 million | Up $10.4 million |
Revenue declined 3.2% excluding foreign currency effects. Meeting fees fell 6.5%, in-meeting product sales fell 14.8%, and internet revenue increased 10.9% to $140.8 million. Online paid weeks grew 10.3%; ending active online subscribers increased 6.2% to 2.5 million. WWI segment revenue was $344.8 million and operating income $40.9 million; WW.com revenue was $142.2 million and operating income $62.3 million.
Lower marketing expense helped hold operating income approximately flat despite lower revenue. Net income fell mainly because interest expense rose 71.3% to $22.6 million, reflecting higher average debt and interest rates. Diluted EPS increased primarily because weighted-average diluted shares fell 24.2% to 56.2 million following 2012 share repurchases.
Cash flow, debt and liquidity
- Operating cash flow was $115.2 million; investing cash outflow was $58.2 million, including $35.0 million for Canadian franchise acquisitions; financing cash outflow was $3.1 million.
- Cash and equivalents were $121.4 million at March 30, 2013, up from $70.2 million at December 29, 2012. The working capital deficit increased to $312.5 million from $229.9 million; the company says negative working capital is typical, partly because customers prepay for services.
- Total debt was $2.400 billion, including $204.2 million classified as current; the reported average effective debt rate was 3.00%. Debt was variable-rate, with $470 million covered by interest-rate swaps. A 50-basis-point rate change was estimated to affect annual interest expense by about $9.7 million.
- At March 30, the company reported $250.5 million of unused revolving commitments, alongside $1.1 million of issued but undrawn letters of credit. It reported compliance with required financial ratios and other financial condition tests under its then-existing facilities.
- On April 2, after quarter-end, the company refinanced its facilities: $2.4 billion of term loans and a $250 million revolving facility, with maturities extending to 2020 and 2018, respectively. It reported $248.8 million of revolving availability after the refinancing. It incurred approximately $45 million in fees and expected a $21.7 million Q2 debt-extinguishment charge.
Outlook, risks and unusual items
Management stated that operating cash flow and available revolving borrowings should be sufficient for anticipated capital expenditure, debt service and working-capital needs over the next 12 months. The filing provides no specific revenue, earnings or other numerical operating guidance. The company initiated a cost-savings program and adjusted marketing, including a new spring campaign. In May, it changed fiscal 2013 bonus arrangements for certain executives in light of the challenging recruitment environment.
Key risks cited include competition and changing consumer preferences, effectiveness of marketing and new offerings, macroeconomic and consumer-confidence conditions, seasonality, foreign exchange and international operations, technology and privacy issues, franchise disputes, and debt service and covenant restrictions. Ordinary-course legal matters were not expected by management to have a material effect, though outcomes cannot be predicted. The filing reported no material change in risk factors from the prior annual report.
Q1 included the $35 million acquisition of Alberta and Saskatchewan franchisee assets. The filing also revised the comparative Q1 2012 cash-flow presentation for identified classification and foreign-currency corrections, which it said were not material individually or in aggregate and did not affect prior-period balance sheets or income statements.
Important facts for investors to verify
- Whether meeting recruitment and attendance stabilize, particularly in North America and the UK, and whether online subscriber growth continues.
- Whether operating-margin improvement from lower marketing spend can be sustained as the company addresses recruitment weakness and invests in technology.
- The post-quarter refinancing’s final interest costs, fees and expected $21.7 million debt-extinguishment charge, and the company’s capacity to service $2.4 billion of debt.
- How variable-rate exposure, swap coverage and refinancing terms affect interest expense and liquidity.
- Whether acquisition integration, working-capital trends and the stated 12-month liquidity assessment develop as management expects.