WW International, Inc. — Q2 2011 Form 10-Q
Reporting period: Three and six months ended July 2, 2011; comparisons are to the periods ended July 3, 2010. Financial statements are unaudited. Dollar amounts below are in millions unless noted otherwise.
Business context
Weight Watchers operates through its WWI meetings, products and related businesses, and WW.com internet business. Management attributed first-half momentum chiefly to the PointsPlus/ProPoints program launches and effective marketing in North America and the UK. Continental Europe meetings remained weak. Management said growth moderated somewhat in Q2 as North America lapped the prior-year marketing campaign’s launch.
Financial performance
| Metric | Q2 2011 | Q2 2010 | H1 2011 | H1 2010 |
|---|---|---|---|---|
| Revenue | $486.0 | $376.7 | $989.4 | $764.7 |
| Gross profit / margin | $287.2 / 59.1% | $211.7 / 56.2% | $570.3 / 57.6% | $423.4 / 55.4% |
| Operating income / margin | $155.3 / 32.0% | $112.2 / 29.8% | $291.1 / 29.4% | $203.6 / 26.6% |
| Net income attributable to WW International | $87.0 | $56.3 | $160.6 | $100.9 |
| Diluted EPS | $1.17 | $0.73 | $2.17 | $1.31 |
| Interest expense | $15.0 | $19.6 | $33.2 | $38.3 |
- Revenue grew 29.0% in Q2 and 29.4% in H1; excluding favorable foreign-exchange effects, growth was 23.9% and 26.2%, respectively. H1 diluted EPS included a stated favorable currency contribution of $0.05.
- Q2 internet revenue increased 74.4% to $105.7 million; active Online subscribers rose 68.4% year over year to 1.8 million. H1 internet revenue rose 70.6% to $197.6 million.
- Q2 global meeting fees increased 25.8%; global paid weeks rose 21.5% and attendance 10.6%. Continental Europe meeting attendance declined 18.0% in Q2; UK meeting fees grew 23.9% on a constant-currency basis.
- Operating margin improvement reflected gross-margin expansion, attributed to greater meeting attendance and the higher-margin online business. Marketing and SG&A expenses also increased; H1 marketing rose 30.2% and SG&A 22.3%.
Cash flow, debt and liquidity
- H1 operating cash flow was $255.0 million, up from $144.4 million. Investing used $20.4 million, including $8.8 million of capital expenditures and $11.3 million of capitalized software spending.
- Financing used $217.0 million, including $202.3 million of debt repayments, $25.9 million of dividends and $34.9 million to acquire treasury stock; $41.1 million of option-exercise proceeds partly offset these outflows. Cash increased $19.8 million to $60.4 million.
- Total debt was $1,162.8 million at July 2, down from $1,365.1 million at January 1; $86.7 million was current and $1,076.1 million long term. Revolver II had $248.7 million available. Debt was variable-rate, with interest-rate swaps hedging part of the exposure.
- Working capital was negative $274.4 million, versus negative $348.7 million at fiscal year-end; the reported improvement largely reflected a $110.9 million reduction in current debt. The company said operating cash flow and revolver availability should fund anticipated needs for the next 12 months. It reported compliance with credit-facility financial tests and covenants.
Outlook, risks and unusual items
- No specific revenue, earnings or other quantified forward guidance is provided in the filing. Management expected to meet debt-facility tests for the foreseeable future and said liquidity should be sufficient for the next 12 months.
- The UK self-employment classification dispute remained under appeal. The company reported an aggregate reserve of approximately $45.1 million through Q2 2011 and expected to continue recording reserves consistent with the adverse lower-tribunal ruling; an Upper Tribunal hearing was scheduled for fall 2011.
- A California wage-and-hour settlement received final approval in May 2011; approximately $6.4 million was paid in Q2 against a previously recorded $6.5 million reserve. A North Carolina wage-and-hour case remained unresolved; the company had made no provision because the outcome and liability could not be estimated.
- The company acquired Danone Asia’s 49% interest in the China joint venture for $1 on April 27, 2011, bringing ownership to 100%. It also completed repayment of debt tranches that matured June 30, 2011.
- Disclosed business risks include competition, consumer demand and marketing effectiveness, seasonal patterns, international and foreign-exchange exposure, technology and privacy, legal and regulatory matters, debt service and restrictive covenants, and potential conflicts with the majority owner. A 50-basis-point rate change was estimated to affect annual interest expense by approximately $1.6 million.
Important facts for investors to verify
- Whether North American and UK enrollment, attendance and online-subscriber growth can be sustained, and how Q2 moderation develops.
- Whether Continental Europe marketing improves and the declines in meeting weeks and attendance reverse.
- The progress and possible financial effect of the UK employment-tax appeal, including the adequacy of the $45.1 million reserve.
- Debt repayment capacity, variable-rate exposure, covenant headroom and the ongoing ability to fund dividends and repurchases amid negative working capital.
- How much earnings growth reflects operating performance versus foreign exchange, tax-reserve reversals and lower interest expense.