WW International, Inc. — FY2017 Form 10-K Summary
Reporting period: Fiscal year ended December 30, 2017 (52 weeks); filed February 28, 2018. Fiscal 2016 was also 52 weeks. The company operated through North America, United Kingdom, Continental Europe and Other segments.
Business context
WWI earns most revenue from meeting and digital subscription services, supplemented by product sales and licensing. At year-end it reported approximately 3.2 million subscribers: 1.3 million meeting subscribers and 2.0 million Online subscribers. WW Freestyle launched in December 2017.
Financial performance
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Revenue | $1,306.9 million | $1,164.9 million | +12.2% |
| Gross profit / margin | $692.6 million / 53.0% | $585.5 million / 50.3% | Margin +2.7 percentage points |
| Operating income / margin | $267.3 million / 20.5% | $200.8 million / 17.2% | +33.1% |
| Net income attributable to WWI | $163.5 million | $67.7 million | +141.5% |
| Diluted EPS | $2.40 | $1.03 | +$1.37 |
| Cash from operating activities | $222.3 million | $119.0 million | +$103.3 million |
- Service revenue rose to $1,081.7 million from $949.1 million. Online subscription revenue was $416.7 million, up 21.2%; meeting fees were $665.0 million, up 9.9%. Licensing, franchise royalties and other revenue declined to $87.3 million from $90.3 million.
- Management attributed stronger margins to improved operating leverage and a greater mix of higher-margin Online business; lower licensing revenue partly offset the improvement.
- Investing cash outflow was $40.8 million, including $40.6 million of capital expenditures and capitalized software spending. Financing cash outflow was $211.5 million, principally reflecting debt refinancing and repayments. Cash ended the year at $83.1 million, down from $108.7 million.
- Working capital deficit widened to $134.0 million from $57.2 million, mainly reflecting higher current debt maturities; excluding cash and current debt, the deficit improved to $134.3 million from $144.9 million.
Debt and liquidity
Gross debt was $1,865.0 million at year-end, versus $2,021.3 million a year earlier; net debt was $1,740.3 million. Net debt to Adjusted EBITDAS, a company-defined non-GAAP measure, was 5.2x. Debt comprised a $1,540.0 million term loan due 2024, $25.0 million drawn on a $150.0 million revolver due 2022, and $300.0 million of 8.625% senior notes due 2025. Revolver availability was $123.7 million. The term loan is variable-rate; a $1.25 billion interest-rate swap hedged part of variable-rate exposure. The company reported compliance with debt covenants and said it expected operating cash flow, cash on hand and available revolver capacity to cover obligations for the next 12 months.
Material changes and unusual items
- Revenue grew 12.2% and total paid weeks increased 17.1%; year-end subscribers rose 22.6%. North America revenue increased 14.0%, Continental Europe 13.6%, Other 4.9%, while UK revenue declined 0.8% as reported, principally due to currency translation.
- Net income benefited substantially from a $56.6 million tax benefit associated with the 2017 Tax Act, including remeasurement of deferred tax liabilities after the U.S. corporate tax rate fell from 35% to 21%. The annual effective tax rate was negative 12.6%, compared with 19.8% in FY2016. Additional discrete tax benefits included $11.6 million related to Spain cessation and other tax adjustments.
- Reported results included a $13.3 million goodwill impairment for Brazil and a net $9.0 million debt-extinguishment expense. The fourth quarter included the tax benefit, Brazil impairment and debt-refinancing charge. Q4 revenue was $312.5 million versus $267.4 million; attributable net income was $63.0 million versus $13.3 million.
- In November 2017, the company refinanced its prior term debt and issued the new term loan and senior notes; refinancing-related fees were $53.8 million, including debt discount, and the filing recorded a $10.5 million extinguishment charge. The reported year-end weighted-average debt rate, including the swap, was 7.34%, up from 5.32%.
- Spain operations ceased in Q1 2017; Mexico operations were anticipated to cease in Q1 2018. Brazil’s challenging conditions and negative performance trends prompted the impairment.
Outlook, risks and contingencies
The filing provides no specific FY2018 revenue or earnings guidance. Management emphasized recruitment, retention, digital offerings and the WW Freestyle launch, while noting the business is seasonal and winter recruitment is especially important. Principal risks include intense competition, changing consumer preferences and free apps, the company’s substantial leverage and variable-rate exposure, execution and technology or privacy risks, foreign exchange exposure, reliance on brand partners including Oprah Winfrey, and potential impairment of goodwill or other assets. Artal effectively controls the company; WWI qualifies as a controlled company under NYSE rules.
The Online Plus class action was closed after the Second Circuit affirmed dismissal and the plaintiff did not pursue further review. Management said other ordinary-course litigation was not expected to have a material adverse effect, though outcomes remain uncertain. The auditor issued unqualified opinions on the financial statements and internal controls; management also concluded controls were effective.
Important facts for investors to verify
- How much of FY2017 earnings growth reflects recurring operations versus the $56.6 million tax benefit and other one-time items.
- Whether subscriber, paid-week and retention momentum continues after the December 2017 WW Freestyle launch, particularly across major markets.
- Debt repayment capacity and refinancing terms, including interest-rate sensitivity, the cash-flow sweep and covenant headroom.
- Brazil performance and assumptions underlying goodwill valuations, plus the financial effects of Spain’s closure and the planned Mexico cessation.
- Whether the stated next-12-month liquidity expectation remains supported by operating cash flow, cash balances and revolver availability.