WW International, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; compared with the three months ended April 2, 2011. Unaudited consolidated results. Amounts below are in U.S. dollars.
Business context
The company operates two reportable segments: Weight Watchers International (WWI), primarily meetings and related offerings, and WeightWatchers.com (WW.com), its internet-based businesses. Management said Q1 2012 was measured against unusually strong enrollment growth in Q1 2011. Global paid weeks grew 12.2%, with online growth more than offsetting declines in meetings.
Financial performance
- Revenue: $503.5 million, essentially flat year over year; up 0.5% excluding unfavorable foreign exchange. Internet revenue rose 38.0% to $126.9 million, while meeting fees declined 6.1% to $252.5 million and product sales and other revenue also decreased.
- Profit and margins: Gross profit increased 1.8% to $288.4 million; gross margin improved to 57.3% from 56.2%. Operating income fell 24.3% to $102.8 million, and operating margin declined to 20.4% from 27.0%. Net income attributable to the company fell 25.8% to $54.6 million; diluted EPS declined to $0.74 from $1.00.
- Expenses: Marketing expense increased 36.2% to $130.3 million, reflecting strategic online marketing investments, including campaigns targeting men in the U.S. and first-time online TV campaigns in several international markets. SG&A increased 6.8% to $55.3 million, partly due to technology and business-development initiatives.
- Cash flow: Operating cash flow was $110.8 million, down 39.8% from $184.1 million. The company cited higher marketing spend and a $30.0 million payment to HMRC related to the UK tax matter. Capital expenditures were $16.3 million, capitalized software expenditures $4.6 million, and ending cash $79.6 million.
- Debt and liquidity: Total debt was $1.751 billion at March 31, 2012, versus $1.052 billion at December 31, 2011. Current debt was $128.0 million; long-term debt was $1.623 billion. The company reported $331.6 million of available unused revolving commitments across its two facilities, subject to facility terms. Working capital deficit was $1.058 billion, substantially reflecting a $778.9 million payable to Artal Holdings for a share repurchase that closed in April.
- Other metrics: Effective tax rate was 38.5%, versus 38.0%. The company declared dividends of $0.18 per share. Total deficit was $1.857 billion at quarter-end.
Material changes and significant transactions
- On March 15, the company amended and extended its credit facilities and obtained up to $1.449 billion in additional term-loan commitments to fund share purchases. It borrowed $726.0 million in March; on April 9 it borrowed approximately $723.4 million for the Artal Holdings purchase. Financing fees incurred in Q1 were approximately $25.4 million.
- The company repurchased 8.78 million shares in a modified Dutch auction on March 28 at $82 per share. On April 9, it repurchased a further 9.50 million shares from Artal Holdings at the same price. Q1 cash financing activities included $724.3 million of treasury-stock purchases, largely offset by new borrowing.
- Debt consisted entirely of variable-rate instruments, with interest-rate swaps hedging part of the exposure. The company estimated that a 50-basis-point rate change would change annual interest expense by approximately $5.0 million.
Outlook, risks, and contingencies
- Management stated that operating cash flow, together with revolving-credit availability, should be sufficient for the next 12 months to cover anticipated capital spending, debt service, and working capital. It also expected to remain in compliance with required financial ratios and tests. No specific revenue or earnings guidance was provided.
- Key operating pressures included lower meeting paid weeks and attendance, weaker meeting results in North America and the UK, and an ineffective UK advertising campaign. Management pointed to online subscriber growth and Continental European meeting growth as offsets.
- The UK self-employment tax dispute remained unresolved. The company had paid HMRC approximately $30.0 million without prejudice and recorded a remaining reserve of approximately $13.7 million. An oral hearing on permission to appeal was scheduled for June 2012; further HMRC claims were also being contested. The filing says no additional reserves were currently expected for the amended claims because amounts had previously been reserved.
- The filing identifies risks including competition, consumer demand and economic conditions, marketing effectiveness, international and currency exposure, information technology and privacy, debt service and restrictive covenants, legal matters, and potential conflicts with the company’s majority owner.
- The company reported that disclosure controls were effective at a reasonable-assurance level and that there had been no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How the substantial increase in debt following the repurchases affects leverage, interest expense, covenant headroom, and future capital allocation.
- Whether online subscriber and revenue growth can continue to offset meeting declines and whether elevated marketing spending produces sustained returns.
- The outcome and potential cash exposure of the UK HMRC dispute, including the scheduled appeal proceedings and remaining reserve.
- The completion and funding of the April 9 Artal Holdings repurchase, and the effect of the transactions on shares outstanding and the interests of minority shareholders.
- Liquidity and refinancing needs given the large working capital deficit, scheduled debt maturities, and variable-rate borrowing exposure.