WW International, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended January 2, 2021; comprised 53 weeks, compared with 52 weeks in FY2019. This annual filing also reports Q4 results. WW operates a global wellness and weight-management business, principally through Digital and Workshops + Digital subscriptions, across North America, Continental Europe, the United Kingdom and Other markets.
Key financial results
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Revenue | $1,378.1 million | $1,413.3 million | -2.5% reported; -2.8% constant currency |
| Gross profit / margin | $777.8 million / 56.4% | $786.7 million / 55.7% | Profit -1.1%; margin +0.7 percentage points |
| Operating income / margin | $216.2 million / 15.7% | $288.0 million / 20.4% | -24.9% |
| Net income attributable to WW | $75.1 million | $119.6 million | -37.2% |
| Diluted earnings per share | $1.07 | $1.72 | -$0.65 |
| Cash from operating activities | $135.9 million | $182.4 million | -$46.5 million |
- Revenue mix shifted toward Digital: Digital subscription revenue rose 21.8% to $743.1 million, while Workshops + Digital fees fell 25.8% to $443.4 million. In-studio product sales decreased to $40.4 million from $118.5 million.
- Ending subscribers increased 4% year over year to approximately 4.4 million: 3.7 million Digital and 0.7 million Workshops + Digital. Digital recruitments grew, while Workshops + Digital recruitments declined sharply.
- FY2020 included $33.1 million of restructuring charges, $32.7 million of noncash Winfrey option compensation expense and a $3.7 million Brazil goodwill impairment. Excluding those items, operating income was $285.6 million and operating margin was 20.7%; these are non-GAAP measures.
- Q4 revenue was $323.4 million, versus $332.6 million a year earlier; operating income was $47.7 million versus $65.9 million, and net income attributable to WW was $12.6 million versus $29.4 million.
Debt, liquidity and cash flow
- Year-end cash and cash equivalents were $165.9 million. The revolving facility had $173.8 million available and no borrowings outstanding. Management said cash, operating cash generation, revolver availability and cost controls were expected to cover obligations for the next 12 months.
- Total debt was $1.509 billion: $1.209 billion under the term loan facility and $300 million of 8.625% senior notes due 2025. The term loan matures in November 2024. Net debt was $1.320 billion; net debt to Adjusted EBITDAS was 3.7x, a non-GAAP ratio.
- Most term-loan debt is variable rate; $750 million was hedged with interest-rate swaps. The filing estimates a hypothetical 90-basis-point rate increase would add approximately $4.1 million to annual interest expense, after swaps and the rate floor.
- Working capital was a deficit of $40.9 million. Cash from investing activities was $65.6 million used, including $21.5 million of capital expenditures, $28.9 million of capitalized software expenditures and approximately $10.0 million for acquisitions. Financing activities used $95.5 million, primarily for scheduled debt repayments.
Material changes, outlook and risks
- COVID-19 drove the suspension of in-person workshops beginning in March 2020 and a rapid move to virtual workshops. Digital recruitment recovered and exceeded the prior year, but reduced studio operations continued to weigh on Workshops + Digital fees and in-studio sales. Management expected significant COVID-related impact in the first half of FY2021 and potentially later periods; the extent was not reliably estimable.
- WW implemented a $100 million cost-savings initiative and amended its credit agreement to provide temporary covenant relief through the second quarter of FY2022. Management reported covenant compliance at year-end. No specific revenue or earnings guidance was provided in the supplied filing text.
- Management expected studio locations to remain below pre-pandemic levels for the foreseeable future. A further restructuring plan announced in early FY2021 was expected to generate approximately $18 million of charges.
- FY2020 restructuring charges included $25.1 million of employee termination benefits and $8.0 million of lease termination and related costs. The company reduced headcount by approximately 43% from FY2019 year-end to FY2020 year-end.
- Key risks include continued COVID-19 disruption and uncertain member recruitment and retention, intense competition and changing consumer preferences, execution of the digital transition, substantial debt and variable interest rates, and technology, privacy and cybersecurity risks. Seasonality makes first-quarter recruitment particularly important.
- A consumer class action concerning Workshops + Digital fees after the move to virtual workshops remained pending. The securities class action was dismissed in November 2020, with no appeal; shareholder derivative matters and demands remained under review or stayed. Management said other ordinary-course litigation was not expected to have a material adverse effect, while noting outcomes cannot be predicted with certainty.
- The company recorded a $2.3 million out-of-period tax expense in FY2020 for prior-year income tax errors, which it said were immaterial to prior-period statements. A German tax audit could result in an assessed amount, including interest, of approximately $0.8 million if authorities prevail.
- The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting. The audit identified goodwill and indefinite-lived franchise-right impairment assessments for the United States and Canada as a critical audit matter.
Important facts for investors to verify
- Whether Digital subscriber growth can offset ongoing declines in Workshops + Digital, studio sales and total revenue.
- Actual cash generation, cost savings and studio-related restructuring costs against management’s liquidity expectations and FY2021 plans.
- Debt repayment capacity, revolver availability, covenant headroom and exposure to higher rates as hedges change or expire.
- Progress and financial impact of the digital strategy, including Digital 360, and the durability of subscriber retention.
- Outcomes of the pending member and derivative litigation, the German tax audit, and future impairment testing—particularly for franchise rights with narrower fair-value headroom.