WW International, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparative period ended April 1, 2017. WWI provides weight-management services through meetings and digital subscriptions, and sells related products and other services. Financial amounts below are in U.S. dollars; figures are rounded.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 | Change / context |
|---|---|---|---|
| Revenue | $408.2 million | $329.1 million | +24.1% reported; +19.5% constant currency |
| Gross profit / margin | $221.0 million / 54.1% | $164.1 million / 49.9% | Margin expanded 4.2 percentage points (MD&A describes 4.3 points, reflecting rounding) |
| Operating income / margin | $62.1 million / 15.2% | $30.2 million / 9.2% | Operating income increased 105.3% reported; +95.6% constant currency |
| Interest expense | $35.9 million | $28.1 million | +27.4%, primarily reflecting the November 2017 refinancing and its higher-rate debt |
| Net income attributable to WWI | $39.1 million | $10.7 million | Includes significant tax benefits in both periods |
| Diluted EPS | $0.56 | $0.16 | Q1 2018 includes a $0.25-per-share tax benefit related to Oprah Winfrey’s stock-option exercise |
| Operating cash flow | $73.5 million | $42.3 million | Increase primarily reflected higher net income |
Service revenue was $328.7 million, including $190.1 million of meeting fees and $138.5 million of online subscriptions. Online subscription revenue grew 42.6% reported; meeting fees grew 15.7%. Total paid weeks rose 27.4%, incoming subscribers 22.6%, and end-of-period subscribers 28.6% year over year. Management attributed growth across major markets to the WW Freestyle program, recruitment and improved retention; the filing’s subscriber metrics cover company-owned operations.
Cash and cash equivalents were $117.6 million at quarter-end. Current assets were $257.0 million and current liabilities $356.4 million, a $99.4 million working-capital deficit. The company reported $1.821 billion of principal debt and $1.663 billion of net debt under its non-GAAP calculation; net debt/Adjusted EBITDAS was 4.5x. The $150 million revolving facility had $148.7 million available, with $1.3 million of undrawn letters of credit. The company was in compliance with credit-agreement covenants.
Capital spending and capitalized software expenditures totaled $7.7 million. Financing activities used $31.7 million, including $25.0 million of revolver repayments and $19.3 million of term-loan payments, partly offset by $14.7 million of stock-option proceeds. The company reported a total deficit of $1.000 billion.
Material changes and unusual items
- Revenue growth and improved operating leverage, along with a higher-margin mix from online business, lifted gross and operating margins. Marketing expense increased 14.5%, but declined as a share of revenue to 24.2% from 26.3%. SG&A rose 26.5%, mainly due to higher compensation and incentive costs and brand investments.
- Interest expense increased following the November 2017 refinancing. Debt included a $1.521 billion term loan and $300 million of 8.625% senior notes; the term-loan LIBOR margin was 4.75%. The swap hedged $1.25 billion of variable-rate exposure. Management estimated a hypothetical 75-basis-point rate increase would raise annual interest expense by about $2.0 million.
- Q1 2018’s effective tax rate was negative 47.7%, including an $18.1 million tax benefit from stock-compensation windfalls and a $1.9 million benefit related to cessation of Mexican operations. Q1 2017 included an $11.9 million tax benefit related to cessation of Spanish operations. These items make reported net income and EPS less representative of underlying operating performance.
- Accounting changes affected opening equity: adoption of intra-entity tax-transfer guidance reduced retained earnings by $48.6 million; revenue-standard adoption increased opening retained earnings by $2.1 million; and an accounting election reclassified $2.5 million of tax effects from accumulated other comprehensive loss to retained earnings. Prior-period revenue was not restated under the modified retrospective adoption method.
Outlook, commentary and risks
WWI provided no specific revenue or earnings guidance in this filing. Management expected operating cash flow, approximately $117.6 million of cash, revolving-credit availability and continued cost focus to provide sufficient liquidity for the next 12 months. Reducing leverage was identified as a capital-structure priority. The business is seasonal, with winter important to recruitment and advertising.
Management said it was still evaluating the 2017 Tax Act’s effects, including GILTI and provisional tax amounts; the provisional tax charge was expected to be finalized no later than Q4 2018. The filing identifies risks from competition, customer appeal and retention, marketing effectiveness, technology and privacy, substantial debt and debt service, international and currency exposure, seasonality, and legal or regulatory matters. Ordinary-course legal matters were not expected by management to have a material adverse effect, though outcomes cannot be predicted with certainty. Disclosure controls were assessed as effective at the reasonable-assurance level.
Important facts for investors to verify
- Whether subscriber, paid-week and online-revenue growth persists beyond the quarter and translates into durable cash generation.
- How much of reported earnings growth reflects core operations versus the substantial tax benefits, particularly the $0.25-per-share stock-option tax benefit.
- Debt reduction, interest expense, leverage and covenant headroom, including the impact of variable rates and required excess-cash-flow payments.
- Final effects of the 2017 Tax Act and GILTI, and any subsequent adjustments to provisional tax amounts.
- Comparability of 2018 and 2017 results given the adoption of the new revenue standard and the fact that prior-period figures were not restated.