WW International, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended April 4, 2015; comparisons are with the three months ended March 29, 2014. Financial statements are unaudited. The company operates meetings, online subscription, product and franchise businesses across North America, the U.K., Continental Europe and other markets.
Financial performance and liquidity
| Metric | Q1 2015 | Prior-year period | Change / context |
|---|---|---|---|
| Revenue | $322.1 million | $409.4 million | Down 21.3% reported; down 16.0% at constant currency |
| Gross profit / margin | $157.3 million / 48.8% | $222.9 million / 54.5% | Margin down 5.7 percentage points |
| Operating income / margin | $18.0 million / 5.6% | $51.1 million / 12.5% | Operating income down 64.7% |
| Net income attributable to WWI | Loss of $5.4 million | Income of $21.5 million | Diluted EPS was $(0.10), versus $0.38 |
| Cash from operations | Used $7.4 million | Provided $80.9 million | Decrease of $88.3 million |
| Cash and cash equivalents | $211.0 million | $301.2 million at January 3, 2015 | Down $90.2 million |
| Total debt | $2,287.2 million | $2,358.0 million at January 3, 2015 | Includes $250.2 million current portion; debt is variable-rate |
Interest expense rose 23.1% to $31.1 million, despite lower average debt, primarily because of higher effective borrowing costs and interest-rate swap effects. The quarter included a $4.8 million gain on early extinguishment of debt. Excluding restructuring charges and that gain, the company reported non-GAAP operating income of $23.8 million, a 7.4% operating margin, and a net loss of $4.8 million, or $(0.09) per diluted share.
Working capital was negative $261.0 million, compared with negative $6.0 million at fiscal year-end; the filing attributes much of the company’s typical negative working capital to advance member and subscriber payments. Investing activities used $13.5 million, including $9.3 million of capitalized software expenditures. Financing activities used $65.1 million, primarily for debt repayments.
At April 4, 2015, the company had $48.2 million of unused revolving-credit commitments, net of letters of credit. A $228.7 million debt maturity is due in April 2016. Management said cash on hand, forecast cash flow and planned cost savings should provide sufficient liquidity to meet it, but stated there can be no assurance.
Material changes and operating drivers
- Revenue declined across the meetings and online businesses globally, with the largest impact in North America. Foreign currency reduced quarterly revenue by $21.7 million.
- Management cited lower active subscriber bases and weaker recruitment. Total paid weeks fell 21.1% year over year; the reported segment table also shows declines in incoming and period-end active bases.
- Gross-margin pressure was driven primarily by North America fixed-cost deleverage and costs supporting 24/7 Expert Chat and technology initiatives. Lower TV advertising reduced marketing expense, but did not offset the revenue and margin decline.
- The company prepaid $63.1 million of Tranche B-1 principal for $57.4 million in cash, plus accrued interest, and made a further $2.5 million voluntary prepayment. Debt declined, while the current portion increased in connection with the April 2016 maturity.
Outlook, risks and unusual items
- Outlook: Fiscal 2015 revenue was forecast at approximately $1.15 billion, down from $1.48 billion in fiscal 2014, reflecting lower starting active bases and an anticipated negative recruitment trend.
- Cost actions: Management established a $100 million cost-savings plan spanning operating, marketing and general and administrative expenses. Q1 restructuring charges were $5.8 million; approximately $4.2 million of additional charges were anticipated for the remainder of fiscal 2015.
- Restatement and controls: The company restated fiscal 2014 financial statements, including the January 3, 2015 balance sheet, primarily to account for certain acquired franchise rights as definite-lived assets rather than indefinite-lived assets. Management reported a material weakness related to franchise-rights accounting and concluded disclosure controls and procedures were not effective as of April 4, 2015. A remediation plan was underway.
- Acquisition: The company acquired Weilos, a mobile health and weight-loss social platform, in March 2015 for a purchase price of $6.7 million. Purchase-price allocations were preliminary.
- Litigation: A securities class action and related shareholder demand letters remained pending. The company said it believed the suits were without merit; outcomes cannot be predicted with certainty.
- Other risks: High debt and interest-rate exposure, competition, continued recruitment weakness, foreign exchange, technology and privacy risks, and the ability to achieve forecast cash flow and savings could affect results and liquidity. The quarterly dividend had been suspended since 2013.
Important facts for investors to verify
- Progress in reversing declines in recruitment, paid weeks and active subscriber bases, particularly in North America.
- Whether the $1.15 billion fiscal 2015 revenue forecast and $100 million savings plan were achieved, and the cash costs and timing of restructuring actions.
- Available liquidity and refinancing or repayment plans for the April 2016 maturity, given the working-capital deficit and substantial debt load.
- Remediation and effectiveness of controls over franchise-rights accounting, and any subsequent restatements or related disclosures.
- Final accounting for the Weilos acquisition, developments in the shareholder litigation, and changes in floating-rate debt and swap exposure.