WW International, Inc. — Q3 2012 Form 10-Q
Reporting period: Quarter ended September 29, 2012; comparisons are with the quarter ended October 1, 2011. The nine-month figures cover the corresponding year-to-date periods. Amounts below are in millions of dollars, except per-share data and where noted.
Business context and financial results
Weight Watchers earns revenue from meetings, products, Internet subscriptions and related activities. It reports two segments: WWI, including non-Internet businesses, and WW.com, its Internet businesses.
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $430.6 | $428.4 | $1,418.9 | $1,417.9 |
| Gross profit / margin | $255.8 / 59.4% | $251.2 / 58.6% | $837.7 / 59.0% | $821.5 / 57.9% |
| Operating income / margin | $132.0 / 30.7% | $138.3 / 32.3% | $388.3 / 27.4% | $429.4 / 30.3% |
| Interest expense | $23.2 | $13.7 | $60.1 | $46.8 |
| Net income attributable to WW International | $67.4 | $80.7 | $199.4 | $241.2 |
| Diluted EPS | $1.20 | $1.09 | $3.19 | $3.26 |
For the first nine months, cash from operations was $301.2, versus $374.9 a year earlier; investing used $71.6 and financing used $185.5. Cash at September 29 was $80.6, up from $47.5 at December 31, 2011. The company reported a $274.0 working-capital deficit, including $133.8 of current debt.
Total debt was $2,414.6 at September 29, up from $1,051.8 at December 31, 2011; $2,280.8 was classified as long-term and $133.8 as current. Debt was entirely variable-rate. The company had $640.5 of interest-rate swaps and reported $1,774.1 of variable-rate debt unhedged; a 50-basis-point rate move was estimated to change annual interest expense by about $8.9. It had $331.8 of unused revolving commitments, before considering outstanding letters of credit.
Changes versus the prior comparable period
- Q3 revenue rose 0.5% as reported, or 2.7% excluding currency effects. Internet revenue increased 21.9% to $124.2; meeting fees fell 4.4% to $223.2. Global meeting paid weeks declined 4.2%, while online paid weeks rose 23.2%.
- For the nine months, revenue was nearly flat as reported and up 1.8% excluding currency effects. Internet revenue grew 29.1% to $386.8, while meeting fees declined 6.2% to $724.2.
- Gross margin improved in both periods, mainly as revenue shifted toward higher-margin online services. However, higher marketing and SG&A spending reduced operating income: down 4.6% in Q3 and 9.6% year to date.
- Net income fell 16.5% in Q3 and 17.3% year to date. Higher interest costs reflected debt raised for share repurchases; the prior-year comparison also benefited from a Finland closure tax benefit. Year-to-date results included a $1.3 debt-extinguishment charge and a $2.7 investment loss.
- Diluted EPS increased in Q3 despite lower net income, helped by the reduced share count following repurchases. Nine-month diluted EPS declined 2.0%.
Outlook, management commentary and risks
- Management said Hurricane Sandy and its aftermath were expected to negatively affect Q4 paid weeks, attendance, revenue and net income. The filing provides no specific numerical earnings or revenue guidance.
- Management attributed meeting weakness to lower enrollments, comparison with unusually strong prior-year program launches and marketing, macroeconomic conditions, and execution challenges rolling out Monthly Pass to certain corporate accounts. Continental European meetings and online subscriptions showed growth.
- The company said operating cash flow and available revolver borrowings should be sufficient for the next 12 months to fund anticipated capital spending, debt service and working capital. It was in compliance with required debt financial tests at quarter-end and expected continued compliance; the facilities contain restrictive covenants and substantially all assets secure the debt.
- A UK tax dispute over whether leaders should have been classified as employees remained unresolved. The company had paid HMRC about $30.0 and recorded a remaining reserve of about $14.7. A UK Court of Appeal hearing was scheduled for January 2013; the company was also discussing possible settlement.
- Other disclosed risks include competition, consumer confidence, seasonality, international and foreign-exchange exposure, marketing effectiveness, technology and privacy matters, franchise relationships, and debt service and covenants. Management reported no material change to the risk factors in its prior annual report.
Most important facts for investors to verify
- Whether online growth can continue to offset weaker meeting enrollments, attendance and paid weeks, particularly in North America and the UK.
- Whether increased marketing and growth investments produce returns sufficient to restore operating margins.
- Debt repayment and refinancing capacity, variable-rate exposure, covenant headroom and the impact of the debt-funded share repurchases on interest expense and liquidity.
- The outcome and potential cash cost of the UK HMRC dispute, including the January 2013 appeal and settlement discussions.
- The actual Q4 impact of Hurricane Sandy and any subsequent company guidance or operating updates.