WW International, Inc. — Form 10-Q Summary
Business context and period: Weight Watchers International reported unaudited results for the third quarter and first nine months of fiscal 2011, ended October 1, 2011. Its two reportable segments are WWI, covering businesses other than WeightWatchers.com, and WW.com, its Internet-based businesses. Unless noted otherwise, amounts below are in U.S. dollars.
Financial performance and position
| Metric | Three months ended Oct. 1, 2011 | Change vs. prior year | Nine months ended Oct. 1, 2011 | Change vs. prior year |
|---|---|---|---|---|
| Revenue | $428.4 million | +29.6% reported; +26.2% constant currency | $1,417.9 million | +29.4% reported; +26.2% constant currency |
| Gross profit / margin | $251.2 million / 58.6% | +40.7%; margin +4.6 percentage points | $821.5 million / 57.9% | +36.5%; margin +3.0 percentage points |
| Operating income / margin | $138.3 million / 32.3% | +52.9%; margin +4.9 percentage points | $429.4 million / 30.3% | +46.0%; margin +3.5 percentage points |
| Net income attributable to the company | $80.7 million | +81.5% | $241.2 million | +66.0% |
| Diluted EPS | $1.09 | Up from $0.59 | $3.26 | Up from $1.90 |
| Interest expense | $13.7 million | Down 28.3% | $46.8 million | Down 18.3% |
Revenue growth reflected higher meeting fees, product sales and Internet revenue. Internet revenue increased 68.5% in the quarter and 69.9% year to date; active online subscribers were approximately 1.7 million at quarter-end, up 63.6% year over year. Global paid weeks rose 38.1% in the quarter and 39.5% year to date. WW.com’s growth and higher meeting attendance helped lift margins, while marketing spending rose faster than revenue in the quarter.
- Cash flow: Operating cash flow was $374.9 million for the nine months, versus $234.9 million a year earlier. Investing used $31.0 million, including $13.0 million of capital expenditures and $17.5 million of capitalized software spending. Financing used $323.9 million, including $298.3 million of debt repayment, $38.7 million of dividends and $34.9 million of treasury-stock purchases, partly offset by $41.4 million from exercised options. Cash increased $20.9 million to $61.4 million.
- Debt and liquidity: Total debt was $1,066.8 million at October 1, down from $1,365.1 million at January 1; $974.5 million was classified as long-term and $92.3 million as current. The revolving facility had $15.0 million drawn and $316.6 million available. The company reported a $292.3 million working-capital deficit. Management said operating cash flows and revolver availability should be sufficient for anticipated capital expenditures, debt service and working-capital needs over the next 12 months.
- Balance sheet: Total assets were $1,086.5 million, total liabilities $1,557.0 million, and total deficit $470.5 million at October 1. The facility is secured by substantially all company assets and includes financial tests and other restrictive covenants.
- Dividends and shares: Dividends declared were $0.18 per share for the quarter and $0.53 year to date. The company repurchased 0.8 million shares for $31.6 million in the first quarter; no repurchases occurred in the second or third quarters. Shares outstanding at October 31 were 73,574,725.
Material changes versus the prior comparable period
- Growth was driven particularly by North America and the United Kingdom, following new program launches and effective marketing. Management said enrollment and online sign-up growth moderated somewhat from unusually high first-quarter levels but remained strong.
- Continental Europe was weaker: third-quarter meeting fees declined 8.0% on a constant-currency basis, paid weeks fell 6.0%, and attendance fell 15.1%. Year-to-date Continental European meeting fees declined 12.0% constant currency, with paid weeks down 11.2%.
- Debt repayments and lower average debt and swap notionals contributed to lower interest expense. The current portion of debt also declined following scheduled repayments and changes to debt repayment requirements.
- Fiscal 2010 comparisons included a $6.5 million California litigation settlement charge. Fiscal 2011 diluted EPS included a $0.05 tax benefit related to closing the Finland business; foreign currency contributed $0.02 per diluted share in the quarter and $0.07 year to date.
Outlook, commentary, risks and contingencies
- No specific revenue, earnings or other numerical guidance is provided in the supplied filing text. Management cited continued growth initiatives, including investment in mobile technology and marketing Weight Watchers Online to men, as part of its strategy for 2012 and beyond.
- The credit agreement requires specified financial ratios and tests. The company reported compliance at quarter-end and expected to remain compliant for the foreseeable future; lenders may accelerate amounts due following an event of default.
- In October 2011, the UK Upper Tribunal dismissed the company’s appeal concerning the classification of UK leaders as employees for tax purposes for April 2001–April 2007. The company was considering its options. It had recorded an approximately $43.8 million reserve, including estimated interest, through the second quarter of fiscal 2011, and said it employed its UK leaders beginning in the third quarter and ceased recording further reserves.
- The California wage-and-hour settlement received final approval in May 2011; approximately $6.4 million was paid. A North Carolina wage-and-hour case remained unresolved; the company said it could not estimate any liability and had made no provision.
- Other identified risks include competition and consumer demand, marketing effectiveness, seasonal results, international and foreign-exchange exposure, technology and privacy risks, franchisee disputes, debt obligations and covenants, and potential conflicts involving the majority owner. Management reported no material changes to previously disclosed risk factors.
- The company disclosed a $28.997 million interest-rate-swap liability at quarter-end. It estimated approximately $8.810 million of derivative losses included in accumulated other comprehensive income would be reclassified into earnings within the next 12 months, based on then-current market rates.
Important facts for investors to verify
- Whether North American and UK enrollment, attendance and online subscriber growth can persist as comparisons become more difficult, and whether Continental Europe improves.
- The amount and potential timing of payments related to the UK self-employment tax matter, including any additional exposure beyond the recorded reserve.
- Debt repayment capacity, covenant headroom, variable-rate exposure and the availability of the revolving facility.
- How much of earnings growth reflects recurring operating performance versus the Finland tax benefit, foreign exchange and the prior-year California settlement comparison.
- Whether higher marketing investment and digital growth continue to deliver profitable customer acquisition and support margins.