WW International, Inc. — Form 10-Q Summary
Business context and reporting period
The filing covers the second quarter and first six months of fiscal 2010, ended July 3, 2010. Weight Watchers reported two segments: its meeting, product and related businesses (WWI) and its Internet-based business (WW.com). Financial statements are unaudited. Dollar amounts below are in U.S. millions unless noted.
Financial performance
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Revenue | $376.7 | $372.5 | $764.7 | $763.1 |
| Operating income | $112.2 | $111.3 | $203.6 | $205.2 |
| Operating margin | 29.8% | 29.9% | 26.6% | 26.9% |
| Net income attributable to WWI | $56.3 | $58.8 | $100.9 | $106.1 |
| Diluted EPS | $0.73 | $0.76 | $1.31 | $1.38 |
| Operating cash flow | Not stated separately | Not stated separately | $144.4 | $162.2 |
- Q2 gross profit was $211.7 million and gross margin was 56.2%, compared with $207.5 million and 55.7% a year earlier. First-half gross profit was $423.4 million and margin was 55.4%, versus $419.6 million and 55.0%.
- Q2 revenue rose 1.1%; excluding a $2.5 million unfavorable foreign-exchange effect, management said it would have increased 1.8%. First-half reported revenue rose 0.2%, but excluding a $12.7 million favorable currency effect it declined 1.4%.
- Internet revenue grew 20.6% in Q2 to $60.6 million and 17.4% in the first half to $115.9 million. Active online subscribers rose 25.8% year over year to 1.061 million. Meeting fees declined 0.8% in Q2 and 2.1% in the first half; first-half global attendance fell 8.4%.
- Q2 marketing expense rose 6.6% to $56.7 million, largely due to increased online marketing. First-half SG&A increased 2.2% to $88.6 million; management cited higher legal and professional fees and bad-debt expense. Interest expense rose 16.0% in Q2 to $19.6 million and 13.6% for the first half to $38.3 million.
Cash, debt and liquidity
- Cash was $65.6 million at July 3, up $19.4 million from fiscal year-end. Six-month operating cash flow of $144.4 million included a $29.1 million payment related to the U.K. VAT matter; excluding that payment, management reported operating cash flow of $173.5 million.
- Gross debt was $1.407 billion, including $222.8 million classified as current, and long-term debt was $1.184 billion. The company had $340.4 million of revolver availability. Debt was variable-rate; $1.218 billion of interest-rate swaps were outstanding.
- Working capital was negative $344.4 million. Total deficit (negative equity) was $693.5 million. The company reported compliance with required credit-facility financial ratios and tests and said cash flows and revolver availability should be sufficient for anticipated capital spending, debt service and working-capital needs over the next 12 months.
- Six-month financing cash outflows included $46.3 million of debt payments, $27.1 million of dividends, $28.3 million of treasury-stock purchases and $11.4 million of deferred financing costs. The April 2010 debt amendment extended certain maturities and incurred approximately $11.5 million in fees.
Material changes, outlook and risks
- Profitability declined despite slightly higher revenue: Q2 attributable net income fell 4.2%, and first-half net income fell 4.9%. Interest costs and increased investment in marketing weighed on results. Management described meeting-volume trends as improving in Q2 compared with Q1, while attendance remained below the prior year.
- No quantified earnings or revenue guidance is provided in the supplied filing text. Management’s stated liquidity outlook is that available operating cash and revolver capacity should cover anticipated needs for 12 months.
- The U.K. First Tier Tribunal ruled in February 2010 that U.K. leaders should have been treated as employees for tax purposes during April 2001–April 2007. The company is appealing and reported an aggregate reserve of approximately $37.7 million through Q2 2010.
- The company is awaiting a tribunal decision on its appeals of U.K. VAT assessments for periods from October 2005 through September 2006. It also paid $29.1 million for prior-period VAT in the first half. The balance-sheet U.K. VAT liability was $2.0 million at July 3, versus $33.6 million at fiscal year-end.
- Two wage-and-hour lawsuits—in California and North Carolina—were disclosed; the company said outcomes and potential losses could not be estimated and made no provision for them. It also cited competition, consumer confidence, seasonality, international and currency exposure, information-security and technology risks, debt covenants, and litigation among forward-looking risks.
- The company repurchased 1.14 million shares for $30.6 million during the first half and declared dividends of $0.35 per share for the period. Dividend payments remain subject to board discretion and credit-facility restrictions.
Important facts for investors to verify
- Track online subscriber growth and whether it offsets weakness in meeting attendance, fees and franchise royalties.
- Review debt maturities, variable-rate exposure, swap coverage, covenant compliance and the availability of the revolver.
- Monitor outcomes and any reserve changes related to the U.K. self-employment and VAT disputes, as well as the unreserved wage-and-hour cases.
- Assess whether marketing, legal and professional costs, and bad-debt expense continue to pressure margins and earnings.
- Compare GAAP results with management’s non-GAAP prior-period adjustments for the U.K. tax ruling and restructuring charges; the adjusted comparisons are not GAAP measures.