WW International, Inc. — Q3 2010 Form 10-Q
Business context and period. Weight Watchers reported its unaudited third quarter and first nine months of fiscal 2010, ended October 2, 2010, with comparisons to the periods ended October 3, 2009. Its two reportable segments are WWI, including meeting and related businesses, and WW.com, its internet business. Fiscal 2010 was scheduled to end January 1, 2011. Unless otherwise noted, financial figures below are in millions of dollars.
Financial performance
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Revenue | $330.6 | $324.5 | $1,095.3 | $1,087.6 |
| Gross profit / margin | $178.5 / 54.0% | $178.0 / 54.9% | $601.9 / 54.9% | $597.6 / 55.0% |
| Operating income / margin | $90.4 / 27.4% | $101.2 / 31.2% | $294.0 / 26.8% | $306.4 / 28.2% |
| Net income attributable to WW International | $44.4 | $52.6 | $145.3 | $158.6 |
| Diluted EPS | $0.59 | $0.68 | $1.90 | $2.06 |
| Interest expense | $19.0 | $16.7 | $57.3 | $50.4 |
Cash flow and liquidity. For the first nine months, operating cash flow was $234.9, versus $242.2 a year earlier. Investing used $15.9, principally for capital and software expenditures; financing used $190.2, including debt repayments, dividends, share repurchases and financing costs. Cash increased $26.8 from fiscal year-end to $72.9. The company reported a $377.9 working-capital deficit, including $224.7 of debt due within one year; excluding cash and current debt, the deficit was $226.1.
Debt. Total debt was $1,388.9 at October 2, 2010, down from $1,453.0 at January 2, 2010; $224.7 was classified as current and $1,164.2 as long-term. The company had $329.9 of revolving-credit availability. Debt was variable-rate, with interest-rate swaps hedging a portion of the exposure. The company reported compliance with required credit-facility covenants and financial tests. Its total deficit was $708.2.
Material changes and operating trends
- Q3 revenue rose 1.9%, but attributable net income fell 15.5% and diluted EPS fell 13.4%. For the nine months, revenue grew 0.7%, while attributable net income fell 8.4% and diluted EPS fell 7.7%.
- WW.com was a key growth contributor: Q3 internet revenue rose 21.7% to $60.5, and nine-month internet revenue rose 18.9% to $176.4. Active online subscribers increased 27.4% year over year to 1.051 million.
- Meeting paid weeks increased 2.6% globally in Q3, but global attendance declined 4.8%; for the nine months, paid weeks declined 0.4% and attendance declined 7.4%. Monthly Pass penetration supported paid weeks but reduced fees per paid week. Management said meeting trends improved through the year, particularly in NACO.
- Currency reduced Q3 revenue by $5.4; excluding currency, revenue increased 3.5%. Currency added $7.1 to nine-month revenue; excluding currency, growth was 0.1%.
- Higher marketing and SG&A spending weighed on margins. Q3 marketing expense increased 10.1% and SG&A increased 18.8%. Management cited marketing investment, consulting and technology costs, legal and professional fees, and costs associated with a California litigation settlement.
Management’s adjusted comparisons for 2009 are non-GAAP: Q3 2009 figures were adjusted for $1.1 of UK self-employment-tax expense; nine-month 2009 figures were adjusted for $3.2 of that expense and excluded $5.1 of restructuring charges. The reported GAAP results are shown in the table above.
Outlook, contingencies and risks
- Liquidity outlook: Management stated that operating cash flows and available revolver borrowings should be sufficient for the next 12 months to meet anticipated capital spending, debt service and working-capital needs. It planned to service longer-term debt with operating cash flow and, as appropriate, other repayment or refinancing options. No specific earnings or revenue guidance was provided in the filing text.
- UK employment-tax matter: The company was appealing an adverse ruling that UK leaders should have been classified as employees for tax purposes. Its accumulated reserve through Q3 2010 was approximately $40.4, and it expected to continue recording quarterly reserves.
- California litigation: In October 2010, the parties reached an agreement in principle to settle the Sabatino matter; the company recorded a $6.5 reserve. Final documentation and court approval remained outstanding. A separate North Carolina wage-and-hour case had no recorded loss provision because the outcome and liability could not be estimated.
- UK VAT: The company did not appeal an adverse ruling on certain VAT assessments and said no additional charge was required from discontinuing that appeal. It paid $29.1 during the nine months for prior-period VAT charges.
- Interest-rate exposure: Management estimated that a hypothetical 50-basis-point change in rates would change annual interest expense by approximately $1.1, based on debt and swaps at October 2, 2010.
- Other stated risks: Competition and consumer acceptance of the program, marketing effectiveness, economic conditions, seasonality, foreign currency and international operations, technology and information security, franchise relationships, regulation, debt service and restrictive covenants, and potential conflicts with the majority owner. The filing said risk factors were not materially changed from the fiscal 2009 Form 10-K.
The company noted that its business is seasonal, with enrollment-generating winter, spring and fall periods, and that meeting revenue generally decreases at year-end and during summer. It reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether improved meeting paid-week and enrollment trends continued, and whether lower attendance and fees per paid week offset that progress.
- Whether WW.com subscriber and revenue growth persisted and translated into consolidated profitability.
- Progress on the UK self-employment-tax appeal and the adequacy of the approximately $40.4 reserve; also confirm the status and final cost of the California settlement.
- Near-term debt maturities, refinancing options, covenant compliance and the company’s ability to manage its working-capital deficit and high debt burden.
- How much of reported revenue and earnings comparisons reflect currency, litigation reserves, UK tax matters and other non-GAAP adjustments.