WW International, Inc. — FY2012 Form 10-K
Reporting period: Fiscal year ended December 29, 2012 (52 weeks); comparisons are with fiscal 2011, ended December 31, 2011. The company operates meeting-based weight-management services, consumer products, licensing and franchise operations, and internet subscriptions through WWI and WeightWatchers.com.
Financial performance
| Metric | FY2012 | FY2011 | Change |
|---|---|---|---|
| Revenue | $1,826.8 million | $1,819.2 million | Up 0.4% reported; up 1.8% excluding currency |
| Gross profit / margin | $1,082.8 million / 59.3% | $1,047.1 million / 57.6% | Margin includes an 80-basis-point UK settlement benefit; adjusted margin was 58.5% |
| Operating income / margin | $510.8 million / 28.0% | $546.3 million / 30.0% | Down 6.5%; adjusted FY2012 margin was 27.2% |
| Net income attributable to company | $257.4 million | $304.9 million | Down 15.6%; adjusted FY2012 was $253.3 million |
| Diluted EPS | $4.23 | $4.11 | Up 2.7%; adjusted FY2012 was $4.16 |
| Operating cash flow | $349.4 million | $404.8 million | Down $55.4 million |
| Cash and cash equivalents | $70.2 million | $53.2 million | Up $17.0 million |
| Total debt | $2,406.4 million | $1,051.8 million | Up substantially, mainly to fund share repurchases |
- Revenue mix shifted further toward WeightWatchers.com: internet revenue rose 26.2% to $504.3 million, or 27.8% of revenue. Meeting fees fell 5.6% to $934.9 million, and in-meeting product sales fell 10.1% to $253.2 million.
- Online paid weeks grew 26.7% and active subscribers rose 18.0% to 1.9 million. Global meeting paid weeks declined 5.4%; meeting attendance fell 11.0% to 50.7 million.
- Marketing expense increased 17.5% to $343.5 million, and SG&A rose 9.6% to $228.5 million, reflecting investment in online advertising, the men’s online product, technology and growth initiatives.
- Interest expense rose 51.3% to $90.5 million, driven by higher average debt and borrowing rates. The effective tax rate increased to 38.3% from 37.0%.
- Investing cash outflow was $109.5 million, including $48.8 million of capital expenditures, $29.9 million of capitalized software spending and $30.4 million for three franchise acquisitions. Financing cash outflow was $211.1 million.
Liquidity, debt and capital allocation
- Working capital deficit was $229.9 million, improved from $279.7 million. Management attributes negative working capital partly to advance payments under commitment plans and deferred revenue.
- At year-end, $301.5 million was available under revolving facilities. The company reported compliance with required credit-facility financial tests and expected to meet them for the foreseeable future.
- Debt was variable-rate; $583.3 million was covered by interest-rate swaps, leaving $1,823.1 million unhedged. A 50-basis-point rate move was estimated to change annual interest expense by approximately $9.1 million.
- The company repurchased approximately 8.8 million shares in a tender offer and 9.5 million shares from controlling shareholder Artal at $82 per share, funded with new borrowing. It paid $0.70 per share in annual dividends; future dividends remain discretionary and subject to credit restrictions.
Material changes, outlook and risks
- FY2012 revenue was nearly flat as strong online growth was largely offset by weaker meetings and related product sales. Management attributed meeting weakness to comparisons with FY2011’s successful program launches, lower enrollments, macroeconomic conditions, and execution challenges introducing Monthly Pass to certain corporate accounts. UK advertising was also described as ineffective; Continental Europe improved.
- The company launched an updated weight-management plan, Weight Watchers 360°, beginning late in FY2012. No specific FY2013 revenue, earnings or margin guidance is provided in the filing.
- Hurricane Sandy and its aftermath adversely affected North American meeting attendance in the fourth quarter. The business is also seasonal, with revenue generally lower at year-end and during summer months.
- The UK self-employment tax dispute was settled in December 2012 for approximately $36.8 million. The company recorded a net pre-tax benefit of $7.4 million, including a $14.5 million reserve reversal partly offset by $7.1 million of interest expense. The remaining $6.8 million was paid in January 2013; the UK Court of Appeal subsequently dismissed the case.
- Principal risks include high leverage and debt covenants, variable-rate interest exposure, competition and changing consumer preferences, the effectiveness of marketing and new programs, foreign currency exposure, consumer spending, technology and privacy/security incidents, and the influence of controlling shareholder Artal. The company reported no goodwill or indefinite-lived intangible impairment at year-end.
Key investor verification points
- Confirm the company’s leverage, upcoming maturities, covenant headroom and capacity to service debt after the debt-funded repurchases.
- Assess whether online growth can continue to offset meeting declines, particularly in North America and the UK, and monitor enrollment, paid-week and attendance trends.
- Separate reported results from the UK settlement benefit and evaluate the recurring cost and returns of higher marketing and technology investment.
- Review cash conversion, capital spending and the sustainability of dividends given the working capital deficit and financing restrictions.
- Verify sensitivity to interest rates and foreign exchange, and monitor risks related to consumer demand, digital competition, privacy and controlling-shareholder governance.