WW International, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended July 1, 2017; comparisons are to the periods ended July 2, 2016. Amounts are in U.S. dollars unless noted. Financial statements are unaudited.
Business context and results
The company provides in-person meetings and digital weight-management subscriptions, along with product sales and other revenue. It reports North America, United Kingdom, Continental Europe and Other segments. North America was the largest segment and the primary driver of revenue growth.
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Revenue | $341.7M | $309.8M | $670.7M | $616.7M |
| Gross profit / margin | $189.0M / 55.3% | $161.0M / 52.0% | $353.1M / 52.6% | $310.7M / 50.4% |
| Operating income / margin | $96.2M / 28.2% | $73.7M / 23.8% | $126.4M / 18.9% | $87.3M / 14.2% |
| Net income attributable to WWI | $45.2M | $30.5M | $55.8M | $19.7M |
| Diluted EPS | $0.67 | $0.46 | $0.83 | $0.30 |
Q2 revenue rose 10.3% reported, or 12.1% in constant currency; first-half revenue rose 8.8%, or 10.4% in constant currency. In Q2, North America revenue increased 13.0%, Continental Europe 7.8%, and Other 9.5%; UK revenue declined 4.6% reported but increased 6.9% in constant currency. Management attributed growth mainly to service revenue, higher recruitment and subscriber levels, particularly in North America and Online. Q2 total paid weeks increased 16.8%; end-of-period subscribers increased 20.1% year over year.
Cash flow, debt and liquidity
- First-half cash from operating activities was $98.1M, versus $46.4M in the prior-year period. Investing activities used $19.1M, including $5.6M of capital expenditures and $13.4M of capitalized software spending. Financing activities used $85.7M, primarily for debt repayments. Cash declined $4.2M to $104.5M.
- At July 1, 2017, debt principal was $1.935B, all under the Tranche B-2 term facility due April 2020. The company prepaid $75.5M principal at a discount during Q2, paying $73.0M plus accrued interest and recognizing a $1.6M pretax extinguishment gain. First-half scheduled repayments were also made.
- The revolving facility had no borrowings, $1.8M of undrawn letters of credit and $48.2M of available commitments. The company reported a $57.9M working-capital deficit, which it says is typical in part because subscription customers pay in advance and deferred revenue is recorded as a liability.
- Debt is variable-rate; the $1.25B interest-rate swap hedges part of the exposure. The company estimated a 50-basis-point rate increase would raise annual interest expense by about $3.4M; a 50-basis-point decrease would reduce it by about $3.8M. Substantially all assets secure the credit facility. It has customary restrictive covenants but no financial maintenance covenants.
Changes, outlook and notable items
- Q2 gross margin expanded 3.3 percentage points, which management attributed mainly to improved leverage in meetings and Online and a mix shift toward higher-margin Online services; lower licensing revenue partly offset the benefit. Marketing expense was 12.3% of Q2 revenue versus 13.3% a year earlier.
- First-half effective tax rate was 23.2%, compared with 30.0%. Results included an $11.6M tax benefit related to cessation of the Spanish subsidiary’s operations and a $1.0M after-tax debt-extinguishment gain. The prior-year period included a $2.5M valuation-allowance reversal. These items affect year-over-year comparability.
- Management identified deleveraging as a capital-structure priority and targeted year-end 2018 net debt/EBITDAS below 4.5x, based on improved operating performance and cash generation. At July 1, trailing-12-month EBITDAS was $299.6M and net debt/EBITDAS was 6.1x. Management said cash, operating cash generation and cost focus should be sufficient for obligations over the next 12 months; this is not a revenue or earnings forecast.
- Mindy Grossman became President and CEO and a director effective July 5, 2017, following the prior CEO’s resignation. The filing identifies the CEO transition as a risk.
- The annual impairment test found no impairment, but Brazil’s reporting-unit fair value exceeded carrying value by only about 10%; a relatively small change in assumptions could lead to goodwill impairment. Brazil goodwill was about $19.3M.
- A putative class action relating to 2015 website and app disruptions was dismissed, but the plaintiff appealed. The company considers the appeal without merit; management said other ordinary-course litigation is not expected to have a material effect, while noting legal outcomes are uncertain.
- Other disclosed risks include competition, customer and product appeal, marketing effectiveness, technology and data security, refinancing and debt-service exposure, foreign exchange and international operations, seasonality, and potential asset impairment. No material change to other previously reported risk factors was identified.
Important facts for investors to verify
- Whether revenue, subscriber and paid-week growth—especially Online growth—continues, and how much depends on North America and recruitment.
- Progress toward the stated 2018 net debt/EBITDAS target, cash generation, debt repayments and the April 2020 maturity concentration.
- How much reported earnings growth reflects recurring operations versus the Spain-related tax benefit and debt-extinguishment gain.
- Exposure to variable rates, availability under the revolving facility, and compliance with restrictive debt covenants.
- Developments in Brazil’s goodwill valuation, the CEO transition and the appeal in the member class action.