WW International, Inc. — Q1 2011 Form 10-Q
Business context and period. Unaudited results cover the three months ended April 2, 2011, compared with the three months ended April 3, 2010. The company operates through its WWI meetings and related businesses and WW.com internet businesses. Amounts below are in U.S. dollars; financial statement figures are converted from thousands to millions where appropriate.
Financial performance
- Revenue: $503.4 million, up 29.8% year over year; excluding favorable currency effects, growth was 28.4%. Meeting fees were $268.9 million (+23.2%), product sales and other revenue $142.6 million, and internet revenue $92.0 million (+66.4%).
- Profit and margins: Gross profit was $283.1 million (+33.8%); gross margin increased to 56.2% from 54.6%. Operating income was $135.7 million (+48.5%), with operating margin of 27.0% versus 23.6%. Net income attributable to the company was $73.6 million (+65.1%); diluted EPS was $1.00 versus $0.58.
- Cash flow: Operating cash flow was $184.1 million versus $64.3 million. Investing activities used $6.4 million, and financing activities used $142.7 million, including $114.1 million of debt payments, $34.9 million of share repurchases and $13.0 million of dividends. Cash increased $36.7 million to $77.2 million.
- Debt and liquidity: Total debt was $1,250.9 million, down from $1,365.1 million at fiscal 2010 year-end; $149.0 million was current. Revolver availability was $383.0 million. Working capital remained negative at $345.4 million. The company reported compliance with debt covenants and expected operating cash flow and revolver capacity to cover anticipated needs for the next 12 months.
- Other metrics: The company declared dividends of $0.18 per common share. It repurchased 813,500 shares for $31.6 million. Effective tax rate was 38.0%, compared with 38.9%.
Material changes and operating drivers
- Management attributed growth to the late-2010 PointsPlus/ProPoints program launches, a revised marketing strategy, and stronger enrollment. Global paid weeks increased 39.7%; meeting paid weeks rose 22.5%, and attendance rose 20.3%.
- Active online subscribers rose 86.6% year over year, from approximately 0.97 million to 1.81 million. WW.com external revenue was $93.6 million versus $55.9 million; WWI external revenue was $409.8 million versus $332.1 million.
- North American company-owned meeting fees increased 32.1%. The United Kingdom grew strongly, while Continental European meeting fees declined 14.9% amid weaker attendance and marketing performance.
- Operating margin improved as revenue outpaced costs and SG&A and marketing declined as a share of revenue. Management noted temporary additional staffing and program-material costs to support the new program launch.
- Operating cash flow improved substantially, but comparisons were affected by a prior-year $30.4 million UK VAT-related payment and higher deferred income from growth in online and Monthly Pass subscribers.
Outlook, risks and unusual items
- The filing provides no specific numerical earnings or revenue guidance. Management said cash flow and available revolver borrowings should be sufficient for anticipated capital expenditures, debt service and working capital over the next 12 months.
- Management cited seasonality, competition, consumer confidence, marketing effectiveness, international and currency exposure, technology and privacy risks, and substantial debt obligations and restrictive covenants as risks. The company’s debt was variable-rate; a hypothetical 50-basis-point rate change was estimated to affect annual interest expense by approximately $1.4 million.
- The company carried a $43.2 million reserve for the UK leader employment-tax dispute and was appealing an adverse tribunal ruling, with an Upper Tribunal hearing scheduled for fall 2011. A separate California wage-and-hour matter had a $6.5 million reserve and preliminary settlement approval; final approval was pending. A North Carolina wage-and-hour case remained unresolved, with no loss provision recorded because the outcome and liability could not be estimated.
- After quarter-end, on April 27, 2011, the company agreed to acquire Danone’s 49% interest in the China joint venture, resulting in 100% ownership.
- Substantially all company assets collateralized the credit facility. Management stated it was covenant-compliant at quarter-end. The filing also reported a large accumulated deficit, reflecting treasury stock and the company’s capital structure.
Important facts for investors to verify
- Whether online subscriber growth and new-program-driven enrollment persist, particularly in North America and the UK, and whether Continental Europe stabilizes.
- The final outcome and potential cash impact of the UK tax appeal and wage-and-hour litigation, including final approval of the California settlement.
- Debt maturities, refinancing needs, covenant headroom, variable-rate exposure and the sustainability of debt repayment alongside dividends and repurchases.
- Whether operating cash flow remains strong as deferred revenue, working capital and tax-payment timing change.
- The purchase price, terms and financial effects of acquiring the China joint-venture minority interest; the filing text does not provide a clear purchase price.