WW International, Inc. (Weight Watchers) — FY2010 Form 10-K
Reporting period: Fiscal year ended January 1, 2011, comprising 52 weeks. This is an annual filing, not a standalone fourth-quarter report. Fiscal 2009 also comprised 52 weeks.
Business context
The company operates meeting-based weight-management services, sells related products, runs online subscriptions through WeightWatchers.com, and earns licensing and franchise royalties. Its two reportable segments are Weight Watchers International (WWI) and WeightWatchers.com. Management cited the November 2010 launch of PointsPlus in the U.S. and Canada and ProPoints in the U.K. and Australia as important late-year developments.
Financial and operating results
| Metric | FY2010 | FY2009 |
|---|---|---|
| Revenue | $1,452.0 million | $1,398.9 million |
| Operating income | $390.3 million | $356.7 million |
| Operating margin | 26.9% | 25.5% |
| Net income attributable to the Company | $194.2 million | $177.3 million |
| Diluted EPS | $2.56 | $2.30 |
| Cash from operating activities | $281.5 million | $265.5 million |
| Cash and cash equivalents at year-end | $40.5 million | $46.1 million |
Reported gross margin was 54.4%, versus 52.0% in 2009; after adjusting for the prior-year UK self-employment charge and the 2010 UK VAT accrual reversal, gross margin was 54.4% in both years. Management’s non-GAAP comparison showed adjusted 2010 operating income of $388.3 million and adjusted diluted EPS of $2.54, versus $394.6 million and $2.64, respectively, in 2009. Thus, reported profit growth partly reflects unusual prior-year charges.
Revenue mix included meeting fees of $819.6 million, product sales of $305.0 million, Internet revenue of $238.8 million, and licensing, franchise royalties and other revenue of $88.6 million. Internet revenue rose 21.8%; active Online subscribers increased 38.2% to 1.054 million. Global meeting attendance fell 6.1% to 51.0 million, while meeting paid weeks edged up 0.4% to 87.9 million. Fourth-quarter NACO meeting paid weeks rose 4.2% and attendance rose 6.8% year over year.
WWI generated $1,211.0 million in external-customer revenue and $303.1 million in operating income; WeightWatchers.com generated $241.0 million in external revenue and $87.2 million in operating income. Interest expense increased 14.2% to $76.2 million; the effective interest rate rose to 5.01% from 4.17%. The effective tax rate was 38.5%.
Liquidity, debt and capital allocation
Operating cash flow was $281.5 million. Capital expenditures and capitalized software spending totaled approximately $22.2 million. Financing cash outflows included $106.6 million of share repurchases, $53.4 million of dividends, and $133.9 million of long-term debt payments, partly offset by $46.0 million of net revolver borrowings.
Total debt was $1,365.1 million, including $197.5 million due within one year; long-term debt was $1,167.6 million. The company had $325.0 million available under its revolving facility and $40.5 million in cash. Working capital deficit was $348.7 million. Debt was variable-rate, with $1.11 billion of interest-rate swaps outstanding. The company reported compliance with its debt covenants at year-end and expected operating cash flow and revolver availability to cover anticipated needs over the following 12 months.
Changes, outlook and material risks
- Revenue increased 3.8% as reported, but the company said revenue grew 3.7% excluding a $2.0 million UK VAT accrual reversal. Internet growth and improved late-year NACO trends offset weak U.K. meetings and lower overall attendance.
- Management said first-quarter volumes were hurt by ineffective marketing and severe weather; new marketing and program launches improved trends later in the year. No specific numerical FY2011 earnings or revenue guidance is provided in the filing.
- UK self-employment tax liability was approximately $40.8 million at year-end, with quarterly accruals continuing. The company was appealing the underlying ruling, with a hearing scheduled for fall 2011.
- The U.K. VAT assessment was paid in FY2010; a $2.0 million excess accrual was reversed to revenue. A California wage-and-hour settlement reserve of $6.5 million was recorded, subject to final court approval. A separate North Carolina wage-and-hour case had no estimated liability recorded because the outcome could not be determined.
- Key risks include substantial debt and restrictive covenants, consumer discretionary-spending weakness, attendance and enrollment trends, program and marketing effectiveness, competition and changing diet preferences, foreign exchange exposure, technology and privacy risks, and legal and regulatory matters. Artal controls a majority of voting power; the company elected controlled-company exemptions from certain NYSE governance requirements.
Important facts for investors to verify
- Whether the late-2010 PointsPlus and ProPoints launches sustain meeting enrollment and attendance growth, especially in the U.K. and North America.
- Underlying earnings trends using comparable adjusted results, rather than reported growth alone.
- Progress and cash impact of the U.K. leader classification appeal, ongoing reserves, and the California settlement’s final approval.
- Debt repayment, refinancing and covenant capacity, including the effect of variable rates and interest-rate swaps.
- Whether online subscriber growth and revenue can offset continuing pressure on in-person attendance.