WW International, Inc. — Form 10-Q Summary
Reporting period: Second quarter and first six months of fiscal 2013, ended June 29, 2013; comparisons are to the corresponding 2012 periods. Unaudited. Unless stated otherwise, amounts are in U.S. dollars.
Business context and results
The company operates in meetings, products and online weight-management services through its WWI and WW.com segments. In Q2, revenue declined as meeting-business recruitment weakened; online growth partly offset the decline.
- Q2 revenue: $465.1 million, down 4.0%. Meeting fees were $231.2 million, down 7.0%; internet revenue was $144.5 million, up 6.6%; product sales and other revenue also declined.
- Q2 profitability: Gross profit was $278.2 million, down 5.2%; gross margin fell to 59.8% from 60.6%. Operating income was $154.0 million, up 0.3%; operating margin improved to 33.1% from 31.7%, primarily due to lower marketing spending. GAAP net income was $64.9 million, down 16.2%, and diluted EPS was $1.15 versus $1.36. Excluding the debt-extinguishment charge, non-GAAP net income was $78.3 million and diluted EPS was $1.39.
- First-half revenue and earnings: Revenue was $952.1 million, down 3.7%; gross profit was $558.4 million, down 4.0%. Operating income was $257.1 million, up 0.3%, with a 27.0% operating margin versus 25.9%. Net income was $113.7 million, down 13.9%; diluted EPS was $2.02 versus $2.01. Excluding the debt-extinguishment charge, non-GAAP net income was $127.0 million and diluted EPS was $2.26.
- First-half cash flow: Operating cash flow was $178.0 million, compared with $179.7 million. Investing activities used $76.4 million, including $35.0 million for franchise acquisitions; capital expenditures were $31.0 million and capitalized software spending was $10.8 million. Financing activities used $49.6 million. Cash ended the period at $120.0 million.
Financial position, debt and liquidity
- At June 29, cash was $120.0 million; current assets were $252.4 million and current liabilities were $337.1 million, a working-capital deficit of $84.7 million. The company says negative working capital is partly associated with customers paying in advance.
- Total debt was $2.40 billion, all variable-rate term loans; $24.0 million was current. The company had no revolver borrowings and $248.8 million of unused revolving commitments. The new credit agreement includes a $250 million revolver maturing in 2018, a $300 million term loan maturing in 2016 and a $2.10 billion term loan maturing in 2020.
- Q2 interest expense rose 13.0% to $26.9 million; first-half interest expense rose 33.8% to $49.4 million. The company cited higher rates and, for the first half, higher average debt related to prior-year share repurchases.
- A $468.8 million interest-rate swap hedged part of the variable-rate debt at quarter-end; $1.93 billion remained unhedged. A hypothetical 50-basis-point rate change was estimated to change annual interest expense by about $9.7 million.
Material changes and management commentary
- Global meeting paid weeks fell 10.4% in Q2 and 9.3% in the first half; meeting attendance fell 14.7% and 16.1%, respectively. Online paid weeks grew 4.4% in Q2 and 7.3% in the first half, but online subscriber recruitment weakened, particularly in the United States. End-of-period active online subscribers were 2.3 million, up 1.4% year over year.
- Management said the Weight Watchers 360 program was less effective at attracting new members than the earlier PointsPlus innovation. Competitive pressure and macroeconomic conditions weighed on meeting recruitment, including in the UK.
- Marketing expense declined 21.7% in Q2 and 13.8% in the first half. SG&A increased 4.4% and 4.8%, respectively, reflecting items including higher bonus and salary expense, acquisitions and technology investment.
- On April 2, 2013, the company refinanced its debt. It recorded a $21.7 million early-extinguishment charge and incurred approximately $45 million of refinancing fees. The charge reduced Q2 and first-half reported earnings; adjusted figures are non-GAAP.
- The company acquired Alberta and Saskatchewan franchise operations for $35 million in March. After quarter-end, it acquired West Virginia for $16 million and Columbus, Ohio, for $23.5 million, and Reno, Nevada, for $4 million.
Outlook, risks and contingencies
- Management expects to enter fiscal 2014 with lower active bases in both meetings and online than at the start of fiscal 2013, and expects those lower bases to negatively affect fiscal 2014 results. The filing provides no specific financial guidance for fiscal 2013 or fiscal 2014.
- Management believed operating cash flow and available revolver capacity would be sufficient for anticipated capital expenditures, debt service and working capital needs over the next 12 months.
- Key disclosed risks include recruitment and competition, effectiveness of marketing and new services, consumer confidence and economic conditions, seasonality, foreign currency, technology and privacy/security, franchise relationships, debt service and restrictive covenants, and legal and regulatory matters.
- The credit agreement restricts certain indebtedness, dividends, share repurchases, investments and asset sales. A specified financial-ratio test applies to the revolver only if borrowing exceeds 20% of revolving commitments. Management said ordinary-course legal matters were not expected to have a material effect, while noting outcomes cannot be predicted with certainty.
Most important facts for investors to verify
- Whether meeting and online recruitment stabilize, and how paid weeks, attendance and active subscriber bases develop.
- Whether management’s expectation of lower fiscal 2014 active bases translates into weaker results; no quantified outlook is provided.
- The effect of variable rates, refinancing terms, debt covenants and the interest-rate swap on interest expense and liquidity.
- Integration, purchase-price allocation and performance of the franchise acquisitions, including the post-quarter acquisitions.
- The distinction between GAAP results and non-GAAP earnings adjusted for the $21.7 million debt-extinguishment charge.