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WTW > SEC Filings for WTW > Form 10-Q on 8-Aug-2013All Recent SEC Filings

Show all filings for WEIGHT WATCHERS INTERNATIONAL INC

Form 10-Q for WEIGHT WATCHERS INTERNATIONAL INC


8-Aug-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Weight Watchers International, Inc. is a Virginia corporation with its principal executive offices in New York, New York. In this Quarterly Report on Form 10-Q unless the context indicates otherwise: "we," "us," "our" and the "Company" refer to Weight Watchers International, Inc. and all of its businesses consolidated for purposes of its financial statements; "Weight Watchers International" and "WWI" refer to Weight Watchers International, Inc. and all of the Company's businesses other than WeightWatchers.com; "WeightWatchers.com" refers to WeightWatchers.com, Inc. and all of the Company's Internet-based businesses; and "NACO" refers to our North American Company-owned meeting operations.

Our fiscal year ends on the Saturday closest to December 31st and consists of either 52- or 53-week periods. In this Quarterly Report on Form 10-Q:

• "fiscal 2012" refers to our fiscal year ended December 29, 2012;

• "fiscal 2013" refers to our fiscal year ended December 28, 2013;

• "fiscal 2014" refers to our fiscal year ended January 3, 2015;

• "fiscal 2015" refers to our fiscal year ended January 2, 2016;

• "fiscal 2016" refers to our fiscal year ended December 31, 2016; and

• "fiscal 2017" refers to our fiscal year ended December 30, 2017.

The following terms used in this Quarterly Report on Form 10-Q are our trademarks: Weight Watchers®, PointsPlus® and ActiveLink®.

You should read the following discussion in conjunction with our Annual Report on Form 10-K for fiscal 2012 that includes additional information about us, our results of operations, our financial position and our cash flows, and with our unaudited consolidated financial statements and related notes included in Item 1 of this Quarterly Report on Form 10-Q (collectively, the "Consolidated Financial Statements").

NON-GAAP FINANCIAL MEASURES

To supplement our consolidated results presented in accordance with accounting principles generally accepted in the United States of America, or GAAP, we have disclosed non-GAAP financial measures of operating results that exclude or adjust certain items. Net income and earnings per fully diluted share are discussed in this Quarterly Report on Form 10-Q both as reported (on a GAAP basis), and, with respect to the second quarter and first six months of fiscal 2013, as adjusted (on a non-GAAP basis) to exclude the impact of an early extinguishment of debt charge recorded in connection with our previously announced April 2, 2013 refinancing of our long-term debt. We generally refer to such non-GAAP measures as excluding or adjusting for the impact of the early extinguishment of debt charge. Our management believes these non-GAAP financial measures provide supplemental information to investors regarding the performance of our business and are useful for period-over-period comparisons of the performance of our business. While we believe that these financial measures are useful in evaluating our business, this information should be considered as supplemental in nature and is not meant to be considered in isolation or as a substitute for the related financial information prepared in accordance with GAAP. In addition, these non-GAAP financial measures may not be the same as similarly entitled measures reported by other companies.

USE OF CONSTANT CURRENCY

As exchange rates are an important factor in understanding period-to-period comparisons, we believe the presentation of results on a constant currency basis in addition to reported results helps improve investors' ability to understand our operating results and evaluate our performance in comparison to prior periods. Constant currency information compares results between periods as if exchange rates had remained constant period-over-period. We use results on a constant currency basis as one measure to evaluate our performance. In this Quarterly Report on Form 10-Q, we calculate constant


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currency by calculating current-year results using prior-year foreign currency exchange rates. We generally refer to such amounts calculated on a constant currency basis as excluding or adjusting for the impact of foreign currency. These results should be considered in addition to, not as a substitute for, results reported in accordance with GAAP. Results on a constant currency basis, as we present them, may not be comparable to similarly titled measures used by other companies and are not measures of performance presented in accordance with GAAP.

CRITICAL ACCOUNTING POLICIES

For a discussion of the critical accounting policies affecting us, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies" of our Annual Report on Form 10-K for fiscal 2012. Our critical accounting policies have not changed since the end of fiscal 2012.

RESULTS OF OPERATIONS

OVERVIEW

In the first half of fiscal 2013, revenues declined 4.0% as compared to the prior year period; however, lower marketing expenses in the first half of fiscal 2013, down 13.8% as compared to the prior year period, coupled with progress on our cost savings initiatives mitigated this revenue decline. Operating income in the second quarter of fiscal 2013 was essentially flat, increasing 0.3%, compared to the prior year period.

In fiscal 2012, total paid weeks continued to grow at a decelerating rate in each fiscal quarter versus the prior year period due to a challenging recruitment environment, particularly for our global meetings business. This challenging recruitment environment continued into fiscal 2013, with increased pressure on both the meetings and Online businesses, further deteriorating our trend in paid weeks. In the first quarter of fiscal 2013, total paid weeks were still above the prior year period, up 1.4%. However, in the second quarter of fiscal 2013, driven by this negative recruitment trend, paid weeks declined 2.5% as compared to the prior year period.

As we entered fiscal 2013, our meetings business active base was lower than the beginning of fiscal 2012. Conversely, though our active Online subscriber base had a declining growth trend throughout fiscal 2012, this subscriber base was higher at the beginning of fiscal 2013 than at the beginning of fiscal 2012. The difficult recruitment environment in the first half of fiscal 2013 had the impact of further reducing the active bases in both our businesses as we progressed through the first half of fiscal 2013. As a result, we expect that we will enter fiscal 2014 with lower active bases in both our meetings and Online businesses as compared to the beginning of fiscal 2013. Irrespective of recruitments for the remainder of fiscal 2013 and fiscal 2014, we expect the lower active bases in both our meetings and Online businesses to have a negative financial impact on our fiscal 2014 results.


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RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 29, 2013 COMPARED TO THE THREE MONTHS ENDED JUNE 30, 2012

The table below sets forth selected financial information for the second quarter of fiscal 2013 from our consolidated statements of net income for the three months ended June 29, 2013 versus selected financial information for the second quarter of fiscal 2012 from our consolidated statements of net income for the three months ended June 30, 2012:

                       Summary of Selected Financial Data



                                               (in millions, except per share amounts)
                                                      For the Three Months Ended
                                          June 29,            June 30,            Increase/
                                            2013                2012              (Decrease)        % Change
Revenues, net                            $     465.1         $     484.8         $     (19.6)          (4.0%)

Cost of revenues                               186.9               191.2                (4.3)          (2.3%)


Gross profit                                   278.2               293.5               (15.3)          (5.2%)
Gross Margin %                                  59.8 %              60.6 %

Marketing expenses                              65.6                83.8               (18.2)         (21.7%)

Selling, general & administrative
expenses                                        58.7                56.2                  2.5            4.4%

Operating income                               154.0               153.5                  0.5            0.3%
Operating Income Margin %                       33.1 %              31.7 %

Interest expense                                26.9                23.8                  3.1           13.0%
Other (income)/expense, net                     (0.1 )               3.8                (3.9)        (100.0%)
Early extinguishment of debt                    21.7                  -                  21.7          100.0%

Income before income taxes                     105.6               126.0               (20.4)         (16.2%)

Provision for income taxes                      40.7                48.5                (7.8)         (16.2%)

Net income                               $      64.9         $      77.5         $     (12.5)         (16.2%)


Weighted average diluted shares
outstanding                                     56.3                57.1                (0.8)          (1.4%)


Diluted EPS                              $      1.15         $      1.36         $     (0.20)         (15.0%)

Note: Totals may not sum due to rounding.

The following summary table sets forth a reconciliation of selected financial data for the three months ended June 29, 2013 on a comparable basis, after the adjustment for the impact of the early extinguishment of debt charge discussed above is reflected:

                                                   Income        Provision
                                                   Before       for Income         Net         Diluted
(in millions, except per share amounts)             Taxes          Taxes         Income          EPS
Second quarter of fiscal 2013                      $ 105.6      $      40.7      $  64.9      $    1.15

Adjustments to Reported Amounts(1)
Early extinguishment of debt charge                   21.7              8.4         13.3           0.24

Total Adjustments                                     21.7              8.4         13.3           0.24

Second quarter of fiscal 2013, as adjusted(1)      $ 127.3      $      49.1      $  78.3      $    1.39

Note: Totals may not sum due to rounding.

(1) "As adjusted" is a non-GAAP financial measure that adjusts certain selected financial data for the second quarter of fiscal 2013. See "Non-GAAP Financial Measures" above for an explanation of our use of non-GAAP financial measures.


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Consolidated Results

Revenues

Net revenues were $465.1 million in the second quarter of fiscal 2013, as compared to $484.8 million in the second quarter of fiscal 2012. Excluding the impact of foreign currency, which negatively impacted our revenues for the second quarter of fiscal 2013 by $0.6 million, net revenues in the second quarter of fiscal 2013 declined 3.9% versus the prior year period. The revenue decline in the second quarter of fiscal 2013 was driven by declines in the meetings business globally, most notably in the NACO and the UK meetings businesses. The decline in the NACO and UK meetings businesses was driven in large part by a lower incoming active base at the start of the second quarter of fiscal 2013 as compared to the start of the second quarter of fiscal 2012, as well as recruitment softness in the second quarter of fiscal 2013 caused by an inability to attract new members into the brand and, in the case of the United Kingdom, competitive pressure. Our Continental European meetings business, which cycled against a new program innovation and benefited from new marketing strategies in the prior year second quarter, also experienced a decline in revenue on a constant currency basis. These declines in the meetings businesses were partially offset by growth in WeightWatchers.com which, except for the US market, benefited from a higher active Online subscriber base at the start of the second quarter of fiscal 2013 as compared to the start of the second quarter of fiscal 2012.

The combination of the above factors also led to a 10.4% decline in global meeting paid weeks in the second quarter of fiscal 2013 versus the prior year period. With the benefit of starting the second quarter of fiscal 2013 with a higher active Online subscriber base, WeightWatchers.com experienced growth of 4.4% in Online paid weeks versus the prior year period. The increase in Online paid weeks did not fully offset the decline in meeting paid weeks, resulting in a 2.5% decrease in global paid weeks in the second quarter of fiscal 2013 versus the prior year period. Global attendance in the second quarter of fiscal 2013 declined 14.7% in comparison to the second quarter of fiscal 2012. We have been seeing a widening in the gap between attendance and paid weeks, which is a natural function of the increase in the average tenure of our Monthly Pass active base. Our end of period active Online subscriber base increased 1.4% in the second quarter of fiscal 2013 versus the prior year period but was negatively impacted by recruitment weakness with declines in US recruitment levels in the first half of fiscal 2013 and, to a lesser extent, in UK recruitment levels in the second quarter of fiscal 2013 as compared to the prior year period.

Gross Profit and Operating Income

Gross profit for the second quarter of fiscal 2013 of $278.2 million decreased $15.3 million, or 5.2%, from $293.5 million in the second quarter of fiscal 2012. Excluding the impact of foreign currency, which negatively impacted gross profit for the second quarter of fiscal 2013 by $0.3 million, gross profit in the second quarter of fiscal 2013 decreased by $15.0 million, or 5.1%, versus the prior year period. Operating income for the second quarter of fiscal 2013 was $154.0 million, an increase of $0.5 million, or 0.3%, from $153.5 million in the second quarter of fiscal 2012. Excluding the impact of foreign currency which negatively impacted operating income for the second quarter of fiscal 2013 by $0.1 million, operating income in the second quarter of fiscal 2013 increased by $0.4 million, or 0.3%, versus the prior year period. This increase in operating income was primarily the result of more efficient spending in marketing in the second quarter of fiscal 2013 versus the prior year period, driven by a combination of the absence of a Weight Watchers Online US men's specific marketing campaign for the second quarter of fiscal 2013 and achieving lower and more efficient digital marketing spend in the United States. Our gross margin in the second quarter of fiscal 2013 decreased to 59.8% from 60.6% in the second quarter of fiscal 2012, and operating income margin in the second quarter of fiscal 2013 increased to 33.1% from 31.7% in the second quarter of fiscal 2012. See "-Components of Expenses and Margins" for additional details.


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Net Income and Earnings Per Share

Net income in the second quarter of fiscal 2013 declined 16.2% from $77.5 million in the second quarter of fiscal 2012 to $64.9 million. Despite the increase in operating income, a charge of $21.7 million in early extinguishment of debt and higher interest expense related to our debt refinancing further reduced net income in the second quarter of fiscal 2013. These two items were partially offset by a write-off of an investment in the second quarter of fiscal 2012 which lowered net income in that period. Earnings per fully diluted share, or EPS, in the second quarter of fiscal 2013 were $1.15, a decrease of $0.20 from $1.36 in the second quarter of fiscal 2012. Excluding this early extinguishment of debt charge (after tax), net income was $78.3 million and EPS was $1.39 in the second quarter of fiscal 2013.

Components of Revenue and Volumes

We derive our revenues principally from meeting fees, Internet revenues, products sold in meetings and licensed products sold in retail channels. In addition, we generate other revenue from royalties paid to us by our franchisees, subscriptions to our branded magazines, and advertising in our publications.

Meeting Fees

Global meeting fees for the second quarter of fiscal 2013 were $231.2 million, a decrease of $17.3 million, or 7.0%, from $248.5 million in the prior year period. Excluding the impact of foreign currency, which decreased our global meeting fees for the second quarter of fiscal 2013 by $0.3 million, global meeting fees in the second quarter of fiscal 2013 decreased by 6.9% versus the prior year period. The decline in meeting fees was driven by a 10.4% decline in global meeting paid weeks in the second quarter of fiscal 2013 to 24.2 million from 27.0 million in the prior year period. The decline in meeting paid weeks was driven by a lower meetings active base at the beginning of the second quarter of fiscal 2013 versus the beginning of the second quarter of fiscal 2012 as well as by the lower enrollments in the second quarter of fiscal 2013 as compared to the prior year period. The negative impact of lower global meeting paid weeks was mitigated by higher meeting fees per paid week which increased 3.9% in the second quarter of fiscal 2013 as compared to the prior year period. This increase in meeting fees per paid week was driven primarily by price increases in both NACO and the United Kingdom and a more discounted offer in NACO in the prior year period that was not repeated in the second quarter of fiscal 2013. Global attendance decreased 14.7% to 11.9 million in the second quarter of fiscal 2013 from 13.9 million in the second quarter of fiscal 2012.

In NACO, meeting fees in the second quarter of fiscal 2013 were $161.1 million, a decrease of $12.2 million, or 7.1%, from $173.3 million in the second quarter of fiscal 2012. The decline in meeting fees was driven primarily by a 10.0% decline in NACO meeting paid weeks from 17.9 million in the second quarter of fiscal 2012 to 16.1 million in the second quarter of fiscal 2013. The decline in meeting paid weeks primarily resulted from the lower meetings active base at the beginning of the second quarter of fiscal 2013 versus the beginning of the second quarter of fiscal 2012 as well as by lower enrollments in the second quarter of fiscal 2013 versus the prior year period. Lower enrollments in the second quarter of fiscal 2013 were driven by difficulty in attracting members to our brand. Although we introduced our new Weight Watchers 360° program in December 2012, this new program was not as effective in driving consumer trial as our PointsPlus innovation. Partially offsetting the decline in NACO meeting fees was a 3.3% increase in meeting fees per paid week in the second quarter of fiscal 2013 as compared to the prior year period. This increase in meeting fees per paid week was driven in part by a 2011 US price increase for new members, the impact of which was more significant in fiscal 2013 due to the cycling of new members throughout 2012. In addition, this increase in meeting fees per paid week was driven by a more discounted offer in the United States in the second quarter of fiscal 2012 that was not repeated in the second quarter of fiscal 2013. In the second quarter of fiscal 2013, NACO attendance decreased 14.5% to 7.5 million from 8.8 million in the second quarter of fiscal 2012. The Company completed three franchise acquisitions in NACO in the second half of fiscal 2012 as well as a fourth franchise acquisition in March 2013. These franchise acquisitions benefitted NACO meeting fees in the second quarter of fiscal 2013 by approximately 2.2%.

International meeting fees in the second quarter of fiscal 2013 were $70.1 million, a decrease of $5.1 million, or 6.8%, from $75.2 million in the prior year period. Excluding the impact of foreign currency, which decreased international meeting fees for the second quarter of fiscal 2013 by $0.1


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million, international meeting fees declined by 6.7% in the second quarter of fiscal 2013 versus the prior year period. In the second quarter of fiscal 2013, the decline in meeting fees was driven by an 11.2% decline in international meeting paid weeks in the quarter versus the prior year period. Meeting paid weeks performance in the second quarter of fiscal 2013 was driven by declines in enrollments in most of our international markets in the quarter versus the prior year period. Partially offsetting the decline in international meeting fees was a 5.0% increase in meeting fees per paid week. This increase in meeting fees per paid week was driven primarily by a UK price increase in the third quarter of fiscal 2012 for all members. International attendance decreased by 14.8% in the second quarter of fiscal 2013 versus the prior year period.

In the second quarter of fiscal 2013, UK meeting fees decreased by 14.5% to $23.1 million from $27.0 million in the second quarter of fiscal 2012. Excluding the impact of foreign currency, which decreased UK meeting fees for the second quarter of fiscal 2013 by $0.7 million, UK meeting fees declined by 11.8% in the second quarter of fiscal 2013 versus the prior year period. Second quarter fiscal 2013 meeting fees were driven lower primarily by a decline of 19.0% in UK meeting paid weeks versus the prior year period. Meeting paid weeks performance in the second quarter of fiscal 2013 was driven by the lower meetings active base at the beginning of the second quarter of fiscal 2013 versus the beginning of the second quarter of fiscal 2012 coupled with lower enrollments in the period as compared to enrollment levels in the prior year period. In the second quarter of fiscal 2013, local competition in the United Kingdom contributed to the decline in enrollments. Partially offsetting the decline in UK meeting fees was a 5.6% increase in meeting fees per paid week. This increase in meeting fees per paid week was driven primarily by a UK price increase in the third quarter of fiscal 2012 for all members. UK attendance decreased by 20.3% in the second quarter of fiscal 2013 versus the prior year period.

Meeting fees in Continental Europe in the second quarter of fiscal 2013 were $37.9 million, an increase of $0.4 million, or 1.0%, from $37.5 million in the second quarter of fiscal 2012. Excluding the impact of foreign currency, which increased Continental European meeting fees in the second quarter of fiscal 2013 by $0.7 million, Continental European meeting fees decreased by 0.8% in the second quarter of fiscal 2013 as compared to the prior year period. The decrease in meeting fees on a constant currency basis was driven by a decrease of 1.6% in Continental European meeting paid weeks in the second quarter of fiscal 2013 versus the prior year period. The decrease in meeting paid weeks was driven by lower enrollments in the second quarter of fiscal 2013 as compared to the prior year period. These lower enrollments were the result of cycling against the successful launch of the new program and new advertising campaigns in the prior year period. In Continental Europe, attendance decreased by 6.7% in the second quarter of fiscal 2013 versus the prior year period.

In-Meeting Product Sales

Global in-meeting product sales for the second quarter of fiscal 2013 were $57.3 million, a decrease of $7.2 million, or 11.2%, from $64.5 million in the second quarter of fiscal 2012. Excluding the impact of foreign currency, which decreased global in-meeting product sales for the second quarter of fiscal 2013 by $0.1 million, global in-meeting product sales in the second quarter of fiscal 2013 declined 11.0% versus the prior year period. This decrease resulted primarily from a 14.7% decline in global meeting attendance in the second quarter of fiscal 2013 versus the prior year period. Slightly offsetting this decline was an increase in product sales per attendee in the second quarter of fiscal 2013 versus the prior year period. On a per attendee basis, in the second quarter of fiscal 2013, global in-meeting product sales increased 4.1%, or 4.3% on a constant currency basis, versus the prior year period. This increase in global in-meeting product sales per attendee in the second quarter of fiscal 2013 was driven by strong per attendee sales of the new ActiveLink product in NACO and consumables and cookbooks in Continental Europe.

In NACO, second quarter fiscal 2013 in-meeting product sales of $32.5 million decreased by $3.2 million, or 8.9%, versus the prior year period. This decrease resulted primarily from a 14.5% attendance decline in the second quarter of fiscal 2013 as compared to the prior year period. In-meeting product sales per attendee increased by 6.6% in the second quarter of fiscal 2013 versus the prior year period as strong sales of the new ActiveLink product more than offset the decline in sales of electronics, cookbooks and non-consumable products.


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International in-meeting product sales were $24.8 million in the second quarter of fiscal 2013, a decrease of 14.0%, or 13.6% on a constant currency basis, versus the prior year period. This decrease was driven primarily by an attendance decline of 14.8% in the second quarter of fiscal 2013 as compared to the second quarter of fiscal 2012, which was largely driven by the United Kingdom. In-meeting product sales per attendee in the second quarter of fiscal 2013 increased by 1.0%, or 1.4% on a constant currency basis, as compared to the prior year period. This increase was the result of strong sales of consumables and cookbooks in some of our Continental European markets driven in part by new product introductions and successful promotions.

Internet Revenues

Internet revenues, which include subscription revenues from sales of our Weight Watchers Online and Weight Watchers eTools products as well as Internet advertising revenues, increased $8.9 million, or 6.6%, to $144.5 million in the second quarter of fiscal 2013 from $135.6 million in the second quarter of fiscal 2012. Foreign currency had a de minimis impact on Internet revenues in the second quarter of fiscal 2013. This increase in Internet revenues was driven by the higher active Online subscriber base at the start of the second quarter of fiscal 2013, up 6.2%, versus the beginning of the second quarter of fiscal 2012, and effective marketing campaigns in Continental Europe contributed to Online paid weeks growth of 4.4% in the second quarter of fiscal 2013 versus the prior year period. This growth in Internet revenues was a deceleration from the period-over-period increase of 10.9% experienced in the first quarter of fiscal 2013 as compared to the prior year period. This deceleration was driven by declining sign-ups in the US business which continued through the second quarter, as the commercial weight loss category continued to be impacted by increasing consumer trial of activity monitors and free apps. End of period active Online subscribers increased by 1.4% to 2.3 million at the end of the second quarter of fiscal 2013 as compared to the end of the second quarter of fiscal 2012.

Other Revenues

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