WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AND PER UNIT AMOUNTS)
The accompanying consolidated financial statements include the accounts of Weight Watchers International, Inc. and all of its subsidiaries. The terms “Company” and “WWI” as used throughout these notes is used to indicate Weight Watchers International, Inc. and all of its operations consolidated for purposes of its financial statements. The Company’s “meetings” business refers to providing access to meetings to the Company’s monthly commitment plan subscribers, “pay-as-you-go” members, Total Access subscribers and other meetings members. “Online” refers to Weight Watchers Online, Weight Watchers Online
Plus
, Personal Coaching and other digital subscription products.
The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and include amounts that are based on management’s best estimates and judgments. While all available information has been considered, actual amounts could differ from those estimates. The consolidated financial statements include all of the Company’s majority-owned subsidiaries. All entities acquired, and any entity of which a majority interest was acquired, are included in the consolidated financial statements from the date of acquisition. All intercompany accounts and transactions have been eliminated in consolidation. The Company’s operating results for any interim period are not necessarily indicative of future or annual results. The consolidated financial statements are unaudited and, accordingly, they do not include all of the information necessary for a comprehensive presentation of results of operations, financial position and cash flow activity required by GAAP for complete financial statements but, in the opinion of management, reflect all adjustments including those of a normal recurring nature necessary for a fair statement of the interim results presented.
These statements should be read in conjunction with the Company’s Annual Report on Form 10-K for fiscal 2016 filed on March 1, 2017, which includes additional information about the Company, its results of operations, its financial position and its cash flows.
2.
|
Recently Issued Accounting Standards
|
In February 2016, the Financial Accounting Standards Board (the “FASB”) issued updated guidance regarding leases, requiring lessees to recognize a right-of-use asset and a lease liability on the balance sheet for all leases with the exception of short-term leases. For lessees, leases will continue to be classified as either operating or finance leases in the income statement. Lessor accounting is similar to the current model but will be updated to align with certain changes to the lessee model. Lessors will continue to classify leases as operating, direct financing or sales-type leases. The effective date of the new guidance for public companies is for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption is permitted. The new guidance must be adopted using a modified retrospective transition and requires application of the new guidance at the beginning of the earliest comparative period presented. The updated guidance is effective for the Company beginning in the first quarter of fiscal 2019. The Company is currently evaluating the impact that the adoption of this guidance will have on the consolidated financial statements and related disclosures of the Company.
In March 2016, the FASB issued updated guidance on revenue from contracts with customers, which is intended to clarify the implementation guidance on principal versus agent considerations. The amendments in this update do not change the core principle of the guidance, but are intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations by including indicators to assist an entity in determining whether it controls a specified good or service before it is transferred to the customer. In April 2016, the FASB issued updated guidance on revenue from contracts with customers, which is intended to clarify guidance related to identifying performance obligations and licensing implementation guidance contained in the new revenue recognition standard. In May 2016, the FASB issued updated guidance on revenue from contracts with customers, which is intended to provide narrow scope guidance and practical expedients contained in the new revenue standard. In December 2016, the FASB issued updated guidance on revenue from contracts with customers for technical corrections and improvements on narrow aspects within the original and amended guidance. The amendments in these updates are effective for annual periods beginning after December 15, 2017 and interim periods within those fiscal years, with early adoption permitted. The Company is in the process of evaluating the effect of adoption on the consolidated financial statements. The Company has developed an inventory of all revenue streams and has begun to assess the implications of adopting the new five step revenue model and reviewing key contracts.
In January 2017, the FASB issued amended guidance to simplify the accounting for goodwill impairment. This guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Under the amended guidance, a goodwill impairment charge will now be recognized for the amount by which the carrying value of a reporting unit exceeds its fair value, not to exceed the carrying amount of goodwill. This guidance is effective for interim and annual periods
6
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AND PER UNIT AMOUNTS)
beginning after December 15, 2019, with early adoption permitted for any impairment tests performed after January 1, 2017. The Co
mpany is currently evaluating the impact that the adoption of this guidance will have on the consolidated financial statements and related disclosures of the Company.
For a discussion of the Company’s other significant accounting policies, see “Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements of the Company’s Annual Report on Form 10-K for fiscal 2016. For a discussion of accounting standards adopted in the current year, see Note 3.
3.
|
Accounting Standards Adopted in Current Year
|
In March 2016, the FASB issued updated guidance on stock compensation which is intended to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification of applicable income tax consequences on the statement of cash flows. This guidance requires recognition of excess tax benefits and shortfalls (resulting from an increase or decrease in the fair value of an award from grant date to the vesting date) in the provision for income taxes as a discrete item in the quarterly period in which they occur. In addition, these amounts will be classified as an operating activity in the consolidated statement of cash flows instead of as a financing activity. The amendments requiring recognition of excess tax benefits and tax shortfalls in the income statement must be applied prospectively (See Note 10), and entities may elect to apply the amendments related to the presentation of excess tax benefits on the statement of cash flows using either a prospective or retrospective transition method. In May 2017, the FASB issued updated guidance on stock compensation which is intended to clarify when changes to the terms and conditions to a share-based payment transaction requires modification accounting.
The company adopted this guidance during the first quarter of fiscal 2017. As required by the standard, the Company recognized prospectively any excess tax benefits in the consolidated statements of net income for the three and six months ended July 1, 2017 and applied the amendments relating to the presentation of excess tax benefits on the statement of cash flows using the prospective method. For the first six months ended July 2, 2016, the Company recorded $649 of excess tax benefits in equity. For the first six months ended July 2, 2016, the Company paid taxes of $1,875 related to net share settlement of equity awards. As permitted under the guidance, the Company will continue to account for forfeitures in compensation cost by estimating the number of awards that are expected to vest.
In August 2016, the FASB issued updated guidance on the statement of cash flows presentation of certain transactions where diversity in practice exists. The Company adopted this guidance during the first quarter of 2017, which had no impact on the consolidated statement of cash flows.
In January 2017, the FASB issued updated guidance to assist Companies with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The Company early adopted this guidance during the first quarter of 2017. The adoption of this guidance had no impact on the consolidated financial statements.
On October 18, 2015 (the “Agreement Date”), the Company entered into the following agreements with Oprah Winfrey: the Strategic Collaboration Agreement, the Winfrey Purchase Agreement (defined below), and the Winfrey Option Agreement (defined below). The transactions contemplated by these agreements are collectively referred to herein as the “Winfrey Transaction”. Details of the Strategic Collaboration Agreement, Winfrey Purchase Agreement and Winfrey Option Agreement are below. See Note 16 for related party transactions with Ms. Winfrey.
Strategic Collaboration Agreement
The Company and Ms. Winfrey granted each other certain intellectual property rights under the Strategic Collaboration Agreement. The agreement has an initial term of five years, with additional successive one-year renewal terms. During the term of this agreement, Ms. Winfrey will consult with the Company and participate in developing, planning, executing and enhancing the Weight Watchers program and related initiatives, and provide it with services in her discretion to promote the Company and its programs, products and services.
7
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AND PER UNIT AMOUNTS)
Winfrey Purchase Agreement
On October 19, 2015, pursuant to the Share Purchase Agreement between the Company and Ms. Winfrey (the “Winfrey Purchase Agreement”), the Company issued and sold to Ms. Winfrey an aggregate of 6,362 shares of the Company’s common stock (the “Purchased Shares”) at a price per share of $6.79 for an aggregate cash purchase price of $43,199. The Company recorded fees related to the issuance of the Purchased Shares totaling $2,315, of which $1,700 was recorded as a reduction of equity in the fourth quarter of fiscal 2015. The Purchased Shares are subject to certain demand registration rights and piggyback rights held by Ms. Winfrey under the Winfrey Purchase Agreement.
The Purchased Shares may not be transferred by Ms. Winfrey within the first two years of the Agreement Date, subject to certain limited exceptions. Thereafter, Ms. Winfrey may generally transfer up to 15% of the Purchased Shares prior to the third anniversary of the Agreement Date, up to 30% prior to the fourth anniversary of the Agreement Date and up to 60% prior to the fifth anniversary of the Agreement Date. On or after the fifth anniversary of the Agreement Date, Ms. Winfrey will be permitted to transfer all of the Purchased Shares. In the event that Ms. Winfrey proposes to transfer any Purchased Shares or Winfrey Option Shares (defined below), the Company will have (a) a right of first offer with respect to such shares if such transfer is (i) for 1% or more of the Company’s issued and outstanding common stock and is proposed to be made pursuant to Rule 144 under the Securities Act of 1933, as amended or (ii) proposed to be sold under a resale shelf registration statement or (b) a right of first refusal with respect to such shares if such transfer is (i) for 1% or more of the Company’s issued and outstanding common stock and is proposed to be made to a competitor of the Company or (ii) for 5% or more of the Company’s issued and outstanding common stock. Such transfer restrictions, right of first offer and right of first refusal terminate if Ms. Winfrey then has the right to be nominated as a director and has met certain eligibility requirements under the Winfrey Purchase Agreement, but is not elected as a director of the Company. If Ms. Winfrey is elected as a director of the Company, she shall receive compensation for her services as a director consistent with that of other non-executive directors of the Company. Such transfer restrictions also terminate if there is a change of control, including if another person (or group), other than Artal Luxembourg S.A. and Ms. Winfrey and their respective affiliates, acquires more than 50% of the total voting power of the Company.
Winfrey Option Agreement
In consideration of Ms. Winfrey entering into the Strategic Collaboration Agreement and the performance of her obligations thereunder, on the Agreement Date, the Company granted Ms. Winfrey a fully vested option (the “Winfrey Option”) to purchase 3,513 shares of common stock at an exercise price of $6.97 per share, which remains outstanding in full. The term sheet, and related terms and conditions, for the Winfrey Option are referred to herein as the “Winfrey Option Agreement”. Based on the Black Scholes option pricing method, the Company recorded $12,759 of compensation expense in the fourth quarter of fiscal 2015 for the Winfrey Option. At the date of the grant, the Company used a dividend yield of 0.0%, 63.88% volatility and a risk-free interest rate of 1.36%. Compensation expense is included as a component of selling, general and administrative expenses.
Subject to certain limited exceptions, shares of common stock issuable upon exercise of the Winfrey Option (the “Winfrey Option Shares”) generally could not be transferred by Ms. Winfrey within the first year of the Agreement Date. Ms. Winfrey generally may transfer up to 20% of the Winfrey Option Shares prior to the second anniversary of the Agreement Date, up to 40% prior to the third anniversary of the Agreement Date, up to 60% prior to the fourth anniversary of the Agreement Date and up to 80% prior to the fifth anniversary of the Agreement Date. On or after the fifth anniversary of the Agreement Date, Ms. Winfrey will be permitted to transfer all of the Winfrey Option Shares. Pursuant to the Winfrey Purchase Agreement, in the event that Ms. Winfrey proposes to transfer any Winfrey Option Shares, the Company will have a right of first offer or a right of first refusal with respect to such shares as described above. Such transfer restrictions terminate under the same director service and change of control circumstances that would result in the termination of the transfer restrictions relating to the Purchased Shares as described above.
5
.
|
Acquisition of Franchisee
|
On June 27, 2016, the Company acquired substantially all of the assets of its franchisee for certain territories in South Florida, Weight Watchers of Greater Miami, Inc., for a purchase price of $3,250 (the “Miami Acquisition”). Payment was in the form of cash ($2,898) plus cash in reserves ($300) and assumed net liabilities of ($52). The total purchase price has been allocated to franchise rights acquired ($114), goodwill ($2,945) and customer relationship value ($191). The acquisition of the franchisee has been accounted for under the purchase method of accounting and, accordingly, earnings of the acquired franchisee have been included in the consolidated operating results of the Company since the date of acquisition. The goodwill will be deductible for tax purposes.
8
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AND PER UNIT AMOUNTS)
6.
|
Franchise Rights Acquired, Goodwill and Other Intangible Assets
|
Franchise rights acquired are due to acquisitions of the Company’s franchised territories as well as the acquisition of franchise promotion agreements and other factors associated with the acquired franchise territories. For the six months ended July 1, 2017, the change in the carrying value of franchise rights acquired is due to the effect of exchange rate changes.
Goodwill primarily relates to the acquisition of the Company by H.J. Heinz Company in 1978, the acquisition of WeightWatchers.com, Inc. in 2005, the acquisitions of the Company’s franchised territories, the acquisitions of the majority interest in Vigilantes do Peso Marketing Ltda. (“VPM”) and of Knowplicity, Inc., d/b/a Wello, in fiscal 2014 and the acquisition of Weilos, Inc. in fiscal 2015. See Note 5 for additional information about acquisitions by the Company. For the six months ended July 1, 2017, the change in the carrying amount of goodwill is due to the effect of exchange rate changes as follows:
|
|
North
|
|
|
United
|
|
|
Continental
|
|
|
|
|
|
|
|
|
|
|
|
America
|
|
|
Kingdom
|
|
|
Europe
|
|
|
Other
|
|
|
Total
|
|
Balance as of December 31, 2016
|
|
$
|
137,543
|
|
|
$
|
1,145
|
|
|
$
|
6,884
|
|
|
$
|
20,566
|
|
|
$
|
166,138
|
|
Effect of exchange rate changes
|
|
|
1,554
|
|
|
|
63
|
|
|
|
573
|
|
|
|
(416
|
)
|
|
|
1,774
|
|
Balance as of July 1, 2017
|
|
$
|
139,097
|
|
|
$
|
1,208
|
|
|
$
|
7,457
|
|
|
$
|
20,150
|
|
|
$
|
167,912
|
|
The Company reviews goodwill and other indefinite-lived intangible assets, including franchise rights acquired with indefinite lives, for potential impairment on at least an annual basis or more often if events so require. The Company performed fair value impairment testing as of May 7, 2017 and May 8, 2016, each the first day of fiscal May, on its goodwill and other indefinite-lived intangible assets.
In performing its annual impairment analysis as of May 7, 2017, the Company determined that the carrying amounts of its goodwill reporting units and franchise rights acquired with indefinite lives units of account did not exceed their respective fair values and therefore, no impairment existed. For all reporting units, except for Brazil, there was significant headroom in the impairment analysis. Based on the results of this test for Brazil, the fair value of this reporting unit exceeded its carrying value by approximately 10%, and accordingly a relatively small change in the underlying assumptions would likely cause a change in the results of the impairment assessment and, as such, could result in an impairment of the goodwill related to Brazil, for which the carrying amount is $19,295.
When determining fair value, the Company utilizes various assumptions, including projections of future cash flows, growth rates and discount rates. A change in these underlying assumptions would cause a change in the results of the tests and, as such, could cause fair value to be less than the carrying amounts and result in an impairment of those assets. In the event such a result occurred, the Company would be required to record a corresponding charge, which would impact earnings. The Company would also be required to reduce the carrying amounts of the related assets on its balance sheet. The Company continues to evaluate these assumptions and believes that these assumptions are appropriate.
The following is a discussion of the goodwill and franchise rights acquired impairment analysis.
Goodwill
In performing the impairment analysis for goodwill, the fair value for the Company’s reporting units is estimated using a discounted cash flow approach. This approach involves projecting future cash flows attributable to the reporting unit and discounting those estimated cash flows using an appropriate discount rate. The estimated fair value is then compared to the carrying value of the reporting units. The Company has determined the appropriate reporting unit for purposes of assessing annual impairment to be the country for all reporting units. For all of the Company’s reporting units except for Brazil (see below), the Company estimated future cash flows by utilizing the historical debt-free cash flows (cash flows provided by operating activities less capital expenditures) attributable to that country and then applied expected future operating income growth rates for such country. The Company utilized operating income as the basis for measuring its potential growth because it believes it is the best indicator of the performance of its business. The Company then discounted the estimated future cash flows utilizing a discount rate which was calculated using the average cost of capital, which included the cost of equity and the cost of debt. The cost of equity was determined by combining a risk-free rate of return and a market risk premium for the Company’s peer group. The risk-free rate of return was determined based on the average rate of long-term U.S. Treasury securities. The market risk premium was determined by reviewing external market data. The cost of debt was determined by estimating the Company’s current borrowing rate.
9
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AND PER UNIT AMOUNTS)
As it relate
s to the impairment analysis for Brazil, the Company estimated future debt free cash flows in contemplation of its growth strategies for that market. In developing these projections, the Company considered the historical impact of similar growth strategies
in other markets as well as the current market conditions in Brazil. The Company then discounted the estimated future cash flows utilizing a discount rate which was calculated using the average cost of capital, which included the cost of equity and the co
st of debt. The cost of equity was determined by combining a risk-free rate of return and a market risk premium for the Company’s peer group. The risk-free rate of return was determined based on the average rate of long-term U.S. Treasury securities. The m
arket risk premium was determined by reviewing external market data including the current economic conditions in Brazil and the country specific risk thereon. A further risk premium was included to reflect the risk associated with the rate of growth projec
ted in the analysis. The cost of debt was determined by estimating the Company’s current borrowing rate.
Franchise Rights Acquired
Finite-lived franchise rights acquired are amortized over the remaining contractual period, which is generally less than one year.
In performing the impairment analysis for indefinite-lived franchise rights acquired, the fair value for franchise rights acquired is estimated using a discounted cash flow approach referred to as the hypothetical start-up approach for franchise rights related to the Company’s meetings business and a relief from royalty methodology for franchise rights related to the Company’s Online business. The aggregate estimated fair value for these rights is then compared to the carrying value of the unit of account for those franchise rights. The Company has determined the appropriate unit of account for purposes of assessing impairment to be the combination of the rights in the meetings and Online businesses in the country in which the acquisitions have occurred. In its hypothetical start-up approach analysis for fiscal 2017, the Company assumed that the year of maturity was reached after 7 years. Subsequent to the year of maturity, the Company estimated future cash flows for the meetings business in each country based on assumptions regarding revenue growth and operating income margins. The cash flows associated with the Online business were based on the expected Online revenue for such country and the application of a market-based royalty rate. The cash flows for the meetings and Online businesses were discounted utilizing rates consistent with those utilized in the goodwill impairment analysis.
The carrying values of finite-lived intangible assets as of July 1, 2017 and December 31, 2016 were as follows:
|
|
July 1, 2017
|
|
|
December 31, 2016
|
|
|
|
Gross
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amortization
|
|
Capitalized software costs
|
|
$
|
130,789
|
|
|
$
|
110,338
|
|
|
$
|
126,737
|
|
|
$
|
101,316
|
|
Website development costs
|
|
|
128,808
|
|
|
|
98,145
|
|
|
|
119,971
|
|
|
|
87,736
|
|
Trademarks
|
|
|
11,145
|
|
|
|
10,745
|
|
|
|
11,092
|
|
|
|
10,647
|
|
Other
|
|
|
8,030
|
|
|
|
7,645
|
|
|
|
7,945
|
|
|
|
7,434
|
|
Trademarks and other intangible assets
|
|
$
|
278,772
|
|
|
$
|
226,873
|
|
|
$
|
265,745
|
|
|
$
|
207,133
|
|
Franchise rights acquired
|
|
|
4,528
|
|
|
|
4,528
|
|
|
|
4,551
|
|
|
|
4,551
|
|
Total finite-lived intangible assets
|
|
$
|
283,300
|
|
|
$
|
231,401
|
|
|
$
|
270,296
|
|
|
$
|
211,684
|
|
Aggregate amortization expense for finite-lived intangible assets was recorded in the amounts of $9,015 and $18,190 for the three and six months ended July 1, 2017, respectively. Aggregate amortization expense for finite-lived intangible assets was recorded in the amounts of $8,603 and $17,023 for the three and six months ended July 2, 2016, respectively. The franchise rights acquired related to the VPM acquisition were amortized ratably over a 2 year period. The franchise rights acquired related to the Miami Acquisition were amortized ratably over a 3 month period.
Estimated amortization expense of existing finite-lived intangible assets for the next five fiscal years and thereafter is as follows:
Remainder of fiscal 2017
|
|
$
|
17,528
|
|
Fiscal 2018
|
|
$
|
21,364
|
|
Fiscal 2019
|
|
$
|
10,195
|
|
Fiscal 2020
|
|
$
|
2,420
|
|
Fiscal 2021 and thereafter
|
|
$
|
392
|
|
10
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AND PER UNIT AMOUNTS)
The components of the Company’s long-term debt were as follows:
|
|
July 1, 2017
|
|
|
December 31, 2016
|
|
|
|
Principal
Balance
|
|
|
Effective Rate
(1)
|
|
|
Principal
Balance
|
|
|
Effective Rate
(1)
|
|
Revolving Facility due April 2, 2018
|
|
$
|
0
|
|
|
|
0.00
|
%
|
|
$
|
0
|
|
|
|
3.35
|
%
|
Tranche B-1 Term Facility due April 2, 2016
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0
|
|
|
|
3.96
|
%
|
Tranche B-2 Term Facility due April 2, 2020
|
|
|
1,935,440
|
|
|
|
4.64
|
%
|
|
|
2,021,250
|
|
|
|
4.41
|
%
|
Total
|
|
|
1,935,440
|
|
|
|
4.64
|
%
|
|
|
2,021,250
|
|
|
|
4.38
|
%
|
Less: Current Portion
|
|
|
20,213
|
|
|
|
|
|
|
|
21,000
|
|
|
|
|
|
Unamortized Deferred Financing Costs
|
|
|
15,528
|
|
|
|
|
|
|
|
18,951
|
|
|
|
|
|
Total Long-Term Debt
|
|
$
|
1,899,699
|
|
|
|
|
|
|
$
|
1,981,299
|
|
|
|
|
|
(1)
|
Includes amortization of deferred financing costs. For fiscal 2016, the effective interest rate for the Revolving Facility and Tranche B-1 Term Facility was computed based on interest expense incurred over the period for which borrowings were outstanding.
|
The Company’s credit facilities at the end of the first quarter of fiscal 2013 consisted of the following term loan facilities and revolving credit facilities: a tranche B loan (“Term B Loan”), a tranche C loan (“Term C Loan”), a tranche D loan (“Term D Loan”), a tranche E loan (“Term E Loan”), a tranche F loan (“Term F Loan”), revolving credit facility A-1 (“Revolver A-1” ) and revolving credit facility A-2 (“Revolver A-2”).
On April 2, 2013, the Company refinanced its credit facilities pursuant to a new Credit Agreement (as amended, supplemented or otherwise modified, the “Credit Agreement”) among the Company, the lenders party thereto, JPMorgan Chase Bank, N.A., as administrative agent and an issuing bank, The Bank of Nova Scotia, as revolving agent, swingline lender and an issuing bank, and the other parties thereto. The Credit Agreement provides for (a) a revolving credit facility (including swing line loans and letters of credit) in an initial aggregate principal amount of $250,000 that will mature on April 2, 2018 (the “Revolving Facility”), (b) an initial term B-1 loan credit facility in an aggregate principal amount of $300,000 that matured on April 2, 2016 (the “Tranche B-1 Term Facility”) and (c) an initial term B-2 loan credit facility in an aggregate principal amount of $2,100,000 that will mature on April 2, 2020 (the “Tranche B-2 Term Facility”, and together with the Tranche B-1 Term Facility, the “Term Facilities”; the Term Facilities and Revolving Facility collectively, the “WWI Credit Facility”). In connection with this refinancing, the Company used the proceeds from borrowings under the Term Facilities to pay off a total of $2,399,904 of outstanding loans, consisting of $128,759 of Term B Loans, $110,602 of Term C Loans, $117,612 of Term D Loans, $1,125,044 of Term E Loans, $817,887 of Term F Loans, $21,247 of loans under the Revolver A-1 and $78,753 of loans under the Revolver A-2. Following the refinancing of a total of $2,399,904 of loans, at April 2, 2013, the Company had $2,400,000 debt outstanding under the Term Facilities and $248,848 of availability under the Revolving Facility. The Company incurred fees of $44,817 during the second quarter of fiscal 2013 in connection with this refinancing. In the second quarter of fiscal 2013, the Company wrote-off fees associated with this refinancing which resulted in the Company recording a charge of $21,685 in early extinguishment of debt.
On September 26, 2014, the Company and certain lenders entered into an agreement amending the Credit Agreement that, among other things, eliminated the Financial Covenant (as defined in the Credit Agreement) with respect to the Revolving Facility. In connection with this amendment, the Company wrote-off deferred financing fees of approximately $1,583 in the third quarter of fiscal 2014. Concurrently with and in order to effect this amendment, the Company reduced the amount of the Revolving Facility from $250,000 to $50,000.
Under the terms of the Credit Agreement, depending on the Company’s Consolidated Leverage Ratio (as defined in the Credit Agreement), on an annual basis on or about the time the Company is required to deliver its financial statements for any fiscal year, the Company is obligated to offer to prepay a portion of the outstanding principal amount of the Term Facilities in an aggregate amount determined by a percentage of its annual excess cash flow (as defined in the Credit Agreement). On March 13, 2015, the Company commenced an offer to prepay at a discount to par up to $75,000 in aggregate principal amount of term loans outstanding under the Tranche B-1 Term Facility. On March 20, 2015, the Company accepted offers with a discount equal to or greater than 9.00% in respect of such term loans. On March 25, 2015, the Company paid an aggregate amount of cash proceeds totaling $57,389 plus an amount sufficient to pay accrued and unpaid interest on the amount prepaid to prepay $63,065 in aggregate principal amount of such term loans under the Tranche B-1 Term Facility. This expenditure reduced, on a dollar for dollar basis, the Company’s
11
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AND PER UNIT AMOUNTS)
$59,728 obligation to make a mandatory excess cash flow prepayment offer to the term loan lenders under the terms of the Credit Agreement. In addition, the Company made a voluntary prepayment at par on March 25, 2015 of $2,500 in respect of such term loans
under the Tranche B-1 Term Facility to reduce the remaining excess cash flow prepayment obligation for fiscal 2014. As a result of this prepayment, the Company wrote-off fees of $326, incurred fees of $601 and recorded a gain on early extinguishment of de
bt of $4,749, inclusive of these fees, in the first quarter of fiscal 2015.
On June 17, 2015, the Company commenced another offer to prepay at a discount to par up to $229,000 in aggregate principal amount of term loans outstanding under the Tranche B-1 Term Facility. On June 22, 2015, the Company accepted offers with a discount equal to or greater than 9.00% in respect of such term loans. On June 26, 2015, the Company paid an aggregate amount of cash proceeds totaling $77,225 plus an amount sufficient to pay accrued and unpaid interest on the amount prepaid to prepay $84,862 in aggregate principal amount of such term loans under the Tranche B-1 Term Facility. As a result of this prepayment, the Company wrote-off fees of $321, incurred fees of $641 and recorded a gain on early extinguishment of debt of $6,677, inclusive of these fees, in the second quarter of fiscal 2015.
On July 14, 2015, the Company drew down the $48,000 available on its Revolving Facility in order to enhance its cash position and to provide additional financial flexibility. As of January 2, 2016, the revolver borrowing was classified as a short-term liability in consideration of the fact that the terms of the Revolving Facility require an assessment as to whether there have been any material adverse changes with respect to the Company in connection with the Company’s monthly interest elections. Although the revolver borrowing was classified as a short-term liability as of January 2, 2016, absent any change in fact and circumstance, the Company had, and continues to have, the ability to extend and not repay the Revolving Facility until its due date of April 2, 2018.
On April 1, 2016, the Company paid in full, with cash on hand, a principal amount of term loans equal to $144,323, which constituted the entire remaining principal amount of term loans outstanding under the Tranche B-1 Term Facility due April 2, 2016.
On July 29, 2016, the Company paid down, with cash on hand, a principal amount of $25,000 of the $48,000 outstanding under its Revolving Facility. On September 16, 2016, the Company paid down, with cash on hand, the remaining outstanding principal amount of $23,000 on its Revolving Facility.
On May 18, 2017, the Company commenced another offer to prepay at a discount to par up to $75,000 in aggregate principal amount of term loans outstanding under the Tranche B-2 Term Facility.
On May 24, 2017, the Company accepted offers with a discount equal to or greater than 3.28% in respect of such term loans. On May 25, 2017,
the Company paid an aggregate amount of cash proceeds totaling
$73,030 plus an amount sufficient to pay accrued and unpaid interest on the amount prepaid to prepay $75,507 in aggregate principal amount of such term loans under the Tranche
B-2
Term Facility
. As a result of this prepayment, the Company wrote-off fees of $618, incurred fees of $305 and recorded a gain on early extinguishment of debt of $1,554, inclusive of these fees, in the second quarter of fiscal 2017.
At July 1, 2017 under the WWI Credit Facility, the Company had $1,935,440 outstanding consisting entirely of a term loan under the Tranche B-2 Term Facility. At July 1, 2017, the Revolving Facility had $0 outstanding, $1,819 in issued but undrawn letters of credit outstanding thereunder and $48,181 in available unused commitments thereunder. The proceeds from borrowings under the Revolving Facility (including swing line loans and letters of credit) are available to be used for working capital and general corporate purposes.
Borrowings under the Credit Agreement bear interest at a rate equal to, at the Company’s option, LIBOR plus an applicable margin or a base rate plus an applicable margin. LIBOR under the Tranche B-2 Term Facility is subject to a minimum interest rate of 0.75% and the base rate under the Tranche B-2 Term Facility is subject to a minimum interest rate of 1.75%. Under the terms of the Credit Agreement, in the event the Company receives a corporate rating of BB- (or lower) from S&P and a corporate rating of Ba3 (or lower) from Moody’s, the applicable margin relating to the Term Facilities would increase by 25 basis points. On February 21, 2014, both S&P and Moody’s issued revised corporate ratings of the Company of B+ and B1, respectively. As a result, effective February 21, 2014, the applicable margin on borrowings under the Tranche B-1 Term Facility went from 2.75% to 3.00% and on borrowings under the Tranche B-2 Term Facility went from 3.00% to 3.25%. The applicable margin relating to the Revolving Facility will fluctuate depending upon the Company’s Consolidated Leverage Ratio. At April 1, 2016, the date of payment of the principal amount of loans outstanding under the Tranche B-1 Term Facility discussed above, borrowings under the Tranche B-1 Term Facility bore interest at LIBOR plus an applicable margin of 3.00%. At July 1, 2017, borrowings under the Tranche B-2 Term Facility bore interest at LIBOR plus an applicable margin of 3.25%. Based on the Company’s Consolidated Leverage Ratio as of July 1, 2017, had there been any borrowings under the Revolving Facility, it would have borne interest at LIBOR plus an applicable margin of 2.50%. On a quarterly basis, the Company will pay a commitment fee to the lenders under the Revolving Facility in respect of unutilized
12
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AND PER UNIT AMOUNTS)
commitmen
ts thereunder, which commitment fee will fluctuate depending upon the Company’s Consolidated Leverage Ratio. Based on the Company’s Consolidated Leverage Ratio as of July 1, 2017 and December 31, 2016, the commitment fee was 0.50% per annum. For the six mo
nths ended July 1, 2017 and the fiscal year ended December 31, 2016
,
the Company paid $122
and $31, respectively, in commitment fees. The Company also will pay customary letter of credit fees and fronting fees under the Revolving Facility, which totaled $2
4 for the six months ended July 1, 2017 and $49 for the fiscal year ended December 31, 2016.
The Credit Agreement contains customary covenants including covenants that, in certain circumstances, restrict the Company’s ability to incur additional indebtedness, pay dividends on and redeem capital stock, make other payments, including investments, sell its assets and enter into consolidations, mergers and transfers of all or substantially all of its assets. The WWI Credit Facility does not require the Company to meet any financial maintenance covenants and is guaranteed by certain of the Company’s existing and future subsidiaries. Substantially all of the Company’s assets secure the WWI Credit Facility.
At July 1, 2017 and December 31, 2016, the Company’s debt consisted entirely of variable-rate instruments. An interest rate swap was entered into to hedge a portion of the cash flow exposure associated with the Company’s variable-rate borrowings. The weighted average interest rate (which includes amortization of deferred financing costs) on the Company’s outstanding debt, exclusive of the impact of the swap, was approximately 4.64% and 4.41% per annum based on interest rates at July 1, 2017 and December 31, 2016, respectively. The weighted average interest rate (which includes amortization of deferred financing costs) on the Company’s outstanding debt, including the impact of the swap, was approximately 5.27% and 5.32% per annum based on interest rates at July 1, 2017 and December 31, 2016, respectively.
Basic earnings per share (“EPS”) are calculated utilizing the weighted average number of common shares outstanding during the periods presented. Diluted EPS is calculated utilizing the weighted average number of common shares outstanding during the periods presented adjusted for the effect of dilutive common stock equivalents.
The following table sets forth the computation of basic and diluted EPS:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
July 1,
|
|
|
July 2,
|
|
|
July 1,
|
|
|
July 2,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weight Watchers International, Inc.
|
|
$
|
45,173
|
|
|
$
|
30,494
|
|
|
$
|
55,825
|
|
|
$
|
19,741
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock outstanding
|
|
|
64,269
|
|
|
|
63,740
|
|
|
|
64,124
|
|
|
|
63,644
|
|
Effect of dilutive common stock equivalents
|
|
|
3,468
|
|
|
|
2,194
|
|
|
|
3,180
|
|
|
|
2,246
|
|
Weighted average diluted common shares outstanding
|
|
|
67,737
|
|
|
|
65,934
|
|
|
|
67,304
|
|
|
|
65,890
|
|
Earnings per share attributable to Weight
Watchers International, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.70
|
|
|
$
|
0.48
|
|
|
$
|
0.87
|
|
|
$
|
0.31
|
|
Diluted
|
|
$
|
0.67
|
|
|
$
|
0.46
|
|
|
$
|
0.83
|
|
|
$
|
0.30
|
|
The number of anti-dilutive common stock equivalents excluded from the calculation of the weighted average number of common shares for diluted EPS was 868 and 1,265 for the three months ended July 1, 2017 and July 2, 2016, respectively and 956 and 1,205 for the six months ended July 1, 2017 and July 2, 2016, respectively.
13
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AND PER UNIT AMOUNTS)
On May 6, 2008 and May 12, 2004, respectively, the Company’s shareholders approved the 2008 Stock Incentive Plan (the “2008 Plan”) and the 2004 Stock Incentive Plan (the “2004 Plan”). On May 6, 2014, the Company’s shareholders approved the 2014 Stock Incentive Plan (as amended and restated, the “2014 Plan”), which replaced the 2008 Plan and 2004 Plan for all equity-based awards granted on or after May 6, 2014. The 2014 Plan is designed to promote the long-term financial interests and growth of the Company by attracting, motivating and retaining employees with the ability to contribute to the success of the business and to align compensation for the Company’s employees over a multi-year period directly with the interests of the shareholders of the Company. The Company’s Board of Directors or a committee thereof administers the 2014 Plan.
Pursuant to the restricted stock provisions of the 2014 Plan, in fiscal 2016 the Compensation and Benefits Committee of the Company’s Board of Directors (the “Compensation Committee”) determined to grant 289.9 performance-based stock unit (“PSU”) awards having both time- and performance-vesting criteria. The time-vesting criteria for these PSUs will be satisfied on the third anniversary of the grant date (i.e., May 16, 2019). The performance-vesting criteria for these PSUs will be satisfied if the Company has achieved a Debt Ratio (as defined in the applicable term sheet for these PSU awards and based on a Debt to EBITDAS ratio (each, as defined therein)) at levels at or above a “threshold” level performance of 4.5x over the performance period from December 31, 2017 to December 29, 2018. Pursuant to these awards, the number of PSUs that become vested, if any, upon the satisfaction of both vesting criteria, shall be equal to (x) the target number of PSUs granted multiplied by (y) the applicable Debt Ratio achievement percentage, rounded down to avoid the issuance of fractional shares. If all of these awards fully meet the time-vesting criteria and the minimum performance condition is attained, depending on the Company’s Debt Ratio achievement, the number of shares of the Company’s common stock issuable under these PSUs range from 62.5 to 312.5. The Company is currently accruing compensation expense to what it believes is the probable outcome upon vesting.
Additionally, pursuant to the restricted stock provisions of the 2014 Plan, in fiscal 2017 the Compensation Committee determined to grant 98.5 PSU awards in May 2017 having both time- and performance-vesting criteria. The time-vesting criteria for these PSUs will be satisfied on the third anniversary of the grant date (i.e., May 15, 2020). The performance-vesting criteria for these PSUs will be satisfied if the Company has achieved certain annual operating income objectives in each fiscal year over a three-year period (i.e., fiscal 2017 through fiscal 2019) (each, a “2017 Award Performance Year”). When the performance measure has been met for a particular 2017 Award Performance Year, that portion of units is “banked” for potential issuance following the satisfaction of the three-year time-vesting criteria. Such portion of units to be “banked” shall be equal to (x) the target number of PSUs granted for the applicable 2017 Award Performance Year multiplied by (y) the applicable achievement percentage, rounded down to avoid the issuance of fractional shares. If all of these awards fully meet the time-vesting criteria and the minimum performance condition is attained in each 2017 Award Performance Year, depending on the Company’s performance achievement, the number of shares of the Company’s common stock issuable under these PSUs range from 32.8 to 164.2. The Company is currently accruing compensation expense to what it believes is the probable outcome upon vesting.
The effective tax rates for the three and six months ended July 1, 2017 were 36.5% and 23.2%, respectively. The effective tax rates for the three and six months ended July 2, 2016 were 31.5% and 30.0%, respectively. For the six months ended July 1, 2017, the primary difference between the US federal statutory tax rate and the Company’s consolidated effective tax rate was due to the $11,633 tax benefit related to the cessation of operations of the Company’s Spanish subsidiary, partially offset by $604 of tax expense related to tax shortfalls in connection with the updated guidance on stock compensation in the first quarter of fiscal 2017, as described in Note 3. For the six months ended July 2, 2016, the primary difference between the US federal statutory tax rate and the Company’s consolidated effective tax rate was due to the reversal of a $2,500 valuation allowance related to tax benefits for foreign losses expected to be realized.
14
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AND PER UNIT AMOUNTS)
The differences between the US federal statutory tax rate and the Company’s consolidated effective tax rate is as follows:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
July 1,
|
|
|
July 2,
|
|
|
July 1,
|
|
|
July 2,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
US federal statutory tax rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State income taxes (net of federal benefit)
|
|
|
1.8
|
%
|
|
|
0.8
|
%
|
|
|
2.4
|
%
|
|
|
0.1
|
%
|
Cessation of Spanish operations
|
|
|
0.4
|
%
|
|
|
0.0
|
%
|
|
|
(16.0
|
%)
|
|
|
0.0
|
%
|
Research and development credit
|
|
|
(1.1
|
%)
|
|
|
0.0
|
%
|
|
|
(2.2
|
%)
|
|
|
0.0
|
%
|
Tax shortfall on share-based awards
|
|
|
(0.8
|
%)
|
|
|
0.0
|
%
|
|
|
0.8
|
%
|
|
|
0.0
|
%
|
Reserves for uncertain tax positions
|
|
|
0.4
|
%
|
|
|
0.2
|
%
|
|
|
0.7
|
%
|
|
|
0.6
|
%
|
Increase (decrease) in valuation allowance
|
|
|
0.1
|
%
|
|
|
(1.2
|
%)
|
|
|
1.2
|
%
|
|
|
(9.4
|
%)
|
Other
|
|
|
0.7
|
%
|
|
|
(3.3
|
%)
|
|
|
1.3
|
%
|
|
|
3.7
|
%
|
Effective Tax Rate
|
|
|
36.5
|
%
|
|
|
31.5
|
%
|
|
|
23.2
|
%
|
|
|
30.0
|
%
|
Raymond Roberts v. Weight Watchers International, Inc.
On January 7, 2016, an Online
Plus
member filed a putative class action complaint against the Company in the Supreme Court of New York, New York County, asserting class claims for breach of contract and violations of the New York General Business Law. On February 5, 2016, the Company removed the case to the United States District Court, Southern District of New York. On March 18, 2016, the plaintiff filed an amended complaint, alleging that, as a result of the temporary glitches in the Company’s website and app in November and December 2015, the Company has: (1) breached its Subscription Agreement with its Online
Plus
members; and (2) engaged in deceptive acts and practices in violation of Section 350 of the New York General Business Law. The plaintiff is seeking unspecified actual, punitive and statutory damages, as well as his attorneys’ fees and costs incurred in connection with this action. The Company filed a motion to dismiss on May 6, 2016. The plaintiff filed his opposition papers on June 9, 2016 and the Company filed its reply papers on June 23, 2016. The Court granted the Company’s motion to dismiss on November 14, 2016. On November 16, 2016, the plaintiff filed a timely notice of appeal of the Court’s decision and on January 31, 2017, the plaintiff filed his brief in support of appeal. The Company filed its opposition brief on April 5, 2017, and the plaintiff filed his reply brief on April 25, 2017. The Company believes that the plaintiff’s appeal is without merit and will be denied in due course.
Other Litigation Matters
Due to the nature of the Company’s activities, it is also, at times, subject to pending and threatened legal actions that arise out of the ordinary course of business. In the opinion of management, the disposition of any such matters is not expected, individually or in the aggregate, to have a material effect on the Company’s results of operations, financial condition or cash flows.
12.
|
Derivative Instruments and Hedging
|
As of July 1, 2017 and December 31, 2016, the Company had in effect an interest rate swap with a notional amount totaling $1,250,000 and $1,500,000, respectively.
On July 26, 2013, in order to hedge a portion of its variable rate debt, the Company entered into a forward-starting interest rate swap with an effective date of March 31, 2014 and a termination date of April 2, 2020. The initial notional amount of this swap was $1,500,000. During the term of this swap, the notional amount decreased from $1,500,000 effective March 31, 2014 to $1,250,000 on April 3, 2017, and will decrease to $1,000,000 on April 1, 2019. This interest rate swap effectively fixes the variable interest rate on the notional amount of this swap at 2.38%. This swap qualifies for hedge accounting and, therefore, changes in the fair value of this swap have been recorded in accumulated other comprehensive loss.
As of July 1, 2017 and December 31, 2016, cumulative unrealized losses for qualifying hedges were reported as a component of accumulated other comprehensive loss in the amounts of $13,332 ($21,856 before taxes) and $16,002 ($26,232 before taxes), respectively.
15
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AND PER UNIT AMOUNTS)
The Company is
hedging forecasted transactions for periods not exceeding the next three years. The Company expects approximately $5,765 ($9,451 before taxes) of derivative losses included in accumulated other comprehensive loss at July 1, 2017, based on current market ra
tes, will be reclassified into earnings within the next 12 months.
13.
|
Fair Value Measurements
|
Accounting guidance on fair value measurements for certain financial assets and liabilities requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:
|
•
|
Level 1 – Quoted prices in active markets for identical assets or liabilities.
|
|
•
|
Level 2 – Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
|
|
•
|
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
|
When measuring fair value, the Company is required to maximize the use of observable inputs and minimize the use of unobservable inputs.
Fair Value of Financial Instruments
The Company’s significant financial instruments include long-term debt and an interest rate swap agreement as of July 1, 2017 and December 31, 2016.
The fair value of the Company’s Term Facilities is determined by utilizing average bid prices on or near the end of each fiscal quarter (Level 2 input). As of July 1, 2017 and December 31, 2016, the fair value of the Company’s long-term debt was approximately $1,853,925 and $1,671,920, respectively, as compared to the carrying value (net of deferring financing costs) of $1,919,912 and $2,002,299, respectively.
Derivative Financial Instruments
The fair values for the Company’s derivative financial instruments are determined using observable current market information such as the prevailing LIBOR interest rate and LIBOR yield curve rates and include consideration of counterparty credit risk. See Note 12 for disclosures related to derivative financial instruments.
The following table presents the aggregate fair value of the Company’s derivative financial instruments:
|
|
|
|
|
|
|
Fair Value Measurements Using:
|
|
|
|
Total
Fair
Value
|
|
|
|
Quoted Prices in
Active Markets
for Identical Assets
(Level 1)
|
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Interest rate swap liability at July 1, 2017
|
|
$
|
25,702
|
|
|
|
$
|
0
|
|
|
$
|
25,702
|
|
|
$
|
0
|
|
Interest rate swap liability at December 31, 2016
|
|
$
|
31,974
|
|
|
|
$
|
0
|
|
|
$
|
31,974
|
|
|
$
|
0
|
|
The Company did not have any transfers into or out of Levels 1 and 2, and did not maintain any assets or liabilities classified as Level 3, during the six months ended July 1, 2017 and the fiscal year ended December 31, 2016.
16
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AND PER UNIT AMOUNTS)
14.
|
Accumulated Other Comprehensive Loss
|
Amounts reclassified out of accumulated other comprehensive loss are as follows:
Changes in Accumulated Other Comprehensive Loss by Component
(a)
|
|
Six Months Ended July 1, 2017
|
|
|
|
Loss on
Qualifying
Hedges
|
|
|
Loss on
Foreign
Currency
Translation
|
|
|
Total
|
|
Beginning Balance at December 31, 2016
|
|
$
|
(16,002
|
)
|
|
$
|
(11,118
|
)
|
|
$
|
(27,120
|
)
|
Other comprehensive (loss) income before reclassifications, net
of tax
|
|
|
(2,915
|
)
|
|
|
2,892
|
|
|
|
(23
|
)
|
Amounts reclassified from accumulated other
comprehensive loss, net of tax
(b)
|
|
|
5,585
|
|
|
|
787
|
|
|
|
6,372
|
|
Net current period other comprehensive income including
noncontrolling interest
|
|
|
2,670
|
|
|
|
3,679
|
|
|
|
6,349
|
|
Less: net current period other comprehensive income
attributable to the noncontrolling interest
|
|
|
0
|
|
|
|
41
|
|
|
|
41
|
|
Ending Balance at July 1, 2017
|
|
$
|
(13,332
|
)
|
|
$
|
(7,398
|
)
|
|
|
(20,730
|
)
|
(a)
|
Amounts in parentheses indicate debits
|
(b)
|
See separate table below for details about these reclassifications
|
|
|
Six Months Ended July 2, 2016
|
|
|
|
Loss on
Qualifying
Hedges
|
|
|
Loss on
Foreign
Currency
Translation
|
|
|
Total
|
|
Beginning Balance at January 2, 2016
|
|
$
|
(23,135
|
)
|
|
$
|
(14,130
|
)
|
|
$
|
(37,265
|
)
|
Other comprehensive (loss) income before
reclassifications, net of tax
|
|
|
(18,627
|
)
|
|
|
7,143
|
|
|
|
(11,484
|
)
|
Amounts reclassified from accumulated other
comprehensive loss, net of tax
(b)
|
|
|
7,546
|
|
|
|
0
|
|
|
|
7,546
|
|
Net current period other comprehensive (loss) income
including noncontrolling interest
|
|
|
(11,081
|
)
|
|
|
7,143
|
|
|
|
(3,938
|
)
|
Less: net current period other comprehensive income
attributable to the noncontrolling interest
|
|
|
0
|
|
|
|
(470
|
)
|
|
|
(470
|
)
|
Ending Balance at July 2, 2016
|
|
$
|
(34,216
|
)
|
|
$
|
(7,457
|
)
|
|
$
|
(41,673
|
)
|
|
(a)
|
Amounts in parentheses indicate debits
|
|
(b)
|
See separate table below for details about these reclassifications
|
17
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AND PER UNIT AMOUNTS)
Reclassifications out of Accumulated Other Comprehensive Loss
(a)
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
|
|
July 1,
|
|
|
July 2,
|
|
|
July 1,
|
|
|
July 2,
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
Details about Other Comprehensive
Loss Components
|
|
Amounts Reclassified from
Accumulated Other
Comprehensive Loss
|
|
|
Amounts Reclassified from
Accumulated Other
Comprehensive Loss
|
|
|
Affected Line Item in the
Statement Where Net
Income is Presented
|
Loss on Qualifying Hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts
|
|
$
|
(3,905
|
)
|
|
$
|
(6,185
|
)
|
|
$
|
(9,155
|
)
|
|
$
|
(12,370
|
)
|
|
Interest expense
|
|
|
|
(3,905
|
)
|
|
|
(6,185
|
)
|
|
|
(9,155
|
)
|
|
|
(12,370
|
)
|
|
Income before income taxes
|
|
|
|
1,523
|
|
|
|
2,412
|
|
|
|
3,570
|
|
|
|
4,824
|
|
|
Provision for income taxes
|
|
|
$
|
(2,382
|
)
|
|
$
|
(3,773
|
)
|
|
$
|
(5,585
|
)
|
|
$
|
(7,546
|
)
|
|
Net income
|
Loss on Foreign Currency Translation
|
|
$
|
(80
|
)
|
|
$
|
0
|
|
|
$
|
(787
|
)
|
|
$
|
0
|
|
|
Other (income) expense, net
|
|
|
|
(80
|
)
|
|
|
0
|
|
|
|
(787
|
)
|
|
|
0
|
|
|
Income before income taxes
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
Provision for income taxes
|
|
|
$
|
(80
|
)
|
|
$
|
0
|
|
|
$
|
(787
|
)
|
|
$
|
0
|
|
|
Net income
|
(a)
|
Amounts in parentheses indicate debits to profit/loss
|
The Company has four reportable segments based on an integrated geographical structure as follows: North America, United Kingdom, Continental Europe (CE) and Other. Other consists of Asia Pacific and emerging markets operations and franchise revenues and related costs, all of which have been grouped together as if they were a single reportable segment because they do not meet any of the quantitative thresholds and are immaterial for separate disclosure. To be consistent with the information that is presented to the chief operating decision maker, the Company does not include intercompany activity in the segment results. Information about the Company’s reportable segments is as follows:
|
|
Total Revenue
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
July 1, 2017
|
|
|
July 2, 2016
|
|
|
July 1, 2017
|
|
|
July 2, 2016
|
|
North America
|
|
$
|
238,989
|
|
|
$
|
211,545
|
|
|
$
|
471,719
|
|
|
$
|
420,388
|
|
United Kingdom
|
|
|
26,435
|
|
|
|
27,702
|
|
|
|
50,434
|
|
|
|
56,613
|
|
Continental Europe
|
|
|
61,496
|
|
|
|
57,048
|
|
|
|
118,914
|
|
|
|
112,754
|
|
Other
|
|
|
14,753
|
|
|
|
13,466
|
|
|
|
29,669
|
|
|
|
26,916
|
|
Total revenue
|
|
$
|
341,673
|
|
|
$
|
309,761
|
|
|
$
|
670,736
|
|
|
$
|
616,671
|
|
18
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AND PER UNIT AMOUNTS)
|
|
Net Income
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
July 1, 2017
|
|
|
July 2, 2016
|
|
|
July 1, 2017
|
|
|
July 2, 2016
|
|
Segment operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
79,073
|
|
|
$
|
56,975
|
|
|
$
|
113,189
|
|
|
$
|
82,499
|
|
United Kingdom
|
|
|
6,672
|
|
|
|
5,506
|
|
|
|
9,245
|
|
|
|
5,915
|
|
Continental Europe
|
|
|
22,767
|
|
|
|
19,523
|
|
|
|
27,823
|
|
|
|
20,729
|
|
Other
|
|
|
3,263
|
|
|
|
2,355
|
|
|
|
4,941
|
|
|
|
3,114
|
|
Total segment operating income
|
|
|
111,775
|
|
|
|
84,359
|
|
|
|
155,198
|
|
|
|
112,257
|
|
General corporate expenses
|
|
|
15,569
|
|
|
|
10,628
|
|
|
|
28,758
|
|
|
|
24,970
|
|
Interest expense
|
|
|
27,092
|
|
|
|
28,609
|
|
|
|
55,234
|
|
|
|
58,634
|
|
Other (income) expense, net
|
|
|
(488
|
)
|
|
|
607
|
|
|
|
154
|
|
|
|
542
|
|
Gain on early extinguishment of debt
|
|
|
(1,554
|
)
|
|
|
0
|
|
|
|
(1,554
|
)
|
|
|
0
|
|
Provision for income taxes
|
|
|
25,992
|
|
|
|
14,034
|
|
|
|
16,864
|
|
|
|
8,431
|
|
Net income
|
|
|
45,164
|
|
|
|
30,481
|
|
|
|
55,742
|
|
|
|
19,680
|
|
Net loss attributable to the noncontrolling interest
|
|
|
9
|
|
|
|
13
|
|
|
|
83
|
|
|
|
61
|
|
Net income attributable to Weight Watchers International, Inc.
|
|
$
|
45,173
|
|
|
$
|
30,494
|
|
|
$
|
55,825
|
|
|
$
|
19,741
|
|
|
|
Depreciation and Amortization
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
July 1, 2017
|
|
|
July 2, 2016
|
|
|
July 1, 2017
|
|
|
July 2, 2016
|
|
North America
|
|
$
|
9,738
|
|
|
$
|
10,894
|
|
|
$
|
19,868
|
|
|
$
|
21,779
|
|
United Kingdom
|
|
|
346
|
|
|
|
299
|
|
|
|
628
|
|
|
|
517
|
|
Continental Europe
|
|
|
292
|
|
|
|
428
|
|
|
|
601
|
|
|
|
884
|
|
Other
|
|
|
136
|
|
|
|
170
|
|
|
|
275
|
|
|
|
469
|
|
Total segment depreciation and amortization
|
|
|
10,512
|
|
|
|
11,791
|
|
|
|
21,372
|
|
|
|
23,649
|
|
General corporate depreciation and amortization
|
|
|
3,556
|
|
|
|
2,601
|
|
|
|
7,043
|
|
|
|
5,274
|
|
Depreciation and amortization
|
|
$
|
14,068
|
|
|
$
|
14,392
|
|
|
$
|
28,415
|
|
|
$
|
28,923
|
|
As more fully described in Note 4, on October 18, 2015, the Company entered into the Strategic Collaboration Agreement with Ms. Winfrey, under which she will consult with the Company and participate in developing, planning, executing and enhancing the Weight Watchers program and related initiatives, and provide it with services in her discretion to promote the Company and its programs, products and services.
In addition to the Strategic Collaboration Agreement, Ms. Winfrey and her related entities provided services to the Company totaling $874 and $2,556 for the three and six months ended July 1, 2017, respectively and $542 and $1,685 for the three and six months ended July 2, 2016, respectively, which services included advertising, production and related fees.
The Company’s accounts payable to parties related to Ms. Winfrey at July 1, 2017 and December 31, 2016 was $0 and $1,123, respectively.
19
CAUTIONARY NOTICE REGARDING
FORWARD-LOOKING STATEMENTS
Except for historical information contained herein, this Quarterly Report on Form 10-Q includes “forward-looking statements,” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, including, in particular, the statements about our plans, strategies and prospects under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” We have generally used the words “may,” “will,” “could,” “expect,” “anticipate,” “believe,” “estimate,” “plan,” “intend” and similar expressions in this Quarterly Report on Form 10-Q to identify forward-looking statements. We have based these forward-looking statements on our current views with respect to future events and financial performance. Actual results could differ materially from those projected in these forward-looking statements. These forward-looking statements are subject to risks, uncertainties and assumptions, including, among other things:
|
•
|
competition from other weight management industry participants or the development of more effective or more favorably perceived weight management methods;
|
|
•
|
our ability to continue to develop new, innovative services and products and enhance our existing services and products or the failure of our services and products to continue to appeal to the market, or our ability to successfully expand into new channels of distribution or respond to consumer trends;
|
|
•
|
the ability to successfully implement new strategic initiatives;
|
|
•
|
the effectiveness of our advertising and marketing programs, including the strength of our social media presence;
|
|
•
|
the impact on the Weight Watchers brand of actions taken by our franchisees, licensees, suppliers and other partners;
|
|
•
|
the inability to refinance our debt obligations on favorable terms or at all;
|
|
•
|
the impact of our debt service obligations and restrictive debt covenants;
|
|
•
|
uncertainties regarding the satisfactory operation of our information technology or systems;
|
|
•
|
the impact of security breaches or privacy concerns;
|
|
•
|
the recognition of asset impairment charges;
|
|
•
|
the loss of key personnel, strategic partners or consultants or failure to effectively manage and motivate our workforce;
|
|
•
|
our chief executive officer transition;
|
|
•
|
the inability to renew certain of our licenses, or the inability to do so on terms that are favorable to us;
|
|
•
|
the expiration or early termination by us of leases;
|
|
•
|
risks and uncertainties associated with our international operations, including regulatory, economic, political and social risks and foreign currency risks;
|
|
•
|
uncertainties related to a downturn in general economic conditions or consumer confidence;
|
|
•
|
our ability to successfully make acquisitions or enter into joint ventures, including our ability to successfully integrate, operate or realize the anticipated benefits of such businesses;
|
|
•
|
the seasonal nature of our business;
|
|
•
|
the impact of events that discourage or impede people from gathering with others or accessing resources;
|
|
•
|
our ability to enforce our intellectual property rights both domestically and internationally, as well as the impact of our involvement in any claims related to intellectual property rights;
|
|
•
|
the outcomes of litigation or regulatory actions;
|
|
•
|
the impact of existing and future laws and regulations;
|
|
•
|
our failure to maintain effective internal control over financial reporting;
|
|
•
|
the possibility that the interests of Artal Group S.A., who effectively controls us, will conflict with other holders of our common stock; and
|
|
•
|
other risks and uncertainties, including those detailed from time to time in our periodic reports filed with the Securities and Exchange Commission.
|
You should not put undue reliance on any forward-looking statements. You should understand that many important factors, including those discussed herein, could cause our results to differ materially from those expressed or suggested in any forward-looking statement. Except as required by law, we do not undertake any obligation to update or revise these forward-looking statements to reflect new information or events or circumstances that occur after the date of this Quarterly Report on Form 10-Q or to reflect the occurrence of unanticipated events or otherwise.
20