NOTES TO 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
Companys meetings business refers to providing access to meetings to the Companys 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) and include all of the Companys 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.
Out-of-Period Adjustments:
In fiscal 2016, the Company identified and recorded out-of-period adjustments related to (i) income tax errors primarily related to
reversing a foreign tax receivable originally recorded in fiscal 2008 that should have been reversed in fiscal 2009; (ii) errors in the prior period tax provision identified upon filing of the tax return and (iii) technology expenses that
should have been capitalized in fiscal 2015. The impact of correcting these errors, which were immaterial to prior period financial statements and corrected in fiscal 2016, increased income before income taxes by $347, increased provision for income
taxes by $2,138 and decreased net income attributable to the Company by $1,791.
In fiscal 2015, the Company identified and
recorded out-of-period adjustments that related to immaterial errors in prior period financial statements, which were corrected in fiscal 2015, that increased income before income taxes by $1,650, provision for income taxes by $1,970, and decreased
net income attributable to the Company by $320.
2.
|
Summary of Significant Accounting Policies
|
Fiscal Year:
The Companys fiscal year ends on the Saturday closest to
December 31
st
and consists of either 52 or 53-week
periods. Fiscal year 2016 contained 52 weeks, fiscal year 2015 contained 52 weeks and fiscal year 2014 contained 53 weeks. In 2014, when the Company realigned its organizational structure and changed the determination of its reportable segments, the
Companys Online business accordingly changed its fiscal year end to be the same as the Companys fiscal year end, which did not have a material effect on the consolidated financial statements. See Note 16 for further information on the
Companys reportable segments.
Use of Estimates:
The preparation of financial statements, in conformity with GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, the Company evaluates its estimates and judgments, including those related
to inventories, the impairment analysis for goodwill and other indefinite-lived intangible assets, share-based compensation, income taxes, tax contingencies and litigation. The Company bases its estimates on historical experience and on various
other factors and assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.
Actual amounts could differ from these estimates.
F-8
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AND PER UNIT AMOUNTS)
Translation of Foreign Currencies:
For all foreign operations, the functional currency is the local currency. Assets and liabilities of these operations are translated into
US dollars using the exchange rate in effect at the end of each reporting period. Income statement accounts are translated at the average rate of exchange prevailing during each reporting period. Translation adjustments arising from the use of
differing exchange rates from period to period are included in accumulated other comprehensive loss.
Foreign currency gains
and losses arising from the translation of intercompany receivables and intercompany payables with the Companys international subsidiaries are recorded as a component of other expense, net, unless the receivable or payable is considered
long-term in nature, in which case the foreign currency gains and losses are recorded as a component of accumulated other comprehensive loss.
Cash Equivalents:
Cash
and cash equivalents are defined as highly liquid investments with original maturities of three months or less. Cash balances may, at times, exceed insurable amounts. The Company believes it mitigates this risk by investing in or through major
financial institutions. Cash includes balances due from third-party credit card companies.
Inventories:
Inventories, which consist of finished goods, are stated at the lower of cost or market on a first-in, first-out basis, net of reserves
for obsolescence and shrinkage.
Property and Equipment:
Property and equipment are recorded at cost. For financial reporting purposes, equipment is depreciated on the straight-line method over the estimated useful lives of the assets (3 to 10 years).
Leasehold improvements are amortized on the straight-line method over the shorter of the term of the lease or the useful life of the related assets. Expenditures for new facilities and improvements that substantially extend the useful life of an
asset are capitalized. Ordinary repairs and maintenance are expensed as incurred. When assets are retired or otherwise disposed of, the cost and related depreciation are removed from the accounts and any related gains or losses are included in
income.
Impairment of Long Lived Assets:
The Company reviews long-lived assets, including amortizable intangible assets, for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not
be fully recoverable.
In fiscal 2016 and fiscal 2015, the Company recorded impairment charges of $484 and $2,028,
respectively, related to internal-use computer software that was not expected to provide substantive service potential.
In
fiscal 2016, fiscal 2015 and fiscal 2014, the Company recorded impairment charges of $131, $427 and $652, respectively, related to property, plant and equipment that were expected to be disposed of before the end of their estimated useful lives.
F-9
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AND PER UNIT AMOUNTS)
Goodwill and Franchise Rights Acquired:
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 the end of fiscal 2015 and fiscal 2014 on its goodwill and other indefinite-lived intangible assets.
In fiscal 2016, the Company changed the timing of its annual impairment review of goodwill and other indefinite-lived
intangible assets to the first day of fiscal May. Previously the Company had performed the test as of the last day of the Companys fiscal year. The Company determined this accounting change was preferable because it allows the Company to
consider the data from the winter season results in the first fiscal quarter. This quarter typically represents approximately 40% of the full year recruitments, and the accounting change allows the Company to incorporate this data into the current
and future year performance estimates. The Company believes the resulting change in accounting principle related to changing the annual impairment testing date did not delay, accelerate, or avoid an impairment charge.
In performing its annual impairment analysis as of May 8, 2016, 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. 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 $19,238.
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 estimates and 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 Companys 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 Companys 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 Companys peer group. The risk-free rate of return was determined based on
F-10
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AND PER UNIT AMOUNTS)
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 Companys
current borrowing rate.
As it relates 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 cost of debt. The cost of equity was determined by combining a
risk-free rate of return and a market risk premium for the Companys 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 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 projected in the analysis. The cost of debt
was determined by estimating the Companys 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 Companys meetings business and a relief from royalty methodology for franchise rights related to
the Companys 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. The values of these franchise rights in the United States, Canada, United Kingdom, Australia,
New Zealand and other countries at December 31, 2016 were $675,515, $50,037, $11,694, $6,473, $4,900 and $0, respectively, totaling $748,619 and the values at January 2, 2016 were $675,515, $48,435, $11,858, $6,563, $4,833 and $122,
respectively, totaling $747,326.
In its hypothetical start-up approach analysis for fiscal 2016, 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.
Other Intangible Assets:
Other finite-lived intangible assets are amortized using the straight-line method over their estimated useful lives of 3 to 20 years. The
Company expenses all software costs (including website development costs) incurred during the preliminary project stage and capitalizes all internal and external direct costs of materials and services consumed in developing software (including
website development costs) once the development has reached the application development stage. Application development stage costs generally include software configuration, coding, installation to hardware and testing. These costs are amortized over
their estimated useful life of 3 years for website development costs and from 3 to 5 years for all other software costs. All costs incurred for upgrades, maintenance and enhancements, including the cost of website content, which do not result
in additional functionality, are expensed as incurred.
F-11
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AND PER UNIT AMOUNTS)
Revenue Recognition:
WWI earns revenue by conducting meetings, for which it charges a fee, predominantly through monthly commitment plans, prepayment plans or the pay-as-you-go arrangement. WWI also earns revenue
from monthly subscriptions for its Online products, selling products in its meetings, online and to its franchisees, collecting commissions from franchisees, collecting royalties related to licensing agreements, selling magazine subscriptions,
publishing, selling advertising space on its websites and in copies of its publications and By Mail product sales.
Monthly
commitment plans, prepaid meeting fees and magazine subscription revenue is recorded to deferred revenue and amortized into revenue over the period earned. Online subscription revenues, consisting of the fees associated with subscriptions for the
Companys Online subscription products, including its Personal Coaching product, are recognized over the period that products are provided. One-time Online sign-up fees are deferred and recognized over the expected customer relationship period.
Online subscription revenues that are paid in advance are deferred and recognized on a straight-line basis over the subscription period. Revenue from pay-as-you-go meeting fees, product sales, By Mail, commissions and royalties is
recognized when services are rendered, products are shipped to customers and title and risk of loss pass to the customers, and commissions and royalties are earned, respectively. Revenue from advertising in magazines is recognized when
advertisements are published. Revenue from magazine sales is recognized when the magazine is sent to the customer. In the meetings business, WWI generally charges non-refundable registration and starter fees in exchange for an introductory
information session and materials it provides to new members. Revenue from these registration and starter fees is recognized when the service and products are provided, which is generally at the same time payment is received from the customer. For
revenue transactions that involve multiple deliverables, the amount of revenue recognized is determined using the relative fair value of each element, which is generally based on each elements stand-alone selling price. Discounts to customers,
including free registration offers, are recorded as a deduction from gross revenue in the period such revenue was recognized. Revenue from advertising on its websites is recognized when the advertisement is viewed by the user.
The Company grants refunds in aggregate amounts that historically have not been material. Because the period of payment of the refund
generally approximates the period revenue was originally recognized, refunds are recorded as a reduction of revenue over the same period.
Advertising Costs:
Advertising costs consist primarily of television and digital media. All costs related to advertising are expensed in the period incurred,
except for media production-related costs, which are expensed the first time the advertising takes place. Total advertising expenses for the fiscal years ended December 31, 2016, January 2, 2016, and January 3, 2015 were
$186,614, $191,060 and $251,954, respectively.
Income Taxes:
Deferred income tax assets and liabilities result primarily from temporary differences between the financial statement and tax bases of assets and liabilities, using enacted tax rates in effect for the
year in which differences are expected to reverse. If it is more-likely-than-not that some portion of a deferred tax asset will not be realized, a valuation allowance is recognized. The Company considers historic levels of income, estimates of
future taxable income and feasible tax planning strategies in assessing the need for a tax valuation allowance.
F-12
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AND PER UNIT AMOUNTS)
The Company recognizes a benefit for uncertain tax positions when a tax position taken
or expected to be taken in a tax return is more-likely-than-not to be sustained upon examination by taxing authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50% likely of being realized upon
ultimate settlement. The Company recognizes accrued interest and penalties associated with uncertain tax positions as part of the provision for income taxes on its consolidated statements of net income.
In addition, assets and liabilities acquired in purchase business combinations are assigned their fair values and deferred taxes are
provided for lower or higher tax bases.
Derivative Instruments and Hedging:
The Company is exposed to certain risks related to its ongoing business operations, primarily interest rate risk and foreign currency
risk. Interest rate swaps are entered into to hedge a portion of the cash flow exposure associated with the Companys variable-rate borrowings. The Company does not use any derivative instruments for trading or speculative purposes.
The Company recognizes the fair value of all derivative instruments as either assets or liabilities on the balance sheet. The Company has
designated and accounted for interest rate swaps as cash flow hedges of its variable-rate borrowings. For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is
reported as a component of accumulated other comprehensive loss and reclassified into earnings in the periods during which the hedged transactions affect earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge
components excluded from the assessment of effectiveness are recognized in current earnings.
The fair value of the
Companys interest rate swaps is reported as a component of accumulated other comprehensive loss on its balance sheet. See Note 17 for a further discussion regarding the fair value of the Companys interest rate swaps. The net effect of
the interest payable and receivable under the Companys interest rate swaps is included in interest expense on the consolidated statements of net income.
Deferred Financing Costs:
Deferred financing costs consist of fees paid by
the Company as part of the establishment, exchange and/or modification of the Companys long-term debt. During the fiscal year ended January 2, 2016, in connection with the prepayment of debt, the Company wrote-off deferred financing fees
of approximately $647, recorded a gain on early extinguishment of debt totaling $11,426, and incurred additional fees of approximately $1,241. During the fiscal year ended January 3, 2015, the Company wrote-off deferred financing fees of
approximately $1,583 in connection with amending its Credit Agreement (as defined in Note 8). Amortization expense for the fiscal years ended December 31, 2016, January 2, 2016 and January 3, 2015 was $6,116, $6,886 and $9,305,
respectively.
Accumulated Other Comprehensive Loss:
The Companys accumulated other comprehensive loss includes changes in the fair value of derivative instruments and the effects of foreign currency translations. At December 31, 2016,
January 2, 2016 and January 3, 2015, the cumulative balance of changes in fair value of derivative instruments, net of taxes, was $(16,002), $(23,135) and $(21,856), respectively. At December 31, 2016, January 2, 2016 and
January 3, 2015, the cumulative balance of the effects of foreign currency translations, net of taxes, was $(11,118), $(14,130) and $1,906, respectively.
F-13
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AND PER UNIT AMOUNTS)
Restructuring Expense:
The Company records estimated expense for restructuring initiatives when such costs are deemed probable and estimable, when approved by the appropriate corporate authority and by accumulating detailed
estimates of costs for such plans. These expenses include the estimated costs of employee severance and related benefits, impairment or accelerated depreciation of property, plant and equipment and capitalized software, and any other qualifying exit
costs. Such costs represent the Companys best estimate, but require assumptions about the plans that may change over time, including attrition rates. Estimates are evaluated periodically to determine whether an adjustment is required.
Reclassification:
Certain prior year amounts have been reclassified to conform to the current year presentation.
3.
|
Accounting Standards Adopted in Current Year
|
In April 2015, the Financial Accounting Standards Board (the FASB) issued updated guidance to simplify the presentation of debt issuance costs. The amendments in this update require that
debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. In August 2015, the FASB issued updated guidance
which clarifies the treatment of debt issuance costs from line-of-credit arrangements. In particular, this guidance clarifies that the Securities and Exchange Commission Staff would not object to an entity deferring and presenting debt issuance
costs related to a line-of-credit arrangement as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of such arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit
arrangement. As further reflected in Note 8, the Company adopted this guidance during the first quarter of fiscal 2016 on a retrospective basis to simplify the presentation of debt issuance costs during the first quarter of fiscal 2016. As
shown in the table below, pursuant to the guidance and a change in accounting principle applied on a retrospective basis, the Company has reclassified unamortized debt issuance costs associated with Term Facilities (defined hereafter) in the
Companys Consolidated Balance Sheet for fiscal 2015 shown herein.
In November 2015, the FASB issued updated
guidance on the classification of deferred tax assets. This accounting standard requires deferred tax assets and liabilities, along with related valuation allowances, to be classified as noncurrent on the balance sheet. As a result, each tax
jurisdiction will now only have one net noncurrent deferred tax asset or liability. The new guidance does not change the existing requirement that prohibits offsetting deferred tax liabilities from one jurisdiction against deferred tax assets of
another jurisdiction. The Company adopted this guidance during the first quarter of fiscal 2016 on a retrospective basis. As shown in the table below, pursuant to the guidance and a change in accounting principle applied on a retrospective basis,
the Company has reclassified current deferred tax assets in the Companys Consolidated Balance Sheet for fiscal 2015 shown herein.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 2, 2016
|
|
|
|
As Filed
|
|
|
Deferred
Financing
|
|
|
Deferred Tax
Asset
|
|
|
As Adjusted
|
|
Deferred income taxes
|
|
$
|
7,516
|
|
|
$
|
0
|
|
|
$
|
(7,516
|
)
|
|
$
|
0
|
|
Total current assets
|
|
$
|
358,973
|
|
|
$
|
0
|
|
|
$
|
(7,516
|
)
|
|
$
|
351,457
|
|
Deferred financing costs, net
|
|
$
|
25,209
|
|
|
$
|
(25,209
|
)
|
|
$
|
0
|
|
|
$
|
0
|
|
Other noncurrent assets
|
|
$
|
6,720
|
|
|
$
|
255
|
|
|
$
|
4,602
|
|
|
$
|
11,577
|
|
Total assets
|
|
$
|
1,422,084
|
|
|
$
|
(24,954
|
)
|
|
$
|
(2,914
|
)
|
|
$
|
1,394,216
|
|
Long-term debt
|
|
$
|
2,021,250
|
|
|
$
|
(24,954
|
)
|
|
$
|
0
|
|
|
$
|
1,996,296
|
|
Deferred income taxes
|
|
$
|
159,539
|
|
|
$
|
0
|
|
|
$
|
(2,914
|
)
|
|
$
|
156,625
|
|
Total liabilities
|
|
$
|
2,707,792
|
|
|
$
|
(24,954
|
)
|
|
$
|
(2,914
|
)
|
|
$
|
2,679,924
|
|
F-14
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AND PER UNIT AMOUNTS)
In August 2014, the FASB issued guidance on going concern, which requires management of
all entities to evaluate whether there are conditions and events that raise substantial doubt about the entitys ability to continue as a going concern within one year after the financial statements are issued (or available to be issued when
applicable). The guidance is effective for annual periods ending after December 15, 2016 and for interim periods thereafter. The adoption of this guidance did not have an effect on our consolidated financial statements during the fiscal year
ended December 31, 2016.
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 22 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.
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 Companys 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 Companys issued and outstanding common stock that 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 Companys 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 Companys 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.
F-15
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AND PER UNIT AMOUNTS)
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.
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.
Acquisition of Additional Equity Interest in Brazil
Prior to
March 12, 2014, the Company had owned 35% of Vigilantes do Peso Marketing Ltda. (VPM), a Brazilian limited liability partnership. On March 12, 2014, the Company acquired an additional 45% equity interest in VPM for a net
purchase price of $14,181 less cash acquired of $2,262. VPM was converted into a joint-stock corporation prior to closing and subsequently operates as a subsidiary of the Company with rights to conduct typical business lines. As a result of the
acquisition, the Company gained a direct controlling financial interest in VPM and began to consolidate this entity as of the date of acquisition.
F-16
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AND PER UNIT AMOUNTS)
The equity interest held immediately before the acquisition was $12. An implied fair
value technique was used to measure acquisition date fair value of the equity interest to be $11,029. As a result of this transaction, the Company adjusted its previously held equity interest to fair value of $11,017 and recorded a charge of
$477 associated with the settlement of the royalty-free arrangement of the Brazilian partnership. The net effect of these items resulted in the Company recognizing a gain of $10,540 ($6,429 after tax or $0.11 per fully diluted share) in the
first quarter of fiscal 2014.
The fair value of the redeemable noncontrolling interest has been valued at $6,157. In
connection with the acquisition, a call option and a put option were granted related to the 20% interest in VPM not owned by the Company.
The acquisition resulted in goodwill related to, among other things, expected synergies in operations and the ability of the Company to provide VPM with various intellectual property and technology
innovations which will afford additional future opportunities in the meetings and Online businesses within the market where VPM operates. The goodwill is not deductible for tax purposes.
Acquisition of Wello
On April 16, 2014, the Company acquired
Knowplicity, Inc., d/b/a Wello, an online fitness and personal training company for a net purchase price of $8,977 less cash acquired of $11. Payment was in the form of common stock issued ($4,207) and cash ($4,770). The total purchase price of
Wello has been allocated to goodwill ($6,204), website development ($4,516), prepaid expenses ($4) and fixed assets ($1) offset by deferred tax liabilities ($1,759). As a result of the acquisition, Wello became a wholly owned subsidiary of the
Company and the Company began to consolidate the entity as of the date of acquisition. The acquisition resulted in goodwill related to, among other things, expected synergies in operations. The goodwill is not deductible for tax purposes.
Acquisition of Weilos
On March 11, 2015, the Company acquired for a purchase price of $6,674 Weilos, Inc. (Weilos), a California-based startup with an online social platform. Payment was in the form of common
stock issued ($2,810), restricted stock issued ($114) and cash ($2,775) plus cash in reserves ($975). The total purchase price of Weilos has been allocated to goodwill ($5,588), identifiable intangibles ($1,741) and other assets ($24) offset by
deferred tax liabilities ($679). Restricted shares with a fair value at the date of grant ($908) were issued to key employees, contingent upon 18 months post-combination employment, and are accounted for as stock compensation cost in the
post-combination financial statements. These restricted shares vested on September 11, 2016. As a result of the acquisition, Weilos became a wholly owned subsidiary of the Company and the Company began to consolidate the entity as of the date
of acquisition. The acquisition resulted in goodwill related to, among other things, expected synergies in operations. The goodwill is not deductible for tax purposes.
6.
|
Franchise Rights Acquired, Goodwill and Other Intangible Assets
|
The Company performed its annual impairment review of goodwill and other indefinite-lived intangible assets for fiscal 2016 and fiscal 2015. As a result of this review, no impairment charges were recorded
for the fiscal years ended December 31, 2016 and January 2, 2016.
Franchise rights acquired are due to acquisitions
of the Companys franchised territories as well as the acquisition of franchise promotion agreements and other factors associated with the acquired franchise territories. For the fiscal year ended December 31, 2016, the change in the
carrying value of franchise rights acquired is due to the Miami Acquisition as described in Note 5 and the effect of exchange rate changes.
F-17
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AND PER UNIT AMOUNTS)
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 Companys franchised territories, the acquisitions of the majority interest in VPM and of Wello in fiscal 2014 and the acquisition of Weilos in fiscal 2015. See
Note 5 for further information on certain acquisitions. For the fiscal year ended December 31, 2016, the change in the carrying amount of goodwill is due to the Miami Acquisition as described in Note 5 and the effect of exchange rate changes as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North
America
|
|
|
United
Kingdom
|
|
|
Continental
Europe
|
|
|
Other
|
|
|
Total
|
|
Balance as of January 2, 2016
|
|
$
|
133,408
|
|
|
$
|
1,370
|
|
|
$
|
7,260
|
|
|
$
|
17,293
|
|
|
$
|
159,331
|
|
Goodwill acquired during the period
|
|
|
2,945
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
2,945
|
|
Effect of exchange rate changes
|
|
|
1,190
|
|
|
|
(225
|
)
|
|
|
(376
|
)
|
|
|
3,273
|
|
|
|
3,862
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2016
|
|
$
|
137,543
|
|
|
$
|
1,145
|
|
|
$
|
6,884
|
|
|
$
|
20,566
|
|
|
$
|
166,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The carrying values of finite-lived intangible assets as of December 31, 2016 and January 2,
2016 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
January 2, 2016
|
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
Capitalized software costs
|
|
$
|
126,737
|
|
|
|
101,316
|
|
|
$
|
119,658
|
|
|
$
|
86,134
|
|
Website development costs
|
|
|
119,971
|
|
|
|
87,736
|
|
|
|
100,105
|
|
|
|
68,673
|
|
Trademarks
|
|
|
11,092
|
|
|
|
10,647
|
|
|
|
10,960
|
|
|
|
10,435
|
|
Other
|
|
|
7,945
|
|
|
|
7,434
|
|
|
|
7,976
|
|
|
|
7,118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks and other intangible assets
|
|
$
|
265,745
|
|
|
$
|
207,133
|
|
|
$
|
238,699
|
|
|
$
|
172,360
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchise rights acquired
|
|
|
4,551
|
|
|
|
4,551
|
|
|
|
4,182
|
|
|
|
4,059
|
|
Total finite-lived intangible assets
|
|
$
|
270,296
|
|
|
$
|
211,684
|
|
|
$
|
242,881
|
|
|
$
|
176,419
|
|
Aggregate amortization expense for finite-lived intangible assets was recorded in the amounts of $35,752,
$34,719 and $29,372, for the fiscal years ended December 31, 2016, January 2, 2016 and January 3, 2015, 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:
|
|
|
|
|
Fiscal 2017
|
|
$
|
33,585
|
|
Fiscal 2018
|
|
$
|
17,586
|
|
Fiscal 2019
|
|
$
|
6,363
|
|
Fiscal 2020
|
|
$
|
1,034
|
|
Fiscal 2021 and thereafter
|
|
$
|
44
|
|
F-18
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AND PER UNIT AMOUNTS)
7.
|
Property and Equipment
|
The components of property and equipment were:
|
|
|
|
|
|
|
|
|
|
|
December 31,
2016
|
|
|
January 2,
2016
|
|
Equipment
|
|
$
|
124,954
|
|
|
$
|
122,789
|
|
Leasehold improvements
|
|
|
79,790
|
|
|
|
79,115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
204,744
|
|
|
|
201,904
|
|
Less: Accumulated depreciation and amortization
|
|
|
(155,170
|
)
|
|
|
(143,718
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
49,574
|
|
|
$
|
58,186
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense of property and equipment for the fiscal years ended
December 31, 2016, January 2, 2016 and January 3, 2015 was $16,881, $18,452 and $20,635, respectively.
The
components of the Companys long-term debt were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
January 2, 2016
|
|
|
|
Principal
Balance
|
|
|
Unamortized
Deferred
Financing Costs
|
|
|
Effective
Rate
(1)
|
|
|
Principal
Balance
|
|
|
Unamortized
Deferred
Financing Costs
|
|
|
Effective
Rate
(1)
|
|
Revolving Facility due April 2, 2018
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
3.35
|
%
|
|
$
|
48,000
|
|
|
$
|
0
|
|
|
|
3.25
|
%
|
Tranche B-1 Term Facility due April 2, 2016
|
|
|
0
|
|
|
|
0
|
|
|
|
3.96
|
%
|
|
|
144,323
|
|
|
|
177
|
|
|
|
3.87
|
%
|
Tranche B-2 Term Facility due April 2, 2020
|
|
|
2,021,250
|
|
|
|
18,951
|
|
|
|
4.41
|
%
|
|
|
2,042,250
|
|
|
|
24,777
|
|
|
|
4.40
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,021,250
|
|
|
$
|
18,951
|
|
|
|
4.38
|
%
|
|
|
2,234,573
|
|
|
$
|
24,954
|
|
|
|
4.34
|
%
|
Less: Current Portion
|
|
|
21,000
|
|
|
|
|
|
|
|
|
|
|
|
213,323
|
|
|
|
|
|
|
|
|
|
Unamortized Deferred Financing Costs
|
|
|
18,951
|
|
|
|
|
|
|
|
|
|
|
|
24,954
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Long-Term Debt
|
|
$
|
1,981,299
|
|
|
|
|
|
|
|
|
|
|
$
|
1,996,296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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.
|
Pursuant to the
retrospective adoption of FASB guidance on debt issuance costs, the Company has reclassified unamortized debt issuance costs associated with Term Facilities (defined hereafter) in the Companys Consolidated Balance Sheet for fiscal 2015 shown
herein.
The Companys 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).
F-19
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AND PER UNIT AMOUNTS)
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 Companys Consolidated Leverage Ratio (as defined in the Credit
Agreement), the Company is obligated to offer to prepay the Term Facilities in an aggregate amount determined by its 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 Companys $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 debt 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.
F-20
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AND PER UNIT AMOUNTS)
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 Companys 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 loans equal to $144,323, which constituted the
entire remaining principal amount of 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. At December 31, 2016, 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.
At December 31, 2016, under the WWI Credit Facility, the Company had $2,021,250 outstanding consisting entirely of a term loan under
the Tranche B-2 Term Facility.
Borrowings under the Credit Agreement bear interest at a rate equal to, at the Companys
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 Moodys, the applicable margin relating to both
of the Term Facilities would increase by 25 basis points. On February 21, 2014, both S&P and Moodys 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 Companys 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 December 31, 2016, borrowings under the Tranche B-2 Term Facility bore interest at LIBOR plus an applicable margin of 3.25%. Based on the Companys Consolidated
Leverage Ratio as of December 31, 2016, 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 commitments thereunder, which commitment fee will fluctuate depending upon the Companys Consolidated Leverage Ratio. Based on the Companys Consolidated Leverage Ratio as of
December 31, 2016 and January 2, 2016, the commitment fee was 0.50% per annum. For the fiscal years ended December 31, 2016 and January 2, 2016 the Company paid $31 and $186, respectively, in commitment fees. The Company
also will pay customary letter of credit fees and fronting fees under the Revolving Facility, which totaled $49 and $48 for the fiscal years ended December 31, 2016 and January 2, 2016, respectively.
F-21
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AND PER UNIT AMOUNTS)
The Credit Agreement contains customary covenants including covenants that, in certain
circumstances, restrict the Companys 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 Companys existing and future subsidiaries. Substantially all of the
Companys assets secure the WWI Credit Facility.
At December 31, 2016 and January 2, 2016, the Companys
debt consisted entirely of variable-rate instruments. Interest rate swaps were entered into to hedge a portion of the cash flow exposure associated with the Companys variable-rate borrowings. The weighted average interest rate (which includes
amortization of deferred financing costs) on the Companys outstanding debt, exclusive of the impact of swaps, was approximately 4.41% and 4.34% per annum based on interest rates at December 31, 2016 and January 2, 2016,
respectively. The weighted average interest rate (which includes amortization of deferred financing costs) on the Companys outstanding debt, including the impact of swaps, was approximately 5.32% and 5.45% per annum based on interest
rates at December 31, 2016 and January 2, 2016, respectively.
Maturities
At December 31, 2016, the aggregate amounts of the Companys existing long-term debt maturing in each of the next four fiscal
years were as follows:
|
|
|
|
|
2017
|
|
$
|
21,000
|
|
2018
|
|
|
21,000
|
|
2019
|
|
|
21,000
|
|
2020
|
|
|
1,958,250
|
|
|
|
|
|
|
|
|
$
|
2,021,250
|
|
|
|
|
|
|
On
October 9, 2003, the Companys Board of Directors authorized and the Company announced a program to repurchase up to $250,000 of the Companys outstanding common stock. On each of June 13, 2005, May 25, 2006 and
October 21, 2010, the Companys Board of Directors authorized and the Company announced adding $250,000 to the program. The repurchase program allows for shares to be purchased from time to time in the open market or through privately
negotiated transactions. No shares will be purchased from Artal Holdings Sp. z o.o., Succursale de Luxembourg and its parents and subsidiaries under the program. The repurchase program currently has no expiration date.
During the fiscal years ended December 31, 2016, January 2, 2016 and January 3, 2015, the Company purchased no
shares of its common stock in the open market under the repurchase program. As of the end of fiscal 2016, $208,933 remained available to purchase shares of the Companys common stock under the repurchase program.
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.
F-22
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AND PER UNIT AMOUNTS)
The following table sets forth the computation of basic and diluted EPS for the fiscal
years ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2016
|
|
|
January 2,
2016
|
|
|
January 3,
2015
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Weight Watchers International, Inc.
|
|
$
|
67,699
|
|
|
$
|
32,945
|
|
|
$
|
117,787
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock outstanding
|
|
|
63,742
|
|
|
|
58,369
|
|
|
|
56,607
|
|
Effect of dilutive common stock equivalents
|
|
|
2,155
|
|
|
|
597
|
|
|
|
98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average diluted common shares outstanding
|
|
|
65,897
|
|
|
|
58,966
|
|
|
|
56,705
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share attributable to Weight Watchers International, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.06
|
|
|
$
|
0.56
|
|
|
$
|
2.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
1.03
|
|
|
$
|
0.56
|
|
|
$
|
2.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The number of anti-dilutive common stock equivalents excluded from the calculation of the weighted
average number of common shares for diluted EPS was 1,536, 1,699 and 3,073 for the fiscal years ended December 31, 2016, January 2, 2016 and January 3, 2015, respectively.
Incentive Compensation
Plans and Winfrey Option
On May 6, 2008 and May 12, 2004, respectively, the Companys shareholders approved
the 2008 Stock Incentive Plan (the 2008 Plan) and the 2004 Stock Incentive Plan (the 2004 Plan). On May 6, 2014, the Companys shareholders approved the 2014 Stock Incentive Plan (as amended, the 2014
Plan and together with the 2004 Plan and the 2008 Plan, the Stock Plans), 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 Companys employees over a multi-year
period directly with the interests of the shareholders of the Company. The Companys Board of Directors or a committee thereof administers the 2014 Plan.
Under the 2014 Plan, grants may take the following forms at the Companys Board of Directors Compensation and Benefit Committees discretion: non-qualified stock options, incentive stock
options, stock appreciation rights, restricted stock units (RSUs), restricted stock and other stock-based awards. As of its effective date, the maximum number of shares of common stock available for grant under the 2014 Plan was 3,500,
subject to increase and adjustment as set forth in the 2014 Plan.
Under the 2014 Plan, the Company also grants fully-vested
shares of its common stock to certain members of its Board of Directors. While these shares are fully vested, the directors are restricted from selling these shares while they are still serving on the Companys Board of Directors. During the
fiscal years ended December 31, 2016, January 2, 2016 and January 3, 2015, the Company granted to such members 36, 50 and 20 fully-vested shares, respectively, and recognized compensation expense of $451, $507 and $497,
respectively.
The Companys long-term equity incentive compensation program has historically included non-qualified
stock option and/or restricted stock unit (including performance-based stock unit with both time- and performance-vesting criteria) awards. These awards have generally had time-vesting criteria.
F-23
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AND PER UNIT AMOUNTS)
From time to time, the Company has granted fully-vested shares of its common stock to
individuals in connection with special circumstances. In fiscal 2015, the Company granted an aggregate of 105 fully-vested shares of its common stock to individuals under such special circumstances. In fiscal 2015 and 2014, the Company also
granted special performance-based stock option awards.
Under the Winfrey Option Agreement, in fiscal 2015, the Company
granted Ms. Winfrey a fully-vested non-qualified stock option to purchase 3,513 shares of its common stock as more fully described in Note 4.
The Company issues common stock for share-based compensation awards from treasury stock. The total compensation cost that has been charged against income for these plans and the Winfrey Option, as
applicable, was $6,527, $24,771, and $10,533 for the fiscal years ended December 31, 2016, January 2, 2016 and January 3, 2015, respectively. Such amounts have been included as a component of selling, general and
administrative expenses. The total income tax benefit recognized in the income statement for all share-based compensation arrangements was $1,849, $8,170 and $3,285 for the fiscal years ended December 31, 2016, January 2,
2016, and January 3, 2015, respectively. The tax benefits realized from options exercised and RSUs vested totaled $2,114, $274 and $301 for the fiscal years ended December 31, 2016, January 2,
2016 and January 3, 2015, respectively. No compensation costs were capitalized. As of December 31, 2016, there was $14,099 of total unrecognized compensation cost related to stock options, RSUs and PSUs granted under the Stock
Plans. That cost is expected to be recognized over a weighted-average period of approximately 1.6 years.
Stock Option Awards Under Stock
Plans
Option Awards with Time-Vesting Criteria
Pursuant to the option components of the Stock Plans, the Companys Board of Directors authorized the Company to enter into
agreements under which certain employees received stock options with time-vesting criteria (Time- Vesting Options). The options are exercisable based on the terms outlined in the agreements. Time-Vesting Options outstanding at
December 31, 2016 and January 2, 2016 vest over a period of three to five years and the expiration term is ten years. Time-Vesting Options outstanding at December 31, 2016 and January 2, 2016 have an exercise price between $3.97
and $63.59 per share.
The fair value of each of these option awards is estimated on the date of grant using the Black-Scholes
option pricing model with the weighted average assumptions noted in the following table. Expected volatility is based on the historical volatility of the Companys common stock. Since the Companys option exercise history is limited, it
has estimated the expected term of these option grants to be the midpoint between the vesting period and the contractual term of each award. The risk-free interest rate is based on the U.S. Treasury yield curve in effect on the date of grant which
most closely corresponds to the expected term of the Time-Vesting Options. The dividend yield is based on the Companys historic average dividend yield. The Company did not grant any Time-Vesting Options in fiscal 2014.
|
|
|
|
|
|
|
December 31,
2016
|
|
January 2,
2016
|
Dividend yield
|
|
0.0%
|
|
0.0%
|
Volatility
|
|
49.6% - 51.4%
|
|
41.0%
|
Risk-free interest rate
|
|
1.24% - 2.26%
|
|
1.84% - 1.89%
|
Expected term (years)
|
|
6.0
|
|
6.0
|
F-24
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AND PER UNIT AMOUNTS)
Option Awards with Time- and Performance-Vesting Criteria
Pursuant to the option components of the Stock Plans, the Companys Board of Directors authorized the Company to enter into
agreements under which certain employees received stock options with both time- and performance-vesting criteria (T&P Options). As of the end of fiscal 2016, there were no outstanding T&P Options. The options were exercisable
based on the terms outlined in the agreements. During fiscal 2015 and fiscal 2014, the Company granted 37 and 1,601 T&P Options, respectively, to certain employees that would have vested based on the achievement of both time- and
performance-vesting criteria. The time-vesting criteria would have been 100% satisfied on the third anniversary of the date of the grant and the performance-vesting criteria was contingent upon meeting or exceeding certain stock price
hurdles. With respect to the performance-vesting criteria, the stock options would have fully vested in 20% increments upon the first date that the average closing stock price for the 20 consecutive preceding trading days was equal to or
greater than specified stock price hurdles. The fair value of the T&P Options was estimated on the date of grant and was based on the likelihood of the Company achieving the performance conditions. The Company estimated the fair value using
a Monte Carlo simulation that used various assumptions that included expected volatility, a risk-free rate and an expected term.
Expected volatility was based on the historical volatility of the Companys common stock. The risk-free interest rate was based on the U.S. Treasury yield curve in effect on the date of grant which
most closely corresponds to the performance measurement period. The expected term represented the period from the grant date to the end of the five year performance period. Compensation expense on T&P Options was recognized ratably over the
three year required service period as this period was longer than the derived service period calculated by the Monte Carlo simulation.
|
|
|
|
|
|
|
January 2,
2016
|
|
January 3,
2015
|
Dividend yield
|
|
0.0%
|
|
0.0%
|
Volatility
|
|
40.5%
|
|
37.8%
|
Risk-free interest rate
|
|
1.6%
|
|
1.4% -1.8%
|
Expected term (years)
|
|
5.0
|
|
5.0
|
On May 7, 2015, the Companys shareholders approved an amendment to the 2014 Plan to permit a
one-time stock option exchange program under which the Company would offer eligible employees the opportunity to exchange certain eligible T&P Options on a (a) two-for-one basis for new stock options for all eligible employees, other than
the Companys Chief Executive Officer (i.e., so that the new stock options would cover half as many shares as the corresponding surrendered options) and (b) 3.5-for-one basis for new stock options for the Companys Chief Executive
Officer (i.e., so that the new stock options would cover a number of shares equal to the quotient of the number of shares covered by the corresponding surrendered options divided by 3.5). The option exchange program was designed to create better
incentives for employees to remain with the Company and contribute to the attainment of its business and financial objectives.
On May 22, 2015, the Company launched a tender offer in connection with the option exchange program which expired on June 22,
2015. Pursuant to the offer, employees tendered options to purchase 1,700 shares of common stock (representing 99.6% of the total shares of common stock underlying the options eligible for exchange) with a weighted-average exercise price of $24.68
per share. The Company cancelled and replaced those options on June 22, 2015 with options to purchase 734 shares of common stock with an exercise price of $5.25 per share, which was the closing price per share of the Companys common stock
on the New York Stock Exchange on June 22, 2015. The replacement options vest over three years, with 25% vesting on each of the first and second anniversaries of the date of grant and 50% vesting on the third anniversary of the date of grant.
The
F-25
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AND PER UNIT AMOUNTS)
option exchange resulted in an incremental stock option expense of $1,599, which was determined by comparing the fair value of the T&P Option as calculated based on a Monte Carlo simulation,
to the fair value of the replacement options, as calculated using the Black-Scholes option pricing model, for the eligible options at the time of exchange. This incremental expense, along with the unamortized expense associated with the cancelled
options, is being recognized ratably over the new vesting period of the replacement options, which is three years.
Option Activity
A summary of all option activity under the Stock Plans and the Winfrey Option (see Note 4 for additional disclosure
regarding the Winfrey Option) for the fiscal year ended December 31, 2016 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Weighted-
Average
Remaining
Contractual
Life (Yrs.)
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at January 2, 2016
|
|
|
5,330
|
|
|
$
|
11.79
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
118
|
|
|
$
|
11.79
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(20
|
)
|
|
$
|
5.25
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(315
|
)
|
|
$
|
12.71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2016
|
|
|
5,113
|
|
|
$
|
11.76
|
|
|
|
8.3
|
|
|
$
|
20,293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2016
|
|
|
4,490
|
|
|
$
|
12.49
|
|
|
|
8.2
|
|
|
$
|
17,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average grant-date fair value of all options granted (including the Winfrey Option as
described in Note 4) was $5.79, $4.86 and $6.51, for the fiscal years ended December 31, 2016, January 2, 2016 and January 3, 2015, respectively. The total intrinsic value of Time-Vesting Options exercised was $117, $17 and
$62 for the fiscal years ended December 31, 2016, January 2, 2016 and January 3, 2015, respectively.
Cash received from Time-Vesting Options exercised during the fiscal years ended December 31, 2016, January 2,
2016 and January 3, 2015 was $139, $95 and $658, respectively.
Restricted Stock Unit Awards with Time-Vesting Criteria
Pursuant to the restricted stock components of the Stock Plans, the Companys Board of Directors authorized the
Company to enter into agreements under which certain employees received RSUs. The RSUs are exercisable based on the terms outlined in the agreements. The RSUs generally vest over a period of two to five years. The fair value of RSUs is determined
using the closing market price of the Companys common stock on the date of grant. A summary of RSU activity under the Stock Plans for the fiscal year ended December 31, 2016 is presented below:
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Weighted-Average
Grant-Date
Fair Value
|
|
Outstanding at January 2, 2016
|
|
|
1,366
|
|
|
$
|
14.66
|
|
Granted
|
|
|
758
|
|
|
$
|
12.68
|
|
Vested
|
|
|
(475
|
)
|
|
$
|
10.84
|
|
Forfeited
|
|
|
(511
|
)
|
|
$
|
16.41
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2016
|
|
|
1,138
|
|
|
$
|
14.15
|
|
|
|
|
|
|
|
|
|
|
F-26
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AND PER UNIT AMOUNTS)
The weighted-average grant-date fair value of RSUs granted was $12.68, $5.55 and $24.37
for the fiscal years ended December 31, 2016, January 2, 2016 and January 3, 2015, respectively. The total fair value of RSUs vested during the fiscal years ended December 31, 2016, January 2,
2016 and January 3, 2015 was $5,145, $1,804 and $3,042, respectively.
Performance-Based Stock Unit Awards with Time- and
Performance-Vesting Criteria
Pursuant to the restricted stock components of the 2014 Plan, in fiscal 2016, the
Compensation and Benefits Committee of the Companys Board of Directors determined to grant 290 performance-based stock unit awards having both time- and performance-vesting criteria (the PSUs). The time-vesting criteria will be
satisfied on the third anniversary of the grant date (i.e., May 16, 2019). The performance-vesting criteria will be satisfied if the Company has achieved a Debt Ratio (as defined in the Companys term sheet for 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. 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 the awards fully meet the time-vesting criteria, depending on the Companys Debt Ratio achievement, the number of shares of the Companys common stock issuable under the PSUs range from 66 to 330. The Company is currently accruing
compensation expense to what it believes is the probable outcome upon vesting.
The fair value of PSUs is determined using the
closing market price of the Companys common stock on the date of grant. A summary of PSU activity under the 2014 Plan for the fiscal year ended December 31, 2016 is presented below:
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Weighted-Average
Grant- Date
Fair Value
|
|
Outstanding at January 2, 2016
|
|
|
0
|
|
|
$
|
0
|
|
Granted
|
|
|
290
|
|
|
$
|
13.19
|
|
Vested
|
|
|
(1
|
)
|
|
$
|
13.20
|
|
Forfeited
|
|
|
(91
|
)
|
|
$
|
13.20
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2016
|
|
|
198
|
|
|
$
|
13.19
|
|
|
|
|
|
|
|
|
|
|
The weighted-average grant-date fair value of PSUs granted was $13.19 for the fiscal year ended
December 31, 2016. The total fair value of PSUs vested during the fiscal year ended December 31, 2016 was $8.
F-27
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AND PER UNIT AMOUNTS)
The
following tables summarize the Companys consolidated provision for US federal, state and foreign taxes on income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2016
|
|
|
January 2,
2016
|
|
|
January 3,
2015
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
US federal
|
|
$
|
(15,254
|
)
|
|
$
|
(6,862
|
)
|
|
$
|
12,904
|
|
State
|
|
|
604
|
|
|
|
1,859
|
|
|
|
(131
|
)
|
Foreign
|
|
|
20,191
|
|
|
|
15,740
|
|
|
|
24,059
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,541
|
|
|
$
|
10,737
|
|
|
$
|
36,832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
US federal
|
|
$
|
10,980
|
|
|
$
|
10,756
|
|
|
$
|
25,162
|
|
State
|
|
|
1,877
|
|
|
|
1,890
|
|
|
|
2,876
|
|
Foreign
|
|
|
(1,764
|
)
|
|
|
(548
|
)
|
|
|
1,061
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
11,093
|
|
|
$
|
12,098
|
|
|
$
|
29,099
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total tax provision
|
|
$
|
16,634
|
|
|
$
|
22,835
|
|
|
$
|
65,931
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of the Companys consolidated income before income taxes consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2016
|
|
|
January 2,
2016
|
|
|
January 3,
2015
|
|
Domestic
|
|
$
|
26,367
|
|
|
$
|
6,299
|
|
|
$
|
88,024
|
|
Foreign
|
|
|
57,760
|
|
|
|
49,315
|
|
|
|
95,640
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
84,127
|
|
|
$
|
55,614
|
|
|
$
|
183,664
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The effective tax rates for the fiscal years ended December 31, 2016, January 2, 2016 and
January 3, 2015 were 19.8%, 41.1% and 35.9%, respectively. The difference between the US federal statutory tax rate and the Companys consolidated effective tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2016
|
|
|
January 2,
2016
|
|
|
January 3,
2015
|
|
US federal statutory rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
Research and development credit
|
|
|
(19.5
|
)
|
|
|
0.0
|
|
|
|
0.0
|
|
Reserves for uncertain tax positions
|
|
|
2.9
|
|
|
|
3.5
|
|
|
|
0.4
|
|
Out-of-period adjustments
|
|
|
2.6
|
|
|
|
4.5
|
|
|
|
0.0
|
|
States income taxes (net of federal benefit)
|
|
|
2.0
|
|
|
|
3.8
|
|
|
|
1.3
|
|
Foreign taxes
|
|
|
(0.1
|
)
|
|
|
(0.4
|
)
|
|
|
(0.6
|
)
|
(Decrease) increase in valuation allowance
|
|
|
(2.3
|
)
|
|
|
(2.2
|
)
|
|
|
1.7
|
|
Loss on closure of China
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
(2.1
|
)
|
Other
|
|
|
(0.8
|
)
|
|
|
(3.1
|
)
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
19.8
|
%
|
|
|
41.1
|
%
|
|
|
35.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-28
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AND PER UNIT AMOUNTS)
The Companys effective tax rate for fiscal year ended December 31, 2016 was
affected by a net tax benefit arising from a research and development tax credit and a Section 199 deduction for the tax years 2012 through 2016 and the reversal of a valuation allowance related to tax benefits for foreign losses that are now
expected to be realized. These benefits were partially offset by income tax expenses recorded for out-of-period adjustments.
The deferred tax assets and liabilities recorded on the Companys consolidated balance sheets are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
2016
|
|
|
January 2,
2016
|
|
Provision for estimated expenses
|
|
$
|
4,269
|
|
|
$
|
4,638
|
|
Depreciation
|
|
|
2,230
|
|
|
|
4,164
|
|
Operating loss carryforwards
|
|
|
24,560
|
|
|
|
34,285
|
|
Salaries and wages
|
|
|
2,832
|
|
|
|
641
|
|
Share-based compensation
|
|
|
13,374
|
|
|
|
14,330
|
|
Foreign tax credit carryforwards
|
|
|
4,075
|
|
|
|
0
|
|
Other
|
|
|
12,154
|
|
|
|
8,024
|
|
Other comprehensive income
|
|
|
18,001
|
|
|
|
24,778
|
|
Less: valuation allowance
|
|
|
(18,270
|
)
|
|
|
(28,279
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
$
|
63,225
|
|
|
$
|
62,581
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
$
|
(1,209
|
)
|
|
$
|
(1,823
|
)
|
Amortization
|
|
|
(229,559
|
)
|
|
|
(210,901
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
$
|
(230,768
|
)
|
|
$
|
(212,724
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax liabilities
|
|
$
|
(167,543
|
)
|
|
$
|
(150,143
|
)
|
|
|
|
|
|
|
|
|
|
Certain foreign operations of the Company have generated net operating loss carryforwards. If it has been
determined that it is more-likely-than-not that the deferred tax assets associated with these net operating loss carryforwards will not be utilized, a valuation allowance has been recorded. As of December 31, 2016 and January 2, 2016,
various foreign subsidiaries had net operating loss carryforwards of approximately $98,546 and $138,562, respectively, most of which can be carried forward indefinitely.
The Companys undistributed earnings of substantially all of its foreign subsidiaries are not considered to be permanently reinvested. Accordingly, the Company has recorded all taxes, after taking
into account foreign tax credits, on the undistributed earnings of these foreign subsidiaries.
The undistributed earnings of
the remaining foreign subsidiaries are indefinitely invested outside the United States. We have not recorded a deferred tax liability of approximately $11,195 for the U.S. income taxes on the undistributed earnings of these foreign subsidiaries.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2016
|
|
|
January 2,
2016
|
|
|
January 3,
2015
|
|
Balance at beginning of year
|
|
$
|
7,698
|
|
|
$
|
6,268
|
|
|
$
|
5,784
|
|
Additions based on tax positions related to the current year
|
|
|
4,580
|
|
|
|
2,106
|
|
|
|
1,304
|
|
Reductions for tax positions of prior years
|
|
|
(3,299
|
)
|
|
|
(676
|
)
|
|
|
(820
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
8,979
|
|
|
$
|
7,698
|
|
|
$
|
6,268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-29
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AND PER UNIT AMOUNTS)
At December 31, 2016, the total amount of unrecognized tax benefits that, if
recognized, would affect the Companys effective tax rate is $8,703. As of December 31, 2016, given the nature of the Companys uncertain tax positions, it is reasonably possible that there will not be a significant change in the
Companys uncertain tax benefits within the next twelve months.
The Company recognizes interest and penalties related to
unrecognized tax benefits in income tax expense. The Company had $452 and $1,229 of accrued interest and penalties at December 31, 2016 and January 2, 2016, respectively. The Company recognized $(777), $(266), and $83 in interest and
penalties during the fiscal years ended December 31, 2016, January 2, 2016 and January 3, 2015, respectively.
The Company or one of its subsidiaries files income tax returns in the US federal jurisdiction, and various state and foreign jurisdictions. At December 31, 2016, with few exceptions, the Company was
no longer subject to US federal, state or local income tax examinations by tax authorities for years prior to 2013, or non-US income tax examinations by tax authorities for years prior to 2009.
13.
|
Employee Benefit Plans
|
The Company sponsors the Third Amended and Restated Weight Watchers Savings Plan (the Savings Plan) for salaried and certain
hourly US employees of the Company. The Savings Plan is a defined contribution plan that provides for employer matching contributions of 50% of the employees tax deferred contributions up to 6% of an employees eligible compensation for
the fiscal year ended December 31, 2016 and 100% of the employees tax deferred contributions up to 3% of an employees eligible compensation for the fiscal years ended January 2, 2016 and January 3, 2015. Expense related to
these contributions for the fiscal years ended December 31, 2016, January 2, 2016 and January 3, 2015 was $1,945, $2,454 and $2,525, respectively.
During fiscal 2014, the Company received a favorable determination letter from the IRS that qualifies the Savings Plan under Section 401(a) of the Internal Revenue Code.
Pursuant to the Savings Plan, the Company also makes profit sharing contributions for all full-time salaried US employees who are
eligible to participate in the Savings Plan (except for certain management personnel). The profit sharing contribution is a guaranteed monthly employer contribution on behalf of each participant based on the participants age and a percentage
of the participants eligible compensation. The Savings Plan also has a discretionary supplemental profit sharing employer contribution component that is determined annually by the Compensation and Benefits Committee of the Companys Board
of Directors. Expense related to these contributions for the fiscal years ended December 31, 2016, January 2, 2016 and January 3, 2015 was $1,027, $733 and $266, respectively.
For certain US management personnel, the Company sponsors the Second Amended and Restated Weight Watchers Executive Profit Sharing Plan
(EPSP). Under the IRS definition, the EPSP is considered a Nonqualified Deferred Compensation Plan. There is a promise of payment by the Company made on the employees behalf instead of an individual account with a cash balance. The
EPSP provides for a guaranteed employer contribution on behalf of each participant based on the participants age and a percentage of the participants eligible compensation. The EPSP has a discretionary supplemental employer contribution
component that is determined annually by the Compensation and Benefits Committee of the Companys Board of Directors.
The account is valued at the end of each fiscal month, based on an annualized interest rate of prime plus 2%, with an annualized cap of
15%. Expense related to this commitment for the fiscal years ended December 31, 2016, January 2, 2016 and January 3, 2015 was $1,915, $1,950 and $1,090, respectively.
F-30
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AND PER UNIT AMOUNTS)
14.
|
Cash Flow Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2016
|
|
|
January 2,
2016
|
|
|
January 3,
2015
|
|
Net cash paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
$
|
88,577
|
|
|
$
|
117,602
|
|
|
$
|
123,100
|
|
Income taxes
|
|
$
|
25,516
|
|
|
$
|
25,566
|
|
|
$
|
35,232
|
|
|
|
|
|
Noncash investing and financing activities were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of net assets acquired in connection with acquisitions
|
|
$
|
305
|
|
|
$
|
1,439
|
|
|
$
|
359
|
|
|
|
|
|
Change in Capital expenditures and Capitalized software included in accounts payable and accrued expenses
|
|
$
|
2,098
|
|
|
$
|
(1,969
|
)
|
|
$
|
3,347
|
|
15.
|
Commitments and Contingencies
|
Tracey
Mead, Derivatively on Behalf of Weight Watchers International, Inc. vs. Artal Group et. al. and Weight Watchers International, Inc.
On May 29, 2014 and June 23, 2014, the Company received shareholder litigation demand letters alleging breaches of fiduciary duties and unjust enrichment by Company officers and directors and
Artal Group S.A. (Artal), to the alleged injury of the Company. The letters alleged defendants disseminated materially false and misleading statements and/or concealed material adverse facts, all relating to similar allegations
asserted in a previously disclosed federal securities litigation pending at such time. The United States District Court for the Southern District of New York subsequently dismissed the securities litigation on May 11, 2016.
In response to the letters, pursuant to Virginia law, the Board of Directors created a special committee to review and evaluate the facts
and circumstances surrounding the claims made in the demand letters. The special committee decided to undertake its review after receiving a decision on defendants motion to dismiss in the federal securities litigation given the overlapping
issues.
On August 11, 2015, a purported shareholder derivative lawsuit was filed in New York State Court in Westchester
County. The complaint alleged that certain Company directors and executive officers breached their various fiduciary duties by knowingly causing the Company to repurchase shares from Artal and from certain executive officers at artificially inflated
prices in connection with a tender offer made to all shareholders. The complaint sought an order for the defendants to disgorge all profits made from selling Company stock between March 16, 2012 and April 9, 2012, as well as an award for
damages sustained by the alleged breaches of fiduciary duty. The parties agreed to settle the case by stipulation dated November 15, 2016. On February 24, 2017, the Court indicated it would approve the settlement, which provided that
the Company will implement certain operational and corporate governance measures, and granted the application for attorneys fees and expenses by plaintiffs counsel for $225.
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
F-31
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AND PER UNIT AMOUNTS)
complaint, alleging that, as a result of the temporary glitches in the Companys 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 Companys motion to dismiss on November 14, 2016. On November 16, 2016, the plaintiff filed a timely notice of appeal of the Courts decision and on January 31, 2017, the
plaintiff filed its brief in support of appeal. The Companys opposition brief is due to be filed on April 5, 2017. The Company believes that the plaintiffs appeal is without merit and will be denied in due course.
Other Litigation Matters
Due to the nature of the Companys 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 to have a material effect on the Companys results of operations, financial condition or cash flows.
Commitments
Minimum
commitments under non-cancelable obligations, primarily for office and rental facilities operating leases at December 31, 2016, consist of the following:
|
|
|
|
|
2017
|
|
$
|
40,291
|
|
2018
|
|
|
32,892
|
|
2019
|
|
|
24,947
|
|
2020
|
|
|
19,247
|
|
2021
|
|
|
16,285
|
|
2022 and thereafter
|
|
|
99,608
|
|
|
|
|
|
|
Total
|
|
$
|
233,270
|
|
|
|
|
|
|
Total rent expense charged to operations under these operating leases for the fiscal years ended
December 31, 2016, January 2, 2016, and January 3, 2015 was $40,927, $42,133 and $44,228, respectively.
16.
|
Segment and Geographic Data
|
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.
F-32
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AND PER UNIT AMOUNTS)
Information about the Companys reportable segments is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue for the Year Ended
|
|
|
|
December 31,
2016
|
|
|
January 2,
2016
|
|
|
January 3,
2015
|
|
North America
|
|
$
|
798,827
|
|
|
$
|
755,396
|
|
|
$
|
947,716
|
|
United Kingdom
|
|
|
100,808
|
|
|
|
124,773
|
|
|
|
156,843
|
|
Continental Europe
|
|
|
210,590
|
|
|
|
229,147
|
|
|
|
298,878
|
|
Other
|
|
|
54,677
|
|
|
|
55,103
|
|
|
|
76,479
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
1,164,902
|
|
|
$
|
1,164,419
|
|
|
$
|
1,479,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income for the Year Ended
|
|
|
|
December 31,
2016
|
|
|
January 2,
2016
|
|
|
January 3,
2015
|
|
Segment operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
175,290
|
|
|
$
|
140,579
|
|
|
$
|
250,282
|
|
United Kingdom
|
|
|
14,199
|
|
|
|
24,310
|
|
|
|
29,187
|
|
Continental Europe
|
|
|
51,096
|
|
|
|
62,364
|
|
|
|
79,282
|
|
Other
|
|
|
8,813
|
|
|
|
8,007
|
|
|
|
13,676
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment operating income
|
|
|
249,398
|
|
|
|
235,260
|
|
|
|
372,427
|
|
General corporate expenses
|
|
|
48,587
|
|
|
|
67,202
|
|
|
|
73,113
|
|
Interest expense
|
|
|
115,160
|
|
|
|
121,843
|
|
|
|
122,984
|
|
Other expense, net
|
|
|
1,524
|
|
|
|
2,027
|
|
|
|
3,206
|
|
Gain on Brazil acquisition
|
|
|
0
|
|
|
|
0
|
|
|
|
(10,540
|
)
|
Gain on early extinguishment of debt
|
|
|
0
|
|
|
|
(11,426
|
)
|
|
|
0
|
|
Provision for taxes
|
|
|
16,634
|
|
|
|
22,835
|
|
|
|
65,931
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
67,493
|
|
|
|
32,779
|
|
|
|
117,733
|
|
Net loss attributable to noncontrolling interest
|
|
|
206
|
|
|
|
166
|
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Weight Watchers International, Inc.
|
|
$
|
67,699
|
|
|
$
|
32,945
|
|
|
$
|
117,787
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization for the Year Ended
|
|
|
|
December 31,
2016
|
|
|
January 2,
2016
|
|
|
January 3,
2015
|
|
North America
|
|
$
|
41,718
|
|
|
$
|
47,128
|
|
|
$
|
34,654
|
|
United Kingdom
|
|
|
971
|
|
|
|
766
|
|
|
|
1,158
|
|
Continental Europe
|
|
|
1,621
|
|
|
|
1,861
|
|
|
|
2,356
|
|
Other
|
|
|
815
|
|
|
|
1,473
|
|
|
|
2,144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment depreciation and amortization
|
|
|
45,125
|
|
|
|
51,228
|
|
|
|
40,312
|
|
General corporate depreciation and amortization
|
|
|
13,624
|
|
|
|
8,829
|
|
|
|
18,227
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
58,749
|
|
|
$
|
60,057
|
|
|
$
|
58,539
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-33
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AND PER UNIT AMOUNTS)
The following tables present information about the Companys sources of revenue and
other information by geographic area. There were no material amounts of sales or transfers among geographic areas and no material amounts of US export sales.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues for the Year Ended
|
|
|
|
December 31,
2016
|
|
|
January 2,
2016
|
|
|
January 3,
2015
|
|
Meeting Fees
|
|
$
|
605,332
|
|
|
$
|
587,801
|
|
|
$
|
744,560
|
|
Online Subscription Revenues
|
|
|
343,789
|
|
|
|
349,567
|
|
|
|
437,385
|
|
In-meeting product sales
|
|
|
125,508
|
|
|
|
127,291
|
|
|
|
169,101
|
|
Licensing, franchise royalties and other
|
|
|
90,273
|
|
|
|
99,760
|
|
|
|
128,870
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,164,902
|
|
|
$
|
1,164,419
|
|
|
$
|
1,479,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues for the Year Ended
|
|
|
|
December 31,
2016
|
|
|
January 2,
2016
|
|
|
January 3,
2015
|
|
United States
|
|
$
|
743,668
|
|
|
$
|
700,972
|
|
|
|
869,541
|
|
Canada
|
|
|
55,159
|
|
|
|
54,277
|
|
|
|
78,175
|
|
United Kingdom
|
|
|
100,808
|
|
|
|
124,773
|
|
|
|
156,843
|
|
Continental Europe
|
|
|
210,590
|
|
|
|
229,147
|
|
|
|
298,878
|
|
Other
|
|
|
54,677
|
|
|
|
55,250
|
|
|
|
76,479
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,164,902
|
|
|
$
|
1,164,419
|
|
|
$
|
1,479,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Lived Assets
|
|
|
|
December 31,
2016
|
|
|
January 2,
2016
|
|
|
January 3,
2015
|
|
United States
|
|
$
|
43,714
|
|
|
$
|
51,103
|
|
|
$
|
67,903
|
|
Canada
|
|
|
2,730
|
|
|
|
2,757
|
|
|
|
3,149
|
|
United Kingdom
|
|
|
1,899
|
|
|
|
2,938
|
|
|
|
724
|
|
Continental Europe
|
|
|
716
|
|
|
|
614
|
|
|
|
1,454
|
|
Other
|
|
|
515
|
|
|
|
774
|
|
|
|
1,420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
49,574
|
|
|
$
|
58,186
|
|
|
$
|
74,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17.
|
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 1Quoted prices in active markets for identical assets or liabilities.
|
|
|
|
Level 2Observable 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 3Unobservable 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.
F-34
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AND PER UNIT AMOUNTS)
Fair Value of Financial Instruments
The Companys significant financial instruments include long-term debt and an interest rate swap agreement as of December 31,
2016 and January 2, 2016. The fair value of the Companys borrowings under the Revolving Facility approximated a carrying value of $48,000 at January 2, 2016 due to the nature of the debt (Level 2 input).
The fair value of the Companys Term Facilities is determined by utilizing average bid prices on or near the end of each fiscal
quarter (Level 2 input). As of December 31, 2016 and January 2, 2016, the fair value of the Companys long-term debt was approximately $1,671,920 and $1,664,393, respectively, as compared to the carrying value (net of deferring
financing costs) of $2,002,299 and $2,161,619, respectively.
Derivative Financial Instruments
The fair values for the Companys 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 18 for disclosures related to derivative financial instruments.
The following table presents the aggregate fair value of the Companys 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 December 31, 2016
|
|
$
|
31,974
|
|
|
$
|
0
|
|
|
$
|
31,974
|
|
|
$
|
0
|
|
Interest rate swap liability at January 2, 2016
|
|
$
|
44,170
|
|
|
$
|
0
|
|
|
$
|
44,170
|
|
|
$
|
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 fiscal years ended December 31, 2016 and January 2, 2016.
18.
|
Derivative Instruments and Hedging
|
As of December 31, 2016 and January 2, 2016, the Company had in effect an interest rate swap with a notional amount totaling $1,500,000.
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 will decrease from $1,500,000 effective
March 31, 2014 to $1,250,000 on April 3, 2017 with a further reduction 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 December 31, 2016 and January 2, 2016, cumulative unrealized losses for qualifying hedges were reported as a component of accumulated other comprehensive loss in the amounts of $16,002
($26,232 before taxes) and $23,135 ($38,053 before taxes), respectively.
F-35
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AND PER UNIT AMOUNTS)
The Company is hedging forecasted transactions for periods not exceeding the next four
years. The Company expects approximately $7,937 ($13,011 before taxes) of derivative losses included in accumulated other comprehensive loss at December 31, 2016, based on current market rates, will be reclassified into earnings within the next
12 months.
19.
|
Accumulated Other Comprehensive Loss
|
Amounts reclassified out of accumulated other comprehensive loss are as follows:
Changes in Accumulated Other Comprehensive Loss by
Component
(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended December 31, 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
|
|
|
(7,730
|
)
|
|
|
3,467
|
|
|
|
(4,263
|
)
|
Amounts reclassified from accumulated other comprehensive loss, net of
tax
(b)
|
|
|
14,863
|
|
|
|
0
|
|
|
|
14,863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current period other comprehensive income including noncontrolling interest
|
|
|
7,133
|
|
|
|
3,467
|
|
|
|
10,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: net current period other comprehensive income attributable to the noncontrolling interest
|
|
|
0
|
|
|
|
(455
|
)
|
|
|
(455
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance at December 31, 2016
|
|
$
|
(16,002
|
)
|
|
$
|
(11,118
|
)
|
|
$
|
(27,120
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Amounts in parentheses indicate debits
|
(b)
|
See separate table below for details about these reclassifications
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 2, 2016
|
|
|
|
Loss on
Qualifying
Hedges
|
|
|
Gain (loss)
on Foreign
Currency
Translation
|
|
|
Total
|
|
Beginning Balance at January 3, 2015
|
|
$
|
(21,856
|
)
|
|
$
|
1,906
|
|
|
$
|
(19,950
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss before reclassifications, net of tax
|
|
|
(16,371
|
)
|
|
|
(16,973
|
)
|
|
|
(33,344
|
)
|
Amounts reclassified from accumulated other comprehensive loss, net of
tax
(b)
|
|
|
15,092
|
|
|
|
0
|
|
|
|
15,092
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current period other comprehensive loss including noncontrolling interest
|
|
|
(1,279
|
)
|
|
|
(16,973
|
)
|
|
|
(18,252
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: net current period other comprehensive loss attributable to the noncontrolling interest
|
|
|
0
|
|
|
|
937
|
|
|
|
937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance at January 2, 2016
|
|
$
|
(23,135
|
)
|
|
$
|
(14,130
|
)
|
|
$
|
(37,265
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Amounts in parentheses indicate debits
|
(b)
|
See separate table below for details about these reclassifications
|
F-36
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AND PER UNIT AMOUNTS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 3, 2015
|
|
|
|
Loss on
Qualifying
Hedges
|
|
|
Gain on
Foreign
Currency
Translation
|
|
|
Total
|
|
Beginning Balance at December 28, 2013
|
|
$
|
(4,603
|
)
|
|
$
|
13,120
|
|
|
$
|
8,517
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss before reclassifications, net of tax
|
|
|
(29,340
|
)
|
|
|
(11,692
|
)
|
|
|
(41,032
|
)
|
Amounts reclassified from accumulated other comprehensive loss, net of
tax
(b)
|
|
|
12,087
|
|
|
|
0
|
|
|
|
12,087
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current period other comprehensive loss including noncontrolling interest
|
|
|
(17,253
|
)
|
|
|
(11,692
|
)
|
|
|
(28,945
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: net current period other comprehensive loss attributable to the noncontrolling interest
|
|
|
0
|
|
|
|
478
|
|
|
|
478
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance at January 3, 2015
|
|
$
|
(21,856
|
)
|
|
$
|
1,906
|
|
|
$
|
(19,950
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Amounts in parentheses indicate debits
|
(b)
|
See separate table below for details about these reclassifications
|
Reclassifications out of Accumulated Other Comprehensive Loss
(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
|
|
December 31,
2016
|
|
|
January 2,
2016
|
|
|
January 3,
2015
|
|
|
|
Details about Other
Comprehensive Loss
Components
|
|
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
|
|
$
|
(24,366
|
)
|
|
$
|
(24,741
|
)
|
|
$
|
(19,815
|
)
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24,366
|
)
|
|
|
(24,741
|
)
|
|
|
(19,815
|
)
|
|
Income before income taxes
|
|
|
|
9,503
|
|
|
|
9,649
|
|
|
|
7,727
|
|
|
Provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(14,863
|
)
|
|
$
|
(15,092
|
)
|
|
$
|
(12,087
|
)
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Amounts in parentheses indicate debits to profit / loss
|
20.
|
Restructuring Charges
|
As
previously disclosed, the Company established a new cost savings initiative and, as part of this cost savings initiative, in fiscal 2015, the Company undertook a plan of reduction in force which resulted in the elimination of certain positions and
termination of employment for certain employees worldwide. In fiscal 2014, the Company reviewed its organization and undertook a restructuring which resulted in the elimination of certain positions and the termination of employment for certain
employees worldwide. In connection with these plans, the Company recorded restructuring charges in connection with employee termination benefit costs of $8,412 ($5,131 after tax) and $11,840 ($7,222 after tax) during the fiscal years ended
January 2, 2016 and January 3, 2015, respectively. For the fiscal years ended January 2, 2016 and January 3, 2015, these charges impacted cost of revenues by $1,505 and $4,642, respectively, and selling, general and
administrative expenses by $6,907 and $7,198, respectively. For the fiscal years ended January 2, 2016 and January 3, 2015, all restructuring charges were recorded to general corporate expense and therefore there was no impact to the
segments.
F-37
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AND PER UNIT AMOUNTS)
As of December 31, 2016 and January 2, 2016, the balance of the liability for
restructuring was $0 and $1,809, respectively. For the fiscal year ended December 31, 2016, the Company made payments of $1,663 and lowered provision estimates by $146.
21.
|
Recently Issued Accounting Pronouncements
|
In February 2016, 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 U.S. revenue streams
and has begun to assess the implications of adopting the new five step revenue model and reviewing key contracts. The Company will begin assessing foreign revenue streams once the U.S. review is finalized.
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. Excess tax benefits and shortfalls are recognized in equity. In addition, these amounts will be classified as an operating activity in the consolidated statement of cash flows instead of as a financing activity. For fiscal 2014 to
2015, the Company recognized net excess tax shortfalls in equity of approximately $788 to $932, respectively. For fiscal 2016, the Company recognized net excess tax benefits in equity of approximately $327. These amounts may not necessarily be
indicative of future amounts that may be recognized subsequent to the adoption of this new standard, as any excess tax benefits or shortfalls recognized would be dependent on future stock prices, employee exercise behavior and applicable tax rates.
The new guidance will be effective for the Company beginning on January 1, 2017 and early adoption is permitted.
F-38
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AND PER UNIT AMOUNTS)
In August 2016, the FASB issued updated guidance on the statement of cash flows
presentation of certain transactions where diversity in practice exists. This guidance is effective for interim and annual periods beginning after December 15, 2017, and early adoption is permitted. The Company does not expect the adoption
of this guidance to have a material 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. This guidance is effective for the Company in the interim and annual periods beginning after
December 15, 2017 with early application permitted provided that the transaction date is prior to the issuance or effective date of this amendment and provided the transaction has not been reported in financial statements that have been issued
or made available for issuance. The Company does not expect the adoption of this guidance to have a material impact on the consolidated financial statements.
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 beginning after December 15, 2019, with early adoption permitted for any impairment tests performed after January 1, 2017. 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.
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 $3,453 and $647 for the fiscal years ended December 31, 2016
and January 2, 2016, respectively, which services included advertising, production and related fees. During fiscal 2016, the Company also purchased $627 of cookbooks, authored by Ms. Winfrey, which are held in inventory as of
December 31, 2016.
The Companys accounts payable to parties related to Ms. Winfrey at December 31, 2016
and January 2, 2016 was $1,123 and $574, respectively.
F-39
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AND PER UNIT AMOUNTS)
23.
|
Quarterly Financial Information (Unaudited)
|
The following is a summary of the unaudited quarterly consolidated results of operations for the fiscal years ended December 31, 2016 and January 2, 2016.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Quarters Ended
|
|
|
|
April 2,
2016
|
|
|
July 2,
2016
|
|
|
October 1,
2016
|
|
|
December 31,
2016
|
|
Fiscal year ended December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues, net
|
|
$
|
306,910
|
|
|
$
|
309,761
|
|
|
$
|
280,819
|
|
|
$
|
267,412
|
|
Gross profit
|
|
$
|
149,673
|
|
|
$
|
161,048
|
|
|
$
|
144,303
|
|
|
$
|
130,477
|
|
Operating income
|
|
$
|
13,557
|
|
|
$
|
73,731
|
|
|
$
|
66,792
|
|
|
$
|
46,730
|
|
Net (loss) income attributable to the Company
|
|
$
|
(10,753
|
)
|
|
$
|
30,494
|
|
|
$
|
34,658
|
|
|
$
|
13,300
|
|
Basic (loss) earnings per share
|
|
$
|
(0.17
|
)
|
|
$
|
0.48
|
|
|
$
|
0.54
|
|
|
$
|
0.21
|
|
Diluted (loss) earnings per share
|
|
$
|
(0.17
|
)
|
|
$
|
0.46
|
|
|
$
|
0.53
|
|
|
$
|
0.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Quarters Ended
|
|
|
|
April 4,
2015
|
|
|
July 4,
2015
|
|
|
October 3,
2015
|
|
|
January 2,
2016
|
|
Fiscal year ended January 2, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues, net
|
|
$
|
322,103
|
|
|
$
|
309,754
|
|
|
$
|
273,324
|
|
|
$
|
259,238
|
|
Gross profit
|
|
$
|
157,303
|
|
|
$
|
159,364
|
|
|
$
|
136,622
|
|
|
$
|
120,798
|
|
Operating income
|
|
$
|
18,044
|
|
|
$
|
70,580
|
|
|
$
|
63,108
|
|
|
$
|
16,326
|
|
Net (loss) income attributable to the Company
|
|
$
|
(5,433
|
)
|
|
$
|
27,877
|
|
|
$
|
21,790
|
|
|
$
|
(11,309
|
)
|
Basic (loss) earnings per share
|
|
$
|
(0.10
|
)
|
|
$
|
0.49
|
|
|
$
|
0.38
|
|
|
$
|
(0.18
|
)
|
Diluted (loss) earnings per share
|
|
$
|
(0.10
|
)
|
|
$
|
0.49
|
|
|
$
|
0.38
|
|
|
$
|
(0.18
|
)
|
Basic and diluted EPS are computed independently for each of the periods presented. Accordingly, the sum
of the quarterly EPS amounts may not agree to the total for the year.
As discussed in Note 1, in fiscal 2016, the Company
identified and recorded out-of-period adjustments related to (i) income tax errors primarily related to reversing a foreign tax receivable originally recorded in fiscal 2008 that should have been reversed in fiscal 2009; (ii) errors in the
prior period tax provision identified upon filing of the tax return and (iii) technology expenses that should have been capitalized in fiscal 2015. The impact of correcting these errors, to the extent applicable to the period, increased the
provision for income taxes and decreased net income attributable to the Company by $2,684 ($0.04 per fully diluted share) in the third quarter of fiscal 2016 and increased operating income, decreased the provision for income taxes and increased net
income attributable to the Company by $1,466, $110, and $1,576 ($0.02 per fully diluted share) in the fourth quarter of fiscal 2016.
As discussed in further detail in Note 12, the Company recorded a net tax benefit arising from a research and development tax credit and a Section 199 deduction for the tax years 2012 through 2015 in
the third quarter of fiscal 2016 of $11,438 ($0.17 per fully diluted share).
As discussed in further detail in Note 20, the
Company recorded restructuring charges of $5,761 ($3,514 after tax), $232 ($142 after tax), $1,081 ($660 after tax) and $1,338 ($815 after tax) during the first, second, third and fourth quarters of fiscal 2015, respectively, in connection with
employee termination benefit costs associated with its previously disclosed cost-savings initiative plan to restructure its organization, reducing gross profit, operating income, net income attributable to the Company and to EPS all four quarters of
fiscal 2015.
F-40
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AND PER UNIT AMOUNTS)
As discussed in further detail in Note 4, operating income, net income and EPS during
the fourth quarter of fiscal 2015 were impacted by the Company recording expenses of $13,593 ($8,292 after tax and $0.13 per fully diluted share) in connection with the Winfrey Transaction in the fourth quarter of fiscal 2015.
As discussed in further detail in Note 8, net income and EPS were impacted by a gain on the early extinguishment of debt of $4,749
($2,897 after tax) and $6,727 ($4,103 after tax), or $0.05 and $0.07 per fully diluted share, during the first and second quarters of fiscal 2015, respectively.
As discussed in Note 1, the Company identified and recorded out-of-period adjustments related to immaterial errors in prior period financial statements that increased net income attributable to the
Company by $420 for the second quarter of fiscal 2015 and decreased net income attributable to the Company by $740 in the fourth quarter of fiscal 2015.
F-41