UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended October 1, 2011March 31, 2012
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 001-16769
WEIGHT WATCHERS INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Virginia | 11-6040273 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
11 Madison Avenue, 17th Floor, New York, New York 10010
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (212) 589-2700
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | x | Accelerated filer | ¨ | |||
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The number of shares of common stock outstanding as of October 31, 2011April 30, 2012 was 73,574,725.55,540,137.
WEIGHT WATCHERS INTERNATIONAL, INC.
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Item 1. | ||||||
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16 | ||||||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 17 | ||||
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | |||||
Item 4. | Controls and Procedures | |||||
Item 1. | Legal Proceedings | |||||
Item 1A. | Risk Factors | |||||
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | |||||
Item 3. | Defaults Upon Senior Securities | |||||
Item 4. | ||||||
Item 5. | Other Information | |||||
Item 6. | Exhibits | |||||
PART I - FINANCIAL INFORMATION
ITEM 1. | FINANCIAL STATEMENTS |
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS AT
(IN THOUSANDS)
$1,091,987 | $1,091,987 | |||||||||||||||
October 1, 2011 | January 1, 2011 | March 31, 2012 | December 31, 2011 | |||||||||||||
ASSETS | ||||||||||||||||
CURRENT ASSETS | ||||||||||||||||
Cash and cash equivalents | $ | 61,421 | $ | 40,534 | $ | 79,611 | $ | 47,469 | ||||||||
Receivables, net | 38,782 | 43,722 | 43,986 | 47,175 | ||||||||||||
Inventories, net | 38,454 | 40,571 | 45,585 | 53,437 | ||||||||||||
Prepaid income taxes | 4,491 | 11,619 | 3,904 | 3,071 | ||||||||||||
Deferred income taxes | 19,841 | 19,800 | 24,505 | 24,612 | ||||||||||||
Prepaid expenses and other current assets | 26,304 | 34,196 | 33,701 | 38,762 | ||||||||||||
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TOTAL CURRENT ASSETS | 189,293 | 190,442 | 231,292 | 214,526 | ||||||||||||
Property and equipment, net | 32,527 | 30,930 | 52,070 | 41,072 | ||||||||||||
Franchise rights acquired | 760,633 | 765,864 | 766,439 | 764,026 | ||||||||||||
Goodwill | 49,989 | 51,425 | 50,018 | 50,012 | ||||||||||||
Trademarks and other intangible assets, net | 35,241 | 29,962 | 39,051 | 37,461 | ||||||||||||
Deferred financing costs, net and other noncurrent assets | 18,816 | 23,364 | ||||||||||||||
Deferred financing costs, net | 31,457 | 8,720 | ||||||||||||||
Other noncurrent assets | 5,796 | 5,811 | ||||||||||||||
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TOTAL ASSETS | $ | 1,086,499 | $ | 1,091,987 | $ | 1,176,123 | $ | 1,121,628 | ||||||||
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LIABILITIES AND TOTAL DEFICIT | ||||||||||||||||
CURRENT LIABILITIES | ||||||||||||||||
Portion of long-term debt due within one year | $ | 92,292 | $ | 197,524 | $ | 128,037 | $ | 124,933 | ||||||||
Payable to related party | 778,902 | 0 | ||||||||||||||
Accounts payable | 32,618 | 39,589 | 49,587 | 60,810 | ||||||||||||
Dividend payable | 13,117 | 13,158 | 9,853 | 13,145 | ||||||||||||
Derivative payable | 28,997 | 39,753 | 21,355 | 24,613 | ||||||||||||
UK self-employment liability | 43,795 | 40,782 | 13,653 | 43,671 | ||||||||||||
Accrued liabilities | 167,214 | 132,028 | 150,793 | 140,573 | ||||||||||||
Income taxes payable | 420 | 2,613 | 15,728 | 2,704 | ||||||||||||
Deferred revenue | 103,142 | 73,688 | 121,246 | 83,758 | ||||||||||||
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TOTAL CURRENT LIABILITIES | 481,595 | 539,135 | 1,289,154 | 494,207 | ||||||||||||
Long-term debt | 974,508 | 1,167,561 | 1,622,751 | 926,868 | ||||||||||||
Deferred income taxes | 89,895 | 62,807 | 110,535 | 100,723 | ||||||||||||
Other | 11,010 | 13,208 | 10,480 | 9,596 | ||||||||||||
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TOTAL LIABILITIES | 1,557,008 | 1,782,711 | 3,032,920 | 1,531,394 | ||||||||||||
TOTAL DEFICIT | ||||||||||||||||
Common stock, $0 par value; 1,000,000 shares authorized; 111,988 shares issued | 0 | 0 | 0 | 0 | ||||||||||||
Treasury stock, at cost, 38,415 shares at October 1, 2011 and 38,618 shares at January 1, 2011 | (1,794,945 | ) | (1,794,066 | ) | ||||||||||||
Treasury stock, at cost, 46,953 shares at March 31, 2012 and 38,389 shares at December 31, 2011 | (2,510,786 | ) | (1,793,983 | ) | ||||||||||||
Retained earnings | 1,325,581 | 1,103,817 | 646,372 | 1,378,616 | ||||||||||||
Accumulated other comprehensive loss | (1,145 | ) | (4,517 | ) | ||||||||||||
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TOTAL WEIGHT WATCHERS INTERNATIONAL, INC. DEFICIT | (470,509 | ) | (694,766 | ) | ||||||||||||
Noncontrolling interest | 0 | 4,042 | ||||||||||||||
Accumulated other comprehensive income | 7,617 | 5,601 | ||||||||||||||
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TOTAL DEFICIT | (470,509 | ) | (690,724 | ) | (1,856,797 | ) | (409,766 | ) | ||||||||
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TOTAL LIABILITIES AND TOTAL DEFICIT | $ | 1,086,499 | $ | 1,091,987 | $ | 1,176,123 | $ | 1,121,628 | ||||||||
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The accompanying notes are an integral part of these consolidated financial statements.
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF NET INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three Months Ended | Nine Months Ended | Three Months Ended | ||||||||||||||||||||||
October 1, 2011 | October 2, 2010 | October 1, 2011 | October 2, 2010 | March 31, 2012 | April 2, 2011 | |||||||||||||||||||
Meeting fees, net | $ | 233,400 | $ | 190,586 | $ | 771,898 | $ | 623,037 | $ | 252,508 | $ | 268,912 | ||||||||||||
Product sales and other, net | 93,132 | 79,529 | 346,442 | 295,957 | 124,082 | 142,555 | ||||||||||||||||||
Internet revenues | 101,902 | 60,491 | 299,538 | 176,350 | 126,945 | 91,965 | ||||||||||||||||||
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Revenues, net | 428,434 | 330,606 | 1,417,878 | 1,095,344 | 503,535 | 503,432 | ||||||||||||||||||
Cost of meetings, products and other | 162,861 | 142,233 | 555,095 | 464,386 | 199,444 | 207,189 | ||||||||||||||||||
Cost of Internet revenues | 14,390 | 9,864 | 41,309 | 29,097 | 15,726 | 13,101 | ||||||||||||||||||
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Cost of revenues | 177,251 | 152,097 | 596,404 | 493,483 | 215,170 | 220,290 | ||||||||||||||||||
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Gross profit | 251,183 | 178,509 | 821,474 | 601,861 | 288,365 | 283,142 | ||||||||||||||||||
Marketing expenses | 61,514 | 39,418 | 232,329 | 170,574 | 130,318 | 95,665 | ||||||||||||||||||
Selling, general and administrative expenses | 51,370 | 48,644 | 159,786 | 137,258 | 55,273 | 51,746 | ||||||||||||||||||
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Operating income | 138,299 | 90,447 | 429,359 | 294,029 | 102,774 | 135,731 | ||||||||||||||||||
Interest expense | 13,655 | 19,032 | 46,826 | 57,320 | 13,167 | 18,173 | ||||||||||||||||||
Other (income) expense, net | 285 | (611 | ) | 54 | 1,025 | |||||||||||||||||||
Other income, net | (509 | ) | (470 | ) | ||||||||||||||||||||
Early extinguishment of debt | 1,328 | 0 | ||||||||||||||||||||||
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Income before income taxes | 124,359 | 72,026 | 382,479 | 235,684 | 88,788 | 118,028 | ||||||||||||||||||
Provision for income taxes | 43,709 | 28,016 | 141,796 | 91,648 | 34,183 | 44,851 | ||||||||||||||||||
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Net income | 80,650 | 44,010 | 240,683 | 144,036 | 54,605 | 73,177 | ||||||||||||||||||
Net loss attributable to the noncontrolling interest | 0 | 427 | 523 | 1,281 | 0 | 416 | ||||||||||||||||||
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Net income attributable to Weight Watchers International, Inc. | $ | 80,650 | $ | 44,437 | $ | 241,206 | �� | $ | 145,317 | $ | 54,605 | $ | 73,593 | |||||||||||
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Earnings per share attributable to Weight Watchers International, Inc. | ||||||||||||||||||||||||
Basic | $ | 1.10 | $ | 0.59 | $ | 3.29 | $ | 1.90 | $ | 0.74 | $ | 1.01 | ||||||||||||
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Diluted | $ | 1.09 | $ | 0.59 | $ | 3.26 | $ | 1.90 | $ | 0.74 | $ | 1.00 | ||||||||||||
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Weighted average common shares outstanding | ||||||||||||||||||||||||
Basic | 73,567 | 75,127 | 73,265 | 76,310 | 73,343 | 72,919 | ||||||||||||||||||
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Diluted | 74,263 | 75,328 | 74,040 | 76,490 | 74,164 | 73,709 | ||||||||||||||||||
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Dividends declared per common share | $ | 0.18 | $ | 0.18 | $ | 0.53 | $ | 0.53 | $ | 0.18 | $ | 0.18 | ||||||||||||
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The accompanying notes are an integral part of these consolidated financial statements.
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWSCOMPREHENSIVE INCOME
(IN THOUSANDS)
Nine Months Ended | ||||||||
October 1, 2011 | October 2, 2010 | |||||||
Cash provided by operating activities | $ | 374,948 | $ | 234,895 | ||||
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Investing activities: | ||||||||
Capital expenditures | (12,950 | ) | (6,607 | ) | ||||
Capitalized software expenditures | (17,526 | ) | (9,291 | ) | ||||
Other items, net | (544 | ) | (15 | ) | ||||
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Cash used for investing activities | (31,020 | ) | (15,913 | ) | ||||
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Financing activities: | ||||||||
Payments of long-term debt | (298,285 | ) | (64,098 | ) | ||||
Payment of dividends | (38,745 | ) | (40,395 | ) | ||||
Payments to acquire treasury stock | (34,924 | ) | (76,891 | ) | ||||
Deferred financing costs | 0 | (11,378 | ) | |||||
Investment and advances from noncontrolling interest | 0 | 2,512 | ||||||
Proceeds from stock options exercised | 41,428 | 39 | ||||||
Tax benefit from restricted stock units vested and stock options exercised | 6,617 | 0 | ||||||
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Cash used for financing activities | (323,909 | ) | (190,211 | ) | ||||
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Effect of exchange rate changes on cash and cash equivalents and other | 868 | (1,973 | ) | |||||
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Net increase in cash and cash equivalents | 20,887 | 26,798 | ||||||
Cash and cash equivalents, beginning of period | 40,534 | 46,137 | ||||||
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Cash and cash equivalents, end of period | $ | 61,421 | $ | 72,935 | ||||
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Three Months Ended | ||||||||
March 31, 2012 | April 2, 2011 | |||||||
Net income | $ | 54,605 | $ | 73,177 | ||||
Other comprehensive income: | ||||||||
Foreign currency translation adjustments, net of tax of $237 and $713, respectively | 212 | 1,116 | ||||||
Current period changes in fair value of derivatives, net of tax of $1,152 and $4,147, respectively | 1,802 | 6,486 | ||||||
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Total other comprehensive income | 2,014 | 7,602 | ||||||
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Comprehensive income | 56,619 | 80,779 | ||||||
Comprehensive loss attributable to the noncontrolling interest | 0 | 416 | ||||||
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Comprehensive income attributable to Weight Watchers International, Inc. | $ | 56,619 | $ | 81,195 | ||||
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The accompanying notes are an integral part of these consolidated financial statements.
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Three Months Ended | ||||||||
March 31, 2012 | April 2, 2011 | |||||||
Cash provided by operating activities | $ | 110,754 | $ | 184,056 | ||||
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Investing activities: | ||||||||
Capital expenditures | (16,329 | ) | (2,215 | ) | ||||
Capitalized software expenditures | (4,607 | ) | (4,317 | ) | ||||
Other items, net | (46 | ) | 108 | |||||
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Cash used for investing activities | (20,982 | ) | (6,424 | ) | ||||
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Financing activities: | ||||||||
Proceeds from new term loans | 726,000 | 0 | ||||||
Payments of long-term debt | (27,012 | ) | (114,137 | ) | ||||
Payment of dividends | (13,012 | ) | (12,974 | ) | ||||
Payments to acquire treasury stock | (724,316 | ) | (34,924 | ) | ||||
Deferred financing costs | (24,810 | ) | 0 | |||||
Proceeds from stock options exercised | 8,049 | 18,135 | ||||||
Tax benefit from restricted stock units vested and stock options exercised | 2,289 | 1,245 | ||||||
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Cash used for financing activities | (52,812 | ) | (142,655 | ) | ||||
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Effect of exchange rate changes on cash and cash equivalents and other | (4,818 | ) | 1,735 | |||||
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Net increase in cash and cash equivalents | 32,142 | 36,712 | ||||||
Cash and cash equivalents, beginning of period | 47,469 | 40,534 | ||||||
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Cash and cash equivalents, end of period | $ | 79,611 | $ | 77,246 | ||||
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The accompanying notes are an integral part of these consolidated financial statements.
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. | Basis of Presentation |
The accompanying consolidated financial statements include the accounts of Weight Watchers International, Inc. and all of its subsidiaries. The term “Company” as used throughout these notes is used to indicate Weight Watchers International, Inc. and all of its businesses consolidated for purposes of its financial statements. The term “WWI” as used throughout these notes is used to indicate Weight Watchers International, Inc. and all of the Company’s businesses other than WW.com. The term “WW.com” as used throughout these notes is used to indicate WeightWatchers.com, Inc. and all of the Company’s Internet-based businesses.
The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and include amounts that are based on management’s best estimates and judgments. While all available information has been considered, actual amounts could differ from those estimates. The consolidated financial statements are unaudited but, in the opinion of management, reflect all adjustments including those of a normal recurring nature necessary for a fair statement of the interim results presented.
OnAs further discussed in Note 3, effective with its formation in February 5, 2008, Weight Watchers Asia Holdings Ltd. (“Weight Watchers Asia”), a direct, wholly-owned subsidiary of the Company and Danone Dairy Asia (“Danone Asia”), an indirect, wholly-owned subsidiaryconsolidated the financial statements of Groupe DANONE S.A., entered into a joint venture agreement to establish a weight management business in the People’s Republic of China. Pursuant to the terms of the joint venture agreement, Weight Watchers Asia and Danone Asia owned 51% and 49%, respectively, of the joint venture entity, Weight Watchers Danone China Limited (together with all of its businesses, the “China Joint Venture”). On April 27, 2011, Weight Watchers Asia entered into a share purchase agreement with Danone Asia, pursuant to which Weight Watchers Asia acquired Danone Asia’s 49% minority equity interest in the China Joint Venture as of that date. Because the Company had a direct controlling financial interest in the China Joint Venture, it consolidated the entity from the first quarter of fiscal 2008. Effective April 27, 2011, the date of the acquisition of Danone Asia’s minority equity interest by Weight Watchers Asia, the Company no longer accounts for a non-controlling interest in the China Joint Venture.Limited.
These statements should be read in conjunction with the Company’s Annual Report on Form 10-K for fiscal 2010,2011, which includes additional information about the Company, its results of operations, its financial position and its cash flows.
2. | Summary of Significant Accounting Policies |
Recently Issued Accounting Pronouncements:
In September 2011, the Financial Accounting Standards Board (the “FASB”) issued updated guidance on the periodic testing of goodwill for impairment. This guidance will allowallows companies to assess qualitative factors to determine if it is more-likely-than-not that goodwill might be impaired and whether it is necessary to perform the two-step goodwill impairment test required under current accounting standards. This guidance is applicable for fiscal years beginning after December 15, 2011, with early adoption permitted. The adoption of this guidance isdid not expected to have a material effect on the consolidated financial position, results of operations or cash flows of the Company.
In June 2011, the FASB issued authoritative guidance requiring companies to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The provisions of the guidance are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. SinceIn December 2011, the FASB issued an amendment deferring the effective date for the presentation of reclassification adjustments out of accumulated other comprehensive income. The Company adopted the provisions of this guidance amendsin the disclosure requirements concerning comprehensive income, itsfirst quarter of fiscal 2012, and such adoption willdid not affect the consolidated financial position, results of operations or cash flows of the Company.
In May 2011, the FASB issued authoritative fair value guidance entitled “Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs”. Some of the amendments included in the guidance clarify the FASB’s intent about the application of existing fair value measurement requirements. Other amendments change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. This guidance is effective for interim and annual periods beginning after December 15, 2011. The Company is still evaluatingadopted the potential future effectsprovisions of this guidance.guidance in the first quarter of fiscal 2012, and such adoption did not have a material impact on the disclosures in its consolidated financial statements.
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
In January 2010,Reclassification:
Certain prior year amounts have been reclassified to conform to the FASB issued authoritative guidance revising certain disclosure requirements concerning fair value measurements. The guidance requires an entity to disclose separately significant transfers into and out of Levels 1 and 2 of the fair value hierarchy and to disclose the reasons for such transfers. It also requires the presentation of purchases, sales, issuances and settlements within Level 3, on a gross basis rather than a net basis. These new disclosure requirements were effective for the Company beginning with its first fiscal quarter of 2010, except for the additional disclosure of Level 3 activity, which was effective for fiscal years beginning after December 15, 2010. The Company did not have any such transfers into and out of Levels 1 and 2 during the nine months ended October 1, 2011 and currently does not maintain any assets or liabilities classified as Level 3.
In October 2009, new revenue recognition guidance was issued regarding arrangements with multiple deliverables. The new guidance permits companies to recognize revenue from certain deliverables earlier than previously permitted, if certain criteria are met. The new guidance is effective for fiscal years beginning on or after June 15, 2010 and did not have a material impact on the Company’s financial position, results of operations or cash flows.current period presentation.
For a discussion of the Company’s other significant accounting policies, see “Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements of the Company’s Annual Report on Form 10-K for fiscal 2010.2011.
3. | Acquisitions of Franchisees and Minority Equity Interest in China Joint Venture |
Acquisitions of Franchisees
The acquisitions of certain franchisees have been accounted for under the purchase method of accounting and, accordingly, their earnings of acquired franchisees have been included in the consolidated operating results of the Company since their datesthe applicable date of acquisition. There have been no key franchise acquisitions since fiscal 2008.
Acquisition of Minority Equity Interest in China Joint Venture
On February 5, 2008, Weight Watchers Asia Holdings Ltd. (“Weight Watchers Asia”), a direct, wholly-owned subsidiary of the Company, and Danone Dairy Asia (“Danone Asia”), an indirect, wholly-owned subsidiary of Groupe DANONE S.A., entered into a joint venture agreement to establish a weight management business in the People’s Republic of China. Pursuant to the terms of the joint venture agreement, Weight Watchers Asia and Danone Asia owned 51% and 49%, respectively, of the joint venture entity, Weight Watchers Danone China Limited (together with all of its businesses, the “China Joint Venture”). Because the Company had a direct controlling financial interest in the China Joint Venture, it consolidated the entity from the first quarter of fiscal 2008.
On April 27, 2011, Weight Watchers Asia entered into a share purchase agreement with Danone Asia, pursuant to acquirewhich Weight Watchers Asia acquired Danone Asia’s 49% minority equity interest in the China Joint Venture as of that date for consideration of $1. As a resultEffective April 27, 2011, the date of the acquisition of Danone Asia’s minority equity interest by Weight Watchers Asia, the Company now owns 100% of the China Joint Venture and no longer accounts for a non-controlling interest in the China Joint Venture. In connection with the acquisition, theThe noncontrolling interest that had been reflected on the Company’s balance sheet was reclassified to retained earnings.
4. | Goodwill and Intangible Assets |
For the ninethree months ended October 1, 2011,March 31, 2012, the change in goodwill was due to the closing of the Company’s Finland business and foreign currency fluctuations. The Company’s goodwill by reportable segment at October 1, 2011March 31, 2012 was $23,789$23,818 related to its WWI segment and $26,200 related to its WW.com segment. Franchise rights acquired are due to acquisitions of the Company’s franchised territories. For the ninethree months ended October 1, 2011,March 31, 2012, the change in franchise rights acquired was due to foreign currency fluctuations.
Aggregate amortization expense for finite-lived intangible assets was recorded in the amounts of $4,313$4,329 and $12,161$3,856 for the three and nine months ended October 1,March 31, 2012 and April 2, 2011, respectively. Aggregate amortization expense for finite-lived intangible assets was recorded in the amounts of $3,349 and $10,366 for the three and nine months ended October 2, 2010, respectively.
The carrying amount of finite-lived intangible assets as of October 1, 2011 and January 1, 2011 was as follows:
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
October 1, 2011 | January 1, 2011 | |||||||||||||||
Gross Carrying Amount | Accumulated Amortization | Gross Carrying Amount | Accumulated Amortization | |||||||||||||
Capitalized software costs | $ | 63,027 | $ | 41,559 | $ | 52,293 | $ | 34,423 | ||||||||
Trademarks | 9,979 | 9,195 | 9,813 | 8,952 | ||||||||||||
Website development costs | 41,757 | 29,056 | 35,245 | 24,350 | ||||||||||||
Other | 7,028 | 6,740 | 7,033 | 6,697 | ||||||||||||
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$ | 121,791 | $ | 86,550 | $ | 104,384 | $ | 74,422 | |||||||||
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Estimated amortization expense of existing finite-lived intangible assets for the next five fiscal years is as follows:
Remainder of fiscal 2011 | $ | 4,143 | ||
Fiscal 2012 | $ | 12,805 | ||
Fiscal 2013 | $ | 9,528 | ||
Fiscal 2014 | $ | 5,549 | ||
Fiscal 2015 | $ | 2,598 |
The components of the Company’s long-term debt are as follows:
October 1, 2011 | January 1, 2011 | |||||||||||||||
Balance | Effective Rate | Balance | Effective Rate | |||||||||||||
Revolver I due 2011 | $ | 0 | 3.25 | % | $ | 1,674 | 3.25 | % | ||||||||
Revolver I due 2011 | 0 | 1.29 | % | 56,565 | 1.29 | % | ||||||||||
Revolver II due 2014 | 0 | 4.75 | % | 3,326 | 4.75 | % | ||||||||||
Revolver II due 2014 | 15,000 | 2.76 | % | 112,435 | 2.83 | % | ||||||||||
Term A Loan due 2011 | 0 | 1.31 | % | 58,250 | 1.35 | % | ||||||||||
Additional Term A Loan due 2013 | 148,749 | 1.29 | % | 209,053 | 1.36 | % | ||||||||||
Term B Loan due 2014 | 238,125 | 1.66 | % | 240,000 | 1.86 | % | ||||||||||
Term C Loan due 2015 | 426,075 | 2.54 | % | 443,117 | 2.65 | % | ||||||||||
Term D Loan due 2016 | 238,851 | 2.54 | % | 240,665 | 2.65 | % | ||||||||||
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Total Debt | 1,066,800 | 2.14 | % | 1,365,085 | 2.01 | % | ||||||||||
Less Current Portion | 92,292 | 197,524 | ||||||||||||||
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Total Long-Term Debt | $ | 974,508 | $ | 1,167,561 | ||||||||||||
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The Company’s credit facilities consist of a term loan facility and a revolving credit facility (collectively, the “WWI Credit Facility”). During the second quarter of fiscal 2011, the composition of the WWI Credit Facility changed as a result of the Company paying off amounts outstanding under certain tranches of the WWI Credit Facility that matured on June 30, 2011. Immediately prior to the change, the term loan facility consisted of two tranche A loans (“Term A Loan” and “Additional Term A Loan”), a tranche B loan (“Term B Loan”), a tranche C loan (“Term C Loan”), and a tranche D loan (“Term D Loan), and the revolving credit facility (the “Revolver”) consisted of two tranches (“Revolver I” and “Revolver II”). Immediately prior to the change, the total of the outstanding and available credit under the Revolver was up to $500,000, of which the Revolver I was $167,353 and the Revolver II was $332,647.
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
On June 30,The carrying amount of finite-lived intangible assets as of March 31, 2012 and December 31, 2011 eachwas as follows:
March 31, 2012 | December 31, 2011 | |||||||||||||||
Gross Carrying Amount | Accumulated Amortization | Gross Carrying Amount | Accumulated Amortization | |||||||||||||
Capitalized software costs | $ | 70,649 | $ | 46,671 | $ | 67,223 | $ | 44,003 | ||||||||
Trademarks | 10,034 | 9,357 | 10,006 | 9,276 | ||||||||||||
Website development costs | 46,553 | 32,548 | 43,987 | 30,747 | ||||||||||||
Other | 7,033 | 6,642 | 7,033 | 6,762 | ||||||||||||
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$ | 134,269 | $ | 95,218 | $ | 128,249 | $ | 90,788 | |||||||||
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Estimated amortization expense of existing finite-lived intangible assets for the next five fiscal years is as follows:
Remainder of fiscal 2012 | $ | 11,403 | ||
Fiscal 2013 | $ | 13,088 | ||
Fiscal 2014 | $ | 9,100 | ||
Fiscal 2015 | $ | 4,134 | ||
Fiscal 2016 | $ | 1,222 |
5. | Long-Term Debt |
The components of the Company’s long-term debt are as follows:
March 31, 2012 | December 31, 2011 | |||||||||||||||
Balance | Effective Rate | Balance | Effective Rate | |||||||||||||
Term A-1 Loan due January 26, 2013 | $ | 95,564 | 1.50 | % | $ | 148,749 | 1.30 | % | ||||||||
Term B Loan due January 26, 2014 | 130,475 | 1.87 | % | 238,125 | 1.65 | % | ||||||||||
Term C Loan due June 30, 2015 | 118,617 | 2.75 | % | 426,075 | 2.55 | % | ||||||||||
Term D Loan due June 30, 2016 | 119,124 | 2.87 | % | 238,852 | 2.56 | % | ||||||||||
Term E Loan due March 15, 2017 | 460,860 | 2.85 | % | — | — | |||||||||||
Term F Loan due March 15, 2019 | 826,148 | 4.00 | % | — | — | |||||||||||
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Total Debt | 1,750,788 | 2.56 | % | 1,051,801 | 2.15 | % | ||||||||||
Less Current Portion | 128,037 | 124,933 | ||||||||||||||
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Total Long-Term Debt | $ | 1,622,751 | $ | 926,868 | ||||||||||||
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The Company’s credit facilities consist of certain term loan facilities and revolving credit facilities (collectively, the “WWI Credit Facility”). During the first quarter of fiscal 2012, the composition of the WWI Credit Facility changed as a result of the Company amending and restating the WWI Credit Facility to, among other things, extend the maturity of certain of the Company’s term loan facilities and the revolving credit facility and to obtain new commitments for the borrowing of an additional $1,449,397 of term loans to finance the purchases of shares of the Company’s common stock in the Tender Offer and from Artal Holdings (each as defined below in Note 6).
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Immediately prior to the amendment of the WWI Credit Facility, the term loan facilities consisted of a tranche A-1 loan (“Term A-1 Loan”), a tranche B loan (“Term B Loan”), a tranche C loan (“Term C Loan”), and a tranche D loan (“Term D Loan”), and a revolving credit facility (“Revolver A-1”). The aggregate principal amount then outstanding under (i) the Term A-1 Loan was $128,648, (ii) the Term B Loan was $237,500, (iii) the Term C Loan was $420,394 and (iv) the Term D Loan was $238,247. Immediately prior to the amendment of the WWI Credit Facility, the Revolver A-1 had no loans outstanding under it, $1,027 of issued but undrawn letters of credit and $331,620 in available unused commitments thereunder.
Following the amendment of the WWI Credit Facility on March 15, 2012, (i) $33,083 in aggregate principal amount of the Term AA-1 Loan and Revolver I matured$301,777 in aggregate principal amount of the Term C Loan were converted into, and was paid$849,397 in full satisfactionaggregate principal amount of obligations thereunder ($29,125commitments to borrow new term loans were provided under, a new tranche E loan (“Term E Loan”), (ii) $107,025 in aggregate principal amount of the Term B Loan and $12,050, respectively). Following$119,123 in aggregate principal amount of the maturityTerm D Loan were converted into, and payment$600,000 in fullaggregate principal amount of obligationscommitments to borrow new term loans were provided under, a new tranche F loan (“Term F Loan”), and (iii) $261,971 in aggregate principal amount of commitments under the Term A Loan, theRevolver A-1 were converted into a new revolving credit facility (“Revolver A-2”). The loans outstanding under each term loan facility consistedexisting prior to the amendment of the AdditionalWWI Credit Facility and the loans and commitments outstanding under the Revolver A-1, in each case that were not converted into the Term AE Loan, the Term F Loan or the Revolver A-2, as applicable, continued to remain outstanding under the WWI Credit Facility as the Term A-1 Loan, the Term B Loan, the Term C Loan, the Term D Loan or the Revolver A-1, as applicable. On March 27, 2012, the Company borrowed an aggregate of $726,000 under the Term E Loan and the Term D Loan. FollowingF Loan to finance the maturitypurchase of shares in the Tender Offer and payment in fullto pay a portion of obligationsthe related fees and expenses. On April 9, 2012, the Company borrowed an aggregate of approximately $723,397 under Revolver I, the Revolver consisted solelyTerm E Loan to finance the purchase of Revolver II, with a total of $332,647 of outstanding and available credit.
shares from Artal Holdings. At October 1, 2011,March 31, 2012, the Company had $1,066,800$1,750,788 outstanding under the WWI Credit Facility, which consisted entirely of outstanding term loans. In addition, at March 31, 2012, the Revolver A-1 had $218 in issued but undrawn letters of credit outstanding thereunder and $70,458 in available unused commitments thereunder and the Revolver A-2 had $809 in issued but undrawn letters of credit outstanding thereunder and $261,162 in available unused commitments thereunder. In connection with this amendment, the Company incurred fees of $25,425 during the three months ended March 31, 2012.
At March 31, 2012 and December 31, 2011, the Company’s debt consisted entirely of variable-rate instruments. Interest rate swaps were entered into to hedge a combinationportion of the cash flow exposure associated with the Company’s variable-rate borrowings. The average interest rate on the Company’s debt, exclusive of the impact of swaps, was approximately 3.18% and 2.40% per annum at March 31, 2012 and December 31, 2011, respectively.
The WWI Credit Facility provides that term loans and amountsthe loans outstanding under the Revolver II.A-1 and the Revolver II had $15,000 outstanding and $316,620 available.
A-2 bear interest at a rate per annum equal to either, at the Company’s option, the LIBO Rate (Reserve Adjusted) (as defined in the WWI Credit Facility agreement) plus an applicable margin or the Alternate Base Rate (as defined in the WWI Credit Facility agreement) plus an applicable margin, which applicable margins will vary depending on the Company’s Net Debt to EBITDA Ratio (as defined in the WWI Credit Facility agreement) from time to time in effect. At October 1, 2011,March 31, 2012, the Additional Term AA-1 Loan bore interest at a rate equal to LIBORLIBO Rate (Reserve Adjusted) plus 1.00%0.875% per annum; the Term B Loan bore interest at a rate equal to LIBORLIBO Rate (Reserve Adjusted) plus 1.25% per annum; the Term C Loan andbore interest at a rate equal to LIBO Rate (Reserve Adjusted) plus 2.125%; the Term D Loan bore interest at a rate equal to LIBORLIBO Rate (Reserve Adjusted) plus 2.25% per annum; and the Revolver IITerm E Loan bore interest at a rate equal to LIBORLIBO Rate (Reserve Adjusted) plus 2.50%2.25% per annum; the Term F Loan bore interest at a rate equal to LIBO Rate (Reserve Adjusted) plus 3.00% per annum; had any loans under the Revolver A-1 been outstanding, they would have borne interest at a rate equal to either the LIBO Rate (Reserve Adjusted) plus 2.25% per annum or the Alternate Base Rate plus 1.25% per annum; and had any loans under the Revolver A-2 been outstanding, they would have borne interest at a rate equal to either the LIBO Rate (Reserve Adjusted) plus 2.25% per annum or the Alternate Base Rate plus 1.25% per annum. For purposes of calculating the interest rate on the Term F Loan the LIBO Rate (Reserve Adjusted) will always be at least 1.00% per annum. In addition to paying interest on outstanding principal under the WWI Credit Facility, at October 1, 2011, the Company was
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
is required to pay aan undrawn commitment fee to the lenders under each of the Revolver IIA-1 and the Revolver A-2 with respect to the unused commitments under each such facility at a rate equalthat is dependent on the Company’s Net Debt to 0.50%EBITDA Ratio from time to time in effect. As of March 31, 2012, the applicable commitment fee rate for the Revolver A-1 was 0.4375% per annum and for the Revolver A-2 was 0.4000% per annum.
The WWI Credit Facility contains customary covenants including covenants that, in certain circumstances, restrict the Company’s ability to incur additional indebtedness, pay dividends on and redeem capital stock, make other payments, including investments, sell its assets and enter into consolidations, mergers and transfers of all or substantially all of its assets. The WWI Credit Facility also requires the Company to maintain specified financial ratios and satisfy certain financial condition tests. At October 1, 2011,March 31, 2012, the Company was in compliance with all of the required financial ratios and also met all of the financial condition tests and expects to continue to do so for the foreseeable future. The WWI Credit Facility contains customary events of default. Upon the occurrence of an event of default under the WWI Credit Facility, the lenders thereunder may cease making loans and declare amounts outstanding to be immediately due and payable. The WWI Credit Facility is guaranteed by certain of the Company’s existing and future subsidiaries. Substantially all the assets of the Company collateralizeCompany’s assets secure the WWI Credit Facility.
The Company amended the WWI Credit Facility on June 26, 2009 to allow itallows the Company to make loan modification offers to all lenders of any tranche of term loans or revolving loanscommitments to extend the maturity date of such loans and/or commitments and/or reduce or eliminate the scheduled amortization. Any such loan modifications would be effective only with respect to such tranche of term loans or revolving loanscommitments and only with respect to those lenders that accept the Company’s offer. Loan modification offers may be accompanied by increased pricing and/or fees payable to accepting lenders. This amendmentThe WWI Credit Facility also providesallows for up to an additional $400,000 of incremental financing through the creation of either new tranches of term loans or through an increase in commitments under the Revolver A-2, in each case to be provided to the Company under the WWI Credit Facility. The incremental capacity is uncommitted and the Company must find lenders to provide any such financing prior to incurrence. In addition, the Company may incur up to an additional $200,000 of incremental term loan financingloans through the creation of a new tranche of term loans, provided that the aggregate principal amount of such new term loans cannot exceed the amount then outstanding under the Company’sits existing revolving credit facility. In addition,facilities and the proceeds from such new tranche of term loans must be used solely to repay certain outstanding revolving loans and permanently reduce the commitments of certain revolving lenders.
6. | Treasury Stock |
On February 23, 2012, the Company commenced a “modified Dutch auction” tender offer for up to $720,000 in value of its common stock at a purchase price not less than $72.00 and not greater than $83.00 per share (the “Tender Offer”). Prior to the Tender Offer, on February 14, 2012, the Company entered into an agreement (the “Purchase Agreement”) with Artal Holdings Sp. z o.o., Succursale de Luxembourg (“Artal Holdings”) whereby Artal Holdings agreed to sell to the Company, at the same price as was determined in the Tender Offer, such number of its shares of the Company’s common stock that, upon the closing of this purchase after the completion of the Tender Offer, Artal Holdings’ percentage ownership in the outstanding shares of the Company’s common stock would be substantially equal to its level prior to the Tender Offer. Artal Holdings also agreed not to participate in the Tender Offer so that it would not affect the determination of the purchase price of the shares in the Tender Offer.
The Tender Offer expired at midnight, New York time, on March 22, 2012, and on March 28, 2012 the Company repurchased 8,780 shares at a purchase price of $82.00 per share. On April 8, 2010,9, 2012, the Company repurchased 9,499 of Artal Holdings’ shares at a purchase price of $82.00 per share pursuant to the Purchase Agreement. In March 2012, the Company amended and extended the WWI Credit Facility pursuant to a loan modification offer to all lenders of all tranches of term loans and revolving loans to, among other things, extend the maturity date of such loans. In connection with this amendment, certain lenders converted a total of $454,480 of their outstanding term loans under the Term A Loan ($151,775) and Additional Term A Loan ($302,705) into term loans under the new Term C Loan which matures on June 30, 2015 (or 2013, upon the occurrence of certain events described in the WWI Credit Facility agreement), and a total of $241,875 of their outstanding term loans under the Term B Loan into term loans under the new Term D Loan which matures on June 30, 2016. In addition, certain lenders converted a total of $332,647 of their outstanding Revolver I commitments into commitments under the new Revolver II which terminates on June 30, 2014 (or 2013, upon the occurrence of certain events described in the WWI Credit Facility agreement), including a proportionate amount of their outstanding Revolver I loans into Revolver II loans. Followingfinance these conversions of a total of $1,029,002 of loans and commitments, at April 8,repurchases. See Note 5.
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2010, the Company had the same amount of debt outstanding under the WWI Credit Facility and amount of availability under the Revolver as it had immediately prior to such conversions. In connection with this loan modification offer, the Company incurred fees of approximately $11,500 during the second quarter of fiscal 2010.
On October 9, 2003, the Company’s Board of Directors authorized and the Company announced a program to repurchase up to $250,000 of the Company’s outstanding common stock. On each of June 13, 2005, May 25, 2006 and October 21, 2010, the Company’s 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. and its parents and subsidiaries under the program. The repurchase program currently has no expiration date.
During the ninethree months ended October 1,March 31, 2012, the Company purchased no shares of its common stock in the open market under the repurchase program. During the three months ended April 2, 2011, the Company purchased 814 shares of its common stock in the open market under the repurchase program for a total cost of $31,550. During the nine months ended October 2, 2010, the Company purchased 2,850The repurchase of shares of its common stock in the open market under the Tender Offer and from Artal Holdings pursuant to the Purchase Agreement was not made pursuant to the Company’s existing stock repurchase program for a total cost of $79,709.program.
7. | Earnings Per Share |
Basic earnings per share (“EPS”) are calculated utilizing the weighted average number of common shares outstanding during the periods presented. Diluted EPS is calculated utilizing the weighted average number of common shares outstanding during the periods presented adjusted for the effect of dilutive common stock equivalents.
The following table sets forth the computation of basic and diluted EPS:
Three Months Ended | Nine Months Ended | Three Months Ended | ||||||||||||||||||||||
October 1, 2011 | October 2, 2010 | October 1, 2011 | October 2, 2010 | March 31, 2012 | April 2, 2011 | |||||||||||||||||||
Numerator: | ||||||||||||||||||||||||
Net income attributable to Weight Watchers International, Inc. | $ | 80,650 | $ | 44,437 | $ | 241,206 | $ | 145,317 | $ | 54,605 | $ | 73,593 | ||||||||||||
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Denominator: | ||||||||||||||||||||||||
Weighted average shares of common stock outstanding | 73,567 | 75,127 | 73,265 | 76,310 | 73,343 | 72,919 | ||||||||||||||||||
Effect of dilutive common stock equivalents | 696 | 201 | 775 | 180 | 821 | 790 | ||||||||||||||||||
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Weighted average diluted common shares outstanding | 74,263 | 75,328 | 74,040 | 76,490 | 74,164 | 73,709 | ||||||||||||||||||
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EPS attributable to Weight Watchers International, Inc.: | ||||||||||||||||||||||||
Basic | $ | 1.10 | $ | 0.59 | $ | 3.29 | $ | 1.90 | $ | 0.74 | $ | 1.01 | ||||||||||||
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Diluted | $ | 1.09 | $ | 0.59 | $ | 3.26 | $ | 1.90 | $ | 0.74 | $ | 1.00 | ||||||||||||
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The number of anti-dilutive common stock equivalents excluded from the calculation of weighted average shares for diluted EPS was 234129 and 2,317352 for the three months ended October 1,March 31, 2012 and April 2, 2011, and October 2, 2010, respectively, and 165 and 2,210 for the nine months ended October 1, 2011 and October 2, 2010, respectively.
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES8. Stock Plans
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
On May 6, 2008, May 12, 2004 and December 16, 1999, respectively, the Company’s shareholders approved the 2008 Stock Incentive Plan (the “2008 Plan”), the 2004 Stock Incentive Plan (the “2004 Plan”) and the 1999 Stock Purchase and Option Plan (the “1999 Plan” and together with the 2008 Plan and the 2004 Plan, the “Stock Plans”). These plans are designed to promote the long-term financial interests and growth of the Company
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
by attracting, motivating and retaining employees with the ability to contribute to the success of the business and to align compensation for the Company’s employees over a multi-year period directly with the interests of the shareholders of the Company. The Company’s Board of Directors or a committee thereof administers the Stock Plans.
In connection with the Company’s annual grant of stock compensation, on March 25, 2011, the Company granted 213 non-qualified stock options and 83 restricted stock units (“RSUs”) to certain employees. The options and RSUs will vest on the third anniversary of the date of grant and the options will expire 10 years from the date of grant. The options and RSUs had an aggregate estimated grant-date fair value of $4,368 and $5,359, respectively.
9. | Income Taxes |
The effective tax rates for the three and nine months ended October 1,March 31, 2012 and April 2, 2011 were 35.1%38.5% and 37.1%38.0%, respectively, and for the three and nine months ended October 1, 2010 were both 38.9%.respectively. For the three and nine months ended October 1,March 31, 2012, the primary differences between the US federal statutory tax rate and the Company’s effective tax rate were state income taxes and increases in valuation allowances, offset by lower rates in certain foreign jurisdictions. For the three months ended April 2, 2011, the primary differences between the US federal statutory tax rate and the Company’s effective tax rate were state income taxes and increases in valuation allowances, offset by lower rates in certain foreign jurisdictions and the reversal of certain tax reserves due to the expiration of the applicable statutes of limitations and the US tax benefit associated with losses due to the closing of the Company’s Finland business. For the three and nine months ended October 2, 2010, the primary differences between the US federal statutory tax rate and the Company’s effective tax rate were state income taxes and increases in valuation allowances, offset by lower statutory rates in certain foreign jurisdictions.limitations.
10. | Legal |
UK Self-Employment Matter
In July 2007, Her Majesty’s Revenue and Customs (“HMRC”) issued to the Company notices of determination and decisions that, for the period April 2001 to April 2007, its leaders and certain other service providers in the United Kingdom should have been classified as employees for tax purposes and, as such, the Company should have withheld tax from the leaders and certain other service providers pursuant to the “Pay As You Earn” (“PAYE”) and national insurance contributions (“NIC”) collection rules and remitted such amounts to HMRC. HMRC also issued a claim to the Company in October 2008 in respect of NIC which corresponds to the prior notices of assessment with respect to PAYE previously raised by HMRC.
In September 2007, the Company appealed to the UK First Tier Tribunal (Tax Chamber) (formerly known as the UK VAT and Duties Tribunal and hereinafter referred to as the “First Tier Tribunal”) HMRC’s notices as to these classifications and against any amount of PAYE and NIC liability claimed to be owed by the Company. In February 2010, the First Tier Tribunal issued a ruling that the Company’s UK leaders should have been classified as employees for UK tax purposes and, as such, the Company should have withheld tax from its leaders pursuant to the PAYE and NIC collection rules for the period from April 2001 to April 2007 with respect to services performed by the leaders for the Company. The Company appealed the First Tier Tribunal’s adverse ruling to the UK Upper Tribunal (Tax and Chancery Chamber) (the “Upper Tribunal”), and in October 2011, the Upper Tribunal issued a ruling dismissing the Company’s appeal. TheIn January 2012, the Company is considering allsought permission from the UK Court of its options in light ofAppeal to appeal the Upper Tribunal’s ruling, dismissing its appeal.which the UK Court of Appeal refused in March 2012. In March 2012, the Company applied to the UK Court of Appeal for an oral hearing to seek permission to appeal to the UK Upper Tribunal, which was granted in April 2012 and will be held in June 2012.
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
In December 2011, HMRC’s claim in respect of NIC was amended to increase the claimed amount for the period April 2002 to April 2007 and include the interest accrued thereon through December 2011. In addition, in February 2012, HMRC asserted a claim in respect of PAYE for the period April 2007 to April 2011 similar to what it had claimed for the period April 2001 to April 2007. The Company is currently appealing this PAYE claim with the First Tier Tribunal and the First Tier Tribunal has directed that the appeal be stayed until following the decision of the UK Court of Appeal with respect to the Company’s appeal of the UK Upper Tribunal’s ruling.
In light of the First Tier Tribunal’s adverse ruling and in accordance with accounting guidance for contingencies, the Company recorded in the fourth quarter of fiscal 2009 a reserve for the period from April 2001 through the end of fiscal 2009, inclusive of estimated accrued interest. On a quarterly basis, beginning in the first quarter of fiscal 2010 and through the second quarter of fiscal 2011, the Company recorded a reserve for UK withholding taxes with respect to its UK leaders consistent with this ruling. The reserve at the end of the second
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
quarter of fiscal 2011 equaled approximately $43,795$43,671 in the aggregate based on the exchange rates at the end of the third quarter of fiscal 2011. As of the beginning of the third quarter of fiscal 2011, the Company employs its UK leaders and therefore has ceased recording any further reserves.
Sabatino v. Weight Watchers North America, Inc.
In September 2009, a lawsuit was filed in the Superior Court of California by one of the Company’s former leaders alleging violations of certain California wage and hour laws on behalf of herself, and, if approved by the court, other leaders and those employees who have performed the location coordinator function in California since September 17, 2005. In this matter, the plaintiff sought unpaid wages and certain other damages. In October 2009, the Company answered the complaint and removed the case to the U.S. District Court for the Northern District of California (the “Federal Court”). In July 2010, the plaintiff filed an amended complaint adding two additional named plaintiffsreserves for this matter. In October 2010, the parties engaged in mediation and reached an agreement in principle to settle this matter in its entirety and, accordingly,addition, the Company recorded a reserve with respect to this matter of $6,500. In May 2011, the parties received the Federal Court’s final approval of the settlement and the Company made paymentsdoes not currently expect additional reserves will be required in connection with the settlementDecember 2011 amended NIC claim and the February 2012 PAYE claim by HMRC, as reserves had previously been made for these amounts. In February 2012, the Company paid HMRC, on a without prejudice basis, a portion of the amount previously reserved equal to approximately $6,364$30,018 based on the exchange rates at the payment date for estimated amounts claimed to be owed by the Company with respect to PAYE and interest thereon for the period April 2001 to July 2011. The reserve at the end of the first quarter of fiscal 2012 equaled approximately $13,653 in the aggregate inbased on the secondexchange rates at the end of the first quarter of fiscal 2011.2012.
Hanson-Kelly & Jackson v. Weight Watchers North America, Inc. and Weight Watchers International, Inc.
In January 2010, a lawsuit was filed in the U.S. District Court for the Middle District of North Carolina by two leaders alleging violations of certain federal and North Carolina wage and hour laws on behalf of themselves, and, if approved by the court, other leaders and receptionists in North Carolina since January 25, 2007. In this matter, the plaintiffs are seekingsought unpaid wages and certain other damages. In April 2010, the Company filed a Motion to Dismiss the claim for unpaid wages under the North Carolina wage and hour laws. In February 2012, the parties engaged in mediation and reached an agreement in principle to resolve the case for a de minimis amount. The court has not ruled yet on this Motion. Althoughapproved the Company disagrees withsettlement agreement negotiated by the allegations that it has violated federal and North Carolina wage and hour lawsparties, and the Company believes it has valid defensescase was dismissed with respect to this matter, litigation is inherently unpredictable. At this time, it is not possible to determine the outcome of, or estimate the liability related to, this action and the Company has not made any provision for lossesprejudice in connection with it.April 2012.
Other Litigation Matters
Due to the nature of the Company’s activities, it is also, at times, subject to pending and threatened legal actions that arise out of the ordinary course of business. In the opinion of management, based in part upon advice of legal counsel, the disposition of any such matters is not expected to have a material effect on the Company’s results of operations, financial condition or cash flows. However, the results of legal actions cannot be predicted with certainty. Therefore, it is possible that the Company’s results of operations, financial condition or cash flows could be materially adversely affected in any particular period by the unfavorable resolutions of one or more legal actions.
11. | Derivative Instruments and Hedging |
As of October 1,March 31, 2012 and April 2, 2011, and October 2, 2010, the Company had in effect interest rate swaps with notional amounts totaling $800,000$755,000 and $1,163,750,$977,500, respectively. In January 2009, the Company entered into a forward-starting interest rate swap with an effective date of January 4, 2010 and a termination date of January 27, 2014. During the term of this forward-starting interest rate swap, the notional amount will fluctuate. The initial notional amount was $425,000 and the highest notional amount will be $755,000.
The Company is hedging forecasted transactions for periods not exceeding the next five years. At October 1, 2011,March 31, 2012, given the current configuration of its debt, the Company estimates that no derivative gains or losses reported in accumulated other comprehensive income (loss) will be reclassified to the StatementsStatement of Net Income within the next 12 months due to hedge ineffectiveness.
As of March 31, 2012 and April 2, 2011, cumulative unrealized losses for qualifying hedges were reported as a component of accumulated other comprehensive income in the amounts of $11,521 ($18,886 before taxes) and $17,633 ($28,907 before taxes), respectively. For the three months ended March 31, 2012 and April 2, 2011, there were no fair value adjustments recorded in the Statement of Net Income since all hedges were considered qualifying and effective.
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
As of October 1, 2011 and October 2, 2010, cumulative unrealized losses for qualifying hedges were reported as a component of accumulated other comprehensive income (loss) in the amount of $17,607 ($28,864 before taxes) and $32,491 ($53,263 before taxes), respectively. For the three and nine months ended October 1, 2011 and October 2, 2010, there were no fair value adjustments recorded in the Statements of Income since all hedges were considered qualifying and effective.
The Company expects approximately $8,810$7,334 ($14,44212,022 before taxes) of derivative losses included in accumulated other comprehensive income (loss) at October 1, 2011,March 31, 2012, based on current market rates, will be reclassified into earnings within the next 12 months.
12. | Fair Value Measurements |
Accounting guidance on fair value measurements for certain financial assets and liabilities requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:
Level 1 – Quoted prices in active markets for identical assets or liabilities.
Level 2 – Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
When measuring fair value, the Company is required to maximize the use of observable inputs and minimize the use of unobservable inputs.
Fair Value of Financial Instruments
The Company’s significant financial instruments include long-term debt and interest rate swap agreements.
The fair value of the Company’s long-term debt is determined by utilizing average bid prices on or near the end of each fiscal quarter.quarter (Level 2 input). As of October 1,March 31, 2012 and April 2, 2011, and October 2, 2010, the fair value of the Company’s long-term debt was approximately $1,039,962$1,742,151 and $1,373,789,$1,250,304, respectively.
Derivative Financial Instruments
The fair values for the Company’s derivative financial instruments are determined using observable current market information such as the prevailing LIBOR interest rate and LIBOR yield curve rates and include consideration of counterparty credit risk. See Note 11 for disclosures related to derivative financial instruments.
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following table presents the aggregate fair value of the Company’s derivative financial instruments:
Fair Value Measurements Using: | ||||||||||||||||
Total Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
Interest rate swap asset at October 1, 2011 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||
Interest rate swap asset at January 1, 2011 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||
Interest rate swap liability at October 1, 2011 | $ | 28,997 | $ | 0 | $ | 28,997 | $ | 0 | ||||||||
Interest rate swap liability at January 1, 2011 | $ | 39,753 | $ | 0 | $ | 39,753 | $ | 0 |
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 asset at March 31, 2012 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||
Interest rate swap asset at December 31, 2011 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||
Interest rate swap liability at March 31, 2012 | $ | 21,355 | $ | 0 | $ | 21,355 | $ | 0 | ||||||||
Interest rate swap liability at December 31, 2011 | $ | 24,613 | $ | 0 | $ | 24,613 | $ | 0 |
13. |
Comprehensive income includes net income, the effects of foreign currency translation and changes in the fair value of derivative instruments. Comprehensive income is as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
October 1, 2011 | October 2, 2010 | October 1, 2011 | October 2, 2010 | |||||||||||||
Net income | $ | 80,650 | $ | 44,010 | $ | 240,683 | $ | 144,036 | ||||||||
Other comprehensive income (loss): | ||||||||||||||||
Foreign currency translation adjustments, net of tax | (6,014 | ) | (4,995 | ) | (3,139 | ) | (2,052 | ) | ||||||||
Current period changes in fair value of derivatives, net of tax | 1,021 | 3,112 | 6,511 | 8,755 | ||||||||||||
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Total other comprehensive income (loss) | (4,993 | ) | (1,883 | ) | 3,372 | 6,703 | ||||||||||
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Comprehensive income | 75,657 | 42,127 | 244,055 | 150,739 | ||||||||||||
Comprehensive loss attributable to the noncontrolling interest | 0 | 427 | 523 | 1,281 | ||||||||||||
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Comprehensive income attributable to Weight Watchers International, Inc. | $ | 75,657 | $ | 42,554 | $ | 244,578 | $ | 152,020 | ||||||||
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Segment Data |
The Company has two reportable segments: WWI and WW.com. WWI has multiple operating segments which have been aggregated into one reportable segment. WWI and WW.com are two separate and distinct businesses for which discrete financial information is available. This discrete financial information is maintained and managed separately and is reviewed regularly by the chief operating decision maker. All intercompany activity is eliminated in consolidation.
WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Information about the Company’s reportable segments is as follows:
Three Months Ended October 1, 2011 | ||||||||||||||||
WWI | WW.com | Intercompany Eliminations | Consolidated | |||||||||||||
Revenues from external customers | $ | 325,584 | $ | 102,850 | $ | 0 | $ | 428,434 | ||||||||
Intercompany revenue | 9,613 | 0 | (9,613 | ) | 0 | |||||||||||
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Total revenue | $ | 335,197 | $ | 102,850 | $ | (9,613 | ) | $ | 428,434 | |||||||
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Depreciation and amortization | $ | 8,545 | $ | 365 | $ | 0 | $ | 8,910 | ||||||||
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Operating income | $ | 91,991 | $ | 46,308 | $ | 0 | $ | 138,299 | ||||||||
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Interest expense | 13,655 | |||||||||||||||
Other expense, net | 285 | |||||||||||||||
Provision for taxes | 43,709 | |||||||||||||||
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Net income | $ | 80,650 | ||||||||||||||
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Total assets | $ | 955,230 | $ | 425,925 | $ | (294,656 | ) | $ | 1,086,499 | |||||||
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Three Months Ended October 2, 2010 | ||||||||||||||||
WWI | WW.com | Intercompany Eliminations | Consolidated | |||||||||||||
Revenues from external customers | $ | 269,603 | $ | 61,003 | $ | 0 | $ | 330,606 | ||||||||
Intercompany revenue | 5,774 | 0 | (5,774 | ) | 0 | |||||||||||
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Total revenue | $ | 275,377 | $ | 61,003 | $ | (5,774 | ) | $ | 330,606 | |||||||
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Depreciation and amortization | $ | 7,371 | $ | 843 | $ | 0 | $ | 8,214 | ||||||||
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Operating income | $ | 66,340 | $ | 24,107 | $ | 0 | $ | 90,447 | ||||||||
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Interest expense | 19,032 | |||||||||||||||
Other income, net | (611 | ) | ||||||||||||||
Provision for taxes | 28,016 | |||||||||||||||
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Net income | $ | 44,010 | ||||||||||||||
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Total assets | $ | 1,133,124 | $ | 263,833 | $ | (293,900 | ) | $ | 1,103,057 | |||||||
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WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three Months Ended March 31, 2012 | ||||||||||||||||
WWI | WW.com | Intercompany Eliminations | Consolidated | |||||||||||||
Total revenue | $ | 375,342 | $ | 128,193 | $ | 0 | $ | 503,535 | ||||||||
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Depreciation and amortization | $ | 7,475 | $ | 2,524 | $ | 0 | $ | 9,999 | ||||||||
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Operating income | $ | 57,312 | $ | 45,462 | $ | 0 | $ | 102,774 | ||||||||
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Interest expense | 13,167 | |||||||||||||||
Early extinguishment of debt | 1,328 | |||||||||||||||
Other income, net | (509 | ) | ||||||||||||||
Provision for taxes | 34,183 | |||||||||||||||
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Net income | $ | 54,605 | ||||||||||||||
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Three Months Ended April 2, 2011 | ||||||||||||||||
WWI | WW.com | Intercompany Eliminations | Consolidated | |||||||||||||
Total revenue | $ | 409,823 | $ | 93,609 | $ | 0 | $ | 503,432 | ||||||||
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Depreciation and amortization | $ | 6,257 | $ | 2,473 | $ | 0 | $ | 8,730 | ||||||||
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Operating income | $ | 97,501 | $ | 38,230 | $ | 0 | $ | 135,731 | ||||||||
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Interest expense | 18,173 | |||||||||||||||
Other income, net | (470 | ) | ||||||||||||||
Provision for taxes | 44,851 | |||||||||||||||
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Net income | $ | 73,177 | ||||||||||||||
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Nine Months Ended October 1, 2011 | ||||||||||||||||
WWI | WW.com | Intercompany Eliminations | Consolidated | |||||||||||||
Revenues from external customers | $ | 1,114,569 | $ | 303,309 | $ | 0 | $ | 1,417,878 | ||||||||
Intercompany revenue | 28,549 | 0 | (28,549 | ) | 0 | |||||||||||
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| |||||||||
Total revenue | $ | 1,143,118 | $ | 303,309 | $ | (28,549 | ) | $ | 1,417,878 | |||||||
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Depreciation and amortization | $ | 25,395 | $ | 1,153 | $ | 0 | $ | 26,548 | ||||||||
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| |||||||||
Operating income | $ | 308,783 | $ | 120,576 | $ | 0 | $ | 429,359 | ||||||||
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| |||||||||||
Interest expense | 46,826 | |||||||||||||||
Other expense, net | 54 | |||||||||||||||
Provision for taxes | 141,796 | |||||||||||||||
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Net income | $ | 240,683 | ||||||||||||||
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Total assets | $ | 955,230 | $ | 425,925 | $ | (294,656 | ) | $ | 1,086,499 | |||||||
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| |||||||||
Nine Months Ended October 2, 2010 | ||||||||||||||||
WWI | WW.com | Intercompany Eliminations | Consolidated | |||||||||||||
Revenues from external customers | $ | 917,330 | $ | 178,014 | $ | 0 | $ | 1,095,344 | ||||||||
Intercompany revenue | 16,847 | 0 | (16,847 | ) | 0 | |||||||||||
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| |||||||||
Total revenue | $ | 934,177 | $ | 178,014 | $ | (16,847 | ) | $ | 1,095,344 | |||||||
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Depreciation and amortization | $ | 22,398 | $ | 2,964 | $ | 0 | $ | 25,362 | ||||||||
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Operating income | $ | 235,900 | $ | 58,129 | $ | 0 | $ | 294,029 | ||||||||
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Interest expense | 57,320 | |||||||||||||||
Other expense, net | 1,025 | |||||||||||||||
Provision for taxes | 91,648 | |||||||||||||||
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Net income | $ | 144,036 | ||||||||||||||
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Total assets | $ | 1,133,124 | $ | 263,833 | $ | (293,900 | ) | $ | 1,103,057 | |||||||
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There has not been a material change in total assets from the Company’s Annual Report on Form 10-K for fiscal 2011.
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
Except for historical information contained herein, this Quarterly Report on Form 10-Q includes “forward-looking statements,” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, including, in particular, the statements about our plans, strategies and prospects under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” We have generally used the words “may,” “will,” “could,” “expect,” “anticipate,” “believe,” “estimate,” “plan,” “intend” and similar expressions in this Quarterly Report on Form 10-Q to identify forward-looking statements. We have based these forward-looking statements on our current views with respect to future events and financial performance. Actual results could differ materially from those projected in these forward-looking statements. These forward-looking statements are subject to risks, uncertainties and assumptions, including, among other things:
competition from other weight management industry participants or the development of more effective or more favorably perceived weight management methods;
our ability to continue to develop innovative new services and products and enhance our existing services and products, or the failure of our services and products to continue to appeal to the market;
the effectiveness of our marketing and advertising programs;
the impact on the Weight Watchers brand of actions taken by our franchisees, licensees and licensees;suppliers;
risks and uncertainties associated with our international operations, including economic, political and social risks and foreign currency risks;
our ability to successfully make acquisitions or enter into joint ventures, including our ability to successfully integrate, operate or realize the projected benefits of such businesses;
uncertainties related to a downturn in general economic conditions or consumer confidence;
the seasonal nature of our business;
the impact of events that discourage people from gathering with others;
our ability to enforce our intellectual property rights both domestically and internationally, as well as the impact of our involvement in any claims related to intellectual property rights;
uncertainties regarding the satisfactory operation of our information technology or systems;
the impact of security breaches andor privacy concerns;
the impact of disputes with our franchise operators;
the impact of existing and future laws and regulations;
the impact of our debt service obligations and restrictive debt covenants;
the possibility that the interests of our majority owner will conflict with other holders of our common stock; and
other risks and uncertainties, including those detailed from time to time in our periodic reports filed with the Securities and Exchange Commission.
You should not put undue reliance on any forward-looking statements. You should understand that many important factors, including those discussed herein, could cause our results to differ materially from those expressed or suggested in any forward-looking statement. Except as required by law, we do not undertake any obligation to update or revise these forward-looking statements to reflect new information or events or circumstances that occur after the date of this Quarterly Report on Form 10-Q or to reflect the occurrence of unanticipated events or otherwise.
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Weight Watchers International, Inc. is a Virginia corporation with its principal executive offices in New York, New York. In this Quarterly Report on Form 10-Q unless the context indicates otherwise: “we,” “us,” “our” and the “Company” refer to Weight Watchers International, Inc. and all of its businesses consolidated for purposes of its financial statements; “Weight Watchers International” and “WWI” refer to Weight Watchers International, Inc. and all of the Company’s businesses other than WeightWatchers.com; “WeightWatchers.com” refers to WeightWatchers.com, Inc. and all of the Company’s Internet-based businesses; and “NACO” refers to our North American Company-owned meeting operations.
Our fiscal year ends on the Saturday closest to December 31st and consists of either 52- or 53-week periods. In this Quarterly Report on Form 10-Q:
“fiscal 2006” refers to our fiscal year ended December 30, 2006;
“fiscal 2008” refers to our fiscal year ended January 3, 2009;
“fiscal 2009” refers to our fiscal year ended January 2, 2010;
“fiscal 2010” refers to our fiscal year ended January 1, 2011;
“fiscal 2011” refers to our fiscal year ended December 31, 2011;
“fiscal 2012” refers to our fiscal year ended December 29, 2012;
“fiscal 2013” refers to our fiscal year ended December 28, 2013;
“fiscal 2014” refers to our fiscal year ended January 3, 2015; and
“fiscal 2015” refers to our fiscal year ended January 2, 2016; and
“fiscal 2016” refers to our fiscal year ended December 31, 2016.
The following terms used in this Quarterly Report on Form 10-Q are our trademarks:Weight Watchers®,PointsPlus®andProPoints®.
You should read the following discussion in conjunction with our Annual Report on Form 10-K for fiscal 20102011 that includes additional information about us, our results of operations, our financial position and our cash flows, and with our unaudited consolidated financial statements and related notes included in Item 1 of this Quarterly Report on Form 10-Q (collectively, the “Consolidated Financial Statements”).
USE OF CONSTANT CURRENCY
As exchange rates are an important factor in understanding period-to-period comparisons, we believe the presentation of results on a constant currency basis in addition to reported results helps improve investors’ ability to understand our operating results and evaluate our performance in comparison to prior periods. Constant currency information compares results between periods as if exchange rates had remained constant period-over-period. We use results on a constant currency basis as one measure to evaluate our performance. In this Quarterly Report on Form 10-Q, we calculate constant currency by calculating current-year results using prior-year foreign currency exchange rates. We generally refer to such amounts calculated on a constant currency basis as excluding or adjusting for the impact of foreign currency. These results should be considered in addition to, not as a substitute for, results reported in accordance with accounting principles generally accepted in the United States, or GAAP. Results on a constant currency basis, as we present them, may not be comparable to similarly titled measures used by other companies and are not measures of performance presented in accordance with GAAP.
CRITICAL ACCOUNTING POLICIES
For a discussion of the critical accounting policies affecting us, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies” of our Annual Report on Form 10-K for fiscal 2010.2011. Our critical accounting policies have not changed since the end of fiscal 2010.2011.
RESULTS OF OPERATIONS
OVERVIEW
Since the second quarterFiscal 2011 was a year of fiscal 2010, the Company has experienced sustainedrevenue and volume growth in revenue, volumes, and profitability in each quarterall fiscal quarters as compared to the prior year periods. The growth trendWe began fiscal 2011 with a successful change in marketing strategy in both the meetings business and WeightWatchers.com in North America in the second quarter of fiscal 2010, and accelerated throughout the remainder of fiscal 2010 fueled by the soft launch of a new program platform in North America and the United Kingdom at the end of fiscal 2010. Accordingly, by the end of fiscal 2010, our customer base that had grown by more than 20% since the beginning of fiscal 2010.
In January 2011, we began marketing campaigns for our new program launches which2010 and throughout the year experienced accelerated period-over-period volume growth in theour North American and UK meetings and WeightWatchers.com businesses toWeight Watchers.com businesses. The momentum of our new program launches,ProPointsin North America andPointsPlus in our other English-speaking markets, and strong marketing and public relations efforts drove this accelerated growth and historically high volumes in fiscal 2011.
The first quarter of fiscal 2012 had the challenge of being compared against the historically high levels of recruitment growth and related results we experienced in the first quarter of fiscal 2011. AsTotal paid weeks continued to grow, up 12.2% in the quarter versus the prior year period, but at a result, on a consolidated Company basis, revenues and volumes grewslower rate than the 39.7% we experienced in all three quartersthe first quarter of fiscal 2011 as compared toversus the prior year periods. Forperiod. Growth in Online revenues in the first nine monthsquarter of fiscal 2011 in total, revenues increased 29.4% and paid weeks increased 39.5%2012 versus the comparable prior year period. Our grossperiod was almost fully offset by revenue declines in the meetings business. Gross margin for the first nine monthsquarter of fiscal 20112012 improved to 57.9%, up57.3% from 54.9%56.2% in the first nine monthsquarter of fiscal 2010.2011. In addition, investments in strategic growth initiatives resulted in an increase in both marketing expenses and selling, general and administrative expenses as a percentage of revenues in the first quarter of fiscal 2012 versus the prior year period. As a result of these investments, operating income margin for the first quarter of fiscal 2012 declined to 20.4% from 27.0% in the first quarter of fiscal 2011.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED OCTOBER 1, 2011MARCH 31, 2012 COMPARED TO THE THREE MONTHS ENDED OCTOBERAPRIL 2, 20102011
The table below sets forth selected financial information for the thirdfirst quarter of fiscal 2012 from our consolidated statements of net income for the three months ended March 31, 2012 versus selected financial information for the first quarter of fiscal 2011 from our consolidated statements of income for the three months ended October 1, 2011 versus selected financial information for the third quarter of fiscal 2010 from our consolidated statements of income for the three months ended OctoberApril 2, 2010:2011:
Summary of Selected Financial Data
(In millions, except per share amounts) | (In millions, except per share amounts) | |||||||||||||||||||||||||||||||
For the Three Months Ended | For the Three Months Ended | |||||||||||||||||||||||||||||||
October 1, 2011 | October 2, 2010 | Increase/ (Decrease) | % Change | March 31, 2012 | April 2, 2011 | Increase/ (Decrease) | % Change | |||||||||||||||||||||||||
Revenues, net | $ | 428.4 | $ | 330.6 | $ | 97.8 | 29.6% | $ | 503.5 | $ | 503.4 | $ | 0.1 | 0.0% | ||||||||||||||||||
Cost of revenues | 177.3 | 152.1 | 25.2 | 16.5% | 215.2 | 220.3 | (5.1 | ) | (2.3%) | |||||||||||||||||||||||
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Gross profit | 251.2 | 178.5 | 72.7 | 40.7% | 288.4 | 283.1 | 5.2 | 1.8% | ||||||||||||||||||||||||
Gross Margin % | 58.6 | % | 54.0 | % | 57.3 | % | 56.2 | % | ||||||||||||||||||||||||
Marketing expenses | 61.5 | 39.4 | 22.1 | 56.1% | 130.3 | 95.7 | 34.7 | 36.2% | ||||||||||||||||||||||||
Selling, general & administrative expenses | 51.4 | 48.6 | 2.7 | 5.6% | 55.3 | 51.7 | 3.5 | 6.8% | ||||||||||||||||||||||||
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Operating income | 138.3 | 90.4 | 47.9 | 52.9% | 102.8 | 135.7 | (32.9 | ) | (24.3%) | |||||||||||||||||||||||
Operating Income Margin % | 32.3 | % | 27.4 | % | 20.4 | % | 27.0 | % | ||||||||||||||||||||||||
Interest expense | 13.7 | 19.0 | (5.4 | ) | (28.3%) | 13.2 | 18.2 | (5.0 | ) | (27.5%) | ||||||||||||||||||||||
Other (income) expense, net | 0.3 | (0.6 | ) | 0.9 | 146.6% | |||||||||||||||||||||||||||
Other income, net | (0.5 | ) | (0.5 | ) | — | 6.0% | ||||||||||||||||||||||||||
Early extinguishment of debt | 1.3 | — | 1.3 | — | ||||||||||||||||||||||||||||
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Income before income taxes | 124.4 | 72.0 | 52.3 | 72.7% | 88.8 | 118.0 | (29.2 | ) | (24.8%) | |||||||||||||||||||||||
Provision for income taxes | 43.7 | 28.0 | 15.7 | 56.0% | 34.2 | 44.9 | (10.7 | ) | (23.8%) | |||||||||||||||||||||||
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Net income | 80.7 | 44.0 | 36.6 | 83.3% | 54.6 | 73.2 | (18.6 | ) | (25.4%) | |||||||||||||||||||||||
Net loss attributable to the noncontrolling interest | — | 0.4 | (0.4 | ) | (100.0%) | — | 0.4 | (0.4 | ) | (100.0%) | ||||||||||||||||||||||
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Net income attributable to the Company | $ | 80.7 | $ | 44.4 | $ | 36.2 | 81.5% | $ | 54.6 | $ | 73.6 | $ | (19.0 | ) | (25.8%) | |||||||||||||||||
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Weighted average diluted shares outstanding | 74.3 | 75.3 | (1.1 | ) | (1.4%) | 74.2 | 73.7 | 0.5 | 0.6% | |||||||||||||||||||||||
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Diluted EPS | $ | 1.09 | $ | 0.59 | $ | 0.50 | 84.1% | $ | 0.74 | $ | 1.00 | $ | (0.26 | ) | (26.3%) | |||||||||||||||||
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Note: Totals may not sum due to rounding.
Consolidated Results
Revenues
Net revenues were $428.4$503.5 million in the thirdfirst quarter of fiscal 2011, an increase of $97.8 million, or 29.6%, from $330.62012, as compared to $503.4 million in the thirdfirst quarter of fiscal 2010.2011. Excluding the impact of foreign currency, which increasednegatively impacted our revenues for the thirdfirst quarter of fiscal 20112012 by $11.2$2.6 million, net revenues in the first quarter of fiscal 2012 grew 26.2%0.5% versus the prior year period. Revenue growth in the thirdfirst quarter of fiscal 2012 was driven primarily by WeightWatchers.com which benefited from a higher active subscriber base at the start of fiscal 2012 as compared to fiscal 2011 and effective marketing and continued consumer interest in our brand and approachthe first quarter of fiscal 2012. Our Continental European meetings business, which benefited from new marketing strategies, also contributed to weight loss, particularlyrevenue growth. This growth was almost completely offset by revenue declines in our North Americanthe NACO and UK meetings and WeightWatchers.com businesses which also benefitedas they cycled against the momentum from their new program launches. Aslaunches in late 2010 and strong marketing and public relations efforts in the first quarter of fiscal 2011. In addition, in the first quarter of fiscal 2012, execution challenges associated with introducing the Monthly Pass commitment plan to NACO’s small account portion of its corporate business, as well as an ineffective advertising campaign in our UK meetings business, negatively impacted revenue growth.
The combination of the above factors which negatively impacted meeting revenues in the quarter led to a result, third quarter fiscal 20115.0% decline in global meeting paid weeks grew 38.1%, global attendance grew 8.7%,in the first quarter of fiscal 2012 versus the prior year period. However, with the benefits of starting the fiscal year with a higher active subscriber base and effective marketing, WeightWatchers.com experienced growth of 35.4% in Online paid weeks, as well as a 32.3% increase in end of period active Online subscribers, grew 63.6% in comparison to third quarter fiscal 2010 levels, despite weak performance in Continental Europe. In our Continental European meetings business, ineffective marketing campaigns resulted in revenue, paid weeks and attendance declines in the thirdfirst quarter of 2011fiscal 2012 versus the prior year period.
Gross Profit and Operating Income
Gross profit for The increase in Online paid weeks offset the thirddecline in meetings paid weeks which resulted in a 12.2% increase in global paid weeks in the first quarter of fiscal 2011 of $251.2 million increased $72.7 million, or 40.7%, from $178.5 million in the third quarter of fiscal 2010. Our operating income for the third quarter of fiscal 2011 was $138.3 million, an increase of $47.9 million, or 52.9%, from $90.4 million in the third quarter of fiscal 2010. Our gross margin in the third quarter of fiscal 2011 increased by 460 basis points versus the prior year period to 58.6%, driving operating income margin expansion of 490 basis points versus the prior year period to 32.3% in the third quarter of fiscal 2011. Margin expansion was the result of
operating leverage gained from higher attendances per meeting and high growth in our higher margin WeightWatchers.com business. In addition, the third quarter of fiscal 2010 included $6.5 million of expense, included in both cost of revenues and selling, general and administrative expense, associated with the previously disclosed settlement of the California litigation (See “Item 1. Legal Proceedings – Sabatino v. Weight Watchers North America, Inc.”), which lowered our operating income margin in that quarter by 197 basis points. In the third quarter of fiscal 2011, marketing expense increased as a percentage of revenues but selling, general and administrative expenses declined by a greater degree as a percentage of revenues as compared to the comparable prior year period.
Net Income and Earnings Per Share
The benefits derived from operating income growth, along with lower interest expense, resulted in net income growth versus the prior year period of 81.5% in the third quarter of fiscal 2011 to $80.7 million, up from $44.4 million in the third quarter of fiscal 2010. Earnings per fully diluted share in the third quarter of fiscal 2011 were $1.09, up $0.50 from $0.59 in the third quarter of fiscal 2010. The third quarter of fiscal 2011 earnings per fully diluted share included a $0.05 tax benefit associated with the closing of our Finland business, while the third quarter of fiscal 2010 earnings per fully diluted share included a $0.05 charge associated with the settlement of the previously disclosed California litigation. The favorable impact of foreign currency contributed $1.8 million to net income in the third quarter of fiscal 2011, or $0.02 per fully diluted share.
Components of Revenue and Volumes
We derive our revenues principally from meeting fees, products sold in meetings, Internet revenues, and licensed products sold in retail channels. In addition, we generate other revenue from royalties paid to us by our franchisees, subscriptions to our branded magazines, and advertising in our publications.
Meeting Fees
Global meeting fees for the third quarter of fiscal 2011 were $233.4 million, an increase of $42.8 million, or 22.5%, from $190.6 million in the prior year period. Excluding the impact of foreign currency, which increased our global meeting fees by $6.1 million, global meeting fees in the third quarter of fiscal 2011 increased by 19.3%2012 versus the prior year period. Global meeting paid weeks grew 19.7% in the third quarter of fiscal 2011 to 24.9 million, up from 20.8 million in the prior year period. The increase versus the prior year period in meeting fees and meeting paid weeks was driven by enrollment growth in the quarter, a larger meeting membership base at the beginning of the quarter versus the prior period, and a larger number and proportion of members participating in Monthly Pass commitment plans versus the prior year period. The meeting membership base has grown steadily over the past several quarters as a result of strong enrollments. Enrollments were fueled by the ongoing positive impact of new program innovations launched in late fiscal 2010 in North America and the United Kingdom and by highly effective marketing since the beginning of the year. In addition, the number and proportion of members purchasing Monthly Pass, who have a longer tenure and contribute higher lifetime revenue, was significantly higher in the third quarter of 2011 as compared to the third quarter of 2010. Global attendance in our meetings business increased 8.7% to 12.6 million in the third quarter of fiscal 2011 from 11.6 million in the third quarter of fiscal 2010.
In the NACO meetings business, meeting fees for the third quarter of fiscal 2011 were $161.2 million, an increase of $32.4 million, or 25.1%, from $128.9 million for the third quarter of fiscal 2010. Excluding the impact of foreign currency, which increased NACO meeting fees by $0.7 million, NACO meeting fees in the third quarter of fiscal 2011 grew by 24.6% versus the prior year period. NACO meeting paid weeks grew by 25.9% to 16.6 million in the third quarter 2011, up from 13.2 million in the third quarter 2010. Meeting fees and meeting paid weeks increased in the quarter as a result of enrollment growth, a larger membership base at the beginning of the quarter versus the prior period, and a larger number and proportion of members participating in Monthly Pass commitment plans versus the prior year period. These increases versus the prior year period were driven by our highly successful launch of thePointsPlus program at the end of fiscal 2010, and our effective marketing campaign strategy, which raised the profile and attraction of our offerings to both former members and new customers. In the third quarter of fiscal 2011, NACO attendance increased 13.6% to 7.9 million, up from 7.0 million in the third quarter of fiscal 2010.
Our international meeting fees in the third quarter of fiscal 2011 were $72.2 million, an increase of $10.4 million, or 16.9%, from $61.7 million in the prior year period. Excluding the impact of foreign currency, which increased international meeting fees by $5.4 million, international meeting fees grew by 8.2% in the third quarter of fiscal 2011 versus the prior year period. International meeting paid weeks increased by 9.0%, and international attendance increased by 1.2%, in the third quarter of fiscal 2011 versus the comparable prior year quarter. The growth in international meeting fees and paid weeks was driven by the United Kingdom’s strong performance, which was partially offset by weakness in Continental Europe.
In the third quarter of fiscal 2011, UK meeting fees increased by 29.5% to $29.4 million. Excluding the impact of foreign currency, which increased UK meeting fees by $1.1 million, UK meeting fees grew by 24.9% in the third quarter of fiscal 2011 versus the prior year period. UK meeting paid weeks in the third quarter of fiscal 2011 grew 18.1% versus the prior year period. UK meeting fees and meeting paid weeks continued to benefit from growth in the membership base, driven by theProPoints program which launched in late 2010. Attendance in the United Kingdom increased by 10.1% in the quarter versus the comparable prior year period.
In contrast to the North American and UK markets, which implemented successful marketing strategies for recruiting new customers and former members, the Continental European meetings business is still in the process of developing effective marketing campaigns. In the third quarter of fiscal 2011, Continental European meeting fees increased by 1.1% to $30.9 million. Excluding the impact of foreign currency, which increased Continental European meeting fees by $2.8 million, Continental European meeting fees declined by 8.0% in the third quarter of fiscal 2011 as compared to the prior year period. This decline reflects a 6.0% decrease in meeting paid weeks versus the prior year period. Continental Europe’s attendance level declined by 15.1% in the third quarter of 2011 versus the prior year period.
In-Meeting Product Sales
Global in-meeting product sales for the third quarter of fiscal 2011 were $61.3 million, an increase of $9.1 million, or 17.4%, from $52.2 million in the third quarter of fiscal 2010. Excluding the impact of foreign currency, which increased in-meeting product sales by $2.0 million, global in-meeting product sales rose 13.6% versus the prior year period from the combination of 8.7% meeting attendance growth and higher product sales per attendee. On a per attendee basis, third quarter 2011 global in-meeting product sales increased 8.0%, or 4.5% on a constant currency basis, versus the prior year period. This increase in products sales per attendee was primarily the result of increased sales of our higher-priced enrollment products partially offset by some contraction in sales of lower-priced consumable products.
In NACO, third quarter 2011 in-meeting product sales of $34.3 million increased by $6.2 million, or 22.3%, versus the prior year period on the strength of 13.6% attendance growth and a 7.7% increase in in-meeting product sales per attendee.
International in-meeting product sales were $27.0 million in the third quarter of fiscal 2011, an increase of 11.7% versus the prior year period, or 3.9% on a constant currency basis. This increase was driven by attendance growth of 1.2% and an increase in product sales per attendee as compared to the prior year period. Strength in attendance and per attendee in-meeting product sales in the United Kingdom in the quarter was partially offset by weakness in Continental Europe.
Internet Revenues
Internet revenues, which include subscription revenues from sales of Weight Watchers Online and Weight Watchers eTools as well as Internet advertising revenues, increased significantly in the third quarter of fiscal 2011, up $41.4 million, or 68.5%, to $101.9 million versus $60.5 million for the third quarter of fiscal 2010. Excluding the impact of foreign currency, which increased Internet revenues by $2.0 million, Internet revenues grew by 65.1% in the third quarter of fiscal 2011 versus the prior year period. Online paid weeks increased 66.6% in the third quarter of fiscal 2011 versus the comparable prior year period and end of period active Online subscribers grew, up 63.6%, from approximately 1.1
million subscribers in the third quarter of fiscal 2010 to approximately 1.7 million subscribers in the third quarter of fiscal 2011. This increase was driven primarily by continued strong marketing campaigns starting in the second quarter of 2010 in the US and UK markets which also benefited from the new program launches at the end of fiscal 2010. In addition, sign-ups grew in Continental Europe, reflecting the effectiveness of our marketing efforts in online channels in these markets.
Other Revenues
Other revenues, comprised primarily of licensing revenues, franchise royalties, revenues from the sale of products by mail and to our franchisees, and revenues from our publications, were $31.9 million for the third quarter of fiscal 2011, an increase of $4.5 million, or 16.6%, from $27.3 million for the third quarter of fiscal 2010. Excluding the impact of foreign currency, other revenues were 12.4% higher in the third quarter of fiscal 2011 than the prior year period. The new program launches have provided ongoing benefit to our other revenues. Franchise commissions and sales of products to our franchisees grew in the aggregate by 32.6%, or 30.3% on a constant currency basis, in the third quarter 2011 versus the prior year period. Our by mail product sales and revenues from our publications also rose, by 26.7% in the aggregate, or 21.5% on a constant currency basis, over the prior year third quarter level. While global licensing revenues in the third quarter of fiscal 2011 were down 1.1% on a constant currency basis versus the prior year period, UK licensing revenues increased. In North America and most other markets, however, licensing revenues decreased driven partially by pricing challenges in a tough economic environment.
Components of Expenses and Margins
Cost of Revenues and Gross Margin
Total cost of revenues in the third quarter of fiscal 2011 was $177.3 million, an increase of $25.2 million, or 16.5%, from $152.1 million in the prior year period. Cost of revenues grew at a slower pace than revenues, due to efficiencies we gained from higher average attendance in our meetings and due to WeightWatchers.com’s cost of revenues being largely fixed. Gross profit for the third quarter of fiscal 2011 of $251.2 million increased $72.7 million, or 40.7%, from $178.5 million in the third quarter of fiscal 2010. Gross margin in the third quarter of fiscal 2011 was 58.6%, as compared to 54.0% in the third quarter of 2010, partially as a result of the higher margin WeightWatchers.com business becoming a larger component of our revenue mix. Of this gross margin increase, 50 basis points resulted from a charge included in the third fiscal quarter of fiscal 2010 associated with the previously disclosed settlement of the California litigation.
Marketing
Marketing expenses for the third quarter of fiscal 2011 were $61.5 million, an increase of $22.1 million, or 56.1%, versus the third quarter of fiscal 2010, or 52.7% on a constant currency basis. Included in our 2011 marketing expenses is a first time significant investment in marketing the Weight Watchers Online product to men, a new initiative in fiscal 2011 focused on building awareness and communicating the relevance of the Weight Watchers brand to the male demographic. This initiative, which is a component of our growth strategy for 2012 and beyond, accounted for 13.1% of the increase in marketing expenses in the third quarter of fiscal 2011 versus the prior year period. The remainder of our marketing in the quarter drove enrollment growth in our meetings businesses in North America and the United Kingdom, and subscriber growth in our WeightWatchers.com business. Marketing expenses as a percentage of revenues were 14.4% in the third quarter of fiscal 2011 as compared to 11.9% in the prior year period.
Selling, General and Administrative
Selling, general and administrative expenses were $51.4 million for the third quarter of fiscal 2011 versus $48.6 million for the third quarter of fiscal 2010, an increase of $2.7 million, or 5.6%. On a constant currency basis, third quarter of fiscal 2011 selling, general and administrative expenses increased by 2.5% versus the third quarter of fiscal 2010, which included $4.9 million of expenses associated with
the previously disclosed settlement of the California litigation. In the third quarter of fiscal 2011, selling, general and administrative expenses increased 14.0% primarily in support of growth initiatives, including technology for the development of our mobile platforms and additions to staff in support of business development. Selling, general and administrative expenses as a percentage of revenues for the third quarter of fiscal 2011 decreased to 12.0% from 14.7% for the third quarter of fiscal 2010.
Operating Income Margin
Our operating income margin in the third quarter of fiscal 2011 increased to 32.3%, up 490 basis points from 27.4% in the third quarter of fiscal 2010. Margin expansion in the quarter was attributable to the favorable impact on gross margin of operating leverage gained from higher attendances per meeting and strong growth in our higher margin WeightWatchers.com business. Marketing expense increased as a percentage of revenue in the third quarter of fiscal 2011 as compared to the prior year period, but was offset by the decline in selling, general and administrative expenses as a percentage of revenues in the third quarter of fiscal 2011 as compared to the prior year period.
Interest Expense and Other
Interest expense was $13.7 million for the third quarter of fiscal 2011, a decrease of $5.4 million, or 28.3%, from $19.0 million in the third quarter of fiscal 2010. Our average debt outstanding decreased in the quarter from $1.4 billion in the third quarter of fiscal 2010 to $1.1 billion in the third quarter of fiscal 2011, including $197.5 million of scheduled repayments since January 2011.In addition, the notional value of our interest rate swaps declined, driving a lower effective interest rate in the quarter, down to 4.43% from 5.06% in the third quarter of fiscal 2010.
We reported $0.3 million of other expense in the third quarter of fiscal 2011 as compared to $0.6 million of other income in the third quarter of fiscal 2010, primarily reflecting the increased impact of foreign currency on intercompany transactions.
Tax
Our effective tax rate was 35.1% for the third quarter of fiscal 2011 as compared to 38.9% for the third quarter of fiscal 2010. In the third quarter of fiscal 2011, we recorded a tax benefit of $3.5 million associated with the closure of our Finland business. Excluding this benefit, our effective tax rate for the third quarter of fiscal 2011 would have been 38.0%. The difference in period-over-period effective tax rates after this adjustment is primarily due to the benefit of reversing certain tax reserves upon the expiration of the applicable statutes of limitations.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED OCTOBER 1, 2011 COMPARED TO THE NINE MONTHS ENDED OCTOBER 2, 2010
The table below sets forth selected financial information for the first nine months of fiscal 2011 from our consolidated statements of income for the nine months ended October 1, 2011 versus selected financial information for the first nine months of fiscal 2010 from our consolidated statements of income for the nine months ended October 2, 2010:
Summary of Selected Financial Data
(In millions, except per share amounts) | ||||||||||||||||
For the Nine Months Ended | ||||||||||||||||
October 1, 2011 | October 2, 2010 | Increase/ (Decrease) | % Change | |||||||||||||
Revenues, net | $ | 1,417.9 | $ | 1,095.3 | $ | 322.5 | 29.4% | |||||||||
Cost of revenues | 596.4 | 493.4 | 102.9 | 20.9% | ||||||||||||
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Gross profit | 821.5 | 601.9 | 219.6 | 36.5% | ||||||||||||
Gross Margin % | 57.9 | % | 54.9 | % | ||||||||||||
Marketing expenses | 232.3 | 170.6 | 61.8 | 36.2% | ||||||||||||
Selling, general & administrative expenses | 159.8 | 137.3 | 22.5 | 16.4% | ||||||||||||
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Operating income | 429.4 | 294.0 | 135.3 | 46.0% | ||||||||||||
Operating Income Margin % | 30.3 | % | 26.8 | % | ||||||||||||
Interest expense | 46.8 | 57.3 | (10.5 | ) | (18.3%) | |||||||||||
Other (income) expense, net | 0.1 | 1.0 | (1.0 | ) | (94.7%) | |||||||||||
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Income before income taxes | 382.5 | 235.7 | 146.8 | 62.3% | ||||||||||||
Provision for income taxes | 141.8 | 91.7 | 50.1 | 54.7% | ||||||||||||
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Net income | 240.7 | 144.0 | 96.6 | 67.1% | ||||||||||||
Net loss attributable to the noncontrolling interest | 0.5 | 1.3 | (0.8 | ) | (59.2%) | |||||||||||
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Net income attributable to the Company | $ | 241.2 | $ | 145.3 | $ | 95.9 | 66.0% | |||||||||
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Weighted average diluted shares outstanding | 74.0 | 76.5 | (2.5 | ) | (3.2%) | |||||||||||
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Diluted EPS | $ | 3.26 | $ | 1.90 | $ | 1.36 | 71.5% | |||||||||
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Note: Totals may not sum due to rounding.
Consolidated Results
Revenues
Net revenues were $1,417.9 million in the first nine months of fiscal 2011, an increase of $322.5 million, or 29.4%, from $1,095.3 million in the first nine months of fiscal 2010. Excluding the impact of foreign currency, which increased our revenues for the first nine months of fiscal 2011 by $35.6 million, revenues grew 26.2% versus the prior year period. Revenue growth in the period was driven by strong momentum beginning at the start of the first nine months of fiscal 2011 from the new program launches at the end of fiscal 2010 in our North American and UK meetings and WeightWatchers.com businesses, and further supported by effective marketing and public relations activities in these markets in the period.
In the first nine months of fiscal 2011, on a consolidated Company basis, global paid weeks grew 39.5%, global attendance grew 13.6% and end of period active Online subscribers grew 63.6% in comparison to the first nine months of fiscal 2010, despite weak performance in our Continental European meetings business. In the first quarter of fiscal 2011, when we launched our marketing campaigns for the new programs in North America and the United Kingdom, strong enrollments and sign-ups of new and former customers drove global paid weeks up 39.7%, global attendance up 20.3% and end of period active Online subscribers up 86.6% versus the comparable prior year period. Growth trends in meeting enrollments and Online sign-ups have moderated somewhat in both the second and third quarters of fiscal 2011 from the historically high levels experienced in the first quarter of fiscal 2011, but remain strong despite lapping2012 declined 10.7% in comparison to the one year anniversary of North America’s successful new marketing strategy launched in the secondfirst quarter of fiscal 2010.2011.
Gross Profit and Operating Income
Gross profit for the first nine monthsquarter of fiscal 20112012 of $821.5$288.4 million increased $219.6$5.2 million, or 36.5%1.8%, from $601.9$283.1 million in the first nine monthsquarter of fiscal 2010.2011. Operating income for the first nine monthsquarter of fiscal 20112012 was $429.4$102.8 million, an increasea decrease of $135.3$32.9 million, or 46.0%24.3%, from $294.0$135.7 million in the first nine monthsquarter of fiscal 2010.2011. Our gross margin in the first nine monthsquarter of fiscal 20112012 increased by 300100 basis points versus the prior year period to 57.9%57.3%, drivingbut operating income margin expansionin the first quarter of 340fiscal 2012 declined 650 basis points versus the prior year period to 30.3% in the first nine months20.4%. See “—Components of fiscal 2011. Margin expansion was primarily the result of operating leverage gained from higher attendances per meetingExpenses and high growth in our higher margin WeightWatchers.com business. In addition, the operating income margin further expanded as a result of a reduction in selling, general and administrative expenses as a percentage of revenues as compared to the prior year period, which more than offset an increase in marketing as a percentage of revenues versus the prior year period. It should be noted that the nine months of fiscal 2010 included $6.5 million of expense, included in both cost of revenues and selling, general and administrative expense, associated with the previously disclosed settlement of the California litigation which lowered our operating income margin in that quarter by 59 basis points.Margins” for additional details.
Net Income and Earnings Per Share
The benefits derived from operatingNet income growth, along with lower interest expense, resulted in net income growthattributable to the Company in the first nine monthsquarter of fiscal 2012 declined 25.8% from $73.6 million in the first quarter of fiscal 2011 to $54.6 million. This decline was the result of 66.0%marketing investments in the first quarter of fiscal 2012 causing a decline in operating income in the quarter versus the prior year period to $241.2 million, up from $145.3 millionperiod. This decline was partially offset by lower interest expense in the first nine months of fiscal 2010.quarter versus the prior year period. Earnings per fully diluted share in the first nine monthsquarter of fiscal 20112012 were $3.26, up $1.36$0.74, a decrease of $0.26 from $1.90$1.00 in the first nine months of fiscal 2010. The 2011 earnings per fully diluted share included a $0.05 tax benefit associated with the closing of our Finland business, while the 2010 earnings per fully diluted share included a $0.05 charge associated with the previously disclosed settlement of the California litigation. In addition, foreign currency provided a $0.07 benefit per fully diluted share in the first nine monthsquarter of fiscal 2011.
Components of Revenue and Volumes
We derive our revenues principally from meeting fees, products sold in meetings, Internet revenues, and licensed products sold in retail channels. In addition, we generate other revenue from royalties paid to us by our franchisees, subscriptions to our branded magazines, and advertising in our publications.
Meeting Fees
Global meeting fees for the first nine monthsquarter of fiscal 20112012 were $771.9$252.5 million, an increasea decrease of $148.9$16.4 million, or 23.9%6.1%, from $623.0$268.9 million in the prior year period. Excluding the impact of foreign currency, which increaseddecreased our global meeting fees by $19.6$1.1 million, global meeting fees in the first nine monthsquarter of fiscal 2011 increased 20.7%2012 decreased by 5.7% versus the prior year period asperiod. The decline in meeting fees was driven by a result of strong enrollment growth. The new program launches5.0% decline in our North American and UK markets in late fiscal 2010, combined with effective marketing and public relations throughout the period, were the key drivers of this growth during the first nine months of 2011. In addition, the number and proportion of our new and existing meeting members purchasing Monthly Pass increased in the first nine months of 2011 versus the corresponding prior year period. Monthly Pass purchasers have a longer tenure, and accordingly, contribute higher lifetime revenue on average than those who pay for attendance on a week-to-week basis.
As a result of the enrollment strength and the increase in Monthly Pass purchasers, global meeting paid weeks rose 21.3% to 81.1 million in the first nine monthsquarter of fiscal 2011, up2012 to 26.5 million from 66.927.8 million in the prior year period. This growth rateThe decline in meeting paid weeks marks a significant improvement from the low growth rates experienced on average throughout fiscal 2010. Global attendance in our meetings business increasedwas driven by 13.6% to 45.6 millionlower enrollments in the first nine monthsquarter of fiscal 2011, from 40.1 million in the first nine months of fiscal 2010. In our North American and UK markets, the new programs not only attracted new customers2012 as compared to the meetings business, but also increased meeting attendance by our existing members. In the first nine months of 2011, our Continental European market experienced paid weeks and attendance declines versus the first nine months of fiscal 2010, as a result of lapping a new program launchhistorically high enrollment levels in the prior year period. This market is stillHowever, the impact of enrollments on paid weeks was minimized by the higher meeting membership base we had at the beginning of fiscal 2012 versus the beginning of fiscal 2011. In addition, global attendance decreased 10.7% to 15.8 million in the processfirst quarter of developing effective marketing campaigns.fiscal 2012 from 17.6 million in the first quarter of fiscal 2011.
In NACO, meeting fees forin the first nine monthsquarter of fiscal 20112012 were $534.9$175.1 million, an increasea decrease of $120.2$13.0 million, or 29.0%6.9%, from $414.8$188.1 million forin the first nine monthsquarter of fiscal 2010.2011. Excluding the impact of foreign currency, which increaseddecreased NACO meeting fees by $2.2$0.2 million, NACO meeting fees grew by 28.4% in the first nine monthsquarter of fiscal 20112012 declined by 6.8% versus the prior year period. MeetingThe decline in meeting fees grew primarily from the positive impact on enrollments of the highly successful newPointsPlus program, which launchedwas driven by a 6.0% decline in late fiscal 2010, our effective marketing campaign strategy which has raised the profile and attraction of our offerings to both former members and new customers, and increased purchases of the Monthly Pass commitment plan. As a result of these factors, NACO meeting paid weeks increased 30.2%from 18.4 million in the first nine monthsquarter of fiscal 2011 versusto 17.3 million in the first quarter of fiscal 2012. The decline in meeting paid weeks in the quarter primarily resulted from lower enrollments in the quarter as compared to the historically high enrollment level in the prior year periodperiod. Lower enrollments in the quarter were driven in part by execution challenges associated with introducing Monthly Pass to 54.0the small account portion of NACO’s corporate business. In the first quarter of fiscal 2012, NACO attendance decreased 11.9% to 9.8 million and attendance grew 22.7%from 11.1 million in the first nine monthsquarter of fiscal 2011 versus the prior year period to 28.8 million.2011.
Our internationalInternational meeting fees in the first nine monthsquarter of fiscal 20112012 were $237.0$77.4 million, an increasea decrease of $28.7$3.4 million, or 13.8%4.2%, from $208.3$80.8 million in the prior year period. Excluding the impact of foreign currency, which increaseddecreased international meeting fees by $17.4$0.9 million, international meeting fees grewdeclined by 5.4%3.1% in the first nine monthsquarter of fiscal 20112012 versus the prior year period. InternationalThe decline in meeting fees was driven by a 3.1% decline in international meeting paid weeks increased 6.7%in the first quarter of fiscal 2012 versus the prior year period. The decline in meeting paid weeks was driven by declines in enrollments in our international English-speaking markets in the quarter versus the prior year period, which were partially offset by enrollment growth in Continental Europe. International attendance decreased by 8.5% in the first quarter of fiscal 2012 versus the prior year period.
In the first quarter of fiscal 2012, UK meeting fees decreased by 8.0% to 27.1$28.6 million from $31.1 million in the first nine monthsquarter of fiscal 2011,2011. Excluding the impact of foreign currency, which decreased UK meeting fees by $0.6 million, UK meeting fees declined by 6.2% in the first quarter of fiscal 2012 versus the prior year period. This decline in meeting fees was driven primarily by a decline of 6.4% in UK meeting paid weeks in the performancefirst quarter of fiscal 2012 versus the prior year period. The decline in meeting paid weeks was entirely driven by lower enrollments in the quarter as compared to the historically high enrollment level in the prior year period. In addition, the UK meetings business. Internationalintroduced a new advertising campaign that was ineffective in driving enrollment growth. UK attendance increased only slightly,decreased by 0.8%, to 16.8 million14.0% in the periodfirst quarter of fiscal 2012 versus 16.7the prior year period.
In contrast to the North American and UK markets, the Continental European meetings business experienced an increase in meeting fees of 0.5% to $36.7 million in the first nine monthsquarter of fiscal 2010, as a result of declines2012 from $36.5 million in the Continental European meetings business.
The UK meetings business benefited fromfirst quarter of fiscal 2011. Excluding the impact of its newProPoints program,foreign currency, which launched in late fiscal 2010 and drovedecreased Continental European meeting fee and paid weeks growth in that market. UKfees by $1.0 million, Continental European meeting fees increased by 3.2% in the first nine monthsquarter of fiscal 2011 grew by 32.6%, or 25.8% on a constant currency basis,2012 as compared to the prior year period, withperiod. This increase in meeting fees was driven by an increase of 5.4% in Continental European meeting paid weeks up 18.6% and attendance up 13.8% in the first nine monthsquarter of fiscal 2011.
2012 versus the prior year period. The growthincrease in meeting paid weeks was driven by higher enrollments in the UK meetings business was partially offset by declining meeting fees and paid weeks volume in the period in Continental Europe, which was cycling against a year earlier, less successful program launch, and which has not developed sufficiently effective marketing campaigns. Continental European meeting fees in the first nine months of fiscal 2011 decreased by 5.2%, or 12.0% on a constant currency basis,quarter as compared to the prior year period, with paid weeks declining 11.2% andperiod. These higher enrollments were the result of effective new marketing strategies in this region. Continental European attendance declining 17.9%increased by 4.3% in the first quarter of fiscal 2012 versus the prior year period.
In-Meeting Product Sales
Global in-meeting product sales for the first nine monthsquarter of fiscal 20112012 were $234.9$87.1 million, an increasea decrease of $34.5$13.9 million, or 17.2%13.8%, from $200.4$101.0 million in the first nine monthsquarter of fiscal 2010.2011. Excluding the impact of foreign currency, which increaseddecreased in-meeting product sales by $6.9$0.7 million, global in-meeting product sales rose 13.8% in the nine month periodfirst quarter of fiscal 2012 declined 13.1% versus the comparable prior year period. This decrease resulted primarily from a 10.7% decline in global meeting attendance in the quarter versus the prior year period. In addition, lower product sales per attendee in the quarter versus the prior year period drove the balance of the decline. On a per attendee basis, first quarter fiscal 2012 global in-meeting product sales increased 3.2% in the first nine months of fiscal 2011 versus the prior year period, but only 0.2% on a constant currency basis. The new program innovation in our North American and UK markets generated growth in sales of higher-priced starter kits and other enrollment products to both new and existing meeting members; however, this growth was partially offset by lower demand for consumable products.
In NACO, in-meeting product sales of $131.5 million in the first nine months of fiscal 2011 increased by $26.6 million, or 25.3%, versus the prior year period, on the strength of higher attendance volumes. NACO’s in-meeting product sales per attendee increased 2.1%decreased 3.4%, or 1.8% on a constant currency basis, versus the comparable prior year period. International in-meeting product sales were $103.4 million in the first nine months of fiscal 2011, an increase of 8.3%, or 1.6%2.7% on a constant currency basis, versus the prior year period. On aThis decrease in product sales per attendee basis, internationalin the first quarter of fiscal 2012 was primarily the result of cycling against abnormally strong first quarter fiscal 2011 sales of enrollment products in connection with the launch of the new programs in our English-speaking markets in late fiscal 2010.
In NACO, first quarter fiscal 2012 in-meeting product sales increased 7.5%of $50.3 million decreased by $8.4 million, or 14.2%, versus the prior year period. This decrease was primarily from an 11.9% attendance decline and, to a lesser extent, a 2.6% decrease in in-meeting product sales per attendee in the first quarter of fiscal 2012 as compared to the prior year period.
International in-meeting product sales were $36.9 million in the first quarter of fiscal 2012, a decrease of 13.1%, or 0.8%11.7% on a constant currency basis, versus the prior year period. This decrease was driven by an attendance decline of 8.5%, and a decrease in in-meeting product sales per attendee of 3.4% on a constant currency basis, in the first quarter of fiscal 2012 as compared to the prior year period.
Internet Revenues
Internet revenues, which include subscription revenues from sales of Weight Watchers Online and Weight Watchers eTools as well as Internet advertising revenues, increased significantly, up $123.2$34.9 million, or 69.9%38.0%, to $299.5$126.9 million forin the first nine monthsquarter of fiscal 20112012 from $176.4$92.0 million forin the first nine monthsquarter of fiscal 2010.2011. Excluding the impact of foreign currency, which increaseddecreased Internet revenues by $5.6$0.7 million, Internet revenues grew by 66.7%38.7% in the first nine monthsquarter of fiscal 20112012 versus the prior year period. We entered fiscal 2011 with anThe combination of strong marketing campaigns in North America and Continental Europe and a higher active Online subscriber base that was 38.2% higher than at the start of fiscal 2012, up 50.5%, versus the beginning of fiscal 2010, and endedyear 2011 contributed to Online paid weeks growth of 35.4% in the first nine monthsquarter of fiscal 2011 with approximately 1.7 million2012 versus the prior year period. Additionally, end of period active Online subscribers up 63.6% from approximately 1.1increased to 2.4 million at the end of the thirdfirst quarter of fiscal 2010. Online paid weeks increased 70.6% in the first nine months of 2011 versus the prior year period. This increase in Online subscribers and paid weeks was driven primarily by continued strong marketing campaigns starting in the second quarter of 2010 in the United States and the United Kingdom, markets which also benefited from the new program launches2012 as compared to 1.8 million at the end of the first quarter of fiscal 2010. In addition, sign-ups grew in Continental Europe, reflecting the effectiveness of our marketing efforts in online channels in these markets.2011.
Other Revenues
Other revenues, comprised primarily of licensing revenues, franchise royalties, revenues from the sale of products by mail and to our franchisees, and revenues from our publications, were $111.6$37.0 million for the first nine monthsquarter of fiscal 2011, an increase2012, a decrease of $16.0$4.6 million, or 16.7%11.0%, from $95.6$41.5 million for the first nine monthsquarter of fiscal 2010.2011. Excluding the impact of foreign currency, which decreased other revenues by $0.1 million, other revenues were 13.1% higher10.7% lower in the first nine monthsquarter of fiscal 2011 than2012 compared to the prior year period. The new program in our North American and UK markets also benefited our other revenues. Franchise commissions and sales of products to our franchisees grewdeclined in the aggregate by 35.0%22.8%, or 32.9%22.4% on a constant currency basis, in the first nine monthsquarter of 2011 versus the prior year period, accounting for $5.3 million of the total increase in other revenues on a constant currency basis for the first nine months of 2011fiscal 2012 versus the prior year period. Our by mail product sales and revenues from our publications also rosedeclined, by 15.4% in the aggregate, by 25.6%, or 21.7% on a constant currency basis, overin the first quarter of fiscal 2012 versus the prior year first nine monthsperiod level. These declines were primarily the result of comparing against the prior year period which had the benefit of the new program launches in our English-speaking markets. Global licensing revenues in the first nine monthsquarter of fiscal 2011, however, were up only slightly, by 2.2%, and2012 were down 1.9%0.5%, or 0.2% on a constant currency basis, versus the prior year period. UK licensing revenues increasedperiod, with declines in the first nine months of 2011 versus the prior year period; however, both North America and Continental Europe experienced weak performance, primarily as a result of pricing challengeslargely offset by growth in a tough economic environment.the United Kingdom.
Components of Expenses and Margins
Cost of Revenues and Gross Margin
Total cost of revenues in the first nine monthsquarter of fiscal 20112012 was $596.4$215.2 million, an increasea decrease of $102.9$5.1 million, or 20.9%2.3%, from $493.4$220.3 million in the prior year period. Cost of revenues grew at a slower ratepace than net revenues, which increased 29.4% in the first nine monthsdue to WeightWatchers.com’s cost of 2011 versus the prior year period. We gained operating efficiency versus the prior year period because of the increase in average attendance per meeting and despite higher expenses related to ensuring a successful launch of the new program innovation in our North American and UK markets.revenues being largely fixed. Gross profit for the first nine monthsquarter of fiscal 20112012 of $821.5$288.4 million increased $219.6$5.2 million, or 36.5%1.8%, from $601.9$283.1 million in the first nine monthsquarter of fiscal 2010, and gross2011. Gross margin expanded to 57.9%, an increasein the first quarter of 300 basis pointsfiscal 2012 was 57.3%, as compared to 54.9%56.2% in the first nine monthsquarter of fiscal 2010. While operating leverage2011. Gross margin expansion was primarily the result of a shift of the proportion of gross margin toward our higher margin WeightWatchers.com business. This margin expansion was partially offset by a decline in the meetings business was a contributor,gross margin. This decline in the increase inmeetings business gross margin was largelyprimarily driven by the resultimpact of the higher margin WeightWatchers.com business, where costcosts associated with our future growth initiatives and lower average number of revenues is largely fixed, becoming a larger component of our revenue mix.members per meeting.
Marketing
Marketing expenses for the first nine monthsquarter of fiscal 20112012 were $232.3$130.3 million, an increase of $61.8$34.7 million, or 36.2%, versus the first nine monthsquarter of fiscal 2010, or 33.5% on a constant2011. Excluding the impact of foreign currency, basis.which increased marketing expenses by $1.2 million, marketing expenses were 37.5% higher in the first quarter of fiscal 2012 compared to the prior year period. Included in our first nine monthsquarter of fiscal 20112012 marketing expense was aexpenses were investments in two strategic initiatives: the first, time significant investment in marketing the Weight Watchers Online product to men a new initiative in fiscal 2011 focused on buildingthe United States to build awareness of and communicatingcommunicate the relevance of the Weight Watchers brand to the male demographic. This initiative,demographic, which is a componentaccounted for 9.5% of the increase in marketing expenses, and the second, first time Online TV marketing campaigns in several of our growth strategy for 2012 and beyond,international markets, which accounted for 7.8%8.0% of the increase in marketing expenses. The investment in Online TV marketing campaigns helped to drive 90.8% growth in Continental Europe’s Online paid weeks in the first quarter of fiscal 2012 as compared to the prior year period. In addition, we invested in TV advertising for Continental Europe’s meetings business, which accounted for 6.2% of the increase in marketing expenses in the first nine monthsquarter of fiscal 2011 versus2012. The increase in marketing expenses also reflected the comparable prior year period. In addition, we increased our marketing investment in the period to support our new program launches and to strengthen recruitment growth during our spring and fall marketing campaigns as well. This strategy proved to be efficient and successful in driving recruitmentimpact of both new and rejoining meeting members and Online subscribers. We opportunistically added marketing in the period to leverage positive public relations, such as our ranking as the number one weight-loss diet by U.S. News & World Report magazine. Notwithstanding all of these strategies and initiatives, our marketing cost per customer acquisition declined by 4.0% in the first nine months of fiscal 2011 versus the prior year period. Our marketinghigher volumes on online advertising costs. Marketing expenses as a percentage of revenues were 16.4%25.9% in the first nine monthsquarter of fiscal 20112012 as compared to 15.6%19.0% in the prior year period, as the revenues from more recent customer acquisitions will accrue over future periods.period.
Selling, General and Administrative
Selling, general and administrative expenses were $159.8$55.3 million for the first nine monthsquarter of fiscal 20112012 versus $137.3$51.7 million for the first nine monthsquarter of fiscal 2010,2011, an increase of $22.5$3.5 million, or 16.4%6.8%. On a constant currency basis, first quarter of fiscal 2012 selling, general and administrative expenses for the first nine months of fiscal 2011 increased by 13.0%7.1% versus the first nine monthsquarter of fiscal 2010.2011. The largest component of the increase in expenses was salary related, reflecting higher bonus expense associated with our strong business performance. In addition, the first nine months of fiscal 2011 included expenseprimarily related to growth initiatives, including new business development and technology for the development of our mobile platforms.platforms and additions to staff in support of business development. Selling, general and administrative expenses as a percentage of revenues for the first nine monthsquarter of fiscal 2011 decreased by 130 basis points2012 increased to 11.3%11.0% from 12.5%10.3% for the first nine monthsquarter of fiscal 2010. It should be noted that the first nine months of fiscal 2010 included $4.9 million of selling, general and administrative expense associated with the previously disclosed settlement of the California litigation, which accounted for 45 basis points of the 130 basis point decrease in selling, general and administrative expenses as a percentage of revenues when comparing the first nine months of fiscal 2011 to the prior year period.2011.
Operating Income Margin
Our operating income margin in the first nine monthsquarter of fiscal 2011 increased2012 decreased to 30.3%20.4%, up 350a decrease of 650 basis points from 26.8%27.0% in the first nine monthsquarter of fiscal 2010. Our2011. The decline in operating income margin was primarily driven by our significant investment in marketing the Weight Watchers Online product to men in the United States and costs related to first time Online TV marketing campaigns in several of our international markets in the first nine monthsquarter of 2010 was decreased by 59 basis points as a result of the $6.5 million charge, included in both cost of revenuesfiscal 2012. Both marketing expenses and selling, general and administrative expense, associated with the previously disclosed settlement of the California litigation. Margin expansion in the first nine months of fiscal 2011 was attributable to the favorable impact on gross margin of operating leverage gained from higher attendances per meeting and strong growth in our higher margin WeightWatchers.com business, where cost of revenues are largely fixed. Marketing expenseexpenses increased as a percentage of revenuesrevenue in the first nine monthsquarter of fiscal 2011 as compared to the prior year period, but was offset by the decline in selling, general and administrative expenses as a percentage of revenues in the first nine months of fiscal 20112012 as compared to the prior year period.
Interest Expense and Other
Interest expense was $46.8$13.2 million for the first nine monthsquarter of fiscal 2011,2012, a decrease of $10.5$5.0 million, or 18.3%27.5%, from $57.3$18.2 million in the first nine monthsquarter of fiscal 2010. Our average debt outstanding decreased for the first nine months of fiscal 2011 to $1.2 billion as compared to $1.4 billion2011. The decline was primarily driven by a reduction in the first nine months of fiscal 2010, including $197.5 million of scheduled repayments since January 2011. In addition, the notional value of our interest rate swaps, declined, drivingwhich resulted in a lower effective interest rate to 4.66%of 4.37% in the first nine monthsquarter of fiscal 2012, down from 5.03% in the first quarter of fiscal 2011. In addition, interest expense was reduced by a decline in our average debt outstanding from $1,329.3 million in the first quarter of fiscal 2011 versus 5.01%to $1,072.3 million in the first nine monthsquarter of fiscal 2010.2012. The decrease in average debt outstanding was driven by $166.3 million of term loan repayments and $174.0 million of revolver payments made during the period from January 2011 until the end of the first quarter of fiscal 2012.
We reported $0.1$0.5 million of other expenseincome in the first nine monthsquarter of fiscal 2011 as compared to $1.0 million of other expense in the first nine months of fiscal 2010,2012, primarily reflecting the impact of foreign currency on intercompany transactions.
In the first quarter of fiscal 2012, we wrote-off $1.3 million of fees in connection with the refinancing of our debt, which we recorded as an early extinguishment of debt charge.
Tax
Our effective tax rate was 37.1%38.5% for the first nine monthsquarter of fiscal 20112012 as compared to 38.9%38.0% for the first nine monthsquarter of fiscal 2010. For the first nine months of fiscal 2011, we recorded a tax benefit associated with the closure of our Finland business. Excluding this benefit, our effective tax rate for the first nine months of fiscal 2011 would have been 38.0%.2011. The difference in period-over-period effective tax rates after this adjustment is primarily due to the benefitresult of reversingthe reversal of certain tax reserves upondue to the expiration of the applicable statutesstatute of limitations.
LIQUIDITY AND CAPITAL RESOURCES
Sources and Uses of Cash —– Fiscal 20112012
Cash and cash equivalents were $61.4$79.6 million at the end of the thirdfirst quarter of fiscal 2011,2012, an increase of $20.9$32.1 million from the end of fiscal 2010.2011. Cash flows provided by operating activities for the first ninethree months of fiscal 20112012 were $374.9$110.8 million, an increasea decrease of $140.0$73.3 million, or 59.6%39.8%, overfrom the $234.9$184.1 million generated in the first ninethree months of fiscal 2010. The increase of $140.0 million in cash flows provided by operating activities2011. This decrease was primarily the result of improvements in our business$34.7 million of additional marketing expenses in the first ninethree months of fiscal 20112012 versus the comparable prior year period. These business improvements includedperiod and a $95.9payment of $30.0 million increase in net income,to Her Majesty’s Revenue and $16.5 millionCustoms, or HMRC, which was previously recorded as part of higher deferred income resulting from significant increases in Online subscribers and Monthly Pass members. In addition,a reserve by the Company in the first nine monthsfourth quarter of fiscal 2010, there was a $29.1 million payment made which reduced cash flows provided by operating activities in that period. The payment reduced a previously recorded UK value added tax, or VAT, accrual which covered prior periods, and which was made2009, in connection with our previously disclosed adversethe UK VAT ruling.self-employment matter.
The $374.9$110.8 million of cash flows provided by operating activities for the first ninethree months of fiscal 20112012 exceeded the period’s net income attributable to the Company by $133.7$56.2 million. The excess of cash flows provided by operating activities over net income arose primarily from changes in our working capital, as described below (see “— Balance Sheet Working Capital”), and from non-cash expenses and differences between book and cash taxes.
Net cash used for investing and financing activities combined totaled $354.9$73.8 million in the first ninethree months of fiscal 2011.2012. Net cash used for investing activities was $31.0$21.0 million in the first ninethree months of fiscal 2011,2012, consisting primarily of capital expenditures in connection with our retail initiative and capitalized software expenditures.expenditures to support global systems initiatives. Net cash used for financing
activities totaled $323.9$52.8 million in the period and consisted primarilyincluded stock repurchases of $724.3 million and deferred financing costs of $24.8 million, partially offset by proceeds from new term loans of $726.0 million in connection with the Tender Offer (as defined below). In addition, we made long-term debt payments of $298.3$27.0 million, stock repurchases of $34.9 million and dividend payments of $38.7 million. These uses were partially offset by $41.4$13.0 million and received $8.0 million of proceeds from stock options exercised in the first ninethree months of fiscal 2011.2012.
Sources and Uses of Cash —– Fiscal 20102011
For the nine months ended October 2, 2010, cashCash and cash equivalents were $72.9$77.2 million in the first quarter of fiscal 2011, an increase of $26.8$36.7 million from the end of fiscal 2009.2010. Cash flows provided by operating activities for first quarter of fiscal 2011 were $184.1 million, an increase of $119.8 million over the nine months ended October 2,$64.3 million generated in the first quarter of fiscal 2010. The increase of $119.8 million in cash flows from operating activities was comprised primarily of three components: a $29.0 million increase in net income in the first quarter of fiscal 2011, a $30.4 million payment made in the first quarter of fiscal 2010 were $234.9which reduced the UK value added tax accrual in connection with our previously disclosed adverse UK tax ruling covering prior periods and $29.3 million exceedingof higher deferred income in the nine monthfirst quarter of fiscal 2011 resulting from significant increases in Online subscribers and Monthly Pass members.
The $184.1 million of cash flows provided by operating activities for the first quarter of fiscal 2011 exceeded the period’s $145.3$73.6 million in net income attributable to the Company by $89.6$110.5 million. Cash flows provided by operating activities included a cash payment of $29.1 million for prior period charges associated with the previously disclosed June 2008 adverse UK tax ruling we received regarding the imposition of UK VAT on our UK meeting fee revenue.
The excess of cash flows provided by operating activities over net income arose primarily from changes in our working capital, and as a result of differences between book and cash taxes.
Net cash used for investing and financing activities combined totaled $206.1 million.$149.1 million in the first quarter of fiscal 2011. Net cash used for investing activities of $15.9$6.4 million in the first quarter of fiscal 2011 consisted primarily of capital expenditures. Net cash used for financing activities totaled $190.2$142.7 million in the period and consisted primarily of long-term debt payments of $114.1 million, stock repurchases of $76.9$34.9 million and dividend payments of $40.4$13.0 million. These uses were slightly offset by $18.1 million as well as long-term debt payments of $64.1 million and financing costs of $11.4 millionproceeds from stock options exercised in connection with our debt extension.the quarter.
Balance Sheet Working Capital
On our balance sheet at October 1, 2011,March 31, 2012, the working capital deficit was $292.3$1,057.9 million, including $61.4$79.6 million of cash and cash equivalents and $92.3$128.0 million of current portion of long-term debt. At January 1,December 31, 2011, our working capital deficit was $348.7$279.7 million which included $40.5$47.5 million of cash and cash equivalents and $197.5$124.9 million of current portion of long-term debt. After making scheduled debt repayments of $197.5$27.0 million during the first ninethree months of fiscal 2011,2012, and because of adespite the refinancing that we undertook in 2010 which changed our debt repayment requirements,the first quarter of fiscal 2012, the current portion of our long-term debt was significantly reducedincreased only slightly by $105.2$3.1 million to $92.3 millionversus the end of fiscal 2011 as described below (see “—Long-Term Debt”). Excluding the changes in cash and cash equivalents and current portion of long-term debt from both periods, the working capital deficit at October 1, 2011March 31, 2012 was $261.4$1,009.4 million, an increase of $69.7$807.2 million as compared to $191.7$202.2 million at January 1,December 31, 2011.
The majority of this $69.7$807.2 million increase in adjusted working capital deficit (which excludes from working capital the changes in cash and cash equivalents and in the current portion of long-term debt) in the first ninethree months of 2011fiscal 2012 versus the January 1,December 31, 2011 level was attributable to $778.9 million payable to Artal Holdings (defined below) for shares to be repurchased in connection with the Tender Offer. The shares were repurchased in the second quarter of fiscal 2012. Operational items increased the deficit by $49.3 million. These operational items included a $37.5 million increase in deferred revenue from growth in our business. Deferred revenue increased by $29.5 million, as we have grown our Online subscriber and Monthly Pass member bases. Payablesbases, seasonality-related reductions of $7.9 million in inventory, and accruals were $36.1a $3.2 million higher,decrease in accounts receivable coupled with a $0.7 million increase in accrued liabilities. Income taxes increased the working capital deficit by another $12.3 million, primarily related to compensation, a combination of timing of payments and the impact of better than expected business performance. The remaining $4.1 million of the increase in the adjustedcurrent income taxes payable. These increases in working capital deficit primarily resulted fromwere partially offset by a $30.0 million decline in prepaid taxes.the UK self-employment liability related to payments made in the first quarter of fiscal 2012 and a $3.3 million decline in the derivative liability.
Long-Term Debt
Our credit facilities consist of acertain term loan facilityfacilities and a revolving credit facility, orfacilities, which we refer to collectively as the WWI Credit Facility. During the secondfirst quarter of fiscal 2011,2012, the composition of the WWI Credit Facility changed as a result of us paying off amounts outstanding under certain tranches ofour amending and restating the WWI
Credit Facility that matured on June 30, 2011. to, among other things, extend the maturity of certain of our term loan facilities and our revolving credit facility and to obtain new commitments for the borrowing of an additional $1,449.4 million of term loans to finance the purchases of shares of our common stock in the Tender Offer and from Artal Holdings.
Immediately prior to the change,amendment of the WWI Credit Facility, the term loan facilityfacilities consisted of twoa tranche A loans,A-1 loan, or Term A Loan and Additional Term AA-1 Loan, a tranche B loan, or Term B Loan, a tranche C loan, or Term C Loan, and a tranche D loan, or Term D Loan, and thea revolving credit facility, or Revolver A-1. The aggregate principal amount then outstanding under (i) the Revolver, consisted of two tranches, Revolver ITerm A-1 Loan was $128.6 million, (ii) the Term B Loan was $237.5 million, (iii) the Term C Loan was $420.4 million and Revolver II.(iv) the Term D Loan was $238.2 million. Immediately prior to the change, the totalamendment of the WWI Credit Facility, the Revolver A-1 had no loans outstanding under it, $1.0 million of issued but undrawn letters of credit and $331.6 million in available creditunused commitments thereunder.
Following the amendment of the WWI Credit Facility on March 15, 2012, (i) $33.1 million in aggregate principal amount of the Term A-1 Loan and $301.8 million in aggregate principal amount of the Term C Loan were converted into, and $849.4 million in aggregate principal amount of commitments to borrow new term loans were provided under, a new tranche E loan, or Term E Loan, (ii) $107.0 million in aggregate principal amount of the Term B Loan and $119.1 million in aggregate principal amount of the Term D Loan were converted into, and $600.0 million in aggregate principal amount of commitments to borrow new term loans were provided under, a new tranche F loan, or Term F Loan, and (iii) $262.0 million in aggregate principal amount of commitments under the Revolver was up to $500.0 million, of which theA-1 were converted into a new revolving credit facility, or Revolver I was $167.4 million and the Revolver II was $332.6 million.
On June 30, 2011,A-2. The loans outstanding under each of the Term A Loan and Revolver I matured and was paid in full satisfaction of obligations thereunder ($29.1 million and $12.1 million, respectively). Following the maturity and payment in full of obligations under the Term A Loan, the term loan facility consistedexisting prior to the amendment of the AdditionalWWI Credit Facility and the loans and commitments outstanding under the Revolver A-1, in each case that were not converted into the Term AE Loan, the Term F Loan or the Revolver A-2, as applicable, continued to remain outstanding under the WWI Credit Facility as the Term A-1 Loan, the Term B Loan, the Term C Loan, the Term D Loan or the Revolver A-1, as applicable. On March 27, 2012, we borrowed an aggregate of $726.0 million under the Term E Loan and the Term D Loan. FollowingF Loan to finance the maturitypurchase of shares in the Tender Offer and payment in fullto pay a portion of obligationsthe related fees and expenses. On April 9, 2012, we borrowed an aggregate of approximately $723.4 million under Revolver I, the Revolver consisted solelyTerm E Loan to finance the purchase of Revolver II, with a total of $332.6 million of outstanding and available credit.
shares from Artal Holdings. At October 1, 2011,March 31, 2012, we had $1,066.8$1,750.8 million outstanding under the WWI Credit Facility, a combinationwhich consisted entirely of outstanding term loans and amounts outstanding underloans. In addition, at March 31, 2012, the Revolver II.A-1 had $0.2 million in issued but undrawn letters of credit outstanding thereunder and $70.5 million in available unused commitments thereunder and the Revolver IIA-2 had $15.0$0.8 million in issued but undrawn letters of credit outstanding thereunder and $316.6$261.1 million available.in available unused commitments thereunder. In connection with this amendment, we incurred fees of approximately $25.4 million during the three months ended March 31, 2012.
At October 1, 2011March 31, 2012 and January 1,December 31, 2011, our debt consisted entirely of variable-rate instruments. Interest rate swaps arewere entered into to hedge a portion of the cash flow exposure associated with our variable-rate borrowings. The average interest rate on our debt, exclusive of the impact of swaps, was approximately 2.2%3.18% and 2.40% per annum at both October 1,March 31, 2012 and December 31, 2011, and January 1, 2011.respectively.
The following schedule sets forth our long-term debt obligations (and interest rates, exclusive of the impact of swaps) at October 1, 2011:March 31, 2012:
Long-Term Debt
At October 1, 2011March 31, 2012
(Balances in millions)
Balance | Alternative Base Rate or LIBOR | Applicable Margin | Interest Rate | |||||||||||||
Revolver II due 2014 | $ | 15.0 | 0.25 | % | 2.50 | % | 2.75 | % | ||||||||
Additional Term A Loan due 2013 | 148.7 | 0.38 | % | 1.00 | % | 1.38 | % | |||||||||
Term B Loan due 2014 | 238.1 | 0.38 | % | 1.25 | % | 1.63 | % | |||||||||
Term C Loan due 2015 | 426.1 | 0.38 | % | 2.25 | % | 2.63 | % | |||||||||
Term D Loan due 2016 | 238.9 | 0.38 | % | 2.25 | % | 2.63 | % | |||||||||
|
| |||||||||||||||
Total Debt | 1,066.8 | |||||||||||||||
Less Current Portion | 92.3 | |||||||||||||||
|
| |||||||||||||||
Total Long-Term Debt | $ | 974.5 | ||||||||||||||
|
|
Balance | ||||
Term A-1 Loan due January 26, 2013 | $ | 95.6 | ||
Term B Loan due January 26, 2014 | 130.5 | |||
Term C Loan due June 30, 2015 | 118.6 | |||
Term D Loan due June 30, 2016 | 119.1 | |||
Term E Loan due March 15, 2017 | 460.9 | |||
Term F Loan due March 15, 2019 | 826.1 | |||
|
| |||
Total Debt | 1,750.8 | |||
Less Current Portion | 128.0 | |||
|
| |||
Total Long-Term Debt | $ | 1,622.8 | ||
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The WWI Credit Facility provides that term loans and the loans outstanding under the Revolver A-1 and the Revolver A-2 bear interest at a rate per annum equal to either, at our option, at LIBOR plus an applicable margin per annum or the alternative base rateLIBO Rate (Reserve Adjusted) (as defined in the WWI Credit Facility agreement) plus an applicable margin per annum.or the Alternate Base Rate (as defined in the WWI Credit Facility agreement) plus an applicable margin, which applicable margins will vary depending on our Net Debt to EBITDA Ratio (as defined in the WWI Credit Facility agreement) from time to time in effect. At October 1, 2011,March 31, 2012, the Additional Term AA-1 Loan bore interest at a rate equal to LIBORLIBO Rate (Reserve Adjusted) plus 1.00%0.875% per annum; the Term B Loan bore interest at a rate equal to LIBORLIBO Rate (Reserve Adjusted) plus 1.25% per annum; the Term C Loan andbore interest at a rate equal to LIBO Rate (Reserve Adjusted) plus 2.125%; the Term D Loan bore interest at a rate equal to LIBORLIBO Rate (Reserve Adjusted) plus 2.25% per annum; and the Revolver IITerm E Loan bore interest at a rate equal to LIBORLIBO Rate (Reserve Adjusted) plus 2.50%2.25% per annum; the Term F Loan bore interest at a rate equal to LIBO Rate (Reserve Adjusted) plus 3.00% per annum; had any loans under the Revolver A-1 been outstanding, they would have borne interest at a rate equal to either the LIBO Rate (Reserve Adjusted) plus 2.25% per annum or the Alternate Base Rate plus 1.25% per annum; and had any loans under the Revolver A-2 been outstanding, they would have borne interest at a rate equal to either the LIBO Rate (Reserve Adjusted) plus 2.25% per annum or the Alternate Base Rate plus 1.25% per annum. For purposes of calculating the interest rate on the Term F Loan the LIBO Rate (Reserve Adjusted) will always be at least 1.00% per annum. In addition to paying interest on outstanding principal under the WWI Credit Facility, at October 1, 2011, we wereare required to pay aan undrawn commitment fee to the lenders under each of the Revolver IIA-1 and the Revolver A-2 with respect to the unused commitments under each such facility at a rate equalthat is dependent on our Net Debt to 0.50%EBITDA Ratio from time to time in effect. As of March 31, 2012, the applicable commitment fee rate for the Revolver A-1 was 0.4375% per annum and for the Revolver A-2 was 0.4000% per annum.
The WWI Credit Facility contains customary covenants including covenants that, in certain circumstances, restrict our ability to incur additional indebtedness, pay dividends on and redeem capital stock, make other payments, including investments, sell our assets and enter into consolidations, mergers and transfers of all or substantially all of our assets. The WWI Credit Facility also requires us to maintain specified financial ratios and satisfy certain financial condition tests. At October 1, 2011,March 31, 2012, we were in compliance with all of the required financial ratios and also met all of the financial condition tests and expect to continue to do so for the foreseeable future. The WWI Credit Facility contains customary events of default. Upon the occurrence of an event of default under the WWI Credit Facility, the lenders thereunder may cease making loans and declare amounts outstanding to be immediately due and payable. The WWI Credit Facility is guaranteed by certain of our existing and future subsidiaries. Substantially all of our assets collateralizesecure the WWI Credit Facility.
We amended the
The WWI Credit Facility on June 26, 2009 to allowallows us to make loan modification offers to all lenders of any tranche of term loans or revolving loanscommitments to extend the maturity date of such loans and/or commitments and/or reduce or eliminate the scheduled amortization. Any such loan modifications would be effective only with respect to such tranche of term loans or revolving loanscommitments and only with respect to those lenders that accept our offer. Loan modification offers may be accompanied by increased pricing and/or fees payable to accepting lenders. This amendmentThe WWI Credit Facility also providesallows for up to an additional $400.0 million of incremental financing through the creation of either new tranches of term loans or through an increase in commitments under the Revolver A-2, in each case to be provided to us under the WWI Credit Facility. The incremental capacity is uncommitted and we must find lenders to provide any such financing prior to incurrence. In addition, we may incur up to an additional $200.0 million of incremental term loan financingloans through the creation of a new tranche of term loans, provided that the aggregate principal amount of such new term loans cannot exceed the amount then outstanding under our existing revolving credit facility. In addition,facilities and the proceeds from such new tranche of term loans must be used solely to repay certain outstanding revolving loans and permanently reduce the commitments of certain revolving lenders.
On April 8, 2010, we amended the WWI Credit Facility pursuant to a loan modification offer to all lenders of all tranches of term loans and revolving loans to, among other things, extend the maturity date of such loans. In connection with this amendment, certain lenders converted a total of $454.5 million of their outstanding term loans under the Term A Loan ($151.8 million) and Additional Term A Loan ($302.7 million) into term loans under the new Term C Loan due 2015 (or 2013, upon the occurrence of certain events described in the WWI Credit Facility agreement), and a total of $241.9 million of their outstanding term loans under the Term B Loan into term loans under the new Term D Loan due 2016. In addition, certain lenders converted a total of $332.6 million of their outstanding Revolver I commitments into commitments under the new Revolver II which terminates in 2014 (or 2013, upon the occurrence of certain events described in the WWI Credit Facility agreement), including a proportionate amount of their outstanding Revolver I loans into Revolver II loans. Following these conversions of a total of $1,029.0 million of loans and commitments, at April 8, 2010, we had the same amount of debt outstanding under the WWI Credit Facility and amount of availability under the Revolver as we had immediately prior to such conversions. In connection with this loan modification offer, we incurred fees of approximately $11.5 million during the second quarter of fiscal 2010.
The following schedule sets forth our year-by-year debt obligations at October 1, 2011:March 31, 2012:
Total Debt Obligation
(Including Current Portion)
At October 1, 2011March 31, 2012
(in millions)
Remainder of fiscal 2011 | $ | 0 | ||
Fiscal 2012 | 124.9 | |||
Fiscal 2013 | 86.0 | |||
Fiscal 2014 | 272.6 | |||
Fiscal 2015 | 354.6 | |||
Thereafter | 228.7 | |||
|
| |||
Total | $ | 1,066.8 | ||
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Remainder of fiscal 2012 Fiscal 2013 Fiscal 2014 Fiscal 2015 Fiscal 2016 Thereafter Total xxxxxx $ 79.7 78.5 199.8 154.9 155.1 1,082.8 $ 1,750.8
We currently plan to meet our long-term debt obligations by using cash flows provided by operating activities and opportunistically using other means to repay or refinance our obligations as we determine appropriate. We believe that cash flows from operating activities, together with borrowings available under our Revolver,revolving credit facilities, will be sufficient for the next 12 months to fund currently anticipated capital expenditure requirements, debt service requirements and working capital requirements.
Dividends and Stock Transactions
We historically have issued a quarterly cash dividend of $0.175 per share of our common stock every quarter beginning withfor the first quarter ofpast several fiscal 2006. Prior to these dividends, we had not declared or paid any cash dividends on our common stock since our acquisition by Artal Luxembourg, S.A. in 1999.
years. Any decision to declare and pay dividends in the future will be made at the discretion of our Board of Directors, after taking into account our financial results, capital requirements and other factors it may deem relevant. Our Board of Directors may decide at any time to increase or decrease the amount of dividends or discontinue the payment of dividends based on these factors. The WWI Credit Facility also contains restrictions on our ability to pay dividends on our common stock.
On October 9, 2003, our Board of Directors authorized and we announced a program to repurchase up to $250.0 million of our outstanding common stock. On each of June 13, 2005, May 25, 2006 and October 21, 2010, our Board of Directors authorized and we announced adding $250.0 million to this 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, or Artal Holdings, and its parents and subsidiaries under the program. The repurchase program currently has no expiration date. During the ninethree months ended October 1,March 31, 2012, the Company repurchased no shares of its common stock in the open market under this program. The repurchase of shares of common stock under the Tender Offer and from Artal Holdings pursuant to the
Purchase Agreement, as discussed further below, was not made pursuant to the repurchase program. During the three months ended April 2, 2011, the Company repurchased in its first quarter 0.8 million shares of its common stock in the open market for a total cost of $31.6 million.
On February 23, 2012, we commenced a “modified Dutch auction” tender offer for up to $720.0 million in value of our common stock at a purchase price not less than $72.00 and not greater than $83.00 per share, or the Tender Offer. Prior to the Tender Offer, on February 14, 2012, we entered into an agreement, or the Purchase Agreement, with Artal Holdings whereby Artal Holdings agreed to sell to us, at the same price as was determined in the Tender Offer, such number of its second and third quarters no shares of itsour common stock. Duringstock that, upon the nine months ended October 2, 2010,closing of this purchase after the Company repurchasedcompletion of the Tender Offer, Artal Holdings’ percentage ownership in its first quarter nothe outstanding shares of itsour common stock would be substantially equal to its level prior to the Tender Offer. Artal Holdings also agreed not to participate in its second quarter 1.1the Tender Offer so that it would not affect the determination of the purchase price of the shares in the Tender Offer.
The Tender Offer expired at midnight, New York time, on March 22, 2012, and on March 28, 2012 we repurchased approximately 8.8 million shares at a purchase price of its common stock,$82.00 per share. On April 9, 2012, we repurchased approximately 9.5 million of Artal Holdings’ shares at a purchase price of $82.00 per share pursuant to the Purchase Agreement. In March 2012, we amended and in its third quarter 1.7 million shares of its common stock inextended the open market for a total cost of $79.7 million.WWI Credit Facility to finance these repurchases. See “—Long-Term Debt”.
The WWI Credit Facility provides that we are permitted to pay dividends and extraordinary dividends, as well as repurchase shares of our common stock, so long as we are not in default under the WWI Credit Facility agreement. However, payment of extraordinary dividends and stock repurchases shall not exceed $150.0 million in the aggregate in any fiscal year if net debt to EBITDA (as defined in the WWI Credit Facility agreement) is equal to or greater than 3.75:1 and an investment grade rating date (as defined in the WWI Credit Facility agreement) has not occurred. We currently do not expect this restriction to impair our ability to pay dividends or make stock repurchases, but it could do so in the future.
OFF-BALANCE SHEET TRANSACTIONS
As part of our ongoing business, we do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes, such as entities often referred to as structured finance or special purpose entities.
SEASONALITY
Our business is seasonal, with revenues generally decreasing at year end and during the summer months. Our operating income for the first half of the year is generally the strongest. Our advertising schedule supports the three key enrollment-generating seasons of the year: winter, spring and fall, with winter having the highest concentration of advertising spending. The timing of certain holidays, particularly Easter, which precedes the spring marketing campaign and occurs between March 22 and April 25, may affect our results of operations and the year-to-year comparability of our results. For example, in fiscal 2009, Easter fell on April 12, which means that our spring marketing campaign began in the second quarter of fiscal 2009 as opposed to beginning in the first
quarter as it did in fiscal 2008. The introduction of Monthly Pass in the meetings business has resulted in less seasonality with regards to our meeting fee revenues because its revenues are amortized over the related subscription period. Our operating income for the first half of the year is generally the strongest. While WeightWatchers.com experiences seasonality similar seasonalityto the meetings business in terms of new subscriber sign-ups, its revenue tends to be less seasonal because it amortizes subscription revenue over the related subscription period.
AVAILABLE INFORMATION
Corporate information and our press releases, Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and amendments thereto, are available free of charge on our website at www.weightwatchersinternational.com as soon as reasonably practicable after such
material is electronically filed with or furnished to the Securities and Exchange Commission (i.e., generally the same day as the filing). Moreover, we also make available at that site the Section 16 reports filed electronically by our officers, directors and 10 percent shareholders. Usually these are publicly accessible no later than the business day following the filing. We use our website at www.weightwatchersinternational.com as a channel of distribution of material Company information. Financial and other material information regarding the Company is routinely posted on and accessible at our website. Our website and the information posted on it or connected to it shall not be deemed to be incorporated herein by reference.
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
The market risk disclosures appearing in “Item 7A. Quantitative and Qualitative Disclosures about Market Risk” of our Annual Report on Form 10-K for fiscal 20102011 have not materially changed from January 1,December 31, 2011.
Based on the amount of our variable rate debt and interest swap agreements as of October 1, 2011,March 31, 2012, a hypothetical 50 basis point increase or decrease in interest rates on our variable rate debt would increase or decrease our annual interest expense by approximately $1.3$5.0 million.
ITEM 4. | CONTROLS AND PROCEDURES |
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and interim principal financial officer, as appropriate, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Our management, with the participation of our principal executive officer and interim principal financial officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation and subject to the foregoing, our principal executive officer and interim principal financial officer concluded that the design and operation of our disclosure controls and procedures are effective at the reasonable assurance level.
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting that occurred during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 1. | LEGAL PROCEEDINGS |
UK Self-Employment Matter
In July 2007, Her Majesty’s Revenue and Customs, or HMRC, issued to us notices of determination and decisions that, for the period April 2001 to April 2007, our leaders and certain other service providers in the United Kingdom should have been classified as employees for tax purposes and, as such, we should have withheld tax from the leaders and certain other service providers pursuant to the “Pay As You Earn,” or PAYE, and national insurance contributions, or NIC, collection rules and remitted such amounts to HMRC. HMRC also issued a claim to us in October 2008 in respect of NIC which corresponds to the prior notices of assessment with respect to PAYE previously raised by HMRC.
In September 2007, we appealed to the UK First Tier Tribunal (Tax Chamber) (formerly known as the UK VAT and Duties Tribunal), or the First Tier Tribunal, HMRC’s notices as to these classifications and against any amount of PAYE and NIC liability claimed to be owed by us. In February 2010, the First
Tier Tribunal issued a ruling that our UK leaders should have been classified as employees for UK tax purposes and, as such, we should have withheld tax from our leaders pursuant to the PAYE and NIC collection rules for the period from April 2001 to April 2007 with respect to services performed by the leaders for us. We appealed the First Tier Tribunal’s adverse ruling to the UK Upper Tribunal (Tax and Chancery Chamber), or the Upper Tribunal, and in October 2011, the Upper Tribunal issued a ruling dismissing our appeal. We are considering allIn January 2012, we sought permission from the UK Court of our options in light ofAppeal to appeal the Upper Tribunal’s ruling, dismissingwhich the UK Court of Appeal refused in March 2012. In March 2012, we applied to the UK Court of Appeal for an oral hearing to seek permission to appeal to the UK Upper Tribunal, which was granted in April 2012 and will be held in June 2012.
In December 2011, HMRC’s claim in respect of NIC was amended to increase the claimed amount for the period April 2002 to April 2007 and include the interest accrued thereon through December 2011. In addition, in February 2012, HMRC asserted a claim in respect of PAYE for the period April 2007 to April 2011 similar to what it had claimed for the period April 2001 to April 2007. We are currently appealing this PAYE claim with the First Tier Tribunal and the First Tier Tribunal has directed that the appeal be stayed until following the decision of the UK Court of Appeal with respect to our appeal.appeal of the UK Upper Tribunal’s ruling.
In light of the First Tier Tribunal’s adverse ruling and in accordance with accounting guidance for contingencies, we recorded in the fourth quarter of fiscal 2009 a reserve for the period from April 2001 through the end of fiscal 2009, inclusive of estimated accrued interest. On a quarterly basis, beginning in the first quarter of fiscal 2010 and through the second quarter of fiscal 2011, we recorded a reserve for UK withholding taxes with respect to our UK leaders consistent with this ruling. The reserve at the end of the second quarter of fiscal 2011 equaled approximately $43.8$43.7 million in the aggregate based on the exchange rates at the end of the third quarter of fiscal 2011. As of the beginning of the third quarter of fiscal 2011, we employ our UK leaders and therefore have ceased recording any further reserves.
Sabatino v. Weight Watchers North America, Inc.
In September 2009, a lawsuit was filed in the Superior Court of California by one of our former leaders alleging violations of certain California wage and hour laws on behalf of herself, and, if approved by the court, other leaders and those employees who have performed the location coordinator function in California since September 17, 2005. In this matter, the plaintiff sought unpaid wages and certain other damages. In October 2009, we answered the complaint and removed the case to the U.S. District Court for the Northern District of California, or the Federal Court. In July 2010, the plaintiff filed an amended complaint adding two additional named plaintiffsreserves for this matter. In October 2010, the parties engaged in mediation and reached an agreement in principle to settle this matter in its entirety and, accordingly,addition, we recorded a reserve with respect to this matter of $6.5 million. In May 2011, the parties received the Federal Court’s final approval of the settlement and we made paymentsdo not currently expect additional reserves will be required in connection with the settlementDecember 2011 amended NIC claim and the February 2012 PAYE claim by HMRC, as reserves had previously been made for these amounts. In February 2012, we paid HMRC, on a without prejudice basis, a portion of the amount previously reserved equal to approximately $6.4$30.0 million based on the exchange rates at the payment date for estimated amounts claimed to be owed by us with respect to PAYE and interest thereon for the period April 2001 to July 2011. The reserve at the end of the first quarter of fiscal 2012 equaled approximately $13.7 million in the aggregate inbased on the secondexchange rates at the end of the first quarter of fiscal 2011.2012.
Hanson-Kelly & Jackson v. Weight Watchers North America, Inc. and Weight Watchers International, Inc.
In January 2010, a lawsuit was filed in the U.S. District Court for the Middle District of North Carolina by two leaders alleging violations of certain federal and North Carolina wage and hour laws on behalf of themselves, and, if approved by the court, other leaders and receptionists in North Carolina since January 25, 2007. In this matter, the plaintiffs are seekingsought unpaid wages and certain other damages. In April 2010, we filed a Motion to Dismiss the claim for unpaid wages under the North Carolina wage
and hour laws. In February 2012, the parties engaged in mediation and reached an agreement in principle to resolve the case for a de minimis amount. The court has not ruled yet on this Motion. Although we disagreeapproved the settlement agreement negotiated by the parties, and the case was dismissed with the allegations that we have violated federal and North Carolina wage and hour laws and we believe we have valid defenses with respect to this matter, litigation is inherently unpredictable. At this time, it is not possible to determine the outcome of, or estimate the liability related to, this action and we have not made any provision for lossesprejudice in connection with it.April 2012.
Other Litigation Matters
Due to the nature of our activities, we are also, at times, subject to pending and threatened legal actions that arise out of the ordinary course of business. In the opinion of management, based in part upon advice of legal counsel, the disposition of any such matters is not expected to have a material effect on our results of operations, financial condition or cash flows. However, the results of legal actions cannot be predicted with certainty. Therefore, it is possible that our results of operations, financial condition or cash flows could be materially adversely affected in any particular period by the unfavorable resolutions of one or more legal actions.
ITEM 1A. | RISK FACTORS |
There have been no material changes in the risk factors from those detailed in our Annual Report on Form 10-K for fiscal 2010.2011.
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
NothingThis table provides certain information with respect to report under this item.our purchases of shares of Weight Watchers International, Inc.’s common stock during the first quarter of fiscal 2012:
Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs | |||||||||||||
January 1 – February 4 | — | $ | — | — | $ | 208,933,489 | (1) | |||||||||
February 5 – March 3 | — | $ | — | — | $ | 1,708,933,489 | (2) | |||||||||
March 4 – March 31 | 8,780,485 | (3) | $ | 82.00 | 8,780,485 | (3) | $ | 987,835,417 | (4) | |||||||
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Total | 8,780,485 | $ | 82.00 | 8,780,485 | ||||||||||||
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(1) | Reflects the approximate dollar value of shares that may yet be purchased under our previously announced repurchase program. For a discussion of our repurchase program, see Note 6 to the Unaudited Consolidated Financial Statements. We made no stock repurchases under this program during the quarter ended March 31, 2012. |
(2) | Reflects (i) the approximate dollar value of shares that may yet be purchased under our previously announced repurchase program and (ii) the plan we announced on February 14, 2012, to launch a “modified Dutch auction” tender offer and related share repurchase from Artal Holdings pursuant to which our Board of Directors authorized us to repurchase up to $1,500.0 million in value of our common stock. See “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources-Dividends and Stock Transactions” for additional details. |
(3) | On February 23, 2012, we commenced the tender offer in which we sought to acquire up to $720.0 million in value of our common stock at a purchase price not greater than $83.00 nor less than $72.00 per share. The tender offer expired at midnight New York City time on March 22, 2012 and in connection therewith, on March 28, 2012, we repurchased 8,780,485 shares of our common stock at a price of $82.00 per share. |
(4) | Reflects (i) the approximate dollar value of shares that may yet be purchased under our previously announced repurchase program and (ii) the dollar value of 9,498,804 shares of our common stock that we repurchased from Artal Holdings on April 9, 2012 at a price of $82.00 per share pursuant to the agreement we entered into with Artal Holdings in connection with the tender offer described above. |
ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
Nothing to report under this item.
ITEM 4. |
Not applicable.
ITEM 5. | OTHER INFORMATION |
Nothing to report under this item.
ITEM | EXHIBITS |
Exhibit | Description | |
Stock Purchase Agreement, dated as of February 14, 2012, by and between Weight Watchers International, Inc. and Artal Holdings Sp. z o.o., Succursale de Luxembourg (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K, as filed on February 16, 2012 (File No. 001-16769), and incorporated herein by reference). | ||
Exhibit 10.2 | Amendment Agreement, dated as of March 15, 2012, among Weight Watchers International, Inc., the guarantors party thereto, the lenders party thereto, JPMorgan Chase Bank, N.A. and Credit Suisse Securities (USA) LLC, as syndication agents, J.P. Morgan Securities LLC, Credit Suisse Securities (USA) LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated and The Bank of Nova Scotia, as joint lead arrangers and joint bookrunners, JPMorgan Chase Bank, N.A., as an issuer, and The Bank of Nova Scotia, as administrative agent for the lenders, as swing line lender and as an issuer, relating to the Seventh Amended and Restated Credit Agreement dated as of March 15, 2012, attached as Annex A thereto. | |
Exhibit 31.1 | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
Certification pursuant to 18 U.S.C. Section 1350. | ||
Exhibit 101 | ||
EX-101.INS EX-101.SCH EX-101.CAL EX-101.DEF EX-101.LAB EX-101.PRE | XBRL Instance Document XBRL Taxonomy Extension Schema XBRL Taxonomy Extension Calculation Linkbase XBRL Taxonomy Extension Definition Linkbase XBRL Taxonomy Extension Label Linkbase XBRL Taxonomy Extension Presentation Linkbase |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
WEIGHT WATCHERS INTERNATIONAL, INC. | ||||
Date: | By: | /s/ David P. Kirchhoff | ||
David P. Kirchhoff | ||||
President, Chief Executive Officer and Director | ||||
(Principal Executive | ||||
| ||||
Exhibit | Description | |
Exhibit 10.1 | Stock Purchase Agreement, dated as of February 14, 2012, by and between Weight Watchers International, Inc. and Artal Holdings Sp. z o.o., Succursale de Luxembourg (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K, as filed on February 16, 2012 (File No. 001-16769), and incorporated herein by reference). | |
Exhibit 10.2 | Amendment Agreement, dated as of March 15, 2012, among Weight Watchers International, Inc., the guarantors party thereto, the lenders party thereto, JPMorgan Chase Bank, N.A. and Credit Suisse Securities (USA) LLC, as syndication agents, J.P. Morgan Securities LLC, Credit Suisse Securities (USA) LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated and The Bank of Nova Scotia, as joint lead arrangers and joint bookrunners, JPMorgan Chase Bank, N.A., as an issuer, and The Bank of Nova Scotia, as administrative agent for the lenders, as swing line lender and as an issuer, relating to the Seventh Amended and Restated Credit Agreement dated as of March 15, 2012, attached as Annex A thereto. | |
Exhibit 31.1 | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
Exhibit 32.1 | Certification pursuant to 18 U.S.C. Section 1350. | |
Exhibit 101 | ||
EX-101.INS EX-101.SCH EX-101.CAL EX-101.DEF EX-101.LAB EX-101.PRE | XBRL Instance Document XBRL Taxonomy Extension Schema XBRL Taxonomy Extension Calculation Linkbase XBRL Taxonomy Extension Definition Linkbase XBRL Taxonomy Extension Label Linkbase XBRL Taxonomy Extension Presentation Linkbase |