wtw-10q_20170701.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 1, 2017

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.)

675 Avenue of the Americas, 6th 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      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      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

 

 

 

 

 

 

 

Non-accelerated filer

 

 (Do not check if a smaller reporting company)

Smaller reporting company

 

 

 

 

 

 

 

 

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

The number of shares of common stock outstanding as of July 26, 2017 was 64,391,084.

 

 

 

 


 

WEIGHT WATCHERS INTERNATIONAL, INC.

TABLE OF CONTENTS

 

 

 

 

Page No.

 

 

 

PART I—FINANCIAL INFORMATION

 

 

 

 

 

 

Item 1.

Financial Statements

 

2

 

 

 

 

 

Unaudited Consolidated Balance Sheets at July 1, 2017 and December 31, 2016

 

2

 

 

 

 

 

Unaudited Consolidated Statements of Net Income for the three and six months ended July 1, 2017 and July 2, 2016

 

3

 

 

 

 

 

Unaudited Consolidated Statements of Comprehensive Income for the three and six months ended July 1, 2017 and July 2, 2016

 

4

 

 

 

 

 

Unaudited Consolidated Statements of Cash Flows for the six months ended July 1, 2017 and July 2, 2016

 

5

 

 

 

 

 

Notes to Unaudited Consolidated Financial Statements

 

6

 

 

 

Cautionary Notice Regarding Forward-Looking Statements

 

20

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

21

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

39

 

 

 

 

Item 4.

Controls and Procedures

 

39

 

 

 

PART II—OTHER INFORMATION

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

39

 

 

 

 

Item 1A.

Risk Factors

 

40

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

40

 

 

 

 

Item 3.

Defaults Upon Senior Securities

 

40

 

 

 

 

Item 4.

Mine Safety Disclosures

 

40

 

 

 

 

Item 5.

Other Information

 

40

 

 

 

 

Item 6.

Exhibits

 

41

 

 

 

Signatures

 

42

 

 

 

Exhibit Index

 

43

 

 

 

 


 

PART I—FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED BALANCE SHEETS AT

(IN THOUSANDS)

 

 

 

July 1,

2017

 

 

December 31,

2016

 

ASSETS

 

 

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

104,485

 

 

$

108,656

 

Receivables (net of allowances: July 1, 2017  - $2,029  and

   December 31, 2016 - $2,973)

 

 

25,221

 

 

 

27,518

 

Inventories

 

 

22,948

 

 

 

32,629

 

Prepaid income taxes

 

 

38,706

 

 

 

35,528

 

Prepaid expenses and other current assets

 

 

23,497

 

 

 

30,880

 

TOTAL CURRENT ASSETS

 

 

214,857

 

 

 

235,211

 

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

47,832

 

 

 

49,574

 

Franchise rights acquired

 

 

752,169

 

 

 

748,619

 

Goodwill

 

 

167,912

 

 

 

166,138

 

Trademarks and other intangible assets, net

 

 

51,899

 

 

 

58,612

 

Other noncurrent assets

 

 

12,651

 

 

 

12,822

 

TOTAL ASSETS

 

$

1,247,320

 

 

$

1,270,976

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND TOTAL DEFICIT

 

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

 

 

 

Portion of long-term debt due within one year

 

$

20,213

 

 

$

21,000

 

Accounts payable

 

 

20,190

 

 

 

40,639

 

Salaries and wages payable

 

 

47,792

 

 

 

49,638

 

Accrued marketing and advertising

 

 

7,321

 

 

 

18,067

 

Accrued interest

 

 

15,618

 

 

 

16,939

 

Other accrued liabilities

 

 

49,389

 

 

 

51,251

 

Derivative payable

 

 

25,702

 

 

 

31,974

 

Deferred revenue

 

 

86,597

 

 

 

62,880

 

TOTAL CURRENT LIABILITIES

 

 

272,822

 

 

 

292,388

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

 

1,899,699

 

 

 

1,981,299

 

Deferred income taxes

 

 

188,638

 

 

 

175,115

 

Other

 

 

24,818

 

 

 

25,048

 

TOTAL LIABILITIES

 

 

2,385,977

 

 

 

2,473,850

 

 

 

 

 

 

 

 

 

 

Redeemable noncontrolling interest

 

 

4,575

 

 

 

4,699

 

 

 

 

 

 

 

 

 

 

TOTAL DEFICIT

 

 

 

 

 

 

 

 

Common stock, $0 par value; 1,000,000 shares authorized;

   118,947 shares issued at July 1, 2017 and at

   December 31, 2016

 

 

0

 

 

 

0

 

 

 

 

 

 

 

 

 

 

Treasury stock, at cost, 54,568 shares at July 1, 2017 and

   55,021 shares at December 31, 2016

 

 

(3,220,433

)

 

 

(3,237,346

)

Retained earnings

 

 

2,097,931

 

 

 

2,056,893

 

Accumulated other comprehensive loss

 

 

(20,730

)

 

 

(27,120

)

TOTAL DEFICIT

 

 

(1,143,232

)

 

 

(1,207,573

)

TOTAL LIABILITIES AND TOTAL DEFICIT

 

$

1,247,320

 

 

$

1,270,976

 

 

The accompanying notes are an integral part of the consolidated financial statements.

2


 

WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF NET INCOME

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

July 1,

 

 

July 2,

 

 

July 1,

 

 

July 2,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Service revenues, net

 

$

283,001

 

 

$

251,550

 

 

$

544,477

 

 

$

495,318

 

Product sales and other, net

 

 

58,672

 

 

 

58,211

 

 

 

126,259

 

 

 

121,353

 

Revenues, net

 

 

341,673

 

 

 

309,761

 

 

 

670,736

 

 

 

616,671

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of services

 

 

120,325

 

 

 

119,758

 

 

 

245,210

 

 

 

244,430

 

Cost of product sales and other

 

 

32,335

 

 

 

28,955

 

 

 

72,416

 

 

 

61,520

 

Cost of revenues

 

 

152,660

 

 

 

148,713

 

 

 

317,626

 

 

 

305,950

 

Gross profit

 

 

189,013

 

 

 

161,048

 

 

 

353,110

 

 

 

310,721

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketing expenses

 

 

41,968

 

 

 

41,199

 

 

 

128,397

 

 

 

127,714

 

Selling, general and administrative expenses

 

 

50,839

 

 

 

46,118

 

 

 

98,273

 

 

 

95,720

 

Operating income

 

 

96,206

 

 

 

73,731

 

 

 

126,440

 

 

 

87,287

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

27,092

 

 

 

28,609

 

 

 

55,234

 

 

 

58,634

 

Other (income) expense, net

 

 

(488

)

 

 

607

 

 

 

154

 

 

 

542

 

Gain on early extinguishment of debt

 

 

(1,554

)

 

 

0

 

 

 

(1,554

)

 

 

0

 

Income before income taxes

 

 

71,156

 

 

 

44,515

 

 

 

72,606

 

 

 

28,111

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

 

25,992

 

 

 

14,034

 

 

 

16,864

 

 

 

8,431

 

Net income

 

 

45,164

 

 

 

30,481

 

 

 

55,742

 

 

 

19,680

 

Net loss attributable to the noncontrolling interest

 

 

9

 

 

 

13

 

 

 

83

 

 

 

61

 

Net income attributable to Weight Watchers International, Inc.

 

$

45,173

 

 

$

30,494

 

 

$

55,825

 

 

$

19,741

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings Per Share attributable to Weight Watchers International, Inc.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.70

 

 

$

0.48

 

 

$

0.87

 

 

$

0.31

 

Diluted

 

$

0.67

 

 

$

0.46

 

 

$

0.83

 

 

$

0.30

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

64,269

 

 

 

63,740

 

 

 

64,124

 

 

 

63,644

 

Diluted

 

 

67,737

 

 

 

65,934

 

 

 

67,304

 

 

 

65,890

 

 

The accompanying notes are an integral part of the consolidated financial statements.

3


 

WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(IN THOUSANDS)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

July 1,

 

 

July 2,

 

 

July 1,

 

 

July 2,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Net income

 

$

45,164

 

 

$

30,481

 

 

$

55,742

 

 

$

19,680

 

Other comprehensive gain (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation gain

 

 

2,630

 

 

 

1,742

 

 

$

6,031

 

 

 

11,661

 

Income tax expense on foreign currency translation gain

 

 

(1,026

)

 

 

(680

)

 

 

(2,352

)

 

 

(4,518

)

Foreign currency translation gain, net of taxes

 

 

1,604

 

 

 

1,062

 

 

 

3,679

 

 

 

7,143

 

(Loss) gain on derivatives

 

 

(1,136

)

 

 

(3,849

)

 

 

4,377

 

 

 

(18,117

)

Income tax benefit (expense) on (loss) gain on derivatives

 

 

443

 

 

 

1,501

 

 

 

(1,707

)

 

 

7,036

 

(Loss) gain on derivatives, net of taxes

 

 

(693

)

 

 

(2,348

)

 

 

2,670

 

 

 

(11,081

)

Total other comprehensive gain (loss)

 

 

911

 

 

 

(1,286

)

 

 

6,349

 

 

 

(3,938

)

Comprehensive income

 

 

46,075

 

 

 

29,195

 

 

 

62,091

 

 

 

15,742

 

Less: Net loss attributable to the noncontrolling interest

 

 

9

 

 

 

13

 

 

 

83

 

 

 

61

 

Less: Foreign currency translation loss (gain), net of taxes

   attributable to the noncontrolling interest

 

 

146

 

 

 

(228

)

 

 

41

 

 

 

(470

)

Comprehensive loss (income) attributable to the noncontrolling interest

 

 

155

 

 

 

(215

)

 

 

124

 

 

 

(409

)

Comprehensive income attributable to Weight Watchers International, Inc.

 

$

46,230

 

 

$

28,980

 

 

$

62,215

 

 

$

15,333

 

 

The accompanying notes are an integral part of the consolidated financial statements.

4


 

WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

 

 

 

Six Months Ended

 

 

 

July 1,

 

 

July 2,

 

 

 

2017

 

 

2016

 

Operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

55,742

 

 

$

19,680

 

Adjustments to reconcile net income  to cash

   provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

25,554

 

 

 

25,777

 

Amortization of deferred financing costs

 

 

2,861

 

 

 

3,146

 

Impairment of intangible and long-lived assets

 

 

60

 

 

 

93

 

Write-off of net assets due to cessation of Spain operations

 

 

70

 

 

 

0

 

Share-based compensation expense

 

 

4,817

 

 

 

4,947

 

Deferred tax provision

 

 

10,331

 

 

 

784

 

Allowance for doubtful accounts

 

 

(857

)

 

 

(471

)

Reserve for inventory obsolescence

 

 

4,962

 

 

 

2,496

 

Foreign currency exchange rate loss

 

 

150

 

 

 

445

 

Gain on early extinguishment of debt

 

 

(1,802

)

 

0

 

Changes in cash due to:

 

 

 

 

 

 

 

 

Receivables

 

 

3,490

 

 

 

(155

)

Inventories

 

 

5,887

 

 

 

(3,296

)

Prepaid expenses

 

 

4,338

 

 

 

8,919

 

Accounts payable

 

 

(19,727

)

 

 

(7,080

)

Accrued liabilities

 

 

(28,575

)

 

 

(22,747

)

Deferred revenue

 

 

21,847

 

 

 

12,921

 

Other long term assets and liabilities, net

 

 

144

 

 

 

(498

)

Income taxes

 

 

8,823

 

 

 

1,405

 

Cash provided by operating activities

 

 

98,115

 

 

 

46,366

 

 

 

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(5,614

)

 

 

(1,693

)

Capitalized software expenditures

 

 

(13,419

)

 

 

(15,185

)

Cash paid for acquisitions

 

 

0

 

 

 

(2,898

)

Other items, net

 

 

(86

)

 

 

(88

)

Cash used for investing activities

 

 

(19,119

)

 

 

(19,864

)

 

 

 

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

 

 

 

Payments on long-term debt

 

 

(83,334

)

 

 

(154,823

)

Taxes paid related to net share settlement of equity awards

 

 

(3,648

)

 

 

0

 

Excess tax benefit of share-based compensation

 

 

0

 

 

 

945

 

Proceeds from stock options exercised

 

 

1,258

 

 

 

10

 

Payment of dividends

 

 

0

 

 

 

(10

)

Cash used for financing activities

 

 

(85,724

)

 

 

(153,878

)

Effect of exchange rate changes on cash and cash equivalents

 

 

2,557

 

 

 

348

 

Net decrease in cash and cash equivalents

 

 

(4,171

)

 

 

(127,028

)

Cash and cash equivalents, beginning of period

 

 

108,656

 

 

 

241,526

 

Cash and cash equivalents, end of period

 

$

104,485

 

 

$

114,498

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

 

5


 

WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(IN THOUSANDS, EXCEPT PER SHARE AND PER UNIT AMOUNTS)

1.

Basis of Presentation

The accompanying consolidated financial statements include the accounts of Weight Watchers International, Inc. and all of its subsidiaries. The terms “Company” and “WWI” as used throughout these notes is used to indicate Weight Watchers International, Inc. and all of its operations consolidated for purposes of its financial statements. The Company’s “meetings” business refers to providing access to meetings to the Company’s monthly commitment plan subscribers, “pay-as-you-go” members, Total Access subscribers and other meetings members. “Online” refers to Weight Watchers Online, Weight Watchers OnlinePlus, Personal Coaching and other digital subscription products.

The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and include amounts that are based on management’s best estimates and judgments. While all available information has been considered, actual amounts could differ from those estimates. The consolidated financial statements include all of the Company’s majority-owned subsidiaries. All entities acquired, and any entity of which a majority interest was acquired, are included in the consolidated financial statements from the date of acquisition. All intercompany accounts and transactions have been eliminated in consolidation. The Company’s operating results for any interim period are not necessarily indicative of future or annual results. The consolidated financial statements are unaudited and, accordingly, they do not include all of the information necessary for a comprehensive presentation of results of operations, financial position and cash flow activity required by GAAP for complete financial statements but, in the opinion of management, reflect all adjustments including those of a normal recurring nature necessary for a fair statement of the interim results presented.

These statements should be read in conjunction with the Company’s Annual Report on Form 10-K for fiscal 2016 filed on March 1, 2017, which includes additional information about the Company, its results of operations, its financial position and its cash flows.

2.

Recently Issued Accounting Standards

In February 2016, the Financial Accounting Standards Board (the “FASB”) issued updated guidance regarding leases, requiring lessees to recognize a right-of-use asset and a lease liability on the balance sheet for all leases with the exception of short-term leases. For lessees, leases will continue to be classified as either operating or finance leases in the income statement. Lessor accounting is similar to the current model but will be updated to align with certain changes to the lessee model. Lessors will continue to classify leases as operating, direct financing or sales-type leases. The effective date of the new guidance for public companies is for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption is permitted. The new guidance must be adopted using a modified retrospective transition and requires application of the new guidance at the beginning of the earliest comparative period presented. The updated guidance is effective for the Company beginning in the first quarter of fiscal 2019. The Company is currently evaluating the impact that the adoption of this guidance will have on the consolidated financial statements and related disclosures of the Company.

In March 2016, the FASB issued updated guidance on revenue from contracts with customers, which is intended to clarify the implementation guidance on principal versus agent considerations. The amendments in this update do not change the core principle of the guidance, but are intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations by including indicators to assist an entity in determining whether it controls a specified good or service before it is transferred to the customer. In April 2016, the FASB issued updated guidance on revenue from contracts with customers, which is intended to clarify guidance related to identifying performance obligations and licensing implementation guidance contained in the new revenue recognition standard. In May 2016, the FASB issued updated guidance on revenue from contracts with customers, which is intended to provide narrow scope guidance and practical expedients contained in the new revenue standard. In December 2016, the FASB issued updated guidance on revenue from contracts with customers for technical corrections and improvements on narrow aspects within the original and amended guidance. The amendments in these updates are effective for annual periods beginning after December 15, 2017 and interim periods within those fiscal years, with early adoption permitted. The Company is in the process of evaluating the effect of adoption on the consolidated financial statements. The Company has developed an inventory of all revenue streams and has begun to assess the implications of adopting the new five step revenue model and reviewing key contracts. 

In January 2017, the FASB issued amended guidance to simplify the accounting for goodwill impairment. This guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Under the amended guidance, a goodwill impairment charge will now be recognized for the amount by which the carrying value of a reporting unit exceeds its fair value, not to exceed the carrying amount of goodwill. This guidance is effective for interim and annual periods

6


WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(IN THOUSANDS, EXCEPT PER SHARE AND PER UNIT AMOUNTS)

 

beginning after December 15, 2019, with early adoption permitted for any impairment tests performed after January 1, 2017. The Company is currently evaluating the impact that the adoption of this guidance will have on the consolidated financial statements and related disclosures of the Company.

For a discussion of the Company’s other significant accounting policies, see “Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements of the Company’s Annual Report on Form 10-K for fiscal 2016. For a discussion of accounting standards adopted in the current year, see Note 3.

3.

Accounting Standards Adopted in Current Year

In March 2016, the FASB issued updated guidance on stock compensation which is intended to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification of applicable income tax consequences on the statement of cash flows. This guidance requires recognition of excess tax benefits and shortfalls (resulting from an increase or decrease in the fair value of an award from grant date to the vesting date) in the provision for income taxes as a discrete item in the quarterly period in which they occur. In addition, these amounts will be classified as an operating activity in the consolidated statement of cash flows instead of as a financing activity. The amendments requiring recognition of excess tax benefits and tax shortfalls in the income statement must be applied prospectively (See Note 10), and entities may elect to apply the amendments related to the presentation of excess tax benefits on the statement of cash flows using either a prospective or retrospective transition method. In May 2017, the FASB issued updated guidance on stock compensation which is intended to clarify when changes to the terms and conditions to a share-based payment transaction requires modification accounting.

The company adopted this guidance during the first quarter of fiscal 2017. As required by the standard, the Company recognized prospectively any excess tax benefits in the consolidated statements of net income for the three and six months ended July 1, 2017 and applied the amendments relating to the presentation of excess tax benefits on the statement of cash flows using the prospective method. For the first six months ended July 2, 2016, the Company recorded $649 of excess tax benefits in equity. For the first six months ended July 2, 2016, the Company paid taxes of $1,875 related to net share settlement of equity awards.  As permitted under the guidance, the Company will continue to account for forfeitures in compensation cost by estimating the number of awards that are expected to vest.

In August 2016, the FASB issued updated guidance on the statement of cash flows presentation of certain transactions where diversity in practice exists. The Company adopted this guidance during the first quarter of 2017, which had no impact on the consolidated statement of cash flows.

In January 2017, the FASB issued updated guidance to assist Companies with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The Company early adopted this guidance during the first quarter of 2017. The adoption of this guidance had no impact on the consolidated financial statements.

4.

Winfrey Transaction

On October 18, 2015 (the “Agreement Date”), the Company entered into the following agreements with Oprah Winfrey: the Strategic Collaboration Agreement, the Winfrey Purchase Agreement (defined below), and the Winfrey Option Agreement (defined below). The transactions contemplated by these agreements are collectively referred to herein as the “Winfrey Transaction”. Details of the Strategic Collaboration Agreement, Winfrey Purchase Agreement and Winfrey Option Agreement are below. See Note 16 for related party transactions with Ms. Winfrey.

Strategic Collaboration Agreement

The Company and Ms. Winfrey granted each other certain intellectual property rights under the Strategic Collaboration Agreement. The agreement has an initial term of five years, with additional successive one-year renewal terms. During the term of this agreement, Ms. Winfrey will consult with the Company and participate in developing, planning, executing and enhancing the Weight Watchers program and related initiatives, and provide it with services in her discretion to promote the Company and its programs, products and services.

7


WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(IN THOUSANDS, EXCEPT PER SHARE AND PER UNIT AMOUNTS)

 

Winfrey Purchase Agreement

On October 19, 2015, pursuant to the Share Purchase Agreement between the Company and Ms. Winfrey (the “Winfrey Purchase Agreement”), the Company issued and sold to Ms. Winfrey an aggregate of 6,362 shares of the Company’s common stock (the “Purchased Shares”) at a price per share of $6.79 for an aggregate cash purchase price of $43,199. The Company recorded fees related to the issuance of the Purchased Shares totaling $2,315, of which $1,700 was recorded as a reduction of equity in the fourth quarter of fiscal 2015. The Purchased Shares are subject to certain demand registration rights and piggyback rights held by Ms. Winfrey under the Winfrey Purchase Agreement.

The Purchased Shares may not be transferred by Ms. Winfrey within the first two years of the Agreement Date, subject to certain limited exceptions. Thereafter, Ms. Winfrey may generally transfer up to 15% of the Purchased Shares prior to the third anniversary of the Agreement Date, up to 30% prior to the fourth anniversary of the Agreement Date and up to 60% prior to the fifth anniversary of the Agreement Date. On or after the fifth anniversary of the Agreement Date, Ms. Winfrey will be permitted to transfer all of the Purchased Shares. In the event that Ms. Winfrey proposes to transfer any Purchased Shares or Winfrey Option Shares (defined below), the Company will have (a) a right of first offer with respect to such shares if such transfer is (i) for 1% or more of the Company’s issued and outstanding common stock and is proposed to be made pursuant to Rule 144 under the Securities Act of 1933, as amended or (ii) proposed to be sold under a resale shelf registration statement or (b) a right of first refusal with respect to such shares if such transfer is (i) for 1% or more of the Company’s issued and outstanding common stock and is proposed to be made to a competitor of the Company or (ii) for 5% or more of the Company’s issued and outstanding common stock. Such transfer restrictions, right of first offer and right of first refusal terminate if Ms. Winfrey then has the right to be nominated as a director and has met certain eligibility requirements under the Winfrey Purchase Agreement, but is not elected as a director of the Company. If Ms. Winfrey is elected as a director of the Company, she shall receive compensation for her services as a director consistent with that of other non-executive directors of the Company. Such transfer restrictions also terminate if there is a change of control, including if another person (or group), other than Artal Luxembourg S.A. and Ms. Winfrey and their respective affiliates, acquires more than 50% of the total voting power of the Company.

Winfrey Option Agreement

In consideration of Ms. Winfrey entering into the Strategic Collaboration Agreement and the performance of her obligations thereunder, on the Agreement Date, the Company granted Ms. Winfrey a fully vested option (the “Winfrey Option”) to purchase 3,513 shares of common stock at an exercise price of $6.97 per share, which remains outstanding in full. The term sheet, and related terms and conditions, for the Winfrey Option are referred to herein as the “Winfrey Option Agreement”. Based on the Black Scholes option pricing method, the Company recorded $12,759 of compensation expense in the fourth quarter of fiscal 2015 for the Winfrey Option. At the date of the grant, the Company used a dividend yield of 0.0%, 63.88% volatility and a risk-free interest rate of 1.36%. Compensation expense is included as a component of selling, general and administrative expenses.

Subject to certain limited exceptions, shares of common stock issuable upon exercise of the Winfrey Option (the “Winfrey Option Shares”) generally could not be transferred by Ms. Winfrey within the first year of the Agreement Date. Ms. Winfrey generally may transfer up to 20% of the Winfrey Option Shares prior to the second anniversary of the Agreement Date, up to 40% prior to the third anniversary of the Agreement Date, up to 60% prior to the fourth anniversary of the Agreement Date and up to 80% prior to the fifth anniversary of the Agreement Date. On or after the fifth anniversary of the Agreement Date, Ms. Winfrey will be permitted to transfer all of the Winfrey Option Shares. Pursuant to the Winfrey Purchase Agreement, in the event that Ms. Winfrey proposes to transfer any Winfrey Option Shares, the Company will have a right of first offer or a right of first refusal with respect to such shares as described above. Such transfer restrictions terminate under the same director service and change of control circumstances that would result in the termination of the transfer restrictions relating to the Purchased Shares as described above.

5.

Acquisition of Franchisee

On June 27, 2016, the Company acquired substantially all of the assets of its franchisee for certain territories in South Florida, Weight Watchers of Greater Miami, Inc., for a purchase price of $3,250 (the “Miami Acquisition”). Payment was in the form of cash ($2,898) plus cash in reserves ($300) and assumed net liabilities of ($52). The total purchase price has been allocated to franchise rights acquired ($114), goodwill ($2,945) and customer relationship value ($191).  The acquisition of the franchisee has been accounted for under the purchase method of accounting and, accordingly, earnings of the acquired franchisee have been included in the consolidated operating results of the Company since the date of acquisition. The goodwill will be deductible for tax purposes.

8


WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(IN THOUSANDS, EXCEPT PER SHARE AND PER UNIT AMOUNTS)

 

6.

Franchise Rights Acquired, Goodwill and Other Intangible Assets

Franchise rights acquired are due to acquisitions of the Company’s franchised territories as well as the acquisition of franchise promotion agreements and other factors associated with the acquired franchise territories. For the six months ended July 1, 2017, the change in the carrying value of franchise rights acquired is due to the effect of exchange rate changes.

Goodwill primarily relates to the acquisition of the Company by H.J. Heinz Company in 1978, the acquisition of WeightWatchers.com, Inc. in 2005, the acquisitions of the Company’s franchised territories, the acquisitions of the majority interest in Vigilantes do Peso Marketing Ltda. (“VPM”) and of Knowplicity, Inc., d/b/a Wello, in fiscal 2014 and the acquisition of Weilos, Inc. in fiscal 2015. See Note 5 for additional information about acquisitions by the Company. For the six months ended July 1, 2017, the change in the carrying amount of goodwill is due to the effect of exchange rate changes as follows:

 

 

 

North

 

 

United

 

 

Continental

 

 

 

 

 

 

 

 

 

 

 

America

 

 

Kingdom

 

 

Europe

 

 

Other

 

 

Total

 

Balance as of December 31, 2016

 

$

137,543

 

 

$

1,145

 

 

$

6,884

 

 

$

20,566

 

 

$

166,138

 

Effect of exchange rate changes

 

 

1,554

 

 

 

63

 

 

 

573

 

 

 

(416

)

 

 

1,774

 

Balance as of July 1, 2017

 

$

139,097

 

 

$

1,208

 

 

$

7,457

 

 

$

20,150

 

 

$

167,912

 

 

The Company reviews goodwill and other indefinite-lived intangible assets, including franchise rights acquired with indefinite lives, for potential impairment on at least an annual basis or more often if events so require. The Company performed fair value impairment testing as of May 7, 2017 and May 8, 2016, each the first day of fiscal May, on its goodwill and other indefinite-lived intangible assets.

In performing its annual impairment analysis as of May 7, 2017, the Company determined that the carrying amounts of its goodwill reporting units and franchise rights acquired with indefinite lives units of account did not exceed their respective fair values and therefore, no impairment existed. For all reporting units, except for Brazil, there was significant headroom in the impairment analysis. Based on the results of this test for Brazil, the fair value of this reporting unit exceeded its carrying value by approximately 10%, and accordingly a relatively small change in the underlying assumptions would likely cause a change in the results of the impairment assessment and, as such, could result in an impairment of the goodwill related to Brazil, for which the carrying amount is $19,295.

When determining fair value, the Company utilizes various assumptions, including projections of future cash flows, growth rates and discount rates. A change in these underlying assumptions would cause a change in the results of the tests and, as such, could cause fair value to be less than the carrying amounts and result in an impairment of those assets. In the event such a result occurred, the Company would be required to record a corresponding charge, which would impact earnings. The Company would also be required to reduce the carrying amounts of the related assets on its balance sheet. The Company continues to evaluate these assumptions and believes that these assumptions are appropriate.

The following is a discussion of the goodwill and franchise rights acquired impairment analysis.

Goodwill

In performing the impairment analysis for goodwill, the fair value for the Company’s reporting units is estimated using a discounted cash flow approach. This approach involves projecting future cash flows attributable to the reporting unit and discounting those estimated cash flows using an appropriate discount rate. The estimated fair value is then compared to the carrying value of the reporting units. The Company has determined the appropriate reporting unit for purposes of assessing annual impairment to be the country for all reporting units. For all of the Company’s reporting units except for Brazil (see below), the Company estimated future cash flows by utilizing the historical debt-free cash flows (cash flows provided by operating activities less capital expenditures) attributable to that country and then applied expected future operating income growth rates for such country. The Company utilized operating income as the basis for measuring its potential growth because it believes it is the best indicator of the performance of its business. The Company then discounted the estimated future cash flows utilizing a discount rate which was calculated using the average cost of capital, which included the cost of equity and the cost of debt. The cost of equity was determined by combining a risk-free rate of return and a market risk premium for the Company’s peer group. The risk-free rate of return was determined based on the average rate of long-term U.S. Treasury securities. The market risk premium was determined by reviewing external market data. The cost of debt was determined by estimating the Company’s current borrowing rate.

9


WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(IN THOUSANDS, EXCEPT PER SHARE AND PER UNIT AMOUNTS)

 

As it relates to the impairment analysis for Brazil, the Company estimated future debt free cash flows in contemplation of its growth strategies for that market. In developing these projections, the Company considered the historical impact of similar growth strategies in other markets as well as the current market conditions in Brazil. The Company then discounted the estimated future cash flows utilizing a discount rate which was calculated using the average cost of capital, which included the cost of equity and the cost of debt. The cost of equity was determined by combining a risk-free rate of return and a market risk premium for the Company’s peer group. The risk-free rate of return was determined based on the average rate of long-term U.S. Treasury securities. The market risk premium was determined by reviewing external market data including the current economic conditions in Brazil and the country specific risk thereon. A further risk premium was included to reflect the risk associated with the rate of growth projected in the analysis. The cost of debt was determined by estimating the Company’s current borrowing rate.

Franchise Rights Acquired

Finite-lived franchise rights acquired are amortized over the remaining contractual period, which is generally less than one year.

In performing the impairment analysis for indefinite-lived franchise rights acquired, the fair value for franchise rights acquired is estimated using a discounted cash flow approach referred to as the hypothetical start-up approach for franchise rights related to the Company’s meetings business and a relief from royalty methodology for franchise rights related to the Company’s Online business. The aggregate estimated fair value for these rights is then compared to the carrying value of the unit of account for those franchise rights. The Company has determined the appropriate unit of account for purposes of assessing impairment to be the combination of the rights in the meetings and Online businesses in the country in which the acquisitions have occurred. In its hypothetical start-up approach analysis for fiscal 2017, the Company assumed that the year of maturity was reached after 7 years. Subsequent to the year of maturity, the Company estimated future cash flows for the meetings business in each country based on assumptions regarding revenue growth and operating income margins. The cash flows associated with the Online business were based on the expected Online revenue for such country and the application of a market-based royalty rate. The cash flows for the meetings and Online businesses were discounted utilizing rates consistent with those utilized in the goodwill impairment analysis.

The carrying values of finite-lived intangible assets as of July 1, 2017 and December 31, 2016 were as follows:

 

 

 

July 1, 2017

 

 

December 31, 2016

 

 

 

Gross

 

 

 

 

 

 

Gross

 

 

 

 

 

 

 

Carrying

 

 

Accumulated

 

 

Carrying

 

 

Accumulated

 

 

 

Amount

 

 

Amortization

 

 

Amount

 

 

Amortization

 

Capitalized software costs

 

$

130,789

 

 

$

110,338

 

 

$

126,737

 

 

$

101,316

 

Website development costs

 

 

128,808

 

 

 

98,145

 

 

 

119,971

 

 

 

87,736

 

Trademarks

 

 

11,145

 

 

 

10,745

 

 

 

11,092

 

 

 

10,647

 

Other

 

 

8,030

 

 

 

7,645

 

 

 

7,945

 

 

 

7,434

 

Trademarks and other intangible assets

 

$

278,772

 

 

$

226,873

 

 

$

265,745

 

 

$

207,133

 

Franchise rights acquired

 

 

4,528

 

 

 

4,528

 

 

 

4,551

 

 

 

4,551

 

Total finite-lived intangible assets

 

$

283,300

 

 

$

231,401

 

 

$

270,296

 

 

$

211,684

 

 

Aggregate amortization expense for finite-lived intangible assets was recorded in the amounts of $9,015 and $18,190 for the three and six months ended July 1, 2017, respectively. Aggregate amortization expense for finite-lived intangible assets was recorded in the amounts of $8,603 and $17,023 for the three and six months ended July 2, 2016, respectively. The franchise rights acquired related to the VPM acquisition were amortized ratably over a 2 year period. The franchise rights acquired related to the Miami Acquisition were amortized ratably over a 3 month period.

Estimated amortization expense of existing finite-lived intangible assets for the next five fiscal years and thereafter is as follows:

 

Remainder of fiscal 2017

 

$

17,528

 

Fiscal 2018

 

$

21,364

 

Fiscal 2019

 

$

10,195

 

Fiscal 2020

 

$

2,420

 

Fiscal 2021 and thereafter

 

$

392

 

 

10


WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(IN THOUSANDS, EXCEPT PER SHARE AND PER UNIT AMOUNTS)

 

7.

Long-Term Debt

The components of the Company’s long-term debt were as follows:

 

 

 

July 1, 2017

 

 

December 31, 2016

 

 

 

Principal

Balance

 

 

Effective Rate (1)

 

 

Principal

Balance

 

 

Effective Rate (1)

 

Revolving Facility due April 2, 2018

 

$

0

 

 

 

0.00

%

 

$

0

 

 

 

3.35

%

Tranche B-1 Term Facility due April 2, 2016

 

 

0

 

 

 

0.00

%

 

 

0

 

 

 

3.96

%

Tranche B-2 Term Facility due April 2, 2020

 

 

1,935,440

 

 

 

4.64

%

 

 

2,021,250

 

 

 

4.41

%

Total

 

 

1,935,440

 

 

 

4.64

%

 

 

2,021,250

 

 

 

4.38

%

Less: Current Portion

 

 

20,213

 

 

 

 

 

 

 

21,000

 

 

 

 

 

Unamortized Deferred Financing Costs

 

 

15,528

 

 

 

 

 

 

 

18,951

 

 

 

 

 

Total Long-Term Debt

 

$

1,899,699

 

 

 

 

 

 

$

1,981,299

 

 

 

 

 

 

(1)

Includes amortization of deferred financing costs. For fiscal 2016, the effective interest rate for the Revolving Facility and Tranche B-1 Term Facility was computed based on interest expense incurred over the period for which borrowings were outstanding.

The Company’s credit facilities at the end of the first quarter of fiscal 2013 consisted of the following term loan facilities and revolving credit facilities: a tranche B loan (“Term B Loan”), a tranche C loan (“Term C Loan”), a tranche D loan (“Term D Loan”), a tranche E loan (“Term E Loan”), a tranche F loan (“Term F Loan”), revolving credit facility A-1 (“Revolver A-1” ) and revolving credit facility A-2 (“Revolver A-2”).

On April 2, 2013, the Company refinanced its credit facilities pursuant to a new Credit Agreement (as amended, supplemented or otherwise modified, the “Credit Agreement”) among the Company, the lenders party thereto, JPMorgan Chase Bank, N.A., as administrative agent and an issuing bank, The Bank of Nova Scotia, as revolving agent, swingline lender and an issuing bank, and the other parties thereto. The Credit Agreement provides for (a) a revolving credit facility (including swing line loans and letters of credit) in an initial aggregate principal amount of $250,000 that will mature on April 2, 2018 (the “Revolving Facility”), (b) an initial term B-1 loan credit facility in an aggregate principal amount of $300,000 that matured on April 2, 2016 (the “Tranche B-1 Term Facility”) and (c) an initial term B-2 loan credit facility in an aggregate principal amount of $2,100,000 that will mature on April 2, 2020 (the “Tranche B-2 Term Facility”, and together with the Tranche B-1 Term Facility, the “Term Facilities”; the Term Facilities and Revolving Facility collectively, the “WWI Credit Facility”). In connection with this refinancing, the Company used the proceeds from borrowings under the Term Facilities to pay off a total of $2,399,904 of outstanding loans, consisting of $128,759 of Term B Loans, $110,602 of Term C Loans, $117,612 of Term D Loans, $1,125,044 of Term E Loans, $817,887 of Term F Loans, $21,247 of loans under the Revolver A-1 and $78,753 of loans under the Revolver A-2. Following the refinancing of a total of $2,399,904 of loans, at April 2, 2013, the Company had $2,400,000 debt outstanding under the Term Facilities and $248,848 of availability under the Revolving Facility. The Company incurred fees of $44,817 during the second quarter of fiscal 2013 in connection with this refinancing. In the second quarter of fiscal 2013, the Company wrote-off fees associated with this refinancing which resulted in the Company recording a charge of $21,685 in early extinguishment of debt.

On September 26, 2014, the Company and certain lenders entered into an agreement amending the Credit Agreement that, among other things, eliminated the Financial Covenant (as defined in the Credit Agreement) with respect to the Revolving Facility. In connection with this amendment, the Company wrote-off deferred financing fees of approximately $1,583 in the third quarter of fiscal 2014. Concurrently with and in order to effect this amendment, the Company reduced the amount of the Revolving Facility from $250,000 to $50,000.

Under the terms of the Credit Agreement, depending on the Company’s Consolidated Leverage Ratio (as defined in the Credit Agreement), on an annual basis on or about the time the Company is required to deliver its financial statements for any fiscal year, the Company is obligated to offer to prepay a portion of the outstanding principal amount of the Term Facilities in an aggregate amount determined by a percentage of its annual excess cash flow (as defined in the Credit Agreement). On March 13, 2015, the Company commenced an offer to prepay at a discount to par up to $75,000 in aggregate principal amount of term loans outstanding under the Tranche B-1 Term Facility. On March 20, 2015, the Company accepted offers with a discount equal to or greater than 9.00% in respect of such term loans. On March 25, 2015, the Company paid an aggregate amount of cash proceeds totaling $57,389 plus an amount sufficient to pay accrued and unpaid interest on the amount prepaid to prepay $63,065 in aggregate principal amount of such term loans under the Tranche B-1 Term Facility. This expenditure reduced, on a dollar for dollar basis, the Company’s

11


WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(IN THOUSANDS, EXCEPT PER SHARE AND PER UNIT AMOUNTS)

 

$59,728 obligation to make a mandatory excess cash flow prepayment offer to the term loan lenders under the terms of the Credit Agreement. In addition, the Company made a voluntary prepayment at par on March 25, 2015 of $2,500 in respect of such term loans under the Tranche B-1 Term Facility to reduce the remaining excess cash flow prepayment obligation for fiscal 2014. As a result of this prepayment, the Company wrote-off fees of $326, incurred fees of $601 and recorded a gain on early extinguishment of debt of $4,749, inclusive of these fees, in the first quarter of fiscal 2015.

On June 17, 2015, the Company commenced another offer to prepay at a discount to par up to $229,000 in aggregate principal amount of term loans outstanding under the Tranche B-1 Term Facility. On June 22, 2015, the Company accepted offers with a discount equal to or greater than 9.00% in respect of such term loans. On June 26, 2015, the Company paid an aggregate amount of cash proceeds totaling $77,225 plus an amount sufficient to pay accrued and unpaid interest on the amount prepaid to prepay $84,862 in aggregate principal amount of such term loans under the Tranche B-1 Term Facility. As a result of this prepayment, the Company wrote-off fees of $321, incurred fees of $641 and recorded a gain on early extinguishment of debt of $6,677, inclusive of these fees, in the second quarter of fiscal 2015.

On July 14, 2015, the Company drew down the $48,000 available on its Revolving Facility in order to enhance its cash position and to provide additional financial flexibility. As of January 2, 2016, the revolver borrowing was classified as a short-term liability in consideration of the fact that the terms of the Revolving Facility require an assessment as to whether there have been any material adverse changes with respect to the Company in connection with the Company’s monthly interest elections. Although the revolver borrowing was classified as a short-term liability as of January 2, 2016, absent any change in fact and circumstance, the Company had, and continues to have, the ability to extend and not repay the Revolving Facility until its due date of April 2, 2018.

On April 1, 2016, the Company paid in full, with cash on hand, a principal amount of term loans equal to $144,323, which constituted the entire remaining principal amount of term loans outstanding under the Tranche B-1 Term Facility due April 2, 2016.

On July 29, 2016, the Company paid down, with cash on hand, a principal amount of $25,000 of the $48,000 outstanding under its Revolving Facility. On September 16, 2016, the Company paid down, with cash on hand, the remaining outstanding principal amount of $23,000 on its Revolving Facility.

On May 18, 2017, the Company commenced another offer to prepay at a discount to par up to $75,000 in aggregate principal amount of term loans outstanding under the Tranche B-2 Term Facility. On May 24, 2017, the Company accepted offers with a discount equal to or greater than 3.28% in respect of such term loans. On May 25, 2017, the Company paid an aggregate amount of cash proceeds totaling $73,030 plus an amount sufficient to pay accrued and unpaid interest on the amount prepaid to prepay $75,507 in aggregate principal amount of such term loans under the Tranche B-2 Term Facility. As a result of this prepayment, the Company wrote-off fees of $618, incurred fees of $305 and recorded a gain on early extinguishment of debt of $1,554, inclusive of these fees, in the second quarter of fiscal 2017.

At July 1, 2017 under the WWI Credit Facility, the Company had $1,935,440 outstanding consisting entirely of a term loan under the Tranche B-2 Term Facility. At July 1, 2017, the Revolving Facility had $0 outstanding, $1,819 in issued but undrawn letters of credit outstanding thereunder and $48,181 in available unused commitments thereunder. The proceeds from borrowings under the Revolving Facility (including swing line loans and letters of credit) are available to be used for working capital and general corporate purposes.

Borrowings under the Credit Agreement bear interest at a rate equal to, at the Company’s option, LIBOR plus an applicable margin or a base rate plus an applicable margin. LIBOR under the Tranche B-2 Term Facility is subject to a minimum interest rate of 0.75% and the base rate under the Tranche B-2 Term Facility is subject to a minimum interest rate of 1.75%. Under the terms of the Credit Agreement, in the event the Company receives a corporate rating of BB- (or lower) from S&P and a corporate rating of Ba3 (or lower) from Moody’s, the applicable margin relating to the Term Facilities would increase by 25 basis points. On February 21, 2014, both S&P and Moody’s issued revised corporate ratings of the Company of B+ and B1, respectively. As a result, effective February 21, 2014, the applicable margin on borrowings under the Tranche B-1 Term Facility went from 2.75% to 3.00% and on borrowings under the Tranche B-2 Term Facility went from 3.00% to 3.25%. The applicable margin relating to the Revolving Facility will fluctuate depending upon the Company’s Consolidated Leverage Ratio. At April 1, 2016, the date of payment of the principal amount of loans outstanding under the Tranche B-1 Term Facility discussed above, borrowings under the Tranche B-1 Term Facility bore interest at LIBOR plus an applicable margin of 3.00%. At July 1, 2017, borrowings under the Tranche B-2 Term Facility bore interest at LIBOR plus an applicable margin of 3.25%. Based on the Company’s Consolidated Leverage Ratio as of July 1, 2017, had there been any borrowings under the Revolving Facility, it would have borne interest at LIBOR plus an applicable margin of 2.50%. On a quarterly basis, the Company will pay a commitment fee to the lenders under the Revolving Facility in respect of unutilized

12


WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(IN THOUSANDS, EXCEPT PER SHARE AND PER UNIT AMOUNTS)

 

commitments thereunder, which commitment fee will fluctuate depending upon the Company’s Consolidated Leverage Ratio. Based on the Company’s Consolidated Leverage Ratio as of July 1, 2017 and December 31, 2016, the commitment fee was 0.50% per annum. For the six months ended July 1, 2017 and the fiscal year ended December 31, 2016, the Company paid $122 and $31, respectively, in commitment fees. The Company also will pay customary letter of credit fees and fronting fees under the Revolving Facility, which totaled $24 for the six months ended July 1, 2017 and $49 for the fiscal year ended December 31, 2016.

The Credit Agreement contains customary covenants including covenants that, in certain circumstances, restrict the Company’s ability to incur additional indebtedness, pay dividends on and redeem capital stock, make other payments, including investments, sell its assets and enter into consolidations, mergers and transfers of all or substantially all of its assets. The WWI Credit Facility does not require the Company to meet any financial maintenance covenants and is guaranteed by certain of the Company’s existing and future subsidiaries. Substantially all of the Company’s assets secure the WWI Credit Facility.

At July 1, 2017 and December 31, 2016, the Company’s debt consisted entirely of variable-rate instruments. An interest rate swap was entered into to hedge a portion of the cash flow exposure associated with the Company’s variable-rate borrowings. The weighted average interest rate (which includes amortization of deferred financing costs) on the Company’s outstanding debt, exclusive of the impact of the swap, was approximately 4.64% and 4.41% per annum based on interest rates at July 1, 2017 and December 31, 2016, respectively. The weighted average interest rate (which includes amortization of deferred financing costs) on the Company’s outstanding debt, including the impact of the swap, was approximately 5.27% and 5.32% per annum based on interest rates at July 1, 2017 and December 31, 2016, respectively.

8.

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

 

 

Six Months Ended

 

 

 

July 1,

 

 

July 2,

 

 

July 1,

 

 

July 2,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weight Watchers International, Inc.

 

$

45,173

 

 

$

30,494

 

 

$

55,825

 

 

$

19,741

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares of common stock outstanding

 

 

64,269

 

 

 

63,740

 

 

 

64,124

 

 

 

63,644

 

Effect of dilutive common stock equivalents

 

 

3,468

 

 

 

2,194

 

 

 

3,180

 

 

 

2,246

 

Weighted average diluted common shares outstanding

 

 

67,737

 

 

 

65,934

 

 

 

67,304

 

 

 

65,890

 

Earnings per share attributable to Weight

   Watchers International, Inc.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.70

 

 

$

0.48

 

 

$

0.87

 

 

$

0.31

 

Diluted

 

$

0.67