ww-10q_20190330.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 March 30, 2019

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 every Interactive Data File required to be submitted 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 such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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

 

 

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  

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock

WW

The Nasdaq Stock Market LLC

 

The number of shares of common stock outstanding as of April 26, 2019 was 66,998,390.

 

 

 

 

 


 

 

WEIGHT WATCHERS INTERNATIONAL, INC.

TABLE OF CONTENTS

 

 

 

Page No.

 

 

 

PART I—FINANCIAL INFORMATION

 

 

 

 

 

 

Item 1.     

Financial Statements

 

2

 

 

 

 

 

Unaudited Consolidated Balance Sheets at March 30, 2019 and December 29, 2018

 

2

 

 

 

 

 

Unaudited Consolidated Statements of Net Income for the three months ended March 30, 2019 and March 31, 2018

 

3

 

 

 

 

 

Unaudited Consolidated Statements of Comprehensive Income for the three months ended March 30, 2019 and March 31, 2018

 

4

 

 

 

 

 

Unaudited Consolidated Statements of Changes in Total Deficit for the three months ended March 30, 2019 and    March 31, 2018

 

5

 

 

 

 

 

Unaudited Consolidated Statements of Cash Flows for the three months ended March 30, 2019 and March 31, 2018

 

6

 

 

 

 

 

Notes to Unaudited Consolidated Financial Statements

 

7

 

 

 

Cautionary Notice Regarding Forward-Looking Statements

 

23

 

 

 

 

Item 2.     

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

 

24

 

 

 

 

Item 3.     

Quantitative and Qualitative Disclosures About Market Risk

 

36

 

 

 

 

Item 4.     

Controls and Procedures

 

37

 

 

 

PART II—OTHER INFORMATION

 

 

 

 

 

 

Item 1.     

Legal Proceedings

 

38

 

 

 

 

Item 1A.     

Risk Factors

 

38

 

 

 

 

Item 2.     

Unregistered Sales of Equity Securities and Use of Proceeds

 

38

 

 

 

 

Item 3.     

Defaults Upon Senior Securities

 

38

 

 

 

 

Item 4.     

Mine Safety Disclosures

 

38

 

 

 

 

Item 5.     

Other Information

 

38

 

 

 

 

Item 6.     

Exhibits

 

39

 

 

 

Signatures

 

40

 

 

 

 


 

PART I—FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED BALANCE SHEETS AT

(IN THOUSANDS)

 

 

 

March 30,

 

 

December 29,

 

 

 

2019

 

 

2018

 

ASSETS

 

 

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

193,358

 

 

$

236,974

 

Receivables (net of allowances: March 30, 2019 - $1,601 and

   December 29, 2018 - $1,743)

 

 

32,104

 

 

 

27,247

 

Inventories

 

 

31,859

 

 

 

25,851

 

Prepaid income taxes

 

 

39,572

 

 

 

33,997

 

Prepaid expenses and other current assets

 

 

30,543

 

 

 

42,355

 

TOTAL CURRENT ASSETS

 

 

327,436

 

 

 

366,424

 

Property and equipment, net

 

 

51,843

 

 

 

52,202

 

Operating lease assets

 

 

148,447

 

 

 

0

 

Franchise rights acquired

 

 

752,638

 

 

 

751,134

 

Goodwill

 

 

153,172

 

 

 

152,519

 

Other intangible assets, net

 

 

57,864

 

 

 

57,162

 

Deferred income taxes

 

 

17,468

 

 

 

16,230

 

Other noncurrent assets

 

 

17,316

 

 

 

18,870

 

TOTAL ASSETS

 

$

1,526,184

 

 

$

1,414,541

 

LIABILITIES AND TOTAL DEFICIT

 

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

 

 

 

Portion of long-term debt due within one year

 

$

57,750

 

 

$

77,000

 

Portion of operating lease liabilities due within one year

 

 

36,125

 

 

 

0

 

Accounts payable

 

 

29,139

 

 

 

27,098

 

Salaries and wages payable

 

 

50,462

 

 

 

64,600

 

Accrued marketing and advertising

 

 

23,972

 

 

 

14,052

 

Accrued interest

 

 

35,912

 

 

 

28,651

 

Other accrued liabilities

 

 

46,599

 

 

 

48,218

 

Derivative payable

 

 

9,961

 

 

 

5,578

 

Income taxes payable

 

 

21,635

 

 

 

22,618

 

Deferred revenue

 

 

60,597

 

 

 

53,501

 

TOTAL CURRENT LIABILITIES

 

 

372,152

 

 

 

341,316

 

Long-term debt, net

 

 

1,651,952

 

 

 

1,669,708

 

Long-term operating lease liabilities

 

 

121,308

 

 

 

0

 

Deferred income taxes

 

 

189,226

 

 

 

190,258

 

Other

 

 

6,612

 

 

 

18,289

 

TOTAL LIABILITIES

 

 

2,341,250

 

 

 

2,219,571

 

 

 

 

 

 

 

 

 

 

Redeemable noncontrolling interest

 

 

3,868

 

 

 

3,913

 

TOTAL DEFICIT

 

 

 

 

 

 

 

 

Common stock, $0 par value; 1,000,000 shares authorized; 120,352

   shares issued at March 30, 2019 and December 29, 2018

 

 

0

 

 

 

0

 

Treasury stock, at cost, 53,375 shares at March 30, 2019 and 53,396 shares at

   December 29, 2018

 

 

(3,174,871

)

 

 

(3,175,624

)

Retained earnings

 

 

2,375,903

 

 

 

2,382,438

 

Accumulated other comprehensive loss

 

 

(19,966

)

 

 

(15,757

)

TOTAL DEFICIT

 

 

(818,934

)

 

 

(808,943

)

TOTAL LIABILITIES AND TOTAL DEFICIT

 

$

1,526,184

 

 

$

1,414,541

 

 

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

 

 

 

March 30,

 

 

March 31,

 

 

 

2019

 

 

2018

 

Service revenues, net

 

$

306,726

 

 

$

328,669

 

Product sales and other, net

 

 

56,438

 

 

 

79,554

 

Revenues, net

 

 

363,164

 

 

 

408,223

 

Cost of services

 

 

128,957

 

 

 

139,778

 

Cost of product sales and other

 

 

33,259

 

 

 

47,442

 

Cost of revenues

 

 

162,216

 

 

 

187,220

 

Gross profit

 

 

200,948

 

 

 

221,003

 

Marketing expenses

 

 

114,249

 

 

 

98,919

 

Selling, general and administrative expenses

 

 

64,802

 

 

 

60,011

 

Operating income

 

 

21,897

 

 

 

62,073

 

Interest expense

 

 

35,195

 

 

 

35,866

 

Other expense (income), net

 

 

303

 

 

 

(235

)

(Loss) income before income taxes

 

 

(13,601

)

 

 

26,442

 

Benefit from income taxes

 

 

(2,875

)

 

 

(12,617

)

Net (loss) income

 

 

(10,726

)

 

 

39,059

 

Net loss attributable to the noncontrolling interest

 

 

39

 

 

 

53

 

Net (loss) income attributable to Weight Watchers International, Inc.

 

$

(10,687

)

 

$

39,112

 

(Loss) Earnings Per Share attributable to Weight Watchers

   International, Inc.

 

 

 

 

 

 

 

 

Basic

 

$

(0.16

)

 

$

0.60

 

Diluted

 

$

(0.16

)

 

$

0.56

 

Weighted average common shares outstanding

 

 

 

 

 

 

 

 

Basic

 

 

66,964

 

 

 

65,123

 

Diluted

 

 

66,964

 

 

 

69,501

 

 

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

 

 

 

March 30,

 

 

March 31,

 

 

 

2019

 

 

2018

 

Net (loss) income

 

$

(10,726

)

 

$

39,059

 

Other comprehensive (loss) gain:

 

 

 

 

 

 

 

 

Foreign currency translation gain (loss)

 

 

1,714

 

 

 

(3,425

)

Income tax (expense) benefit on foreign currency translation

  gain (loss)

 

 

(435

)

 

 

868

 

Foreign currency translation gain (loss), net of taxes

 

 

1,279

 

 

 

(2,557

)

(Loss) gain on derivatives

 

 

(7,361

)

 

 

11,167

 

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

 

 

1,867

 

 

 

(2,832

)

(Loss) gain on derivatives, net of taxes

 

 

(5,494

)

 

 

8,335

 

Total other comprehensive (loss) gain

 

 

(4,215

)

 

 

5,778

 

Comprehensive (loss) income

 

 

(14,941

)

 

 

44,837

 

Net loss attributable to the noncontrolling interest

 

 

39

 

 

 

53

 

Foreign currency translation loss, net of taxes

   attributable to the noncontrolling interest

 

 

6

 

 

 

236

 

Comprehensive loss attributable to the noncontrolling

   interest

 

 

45

 

 

 

289

 

Comprehensive (loss) income attributable to Weight Watchers

   International, Inc.

 

$

(14,896

)

 

$

45,126

 

 

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

4


 

WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES

UNAUDITED Consolidated Statements of Changes in Total Deficit

(IN THOUSANDS)

 

 

 

 

 

 

 

 

Weight Watchers International, Inc.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

Redeemable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

Noncontrolling

 

 

 

Common Stock

 

 

Treasury Stock

 

 

Comprehensive

 

 

Retained

 

 

 

 

 

Three months ended March 30, 2019

Interest

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Loss

 

 

Earnings

 

Total

 

Balance at December 29, 2018

 

$

3,913

 

 

 

 

120,352

 

 

$

0

 

 

 

53,396

 

 

$

(3,175,624

)

 

$

(15,757

)

 

$

2,382,438

 

 

$

(808,943

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive Loss

 

 

(45

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,209

)

 

 

(10,687

)

 

 

(14,896

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of treasury stock under

   stock plans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(21

)

 

 

753

 

 

 

 

 

 

 

(660

)

 

 

93

 

Compensation expense on share-

   based awards

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,812

 

 

 

4,812

 

Balance at March 30, 2019

 

$

3,868

 

 

 

 

120,352

 

 

$

0

 

 

 

53,375

 

 

$

(3,174,871

)

 

$

(19,966

)

 

$

2,375,903

 

 

$

(818,934

)

 

 

 

 

 

 

 

 

Weight Watchers International, Inc.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

Redeemable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

Noncontrolling

 

 

 

Common Stock

 

 

Treasury Stock

 

 

Comprehensive

 

 

Retained

 

 

 

 

 

Three months ended March 31, 2018

Interest

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Loss

 

 

Earnings

 

Total

 

Balance at December 30, 2017

 

$

4,467

 

 

 

 

118,947

 

 

$

0

 

 

 

54,258

 

 

$

(3,208,836

)

 

$

(10,467

)

 

$

2,203,317

 

 

$

(1,015,986

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive Income

 

 

(289

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6,014

 

 

 

39,112

 

 

 

45,126

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of treasury stock under

   stock plans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(144

)

 

 

5,505

 

 

 

 

 

 

 

(2,447

)

 

 

3,058

 

Compensation expense on share-

   based awards

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,384

 

 

 

4,384

 

Issuance of common stock

 

 

 

 

 

 

 

1,405

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9,796

 

 

 

9,796

 

Cumulative effect of revenue accounting

   change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,933

 

 

 

2,933

 

Cumulative effect of tax accounting change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,485

)

 

 

(46,927

)

 

 

(49,412

)

Balance at March 31, 2018

 

$

4,178

 

 

 

 

120,352

 

 

$

0

 

 

 

54,114

 

 

$

(3,203,331

)

 

$

(6,938

)

 

$

2,210,168

 

 

$

(1,000,101

)

 

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

5


 

WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

 

 

 

Three Months Ended

 

 

 

March 30,

 

 

March 31,

 

 

 

2019

 

 

2018

 

Operating activities:

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(10,726

)

 

$

39,059

 

Adjustments to reconcile net (loss) income to cash

   provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

11,405

 

 

 

11,154

 

Amortization of deferred financing costs and debt discount

 

 

2,208

 

 

 

1,914

 

Share-based compensation expense

 

 

4,812

 

 

 

4,384

 

Deferred tax benefit

 

 

(433

)

 

 

(457

)

Allowance for doubtful accounts

 

 

(290

)

 

 

(49

)

Reserve for inventory obsolescence

 

 

2,243

 

 

 

6,423

 

Foreign currency exchange rate loss (gain)

 

 

173

 

 

 

(367

)

Changes in cash due to:

 

 

 

 

 

 

 

 

Receivables

 

 

(3,316

)

 

 

(5,562

)

Inventories

 

 

(8,059

)

 

 

1,241

 

Prepaid expenses

 

 

1,105

 

 

 

(15,088

)

Accounts payable

 

 

2,171

 

 

 

7,510

 

Accrued liabilities

 

 

(326

)

 

 

(2,175

)

Deferred revenue

 

 

6,925

 

 

 

22,932

 

Other long term assets and liabilities, net

 

 

272

 

 

 

(6,328

)

Income taxes

 

 

(940

)

 

 

8,868

 

Cash provided by operating activities

 

 

7,224

 

 

 

73,459

 

Investing activities:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(4,059

)

 

 

(1,753

)

Capitalized software expenditures

 

 

(7,167

)

 

 

(5,966

)

Other items, net

 

 

3

 

 

 

(24

)

Cash used for investing activities

 

 

(11,223

)

 

 

(7,743

)

Financing activities:

 

 

 

 

 

 

 

 

Net payments on revolver

 

 

0

 

 

 

(25,000

)

Payments on long-term debt

 

 

(38,500

)

 

 

(19,250

)

Taxes paid related to net share settlement of equity awards

 

 

(381

)

 

 

(2,128

)

Proceeds from stock options exercised

 

 

127

 

 

 

14,679

 

Other items, net

 

 

(80

)

 

 

0

 

Cash used for financing activities

 

 

(38,834

)

 

 

(31,699

)

Effect of exchange rate changes on cash and cash equivalents

 

 

(783

)

 

 

544

 

Net (decrease) increase in cash and cash equivalents

 

 

(43,616

)

 

 

34,561

 

Cash and cash equivalents, beginning of period

 

 

236,974

 

 

 

83,054

 

Cash and cash equivalents, end of period

 

$

193,358

 

 

$

117,615

 

 

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

 

 

 

6


 

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 “WW” as used throughout these notes are used to indicate Weight Watchers International, Inc. and all of its operations consolidated for purposes of its financial statements. The Company’s “Digital” business refers to providing subscriptions to the Company’s digital product offerings, including the Personal Coaching + Digital product.  The Company’s “Studio + Digital” business refers to providing access to the Company’s weekly in-person workshops combined with the Company’s digital subscription product offerings to commitment plan subscribers. The “Studio + Digital” business also includes the provision of access to workshops for members who do not subscribe to commitment plans, including the Company’s “pay-as-you-go” members.

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 2018 filed on February 26, 2019, which includes additional information about the Company, its results of operations, its financial position and its cash flows.

2.

Recently Issued Accounting Standards

For a discussion of the Company’s 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 2018. For a discussion of accounting standards adopted in the current period, see Note 3.

3.

Accounting Standards Adopted in Current Year

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. In July 2018, the FASB issued updated guidance by providing an entity with an additional and optional transition method to adopt the new lease guidance.  On December 30, 2018, the Company adopted the updated lease guidance on a modified retrospective basis as of the adoption date. Periods prior to the adoption date continue to be reported under the historical lease accounting guidance.  See Note 4 for further details.

 

4.

Leases  

 

Adoption of Lease Standard

On December 30, 2018, the Company adopted the updated guidance on leases using the modified retrospective transition method.  Results for reporting periods beginning on or after December 30, 2018 are presented under the updated guidance, while prior period amounts are not adjusted and continue to be reported in accordance with the Company’s historical lease accounting.

The adoption of the standard had a material impact on the Company’s consolidated balance sheets but did not have a material impact on its consolidated statements of net income. The Company recorded $158,773 as a right of use asset, $167,081 of lease

7


WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

 

liabilities and $0 for retained earnings for operating leases upon adoption of the updated guidance. The standard did not have a material impact on the Company’s finance lease contracts.  

A lease is defined as an arrangement that contractually specifies the right to use and control an identified asset for a specific period of time in exchange for consideration. Operating leases are included in operating lease assets, portion of operating lease liabilities due within one year, and long-term operating lease liabilities in the Company’s 2019 consolidated balance sheet. Finance leases are included in property and equipment, net, other accrued liabilities, and other long-term liabilities in the Company’s 2019 consolidated balance sheet.  Lease assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Lease assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term, using the Company’s incremental borrowing rate commensurate with the lease term, based on the information available at adoption of the updated guidance. The lease asset includes scheduled lease payments made and excludes lease incentives, such as free rent periods and tenant improvement allowances. The Company has certain leases that may include an option to renew and when it is reasonably probable to exercise such option, the Company will include the renewal option terms in determining the lease asset and lease liability. The Company does not have any renewal options that would have a material impact on the terms of the leases and that are also reasonably expected to be exercised at this time.  A lease may contain both fixed and variable payments. Variable lease payments that are linked to an index or rate are measured based on the current index or rate at adoption of the updated guidance, or lease commencement date for new leases, with the impact of future changes in the index or rate being recorded as a period expense.  Lease expense for lease payments is recognized on a straight-line basis over the lease term.

The Company’s operating and finance leases are primarily for its studio locations, corporate offices, data centers and certain equipment, including automobiles.

At March 30, 2019, the Company’s lease assets and lease liabilities were as follows:

 

 

 

March 30, 2019

 

Assets:

 

 

 

 

Operating lease assets

 

$

148,447

 

Finance lease assets

 

 

573

 

Total leased assets

 

$

149,020

 

 

 

 

 

 

Liabilities:

 

 

 

 

Current

 

 

 

 

Operating

 

$

36,125

 

Finance

 

 

376

 

Noncurrent

 

 

 

 

Operating

 

$

121,308

 

Finance

 

 

107

 

Total lease liabilities

 

$

157,916

 

For the three months ended March 30, 2019, the components of the Company’s lease expense were as follows:

 

 

 

Three Months Ended

 

 

 

March 30,

 

 

 

2019

 

Operating lease cost

 

$

13,372

 

Finance lease cost:

 

 

 

 

Amortization of leased assets

 

 

80

 

Interest on lease liabilities

 

 

8

 

Total finance lease cost

 

$

88

 

Total lease cost

 

$

13,460

 

 

8


WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

 

At March 30, 2019, the Company’s weighted average remaining lease term and weighted average discount rates were as follows:

 

 

 

March 30, 2019

 

Weighted Average Remaining Lease Term (years)

 

 

 

 

Operating leases

 

 

7.47

 

Finance leases

 

 

1.21

 

 

 

 

 

 

Weighted Average Discount Rate

 

 

 

 

Operating leases

 

 

7.03

 

Finance leases

 

 

4.74

 

 

The Company’s leases have remaining lease terms of 0 to 14 years with a weighted average lease term of 7.45 years.

At March 30, 2019, the maturity of the Company’s lease liabilities in each of the next five fiscal years and thereafter were as follows:

 

 

Operating Leases

 

 

Finance Leases

 

 

Total

 

Remainder of fiscal 2019

$

35,516

 

 

$

360

 

 

$

35,876

 

2020

 

36,625

 

 

 

110

 

 

 

36,735

 

2021

 

27,812

 

 

 

27

 

 

 

27,839

 

2022

 

18,965

 

 

 

 

 

 

18,965

 

2023

 

14,252

 

 

 

 

 

 

14,252

 

Thereafter

 

75,909

 

 

 

 

 

 

75,909

 

Total lease payments

$

209,079

 

 

$

497

 

 

$

209,576

 

Less imputed interest

 

51,646

 

 

 

14

 

 

 

51,660

 

Present value of lease liabilities

$

157,433

 

 

$

483

 

 

$

157,916

 

 

Minimum commitments under non-cancelable obligations, primarily for office and rental facilities operating leases at December 29, 2018, consisted of the following:

 

2019

 

$

63,261

 

2020

 

 

38,491

 

2021

 

 

22,341

 

2022

 

 

14,017

 

2023

 

 

9,192

 

2024 and thereafter

 

 

37,704

 

Total

 

$

185,006

 

 

Total rent expense charged to operations for office and rental facilities under these operating leases for the three months ended March 31, 2018 was $10,791.

9


WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

 

Supplemental cash flow information related to leases for the three months ended March 30, 2019 were as follows:

 

 

 

Three Months Ended

 

 

 

March 30,

 

 

 

2019

 

Cash paid for amounts included in the measurement of lease liabilities

 

 

 

 

Operating cash flows from operating leases

 

$

12,742

 

Operating cash flows from finance leases

 

$

8

 

Financing cash flows from finance leases

 

$

80

 

 

 

 

 

 

Leased assets obtained in exchange for new operating lease liabilities

 

$

887

 

Leased assets obtained in exchange for new finance lease liabilities

 

$

 

 

Practical Expedients and Accounting Policy Elections

The Company elected the package of practical expedients permitted under the transition guidance within the new standard, which allowed the Company not to reassess whether any expired or existing contracts contained leases, to carry forward existing lease classifications and not to reassess initial direct costs for existing leases. In addition, the Company elected the benefit of hindsight practical expedient in determining the lease term for existing leases upon adoption of the updated guidance.  

The Company has lease agreements with lease and non-lease components and has elected the practical expedient not to separate non-lease components from lease components and instead to account for each separate lease component and non-lease component as a single lease component.

The Company has elected the short-term lease exception accounting policy, whereby the recognition requirements of the updated guidance is not applied and lease expense is recorded on a straight-line basis with respect to leases with an initial term of 12 months or less.

5.

Revenue  

Adoption of Revenue from Contracts with Customers

On December 31, 2017, the Company adopted the updated guidance on revenue from contracts with customers using the modified retrospective method applied to those contracts which were not completed as of December 31, 2017. Results for reporting periods beginning after December 31, 2017 are presented under the updated guidance, while prior period amounts are not adjusted and continue to be reported in accordance with the Company’s historical revenue accounting.

The Company recorded a net increase to opening retained earnings of $2,145 as of December 31, 2017 due to the cumulative impact of adopting the updated guidance, inclusive of a $3,501 decrease to deferred revenue, a decrease of $568 to prepaid expenses and other current assets and an increase to the deferred income tax liability of $788.

Revenue Recognition

Revenues are recognized when control of the promised services or goods is transferred to the Company’s customers, in an amount that reflects the consideration it expects to be entitled to in exchange for those services or goods.

The Company earns revenue from subscriptions for its digital products and by conducting workshops, for which it charges a fee, predominantly through commitment plans, prepayment plans or the “pay-as-you-go” arrangement. The Company also earns revenue by selling consumer products (including publications) in its workshops, online through its ecommerce platform and to its franchisees, collecting commissions from franchisees, collecting royalties related to licensing agreements, selling magazine subscriptions, publishing, selling advertising space on its websites and in copies of its publications and By Mail product sales.

Commitment plan revenues, prepaid workshop fees and magazine subscription revenue are recorded to deferred revenue and amortized into revenue as control is transferred over the period earned since these performance obligations are satisfied over time. Digital subscription revenues, consisting of the fees associated with subscriptions for the Company’s Digital products, including its

10


WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

 

Personal Coaching + Digital product, are deferred and recognized on a straight-line basis as control is transferred over the subscription period. One-time Digital sign-up fees are considered immaterial in the context of the contract and the related revenue is recorded to deferred revenue and amortized into revenue over the commitment period. In the Studio + Digital business, the Company generally charges non-refundable registration and starter fees in exchange for access to the Company’s digital subscription products, an introductory information session and materials it provides to new members. Revenue from these registration and starter fees is considered immaterial in the context of the contract and is recorded to deferred revenue and amortized into revenue over the commitment period. Revenue from “pay-as-you-go” workshop fees, consumer product sales and By Mail, commissions and royalties is recognized at the point in time control is transferred, which is when services are rendered, products are shipped to customers and title and risk of loss passes to the customers, and commissions and royalties are earned, respectively. Revenue from advertising in magazines is recognized when advertisements are published. Revenue from magazine sales is recognized when the magazine is sent to the customer. For revenue transactions that involve multiple performance obligations, the amount of revenue recognized is determined using the relative fair value approach, which is generally based on each performance obligation’s stand-alone selling price. Discounts to customers, including free registration offers, are recorded as a deduction from gross revenue in the period such revenue was recognized. Revenue from advertising on its websites is recognized when the advertisement is viewed by the user.  

The Company grants refunds in aggregate amounts that historically have not been material. Because the period of payment of the refund generally approximates the period revenue was originally recognized, refunds are recorded as a reduction of revenue over the same period.

The following table presents the Company’s revenues disaggregated by revenue source:

 

 

 

Three Months Ended

 

 

 

March 30,

 

March 31,

 

 

 

2019

 

2018

 

Digital Subscription Revenues

 

$

148,855

 

 

 

$

138,547

 

Studio + Digital Fees

 

 

157,871

 

 

 

 

190,122

 

Service Revenues, net

 

$

306,726

 

 

 

$

328,669

 

Product sales and other, net