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WW WW International

Filed: 29 Oct 20, 4:24pm

 

 

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 September 26, 2020

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

 

WW 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)

 

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, no par value

WW

The Nasdaq Stock Market LLC

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  

 

 

The number of shares of common stock outstanding as of October 22, 2020 was 68,093,574.

 

 

 


 

WW INTERNATIONAL, INC.

TABLE OF CONTENTS

 

 

 

Page No.

 

 

 

PART I—FINANCIAL INFORMATION

 

 

 

 

 

 

Item 1.     

Financial Statements

 

2

 

 

 

 

 

Unaudited Consolidated Balance Sheets at September 26, 2020 and December 28, 2019

 

2

 

 

 

 

 

Unaudited Consolidated Statements of Net Income for the three and nine months ended September 26, 2020 and September 28, 2019

 

3

 

 

 

 

 

Unaudited Consolidated Statements of Comprehensive Income for the three and nine months ended September 26, 2020 and September 28, 2019

 

4

 

 

 

 

 

Unaudited Consolidated Statements of Changes in Total Deficit for the three and nine months ended September 26, 2020 and September 28, 2019

 

5

 

 

 

 

 

Unaudited Consolidated Statements of Cash Flows for the nine months ended September 26, 2020 and September 28, 2019

 

7

 

 

 

 

 

Notes to Unaudited Consolidated Financial Statements

 

8

 

 

 

Cautionary Notice Regarding Forward-Looking Statements

 

27

 

 

 

 

Item 2.     

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

 

29

 

 

 

 

Item 3.     

Quantitative and Qualitative Disclosures About Market Risk

 

55

 

 

 

 

Item 4.     

Controls and Procedures

 

55

 

 

 

PART II—OTHER INFORMATION

 

 

 

 

 

 

Item 1.     

Legal Proceedings

 

56

 

 

 

 

Item 1A.     

Risk Factors

 

56

 

 

 

 

Item 2.     

Unregistered Sales of Equity Securities and Use of Proceeds

 

58

 

 

 

 

Item 3.     

Defaults Upon Senior Securities

 

58

 

 

 

 

Item 4.     

Mine Safety Disclosures

 

58

 

 

 

 

Item 5.     

Other Information

 

58

 

 

 

 

Item 6.     

Exhibits

 

59

 

 

 

Signatures

 

60

 

 

 


PART I—FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

WW INTERNATIONAL, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED BALANCE SHEETS AT

(IN THOUSANDS)

 

 

 

September 26,

 

 

December 28,

 

 

 

2020

 

 

2019

 

ASSETS

 

 

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

204,397

 

 

$

182,736

 

Receivables (net of allowances: September 26, 2020 - $2,003 and

   December 28, 2019 - $1,813)

 

 

36,377

 

 

 

30,519

 

Inventories

 

 

33,298

 

 

 

27,204

 

Prepaid income taxes

 

 

20,783

 

 

 

8,395

 

Prepaid marketing and advertising

 

 

3,751

 

 

 

15,954

 

Prepaid expenses and other current assets

 

 

22,798

 

 

 

30,582

 

TOTAL CURRENT ASSETS

 

 

321,404

 

 

 

295,390

 

Property and equipment, net

 

 

57,306

 

 

 

54,066

 

Operating lease assets

 

 

131,777

 

 

 

151,983

 

Franchise rights acquired

 

 

751,664

 

 

 

753,445

 

Goodwill

 

 

152,791

 

 

 

157,916

 

Other intangible assets, net

 

 

59,606

 

 

 

59,031

 

Deferred income taxes

 

 

12,487

 

 

 

14,319

 

Other noncurrent assets

 

 

15,974

 

 

 

12,164

 

TOTAL ASSETS

 

$

1,503,009

 

 

$

1,498,314

 

LIABILITIES AND TOTAL DEFICIT

 

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

 

 

 

Portion of long-term debt due within one year

 

$

96,250

 

 

$

96,250

 

Portion of operating lease liabilities due within one year

 

 

35,101

 

 

 

33,236

 

Accounts payable

 

 

27,565

 

 

 

29,064

 

Salaries and wages payable

 

 

50,781

 

 

 

66,656

 

Accrued marketing and advertising

 

 

8,561

 

 

 

14,815

 

Accrued interest

 

 

14,343

 

 

 

24,637

 

Other accrued liabilities

 

 

45,387

 

 

 

43,558

 

Derivative payable

 

 

32,542

 

 

 

21,597

 

Income taxes payable

 

 

5,807

 

 

 

3,644

 

Deferred revenue

 

 

48,012

 

 

 

60,613

 

TOTAL CURRENT LIABILITIES

 

 

364,349

 

 

 

394,070

 

Long-term debt, net

 

 

1,426,580

 

 

 

1,479,920

 

Long-term operating lease liabilities

 

 

110,034

 

 

 

128,464

 

Deferred income taxes

 

 

175,938

 

 

 

175,235

 

Other

 

 

7,259

 

 

 

2,446

 

TOTAL LIABILITIES

 

 

2,084,160

 

 

 

2,180,135

 

Redeemable noncontrolling interest

 

 

3,599

 

 

 

3,722

 

TOTAL DEFICIT

 

 

 

 

 

 

 

 

Common stock, $0 par value; 1,000,000 shares authorized; 120,649 shares

   issued at September 26, 2020 and 120,352 shares issued at December 28, 2019

 

 

0

 

 

 

0

 

Treasury stock, at cost, 52,626 shares at September 26, 2020 and 52,933

   shares at December 28, 2019

 

 

(3,146,011

)

 

 

(3,158,274

)

Retained earnings

 

 

2,596,926

 

 

 

2,500,083

 

Accumulated other comprehensive loss

 

 

(35,665

)

 

 

(27,352

)

TOTAL DEFICIT

 

 

(584,750

)

 

 

(685,543

)

TOTAL LIABILITIES AND TOTAL DEFICIT

 

$

1,503,009

 

 

$

1,498,314

 

 

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

2


WW INTERNATIONAL, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF NET INCOME

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 26,

 

 

September 28,

 

 

September 26,

 

 

September 28,

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Service revenues, net

$

282,310

 

 

$

298,041

 

 

$

899,964

 

 

$

918,535

 

Product sales and other, net

 

38,389

 

 

 

50,526

 

 

 

154,733

 

 

 

162,219

 

Revenues, net

 

320,699

 

 

 

348,567

 

 

 

1,054,697

 

 

 

1,080,754

 

Cost of services

 

99,485

 

 

 

122,374

 

 

 

343,056

 

 

 

373,452

 

Cost of product sales and other

 

31,118

 

 

 

31,424

 

 

 

115,882

 

 

 

95,771

 

Cost of revenues

 

130,603

 

 

 

153,798

 

 

 

458,938

 

 

 

469,223

 

Gross profit

 

190,096

 

 

 

194,769

 

 

 

595,759

 

 

 

611,531

 

Marketing expenses

 

38,262

 

 

 

36,327

 

 

 

198,090

 

 

 

200,543

 

Selling, general and administrative expenses

 

59,192

 

 

 

63,713

 

 

 

225,509

 

 

 

188,889

 

Goodwill impairment

 

0

 

 

 

0

 

 

 

3,665

 

 

 

0

 

Operating income

 

92,642

 

 

 

94,729

 

 

 

168,495

 

 

 

222,099

 

Interest expense

 

29,735

 

 

 

33,118

 

 

 

92,281

 

 

 

103,045

 

Other (income) expense, net

 

(211

)

 

 

1,460

 

 

 

230

 

 

 

2,201

 

Income before income taxes

 

63,118

 

 

 

60,151

 

 

 

75,984

 

 

 

116,853

 

Provision for income taxes

 

8,604

 

 

 

13,123

 

 

 

13,546

 

 

 

26,834

 

Net income

 

54,514

 

 

 

47,028

 

 

 

62,438

 

 

 

90,019

 

Net loss attributable to the noncontrolling interest

 

11

 

 

 

58

 

 

 

30

 

 

 

214

 

Net income attributable to WW International, Inc.

$

54,525

 

 

$

47,086

 

 

$

62,468

 

 

$

90,233

 

Earnings per share attributable to WW International, Inc.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.80

 

 

$

0.70

 

 

$

0.92

 

 

$

1.34

 

Diluted

$

0.78

 

 

$

0.68

 

 

$

0.89

 

 

$

1.30

 

Weighted average common shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

68,013

 

 

 

67,298

 

 

 

67,697

 

 

 

67,129

 

Diluted

 

70,002

 

 

 

69,617

 

 

 

69,936

 

 

 

69,364

 

 

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

3


WW INTERNATIONAL, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(IN THOUSANDS)

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 26,

 

 

September 28,

 

 

September 26,

 

 

September 28,

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Net income

$

54,514

 

 

$

47,028

 

 

$

62,438

 

 

$

90,019

 

Other comprehensive gain (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation gain (loss)

 

4,004

 

 

 

(2,983

)

 

 

(827

)

 

 

532

 

Income tax (expense) benefit on foreign currency

   translation gain (loss)

 

(1,017

)

 

 

757

 

 

 

215

 

 

 

(135

)

Foreign currency translation gain (loss), net of taxes

 

2,987

 

 

 

(2,226

)

 

 

(612

)

 

 

397

 

Gain (loss) on derivatives

 

2,125

 

 

 

(4,251

)

 

 

(10,467

)

 

 

(22,431

)

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

   derivatives

 

(541

)

 

 

1,078

 

 

 

2,673

 

 

 

5,689

 

Gain (loss) on derivatives, net of taxes

 

1,584

 

 

 

(3,173

)

 

 

(7,794

)

 

 

(16,742

)

Total other comprehensive gain (loss)

 

4,571

 

 

 

(5,399

)

 

 

(8,406

)

 

 

(16,345

)

Comprehensive income

 

59,085

 

 

 

41,629

 

 

 

54,032

 

 

 

73,674

 

Net loss attributable to the noncontrolling interest

 

11

 

 

 

58

 

 

 

30

 

 

 

214

 

Foreign currency translation (gain) loss, net of taxes

   attributable to the noncontrolling interest

 

(1

)

 

 

44

 

 

 

93

 

 

 

38

 

Comprehensive loss attributable to the noncontrolling

   interest

 

10

 

 

 

102

 

 

 

123

 

 

 

252

 

Comprehensive income attributable to

   WW International, Inc.

$

59,095

 

 

$

41,731

 

 

$

54,155

 

 

$

73,926

 

 

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

4


WW INTERNATIONAL, INC. AND SUBSIDIARIES

UNAUDITED Consolidated Statements of Changes in Total Deficit

(IN THOUSANDS)

 

 

 

 

 

 

 

 

 

WW International, Inc.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Redeemable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

Three Months Ended September 26, 2020

 

Noncontrolling

 

 

 

Common Stock

 

 

Treasury Stock

 

 

Comprehensive

 

 

Retained

 

 

 

 

 

 

 

Interest

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Loss

 

 

Earnings

 

 

Total

 

Balance at June 27, 2020

 

$

3,609

 

 

 

 

120,649

 

 

$

0

 

 

 

52,669

 

 

$

(3,147,758

)

 

$

(40,235

)

 

$

2,538,840

 

 

$

(649,153

)

Comprehensive income (loss)

 

 

(10

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,570

 

 

 

54,525

 

 

 

59,095

 

Issuance of treasury stock under

   stock plans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(43

)

 

 

1,747

 

 

 

 

 

 

 

(2,468

)

 

 

(721

)

Compensation expense on share-

   based awards

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6,029

 

 

 

6,029

 

Balance at September 26, 2020

 

$

3,599

 

 

 

 

120,649

 

 

$

0

 

 

 

52,626

 

 

$

(3,146,011

)

 

$

(35,665

)

 

$

2,596,926

 

 

$

(584,750

)

 

 

 

 

 

 

 

 

 

 

WW International, Inc.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Redeemable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

Nine Months Ended September 26, 2020

 

Noncontrolling

 

 

 

Common Stock

 

 

Treasury Stock

 

 

Comprehensive

 

 

Retained

 

 

 

 

 

 

 

Interest

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Loss

 

 

Earnings

 

 

Total

 

Balance at December 28, 2019

 

$

3,722

 

 

 

 

120,352

 

 

$

0

 

 

 

52,933

 

 

$

(3,158,274

)

 

$

(27,352

)

 

$

2,500,083

 

 

$

(685,543

)

Comprehensive income (loss)

 

 

(123

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(8,313

)

 

 

62,468

 

 

 

54,155

 

Issuance of treasury stock under

   stock plans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(307

)

 

 

12,263

 

 

 

 

 

 

 

(16,372

)

 

 

(4,109

)

Compensation expense on share-

   based awards

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

48,680

 

 

 

48,680

 

Issuance of common stock

 

 

 

 

 

 

 

297

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,067

 

 

 

2,067

 

Balance at September 26, 2020

 

$

3,599

 

 

 

 

120,649

 

 

$

0

 

 

 

52,626

 

 

$

(3,146,011

)

 

$

(35,665

)

 

$

2,596,926

 

 

$

(584,750

)

 


5


 

 

 

 

 

 

 

 

WW International, Inc.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Redeemable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

Three Months Ended September 28, 2019

 

Noncontrolling

 

 

 

Common Stock

 

 

Treasury Stock

 

 

Comprehensive

 

 

Retained

 

 

 

 

 

 

 

Interest

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Loss

 

 

Earnings

 

 

Total

 

Balance at June 29, 2019

 

$

3,763

 

 

 

 

120,352

 

 

$

0

 

 

 

53,089

 

 

$

(3,164,409

)

 

$

(26,709

)

 

$

2,420,958

 

 

$

(770,160

)

Comprehensive income (loss)

 

 

(102

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,355

)

 

 

47,086

 

 

 

41,731

 

Issuance of treasury stock under

   stock plans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(43

)

 

 

1,633

 

 

 

 

 

 

 

(2,049

)

 

 

(416

)

Compensation expense on share-

   based awards

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5,243

 

 

 

5,243

 

Balance at September 28, 2019

 

$

3,661

 

 

 

 

120,352

 

 

$

0

 

 

 

53,046

 

 

$

(3,162,776

)

 

$

(32,064

)

 

$

2,471,238

 

 

$

(723,602

)

 

 

 

 

 

 

 

 

 

WW International, Inc.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Redeemable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

Nine Months Ended September 28, 2019

 

Noncontrolling

 

 

 

Common Stock

 

 

Treasury Stock

 

 

Comprehensive

 

 

Retained

 

 

 

 

 

 

 

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 income (loss)

 

 

(252

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(16,307

)

 

 

90,233

 

 

 

73,926

 

Issuance of treasury stock under

   stock plans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(350

)

 

 

12,848

 

 

 

 

 

 

 

(16,360

)

 

 

(3,512

)

Compensation expense on share-

   based awards

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

14,927

 

 

 

14,927

 

Balance at September 28, 2019

 

$

3,661

 

 

 

 

120,352

 

 

$

0

 

 

 

53,046

 

 

$

(3,162,776

)

 

$

(32,064

)

 

$

2,471,238

 

 

$

(723,602

)

 

 

 

 

 

 

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

6


WW INTERNATIONAL, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

 

 

 

Nine Months Ended

 

 

 

September 26,

 

 

September 28,

 

 

 

2020

 

 

2019

 

Operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

62,438

 

 

$

90,019

 

Adjustments to reconcile net income to cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

37,402

 

 

 

33,543

 

Amortization of deferred financing costs and debt discount

 

 

6,614

 

 

 

6,876

 

Goodwill impairment

 

 

3,665

 

 

 

0

 

Share-based compensation expense

 

 

48,680

 

 

 

14,927

 

Deferred tax provision (benefit)

 

 

5,302

 

 

 

(5,631

)

Allowance for doubtful accounts

 

 

(77

)

 

 

(140

)

Reserve for inventory obsolescence

 

 

11,978

 

 

 

6,898

 

Foreign currency exchange rate loss

 

 

847

 

 

 

1,793

 

Changes in cash due to:

 

 

 

 

 

 

 

 

Receivables

 

 

(5,602

)

 

 

944

 

Inventories

 

 

(16,470

)

 

 

(6,064

)

Prepaid expenses

 

 

7,115

 

 

 

33,299

 

Accounts payable

 

 

2,966

 

 

 

1,337

 

Accrued liabilities

 

 

(31,321

)

 

 

(17,812

)

Deferred revenue

 

 

(12,836

)

 

 

5,535

 

Other long term assets and liabilities, net

 

 

4,895

 

 

 

(1,114

)

Income taxes

 

 

1,828

 

 

 

(12,729

)

Cash provided by operating activities

 

 

127,424

 

 

 

151,681

 

Investing activities:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(20,469

)

 

 

(10,479

)

Capitalized software expenditures

 

 

(22,189

)

 

 

(24,082

)

Other items, net

 

 

(5,094

)

 

 

244

 

Cash used for investing activities

 

 

(47,752

)

 

 

(34,317

)

Financing activities:

 

 

 

 

 

 

 

 

Net (payments) borrowings on revolver

 

 

0

 

 

 

0

 

Payments on long-term debt

 

 

(57,750

)

 

 

(107,750

)

Taxes paid related to net share settlement of equity awards

 

 

(4,953

)

 

 

(4,796

)

Proceeds from stock options exercised

 

 

2,364

 

 

 

475

 

Other items, net

 

 

(623

)

 

 

(350

)

Cash used for financing activities

 

 

(60,962

)

 

 

(112,421

)

Effect of exchange rate changes on cash and cash equivalents

 

 

2,951

 

 

 

(2,755

)

Net increase in cash and cash equivalents

 

 

21,661

 

 

 

2,188

 

Cash and cash equivalents, beginning of period

 

 

182,736

 

 

 

236,974

 

Cash and cash equivalents, end of period

 

$

204,397

 

 

$

239,162

 

 

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

 

 

 

7


WW 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 WW International, Inc. and all of its subsidiaries. The terms “Company” and “WW” as used throughout these notes are used to indicate WW 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 (“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. For example, the global outbreak of the coronavirus (COVID-19) has had and will continue to have a significant adverse impact on the Company’s business as well as on the business environment and the markets in which it operates. This global health crisis has also had a significant adverse effect on overall economic conditions and the Company expects consumer demand to continue to be negatively impacted due to changes in consumer behavior and confidence and health concerns. The situation remains dynamic and subject to rapid and possibly significant change, with the United States and other countries continuing to struggle with rolling outbreaks of the virus. Accordingly, the full extent of the magnitude and duration of the negative impact to the Company’s business from the COVID-19 pandemic cannot be predicted with certainty. The Company considered the impact of COVID-19 on the assumptions and estimates used when preparing its Quarterly Report on Form 10-Q quarterly financial statements. These assumptions and estimates may change, as new events occur and additional information is obtained, and such future changes may have an adverse impact on the Company's results of operations, financial position and liquidity. 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 2019 filed on February 25, 2020, which includes additional information about the Company, its results of operations, its financial position and its cash flows.

2.

Recently Issued Accounting Standards

In December 2019, the Financial Accounting Standards Board (the “FASB”) issued updated guidance simplifying the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 as well as by improving consistent application of GAAP by clarifying and amending existing guidance. The effective date of the new guidance for public companies is for fiscal years beginning after December 15, 2020 and interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.

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 2019. For a discussion of accounting standards adopted in the current year, see Note 3.

3.

Accounting Standards Adopted in Current Year

In August 2018, the FASB issued updated guidance addressing customer’s accounting for implementation costs incurred in a cloud computing arrangement that is a service contract, which requires customers to apply internal-use software guidance to determine the implementation costs that are able to be capitalized. Capitalized implementation costs are required to be amortized over the term of the arrangement, beginning when the cloud computing arrangement is ready for its intended use. The effective date of the new guidance for public companies is for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption is permitted. On December 29, 2019, the Company adopted the updated guidance on a prospective basis to all software implementation costs incurred after the date of adoption. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

8


WW INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

 

4.

Leases

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 consolidated balance sheets. Finance leases are included in property and equipment, net, other accrued liabilities, and other long-term liabilities in the Company’s consolidated balance sheets. 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, since the Company’s lessors do not provide an implicit rate, nor is one readily available. The incremental borrowing rate is calculated based on the Company’s credit yield curve and adjusted for collateralization, credit quality and economic environment impact, all where applicable. The lease asset includes scheduled lease payments 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 as of September 26, 2020. 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 the implementation of the lease accounting standard, 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 studios, corporate offices, data centers and certain equipment, including automobiles.

At September 26, 2020 and December 28, 2019, the Company’s lease assets and lease liabilities were as follows:

 

 

 

September 26, 2020

 

 

December 28, 2019

 

Assets:

 

 

 

 

 

 

 

 

Operating lease assets

 

$

131,777

 

 

$

151,983

 

Finance lease assets

 

 

240

 

 

 

259

 

Total leased assets

 

$

132,017

 

 

$

152,242

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

Current

 

 

 

 

 

 

 

 

Operating

 

$

35,101

 

 

$

33,236

 

Finance

 

 

112

 

 

 

126

 

Noncurrent

 

 

 

 

 

 

 

 

Operating

 

$

110,034

 

 

$

128,464

 

Finance

 

 

92

 

 

 

96

 

Total lease liabilities

 

$

145,339

 

 

$

161,922

 

For the three and nine months ended September 26, 2020 and September 28, 2019, the components of the Company’s lease expense were as follows:

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 26,

 

 

September 28,

 

 

September 26,

 

 

September 28,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Operating lease cost:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed lease cost

 

$

12,040

 

 

$

12,906

 

 

$

37,181

 

 

$

38,641

 

Variable lease cost

 

 

0

 

 

 

0

 

 

 

(4

)

 

 

0

 

Total operating lease cost

 

$

12,040

 

 

$

12,906

 

 

$

37,177

 

 

$

38,641

 

Finance lease cost:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of leased assets

 

 

42

 

 

 

132

 

 

 

148

 

 

 

350

 

Interest on lease liabilities

 

 

3

 

 

 

4

 

 

 

9

 

 

 

17

 

Total finance lease cost

 

$

45

 

 

$

136

 

 

$

157

 

 

$

367

 

Total lease cost

 

$

12,085

 

 

$

13,042

 

 

$

37,334

 

 

$

39,008

 

 

9


WW INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

 

At September 26, 2020 and December 28, 2019, the Company’s weighted average remaining lease term and weighted average discount rates were as follows:

 

 

 

September 26, 2020

 

 

December 28, 2019

 

Weighted Average Remaining Lease Term (years)

 

 

 

 

 

 

 

 

Operating leases

 

 

6.91

 

 

 

7.06

 

Finance leases

 

 

2.36

 

 

 

2.43

 

 

 

 

 

 

 

 

 

 

Weighted Average Discount Rate

 

 

 

 

 

 

 

 

Operating leases

 

 

6.90

 

 

 

7.02

 

Finance leases

 

 

5.56

 

 

 

5.97

 

The Company’s leases have remaining lease terms of 0 to 12 years with a weighted average lease term of 6.91 years as of September 26, 2020.

At September 26, 2020, 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 2020

$

11,670

 

 

$

38

 

 

$

11,708

 

2021

 

41,296

 

 

 

90

 

 

 

41,386

 

2022

 

29,884

 

 

 

59

 

 

 

29,943

 

2023

 

21,577

 

 

 

26

 

 

 

21,603

 

2024

 

16,165

 

 

 

5

 

 

 

16,170

 

Thereafter

 

65,922

 

 

 

0

 

 

 

65,922

 

Total lease payments

$

186,514

 

 

$

218

 

 

$

186,732

 

Less imputed interest

 

41,379

 

 

 

14

 

 

 

41,393

 

Present value of lease liabilities

$

145,135

 

 

$

204

 

 

$

145,339

 

 

Supplemental cash flow information related to leases for the nine months ended September 26, 2020 and September 28, 2019 were as follows:

 

 

 

Nine Months Ended

 

 

 

September 26,

 

 

September 28,

 

 

 

2020

 

 

2019

 

Cash paid for amounts included in the measurement of lease liabilities

 

 

 

 

 

 

 

 

Operating cash flows from operating leases

 

$

37,123

 

 

$

38,664

 

Operating cash flows from finance leases

 

$

9

 

 

$

17

 

Financing cash flows from finance leases

 

$

148

 

 

$

350

 

 

 

 

 

 

 

 

 

 

Leased assets obtained in exchange for new operating lease liabilities

 

$

9,281

 

 

$

26,270

 

Leased assets obtained in exchange for new finance lease liabilities

 

$

127

 

 

$

105

 

 

 


10


WW INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

 

5.

Revenue  

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

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 26,

 

 

September 28,

 

 

September 26,

 

 

September 28,

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Digital Subscription Revenues

$

188,731

 

 

$

153,940

 

 

$

541,197

 

 

$

459,764

 

Studio + Digital Fees

 

93,579

 

 

 

144,101

 

 

 

358,767

 

 

 

458,771

 

Service Revenues, net

$

282,310

 

 

$

298,041

 

 

$

899,964

 

 

$

918,535

 

Product sales and other, net

 

38,389

 

 

 

50,526

 

 

 

154,733

 

 

 

162,219

 

Revenues, net

$

320,699

 

 

$

348,567

 

 

$

1,054,697

 

 

$

1,080,754

 

 

The following tables present the Company’s revenues disaggregated by revenue source and segment:

 

 

Three Months Ended September 26, 2020

 

 

North

 

 

Continental

 

 

United

 

 

 

 

 

 

 

 

 

 

America

 

 

Europe

 

 

Kingdom

 

 

Other

 

 

Total

 

Digital Subscription Revenues

$

122,120

 

 

$

53,230

 

 

$

9,227

 

 

$

4,154

 

 

$

188,731

 

Studio + Digital Fees

 

69,111

 

 

 

14,288

 

 

 

7,515

 

 

 

2,665

 

 

 

93,579

 

Service Revenues, net

$

191,231

 

 

$

67,518

 

 

$

16,742

 

 

$

6,819

 

 

$

282,310

 

Product sales and other, net

 

23,964

 

 

 

8,993

 

 

 

3,730

 

 

 

1,702

 

 

 

38,389

 

Revenues, net

$

215,195

 

 

$

76,511

 

 

$

20,472

 

 

$

8,521

 

 

$

320,699

 

 

 

Three Months Ended September 28, 2019

 

 

North

 

 

Continental

 

 

United

 

 

 

 

 

 

 

 

 

 

America

 

 

Europe

 

 

Kingdom

 

 

Other

 

 

Total

 

Digital Subscription Revenues

$

101,579

 

 

$

42,230

 

 

$

6,608

 

 

$

3,523

 

 

$

153,940

 

Studio + Digital Fees

 

108,338

 

 

 

20,644

 

 

 

10,733

 

 

 

4,386

 

 

 

144,101

 

Service Revenues, net

$

209,917

 

 

$

62,874

 

 

$

17,341

 

 

$

7,909

 

 

$

298,041

 

Product sales and other, net

 

33,767

 

 

 

8,264

 

 

 

5,592

 

 

 

2,903

 

 

 

50,526

 

Revenues, net

$

243,684

 

 

$

71,138

 

 

$

22,933

 

 

$

10,812

 

 

$

348,567

 

 

 

Nine Months Ended September 26, 2020

 

 

North

 

 

Continental

 

 

United

 

 

 

 

 

 

 

 

 

 

America

 

 

Europe

 

 

Kingdom

 

 

Other

 

 

Total

 

Digital Subscription Revenues

$

354,391

 

 

$

150,572

 

 

$

24,374

 

 

$

11,860

 

 

$

541,197

 

Studio + Digital Fees

 

268,086

 

 

 

53,665

 

 

 

26,645

 

 

 

10,371

 

 

 

358,767

 

Service Revenues, net

$

622,477

 

 

$

204,237

 

 

$

51,019

 

 

$

22,231

 

 

$

899,964

 

Product sales and other, net

 

103,949

 

 

 

30,084

 

 

 

14,219

 

 

 

6,481

 

 

 

154,733

 

Revenues, net

$

726,426

 

 

$

234,321

 

 

$

65,238

 

 

$

28,712

 

 

$

1,054,697

 

 

 

Nine Months Ended September 28, 2019

 

 

North

 

 

Continental

 

 

United

 

 

 

 

 

 

 

 

 

 

America

 

 

Europe

 

 

Kingdom

 

 

Other

 

 

Total

 

Digital Subscription Revenues

$

303,190

 

 

$

125,999

 

 

$

20,019

 

 

$

10,556

 

 

$

459,764

 

Studio + Digital Fees

 

342,896

 

 

 

68,274

 

 

 

33,493

 

 

 

14,108

 

 

 

458,771

 

Service Revenues, net

$

646,086

 

 

$

194,273

 

 

$

53,512

 

 

$

24,664

 

 

$

918,535

 

Product sales and other, net

 

103,255

 

 

 

30,350

 

 

 

18,556

 

 

 

10,058

 

 

 

162,219

 

Revenues, net

$

749,341

 

 

$

224,623

 

 

$

72,068

 

 

$

34,722

 

 

$

1,080,754

 

 

11


WW INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

 

Information about Contract Balances

For Service Revenues, the Company typically collects payment in advance of providing services. Any amounts collected in advance of services being provided are recorded in deferred revenue. In the case where amounts are not collected, but the service has been provided and the revenue has been recognized, the amounts are recorded in accounts receivable. The opening and ending balances of the Company’s deferred revenues are as follows:

 

 

 

Deferred

 

 

Deferred

 

 

 

Revenue

 

 

Revenue-Long Term

 

Balance as of December 28, 2019

 

$

60,613

 

 

$

54

 

Net decrease during the period

 

 

(12,601

)

 

 

(4

)

Balance as of September 26, 2020

 

$

48,012

 

 

$

50

 

 

Revenue recognized from amounts included in current deferred revenue as of December 28, 2019 was $59,898 for the nine months ended September 26, 2020. The Company’s long-term deferred revenue, which is included in other liabilities on the Company’s consolidated balance sheet, had a balance of $50 and $54 at September 26, 2020 and December 28, 2019, respectively, for revenue that will not be recognized during the next fiscal year and is generally related to upfront payments received as an inducement for entering into certain sales-based royalty agreements with third party licensees. This revenue is amortized on a straight-line basis over the term of the applicable agreement.

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 nine months ended September 26, 2020, the change in the carrying value of franchise rights acquired was primarily due to the effect of exchange rate changes.

Goodwill primarily relates to the acquisition of the Company by The Kraft Heinz Company (successor to H.J. Heinz Company) in 1978 and the Company’s acquisitions of WW.com, Inc. (formerly known as WeightWatchers.com, Inc.) in 2005, the Company’s franchised territories and the majority interest in Vigilantes do Peso Marketing Ltda. For the nine months ended September 26, 2020, the change in the carrying amount of goodwill was due to the impairment charge of the Company’s Brazil reporting unit and the effect of exchange rate changes as follows:

 

 

 

North

 

 

Continental

 

 

United

 

 

 

 

 

 

 

 

 

 

 

America

 

 

Europe

 

 

Kingdom

 

 

Other

 

 

Total

 

Balance as of December 28, 2019

 

$

143,940

 

 

$

7,015

 

 

$

1,213

 

 

$

5,748

 

 

$

157,916

 

Goodwill impairment

 

 

0

 

 

 

0

 

 

 

0

 

 

 

(3,665

)

 

 

(3,665

)

Effect of exchange rate changes

 

 

(933

)

 

 

228

 

 

 

(31

)

 

 

(724

)

 

 

(1,460

)

Balance as of September 26, 2020

 

$

143,007

 

 

$

7,243

 

 

$

1,182

 

 

$

1,359

 

 

$

152,791

 

 

Franchise Rights Acquired

Finite-lived franchise rights acquired are amortized over the remaining contractual period, which is generally less than one year. Indefinite-lived franchise rights acquired are tested on an annual basis for impairment.

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 Studio + Digital business and a relief from royalty methodology for franchise rights related to the Company’s Digital 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 both the Studio + Digital business and the Digital business in the country in which the applicable acquisition occurred. The book values of these franchise rights in the United States, Canada, United Kingdom, Australia and New Zealand as of the September 26, 2020 balance sheet date were $671,914, $53,915, $11,483, $6,316, and $4,633, respectively.

 


12


WW INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

 

In its hypothetical start-up approach analysis for fiscal 2020, 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 Studio + Digital business in each country based on assumptions regarding revenue growth and operating income margins.  The cash flows associated with the Digital business in each country were based on the expected Digital revenue for such country and the application of a royalty rate based on current market terms. The cash flows for the Studio + Digital and Digital businesses were discounted utilizing rates consistent with those utilized in the annual goodwill 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 unit. The Company has determined the appropriate reporting unit for purposes of assessing annual impairment to be the country for all reporting units. The values of goodwill in the United States, Canada and other countries as of the September 26, 2020 balance sheet date were $102,968, $40,040 and $9,783, respectively.

For all of the Company’s reporting units tested as of May 3, 2020, the Company estimated future cash flows by utilizing the historical debt-free cash flows (cash flows provided by operations 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 weighted-average cost of capital, which included the cost of equity and the cost of debt.

Franchise Rights Acquired and Goodwill Annual Impairment Test

The Company reviews indefinite-lived intangible assets, including franchise rights acquired with indefinite lives, and goodwill 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 3, 2020 and May 5, 2019, each the first day of fiscal May, on its indefinite-lived intangible assets and goodwill.

In performing its annual impairment analysis as of May 3, 2020 and May 5, 2019, the Company determined that the carrying amounts of its franchise rights acquired with indefinite lives units of account and goodwill reporting units did not exceed their respective fair values and, therefore, 0 impairment existed.

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 could cause a change in the results of the impairment assessments 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.

Based on the results of the Company’s annual franchise rights acquired impairment analysis performed for all of its units of account, except for Canada and New Zealand, as of the September 26, 2020 balance sheet date, those units had an estimated fair value at least 35% higher than the respective unit’s carrying amount. Collectively, these units of account represent 92.2% of the Company’s total franchise rights acquired. Based on the results of the Company’s annual franchise rights acquired impairment test performed for its Canada unit of account, which holds 7.2% of the Company’s franchise rights acquired as of the September 26, 2020 balance sheet date, the estimated fair value of this unit of account exceeded its carrying value by approximately 16.5%. Based on the results of the Company’s annual franchise rights acquired impairment test performed for its New Zealand unit of account, which holds 0.6% of the Company’s franchise rights acquired as of the September 26, 2020 balance sheet date, the estimated fair value of this unit of account exceeded its carrying value by approximately 9.8%. Accordingly, a change in the underlying assumptions for New Zealand may change the results of the impairment assessment and, as such, could result in an impairment of the franchise rights acquired related to New Zealand, for which the net book value is $4,633 as of September 26, 2020.

Based on the results of the Company’s May 3, 2020 annual goodwill impairment test performed for all of its reporting units as of the September 26, 2020 balance sheet date, there was significant headroom in the goodwill impairment analysis for those units, with the difference between the carrying value and the fair value exceeding 100%.


13


WW INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

 

Brazil Goodwill Impairment

With respect to the Company’s Brazil reporting unit, during the first quarter of fiscal 2020, the Company made a strategic decision to shift to an exclusively Digital business in that country. The Company determined that making this decision together with the negative impact of COVID-19, the ongoing challenging economic environment in Brazil and the Company’s reduced expectations regarding the reporting unit’s future operating cash flows required the Company to perform an interim goodwill impairment analysis. In performing this discounted cash flow analysis, the Company determined that the carrying amount of this reporting unit exceeded its fair value and as a result recorded an impairment charge of $3,665, which comprises the remaining balance of goodwill for this reporting unit.

As it relates to the goodwill 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 growth strategies under the current market conditions in Brazil. The Company then discounted the estimated future cash flows utilizing a discount rate which was calculated using the weighted-average cost of capital, which included the cost of equity and the cost of debt.

Finite-lived Intangible Assets

The carrying values of finite-lived intangible assets as of September 26, 2020 and December 28, 2019 were as follows:

 

 

 

September 26, 2020

 

 

December 28, 2019

 

 

 

Gross

 

 

 

 

 

 

Gross

 

 

 

 

 

 

 

Carrying

 

 

Accumulated

 

 

Carrying

 

 

Accumulated

 

 

 

Amount

 

 

Amortization

 

 

Amount

 

 

Amortization

 

Capitalized software costs

 

$

127,891

 

 

$

105,530

 

 

$

119,537

 

 

$

97,588

 

Website development costs

 

 

91,098

 

 

 

63,406

 

 

 

77,823

 

 

 

50,748

 

Trademarks

 

 

11,974

 

 

 

11,402

 

 

 

11,869

 

 

 

11,228

 

Other

 

 

14,043

 

 

 

5,062

 

 

 

14,003

 

 

 

4,637

 

Trademarks and other intangible assets

 

$

245,006

 

 

$

185,400

 

 

$

223,232

 

 

$

164,201

 

Franchise rights acquired

 

 

7,866

 

 

 

4,463

 

 

 

8,180

 

 

 

4,618

 

Total finite-lived intangible assets

 

$

252,872

 

 

$

189,863

 

 

$

231,412

 

 

$

168,819

 

 

Aggregate amortization expense for finite-lived intangible assets was recorded in the amounts of $7,557 and $22,108 for the three and nine months ended September 26, 2020, respectively. Aggregate amortization expense for finite-lived intangible assets was recorded in the amounts of $6,973 and $22,014 for the three and nine months ended September 28, 2019, respectively.

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

 

Remainder of fiscal 2020

 

$

7,525

 

Fiscal 2021

 

$

25,100

 

Fiscal 2022

 

$

15,034

 

Fiscal 2023

 

$

4,961

 

Fiscal 2024 and thereafter

 

$

10,389

 

 

14


WW 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:

 

 

 

September 26, 2020

 

 

December 28, 2019

 

 

 

Principal

Balance

 

 

Unamortized

Deferred

Financing

Costs

 

 

Unamortized

Debt Discount

 

 

Effective

Rate (1)

 

 

Principal

Balance

 

 

Unamortized

Deferred

Financing

Costs

 

 

Unamortized

Debt Discount

 

 

Effective

Rate (1)

 

Revolving Credit Facility due November 29, 2022

 

$

0

 

 

$

0

 

 

$

0

 

 

 

2.94

%

 

$

0

 

 

$

0

 

 

$

0

 

 

 

0.00

%

Term Loan Facility due November 29, 2024

 

 

1,247,500

 

 

 

5,439

 

 

 

18,333

 

 

 

6.54

%

 

 

1,305,250

 

 

 

6,418

 

 

 

21,634

 

 

 

7.93

%

Notes due December 1, 2025

 

 

300,000

 

 

 

898

 

 

 

0

 

 

 

8.62

%

 

 

300,000

 

 

 

1,028

 

 

 

0

 

 

 

8.72

%

Total

 

$

1,547,500

 

 

$

6,337

 

 

$

18,333

 

 

 

6.84

%

 

$

1,605,250

 

 

$

7,446

 

 

$

21,634

 

 

 

8.07

%

Less: Current portion

 

 

96,250

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

96,250

 

 

 

 

 

 

 

 

 

 

 

 

 

Unamortized deferred financing costs

 

 

6,337

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7,446

 

 

 

 

 

 

 

 

 

 

 

 

 

Unamortized debt discount

 

 

18,333

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

21,634

 

 

 

 

 

 

 

 

 

 

 

 

 

Total long-term debt

 

$

1,426,580

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

1,479,920

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Includes amortization of deferred financing costs and debt discount.

On November 29, 2017, the Company refinanced its then-existing credit facilities (hereinafter referred to as “the November 2017 debt refinancing”) with proceeds received from $1,565,000 in an aggregate principal amount of borrowings under its new credit facilities, consisting of a $1,540,000 term loan facility and a $150,000 revolving credit facility (of which $25,000 was drawn upon at the time of the November 2017 debt refinancing) (collectively, as amended from time to time, the “Credit Facilities”) and proceeds received from $300,000 in aggregate principal amount from the issuance of 8.625% Senior Notes due 2025 (the “Notes”). During the fourth quarter of fiscal 2017, the Company incurred fees of $53,832 (which included $30,800 of a debt discount) in connection with the November 2017 debt refinancing. In addition, the Company recorded a loss on early extinguishment of debt of $10,524 in connection thereto. This early extinguishment of debt write-off was comprised of $5,716 of deferred financing fees paid in connection with the November 2017 debt refinancing and $4,808 of pre-existing deferred financing fees.

Senior Secured Credit Facilities

The Credit Facilities were issued under a new credit agreement, dated November 29, 2017 (as amended from time to time, the “Credit Agreement”), among the Company, as borrower, the lenders party thereto, JPMorgan Chase Bank, N.A. (“JPMorgan Chase”), as administrative agent and an issuing bank, Bank of America, N.A., as an issuing bank, and Citibank, N.A., as an issuing bank. The Credit Facilities initially consisted of (1) $1,540,000 in aggregate principal amount of senior secured tranche B term loans due in 2024 (the “Term Loan Facility”) and (2) a $150,000 in an aggregate principal amount of commitments under a senior secured revolving credit facility (which included borrowing capacity available for letters of credit) due in 2022 (the “Revolving Credit Facility”).

On June 14, 2020, the Company entered into an amendment to the Credit Agreement (the “Credit Agreement Amendment”) that provided for an increase in the aggregate principal amount of commitments under the Company’s Revolving Credit Facility by $25,000, providing the Company with $175,000 in aggregate principal amount of commitments under the Revolving Credit Facility, and that included certain other amendments to the Credit Agreement, which among other things, relaxed the requirements of the financial maintenance covenant under the Credit Agreement until the end of the second fiscal quarter of 2022, as further detailed below.

On both May 31, 2019 and October 10, 2019, the Company made a voluntary prepayment at par of $50,000 in an aggregate amount of its outstanding term loans under the Term Loan Facility. As a result of these prepayments, the Company wrote off deferred financing fees of $526 in the aggregate in fiscal 2019.

As previously disclosed, on March 23, 2020, as a precautionary measure in light of the COVID-19 outbreak, the Company drew down $148,000 in an aggregate principal amount under the Revolving Credit Facility in order to enhance its cash position and to provide additional financial flexibility. The revolver borrowing was classified as a short-term liability in connection with the Company’s monthly interest elections. The Company repaid $148,000 in aggregate principal amount of borrowings under the Revolving Credit Facility on June 5, 2020.

As of September 26, 2020, the Company had $1,247,500 in an aggregate principal amount of loans outstanding under its Credit Facilities, with $173,846 of availability and $1,154 in issued but undrawn letters of credit outstanding under the Revolving Credit Facility. There were 0 outstanding borrowings under the Revolving Credit Facility as of September 26, 2020.

15


WW INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

 

All obligations under the Credit Agreement are guaranteed by, subject to certain exceptions, each of the Company’s current and future wholly-owned material domestic restricted subsidiaries. All obligations under the Credit Agreement, and the guarantees of those obligations, are secured by substantially all of the assets of the Company and each guarantor, subject to customary exceptions, including:

 

a pledge of 100% of the equity interests directly held by the Company and each guarantor in any wholly-owned domestic material subsidiary of the Company or any guarantor (which pledge, in the case of any non-U.S. subsidiary of a U.S. subsidiary, will not include more than 65% of the voting stock of such first-tier non-U.S. subsidiary), subject to certain exceptions; and

 

a security interest in substantially all other tangible and intangible assets of the Company and each guarantor, subject to certain exceptions.

Under the terms of the Credit Agreement, depending on the Company’s Consolidated First Lien 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 Loan Facility in an aggregate amount determined by a percentage of its annual excess cash flow (as defined in the Credit Agreement) (said payment, a “Cash Flow Sweep”).

Borrowings under the Term Loan Facility and, after giving effect to the Credit Agreement Amendment, the Revolving Credit Facility, in each case, bear interest at a rate per annum equal to, at the Company’s option, either (1) an applicable margin plus a base rate determined by reference to the highest of (a) 0.50% per annum plus the higher of (i) the Federal Funds Effective Rate and (ii) the Overnight Bank Funding Rate as determined by the Federal Reserve Bank of New York, (b) the prime rate of JPMorgan Chase and (c) the LIBOR rate determined by reference to the cost of funds for U.S. dollar deposits for an interest period of one month adjusted for certain additional costs, plus 1.00%; provided that such rate is not lower than a floor of 1.75% or (2) an applicable margin plus a LIBOR rate determined by reference to the cost of funds for U.S. dollar deposits for the interest period relevant to such borrowing adjusted for certain additional costs, provided that LIBOR is not lower than a floor of 0.75%. Borrowings under the Revolving Credit Facility bear interest at a rate per annum equal to an applicable margin based upon a leverage-based pricing grid (except as otherwise described below), plus, at the Company’s option, either (1) a base rate determined by reference to the highest of (a) 0.50% per annum plus the higher of (i) the Federal Funds Effective Rate and (ii) the Overnight Bank Funding Rate as determined by the Federal Reserve Bank of New York, (b) the prime rate of JPMorgan Chase and (c) the LIBOR rate determined by reference to the cost of funds for U.S. dollar deposits for an interest period of one month adjusted for certain additional costs, plus 1.00% or (2) a LIBOR rate determined by reference to the cost of funds for U.S. dollar deposits for the interest period relevant to such borrowing adjusted for certain additional costs. Under the terms of the Credit Agreement Amendment, a new level in the leverage based pricing grid was added providing for an applicable margin for extensions of credit under the Revolving Credit Facility of 3.00% when the Consolidated First Lien Leverage Ratio discussed below is greater than or equal to 3.75:1.00. As of September 26, 2020, the applicable margins for the LIBOR rate borrowings under the Term Loan Facility and the Revolving Credit Facility were 4.75% and 2.25%, respectively. In the event that LIBOR is phased out as is currently expected, the Credit Agreement provides that the Company and the administrative agent may amend the Credit Agreement to replace the LIBOR definition therein with a successor rate subject to notifying the lending syndicate of such change and not receiving within five business days of such notification objections to such replacement rate from lenders holding at least a majority of the aggregate principal amount of loans and commitments then outstanding under the Credit Agreement. If the Company fails to do so, its borrowings will be based off of the alternative base rate plus a margin.

On a quarterly basis, the Company pays a commitment fee to the lenders under the Revolving Credit Facility in respect of unutilized commitments thereunder, which commitment fee fluctuates depending upon the Company’s Consolidated First Lien Leverage Ratio. Under the terms of the Credit Agreement Amendment, a new level in the leverage based pricing grid was added providing for a commitment fee of 0.625% when the Consolidated First Lien Leverage Ratio discussed below is greater than or equal to 3.75:1.00. Based on the Company’s Consolidated First Lien Leverage Ratio as of September 26, 2020, the commitment fee was 0.35% per annum. The Company’s Consolidated First Lien Leverage Ratio as of September 26, 2020 was 2.80:1.00.

The Credit Agreement contains other customary terms, including (1) representations, warranties and affirmative covenants, (2) negative covenants, including limitations on indebtedness, liens, mergers, acquisitions, asset sales, investments, distributions, prepayments of subordinated debt, amendments of material agreements governing subordinated indebtedness, changes to lines of business and transactions with affiliates, in each case subject to baskets, thresholds and other exceptions, and (3) customary events of default.


16


WW INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

 

The availability of certain baskets and the ability to enter into certain transactions are also subject to compliance with certain financial ratios. In addition, if the aggregate principal amount of extensions of credit outstanding under the Revolving Credit Facility as of any fiscal quarter end exceeds 33 1/3% of the amount of the aggregate commitments under the Revolving Credit Facility in effect on such date, the Company must be in compliance with a Consolidated First Lien Leverage Ratio of 3.75:1.00, provided, however, that the Credit Agreement Amendment increased the required Consolidated First Lien Leverage Ratio to 4.50:1.00, commencing with the second fiscal quarter of 2020 through the end of fiscal 2020, with a further step up to 5.00:1.00 for fiscal 2021, before stepping down to 4.50:1.00 for the first fiscal quarter of 2022, and again to 3.75:1.00, commencing with the second fiscal quarter of 2022 (such increases in the Consolidated First Lien Leverage Ratio and the timing applicable thereto, collectively, the “Financial Covenant Relief Period”). The Financial Covenant Relief Period is subject to the Company’s continued compliance with certain conditions, which include meeting a Consolidated First Lien Leverage Ratio of 3.75:1.00 with respect to certain types of investments, restricted payments and prepayments of junior debt during the Financial Covenant Relief Period. If at any time the Company expects that it will not be in compliance with the conditions of the Financial Covenant Relief Period, the Company expects it will reduce its extensions of credit under the Revolving Credit Facility to $58,333 or less prior to the last day of such fiscal quarter so that it is not required to comply with the conditions of the Financial Covenant Relief Period. In any such event, the Company would be able to reborrow the full amount under the Revolving Credit Facility subsequent to such fiscal quarter end given that the applicable Consolidated First Lien Leverage Ratio to be tested during the Financial Covenant Relief Period is only tested as of the last day of each fiscal quarter. 

As of September 26, 2020, the Company was in compliance with all applicable financial covenants and the applicable Consolidated First Lien Leverage Ratio in the Credit Agreement governing the Revolving Credit Facility though it was not required to comply at such time.

Senior Notes

The Notes were issued pursuant to an Indenture, dated as of November 29, 2017 (the “Indenture”), among the Company, the guarantors named therein and The Bank of New York Mellon, as trustee. The Indenture contains customary covenants, events of default and other provisions for an issuer of non-investment grade debt securities. These covenants include limitations on indebtedness, liens, mergers, acquisitions, asset sales, investments, distributions, prepayments of subordinated debt and transactions with affiliates, in each case subject to baskets, thresholds and other exceptions.

The Notes accrue interest at a rate per annum equal to 8.625% and are due on December 1, 2025. Interest on the Notes is payable semi-annually on June 1 and December 1 of each year, beginning on June 1, 2018. On or after December 1, 2020, the Company may on any one or more occasions redeem some or all of the Notes at a purchase price equal to 104.313% of the principal amount of the Notes, plus accrued and unpaid interest, if any, to, but not including, the redemption date, such optional redemption price decreasing to 102.156% on or after December 1, 2021 and to 100.000% on or after December 1, 2022. Prior to December 1, 2020, the Company may on any one or more occasions redeem up to 40% of the aggregate principal amount of the Notes with an amount not to exceed the net proceeds of certain equity offerings at 108.625% of the aggregate principal amount thereof, plus accrued and unpaid interest, if any, to, but not including, the redemption date. Prior to December 1, 2020, the Company may redeem some or all of the Notes at a make-whole price plus accrued and unpaid interest, if any, to, but not including, the redemption date. If a change of control occurs, the Company must offer to purchase for cash the Notes at a purchase price equal to 101% of the principal amount of the Notes, plus accrued and unpaid interest, if any, to, but not including, the purchase date. Following the sale of certain assets and subject to certain conditions, the Company must offer to purchase for cash the Notes at a purchase price equal to 100% of the principal amount of the Notes, plus accrued and unpaid interest, if any, to, but not including, the purchase date. The Notes are guaranteed on a senior unsecured basis by the Company’s subsidiaries that guarantee the Credit Facilities.

Outstanding Debt

At September 26, 2020, the Company had $1,547,500 outstanding under the Credit Facilities and the Notes, consisting of borrowings under the Term Loan Facility of $1,247,500, $0 drawn down on the Revolving Credit Facility and $300,000 in aggregate principal amount of Notes issued and outstanding.

 


17


WW INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

 

At September 26, 2020 and December 28, 2019, the Company’s debt consisted of both fixed and variable-rate instruments. Interest rate swaps were entered into to hedge a portion of the cash flow exposure associated with the Company’s variable-rate borrowings. See Note 12 for information on the Company’s interest rate swaps. The weighted average interest rate (which includes amortization of deferred financing costs and debt discount) on the Company’s outstanding debt, exclusive of the impact of the swaps then in effect, was approximately 6.95% and 8.08% per annum at September 26, 2020 and December 28, 2019, respectively, based on interest rates on these dates. The weighted average interest rate (which includes amortization of deferred financing costs and debt discount) on the Company’s outstanding debt, including the impact of the swaps then in effect, was approximately 7.34% and 7.59% per annum at September 26, 2020 and December 28, 2019, respectively, based on interest rates on these dates.

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 earnings per share:

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 26,

 

 

September 28,

 

 

September 26,

 

 

September 28,

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to

   WW International, Inc.

$

54,525

 

 

$

47,086

 

 

$

62,468

 

 

$

90,233

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares of common stock

   outstanding

 

68,013

 

 

 

67,298

 

 

 

67,697

 

 

 

67,129

 

Effect of dilutive common stock equivalents

 

1,989

 

 

 

2,319

 

 

 

2,239

 

 

 

2,235

 

Weighted average diluted common shares

   outstanding

 

70,002

 

 

 

69,617

 

 

 

69,936

 

 

 

69,364

 

Earnings per share attributable to

   WW International, Inc.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.80

 

 

$

0.70

 

 

$

0.92

 

 

$

1.34

 

Diluted

$

0.78

 

 

$

0.68

 

 

$

0.89

 

 

$

1.30

 

The number of anti-dilutive common stock equivalents excluded from the calculation of the weighted average number of common shares for diluted EPS was 5,358 and 1,687 for the three months ended September 26, 2020 and September 28, 2019, respectively. The number of anti-dilutive common stock equivalents excluded from the calculation of the weighted average number of common shares for diluted EPS was 3,589 and 1,793 for the nine months ended September 26, 2020 and September 28, 2019, respectively.

9.

Stock Plans

On May 6, 2008, the Company’s shareholders approved the 2008 Stock Incentive Plan (the “2008 Plan”). On May 6, 2014, the Company’s shareholders approved the 2014 Stock Incentive Plan (as amended and restated, the “2014 Plan”), which replaced the 2008 Plan for all equity-based awards granted on or after May 6, 2014. The 2014 Plan is designed to promote the long-term financial interests and growth of the Company by attracting, motivating and retaining employees with the ability to contribute to the success of the business and to align compensation for the Company’s employees over a multi-year period directly with the interests of the shareholders of the Company. The Company’s long-term equity incentive compensation program has historically included time-vesting non-qualified stock option and/or restricted stock unit (including performance-based stock unit with both time- and performance-vesting criteria (“PSUs”)) awards. From time to time, the Company has granted fully-vested shares of its common stock to individuals in connection with special circumstances. The Company’s Board of Directors or a committee thereof administers the 2014 Plan.

 


18


WW INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

 

In fiscal 2019, the Company granted 280.1 PSUs having both time- and performance-vesting criteria. The time-vesting criteria for these PSUs will be satisfied upon continued employment (with limited exceptions) on the third anniversary of the grant date. The performance-vesting criteria for these PSUs will be satisfied if the Company has achieved a certain annual operating income objective for the performance period of fiscal 2021. Pursuant to these awards, the number of PSUs that become vested, if any, upon the satisfaction of both vesting criteria, shall be equal to (x) the target number of PSUs granted multiplied by (y) the applicable achievement percentage, rounded down to avoid the issuance of fractional shares. The Company is currently accruing compensation expense to what it believes is the probable outcome upon vesting.

In fiscal 2018, the Company granted 81.3 PSUs having both time- and performance-vesting criteria. The time-vesting criteria for these PSUs will be satisfied upon continued employment (with limited exceptions) on the third anniversary of the grant date. The performance-vesting criteria for these PSUs will be satisfied if the Company has achieved a certain annual operating income objective for the performance period of fiscal 2020. Pursuant to these awards, the number of PSUs that become vested, if any, upon the satisfaction of both vesting criteria, shall be equal to (x) the target number of PSUs granted multiplied by (y) the applicable achievement percentage, rounded down to avoid the issuance of fractional shares. The applicable achievement percentage shall increase in the event the Company has achieved a certain revenue target during such performance period. The Company is currently accruing compensation expense to what it believes is the probable outcome upon vesting.

In fiscal 2017, the Company granted 98.5 PSUs in May 2017 and 47.9 PSUs in July 2017, all having both time- and performance-vesting criteria. The time-vesting criteria for these PSUs was satisfied upon continued employment (with limited exceptions) on May 15, 2020. The performance-vesting criteria for two-thirds of these PSUs was satisfied when the Company achieved, in the case of the May 2017 awards, certain annual operating income objectives and, in the case of the July 2017 award, certain net income or operating income objectives, as applicable for each of the fiscal 2017 and fiscal 2018 performance years. The performance-vesting criteria for the fiscal 2019 performance year was not satisfied. When the performance measure was met, if at all, for a particular 2017 Award Performance Year (i.e., each fiscal year over a three-year period, fiscal 2017 through fiscal 2019), that portion of units was “banked” for potential issuance following the satisfaction of the time-vesting criteria. Such portion of units “banked” was equal to (x) the target number of PSUs granted for the applicable 2017 Award Performance Year multiplied by (y) the applicable achievement percentage (166.67% in the case of fiscal 2017 and fiscal 2018), rounded down to avoid the issuance of fractional shares. Pursuant to these awards, the number of PSUs that became vested in fiscal 2020 upon the satisfaction of the time-vesting criteria was 122.6. The Company accrued compensation expense in an amount equal to the outcome upon vesting.

In fiscal 2016, the Company granted 289.9 PSUs having both time- and performance-vesting criteria. The time-vesting criteria for these PSUs was satisfied upon continued employment (with limited exceptions) on the third anniversary of the grant date. The performance-vesting criteria for these PSUs was satisfied when the Company achieved a Debt Ratio (as defined in the applicable term sheet for these PSU awards and based on a Debt to EBITDAS ratio (each, as defined therein)) at levels at or below 4.5x over the performance period from December 31, 2017 to December 29, 2018. Pursuant to these awards, the number of PSUs that became vested in fiscal 2019 upon the satisfaction of the time-vesting criteria of 219.3 was calculated as (x) the target number of PSUs granted multiplied by (y) 166.67%, the applicable Debt Ratio achievement percentage, rounded down to avoid the issuance of fractional shares. The Company accrued compensation expense in an amount equal to the outcome upon vesting.

10.Income Taxes

The effective tax rates for the three and nine months ended September 26, 2020 were 13.6% and 17.8%, respectively. The effective tax rates for the three and nine months ended September 28, 2019 were 21.8% and 23.0%, respectively. For the nine months ended September 26, 2020, the tax expense was impacted by a tax benefit related to the reversal of the 2018, 2019 and 2020 tax impact of global intangible low-taxed income (“GILTI”) and a tax windfall from stock compensation, partially offset by an impairment of the Company’s Brazil reporting unit which has a full valuation allowance and an increase to tax reserves related to a foreign income tax audit. For the nine months ended September 26, 2020, the difference between the U.S. federal statutory tax rate and the Company’s consolidated effective tax rate was primarily due to tax expense from income earned in foreign jurisdictions and state income tax expense, partially offset by a tax benefit related to foreign-derived intangible income (“FDII”). For the nine months ended September 28, 2019, the difference between the U.S. federal statutory tax rate and the Company’s consolidated effective tax rate was primarily due to tax expense related to income earned in foreign jurisdictions, tax expense related to GILTI and state income tax expense, partially offset by tax benefits related to FDII, the reversal of tax reserves no longer needed and the cessation of certain publishing operations.

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (CARES) Act (the “CARES Act”) was signed into law. The CARES Act includes provisions relating to modifications to the net interest deduction limitation, net operating loss carryforward rules, refundable payroll tax credits and deferment of the employer portion of certain payroll taxes.

19


WW INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

 

On July 20, 2020, the U.S. Treasury Department released final regulations under Internal Revenue Code Section 951A (TD 9902) permitting a taxpayer to elect to exclude from its GILTI inclusion items of income subject to a high effective rate of foreign tax.  As a result of the final regulations, the Company recorded a $7,566 discrete tax benefit in the three months ended September 26, 2020 related to the 2018 and 2019 taxes previously accrued attributable to GILTI.

11.Legal

Securities Class Action and Derivative Matters

In March 2019, two substantially identical class action complaints alleging violations of the federal securities laws were filed by individual shareholders against the Company, certain of the Company’s current officers and the Company’s former controlling shareholder, Artal Group S.A. (“Artal”), in the United States District Court for the Southern District of New York. The actions were consolidated and lead plaintiffs were appointed in June 2019. A consolidated amended complaint was filed on July 29, 2019, naming as defendants the Company, certain of the Company’s current officers and directors, and Artal and certain of its affiliates. A second consolidated amended complaint was filed on September 27, 2019. The operative complaint asserts claims on behalf of all purchasers of the Company’s common stock between May 4, 2018 and February 26, 2019, inclusive (the “Class Period”), including purchasers of the Company’s common stock traceable to the May 2018 secondary offering of the Company’s common stock by certain of its shareholders. The complaint alleges that, during the Class Period, the defendants disseminated materially false and misleading statements and/or concealed or recklessly disregarded material adverse facts. The complaint alleges claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 thereunder, and with respect to the secondary offering, under Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, as amended. The plaintiffs seek to recover unspecified damages on behalf of the class members. The Company believes that the action is without merit and intends to vigorously defend it. The Company filed a motion to dismiss the complaint on October 31, 2019.

Between March and July 2019, the Company received shareholder litigation demands alleging breaches of fiduciary duties by certain current and former Company directors and executive officers, to the alleged injury of the Company. The allegations in the demands relate to those contained in the ongoing securities class action litigation. In response to the demands, pursuant to Virginia law, the Board of Directors has created a special committee to investigate and evaluate the claims made in the demands. In addition, four derivative complaints were filed, each making allegations against certain of the Company’s officers and directors and/or Artal and certain of its affiliates. First, on June 13, 2019, a shareholder derivative complaint was filed in the Southern District of New York against certain of the Company’s officers and directors alleging, among other things, that the defendants breached fiduciary duties to the alleged injury of the Company. The plaintiff voluntarily dismissed the complaint on July 8, 2019 and the Company agreed to treat the complaint as a litigation demand. Second, on July 23, 2019, another shareholder derivative complaint was filed in the Southern District of New York against certain of the Company’s officers and directors alleging, among other things, that the defendants breached fiduciary duties to the alleged injury of the Company. The plaintiff voluntarily dismissed the complaint the same day. Third, on October 25, 2019, another shareholder derivative complaint was filed in the Southern District of New York against certain of the Company’s officers and directors alleging, among other things, that the defendants breached fiduciary duties to the alleged injury of the Company. Finally, on December 16, 2019, a shareholder derivative complaint was filed in New York Supreme Court against certain of the Company’s officers and directors, and Artal and certain of its affiliates, alleging, among other things, that the defendants breached fiduciary duties to the alleged injury of the Company. This action and the derivative action filed October 25, 2019 have each been stayed pending a decision on the defendants’ motion to dismiss the securities class action. The Company believes that these actions are without merit and intends to vigorously defend them.  

Member Class Action Matters

Two substantially similar class action complaints were filed by individual Studio + Digital members against the Company in the United States District Court for the Southern District of New York (the “SDNY”) in May 2020 (the “Vodden Matter”) and the Superior Court of California in Ventura County in June 2020 (the “Quintanilla Matter”). The complaints were filed on behalf of all Studio + Digital members nationwide and regard the fees charged for Studio + Digital memberships since the temporary replacement of in-person workshops with virtual workshops in March 2020 in response to the COVID-19 pandemic. The complaints alleged, among other things, that the Company’s decision to charge its members the full Studio + Digital membership fee while only providing a virtual workshop experience violated state consumer protection laws in New York and/or California, as applicable, and gave rise to claims for breach of contract, fraud, and other tort causes of action based on the same factual allegations that are the basis for the breach of contract claim. The plaintiffs sought to recover damages plus injunctive relief to enjoin the Company from engaging in similar conduct in the future on behalf of the class members.

20


WW INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

 

The Company filed a motion to dismiss the Vodden Matter on August 3, 2020 and, in response, the plaintiff filed a notice of voluntary dismissal without prejudice on August 17, 2020. The Company filed a notice to remove the Quintanilla Matter to the United States District Court for the Central District of California on July 30, 2020 and per the parties’ stipulation, the case was transferred to the SDNY on August 7, 2020. On September 23, 2020, the Company filed a motion to dismiss all of the plaintiff’s claims with prejudice. At the parties’ September 29, 2020 preliminary conference, the court issued an order permitting the plaintiff to either submit her opposition to the motion to dismiss or file an amended complaint by October 14, 2020. On October 14, 2020, the plaintiff filed an amended complaint with predominantly the same claims. The Company intends to file another motion to dismiss the Quintanilla Matter on or about November 4, 2020. The Company believes that the Quintanilla Matter is without merit and intends to vigorously defend it.

Other Litigation Matters

Due to the nature of the Company’s activities, it is also, at times, subject to other pending and threatened legal actions that arise out of the ordinary course of business. In the opinion of management, the disposition of any such matters is not expected, individually or in the aggregate, to have a material adverse 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 resolution of one or more legal actions.

12.

Derivative Instruments and Hedging

As of September 26, 2020, the Company had in effect interest rate swaps with an aggregate notional amount totaling $750,000. As of December 28, 2019, the Company had in effect an interest rate swap with a notional amount totaling $1,000,000, which expired by its terms on April 2, 2020.

On July 26, 2013, in order to hedge a portion of its variable rate debt, the Company entered into a forward-starting interest rate swap with an effective date of March 31, 2014 and a termination date of April 2, 2020. The initial notional amount of this swap was $1,500,000. During the term of this swap, the notional amount decreased from $1,500,000 effective March 31, 2014 to $1,250,000 on April 3, 2017 and to $1,000,000 on April 1, 2019. This interest rate swap effectively fixed the variable interest rate on the notional amount of this swap at 2.41%. This swap qualified for hedge accounting and, therefore, changes in the fair value of this swap were recorded in accumulated other comprehensive loss.

On June 11, 2018, in order to hedge a portion of its variable rate debt, the Company entered into a forward-starting interest rate swap (the “2018 swap”) with an effective date of April 2, 2020 and a termination date of March 31, 2024. The initial notional amount of this swap is $500,000. During the term of this swap, the notional amount will decrease from $500,000 effective April 2, 2020 to $250,000 on March 31, 2021. This interest rate swap effectively fixed the variable interest rate on the notional amount of this swap at 3.1005%. On June 7, 2019, in order to hedge a portion of its variable rate debt, the Company entered into a forward-starting interest rate swap (together with the 2018 swap, the “current swaps”) with an effective date of April 2, 2020 and a termination date of March 31, 2024. The notional amount of this swap is $250,000. This interest rate swap effectively fixed the variable interest rate on the notional amount of this swap at 1.901%. The current swaps qualify for hedge accounting and, therefore, changes in the fair value of the current swaps have been recorded in accumulated other comprehensive loss.

As of September 26, 2020 and December 28, 2019, cumulative unrealized losses for qualifying hedges were reported as a component of accumulated other comprehensive loss in the amounts of $23,323 ($31,323 before taxes) and $15,529 ($20,856 before taxes), respectively. As of September 26, 2020, the aggregate fair value of the Company’s current swaps was a liability of $32,542, which is included in derivative payable in the consolidated balance sheet. As of December 28, 2019, the fair value of the Company’s then-effective swap was a liability of $1,881, which is included in derivative payable in the consolidated balance sheet. As of December 28, 2019, the aggregate fair value of the Company’s current swaps was a liability of $19,716, which is included in derivative payable in the consolidated balance sheet.

The Company is hedging forecasted transactions for periods not exceeding the next four years. The Company expects approximately $6,422 ($8,609 before taxes) of derivative losses included in accumulated other comprehensive loss at September 26, 2020, based on current market rates, will be reclassified into earnings within the next 12 months.

21


WW INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

 

13.

Fair Value Measurements

Accounting guidance on fair value measurements for certain financial assets and liabilities requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:

 

Level 1 – Quoted prices in active markets for identical assets or liabilities.

 

Level 2 – Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

When measuring fair value, the Company is required to maximize the use of observable inputs and minimize the use of unobservable inputs.

Fair Value of Financial Instruments

The Company’s significant financial instruments include long-term debt and interest rate swap agreements as of September 26, 2020 and December 28, 2019. The fair value of the Company’s borrowings under the Revolving Credit Facility approximated a carrying value of $0 at both September 26, 2020 and December 28, 2019.

The fair value of the Company’s Credit Facilities is determined by utilizing average bid prices on or near the end of each fiscal quarter (Level 2 input). As of September 26, 2020 and December 28, 2019, the fair value of the Company’s long-term debt was approximately $1,533,476 and $1,597,852, respectively, as compared to the carrying value (net of deferred financing costs and debt discount) of $1,522,830 and $1,576,170, respectively.

Derivative Financial Instruments

The fair values for the Company’s derivative financial instruments are determined using observable current market information such as the prevailing LIBOR interest rate and LIBOR yield curve rates and include consideration of counterparty credit risk. See Note 12 for disclosures related to derivative financial instruments.

The following table presents the aggregate fair value of the Company’s derivative financial instruments:

 

 

 

 

 

 

 

 

Fair Value Measurements Using:

 

 

 

Total

Fair

Value

 

 

 

Quoted Prices in

Active Markets

for Identical Assets

(Level 1)

 

 

Significant Other

Observable Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

Interest rate swap liability at September 26, 2020

 

$

32,542

 

 

 

$

0

 

 

$

32,542

 

 

$

0

 

Interest rate swap liability at December 28, 2019

 

$

21,597

 

 

 

$

0

 

 

$

21,597

 

 

$

0

 

The Company did 0t have any transfers into or out of Levels 1 and 2 and did not maintain any assets or liabilities classified as Level 3 during the nine months ended September 26, 2020 and the fiscal year ended December 28, 2019.

22


WW INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

 

14.

Accumulated Other Comprehensive Loss

Amounts reclassified out of accumulated other comprehensive loss are as follows:

Changes in Accumulated Other Comprehensive Loss by Component (a)  

 

 

 

Nine Months Ended September 26, 2020

 

 

 

Loss on

Qualifying

Hedges

 

 

Loss on

Foreign

Currency

Translation

 

 

Total

 

Beginning balance at December 28, 2019

 

$

(15,529

)

 

$

(11,823

)

 

$

(27,352

)

Other comprehensive loss before

   reclassifications, net of tax

 

 

(13,937

)

 

 

(612

)

 

 

(14,549

)

Amounts reclassified from accumulated other

   comprehensive loss, net of tax(b)

 

 

6,143

 

 

 

0

 

 

 

6,143

 

Net current period other comprehensive loss

   including noncontrolling interest

 

 

(7,794

)

 

 

(612

)

 

 

(8,406

)

Less: Net current period other comprehensive

   loss attributable to the noncontrolling interest

 

 

0

 

 

 

93

 

 

 

93

 

Ending balance at September 26, 2020

 

$

(23,323

)

 

$

(12,342

)

 

$

(35,665

)

 

(a)

Amounts in parentheses indicate debits

(b)

See separate table below for details about these reclassifications

 

 

 

Nine Months Ended September 28, 2019

 

 

 

Loss on

Qualifying

Hedges

 

 

Loss on

Foreign

Currency

Translation

 

 

Total

 

Beginning balance at December 29, 2018

 

$

(1,175

)

 

$

(14,582

)

 

$

(15,757

)

Other comprehensive (loss) income before

   reclassifications, net of tax

 

 

(15,585

)

 

 

397

 

 

 

(15,188

)

Amounts reclassified from accumulated other

   comprehensive loss, net of tax(b)

 

 

(1,157

)

 

 

0

 

 

 

(1,157

)

Net current period other comprehensive (loss)

   income including noncontrolling interest

 

 

(16,742

)

 

 

397

 

 

 

(16,345

)

Less: Net current period other comprehensive

   loss attributable to the noncontrolling interest

 

 

0

 

 

 

38

 

 

 

38

 

Ending balance at September 28, 2019

 

$

(17,917

)

 

$

(14,147

)

 

$

(32,064

)

 

(a)

Amounts in parentheses indicate debits

(b)

See separate table below for details about these reclassifications

23


WW INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

 

Reclassifications out of Accumulated Other Comprehensive Loss (a)

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 26,

 

 

September 28,

 

 

September 26,

 

 

September 28,

 

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

 

Details about Other Comprehensive

Loss Components

Amounts Reclassified from

Accumulated Other

Comprehensive Loss

 

 

Amounts Reclassified from

Accumulated Other

Comprehensive Loss

Affected Line Item in the

Statement Where Net

Income is Presented

(Loss) Gain on Qualifying Hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

$

(3,698

)

 

$

(210

)

 

$

(8,235

)

 

$

1,550

 

 

Interest expense

 

 

(3,698

)

 

 

(210

)

 

 

(8,235

)

 

 

1,550

 

 

Income before income taxes

 

 

939

 

 

 

53

 

 

 

2,092

 

 

 

(393

)

 

Provision from income taxes

 

$

(2,759

)

 

$

(157

)

 

$

(6,143

)

 

$

1,157

 

 

Net income

 

(a)

Amounts in parentheses indicate debits to profit/loss

15.

Segment Data

The Company has 4 reportable segments based on an integrated geographical structure as follows: North America, Continental Europe (CE), United Kingdom and Other. Other consists of Australia, New Zealand and emerging markets operations and franchise revenues and related costs, all of which have been grouped together as if they were a single reportable segment because they do not meet any of the quantitative thresholds and are immaterial for separate disclosure. To be consistent with the information that is presented to the chief operating decision maker, the Company does not include intercompany activity in the segment results.

Information about the Company’s reportable segments is as follows:

 

 

Total Revenue, net

 

 

Total Revenue, net

 

Three Months Ended

 

 

Nine Months Ended

 

September 26, 2020

 

 

September 28, 2019

 

 

September 26, 2020

 

 

September 28, 2019

 

 

North America

$

215,195

 

 

$

243,684

 

 

$

726,426

 

 

$

749,341

 

 

Continental Europe

 

76,511

 

 

 

71,138

 

 

 

234,321

 

 

 

224,623

 

 

United Kingdom

 

20,472

 

 

 

22,933

 

 

 

65,238

 

 

 

72,068

 

 

Other

 

8,521

 

 

 

10,812

 

 

 

28,712

 

 

 

34,722

 

 

Total revenue, net

$

320,699

 

 

$

348,567

 

 

$

1,054,697

 

 

$

1,080,754

 

 

 

 

Net Income

 

 

Net Income

 

Three Months Ended

 

 

Nine Months Ended

 

September 26, 2020

 

 

September 28, 2019

 

 

September 26, 2020

 

 

September 28, 2019

 

 

Segment operating income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

North America

$

79,978

 

 

$

83,998

 

 

$

204,748

 

 

$

216,281

 

 

Continental Europe

 

37,159

 

 

 

32,679

 

 

 

92,360

 

 

 

73,518

 

 

United Kingdom

 

4,056

 

 

 

3,271

 

 

 

7,406

 

 

 

6,829

 

 

Other

 

1,551

 

 

 

1,435

 

 

 

1,582

 

 

 

2,829

 

 

Total segment operating income

 

122,744

 

 

 

121,383

 

 

 

306,096

 

 

 

299,457

 

 

General corporate expenses

 

30,102

 

 

 

26,654

 

 

 

137,601

 

 

 

77,358

 

 

Interest expense

 

29,735

 

 

 

33,118

 

 

 

92,281

 

 

 

103,045

 

 

Other (income) expense, net

 

(211

)

 

 

1,460

 

 

 

230

 

 

 

2,201

 

 

Provision for income taxes

 

8,604

 

 

 

13,123

 

 

 

13,546

 

 

 

26,834

 

 

Net income

$

54,514

 

 

$

47,028

 

 

$

62,438

 

 

$

90,019

 

 

Net loss attributable to the noncontrolling interest

 

11

 

 

 

58

 

 

 

30

 

 

 

214

 

 

Net income attributable to WW International, Inc.

$

54,525

 

 

$

47,086

 

 

$

62,468

 

 

$

90,233

 

 

 

24


WW INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

 

 

 

Depreciation and Amortization

 

 

Depreciation and Amortization

 

Three Months Ended

 

 

Nine Months Ended

 

September 26, 2020

 

 

September 28, 2019

 

 

September 26, 2020

 

 

September 28, 2019

 

 

North America

$

9,496

 

 

$

9,048

 

 

$

30,041

 

 

$

27,434

 

 

Continental Europe

 

409

 

 

 

496

 

 

 

1,192

 

 

 

1,272

 

 

United Kingdom

 

252

 

 

 

164

 

 

 

762

 

 

 

588

 

 

Other

 

91

 

 

 

103

 

 

 

273

 

 

 

321

 

 

Total segment depreciation and amortization

 

10,248

 

 

 

9,811

 

 

 

32,268

 

 

 

29,615

 

 

General corporate depreciation and amortization

 

4,403

 

 

 

3,235

 

 

 

11,748

 

 

 

10,804

 

 

Depreciation and amortization

$

14,651

 

 

$

13,046

 

 

$

44,016

 

 

$

40,419

 

 

 

16.

Related Party

As previously disclosed, on October 18, 2015, the Company entered into the Strategic Collaboration Agreement with Oprah Winfrey, under which she would consult with the Company and participate in developing, planning, executing and enhancing the WW program and related initiatives, and provide it with services in her discretion to promote the Company and its programs, products and services for an initial term of five years (the “Initial Term”).

As previously disclosed, on December 15, 2019, the Company entered into an amendment of the Strategic Collaboration Agreement with Ms. Winfrey, pursuant to which, among other things, the Initial Term of the Strategic Collaboration Agreement was extended until April 17, 2023 (with no additional successive renewal terms) after which a second term will commence and continue through the earlier of the date of the Company’s 2025 annual meeting of shareholders or May 31, 2025. Ms. Winfrey will continue to provide the above-described services during the remainder of the Initial Term and, during the second term, will provide certain consulting and other services to the Company. In consideration of Ms. Winfrey entering into the amendment to the Strategic Collaboration Agreement and the performance of her obligations thereunder, on December 15, 2019 the Company granted Ms. Winfrey a fully vested option to purchase 3,276 shares of the Company’s common stock (the "Winfrey Amendment Option") which became exercisable on May 6, 2020, the date on which shareholder approval of such option was obtained. The amendment to the Strategic Collaboration Agreement became operative on May 6, 2020 when the Company’s shareholders approved the Winfrey Amendment Option. Based on the Black Scholes option pricing method as of May 6, 2020, the Company recorded $32,686 of compensation expense in the second quarter of fiscal 2020 for the Winfrey Amendment Option. The Company used a dividend yield of 0.0%, 63.68% volatility and a risk-free interest rate of 0.41%. Compensation expense is included as a component of selling, general and administrative expenses.

In addition to the Strategic Collaboration Agreement, Ms. Winfrey and her related entities provided services to the Company totaling $305 and $2,066 for the three and nine months ended September 26, 2020, respectively, and $662 and $2,665 for the three and nine months ended September 28, 2019, respectively, which services included advertising, production and related fees. Also, during the three months ended September 28, 2019, the Company received advertising services from entities related to Ms. Winfrey at no charge with an estimated value of $330.

Entities related to Ms. Winfrey were reimbursed for actual costs incurred in connection with the WW Presents: Oprah’s 2020 Vision tour totaling $2 and $1,653 for the three and nine months ended September 26, 2020, respectively.

The Company’s accounts payable to parties related to Ms. Winfrey at September 26, 2020 and December 28, 2019 was $198 and $72, respectively.

In June 2020, as permitted by the transfer provisions set forth in the previously disclosed Share Purchase Agreement, dated October 18, 2015, between the Company and Ms. Winfrey, as amended, and the previously disclosed Winfrey Option Agreement, dated October 18, 2015, between the Company and Ms. Winfrey, Ms. Winfrey sold 604 of the shares she purchased under such purchase agreement and exercised a portion of her stock options granted in 2015 resulting in the sale of 297 shares issuable under such options, respectively.

 


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WW INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

 

17.Restructuring

As previously disclosed, in the second quarter of fiscal 2020, in connection with its cost-savings initiative, the Company committed to a plan of reduction in force which has resulted and will result in the elimination of certain positions and termination of employment for certain employees worldwide. The Company had previously estimated this plan would cost $14,000. This estimate has been revised to $22,500 driven primarily by the strategic cost reductions to the Company’s global Studio + Digital operations to adjust to anticipated consumer demand. During the second and third quarters of fiscal 2020, the Company reduced its total headcount by approximately 35% since the end of fiscal 2019. As of September 26, 2020, the Company had approximately 11 employees, a majority of whom were part-time employees. The Company recorded expenses in connection with employee termination benefit costs of $2,251 ($1,680 after tax) and $13,459 ($9,996 after tax) during the three and nine months ended September 26, 2020, respectively. These expenses impacted cost of revenues by $1,062 and $7,565 and selling, general and administrative expenses by $1,189 and $5,894 in the three and nine months ended September 26, 2020, respectively. All expenses were recorded to general corporate expenses and, therefore, there was no impact to the segments. For the three and nine months ended September 26, 2020, the Company made payments of $4,419 and $8,086, respectively, towards the liability for these expenses and increased provision estimates by $20 for each respective period. The Company expects the remaining liability of $5,393 to be paid in full no later than the end of fiscal 2021. The Company anticipates recording additional expenses in connection with this restructuring of approximately $9,000.

As previously disclosed, in the first quarter of fiscal 2019, the Company undertook an organizational realignment which resulted in the elimination of certain positions and termination of employment for certain employees worldwide. The Company recorded expenses in connection with employee termination benefit costs of $6,331 ($4,727 after tax) during the nine months ended September 28, 2019 (all expenses were recorded in the first quarter of fiscal 2019). These expenses impacted cost of revenues by $1,425 and selling, general and administrative expenses by $4,906 in the nine months ended September 28, 2019. The Company did not record additional expenses in connection with this organizational realignment. All expenses were recorded to general corporate expenses and, therefore, there was no impact to the segments. For the fiscal year ended December 28, 2019, the Company made payments of $5,077 towards the liability for these expenses and lowered provision estimates by $83. For the nine months ended September 26, 2020, the Company made payments of $1,052 towards the liability for these expenses and lowered provision estimates by $119. As of September 26, 2020, there was 0 outstanding liability related thereto.

 

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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 and the impact of the COVID-19 virus 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,” “aim” 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:

 

the impact of the global outbreak of the COVID-19 virus on our business and liquidity and on the business environment and markets in which we operate;

 

competition from other weight management and wellness industry participants or the development of more effective or more favorably perceived weight management methods;

 

our ability to continue to develop new, innovative services and products and enhance our existing services and products or the failure of our services, products or brands to continue to appeal to the market, or our ability to successfully expand into new channels of distribution or respond to consumer trends;

 

the ability to successfully implement new strategic initiatives, including our strategic digital transformation;

 

the effectiveness of our advertising and marketing programs, including the strength of our social media presence;

 

the impact on our reputation of actions taken by our franchisees, licensees, suppliers and other partners;  

 

the impact of our substantial amount of debt, debt service obligations and debt covenants, and our exposure to variable rate indebtedness;

 

the ability to generate sufficient cash to service our debt and satisfy our other liquidity requirements;

 

uncertainties regarding the satisfactory operation of our technology or systems;

 

the impact of data security breaches or privacy concerns, including the costs of compliance with evolving privacy laws and regulations;

 

the recognition of asset impairment charges;

 

the loss of key personnel, strategic partners or consultants or failure to effectively manage and motivate our workforce;

 

the inability to renew certain of our licenses, or the inability to do so on terms that are favorable to us;

 

the expiration or early termination by us of leases;

 

risks and uncertainties associated with our international operations, including regulatory, economic, political, social, intellectual property, and foreign currency risks;

 

uncertainties related to a downturn in general economic conditions or consumer confidence;

 

our ability to successfully make acquisitions or enter into joint ventures, including our ability to successfully integrate, operate or realize the anticipated benefits of such businesses;

 

the seasonal nature of our business;

 

the impact of events that discourage or impede people from gathering with others or accessing resources;

 

our ability to enforce our intellectual property rights both domestically and internationally, as well as the impact of our involvement in any claims related to intellectual property rights;

 

the outcomes of litigation or regulatory actions;

 

the impact of existing and future laws and regulations;

 

our failure to maintain effective internal control over financial reporting;

 

the possibility that the interests of Artal Group S.A, or Artal, the largest holder of our common stock and a shareholder with significant influence over us, will conflict with our interests or the interests of other holders of our common stock;

 

the impact that the sale of substantial amounts of our common stock by existing large shareholders, or the perception that such sales could occur, could have on the market price 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.


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You should not put undue reliance on any forward-looking statements. You should understand that many important factors, including those discussed under the heading “Risk Factors”, 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.

 

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ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

WW International, Inc., formerly known as 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,” the “Company” and “WW” refer to WW International, Inc. and all of its operations consolidated for purposes of its financial statements; “North America” refers to our North American Company-owned operations; “Continental Europe” refers to our Continental Europe Company-owned operations; “United Kingdom” refers to our United Kingdom Company-owned operations; and “Other” refers to Australia, New Zealand and emerging markets operations and franchise revenues and related costs. Each of North America, Continental Europe, United Kingdom and Other is also a reportable segment. Our “Digital” business refers to providing subscriptions to our digital product offerings, including the Personal Coaching + Digital product.  Our “Studio + Digital” business refers to providing access to our weekly in-person workshops combined with our digital subscription product offerings to commitment plan subscribers. Our “Studio + Digital” business also includes the provision of access to workshops for members who do not subscribe to commitment plans, including our “pay-as-you-go” members.

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 2016” refers to our fiscal year ended December 31, 2016;

 

“fiscal 2017” refers to our fiscal year ended December 30, 2017;

 

“fiscal 2018” refers to our fiscal year ended December 29, 2018;

 

“fiscal 2019” refers to our fiscal year ended December 28, 2019;

 

“fiscal 2020” refers to our fiscal year ended January 2, 2021 (includes a 53rd week);

 

“fiscal 2021” refers to our fiscal year ended January 1, 2022;

 

“fiscal 2022” refers to our fiscal year ended December 31, 2022;

 

“fiscal 2023” refers to our fiscal year ended December 30, 2023;

 

“fiscal 2024” refers to our fiscal year ended December 28, 2024; and

 

“fiscal 2025” refers to our fiscal year ended January 3, 2026 (includes a 53rd week).

The following terms used in this Quarterly Report on Form 10-Q are our trademarks: Weight Watchers® and myWWTM.

You should read the following discussion in conjunction with our Annual Report on Form 10-K for fiscal 2019 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 referred to as the “Consolidated Financial Statements”).


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NON-GAAP FINANCIAL MEASURES

To supplement our consolidated results presented in accordance with accounting principles generally accepted in the United States, or GAAP, we have disclosed non-GAAP financial measures of operating results that exclude or adjust certain items. Gross profit, gross profit margin, operating income and operating income margin are discussed in this Quarterly Report on Form 10-Q both as reported (on a GAAP basis) and as adjusted (on a non-GAAP basis), with respect to the third quarter of fiscal 2020 to exclude the impact of the charges associated with our previously disclosed 2020 organizational restructuring plan, and with respect to the first nine months of fiscal 2020 to exclude the impact of the one-time stock compensation expense associated with the previously disclosed option granted to Ms. Oprah Winfrey in connection with the Company extending its partnership with Ms. Winfrey (the “Winfrey Stock Compensation expense”), the 2020 restructuring charges and the impairment charge for our goodwill related to our Brazil reporting unit, as applicable. We generally refer to such non-GAAP measures as excluding or adjusting for the impact of the Winfrey Stock Compensation expense, 2020 restructuring charges and goodwill impairment charge. We also present within this Quarterly Report on Form 10-Q the non-GAAP financial measures: earnings before interest, taxes, depreciation, amortization and stock-based compensation (“EBITDAS”); earnings before interest, taxes, depreciation, amortization, stock-based compensation, 2020 restructuring charges and goodwill impairment (“Adjusted EBITDAS”); total debt less unamortized deferred financing costs, unamortized debt discount and cash on hand (i.e., net debt); and a net debt/Adjusted EBITDAS ratio. See “—Liquidity and Capital Resources—EBITDAS, Adjusted EBITDAS and Net Debt” for the reconciliations of these non-GAAP financial measures to the most comparable GAAP financial measure in each case. Our management believes these non-GAAP financial measures provide useful supplemental information to investors regarding the performance of our business and are useful for period-over-period comparisons of the performance of our business. While we believe that these non-GAAP financial measures are useful in evaluating our business, this information should be considered as supplemental in nature and is not meant to be considered in isolation or as a substitute for the related financial information prepared in accordance with GAAP. In addition, these non-GAAP financial measures may not be the same as similarly entitled measures reported by other companies.

USE OF CONSTANT CURRENCY

As exchange rates are an important factor in understanding period-to-period comparisons, we believe in certain cases 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 or being on a constant currency basis. These results should be considered in addition to, not as a substitute for, results reported in accordance with GAAP and are not meant to be considered in isolation. 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

Franchise Rights Acquired

Finite-lived franchise rights acquired are amortized over the remaining contractual period, which is generally less than one year. Indefinite-lived franchise rights acquired are tested on an annual basis for impairment.

In performing the impairment analysis for our indefinite-lived franchise rights acquired, the fair value for our franchise rights acquired is estimated using a discounted cash flow approach referred to as the hypothetical start-up approach for our franchise rights related to our Studio + Digital business and a relief from royalty methodology for our franchise rights related to our Digital 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. We have determined the appropriate unit of account for purposes of assessing impairment to be the combination of the rights in both the Studio + Digital business and Digital business in the country in which the applicable acquisition occurred. The book values of these franchise rights in the United States, Canada, United Kingdom, Australia, and New Zealand as of the September 26, 2020 balance sheet date were $671.9 million, $53.9 million, $11.5 million, $6.3 million, and $4.6 million, respectively.

In our hypothetical start-up approach analysis for fiscal 2020, we assumed that the year of maturity was reached after 7 years. Subsequent to the year of maturity, we estimated future cash flows for the Studio + Digital business in each country based on assumptions regarding revenue growth and operating income margins. The cash flows associated with the Digital business in each country were based on the expected Digital revenue for such country and the application of a royalty rate based on current market terms. The cash flows for the Studio + Digital and Digital businesses were discounted utilizing rates consistent with those utilized in the annual goodwill impairment analysis.

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Goodwill

In performing the impairment analysis for goodwill, the fair value for our 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 unit. We have determined the appropriate reporting unit for purposes of assessing annual impairment to be the country for all reporting units. The values of goodwill in the United States, Canada and other countries as of the September 26, 2020 balance sheet date were $103.0 million, $40.0 million and $9.8 million, respectively.

For all of our reporting units tested as of May 3, 2020, we estimated future cash flows by utilizing the historical debt-free cash flows (cash flows provided by operations less capital expenditures) attributable to that country and then applied expected future operating income growth rates for such country. We utilized operating income as the basis for measuring our potential growth because we believe it is the best indicator of the performance of our business. We then discounted the estimated future cash flows utilizing a discount rate which was calculated using the weighted-average cost of capital, which included the cost of equity and the cost of debt.

Franchise Rights Acquired and Goodwill Annual Impairment Test

We review indefinite-lived intangible assets, including franchise rights acquired with indefinite lives, and goodwill for potential impairment on at least an annual basis or more often if events so require. We performed fair value impairment testing as of May 3, 2020 and May 5, 2019, each the first day of fiscal May, on our indefinite-lived intangible assets and goodwill.

In performing our annual impairment analysis as of May 3, 2020 and May 5, 2019, we determined that the carrying amounts of our franchise rights acquired with indefinite lives units of account and goodwill reporting units did not exceed their respective fair values and, therefore, no impairment existed.

When determining fair value, we utilize various assumptions, including projections of future cash flows, growth rates and discount rates. A change in these underlying assumptions could cause a change in the results of the impairment assessments 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, we would be required to record a corresponding charge, which would impact earnings. We would also be required to reduce the carrying amounts of the related assets on our balance sheet. We continue to evaluate these assumptions and believe that these assumptions are appropriate.

In performing our annual impairment analysis, we also considered the trading value of both our equity and debt. If the trading values of both our equity and debt were to significantly decline from their current levels, we may have to take an impairment charge at the appropriate time, which could be material. For additional information on risks associated with our recognizing asset impairment charges, see “Item 1A. Risk Factors” of our Annual Report on Form 10-K for fiscal 2019.

Based on the results of our annual franchise rights acquired impairment analysis performed for all of our units of account, except for Canada and New Zealand, as of the September 26, 2020 balance sheet date, those units had an estimated fair value at least 35% higher than the respective unit’s carrying amount. Collectively, these units of account represent 92.2% of our total franchise rights acquired. Based on the results of our annual franchise rights acquired impairment test performed for our Canada unit of account, which holds 7.2% of our franchise rights acquired as of the September 26, 2020 balance sheet date, the estimated fair value of this unit of account exceeded its carrying value by approximately 16.5%. Based on the results of our annual franchise rights acquired impairment test performed for our New Zealand unit of account, which holds 0.6% of our franchise rights acquired as of the September 26, 2020 balance sheet date, the estimated fair value of this unit of account exceeded its carrying value by approximately 9.8%. Accordingly, a change in the underlying assumptions for New Zealand may change the results of the impairment assessment and, as such, could result in an impairment of the franchise rights acquired related to New Zealand, for which the net book value is $4.6 million as of September 26, 2020.

In performing this impairment analysis for fiscal 2020, for the year of maturity, we assumed Studio + Digital revenue (comprised of Studio + Digital Fees and revenues from products sold to members in studios) growth of (30.6%) to (39.3%) in the year of maturity from fiscal 2019, in each case, earned in the applicable country and assumed cumulative annual revenue growth rates for the years beyond the year of maturity of 1.7%. For the year of maturity and beyond, we assumed operating income margin rates of 0.2% to 12.4%.

Based on the results of our May 3, 2020 annual goodwill impairment test performed for all of our reporting units as of the September 26, 2020 balance sheet date, there was significant headroom in the goodwill impairment analysis for those units, with the difference between the carrying value and the fair value exceeding 100%.

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The following are the more significant assumptions utilized in our annual impairment analyses for fiscal 2020 and fiscal 2019:

 

 

Fiscal

 

 

Fiscal

 

 

 

2020

 

 

2019

 

Debt-Free Cumulative Annual Cash Flow Growth Rate

 

4.0% to 13.9%

 

 

4.2%

 

Discount Rate

 

9.5%

 

 

9.0%

 

Brazil Goodwill Impairment

With respect to our Brazil reporting unit, during the first quarter of fiscal 2020, we made a strategic decision to shift to an exclusively Digital business in that country. We determined that making this decision together with the negative impact of COVID-19, the ongoing challenging economic environment in Brazil and our reduced expectations regarding the reporting unit’s future operating cash flows required us to perform an interim goodwill impairment analysis. In performing this discounted cash flow analysis, we determined that the carrying amount of this reporting unit exceeded its fair value and as a result recorded an impairment charge of $3.7 million, which comprises the remaining balance of goodwill for this reporting unit.

As it relates to our goodwill impairment analysis for Brazil, we estimated future debt-free cash flows in contemplation of our growth strategies for that market. In developing these projections, we considered the growth strategies under the current market conditions in Brazil. We then discounted the estimated future cash flows utilizing a discount rate which was calculated using the weighted-average cost of capital, which included the cost of equity and the cost of debt.

Other Critical Accounting Policies

For a discussion of the other 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 2019. Our critical accounting policies have not changed since the end of fiscal 2019.

PERFORMANCE INDICATORS

Our management team regularly reviews and analyzes a number of financial and operating metrics, including the key performance indicators listed below, in order to manage our business, measure our performance, identify trends affecting our business, determine the allocation of resources, make decisions regarding corporate strategies and assess the quality and potential variability of our cash flows and earnings. We also believe that these key performance indicators are useful to both management and investors for forecasting purposes and to facilitate comparisons to our historical operating results. These metrics are supplemental to our GAAP results and include operational measures.

 

Revenues—Our “Service Revenues” consist of “Digital Subscription Revenues” and “Studio + Digital Fees”. “Digital Subscription Revenues” consist of the fees associated with subscriptions for our Digital offerings, including our Personal Coaching + Digital product. “Studio + Digital Fees” consist of the fees associated with our subscription plans for combined workshops and digital offerings and other payment arrangements for access to workshops. In addition, “product sales and other” consists of sales of consumer products in studios, via ecommerce and through several trusted retail partners, revenues from licensing, magazine subscriptions, publishing and third-party advertising in publications and on our websites and sales from the By Mail product, other revenues (including revenues from the WW Presents: Oprah’s 2020 Vision tour), and, in the case of the consolidated financial results and Other reportable segment, franchise fees with respect to commitment plans and royalties.

 

Paid Weeks—The “Paid Weeks” metric reports paid weeks by WW customers in Company-owned operations for a given period as follows: (i) “Digital Paid Weeks” is the total paid subscription weeks for our digital subscription products (including Personal Coaching + Digital); (ii) “Studio + Digital Paid Weeks” is the sum of total paid commitment plan weeks which include workshops and digital offerings and total “pay-as-you-go” weeks; and (iii) “Total Paid Weeks” is the sum of Digital Paid Weeks and Studio + Digital Paid Weeks.

 

Incoming Subscribers—“Subscribers” refer to Digital subscribers and Studio + Digital subscribers who participate in recur bill programs in Company-owned operations. The “Incoming Subscribers” metric reports WW subscribers in Company-owned operations at a given period start as follows: (i) “Incoming Digital Subscribers” is the total number of Digital, including Personal Coaching + Digital, subscribers; (ii) “Incoming Studio + Digital Subscribers” is the total number of commitment plan subscribers that have access to combined workshops and digital offerings; and (iii) “Incoming Subscribers” is the sum of Incoming Digital Subscribers and Incoming Studio + Digital Subscribers. Recruitment and retention are key drivers for this metric.


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End of Period Subscribers—The “End of Period Subscribers” metric reports WW subscribers in Company-owned operations at a given period end as follows: (i) “End of Period Digital Subscribers” is the total number of Digital, including Personal Coaching + Digital, subscribers; (ii) “End of Period Studio + Digital Subscribers” is the total number of commitment plan subscribers that have access to combined workshops and digital offerings; and (iii) “End of Period Subscribers” is the sum of End of Period Digital Subscribers and End of Period Studio + Digital Subscribers. Recruitment and retention are key drivers for this metric.

 

Gross profit and operating expenses as a percentage of revenue.

COVID-19 PANDEMIC

In March 2020, the World Health Organization categorized the outbreak of the novel coronavirus (COVID-19) as a pandemic. It continues to spread globally and to impact our business operations and the markets in which we operate. While the outbreak of COVID-19 did not have a significant effect on our reported results for the first quarter of fiscal 2020, it did have a significant effect on our reported results for the second and third quarters of fiscal 2020. The pandemic initially caused a significant decline in recruitments for both our Digital and our Studio + Digital businesses, beginning in the middle of March 2020, as compared to the prior year period. Starting in the middle of April 2020, Digital recruitment trends returned to growth. Our third quarter fiscal 2020 Digital recruitments were higher as compared to the prior year period. Our Studio + Digital business continued to experience significant declines in recruitments as compared to the prior year period through the end of the third quarter, a trend that is expected to continue in the fourth quarter of fiscal 2020 and potentially in subsequent periods. With approximately 90% of recruitments in the third quarter of fiscal 2020 coming from our Digital business, the recruitment mix shift in the quarter reflected the strength of our Digital business and the limited re-opening of our studios. This trend in Studio + Digital recruitments throughout the COVID-19 pandemic negatively impacted revenues in the third quarter of fiscal 2020 as compared to the prior year period. The pandemic has not materially impacted our member cancellation rates year-over-year to date. Overall member retention remained above ten months as of the end of the third quarter of fiscal 2020. These trends are reflected in the number of End of Period Subscribers for the third quarter of fiscal 2020, which was up 5% as compared to the prior year period, consisting of 3.8 million Digital subscribers and 0.9 million Studio + Digital subscribers.

The extent to which our operations and business trends will continue in future periods to be impacted by, and any unforeseen costs will result from, the ongoing outbreak of COVID-19 will depend largely on future developments, which are highly uncertain and cannot be accurately predicted. These developments include, among other things, new information that may emerge concerning the severity of the outbreak, health implications and vaccine availability, actions by government authorities to contain the outbreak or treat its impact, and changes in consumer behavior resulting from the outbreak and such government actions. We continue to actively monitor the ongoing global outbreak of COVID-19 and its impact and related developments and expect, similar to the third quarter of fiscal 2020, that it will significantly impact our reported results for the fourth quarter of fiscal 2020 and may potentially do so in subsequent periods.

In response to the public health crisis posed by COVID-19, we suspended our in-person workshops and moved quickly to transition these workshops to an entirely virtual experience. In June 2020, we began a phased re-opening with reduced operations of a limited number of our studio locations. We plan to continue these re-openings and resume in-person workshops where we can in a manner that promotes the health and safety of our employees and members. However, during these uncertain times, we may need to close re-opened studios, may not be able to open studios as planned or may need to further reduce operations. We continue to serve our members virtually, both via our Digital business and through virtual workshops now available to our Studio + Digital subscribers. Nevertheless, our business operations, recruitment trends with respect to our Studio + Digital business and in-studio product sales remain substantially affected by our suspension of our in-person workshops and reduced operations. We expect that applicable regulatory restrictions, including continued or reinstated stay-at-home requirements and restrictions on in-person group gatherings, may impact our ability to re-open our studio locations and may impose restrictions on how we conduct our in-person workshops as they resume, including as a result of social distancing requirements. Our ability to re-open studio locations and applicable regulatory restrictions on our workshops will vary by jurisdiction. Additionally, as we re-open studio locations, we may incur additional operating costs on a studio-by-studio basis.

We are accelerating our strategic digital transformation. This acceleration began with the launch of virtual workshops as previously discussed, and we expect to continue to evolve our virtual experience and offerings for our members. For example, we continue to work towards the launch of a new digitally-enabled, community-focused and coach-led offering this year, which will reflect learnings from our current virtual workshops and ongoing test pilots. We are reallocating certain resources and will incur additional costs to support this acceleration.

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As we continue to address the impact of the pandemic, and the related evolving legal and consumer landscape, we are focused on how to best meet our members’ and consumers’ needs as restrictions are lifted or reinstated and we continue our digital transformation. We are consolidating certain of our studios into branded studio locations and are also closing certain branded studio locations. The decision to re-open a studio location, if at all, or consolidate studio locations, will be influenced by a number of factors, including applicable legal restrictions, consumer confidence and preferences, changes in consumer behavior, and the protection of the health and safety of our employees and members, and will be dependent on aligning with our digital and brand strategy. The current number of our studio locations is lower than that prior to the pandemic, and we expect it to remain below pre-COVID-19 levels for the foreseeable future. As a result, we have incurred and will incur costs associated with our real estate realignment.

Due to the negative impact of COVID-19, and the uncertainty of the full extent of the magnitude and duration of such impact on our business and the economies and financial markets in which we operate, we implemented a $100.0 million cost-savings initiative with respect to our cost structure. We undertook this initiative to proactively manage our liquidity so we can maintain flexibility to respond to evolving business and consumer conditions arising from the pandemic, as well as continue to fund investments in innovating our program and long-term debt obligations. Additionally, in June 2020, we amended our Credit Agreement (as defined below) to relax the requirements of the financial maintenance covenant until the end of the second quarter of fiscal 2022 so as to provide additional flexibility for accessing liquidity available under our Revolving Credit Facility (as defined below).  See “—Liquidity and Capital Resources—Long-Term Debt—Senior Secured Credit Facilities” for additional details on this amendment. We expect to continue to assess the evolving impact of the COVID-19 pandemic, and intend to refine our cost-savings initiative and resource allocation accordingly. For additional information on our cash flows and long-term debt, see “—Liquidity and Capital Resources.”

While we expect the effects of the pandemic and the related responses to negatively impact our results of operations, cash flows and financial position, the uncertainty of the full extent of the duration and severity of the economic and operational impacts of COVID-19 means we cannot reasonably estimate the related financial impact at this time. For more information, see “Item 1A. Risk Factors” in Part II of this Quarterly Report on Form 10-Q. We continue to believe that our powerful communities and our ability to inspire people to adopt healthy habits will be invaluable to people across the globe as they continue to acclimate to new social and economic environments, and that they uniquely position us in the markets in which we operate.

34


 

RESULTS OF OPERATIONS

THREE MONTHS ENDED SEPTEMBER 26, 2020 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 28, 2019

The table below sets forth selected financial information for the third quarter of fiscal 2020 from our consolidated statements of net income for the three months ended September 26, 2020 versus selected financial information for the third quarter of fiscal 2019 from our consolidated statements of net income for the three months ended September 28, 2019.

Summary of Selected Financial Data

 

 

 

(In millions, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

For The Three Months Ended

 

 

 

 

 

 

% Change

 

 

September 26, 2020

 

 

September 28, 2019

 

 

Increase/

(Decrease)

 

 

%

Change

 

 

Constant

Currency

Revenues, net

 

$

320.7

 

 

$

348.6

 

 

$

(27.9

)

 

 

(8.0

%)

 

 

(9.4

%)

 

Cost of revenues

 

 

130.6

 

 

 

153.8

 

 

 

(23.2

)

 

 

(15.1

%)

 

 

(16.2

%)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

 

190.1

 

 

 

194.8

 

 

 

(4.7

)

 

 

(2.4

%)

 

 

(4.0

%)

 

Gross Margin %

 

 

59.3

%

 

 

55.9

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketing expenses

 

 

38.3

 

 

 

36.3

 

 

 

1.9

 

 

 

5.3

%

 

 

3.2

%

 

Selling, general & administrative

   expenses

 

 

59.2

 

 

 

63.7

 

 

 

(4.5

)

 

 

(7.1

%)

 

 

(7.9

%)

 

Operating income

 

 

92.6

 

 

 

94.7

 

 

 

(2.1

)

 

 

(2.2

%)

 

 

(4.2

%)

 

Operating Income Margin %

 

 

28.9

%

 

 

27.2

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

29.7

 

 

 

33.1

 

 

 

(3.4

)

 

 

(10.2

%)

 

 

(10.2

%)

 

Other (income) expense, net

 

 

(0.2

)

 

 

1.5

 

 

 

(1.7

)

 

 

100.0

%

*

 

100.0

%

*

Income before income taxes

 

 

63.1

 

 

 

60.2

 

 

 

3.0

 

 

 

4.9

%

 

 

1.8

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

 

8.6

 

 

 

13.1

 

 

 

(4.5

)

 

 

(34.4

%)

 

 

(38.6

%)

 

Net income

 

 

54.5

 

 

 

47.0

 

 

 

7.5

 

 

 

15.9

%

 

 

13.0

%

 

Net loss attributable to the

   noncontrolling interest

 

 

0.0

 

 

 

0.1

 

 

 

(0.0

)

 

 

(80.6

%)

 

 

(73.5

%)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to

   WW International, Inc.

 

$

54.5

 

 

$

47.1

 

 

$

7.4

 

 

 

15.8

%

 

 

12.9

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average diluted shares

   outstanding

 

 

70.0

 

 

 

69.6

 

 

 

0.4

 

 

 

0.6

%

 

 

0.6

%

 

Diluted earnings per share

 

$

0.78

 

 

$

0.68

 

 

$

0.10

 

 

 

15.2

%

 

 

12.3

%

 

 

Note: Totals may not sum due to rounding.

*Note: Percentage in excess of 100.0%.

 


35


 

Certain results for the third quarter of fiscal 2020 are adjusted to exclude the impact of the $2.3 million of charges associated with our previously disclosed 2020 organizational restructuring plan. See “Non-GAAP Financial Measures” above. The table below sets forth a reconciliation of certain of those components of our selected financial data for the three months ended September 26, 2020 which have been adjusted.

 

 

 

 

 

 

Gross

 

 

 

 

 

 

Operating

 

 

 

Gross

 

 

Profit

 

 

Operating

 

 

Income

 

(in millions except percentages)

 

Profit

 

 

Margin

 

 

Income

 

 

Margin

 

Third Quarter of Fiscal 2020

 

$

190.1

 

 

 

59.3

%

 

$

92.6

 

 

 

28.9

%

Adjustments to reported amounts (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2020 restructuring charges

 

 

1.1

 

 

 

 

 

 

 

2.3

 

 

 

 

 

Total adjustments (1)

 

 

1.1

 

 

 

 

 

 

 

2.3

 

 

 

 

 

Third Quarter of Fiscal 2020, as adjusted (1)

 

$

191.2

 

 

 

59.6

%

 

$

94.9

 

 

 

29.6

%

 

Note: Totals may not sum due to rounding.

(1)

The “As adjusted” measure is a non-GAAP financial measure that adjusts the consolidated statements of net income for the third quarter of fiscal 2020 to exclude the impact of the $2.3 million ($1.7 million after tax) of 2020 restructuring charges. See “Non-GAAP Financial Measures” above for an explanation of our use of non-GAAP financial measures.

Consolidated Results

Revenues

Revenues in the third quarter of fiscal 2020 were $320.7 million, a decrease of $27.9 million, or 8.0%, versus the third quarter of fiscal 2019. Excluding the impact of foreign currency, which positively impacted our revenues for the third quarter of fiscal 2020 by $4.8 million, revenues in the third quarter of fiscal 2020 would have decreased 9.4% versus the prior year period. This decrease was driven by lower revenues related to Studio + Digital Fees and in-studio product sales as a result of the closure of a majority of our studios due to the COVID-19 pandemic. Furthermore, the subsequent reopening of a limited number of our studios in each market was further impacted by the strategic realignment of our Studio + Digital business. See “—Segment Results” for additional details on revenues.

Cost of Revenues and Gross Profit

Total cost of revenues in the third quarter of fiscal 2020 decreased $23.2 million, or 15.1%, versus the prior year period. Excluding the impact of $1.1 million of 2020 restructuring charges, total cost of revenues in the third quarter of fiscal 2020 would have decreased by 15.8%, or 16.9% on a constant currency basis, versus the prior year period. Gross profit decreased $4.7 million, or 2.4%, in the third quarter of fiscal 2020 compared to the third quarter of fiscal 2019. Excluding the impact of foreign currency, which positively impacted gross profit for the third quarter of fiscal 2020 by $3.1 million, gross profit in the third quarter of fiscal 2020 would have decreased 4.0% versus the prior year period. Excluding the impact of $1.1 million of 2020 restructuring charges, gross profit in the third quarter of fiscal 2020 would have decreased by 1.9%, or 3.5% on a constant currency basis, versus the prior year period primarily due to the decrease in revenues. Gross margin in the third quarter of fiscal 2020 increased 3.4% to 59.3% versus 55.9% in the third quarter of fiscal 2019. Excluding the impact of $1.1 million of 2020 restructuring charges, gross margin in the third quarter of fiscal 2020 would have increased 3.7% to 59.6% versus the prior year period. Gross margin increase was driven primarily by a mix shift to our higher margin Digital business.

Marketing

Marketing expenses for the third quarter of fiscal 2020 increased $1.9 million, or 5.3%, versus the third quarter of fiscal 2019. Excluding the impact of foreign currency, which increased marketing expenses for the third quarter of fiscal 2020 by $0.8 million, marketing expenses in the third quarter of fiscal 2020 would have increased 3.2% versus the third quarter of fiscal 2019. This increase in marketing expenses was largely due to increased TV media and production costs in our Continental European markets. Marketing expenses as a percentage of revenue for the third quarter of fiscal 2020 increased to 11.9% from 10.4% for the third quarter of fiscal 2019.


36


 

Selling, General and Administrative

Selling, general and administrative expenses for the third quarter of fiscal 2020 decreased $4.5 million, or 7.1%, versus the third quarter of fiscal 2019. Excluding the impact of foreign currency, which increased selling, general and administrative expenses for the third quarter of fiscal 2020 by $0.5 million, selling, general and administrative expenses in the third quarter of fiscal 2020 would have decreased 7.9% versus the prior year period. Excluding the impact of the $1.2 million of 2020 restructuring charges, selling, general and administrative expenses in the third quarter of fiscal 2020 would have decreased by 9.0%, or 9.7% on a constant currency basis, versus the prior year period. The decrease in selling, general and administrative expenses in the third quarter of fiscal 2020 was driven primarily by lower salary and related costs, travel & entertainment and professional fees versus the prior year period. Selling, general and administrative expenses as a percentage of revenue for the third quarter of fiscal 2020 increased to 18.5% from 18.3% for the third quarter of fiscal 2019.

Operating Income

Operating income in the third quarter of fiscal 2020 decreased $2.1 million, or 2.2%, versus the prior year period. Excluding the impact of foreign currency, which positively impacted operating income for the third quarter of fiscal 2020 by $1.9 million, operating income in the third quarter of fiscal 2020 would have decreased 4.2% versus the prior year period. Excluding the impact of the $2.3 million of 2020 restructuring charges, operating income in the third quarter of fiscal 2020 would have increased by 0.2%, or decreased by 1.8% on a constant currency basis, versus the prior year period. Operating income margin in the third quarter of fiscal 2020 increased 1.7% to 28.9% versus 27.2% in the third quarter of fiscal 2019. Excluding the impact of the 2020 restructuring charges, operating income margin in the third quarter of fiscal 2020 would have increased by 2.4%, or 2.3% on a constant currency basis, versus the prior year period. The increase in operating income margin was driven primarily by an increase in gross margin, partially offset by an increase in marketing expenses as a percentage of revenue.

Interest Expense

Interest expense in the third quarter of fiscal 2020 decreased $3.4 million, or 10.2%, versus the third quarter of fiscal 2019. The decrease in interest expense was driven primarily by a decrease in our outstanding indebtedness resulting from principal repayments. The effective interest rate on our debt, based on interest incurred (which includes amortization of our deferred financing costs and debt discount) and our average borrowings during the third quarter of fiscal 2020 and the third quarter of fiscal 2019 and excluding the impact of our interest rate swaps then in effect, decreased to 6.57% per annum at the end of the third quarter of fiscal 2020 from 7.82% per annum at the end of the third quarter of fiscal 2019. Including the impact of our interest rate swaps then in effect, the effective interest rate on our debt, based on interest incurred (which includes amortization of our deferred financing costs and debt discount) and our average borrowings during the third quarter of fiscal 2020 and the third quarter of fiscal 2019, decreased to 7.53% per annum at the end of the third quarter of fiscal 2020 from 7.87% per annum at the end of the third quarter of fiscal 2019.  See “—Liquidity and Capital Resources—Long-Term Debt” for additional details regarding our debt, including interest rates and payments thereon. For additional details on our interest rate swaps, see “Item 3. Quantitative and Qualitative Disclosures about Market Risk” in Part I of this Quarterly Report on Form 10-Q.

Other (Income) Expense, Net

Other (income) expense, net, which consists primarily of the impact of foreign currency on intercompany transactions, changed by $1.7 million in the third quarter of fiscal 2020 to $0.2 million of income as compared to $1.5 million of expense in the prior year period.

Tax

Our effective tax rate for the third quarter of fiscal 2020 was 13.6% as compared to 21.8% for the third quarter of fiscal 2019. The tax expense in the third quarter of fiscal 2020 was impacted by a tax benefit related to the reversal of the 2018, 2019 and 2020 tax impact of global intangible low-taxed income, or GILTI. For the third quarter of fiscal 2020, the difference between the U.S. federal statutory tax rate and our consolidated effective tax rate was primarily due to tax expense from income earned in foreign jurisdictions and state income tax expense, partially offset by a tax benefit related to foreign-derived intangible income, or FDII. For the third quarter of fiscal 2019, the difference between the U.S. federal statutory tax rate and our consolidated effective tax rate was primarily due to tax expense related to income earned in foreign jurisdictions and tax expense related to GILTI, partially offset by a tax benefit related to FDII and favorable tax return adjustments.

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act, or the CARES Act, was signed into law. The CARES Act includes provisions relating to modifications to the net interest deduction limitation, net operating loss carryforward rules, refundable payroll tax credits and deferment of the employer portion of certain payroll taxes.


37


 

On July 20, 2020, the U.S. Treasury Department released final regulations under Internal Revenue Code Section 951A (TD 9902) permitting a taxpayer to elect to exclude from its GILTI inclusion items of income subject to a high effective rate of foreign tax.  As a result of the final regulations, we recorded a $7.6 million discrete tax benefit in the third quarter of fiscal 2020 related to the 2018 and 2019 taxes previously accrued attributable to GILTI.

Net Income Attributable to the Company and Earnings Per Share

Net income attributable to the Company in the third quarter of fiscal 2020 reflected a $7.4 million, or 15.8%, increase from the third quarter of fiscal 2019. Excluding the impact of foreign currency, which positively impacted net income attributable to the Company in the third quarter of fiscal 2020 by $1.3 million, net income attributable to the Company in the third quarter of fiscal 2020 would have increased 12.9% from the third quarter of fiscal 2019. Net income attributable to the Company in the third quarter of fiscal 2020 included a $1.7 million impact from 2020 restructuring charges. 

Earnings per fully diluted share, or EPS, in the third quarter of fiscal 2020 was $0.78 compared to $0.68 in the third quarter of fiscal 2019. EPS for the third quarter of fiscal 2020 included a $0.02 impact from 2020 restructuring charges. Additionally, EPS for the third quarter of fiscal 2020 included a $0.11 tax benefit related to the reversal of the 2018 and 2019 tax impact of GILTI.


38


 

Segment Results

Metrics and Business Trends

The following tables set forth key metrics by reportable segment for the third quarter of fiscal 2020 and the percentage change in those metrics versus the prior year period:

(in millions except percentages and as noted)

 

 

Q3 2020

 

 

 

GAAP

 

 

Constant Currency

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product

 

 

 

 

 

 

 

 

 

 

Product

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

Service

 

 

Sales &

 

 

Total

 

 

Service

 

 

Sales &

 

 

Total

 

 

Paid

 

 

Incoming

 

 

EOP

 

 

 

Revenues

 

 

Other

 

 

Revenues

 

 

Revenues

 

 

Other

 

 

Revenues

 

 

Weeks

 

 

Subscribers

 

 

Subscribers

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

North America

 

$

191.2

 

 

$

24.0

 

 

$

215.2

 

 

$

191.4

 

 

$

24.0

 

 

$

215.3

 

 

 

40.1

 

 

 

3,209.2

 

 

 

2,990.3

 

CE

 

 

67.5

 

 

 

9.0

 

 

 

76.5

 

 

 

64.1

 

 

 

8.5

 

 

 

72.6

 

 

 

15.8

 

 

 

1,272.6

 

 

 

1,206.3

 

UK

 

 

16.7

 

 

 

3.7

 

 

 

20.5

 

 

 

16.0

 

 

 

3.6

 

 

 

19.5

 

 

 

5.0

 

 

 

383.7

 

 

 

367.9

 

Other (1)

 

 

6.8

 

 

 

1.7

 

 

 

8.5

 

 

 

6.7

 

 

 

1.7

 

 

 

8.4

 

 

 

1.2

 

 

 

97.6

 

 

 

97.9

 

Total

 

$

282.3

 

 

$

38.4

 

 

$

320.7

 

 

$

278.2

 

 

$

37.7

 

 

$

315.9

 

 

 

62.1

 

 

 

4,963.1

 

 

 

4,662.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

% Change Q3 2020 vs. Q3 2019

 

North America

 

 

(8.9

%)

 

 

(29.0

%)

 

 

(11.7

%)

 

 

(8.8

%)

 

 

(29.0

%)

 

 

(11.6

%)

 

 

5.7

%

 

 

9.1

%

 

 

4.8

%

CE

 

 

7.4

%

 

 

8.8

%

 

 

7.6

%

 

 

1.9

%

 

 

3.2

%

 

 

2.0

%

 

 

11.0

%

 

 

11.9

%

 

 

11.0

%

UK

 

 

(3.5

%)

 

 

(33.3

%)

 

 

(10.7

%)

 

 

(7.8

%)

 

 

(36.4

%)

 

 

(14.8

%)

 

 

(2.7

%)

 

 

(0.9

%)

 

 

(4.5

%)

Other (1)

 

 

(13.8

%)

 

 

(41.4

%)

 

 

(21.2

%)

 

 

(14.7

%)

 

 

(43.1

%)

 

 

(22.3

%)

 

 

(7.3

%)

 

 

(5.0

%)

 

 

(5.2

%)

Total

 

 

(5.3

%)

 

 

(24.0

%)

 

 

(8.0

%)

 

 

(6.7

%)

 

 

(25.4

%)

 

 

(9.4

%)

 

 

6.0

%

 

 

8.6

%

 

 

5.3

%

Note: Totals may not sum due to rounding.

(1)

Represents Australia, New Zealand and emerging markets operations and franchise revenues.

 

 

(in millions except percentages and as noted)

 

 

Q3 2020

 

 

 

Digital Subscription Revenues

 

 

Digital

 

 

Incoming

 

 

EOP

 

 

Studio + Digital Fees

 

 

Studio + Digital

 

 

Incoming

 

 

EOP

 

 

 

 

 

 

 

Constant

 

 

Paid

 

 

Digital

 

 

Digital

 

 

 

 

 

 

Constant

 

 

Paid

 

 

Studio + Digital

 

 

Studio + Digital

 

 

 

GAAP

 

 

Currency

 

 

Weeks

 

 

Subscribers

 

 

Subscribers

 

 

GAAP

 

 

Currency

 

 

Weeks

 

 

Subscribers

 

 

Subscribers

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

North America

 

$

122.1

 

 

$

122.2

 

 

 

31.8

 

 

 

2,475.4

 

 

 

2,416.4

 

 

$

69.1

 

 

$

69.2

 

 

 

8.3

 

 

 

733.9

 

 

 

573.9

 

CE

 

 

53.2

 

 

 

50.5

 

 

 

13.9

 

 

 

1,104.7

 

 

 

1,064.7

 

 

 

14.3

 

 

 

13.6

 

 

 

1.9

 

 

 

167.8

 

 

 

141.5

 

UK

 

 

9.2

 

 

 

8.8

 

 

 

3.4

 

 

 

249.9

 

 

 

255.7

 

 

 

7.5

 

 

 

7.2

 

 

 

1.6

 

 

 

133.8

 

 

 

112.2

 

Other (1)

 

 

4.2

 

 

 

4.1

 

 

 

0.9

 

 

 

69.7

 

 

 

72.5

 

 

 

2.7

 

 

 

2.7

 

 

 

0.3

 

 

 

27.9

 

 

 

25.4

 

Total

 

$

188.7

 

 

$

185.6

 

 

 

49.9

 

 

 

3,899.7

 

 

 

3,809.4

 

 

$

93.6

 

 

$

92.6

 

 

 

12.2

 

 

 

1,063.4

 

 

 

853.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

% Change Q3 2020 vs. Q3 2019

 

North America

 

 

20.2

%

 

 

20.3

%

 

 

24.7

%

 

 

24.0

%

 

 

24.1

%

 

 

(36.2

%)

 

 

(36.2

%)

 

 

(33.1

%)

 

 

(22.3

%)

 

 

(36.6

%)

CE

 

 

26.0

%

 

 

19.5

%

 

 

20.2

%

 

 

20.8

%

 

 

21.2

%

 

 

(30.8

%)

 

 

(34.2

%)

 

 

(28.2

%)

 

 

(24.8

%)

 

 

(32.1

%)

UK

 

 

39.6

%

 

 

33.3

%

 

 

33.2

%

 

 

28.1

%

 

 

29.2

%

 

 

(30.0

%)

 

 

(33.0

%)

 

 

(38.3

%)

 

 

(30.3

%)

 

 

(40.1

%)

Other (1)

 

 

17.9

%

 

 

16.0

%

 

 

14.5

%

 

 

17.4

%

 

 

18.1

%

 

 

(39.2

%)

 

 

(39.4

%)

 

 

(39.5

%)

 

 

(35.8

%)

 

 

(39.3

%)

Total

 

 

22.6

%

 

 

20.5

%

 

 

23.8

%

 

 

23.2

%

 

 

23.5

%

 

 

(35.1

%)

 

 

(35.8

%)

 

 

(33.3

%)

 

 

(24.2

%)

 

 

(36.5

%)

Note: Totals may not sum due to rounding.

(1)

Represents Australia, New Zealand and emerging markets operations and franchise revenues.

39


 

North America Performance

The decrease in North America revenues in the third quarter of fiscal 2020 versus the prior year period was driven primarily by a decrease in Service Revenues. The decrease in Service Revenues in the third quarter of fiscal 2020 versus the prior year period was driven by a decrease in Studio + Digital Fees, partially offset by an increase in Digital Subscription Revenues. Studio + Digital Fees were negatively impacted by the significant recruitment decline in the third quarter of fiscal 2020 driven by the closure of a majority of our studios due to the COVID-19 pandemic. Furthermore, the subsequent reopening of a limited number of our studios was further impacted by the strategic realignment of our Studio + Digital business. The increase in North America Total Paid Weeks was driven by the higher number of Incoming Digital Subscribers at the beginning of the third quarter of fiscal 2020 versus the beginning of the third quarter of fiscal 2019 and higher Digital recruitments in the third quarter of fiscal 2020 versus the prior year period. Higher Digital recruitments in the third quarter of fiscal 2020 were driven by the appeal of the myWW program and our digital tools, as well as strong marketing execution versus the prior year period.

The decrease in North America product sales and other in the third quarter of fiscal 2020 versus the prior year period was driven primarily by a decrease in in-studio product sales.

Continental Europe Performance

The increase in Continental Europe revenues in the third quarter of fiscal 2020 versus the prior year period was driven primarily by an increase in Service Revenues. The increase in Service Revenues in the third quarter of fiscal 2020 versus the prior year period was driven by an increase in Digital Subscription Revenues, partially offset by a decrease in Studio + Digital Fees. Studio + Digital Fees were negatively impacted by the significant recruitment decline in the third quarter of fiscal 2020 driven by the closure of a majority of our studios due to the COVID-19 pandemic. Furthermore, the subsequent reopening of a limited number of our studios was further impacted by the strategic realignment of our Studio + Digital business. The increase in Continental Europe Total Paid Weeks was driven primarily by the higher number of Incoming Digital Subscribers at the beginning of the third quarter of fiscal 2020 versus the beginning of the third quarter of fiscal 2019 and higher Digital recruitments in the third quarter of fiscal 2020 versus the prior year period. Higher Digital recruitments in the third quarter of fiscal 2020 were driven by the appeal of the myWW program and our digital tools, as well as strong marketing execution versus the prior year period.

The increase in Continental Europe product sales and other in the third quarter of fiscal 2020 versus the prior year period was driven primarily by an increase in product sales.

United Kingdom Performance

The decrease in UK revenues in the third quarter of fiscal 2020 versus the prior year period was driven by a decrease in product sales and other and, to a lesser extent, a decrease in Service Revenues. The decrease in Service Revenues in the third quarter of fiscal 2020 versus the prior year period was driven by a decrease in Studio + Digital Fees, partially offset by an increase in Digital Subscription Revenues. The decrease in UK Total Paid Weeks was driven primarily by the significant Studio + Digital recruitment decline in the third quarter of fiscal 2020 driven by the closure of a majority of our studios due to the COVID-19 pandemic. Furthermore, the subsequent reopening of a limited number of our studios was further impacted by the strategic realignment of our Studio + Digital business, partially offset by the increase in Digital recruitments and by the higher number of Incoming Digital Subscribers at the beginning of the third quarter of fiscal 2020 versus the beginning of the third quarter of fiscal 2019.

The decrease in UK product sales and other in the third quarter of fiscal 2020 versus the prior year period was driven primarily by a decrease in in-studio product sales.

Other Performance

The decrease in Other revenues in the third quarter of fiscal 2020 versus the prior year period was driven by both a decrease in Service Revenues and a decrease in product sales and other. The decrease in Service Revenues in the third quarter of fiscal 2020 versus the prior year period was driven by a decrease in Studio + Digital Fees.

The decrease in Other product sales and other in the third quarter of fiscal 2020 versus the prior year period was driven by both a decrease in franchise commissions and a decrease in product sales.

 

40


 

RESULTS OF OPERATIONS

NINE MONTHS ENDED SEPTEMBER 26, 2020 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 28, 2019

The table below sets forth selected financial information for the first nine months of fiscal 2020 from our consolidated statements of net income for the nine months ended September 26, 2020 versus selected financial information for the first nine months of fiscal 2019 from our consolidated statements of net income for the nine months ended September 28, 2019:

Summary of Selected Financial Data

 

 

 

(In millions, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

For The Nine Months Ended

 

 

 

 

 

 

% Change

 

 

September 26, 2020

 

 

September 28, 2019

 

 

Increase/

(Decrease)

 

 

%

Change

 

 

Constant

Currency

Revenues, net

 

$

1,054.7

 

 

$

1,080.8

 

 

$

(26.1

)

 

 

(2.4

%)

 

 

(2.2

%)

 

Cost of revenues

 

 

458.9

 

 

 

469.2

 

 

 

(10.3

)

 

 

(2.2

%)

 

 

(2.0

%)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

 

595.8

 

 

 

611.5

 

 

 

(15.8

)

 

 

(2.6

%)

 

 

(2.4

%)

 

Gross Margin %

 

 

56.5

%

 

 

56.6

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketing expenses

 

 

198.1

 

 

 

200.5

 

 

 

(2.5

)

 

 

(1.2

%)

 

 

(1.0

%)

 

Selling, general & administrative

   expenses

 

 

225.5

 

 

 

188.9

 

 

 

36.6

 

 

 

19.4

%

 

 

19.7

%

 

Goodwill impairment

 

 

3.7

 

 

 

 

 

 

3.7

 

 

 

100.0

%

 

 

100.0

%

 

Operating income

 

 

168.5

 

 

 

222.1

 

 

 

(53.6

)

 

 

(24.1

%)

 

 

(24.5

%)

 

Operating Income Margin %

 

 

16.0

%

 

 

20.6

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

92.3

 

 

 

103.0

 

 

 

(10.8

)

 

 

(10.4

%)

 

 

(10.4

%)

 

Other expense, net

 

 

0.2

 

 

 

2.2

 

 

 

(2.0

)

 

 

(89.6

%)

 

 

(89.6

%)

 

Income before income taxes

 

 

76.0

 

 

 

116.9

 

 

 

(40.9

)

 

 

(35.0

%)

 

 

(35.6

%)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

 

13.5

 

 

 

26.8

 

 

 

(13.3

)

 

 

(49.5

%)

 

 

(49.3

%)

 

Net income

 

 

62.4

 

 

 

90.0

 

 

 

(27.6

)

 

 

(30.6

%)

 

 

(31.5

%)

 

Net loss attributable to the

   noncontrolling interest

 

 

0.0

 

 

 

0.2

 

 

 

(0.2

)

 

 

(86.2

%)

 

 

(80.5

%)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to

   WW International, Inc.

 

$

62.5

 

 

$

90.2

 

 

$

(27.8

)

 

 

(30.8

%)

 

 

(31.6

%)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average diluted shares

   outstanding

 

 

69.9

 

 

 

69.4

 

 

 

0.6

 

 

 

0.8

%

 

 

0.8

%

 

Diluted earnings per share

 

$

0.89

 

 

$

1.30

 

 

$

(0.41

)

 

 

(31.3

%)

 

 

(32.2

%)

 

 

Note: Totals may not sum due to rounding.


41


 

Certain results for the first nine months of fiscal 2020 are adjusted to exclude the impact of the $32.7 million one-time stock compensation expense associated with the previously disclosed option granted to Ms. Winfrey in connection with the Company extending its partnership with Ms. Winfrey, the $13.5 million of charges associated with our previously disclosed 2020 organizational restructuring plan and the $3.7 million impairment charge for goodwill related to our Brazil reporting unit. See “Non-GAAP Financial Measures” above. The table below sets forth a reconciliation of certain of those components of our selected financial data for the first nine months ended September 26, 2020 which have been adjusted.

 

 

 

 

 

 

Gross

 

 

 

 

 

 

Operating

 

 

 

Gross

 

 

Profit

 

 

Operating

 

 

Income

 

(in millions except percentages)

 

Profit

 

 

Margin

 

 

Income

 

 

Margin

 

First Nine Months of Fiscal 2020

 

$

595.8

 

 

 

56.5

%

 

$

168.5

 

 

 

16.0

%

Adjustments to reported amounts (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Winfrey Stock Compensation expense

 

 

 

 

 

 

 

 

 

32.7

 

 

 

 

 

2020 restructuring charges

 

 

7.6

 

 

 

 

 

 

 

13.5

 

 

 

 

 

Goodwill impairment

 

 

 

 

 

 

 

 

 

3.7

 

 

 

 

 

Total adjustments (1)

 

 

7.6

 

 

 

 

 

 

 

49.8

 

 

 

 

 

First Nine Months of Fiscal 2020, as adjusted (1)

 

$

603.3

 

 

 

57.2

%

 

$

218.3

 

 

 

20.7

%

 

Note: Totals may not sum due to rounding.

(1)

The “As adjusted” measure is a non-GAAP financial measure that adjusts the consolidated statements of net income for the first nine months of fiscal 2020 to exclude the impact of the $32.7 million ($24.4 million after tax) Winfrey Stock Compensation expense, the $13.5 million ($10.0 million after tax) of 2020 restructuring charges and the $3.7 million ($2.7 million after tax) goodwill impairment charge. See “Non-GAAP Financial Measures” above for an explanation of our use of non-GAAP financial measures.

Consolidated Results

Revenues

Revenues in the first nine months of fiscal 2020 were $1,054.7 million, a decrease of $26.1 million, or 2.4%, versus the first nine months of fiscal 2019. Excluding the impact of foreign currency, which negatively impacted our revenues for the first nine months of fiscal 2020 by $2.3 million, revenues in the first nine months of fiscal 2020 would have decreased 2.2% versus the prior year period. This decrease was driven primarily by lower revenues related to Studio + Digital Fees and in-studio product sales as a result of the closure of substantially all of our studios due to the COVID-19 pandemic. Furthermore, the subsequent reopening of a limited number of our studios in each market was further impacted by the strategic realignment of our Studio + Digital business. See “—Segment Results” for additional details on revenues.    

Cost of Revenues and Gross Profit

Total cost of revenues in the first nine months of fiscal 2020 decreased $10.3 million, or 2.2%, versus the prior year period. Excluding the impact of $7.6 million of 2020 restructuring charges, total cost of revenues in the first nine months of fiscal 2020 would have decreased by 3.8%, or 3.6% on a constant currency basis, versus the prior year period. Gross profit decreased $15.8 million, or 2.6%, in the first nine months of fiscal 2020 compared to the first nine months of fiscal 2019. Excluding the impact of foreign currency, which negatively impacted gross profit for the first nine months of fiscal 2020 by $1.3 million, gross profit in the first nine months of fiscal 2020 would have decreased 2.4% versus the prior year period. Excluding the impact of $7.6 million of 2020 restructuring charges, gross profit in the first nine months of fiscal 2020 would have decreased by 1.3%, or 1.1% on a constant currency basis, versus the prior year period. Gross margin decreased to 56.5% in the first nine months of fiscal 2020 as compared to 56.6% in the prior year period. Excluding the impact of $7.6 million of 2020 restructuring charges, gross margin in the first nine months of fiscal 2020 would have increased 0.6% to 57.2% versus the prior year period. Gross margin increase was driven by a mix shift to our higher margin Digital business, partially offset by the net profit from the WW Presents: Oprah’s 2020 Vision tour as a percentage of revenue.

Marketing

Marketing expenses for the first nine months of fiscal 2020 decreased $2.5 million, or 1.2%, versus the first nine months of fiscal 2019. Excluding the impact of foreign currency, which decreased marketing expenses for the first nine months of fiscal 2020 by $0.5 million, marketing expenses in the first nine months of fiscal 2020 would have decreased 1.0% versus the first nine months of fiscal 2019. Marketing expenses as a percentage of revenue increased to 18.8% in the first nine months of fiscal 2020 as compared to 18.6% in the prior year period.


42


 

Selling, General and Administrative

Selling, general and administrative expenses for the first nine months of fiscal 2020 increased $36.6 million, or 19.4%, versus the first nine months of fiscal 2019. Excluding the impact of foreign currency, which decreased selling, general and administrative expenses for the first nine months of fiscal 2020 by $0.5 million, selling, general and administrative expenses in the first nine months of fiscal 2020 would have increased 19.7% versus the prior year period. Excluding the impact of the $32.7 million Winfrey Stock Compensation expense and $5.9 million of 2020 restructuring charges, selling, general and administrative expenses in the first nine months of fiscal 2020 would have decreased by 1.0%, or 0.8% on a constant currency basis, versus the prior year period. Selling, general and administrative expenses as a percentage of revenue increased to 21.4% in the first nine months of fiscal 2020 as compared to 17.5% in the prior year period.

Impairment

In performing our interim impairment analysis for our Brazil reporting unit, we determined that, based on the fair values calculated, the carrying amount of goodwill related to our Brazil reporting unit exceeded our fair value and recorded an impairment charge of $3.7 million for the first nine months of fiscal 2020.

Operating Income

Operating income in the first nine months of fiscal 2020 decreased $53.6 million, or 24.1%, versus the prior year period. Excluding the impact of foreign currency, which positively impacted operating income for the first nine months of fiscal 2020 by $0.7 million, operating income in the first nine months of fiscal 2020 would have decreased 24.5% versus the prior year period. Excluding the impact of the $32.7 million Winfrey Stock Compensation expense, the $13.5 million of 2020 restructuring charges and the $3.7 million goodwill impairment charge related to our Brazil reporting unit, operating income in the first nine months of fiscal 2020 would have decreased by 1.7%, or 1.6% on a constant currency basis, versus the prior year period. This decrease in operating income was driven primarily by a decrease in gross profit and increase in selling, general and administrative expenses, partially offset by a decrease in marketing expenses, as compared to the prior year period. Operating income margin in the first nine months of fiscal 2020 decreased 4.6% to 16.0% versus 20.6% in the first nine months of fiscal 2019. Excluding the impact of the Winfrey Stock Compensation expense, 2020 restructuring charges and goodwill impairment, operating income margin in the first nine months of fiscal 2020 would have increased by 0.1% both as reported and on a constant currency basis versus the prior year period.

Interest Expense

Interest expense in the first nine months of fiscal 2020 decreased $10.8 million, or 10.4%, versus the first nine months of fiscal 2019. The decrease in interest expense was driven primarily by a decrease in our outstanding indebtedness resulting from principal repayments. The effective interest rate on our debt, based on interest incurred (which includes amortization of our deferred financing costs and debt discount) and our average borrowings during the first nine months of fiscal 2020 and the first nine months of fiscal 2019 and excluding the impact of our interest rate swaps then in effect, decreased to 6.84% per annum at the end of the first nine months of fiscal 2020 from 8.06% per annum at the end of the first nine months of fiscal 2019. Including the impact of our interest rate swaps then in effect, the effective interest rate on our debt, based on interest incurred (which includes amortization of our deferred financing costs and debt discount) and our average borrowings during the first nine months of fiscal 2020 and the first nine months of fiscal 2019, decreased to 7.53% per annum at the end of the first nine months of fiscal 2020 from 7.93% per annum at the end of the first nine months of fiscal 2019. See “—Liquidity and Capital Resources—Long-Term Debt” for additional details regarding our debt, including interest rates and payments thereon. For additional details on our interest rate swaps, see “Item 3. Quantitative and Qualitative Disclosures about Market Risk” in Part I of this Quarterly Report on Form 10-Q.

Other Expense, Net

Other expense, net, which consists primarily of the impact of foreign currency on intercompany transactions, decreased by $2.0 million in the first nine months of fiscal 2020 to $0.2 million of expense as compared to $2.2 million of expense in the prior year period.

43


 

Tax

Our effective tax rate for the first nine months of fiscal 2020 was 17.8% as compared to 23.0% for the first nine months of fiscal 2019. The tax expense for the first nine months of fiscal 2020 was impacted by a tax benefit related to the reversal of the 2018, 2019 and 2020 tax impact of GILTI and a tax windfall from stock compensation, partially offset by an impairment of our Brazil reporting unit which has a full valuation allowance and an increase to tax reserves related to a foreign income tax audit. For the first nine months of fiscal 2020, the difference between the U.S. federal statutory tax rate and our consolidated effective tax rate was primarily due to tax expense from income earned in foreign jurisdictions and state income tax expense, partially offset by a tax benefit related to FDII. For the first nine months of fiscal 2019, the difference between the U.S. federal statutory tax rate and our consolidated effective tax rate was primarily due to tax expense related to income earned in foreign jurisdictions, tax expense related to GILTI and state income tax expense, partially offset by tax benefits related to FDII, the reversal of tax reserves no longer needed and the cessation of certain publishing operations.

On March 27, 2020, the CARES Act was signed into law. The CARES Act includes provisions relating to modifications to the net interest deduction limitation, net operating loss carryforward rules, refundable payroll tax credits and deferment of the employer portion of certain payroll taxes.

On July 20, 2020, the U.S. Treasury Department released final regulations under Internal Revenue Code Section 951A (TD 9902) permitting a taxpayer to elect to exclude from its GILTI inclusion items of income subject to a high effective rate of foreign tax.  As a result of the final regulations, we recorded a $7.6 million discrete tax benefit in the third quarter of fiscal 2020 related to the 2018 and 2019 taxes previously accrued attributable to GILTI.

Net Income Attributable to the Company and Earnings Per Share

Net income attributable to the Company in the first nine months of fiscal 2020 reflected a $27.8 million, or 30.8%, decrease from the first nine months of fiscal 2019. Excluding the impact of foreign currency, which positively impacted net income attributable to the Company in the first nine months of fiscal 2020 by $0.8 million, net income attributable to the Company in the first nine months of fiscal 2020 would have decreased 31.6% from the first nine months of fiscal 2019. Net income attributable to the Company in the first nine months of fiscal 2020 included a $24.4 million impact from the Winfrey Stock Compensation expense, a $10.0 million impact from 2020 restructuring charges and a $2.7 million impact from the goodwill impairment charge related to our Brazil reporting unit.

EPS in the first nine months of fiscal 2020 was $0.89 compared to $1.30 in the first nine months of fiscal 2019. EPS for the first nine months of fiscal 2020 included a $0.35 impact from the Winfrey Stock Compensation expense, a $0.14 impact from 2020 restructuring charges and a $0.04 impact from the goodwill impairment charge related to our Brazil reporting unit. Additionally, EPS for the first nine months of fiscal 2020 included a $0.11 tax benefit related to the reversal of the 2018 and 2019 tax impact of GILTI. EPS for the first nine months of fiscal 2019 included a $0.07 expense in connection with our previously disclosed 2019 organizational realignment.

44


 

Segment Results

Metrics and Business Trends

The following tables set forth key metrics by reportable segment for the first nine months of fiscal 2020 and the percentage change in those metrics versus the prior year period:

(in millions except percentages and as noted)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

First Nine Months of Fiscal 2020

 

 

 

GAAP

 

 

Constant Currency

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product

 

 

 

 

 

 

 

 

 

 

Product

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

Service

 

 

Sales &

 

 

Total

 

 

Service

 

 

Sales &

 

 

Total

 

 

Paid

 

 

Incoming

 

 

EOP

 

 

 

Revenues

 

 

Other

 

 

Revenues

 

 

Revenues

 

 

Other

 

 

Revenues

 

 

Weeks

 

 

Subscribers

 

 

Subscribers

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

North America

 

$

622.5

 

 

$

104.0

 

 

$

726.4

 

 

$

623.2

 

 

$

104.0

 

 

$

727.2

 

 

 

123.6

 

 

 

2,722.1

 

 

 

2,990.3

 

CE

 

 

204.2

 

 

 

30.1

 

 

 

234.3

 

 

 

204.0

 

 

 

30.2

 

 

 

234.2

 

 

 

48.3

 

 

 

1,059.9

 

 

 

1,206.3

 

UK

 

 

51.0

 

 

 

14.2

 

 

 

65.2

 

 

 

51.1

 

 

 

14.3

 

 

 

65.4

 

 

 

15.4

 

 

 

361.4

 

 

 

367.9

 

Other (1)

 

 

22.2

 

 

 

6.5

 

 

 

28.7

 

 

 

23.6

 

 

 

6.6

 

 

 

30.2

 

 

 

4.1

 

 

 

101.8

 

 

 

97.9

 

Total

 

$

900.0

 

 

$

154.7

 

 

$

1,054.7

 

 

$

902.0

 

 

$

155.0

 

 

$

1,057.0

 

 

 

191.4

 

 

 

4,245.3

 

 

 

4,662.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

% Change First Nine Months of Fiscal 2020 vs. First Nine Months of Fiscal 2019

 

North America

 

 

(3.7

%)

 

 

0.7

%

 

 

(3.1

%)

 

 

(3.5

%)

 

 

0.8

%

 

 

(2.9

%)

 

 

7.5

%

 

 

6.4

%

 

 

4.8

%

CE

 

 

5.1

%

 

 

(0.9

%)

 

 

4.3

%

 

 

5.0

%

 

 

(0.7

%)

 

 

4.2

%

 

 

10.8

%

 

 

12.7

%

 

 

11.0

%

UK

 

 

(4.7

%)

 

 

(23.4

%)

 

 

(9.5

%)

 

 

(4.4

%)

 

 

(23.2

%)

 

 

(9.3

%)

 

 

(0.2

%)

 

 

8.3

%

 

 

(4.5

%)

Other (1)

 

 

(9.9

%)

 

 

(35.6

%)

 

 

(17.3

%)

 

 

(4.3

%)

 

 

(34.6

%)

 

 

(13.1

%)

 

 

(0.1

%)

 

 

1.8

%

 

 

(5.2

%)

Total

 

 

(2.0

%)

 

 

(4.6

%)

 

 

(2.4

%)

 

 

(1.8

%)

 

 

(4.5

%)

 

 

(2.2

%)

 

 

7.5

%

 

 

8.0

%

 

 

5.3

%

 

Note: Totals may not sum due to rounding.

(1)

Represents Australia, New Zealand and emerging markets operations and franchise revenues.

 

(in millions except percentages and as noted)

 

 

First Nine Months of Fiscal 2020

 

 

 

Digital Subscription Revenues

 

 

Digital

 

 

Incoming

 

 

EOP

 

 

Studio + Digital Fees

 

 

Studio + Digital

 

 

Incoming

 

 

EOP

 

 

 

 

 

 

 

Constant

 

 

Paid

 

 

Digital

 

 

Digital

 

 

 

 

 

 

Constant

 

 

Paid

 

 

Studio + Digital

 

 

Studio + Digital

 

 

 

GAAP

 

 

Currency

 

 

Weeks

 

 

Subscribers

 

 

Subscribers

 

 

GAAP

 

 

Currency

 

 

Weeks

 

 

Subscribers

 

 

Subscribers

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

North America

 

$

354.4

 

 

$

354.8

 

 

 

91.6

 

 

 

1,870.5

 

 

 

2,416.4

 

 

$

268.1

 

 

$

268.4

 

 

 

32.0

 

 

 

851.6

 

 

 

573.9

 

CE

 

 

150.6

 

 

 

150.1

 

 

 

40.8

 

 

 

863.4

 

 

 

1,064.7

 

 

 

53.7

 

 

 

53.9

 

 

 

7.5

 

 

 

196.6

 

 

 

141.5

 

UK

 

 

24.4

 

 

 

24.3

 

 

 

9.3

 

 

 

189.7

 

 

 

255.7

 

 

 

26.6

 

 

 

26.8

 

 

 

6.2

 

 

 

171.8

 

 

 

112.2

 

Other (1)

 

 

11.9

 

 

 

12.5

 

 

 

2.7

 

 

 

61.4

 

 

 

72.5

 

 

 

10.4

 

 

 

11.1

 

 

 

1.4

 

 

 

40.4

 

 

 

25.4

 

Total

 

$

541.2

 

 

$

541.8

 

 

 

144.4

 

 

 

2,984.9

 

 

 

3,809.4

 

 

$

358.8

 

 

$

360.2

 

 

 

47.0

 

 

 

1,260.4

 

 

 

853.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

% Change First Nine Months of Fiscal 2020 vs. First Nine Months of Fiscal 2019

 

North America

 

 

16.9

%

 

 

17.0

%

 

 

20.4

%

 

 

13.5

%

 

 

24.1

%

 

 

(21.8

%)

 

 

(21.7

%)

 

 

(17.7

%)

 

 

(6.4

%)

 

 

(36.6

%)

CE

 

 

19.5

%

 

 

19.1

%

 

 

17.6

%

 

 

18.2

%

 

 

21.2

%

 

 

(21.4

%)

 

 

(21.0

%)

 

 

(15.7

%)

 

 

(6.4

%)

 

 

(32.1

%)

UK

 

 

21.8

%

 

 

21.6

%

 

 

23.5

%

 

 

18.5

%

 

 

29.2

%

 

 

(20.4

%)

 

 

(20.0

%)

 

 

(22.5

%)

 

 

(1.0

%)

 

 

(40.1

%)

Other (1)

 

 

12.4

%

 

 

18.3

%

 

 

16.4

%

 

 

11.0

%

 

 

18.1

%

 

 

(26.5

%)

 

 

(21.2

%)

 

 

(22.4

%)

 

 

(9.5

%)

 

 

(39.3

%)

Total

 

 

17.7

%

 

 

17.8

%

 

 

19.7

%

 

 

15.1

%

 

 

23.5

%

 

 

(21.8

%)

 

 

(21.5

%)

 

 

(18.2

%)

 

 

(5.8

%)

 

 

(36.5

%)

 

Note: Totals may not sum due to rounding.

(1)

Represents Australia, New Zealand and emerging markets operations and franchise revenues.

45


 

North America Performance

The decrease in North America revenues in the first nine months of fiscal 2020 versus the prior year period was driven by a decrease in Service Revenues, partially offset by an increase in product sales and other. The decrease in Service Revenues in the first nine months of fiscal 2020 versus the prior year period was driven by a decrease in Studio + Digital Fees, partially offset by an increase in Digital Subscription Revenues. Studio + Digital Fees were negatively impacted by the significant recruitment decline in the second and third quarters of fiscal 2020 driven by the closure of substantially all of our studios due to the COVID-19 pandemic. Furthermore, the subsequent reopening of a limited number of our studios was further impacted by the strategic realignment of our Studio + Digital business. The increase in North America Total Paid Weeks in the first nine months of fiscal 2020 was driven primarily by the higher number of Incoming Subscribers at the beginning of fiscal 2020 versus the beginning of fiscal 2019 and higher Digital recruitments in the first nine months of fiscal 2020 versus the prior year period. Higher Digital recruitments in the first nine months of fiscal 2020 were driven by the successful launch of the new myWW program, the appeal of the program and our digital tools, and strong marketing execution versus the prior year period.

The increase in North America product sales and other in the first nine months of fiscal 2020 versus the prior year period was driven primarily by revenue received in connection with the WW Presents: Oprah’s 2020 Vision tour, partially offset by a decrease in in-studio product sales.

Continental Europe Performance

The increase in Continental Europe revenues in the first nine months of fiscal 2020 versus the prior year period was driven by an increase in Service Revenues. The increase in Service Revenues in the first nine months of fiscal 2020 versus the prior year period was driven by an increase in Digital Subscription Revenues, partially offset by a decrease in Studio + Digital Fees. Studio + Digital Fees were negatively impacted by the significant recruitment decline in the second and third quarters of fiscal 2020 driven by the closure of substantially all of our studios due to the COVID-19 pandemic. Furthermore, the subsequent reopening of a limited number of our studios was further impacted by the strategic realignment of our Studio + Digital business. The increase in Continental Europe Total Paid Weeks was driven primarily by the higher number of Incoming Subscribers at the beginning of fiscal 2020 versus the beginning of fiscal 2019 and higher Digital recruitments in the first nine months of fiscal 2020 versus the prior year period. Higher Digital recruitments in the first nine months of fiscal 2020 were driven by the successful launch of the new myWW program, the appeal of the program and our digital tools, and strong marketing execution versus the prior year period.

United Kingdom Performance

The decrease in UK revenues in the first nine months of fiscal 2020 versus the prior year period was driven by both a decrease in product sales and other and a decrease in Service Revenues. The decrease in Service Revenues in the first nine months of fiscal 2020 versus the prior year period was driven by a decrease in Studio + Digital Fees, partially offset by an increase in Digital Subscription Revenues. Studio + Digital Fees were negatively impacted by the significant recruitment decline in the second and third quarters of fiscal 2020 driven by the closure of substantially all of our studios due to the COVID-19 pandemic. Furthermore, the subsequent reopening of a limited number of our studios was further impacted by the strategic realignment of our Studio + Digital business. The minimal decrease in UK Total Paid Weeks was driven primarily by lower Studio + Digital recruitments, partially offset by the higher number of Incoming Subscribers at the beginning of fiscal 2020 versus the beginning of fiscal 2019 and higher Digital recruitments in the first nine months of fiscal 2020 versus the prior year period. Higher Digital recruitments in the first nine months of fiscal 2020 were driven by the successful launch of the new myWW program, the appeal of the program and our digital tools, and strong marketing execution versus the prior year period.

The decrease in UK product sales and other in the first nine months of fiscal 2020 versus the prior year period was driven primarily by a decrease in in-studio product sales.

Other Performance

The decrease in Other revenues in the first nine months of fiscal 2020 versus the prior year period was driven by both a decrease in product sales and other and a decrease in Service Revenues. The decrease in Service Revenues in the first nine months of fiscal 2020 versus the prior year period was driven primarily by a decrease in Studio + Digital Fees. Studio + Digital Fees were negatively impacted by the significant recruitment decline in the second and third quarters of fiscal 2020 driven by the closure of substantially all of our studios due to the COVID-19 pandemic. Furthermore, the subsequent reopening of a limited number of our studios was further impacted by the strategic realignment of our Studio + Digital business.

The decrease in Other product sales and other in the first nine months of fiscal 2020 versus the prior year period was driven primarily by a decrease in product sales and a decrease in franchise commissions.

46


 

LIQUIDITY AND CAPITAL RESOURCES

Cash flows provided by operating activities have historically supplied, and are expected to continue to supply, us with our primary source of liquidity. We use these cash flows, supplemented with long-term debt and short-term borrowings, to fund our operations and global strategic initiatives, pay down debt and engage in selective acquisitions. We currently believe that cash generated by operations, our cash on hand of approximately $204.4 million and our $173.8 million of availability under our Revolving Credit Facility at September 26, 2020 and our cost-savings initiative described below will provide us with sufficient liquidity to meet our obligations for the next twelve months. In addition, if necessary, we have the flexibility to delay investments or reduce marketing spend.

Due to the negative impact of COVID-19, and the uncertainty of the full extent of the magnitude and duration of such impact on our business and the economies and financial markets in which we operate, we implemented a $100.0 million cost-savings initiative with respect to our cost structure. We undertook this initiative to proactively manage our liquidity so we can maintain flexibility to respond to evolving business and consumer conditions arising from the pandemic, as well as continue to fund investments in innovating our program and long-term debt obligations. In connection with this initiative, we instituted a number of measures throughout our operations to mitigate expenses and reduce costs as well as ensure liquidity and the availability of our Revolving Credit Facility. As with any potential cost-savings measures, we may not be able to recognize all identified potential savings. Even if we are able to recognize the identified savings, the magnitude of our cost-savings initiative may be insufficient to address the evolving and uncertain economic impact of COVID-19 and resulting liquidity needs. To the extent that we do not successfully manage our costs, our liquidity and financial results, as well as our ability to access our Revolving Credit Facility, may be adversely affected. Additionally, in June 2020, we amended our Credit Agreement (as defined below) to relax the requirements of the financial maintenance covenant until the end of the second quarter of fiscal 2022 so as to provide additional flexibility for accessing liquidity available under our Revolving Credit Facility (as defined below). See “Liquidity and Capital ResourcesLong-Term DebtSenior Secured Credit Facilities” for additional details on this amendment.

As market conditions warrant, we may, from time to time, seek to purchase our outstanding debt securities or loans, including the Notes and borrowings under the Credit Facilities (each as defined below). Such transactions could be privately negotiated or open market transactions, pursuant to tender offers or otherwise. Subject to any applicable limitations contained in the agreements governing, or terms of, our indebtedness, any such purchases made by us may be funded by the use of cash on our balance sheet or the incurrence of new secured or unsecured debt. The amounts involved in any such purchase transactions, individually or in the aggregate, may be material. Any such purchases may equate to a substantial amount of a particular class or series of debt, which may reduce the trading liquidity of such class or series.

47


 

Balance Sheet Working Capital

The following table sets forth certain relevant measures of our balance sheet working capital deficit, excluding cash and cash equivalents and current portion of long-term debt at:

 

 

 

September 26,

 

 

December 28,

 

 

Increase/

 

 

 

2020

 

 

2019

 

 

(Decrease)

 

 

 

(in millions)

 

Total current assets

 

$

321.4

 

 

$

295.4

 

 

$

26.0

 

Total current liabilities

 

 

364.3

 

 

 

394.1

 

 

 

(29.7

)

Working capital deficit

 

 

(42.9

)

 

 

(98.7

)

 

 

(55.7

)

Cash and cash equivalents

 

 

204.4

 

 

 

182.7

 

 

 

21.7

 

Current portion of long-term debt

 

 

96.3

 

 

 

96.3

 

 

 

0.0

 

Working capital deficit, excluding cash and cash equivalents

   and current portion of long-term debt

 

$

(151.1

)

 

$

(185.2

)

 

$

(34.1

)

 

Note: Totals may not sum due to rounding.

The following table sets forth a summary of the primary factors contributing to the $34.1 million decrease in our working capital deficit, excluding cash and cash equivalents and current portion of long-term debt:

 

 

 

September 26,

 

 

December 28,

 

 

Increase/

 

 

Impact to

Working

 

 

 

2020

 

 

2019

 

 

(Decrease)

 

 

Capital Deficit

 

 

 

(in millions)

 

Derivative payable

 

$

32.5

 

 

$

21.6

 

 

$

10.9

 

 

$

10.9

 

Income taxes payable

 

$

5.8

 

 

$

3.6

 

 

$

2.2

 

 

$

2.2

 

Portion of operating lease liabilities due within one year

 

$

35.1

 

 

$

33.2

 

 

$

1.9

 

 

$

1.9

 

Accrued interest

 

$

14.3

 

 

$

24.6

 

 

$

(10.3

)

 

$

(10.3

)

Prepaid income taxes

 

$

20.8

 

 

$

8.4

 

 

$

12.4

 

 

$

(12.4

)

Deferred revenue

 

$

48.0

 

 

$

60.6

 

 

$

(12.6

)

 

$

(12.6

)

Operational liabilities and other, net of assets

 

$

36.2

 

 

$

50.0

 

 

$

(13.8

)

 

$

(13.8

)

Working capital deficit change, excluding cash and cash

   equivalents and current portion of long-term debt

 

 

 

 

 

 

 

 

 

 

 

 

 

$

(34.1

)

Note: Totals may not sum due to rounding.

The increase in derivative payable was due to a change in fair value driven by the change in interest rates. The decrease in accrued interest was due to the timing of debt principal payments. The increase in prepaid income taxes was primarily related to an increase in interest expense carryforward utilization as a result of the CARES Act. The decrease in deferred revenue was driven primarily by an increase in promotional sign-up offers. The decrease in operational liabilities and other, net of assets, which includes accrued salaries and wages, was driven primarily by the timing of payments.

Cash Flows

The following table sets forth a summary of our cash flows for the nine months ended:

 

 

 

September 26, 2020

 

 

September 28, 2019

 

 

 

(in millions)

 

Net cash provided by operating activities

 

$

127.4

 

 

$

151.7

 

Net cash used for investing activities

 

$

(47.8

)

 

$

(34.3

)

Net cash used for financing activities

 

$

(61.0

)

 

$

(112.4

)

 


48


 

Operating Activities

First Nine Months of Fiscal 2020

Cash flows provided by operating activities of $127.4 million for the first nine months of fiscal 2020 reflected a decrease of $24.3 million from $151.7 million of cash flows provided by operating activities in the first nine months of fiscal 2019. The decrease in cash provided by operating activities was primarily the result of a decrease in net income attributable to the Company of $27.8 million in the first nine months of fiscal 2020 as compared to the prior year period.

First Nine Months of Fiscal 2019

Cash flows provided by operating activities of $151.7 million for the first nine months of fiscal 2019 reflected a decrease of $103.0 million from $254.6 million of cash flows provided by operating activities in the first nine months of fiscal 2018. The decrease in cash provided by operating activities was primarily the result of a decrease in net income attributable to the Company of $89.7 million in the first nine months of fiscal 2019 as compared to the prior year period.

Investing Activities

First Nine Months of Fiscal 2020

Net cash used for investing activities totaled $47.8 million in the first nine months of fiscal 2020, an increase of $13.4 million as compared to the first nine months of fiscal 2019. This increase was primarily attributable to higher capital expenditures in the first nine months of fiscal 2020. In the first nine months of fiscal 2020, we entered into a strategic collaboration agreement with ClassPass Inc. (“ClassPass”) and also invested $5.0 million in ClassPass’ recent $285.0 million Series E Preferred Stock funding round.

First Nine Months of Fiscal 2019

Net cash used for investing activities totaled $34.3 million in the first nine months of fiscal 2019, a decrease of $10.6 million as compared to the first nine months of fiscal 2018. This decrease was primarily attributable to investments in intellectual property and the purchase of Kurbo Health, Inc. in the first nine months of fiscal 2018 partially offset by higher capital expenditures for technology in the first nine months of fiscal 2019.

Financing Activities

First Nine Months of Fiscal 2020

Net cash used for financing activities totaled $61.0 million in the first nine months of fiscal 2020 primarily due to $57.8 million used for scheduled debt repayments under our Term Loan Facility. See “—Long-Term Debt” for additional details on debt.

First Nine Months of Fiscal 2019

Net cash used for financing activities totaled $112.4 million in the first nine months of fiscal 2019 primarily due to $50.0 million used for the debt prepayment and $57.8 million used for scheduled debt repayments under our Term Loan Facility. See “—Long-Term Debt” for additional details on debt payments.

49


 

Long-Term Debt

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.

The following schedule sets forth our long-term debt obligations at September 26, 2020:

Long-Term Debt

At September 26, 2020

(Balances in millions)

 

 

Balance

 

Term Loan Facility due November 29, 2024

 

$

1,247.5

 

Notes due December 1, 2025

 

 

300.0

 

Total

 

 

1,547.5

 

Less: Current portion

 

 

96.3

 

Unamortized deferred financing costs

 

 

6.3

 

Unamortized debt discount

 

 

18.3

 

Total long-term debt

 

$

1,426.6

 

 

Note: Totals may not sum due to rounding.

On November 29, 2017, we refinanced our then-existing credit facilities (referred to herein as the November 2017 debt refinancing) with proceeds received from $1,565.0 million in an aggregate principal amount of borrowings under our new credit facilities, consisting of a $1,540.0 million term loan facility and a $150.0 million revolving credit facility (of which $25.0 million was drawn upon at the time of the November 2017 debt refinancing) (collectively, as amended from time to time, referred to herein as the Credit Facilities) and proceeds received from $300.0 million in aggregate principal amount from the issuance of 8.625% Senior Notes due 2025, or the Notes. During the fourth quarter of fiscal 2017, we incurred fees of $53.8 million (which included $30.8 million of a debt discount) in connection with the November 2017 debt refinancing. In addition, we recorded a loss on early extinguishment of debt of $10.5 million in connection thereto. This early extinguishment of debt write-off was comprised of $5.7 million of deferred financing fees paid in connection with the November 2017 debt refinancing and $4.8 million of pre-existing deferred financing fees.

Senior Secured Credit Facilities

The Credit Facilities were issued under a new credit agreement, dated November 29, 2017, or, as amended from time to time, the Credit Agreement, among the Company, as borrower, the lenders party thereto, JPMorgan Chase Bank, N.A., or JPMorgan Chase, as administrative agent and an issuing bank, Bank of America, N.A., as an issuing bank, and Citibank, N.A., as an issuing bank. The Credit Facilities initially consisted of (1) $1,540.0 million in aggregate principal amount of senior secured tranche B term loans due in 2024, or the Term Loan Facility, and (2) a $150.0 million in an aggregate principal amount of commitments under a senior secured revolving credit facility (which included borrowing capacity available for letters of credit) due in 2022, or the Revolving Credit Facility.

On June 14, 2020, we entered into an amendment to the Credit Agreement, or the Credit Agreement Amendment, that provided for an increase in the aggregate principal amount of commitments under our Revolving Credit Facility by $25.0 million, providing us with $175.0 million in aggregate principal amount of commitments under the Revolving Credit Facility, and that included certain other amendments to the Credit Agreement, which among other things, relaxed the requirements of the financial maintenance covenant under the Credit Agreement until the end of the second fiscal quarter of 2022, as further detailed below.

On both May 31, 2019 and October 10, 2019, we made a voluntary prepayment at par of $50.0 million in an aggregate amount of our outstanding term loans under the Term Loan Facility. As a result of these prepayments, we wrote off deferred financing fees of $0.5 million in the aggregate in fiscal 2019.

As previously disclosed, on March 23, 2020, as a precautionary measure in light of the COVID-19 outbreak, we drew down $148.0 million in an aggregate principal amount under the Revolving Credit Facility in order to enhance our cash position and to provide additional financial flexibility. The revolver borrowing was classified as a short-term liability in connection with our monthly interest elections. We repaid $148.0 million in aggregate principal amount of borrowings under the Revolving Credit Facility on June 5, 2020.

As of September 26, 2020, we had $1,247.5 million in an aggregate principal amount of loans outstanding under our Credit Facilities, with $173.8 million of availability and $1.2 million in issued but undrawn letters of credit outstanding under the Revolving Credit Facility. There were no outstanding borrowings under the Revolving Credit Facility as of September 26, 2020.


50


 

All obligations under the Credit Agreement are guaranteed by, subject to certain exceptions, each of our current and future wholly-owned material domestic restricted subsidiaries. All obligations under the Credit Agreement, and the guarantees of those obligations, are secured by substantially all of the assets of the Company and each guarantor, subject to customary exceptions, including:

 

a pledge of 100% of the equity interests directly held by the Company and each guarantor in any wholly-owned domestic material subsidiary of the Company or any guarantor (which pledge, in the case of any non-U.S. subsidiary of a U.S. subsidiary, will not include more than 65% of the voting stock of such first-tier non-U.S. subsidiary), subject to certain exceptions; and

 

a security interest in substantially all other tangible and intangible assets of the Company and each guarantor, subject to certain exceptions.

Under the terms of the Credit Agreement, depending on our Consolidated First Lien Leverage Ratio (as defined in the Credit Agreement), on an annual basis on or about the time we are required to deliver our financial statements for any fiscal year, we are obligated to offer to prepay a portion of the outstanding principal amount of the Term Loan Facility in an aggregate amount determined by a percentage of our annual excess cash flow (as defined in the Credit Agreement) (said payment referred to herein as a Cash Flow Sweep).

Borrowings under the Term Loan Facility and, after giving effect to the Credit Agreement Amendment, the Revolving Credit Facility, in each case, bear interest at a rate per annum equal to, at our option, either (1) an applicable margin plus a base rate determined by reference to the highest of (a) 0.50% per annum plus the higher of (i) the Federal Funds Effective Rate and (ii) the Overnight Bank Funding Rate as determined by the Federal Reserve Bank of New York, (b) the prime rate of JPMorgan Chase and (c) the LIBOR rate determined by reference to the cost of funds for U.S. dollar deposits for an interest period of one month adjusted for certain additional costs, plus 1.00%; provided that such rate is not lower than a floor of 1.75% or (2) an applicable margin plus a LIBOR rate determined by reference to the cost of funds for U.S. dollar deposits for the interest period relevant to such borrowing adjusted for certain additional costs, provided that LIBOR is not lower than a floor of 0.75%. Borrowings under the Revolving Credit Facility bear interest at a rate per annum equal to an applicable margin based upon a leverage-based pricing grid (except as otherwise described below), plus, at our option, either (1) a base rate determined by reference to the highest of (a) 0.50% per annum plus the higher of (i) the Federal Funds Effective Rate and (ii) the Overnight Bank Funding Rate as determined by the Federal Reserve Bank of New York, (b) the prime rate of JPMorgan Chase and (c) the LIBOR rate determined by reference to the cost of funds for U.S. dollar deposits for an interest period of one month adjusted for certain additional costs, plus 1.00% or (2) a LIBOR rate determined by reference to the cost of funds for U.S. dollar deposits for the interest period relevant to such borrowing adjusted for certain additional costs. Under the terms of the Credit Agreement Amendment, a new level in the leverage based pricing grid was added providing for an applicable margin for extensions of credit under the Revolving Credit Facility of 3.00% when the Consolidated First Lien Leverage Ratio discussed below is greater than or equal to 3.75:1.00. As of September 26, 2020, the applicable margins for the LIBOR rate borrowings under the Term Loan Facility and the Revolving Credit Facility were 4.75% and 2.25%, respectively. In the event that LIBOR is phased out as is currently expected, the Credit Agreement provides that the Company and the administrative agent may amend the Credit Agreement to replace the LIBOR definition therein with a successor rate subject to notifying the lending syndicate of such change and not receiving within five business days of such notification objections to such replacement rate from lenders holding at least a majority of the aggregate principal amount of loans and commitments then outstanding under the Credit Agreement. If we fail to do so, our borrowings will be based off of the alternative base rate plus a margin.

On a quarterly basis, we pay a commitment fee to the lenders under the Revolving Credit Facility in respect of unutilized commitments thereunder, which commitment fee fluctuates depending upon our Consolidated First Lien Leverage Ratio. Under the terms of the Credit Agreement Amendment, a new level in the leverage based pricing grid was added providing for a commitment fee of 0.625% when the Consolidated First Lien Leverage Ratio discussed below is greater than or equal to 3.75:1.00. Based on our Consolidated First Lien Leverage Ratio as of September 26, 2020, the commitment fee was 0.35% per annum. Our Consolidated First Lien Leverage Ratio as of September 26, 2020 was 2.80:1.00.

The Credit Agreement contains other customary terms, including (1) representations, warranties and affirmative covenants, (2) negative covenants, including limitations on indebtedness, liens, mergers, acquisitions, asset sales, investments, distributions, prepayments of subordinated debt, amendments of material agreements governing subordinated indebtedness, changes to lines of business and transactions with affiliates, in each case subject to baskets, thresholds and other exceptions, and (3) customary events of default.


51


 

The availability of certain baskets and the ability to enter into certain transactions are also subject to compliance with certain financial ratios. In addition, if the aggregate principal amount of extensions of credit outstanding under the Revolving Credit Facility as of any fiscal quarter end exceeds 33 1/3% of the amount of the aggregate commitments under the Revolving Credit Facility in effect on such date, we must be in compliance with a Consolidated First Lien Leverage Ratio of 3.75:1.00, provided, however, that the Credit Agreement Amendment increased the required Consolidated First Lien Leverage Ratio to 4.50:1.00, commencing with the second fiscal quarter of 2020 through the end of fiscal 2020, with a further step up to 5.00:1.00 for fiscal 2021, before stepping down to 4.50:1.00 for the first fiscal quarter of 2022, and again to 3.75:1.00, commencing with the second fiscal quarter of 2022 (such increases in the Consolidated First Lien Leverage Ratio and the timing applicable thereto, collectively, referred to herein as the Financial Covenant Relief Period. The Financial Covenant Relief Period is subject to our continued compliance with certain conditions, which include meeting a Consolidated First Lien Leverage Ratio of 3.75:1.00 with respect to certain types of investments, restricted payments and prepayments of junior debt during the Financial Covenant Relief Period. If at any time we expect that we will not be in compliance with the conditions of the Financial Covenant Relief Period, we expect we will reduce our extensions of credit under the Revolving Credit Facility to $58.3 million or less prior to the last day of such fiscal quarter so that we are not required to comply with the conditions of the Financial Covenant Relief Period. In any such event, we would be able to reborrow the full amount under the Revolving Credit Facility subsequent to such fiscal quarter end given that the applicable Consolidated First Lien Leverage Ratio to be tested during the Financial Covenant Relief Period is only tested as of the last day of each fiscal quarter.

As of September 26, 2020, we were in compliance with all applicable financial covenants and the applicable Consolidated First Lien Leverage Ratio in the Credit Agreement governing the Revolving Credit Facility though we were not required to comply at such time.

Senior Notes

The Notes were issued pursuant to an Indenture, dated as of November 29, 2017, or the Indenture, among the Company, the guarantors named therein and The Bank of New York Mellon, as trustee. The Indenture contains customary covenants, events of default and other provisions for an issuer of non-investment grade debt securities. These covenants include limitations on indebtedness, liens, mergers, acquisitions, asset sales, investments, distributions, prepayments of subordinated debt and transactions with affiliates, in each case subject to baskets, thresholds and other exceptions.

The Notes accrue interest at a rate per annum equal to 8.625% and are due on December 1, 2025. Interest on the Notes is payable semi-annually on June 1 and December 1 of each year, beginning on June 1, 2018. On or after December 1, 2020, we may on any one or more occasions redeem some or all of the Notes at a purchase price equal to 104.313% of the principal amount of the Notes, plus accrued and unpaid interest, if any, to, but not including, the redemption date, such optional redemption price decreasing to 102.156% on or after December 1, 2021 and to 100.000% on or after December 1, 2022. Prior to December 1, 2020, we may on any one or more occasions redeem up to 40% of the aggregate principal amount of the Notes with an amount not to exceed the net proceeds of certain equity offerings at 108.625% of the aggregate principal amount thereof, plus accrued and unpaid interest, if any, to, but not including, the redemption date. Prior to December 1, 2020, we may redeem some or all of the Notes at a make-whole price plus accrued and unpaid interest, if any, to, but not including, the redemption date. If a change of control occurs, we must offer to purchase for cash the Notes at a purchase price equal to 101% of the principal amount of the Notes, plus accrued and unpaid interest, if any, to, but not including, the purchase date. Following the sale of certain assets and subject to certain conditions, we must offer to purchase for cash the Notes at a purchase price equal to 100% of the principal amount of the Notes, plus accrued and unpaid interest, if any, to, but not including, the purchase date. The Notes are guaranteed on a senior unsecured basis by our subsidiaries that guarantee the Credit Facilities.

Outstanding Debt

At September 26, 2020, we had $1,547.5 million outstanding under the Credit Facilities and the Notes, consisting of borrowings under the Term Loan Facility of $1,247.5 million, $0.0 drawn down on the Revolving Credit Facility and $300.0 million in aggregate principal amount of Notes issued and outstanding.

At September 26, 2020 and December 28, 2019, our debt consisted of both fixed and variable-rate instruments. Interest rate swaps were entered into to hedge a portion of the cash flow exposure associated with our variable-rate borrowings. Further information regarding our interest rate swaps can be found in Part I, Item 1 of this Quarterly Report on Form 10-Q under Note 12 “Derivative Instruments and Hedging” in the Notes to the Consolidated Financial Statements. The weighted average interest rate (which includes amortization of deferred financing costs and debt discount) on our outstanding debt, exclusive of the impact of the swaps then in effect, was approximately 6.95% and 8.08% per annum at September 26, 2020 and December 28, 2019, respectively, based on interest rates on these dates. The weighted average interest rate (which includes amortization of deferred financing costs and debt discount) on our outstanding debt, including the impact of the swaps then in effect, was approximately 7.34% and 7.59% per annum at September 26, 2020 and December 28, 2019, respectively, based on interest rates on these dates.

52


 

The following schedule sets forth our year-by-year debt obligations at September 26, 2020:

Total Debt Obligation

(Including Current Portion)

At September 26, 2020

(in millions)

 

Remainder of fiscal 2020

 

$

38.5

 

Fiscal 2021

 

$

77.0

 

Fiscal 2022

 

$

77.0

 

Fiscal 2023

 

$

77.0

 

Fiscal 2024

 

$

978.0

 

Fiscal 2025 and thereafter

 

$

300.0

 

Total

 

$

1,547.5

 

 

Note: Totals may not sum due to rounding.

Accumulated Other Comprehensive Loss

Our accumulated other comprehensive loss includes changes in the fair value of derivative instruments and the effects of foreign currency translations. At September 26, 2020 and September 28, 2019, the cumulative balance of changes in the fair value of derivative instruments, net of taxes, was a loss of $23.3 million and $17.9 million, respectively. At September 26, 2020 and September 28, 2019, the cumulative balance of the effects of foreign currency translations, net of taxes, was a loss of $12.3 million and $14.1 million, respectively.

Dividends and Stock Transactions

We do not currently pay a dividend and we have no current plans to pay dividends in the foreseeable future. Any future determination to declare and pay dividends will be made at the sole discretion of our Board of Directors, after taking into account our financial condition and results of operations, capital requirements, contractual, legal, tax and regulatory restrictions, the provisions of Virginia law affecting the payment of distributions to shareholders and such other factors our Board of Directors may deem relevant. In addition, our ability to pay dividends may be limited by covenants in our existing indebtedness, including the Credit Facilities and the Indenture governing the Notes, and may be limited by the agreements governing other indebtedness we or our subsidiaries incur in the future.

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, the addition of $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 and its parents and subsidiaries under this program. The repurchase program currently has no expiration date. During the nine months ended September 26, 2020 and September 28, 2019, we repurchased no shares of our common stock under this program or otherwise.

EBITDAS, Adjusted EBITDAS and Net Debt

We define EBITDAS, a non-GAAP financial measure, as earnings before interest, taxes, depreciation, amortization and stock-based compensation and Adjusted EBITDAS, a non-GAAP financial measure, as earnings before interest, taxes, depreciation, amortization, stock-based compensation, 2020 restructuring charges and goodwill impairment.

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The table below sets forth the reconciliation for EBITDAS and Adjusted EBITDAS, each a non-GAAP financial measure, to net loss, the most comparable GAAP financial measure, for the three and nine months ended September 26, 2020 and September 28, 2019, and EBITDAS and Adjusted EBITDAS to net income for the trailing twelve months ended September 26, 2020:

(in millions)

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

 

 

 

 

September 26, 2020

 

 

September 28, 2019

 

 

September 26, 2020

 

 

September 28, 2019

 

 

Trailing Twelve

Months

 

Net income

 

$

54.5

 

 

$

47.1

 

 

$

62.5

 

 

$

90.2

 

 

$

91.9

 

Interest

 

 

29.7

 

 

 

33.1

 

 

 

92.3

 

 

 

103.0

 

 

 

124.5

 

Taxes

 

 

8.6

 

 

 

13.1

 

 

 

13.5

 

 

 

26.8

 

 

 

18.2

 

Depreciation and amortization

 

 

12.4

 

 

 

10.9

 

 

 

37.4

 

 

 

33.5

 

 

 

48.9

 

Stock-based compensation

 

 

6.0

 

 

 

5.2

 

 

 

48.7

 

 

 

14.9

 

 

 

54.2

 

EBITDAS

 

$

111.3

 

 

$

109.4

 

 

$

254.4

 

 

$

268.6

 

 

$

337.7

 

2020 restructuring charges

 

 

2.3

 

 

 

 

 

 

13.5

 

 

 

 

 

 

13.5

 

Goodwill impairment

 

 

 

 

 

 

 

 

3.7

 

 

 

 

 

 

3.7

 

Adjusted EBITDAS (1)

 

$

113.6

 

 

$

109.4

 

 

$

271.5

 

 

$

268.6

 

 

$

354.8

 

 

Note: Totals may not sum due to rounding.

(1)

The “Adjusted EBITDAS” measure is a non-GAAP financial measure that adjusts the consolidated statements of net income for the three months ended September 26, 2020 to exclude the $2.3 million of 2020 restructuring charges and adjusts the consolidated statements of net income for the nine months ended September 26, 2020 to exclude the $13.5 million of 2020 restructuring charges and the $3.7 million impairment charge for goodwill related to our Brazil reporting unit. See “Non-GAAP Financial Measures” above for an explanation of our use of non-GAAP financial measures.

Reducing leverage is a capital structure priority for the Company. As of September 26, 2020, our net debt/Adjusted EBITDAS ratio was 3.7x.

The table below sets forth the reconciliation for net debt, a non-GAAP financial measure, to total debt, the most comparable GAAP financial measure, for the nine months ended:

(in millions)

 

 

September 26, 2020

 

Total debt

 

$

1,547.5

 

Less: Unamortized deferred financing costs

 

 

6.3

 

Less: Unamortized debt discount

 

 

18.3

 

Less: Cash on hand

 

 

204.4

 

Net debt

 

$

1,318.4

 

 

Note: Totals may not sum due to rounding.

We present EBITDAS, Adjusted EBITDAS and net debt/Adjusted EBITDAS because we consider them to be useful supplemental measures of our performance. In addition, we believe EBITDAS, Adjusted EBITDAS and net debt/Adjusted EBITDAS are useful to investors, analysts and rating agencies in measuring the ability of a company to meet its debt service obligations. See “—Non-GAAP Financial Measures” herein for an explanation of our use of these non-GAAP financial measures.

OFF-BALANCE SHEET ARRANGEMENTS

As part of our ongoing business, we do not participate in arrangements 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 due to the importance of the winter season to our overall member recruitment environment. Historically, we experience our highest level of recruitment during the first quarter of the year, which is supported with the highest concentration of advertising spending. Therefore, our number of End of Period Subscribers in the first quarter of the year is typically higher than the number in other quarters of the year, historically reflecting a decline over the course of the year.

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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 corporate website at corporate.ww.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), or the SEC. Moreover, we also make available at that site the Section 16 reports filed electronically by our officers, directors and 10 percent shareholders.

We use our corporate website at corporate.ww.com and certain social media channels such as our corporate Facebook page (www.facebook.com/WW), Instagram account (Instagram.com/WW) and Twitter account (@ww_us) as channels of distribution of Company information. The information we post through these channels may be deemed material. Accordingly, investors should monitor these channels, in addition to following our press releases, SEC filings and public conference calls and webcasts. The contents of our website and social media channels shall not be deemed to be incorporated herein by reference.

ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As of September 26, 2020, 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 2019 have not materially changed from December 28, 2019.

At the end of the third quarter of fiscal 2020, borrowings under the Credit Facilities bore interest at LIBOR plus an applicable margin of 4.75%. For the Term Loan Facility, the minimum interest rate for LIBOR applicable to such facility pursuant to the terms of the Credit Agreement is set at 0.75%, referred to herein as the LIBOR Floor. In addition, as of September 26, 2020, our interest rate swaps in effect had an aggregate notional amount of $750.0 million. Accordingly, as of September 26, 2020, based on the amount of variable rate debt outstanding and the then-current LIBOR rate, after giving consideration to the impact of the interest rate swaps and the LIBOR Floor, a hypothetical 90 basis point increase in interest rates would have increased annual interest expense by approximately $4.5 million and a hypothetical 90 basis point decrease in interest rates would have decreased annual interest expense by approximately $0.0 million. This increase and decrease is driven primarily by the interest rate applicable to our Term Loan Facility and the LIBOR Floor, respectively.

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 SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and our 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 our principal financial officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of September 26, 2020, the end of the third quarter of fiscal 2020. Based upon that evaluation and subject to the foregoing, our principal executive officer and our principal financial officer concluded that, as of the end of the third quarter of fiscal 2020, the design and operation of our disclosure controls and procedures were 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 our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II – OTHER INFORMATION

ITEM 1.

The information called for by this item is incorporated herein by reference to Note 11 “Legal” of the notes to the unaudited consolidated financial statements contained in this Quarterly Report on Form 10-Q.

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 2019 other than as disclosed in our Quarterly Reports on Form 10-Q for the first and second quarters of fiscal 2020, and as updated below.

The global outbreak of the COVID-19 virus is adversely impacting, and will continue to adversely impact, our business and may adversely impact our liquidity.

The global outbreak of the coronavirus (COVID-19) has had and will continue to have a significant adverse impact on our business as well as on the business environment and the markets in which we operate. This global health crisis has also had a significant adverse effect on overall economic conditions and we expect consumer demand to continue to be negatively impacted due to changes in consumer behavior and confidence and health concerns. The situation remains dynamic and subject to rapid and possibly significant change, and accordingly the full extent of the magnitude and duration of the negative impact to our business from the COVID-19 pandemic cannot be predicted with certainty.

While we have taken steps to address the risks and impact of the COVID-19 pandemic, as a result of the pandemic, we have experienced significant disruption to our business, including with respect to decreases in member recruitment. While the recruitment disruption was temporary in our Digital business, it has been more pronounced and sustained in our Studio + Digital business, in part due to our suspension in mid-March of our in-person workshops. Our member retention in both our Digital and Studio + Digital businesses may also be significantly negatively impacted by the pandemic.

Following the suspension of our in-person workshops, we rapidly transitioned these workshops to an entirely virtual experience. In June 2020, we began a phased re-opening with reduced operations of a limited number of our studio locations. However, during these uncertain times, we may need to close re-opened studios, may not be able to open studios as planned or may need to further reduce operations. We continue to offer virtual workshops, which may not be successful in meeting the needs or preferences of many of our members, employees and the communities in which we operate. This may result in further decreases in our recruitment as well as a significant decrease in our retention of members. The suspension of our in-person workshops and reduced operations has and will continue to adversely impact our in-studio product sales. We cannot predict how long these suspensions and reduced operations will continue as federal, state, local and foreign authorities and public health officials have adopted numerous mitigation measures to address the spread of the virus, including temporary closure requirements with respect to non-essential business operations (including our workshops) to discourage people from congregating. The duration of these requirements will also likely vary by jurisdiction. The decision to resume in-person workshops has been and will continue to be influenced by a number of factors, including applicable legal restrictions, consumer confidence and preferences and the protection of the health and safety of our employees and members, and there is substantial uncertainty regarding the manner and timing of any resumption of our in-person workshops. We may face longer closure requirements than expected and other operational restrictions with respect to some or all of our studio and other physical locations due to, among other factors, evolving and stringent federal, state, local and foreign restrictions including social distancing requirements.


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Even as we are able to re-open closed studio locations and resume in-person workshops, changes in consumer behavior, including willingness to meet in groups, increasing unemployment levels and associated changes in household income, as well as health concerns may impact consumer demand for our products, customer traffic at our studio locations and recruitment and retention of members in both our Digital and Studio + Digital businesses. A number of our members may be more concerned with maintaining social distancing for a longer period if they perceive themselves to be a part of a higher at-risk group for complications arising from COVID-19. We may also find it more difficult to staff our business operations. The perceived risk of infection or health risk may adversely affect traffic to our studio locations and, in turn, our business, liquidity, financial condition and results of operations, particularly if any self-imposed or government-imposed restrictions are in place for a significant amount of time. In addition, government requirements may increase our operating costs on a studio-by-studio basis as a studio location re-opens due to, among other things, social distancing requirements and costs associated with increased cleaning and other sanitary or protective measures. As part of our focus on best meeting our members’ and consumers’ needs as COVID-related restrictions are lifted or reinstated and as we continue our digital transformation, we are consolidating certain of our studios into branded studio locations and are also closing certain branded studio locations. As a result, we have incurred and will incur costs associated with our real estate realignment. The decision to re-open a studio location, if at all, or consolidate studio locations, will be influenced by a number of factors, including applicable legal restrictions, consumer confidence and preferences, changes in consumer behavior, and the protection of the health and safety of our employees and members, and will be dependent on aligning with our digital and brand strategy. We may not be able to successfully control our studio environments and realize the intended business advantages of maintaining a select group of studio locations, which could adversely affect our Studio + Digital business and results of operations.

Our business depends on a number of third parties including vendors, landlords, lenders, marketing partners, third-party technology providers and suppliers. The COVID-19 outbreak may have a material adverse impact on these parties and their ability to meet their obligations to us. Any such failure by our third-party partners could negatively impact our ability to provide our products and services to customers. One or more of these third parties may experience financial distress, staffing shortages or liquidity challenges, file for bankruptcy protection, go out of business, or suffer disruptions in their business due to the COVID-19 outbreak. For example, the failure of any third-party technology provider to provide continuous and uninterrupted service could result in disruptions in our websites, services and products or network systems. The full extent of the impact of COVID-19 on these third-party partners continues to evolve and is uncertain.

If a significant percentage of our workforce, or the workforces of our suppliers and other third-party partners, is unable to work, whether because of illness, quarantine, limitations on travel or other government restrictions in connection with COVID-19, our operations may be negatively impacted. We also depend on senior management and other key personnel and consultants, and the illness of certain personnel or consultants could result in the loss of expertise and negatively affect our operations, brand image and goodwill.

The widespread health crisis also could adversely affect the economies and financial markets of many countries in which we operate, resulting in an economic downturn that could affect consumer demand for our products and services. Our customer purchasing patterns can be influenced by economic factors. The precise impact, and extent thereof, on our business from the disruption of financial markets and the weakening of overall economic conditions cannot be predicted with certainty. Uncertainties regarding the economic impact of COVID-19 have resulted in, and are likely to continue to result in, sustained impact on the economy. Our business is particularly sensitive to reductions in discretionary consumer spending, which may be adversely impacted by a recession or fears of a recession, volatility and declines in the stock market and increasingly pessimistic consumer sentiment due to perceived or actual economic and/or health risks. Consumers may shift purchases to lower-priced or other perceived value offerings during economic downturns. Prolonged unfavorable economic conditions, including as a result of COVID-19, and any resulting recession or slowed economic growth, may have an adverse effect on our financial condition and results of operations.

Due to the negative impact of COVID-19, and the uncertainty of the full extent of the magnitude and duration of such impact on our business and the economies and financial markets in which we operate, we implemented a $100.0 million cost-savings initiative with respect to our cost structure. In connection with this initiative, we instituted a number of measures throughout our operations to mitigate such expenses and reduce costs as well as ensure liquidity and the availability of our Revolving Credit Facility. As with any potential cost-savings measures, we may not be able to recognize all identified potential savings. Even if we are able to recognize the identified savings, the magnitude of our cost-savings initiative may be insufficient to address the evolving and uncertain economic impact of COVID-19 and resulting liquidity needs. To the extent that we do not successfully manage our costs, our liquidity and financial results, as well as our ability to access our Revolving Credit Facility, may be adversely affected.

While emerging and evolving regulations impact our effective tax rate, and while we anticipate receiving certain benefits thereunder in the future, given the uncertainty of the regulatory environment, we cannot predict with certainty whether we will receive any such benefits in the future, or the extent to which we will receive such benefits, if at all.


57


 

If we are unable to generate sufficient cash or to access liquidity at the time and on terms we may require, we may encounter difficulty funding our business requirements including debt repayments when due. We may not be able to access liquidity, including our Revolving Credit Facility, or the terms and conditions of available credit may be substantially more expensive than previously expected due to changes in our operating results and general financial conditions and credit markets. We may require waivers or amendments to our existing long-term debt and these requirements may trigger pricing increases from lenders for available credit. Reductions in our liquidity position and the need to use capital for other day to day requirements of our business may affect a number of our business initiatives and long-term investments and as a result we may be required to curtail and/or postpone business investments as well as other initiatives that require capital investment.

We have implemented emergency pay policies and taken other compensation and benefit actions to support our employees during the COVID-19 business interruption, but those actions may not be sufficient to compensate them for the entire duration of any business interruption resulting from COVID-19. Those employees might seek and find other employment during that interruption, or might otherwise choose not to return to their positions, which could materially adversely affect our ability to properly staff and re-open our studio locations with experienced teams when the business interruptions caused by COVID-19 abate or end.

The COVID-19 pandemic (including governmental responses, broad economic impacts and market disruptions) has heightened the risks related to the other risk factors described in our Annual Report on Form 10-K for fiscal 2019.

We may not be able to successfully accelerate or implement our strategic digital transformation, which could adversely impact our business, financial conditions or results of operations.

We are accelerating our strategic digital transformation. This acceleration began with the launch of virtual workshops in March 2020 when we suspended our in-person workshops in response to COVID-19. We expect to continue to evolve our virtual experience and offerings for our members. For example, we continue to work towards the launch of a new digitally-enabled, community-focused and coach-led offering this year, which will reflect learnings from our current virtual workshops and ongoing test pilots. We are reallocating certain resources and will incur additional costs to support this acceleration. This transition to more virtual experiences may not be successful in meeting the needs or preferences of many of our current or potential members. As a result, we may experience decreases in our recruitment and retention of members, or increased member cancellations. Additionally, we may also find it difficult to transition our coaches from in-person coaching to virtual coaching, which may negatively affect our ability to properly staff virtual workshops with experienced coaches. We may not be able to successfully launch our new virtual or other digital offerings and realize the intended business opportunities, growth prospects, including new business channels, and competitive advantages of our digital transformation. Assumptions underlying expected financial results or consumer demand and receptivity may not be met or economic or consumer conditions may deteriorate, including as a result of the impact of COVID-19, and may adversely impact our ability to successfully implement this digital strategy. If these or other factors limit our ability to successfully execute this strategic initiative, our business, financial conditions or results of operations may be adversely impacted.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Nothing to report under this item.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

Nothing to report under this item.

ITEM 4.

MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5.

OTHER INFORMATION

Nothing to report under this item.


58


 

ITEM 6.

EXHIBITS

Exhibit Number

 

 

Description

 

 

 

*Exhibit 3.1

 

Amended and Restated Bylaws of WW International, Inc. (effective as of October 1, 2020).

 

 

 

*†Exhibit 10.1

 

Offer Letter, dated July 30, 2020, by and between WW International, Inc. and Amy O’Keefe.

 

 

 

*Exhibit 31.1

 

Rule 13a-14(a) Certification by Mindy Grossman, Chief Executive Officer.

 

 

 

*Exhibit 31.2

 

Rule 13a-14(a) Certification by Amy O’Keefe, Chief Financial Officer.

 

 

 

*Exhibit 32.1

 

Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

*Exhibit 101

 

 

 

 

 

*EX-101.INS

 

Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

 

 

 

*EX-101.SCH

 

Inline XBRL Taxonomy Extension Schema Document

 

 

 

*EX-101.CAL

 

Inline XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

*EX-101.DEF

 

Inline XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

*EX-101.LAB

 

Inline XBRL Taxonomy Extension Label Linkbase Document

 

 

 

*EX-101.PRE

 

Inline XBRL Taxonomy Extension Presentation Linkbase Document

 

 

 

*Exhibit 104

 

The cover page from WW International, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 26, 2020, formatted in Inline XBRL (included within the Exhibit 101 attachments).

 

*

Filed herewith.

Represents a management arrangement or compensatory plan.

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SIGNATURES

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.

 

 

WW INTERNATIONAL, INC.

 

 

 

Date: October 29, 2020

By:  

/s/ Mindy Grossman

 

 

Mindy Grossman

 

 

President, Chief Executive Officer and Director 

(Principal Executive Officer)

 

Date: October 29, 2020

By:  

/s/ Amy O’Keefe

 

 

Amy O’Keefe

 

 

Chief Financial Officer

(Principal Financial Officer)

 

60