0001564590-18-026364.txt : 20181102 0001564590-18-026364.hdr.sgml : 20181102 20181102063229 ACCESSION NUMBER: 0001564590-18-026364 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 71 CONFORMED PERIOD OF REPORT: 20180929 FILED AS OF DATE: 20181102 DATE AS OF CHANGE: 20181102 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WEIGHT WATCHERS INTERNATIONAL INC CENTRAL INDEX KEY: 0000105319 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PERSONAL SERVICES [7200] IRS NUMBER: 116040273 STATE OF INCORPORATION: VA FISCAL YEAR END: 1229 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-16769 FILM NUMBER: 181155462 BUSINESS ADDRESS: STREET 1: 675 AVENUE OF THE AMERICAS STREET 2: 6TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10010 BUSINESS PHONE: 2125892700 MAIL ADDRESS: STREET 1: 675 AVENUE OF THE AMERICAS STREET 2: 6TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10010 10-Q 1 wtw-10q_20180929.htm 10-Q wtw-10q_20180929.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q  

 

(Mark One)

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

For the quarterly period ended September 29, 2018

OR

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

For the transition period from              to             

Commission File Number: 001-16769

 

WEIGHT WATCHERS INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

 

 

Virginia

 

11-6040273

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

675 Avenue of the Americas, 6th Floor, New York, New York 10010

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (212) 589-2700

 

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 26, 2018 was 66,837,077. 

 

 

 

 


 

 

WEIGHT WATCHERS INTERNATIONAL, INC.

TABLE OF CONTENTS

 

 

 

Page No.

 

 

 

PART I—FINANCIAL INFORMATION

 

 

 

 

 

 

Item 1.     

Financial Statements

 

2

 

 

 

 

 

Unaudited Consolidated Balance Sheets at September 29, 2018 and December 30, 2017

 

2

 

 

 

 

 

Unaudited Consolidated Statements of Net Income for the three and nine months ended September 29, 2018 and September 30, 2017

 

3

 

 

 

 

 

Unaudited Consolidated Statements of Comprehensive Income for the three and nine months ended September 29, 2018 and September 30, 2017

 

4

 

 

 

 

 

Unaudited Consolidated Statements of Cash Flows for the nine months ended September 29, 2018 and September 30, 2017

 

5

 

 

 

 

 

Notes to Unaudited Consolidated Financial Statements

 

6

 

 

 

Cautionary Notice Regarding Forward-Looking Statements

 

23

 

 

 

 

Item 2.     

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

 

24

 

 

 

 

Item 3.     

Quantitative and Qualitative Disclosures About Market Risk

 

42

 

 

 

 

Item 4.     

Controls and Procedures

 

42

 

 

 

PART II—OTHER INFORMATION

 

 

 

 

 

 

Item 1.     

Legal Proceedings

 

43

 

 

 

 

Item 1A.     

Risk Factors

 

43

 

 

 

 

Item 2.     

Unregistered Sales of Equity Securities and Use of Proceeds

 

43

 

 

 

 

Item 3.     

Defaults Upon Senior Securities

 

43

 

 

 

 

Item 4.     

Mine Safety Disclosures

 

43

 

 

 

 

Item 5.     

Other Information

 

43

 

 

 

 

Item 6.     

Exhibits

 

44

 

 

 

Signatures

 

45

 

 

 

 


 

PART I—FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED BALANCE SHEETS AT

(IN THOUSANDS)

 

 

 

September 29,

 

 

December 30,

 

 

 

2018

 

 

2017

 

ASSETS

 

 

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

219,770

 

 

$

83,054

 

Receivables (net of allowances: September 29, 2018 - $1,786 and

   December 30, 2017 - $2,001)

 

 

28,871

 

 

 

23,913

 

Inventories

 

 

14,270

 

 

 

31,728

 

Prepaid income taxes

 

 

39,950

 

 

 

43,488

 

Prepaid expenses and other current assets

 

 

33,259

 

 

 

26,805

 

TOTAL CURRENT ASSETS

 

 

336,120

 

 

 

208,988

 

Property and equipment, net

 

 

49,811

 

 

 

47,978

 

Franchise rights acquired

 

 

750,730

 

 

 

754,040

 

Goodwill

 

 

154,697

 

 

 

156,281

 

Other intangible assets, net

 

 

56,605

 

 

 

46,536

 

Deferred income taxes

 

 

14,170

 

 

 

12,447

 

Other noncurrent assets

 

 

19,370

 

 

 

19,730

 

TOTAL ASSETS

 

$

1,381,503

 

 

$

1,246,000

 

LIABILITIES AND TOTAL DEFICIT

 

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

 

 

 

Portion of long-term debt due within one year

 

$

57,750

 

 

$

82,750

 

Accounts payable

 

 

22,960

 

 

 

24,356

 

Salaries and wages payable

 

 

58,119

 

 

 

62,179

 

Accrued marketing and advertising

 

 

16,058

 

 

 

18,154

 

Accrued interest

 

 

31,932

 

 

 

10,834

 

Other accrued liabilities

 

 

66,843

 

 

 

58,251

 

Derivative payable

 

 

0

 

 

 

12,171

 

Deferred revenue

 

 

58,367

 

 

 

74,332

 

TOTAL CURRENT LIABILITIES

 

 

312,029

 

 

 

343,027

 

Long-term debt, net

 

 

1,687,464

 

 

 

1,740,612

 

Deferred income taxes

 

 

206,070

 

 

 

143,591

 

Other

 

 

17,213

 

 

 

30,289

 

TOTAL LIABILITIES

 

 

2,222,776

 

 

 

2,257,519

 

Redeemable noncontrolling interest

 

 

3,939

 

 

 

4,467

 

TOTAL DEFICIT

 

 

 

 

 

 

 

 

Common stock, $0 par value; 1,000,000 shares authorized; 120,353 shares issued

   at September 29, 2018 and 118,947 shares issued at December 30, 2017

 

 

0

 

 

 

0

 

Treasury stock, at cost, 53,517 shares at September 29, 2018 and 54,258 shares

   at December 30, 2017

 

 

(3,180,015

)

 

 

(3,208,836

)

Retained earnings

 

 

2,340,255

 

 

 

2,203,317

 

Accumulated other comprehensive loss

 

 

(5,452

)

 

 

(10,467

)

TOTAL DEFICIT

 

 

(845,212

)

 

 

(1,015,986

)

TOTAL LIABILITIES AND TOTAL DEFICIT

 

$

1,381,503

 

 

$

1,246,000

 

 

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

2


 

WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF NET INCOME

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 29,

 

 

September 30,

 

 

September 29,

 

 

September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Service revenues, net

 

$

311,963

 

 

$

273,219

 

 

$

984,362

 

 

$

817,696

 

Product sales and other, net

 

 

53,802

 

 

 

50,468

 

 

 

199,373

 

 

 

176,726

 

Revenues, net

 

 

365,765

 

 

 

323,687

 

 

 

1,183,735

 

 

 

994,422

 

Cost of services

 

 

122,357

 

 

 

118,073

 

 

 

390,296

 

 

 

363,284

 

Cost of product sales and other

 

 

28,014

 

 

 

28,526

 

 

 

112,250

 

 

 

100,943

 

Cost of revenues

 

 

150,371

 

 

 

146,599

 

 

 

502,546

 

 

 

464,227

 

Gross profit

 

 

215,394

 

 

 

177,088

 

 

 

681,189

 

 

 

530,195

 

Marketing expenses

 

 

35,515

 

 

 

30,310

 

 

 

189,855

 

 

 

158,707

 

Selling, general and administrative expenses

 

 

61,019

 

 

 

55,400

 

 

 

182,696

 

 

 

153,671

 

Operating income

 

 

118,860

 

 

 

91,378

 

 

 

308,638

 

 

 

217,817

 

Interest expense

 

 

35,506

 

 

 

26,993

 

 

 

107,238

 

 

 

82,227

 

Other expense, net

 

 

881

 

 

 

125

 

 

 

1,978

 

 

 

278

 

Gain on early extinguishment of debt

 

 

0

 

 

 

0

 

 

 

0

 

 

 

(1,554

)

Income before income taxes

 

 

82,473

 

 

 

64,260

 

 

 

199,422

 

 

 

136,866

 

Provision for income taxes

 

 

12,374

 

 

 

19,593

 

 

 

19,580

 

 

 

36,457

 

Net income

 

 

70,099

 

 

 

44,667

 

 

 

179,842

 

 

 

100,409

 

Net loss attributable to the noncontrolling interest

 

 

33

 

 

 

52

 

 

 

122

 

 

 

135

 

Net income attributable to Weight Watchers International, Inc.

 

$

70,132

 

 

$

44,719

 

 

$

179,964

 

 

$

100,544

 

Earnings Per Share attributable to Weight Watchers

   International, Inc.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

1.05

 

 

$

0.69

 

 

$

2.72

 

 

$

1.57

 

Diluted

 

$

1.00

 

 

$

0.65

 

 

$

2.57

 

 

$

1.48

 

Weighted average common shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

66,701

 

 

 

64,463

 

 

 

66,074

 

 

 

64,237

 

Diluted

 

 

70,331

 

 

 

68,686

 

 

 

70,117

 

 

 

67,939

 

 

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

3


 

WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(IN THOUSANDS)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 29,

 

 

September 30,

 

 

September 29,

 

 

September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net income

 

$

70,099

 

 

$

44,667

 

 

$

179,842

 

 

$

100,409

 

Other comprehensive gain:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation gain (loss)

 

 

1,534

 

 

 

5,673

 

 

 

(5,695

)

 

 

11,704

 

Income tax (expense) benefit on foreign currency translation

   gain (loss)

 

 

(390

)

 

 

(2,206

)

 

 

1,443

 

 

 

(4,559

)

Foreign currency translation gain (loss), net of taxes

 

 

1,144

 

 

 

3,467

 

 

 

(4,252

)

 

 

7,145

 

Gain on derivatives

 

 

2,904

 

 

 

4,105

 

 

 

15,201

 

 

 

8,482

 

Income tax expense on gain on derivatives

 

 

(736

)

 

 

(1,601

)

 

 

(3,855

)

 

 

(3,308

)

Gain on derivatives, net of taxes

 

 

2,168

 

 

 

2,504

 

 

 

11,346

 

 

 

5,174

 

Total other comprehensive gain

 

 

3,312

 

 

 

5,971

 

 

 

7,094

 

 

 

12,319

 

Comprehensive income

 

 

73,411

 

 

 

50,638

 

 

 

186,936

 

 

 

112,728

 

Net loss attributable to the noncontrolling interest

 

 

33

 

 

 

52

 

 

 

122

 

 

 

135

 

Foreign currency translation loss (gain), net of taxes

   attributable to the noncontrolling interest

 

 

33

 

 

 

(113

)

 

 

406

 

 

 

(72

)

Comprehensive loss (income) attributable to the noncontrolling

   interest

 

 

66

 

 

 

(61

)

 

 

528

 

 

 

63

 

Comprehensive income attributable to Weight Watchers

   International, Inc.

 

$

73,477

 

 

$

50,577

 

 

$

187,464

 

 

$

112,791

 

 

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

4


 

WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

 

 

 

Nine Months Ended

 

 

 

September 29,

 

 

September 30,

 

 

 

2018

 

 

2017

 

Operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

179,842

 

 

$

100,409

 

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

32,594

 

 

 

38,331

 

Amortization of deferred financing costs and debt discount

 

 

6,330

 

 

 

4,292

 

Impairment of intangible and long-lived assets

 

 

3

 

 

 

670

 

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

 

 

0

 

 

 

70

 

Share-based compensation expense

 

 

15,346

 

 

 

9,372

 

Deferred tax provision

 

 

1,322

 

 

 

6,393

 

Allowance for doubtful accounts

 

 

(68

)

 

 

(775

)

Reserve for inventory obsolescence

 

 

6,146

 

 

 

6,280

 

Foreign currency exchange rate loss

 

 

1,480

 

 

 

158

 

Gain on early extinguishment of debt

 

 

0

 

 

 

(1,840

)

Changes in cash due to:

 

 

 

 

 

 

 

 

Receivables

 

 

(12,763

)

 

 

6,768

 

Inventories

 

 

11,888

 

 

 

4,821

 

Prepaid expenses

 

 

2,535

 

 

 

9,711

 

Accounts payable

 

 

(2,024

)

 

 

(19,622

)

Accrued liabilities

 

 

16,634

 

 

 

(21,459

)

Deferred revenue

 

 

(12,465

)

 

 

16,692

 

Other long term assets and liabilities, net

 

 

(12,819

)

 

 

5,907

 

Income taxes

 

 

20,658

 

 

 

18,627

 

Cash provided by operating activities

 

 

254,639

 

 

 

184,805

 

Investing activities:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(11,932

)

 

 

(10,755

)

Capitalized software expenditures

 

 

(20,115

)

 

 

(20,242

)

Cash paid for acquisitions

 

 

(3,063

)

 

 

0

 

Other items, net

 

 

(9,843

)

 

 

(130

)

Cash used for investing activities

 

 

(44,953

)

 

 

(31,127

)

Financing activities:

 

 

 

 

 

 

 

 

Net borrowings (payments) on revolver

 

 

(25,000

)

 

 

0

 

Payments on long-term debt

 

 

(57,750

)

 

 

(88,387

)

Taxes paid related to net share settlement of equity awards

 

 

(20,564

)

 

 

(4,894

)

Proceeds from stock options exercised

 

 

32,610

 

 

 

4,925

 

Cash used for financing activities

 

 

(70,704

)

 

 

(88,356

)

Effect of exchange rate changes on cash and cash equivalents

 

 

(2,266

)

 

 

4,269

 

Net increase in cash and cash equivalents

 

 

136,716

 

 

 

69,591

 

Cash and cash equivalents, beginning of period

 

 

83,054

 

 

 

108,656

 

Cash and cash equivalents, end of period

 

$

219,770

 

 

$

178,247

 

 

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

 

 

5


 

WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

1.

Basis of Presentation

The accompanying consolidated financial statements include the accounts of Weight Watchers International, Inc. and all of its subsidiaries. The terms “Company” and “WW” as used throughout these notes are used to indicate Weight Watchers International, Inc. and all of its operations consolidated for purposes of its financial statements. The Company’s “Digital” business refers to providing subscriptions to the Company’s digital offerings, including the Personal Coaching product.  The Company’s “Digital + Studio” 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 “Digital + Studio” business also includes the provision of access to workshops for the Company’s “pay-as-you-go” members and other studio members.

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

These statements should be read in conjunction with the Company’s Annual Report on Form 10-K for fiscal 2017 filed on February 28, 2018, which includes additional information about the Company, its results of operations, its financial position and its cash flows.

2.

Recently Issued Accounting Standards

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

 

For a discussion of the Company’s other significant accounting policies, see “Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements of the Company’s Annual Report on Form 10-K for fiscal 2017. For a discussion of accounting standards adopted in the current period, see Note 3.

3.

Accounting Standards Adopted in Current Year

In March 2016, the FASB issued updated guidance on revenue from contracts with customers, which is intended to clarify the implementation guidance on principal versus agent considerations. The amendments in this update do not change the core principle of the guidance, but are intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations by including indicators to assist an entity in determining whether it controls a specified good or service before it is transferred to the customer. In April 2016, the FASB issued updated guidance on revenue from contracts with customers, which is intended to clarify guidance related to identifying performance obligations and licensing implementation guidance contained in the new revenue recognition standard. In May 2016, the FASB issued updated guidance on revenue from contracts with customers, which is intended to provide narrow scope guidance and practical expedients contained in the new revenue standard. In December 2016, the FASB issued updated guidance on revenue from contracts with customers for technical corrections and improvements on narrow

6


WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

 

aspects within the original and amended guidance. The amendments in these updates are effective for annual periods beginning after December 15, 2017 and interim periods within those fiscal years, with early adoption permitted. On the first day of the first quarter of fiscal 2018, the Company adopted the updated guidance on revenue from contracts with customers on a modified retrospective basis. See Note 4 for further details.

 

In October 2016, the FASB issued updated guidance on intra-equity transfers of assets other than inventory which is intended to improve the accounting for income tax consequences by eliminating the deferral of tax effects of intra-entity asset transfers other than inventory within the consolidated entity. The current guidance to defer the recognition of any tax impact on the transfer of inventory within the consolidated entity until it is sold to a third party remains unaffected. The updated guidance is effective for annual periods beginning after December 15, 2017 and interim periods within those fiscal years, with early adoption permitted. The updated guidance must be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company adopted this guidance the first day of the first quarter of 2018, and as a result, recorded a net deferred tax liability with a corresponding cumulative adjustment to decrease retained earnings of $48,624 associated with an intra-entity transfer of certain intellectual property rights related to the Company’s non-U.S. business to its Canadian entity. Before the 2017 Tax Act was passed, the Company’s position was that this transaction was net neutral from a tax perspective and therefore a cumulative effect entry might not be required.  However, after further analysis of the new tax law during the first quarter of 2018, the Company concluded an entry to retained earnings was necessary.  

In February 2018, the FASB issued updated guidance on tax effects of items within accumulated other comprehensive income resulting from Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”).  This update eliminates the stranded tax effects from the Act and permits a company to make an accounting policy election to reclassify those effects from accumulated other comprehensive income (“AOCI”) to retained earnings. The updated guidance is effective for the Company beginning in the first quarter of fiscal 2019 and early adoption is permitted. The Company adopted this guidance the first day of the first quarter of fiscal 2018, and the election was made to reclassify the income tax effects of the 2017 Tax Act from accumulated other comprehensive loss to retained earnings, resulting in a $2,485 increase to retained earnings in the consolidated balance sheet. There were no other income tax effects related to the application of the 2017 Tax Act with the adoption of this updated guidance.

 

In March 2018, the FASB issued guidance pursuant to the amendments issued by the staff of the U.S. Securities and Exchange CommissionThe amendments provide guidance on when to record and disclose provisional amounts for certain income tax effects of the 2017 Tax Act. The amendments also require any provisional amounts or subsequent adjustments to be included in net income from continuing operations. Additionally, this guidance discusses required disclosures that an entity must make with regard to the 2017 Tax Act. This guidance is effective immediately as new information is available to adjust provisional amounts that were previously recorded. The Company adopted this guidance the first day of the first quarter of fiscal 2018 and will continue to evaluate indicators that may give rise to a change in our tax provision as a result of the 2017 Tax Act. See Note 10 for additional information on the 2017 Tax Act.

In June 2018, the FASB issued updated guidance regarding share-based payment transactions for acquiring goods and services from nonemployees. The updated guidance applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The effective date of the new guidance for public companies is for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption is permitted, but no earlier than an entity’s adoption date of the revenue guidance. The updated guidance is effective for the Company beginning in the first quarter of fiscal 2019. The Company early adopted this guidance during the third quarter of 2018. The adoption of this guidance had no impact on the consolidated financial statements.

 

4.

Revenue  

 

Adoption of Revenue from Contracts with Customers

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

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

7


WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

 

Revenue Recognition

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

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

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

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

 

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

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 29,

 

 

September 30,

 

 

September 29,

 

 

September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Digital Subscription Revenues

 

$

143,299

 

 

$

107,587

 

 

$

432,863

 

 

$

312,710

 

Digital + Studio Fees

 

 

168,664

 

 

 

165,632

 

 

 

551,499

 

 

 

504,986

 

Service revenues, net

 

$

311,963

 

 

$

273,219

 

 

$

984,362

 

 

$

817,696

 

Product sales and other, net

 

 

53,802

 

 

 

50,468

 

 

 

199,373

 

 

 

176,726

 

Revenues, net

 

$

365,765

 

 

$

323,687

 

 

$

1,183,735

 

 

$

994,422

 

 

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

 

 

 

Three Months Ended September 29, 2018

 

 

 

North

 

 

Continental

 

 

United

 

 

 

 

 

 

 

 

 

 

 

America

 

 

Europe

 

 

Kingdom

 

 

Other

 

 

Total

 

Digital Subscription Revenues

 

$

95,664

 

 

$

37,928

 

 

$

6,282

 

 

$

3,425

 

 

$

143,299

 

Digital + Studio Fees

 

 

125,282

 

 

 

25,441

 

 

 

12,619

 

 

 

5,322

 

 

 

168,664

 

Service revenues, net

 

$

220,946

 

 

$

63,369

 

 

$

18,901

 

 

$

8,747

 

 

$

311,963

 

Product sales and other, net

 

 

34,335

 

 

 

9,025

 

 

 

6,455

 

 

 

3,987

 

 

 

53,802

 

Revenues, net

 

$

255,281

 

 

$

72,394

 

 

$

25,356

 

 

$

12,734

 

 

$

365,765

 

8


WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

 

 

 

 

Three Months Ended September 30, 2017

 

 

 

North

 

 

Continental

 

 

United

 

 

 

 

 

 

 

 

 

 

 

America

 

 

Europe

 

 

Kingdom

 

 

Other

 

 

Total

 

Digital Subscription Revenues

 

$

71,294

 

 

$

27,746

 

 

$

5,687

 

 

$

2,860

 

 

$

107,587

 

Digital + Studio Fees

 

 

122,441

 

 

 

23,412

 

 

 

13,306

 

 

 

6,473

 

 

 

165,632

 

Service revenues, net

 

$

193,735

 

 

$

51,158

 

 

$

18,993

 

 

$

9,333

 

 

$

273,219

 

Product sales and other, net

 

 

29,942

 

 

 

9,507

 

 

 

6,480

 

 

 

4,539

 

 

 

50,468

 

Revenues, net

 

$

223,677

 

 

$

60,665

 

 

$

25,473

 

 

$

13,872

 

 

$

323,687

 

 

 

 

Nine Months Ended September 29, 2018

 

 

 

North

 

 

Continental

 

 

United

 

 

 

 

 

 

 

 

 

 

 

America

 

 

Europe

 

 

Kingdom

 

 

Other

 

 

Total

 

Digital Subscription Revenues

 

$

289,002

 

 

$

113,431

 

 

$

19,800

 

 

$

10,630

 

 

$

432,863

 

Digital + Studio Fees

 

 

408,200

 

 

 

83,923

 

 

 

41,552

 

 

 

17,824

 

 

 

551,499

 

Service revenues, net

 

$

697,202

 

 

$

197,354

 

 

$

61,352

 

 

$

28,454

 

 

$

984,362

 

Product sales and other, net

 

 

121,805

 

 

 

39,164

 

 

 

23,498

 

 

 

14,906

 

 

 

199,373

 

Revenues, net

 

$

819,007

 

 

$

236,518

 

 

$

84,850

 

 

$

43,360

 

 

$

1,183,735

 

 

 

 

Nine Months Ended September 30, 2017

 

 

 

North

 

 

Continental

 

 

United

 

 

 

 

 

 

 

 

 

 

 

America

 

 

Europe

 

 

Kingdom

 

 

Other

 

 

Total

 

Digital Subscription Revenues

 

$

212,976

 

 

$

74,989

 

 

$

15,887

 

 

$

8,858

 

 

$

312,710

 

Digital + Studio Fees

 

 

376,106

 

 

 

70,176

 

 

 

39,448

 

 

 

19,256

 

 

 

504,986

 

Service revenues, net

 

$

589,082

 

 

$

145,165

 

 

$

55,335

 

 

$

28,114

 

 

$

817,696

 

Product sales and other, net

 

 

106,315

 

 

 

34,415

 

 

 

20,572

 

 

 

15,424

 

 

 

176,726

 

Revenues, net

 

$

695,397

 

 

$

179,580

 

 

$

75,907

 

 

$

43,538

 

 

$

994,422

 

 

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 30, 2017

 

$

74,332

 

 

$

2,049

 

Net increase (decrease) during the period

 

 

(15,965)

 

 

 

(815)

 

Balance as of September 29, 2018

 

$

58,367

 

 

$

1,234

 

 

9


WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

 

Revenue recognized from amounts included in current deferred revenue as of December 30, 2017 was $71,930 for the nine months ended September 29, 2018. The Company’s long-term deferred revenue, which is included in other liabilities on the Company’s consolidated balance sheet, had a balance of $1,234 at September 29, 2018 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 agreements.

Practical Expedients and Exemptions

The Company elected to apply the updated guidance only to contracts that were not completed as of December 31, 2017, the date of adoption. The Company does not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less. The Company expenses sales commissions when incurred (amortization period would have been one year or less) and these expenses are recorded within selling, general and administrative expenses. The Company treats shipping and handling fees as fulfillment costs and not as a separate performance obligation, and as a result, any fees received from customers are included in the transaction price allocated to the performance obligation of providing goods with a corresponding amount accrued within cost of product sales and other for amounts paid to applicable carriers. Sales tax, value-added tax, and other taxes the Company collects concurrent with revenue-producing activities are excluded from revenue. 

 

 

5.

Acquisition of Kurbo Health, Inc.

On August 10, 2018, the Company acquired substantially all of the assets of Kurbo Health, Inc. (“Kurbo”), a family-based healthy lifestyle coaching program, for a net purchase price of $3,063.  Payment was in the form of cash.  The total purchase price of Kurbo has been allocated to goodwill ($1,101), website development ($1,916), prepaid expenses ($78) and other assets ($32) partially offset by deferred revenue ($57) and other liabilities ($7).  The acquisition of Kurbo has been accounted for under the purchase method of accounting and, accordingly, earnings of Kurbo have been included in the consolidated operating results of the Company since the date of acquisition. The goodwill will be deductible annually for tax purposes.

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 29, 2018, the change in the carrying value of franchise rights acquired is due to the effect of exchange rate changes.

Goodwill primarily relates to the acquisition of the Company by H.J. Heinz Company in 1978, the acquisition of WeightWatchers.com, Inc. in 2005, the acquisitions of the Company’s franchised territories, the acquisitions of the majority interest in Vigilantes do Peso Marketing Ltda. and of Knowplicity, Inc., d/b/a Wello, in fiscal 2014 and the acquisition of Weilos, Inc. in fiscal 2015.  For the nine months ended September 29, 2018, the change in the carrying amount of goodwill is due to the Kurbo acquisition (see Note 5 for further information) and the effect of exchange rate changes as follows:

 

 

 

North

 

 

Continental

 

 

United

 

 

 

 

 

 

 

 

 

 

 

America

 

 

Europe

 

 

Kingdom

 

 

Other

 

 

Total

 

Balance as of December 30, 2017

 

$

140,389

 

 

$

7,759

 

 

$

1,253

 

 

$

6,880

 

 

$

156,281

 

Goodwill acquired during the period

 

 

1,101

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

1,101

 

Effect of exchange rate changes

 

 

(1,115

)

 

 

(433

)

 

 

(45

)

 

 

(1,092

)

 

 

(2,685

)

Balance as of September 29, 2018

 

$

140,375

 

 

$

7,326

 

 

$

1,208