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Section 1: 10-Q (10-Q)

wtw-10q_20180630.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 June 30, 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 July 31, 2018 was 66,623,118. 

 

 

 

 


 

WEIGHT WATCHERS INTERNATIONAL, INC.

TABLE OF CONTENTS

 

 

 

Page No.

 

 

 

PART I—FINANCIAL INFORMATION

 

 

 

 

 

 

Item 1.     

Financial Statements

 

2

 

 

 

 

 

Unaudited Consolidated Balance Sheets at June 30, 2018 and December 30, 2017

 

2

 

 

 

 

 

Unaudited Consolidated Statements of Net Income for the three and six months ended June 30, 2018 and July 1, 2017

 

3

 

 

 

 

 

Unaudited Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2018 and July 1, 2017

 

4

 

 

 

 

 

Unaudited Consolidated Statements of Cash Flows for the six months ended June 30, 2018 and July 1, 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

 

43

 

 

 

 

Item 4.     

Controls and Procedures

 

43

 

 

 

PART II—OTHER INFORMATION

 

 

 

 

 

 

Item 1.     

Legal Proceedings

 

44

 

 

 

 

Item 1A.     

Risk Factors

 

44

 

 

 

 

Item 2.     

Unregistered Sales of Equity Securities and Use of Proceeds

 

44

 

 

 

 

Item 3.     

Defaults Upon Senior Securities

 

44

 

 

 

 

Item 4.     

Mine Safety Disclosures

 

44

 

 

 

 

Item 5.     

Other Information

 

44

 

 

 

 

Item 6.     

Exhibits

 

45

 

 

 

Signatures

 

46

 

 

 

 


 

PART I—FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED BALANCE SHEETS AT

(IN THOUSANDS)

 

 

 

June 30,

 

 

December 30,

 

 

 

2018

 

 

2017

 

ASSETS

 

 

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

167,755

 

 

$

83,054

 

Receivables (net of allowances: June 30, 2018 - $2,021 and

   December 30, 2017 - $2,001)

 

 

27,401

 

 

 

23,913

 

Inventories

 

 

18,649

 

 

 

31,728

 

Prepaid income taxes

 

 

49,193

 

 

 

43,488

 

Prepaid expenses and other current assets

 

 

28,457

 

 

 

26,805

 

TOTAL CURRENT ASSETS

 

 

291,455

 

 

 

208,988

 

Property and equipment, net

 

 

48,138

 

 

 

47,978

 

Franchise rights acquired

 

 

750,335

 

 

 

754,040

 

Goodwill

 

 

153,130

 

 

 

156,281

 

Other intangible assets, net

 

 

54,113

 

 

 

46,536

 

Deferred income taxes

 

 

15,239

 

 

 

12,447

 

Other noncurrent assets

 

 

24,142

 

 

 

19,730

 

TOTAL ASSETS

 

$

1,336,552

 

 

$

1,246,000

 

LIABILITIES AND TOTAL DEFICIT

 

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

 

 

 

Portion of long-term debt due within one year

 

$

118,498

 

 

$

82,750

 

Accounts payable

 

 

22,952

 

 

 

24,356

 

Salaries and wages payable

 

 

56,678

 

 

 

62,179

 

Accrued marketing and advertising

 

 

12,242

 

 

 

18,154

 

Accrued interest

 

 

25,249

 

 

 

10,834

 

Other accrued liabilities

 

 

60,125

 

 

 

58,251

 

Derivative payable

 

 

0

 

 

 

12,171

 

Deferred revenue

 

 

83,878

 

 

 

74,332

 

TOTAL CURRENT LIABILITIES

 

 

379,622

 

 

 

343,027

 

Long-term debt, net

 

 

1,644,471

 

 

 

1,740,612

 

Deferred income taxes

 

 

204,304

 

 

 

143,591

 

Other

 

 

31,151

 

 

 

30,289

 

TOTAL LIABILITIES

 

 

2,259,548

 

 

 

2,257,519

 

Redeemable noncontrolling interest

 

 

4,004

 

 

 

4,467

 

TOTAL DEFICIT

 

 

 

 

 

 

 

 

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

   shares issued at June 30, 2018 and 118,947 shares issued at December 30, 2017

 

 

0

 

 

 

0

 

Treasury stock, at cost, 53,765 shares at June 30, 2018 and 54,258

   shares at December 30, 2017

 

 

(3,189,796

)

 

 

(3,208,836

)

Retained earnings

 

 

2,271,593

 

 

 

2,203,317

 

Accumulated other comprehensive loss

 

 

(8,797

)

 

 

(10,467

)

TOTAL DEFICIT

 

 

(927,000

)

 

 

(1,015,986

)

TOTAL LIABILITIES AND TOTAL DEFICIT

 

$

1,336,552

 

 

$

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

 

 

Six Months Ended

 

 

 

June 30,

 

 

July 1,

 

 

June 30,

 

 

July 1,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Service revenues, net

 

$

343,730

 

 

$

283,001

 

 

$

672,399

 

 

$

544,477

 

Product sales and other, net

 

 

66,017

 

 

 

58,672

 

 

 

145,571

 

 

 

126,259

 

Revenues, net

 

 

409,747

 

 

 

341,673

 

 

 

817,970

 

 

 

670,736

 

Cost of services

 

 

128,159

 

 

 

120,325

 

 

 

267,939

 

 

 

245,210

 

Cost of product sales and other

 

 

36,794

 

 

 

32,335

 

 

 

84,236

 

 

 

72,416

 

Cost of revenues

 

 

164,953

 

 

 

152,660

 

 

 

352,175

 

 

 

317,626

 

Gross profit

 

 

244,794

 

 

 

189,013

 

 

 

465,795

 

 

 

353,110

 

Marketing expenses

 

 

55,421

 

 

 

41,968

 

 

 

154,340

 

 

 

128,397

 

Selling, general and administrative expenses

 

 

61,665

 

 

 

50,839

 

 

 

121,676

 

 

 

98,273

 

Operating income

 

 

127,708

 

 

 

96,206

 

 

 

189,779

 

 

 

126,440

 

Interest expense

 

 

35,866

 

 

 

27,092

 

 

 

71,732

 

 

 

55,234

 

Other expense (income), net

 

 

1,333

 

 

 

(488

)

 

 

1,097

 

 

 

154

 

Gain on early extinguishment of debt

 

 

0

 

 

 

(1,554

)

 

 

0

 

 

 

(1,554

)

Income before income taxes

 

 

90,509

 

 

 

71,156

 

 

 

116,950

 

 

 

72,606

 

Provision for income taxes

 

 

19,825

 

 

 

25,992

 

 

 

7,208

 

 

 

16,864

 

Net income

 

 

70,684

 

 

 

45,164

 

 

 

109,742

 

 

 

55,742

 

Net loss attributable to the noncontrolling interest

 

 

36

 

 

 

9

 

 

 

90

 

 

 

83

 

Net income attributable to Weight Watchers International, Inc.

 

$

70,720

 

 

$

45,173

 

 

$

109,832

 

 

$

55,825

 

Earnings Per Share attributable to Weight Watchers

   International, Inc.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

1.07

 

 

$

0.70

 

 

$

1.67

 

 

$

0.87

 

Diluted

 

$

1.01

 

 

$

0.67

 

 

$

1.57

 

 

$

0.83

 

Weighted average common shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

66,400

 

 

 

64,269

 

 

 

65,761

 

 

 

64,124

 

Diluted

 

 

70,154

 

 

 

67,737

 

 

 

69,914

 

 

 

67,304

 

 

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

3


 

WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(IN THOUSANDS)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

July 1,

 

 

June 30,

 

July 1,

 

 

 

2018

 

 

2017

 

 

2018

 

2017

 

Net income

 

$

70,684

 

 

$

45,164

 

 

$

109,742

 

$

55,742

 

Other comprehensive (loss) gain:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation (loss) gain

 

 

(3,804

)

 

 

2,630

 

 

 

(7,229

)

 

6,031

 

Income tax benefit (expense) on foreign currency translation

   (loss) gain

 

 

965

 

 

 

(1,026

)

 

 

1,833

 

 

(2,352

)

Foreign currency translation (loss) gain, net of taxes

 

 

(2,839

)

 

 

1,604

 

 

 

(5,396

)

 

3,679

 

Gain (loss) on derivatives

 

 

1,130

 

 

 

(1,136

)

 

 

12,297

 

 

4,377

 

Income tax (expense) benefit on gain on derivatives

 

 

(287

)

 

 

443

 

 

 

(3,119

)

 

(1,707

)

Gain (loss) on derivatives, net of taxes

 

 

843

 

 

 

(693

)

 

 

9,178

 

 

2,670

 

Total other comprehensive (loss) gain

 

 

(1,996

)

 

 

911

 

 

 

3,782

 

 

6,349

 

Comprehensive income

 

 

68,688

 

 

 

46,075

 

 

 

113,524

 

 

62,091

 

Net loss attributable to the noncontrolling interest

 

 

36

 

 

 

9

 

 

 

90

 

 

83

 

Foreign currency translation loss, net of taxes

   attributable to the noncontrolling interest

 

 

137

 

 

 

146

 

 

 

373

 

 

41

 

Comprehensive loss attributable to the noncontrolling

   interest

 

 

173

 

 

 

155

 

 

 

463

 

 

124

 

Comprehensive income attributable to Weight Watchers

   International, Inc.

 

$

68,861

 

 

$

46,230

 

 

$

113,987

 

$

62,215

 

 

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

4


 

WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

 

 

 

Six Months Ended

 

 

 

 

June 30,

 

 

July 1,

 

 

 

 

2018

 

 

2017

 

 

Operating activities:

 

 

 

 

 

 

 

 

 

Net income

 

$

109,742

 

 

$

55,742

 

 

Adjustments to reconcile net income to cash

   provided by operating activities:

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

21,774

 

 

 

25,554

 

 

Amortization of deferred financing costs and debt discount

 

 

4,122

 

 

 

2,861

 

 

Impairment of intangible and long-lived assets

 

 

0

 

 

 

60

 

 

Write-off of net assets due to cessation of Spain

   operations

 

 

0

 

 

 

70

 

 

Share-based compensation expense

 

 

9,675

 

 

 

4,817

 

 

Deferred tax provision

 

 

752

 

 

 

10,331

 

 

Allowance for doubtful accounts

 

 

54

 

 

 

(857

)

 

Reserve for inventory obsolescence

 

 

8,338

 

 

 

4,962

 

 

Foreign currency exchange rate loss

 

 

868

 

 

 

150

 

 

Gain on early extinguishment of debt

 

 

0

 

 

 

(1,802

)

 

Changes in cash due to:

 

 

 

 

 

 

 

 

 

Receivables

 

 

(9,650

)

 

 

3,490

 

 

Inventories

 

 

4,999

 

 

 

5,887

 

 

Prepaid expenses

 

 

(3,023

)

 

 

4,338

 

 

Accounts payable

 

 

(798

)

 

 

(19,727

)

 

Accrued liabilities

 

 

(1,696

)

 

 

(28,575

)

 

Deferred revenue

 

 

13,259

 

 

 

21,847

 

 

Other long term assets and liabilities, net

 

 

(4,309

)

 

 

144

 

 

Income taxes

 

 

14,480

 

 

 

8,823

 

 

Cash provided by operating activities

 

 

168,587

 

 

 

98,115

 

 

Investing activities:

 

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(7,733

)

 

 

(5,614

)

 

Capitalized software expenditures

 

 

(13,118

)

 

 

(13,419

)

 

Other items, net

 

 

(9,669

)

 

 

(86

)

 

Cash used for investing activities

 

 

(30,520

)

 

 

(19,119

)

 

Financing activities:

 

 

 

 

 

 

 

 

 

Net (payments) borrowings on revolver

 

 

(25,000

)

 

 

0

 

 

Payments on long-term debt

 

 

(38,500

)

 

 

(83,334

)

 

Taxes paid related to net share settlement of equity awards

 

 

(11,139

)

 

 

(3,648

)

 

Proceeds from stock options exercised

 

 

23,262

 

 

 

1,258

 

 

Cash used for financing activities

 

 

(51,377

)

 

 

(85,724

)

 

Effect of exchange rate changes on cash and cash equivalents

 

 

(1,989

)

 

 

2,557

 

 

Net increase (decrease) in cash and cash equivalents

 

 

84,701

 

 

 

(4,171

)

 

Cash and cash equivalents, beginning of period

 

 

83,054

 

 

 

108,656

 

 

Cash and cash equivalents, end of period

 

$

167,755

 

 

$

104,485

 

 

 

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

 

 

 

5


 

WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

1.

Basis of Presentation

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

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

These statements should be read in conjunction with the Company’s Annual Report on Form 10-K for fiscal 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. The Company is currently evaluating the impact that the adoption of this guidance will have on the consolidated financial statements and related disclosures of the Company.

In June 2018, the FASB issued updated guidance regarding share-based payment transactions for acquiring goods and services from nonemployees. The guidance also specifies that the updated guidance on stock compensation 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 is currently evaluating the potential effects of this guidance on its consolidated financial statements.

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

6


WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

 

agent considerations by including indicators to assist an entity in determining whether it controls a specified good or service before it is transferred to the customer. In April 2016, the FASB issued updated guidance on revenue from contracts with customers, which is intended to clarify guidance related to identifying performance obligations and licensing implementation guidance contained in the new revenue recognition standard. In May 2016, the FASB issued updated guidance on revenue from contracts with customers, which is intended to provide narrow scope guidance and practical expedients contained in the new revenue standard. In December 2016, the FASB issued updated guidance on revenue from contracts with customers for technical corrections and improvements on narrow aspects within the original and amended guidance. The amendments in these updates are effective for annual periods beginning after December 15, 2017 and interim periods within those fiscal years, with early adoption permitted. On December 31, 2017, 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 at March 31, 2018. 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 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 9 for additional information on the 2017 Tax Act.

 

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.

WWI earns revenue by conducting meetings, for which it charges a fee, predominantly through commitment plans, prepayment plans or the “pay-as-you-go” arrangement. WWI also earns revenue from subscriptions for the Company’s Online products, selling products (including publications) in its meetings, 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 meeting fees and magazine subscription revenue is recorded to deferred revenue and amortized into revenue as control is transferred over the period earned since the performance obligations are satisfied over time. In the meetings business, WWI generally charges non-refundable registration and starter fees in exchange for 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. Online subscription revenues, consisting of the fees associated with subscriptions for the Company’s Online 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 Online 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. Revenue from “pay-as-you-go” meeting fees, 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

 

 

Six Months Ended

 

 

 

June 30,

July 1,

 

 

June 30,

 

 

July 1,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Meeting Fees

 

$

 

192,712

 

 

$

 

175,003

 

 

$

 

382,834

 

 

$

 

339,355

 

Online Subscription Revenues

 

 

 

151,018

 

 

 

 

107,998

 

 

 

 

289,565

 

 

 

 

205,122

 

Service revenues, net

 

$

 

343,730

 

 

$

 

283,001

 

 

$

 

672,399

 

 

$

 

544,477

 

Product sales and other, net

 

 

 

66,017

 

 

 

 

58,672

 

 

 

 

145,571

 

 

 

 

126,259

 

Revenues, net

 

$

 

409,747

 

 

$

 

341,673

 

 

$

 

817,970

 

 

$

 

670,736

 

 

8


WEIGHT WATCHERS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

 

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

 

 

 

Three Months Ended June 30, 2018

 

 

 

North

 

 

 

Continental

 

 

United

 

 

 

 

 

 

 

 

 

 

 

America

 

 

 

Europe

 

 

Kingdom

 

 

Other

 

 

Total

 

Meeting Fees

 

$

142,767

 

 

 

$

29,402

 

 

$

14,551

 

 

$

5,992

 

 

$

192,712

 

Online Subscription Revenues

 

 

101,099

 

 

 

 

39,342

 

 

 

6,955

 

 

 

3,622

 

 

 

151,018

 

      Service revenues, net

 

$

243,866

 

 

 

$

68,744

 

 

$

21,506

 

 

$

9,614

 

 

$

343,730

 

Product sales and other, net

 

 

40,672

 

 

 

 

12,848

 

 

 

7,704

 

 

 

4,793

 

 

 

66,017

 

Revenues, net

 

$

284,538

 

 

 

$

81,592

 

 

$

29,210

 

 

$

14,407

 

 

$

409,747

 

 

 

 

Three Months Ended July 1, 2017

 

 

 

North

 

 

 

Continental

 

 

United

 

 

 

 

 

 

 

 

 

 

 

America

 

 

 

Europe

 

 

Kingdom

 

 

Other

 

 

Total

 

Meeting Fees

 

$

129,666

 

 

 

$

24,798

 

 

$

14,028

 

 

$

6,511

 

 

$

175,003

 

Online Subscription Revenues

 

 

73,535

 

 

 

 

25,701

 

 

 

5,745

 

 

 

3,017

 

 

 

107,998

 

      Service revenues, net

 

$

203,201

 

 

 

$

50,499

 

 

$

19,773

 

 

$

9,528

 

 

$

283,001

 

Product sales and other, net

 

 

35,788

 

 

 

 

10,997

 

 

 

6,662

 

 

 

5,225

 

 

 

58,672

 

Revenues, net

 

$

238,989

 

 

 

$

61,496

 

 

$

26,435

 

 

$

14,753

 

 

$

341,673

 

 

 

 

Six Months Ended June 30, 2018

 

 

 

North

 

 

 

Continental

 

 

 

 

United

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

America

 

 

 

Europe

 

 

 

 

Kingdom

 

 

 

 

Other

 

 

 

 

Total

 

Meeting Fees

 

$

282,918

 

 

 

$

58,482

 

 

 

 

$

28,933

 

 

 

 

$

12,500

 

 

 

 

$

382,834

 

Online Subscription Revenues

 

 

193,339

 

 

 

 

75,503

 

 

 

 

 

13,519

 

 

 

 

 

7,205

 

 

 

 

 

289,565

 

      Service revenues, net

 

$

476,257

 

 

 

$

133,985

 

 

 

 

$

42,452

 

 

 

 

$

19,705

 

 

 

 

$

672,399

 

Product sales and other, net

 

 

87,458

 

 

 

 

30,138

 

 

 

 

 

17,043

 

 

 

 

 

10,932

 

 

 

 

 

145,571

 

Revenues, net

 

$

563,715

 

 

 

$

164,123

 

 

 

 

$

59,495

 

 

 

 

$

30,637

 

 

 

 

$

817,970

 

 

 

 

Six Months Ended July 1, 2017

 

 

 

North

 

 

 

Continental

 

 

United

 

 

 

 

 

 

 

 

 

 

 

America

 

 

 

Europe

 

 

Kingdom

 

 

Other

 

 

Total

 

Meeting Fees

 

$

253,665

 

 

 

$

46,764

 

 

$

26,141

 

 

$

12,785

 

 

$

339,355

 

Online Subscription Revenues

 

 

141,682

 

 

 

 

47,243

 

 

 

10,200

 

 

 

5,997

 

 

 

205,122

 

      Service revenues, net

 

$

395,347

 

 

 

$

94,007

 

 

$

36,341

 

 

$

18,782

 

 

$

544,477

 

Product sales and other, net

 

 

76,372

 

 

 

 

24,907

 

 

 

14,093

 

 

 

10,887

 

 

 

126,259

 

Revenues, net

 

$

471,719

 

 

 

$

118,914

 

 

$

50,434

 

 

$

29,669

 

 

$

670,736

 

 

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

 

 

9,546

 

 

 

(548

)

Balance as of June 30, 2018

 

$

83,878

 

 

$

1,501

 

 

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 $67,090 for the six months ended June 30, 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 $1,501 at June 30, 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.

Franchise Rights Acquired, Goodwill and Other Intangible Assets

Franchise rights acquired are due to acquisitions of the Company’s franchised territories as well as the acquisition of franchise promotion agreements and other factors associated with the acquired franchise territories. For the six months ended June 30, 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 six months ended June 30, 2018, the change in the carrying amount of goodwill is due to the effect of exchange rate changes as follows:

 

 

 

North

 

 

Continental

 

 

United