WW INTERNATIONAL, INC. You should read the following discussion in conjunction with our consolidated financial statements and related notes included in Item 15 of this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties, such as statements of our plans, strategies, prospects, objectives, expectations and intentions. The cautionary statements discussed in "Cautionary Notice Regarding Forward-Looking Statements" and elsewhere in this Annual Report on Form 10-K should be read as applying to all forward-looking statements wherever they appear in this Annual Report on Form 10-K. Our actual results could differ materially from those discussed here. Factors that could cause or contribute to these differences include, without limitation, those discussed in "Risk Factors" included in Item 1A of this Annual Report on Form 10-K. For the discussion of the financial condition and results of operations for the year endedJanuary 2, 2021 compared to the year endedDecember 28, 2019 , refer to "Part II-Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year endedJanuary 2, 2021 filed with theSEC onFebruary 25, 2021 , which discussion is incorporated herein by reference.
Overview
We are a global wellness company powered by the world's leading commercial weight management program and an award-winning digital subscription platform. We are focused on inspiring people to adopt healthy habits for real life and aim to democratize and deliver wellness for all. With nearly six decades of weight management experience, expertise and know-how, we are one of the most recognized and trusted brand names among weight-conscious consumers. We educate our members and provide them with guidance, digital tools and an inspiring community to enable them to develop healthy habits and focus on their overall health and wellness. WW-branded services and products include digital offerings provided through our apps and websites, workshops, consumer products, and various events and experiences. Our business has gone through a significant shift to a digital subscription model over the past several years and our primary sources of revenue are subscriptions for our digital products and for our workshops. Our "Digital" business refers to providing subscriptions to our digital product offerings, including Digital 360 and Personal Coaching + Digital. Our "Workshops + Digital" (formerly known as "Studio + Digital") business refers to providing unlimited access to our workshops combined with our digital subscription product offerings to commitment plan subscribers. It also includes the provision of access to workshops for members who do not subscribe to commitment plans, including our "pay-as-you-go" members. We operate in numerous countries around the world, including through our franchise operations. We have four reportable segments based on an integrated geographical structure as follows:North America , Continental Europe (CE),United Kingdom and Other. See the section entitled "Business-Business Organization and Global Operations" in Item 1 of this Annual Report on Form 10-K for further information on these reportable segments and the countries in which we operate.
Components of our Results of Operations
Revenues
We derive our revenues principally from:
• Subscription Revenues. Our "Subscription Revenues" consist of "Digital
Subscription Revenues" and "Workshops + Digital Fees" (formerly known as
"Studio + Digital Fees"). "Digital Subscription Revenues" consist of the
fees associated with subscriptions for our Digital offerings, including
Digital 360 and Personal Coaching + Digital. "Workshops + 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-studio product sales. We sell a range of consumer products,
including bars, snacks, cookbooks and kitchen tools, in our studios.
• E-commerce, licensing, franchise royalties and other. We generaterevenues from sales of consumer products online through our e-commerce
platforms and through our trusted partners. We license our trademarks
and other intellectual property in certain categories of food, beverages
and other relevant consumer products and services. We also co-brand or
endorse with carefully selected branded consumer products and services.
In addition, our franchisees typically pay us a royalty fee of 10% of
their Workshops + Digital fee revenues as well as purchase products for
sale in their workshops. We also generate revenues from publishing.
34--------------------------------------------------------------------------------
The following table sets forth our revenues by category for the past two fiscal
years.
Revenue Sources
(in millions)
Fiscal 2021 Fiscal 2020
(52 weeks) (53 weeks)
Subscription Revenues $ 1,063.0 $ 1,186.5
In-studio product sales 21.9 40.4
E-commerce, licensing, franchise royalties and other 127.5 151.3
Total $ 1,212.5 $ 1,378.1 Note: Totals may not sum due to rounding.
Total revenues for fiscal 2021 decreased 12.0% versus fiscal 2020 driven primarily by a decrease in Subscription Revenues. Additional revenue details are as follows:
• Subscription Revenues. Subscription Revenues for fiscal 2021 decreased
10.4% versus fiscal 2020 due to a decrease in Workshops + Digital Fees,
partially offset by an increase in Digital Subscription Revenues. Our
Workshops + Digital products are priced at a premium compared to ourDigital products. Workshops + Digital Fees were negatively impacted by
both the lower number of Incoming Workshops + Digital Subscribers at the
beginning of fiscal 2021 versus the beginning of fiscal 2020 and the
significant recruitment decline in fiscal 2021 driven by the closure of
certain of our studios and the limited reopening of others primarily
related to the COVID-19 environment. End of Period Subscribers for
fiscal 2021 decreased 5.8% versus the prior year. In fiscal 2021,
recruitment declined compared to the prior year due to the COVID-19
environment and cycling against the successful launch of the myWW
program in fiscal 2020. Partially mitigating these trends, member
retention in the aggregate has improved over fiscal 2020 and was at
historic highs in fiscal 2021. Recruitment and retention continue to be
a key strategic focus.
• In-studio product sales. In-studio product sales for fiscal 2021
decreased 45.7% versus fiscal 2020 as a result of the closure of our
studios and reduced operations related to the COVID-19 pandemic.
• E-commerce, licensing, franchise royalties and other. All other revenues
for fiscal 2021 decreased 15.7% versus fiscal 2020 primarily due to
cycling against the revenue received in connection with the WW Presents:
Cost of Revenues
Total cost of revenues primarily consists of expenses to operate our studios and workshops, costs to sell consumer products and costs to develop and operate our digital products. Operating costs primarily consist of salary expense paid to operations management, commissions and expenses paid to our employees, coaches and guides, studio room rent, customer service costs (both in-house and third-party), program material expenses, depreciation and amortization associated with field automation, credit card and fulfillment fees and training and other expenses. Cost to sell products includes costs of products purchased from our third-party suppliers, inventory reserves, royalties, and inbound and outbound shipping and related costs incurred in making our products available for sale or use. Costs to operate our digital products include salaries and related benefits, depreciation and amortization of website development, credit card processing fees and other costs incurred in developing our digital offerings.
Marketing Expenses
Marketing expenses primarily consist of costs to produce advertising and
marketing materials as well as media costs to advertise our brand and products
across multiple platforms (e.g., television, YouTube, social media,
programmatic, audio, search, affiliate, branded content, electronic customer
relationship marketing (eCRM), direct mail and public relations), costs paid to
third-party agencies who help us develop our marketing campaigns and strategy,
expenses in support of market research, as well as costs incurred in connection
with local marketing and promotions.
35--------------------------------------------------------------------------------
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist of compensation, benefits and other related costs, including stock-based compensation, third-party consulting, temporary help, audit, legal and litigation expenses as well as facility costs and depreciation and amortization of systems in support of the business infrastructure and offices globally. Selling, general and administrative expenses also include amortization expense of certain of our intangible assets and certain one-time transaction expenses.
Gross Margin
The following table sets forth our gross profit and gross margin for the past two fiscal years, as adjusted for fiscal 2021 to exclude the impact of the 2021 plan restructuring charges and the reversal of 2020 plan restructuring charges, and as adjusted for fiscal 2020 to exclude the impact of the 2020 plan restructuring charges. See "Non-GAAP Financial Measures" for additional information. (in millions except percentages) Fiscal 2021 Fiscal 2020 Gross Profit$ 726.4 $ 777.8 Gross Margin 59.9 % 56.4 % Adjustments to Reported Amounts (1) 2021 plan restructuring charges 16.7
-
2020 plan restructuring charges (1.3 )
23.3
Gross Profit, as adjusted (1)$ 741.8 $
801.1
Gross Margin impact from above adjustments (1) (1.3 %) (1.7 %) Gross Margin, as adjusted (1) 61.2 % 58.1 %
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 fiscal 2021 to exclude the impact
of the
charges and the reversal of
plan restructuring charges, and for fiscal 2020 to exclude the impact of the
See "Non-GAAP Financial Measures" below for an explanation of our use of
non-GAAP financial measures.
In fiscal 2021, excluding the impact of the 2021 plan restructuring charges and
the reversal of 2020 plan restructuring charges, the gross margin increase from
fiscal 2020, excluding the impact of the 2020 plan restructuring charges, was
driven primarily by a revenue mix shift to our higher margin Digital business
and cycling against the lower margin revenues from the WW Presents: Oprah 's 2020
Vision tour, partially offset by an increase in fixed costs in our Digital
business primarily related to Digital 360.
36
--------------------------------------------------------------------------------Operating Income Margin
The following table sets forth our operating income for the past two fiscal years, as adjusted for fiscal 2021 to exclude the impact of the 2021 plan restructuring charges and the reversal of 2020 plan restructuring charges, and as adjusted for fiscal 2020 to exclude the impact of the 2020 plan restructuring charges, the Winfrey Stock Compensation expense and the impairment charge for our goodwill related to ourBrazil reporting unit: (in millions except percentages) Fiscal 2021 Fiscal 2020 Operating Income$ 196.3 $ 216.2 Operating Income Margin 16.2 % 15.7 % Adjustments to Reported Amounts (1) 2021 plan restructuring charges 21.5 - 2020 plan restructuring charges (1.6 ) 33.1 Winfrey Stock Compensation expense - 32.7 Goodwill impairment - 3.7 Operating Income, as adjusted (1)$ 216.2 $ 285.6 Operating Income Margin impact from above adjustments (1) (1.6 %) (5.0 %) Operating Income Margin, as adjusted (1) 17.8 % 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 fiscal 2021 to exclude the impact
of the
charges and the reversal of
plan restructuring charges, and for fiscal 2020 to exclude the impact of the
the
expense and the
charge related to our Brazil reporting unit. See "Non-GAAP Financial
Measures" below for an explanation of our use of non-GAAP financial
measures.
In fiscal 2021, excluding the impact of the 2021 plan restructuring charges and
the reversal of 2020 plan restructuring charges, the decrease in operating
income margin from fiscal 2020, excluding the impact of the 2020 restructuring
charges, the Winfrey Stock Compensation expense and the goodwill impairment
charge, was driven primarily by an increase in selling, general and
administrative expenses as a percentage of revenue and an increase in marketing
expenses as a percentage of revenue, partially offset by an increase in gross
margin.
Material Trends
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 "Subscription Revenues" consist of "Digital Subscription
Revenues" and "Workshops + Digital Fees". "Digital Subscription
Revenues" consist of the fees associated with subscriptions for our
Digital offerings, including Digital 360 and Personal Coaching +Digital. "Workshops + 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 via
e-commerce, in studios and through our trusted partners, revenues from
licensing and publishing, other revenues (including revenues from the WW
Presents: Oprah 's 2020 Vision tour), and, in the case of theconsolidated financial results and Other reportable segment, franchise
fees with respect to commitment plans and royalties.
37--------------------------------------------------------------------------------
• 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 Digital 360 and Personal Coaching +
Digital); (ii) "Workshops + Digital Paid Weeks" (formerly known as
"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 Workshops + Digital Paid Weeks.
• Incoming Subscribers-"Subscribers" refer to Digital subscribers andWorkshops + 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 Digital 360 and Personal Coaching + Digital,
subscribers; (ii) "Incoming Workshops + Digital Subscribers" (formerly
known as "
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 Workshops + Digital
Subscribers. Recruitment and retention are key drivers for this metric.
• 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 Digital 360 and Personal Coaching + Digital,
subscribers; (ii) "End of Period Workshops + Digital Subscribers"
(formerly known as "End of
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
Workshops + Digital Subscribers. Recruitment and retention are key
drivers for this metric.
• Gross profit and operating expenses as a percentage of revenue.
COVID-19 Pandemic
The novel coronavirus (including its variants, COVID-19) pandemic continues to
impact our business operations and the markets in which we operate.
Additionally, we have seen significant shifts in consumer sentiment with respect
to the weight loss and wellness marketplace as the pandemic evolves. COVID-19
had a significant effect on our reported results for fiscal 2020 and fiscal
2021. While the number of End of Period Subscribers at the end of fiscal 2021
was essentially flat compared to the pre-pandemic number at the end of fiscal
2019, it decreased 5.8% versus the end of fiscal 2020. While Digital
recruitments were strong in the beginning of the COVID-19 pandemic, a subsequent
turn in consumer sentiment has driven a decline in Digital recruitments, and
recruitment projections for our Digital business are unpredictable. Our
Workshops + Digital recruitments were dramatically impacted during the first
year of the pandemic, and mix shifted toward our Digital business. This change
in our mix, especially when amplified by the nature of our subscription
business, has negatively impacted revenue and may continue to impact it in the
future. The negative impact of COVID-19, including its impact on consumer
sentiment, is expected to continue to impact the business in the first quarter
of fiscal 2022. Over the longer term, it remains uncertain how the COVID-19
pandemic will impact consumer demand for our products and services and consumer
preferences and behavior generally.
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, the severity of any variant or surges in COVID-19
cases, new information about health implications, vaccine availability and
hesitancy, and actions by government authorities to contain the outbreak or
treat its impact. This dynamic situation is driving uncertainly at the
macroeconomic, local and consumer levels. We continue to actively monitor the
ongoing global outbreak of COVID-19 and its impact and related developments.
38
--------------------------------------------------------------------------------
In response to the public health crisis posed by COVID-19, in March 2020 , 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.
During fiscal 2021, we selectively resumed in-person workshops where profitable
and consistent with promoting the health and safety of our employees and
members. However, during these uncertain times, we will continue to adhere to
the requirements in local jurisdictions to close re-opened studios as necessary.
We continue to evolve our workshop strategy as we evaluate our cost structure
and respond to shifting consumer sentiment. This evolution may lead to further
reduced operations. We continue to serve our members virtually, both via our
Digital business and through virtual workshops. However, our Workshops + Digital
business, including its business operations, number of subscribers and in-studio
product sales, remain substantially affected by the evolving COVID-19
environment.
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. We consolidated certain of our studios and continue to
close certain other branded studio locations. The decision to re-open a studio
location, if at all, or further consolidate studio locations, will be influenced
by a number of factors, including applicable legal restrictions, consumer
confidence and preferences, changes in consumer sentiment and behavior, and the
protection of the health and safety of our employees and members, and will be
dependent on cost efficiencies and alignment with our digital and brand
strategy. The current number of our studio locations is significantly lower than
that prior to the pandemic, and we expect it to remain below pre-COVID-19
levels. As a result, we have incurred, and we expect to continue to incur,
significant costs associated with our real estate realignment.
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 I of this Annual Report on Form 10-K. 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.
Market Trends
We believe that our revenues and profitability can be sensitive to major trends in the wellness and weight management industries. In particular, we believe that our business could be adversely impacted by:
• increased competition from weight loss and wellness apps;
• reduced consumer interest in commercial weight loss and diet programs;
• the development of more effective or more favorably perceived weightmanagement methods or technologies, including by the pharmaceutical,
genetics and biotechnology industries;
• a failure to develop and market new, innovative services and products,
to enhance our existing services and products, or to successfully expand
into new channels of distribution or respond to consumer trends or
sentiment, including consumer focus on integrated lifestyle and fitness
approaches;
• a failure to successfully implement new strategic initiatives;
• a decrease in the effectiveness of our marketing, advertising, and
social media programs or an increase in the effectiveness of our
competitors' similar programs;
• an impairment of our brands and other intellectual property;
• a failure of our technology or systems to perform as designed;
• any event or condition, including health epidemics and natural
disasters, that may discourage or impede people from gathering with
others or accessing resources; and
• a downturn in general economic conditions or consumer confidence.
39--------------------------------------------------------------------------------
North America Metrics and Business Trends
In fiscal 2021, North America Total Paid Weeks decreased 4.2% versus the prior year. The decrease in North America Total Paid Weeks was driven primarily by lower recruitments versus the prior year due to the COVID-19 environment and cycling against the successful launch of the myWW program in fiscal 2020.
Continental Europe Metrics and Business Trends
In fiscal 2021, Continental Europe Total Paid Weeks increased 0.3% versus the prior year, driven primarily by the higher number of Incoming Digital Subscribers at the beginning of fiscal 2021 versus the beginning of fiscal 2020, offset by lower recruitments versus the prior year due to the COVID-19 environment.
United Kingdom Metrics and Business Trends
In fiscal 2021,UK Total Paid Weeks decreased 19.0% versus the prior year. The decrease inUK Total Paid Weeks was driven primarily by lower recruitments versus the prior year due to the COVID-19 environment and cycling against the successful launch of the myWW program in fiscal 2020.
Non-GAAP Financial Measures
To supplement our consolidated results presented in accordance with accounting principles generally accepted inthe 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 Annual Report on Form 10-K both as reported (on a GAAP basis) and as adjusted (on a non-GAAP basis), as applicable, with respect to (i) fiscal 2021 to exclude the net impact of (x) charges associated with our previously disclosed 2021 organizational restructuring plan and (y) the reversal of certain of the charges associated with our previously disclosed 2020 organizational restructuring plan and (ii) fiscal 2020 to exclude the impact of (x) charges associated with our previously disclosed 2020 organizational restructuring plan, (y) 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 withMs. Winfrey (the "Winfrey Stock Compensation expense") and (z) the impairment charge for our goodwill related to ourBrazil reporting unit. We generally refer to such non-GAAP measures as follows: (i) with respect to the adjustments for fiscal 2021, as excluding or adjusting for the net impact of restructuring charges; and (ii) with respect to the adjustments for fiscal 2020, as excluding or adjusting for the impact of the restructuring charges, the Winfrey Stock Compensation expense and the goodwill impairment charge. We also present within this Annual Report on Form 10-K 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, early extinguishment of debt, restructuring charges (including the net impact where applicable) 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. 40
--------------------------------------------------------------------------------
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 Annual Report on Form 10-K, 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 Estimates
"Management's Discussion and Analysis of Financial Condition and Results of Operations" is based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates and judgments, including those related to the impairment analysis for goodwill and other indefinite-lived intangible assets. We base our estimates on historical experience and on various other factors and assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. We consider an accounting estimate to be critical if: (1) the accounting estimate requires us to make assumptions about matters that were highly uncertain at the time the accounting estimate was made, and (2) changes in the estimate that are reasonably likely to occur from period to period, or use of different estimates that we reasonably could have used in the current period, would have a material impact on our financial condition or results of operations. Based on this criteria, we believe the following accounting policies are most important to the portrayal of our financial condition and results of operations and require our most significant judgments and estimates. In addition, there are other items within our financial statements that require estimation, but are not deemed critical as defined above. Changes in estimates used in these and other items could have a material impact on our financial statements.
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 Workshops + 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 Workshops + Digital business and the Digital business in the country in which the applicable acquisition occurred. The net book values of these franchise rights inthe United States ,Canada ,United Kingdom ,Australia and New Zealand as of theJanuary 1, 2022 balance sheet date were$698.4 million ,$60.1 million ,$12.2 million ,$6.5 million and$4.8 million , respectively. In our hypothetical start-up approach analysis for fiscal 2021, 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 Workshops + Digital business in each country based on assumptions regarding revenue growth and operating income margins. In our relief from royalty approach analysis for fiscal 2021, 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 Workshops + Digital and the Digital businesses were discounted utilizing rates which were calculated using the weighted-average cost of capital, which included the cost of equity and the cost of debt. 41
--------------------------------------------------------------------------------
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 net book values of goodwill inthe United States ,Canada and other countries as of theJanuary 1, 2022 balance sheet date were$105.1 million ,$42.4 million and$9.9 million , respectively. For all of our reporting units tested as ofMay 9, 2021 , 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.
Indefinite-Lived 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
In performing our annual impairment analysis as ofMay 9, 2021 andMay 3, 2020 , 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. 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 this Annual Report on Form 10-K. Based on the results of ourMay 9, 2021 annual franchise rights acquired impairment analysis performed for all of our units of account, all units, except forNew Zealand , had an estimated fair value at least 45% higher than the respective unit's carrying amount. Collectively, these units of account represent 99.4% of our total franchise rights acquired as of theJanuary 1, 2022 balance sheet date. Based on the results of our annual franchise rights acquired impairment test performed for ourNew Zealand unit of account, which holds 0.6% of our franchise rights acquired as of theJanuary 1, 2022 balance sheet date, the estimated fair value of this unit of account exceeded its carrying value by approximately 10%. Accordingly, a change in the underlying assumptions forNew Zealand may change the results of the impairment assessment and, as such, could result in an impairment of the franchise rights acquired related toNew Zealand , for which the net book value was$4.8 million as ofJanuary 1, 2022 . In performing this impairment analysis for fiscal 2021, in our hypothetical start-up approach analysis, for the year of maturity, we assumed Workshops + Digital revenue (comprised of Workshops + Digital Fees and revenues from products sold to members in studios) growth of (41.5%) to 5.6% in the year of maturity from fiscal 2020, in each case, earned in the applicable country and assumed cumulative annual revenue growth rates for the years beyond the year of maturity of 1.8%. For the year of maturity and beyond, we assumed operating income margin rates of 7.1% to 11.7%. In our relief from royalty approach, we assumed Digital revenue growth in each country of 17.9% to 28.3% in fiscal 2021 and of 4.7% to 26.8% in fiscal 2022. Based on the results of ourMay 9, 2021 annual goodwill impairment test performed for all of our reporting units, 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%. 42
--------------------------------------------------------------------------------
The following are the more significant assumptions utilized in our annual impairment analyses for fiscal 2021 and fiscal 2020:
Fiscal 2021 Fiscal 2020
Debt-Free Cumulative Annual Cash Flow Growth Rate 0.2% to 2.6% 4.0% to 13.9%
Discount Rate 8.5% 9.5%
Canada Indefinite-Lived Franchise Rights Acquired Interim Impairment Test
OurCanada unit of account had a net book value of$60.1 million , 7.7% of our franchise rights acquired as of theJanuary 1, 2022 balance sheet date. Given the lower headroom in theMay 9, 2021 annual franchise rights acquired impairment test for this unit relative to the other units of account and the decline in business performance through fiscal 2021 (which may continue into fiscal 2022), we performed an interim impairment analysis as ofJanuary 1, 2022 . In this test, the estimated fair value of this unit of account exceeded its carrying value by approximately 3%. Therefore, we did not record an impairment for theCanada unit of account. Any impairment test is highly dependent on the assumptions used. The most significant assumptions at issue are the discount rate applied and the Digital revenue growth rate used. In the interim impairment analysis, we applied a discount rate of 9.0% based on our actual weighted-average cost of capital, which included the cost of equity and the cost of debt. We projected Digital revenues based upon our current and past performance. Changes in these assumptions would have a significant impact on the valuation model. Holding all other assumptions constant, a hypothetical 50 basis point increase in our discount rate assumption would decrease the fair value by approximately 8%, which would result in an impairment. Holding all other assumptions constant, a hypothetical 1% reduction in projected Digital revenues for each year in the analysis would decrease the fair value by approximately 5%, which would also result in an impairment.
Brazil Goodwill Impairment
With respect to ourBrazil 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 this decision, together with the negative impact of COVID-19, the ongoing challenging economic environment inBrazil 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 comprised the remaining balance of goodwill for this reporting unit. As it related to our goodwill impairment analysis forBrazil , 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 inBrazil . 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. Critical Accounting Policies Information concerning our critical accounting policies is set forth in Note 2 of our audited consolidated financial statements, contained in Part IV, Item 15 of this Annual Report on Form 10-K. 43
--------------------------------------------------------------------------------
RESULTS OF OPERATIONS FOR FISCAL 2021 (52 weeks) COMPARED TO FISCAL 2020 (53 weeks)
The Company's fiscal year ends on the Saturday closest toDecember 31st and consists of either 52- or 53-week periods. Fiscal 2021 contained 52 weeks, while fiscal 2020 contained 53 weeks. The first week of fiscal 2020, which began onDecember 29, 2019 and ended onJanuary 4, 2020 , contributed an additional$25.5 million in fiscal 2020 net revenues. Due to the timing of the first week of fiscal 2020, additional marketing expense drove a decline of$7.5 million in fiscal 2020 operating income. The first week of fiscal 2020 also contributed 3.2 million of additional Digital Paid Weeks, 1.3 million of additional Workshops + Digital Paid Weeks and 4.5 million of additional Total Paid Weeks to fiscal 2020. The additional week in fiscal 2020 also resulted in an additional week of interest expense for that year. The table below sets forth selected financial information for fiscal 2021 from our consolidated statements of net income for fiscal 2021 versus selected financial information for fiscal 2020 from our consolidated statements of net income for fiscal 2020. Summary of Selected Financial Data (In millions, except per share amounts) % Change Increase/ % Constant Fiscal 2021 Fiscal 2020 (Decrease) Change Currency Revenues, net$ 1,212.5 $ 1,378.1 $ (165.7 ) (12.0 %) (13.7 %) Cost of revenues 486.1 600.3 (114.2 ) (19.0 %) (20.2 %) Gross profit 726.4 777.8 (51.5 ) (6.6 %) (8.7 %) Gross Margin % 59.9 % 56.4 % Marketing expenses 261.5 260.7 0.7 0.3 % (2.0 %) Selling, general & administrative expenses 268.6 297.3 (28.7 ) (9.6 %) (10.7 %) Goodwill impairment - 3.7 (3.7 ) (100.0 %) (100.0 %) Operating income 196.3 216.2 (19.9 ) (9.2 %) (12.3 %) Operating Income Margin % 16.2 % 15.7 % Interest expense 87.9 123.3 (35.4 ) (28.7 %) (28.7 %) Other expense, net 1.4 0.3 1.0 100.0 % * 100.0 % * Early extinguishment of debt 30.4 0.0 30.4 100.0 % 100.0 % Income before income taxes 76.7 92.5
(15.8 ) (17.1 %) (24.5 %)
Provision for income taxes 9.8 17.5 (7.7 ) (44.0 %) (55.0 %) Net income 66.9 75.0 (8.1 ) (10.9 %) (17.4 %) Net loss attributable to the noncontrolling interest - 0.0 (0.0 ) (100.0 %) (100.0 %) Net income attributable to
Weighted average diluted shares outstanding 70.7 70.0 0.7 1.0 % 1.0 % Diluted earnings per share $ 0.95 $ 1.07$ (0.13 ) (11.8 %) (18.2 %)
Note: Totals may not sum due to rounding.
*Note: Percentage in excess of 100.0%.
44
--------------------------------------------------------------------------------
Certain results for fiscal 2021 are adjusted to exclude the impact of the $21.5
million of 2021 plan restructuring charges and the reversal of $1.6 million of
2020 plan restructuring charges. See "Non-GAAP Financial Measures" above. The
table below sets forth a reconciliation of certain of those components of our
selected financial data for the fiscal year ended January 1, 2022 which have
been adjusted.
Gross Operating
Gross Profit Operating Income(in millions except percentages) Profit Margin Income
Margin
Fiscal 2021$ 726.4 59.9 %$ 196.3 16.2 % Adjustments to reported amounts (1) 2021 plan restructuring charges 16.7 21.5 2020 plan restructuring charges (1.3 ) (1.6 ) Total adjustments (1) 15.4 19.9 Fiscal 2021, as adjusted (1)$ 741.8 61.2 %$ 216.2 17.8 %
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 fiscal 2021 to exclude the impact
of the
charges and the reversal of
plan restructuring charges. See "Non-GAAP Financial Measures" above for an
explanation of our use of non-GAAP financial measures.
Certain results for fiscal 2020 are adjusted to exclude the impact of the$33.1 million of 2020 plan restructuring charges, the$32.7 million Winfrey Stock Compensation expense and the$3.7 million goodwill impairment charge related to ourBrazil reporting unit. See "Non-GAAP Financial Measures" above. The table below sets forth a reconciliation of certain of those components of our selected financial data for the fiscal year endedJanuary 2, 2021 which have been adjusted. Gross Operating Gross Profit Operating Income
(in millions except percentages) Profit Margin Income
Margin
Fiscal 2020$ 777.8 56.4 %$ 216.2 15.7 % Adjustments to reported amounts (1) 2020 plan restructuring charges 23.3 33.1 Winfrey Stock Compensation expense - 32.7 Goodwill impairment - 3.7 Total adjustments (1) 23.3 69.4 Fiscal 2020, as adjusted (1)$ 801.1 58.1 %$ 285.6 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 fiscal 2020 to exclude the impact
of the
charges, the
Compensation expense and the
impairment charge. See "Non-GAAP Financial Measures" above for an
explanation of our use of non-GAAP financial measures.
Consolidated Results Revenues Revenues for fiscal 2021 were$1,212.5 million , a decrease of$165.7 million , or 12.0%, versus fiscal 2020. Excluding the impact of foreign currency, which positively impacted our revenues in fiscal 2021 by$23.2 million , revenues for fiscal 2021 would have decreased 13.7% versus the prior year. This decrease was driven primarily by lower revenues related to Workshops + Digital Fees as a result of the lower number of subscribers at the beginning of fiscal 2021 and throughout the fiscal year as compared to the prior year period due to the COVID-19 pandemic. See "-Segment Results" for additional details on revenues. 45
--------------------------------------------------------------------------------
Cost of Revenues
Total cost of revenues for fiscal 2021 decreased$114.2 million , or 19.0%, versus the prior year. Excluding the net impact of the$15.4 million of restructuring charges in fiscal 2021 and the impact of the$23.3 million of restructuring charges in fiscal 2020, total cost of revenues for fiscal 2021 would have decreased by 18.4%, or 19.7% on a constant currency basis, versus the prior year. Gross Profit Gross profit decreased$51.5 million , or 6.6%, in fiscal 2021 compared to fiscal 2020. Excluding the impact of foreign currency, which positively impacted gross profit in fiscal 2021 by$15.9 million , gross profit for fiscal 2021 would have decreased 8.7% versus the prior year. Excluding the net impact of the$15.4 million of restructuring charges in fiscal 2021 and the impact of the$23.3 million of restructuring charges in fiscal 2020, gross profit for fiscal 2021 would have decreased by 7.4%, or 9.4% on a constant currency basis, versus the prior year primarily due to the decrease in revenues. Gross margin for fiscal 2021 increased 3.5% to 59.9% versus 56.4% for fiscal 2020. Excluding the impact of foreign currency, gross margin for fiscal 2021 would have increased 3.3% to 59.7% versus the prior year. Excluding the net impact of restructuring charges in fiscal 2021 and the impact of restructuring charges in fiscal 2020, gross margin for fiscal 2021 would have increased 3.0% to 61.2% versus the prior year. Excluding the impact of foreign currency, the net impact of restructuring charges in fiscal 2021 and the impact of restructuring charges in fiscal 2020, gross margin for fiscal 2021 would have increased 2.9% to 61.0% versus the prior year. The gross margin increase was driven primarily by a revenue mix shift to our higher margin Digital business and cycling against the lower margin revenues from the WW Presents:Oprah 's 2020 Vision tour, partially offset by an increase in fixed costs in our Digital business primarily related to Digital 360.
Marketing
Marketing expenses for fiscal 2021 increased$0.7 million , or 0.3%, versus fiscal 2020. Excluding the impact of foreign currency, which increased marketing expenses in fiscal 2021 by$5.9 million , marketing expenses for fiscal 2021 would have decreased 2.0% versus fiscal 2020. Marketing expenses as a percentage of revenue increased to 21.6% in fiscal 2021 as compared to 18.9% in fiscal 2020.
Selling, General and Administrative
Selling, general and administrative expenses for fiscal 2021 decreased$28.7 million , or 9.6%, versus fiscal 2020. Excluding the impact of foreign currency, which increased selling, general and administrative expenses in fiscal 2021 by$3.2 million , selling, general and administrative expenses for fiscal 2021 would have decreased 10.7% versus the prior year. Excluding the net impact of the$4.5 million of restructuring charges in fiscal 2021 and the impact of both the$32.7 million Winfrey Stock Compensation expense and the$9.8 million of restructuring charges in fiscal 2020, selling, general and administrative expenses for fiscal 2021 would have increased by 3.7%, or 2.4% on a constant currency basis, versus the prior year. This increase in selling, general and administrative expenses was driven primarily by higher employee compensation and related expenses. Selling, general and administrative expenses as a percentage of revenue increased to 22.2% in fiscal 2021 as compared to 21.6% in fiscal 2020.
Impairment
In performing our interim impairment analysis for ourBrazil reporting unit during the first quarter of fiscal 2020, we determined that, based on the fair values calculated, the carrying amount of goodwill related to ourBrazil reporting unit exceeded our fair value and recorded an impairment charge of$3.7 million in fiscal 2020. 46
--------------------------------------------------------------------------------
Operating Income
Operating income for fiscal 2021 decreased$19.9 million , or 9.2%, versus fiscal 2020. Excluding the impact of foreign currency, which positively impacted operating income in fiscal 2021 by$6.8 million , operating income for fiscal 2021 would have decreased 12.3% versus the prior year. Excluding the net impact of the$19.9 million of restructuring charges in fiscal 2021 and the impact of the$33.1 million of restructuring charges, the$32.7 million Winfrey Stock Compensation expense and the$3.7 million goodwill impairment charge related to ourBrazil reporting unit in fiscal 2020, operating income for fiscal 2021 would have decreased by 24.3%, or 26.7% on a constant currency basis, versus the prior year. This decrease in operating income was driven primarily by a decrease in gross profit as compared to the prior year. Operating income margin for fiscal 2021 increased 0.5% to 16.2% from 15.7% for fiscal 2020. Excluding the net impact of restructuring charges in fiscal 2021 and the impact of restructuring charges, the Winfrey Stock Compensation expense and the goodwill impairment charge in fiscal 2020, operating income margin for fiscal 2021 would have decreased by 2.9%, or 3.1% on a constant currency basis, versus the prior year. This decrease in operating income margin was driven primarily by an increase in selling, general and administrative expenses as a percentage of revenue and an increase in marketing expenses as a percentage of revenue, partially offset by an increase in gross margin, versus the prior year.
Interest Expense
Interest expense for fiscal 2021 decreased$35.4 million , or 28.7%, versus fiscal 2020. The decrease in interest expense was driven primarily by lower interest rates under our New Term Loan Facility (as defined below) and on our Senior Secured Notes (as defined below) as a result of ourApril 2021 debt refinancing (as defined below). 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 fiscal 2021 and fiscal 2020 and excluding the impact of our interest rate swaps then in effect, decreased to 5.15% per annum at the end of fiscal 2021 from 6.94% per annum at the end of fiscal 2020. 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 fiscal 2021 and fiscal 2020, decreased to 5.85% per annum at the end of fiscal 2021 from 7.72% per annum at the end of fiscal 2020. 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 7A. Quantitative and Qualitative Disclosures about Market Risk" in this Annual Report on Form 10-K.
Other Expense, Net
Other expense, net, which consists primarily of the impact of foreign currency on intercompany transactions, increased by$1.0 million in fiscal 2021 to$1.4 million of expense as compared to$0.3 million of expense in the prior year.
Early Extinguishment of Debt
In fiscal 2021, we recorded$30.4 million in an aggregate amount of early extinguishment of debt charges, comprised of (1)$29.2 million recorded in the second quarter of fiscal 2021 resulting from fees in connection with theApril 2021 debt refinancing, consisting of$12.9 million of a prepayment penalty on the Discharged Senior Notes (as defined below),$9.0 million of financing fees and the write-off of$7.2 million of pre-existing deferred financing fees and debt discount and (2)$1.2 million recorded in the fourth quarter of fiscal 2021 resulting from the write-off of a debt discount and deferred financing fees in connection with the voluntary debt prepayments of our outstanding term loans under the New Term Loan Facility. For additional details, see "-Liquidity and Capital Resources-Long-Term Debt".
Tax
Our effective tax rate for fiscal 2021 was 12.7% as compared to 18.9% for fiscal 2020. The tax expense for fiscal 2021 was impacted by a tax benefit related to a decrease in the applicable state tax rate on certain deferred income, a tax benefit related to tax windfalls from stock compensation and a tax benefit due to the reversal of a valuation allowance related to certain non-U.S. net operating losses that are now expected to be realized, partially offset by tax expense related to income earned in foreign jurisdictions at rates higher than theU.S. 47 -------------------------------------------------------------------------------- The tax expense for fiscal 2020 was impacted by a tax benefit related to the reversal of the tax impact of global intangible low-taxed income, or GILTI, a tax benefit related to tax windfalls from stock compensation and a tax benefit related to foreign-derived intangible income, partially offset by tax expense related to income earned in foreign jurisdictions at rates higher than theU.S. and out-of-period income tax adjustments. OnMarch 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. OnJuly 20, 2020 , theU.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 tax benefit in fiscal 2020 related to the fiscal 2018 and fiscal 2019 taxes previously accrued attributable to GILTI.
Net Income Attributable to the Company and Earnings Per Share
Net income attributable to the Company for fiscal 2021 was$66.9 million , which reflected a$8.2 million , or 10.9%, decrease from fiscal 2020. Excluding the impact of foreign currency, which positively impacted net income attributable to the Company in fiscal 2021 by$4.9 million , net income attributable to the Company for fiscal 2021 would have decreased by 17.4% versus the prior year. Net income attributable to the Company for fiscal 2021 included a$22.7 million impact from the write-off of fees related to our aggregate early extinguishment of debt charges and a$14.9 million net impact from restructuring charges. Additionally, net income attributable to the Company for fiscal 2021 included a$6.3 million tax benefit related to a decrease in the applicable state tax rate on certain deferred income and a$1.6 million tax benefit due to the reversal of a valuation allowance related to certain non-U.S. net operating losses that are now expected to be realized. Net income attributable to the Company for fiscal 2020 included a$24.8 million impact from restructuring charges, a$24.5 million impact from the Winfrey Stock Compensation expense and a$2.7 million impact from the goodwill impairment charge related to ourBrazil reporting unit. Additionally, net income attributable to the Company for fiscal 2020 included a$7.6 million tax benefit related to the reversal of the fiscal 2018 and fiscal 2019 tax impact of GILTI. Earnings per fully diluted share, or EPS, for fiscal 2021 was$0.95 compared to$1.07 for fiscal 2020. EPS for fiscal 2021 included a$0.32 impact from the write-off of fees related to our aggregate early extinguishment of debt charges and a$0.21 net impact from restructuring charges. Additionally, EPS for fiscal 2021 included a$0.09 tax benefit related to a decrease in the applicable state tax rate on certain deferred income and a$0.02 tax benefit due to the reversal of a valuation allowance related to certain non-U.S. net operating losses that are now expected to be realized. EPS for fiscal 2020 included a$0.35 impact from restructuring charges, a$0.35 impact from the Winfrey Stock Compensation expense and a$0.04 impact from the goodwill impairment charge related to ourBrazil reporting unit. Additionally, EPS for fiscal 2020 included an$0.11 tax benefit related to the reversal of the fiscal 2018 and fiscal 2019 tax impact of GILTI. 48
--------------------------------------------------------------------------------
Segment Results
Metrics and Business Trends
The following tables set forth key metrics by reportable segment for fiscal 2021 and the percentage change in those metrics versus the prior year:
(in millions except percentages and as noted)
Fiscal 2021
GAAP Constant Currency
Product Product Total
Subscription Sales & Total Subscription Sales & Total Paid Incoming EOP
Revenues Other Revenues Revenues Other Revenues Weeks Subscribers Subscribers
(in thousands)
North America $ 714.2 $ 100.6 $ 814.8 $ 711.1 $ 100.0 $ 811.2 157.0 2,822.3 2,734.9
CE 265.0 32.9 297.9 254.1 31.3 285.3 64.8 1,179.6 1,094.1
UK 55.1 10.8 65.8 51.3 10.0 61.3 16.4 323.5 245.0
Other (1) 28.8 5.2 33.9 26.6 4.9 31.5 5.2 97.7 94.5
Total $ 1,063.0 $ 149.4 $ 1,212.5 $ 1,043.1 $ 146.2 $ 1,189.2 243.4 4,423.0 4,168.6
% Change Fiscal 2021 vs. Fiscal 2020
North America (12.3 %) (21.3 %) (13.5 %) (12.7 %) (21.7 %) (13.9 %) (4.2 %) 3.7 % (3.1 %)
CE (3.7 %) (13.9 %) (4.9 %) (7.7 %) (18.2 %) (8.9 %) 0.3 % 11.3 % (7.2 %)
UK (18.1 %) (37.4 %) (22.0 %) (23.7 %) (41.8 %) (27.4 %) (19.0 %) (10.5 %) (24.3 %)
Other (1) (3.4 %) (39.1 %) (11.3 %) (10.6 %) (42.8 %) (17.7 %) (4.6 %) (4.3 %) (3.2 %)
Total (10.4 %) (22.0 %) (12.0 %) (12.1 %) (23.7 %) (13.7 %) (4.3 %) 4.2 % (5.8 %)
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)
Fiscal 2021
Workshops Incoming EOP
Digital Subscription Revenues Digital Incoming EOP Workshops + Digital Fees + Digital Workshops Workshops
Constant Paid Digital Digital Constant Paid + Digital + Digital
GAAP Currency Weeks Subscribers Subscribers GAAP Currency Weeks Subscribers Subscribers
(in thousands) (in thousands)
North America $ 504.2 $ 501.7 128.3 2,334.1 2,186.9 $ 210.1 $ 209.4 28.7 488.2 548.0
CE 228.3 218.9 59.3 1,059.9 998.5 36.7 35.2 5.5 119.7 95.7
UK 36.3 33.8 12.4 235.0 179.7 18.7 17.4 4.0 88.5 65.3
Other (1) 19.4 17.9 4.1 74.0 76.0 9.4 8.7 1.2 23.7 18.5
Total $ 788.2 $ 772.4 204.1 3,703.0 3,441.1 $ 274.9 $ 270.7 39.3 720.0 727.4
% Change Fiscal 2021 vs. Fiscal 2020
North America 4.1 % 3.6 % 3.0 % 24.8 % (6.3 %) (36.3 %) (36.5 %) (27.1 %) (42.7 %) 12.3 %
CE 9.8 % 5.3 % 7.4 % 22.8 % (5.8 %) (45.4 %) (47.7 %) (41.6 %) (39.1 %) (20.1 %)
UK 7.2 % (0.3 %) (1.8 %) 23.9 % (23.5 %) (43.8 %) (47.6 %) (47.6 %) (48.5 %) (26.2 %)
Other (1) 16.1 % 7.5 % 7.0 % 20.1 % 2.8 % (28.2 %) (33.6 %) (30.6 %) (41.5 %) (21.9 %)
Total 6.1 % 3.9 % 4.0 % 24.0 % (7.1 %) (38.0 %) (39.0 %) (32.3 %) (42.9 %) 1.0 %
Note: Totals may not sum due to rounding.
(1) Represents Australia , New Zealand and emerging markets operations and
franchise revenues.
49--------------------------------------------------------------------------------
North America Performance
The decrease inNorth America revenues for fiscal 2021 versus the prior year was driven primarily by a decrease in Subscription Revenues. The decrease in Subscription Revenues for fiscal 2021 versus the prior year was driven primarily by a decrease in Workshops + Digital Fees. Workshops + Digital Fees were negatively impacted by both the lower number of Incoming Workshops + Digital Subscribers at the beginning of fiscal 2021 versus the beginning of fiscal 2020 and the significant recruitment decline in fiscal 2021 as compared to the prior year driven by the closure of certain of our studios and the limited reopening of others primarily related to the COVID-19 environment. The decrease in North America Total Paid Weeks for fiscal 2021 was driven primarily by lower recruitments versus the prior year due to the COVID-19 environment and cycling against the successful launch of the myWW program in fiscal 2020. The decrease inNorth America product sales and other for fiscal 2021 versus the prior year was driven primarily by cycling against the revenue received in connection with the WW Presents:Oprah 's 2020 Vision tour in fiscal 2020 and a decrease in in-studio product sales.
Continental Europe Performance
The decrease in Continental Europe revenues for fiscal 2021 versus the prior year was driven by both a decrease in Subscription Revenues and a decrease in product sales and other. The decrease in Subscription Revenues for fiscal 2021 versus the prior year was driven by a decrease in Workshops + Digital Fees, partially offset by an increase in Digital Subscription Revenues. Workshops + Digital Fees were negatively impacted by both the lower number of Incoming Workshops + Digital Subscribers at the beginning of fiscal 2021 versus the beginning of fiscal 2020 and the significant recruitment decline in fiscal 2021 as compared to the prior year driven by the closure of certain of our studios and the limited reopening of others primarily related to the COVID-19 environment. The slight increase in Continental Europe Total Paid Weeks for fiscal 2021 versus the prior year was driven primarily by the higher number of Incoming Digital Subscribers at the beginning of fiscal 2021 versus the beginning of fiscal 2020, offset by lower recruitments versus the prior year due to the COVID-19 environment.
The decrease in Continental Europe product sales and other for fiscal 2021 versus the prior year was driven primarily by a decrease in product sales.
United Kingdom Performance
The decrease inUK revenues for fiscal 2021 versus the prior year was driven by both a decrease in Subscription Revenues and a decrease in product sales and other. The decrease in Subscription Revenues for fiscal 2021 versus the prior year was driven primarily by a decrease in Workshops + Digital Fees. Workshops + Digital Fees were negatively impacted by both the lower number of Incoming Workshops + Digital Subscribers at the beginning of fiscal 2021 versus the beginning of fiscal 2020 and the significant recruitment decline in fiscal 2021 as compared to the prior year driven by the closure of certain of our studios and the limited reopening of others primarily related to the COVID-19 environment. The decrease inUK Total Paid Weeks for fiscal 2021 was driven primarily by lower recruitments versus the prior year due to the COVID-19 environment and cycling against the successful launch of the myWW program in fiscal 2020.
The decrease in
Other Performance
The decrease in Other revenues for fiscal 2021 versus the prior year was driven
by both a decrease in product sales and other and a decrease in Subscription
Revenues. The decrease in Subscription Revenues for fiscal 2021 versus the prior
year was driven by a decrease in Workshops + Digital Fees, partially offset by
an increase in Digital Subscription Revenues. Workshops + Digital Fees were
negatively impacted by both the lower number of Incoming Workshops + Digital
Subscribers at the beginning of fiscal 2021 versus the beginning of fiscal 2020
and the recruitment decline in fiscal 2021 as compared to the prior year driven
by the closure of certain of our studios and the limited reopening of others
primarily related to the COVID-19 environment.
The decrease in Other product sales and other for fiscal 2021 versus the prior
year was driven primarily by a decrease in franchise commissions and product
sales.
50--------------------------------------------------------------------------------
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$153.8 million atJanuary 1, 2022 , our$173.9 million of availability under our New Revolving Credit Facility (as defined below) atJanuary 1, 2022 and our continued cost focus will provide us with sufficient liquidity to meet our obligations for the short- and long-term. In addition, if necessary, we have the flexibility to delay investments or reduce marketing spend. We continue to proactively manage our liquidity so we can maintain flexibility to fund investments in our business, honor our long-term debt obligations, and respond to evolving business and consumer conditions arising from the COVID-19 pandemic. To increase our flexibility and reduce our cash interest payments, we refinanced our then-existing credit facilities and then-existing senior notes inApril 2021 . See "-Long-Term Debt" for additional details on this refinancing. Additionally, 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 New Revolving Credit Facility. The evolving nature, and uncertain economic impact, of COVID-19 may impact our liquidity going forward. To the extent that we do not successfully manage our costs, our liquidity and financial results, as well as our ability to access our New Revolving Credit Facility, may be adversely affected. As market conditions warrant, we may, from time to time, seek to purchase our outstanding debt securities or loans, including the Senior Secured Notes and borrowings under the New 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, the incurrence of new secured or unsecured debt, the issuance of our equity or the sale of assets. 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.
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:
January 1, January 2, Increase/
2022 2021 (Decrease)
(in millions)
Total current assets $ 271.2 $ 299.2 $ (28.0 )
Total current liabilities 229.1 340.1 (111.0 )
Working capital surplus (deficit) 42.0 (40.9 ) (82.9 )
Cash and cash equivalents 153.8 165.9 (12.1 )
Current portion of long-term debt - 77.0 (77.0 )
Working capital deficit, excluding cash
and cash
equivalents and current portion of
long-term debt $ (111.8 ) $ (129.8 ) $ (18.0 ) Note: Totals may not sum due to rounding.
51
--------------------------------------------------------------------------------
The following table sets forth a summary of the primary factors contributing to
the $18.0 million decrease in our working capital deficit, excluding cash and
cash equivalents and current portion of long-term debt:
Impact to
January 1, January 2, Increase/ Working
2022 2021 (Decrease) Capital Deficit
(in millions)
Derivative payable $ 14.7 $ 28.3 $ (13.6 ) $ (13.6 )
Prepaid income taxes $ 30.5 $ 20.0 $ 10.5 $ (10.5 )
Portion of operating lease
liabilities due within
one year $ 20.3 $ 28.6 $ (8.3 ) $ (8.3 )
Income taxes payable $ 1.7 $ 7.8 $ (6.1 ) $ (6.1 )
Deferred revenue $ 45.9 $ 50.5 $ (4.6 ) $ (4.6 )
Accrued interest $ 5.1 $ 2.7 $ 2.4 $ 2.4
Operational liabilities and
other, net of assets $ 54.7 $ 32.0 $ 22.7 $ 22.7
Working capital deficit change,
excluding cash
and cash equivalents and
current portion of
long-term debt $ (18.0 )
Note: Totals may not sum due to rounding.
The decrease in derivative payable was due to a change in fair value driven by
the change in interest rates. The increase in prepaid income taxes was primarily
due to the timing of tax payments, partially offset by tax accruals. The
decrease in the portion of operating lease liabilities due within one year was
due to the increase in lease terminations. The decrease in income taxes payable
was primarily due to the timing of tax payments, partially offset by tax
accruals. The increase in operational liabilities and other, net of assets,
which includes accrued salaries and wages, was driven primarily by a decline in
inventory balances and a decline in prepaid advertising due to the timing of
payments.
Cash Flows
The following table sets forth a summary of our cash flows for the fiscal years
ended:
January 1 , January 2,
2022 2021
(in millions)
Net cash provided by operating activities
Operating Activities Fiscal 2021 Cash flows provided by operating activities of$157.3 million in fiscal 2021 reflected an increase of$21.3 million from$135.9 million of cash flows provided by operating activities in fiscal 2020. The increase in cash provided by operating activities was primarily the result of an increase in cash provided by operating assets and liabilities, partially offset by a decrease in non-cash add-backs in fiscal 2021 as compared to the prior year.
Fiscal 2020
Cash flows provided by operating activities of$135.9 million in fiscal 2020 reflected a decrease of$46.5 million from$182.4 million of cash flows provided by operating activities in 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$44.5 million in fiscal 2020 as compared to the prior year. 52
--------------------------------------------------------------------------------
Investing Activities
Fiscal 2021
Net cash used for investing activities totaled$52.8 million in fiscal 2021, a decrease of$12.8 million as compared to fiscal 2020. This decrease was primarily attributable to lower capital expenditures in fiscal 2021 as compared to the prior year. Fiscal 2020 Net cash used for investing activities totaled$65.6 million in fiscal 2020, an increase of$13.0 million as compared to fiscal 2019. This increase was primarily attributable to cash paid for acquisitions in fiscal 2020. In fiscal 2020, we entered into a strategic collaboration agreement withClassPass Inc. ("ClassPass") and also invested$5.0 million inClassPass' $285.0 million Series E Preferred Stock funding round.
Financing Activities
Fiscal 2021
Net cash used for financing activities totaled$111.5 million in fiscal 2021 primarily due to theApril 13, 2021 payment in full of approximately$1.2 billion of borrowings under our then-existing credit facilities and redemption of all of the$300.0 million aggregate principal amount of our then-existing senior notes, as well as the payment in aggregate of$37.9 million of prepayment penalties, financing costs and debt discount in connection with theApril 2021 debt refinancing. In addition, there was$52.5 million used in an aggregate amount for voluntary debt prepayments under our New Term Loan Facility (as defined below) in the fourth quarter of fiscal 2021,$2.5 million used for scheduled debt repayments under our New Term Loan Facility in the third quarter of fiscal 2021 and$19.3 million used for scheduled debt repayments under our then-existing term loan facility in the first quarter of fiscal 2021. These payments were partially offset by the proceeds received of$1,000.0 million in an aggregate principal amount of borrowings under our New Term Loan Facility and proceeds received from the issuance of$500.0 million in aggregate principal amount of our Senior Secured Notes (as defined below) in connection with ourApril 2021 debt refinancing. See "-Long-Term Debt" for additional details on debt. Fiscal 2020
Net cash used for financing activities totaled
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 atJanuary 1, 2022 : Long-Term Debt At January 1, 2022 (Balances in millions) January 1, 2022 Term Loan Facility due April 13, 2028 $ 945.0 Senior Secured Notes due April 15, 2029 500.0 Total 1,445.0 Less: Current portion - Unamortized deferred financing costs 12.5 Unamortized debt discount 14.4 Total long-term debt $ 1,418.1
Note: Totals may not sum due to rounding.
53
--------------------------------------------------------------------------------
On April 13, 2021 , we (1) repaid in full approximately $1.2 billion in aggregate
principal amount of senior secured tranche B term loans due in 2024 under our
then-existing credit facilities and (2) redeemed all of the $300.0 million in
aggregate principal amount of our then-outstanding 8.625% Senior Notes due in
2025, or the Discharged Senior Notes. On April 13, 2021 , our then-existing
credit facilities included a senior secured revolving credit facility (which
included borrowing capacity available for letters of credit) due in 2022 with
$175.0 million in an aggregate principal amount of commitments. There were no
outstanding borrowings under such revolving credit facility on that date. We
funded such repayment of loans and redemption of notes with cash on hand as well
as with proceeds received from approximately $1,000.0 million in an aggregate
principal amount of borrowings under our new credit facilities and proceeds
received from the issuance of $500.0 million in aggregate principal amount of
4.500% Senior Secured Notes due 2029, or the Senior Secured Notes. These
transactions are collectively referred to herein as the April 2021 debt
refinancing. Our new credit facilities consist of a $1,000.0 million term loan
facility and a $175.0 million revolving credit facility (which includes
borrowing capacity available for letters of credit) (collectively, as amended
from time to time, referred to herein as the New Credit Facilities). During the
second quarter of fiscal 2021, we incurred fees of $37.9 million (which included
$12.9 million of a prepayment penalty on the Discharged Senior Notes and $5.0
million of a debt discount on our New Term Loan Facility (as defined below)) in
connection with our April 2021 debt refinancing. In addition, we recorded a loss
on early extinguishment of debt of $29.2 million in connection thereto. This
early extinguishment of debt charge was comprised of $12.9 million of a
prepayment penalty on the Discharged Senior Notes, $9.0 million of financing
fees paid in connection with our April 2021 debt refinancing and the write-off
of $7.2 million of pre-existing deferred financing fees and debt discount.
New Credit Facilities
The New Credit Facilities were issued under a credit agreement, datedApril 13, 2021 or, as amended from time to time, the New Credit Agreement, among the Company, as borrower, the lenders party thereto, andBank of America, N.A ., orBank of America , as administrative agent and an issuing bank. The New Credit Facilities consist of (1)$1,000.0 million in aggregate principal amount of senior secured tranche B term loans due in 2028, or the New Term Loan Facility, and (2)$175.0 million in an aggregate principal amount of commitments under a senior secured revolving credit facility (which includes borrowing capacity available for letters of credit) due in 2026, or the New Revolving Credit Facility. InDecember 2021 , we made voluntary prepayments at par in an aggregate amount of$52.5 million in respect of our outstanding term loans under the New Term Loan Facility. As a result of these prepayments, we wrote off a debt discount and deferred financing fees of$1.2 million in the aggregate in the fourth quarter of fiscal 2021. As ofJanuary 1, 2022 , we had$945.0 million in an aggregate principal amount of loans outstanding under our New Credit Facilities, with$173.9 million of availability and$1.1 million in issued but undrawn letters of credit outstanding under the New Revolving Credit Facility. There were no outstanding borrowings under the New Revolving Credit Facility as ofJanuary 1, 2022 . All obligations under the New 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 New 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 material subsidiary of the Company or any guarantor (which pledge, in the case of any non-U.S. subsidiary of aU.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.
The New Credit Facilities require the Company to prepay outstanding term loans, subject to certain exceptions, with:
• 50% (which percentage will be reduced to 25% and 0% if the Company
attains certain first lien secured net leverage ratios) of the Company's
annual excess cash flow;
• 100% of the net cash proceeds of certain non-ordinary course asset sales
by the Company and its restricted subsidiaries (including casualty and
condemnation events, subject to de minimis thresholds), and subject to
the right to reinvest 100% of such proceeds, subject to certain
qualifications; and
54--------------------------------------------------------------------------------
• 100% of the net proceeds of any issuance or incurrence of debt by the
Company or any of its restricted subsidiaries, other than certain debt
permitted under the New Credit Agreement.
The foregoing mandatory prepayments will be used to reduce the installments of
principal on the New Term Loan Facility. We may voluntarily repay outstanding
loans under the New Credit Facilities at any time without penalty, except for
customary "breakage" costs with respect to LIBOR loans under the New Credit
Facilities.
Borrowings under the New Term Loan Facility 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 Federal
Funds Effective Rate as determined by the Federal Reserve Bank of New York ,
(b) the prime rate of Bank of America 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 1.50% 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 0.50%.
Borrowings under the New Revolving Credit Facility bear interest at a rate per
annum equal to an applicable margin based upon a leverage-based pricing grid,
plus, at our option, either (1) a base rate determined by reference to the
highest of (a) 0.50% per annum plus the Federal Funds Effective Rate as
determined by the Federal Reserve Bank of New York , (b) the prime rate of Bank
of America 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 1.00% 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, provided such rate is not lower
than a floor of zero. As of January 1, 2022 , the applicable margins for the
LIBOR rate borrowings under the New Term Loan Facility and the New Revolving
Credit Facility were 3.50% and 2.75%, respectively. In the event that LIBOR is
phased out as is currently expected, the New Credit Agreement provides that we
and the administrative agent may amend the New 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 New Credit Agreement; provided that such lending syndicate
may not object to a SOFR-based successor rate contained in any such
amendment. 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 New
Revolving Credit Facility in respect of unutilized commitments thereunder, which
commitment fee fluctuates depending upon our Consolidated First Lien Leverage
Ratio (as defined in the New Credit Agreement).
The New 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.
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 New Revolving Credit Facility as of any fiscal quarter end exceeds 35%
of the amount of the aggregate commitments under the New Revolving Credit
Facility in effect on such date, we must be in compliance with a Consolidated
First Lien Leverage Ratio of, on or prior to the end of the first fiscal quarter
of 2022, 6.00:1.00, with a step down to 5.75:1.00 for the period ending after
the first fiscal quarter of 2022 through and including with first fiscal quarter
of 2023, with an additional step down to 5.50:1.00 for the period ending after
the first fiscal quarter of 2023 through and including with first fiscal quarter
of 2024, with a step down to 5.25:1.00 for the period ending after the first
fiscal quarter of 2024 through and including with first fiscal quarter of 2025
and again to 5.00:1.00, for the period following the first fiscal quarter of
2025.
Senior Secured Notes
The Senior Secured Notes were issued pursuant to an Indenture, dated as of April
13, 2021 , or, as amended, supplemented or modified from time to time, the New
Indenture, among the Company, the guarantors named therein and The Bank of New
York Mellon , as trustee and notes collateral agent. The New Indenture contains
customary terms, events of default and covenants 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.
55
--------------------------------------------------------------------------------
The Senior Secured Notes accrue interest at a rate per annum equal to 4.500% and
will mature on April 15, 2029 . Interest on the Senior Secured Notes is payable
semi-annually on April 15 and October 15 of each year, beginning on October 15,
2021 . On or after April 15, 2024 , we may on any one or more occasions redeem
some or all of the Senior Secured Notes at a purchase price equal to 102.250% of
the principal amount of the Senior Secured Notes, plus accrued and unpaid
interest, if any, to, but not including, the redemption date, such optional
redemption price decreasing to 101.125% on or after April 15, 2025 and to
100.000% on or after April 15, 2026 . Prior to April 15, 2024 , we may on any one
or more occasions redeem up to 40% of the aggregate principal amount of the
Senior Secured Notes with an amount not to exceed the net proceeds of certain
equity offerings at 104.500% of the aggregate principal amount thereof, plus
accrued and unpaid interest, if any, to, but not including, the redemption date.
Prior to April 15, 2024 , we may redeem some or all of the Senior Secured Notes
at a make-whole price plus accrued and unpaid interest, if any, to, but not
including, the redemption date. In addition, during any twelve-month period
ending prior to April 15, 2024 , we may redeem up to 10% of the aggregate
principal amount of the Senior Secured Notes at a purchase price equal to
103.000% of the principal amount of the Senior Secured Notes to be redeemed,
plus accrued and unpaid interest, if any, to, but excluding, the redemption
date. If a change of control occurs, we must offer to purchase for cash the
Senior Secured Notes at a purchase price equal to 101% of the principal amount
of the Senior Secured 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 Senior
Secured Notes at a purchase price equal to 100% of the principal amount of the
Senior Secured Notes, plus accrued and unpaid interest, if any, to, but not
including, the purchase date.
The Senior Secured Notes are guaranteed on a senior secured basis by our
subsidiaries that guarantee the New Credit Facilities. The Senior Secured Notes
and the note guarantees are secured by a first-priority lien on all the
collateral that secures the New Credit Facilities, subject to a shared lien of
equal priority with the Company's and each guarantor's obligations under the New
Credit Facilities and subject to certain thresholds, exceptions and permitted
liens.
Outstanding Debt
At January 1, 2022 , we had $1,445.0 million outstanding under the New Credit
Facilities and the Senior Secured Notes, consisting of borrowings under the New
Term Loan Facility of $945.0 million , $0.0 drawn down on the New Revolving
Credit Facility and $500.0 million in aggregate principal amount of Senior
Secured Notes issued and outstanding.
At the end of fiscal 2021 and fiscal 2020, 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 IV,
Item 15 of this Annual Report on Form 10-K under Note 19 "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 5.11% and 7.03% per annum at January 1, 2022
and January 2, 2021 , 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 5.62% and 7.41% per annum at
January 1, 2022 and January 2, 2021 , respectively, based on interest rates on
these dates.
Dividends
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 New Credit Agreement governing the New Credit Facilities and the
New Indenture governing the Senior Secured Notes, and may be limited by the
agreements governing other indebtedness we or our subsidiaries incur in the
future.
56--------------------------------------------------------------------------------
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, early extinguishment of debt, restructuring charges (including the net impact where applicable) and goodwill impairment.
The table below sets forth the reconciliations for EBITDAS and Adjusted EBITDAS, each a non-GAAP financial measure, to net income, the most comparable GAAP financial measure, for the fiscal years ended:
(in millions)
January 1, 2022 January 2, 2021
Net Income $ 66.9 $ 75.1
Interest 87.9 123.3
Taxes 9.8 17.5
Depreciation and amortization 45.5 50.0
Stock-based compensation 21.3 55.0
EBITDAS $ 231.4 $ 320.9
Early extinguishment of debt $ 30.4 -
2021 plan restructuring charges 21.5 -
2020 plan restructuring charges (1.6 ) 33.1
Goodwill impairment - 3.7
Adjusted EBITDAS (1) $ 281.7 $ 357.6
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 fiscal 2021 to exclude the
restructuring charges and the reversal of
restructuring charges and adjusts the consolidated statements of net income
for fiscal 2020 to exclude the
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
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 fiscal year ended:
(in millions)
January 1, 2022
Total debt $ 1,445.0
Less: Unamortized deferred financing costs 12.5
Less: Unamortized debt discount 14.4
Less: Cash on hand 153.8
Net debt $ 1,264.3
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.
57--------------------------------------------------------------------------------
Contractual Obligations
We are obligated under non-cancelable agreements primarily for office and rent facilities operating leases. Consolidated rent expense charged to operations under all our leases for fiscal 2021 was approximately$46.4 million . The following table summarizes our future contractual obligations as of the end of fiscal 2021: Payment Due by Period Less than More than Total 1 Year 1-3 Years 3-5 Years 5 Years (in millions) Long-Term Debt (1) Principal$ 1,445.0 $ - $ - $ -$ 1,445.0 Interest 429.4 69.6 126.5 128.1 105.2 Operating leases, finance leases and non-cancelable agreements 147.9 36.1 45.8 20.7 45.3 Total (2)$ 2,022.3 $ 105.7 $ 172.3 $ 148.8 $ 1,595.5
Note: Totals may not sum due to rounding. (1) Due to the fact that a portion of our debt is variable rate based, we have
assumed for purposes of this table that the interest rate on all of our debt
as of the end of fiscal 2021 remains constant for all periods presented.
(2) The provision for income tax contingencies included in other long-term
liabilities on the consolidated balance sheet is not included in the table
above due to the fact that the Company is unable to estimate the timing of
payment for this liability.
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. We believe that cash flows from operating activities, together with cash on hand, will provide sufficient liquidity for the short-term to fund currently anticipated capital expenditure and working capital requirements, as well as debt service requirements.
Franchisee Acquisitions
On
OnMarch 22, 2021 , we acquired substantially all of the assets of our franchisee for certain territories inMichigan ,The WW Group, Inc. , for an aggregate purchase price of$17.5 million . OnMarch 22, 2021 , we acquired substantially all of the assets of our franchisee for certain territories inOntario, Canada ,The WW Group Co. , for an aggregate purchase price of$3.1 million . OnOctober 26, 2020 , we acquired substantially all of the assets of our franchisees for certain territories inArizona andCalifornia ,Weight Watchers of Arizona, Inc. and Weight Watchers ofImperial County, Inc. , respectively, for an aggregate purchase price of$10.0 million .
Factors Affecting Future Liquidity
Any future acquisitions, joint ventures or other similar transactions could require additional capital and we cannot be certain that any additional capital will be available on acceptable terms or at all. Our ability to fund our capital expenditure requirements, interest, principal and dividend payment obligations and working capital requirements depends on our future operations, performance and cash flow. These are subject to prevailing economic conditions and to financial, business and other factors, some of which are beyond our control.
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.
58--------------------------------------------------------------------------------
Related Parties
For a discussion of related party transactions affecting us, see "Item 13. Certain Relationships and Related Transactions, and Director Independence" in Part III of this Annual Report on Form 10-K.
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. Item 7A. Quantitative and Qualitative Disclosures about Market Risk We are exposed to market risks relating to interest rate changes and foreign currency fluctuations. All of our market risk sensitive instruments were entered into for purposes other than trading. The Company's exposure to market risk as of the end of fiscal 2021 is described below.
Interest Rate Risk
Our exposure to market risk for changes in interest rates relates to interest expense of variable rate debt, in particular changes in LIBOR or the base rates which are used to determine the applicable interest rates for borrowings under the New Credit Facilities. OnJuly 26, 2013 , in order to hedge a portion of our variable rate debt, we entered into a forward-starting interest rate swap with an effective date ofMarch 31, 2014 and a termination date ofApril 2, 2020 . The initial notional amount of this swap was$1.5 billion . During the term of this swap, the notional amount decreased from$1.5 billion effectiveMarch 31, 2014 to$1.25 billion onApril 3, 2017 and to$1.0 billion onApril 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. OnJune 11, 2018 , in order to hedge a portion of our variable rate debt, we entered into a forward-starting interest rate swap, or the 2018 swap, with an effective date ofApril 2, 2020 and a termination date ofMarch 31, 2024 . The initial notional amount of this swap was$500.0 million . During the term of this swap, the notional amount decreased from$500.0 million effectiveApril 2, 2020 to$250.0 million onMarch 31, 2021 . This interest rate swap effectively fixed the variable interest rate on the notional amount of this swap at 3.1005%. OnJune 7, 2019 , in order to hedge a portion of our variable rate debt, we entered into a forward-starting interest rate swap (together with the 2018 swap, known as the current swaps) with an effective date ofApril 2, 2020 and a termination date ofMarch 31, 2024 . The notional amount of this swap is$250.0 million . 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 the end of fiscal 2021, we had$945.0 million of variable rate debt, of which$445.0 million remained unhedged. As ofJanuary 1, 2022 , borrowings under the New Credit Facilities bore interest at LIBOR plus an applicable margin of 3.50%. For the New Term Loan Facility, the minimum interest rate for LIBOR applicable to such facility pursuant to the terms of the New Credit Agreement is set at 0.50%, referred to herein as the LIBOR Floor. In addition, as ofJanuary 1, 2022 , our interest rate swaps in effect had an aggregate notional amount of$500.0 million . Accordingly, as ofJanuary 1, 2022 , 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$4.0 million , driven primarily by the interest rate applicable to our New Term Loan Facility. A hypothetical 90 basis point decrease in interest rates would have resulted in no change to annual interest expense, driven primarily by the LIBOR Floor.
There have been no material changes to our exposure to market risk from the end of fiscal 2020 as compared to the end of fiscal 2021.
59--------------------------------------------------------------------------------
Foreign Currency Risk
Other than inter-company transactions between our domestic and foreign entities, we generally do not have significant transactions that are denominated in a currency other than the functional currency applicable to each entity. As a result, substantially all of our revenues and expenses in each jurisdiction in which we operate are in the same functional currency. In general, we are a net receiver of currencies other than theU.S. dollar. Accordingly, changes in exchange rates may negatively affect our revenues and gross margins as expressed inU.S. dollars. In the future, we may enter into forward and swap contracts to hedge transactions denominated in foreign currencies to reduce the currency risk associated with fluctuating exchange rates. Realized and unrealized gains and losses from any of these transactions may be included in net income for the period. Fluctuations in currency exchange rates, particularly with respect to the euro, canadian dollar and pound sterling, may impact our shareholders' equity. The assets and liabilities of our non-U.S. subsidiaries are translated intoU.S. dollars at the exchange rates in effect at the balance sheet date. Revenues and expenses are translated intoU.S. dollars at the average exchange rate for the period. The resulting translation adjustments are recorded in shareholders' equity as a component of accumulated other comprehensive loss. In addition, exchange rate fluctuations will cause theU.S. dollar translated amounts to change in comparison to prior periods. Item 8. Financial Statements and Supplementary Data This information is incorporated by reference to our consolidated financial statements on pages F-1 through F-42 and our financial statement schedule on page S-1, including the report thereon ofPricewaterhouseCoopers LLP on pages F-2 to F-4. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.
© Edgar Online, source
