WW International Inc.(WW) - 2023 Q3 - Quarterly Report

PART I—FINANCIAL INFORMATION Item 1. Financial Statements This chapter presents the unaudited consolidated financial statements of WW International, Inc. and its subsidiaries, including balance sheets, statements of operations, comprehensive income (loss), changes in total deficit, and cash flows, along with detailed notes, prepared in accordance with GAAP and revised to correct immaterial misstatements Unaudited Consolidated Balance Sheets | Indicator | September 30, 2023 (Thousands of USD) | December 31, 2022 (Thousands of USD) | | :-------------------------------- | :----------------------- | :----------------------- | | Assets | | | | Cash and cash equivalents | 107,498 | 178,326 | | Total assets | 1,032,253 | 1,028,430 | | Liabilities and Total Deficit | | | | Total liabilities | 1,707,420 | 1,714,210 | | Total deficit | (675,167) | (685,780) | | Total liabilities and total deficit | 1,032,253 | 1,028,430 | - As of September 30, 2023, the company's cash and cash equivalents were $107,498 thousand, a decrease from $178,326 thousand as of December 31, 2022[9] - As of September 30, 2023, total assets were $1,032,253 thousand, slightly higher than $1,028,430 thousand as of December 31, 2022[9] Unaudited Consolidated Statements of Operations | Indicator | Three Months Ended September 30, 2023 (Thousands of USD) | Three Months Ended October 1, 2022 (Thousands of USD) | Nine Months Ended September 30, 2023 (Thousands of USD) | Nine Months Ended October 1, 2022 (Thousands of USD) | | :-------------------------------- | :--------------------------------- | :--------------------------------- | :-------------------------------- | :--------------------------------- | | Net revenue | 214,871 | 249,718 | 683,594 | 816,932 | | Cost of revenues | 73,116 | 97,367 | 279,148 | 321,521 | | Gross profit | 141,755 | 152,351 | 404,446 | 495,411 | | Operating income (loss) | 30,607 | (254,529) | 28,340 | (232,193) | | Net income (loss) | 43,731 | (206,036) | (24,120) | (221,087) | | Basic earnings (loss) per share | 0.55 | (2.93) | (0.32) | (3.15) | | Diluted earnings (loss) per share | 0.54 | (2.93) | (0.32) | (3.15) | - For the three months ended September 30, 2023, the company reported net income of $43,731 thousand, a significant improvement from a net loss of $206,036 thousand in the prior-year period, primarily driven by a shift from operating loss to profit[11] - For the nine months ended September 30, 2023, the company's net loss significantly narrowed to $24,120 thousand from $221,087 thousand in the prior-year period[11] Unaudited Consolidated Statements of Comprehensive Income (Loss) | Indicator | Three Months Ended September 30, 2023 (Thousands of USD) | Three Months Ended October 1, 2022 (Thousands of USD) | Nine Months Ended September 30, 2023 (Thousands of USD) | Nine Months Ended October 1, 2022 (Thousands of USD) | | :-------------------------------- | :--------------------------------- | :--------------------------------- | :-------------------------------- | :--------------------------------- | | Net income (loss) | 43,731 | (206,036) | (24,120) | (221,087) | | Total other comprehensive income (loss) | (4,439) | (715) | (6,498) | 7,287 | | Comprehensive income (loss) | 39,292 | (206,751) | (30,618) | (213,800) | - For the three months ended September 30, 2023, comprehensive income was $39,292 thousand, compared to a comprehensive loss of $206,751 thousand in the prior-year period, primarily due to improved net income[13] - For the nine months ended September 30, 2023, comprehensive loss significantly narrowed to $30,618 thousand from $213,800 thousand in the prior-year period[13] Unaudited Consolidated Statements of Changes in Total Deficit | Indicator | September 30, 2023 (Thousands of USD) | December 31, 2022 (Thousands of USD) | | :-------------------------------- | :----------------------- | :----------------------- | | Treasury stock | (3,073,196) | (3,097,304) | | Retained earnings | 2,409,997 | 2,416,994 | | Accumulated other comprehensive loss | (11,968) | (5,470) | | Total deficit | (675,167) | (685,780) | - As of September 30, 2023, total deficit improved to ($675,167) thousand from ($685,780) thousand as of December 31, 2022, driven by comprehensive income and treasury stock issuance[9][15] - For the nine months ended September 30, 2023, the company issued $24,108 thousand in treasury stock and incurred $8,956 thousand in compensation expense from equity incentive plans[15] Unaudited Consolidated Statements of Cash Flows | Indicator | Nine Months Ended September 30, 2023 (Thousands of USD) | Nine Months Ended October 1, 2022 (Thousands of USD) | | :-------------------------------- | :--------------------------------- | :--------------------------------- | | Cash (used in) provided by operating activities | (1,153) | 80,546 | | Cash used in investing activities | (66,709) | (33,719) | | Cash used in financing activities | (1,928) | (2,137) | | Net (decrease) increase in cash and cash equivalents | (70,828) | 34,497 | | Cash and cash equivalents at end of period | 107,498 | 188,291 | - For the nine months ended September 30, 2023, cash flow from operating activities was ($1,153) thousand, compared to $80,546 thousand in the prior-year period, primarily due to net loss and changes in working capital[18] - Cash used in investing activities increased to $66,709 thousand, mainly due to cash outlays for the acquisition of Sequence[18] Notes to Unaudited Consolidated Financial Statements 1. Basis of Presentation This note outlines the basis for preparing the company's consolidated financial statements, including the scope of consolidation for WW International, Inc. and its subsidiaries, GAAP principles, management estimates, and the evaluation and consolidation of Variable Interest Entities (VIEs), particularly Friendly-Physician Entities (FPEs), also disclosing immaterial revisions to previously issued statements to correct income tax accounting misstatements - The company's business is segmented into Digital (digital product subscriptions), Workshops + Digital (in-person workshops combined with digital products), and Clinical (Sequence clinical products)[20] - The company has consolidated Friendly-Physician Entities (FPEs) into its financial statements, as it is deemed the primary beneficiary of these Variable Interest Entities (VIEs)[23][25] - The company revised previously issued consolidated financial statements for December 31, 2022, and October 1, 2022, to correct immaterial misstatements in income tax accounting[28][29] 2. Accounting Standards Adopted in Current Year For the nine months ended September 30, 2023, the company did not adopt any new accounting standards - For the nine months ended September 30, 2023, the company did not adopt any new accounting standards[31] 3. Leases This note details the company's lease assets and liabilities, primarily for studios and corporate offices, showing a decrease in operating lease assets and liabilities as of September 30, 2023, with reduced lease costs, as the company continues to manage its lease obligations through subleasing and real estate portfolio optimization | Indicator | September 30, 2023 (Thousands of USD) | December 31, 2022 (Thousands of USD) | | :----------------------- | :----------------------- | :----------------------- | | Operating lease right-of-use assets | 55,414 | 75,696 | | Operating lease liabilities (current) | 9,804 | 17,955 | | Operating lease liabilities (long-term) | 56,643 | 68,099 | | Total lease liabilities | 66,456 | 86,092 | | Indicator | Three Months Ended September 30, 2023 (Thousands of USD) | Three Months Ended October 1, 2022 (Thousands of USD) | | :----------------------- | :--------------------------------- | :--------------------------------- | | Total operating lease cost | 3,789 | 8,889 | | Total finance lease cost | 5 | 29 | | Total lease cost | 3,794 | 8,918 | - As of September 30, 2023, the company's operating leases had a weighted-average remaining lease term of 7.42 years and a weighted-average discount rate of 7.48%[35] - The company recorded $2,455 thousand in sublease income, offsetting selling, general, and administrative expenses, for the first nine months of fiscal year 2023[34] 4. Revenue This note details the company's revenue by source and reporting segment, showing a decrease in total revenue for both the three and nine months ended September 30, 2023, with new clinical subscription revenue from the Sequence acquisition, while digital subscription revenue, Workshops + Digital service fees, and product sales significantly declined | Revenue Source | Three Months Ended September 30, 2023 (Thousands of USD) | Three Months Ended October 1, 2022 (Thousands of USD) | Nine Months Ended September 30, 2023 (Thousands of USD) | Nine Months Ended October 1, 2022 (Thousands of USD) | | :----------------------- | :--------------------------------- | :--------------------------------- | :-------------------------------- | :--------------------------------- | | Digital subscription revenue | 140,889 | 155,881 | 437,613 | 521,582 | | Workshops + Digital service fees | 52,618 | 64,865 | 171,473 | 196,540 | | Clinical subscription revenue | 9,989 | — | 17,581 | — | | Net subscription revenue | 203,496 | 220,746 | 626,667 | 718,122 | | Net product sales and other | 11,375 | 28,972 | 56,927 | 98,810 | | Net revenue | 214,871 | 249,718 | 683,594 | 816,932 | - For the three months ended September 30, 2023, total revenue decreased by 14.0% year-over-year to $214,871 thousand, primarily due to declines in digital subscription revenue and Workshops + Digital service fees[38] - For the nine months ended September 30, 2023, total revenue decreased by 16.3% year-over-year to $683,594 thousand, but included $17,581 thousand in new clinical subscription revenue[38] 5. Acquisitions This note discloses the company's acquisition of Weekend Health, Inc. (Sequence) on April 10, 2023, for a total consideration of $132,000 thousand, including cash and newly issued common stock, resulting in $89,190 thousand in goodwill, with Sequence's operations consolidated from the acquisition date and contributing $9,989 thousand and $17,581 thousand in revenue for the third quarter and first nine months of fiscal year 2023, respectively - The company completed the acquisition of Sequence on April 10, 2023, for a total consideration of $132,000 thousand, comprising approximately $64,217 thousand in cash and $34,702 thousand in newly issued common stock[43][44] | Indicator | Amount (Thousands of USD) | | :----------------------- | :-------------- | | Total consideration transferred | 121,698 | | Total assets acquired | 35,798 | | Total liabilities assumed | 3,290 | | Net assets acquired | 32,508 | | Total goodwill | 89,190 | - Sequence contributed $9,989 thousand and $17,581 thousand in revenue, and $3,133 thousand and $4,763 thousand in net losses, for the third quarter and first nine months of fiscal year 2023, respectively[51] 6. Franchise Rights Acquired, Goodwill and Other Intangible Assets This note details changes and impairment testing for franchise rights, goodwill, and other intangible assets, showing goodwill increased to $244,927 thousand as of September 30, 2023, primarily due to the Sequence acquisition, with no impairment found in 2023 but significant impairment recorded in 2022 for certain franchise rights and Kurbo goodwill, also providing amortization information for finite-lived intangible assets | Indicator | September 30, 2023 (Thousands of USD) | December 31, 2022 (Thousands of USD) | | :----------------------- | :----------------------- | :----------------------- | | Franchise rights | 386,168 | 386,745 | | Goodwill | 244,927 | 155,998 | | Other intangible assets, net | 66,532 | 63,306 | - As of September 30, 2023, the carrying value of goodwill was $244,927 thousand, an increase from December 31, 2022, primarily due to $89,190 thousand in goodwill generated from the Sequence acquisition[55] - The company found no impairment for indefinite-lived franchise rights and goodwill during its annual impairment test on May 7, 2023, though a total of $312,741 thousand in impairment was recorded in the third quarter of 2022 for franchise rights in the U.S., Canada, and New Zealand[62][68] - For the nine months ended September 30, 2023, amortization expense for finite-lived intangible assets was $32,590 thousand[70] 7. Long-Term Debt This note provides details on the company's long-term debt, including term loans and senior secured notes, totaling $1,445,000 thousand as of September 30, 2023, highlighting the 2021 debt refinancing and the June 2023 credit agreement amendment to replace LIBOR with Term SOFR, and noting non-compliance with the consolidated first lien leverage ratio as of September 30, 2023, which restricts revolving credit facility borrowings | Debt Component | September 30, 2023 (Thousands of USD) | December 31, 2022 (Thousands of USD) | | :----------------------- | :----------------------- | :----------------------- | | Term loan | 945,000 | 945,000 | | Senior secured notes | 500,000 | 500,000 | | Total | 1,445,000 | 1,445,000 | | Long-term debt, net | 1,425,419 | 1,422,284 | - As of September 30, 2023, the company was not in compliance with its consolidated first lien leverage ratio (actual 8.64:1.00, required 5.50:1.00), limiting revolving credit facility borrowings to 35% of the total commitment ($61,250 thousand)[84] - As of September 30, 2023, the company's weighted-average interest rate, excluding interest rate swap impact, was 7.48%, and 6.44% including swap impact, both higher than December 31, 2022[90] 8. Per Share Data This note provides the calculation of basic and diluted earnings (loss) per share, showing diluted earnings per share of $0.54 for the three months ended September 30, 2023, a significant improvement from a diluted loss per share of $2.93 in the prior-year period, and a narrowed diluted loss per share of $0.32 for the nine months ended September 30, 2023, compared to $3.15 in the prior-year period | Indicator | Three Months Ended September 30, 2023 (USD) | Three Months Ended October 1, 2022 (USD) | Nine Months Ended September 30, 2023 (USD) | Nine Months Ended October 1, 2022 (USD) | | :----------------------- | :----------------------- | :----------------------- | :----------------------- | :----------------------- | | Basic earnings (loss) per share | 0.55 | (2.93) | (0.32) | (3.15) | | Diluted earnings (loss) per share | 0.54 | (2.93) | (0.32) | (3.15) | | Diluted weighted-average common shares outstanding | 80,638 | 70,383 | 75,861 | 70,258 | - For the three months ended September 30, 2023, diluted earnings per share was $0.54, a significant improvement from a diluted loss per share of $2.93 in the prior-year period[91] - For the nine months ended September 30, 2023, diluted loss per share significantly narrowed to $0.32 from $3.15 in the prior-year period[91] 9. Taxes This note discusses the company's income tax situation, with effective tax rates of (727.7%) and 44.0% for the three and nine months ended September 30, 2023, respectively, showing significant volatility primarily due to an increase in the U.S. deferred tax asset valuation allowance, foreign jurisdiction income tax expense, and the Foreign Derived Intangible Income (FDII) tax benefit, also disclosing non-income tax matters related to the Affordable Care Act | Indicator | Three Months Ended September 30, 2023 | Three Months Ended October 1, 2022 | Nine Months Ended September 30, 2023 | Nine Months Ended October 1, 2022 | | :----------------------- | :----------------------- | :----------------------- | :----------------------- | :----------------------- | | Effective tax rate | (727.7%) | 25.6% | 44.0% | 24.9% | - In fiscal year 2023, the company increased its U.S. deferred tax asset valuation allowance due to U.S. interest deduction limitations, resulting in an unusually high negative annual effective tax rate[92] - The company is appealing certain penalties assessed by the IRS regarding Affordable Care Act annual disclosure and reporting requirements, believing it is not liable for the matter[94] 10. Legal This note indicates that the company faces pending and potential legal proceedings in its ordinary course of business, but management believes their disposition is not expected to have a material adverse effect on the company's operating results, financial condition, or cash flows, though the outcome of legal actions remains uncertain - The company faces legal proceedings in its ordinary course of business, but management believes their disposition is not expected to have a material adverse effect on operating results, financial condition, or cash flows[95] 11. Derivative Instruments and Hedging This note discloses the company's interest rate swap agreements used to hedge cash flow risk from floating-rate borrowings, which were amended in June 2023 to convert the benchmark rate from LIBOR to Term SOFR, with the company holding $500,000 thousand in total notional amount of interest rate swaps as of September 30, 2023, and an accumulated unrealized gain of $5,507 thousand, with approximately $7,926 thousand in net derivative gains expected to be reclassified to earnings in the next 12 months - The company amended its interest rate swap agreements in June 2023, converting the benchmark rate from LIBOR to Term SOFR[96] - As of September 30, 2023, the company held interest rate swaps with a total notional amount of $500,000 thousand[97] | Indicator | September 30, 2023 (Thousands of USD) | December 31, 2022 (Thousands of USD) | | :----------------------- | :----------------------- | :----------------------- | | Accumulated unrealized gain (qualifying cash flow hedges) | 5,507 | 10,723 | | Interest rate swap assets (current) | 7,272 | 11,748 | | Interest rate swap assets (non-current) | — | 2,450 | - The company expects approximately $7,926 thousand (pre-tax $10,569 thousand) of net derivative gains included in accumulated other comprehensive loss as of September 30, 2023, to be reclassified to earnings within the next 12 months[100] 12. Fair Value Measurements This note explains the company's fair value measurement methods for financial assets and liabilities, categorized into three levels (Level 1, Level 2, Level 3), with long-term debt and interest rate swap agreements being key financial instruments, showing long-term debt fair value of approximately $1,058,128 thousand versus a carrying value of $1,425,419 thousand as of September 30, 2023, and derivative financial instrument fair values determined using observable market information (Level 2 inputs) - The company categorizes fair value measurements into three levels: Level 1 (quoted prices in active markets), Level 2 (observable inputs other than Level 1 quotes), and Level 3 (unobservable inputs)[101] - As of September 30, 2023, the fair value of the company's long-term debt was approximately $1,058,128 thousand, compared to a carrying value (net of deferred financing costs and debt discount) of $1,425,419 thousand[103] | Indicator | Fair Value as of September 30, 2023 (Thousands of USD) | Fair Value as of December 31, 2022 (Thousands of USD) | | :----------------------- | :----------------------- | :----------------------- | | Interest rate swap current assets | 7,272 | 11,748 | | Interest rate swap non-current assets | — | 2,450 | 13. Accumulated Other Comprehensive Loss This note details the components and changes in accumulated other comprehensive loss, primarily comprising qualifying cash flow hedge gains (losses) and foreign currency translation losses, with a total accumulated other comprehensive loss of ($11,968) thousand as of September 30, 2023, including $5,507 thousand in qualifying cash flow hedge gains and ($17,475) thousand in foreign currency translation losses | Indicator | September 30, 2023 (Thousands of USD) | December 31, 2022 (Thousands of USD) | | :----------------------- | :----------------------- | :----------------------- | | Qualifying cash flow hedge gains | 5,507 | 10,723 | | Foreign currency translation losses | (17,475) | (16,193) | | Total accumulated other comprehensive loss | (11,968) | (5,470) | - For the nine months ended September 30, 2023, the net amount reclassified from accumulated other comprehensive loss to earnings was $6,994 thousand, primarily from interest rate swap contracts[107] 14. Segment Data This note discloses the company's financial information by two reporting segments, North America and International, reflecting an organizational structure adjustment effective fiscal year 2023, showing a decrease in total revenue for both segments for the three and nine months ended September 30, 2023, but an improvement in North America's operating income - Effective January 1, 2023, the company adjusted its reporting segments to North America and International to better align with strategic priorities[108] | Segment | Three Months Ended September 30, 2023 Total Revenue (Thousands of USD) | Three Months Ended October 1, 2022 Total Revenue (Thousands of USD) | Nine Months Ended September 30, 2023 Total Revenue (Thousands of USD) | Nine Months Ended October 1, 2022 Total Revenue (Thousands of USD) | | :----------------------- | :--------------------------------- | :--------------------------------- | :-------------------------------- | :--------------------------------- | | North America | 154,687 | 176,469 | 487,900 | 569,525 | | International | 60,184 | 73,249 | 195,694 | 247,407 | | Net Revenue | 214,871 | 249,718 | 683,594 | 816,932 | | Segment | Three Months Ended September 30, 2023 Operating Income (Loss) (Thousands of USD) | Three Months Ended October 1, 2022 Operating Income (Loss) (Thousands of USD) | Nine Months Ended September 30, 2023 Operating Income (Loss) (Thousands of USD) | Nine Months Ended October 1, 2022 Operating Income (Loss) (Thousands of USD) | | :----------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | | North America | 36,064 | (255,102) | 81,850 | (207,039) | | International | 23,675 | 29,074 | 55,797 | 77,216 | | Total Segment Operating Income (Loss) | 59,739 | (226,028) | 137,647 | (129,823) | 15. Related Party This note discloses the company's strategic collaboration agreement with Oprah Winfrey, extended through 2025, for her continued consulting and promotional services, with service fees from Oprah Winfrey and her related entities totaling $62 thousand and $384 thousand for the three and nine months ended September 30, 2023, respectively - The company's strategic collaboration agreement with Oprah Winfrey has been extended through 2025, with her continuing to provide consulting and promotional services[112] | Service Fees | Three Months Ended September 30, 2023 (Thousands of USD) | Three Months Ended October 1, 2022 (Thousands of USD) | Nine Months Ended September 30, 2023 (Thousands of USD) | Nine Months Ended October 1, 2022 (Thousands of USD) | | :----------------------- | :--------------------------------- | :--------------------------------- | :-------------------------------- | :--------------------------------- | | Oprah Winfrey related entity services | 62 | 284 | 384 | 860 | - As of September 30, 2023, amounts payable to Oprah Winfrey's related parties were $61 thousand[113] 16. Restructuring This note details the company's restructuring plans for 2023, 2022, 2021, and 2020, with the 2023 plan aiming to centralize global management, optimize non-strategic business lines, and rationalize the real estate portfolio, projecting total costs of $47,000 thousand to $54,000 thousand, having incurred $30,603 thousand in restructuring charges for the nine months ended September 30, 2023, primarily for employee termination benefits and lease termination costs, with all plans expected to conclude by the end of fiscal year 2025 - The 2023 restructuring plan aims to centralize global management, optimize non-strategic business lines, and rationalize the real estate portfolio, with estimated total costs ranging from $47,000 thousand to $54,000 thousand[115] | Restructuring Plan | Three Months Ended September 30, 2023 (Thousands of USD) | Nine Months Ended September 30, 2023 (Thousands of USD) | | :----------------------- | :--------------------------------- | :--------------------------------- | | Real estate restructuring - lease termination and related costs | (523) | 14,371 | | Real estate restructuring - employee termination benefits | 562 | 4,825 | | Organizational restructuring - employee termination benefits | 4,025 | 8,901 | | Other costs | 2,123 | 2,506 | | Total restructuring charges | 6,187 | 30,603 | - As of September 30, 2023, remaining lease termination liabilities for the 2023 plan were $528 thousand, and employee termination benefit liabilities were $11,814 thousand, expected to be paid by the end of fiscal year 2025[122] 17. Revision of Previously Issued Financial Statements This note details the company's revisions to previously issued consolidated financial statements to correct immaterial misstatements in income tax accounting and other previously identified immaterial misstatements, impacting the statements of operations, comprehensive loss, and cash flows for December 31, 2022, and October 1, 2022, leading to adjustments in net loss and loss per share - The company revised previously issued financial statements to correct immaterial misstatements in income tax accounting, primarily involving U.S. deferred tax liabilities and deferred tax assets[141] - Beginning retained earnings as of January 1, 2023, were overstated by $5,465 thousand, including $1,965 thousand for income tax misstatements and $3,500 thousand for other misstatements[142] | Indicator | Nine Months Ended October 1, 2022 (Pre-revision) (Thousands of USD) | Adjustment (Thousands of USD) | Nine Months Ended October 1, 2022 (As Revised) (Thousands of USD) | | :----------------------- | :--------------------------------------- | :-------------- | :--------------------------------------- | | Income tax benefit | (75,431) | 2,185 | (73,246) | | Net loss | (218,902) | (2,185) | (221,087) | | Basic loss per share | (3.12) | (0.03) | (3.15) | | Diluted loss per share | (3.12) | (0.03) | (3.15) | Cautionary Notice Regarding Forward-Looking Statements This chapter warns investors that the quarterly report contains forward-looking statements based on current views of future events and financial performance, but actual results may differ materially due to various risks and uncertainties, including COVID-19 impacts, market competition, user retention, new product development, strategy implementation, key personnel loss, debt burden, acquisition risks, and regulatory changes - Forward-looking statements are based on current views of future events and financial performance, but actual results may vary significantly due to various risks and uncertainties[149] - Risks and uncertainties that could cause actual results to differ include: - The impact of the COVID-19 pandemic on business and the consumer environment - Competition from other weight management and health industry participants - Failure to consistently retain and grow the subscriber base - The ability to successfully implement strategic initiatives, including the transformation of the Workshops + Digital business - The acquisition of Sequence may not achieve anticipated benefits and may present integration, dilution, and regulatory risks - The company's substantial debt, debt service obligations, and debt covenants, and exposure to floating-rate debt - Data security breaches, privacy concerns, and the costs of complying with evolving privacy laws and regulations - Risks associated with international operations, including regulatory, economic, political, social, intellectual property, and foreign exchange risks[150][152] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This chapter provides management's detailed discussion and analysis of the company's financial condition and operating results for the three and nine months ended September 30, 2023, covering changes in revenue, costs, gross profit, operating expenses, interest expense, taxes, and net income (loss), analyzed with non-GAAP financial measures and key performance indicators, and further exploring liquidity, capital resources, long-term debt, and the impact of restructuring plans Non-GAAP Financial Measures This chapter explains the company's use of non-GAAP financial measures, including adjusted gross profit, operating income (loss), EBITDAS, and adjusted EBITDAS, as well as net debt and net debt/adjusted EBITDAS ratio, which exclude the impact of specific items like restructuring charges, acquisition transaction costs, and asset impairments to provide a clearer view of business performance and facilitate period-over-period comparisons for investors - The company uses non-GAAP financial measures (such as adjusted gross profit, operating income, EBITDAS, and adjusted EBITDAS) to supplement GAAP results, excluding the impact of specific items like restructuring charges, acquisition transaction costs, and asset impairments[157] - Adjusted EBITDAS is defined as earnings before interest, taxes, depreciation, amortization, stock-based compensation expense, franchise rights and goodwill impairment, net restructuring charges, and non-recurring transaction costs related to the Sequence acquisition[157][273] Use of Constant Currency This chapter explains the company's use of constant currency to evaluate performance by calculating current-year results using prior-year foreign currency exchange rates, thereby eliminating the impact of currency fluctuations on period-over-period comparisons, which helps investors better understand operating results and performance - The company uses constant currency to evaluate performance by calculating current-year results using prior-year foreign currency exchange rates, eliminating the impact of currency fluctuations on period-over-period comparisons[158] - Constant currency results are supplemental to GAAP results and should not be considered as a substitute for or isolated from them[158] Critical Accounting Estimates This chapter highlights the company's critical accounting estimates in impairment testing for franchise rights, goodwill, and other intangible assets, where annual impairment tests for indefinite-lived franchise rights and goodwill use discounted cash flow methods (including the hypothetical start-up and relief-from-royalty methods) to estimate fair value, discounted using a weighted-average cost of capital, with these estimates relying on assumptions about future cash flows, revenue growth rates, operating margins, and discount rates, where any significant changes could lead to impairment - The company annually tests indefinite-lived franchise rights and goodwill for impairment, using discounted cash flow methods (including the hypothetical start-up and relief-from-royalty methods) to estimate fair value[160][161][162] - Key assumptions include future cash flow projections, revenue growth rates, operating margins, and discount rates, where any significant changes could lead to impairment[165] - As of September 30, 2023, the net carrying values of franchise rights for the U.S., Australia, UK, and New Zealand were $374.4 million, $4.0 million, $2.7 million, and $2.3 million, respectively[160] Performance Indicators This chapter lists key performance indicators regularly reviewed and analyzed by management to manage the business, measure performance, identify trends, and allocate resources, including net revenue (by subscription type and product sales), paid weeks (by Digital, Workshops + Digital, and Clinical), beginning and end of period subscribers, and gross profit and operating expenses as a percentage of revenue - Key performance indicators include: - Net Revenue: Comprising Digital subscription revenue, Workshops + Digital service fees, Clinical subscription revenue, and product sales and other revenue - Paid Weeks: The total number of paid weeks across Digital, Workshops + Digital, and Clinical members - Beginning of Period Subscribers: The total number of Digital, Workshops + Digital, and Clinical subscribers for the company's owned businesses at the beginning of the period - End of Period Subscribers: The total number of Digital, Workshops + Digital, and Clinical subscribers for the company's owned businesses at the end of the period - Gross Profit and Operating Expenses as a percentage of revenue[171] Results of Operations - Three Months Ended September 30, 2023 Compared to October 1, 2022 For the three months ended September 30, 2023, the company's net revenue was $214.9 million, a 14.0% year-over-year decrease, but net income turned profitable at $43.7 million from a $206.0 million loss in the prior-year period, with gross margin improving to 66.0% due to fixed cost reductions in Workshops + Digital and a shift to higher-margin digital business, while marketing and SG&A expenses increased, and operating income significantly improved due to a large franchise rights impairment in the prior year | Indicator | Three Months Ended September 30, 2023 (Millions of USD) | Three Months Ended October 1, 2022 (Millions of USD) | Year-over-Year Change (%) | Constant Currency Change (%) | | :-------------------------------- | :--------------------------------- | :--------------------------------- | :------------- | :--------------- | | Net revenue | 214.9 | 249.7 | (14.0) | (15.3) | | Gross profit | 141.8 | 152.4 | (7.0) | (8.7) | | Gross margin | 66.0% | 61.0% | +5.0pp | +4.7pp | | Marketing expenses | 48.1 | 35.7 | 34.8 | 33.1 | | Selling, general and administrative expenses | 63.0 | 58.4 | 7.9 | 7.0 | | Operating income (loss) | 30.6 | (254.5) | 100.0%* | 100.0%* | | Net income (loss) | 43.7 | (206.0) | 100.0%* | 100.0%* | | Diluted earnings (loss) per share | 0.54 | (2.93) | 100.0%* | 100.0%* | - Gross margin improved from 61.0% in Q3 2022 to 66.0% in Q3 2023, primarily due to fixed cost reductions in the Workshops + Digital business and a shift in revenue mix towards higher-margin digital business[184] - Operating income turned profitable at $30.6 million in Q3 2023 from a $254.5 million loss in Q3 2022, mainly due to a $312.7 million franchise rights impairment recorded in the prior-year period[174][187][188] Results of Operations - Nine Months Ended September 30, 2023 Compared to October 1, 2022 For the nine months ended September 30, 2023, the company's net revenue was $683.6 million, a 16.3% year-over-year decrease, with net loss significantly narrowing to $24.1 million from $221.1 million in the prior-year period, gross margin slightly decreased to 59.2% but adjusted gross margin improved, marketing and SG&A expenses both decreased, and operating income significantly improved due to large franchise rights and goodwill impairments in the prior year | Indicator | Nine Months Ended September 30, 2023 (Millions of USD) | Nine Months Ended October 1, 2022 (Millions of USD) | Year-over-Year Change (%) | Constant Currency Change (%) | | :-------------------------------- | :--------------------------------- | :--------------------------------- | :------------- | :--------------- | | Net revenue | 683.6 | 816.9 | (16.3) | (16.1) | | Gross profit | 404.4 | 495.4 | (18.4) | (18.2) | | Gross margin | 59.2% | 60.6% | -1.4pp | -1.5pp | | Marketing expenses | 187.5 | 195.1 | (3.9) | (3.2) | | Selling, general and administrative expenses | 188.6 | 193.3 | (2.4) | (2.2) | | Operating income (loss) | 28.3 | (232.2) | 100.0%* | 100.0%* | | Net loss | (24.1) | (221.1) | (89.1) | (88.7) | | Diluted loss per share | (0.32) | (3.15) | (89.9) | (89.6) | - Net loss significantly narrowed from $221.1 million in the first nine months of 2022 to $24.1 million in the first nine months of 2023, primarily due to $339.2 million in franchise rights and goodwill impairments recorded in the prior-year period[206][221][222][223] - Adjusted gross margin (excluding restructuring charges) improved from 61.1% in the first nine months of 2022 to 62.0% in the first nine months of 2023, primarily due to fixed cost reductions in the Workshops + Digital business[213][217] Liquidity and Capital Resources This chapter discusses the company's liquidity and capital resources, primarily met by cash flow from operations, supplemented by long-term debt and short-term borrowings, with $107.5 million in cash and cash equivalents and available revolving credit as of September 30, 2023, noting $40.3 million cash paid for the Sequence acquisition and multiple restructuring plans implemented to reduce costs, and facing a debt burden with a net debt/adjusted EBITDAS ratio of 8.8x as of September 30, 2023 - The company primarily meets its liquidity needs through cash flow from operating activities, supplemented by long-term debt and short-term borrowings[239] - As of September 30, 2023, the company had approximately $107.5 million in cash and cash equivalents and available revolving credit[239] | Indicator | September 30, 2023 (Millions of USD) | | :----------------------- | :----------------------- | | Total debt | 1,445.0 | | Less: Unamortized deferred financing costs | 9.2 | | Less: Unamortized debt discount | 10.3 | | Less: Cash on hand | 107.5 | | Net debt | 1,317.9 | - As of September 30, 2023, the company's net debt/adjusted EBITDAS ratio was 8.8x[277] Off-Balance Sheet Arrangements This chapter states that the company does not engage in non-consolidated entities or financial partnerships designed to facilitate off-balance sheet arrangements or contractual restrictions in its ordinary course of business - The company does not engage in non-consolidated entities or financial partnerships designed to facilitate off-balance sheet arrangements or contractual restrictions[280] Seasonality This chapter notes the seasonal nature of the company's primary business, with winter being a key period for member recruitment, historically leading to the highest recruitment levels and advertising spending in the first quarter, causing end-of-period subscribers to typically peak in the first quarter and then gradually decline throughout the year - The company's primary business is seasonal, with winter being a key period for member recruitment, and the first quarter typically seeing the highest recruitment levels and advertising spending[281] - End-of-period subscribers typically peak in the first quarter and then gradually decline throughout the year[281] Available Information This chapter provides access points for the company's public information, including its corporate website corporate.ww.com and its corporate Facebook, LinkedIn, Instagram, and X (Twitter) accounts, advising investors to monitor information released through these channels as it may be deemed material - The company disseminates information through its corporate website corporate.ww.com and social media channels such as Facebook, LinkedIn, Instagram, and X[282][283] - Information released through these channels may be considered material, and investors are advised to monitor them[283] Item 3. Quantitative and Qualitative Disclosures About Market Risk This chapter discloses the company's market risk exposure, primarily focusing on interest rate risk, noting the Q2 2023 amendment to credit and interest rate swap agreements to convert the benchmark rate from LIBOR to Term SOFR, with most of the company's debt being floating-rate and hedged by interest rate swaps, and projecting that a 90-basis-point change in interest rates would increase or decrease annual interest expense by approximately $4 million - In Q2 2023, the company amended its credit agreement and interest rate swap agreements, converting the benchmark rate from LIBOR to Term SOFR[284] - As of September 30, 2023, borrowings under the company's revolving credit facility bore interest at Term SOFR plus an applicable margin of 3.50%, with a Term SOFR floor of 0.50%[285] - As of September 30, 2023, considering interest rate swaps and the Term SOFR floor, a hypothetical 90-basis-point increase or decrease in interest rates would increase or decrease annual interest expense by approximately $4 million[285] Item 4. Controls and Procedures This chapter discusses the company's disclosure controls and procedures and internal controls, with management assessing and concluding that disclosure controls and procedures were effective at a reasonable assurance level as of September 30, 2023, and no significant changes occurred in internal controls during the quarter - As of September 30, 2023, management assessed and concluded that the company's disclosure controls and procedures were effective at a reasonable assurance level[286] - No significant changes occurred in internal controls during the quarter[287] PART II—OTHER INFORMATION Item 1. Legal Proceedings This chapter cross-references legal proceedings information to Note 10 'Legal' of the consolidated financial statements, indicating that the company faces legal proceedings in its ordinary course of business, but management believes their disposition is not expected to have a material adverse effect - Legal proceedings information is cross-referenced to Note 10 'Legal' of the consolidated financial statements[288] Item 1A. Risk Factors This chapter updates the company's risk factors, primarily focusing on risks related to the acquisition of Weekend Health, Inc. (Sequence), including the potential failure to realize anticipated benefits, dilutive effects on EPS, limited experience in the telehealth industry, potential undisclosed liabilities of Sequence, and exposure to extensive and complex healthcare laws and regulations, as well as potential fraud, waste, and abuse laws due to its telehealth operations - The acquisition of Sequence may not achieve anticipated benefits, leading to increased costs, reduced revenue, or management distraction[290] - The acquisition is expected to be dilutive to earnings per share initially, and long-term benefits may be less than anticipated or remain dilutive[292] - Risks related to the acquisition of Sequence include: - The company's limited experience in the telehealth industry may affect its competitive ability and capacity to realize acquisition benefits - Sequence may have undisclosed liabilities, losses, or other risks, and insurance or indemnification protection may be insufficient - The company's reputation could be harmed by the actions of franchisees, licensees, vendors, and other partners, particularly in the telehealth sector - The company, professional corporations (PCs), and Affiliated Professionals are subject to extensive and complex healthcare laws and regulations, and non-compliance could result in civil or criminal penalties - Evolving telehealth laws and regulations may lead to additional compliance costs and operational impacts, and the company may face audit and investigation risks under fraud, waste, and abuse laws[293][296][298][304][311] Item 2. Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities This chapter reports no unregistered sales of equity securities, use of proceeds, or issuer purchases of equity securities during the quarter - There were no unregistered sales of equity securities, use of proceeds, or issuer purchases of equity securities during the quarter[319] Item 3. Defaults Upon Senior Securities This chapter reports no defaults upon senior securities during the quarter - There were no defaults upon senior securities during the quarter[320] Item 4. Mine Safety Disclosures This chapter states that mine safety disclosures are not applicable to the company's business - Mine safety disclosures are not applicable to the company's business[321] Item 5. Other Information This chapter discloses the company's securities trading policy for directors and senior officers, requiring all transactions to comply with applicable U.S. federal securities laws and prohibiting trading while in possession of material non-public information, and notes that no such contracts, instructions, or written plans meeting Rule 10b5-1(c) affirmative defense conditions were adopted or terminated by directors or senior officers during the quarter ended September 30, 2023 - The company's securities trading policy for directors and senior officers requires all transactions to comply with applicable U.S. federal securities laws, prohibiting trading while in possession of material non-public information[322] - No contracts, instructions, or written plans meeting Rule 10b5-1(c) affirmative defense conditions for securities purchases or sales were adopted or terminated by company directors or senior officers during the quarter ended September 30, 2023[323] Item 6. Exhibits This chapter lists all exhibits filed with the quarterly report, including the merger agreement, CEO and CFO certification documents, and Inline XBRL files - Exhibits include: - Exhibit 2.1: Agreement and Plan of Merger, dated March 4, 2023, by and among WW International, Inc. and Weekend Health, Inc - Exhibit 31.1 and 31.2: Rule 13a-14(a) Certifications by the Chief Executive Officer and Chief Financial Officer - Exhibit 32.1: Certification by the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 - Exhibit 101: The Inline XBRL Instance Document and the related Taxonomy Extension Schema Document, Label Linkbase Document, Presentation Linkbase Document, and Calculation Linkbase Document - Exhibit 104: The cover page from the Quarterly Report on Form 10-Q, formatted in Inline XBRL SIGNATURES - This report was signed by Sima Sistani, Chief Executive Officer, and Heather Stark, Chief Financial Officer, of WW International, Inc. on November 2, 2023[329]