WeightWatchers 2006 Annual Report Download - page 52

Download and view the complete annual report

Please find page 52 of the 2006 WeightWatchers annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 112

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112

from 52.5% of sales in the prior year. A number of factors contributed to this margin expansion: price increases
in NACO and the United Kingdom meeting fees and in the WeightWatchers.com subscription fee; less frequent
discounting of product sales; and strong growth in our high margin licensing business. Further,
WeightWatchers.com’s margin has increased as it has leveraged its existing infrastructure while growing its
business.
Marketing expenses increased $23.5 million, or 17.4%, to $158.3 million for fiscal 2005 from
$134.8 million for fiscal 2004. The inclusion of WeightWatchers.com in the first quarter of fiscal 2005, typically
when our highest marketing spend occurs, contributed nearly one third of the increase—$8.3 million versus the
prior year. The remainder of the increase in marketing spend is largely driven by timing. In fiscal 2005, we
resumed in Continental Europe and the United Kingdom our practice of launching, and therefore expensing, our
January winter diet season direct marketing campaign in late December. This practice had been interrupted in
fiscal 2004. As a result, fiscal 2005 included two years of winter diet season direct marketing costs. The costs for
fiscal 2005 were expensed in first quarter of fiscal 2005, and costs for fiscal 2006 were expensed in the fourth
quarter of fiscal 2005. As a percentage of net revenues, marketing expenses were 13.7% for fiscal 2005, as
compared to 13.2% in the prior fiscal year.
Selling, general and administrative expenses were $169.8 million for fiscal 2005, an increase of
$72.7 million from $97.1 million for fiscal 2004. During fiscal 2005, we recorded $46.4 million of non-recurring
transaction-related expenses related to the acquisition of the additional ownership interest in
WeightWatchers.com. These transaction related expenses were primarily compensation charges associated with
the buyout of employee stock options, and expenses associated with the relocation of WeightWatchers.com’s
headquarters. In addition, there are certain recurring transaction related expenses which will be ongoing, but
declining, for the next few years. These recurring expenses include amortization related to the acquired
intangible assets with a definite life and compensation expense for restricted stock units granted to
WeightWatchers.com employees in exchange for unvested WeightWatchers.com stock options. During fiscal
2005, we recorded $2.5 million for these expenses.
Excluding non-recurring transaction-related expenses, our selling, general and administrative expense
increased $26.3 million, or 27.1%, over the comparable period in fiscal 2004, and from 9.5% of revenues in
fiscal 2004 to 10.7% of revenues in fiscal 2005. This increase comes primarily from the impact of strengthening
our management team and higher performance bonuses for staff in most of our regions. In addition, the
consolidation of an additional quarter of WeightWatchers.com in fiscal 2005 as compared to fiscal 2004 added
$3.8 million.
Operating income was $302.5 million for fiscal 2005. Adjusted for non-recurring transaction related
expenses, operating income for fiscal 2005 rose to $348.9 million, an increase of $43.0 million, or 14.1%, from
$305.9 million for fiscal 2004. The operating income margin for fiscal 2005 was 26.3%. On the adjusted basis,
the operating income margin for fiscal 2005 was 30.3%, as compared to 29.8% in fiscal 2004.
Net interest charges increased 25.1%, or $4.2 million, to $21.0 million for fiscal 2005, as compared to
$16.8 million in fiscal 2004. This increase was due to higher interest rates, partially offset by the reduction in
interest expense due to the redemption of the remaining $15.5 million of our 13% Senior Subordinated Notes in
October 2004, and by slightly lower average debt balances in fiscal 2005 as compared to fiscal 2004.
For fiscal 2005, we reported other expense of $2.2 million as compared to other income of $4.7 million for
fiscal 2004. The variance of $6.9 million is primarily due to a first quarter fiscal 2004 loan repayment, made
prior to our adoption of FIN 46R, from WeightWatchers.com of $4.9 million.
In fiscal 2004, $4.3 million of expenses were recorded associated with the early extinguishment of debt as a
result of the first quarter fiscal 2004 refinancing of the WWI Credit Facility, undertaken to move a large portion
of our fixed Term Loans to the Revolver, (see “Liquidity and Capital Resources—Sources and Uses of Cash—
39