WeightWatchers 2007 Annual Report Download - page 52

Marketing expenses remained essentially flat, up $0.6 million, or 0.4%, to $158.9 million for fiscal 2006,
from $158.3 million for fiscal 2005. Marketing expenses in the first quarter of fiscal 2006 declined $7.2 million,
or 11.8%, largely the result of timing. Our spring marketing campaign shifted into the second quarter of fiscal
2006 because of a three-week late Easter holiday, April 16th in fiscal 2006 versus March 27th in fiscal 2005. In
addition, the U.K.’s marketing expense was more front-loaded in fiscal 2005 for the launch of the Switch
innovation. Furthermore, our fiscal 2006 and fiscal 2007 international winter marketing campaign direct mail
expense was incurred in the fourth quarters of fiscal 2005 and fiscal 2006, respectively. In fiscal 2005, our winter
marketing campaign direct mail expense was incurred in the first quarter of fiscal 2005, when mailed. For the
remainder of fiscal 2006, marketing expenses increased $7.8 million, or 8.1%. The higher spending on marketing
in the remainder of the year was partially due to the timing of Easter, as mentioned above, and in support of the
newly acquired territories coupled with increased offline advertising to support the WeightWatchers.com
business. Marketing, as a percentage of revenues declined to 12.9% for fiscal 2006, as compared to 13.7% in the
prior year.
Selling, general and administrative expenses were $137.3 million for fiscal 2006 as compared to $169.8
million for fiscal 2005, a decrease of $32.5 million, or 19.1%. Fiscal 2005 selling, general and administrative
expenses included $46.4 million of transaction-related expenses. Excluding these transaction-related expenses
from fiscal 2005, selling, general and administrative expenses were up $13.9 million, or 11.3%, for fiscal 2006
versus the comparable adjusted prior year period. Approximately $9.4 million of the increase in selling, general
and administrative expenses is attributable to higher non-cash share-based compensation expense, the majority of
which is due to the expensing of stock options in accordance with FAS 123(R), which was adopted at the
beginning of fiscal 2006. Selling, general and administrative expenses were 11.1% of revenues for fiscal 2006
including the impact of incremental non-cash share-based compensation, as compared to 10.7% in fiscal 2005
after eliminating transaction expenses from that period. On a reported basis, selling, general and administrative
expenses were 14.7% of revenues in fiscal 2005.
Operating income was $380.0 million for fiscal 2006, an increase of $77.5 million, or 25.6%, from $302.5
million for fiscal 2005. The operating income margin for fiscal 2006 was 30.8%, as compared to 26.3% for the
prior year. Excluding transaction-related expenses in fiscal 2005 due to the WeightWatchers.com acquisition,
operating income increased $31.1 million, or 8.9%, from $348.9 million for fiscal 2005. On a comparable basis,
the operating income margin improved 50 basis points from 30.3% in the prior year to 30.8% in the current year.
Net interest charges increased $28.5 million to $49.5 million for fiscal 2006, as compared to $21.0 million
for fiscal 2005. Our average debt outstanding rose $341.8 million from the December 2005 level. At the end of
fiscal 2005, WeightWatchers.com put in place credit facilities of $215 million, at a higher interest rate than our
previously existing debt, as the final stage of its acquisition by Weight Watchers International. The remaining
increase in our average debt outstanding was due to share repurchases and the reactivation of our franchise
acquisition program. Our effective interest rate rose from 4.94% for fiscal 2005 to 6.48% for fiscal 2006.
For fiscal 2006, we reported other income of $1.4 million as compared to other expense of $2.2 million in
fiscal 2005. The $3.6 million increase is primarily the result of foreign currency fluctuations on intercompany
transactions.
In connection with the early extinguishment of debt resulting from the 2006 refinancing of the WWI Credit
Facility, we recorded a charge of $1.3 million relating to the write-off of a portion of the deferred financing costs
associated with our old debt.
Our effective tax rate for fiscal 2006 was 36.5%, as compared to 37.6% for fiscal 2005. In fiscal 2006, we
recognized a tax benefit of $6.3 million by reversing tax reserves, which due to the resolution of certain tax
matters were no longer necessary, partially offset by adjustments to our tax valuation allowance for foreign tax
net operating loss carryforwards.
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