WeightWatchers 2013 Annual Report Download - page 81

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WeightWatchers.com experiences seasonality similar to the meetings business in terms of new subscriber sign-
ups, its revenue tends to be less seasonal because it amortizes subscription revenue over the related subscription
period.
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. As of the end of fiscal 2013,
there have been no material changes to the Company’s exposure to market risk since the end of fiscal 2012.
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 WWI Credit Facility. As of the end of fiscal 2013, borrowings under the Tranche B-1 Term
Facility bore interest at LIBOR plus an applicable margin of 2.75% and borrowings under the Tranche B-2 Term
Facility bore interest at LIBOR plus an applicable margin of 3.00%, and we had no borrowings under the Revolving
Facility. As of the end of fiscal 2013, we had in effect an interest rate swap with a notional amount totaling $466.2
million to hedge a portion of our variable rate debt. As of such date, we had $2,388.0 million of variable rate debt,
of which $1,921.8 million remained unhedged. This interest rate swap that went effective on January 4, 2010 and
terminated on January 27, 2014 had an initial notional amount of $425.0 million, which amount fluctuated during
the remainder of its term to a maximum of $466.2 million. From December 29, 2012 through April 1, 2013, this
swap had qualified for hedge accounting, and therefore changes in the fair value of this derivative were recorded in
accumulated other comprehensive income (loss). Effective April 2, 2013, due to our debt refinancing, we ceased the
application of hedge accounting for this swap. Accordingly, changes in the fair value of this swap were recorded in
earnings subsequent to April 2, 2013 and were immaterial for fiscal 2013.
On July 26, 2013, in order to hedge an additional portion of our variable rate debt, we entered into a
forward-starting interest rate swap with an effective date of March 31, 2014 and a termination date of April 2,
2020. The initial notional amount of this swap is $1.5 billion. During the term of this swap, the notional amount
will decrease from $ 1.5 billion effective March 31, 2014 to $ 1.25 billion on April 3, 2017 with a further
reduction to $ 1.0 billion on April 1, 2019. This interest rate swap in effect converts the variable interest rate on a
portion of our debt equal to the notional amount of this swap to a fixed rate of 2.38125%. This swap qualifies for
hedge accounting and, therefore, changes in the fair value of this swap have been recorded in accumulated other
comprehensive income (loss).
As of the end of fiscal 2013, based on the amount of our variable rate debt and the interest rate swap
agreement at that time, a hypothetical 50 basis point increase or decrease in interest rates on our variable rate
debt would increase or decrease our annual interest expense by approximately $9.6 million. This change in
market risk exposure from the end of fiscal 2012 was primarily driven by the reduction of the notional amount of
our interest rate swap from $583.2 million at the end of fiscal 2012 to $466.2 million at the end of fiscal 2013.
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 the US dollar.
Accordingly, changes in exchange rates may negatively affect our revenues and gross margins as expressed in
US 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.
67