XML 22 R12.htm IDEA: XBRL DOCUMENT
v3.5.0.2

Franchise Rights Acquired, Goodwill and Other Intangible Assets | 6 Months Ended
--- | ---
Jul. 02, 2016
Franchise Rights Acquired, Goodwill and Other Intangible Assets |
6. | Franchise Rights Acquired, Goodwill and Other Intangible Assets
Franchise rights acquired are due to acquisitions of the Company’s franchised territories as well as the acquisition of franchise promotion agreements and other factors associated with the acquired franchise territories. For the six months ended July 2, 2016, the change in the carrying value of indefinite-lived franchise rights acquired is due to the franchisee acquisition as described in Note 5, and the effect of exchange rate changes. Goodwill primarily relates to the acquisition of the Company by H.J. Heinz Company in 1978, the acquisition of WeightWatchers.com, Inc. in 2005, the acquisitions of the Company’s franchised territories, the acquisitions of the majority interest in VPM and of Wello in fiscal 2014 and the acquisition of Weilos in fiscal 2015. See Note 5 for further information on the Weilos acquisition. For the six months ended July 2, 2016, the change in the carrying amount of goodwill is due to the franchise acquisition as described in Note 5, and the effect of exchange rate changes as follows:
|  | North America |  |  | United Kingdom |  |  | Continental Europe |  |  | Other |  |  | Total |
Balance as of January 2, 2016 |  | $ | 133,408 |  |  | $ | 1,370 |  |  | $ | 7,260 |  |  | $ | 17,293 |  |  | $ | 159,331 |
Goodwill acquired during the period |  |  | 2,945 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 2,945 |
Effect of exchange rate changes |  |  | 2,820 |  |  |  | (139 | ) |  |  | 98 |  |  |  | 3,427 |  |  |  | 6,206 |
Balance as of July 2, 2016 |  | $ | 139,173 |  |  | $ | 1,231 |  |  | $ | 7,358 |  |  | $ | 20,720 |  |  | $ | 168,482 |
The Company reviews goodwill and other indefinite-lived intangible assets, including franchise rights acquired with indefinite lives, for potential impairment on at least an annual basis or more often if events so require. In the second quarter of 2016 the Company changed the timing to perform its annual impairment review of goodwill and other indefinite-lived intangible assets to the first day of fiscal May whereas it had previously performed the test as of the last day of the Company’s fiscal year-end. This accounting change is preferable because it provides the Company time to obtain the data from the Winter Season results which includes the first fiscal quarter, which represents approximately 40% of the full year recruitments, and incorporates this data into the current and future year performance estimates. The Company believes the resulting change in accounting principle related to changing the annual impairment testing date did not delay, accelerate, or avoid an impairment charge. In performing the impairment analysis for goodwill, the fair value for our reporting units is estimated using a discounted cash flow approach. For all of the Company’s reporting units except for Brazil (see below), we estimated future cash flows by utilizing the historical debt-free cash flows (cash flows provided by operating activities 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 average cost of capital, which includes the cost of equity and the cost of debt. The cost of equity was determined by combining a risk-free rate of return and a market risk premium for the Company’s peer group. The risk-free rate of return was determined based on the average rate of long-term U.S. Treasury securities. The market risk premium was determined by reviewing external market data. The cost of debt was determined by estimating the Company’s current borrowing rate. As it relates to our impairment analysis for Brazil, we estimated future debt free cash flows in contemplation of our growth strategies for that market. In developing these projections, we considered the historical impact of similar growth strategies in other markets as well as the current market conditions in Brazil. We then discounted the estimated future cash flows utilizing a discount rate which was calculated using the average cost of capital, which included the cost of equity and the cost of debt. The cost of equity was determined by combining a risk-free rate of return and a market risk premium for the Company’s peer group. The risk-free rate of return was determined based on the average rate of long-term U.S. Treasury securities. The market risk premium was determined by reviewing external market data including the current economic conditions in Brazil and the country specific risk thereon. A further risk premium was included to reflect the risk associated with the rate of growth projected in the analysis. The cost of debt was determined by estimating the Company’s current borrowing rate. 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 meetings business and a relief from royalty methodology for our franchise rights related to our Online 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 the meetings and Online businesses in the country in which the acquisitions have occurred. In our hypothetical start-up approach analysis 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 meetings business in each country based on assumptions regarding revenue growth and operating income margins. We then discounted the estimated future cash flows utilizing discount rates consistent with those used in our goodwill impairment analysis as discussed above. In performing our annual impairment analysis as of May 8, 2016, the Company determined that the carrying amounts of its goodwill reporting units and franchise rights acquired with indefinite lives units of account did not exceed their respective fair values and therefore, no impairment existed. Except for Brazil, there is significant headroom in our impairment analysis. Based on the results of this test for Brazil, the fair value of this reporting unit exceeds the carrying value by approximately 10%, and accordingly a relatively small change in the underlying assumptions would likely cause a change in the results of the impairment assessment and, as such, could result in an impairment of the goodwill related to Brazil, for which the carrying amount is $18,045. The carrying values of finite-lived intangible assets as of July 2, 2016 and January 2, 2016 were as follows:
|  | July 2, 2016 |  |  | January 2, 2016 |
|  | Gross |  |  |  |  |  | Gross |  |  |  |
|  | Carrying |  |  | Accumulated |  |  | Carrying |  |  | Accumulated |
|  | Amount |  |  | Amortization |  |  | Amount |  |  | Amortization |
Capitalized software costs |  | $ | 124,809 |  |  |  | 94,279 |  |  | $ | 119,658 |  |  | $ | 86,134 |
Website development costs |  |  | 109,734 |  |  |  | 77,438 |  |  |  | 100,105 |  |  |  | 68,673 |
Trademarks |  |  | 11,036 |  |  |  | 10,542 |  |  |  | 10,960 |  |  |  | 10,435 |
Other |  |  | 8,003 |  |  |  | 7,257 |  |  |  | 7,976 |  |  |  | 7,118 |
Trademarks and other intangible assets |  | $ | 253,583 |  |  | $ | 189,516 |  |  | $ | 238,699 |  |  | $ | 172,360 |
Franchise rights acquired |  |  | 4,558 |  |  |  | 4,444 |  |  |  | 4,182 |  |  |  | 4,059 |
Total finite-lived intangible assets |  | $ | 258,141 |  |  | $ | 193,960 |  |  | $ | 242,881 |  |  | $ | 176,419 |
Aggregate amortization expense for finite-lived intangible assets was recorded in the amounts of $8,603 and $17,023 for the three and six months ended July 2, 2016, respectively. Aggregate amortization expense for finite-lived intangible assets was recorded in the amounts of $9,810 and $19,028 for the three and six months ended July 4, 2015, respectively. The franchise rights acquired related to the VPM acquisition were amortized ratably over a 2 year period. The franchise rights acquired related to the Miami acquisition are being amortized ratably over a 3 month period. Estimated amortization expense of existing finite-lived intangible assets for the next five fiscal years and thereafter is as follows:
Remainder of fiscal 2016 |  | $ | 17,628 |
Fiscal 2017 |  | $ | 29,570 |
Fiscal 2018 |  | $ | 13,502 |
Fiscal 2019 |  | $ | 3,399 |
Fiscal 2020 and thereafter |  | $ | 82 |

X
- Definition The entire disclosure for the aggregate amount of goodwill and a description of intangible assets, which may include (a) for amortizable intangible assets (also referred to as finite-lived intangible assets), the carrying amount, the amount of any significant residual value, and the weighted-average amortization period, (b) for intangible assets not subject to amortization (also referred to as indefinite-lived intangible assets), the carrying amount, and (c) the amount of research and development assets acquired and written off in the period, including the line item in the income statement in which the amounts written off are aggregated, if not readily apparent from the income statement. Also discloses (a) for amortizable intangibles assets in total and by major class, the gross carrying amount and accumulated amortization, the total amortization expense for the period, and the estimated aggregate amortization expense for each of the five succeeding fiscal years, (b) for intangible assets not subject to amortization the carrying amount in total and by major class, and (c) for goodwill, in total and for each reportable segment, the changes in the carrying amount of goodwill during the period (including the aggregate amount of goodwill acquired, the aggregate amount of impairment losses recognized, and the amount of goodwill included in the gain (loss) on disposal of a reporting unit). If any part of goodwill has not been allocated to a reportable segment, discloses the unallocated amount and the reasons for not allocating. For each impairment loss recognized related to an intangible asset (excluding goodwill), discloses: (a) a description of the impaired intangible asset and the facts and circumstances leading to the impairment, (b) the amount of the impairment loss and the method for determining fair value, (c) the caption in the income statement or the statement of activities in which the impairment loss is aggregated, and (d) the segment in which the impaired intangible asset is reported. For each goodwill impairment loss recognized, discloses: (a) a description of the facts and circumstances leading to the impairment, (b) the amount of the impairment loss and the method of determining the fair value of the associated reporting unit, and (c) if a recognized impairment loss is an estimate not finalized and the reasons why the estimate is not final. May also disclose the nature and amount of any significant adjustments made to a previous estimate of an impairment loss. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 350 -SubTopic 30 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=66006027&loc=d3e16373-109275 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 350 -SubTopic 30 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=66006027&loc=d3e16265-109275 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 350 -SubTopic 30 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=66006027&loc=d3e16323-109275 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 350 -SubTopic 20 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=35741047&loc=d3e13816-109267 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 350 -SubTopic 20 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=35741047&loc=d3e13854-109267 + Details
Name: | us-gaap_GoodwillAndIntangibleAssetsDisclosureTextBlock
Namespace Prefix: | us-gaap_
Data Type: | nonnum:textBlockItemType
Balance Type: | na
Period Type: | duration