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Franchise Rights Acquired, Goodwill and Other Intangible Assets | 9 Months Ended
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Sep. 28, 2019
Goodwill And Intangible Assets Disclosure [Abstract] |
Franchise Rights Acquired, Goodwill and Other Intangible Assets |
7. | 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 nine months ended September 28, 2019, the change in the carrying value of franchise rights acquired is due to the effect of exchange rate changes. Goodwill primarily relates to the acquisition of the Company by The Kraft Heinz Company (successor to H.J. Heinz Company) in 1978 and the Company’s acquisitions of WW.com, Inc. (formerly known as WeightWatchers.com, Inc.) in 2005, the Company’s franchised territories and the majority interest in Vigilantes do Peso Marketing Ltda. For the nine months ended September 28, 2019, the change in the carrying amount of goodwill was due to the effect of exchange rate changes as follows:
|  | North |  |  | Continental |  |  | United |  |  |  |  |  |  |  |  |
|  | America |  |  | Europe |  |  | Kingdom |  |  | Other |  |  | Total |
Balance as of December 29, 2018 |  | $ | 138,156 |  |  | $ | 7,242 |  |  | $ | 1,178 |  |  | $ | 5,943 |  |  | $ | 152,519 |
Effect of exchange rate changes |  |  | 1,142 |  |  |  | (459 | ) |  |  | (38 | ) |  |  | (358 | ) |  |  | 287 |
Balance as of September 28, 2019 |  | $ | 139,298 |  |  | $ | 6,783 |  |  | $ | 1,140 |  |  | $ | 5,585 |  |  | $ | 152,806 |
Goodwill and Franchise Rights Acquired Annual Impairment Test 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. The Company performed fair value impairment testing as of May 5, 2019 and May 6, 2018, each the first day of fiscal May, on its goodwill and other indefinite-lived intangible assets. In performing its annual impairment analysis as of May 5, 2019 and May 6, 2018, 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. When determining fair value, the Company utilizes various assumptions, including projections of future cash flows, growth rates and discount rates. A change in these underlying assumptions would likely cause a change in the results of the impairment assessments and, as such, could cause fair value to be less than the carrying amounts and result in an impairment of those assets. In the event such a result occurred, the Company would be required to record a corresponding charge, which would impact earnings. The Company would also be required to reduce the carrying amounts of the related assets on its balance sheet. For all reporting units, except for Brazil, there was significant headroom in the goodwill impairment analysis. Based on the results of the Company’s annual goodwill impairment test performed for all of its reporting units, except for Brazil, as of the September 28, 2019 balance sheet date, for reporting units that hold 97.2% of the Company’s goodwill, those units had an estimated fair value at least 60% higher than the respective reporting unit’s carrying amount. Based on the results of the Company’s annual goodwill impairment test performed for its Brazil reporting unit, which holds 2.8% of the Company’s goodwill as of the September 28, 2019 balance sheet date, the estimated fair value of this reporting unit was approximately 3.0% higher than its carrying value. Accordingly, a change in the underlying assumptions for Brazil 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 net book value was $4,278 as of September 28, 2019. For all units of account, except for New Zealand, there was significant headroom in the franchise rights acquired impairment analysis. Based on the results of the Company’s annual franchise rights acquired impairment analysis performed for all of its units of account, except for New Zealand, as of the September 28, 2019 balance sheet date, for units of account that hold 99.4% of the Company’s franchise rights acquired, those units had an estimated fair value at least 40% higher than the respective units of account carrying amount. Based on the results of the Company’s annual franchise rights acquired impairment test performed for its New Zealand unit of account, which holds 0.6% of the Company’s franchise rights acquired as of the September 28, 2019 balance sheet date, the estimated fair value of this unit of account exceeded its carrying value by approximately 3.0%. Accordingly, a change in the underlying assumptions for New Zealand would likely cause a change in the results of the impairment assessment and, as such, could result in an impairment of the franchise rights acquired related to New Zealand, for which the net book value was $4,455 as of September 28, 2019. The following is a discussion of the goodwill and franchise rights acquired impairment analysis. Goodwill In performing the impairment analysis for goodwill, the fair value for the Company’s reporting units is estimated using a discounted cash flow approach. This approach involves projecting future cash flows attributable to the reporting unit and discounting those estimated cash flows using an appropriate discount rate. The estimated fair value is then compared to the carrying value of the reporting unit. The Company has determined the appropriate reporting unit for purposes of assessing annual impairment to be the country for all reporting units. The values of goodwill in the United States, Canada, Brazil and other countries as of the September 28, 2019 balance sheet date were $98,857, $40,442, $4,278 and $9,229, respectively. For all of the Company’s reporting units except for Brazil (see below), the Company 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. The Company utilized operating income as the basis for measuring its potential growth because it believes it is the best indicator of the performance of its business. The Company 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. The cost of debt was determined by estimating the Company’s current borrowing rate. As it relates to the goodwill impairment analysis for Brazil, the Company estimated future debt-free cash flows in contemplation of its growth strategies for that market. In developing these projections, the Company considered the historical impact of similar growth strategies in other markets as well as the current market conditions in Brazil. The Company 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, all as reflected in the discount rate. The cost of debt was determined by estimating the Company’s current borrowing rate. Franchise Rights Acquired Finite-lived franchise rights acquired are amortized over the remaining contractual period, which is generally less than one year. Indefinite-lived franchise rights acquired are tested on an annual basis for impairment. In performing the impairment analysis for indefinite-lived franchise rights acquired, the fair value for franchise rights acquired is estimated using a discounted cash flow approach referred to as the hypothetical start-up approach for franchise rights related to the Company’s Studio + Digital business and a relief from royalty methodology for franchise rights related to the Company’s Digital 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. The Company has determined the appropriate unit of account for purposes of assessing impairment to be the combination of the rights in both the Studio + Digital business and the Digital business in the country in which the applicable acquisition occurred. The book values of these franchise rights in the United States, Canada, United Kingdom, Australia and New Zealand at September 28, 2019 were $671,914, $54,456, $11,072, $6,081 and $4,455, respectively. In its hypothetical start-up approach analysis for fiscal 2019, the Company assumed that the year of maturity was reached after 7 years. Subsequent to the year of maturity, the Company estimated future cash flows for the Studio + Digital business in each country based on assumptions regarding revenue growth and operating income margins. The cash flows associated with the Digital business in each country were based on the expected Digital revenue for such country and the application of a market-based royalty rate. The cash flows for the Studio + Digital and Digital businesses were discounted utilizing rates consistent with those utilized in the annual goodwill impairment analysis. Finite-lived Intangible Assets The carrying values of finite-lived intangible assets as of September 28, 2019 and December 29, 2018 were as follows:
|  | September 28, 2019 |  |  | December 29, 2018 |
|  | Gross |  |  |  |  |  |  | Gross |  |  |  |  |
|  | Carrying |  |  | Accumulated |  |  | Carrying |  |  | Accumulated |
|  | Amount |  |  | Amortization |  |  | Amount |  |  | Amortization |
Capitalized software costs |  | $ | 131,559 |  |  | $ | 110,009 |  |  | $ | 121,508 |  |  | $ | 102,659 |
Website development costs |  |  | 117,972 |  |  |  | 90,832 |  |  |  | 105,710 |  |  |  | 77,825 |
Trademarks |  |  | 11,805 |  |  |  | 11,172 |  |  |  | 11,620 |  |  |  | 11,010 |
Other |  |  | 13,982 |  |  |  | 4,488 |  |  |  | 13,967 |  |  |  | 4,149 |
Trademarks and other intangible assets |  | $ | 275,318 |  |  | $ | 216,501 |  |  | $ | 252,805 |  |  | $ | 195,643 |
Franchise rights acquired |  |  | 8,030 |  |  |  | 4,415 |  |  |  | 8,110 |  |  |  | 4,319 |
Total finite-lived intangible assets |  | $ | 283,348 |  |  | $ | 220,916 |  |  | $ | 260,915 |  |  | $ | 199,962 |
Aggregate amortization expense for finite-lived intangible assets was recorded in the amounts of $6,973 and $22,014 for the three and nine months ended September 28, 2019, respectively. Aggregate amortization expense for finite-lived intangible assets was recorded in the amounts of $7,213 and $21,453 for the three and nine months ended September 29, 2018, respectively. Estimated amortization expense of existing finite-lived intangible assets for the next five fiscal years and thereafter is as follows:
Remainder of fiscal 2019 |  | $ | 7,129 |
Fiscal 2020 |  | $ | 23,281 |
Fiscal 2021 |  | $ | 15,374 |
Fiscal 2022 |  | $ | 5,406 |
Fiscal 2023 and thereafter |  | $ | 11,242 |

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