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Franchise Rights Acquired, Goodwill and Other Intangible Assets | 9 Months Ended
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Oct. 01, 2022
Goodwill And Intangible Assets Disclosure [Abstract] |
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 nine months ended October 1, 2022, the change in the carrying value of franchise rights acquired was due to the impairments of the United States, Canada and New Zealand units of account as discussed below, the effect of exchange rate changes and the Northern Ireland franchisee acquisition as described in Note 5. 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, LLC (formerly known as WW.com, Inc. and WeightWatchers.com, Inc.) in 2005 and the Company’s franchised territories. See Note 5 for additional information about acquisitions by the Company. For the nine months ended October 1, 2022, the change in the carrying amount of goodwill was due to the Republic of Ireland franchisee and Northern Ireland franchisee acquisitions as described in Note 5, the impairment of the Company's wholly-owned subsidiary Kurbo, Inc. (“Kurbo”) as discussed below and the effect of exchange rate changes as follows:
|  | North |  |  | Continental |  |  | United |  |  |  |  |  |  |
|  | America |  |  | Europe |  |  | Kingdom |  |  | Other |  |  | Total |
Balance as of January 2, 2021 |  | $ | 145,071 |  |  | $ | 7,792 |  |  | $ | 1,268 |  |  | $ | 1,486 |  |  | $ | 155,617 |
Goodwill acquired during the period |  |  | 2,153 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 2,153 |
Effect of exchange rate changes |  |  | 306 |  |  |  | (606 | ) |  |  | (14 | ) |  |  | (82 | ) |  |  | (396 | )
Balance as of January 1, 2022 |  | $ | 147,530 |  |  | $ | 7,186 |  |  | $ | 1,254 |  |  | $ | 1,404 |  |  | $ | 157,374 |
Goodwill acquired during the period |  |  | — |  |  |  | — |  |  |  | 5,936 |  |  |  | — |  |  |  | 5,936 |
Goodwill impairment |  |  | (1,101 | ) |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (1,101 | )
Effect of exchange rate changes |  |  | (3,651 | ) |  |  | (1,152 | ) |  |  | (1,084 | ) |  |  | (167 | ) |  |  | (6,054 | )
Balance as of October 1, 2022 |  | $ | 142,778 |  |  | $ | 6,034 |  |  | $ | 6,106 |  |  | $ | 1,237 |  |  | $ | 156,155 |
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 for potential impairment on at least an annual basis or more often if events so require. 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 Workshops + 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 Workshops + Digital business and the Digital business in the country in which the applicable acquisition occurred. The net book values of these franchise rights in the United States, Canada, United Kingdom, Australia and New Zealand as of the October 1, 2022 balance sheet date were $400,092, $19,342, $10,061, $5,753 and $2,141, respectively. In its hypothetical start-up approach analysis for fiscal 2022, 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 Workshops + Digital business in each country based on assumptions regarding revenue growth and operating income margins. In the Company’s relief from royalty approach analysis for fiscal 2022, 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 royalty rate based on current market terms. The cash flows for the Workshops + Digital and the Digital businesses were discounted utilizing rates which were calculated using the weighted-average cost of capital, which included the cost of equity and the cost of debt. 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 net book values of goodwill in the United States, Canada and other countries as of the October 1, 2022 balance sheet date were $104,019, $38,759 and $13,377, respectively. For all of the Company’s reporting units tested as of May 8, 2022, the Company estimated future cash flows by utilizing the historical debt-free cash flows (cash flows provided by operations 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 weighted-average cost of capital, which included the cost of equity and the cost of debt. Indefinite-Lived Franchise Rights Acquired and Goodwill Annual Impairment Test The Company reviews indefinite-lived intangible assets, including franchise rights acquired with indefinite lives, and goodwill 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 8, 2022 and May 9, 2021, each the first day of fiscal May, on its indefinite-lived intangible assets and goodwill. In performing its annual impairment analysis as of May 8, 2022, the Company determined that (i) the carrying amounts of its Canada and New Zealand franchise rights acquired with indefinite-lived units of account exceeded their respective fair values and, as a result, the Company recorded impairment charges for its Canada and New Zealand units of account of $24,485 and $834, respectively, in the second quarter of fiscal 2022; and (ii) the carrying amounts of all of its other franchise rights acquired with indefinite-lived units of account did not exceed their respective fair values and, therefore, no impairment existed with respect thereto. In performing its annual impairment analysis as of May 9, 2021, the Company determined that the carrying amounts of its franchise rights acquired with indefinite-lived units of account did not exceed their respective fair values and, therefore, no impairment existed. In performing its annual impairment analysis as of May 8, 2022 and May 9, 2021, the Company determined that the carrying amounts of its goodwill reporting units 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 could 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. Based on the results of the Company’s May 8, 2022 annual franchise rights acquired impairment test performed for its United States unit of account, which held 92.7% of the Company’s franchise rights acquired as of the July 2, 2022 balance sheet date, the estimated fair value of this unit of account exceeded its carrying value by approximately 15%. Based on the results of the Company’s May 8, 2022 annual franchise rights acquired impairment analysis performed for its Canada and New Zealand units of account, which held 4.6 % and 0.5%, respectively, of the Company’s franchise rights acquired as of the July 2, 2022 balance sheet date, the estimated fair values of these units of account were equal to their respective carrying values. The above difference or lack thereof between the estimated fair value of the applicable unit of account and its carrying value is referred to herein as the “Annual Impairment Headroom”. As previously disclosed, a change in the underlying assumptions for the United States, Canada and New Zealand could change the results of the impairment assessment and, as such, could result in an impairment of the franchise rights acquired related to the United States, Canada and New Zealand, for which the net book values were $698,383, $34,556 and $3,574, respectively, as of July 2, 2022. Based on the results of the Company’s May 8, 2022 annual franchise rights acquired impairment analysis performed for its remaining units of account, which collectively held 2.2% of the Company’s franchise rights acquired as of the July 2, 2022 balance sheet date, the estimated fair values of these units of account exceeded their respective carrying values by over 100%. Based on the results of the Company’s May 8, 2022 annual goodwill impairment analysis performed for all of its reporting units, all units, except for the Republic of Ireland, had an estimated fair value at least 35% higher than the respective unit’s carrying amount. Collectively, these reporting units represented 97.4% of the Company’s total goodwill as of the October 1, 2022 balance sheet date. Based on the results of the Company’s May 8, 2022 annual goodwill impairment analysis performed for its Republic of Ireland reporting unit, which holds 2.6% of the Company’s goodwill as of the October 1, 2022 balance sheet date, the estimated fair value of this reporting unit exceeded its carrying value by approximately 14%. Accordingly, a change in the underlying assumptions for the Republic of Ireland may change the results of the impairment assessment and, as such, could result in an impairment of the goodwill related to the Republic of Ireland, for which the net book value w as $4,009 as of October 1, 2022. Indefinite-Lived Franchise Rights Acquired Interim Impairment Test During the quarter ended October 1, 2022, the Company identified various qualitative and quantitative factors which collectively, when combined with the Annual Impairment Headroom discussed above for the United States, Canada and New Zealand units of account, indicated a triggering event had occurred within these units of account. These factors included actual business performance as compared to the assumptions used in its annual impairment test, the continued decline in the Company’s market capitalization and market factors, including the increase in interest rates. As a result of this triggering event, the Company performed an interim impairment test of these units of account. In performing this interim impairment test as of October 1, 2022, the Company determined that the carrying amounts of its United States, Canada and New Zealand franchise rights acquired with indefinite-lived units of account exceeded their respective fair values. Accordingly, the Company recorded impairment charges for its United States, Canada and New Zealand units of account of $298,291, $13,312 and $1,138, respectively, in the third quarter of fiscal 2022. The preponderance of these impairments was driven by the increased weighted-average cost of capital used in this interim impairment test as compared to the weighted-average cost of capital used in the May 8, 2022 annual impairment test of its indefinite-lived franchise rights acquired, reflecting market factors including higher interest rates and the trading values of the Company's equity and debt. 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 could 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. Based on the results of the Company’s October 1, 2022 interim franchise rights acquired impairment test performed for its United States, Canada and New Zealand units of account, which hold 91.5%, 4.4% and 0.5%, respectively, of the Company’s franchise rights acquired as of the October 1, 2022 balance sheet date, the estimated fair values of these units of account were equal to their respective carrying values. Accordingly, a change in the underlying assumptions for the United States, Canada and New Zealand may change the results of the impairment assessment and, as such, could result in an impairment of the franchise rights acquired related to the United States, Canada and New Zealand, for which the net book values were $400,092, $19,342 and $2,141, respectively, as of October 1, 2022. Kurbo Goodwill Impairment On August 10, 2018, the Company acquired substantially all of the assets of Kurbo Health, Inc., a family-based healthy lifestyle coaching program, for a net purchase price of $3,063, of which $1,101 was allocated to goodwill. The goodwill was deductible annually for tax purposes. The Company determined in the second quarter of fiscal 2022 to exit the Kurbo business in the third quarter of fiscal 2022 as part of its strategic plan. As a result of this determination, the Company recorded an impairment charge of $1,101 in the second quarter of fiscal 2022, which comprised the entire goodwill balance for Kurbo. Finite-lived Intangible Assets The carrying values of finite-lived intangible assets as of October 1, 2022 and January 1, 2022 were as follows:
|  | October 1, 2022 |  |  | January 1, 2022 |
|  | Gross |  |  |  |  |  | Gross |  |  |  |
|  | Carrying |  |  | Accumulated |  |  | Carrying |  |  | Accumulated |
|  | Amount |  |  | Amortization |  |  | Amount |  |  | Amortization |
Capitalized software costs |  | $ | 115,746 |  |  | $ | 101,017 |  |  | $ | 115,065 |  |  | $ | 94,771 |
Website development costs |  |  | 130,738 |  |  |  | 90,790 |  |  |  | 110,678 |  |  |  | 78,629 |
Trademarks |  |  | 12,145 |  |  |  | 11,833 |  |  |  | 12,116 |  |  |  | 11,677 |
Other |  |  | 13,880 |  |  |  | 5,917 |  |  |  | 14,021 |  |  |  | 5,677 |
Trademarks and other intangible assets |  | $ | 272,509 |  |  | $ | 209,557 |  |  | $ | 251,880 |  |  | $ | 190,754 |
Franchise rights acquired |  |  | 8,126 |  |  |  | 5,001 |  |  |  | 7,905 |  |  |  | 4,766 |
Total finite-lived intangible assets |  | $ | 280,635 |  |  | $ | 214,558 |  |  | $ | 259,785 |  |  | $ | 195,520 |
Aggregate amortization expense for finite-lived intangible assets was recorded in the amounts of $8,347 and $25,282 for the three and nine months ended October 1, 2022, respectively. Aggregate amortization expense for finite-lived intangible assets was recorded in the amounts of $8,032 and $24,066 for the three and nine months ended October 2, 2021, respectively. Estimated amortization expense of existing finite-lived intangible assets for the next five fiscal years and thereafter is as follows:
Remainder of fiscal 2022 |  | $ | 8,223 |
Fiscal 2023 |  | $ | 27,053 |
Fiscal 2024 |  | $ | 16,687 |
Fiscal 2025 |  | $ | 5,378 |
Fiscal 2026 |  | $ | 845 |
Fiscal 2027 |  | $ | 720 |
Thereafter |  | $ | 7,171 |

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