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Fair Value Measurements

3 Months Ended

Mar. 31, 2020

12.	Fair Value Measurements

We account for certain assets and liabilities at fair value. Fair value is defined as the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date, assuming the transaction occurs in the principal or most advantageous market for that asset or liability.

Fair Value Hierarchy

The hierarchy below lists three levels of fair value based on the extent to which inputs used in measuring fair value are observable in the market. We categorize each of our fair value measurements in one of these three levels based on the lowest level input that is significant to the fair value measurement in its entirety. These levels are:

Level 1:

Quoted prices in active markets for identical assets or liabilities;

Level 2:

Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-based valuation techniques in which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and

Level 3:

Unobservable inputs that are supported by little or no market activity and typically reflect management's estimates of assumptions that market participants would use in pricing the asset or liability.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following table presents our assets and liabilities measured at fair value on a recurring basis at March 31, 2020 and December 31, 2019.

	Level 2
(In thousands)	March 31, 2020		December 31, 2019

Liabilities:
Interest rate swap agreements	$	42,869	$	16,238

The fair values of interest rate swap agreements are primarily determined based on the present value of future cash flows using internal models and third-party pricing services with observable inputs, including interest rates, yield curves and applicable credit spreads.

Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis

We measure certain assets at fair value on a nonrecurring basis in the fourth quarter of each year, including the following:

•

reporting units measured at fair value as part of a goodwill impairment test; and

•

indefinite-lived intangible assets measured at fair value for impairment assessment.

Each of these assets above is classified as Level 3 within the fair value hierarchy. The COVID-19 pandemic has had and is having an adverse impact on the overall economy, resulting in rapidly changing market and economic conditions that have impacted the Company. In March 2020, we experienced a significant decline in the Company’s market capitalization and in the actual and forecasted operating results of our Healthcare segment, in addition to the unfavorable change in market conditions. As a result, management concluded that there were triggering events during the first quarter of 2020 necessitating an impairment evaluation of our goodwill (for each of our reporting units) and indefinite-lived intangible assets (which consist of the Nutrisystem tradename and the SilverSneakers tradename).

We estimated the fair value of each reporting unit using a combination of a discounted cash flow model and a market-based approach, and we reconciled the aggregate fair value of our reporting units to our consolidated market capitalization. Estimating fair value requires significant judgments, including management’s estimate of future cash flows of each reporting unit (which is dependent on internal forecasts of projected income), estimation of the long-term growth rates of future revenues for our reporting units, the terminal growth rate of revenue, the tax rate, and determination of the weighted average cost of capital, as well as relevant comparable company revenue and earnings multiples and market participant acquisition premium for the market-based approaches. Changes in these estimates and assumptions could materially affect the estimate of fair value and goodwill impairment for each reporting unit. There is significant uncertainty relating to the potential future impacts of the COVID-19 pandemic on our business and the overall market.

Certain significant inputs used in the estimation of fair value were adversely impacted by the changing market and economic conditions discussed above, most notably the weighted average cost of capital, resulting in a lower estimated fair value for each of our reporting units. Before we performed the impairment analysis performed during the first quarter, the estimated fair value of the Nutrition reporting unit was equal to its carrying value due to an impairment loss we recorded in the fourth quarter of 2019. Because there was no excess of estimated fair value over carrying value (“headroom”) for the Nutrition reporting unit at the beginning of 2020, the decrease in the estimated fair value of the Nutrition reporting unit during the first quarter of 2020 resulted in an impairment of the carrying value of goodwill for the Nutrition reporting unit, and we recorded a $119.5 million goodwill impairment loss. None of the impaired goodwill is deductible for tax purposes, and there is no cash tax benefit related to the impairment. For the Healthcare reporting unit, the fair value of the reporting unit exceeded its carrying amount, and we determined that the carrying value of goodwill was not impaired.

Also during the first quarter of 2020, we estimated the fair value of indefinite-lived intangible assets, which consisted of two tradenames (the Nutrisystem tradename and the SilverSneakers tradename), using the relief-from-royalty method, which required significant assumptions such as the long-term growth rate of future revenues, the royalty rate for such revenue, and a discount rate. Changes in these estimates and assumptions could materially affect the estimate of fair value for the tradenames. Similar to the goodwill impairment analysis described above, the discount rate used in the estimation of fair value of the tradenames was adversely impacted by the changing market and economic conditions discussed above, resulting in a lower estimated fair value for each tradename.

Due to an impairment loss recorded in the fourth quarter of 2019 related to the Nutrisystem tradename and goodwill, the estimated fair value of the Nutrisystem tradename was equal to its carrying value at the beginning of 2020. The decrease in the estimated fair value of the Nutrisystem tradename during the first quarter of 2020 resulted in an impairment of tradename, and we recorded a $80.0 million impairment loss related to the Nutrisystem tradename. None of this impairment loss is deductible for tax purposes, and there is no cash tax benefit related to the impairment. Based on our impairment assessment of the SilverSneakers tradename, we determined that the carrying value of the tradename was not impaired as of the measurement date.

Fair Value of Other Financial Instruments

The estimated fair value of each class of financial instruments at March 31, 2020 was as follows:

Cash and cash equivalents – The carrying amount of $83.0 million approximates fair value due to the short maturity of those instruments (less than three months).

Debt – The estimated fair value of outstanding borrowings under the Credit Agreement, which includes term loan facilities and a revolving credit facility (see Note 10), is determined based on the fair value hierarchy as discussed above.

The Term Loans are actively traded and therefore are classified as Level 1 valuations. The estimated fair value is based on the last quoted price of the Term Loans through March 31, 2020. The Revolving Credit Facility is not actively traded and therefore is classified as a Level 2 valuation based on the market for similar instruments. The estimated fair value and carrying amount of outstanding borrowings under the Term Loans at March 31, 2020 were $851.0 million and $1,010.4 million, respectively. The estimated fair value and carrying amount of outstanding borrowings under the Revolving Credit Facility at March 31, 2020 were $59.8 million and $77.2 million, respectively.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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