Fair Values of Financial Instruments

3 Months Ended

Apr. 02, 2021

GAAP requires assets and liabilities carried at fair value to be classified and disclosed in one of the following categories:

•Level 1: Quoted market prices in active markets for identical assets or liabilities.

•Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.

•Level 3: Unobservable inputs that are not corroborated by market data.

The following methods and assumptions were used by the Company in estimating the fair values of its financial instruments. There were no transfers of assets or liabilities between levels in any period presented.

Financial Instrument

Fair Value
Level

Methods and Assumptions

Deferred compensation plan assets and liabilities

Level 1

The fair value of the Company’s nonqualified deferred compensation plan for certain executives and other highly compensated employees is based on the fair values of associated assets and liabilities, which are held in mutual funds and are based on the quoted market values of the securities held within the mutual funds.

Commodity derivative instruments

Level 2

The fair values of the Company’s commodity derivative instruments are based on current settlement values at each balance sheet date, which represent the estimated amounts the Company would have received or paid upon termination of these instruments. The Company’s credit risk related to the commodity derivative instruments is managed by requiring high standards for its counterparties and periodic settlements. The Company considers nonperformance risk in determining the fair values of commodity derivative instruments.

Long-term debt

Level 2

The carrying amounts of the Company’s variable rate debt approximate the fair values due to variable interest rates with short reset periods. The fair values of the Company’s fixed rate debt are based on estimated current market prices.

Acquisition related contingent consideration

Level 3

The fair value of the Company’s acquisition related contingent consideration is based on internal forecasts and the weighted average cost of capital (“WACC”) derived from market data.

The following tables summarize the carrying amounts and fair values by level of the Company’s deferred compensation plan assets and liabilities, commodity derivative instruments, long-term debt and acquisition related contingent consideration:


	April 2, 2021
(in thousands)	Carrying Amount		Total Fair Value		Fair Value Level 1		Fair Value Level 2		Fair Value Level 3
Assets:
Deferred compensation plan assets	$	52,595	$	52,595	$	52,595	$	—	$	—
Commodity derivative instruments	3,321		3,321		—		3,321		—
Liabilities:
Deferred compensation plan liabilities	52,595		52,595		52,595		—		—

Long-term debt	909,304		967,350		—		967,350		—
Acquisition related contingent consideration	435,746		435,746		—		—		435,746


	December 31, 2020
(in thousands)	Carrying Amount		Total Fair Value		Fair Value Level 1		Fair Value Level 2		Fair Value Level 3
Assets:
Deferred compensation plan assets	$	51,742	$	51,742	$	51,742	$	—	$	—
Commodity derivative instruments	2,473		2,473		—		2,473		—
Liabilities:
Deferred compensation plan liabilities	51,742		51,742		51,742		—		—
Long-term debt	940,465		1,015,700		—		1,015,700		—
Acquisition related contingent consideration	434,694		434,694		—		—		434,694

The acquisition related contingent consideration was valued using a probability weighted discounted cash flow model based on internal forecasts and the WACC derived from market data, which are considered Level 3 inputs. Each reporting period, the

Company adjusts its acquisition related contingent consideration liability related to the distribution territories to fair value by discounting future expected sub-bottling payments required under the CBA using the Company’s estimated WACC.

The future expected sub-bottling payments extend through the life of applicable distribution assets acquired from CCR, which is generally 40 years. As a result, the fair value of the acquisition related contingent consideration liability is impacted by the Company’s WACC, management’s estimate of the amounts that will be paid in the future under the CBA, and current sub-bottling payments (all Level 3 inputs). Changes in any of these Level 3 inputs, particularly the underlying risk-free interest rate used to estimate the Company’s WACC, could result in material changes to the fair value of the acquisition related contingent consideration liability and could materially impact the amount of non-cash expense (or income) recorded each reporting period.

The acquisition related contingent consideration liability is the Company’s only Level 3 asset or liability. A summary of the Level 3 activity is as follows:


	First Quarter
(in thousands)	2021		2020
Beginning balance - Level 3 liability	$	434,694	$	446,684
Payments of acquisition related contingent consideration	(10,046)		(10,452)
Reclassification to current payables	100		150
Increase in fair value	10,998		712
Ending balance - Level 3 liability	$	435,746	$	437,094

As of April 2, 2021 and March 29, 2020, discount rates of 7.9% and 7.4%, respectively, were utilized in the valuation of the Company’s acquisition related contingent consideration liability. The increase in the fair value of the acquisition related contingent consideration liability in the first quarter of 2021 and the first quarter of 2020 was primarily driven by higher projections of future cash flows in the distribution territories subject to sub-bottling fees, partially offset by an increase in the discount rate used to calculate fair value. These fair value adjustments were recorded in other expense, net in the condensed consolidated statements of operations.

The anticipated amount the Company could pay annually under the acquisition related contingent consideration arrangements for the distribution territories subject to sub-bottling fees is expected to be in the range of $30 million to $54 million.

- 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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