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Fair Value of Financial Instruments
3 Months Ended
Apr. 03, 2016
Fair Value Disclosures [Abstract]  
Fair Value of Financial Instruments

10.  Fair Value of Financial Instruments

The following methods and assumptions were used by the Company in estimating the fair values of its financial instruments:

 

Instrument

Method and Assumptions

Cash and Cash Equivalents,

Accounts Receivable and

Accounts Payable

 

Public Debt Securities

 

The fair values of cash and cash equivalents, accounts receivable and accounts payable approximate carrying values due to the short maturity of these items.

 

 

The fair values of the Company’s public debt securities are based on estimated current market prices.

 

Non-Public Variable Rate Debt

 

The carrying amounts of the Company’s variable rate borrowings approximate their fair values due to variable interest rates with short reset periods.

 

Deferred Compensation Plan Assets/Liabilities

The fair values of deferred compensation plan assets and liabilities, which are held in mutual funds, are based upon the quoted market value of the securities held within the mutual funds.

 

Acquisition Related Contingent Consideration

 

Derivative Financial Instruments

The fair values of acquisition related contingent consideration are based on internal forecasts and the weighted average cost of capital (“WACC”) derived from market data.

 

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

The carrying amounts and fair values of the Company's debt, deferred compensation plan assets and liabilities, commodity hedging agreements and acquisition related contingent consideration were as follows:

 

 

 

Apr. 3, 2016

 

 

Jan. 3, 2016

 

 

Mar. 29, 2015

 

 

 

Carrying

 

 

Fair

 

 

Carrying

 

 

Fair

 

 

Carrying

 

 

Fair

 

In Thousands

 

Amount

 

 

Value

 

 

Amount

 

 

Value

 

 

Amount

 

 

Value

 

Public debt securities

 

$

(620,036

)

 

$

(658,200

)

 

$

(619,628

)

 

$

(645,400

)

 

$

(371,696

)

 

$

(406,500

)

Non-public variable rate debt

 

 

(140,000

)

 

 

(140,000

)

 

 

0

 

 

 

0

 

 

 

(153,000

)

 

 

(153,000

)

Deferred compensation plan assets

 

 

21,407

 

 

 

21,407

 

 

 

20,755

 

 

 

20,755

 

 

 

19,720

 

 

 

19,720

 

Deferred compensation plan liabilities

 

 

(21,407

)

 

 

(21,407

)

 

 

(20,755

)

 

 

(20,755

)

 

 

(19,720

)

 

 

(19,720

)

Commodity hedging agreements-assets

 

 

70

 

 

 

70

 

 

 

3

 

 

 

3

 

 

 

643

 

 

 

643

 

Commodity hedging agreements-liabilities

 

 

(2,470

)

 

 

(2,470

)

 

 

(3,442

)

 

 

(3,442

)

 

 

0

 

 

 

0

 

Acquisition related contingent consideration

 

 

(177,933

)

 

 

(177,933

)

 

 

(136,750

)

 

 

(136,750

)

 

 

(98,505

)

 

 

(98,505

)

 

GAAP requires that assets and liabilities carried at fair value 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 table summarizes, by assets and liabilities, the valuation of the Company’s deferred compensation plan, commodity hedging agreements and acquisition related contingent consideration:

 

 

 

Apr. 3, 2016

 

 

Jan. 3, 2016

 

 

Mar. 29, 2015

 

In Thousands

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred compensation plan assets

 

$

21,407

 

 

 

 

 

 

 

 

 

 

$

20,755

 

 

 

 

 

 

 

 

 

 

$

19,720

 

 

 

 

 

 

 

 

 

Commodity hedging agreements

 

 

 

 

 

$

70

 

 

 

 

 

 

 

 

 

 

$

3

 

 

 

 

 

 

 

 

 

 

$

643

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred compensation plan liabilities

 

 

21,407

 

 

 

 

 

 

 

 

 

 

 

20,755

 

 

 

 

 

 

 

 

 

 

 

19,720

 

 

 

 

 

 

 

 

 

Commodity hedging agreements

 

 

 

 

 

 

2,470

 

 

 

 

 

 

 

 

 

 

 

3,442

 

 

 

 

 

 

 

 

 

 

 

0

 

 

 

 

 

Acquisition related contingent

   consideration

 

 

 

 

 

 

 

 

 

$

177,933

 

 

 

 

 

 

 

 

 

 

$

136,570

 

 

 

 

 

 

 

 

 

 

$

98,505

 

 

The fair value estimates of the Company’s debt are classified as Level 2.  Public debt securities are valued using quoted market prices of the debt or debt with similar characteristics.

The Company maintains a non-qualified deferred compensation plan for certain executives and other highly compensated employees.  The investment assets are held in mutual funds.  The fair value of the mutual funds is based on the quoted market value of the securities held within the funds (Level 1).  The related deferred compensation liability represents the fair value of the investment assets.

The fair values of the Company’s commodity hedging agreements are based upon rates from public commodity exchanges that are observable and quoted periodically over the full term of the agreement and are considered Level 2 items.

Under the CBAs the Company entered into in 2016, 2015 and 2014, the Company will make a quarterly sub-bottling payment to CCR on a continuing basis for the grant of exclusive rights to distribute, promote, market and sell specified covered beverages and beverage products in the acquired territories.  This acquisition related contingent consideration is 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 territory expansion to fair value by discounting future expected sub-bottling payments required under the CBAs using the Company’s estimated WACC. These future expected sub-bottling payments extend through the life of the related distribution assets acquired in each expansion territory, 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 CBAs, 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 and could materially impact the amount of noncash expense (or income) recorded each reporting period.

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

 

 

 

First Quarter

 

In Thousands

 

2016

 

 

2015

 

Opening balance

 

$

136,570

 

 

$

46,850

 

Increase due to acquisitions

 

 

31,171

 

 

 

47,283

 

Payments/accruals

 

 

(6,959

)

 

 

(717

)

Fair value adjustment - (income) expense

 

 

17,151

 

 

 

5,089

 

Ending balance

 

$

177,933

 

 

$

98,505

 

As of April 3, 2016 and March 29, 2015, the Company has recorded a liability of $177.9 million and $98.5 million, respectively, to reflect the estimated fair value of the contingent consideration related to the future sub-bottling payments. The contingent consideration was valued using a probability weighted discounted cash flow model based on internal forecasts and the WACC derived from market data. The contingent consideration is reassessed and adjusted to fair value each quarter through other income (expense). During Q1 2016 and Q1 2015, the Company recorded an unfavorable fair value adjustment to the contingent consideration liability of $17.2 million and $5.1 million, respectively, primarily due to updated projections and a change in the risk-free interest rate.

 

The unfavorable fair value adjustment of the acquisition related contingent consideration for both Q1 2016 and Q1 2015, which was primarily due to updated projections and a change in the risk-free interest rate used to estimate the Company’s WACC, is recorded in other income (expense) on the Company’s consolidated statements of operations.

There were no transfers of assets or liabilities between Levels in any period presented.