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Fair Values of Financial Instruments
12 Months Ended
Dec. 30, 2018
Fair Value Disclosures [Abstract]  
Fair Values of Financial Instruments

15.

Fair Values of Financial Instruments

 

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

 

Method and Assumptions

Deferred compensation plan assets and liabilities

 

Level 1

 

The fair value of the Company’s non-qualified 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 value of the securities held within the mutual funds.

Commodity hedging agreements

 

Level 2

 

The fair values of 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. The Company’s 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.

Non-public variable rate debt

 

Level 2

 

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

Non-public fixed rate debt

 

Level 2

 

The fair values of the Company’s non-public fixed rate debt are based on estimated current market prices.

Public debt securities

 

Level 2

 

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

Acquisition related contingent consideration

 

Level 3

 

The fair values of acquisition related contingent consideration are based on internal forecasts and the WACC derived from market data.

 

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

 

 

 

December 30, 2018

 

 

 

Carrying

 

 

Total

 

 

Fair Value

 

 

Fair Value

 

 

Fair Value

 

(in thousands)

 

Amount

 

 

Fair Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred compensation plan assets

 

$

33,160

 

 

$

33,160

 

 

$

33,160

 

 

$

-

 

 

$

-

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred compensation plan liabilities

 

 

33,160

 

 

 

33,160

 

 

 

33,160

 

 

 

-

 

 

 

-

 

Commodity hedging agreements

 

 

10,305

 

 

 

10,305

 

 

 

-

 

 

 

10,305

 

 

 

-

 

Non-public variable rate debt

 

 

372,074

 

 

 

372,500

 

 

 

-

 

 

 

372,500

 

 

 

-

 

Non-public fixed rate debt

 

 

274,717

 

 

 

261,200

 

 

 

-

 

 

 

261,200

 

 

 

-

 

Public debt securities

 

 

457,612

 

 

 

455,400

 

 

 

-

 

 

 

455,400

 

 

 

-

 

Acquisition related contingent consideration

 

 

382,898

 

 

 

382,898

 

 

 

-

 

 

 

-

 

 

 

382,898

 

 

 

 

December 31, 2017

 

 

 

Carrying

 

 

Total

 

 

Fair Value

 

 

Fair Value

 

 

Fair Value

 

(in thousands)

 

Amount

 

 

Fair Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred compensation plan assets

 

$

33,166

 

 

$

33,166

 

 

$

33,166

 

 

$

-

 

 

$

-

 

Commodity hedging agreements

 

 

4,420

 

 

 

4,420

 

 

 

-

 

 

 

4,420

 

 

 

-

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred compensation plan liabilities

 

 

33,166

 

 

 

33,166

 

 

 

33,166

 

 

 

-

 

 

 

-

 

Non-public variable rate debt

 

 

506,398

 

 

 

507,000

 

 

 

-

 

 

 

507,000

 

 

 

-

 

Non-public fixed rate debt

 

 

124,829

 

 

 

126,400

 

 

 

-

 

 

 

126,400

 

 

 

-

 

Public debt securities

 

 

456,791

 

 

 

475,100

 

 

 

-

 

 

 

475,100

 

 

 

-

 

Acquisition related contingent consideration

 

 

381,291

 

 

 

381,291

 

 

 

-

 

 

 

-

 

 

 

381,291

 

 

Under the CBA, the Company is required to make quarterly sub-bottling payments 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 distribution territories acquired in the System Transformation, excluding territories the Company acquired in an exchange transaction. 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 distribution territories to fair value by discounting future expected sub-bottling payments required under the CBA using the Company’s estimated WACC.

 

These future expected sub-bottling payments extend through the life of the related distribution assets acquired in each distribution 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 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 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 Level 3 activity is as follows:

 

 

 

Fiscal Year

 

(in thousands)

 

2018

 

 

2017

 

Opening balance - Level 3 liability

 

$

381,291

 

 

$

253,437

 

Increase due to System Transformation Transactions acquisitions(1)

 

 

-

 

 

 

128,880

 

Measurement period adjustments(2)

 

 

813

 

 

 

14,826

 

Payment of acquisition related contingent consideration

 

 

(24,683

)

 

 

(16,738

)

Reclassification to current payables

 

 

(3,290

)

 

 

(2,340

)

Unfavorable fair value adjustment

 

 

28,767

 

 

 

3,226

 

Ending balance - Level 3 liability

 

$

382,898

 

 

$

381,291

 

 

(1)

Increase due to System Transformation Transactions acquisitions includes an increase in the acquisition related contingent consideration of $62.5 million in 2017 from the opening balance sheets for the distribution territories and regional manufacturing facilities acquired in the System Transformation during 2017, as disclosed in the financial statements in the Company’s filed periodic reports. These adjustments are for post-closing adjustments made in accordance with the terms and conditions of the applicable asset purchase agreement or asset exchange agreement for each System Transformation Transaction.

(2)

Measurement period adjustments relate to post-closing adjustments made in accordance with the terms and conditions of the applicable asset purchase agreement or asset exchange agreement for each System Transformation Transaction.

 

The fair value adjustments to the acquisition related contingent consideration liability during 2018 were primarily driven by cash payments and changes to the projected future operating results of the distribution territories acquired as part of the System Transformation subject to sub-bottling fees, partially offset by an increase in the risk-free interest rate. The fair value adjustment to the acquisition related contingent consideration liability during 2017 was primarily driven by final settlement of cash purchase prices for previously closed System Transformation Transactions and a decrease in the risk-free interest rate, partially offset by a benefit resulting from the Tax Act.

 

The amount the Company could pay annually under the acquisition related contingent consideration arrangements for the System Transformation Transactions is expected to be in the range of $25 million to $48 million.