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Fair Value Measurements

3 Months Ended

Mar. 29, 2020

Fair value is the price that would be received for an asset or paid to transfer a liability, or the exit price, in an orderly transaction between market participants on the measurement date. Fair value is categorized into one of the following three levels based on the lowest level of significant input:



Level 1		Unadjusted quoted market prices in active markets for identical assets or liabilities
Level 2		Observable inputs available at measurement date other than quoted prices included in Level 1
Level 3		Unobservable inputs that cannot be corroborated by observable market data

Fair Value Measurements on a Recurring Basis - The following table summarizes the Company’s financial assets and liabilities measured at fair value by hierarchy level on a recurring basis as of the periods indicated:



	MARCH 29, 2020						DECEMBER 29, 2019
(dollars in thousands)	TOTAL		LEVEL 1		LEVEL 2		TOTAL		LEVEL 1		LEVEL 2
Assets:
Cash equivalents:
Fixed income funds	$	2,324	$	2,324	$	—	$	1,037	$	1,037	$	—
Money market funds	7,046		7,046		—		12,752		12,752		—
Total asset recurring fair value measurements	$	9,370	$	9,370	$	—	$	13,789	$	13,789	$	—

Liabilities:
Accrued and other current liabilities:
Derivative instruments - interest rate swaps	$	13,335	$	—	$	13,335	$	7,174	$	—	$	7,174
Other long-term liabilities:
Derivative instruments - interest rate swaps	26,758		—		26,758		16,835		—		16,835
Total liability recurring fair value measurements	$	40,093	$	—	$	40,093	$	24,009	$	—	$	24,009

Fair value of each class of financial instrument is determined based on the following:



FINANCIAL INSTRUMENT		METHODS AND ASSUMPTIONS
Fixed income funds and Money market funds		Carrying value approximates fair value because maturities are less than three months.
Derivative instruments		The Company’s derivative instruments include interest rate swaps. Fair value measurements are based on the contractual terms of the derivatives and use observable market-based inputs. The interest rate swaps are valued using a discounted cash flow analysis on the expected cash flows of each derivative using observable inputs including interest rate curves and credit spreads. The Company also considers its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. As of March 29, 2020 and December 29, 2019, the Company has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives.

Fair Value Measurements on a Nonrecurring Basis - Assets and liabilities that are measured at fair value on a nonrecurring basis relate primarily to property, fixtures and equipment, operating lease right-of-use assets, goodwill and other intangible assets, which are remeasured when carrying value exceeds fair value. Carrying value after impairment approximates fair value. The following table summarizes the Company’s assets measured at fair value by hierarchy level on a nonrecurring basis, for the periods indicated:



	THIRTEEN WEEKS ENDED
	MARCH 29, 2020				MARCH 31, 2019
(dollars in thousands)	CARRYING VALUE		TOTAL IMPAIRMENT		CARRYING VALUE		TOTAL IMPAIRMENT
Assets held for sale (1)	$	1,182	$	75	$	2,149	$	215
Operating lease right-of-use assets (2)	55,644		19,563		2,242		596
Property, fixtures and equipment (3)	21,693		18,398		490		2,671
Goodwill and other assets (4)	1,044		2,388		—		—
	$	79,563	$	40,424	$	4,881	$	3,482

____________________


(1)	Assets generally measured using third-party market appraisals or executed sales contracts (Level 2).


(2)	Carrying values measured using Level 3 inputs to estimate fair value totaled $55.6 million and $2.0 million during the thirteen weeks ended March 29, 2020 and March 31, 2019, respectively. All other assets were valued using Level 2 inputs. Third-party market appraisals (Level 2) and discounted cash flow models (Level 3) were used to estimate fair value.


(3)	Carrying values measured using Level 3 inputs to estimate fair value totaled $19.2 million and $0.5 million during the thirteen weeks ended March 29, 2020 and March 31, 2019, respectively. All other assets were valued using Level 2 inputs. Third-party market appraisals (Level 2) and discounted cash flow models (Level 3) were used to estimate fair value.


(4)	All assets measured using the quoted market value of comparable assets (Level 2).

See Note 4 - Impairments, Exit Costs and Disposals for information regarding impairment charges resulting from the fair value measurement performed on a nonrecurring basis during the thirteen weeks ended March 29, 2020. Projected future cash flows, including discount rate and growth rate assumptions, are derived from current economic conditions, expectations of management and projected trends of current operating results. As a result, the Company has determined that the majority of the inputs used to value its long-lived assets held and used are unobservable inputs that fall within Level 3 of the fair value hierarchy.

In assessment of impairment for operating locations, the Company determined the fair values of individual operating locations using an income approach, which required discounting projected future cash flows. When determining the stream of projected future cash flows associated with an individual operating location, management made assumptions, including highest and best use and inputs from restaurant operations, where necessary, and about key variables including the following unobservable inputs: revenue growth rates, controllable and uncontrollable expenses, and asset residual values. In order to calculate the present value of those future cash flows, the Company discounted cash flow estimates at its weighted-average cost of capital applicable to the country in which the measured assets reside.

The following table presents quantitative information related to certain unobservable inputs used in the Company’s Level 3 fair value measurements of Operating lease right-of-use assets and Property, fixtures and equipment for the impairment losses incurred during the period indicated:



	THIRTEEN WEEKS ENDED
UNOBSERVABLE INPUTS	MARCH 29, 2020
Weighted-average cost of capital	10.4%
Long-term growth rate	1.5%	to	2.0%

Interim Disclosures about Fair Value of Financial Instruments - The Company’s non-derivative financial instruments consist of cash equivalents, accounts receivable, accounts payable and current and long-term debt. The fair values of

cash equivalents, accounts receivable and accounts payable approximate their carrying amounts reported on its Consolidated Balance Sheets due to their short duration.

Debt is carried at amortized cost; however, the Company estimates the fair value of debt for disclosure purposes. The following table includes the carrying value and fair value of the Company’s debt by hierarchy level as of the periods indicated:



	MARCH 29, 2020				DECEMBER 29, 2019
	CARRYING VALUE		FAIR VALUE LEVEL 2		CARRYING VALUE		FAIR VALUE LEVEL 2
(dollars in thousands)	CARRYING VALUE		FAIR VALUE LEVEL 2		CARRYING VALUE		FAIR VALUE LEVEL 2
Senior Secured Credit Facility:
Term loan A	$	443,750	$	397,156	$	450,000	$	450,563
Revolving credit facility	$	975,000	$	832,777	$	599,000	$	599,000

- 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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