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Fair Values of Financial Instruments

12 Months Ended

Dec. 29, 2019

16.	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.

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

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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.
Pension plan assets held in trust funds	Level 1	The fair value of the Company’s pension plan assets held in trust funds is based on the fair values of the underlying investments, which are actively managed equity securities and fixed income investment vehicles that are valued at the net asset value per share multiplied by the number of shares held.
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, pension plan assets held in trust funds, commodity hedging agreements, debt and acquisition related contingent consideration:

	December 29, 2019
	Carrying		Total		Fair Value		Fair Value		Fair Value
(in thousands)	Amount		Fair Value		Level 1		Level 2		Level 3
Assets:
Deferred compensation plan assets	$	42,543	$	42,543	$	42,543	$	-	$	-
Pension plan assets held in trust funds		276,085		276,085		276,085		-		-
Commodity hedging agreements		1,007		1,007		-		1,007		-
Liabilities:
Deferred compensation plan liabilities		42,543		42,543		42,543		-		-
Commodity hedging agreements		1,174		1,174		-		1,174		-
Non-public variable rate debt		307,250		307,500		-		307,500		-
Non-public fixed rate debt		374,723		383,900		-		383,900		-
Public debt securities		347,947		367,300		-		367,300		-
Acquisition related contingent consideration		446,684		446,684		-		-		446,684

	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

The 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.

The future expected sub-bottling payments extend through the life of the applicable distribution assets acquired in each System Transformation transaction, 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 income or expense 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)	2019			2018
Beginning balance - Level 3 liability	$	382,898		$	381,291
Measurement period adjustments⁽¹⁾		-			813
Payment of acquisition related contingent consideration		(27,182	)		(24,683	)
Reclassification to current payables		(1,820	)		(3,290	)
Increase in fair value		92,788			28,767
Ending balance - Level 3 liability	$	446,684		$	382,898

⁽¹⁾

Measurement period adjustments relate to post-closing adjustments made in accordance with the terms and conditions of the applicable asset purchase agreement for distribution territories acquired by the Company in April 2017 and October 2017 as part of the System Transformation. All final post-closing adjustments for these transactions were completed during 2018.

The increase in the fair value of the acquisition related contingent consideration liability during 2019 was primarily driven by changes in future cash flow projections of the distribution territories subject to sub-bottling fees and a decrease in the discount rate used to calculate fair value. The increase in the fair value of the acquisition related contingent consideration liability during 2018 was primarily driven by changes in future cash flow projections of the distribution territories subject to sub-bottling fees. These fair value adjustments were recorded in other expense, net in the consolidated statements of operations.

The anticipated amount the Company could pay annually under acquisition related contingent consideration arrangements is expected to be in the range of $27 million to $51 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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