Fair Value Measurement
|9 Months Ended|
Oct. 06, 2013
|Fair Value Measurement|
|Fair Value Measurement||
8. Fair Value Measurement
Fair value measurements are made under a three-tier fair value hierarchy, which prioritizes the inputs used in the measuring of fair value:
Level 1: Observable inputs that reflect unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level 2: Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.
Level 3: Inputs that are generally unobservable. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value.
Assets and Liabilities Measured at Fair Value
The derivative liability associated with the interest rate swap is considered to be a Level 2 instrument. The interest rate swap was a standard cash flow hedge with a fair value estimated using industry-standard valuation models. Such models project future cash flows and discount the future amounts to a present value using market-based observable inputs, including interest rate curves. See Note 7, Derivative and Other Comprehensive Income, for the discussion of the derivative liability.
The Company’s deferred compensation plan is a nonqualified deferred compensation plan which allows highly compensated employees to defer a portion of their base salary and variable compensation each plan year. In the periods prior to the third quarter 2013, the Company’s plan administrator purchased Company-owned whole-life insurance contracts on certain team members to offset the deferred compensation plan obligation. During the third quarter 2013, the Company liquidated these insurance policies and invested the $3.3 million cash realized from the liquidation in a rabbi trust. Assets of the rabbi trust are invested in certain mutual funds that cover an investment spectrum range from equities to money market instruments. At October 6, 2013, these mutual funds have published market prices and are reported at fair value of $3.4 million, using Level 1 inputs. The fair value of the trust assets is included in other assets, net. At October 6, 2013, the liability for the deferred compensation plan is recorded at the fair value of the rabbi trust assets and is included in other non-current liabilities.
Prior to the third quarter 2013, the carrying value of both the liability for the deferred compensation plan and associated life insurance policy were equal to their fair value. These agreements were required to be measured at fair value on a recurring basis and were valued using Level 2 inputs. At December 30, 2012, a liability for participant contributions and investment income thereon of $3.0 million was included in other non-current liabilities. The cash surrender value of these policies was $2.9 million and was included in other assets, net.
As of October 6, 2013, the Company had no financial assets or liabilities that were measured using Level 3 inputs. The Company also had no non-financial assets or liabilities that were required to be measured at fair value on a recurring basis.
The following table presents our assets and liabilities that are fair valued on a recurring basis as of October 6, 2013 and December 30, 2012 (in thousands):
Disclosures of Fair Value of Other Assets and Liabilities
The Company’s liabilities under its credit facility and capital leases are carried at historical cost in the accompanying consolidated balance sheet. For disclosure purposes, the Company estimated the fair value of the credit facility and capital lease obligations using discounted cash flow analysis based on market rates obtained from independent third parties for similar types of debt. Both the credit facility and the Company’s capital lease obligations are considered to be Level 2 instruments. The carrying value of the Company’s credit facility as of October 6, 2013, and December 30, 2012, was $81.5 million and $125.0 million. The fair value of the Company’s credit facility as of October 6, 2013, and December 30, 2012, was approximately $81.4 million and $124.4 million. There are $9.4 million of outstanding borrowings recorded for the Company’s capital leases as of October 6, 2013, which have an estimated fair value of $11.0 million. At December 30, 2012, the carrying amount of the Company’s capital lease obligations was $10.0 million, and the fair value was $11.8 million.
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.
Reference 1: http://www.xbrl.org/2003/role/presentationRef