Fair Value Measurements |
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Sep. 28, 2023 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Fair Value Disclosures [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Fair Value Measurements | Fair Value MeasurementsAs of September 28, 2023 and December 29, 2022, the Company had certain financial assets and liabilities on its Condensed Consolidated Balance Sheets that were required to be measured at fair value on a recurring or non-recurring basis. The estimated fair values of financial assets and liabilities such as cash and cash equivalents, receivables, prepaid expenses and other current assets, other assets, accounts payable, and accrued expenses and other current liabilities approximate their respective carrying values as reported within the Condensed Consolidated Balance Sheets. See Note 3, “Debt” for discussion of the fair value of the Company’s debt. Contingent Earn-out Liabilities
As of September 28, 2023, the contingent earn-out liabilities had an aggregate estimated fair value of $10.9 million (classified as Level 3 within the fair value hierarchy), of which $5.6 million is included in accrued expenses and other current liabilities and $5.3 million is included in other liabilities within the Condensed Consolidated Balance Sheets.
The table below summarizes changes in contingent earn-out liabilities during the thirty-nine weeks ended September 28, 2023.
(1) During the thirty-nine weeks ended September 28, 2023, the Company acquired a commercial flooring and installation supplies distributor for total consideration of $20.1 million, including $17.4 million of cash and contingent earn-out consideration with an estimated fair value of $2.8 million. The estimated fair value of the contingent earn-out consideration was determined using a discounted cash flow model which included significant unobservable inputs related to projected revenue and gross margin. Payout of the contingent consideration is subject to the acquired company’s achievement of certain annual gross margin and gross profit targets in fiscal years 2023 through 2025. A portion of these earn-out opportunities is payable each year only to the extent the applicable performance targets for that year are met, with a maximum potential payout of $4.0 million requiring that each of the individual annual targets are achieved. Refer to Note 10, “Acquisition” for additional information.
The $2.3 million net increase in the fair value of contingent earn-out liabilities during the thirty-nine weeks ended September 28, 2023 was recognized in general and administrative expense within the Condensed Consolidated Statements of Operations and Comprehensive Income.
Interest Rate Cap Contracts
Changes in interest rates impact the Company’s results of operations. In an effort to manage exposure to this risk, the Company enters into derivative contracts and may adjust its derivative portfolio as market conditions change.
The Company has outstanding interest rate cap contracts that are designated as cash flow hedges. The effective portion of the gain or loss on effective cash flow hedges is reported as a component of Accumulated Other Comprehensive Income (“AOCI”) and reclassified into earnings in the same period in which the hedged transaction affects earnings. The effective portion of the derivative represents the change in fair value of the hedge that offsets the change in fair value of the hedged item. To the extent the change in the fair value of the hedge does not perfectly offset the change in the fair value of the hedged item, the ineffective portion of the hedge is immediately recognized in earnings.
The Company’s outstanding interest rate cap contracts were valued primarily using Level 2 inputs based on data readily observable in public markets. The Company's interest rate cap contracts were negotiated with counterparties without going through a public exchange. Accordingly, the Company's fair value assessments for these derivative contracts gave consideration to the risk of counterparty default as well as the Company's own credit risk. As of September 28, 2023 and December 29, 2022, the total fair value of the Company's interest rate cap contracts was approximately $3.2 million and $5.9 million, respectively, which are presented as a component of AOCI within stockholders’ equity on the Condensed Consolidated Balance Sheets net of tax of $0.7 million and $1.4 million, respectively. During the thirteen and thirty-nine weeks ended September 28, 2023, the Company reclassified $1.4 million and $3.7 million, respectively, of interest income from AOCI into earnings related to the interest rate cap contracts. During the thirteen and thirty-nine weeks ended September 29, 2022, $0.2 million of interest income was reclassified from AOCI into earnings.
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