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Floor & Decor Holdings, Inc. - Quarter Report: 2019 September (Form 10-Q)

Table of Contents

m

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 26, 2019

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from           to         

Commission file number 001-38070

Floor & Decor Holdings, Inc.

(Exact name of registrant as specified in its charter)

Delaware

27-3730271

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

2500 Windy Ridge Parkway SE

Atlanta, Georgia

30339

(Address of principal executive offices)

(Zip Code)

(404471-1634

2233 Lake Park Drive

Smyrna, Georgia 30080

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year,

if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Class A common stock, $0.001 par value per share

FND

New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer

Accelerated Filer

Non-Accelerated Filer

Smaller Reporting Company

Emerging Growth Company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No  

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class

Outstanding at October 30, 2019

Class A common stock, $0.001 par value per share

101,057,968

Table of Contents

Table of Contents

Page

Part I – Financial Information

3

Item 1.

Financial Statements

3

Condensed Consolidated Balance Sheets (Unaudited)

3

Condensed Consolidated Statements of Operations and Comprehensive Income (Unaudited)

4

Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)

5

Condensed Consolidated Statements of Cash Flows (Unaudited)

6

Notes to Condensed Consolidated Financial Statements

7

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

14

Forward-Looking Statements

14

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

24

Item 4.

Controls and Procedures

25

Part II – Other Information

26

Item 1.

Legal Proceedings

26

Item 1A.

Risk Factors

26

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

26

Item 3.

Defaults Upon Senior Securities

26

Item 4.

Mine Safety Disclosures

26

Item 5.

Other Information

26

Item 6.

Exhibits

28

Signatures

2

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

Floor & Decor Holdings, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited)

    

As of

    

As of

September 26,

December 27,

in thousands, except for share and per share data

2019

2018

Assets

 

  

 

  

Current assets:

 

  

 

  

Cash and cash equivalents

$

84,106

$

644

Income taxes receivable

9,249

4,324

Receivables, net

 

45,284

 

67,527

Inventories, net

 

483,957

 

471,014

Prepaid expenses and other current assets

 

21,113

 

15,949

Total current assets

 

643,709

 

559,458

Fixed assets, net

 

425,498

 

328,366

Right-of-use assets

743,517

Intangible assets, net

 

109,307

 

109,330

Goodwill

 

227,447

 

227,447

Other assets

 

7,395

 

9,490

Total long-term assets

 

1,513,164

 

674,633

Total assets

$

2,156,873

$

1,234,091

Liabilities and stockholders’ equity

 

Current liabilities:

 

Current portion of term loans

$

$

3,500

Current portion of lease liabilities

53,117

Trade accounts payable

 

318,350

 

313,503

Accrued expenses and other current liabilities

 

112,141

 

82,038

Deferred revenue

 

8,824

 

5,244

Total current liabilities

 

492,432

 

404,285

Term loans

 

143,288

 

141,834

Deferred rent

 

 

36,980

Lease liabilities

775,838

Deferred income tax liabilities, net

 

20,005

 

26,838

Tenant improvement allowances

 

 

37,295

Other liabilities

 

2,270

 

2,550

Total long-term liabilities

 

941,401

 

245,497

Total liabilities

 

1,433,833

 

649,782

Commitments and Contingencies (Note 5)

 

 

Stockholders’ equity

 

 

Capital stock:

 

 

Preferred stock, $0.001 par value; 10,000,000 shares authorized; 0 shares issued and outstanding at September 26, 2019 and December 27, 2018

 

 

Common stock Class A, $0.001 par value; 450,000,000 shares authorized; 101,025,978 shares issued and outstanding at September 26, 2019 and 97,588,539 issued and outstanding at December 27, 2018

 

101

 

98

Common stock Class B, $0.001 par value; 10,000,000 shares authorized; 0 shares issued and outstanding at September 26, 2019 and December 27, 2018

 

 

Common stock Class C, $0.001 par value; 30,000,000 shares authorized; 0 shares issued and outstanding at September 26, 2019 and December 27, 2018

 

 

Additional paid-in capital

 

364,626

 

340,462

Accumulated other comprehensive income (loss), net

 

(361)

 

186

Retained earnings

 

358,674

 

243,563

Total stockholders’ equity

 

723,040

 

584,309

Total liabilities and stockholders’ equity

$

2,156,873

$

1,234,091

See accompanying notes to condensed consolidated financial statements.

3

Table of Contents

Floor & Decor Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations and Comprehensive Income

(Unaudited)

    

Thirteen Weeks Ended

    

Thirty-nine Weeks Ended

September 26,

September 27,

September 26,

September 27,

in thousands, except for per share data

2019

    

2018

2019

    

2018

Net sales

$

521,093

$

435,882

$

1,518,454

$

1,273,109

Cost of sales

 

307,305

 

257,656

 

885,469

 

751,859

Gross profit

 

213,788

 

178,226

 

632,985

 

521,250

Operating expenses:

 

 

 

 

Selling and store operating

 

136,958

 

109,182

 

398,984

 

320,375

General and administrative

 

37,246

 

26,477

 

98,364

 

74,995

Pre-opening

 

8,184

 

8,330

 

18,580

 

17,892

Total operating expenses

 

182,388

 

143,989

 

515,928

 

413,262

Operating income

 

31,400

 

34,237

 

117,057

 

107,988

Interest expense

 

1,978

 

2,171

 

7,122

 

6,100

Income before income taxes

 

29,422

 

32,066

 

109,935

 

101,888

(Benefit) provision for income taxes

 

(11,552)

 

5,498

 

(5,355)

 

3,603

Net income

$

40,974

$

26,568

$

115,290

$

98,285

Change in fair value of hedge instruments, net of tax

131

(547)

 

796

Total comprehensive income

$

40,974

$

26,699

$

114,743

$

99,081

Basic earnings per share

$

0.41

$

0.27

$

1.17

$

1.02

Diluted earnings per share

$

0.39

$

0.25

$

1.10

$

0.94

See accompanying notes to condensed consolidated financial statements.

4

Table of Contents

Floor & Decor Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited)

Accumulated

Common Stock

Additional

Other

Total

Class A

Paid-in

Comprehensive

Retained

Stockholders’

in thousands

  

Shares

  

Amount

  

Capital

  

Income (Loss)

  

Earnings

  

Equity

Balance, December 28, 2018

 

97,588

$

98

 

$

340,462

$

186

$

243,563

$

584,309

Stock based compensation expense

 

 

 

 

2,250

 

 

 

2,250

Exercise of stock options

 

348

 

 

 

1,776

 

 

 

1,776

Cumulative effect from adoption of ASU No. 2016-02

(179)

(179)

Shares issued under employee stock plans

 

61

 

 

 

1,419

 

 

 

1,419

Other comprehensive loss, net of tax

 

 

 

 

(334)

 

 

(334)

Net income

 

 

 

 

 

 

30,720

 

30,720

Balance, March 28, 2019

 

97,997

$

98

 

$

345,907

$

(148)

$

274,104

$

619,961

Stock based compensation expense

 

 

 

 

2,168

 

 

 

2,168

Exercise of stock options

1,090

1

5,375

5,376

Issuance of restricted stock awards

24

Other comprehensive loss, net of tax

(213)

(213)

Net income

 

 

 

 

 

 

43,596

 

43,596

Balance, June 27, 2019

 

99,111

$

99

 

$

353,450

$

(361)

$

317,700

$

670,888

Stock based compensation expense

 

 

 

 

2,242

 

 

 

2,242

Exercise of stock options

 

1,871

 

2

 

 

7,908

 

 

 

7,910

Shares issued under employee stock plans

43

1,026

1,026

Net income

 

 

 

 

 

 

40,974

 

40,974

Balance, September 26, 2019

101,025

$

101

 

$

364,626

$

(361)

$

358,674

$

723,040

Accumulated

Common Stock

Additional

Other

Total

Class A

Paid-in

Comprehensive

Retained

Stockholders’

in thousands

  

Shares

  

Amount

  

Capital

  

Income (Loss)

  

Earnings

  

Equity

Balance, December 29, 2017

 

95,509

$

96

 

$

323,419

$

(205)

$

119,550

$

442,860

Stock based compensation expense

 

 

 

 

1,415

 

 

 

1,415

Exercise of stock options

 

585

 

 

 

3,195

 

 

 

3,195

Cumulative effect from adoption of ASU No. 2014-09

 

 

 

 

7,826

 

7,826

Other comprehensive gain, net of tax

 

 

 

 

 

430

 

 

430

Net income

 

 

 

 

 

31,871

 

31,871

Balance, March 29, 2018

 

96,094

$

96

 

$

328,029

$

225

$

159,247

$

487,597

Stock based compensation expense

 

 

 

 

1,536

 

 

 

1,536

Exercise of stock options

 

1,124

 

1

 

 

5,459

 

 

 

5,460

Other comprehensive gain, net of tax

 

 

 

235

 

 

235

Net income

 

 

 

 

 

 

39,846

 

39,846

Balance, June 28, 2018

97,218

$

97

$

335,024

$

460

$

199,093

$

534,674

Stock based compensation expense

 

 

 

1,659

 

 

 

1,659

Exercise of stock options

 

108

 

 

 

644

 

 

 

644

Other comprehensive gain, net of tax

 

 

 

 

 

131

 

 

131

Net income

 

 

 

 

 

 

26,568

 

26,568

Balance, September 27, 2018

 

97,326

$

97

 

$

337,327

$

591

$

225,661

$

563,676

See accompanying notes to condensed consolidated financial statements.

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Table of Contents

Floor & Decor Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

    

Thirty-nine Weeks Ended

September 26,

September 27,

in thousands

2019

2018

Operating activities

 

  

 

  

Net income

$

115,290

$

98,285

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

Depreciation and amortization

 

53,297

 

37,043

Loss on asset impairments and disposals

4,111

Amortization of tenant improvement allowances

 

 

(3,277)

Deferred income taxes

 

(6,644)

 

2,605

Interest cap derivative contracts

323

(878)

Stock based compensation expense

 

6,660

 

4,611

Changes in operating assets and liabilities:

 

 

Receivables, net

 

6,166

 

(1,627)

Inventories, net

 

(12,943)

 

13,685

Trade accounts payable

 

4,847

 

(20,945)

Accrued expenses and other current liabilities

 

26,209

 

(2,352)

Income taxes

 

(4,871)

 

312

Deferred revenue

 

3,579

 

2,806

Deferred rent

 

 

7,340

Tenant improvement allowances

 

 

11,974

Other, net

 

13,570

 

(5,883)

Net cash provided by operating activities

 

209,594

 

143,699

Investing activities

 

  

 

  

Purchases of fixed assets

 

(141,015)

 

(109,395)

Net cash used in investing activities

 

(141,015)

 

(109,395)

Financing activities

 

  

 

  

Borrowings on revolving line of credit

 

100,100

 

204,050

Payments on revolving line of credit

 

(100,100)

 

(245,050)

Payments on term loans

 

(2,625)

 

(2,625)

Proceeds from exercise of stock options

 

15,063

 

9,299

Proceeds from employee stock purchase plan

2,445

Net cash provided by (used in) financing activities

 

14,883

 

(34,326)

Net increase (decrease) in cash and cash equivalents

 

83,462

 

(22)

Cash and cash equivalents, beginning of the period

 

644

 

556

Cash and cash equivalents, end of the period

$

84,106

$

534

Supplemental disclosures of cash flow information

 

 

  

Buildings and equipment acquired under operating leases

$

177,953

$

Cash paid for interest

$

5,726

$

5,732

Cash paid for income taxes

$

12,125

$

722

Fixed assets accrued at the end of the period

$

23,394

$

14,500

See accompanying notes to condensed consolidated financial statements.

6

Table of Contents

Floor & Decor Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Summary of Significant Accounting Policies

Nature of Business

Floor & Decor Holdings, Inc., together with its subsidiaries (the “Company,” “we,” “our” or “us”) is a highly differentiated, rapidly growing specialty retailer of hard surface flooring and related accessories. We offer a broad in-stock assortment of tile, wood, laminate, vinyl, and natural stone flooring along with decorative and installation accessories at everyday low prices. Our stores appeal to a variety of customers, including professional installers and commercial businesses (“Pro”), Do-it-Yourself customers (“DIY”) and customers who buy our products for professional installation (“Buy-it-Yourself” or “BIY”). We operate within one reportable segment.

As of September 26, 2019, the Company, through its wholly owned subsidiary, Floor and Decor Outlets of America, Inc. (“F&D”), operates 113 warehouse-format stores, which average 76,000 square feet, and one small-format standalone design center in 28 states, as well as three distribution centers and an e-commerce site, FloorandDecor.com.

Fiscal Year

The Company’s fiscal year is the 52- or 53-week period ending on the Thursday on or preceding December 31st. Fiscal years ending December 26, 2019 (“fiscal 2019”) and December 27, 2018 (“fiscal 2018”) include 52 weeks. When a 53-week fiscal year occurs, we report the additional week at the end of the fiscal fourth quarter. 52-week fiscal years consist of thirteen-week periods in each quarter of the fiscal year.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. These financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information. The Condensed Consolidated Balance Sheet as of December 27, 2018 has been derived from the audited Consolidated Balance Sheet for the fiscal year then ended. The interim condensed consolidated financial statements should be read together with the audited consolidated financial statements and related footnote disclosures included in the Company’s Annual Report on Form 10-K for fiscal 2018, filed with the Securities and Exchange Commission (the “SEC”) on February 25, 2019 (the “Annual Report”).

Management believes the accompanying unaudited condensed consolidated financial statements reflect all normal recurring adjustments considered necessary for a fair statement of results for the interim periods presented.

Results of operations for the thirteen and thirty-nine weeks ended September 26, 2019 and September 27, 2018 are not necessarily indicative of the results to be expected for the full years.

There have been no updates to our Significant Accounting Policies since the Annual Report, except for the accounting policy changes in connection with the newly adopted lease accounting standard outlined in Note 5 to our Condensed Consolidated Financial Statements included in this Quarterly Report. For more information regarding our Significant Accounting Policies and Estimates, see the “Summary of Significant Accounting Policies” section of “Item 8. Financial Statements and Supplementary Data” of our Annual Report.

Recently Issued Accounting Pronouncements

There have been no updates to Recently Issued Accounting Pronouncements that have yet to be adopted since the Annual Report. For information regarding Recently Issued Accounting Pronouncements, see the “Summary of Significant Accounting Policies” section of “Item 8. Financial Statements and Supplementary Data” of our Annual Report.

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Recently Adopted Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-02, “Leases (Topic 842).” ASU No. 2016-02 requires that lessees recognize lease assets and lease liabilities on the balance sheet with an option to exclude short-term leases (leases with terms of 12 months or less). The guidance also requires disclosures about the amount, timing, and uncertainty of cash flows arising from leases. We adopted the ASU in the first quarter of fiscal 2019 using the modified retrospective approach. The cumulative effect adjustment upon adoption resulted in an immaterial opening balance sheet reduction to retained earnings. The adoption of ASU No. 2016-02 had a material impact on the Company’s Condensed Consolidated Balance Sheets but did not have a material impact on the Company’s Condensed Consolidated Statements of Operations and Comprehensive Income or Condensed Consolidated Statements of Cash Flows. Refer to Note 5 to our Condensed Consolidated Financial Statements included in this Quarterly Report for further details.

2. Revenues

Disaggregated Revenue

The following table presents the net sales of each major product category (in thousands):

Thirteen Weeks Ended

Thirteen Weeks Ended

September 26, 2019

September 27, 2018

    

    

    

% of

    

    

% of

Product Category

Net Sales

Net Sales

Net Sales

Net Sales

Tile

$

133,340

 

26

%  

$

119,988

 

28

%

Laminate / Luxury Vinyl Plank

 

116,037

 

22

 

83,667

 

19

Decorative Accessories

 

100,357

 

19

 

82,814

 

19

Installation Materials and Tools

 

88,197

 

17

 

69,412

 

16

Wood

 

51,807

 

10

 

49,005

 

11

Natural Stone

 

31,511

 

6

 

28,025

 

6

Other (1)

 

(156)

 

 

2,971

 

1

Total

$

521,093

 

100

%  

$

435,882

 

100

%

Thirty-nine Weeks Ended

Thirty-nine Weeks Ended

September 26, 2019

September 27, 2018

    

    

    

% of

    

    

% of

Product Category

Net Sales

Net Sales

Net Sales

Net Sales

Tile

$

394,969

 

26

%  

$

360,798

 

28

%

Laminate / Luxury Vinyl Plank

 

321,757

 

21

 

227,995

 

18

Decorative Accessories

 

292,391

 

19

 

244,279

 

19

Installation Materials and Tools

 

256,498

 

17

 

201,194

 

16

Wood

 

153,799

 

10

 

144,401

 

11

Natural Stone

 

95,301

 

6

 

85,564

 

7

Other (1)

 

3,739

 

1

 

8,878

 

1

Total

$

1,518,454

 

100

%  

$

1,273,109

 

100

%

(1) Other includes delivery revenue less adjustments for deferred revenue, sales returns reserves, rewards under our Pro Premier Loyalty program, and other revenue related adjustments that are not allocated on a product-level basis.

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3. Debt

Fair Value of Debt

Market risk associated with our fixed and variable rate long-term debt relates to the potential change in fair value and negative impact to future earnings, respectively, from a change in interest rates. The aggregate fair value of debt is based primarily on our estimates of interest rates, maturities, credit risk, and underlying collateral and is classified as Level 3 within the fair value hierarchy. At September 26, 2019 and December 27, 2018, the carrying amounts and fair values of our debt were as follows:

    

September 26,

    

December 27,

in thousands

2019

2018

Total debt at par value

$

146,375

$

149,000

Less: unamortized discount and debt issuance costs

 

3,087

 

3,666

Net carrying amount

$

143,288

$

145,334

Fair value

$

145,643

$

147,883

4. Income Taxes

Effective tax rates for the thirteen and thirty-nine weeks ended September 26, 2019 and September 27, 2018 were based on the Company’s forecasted annualized effective tax rates and were adjusted for discrete items, such as stock option exercises, that occurred within each period. Our effective income tax rates were (39.3)% and 17.1% for the thirteen weeks ended September 26, 2019 and September 27, 2018, respectively. The lower effective tax rate for the current period was primarily due to the recognition of higher excess tax benefits related to stock options exercised than in the corresponding prior year period

Our effective income tax rates were (4.9)% and 3.5% for the thirty-nine weeks ended September 26, 2019 and September 27, 2018, respectively. The lower effective tax rate for the thirty-nine weeks ended September 26, 2019 was primarily due to the recognition of higher excess tax benefits related to stock options exercised than in the corresponding prior year period.

5. Commitments and Contingencies

Lease Commitments

In the first quarter of fiscal 2019, we adopted ASU No. 2016-02, Leases (Topic 842), which requires that lessees recognize lease assets and lease liabilities for all leases on the balance sheet with an option to exclude short-term leases (leases with terms of 12 months or less), which we elected. We adopted ASU No. 2016-02 using the modified retrospective approach and elected the package of practical expedients to use in transition, which permitted us not to reassess, under the new standard, our prior conclusions about lease identification and lease classification. The cumulative effect adjustment upon adoption of ASU No. 2016-02 resulted in an immaterial adjustment to retained earnings. The adoption also resulted in the addition of $620.8 million of right-of-use assets and a corresponding $683.0 million of lease liabilities to our balance sheet, while eliminating deferred rent and tenant improvement allowances. Additionally, we do not separate lease and nonlease components of contracts.

The majority of our long-term operating lease agreements are for our corporate office, retail locations, and distribution centers, which expire in various years through 2040. The initial lease terms for these facilities range from 10-15 years, with the exception of two buildings which have 20-year initial lease terms. The majority of our building leases also include options to extend, which are factored into the recognition of their respective assets and liabilities when appropriate based on management’s assessment of the probability that the options will be exercised. Additionally, one building lease contains variable lease payments, which are determined based on a percentage of retail sales over a contractual level, and we sublease real estate within one distribution center to a third party. Certain of our lease agreements include escalating rents over the lease terms which, under Topic 842, results in rent being expensed on a straight-line basis over the life of the lease that commences on the date we have the right to control the property. Our lease agreements do not contain any residual value guarantees or restrictive covenants that would reasonably be expected to have a material impact on our business.

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When readily determinable, the rate implicit in the lease is used to discount lease payments to present value; however, substantially all of our leases do not provide a readily determinable implicit rate. If the rate implicit in the lease is not readily determinable, we use a third party to assist in the determination of a secured incremental borrowing rate, determined on a collateralized basis, to discount lease payments based on information available at lease commencement. The secured incremental borrowing rate is estimated based on yields obtained from Bloomberg for U.S. consumers with a BB- credit rating and is adjusted for collateralization as well as inflation.

Lease Position

The table below presents supplemental balance sheet information related to operating leases.

As of

in thousands, except lease term and discount rate

Classification

September 26, 2019

Assets

Building

Right-of-use assets

$

732,345

Equipment

Right-of-use assets

6,947

Land

Right-of-use assets

194

Software

Right-of-use assets

4,031

Total operating lease assets

$

743,517

Liabilities

 

Current

 

Building

Current portion of lease liabilities

$

47,747

Equipment

Current portion of lease liabilities

3,303

Land

Current portion of lease liabilities

85

Software

Current portion of lease liabilities

1,982

Total current operating lease liabilities

53,117

Noncurrent

Building

Lease liabilities

769,510

Equipment

Lease liabilities

4,066

Land

Lease liabilities

114

Software

Lease liabilities

2,148

Total noncurrent operating lease liabilities

775,838

Total operating lease liabilities

$

828,955

Weighted-average remaining lease term

 

10 years

Weighted-average discount rate

5.2%

Lease Costs

The table below presents components of lease expense for operating leases.

    

Thirteen Weeks Ended

    

Thirty-nine Weeks Ended

in thousands

Classification

September 26, 2019

September 26, 2019

Operating lease cost (1)

Selling and store operating

$

29,978

$

84,907

Operating lease right-of-use asset impairment

General and administrative

4,136

4,136

Sublease income

Selling and store operating

 

(588)

 

(1,817)

Total lease cost

$

33,526

$

87,226

(1) Includes variable lease costs, which are immaterial.

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Undiscounted Cash Flows

Future minimum lease payments under non-cancelable operating leases (with initial or remaining lease terms in excess of one year) as of September 26, 2019, were:

in thousands

    

Amount

Thirteen weeks ending December 26, 2019

$

19,609

2020

 

108,355

2021

 

118,784

2022

 

111,501

2023

 

108,266

Thereafter

 

623,390

Total minimum lease payments (2)

$

1,089,905

Less: amount of lease payments representing interest

260,950

Present value of future minimum lease payments

828,955

Less: current obligations under leases

53,117

Long-term lease obligations

$

775,838

(2) Future lease payments exclude approximately $209.4 million of legally binding minimum lease payments for operating leases signed but not yet commenced.

For the thirty-nine weeks ended September 26, 2019, cash paid for operating leases was $80.2 million.

Right-of-use Asset Impairment

Long-lived assets, such as operating lease right-of-use assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Conditions that may indicate impairment include, but are not limited to, a significant adverse change in customer demand or business climate that could affect the value of an asset, a product recall, or an adverse action by a regulator. In accordance with ASC 360, the evaluation is performed at the lowest level for which identifiable cash flows are available that are largely independent of the cash flows of other assets or asset groups. If the sum of the estimated undiscounted future cash flows is less than the carrying value of the related asset or asset group, an impairment loss is recognized equal to the difference between carrying value and fair value.

During the thirteen weeks ended September 26, 2019, we began the move from our former Store Support Center in Smyrna, Georgia to a nearby location in Atlanta, Georgia. Prior to this period, we expected to fully cover future payments under the operating lease agreement with proceeds from a sublease. As of the end of the current quarter, we no longer expected to find a sublease tenant that would fully cover these future payments and concluded that the right-of-use asset related to the operating lease was not recoverable. Therefore, we determined the fair value of the right-of-use asset based on a discounted cash flow analysis reflective of the income expected from a sublease. Based on the excess of the asset’s carrying value over fair value, we recognized an impairment of $4.1 million. The operating lease right-of-use asset for the Smyrna, Georgia Store Support Center is classified within level 3 of the fair value hierarchy based on the use of unobservable inputs that were significant to the fair value measurement. The impairment had no impact on our lease liability.

Litigation

On May 20, 2019, an alleged stockholder of the Company filed a putative class action lawsuit, Taylor v. Floor & Decor Holdings, Inc., et al., No. 1:19-cv-02270-SCJ (N.D. Ga.), in the United States District Court for the Northern District of Georgia against the Company and certain of our officers, directors and stockholders. On August 14, 2019, the Court named a lead plaintiff, and the case was re-captioned In re Floor & Decor Holdings, Inc. Securities Litigation, No. 1:19-cv-02270-SCJ (N.D. Ga.). The operative complaint alleges certain violations of federal securities laws based on, among other things, purported materially false and misleading statements and omissions allegedly made by the Company between May 23, 2018 and August 1, 2018 and seeks class certification, unspecified monetary damages, costs and attorneys’ fees and equitable relief. The Company denies the material allegations in this lawsuit, which is in the early stages and has not yet been certified as a class, and intends to defend itself vigorously. In addition, the Company

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maintains insurance that may cover any liability arising out of this litigation up to the policy limits and subject to meeting certain deductibles and to other terms and conditions thereof. Estimating an amount or range of possible losses resulting from litigation proceedings is inherently difficult, particularly where the matters involve indeterminate claims for monetary damages and are in the stages of the proceedings where key factual and legal issues have not been resolved. For these reasons, we are currently unable to predict the ultimate timing or outcome of or reasonably estimate the possible losses or a range of possible losses resulting from this litigation.

We are also subject to various other legal actions, claims and proceedings arising in the ordinary course of business, which may include claims related to general liability, workers’ compensation, product liability, intellectual property and employment-related matters resulting from our business activities. As with most actions such as these, an estimation of any possible and/or ultimate liability cannot always be determined. We establish reserves for specific legal proceedings when we determine that the likelihood of an unfavorable outcome is probable and the amount of loss can be reasonably estimated. These various other ordinary course proceedings are not expected to have a material impact on our consolidated financial position, cash flows, or results of operations, however regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources, and other factors.

6. Stock Based Compensation

At our 2018 annual meeting of stockholders held on May 17, 2018, our stockholders approved the Floor & Decor Holdings, Inc. Employee Stock Purchase Plan (the “ESPP”), which became available to substantially all of our employees beginning in the third quarter of fiscal 2018. The ESPP permits eligible employees to purchase shares of our common stock through payroll deductions, subject to certain limitations. The purchase price of the shares under the ESPP will in no event be less than the lesser of 85% of the lower of the fair market value of our common stock on either the first or last trading day of each six-month offering period. There were 1,500,000 shares of our Class A common stock, par value $0.001 per share, originally approved for issuance under the ESPP. During the thirteen and thirty-nine weeks ended September 26, 2019, the Company recognized $130 and $400 thousand of stock-based compensation expense related to the ESPP, respectively.

7. Earnings Per Share

Net Income per Common Share

We calculate basic earnings per share by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income by the weighted average number of common shares outstanding adjusted for the dilutive effect of stock options.

The following table shows the computation of basic and diluted earnings per share:

    

Thirteen Weeks Ended

    

Thirty-nine Weeks Ended

September 26,

September 27,

September 26,

September 27,

in thousands, except per share data

2019

    

2018

2019

    

2018

Net income

$

40,974

$

26,568

$

115,290

$

98,285

Basic weighted average shares outstanding

 

100,137

 

97,254

 

98,855

 

96,551

Dilutive effect of share based awards

 

5,043

7,311

 

5,957

8,185

Diluted weighted average shares outstanding

 

105,180

 

104,565

 

104,812

 

104,736

Basic earnings per share

$

0.41

$

0.27

$

1.17

$

1.02

Diluted earnings per share

$

0.39

$

0.25

$

1.10

$

0.94

The following awards have been excluded from the computation of dilutive earnings per share because the effect would be anti-dilutive:

    

Thirteen Weeks Ended

    

Thirty-nine Weeks Ended

September 26,

September 27,

September 26,

September 27,

in thousands

2019

2018

2019

2018

Stock options

 

281

 

209

 

997

 

168

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8. Subsequent Event

In October 2018, we signed a lease to relocate our Store Support Center to a nearby location in Atlanta, Georgia. During October 2019, we completed our move to the new location and terminated the lease for our previous Store Support Center facility in Smyrna, Georgia. As a result, we recognized a loss of $2.1 million related to the settlement of our remaining obligations under the lease and the write off of the remaining right-of-use asset for the facility upon lease termination.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of the financial condition and results of our operations should be read together with the financial statements and related notes of Floor & Decor Holdings, Inc. and Subsidiaries included in Item 1 of this quarterly report on Form 10-Q (this “Quarterly Report”) and with our audited financial statements and the related notes included in our Annual Report on Form 10-K for the fiscal year ended December 27, 2018 and filed with the Securities and Exchange Commission (the “SEC”) on February 25, 2019 (the “Annual Report”). As used in this Quarterly Report, except where the context otherwise requires or where otherwise indicated, the terms “Floor & Decor,” “Company,” “we,” “our” or “us” refer to Floor & Decor Holdings, Inc. and its subsidiaries.

Forward-Looking Statements

The discussion in this Quarterly Report, including under this Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of Part I and Item 1A, “Risk Factors” of Part II, contains forward-looking statements within the meaning of the federal securities laws. All statements other than statements of historical fact contained in this Quarterly Report, including statements regarding the Company’s future operating results and financial position, business strategy and plans and objectives of management for future operations, are forward-looking statements. These statements are based on our current expectations, assumptions, estimates and projections. These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “could,” “seeks,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “budget,” “potential” or “continue” or the negative of these terms or other similar expressions.

The forward-looking statements contained in this Quarterly Report are only predictions. Although we believe that the expectations reflected in the forward-looking statements in this Quarterly Report are reasonable, we cannot guarantee future events, results, performance or achievements. A number of important factors could cause actual results to differ materially from those indicated by the forward-looking statements in this Quarterly Report, including, without limitation, those factors described in this Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of Part I and Item 1A, “Risk Factors” of Part II. Some of the key factors that could cause actual results to differ from our expectations include the following:

an overall decline in the health of the economy, the hard surface flooring industry, consumer spending and the housing market;
any disruption in our distribution capabilities resulting from our inability to operate our distribution centers going forward;
competition from other stores and internet-based competition;
our failure to execute our business strategy effectively and deliver value to our customers;
our inability to manage our growth;
our inability to manage costs and risks relating to new store openings;
our dependence on foreign imports for the products we sell, which may include the impact of tariffs and other duties;
our inability to find, train and retain key personnel;
violations of laws and regulations applicable to us or our suppliers;
our failure to adequately protect against security breaches involving our information technology systems and customer information;
our failure to successfully anticipate consumer preferences and demand;
our inability to find available locations for our stores or our store support center on terms acceptable to us;

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our inability to obtain merchandise on a timely basis at prices acceptable to us;
suppliers may sell similar or identical products to our competitors;
our inability to maintain sufficient levels of cash flow to meet growth expectations;
our inability to manage our inventory obsolescence, shrinkage and damage;
fluctuations in material and energy costs;
our vulnerability to natural disasters and other unexpected events; and
restrictions imposed by our indebtedness on our current and future operations.

Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, you should not rely on these forward-looking statements as predictions of future events. The forward-looking statements contained in this Quarterly Report speak only as of the date hereof. New risks and uncertainties arise over time, and it is not possible for us to predict those events or how they may affect us. If a change to the events and circumstances reflected in our forward-looking statements occurs, our business, financial condition and operating results may vary materially from those expressed in our forward-looking statements. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events or otherwise.

Overview

Founded in 2000, Floor & Decor is a high growth, differentiated, multi-channel specialty retailer of hard surface flooring and related accessories with 113 warehouse format stores across 28 states as of September 26, 2019. We believe that we offer the industry’s broadest in-stock assortment of tile, wood, laminate, vinyl, and natural stone flooring along with decorative and installation accessories at everyday low prices positioning us as the one stop destination for our customers’ entire hard surface flooring needs. We appeal to a variety of customers, including professional installers and commercial businesses (“Pro”), Do-it-Yourself customers (“DIY”), and customers who buy the products for professional installation.

We operate on a 52- or 53-week fiscal year ending the Thursday on or preceding December 31. The following discussion contains references to the first thirty-nine weeks of fiscal 2019 and fiscal 2018, which ended on September 26, 2019 and September 27, 2018, respectively.

During the thirty-nine weeks ended September 26, 2019, we continued to make long-term key strategic investments, including:

opening thirteen new warehouse-format stores ending the quarter with 113 warehouse-format stores;
focusing on innovative new products and localized assortments, supported by inspirational in-store and online visual merchandising solutions;
investing capital in our stores, information technology and our connected customer strategies to continue enhancing and integrating the online and in-store shopping experience for our customers; and
engaging more professional customers, including adding regional professional sales associates to grow our commercial sales, as well as signing up more customers on our Pro Premier Loyalty Program.

Key Performance Indicators

We consider a variety of performance and financial measures in assessing the performance of our business. The key performance and financial measures we use to determine how our business is performing are comparable store sales, the number of new store openings, gross profit and gross margin, operating income, and EBITDA and Adjusted EBITDA. For definitions and a discussion of how we use our key performance indicators, see the “Key Performance Indicators” section of “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report. See “Non-GAAP Financial Measures” below for a discussion of how we define EBITDA and Adjusted EBITDA and a reconciliation of EBITDA and Adjusted EBITDA to net income, the most

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directly comparable financial measure calculated and presented in accordance with accounting principles generally accepted in the United States (“GAAP”).

Other key financial terms we use include net sales, selling and store operating expenses, general and administrative expenses, and pre-opening expenses. For definitions and a discussion of how we use our other key financial definitions, see the “Other Key Financial Definitions” section of “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report.

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Results of Operations

The following table summarizes key components of our results of operations for the periods indicated, both in dollars and as a percentage of net sales (actuals in thousands; dollar changes in millions):

Thirteen Weeks Ended

September 26, 2019

September 27, 2018

    

Actual

    

% of Sales

    

Actual

    

% of Sales

 

    

$ Increase/(Decrease)

    

% Increase/(Decrease)

 

Net sales

$

521,093

100.0

%  

$

435,882

100.0

%

$

85.2

19.5

%

Cost of sales

 

307,305

59.0

 

 

257,656

59.1

49.6

19.3

Gross profit

 

213,788

41.0

 

 

178,226

40.9

35.6

20.0

Operating expenses:

Selling and store operating

 

136,958

26.3

 

 

109,182

25.0

27.8

25.4

General and administrative

 

37,246

7.1

 

 

26,477

6.1

10.8

40.7

Pre-opening

 

8,184

1.6

 

 

8,330

1.9

(0.1)

(1.8)

Total operating expenses

182,388

35.0

143,989

33.0

38.4

26.7

Operating income

 

31,400

6.0

 

 

34,237

7.9

(2.8)

(8.3)

Interest expense

 

1,978

0.4

 

 

2,171

0.5

(0.2)

(8.9)

Income before income taxes

 

29,422

5.6

 

 

32,066

7.4

(2.6)

(8.2)

(Benefit) provision for income taxes

 

(11,552)

(2.3)

 

 

5,498

1.2

(17.1)

NM

Net income

$

40,974

7.9

%

$

26,568

6.1

%

$

14.4

54.2

%

Thirty-nine Weeks Ended

September 26, 2019

September 27, 2018

    

Actual

    

% of Sales

    

Actual

    

% of Sales

 

    

$ Increase/(Decrease)

    

% Increase

 

Net sales

$

1,518,454

100.0

%  

$

1,273,109

100.0

%

$

245.3

19.3

%

Cost of sales

 

885,469

58.3

 

 

751,859

59.1

133.6

17.8

Gross profit

 

632,985

41.7

 

 

521,250

40.9

111.7

21.4

Operating expenses:

Selling and store operating

 

398,984

26.3

 

 

320,375

25.2

78.6

24.5

General and administrative

 

98,364

6.5

 

 

74,995

5.9

23.4

31.2

Pre-opening

 

18,580

1.2

 

 

17,892

1.4

0.7

3.8

Total operating expenses

515,928

34.0

413,262

32.5

102.7

24.8

Operating income

 

117,057

7.7

 

 

107,988

8.5

9.1

8.4

Interest expense

 

7,122

0.5

 

 

6,100

0.5

1.0

16.8

Income before income taxes

 

109,935

7.2

 

 

101,888

8.0

8.0

7.9

(Benefit) provision for income taxes

 

(5,355)

(0.4)

 

 

3,603

0.3

(9.0)

NM

Net income

$

115,290

7.6

%

$

98,285

7.7

%

$

17.0

17.3

%

NM – Not meaningful

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Selected Financial Information

Thirteen Weeks Ended

Thirty-nine Weeks Ended

 

September 26, 2019

    

September 27, 2018

 

September 26, 2019

    

September 27, 2018

 

Comparable store sales (% change)

4.6

%  

11.1

%

3.6

%  

12.6

%

Comparable average ticket (% change)

2.8

%  

(1.4)

%  

2.0

%  

%  

Comparable customer transactions (% change)

1.8

%  

12.7

%  

1.6

%  

12.7

%  

Number of warehouse-format stores

113

 

95

 

113

 

95

 

Adjusted EBITDA (in thousands) (1)

$

57,147

 

$

48,918

 

$

183,807

 

$

147,428

 

Adjusted EBITDA margin

11.0

%  

11.2

%  

12.1

%  

11.6

%  

(1) Adjusted EBITDA is a non-GAAP financial measure. See “Non-GAAP Financial Measures” section below for additional information and a reconciliation to the most comparable GAAP measure.

Net Sales

Net sales during the thirteen weeks ended September 26, 2019 increased $85.2 million, or 19.5%, compared to the corresponding prior year period due to the opening of 18 new stores since September 27, 2018 and an increase in comparable store sales of 4.6%. The comparable store sales increase during the period of 4.6%, or $20.1 million, was driven by a 2.8% increase in comparable average ticket and a 1.8% increase in comparable customer transactions. Among our six product categories, three experienced comparable store sales increases including laminate/luxury vinyl plank, installation materials and tools, and decorative accessories. Non-comparable store sales increased $65.1 million during the same period primarily due to the increase in new stores previously described.

Net sales during the thirty-nine weeks ended September 26, 2019 increased $245.3 million, or 19.3%, compared to the corresponding prior year period due to the opening of 18 new stores since September 27, 2018 and an increase in comparable store sales of 3.6%. The comparable store sales increase during the period of 3.6%, or $45.7 million, was driven by a 2.0% increase in comparable average ticket and a 1.6% increase in comparable customer transactions. Among our six product categories, three experienced comparable store sales increases including laminate/luxury vinyl plank, installation materials and tools, and decorative accessories. Non-comparable store sales increased $199.6 million during the same period primarily due to the increase in new stores previously described.

We believe the increases in net sales and customer transactions are due to the execution of our key strategic investments. We believe our continued investments and focused merchandising, connected customer, Pro, marketing, and visual merchandising strategies, along with new innovative products, led to our sales growth during the periods presented. We have also modestly increased retail prices due to increased tariffs.

Gross Profit and Gross Margin

Gross profit during the thirteen weeks ended September 26, 2019 increased $35.6 million, or 20.0%, compared to the corresponding prior year period. This increase in gross profit was driven by the 19.5% increase in sales and a slight increase in gross margin to 41.0%, up approximately 10 basis points from 40.9% in the corresponding prior year period. This increase in gross margin was primarily due to higher product gross margin.

Gross profit during the thirty-nine weeks ended September 26, 2019 increased $111.7 million, or 21.4%, compared to the corresponding prior year period. This increase in gross profit was driven by the 19.3% increase in sales and an increase in gross margin to 41.7%, up approximately 80 basis points from 40.9% in the corresponding prior year period. The improvement in gross margin was attributable to better product gross margins as well as leveraging our supply chain costs on higher sales. The improved product margins were due to favorable negotiations with our suppliers, improved merchandising strategies, including higher sales from higher margin categories like installation and decorative accessories, and various strategic retail increases.

Selling and Store Operating Expenses

Selling and store operating expenses during the thirteen weeks ended September 26, 2019 increased $27.8 million, or 25.4%, compared to the corresponding prior year period, due primarily to opening 18 new stores since

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September 27, 2018. As a percentage of net sales, our selling and store operating expenses increased approximately 130 basis points to 26.3% from 25.0% in the corresponding prior year period primarily driven by new stores open less than one year. Comparable store selling and store operating expenses as a percentage of comparable store sales increased by approximately 20 basis points, driven by higher advertising and other operating expenses.

Selling and store operating expenses during the thirty-nine weeks ended September 26, 2019 increased $78.6 million, or 24.5%, compared to the corresponding prior year period, due primarily to opening 18 new stores since September 27, 2018. As a percentage of net sales, our selling and store operating expenses increased approximately 110 basis points to 26.3% from 25.2% in the corresponding prior year period driven by new stores open less than one year. Comparable store selling and store operating expenses as a percentage of comparable store sales decreased by approximately 20 basis points due primarily to leveraging personnel expenses on higher net sales.

General and Administrative Expenses

General and administrative expenses, which are typically expenses incurred outside of our stores, increased $10.8 million, or 40.7%, during the thirteen weeks ended September 26, 2019 compared to the corresponding prior year period due to our continued investments in personnel for our store support functions, increased depreciation due to technology investments to support store growth, and a $4.1 million impairment charge related to the operating lease right-of-use asset for our former Store Support Center in Smyrna, Georgia. Our general and administrative expenses as a percentage of net sales increased approximately 100 basis points to 7.1% from 6.1% in the corresponding prior year period, of which 80 basis points of the increase was due to the impairment charge.

General and administrative expenses during the thirty-nine weeks ended September 26, 2019 increased $23.4 million, or 31.2%, compared to the corresponding prior year period due to our continued investments in personnel for our store support functions, increased depreciation due to technology investments to support store growth, and a $4.1 million impairment charge related to the operating lease right-of-use asset for our former Store Support Center in Smyrna, Georgia. Our general and administrative expenses as a percentage of net sales increased approximately 60 basis points to 6.5% from 5.9% in the corresponding prior year period, of which 30 basis points of the increase was due to the impairment charge.

Pre-Opening Expenses

Pre-opening expenses during the thirteen weeks ended September 26, 2019 decreased $0.1 million, or 1.8%, compared to the corresponding prior year period. The decrease is primarily due to an enhanced store opening process which shortens the period it takes to open new stores, thereby lessening pre-occupancy costs, as well as opening fewer stores in higher cost metropolitan markets. We opened seven stores during each of the thirteen weeks ended September 26, 2019 and September 27, 2018. Of the seven store openings during the thirteen weeks ended September 26, 2019, three were in existing markets as compared to one store opening in existing markets during the corresponding prior year period.

Pre-opening expenses during the thirty-nine weeks ended September 26, 2019 increased $0.7 million, or 3.8%, compared to the corresponding prior year period. For the first nine months of fiscal 2019, this expense grew at a slower rate than sales due to an enhanced store opening process which allows us to shorten the period it takes to open new stores, thereby lessening pre-opening occupancy costs. We opened thirteen stores during the thirty-nine weeks ended September 26, 2019 compared to opening twelve stores during the corresponding prior year period.

Interest Expense

Interest expense during the thirteen weeks ended September 26, 2019 decreased $0.2 million, or 8.9%, compared to the corresponding prior year period. The decrease in interest expense was primarily due to lowering our average debt balance to $146.6 million during the thirteen weeks ended September 26, 2019 compared to an average debt balance of $160.6 million in the corresponding prior year period.

Interest expense during the thirty-nine weeks ended September 26, 2019 increased $1.0 million, or 16.8%, compared to the corresponding prior year period. The increase in interest expense was primarily due to the increase in

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our average interest rate to 5.6% for the thirty-nine weeks ended September 26, 2019 from 4.6% in the corresponding prior year period.

Taxes

The provision for income taxes during the thirteen weeks ended September 26, 2019 decreased $17.1 million compared to the corresponding prior year period. The effective tax rate was (39.3)% for the thirteen weeks ended September 26, 2019 compared to 17.1% in the corresponding prior year period. The decrease in the effective tax rate for the current period was primarily due to the recognition of higher excess tax benefits related to stock options exercised than in the corresponding prior year period.

The provision for income taxes during the thirty-nine weeks ended September 26, 2019 decreased $9.0 million compared to the corresponding prior year period. The effective tax rate was (4.9)% for the thirty-nine weeks ended September 26, 2019 compared to 3.5% in the corresponding prior year period. The decrease in the effective tax rate was primarily due to the recognition of higher excess tax benefits related to stock options exercised than in the corresponding prior year period.

Non-GAAP Financial Measures

EBITDA and Adjusted EBITDA are key metrics used by management and our board of directors to assess our financial performance and enterprise value. We believe that operating income, EBITDA and Adjusted EBITDA are useful measures, as they eliminate certain expenses that are not indicative of our core operating performance and facilitate a comparison of our core operating performance on a consistent basis from period to period. We also use Adjusted EBITDA as a basis to determine covenant compliance with respect to our Credit Facilities (as defined below), to supplement GAAP measures of performance to evaluate the effectiveness of our business strategies, to make budgeting decisions, and to compare our performance against that of other peer companies using similar measures. EBITDA and Adjusted EBITDA are also frequently used by analysts, investors, and other interested parties as performance measures to evaluate companies in our industry.

EBITDA and Adjusted EBITDA are supplemental measures of financial performance that are not required by or presented in accordance with GAAP. We define EBITDA as net income before interest, loss on early extinguishment of debt, taxes, depreciation and amortization. We define Adjusted EBITDA as net income before interest, loss on early extinguishment of debt, taxes, depreciation and amortization adjusted to eliminate the impact of certain items that we do not consider indicative of our core operating performance. See below for a reconciliation of EBITDA and Adjusted EBITDA to net income, the most directly comparable financial measure calculated and presented in accordance with GAAP.

EBITDA and Adjusted EBITDA are non-GAAP measures of our financial performance and should not be considered as alternatives to net income as a measure of financial performance or any other performance measure derived in accordance with GAAP, and they should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. Additionally, EBITDA and Adjusted EBITDA are not intended to be measures of liquidity or free cash flow for management's discretionary use. In addition, these non-GAAP measures exclude certain non-recurring and other charges. Each of these non-GAAP measures has its limitations as an analytical tool, and you should not consider them in isolation or as a substitute for analysis of our results as reported under GAAP. In evaluating EBITDA and Adjusted EBITDA, you should be aware that in the future we will incur expenses that are the same as or similar to some of the items eliminated in the adjustments made to determine EBITDA and Adjusted EBITDA, such as stock compensation expense, loss (gain) on asset disposal, executive recruiting/relocation, and other adjustments. Our presentation of EBITDA and Adjusted EBITDA should not be construed to imply that our future results will be unaffected by any such adjustments. Definitions and calculations of EBITDA and Adjusted EBITDA differ among companies in the retail industry, and therefore EBITDA and Adjusted EBITDA disclosed by us may not be comparable to the metrics disclosed by other companies.

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The following table reconciles net income to EBITDA and Adjusted EBITDA for the periods presented:

    

Thirteen Weeks Ended

    

Thirty-nine Weeks Ended

in thousands

September 26, 2019

    

September 27, 2018

September 26, 2019

    

September 27, 2018

Net income

$

40,974

$

26,568

$

115,290

$

98,285

Depreciation and amortization (1)

 

18,188

 

11,987

 

52,451

 

32,898

Interest expense

 

1,978

 

2,171

 

7,122

 

6,100

Income tax (benefit) expense

 

(11,552)

 

5,498

 

(5,355)

 

3,603

EBITDA

 

49,588

 

46,224

 

169,508

 

140,886

Stock compensation expense (2)

 

2,242

 

1,659

 

6,660

 

4,611

Loss on asset impairments and disposals (3)

4,133

4,111

Other (4)

 

1,184

 

1,035

 

3,528

 

1,931

Adjusted EBITDA

$

57,147

$

48,918

$

183,807

$

147,428

(1) Excludes amortization of deferred financing costs, which is included as part of interest expense in the table above. For the thirteen and thirty-nine weeks ended September 27, 2018, amounts are also net of amortization of tenant improvement allowances.

(2) Non-cash charges related to stock-based compensation programs, which vary from period to period depending on timing of awards and forfeitures.

(3) Amount primarily represents impairment loss for the operating lease right-of-use asset related to the Company’s former Store Support Center in Smyrna, Georgia.

(4) Other adjustments include amounts management does not consider indicative of our core operating performance. Amounts for the thirteen and thirty-nine weeks ended September 26, 2019 primarily relate to costs associated with the relocation of the Company’s Store Support Center as well as secondary public offering costs of our Class A common stock by certain of our stockholders. Amounts for the thirteen and thirty-nine weeks ended September 27, 2018 primarily relate to costs associated with the secondary public offerings of our Class A common stock by certain of our stockholders and the closing of our Miami distribution center, net of insurance recoveries from hurricanes Harvey and Irma.

Liquidity and Capital Resources

Liquidity is provided primarily by our cash flows from operations and our $300.0 million asset-backed revolving credit facility (the “ABL Facility”). As of September 26, 2019, we had $369.6 million in unrestricted liquidity, consisting of $84.1 million in cash and cash equivalents and $285.5 million immediately available for borrowing under the ABL Facility without violating any covenants thereunder.

Our primary cash needs are for merchandise inventories, payroll, store rent, and other operating expenses and capital expenditures associated with opening new stores and remodeling existing stores, as well as information technology, e-commerce, and store support center infrastructure. We also use cash for the payment of taxes and interest.

The most significant components of our operating assets and liabilities are merchandise inventories and accounts payable, and, to a lesser extent, accounts receivable, prepaid expenses and other assets, other current and non-current liabilities, taxes receivable, and taxes payable. Our liquidity is not generally seasonal, and our uses of cash are primarily tied to when we open stores and make other capital expenditures. We believe that the cash on hand expected to be generated from operations and the availability of borrowings under the ABL Facility will be sufficient to meet liquidity requirements, anticipated capital expenditures, and payments due under the ABL Facility and our $350.0 million senior secured term loan facility (the “Term Loan Facility” and together with the ABL Facility, our “Credit Facilities”) for at least the next 12 months.

The Term Loan Facility has no financial maintenance covenants. As of September 26, 2019, we were in compliance with the covenants of the Credit Facilities and no Event of Default (as defined in the credit agreements governing our Credit Facilities) had occurred.

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Total capital expenditures in fiscal 2019 are planned to be between approximately $203.0 million to $213.0 million and will be funded primarily by cash generated from operations. We intend to make the following capital expenditures in fiscal 2019:

open 20 stores and start construction on stores opening in early 2020 using approximately $131.0 million to $137.0 million of cash;
invest in existing store remodeling projects and our distribution centers using approximately $35.0 million to $37.0 million of cash; and 
invest in information technology infrastructure, e-commerce, and other store support center initiatives using approximately $37.0 million to $39.0 million of cash.

Cash Flow Analysis

A summary of our operating, investing, and financing activities are shown in the following table:

Thirty-nine Weeks Ended

in thousands

    

September 26, 2019

    

September 27, 2018

Net cash provided by operating activities

$

209,594

$

143,699

Net cash used in investing activities

 

(141,015)

 

(109,395)

Net cash provided by (used in) financing activities

 

14,883

 

(34,326)

Net increase (decrease) in cash and cash equivalents

$

83,462

$

(22)

Net Cash Provided By Operating Activities

Cash provided by operating activities consists primarily of net income adjusted for noncash items, including depreciation and amortization, stockbased compensation, deferred taxes, and the effects of changes in operating assets and liabilities.

Net cash provided by operating activities was $209.6 million for the thirty-nine weeks ended September 26, 2019 and $143.7 million for the thirty-nine weeks ended September 27, 2018. The net cash provided by operating activities for the thirty-nine weeks ended September 26, 2019 was primarily the result of net income, including lower taxes due to stock option exercises, and improvements in working capital. The improvements in working capital were primarily driven by the timing of inventory receipts and the associated payables as well as higher receivable collections and the timing of liability payments.

The net cash provided by operating activities for the thirty-nine weeks ended September 27, 2018 was primarily the result of net income, including lower taxes due to stock option exercises.

Net Cash Used In Investing Activities

Investing activities consist primarily of capital expenditures for new store openings, existing store remodels (including leasehold improvements, new racking, new fixtures, new product and display vignettes, and enhanced design centers) and new infrastructure and information systems.

Capital expenditures during the thirty-nine weeks ended September 26, 2019 and September 27, 2018 were $141.0 million and $109.4 million, respectively. We continued our investment in new stores, as we opened thirteen new stores and relocated one through September 26, 2019 and are preparing for an additional thirteen new stores and one distribution center to be opened during the fourth quarter of fiscal 2019 and first quarter of fiscal 2020. We generally incur the majority of our capital expenditures six months in advance of the new store opening. During the thirty-nine weeks ended September 26, 2019, approximately 62.3% of capital expenditures related to new stores, 16.4% was for existing stores and distribution centers, while the remaining spend was associated with information technology and e-commerce investments to support our growth.

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 During the thirty-nine weeks ended September 27, 2018, approximately 66.0% of capital expenditures related to new stores, 21.9% was for existing stores and distribution centers, while the remaining capital expenditures were associated with information technology and ecommerce investments to support our growth.

Net Cash Provided By (Used In) Financing Activities

Financing activities consist primarily of borrowings and related repayments under our credit agreements as well as proceeds from the exercise of stock options.

Net cash provided by financing activities was $14.9 million for the thirty-nine weeks ended September 26, 2019 compared with net cash used in financing activities was $34.3 million for the thirty-nine weeks ended September 27, 2018. The net cash provided by financing activities for the thirty-nine weeks ended September 26, 2019 was primarily driven by proceeds from stock option exercises and the employee stock purchase plan of $15.1 million and $2.4 million, respectively.

The net cash used in financing activities for the thirty-nine weeks ended September 27, 2018 was primarily driven by a net paydown on the ABL Facility of $41.0 million, partially offset by proceeds from the exercise of stock options of $9.3 million.

U.S. Tariffs and Global Economy

The current domestic and international political environment, including existing and potential changes to U.S. policies related to global trade and tariffs, have resulted in uncertainty surrounding the future state of the global economy. In particular, the ongoing trade dispute between the U.S. and China has resulted in the U.S. imposing tariffs of 25% on many products from China. Historically, approximately half of the products we sell were imported from China, the vast majority of which are impacted by these tariffs. As we continue to analyze the impact these tariffs may have on our business, we have begun taking steps to mitigate some of these cost increases through negotiating lower costs from our vendors, increasing retail pricing as we deem appropriate, and sourcing from alternative countries. While we expect our efforts will mitigate a substantial portion of the overall effect of increased tariffs in fiscal 2019, we expect the enacted tariffs will increase our inventory costs and associated cost of goods sold as we incur the tariffs

In addition, on May 24, 2019, the U.S. International Trade Commission (the “ITC”) announced it had completed a preliminary phase antidumping and countervailing duty investigation pursuant to the Tariff Act of 1930 with respect to the imports of ceramic tile from China and determined there is a reasonable indication that the ceramic tile production industry in the U.S. is being materially injured by imports of ceramic tile from China that have allegedly been subsidized by the Chinese government and are being sold in the U.S. at less than fair value, otherwise known as “dumping”. As a result of the ITC’s affirmative determinations, the U.S. Department of Commerce (the “DOC”) began its own related investigation. In September 2019, the DOC reached a preliminary determination that imports from China were subsidized and imposed preliminary duties of 103.77% on most Chinese exporters.

The DOC is also expected to reach its preliminary determination as to the level of dumping, if any, in early November 2019. Once the DOC has reached its preliminary determination, it will instruct the U.S. Customs and Border Protection to require cash deposits based on these preliminary rates. The DOC’s preliminary determination will be subject to revision or rescission either in the DOC’s final determinations, expected in March of 2020, or in the ITC’s final determination with respect to injury shortly thereafter. If the final determinations are affirmative, then countervailing and antidumping orders will be published. The final rates for the first 12 month period of the orders would not be determined until the administrative review process is completed, approximately 2 years after the order is published.

While it is too early to determine what the final outcome of the DOC and ITC investigations will be and what impact, if any, they will have on the Company, we have begun taking steps to mitigate the risk of future exposure by sourcing from alternative countries. While we do not currently believe our current inventory is subject to these additional duties, if these additional duties were to apply to our current inventory, we believe our exposure could be approximately $7.0 million. The actual additional duties, if applicable to us, could differ from this estimate. We have not established a reserve for this matter as we currently do not believe our current inventory is subject to these additional duties, and we note that any liability as of September 26, 2019 would not be material. Potential costs and any attendant impact on

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pricing arising from these tariffs or potential duties, and any further expansion in the types or levels of tariffs or duties implemented, could require us to modify our current business practices and could adversely affect our business, financial condition, and results of operations.

Contractual Obligations

There were no material changes to our contractual obligations outside the ordinary course of our business during the thirty-nine weeks ended September 26, 2019.

Off-Balance Sheet Arrangements

For the thirty-nine weeks ended September 26, 2019, we were not party to any material off-balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, net sales, expenses, results of operations, liquidity, capital expenditures or capital resources. We do not have any relationship with unconsolidated entities or financial partnerships for the purpose of facilitating off-balance sheet arrangements or for other contractually narrow or limited purposes.

Critical Accounting Policies and Estimates

Our consolidated financial statements have been prepared in accordance with GAAP, which requires management to make estimates and assumptions that affect reported amounts. The estimates and assumptions are based on historical experience and other factors management believes to be reasonable. Actual results may differ from those estimates and assumptions. There have been no significant changes to our critical accounting policies as disclosed in our Annual Report. See Note 1 to our condensed consolidated financial statements included in this Quarterly Report, which describes recent accounting pronouncements adopted by us, if any.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

For quantitative and qualitative disclosures about market risk affecting the Company, see “Quantitative and Qualitative Disclosures About Market Risk” in Item 7A of Part II of the Annual Report. Our exposure to market risk has not changed materially since December 27, 2018.

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Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) are designed to provide reasonable assurance that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act are recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in reports filed or submitted under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. The Company’s management, including the chief executive officer and the chief financial officer, have reviewed the effectiveness of the Company’s disclosure controls and procedures as of September 26, 2019 and, based on their evaluation, have concluded that the Company’s disclosure controls and procedures were not effective at the reasonable assurance level at that date due to a material weakness in internal control over financial reporting that was disclosed in the Annual Report. Notwithstanding the material weakness in the Company’s internal control over financial reporting, we have concluded that the condensed consolidated financial statements included in this Quarterly Report fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with GAAP. Additionally, the material weakness did not result in any restatements of our condensed consolidated financial statements or disclosures for any prior period.

Changes in Internal Control Over Financial Reporting

There have been no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) of the Exchange Act) during the fiscal quarter ended September 26, 2019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Remediation

As previously described in Part II, Item 9A of the Annual Report, the Company initiated and has continued to implement a remediation plan to address the material weakness mentioned above. However, the material weakness will not be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. Based on the steps we have taken to date and the anticipated timing of appropriate test work to ensure adequate design and operating effectiveness of such controls, the Company expects that the remediation of this material weakness will be completed prior to the end of fiscal 2019; however, we cannot provide any assurance that these remediation efforts will be successful or that our internal control over financial reporting will be effective as a result of these efforts.

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PART II - OTHER INFORMATION

Item 1. Legal Proceedings

See the information under the “Litigation” caption in Note 5, Commitments and Contingencies to our Condensed Consolidated Financial Statements included in this Quarterly Report and the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations - U.S. Tariffs and Global Economy” in this Quarterly Report, each of which we incorporate here by reference.

Item 1A. Risk Factors

In addition to the other information set forth in this Quarterly Report, you should carefully consider the risk factors described in Part I, “Item 1A. Risk Factors” in our Annual Report and Part II, “Item 1A Risk Factors” in our Quarterly Report for the quarterly period ended June 27, 2019, filed with the SEC on August 1, 2019, which could materially affect our business, financial condition and/or operating results.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

 

None.

Item 4. Mine Safety Disclosures

 

Not applicable.

Item 5. Other Information

 

Disclosure Pursuant to Section 219 of the Iran Threat Reduction and Syria Human Rights Act

Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012 (“ITRA”) and Section 13(r) of the Exchange Act, require an issuer to disclose in its annual and quarterly reports whether it or any of its affiliates have knowingly engaged in specified activities or transactions relating to Iran. We are required to include certain disclosures in our periodic reports if we or any of our "affiliates" (as defined in Rule 12b-2 under the Exchange Act) knowingly engaged in certain specified activities, transactions or dealings relating to Iran or with certain individuals or entities targeted by United States' economic sanctions during the period covered by the report. Disclosure is generally required even where the activities, transactions or dealings were conducted in compliance with applicable law. Neither we nor any of our controlled affiliates or subsidiaries knowingly engaged in any of the specified activities relating to Iran or otherwise engaged in any activities associated with Iran during the reporting period. However, because the SEC defines the term “affiliate” broadly, it includes any person or entity that is under common control with us as well as any entity that controls us or is controlled by us.

One of our shareholders, Ares Corporate Opportunities Fund III, L.P. (“Ares”) beneficially owns, in the aggregate, approximately 19.2% of our outstanding Class A common stock. Ares is affiliated with Ares Management Corporation (“Ares Management”). The description that follows has been provided to us by Ares Management. On June 20, 2019, certain investment funds managed or advised by U.K.-based affiliates of Ares Management (the “Ares Entities”) acquired approximately 28.7% of the ordinary shares and 54.3% of the preferred shares of AgriBriefing 1364 Limited (“AgriBriefing”), a company based in London that provides price reporting data on a subscription basis to participants in the agricultural industry. Although the Ares Entities do not hold the largest voting position in AgriBriefing, their holdings of ordinary and preferred shares represent a majority of the outstanding equity interests in AgriBriefing. In addition, the Ares Entities hold certain contractual veto rights and the right to appoint a director to the board of directors of AgriBriefing. As a result, under applicable SEC definitions, the Ares Entities may be deemed to control AgriBriefing; however, this statement is not meant to be an admission that common control exists.

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The disclosure below relates solely to activities conducted by AgriBriefing. The disclosure does not relate to any activities conducted by us and does not involve us, Ares, or Ares Management. Neither we nor Ares nor Ares Management had any involvement in or control over the disclosed activities of AgriBriefing, and we have not independently verified or participated in the preparation of this disclosure. We are not representing as to the accuracy or completeness of the disclosure and do not undertake any obligation to correct or update it.

We understand that Ares Management intends to disclose in its next quarterly SEC Report that:

“Subsequent to completion of the Ares Entities’ investment in AgriBriefing, in connection with Ares’ routine quarterly survey of its investment funds’ portfolio companies, AgriBriefing informed the Ares Entities that it had subscription contracts with five customers whose billing addresses were based in Iran. We have not been able to verify the identity or affiliations of these customers. As a result, it appears that we are required to provide this disclosure under ITRA and Section 13(r) of the Exchange Act.

These subscriptions generated annual gross revenues of less than €25,000 (less than 1% of AgriBriefing’s revenues) and de minimus net profits.

AgriBriefing confirmed that each of the subscriptions commenced prior to the investment in AgriBriefing by the Ares Entities, and that it terminated these subscriptions in July 2019 and does not intend to engage in any further dealings or transactions with these customers.

Based on currently available information, we and the Ares Entities have no reason to believe that any of the five customers are listed on the U.S. Treasury Department Office of Foreign Assets Control list of Specially Designated Nationals or that AgriBriefing has conducted any dealings in violation ITRA.”

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Item 6. Exhibits

Exhibit No.

Exhibit Description

3.1

Restated Certificate of Incorporation of Floor & Decor Holdings, Inc. (1)

3.2

Second Amended and Restated Bylaws of Floor & Decor Holdings, Inc. (1)

31.1

Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1

Certification of CEO and CFO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS

XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

101.SCH

Inline XBRL Taxonomy Extension Schema Document.

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document.

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document.

104

Cover Page Interactive Data File - the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

(1)(1) Filed as an exhibit to Amendment No. 4 to the Registrant’s Registration Statement on Form S-1 (File No. 333-216000) filed with the SEC on April 24, 2017, and incorporated herein by reference.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

FLOOR & DECOR HOLDINGS, INC.

Dated:  November 1, 2019

By:


/s/ Thomas V. Taylor

Thomas V. Taylor

Chief Executive Officer

(Principal Executive Officer)

Dated:  November 1, 2019

By:

/s/ Trevor S. Lang

Trevor S. Lang

Executive Vice President and Chief Financial Officer

(Principal Financial Officer and Principal Accounting Officer)

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