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Floor & Decor Holdings, Inc. - Quarter Report: 2019 June (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 June 27, 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

(I.R.S. Employer

incorporation or organization)

Identification No.)

2233 Lake Park Drive

Smyrna, Georgia

30080

(Address of principal executive offices)

(Zip Code)

(404471-1634

Not Applicable

(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 July 30, 2019

Class A common stock, $0.001 par value per share

99,613,063

Table of Contents

Table of Contents

Page

Part I – Financial Information

3

Item 1.

Financial Statements

3

Condensed Consolidated Balance Sheets

3

Condensed Consolidated Statements of Operations and Comprehensive Income

4

Condensed Consolidated Statements of Stockholders’ Equity

5

Condensed Consolidated Statements of Cash Flows

6

Notes to Condensed Consolidated Financial Statements

7

Item 2.

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

13

Forward-Looking Statements

13

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

23

Item 4.

Controls and Procedures

24

Part II – Other Information

25

Item 1.

Legal Proceedings

25

Item 1A.

Risk Factors

25

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

25

Item 3.

Defaults Upon Senior Securities

25

Item 4.

Mine Safety Disclosures

25

Item 5.

Other Information

25

Item 6.

Exhibits

27

2

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

Floor & Decor Holdings, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(In Thousands, Except Share and Per Share Data)

(Unaudited)

    

As of

    

As of

June 27,

December 27,

2019

2018

Assets

 

  

 

  

Current assets:

 

  

 

  

Cash and cash equivalents

$

51,450

$

644

Income taxes receivable

2,837

4,324

Receivables, net

 

35,641

 

67,527

Inventories, net

 

446,397

 

471,014

Prepaid expenses and other current assets

 

27,689

 

15,949

Total current assets

 

564,014

 

559,458

Fixed assets, net

 

382,646

 

328,366

Right of use assets

720,009

Intangible assets, net

 

109,315

 

109,330

Goodwill

 

227,447

 

227,447

Other assets

 

7,693

 

9,490

Total long-term assets

 

1,447,110

 

674,633

Total assets

$

2,011,124

$

1,234,091

Liabilities and stockholders’ equity

 

Current liabilities:

 

Current portion of term loans

$

3,500

$

3,500

Current portion of lease liabilities

44,461

Trade accounts payable

 

272,695

 

313,503

Accrued expenses and other current liabilities

 

97,015

 

82,038

Deferred revenue

 

6,967

 

5,244

Total current liabilities

 

424,638

 

404,285

Term loans

 

140,470

 

141,834

Deferred rent

 

 

36,980

Lease liabilities

747,595

Deferred income tax liabilities, net

 

25,173

 

26,838

Tenant improvement allowances

 

 

37,295

Other liabilities

 

2,360

 

2,550

Total long-term liabilities

 

915,598

 

245,497

Total liabilities

 

1,340,236

 

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 June 27, 2019 and December 27, 2018

 

 

Common stock Class A, $0.001 par value; 450,000,000 shares authorized; 99,111,260 shares issued and outstanding at June 27, 2019 and 97,588,539 issued and outstanding at December 27, 2018

 

99

 

98

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

 

 

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

 

 

Additional paid-in capital

 

353,450

 

340,462

Accumulated other comprehensive income (loss), net

 

(361)

 

186

Retained earnings

 

317,700

 

243,563

Total stockholders’ equity

 

670,888

 

584,309

Total liabilities and stockholders’ equity

$

2,011,124

$

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

(In Thousands, Except Per Share Data)

(Unaudited)

    

Thirteen Weeks Ended

    

Twenty-six Weeks Ended

June 27,

June 28,

June 27,

June 28,

2019

    

2018

2019

    

2018

Net sales

$

520,311

$

434,279

$

997,361

$

837,227

Cost of sales

 

302,488

 

256,641

 

578,164

 

494,203

Gross profit

 

217,823

 

177,638

 

419,197

 

343,024

Operating expenses:

 

 

 

 

Selling and store operating

 

134,643

 

108,626

 

262,026

 

211,193

General and administrative

 

30,916

 

25,179

 

61,118

 

48,518

Pre-opening

 

6,369

 

6,588

 

10,396

 

9,562

Total operating expenses

 

171,928

 

140,393

 

333,540

 

269,273

Operating income

 

45,895

 

37,245

 

85,657

 

73,751

Interest expense

 

2,223

 

2,145

 

5,144

 

3,929

Income before income taxes

 

43,672

 

35,100

 

80,513

 

69,822

Provision (benefit) for income taxes

 

76

 

(4,746)

 

6,197

 

(1,895)

Net income

$

43,596

$

39,846

$

74,316

$

71,717

Change in fair value of hedge instruments, net of tax

(213)

235

(547)

 

665

Total comprehensive income

$

43,383

$

40,081

$

73,769

$

72,382

Basic earnings per share

$

0.44

$

0.41

$

0.76

$

0.75

Diluted earnings per share

$

0.42

$

0.38

$

0.71

$

0.68

See accompanying notes to condensed consolidated financial statements.

4

Table of Contents

Floor & Decor Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders’ Equity

(In Thousands)

(Unaudited)

Accumulated

Common Stock

Additional

Other

Total

Class A

Paid-in

Comprehensive

Retained

Stockholders’

  

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

Accumulated

Common Stock

Additional

Other

Total

Class A

Paid-in

Comprehensive

Retained

Stockholders’

  

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

See accompanying notes to condensed consolidated financial statements.

5

Table of Contents

Floor & Decor Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(In Thousands)

(Unaudited)

    

Twenty-six Weeks Ended

June 27,

June 28,

2019

2018

Operating activities

 

  

 

  

Net income

$

74,316

$

71,717

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

 

 

Depreciation and amortization

 

34,910

 

23,632

Gain on asset disposals

22

Amortization of tenant improvement allowances

 

 

(2,165)

Deferred income taxes

 

(1,478)

 

2,822

Interest cap derivative contracts

1,250

(794)

Stock based compensation expense

 

4,418

 

2,952

Changes in operating assets and liabilities:

 

 

Receivables, net

 

15,809

 

12,697

Inventories, net

 

24,618

 

(14,989)

Trade accounts payable

 

(40,808)

 

6,257

Accrued expenses and other current liabilities

 

9,058

 

(21,912)

Income taxes

 

1,541

 

(5,320)

Deferred revenue

 

1,723

 

2,441

Deferred rent

 

 

4,955

Tenant improvement allowances

 

 

3,034

Other, net

 

(3,222)

 

(1,404)

Net cash provided by operating activities

 

122,157

 

83,923

Investing activities

 

  

 

  

Purchases of fixed assets

 

(78,172)

 

(63,438)

Net cash used in investing activities

 

(78,172)

 

(63,438)

Financing activities

 

  

 

  

Borrowings on revolving line of credit

 

95,300

 

129,300

Payments on revolving line of credit

 

(95,300)

 

(156,700)

Payments on term loans

 

(1,750)

 

(1,750)

Proceeds from exercise of stock options

 

7,152

 

8,656

Proceeds from employee stock purchase plan

1,419

Net cash provided by (used in) financing activities

 

6,821

 

(20,494)

Net increase (decrease) in cash and cash equivalents

 

50,806

 

(9)

Cash and cash equivalents, beginning of the period

 

644

 

556

Cash and cash equivalents, end of the period

$

51,450

$

547

Supplemental disclosures of cash flow information

 

 

  

Buildings and equipment acquired under operating leases

$

132,213

$

Cash paid for interest

$

3,912

$

3,844

Cash paid for income taxes

$

12,099

$

637

Fixed assets accrued at the end of the period

$

25,420

$

18,596

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)

June 27, 2019

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 June 27, 2019, the Company, through its wholly owned subsidiary, Floor and Decor Outlets of America, Inc. (“F&D”), operates 106 warehouse-format stores, which average 75,000 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 twenty-six weeks ended June 27, 2019 and June 28, 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

June 27, 2019

June 28, 2018

    

    

    

% of

    

    

% of

Product Category

Net Sales

Net Sales

Net Sales

Net Sales

Tile

$

136,319

 

26

%  

$

123,408

 

28

%

Laminate / Luxury Vinyl Plank

 

108,218

 

21

 

77,436

 

18

Decorative Accessories

 

97,594

 

19

 

82,976

 

19

Installation Materials and Tools

 

88,592

 

17

 

68,201

 

16

Wood

 

52,762

 

10

 

48,911

 

11

Natural Stone

 

32,903

 

6

 

29,533

 

7

Delivery and Other

 

3,923

 

1

 

3,814

 

1

Total

$

520,311

 

100

%  

$

434,279

 

100

%

Twenty-six Weeks Ended

Twenty-six Weeks Ended

June 27, 2019

June 28, 2018

    

    

    

% of

    

    

% of

Product Category

Net Sales

Net Sales

Net Sales

Net Sales

Tile

$

261,629

 

26

%  

$

240,810

 

29

%

Laminate / Luxury Vinyl Plank

 

205,720

 

21

 

144,328

 

17

Decorative Accessories

 

192,034

 

19

 

161,465

 

19

Installation Materials and Tools

 

168,301

 

17

 

131,782

 

16

Wood

 

101,992

 

10

 

95,396

 

11

Natural Stone

 

63,790

 

6

 

57,539

 

7

Delivery and Other

 

3,895

 

1

 

5,907

 

1

Total

$

997,361

 

100

%  

$

837,227

 

100

%

.

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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 June 27, 2019 and December 27, 2018, the carrying amounts and fair values of our debt were as follows:

    

June 27,

    

December 27,

(in thousands)

2019

2018

Total debt at par value

$

147,250

$

149,000

Less: unamortized discount and debt issuance costs

 

3,280

 

3,666

Net carrying amount

$

143,970

$

145,334

Fair value

$

146,514

$

147,883

4. Income Taxes

Our effective income tax rates were 7.7% and (2.7)% for the twenty-six weeks ended June 27, 2019 and June 28, 2018, respectively. The higher effective tax rate for the twenty-six weeks ended June 27, 2019 was primarily due to the recognition of lower excess tax benefits in the current period 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 also 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 $621 million of right of use assets and a corresponding $683 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 2038. All of our building leases have 10-15 year lease terms, except one lease which has a 20-year term. 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. 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 store and one distribution center to third parties. 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.

As most of our leases do not provide a readily determinable implicit rate, we use a third party to assist in the determination of the incremental borrowing rate, specifically the Bloomberg yield curve for U.S. consumers with a BB- credit rating. The rate is adjusted for collateralization as well as inflation.

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Lease Position

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

As of

(in thousands, except lease term and discount rate)

Balance Sheet Classification

June 27, 2019

Assets

Building

Right of use assets

$

707,855

Equipment

Right of use assets

7,448

Land

Right of use assets

219

Software

Right of use assets

4,487

Total operating lease assets

$

720,009

Liabilities

 

Current

 

Building

Current portion of lease liabilities

$

38,625

Equipment

Current portion of lease liabilities

3,353

Land

Current portion of lease liabilities

89

Software

Current portion of lease liabilities

2,394

Total current operating lease liabilities

44,461

Noncurrent

Building

Lease liabilities

740,739

Equipment

Lease liabilities

4,601

Land

Lease liabilities

136

Software

Lease liabilities

2,119

Total noncurrent operating lease liabilities

747,595

Total operating lease liabilities

$

792,056

Weighted-average remaining lease term

 

9 years

Weighted-average discount rate

5.5%

Lease Costs

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

    

Thirteen Weeks Ended

    

Twenty-six Weeks Ended

(in thousands)

Classification

June 27, 2019

June 27, 2019

Operating lease cost (1)

Selling and store operating

$

28,914

$

54,929

Sublease income

Selling and store operating

 

(606)

 

(1,229)

Total lease cost

$

28,308

$

53,700

(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 June 27, 2019, were:

(in thousands)

    

Amount

Twenty-six weeks ending December 26, 2019

$

50,319

2020

 

97,378

2021

 

112,876

2022

 

107,688

2023

 

102,990

Thereafter

 

594,379

Total minimum lease payments (2)

$

1,065,630

Less: amount of lease payments representing interest

273,574

Present value of future minimum lease payments

792,056

Less: current obligations under leases

44,461

Long-term lease obligations

$

747,595

(2) Future lease payments exclude approximately $200 million of legally binding minimum lease payments for operating leases signed but not yet commenced.

For the twenty-six weeks ended June 27, 2019, cash paid for operating leases was $52.4 million.

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. The 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 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

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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 twenty-six weeks ended June 27, 2019, the Company recognized $127 and $270 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

    

Twenty-six Weeks Ended

June 27,

June 28,

June 27,

June 28,

(in thousands, except per share data)

2019

    

2018

2019

    

2018

Net income

$

43,596

$

39,846

$

74,316

$

71,717

Basic weighted average shares outstanding

 

98,642

 

96,684

 

98,214

 

96,199

Dilutive effect of share based awards

 

6,198

8,253

 

6,392

8,609

Diluted weighted average shares outstanding

 

104,840

 

104,937

 

104,606

 

104,808

Basic earnings per share

$

0.44

$

0.41

$

0.76

$

0.75

Diluted earnings per share

$

0.42

$

0.38

$

0.71

$

0.68

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

    

Thirteen Weeks Ended

    

Twenty-six Weeks Ended

June 27,

June 28,

June 27,

June 28,

(in thousands)

2019

2018

2019

2018

Stock options

 

1,011

 

181

 

1,003

 

130

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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 106 warehouse format stores across 28 states as of June 27, 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 twenty-six weeks of fiscal 2019 and fiscal 2018, which ended on June 27, 2019 and June 28, 2018, respectively.

During the twenty-six weeks ended June 27, 2019, we continued to make long-term key strategic investments, including:

opening six new warehouse-format stores ending the quarter with 106 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 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 our 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:

Thirteen Weeks Ended

June 27, 2019

June 28, 2018

(in thousands)

Actual

% of Sales

    

Actual

% of Sales

 

$ Increase/(Decrease)

% Increase/(Decrease)

 

Net sales

$

520,311

100.0

%  

$

434,279

100.0

%

$

86.0

19.8

%

Cost of sales

 

302,488

58.1

 

 

256,641

59.1

45.8

17.9

Gross profit

 

217,823

41.9

 

 

177,638

40.9

40.2

22.6

Operating expenses:

Selling and store operating expenses

 

134,643

25.9

 

 

108,626

25.0

26.0

24.0

General and administrative expenses

 

30,916

5.9

 

 

25,179

5.8

5.7

22.8

Pre-opening expenses

 

6,369

1.2

 

 

6,588

1.5

(0.2)

(3.3)

Total operating expenses

171,928

33.0

140,393

32.3

31.5

22.5

Operating income

 

45,895

8.8

 

 

37,245

8.6

8.7

23.2

Interest expense

 

2,223

0.4

 

 

2,145

0.5

0.1

3.6

Income before income taxes

 

43,672

8.4

 

 

35,100

8.1

8.6

24.4

Provision (benefit) for income taxes

 

76

 

 

(4,746)

(1.1)

4.8

NM

Net income

$

43,596

8.4

%

$

39,846

9.2

%

$

3.8

9.4

%

Twenty-six Weeks Ended

June 27, 2019

June 28, 2018

(in thousands)

Actual

% of Sales

    

Actual

% of Sales

 

$ Increase

% Increase

 

Net sales

$

997,361

100.0

%  

$

837,227

100.0

%

$

160.1

19.1

%

Cost of sales

 

578,164

58.0

 

 

494,203

59.0

84.0

17.0

Gross profit

 

419,197

42.0

 

 

343,024

41.0

76.2

22.2

Operating expenses:

Selling and store operating expenses

 

262,026

26.3

 

 

211,193

25.3

50.8

24.1

General and administrative expenses

 

61,118

6.1

 

 

48,518

5.8

12.6

26.0

Pre-opening expenses

 

10,396

1.0

 

 

9,562

1.1

0.8

8.7

Total operating expenses

333,540

33.4

269,273

32.2

64.3

23.9

Operating income

 

85,657

8.6

 

 

73,751

8.8

11.9

16.1

Interest expense

 

5,144

0.5

 

 

3,929

0.5

1.2

30.9

Income before income taxes

 

80,513

8.1

 

 

69,822

8.3

10.7

15.3

Provision (benefit) for income taxes

 

6,197

0.6

 

 

(1,895)

(0.3)

8.1

NM

Net income

$

74,316

7.5

%

$

71,717

8.6

%

$

2.6

3.6

%

NM – Not meaningful

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Selected Financial Information

Thirteen Weeks Ended

Twenty-six Weeks Ended

 

June 27, 2019

    

June 28, 2018

 

June 27, 2019

    

June 28, 2018

 

Comparable stores sales

3.0

%  

11.4

%

3.1

%  

13.4

%

Comparable average ticket

1.9

%  

(0.5)

%  

1.5

%  

0.6

%  

Comparable customer transactions

1.1

%  

12.0

%  

1.5

%  

12.7

%  

Number of warehouse-format stores

106

 

88

 

106

 

88

 

Adjusted EBITDA (in thousands) (1)

$

66,592

 

$

50,683

 

$

126,660

 

$

98,510

 

Adjusted EBITDA margin

12.8

%  

11.7

%  

12.7

%  

11.8

%  

(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 June 27, 2019 increased $86.0 million, or 19.8%, compared to the corresponding prior year period. Three out of six of our product categories experienced comparable store sales increases during the period, driven by increases in laminate/luxury vinyl plank, installation materials and tools, and decorative accessories that were above our average for the thirteen weeks ended June 27, 2019. Comparable store sales increased 3.0%, or $15.6 million, and our non-comparable store sales contributed $70.4 million. The increase in comparable store sales was driven by a 1.9% increase in comparable average ticket and a 1.1% increase in comparable customer transactions.

Net sales during the twenty-six weeks ended June 27, 2019 increased $160.1 million, or 19.1%, compared to the corresponding prior year period. Three out of six of our product categories experienced comparable store sales increases during the period, driven by increases in laminate/luxury vinyl plank, installation materials and tools, and decorative accessories that were above our average for the twenty-six weeks ended June 27, 2019. Comparable store sales increased 3.1%, or $25.6 million, and our non-comparable store sales contributed $134.5 million. The increase in comparable store sales was largely driven by a 1.5% increase in comparable customer transactions and a 1.5% increase in comparable average ticket growth. We believe the increase 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.

Gross Profit and Gross Margin

Gross profit during the thirteen weeks ended June 27, 2019 increased $40.2 million, or 22.6%, compared to the corresponding prior year period. This increase in gross profit was primarily the result of increased sales driven by comparable store sales increase of 3.0% and the opening of 18 new stores since June 28, 2018. Gross margin for the thirteen weeks ended June 27, 2019 increased approximately 100 basis points to 41.9% from 40.9% in the corresponding prior year period. This increase in gross margin was primarily attributable to higher product gross margin.

Gross profit during the twenty-six weeks ended June 27, 2019 increased $76.2 million, or 22.2%, compared to the corresponding prior year period. This increase in gross profit was primarily the result of increased sales driven by comparable store sales increase of 3.1% and the opening of 18 new stores since June 28, 2018. Gross margin for the twenty-six weeks ended June 27, 2019 increased approximately 100 basis points to 42.0% from 41.0% in the corresponding prior year period. This improvement in gross margin was equally 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 June 27, 2019 increased $26.0 million, or 24.0% compared to the corresponding prior year period, due primarily to opening 18 new stores since June 28, 2018. As a percentage of net sales, our selling and store operating expenses increased approximately 90 basis points to 25.9%

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from 25.0% in the corresponding prior year period. Comparable store selling and store operating expenses as a percentage of comparable store sales decreased by approximately 40 basis points, as we leveraged personnel and advertising expenses on higher net sales.

Selling and store operating expenses during the twenty-six weeks ended June 27, 2019 increased $50.8 million, or 24.1% compared to the corresponding prior year period, due primarily to opening 18 new stores since June 28, 2018. As a percentage of net sales, our selling and store operating expenses increased approximately 100 basis points to 26.3% from 25.3% in the corresponding prior year period driven entirely 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 50 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 $5.7 million, or 22.8% during the thirteen weeks ended June 27, 2019 compared to the corresponding prior year period, due to our continued investments in personnel for our store support functions in support of our store growth. Our general and administrative expenses as a percentage of net sales increased approximately 10 basis points to 5.9% from 5.8% in the corresponding prior year period.

General and administrative expenses during the twenty-six weeks ended June 27, 2019 increased $12.6 million, or 26.0% compared to the corresponding prior year period, due to our continued investments in personnel for our store support functions in support of our store growth. Our general and administrative expenses as a percentage of net sales increased approximately 30 basis points to 6.1% from 5.8% in the corresponding prior year period.

Pre-Opening Expenses

Pre-opening expenses during the thirteen weeks ended June 27, 2019 decreased $0.2 million, or 3.3% compared to the corresponding prior year period. The decrease is primarily the result of lower average occupancy costs related to new stores being opened in existing markets, rather than new, higher cost metropolitan markets. During the thirteen weeks ended June 27, 2019 we opened three stores and relocated one store, as compared to opening four stores during the corresponding prior year period. Of the three store openings and one relocation, three were in existing markets as compared to one store during the corresponding prior year period.

Pre-opening expenses during the twenty-six weeks ended June 27, 2019 increased $0.8 million, or 8.7% compared to the corresponding prior year period. For the first six months of fiscal 2019, we were able to grow this expense 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. During the twenty-six weeks ended June 27, 2019, we opened six stores as compared to opening five stores during the corresponding prior year period.

Interest Expense

Interest expense during the thirteen weeks ended June 27, 2019 increased $0.1 million, or 3.6% compared to the corresponding prior year period. The increase in interest expense was primarily due to the increase in our average interest rate to 6.0% for the thirteen weeks ended June 27, 2019 from 4.9% in the corresponding prior year period.

Interest expense during the twenty-six weeks ended June 27, 2019 increased $1.2 million, or 30.9% compared to the corresponding prior year period. The increase in interest expense was primarily due to the increase in our average interest rate to 6.0% for the twenty-six weeks ended June 27, 2019 from 4.3% in the corresponding prior year period.

Taxes

The provision for income taxes during the thirteen weeks ended June 27, 2019 increased $4.8 million compared to the corresponding prior year period. The effective tax rate was 0.2% for the thirteen weeks ended June 27, 2019 compared to (13.5)% in the corresponding prior year period. The increase in the effective tax rate was primarily due to the recognition of lower excess tax benefits in the current period related to stock options exercised than in the corresponding prior year period.

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The provision for income taxes during the twenty-six weeks ended June 27, 2019 increased $8.1 million compared to the corresponding prior year period. The effective tax rate was 7.7% for the twenty-six weeks ended June 27, 2019 compared to (2.7)% in the corresponding prior year period. The increase in the effective tax rate was primarily due to the recognition of lower excess tax benefits in the current period 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 our 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 reconciliations of net income to EBITDA and Adjusted EBITDA for the periods noted below are set forth in the table as follows:

    

Thirteen Weeks Ended

    

Twenty-six Weeks Ended

(in thousands)

June 27, 2019

    

June 28, 2018

June 27, 2019

    

June 28, 2018

Net income

$

43,596

$

39,846

$

74,316

$

71,717

Depreciation and amortization (1)

 

17,392

 

10,683

 

34,263

 

20,911

Interest expense

 

2,223

 

2,145

 

5,144

 

3,929

Income tax expense (benefit)

 

76

 

(4,746)

 

6,197

 

(1,895)

EBITDA

 

63,287

 

47,928

 

119,920

 

94,662

Stock compensation expense (2)

 

2,168

 

1,537

 

4,418

 

2,952

Gain on asset disposal

(22)

(22)

Other (3)

 

1,159

 

1,218

 

2,344

 

896

Adjusted EBITDA

$

66,592

$

50,683

$

126,660

$

98,510

(1) Excludes deferred financing amortization, which is included as a part of interest expense in the table above. For the thirteen and twenty-six weeks ended June 28, 2018, amounts are 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) Other adjustments include amounts management does not consider indicative of our core operating performance. Amounts for the thirteen and twenty-six weeks ended June 27, 2019 primarily relate to costs associated with the secondary public offering of our Class A common stock by certain of our stockholders, completed in February 2019, as well as the relocation of the Company’s Store Support Center and closure of our Miami distribution center. Amounts for the thirteen and twenty-six weeks ended June 28, 2018 primarily relate to costs associated with the secondary public offering of our Class A common stock by certain of our stockholders, completed in May 2018, 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 million asset-backed revolving credit facility (the “ABL Facility”). As of June 27, 2019, we had $325.7 million in unrestricted liquidity, consisting of $51.5 million in cash and cash equivalents and $274.2 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 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 June 27, 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 $205 million to $215 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 $125 million to $132 million of cash;
invest in existing store remodeling projects and our distribution centers using approximately $41 million to $43 million of cash; and 
invest in information technology infrastructure, e-commerce and other store support center initiatives using approximately $39 million to $40 million of cash.

Cash Flow Analysis

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

Twenty-six Weeks Ended

(in thousands)

    

    

June 27, 2019

    

June 28, 2018

Net cash provided by operating activities

$

122,157

$

83,923

Net cash used in investing activities

 

(78,172)

 

(63,438)

Net cash provided by (used in) financing activities

 

6,821

 

(20,494)

Net increase (decrease) in cash and cash equivalents

$

50,806

$

(9)

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 $122.2 million for the twenty-six weeks ended June 27, 2019 and $83.9 million for the twenty-six weeks ended June 28, 2018. The net cash provided by operating activities for the twenty-six weeks ended June 27, 2019 was primarily the result of an increase in net income 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 twenty-six weeks ended June 28, 2018 was primarily the result of an increase in net income, which was slightly offset by reduced working capital requirements mainly associated with timing of inventory payments.

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 twenty-six weeks ended June 27, 2019 and June 28, 2018 were $78.2 million and $63.4 million, respectively. We continued our investment in new stores, as we opened six new stores and relocated one through June 27, 2019 and are preparing for an additional fourteen new stores to be opened during the third and fourth quarters of fiscal 2019. We generally incur the majority of our capital expenditures six months in advance of the new store opening. During the twenty-six weeks ended June 27, 2019, approximately 63% of capital expenditures related to new stores, 16% was for existing stores and distribution centers, and the remainder spent was associated with information technology and e-commerce investments to support our growth.

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 During the twenty-six weeks ended June 28, 2018, approximately 64% of capital expenditures related to new stores, 24% was for existing stores and distribution centers, and the remainder spent was 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 $6.8 million for the twenty-six weeks ended June 27, 2019 and net cash used in financing activities was $20.5 million for the twenty-six weeks ended June 28, 2018. The net cash provided by financing activities for the twenty-six weeks ended June 27, 2019 was primarily driven by proceeds from the employee share purchase plan and exercise of stock options of $1.4 million and $7.1 million, respectively.

The net cash used in financing activities for the twenty-six weeks ended June 28, 2018 was primarily driven by a net paydown on the ABL Facility of $27.4 million, slightly offset by proceeds from the exercise of stock options of $8.7 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 September 2018, the U.S. imposed tariffs of 10% on many products from China, and the U.S. administration has since increased that amount to 25% as of June 2019. 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 recently 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 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. As a result of the Commission’s affirmative determinations, the U.S. Department of Commerce will continue with its antidumping and countervailing duty investigations concerning imports of this product from China, with its preliminary countervailing duty determination due in September 2019, and its preliminary antidumping duty determination due in September 2019, which date is subject to extension. While it is too early to determine what the outcome of this investigation will be and what impact, if any, it will have on the Company, we have begun taking steps to mitigate the risk of exposure by sourcing from alternative countries. Potential costs and any attendant impact on 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 twenty-six weeks ended June 27, 2019.

Off-Balance Sheet Arrangements

For the twenty-six weeks ended June 27, 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

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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 June 27, 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 June 27, 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, 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, which could materially affect our business, financial condition and/or operating results.

We, and some of our officers and directors and stockholders, have been named as parties in a purported securities class action lawsuit, the material allegations of which we deny. While we intend to defend ourselves vigorously, litigation can result in substantial damages and costs, divert management’s time and attention from our business and could adversely affect our results of operations, financial condition and stock price.

In May 2019, an alleged stockholder of the Company filed a putative class action lawsuit against the Company and certain of our officers, directors and stockholders alleging certain violations of federal securities laws based on, among other things, purported materially false and misleading statements and omissions allegedly made by the Company. See the information under the “Litigation” caption in Note 5, Commitments and Contingencies to our Condensed Consolidated Financial Statements included in this Quarterly Report for more information. We deny the material allegations in the lawsuit and intend to defend ourselves vigorously. No assurances can be given that the results of these matters will be favorable to us. In addition, we may be the target of securities-related litigation in the future, both related and unrelated to the existing class action lawsuit. Litigation can divert our management’s attention and resources, result in substantial costs, and have an adverse effect on our business, results of operations, financial condition and stock price.

We maintain director and officer insurance that we regard as reasonably adequate to protect us from potential claims; however, we are responsible for meeting certain deductibles under such policies, and, in any event, we cannot assure you that the insurance coverage will adequately protect us from all claims made against us. Further, as a result of the pending litigation the costs of insurance may increase, and the availability of coverage may decrease. As a result, we may not be able to maintain our current levels of insurance at a reasonable cost, or at all, which might make it more difficult to attract qualified candidates to serve as executive officers or directors. There also may be adverse publicity associated with litigation that could negatively affect customer perception of our business and materially damage our reputation and the value of our brand regardless of whether the material allegations are valid or whether we are ultimately found liable.

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

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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 19.6% 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.

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.

Ares Management included the following disclosure in its Form 10-Q for the fiscal quarter ended June 30, 2019:

“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 has confirmed that each of the subscriptions commenced prior to the investment in AgriBriefing by the Ares Entities, and that it has terminated these subscriptions 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)

10.1

First Amendment, dated March 11, 2019, to Consulting Agreement by and between Floor and Decor Outlets of America, Inc., FDO Holdings, Inc., and George Vincent West. #

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.

## Denotes a management contract or compensatory plan or arrangement.

(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:  August 1, 2019

By:


/s/ Thomas V. Taylor

Thomas V. Taylor

Chief Executive Officer

(Principal Executive Officer)

Dated:  August 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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