FLOOR & DECOR HOLDINGS, INC., 10-K filed on 3/5/2018
Annual Report
Document and Entity Information (USD $)
In Millions, except Share data, unless otherwise specified
12 Months Ended
Dec. 28, 2017
Mar. 1, 2018
Jun. 29, 2017
Document and Entity Information
 
 
 
Entity Registrant Name
Floor & Decor Holdings, Inc. 
 
 
Entity Central Index Key
0001507079 
 
 
Document Type
10-K 
 
 
Document Period End Date
Dec. 28, 2017 
 
 
Amendment Flag
false 
 
 
Current Fiscal Year End Date
--12-28 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Voluntary Filers
No 
 
 
Entity Well-known Seasoned Issuer
No 
 
 
Entity Filer Category
Non-accelerated Filer 
 
 
Entity Public Float
 
 
$ 765 
Entity Common Stock, Shares Outstanding
 
95,663,245 
 
Document Fiscal Period Focus
FY 
 
 
Document Fiscal Year Focus
2017 
 
 
Condensed Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Dec. 28, 2017
Dec. 29, 2016
Current assets:
 
 
Cash and cash equivalents
$ 556 
$ 451 
Income taxes receivable
12,472 
 
Receivables, net
54,041 
34,533 
Inventories, net
427,950 
293,702 
Prepaid expenses and other current assets
8,193 
7,529 
Total current assets
503,212 
336,215 
Fixed assets, net
220,952 
150,471 
Intangible assets, net
109,362 
109,394 
Goodwill
227,447 
227,447 
Other assets
7,019 
7,639 
Total long-term assets
564,780 
494,951 
Total assets
1,067,992 
831,166 
Current liabilities:
 
 
Current portion of term loans
3,500 
3,500 
Trade accounts payable
258,730 
158,466 
Accrued expenses
74,547 
61,505 
Income taxes payable
 
5,787 
Deferred revenue
22,523 
14,456 
Total current liabilities
359,300 
243,714 
Term loans
144,562 
337,243 
Revolving line of credit
41,000 
50,000 
Deferred rent
25,570 
16,750 
Deferred income tax liabilities, net
27,218 
28,265 
Tenant improvement allowances
26,779 
20,319 
Other liabilities
703 
592 
Total long-term liabilities
265,832 
453,169 
Total liabilities
625,132 
696,883 
Commitments and contingencies
   
   
Capital stock:
 
 
Additional paid-in capital
323,419 
117,270 
Accumulated other comprehensive income (loss), net
(205)
176 
Retained earnings
119,550 
16,754 
Total stockholders' equity
442,860 
134,283 
Total liabilities and stockholders' equity
1,067,992 
831,166 
Class A Common Stock
 
 
Capital stock:
 
 
Common Stock
96 
77 
Class C Common Stock
 
 
Capital stock:
 
 
Common Stock
 
$ 6 
Condensed Consolidated Balance Sheets (Parenthetical) (USD $)
Dec. 28, 2017
Dec. 29, 2016
Preferred Stock, Number of Shares, Par Value and Other Disclosures [Abstract]
 
 
Preferred stock, par value
$ 0.001 
$ 0.001 
Preferred stock, shares authorized
10,000,000 
10,000,000 
Preferred stock, shares issued
Preferred stock, shares outstanding
Class A Common Stock
 
 
Common Stock, Number of Shares, Par Value and Other Disclosures [Abstract]
 
 
Common stock, par value
$ 0.001 
$ 0.001 
Common stock, shares authorized
450,000,000 
450,000,000 
Common stock, shares issued
95,509,179 
76,847,116 
Common stock, shares outstanding
95,509,179 
76,847,116 
Class B Common Stock
 
 
Common Stock, Number of Shares, Par Value and Other Disclosures [Abstract]
 
 
Common stock, par value
$ 0.001 
$ 0.001 
Common stock, shares authorized
10,000,000 
10,000,000 
Common stock, shares issued
395,742 
Common stock, shares outstanding
395,742 
Class C Common Stock
 
 
Common Stock, Number of Shares, Par Value and Other Disclosures [Abstract]
 
 
Common stock, par value
$ 0.001 
$ 0.001 
Common stock, shares authorized
30,000,000 
30,000,000 
Common stock, shares issued
6,275,489 
Common stock, shares outstanding
6,275,489 
Condensed Consolidated Statements of Income (USD $)
In Thousands, except Per Share data, unless otherwise specified
12 Months Ended
Dec. 28, 2017
Dec. 29, 2016
Dec. 31, 2015
Income Statement [Abstract]
 
 
 
Net sales
$ 1,384,767 
$ 1,050,759 
$ 784,012 
Cost of sales
812,203 
621,497 
471,390 
Gross profit
572,564 
429,262 
312,622 
Operating expenses:
 
 
 
Selling and store operating
353,647 
271,876 
202,637 
General and administrative
84,661 
64,025 
49,917 
Pre-opening
16,485 
13,732 
7,380 
Litigation settlement
 
10,500 
 
Executive severance
 
 
296 
Total operating expenses
454,793 
360,133 
260,230 
Operating income
117,771 
69,129 
52,392 
Interest expense
13,777 
12,803 
9,386 
Loss on early extinguishment of debt
5,442 
1,813 
 
Income before income taxes
98,552 
54,513 
43,006 
Provision for income taxes
(4,236)
11,474 
16,199 
Net income
$ 102,788 
$ 43,039 
$ 26,807 
Basic earnings per share
$ 1.13 
$ 0.52 
$ 0.32 
Diluted earnings per share
$ 1.03 
$ 0.49 
$ 0.31 
Condensed Consolidated Statements of Income (Parenthetical)
12 Months Ended
Dec. 28, 2017
Dec. 29, 2016
Dec. 31, 2015
Income Statement [Abstract]
 
 
 
Fiscal year period
364 days 
364 days 
371 days 
Condensed Consolidated Statements of Comprehensive Income (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 28, 2017
Dec. 29, 2016
Dec. 31, 2015
Statement of Comprehensive Income [Abstract]
 
 
 
Net income
$ 102,788 
$ 43,039 
$ 26,807 
Other comprehensive income (loss) - change in fair value of hedge instruments, net of tax
(381)
276 
43 
Total comprehensive income
$ 102,407 
$ 43,315 
$ 26,850 
Condensed Consolidated Statements of Comprehensive Income (Parenthetical)
12 Months Ended
Dec. 28, 2017
Dec. 29, 2016
Dec. 31, 2015
Statement of Comprehensive Income [Abstract]
 
 
 
Fiscal year period
364 days 
364 days 
371 days 
Condensed Consolidated Statements of Stockholders' Equity (USD $)
In Thousands, except Share data, unless otherwise specified
Common stock
Class A Common Stock
USD ($)
Common stock
Class B Common Stock
Common stock
Class C Common Stock
USD ($)
Additional paid-in capital
USD ($)
Accumulated other comprehensive income (loss)
USD ($)
Retained earnings
USD ($)
Class A Common Stock
Class B Common Stock
Class C Common Stock
Total
USD ($)
Balance at Dec. 25, 2014
$ 77 
 
$ 6 
$ 261,009 
$ (143)
$ 21,287 
 
 
 
$ 282,236 
Balance (in shares) at Dec. 25, 2014
76,847,000 
211,000 
6,275,000 
 
 
 
 
 
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
 
 
 
 
 
Stock-based compensation expense
 
 
 
3,258 
 
 
 
 
 
3,258 
Stock-based compensation (in shares)
 
34,000 
 
 
 
 
 
 
 
 
Exercise of stock options
 
 
 
40 
 
 
 
 
 
40 
Exercise of stock options (in shares)
 
5,000 
 
 
 
 
 
 
 
5,149 
Tax benefit/deficiency from employee stock options
 
 
 
(19)
 
 
 
 
 
(19)
Other comprehensive gain, net of tax
 
 
 
 
43 
 
 
 
 
43 
Net income
 
 
 
 
 
26,807 
 
 
 
26,807 
Balance at Dec. 31, 2015
77 
 
264,288 
(100)
48,094 
 
 
 
312,365 
Balance (in shares) at Dec. 31, 2015
76,847,000 
251,000 
6,275,000 
 
 
 
 
 
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
 
 
 
 
 
Stock-based compensation expense
 
 
 
3,182 
 
47 
 
 
 
3,229 
Exercise of stock options
 
 
 
284 
 
 
 
 
 
284 
Exercise of stock options (in shares)
 
145,000 
 
 
 
 
 
 
 
145,140 
Other comprehensive gain, net of tax
 
 
 
 
276 
 
 
 
 
276 
Dividend declared
 
 
 
(150,722)
 
(74,278)
 
 
 
(225,000)
Cumulative effect from adoption of ASU No. 2016-09 (Accounting Standards Update 2016-09 [Member])
 
 
 
238 
 
(148)
 
 
 
90 
Net income
 
 
 
 
 
43,039 
 
 
 
43,039 
Balance at Dec. 29, 2016
77 
 
117,270 
176 
16,754 
 
 
 
134,283 
Balance (in shares) at Dec. 29, 2016
76,847,000 
396,000 
6,275,000 
 
 
 
76,847,116 
395,742 
6,275,489 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
 
 
 
 
 
Stock-based compensation expense
 
 
 
4,951 
 
 
 
 
4,959 
Conversion of Class B Common Stock (in shares)
396,000 
(396,000)
 
 
 
 
 
 
 
 
Conversion of Class C Common Stock
 
(6)
 
 
 
 
 
 
 
Conversion of Class C Common Stock (in shares)
6,275,000 
 
(6,275,000)
 
 
 
 
 
 
 
Exercise of stock options
 
 
8,872 
 
 
 
 
 
8,874 
Exercise of stock options (in shares)
1,828,000 
 
 
 
 
 
 
 
 
1,828,339 
IPO proceeds
10 
 
 
192,326 
 
 
 
 
 
192,336 
Number of shares issued
10,147,000 
 
 
 
 
 
 
 
 
 
Issuance of restricted stock award (in shares)
15,000 
 
 
 
 
 
 
 
 
 
Other comprehensive gain, net of tax
 
 
 
 
(381)
 
 
 
 
(381)
Net income
 
 
 
 
 
102,788 
 
 
 
102,788 
Balance at Dec. 28, 2017
$ 96 
 
 
$ 323,419 
$ (205)
$ 119,550 
 
 
 
$ 442,860 
Balance (in shares) at Dec. 28, 2017
95,509,000 
 
 
 
 
 
95,509,179 
 
Condensed Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 28, 2017
Dec. 29, 2016
Dec. 31, 2015
Operating activities
 
 
 
Net income
$ 102,788 
$ 43,039 
$ 26,807 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
38,062 
28,604 
19,684 
Loss on early extinguishment of debt
5,442 
1,813 
 
Loss on asset disposals
128 
451 
144 
Amortization of tenant improvement allowances
(3,311)
(2,561)
(2,197)
Deferred income taxes
(557)
(5,536)
464 
Stock based compensation expense
4,959 
3,229 
3,258 
Changes in operating assets and liabilities:
 
 
 
Receivables, net
(19,508)
(10,793)
(7,997)
Inventories, net
(134,248)
(21,133)
(70,988)
Other assets
(1,591)
(4,817)
(2,520)
Trade accounts payable
100,264 
11,145 
40,454 
Accrued expenses
9,485 
27,244 
4,908 
Income taxes
(18,259)
8,271 
(4,805)
Deferred revenue
8,067 
2,311 
4,997 
Deferred rent
9,243 
3,870 
3,327 
Tenant improvement allowances
7,984 
4,244 
4,816 
Other
259 
75 
28 
Net cash provided by operating activities
109,207 
89,456 
20,380 
Investing activities
 
 
 
Purchases of fixed assets
(102,253)
(74,648)
(45,037)
Other
 
 
16 
Net cash used in investing activities
(102,253)
(74,648)
(45,021)
Financing activities
 
 
 
Borrowings on revolving line of credit
236,700 
171,850 
204,300 
Payments on revolving line of credit
(245,700)
(214,750)
(177,900)
Proceeds from term loans
 
362,000 
 
Payments on term loans
(197,500)
(98,334)
(1,667)
Prepayment penalty on term loan extinguishment
 
(179)
 
Debt issuance costs
(1,559)
(10,546)
(93)
Cash dividends
 
(225,000)
 
Net proceeds from initial public offering
192,336 
 
 
Proceeds from exercise of stock options
8,874 
284 
40 
Net cash (used in) provided by financing activities
(6,849)
(14,675)
24,680 
Net (decrease) increase in cash and cash equivalents
105 
133 
39 
Cash and cash equivalents, beginning of the period
451 
318 
279 
Cash and cash equivalents, end of the period
556 
451 
318 
Supplemental disclosures of cash flow information
 
 
 
Cash paid for interest
15,748 
6,922 
8,898 
Cash paid for income taxes
14,392 
8,929 
20,182 
Fixed assets accrued at the end of the period
8,521 
5,387 
7,002 
Fixed assets acquired as part of lease - paid for by lessor
$ 1,786 
$ 2,290 
 
Condensed Consolidated Statements of Cash Flows (Parenthetical)
12 Months Ended
Dec. 28, 2017
Dec. 29, 2016
Dec. 31, 2015
Statement of Cash Flows [Abstract]
 
 
 
Fiscal year period
364 days 
364 days 
371 days 
Summary of Significant Accounting Policies
Summary of Significant Accounting Policies

1. Summary of Significant Accounting Policies

Nature of Business

Floor & Decor Holdings, Inc. (f/k/a FDO 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 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 the products for professional installation (“Buy it Yourself” or “BIY”). We operate within one reportable segment.

As of December 28, 2017, the Company, through its wholly owned subsidiary, Floor and Decor Outlets of America, Inc. (“F&D”), operates 83 warehouse-format stores, which average 73,000 square feet, and one small-format standalone design center in 21 states, as well as four 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 ended December 28, 2017 (“fiscal 2017”) and December 29, 2016 (“fiscal 2016”) include 52 weeks. Fiscal year ended December 31, 2015 (“fiscal 2015”) includes 53 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 the first, second, third and fourth quarters of the fiscal year.

Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Certain prior year amounts have been reclassified in the consolidated financial statements to conform to the current year presentation. Unless indicated otherwise, the information in this Annual Report has been adjusted to give effect to a 321.820-for-one stock split of the Company’s outstanding common stock, which was approved by the Company's board of directors and shareholders on April 13, 2017 and effected on April 24, 2017.

Cash and Cash Equivalents

Cash consists of currency and demand deposits with banks.

Receivables

Receivables consist primarily of amounts due from credit card companies, receivables from vendors and tenant improvement allowances owed by landlords. The Company typically collects its credit card receivables within three to five business days of the underlying sale to the customer. The Company has agreements with a majority of its large merchandise vendors that allow for specified rebates based on purchasing volume. Generally, these agreements are on an annual basis, and the Company collects the rebates subsequent to its fiscal year end. Additionally, the Company has agreements with substantially all vendors that allow for the return of certain merchandise throughout the normal course of business. When inventory is identified to return to a vendor, it is removed from inventory and recorded as a receivable on the Consolidated Balance Sheet, and any variance between capitalized inventory cost associated with the return and the expected vendor reimbursement is expensed in Cost of sales in the Consolidated Statement of Income when the inventory is identified to be returned to the vendor. The Company reserves for estimated uncollected receivables based on historical trends, which historically have been immaterial. The allowance for doubtful accounts as of December 28, 2017 and December 29, 2016, was $349 thousand and $188 thousand, respectively.

Credit Program

Credit is offered to the Company's customers through a proprietary credit card underwritten by third-party financial institutions and at no recourse to the Company.

Inventory Valuation and Shrinkage

Inventories consist of merchandise held for sale and are stated at the lower of cost and net realizable value. When evidence exists that the net realizable value of inventory is lower than its cost, the difference is recorded in Cost of sales in the Consolidated Statement of Income as a loss in the period in which it occurs. The Company determines inventory costs using the weighted average cost method. The Company capitalizes transportation, duties and other costs to get product to its retail locations. The Company records reserves for estimated losses related to shrinkage and other amounts that are otherwise not expected to be fully recoverable. These reserves are calculated based on historical shrinkage, selling price, margin and current business trends. The estimates have calculations that require management to make assumptions based on the current rate of sales, age, salability and profitability of inventory, historical percentages that can be affected by changes in the Company's merchandising mix, customer preferences and changes in actual shrinkage trends. These reserves totaled $2,936 thousand and $2,449 thousand as of December 28, 2017 and December 29, 2016, respectively.

Physical inventory counts and cycle counts are performed on a regular basis in each store and distribution center to ensure that amounts reflected in the accompanying Consolidated Balance Sheets are properly stated. During the period between physical inventory counts in our stores, the Company accrues for estimated losses related to shrinkage on a store-by-store basis. Shrinkage is the difference between the recorded amount of inventory and the physical inventory. Shrinkage may occur due to theft or loss, among other things.

Fixed Assets

Fixed assets consist primarily of furniture, fixtures and equipment, leasehold improvements (including those that are reimbursed by landlords as tenant improvement allowances), computer software and hardware and land. Fixed assets are stated at cost less accumulated depreciation utilizing the straight-line method over the assets' estimated useful lives.

Leasehold improvements are amortized using the straight-line method over the shorter of (i) the original term of the lease, (ii) renewal term of the lease if the renewal is reasonably expected or (iii) the useful life of the improvement. The Company's fixed assets are depreciated using the following estimated useful lives:

 

 

 

 

    

Useful Life

Furniture, fixtures and equipment

 

2 - 7 years

Leasehold improvements

 

10 - 25 years

Computer software and hardware

 

3 - 7 years

Land

 

Indefinite

 

The cost and related accumulated depreciation of assets sold or otherwise disposed are removed from the accounts, and the related gain or loss is reported in the Consolidated Statements of Income.

.

Capitalized Software Costs

The Company capitalizes certain costs related to the acquisition and development of software and amortizes these costs using the straight-line method over the estimated useful life of the software. Certain development costs not meeting the criteria for capitalization are expensed as incurred.

Goodwill and Other Indefinite‑Lived Intangible Assets

Goodwill represents the excess of purchase price over the fair value of net assets acquired. The Company does not amortize goodwill and other intangible assets with indefinite lives resulting from business combinations but, in accordance with the Financial Accounting Standards Board ("FASB") Accounting Standards Codification (“ASC”) 350, Intangibles—Goodwill and Other, does assess the recoverability of goodwill annually in the fourth quarter of each fiscal year, or more often if indicators warrant, by determining whether the fair value of each reporting unit supports its carrying value. In accordance with ASC 350, identifiable intangible assets with finite lives are amortized over their estimated useful lives. Each year the Company may assess qualitative factors to determine whether it is more likely than not that the fair value of the single reporting unit is less than its carrying amount as a basis for determining whether it is necessary to complete quantitative impairment assessments.

 

The Company completed a qualitative assessment in fiscal 2017. Based on such goodwill impairment analysis performed qualitatively as of October 27, 2017, the Company determined that the fair value of its reporting unit is in excess of the carrying value. No events or changes in circumstances have occurred since the date of the Company's most recent annual impairment test that would more likely than not reduce the fair value of the reporting unit below its carrying amount.

 

The Company annually (or more frequently if there are indicators of impairment) evaluates whether its indefinite-lived asset continues to have an indefinite life or have impaired carrying values due to changes in the asset or its related risks. The impairment review is performed by comparing the carrying value of the indefinite-lived intangible asset to its estimated fair value. If the recorded carrying value of the indefinite-lived asset exceeds its estimated fair value, an impairment charge is recorded to write the asset down to its estimated fair value.

The estimated lives of the Company’s intangible assets are as follows:

 

 

 

 

    

Useful Life

Trade names

 

Indefinite

Vendor relationships

 

10 years

 

The Company’s goodwill and other indefinite‑lived intangible assets impairment loss calculations contain uncertainties because they require management to make significant judgments in estimating the fair value of the Company’s reporting unit and indefinite‑lived intangible asset, including the projection of future cash flows, assumptions about which market participants are the most comparable, the selection of discount rates and the weighting of the income and market approaches. These calculations contain uncertainties because they require management to make assumptions such as estimating economic factors and the profitability of future business operations and, if necessary, the fair value of the reporting unit’s assets and liabilities among others. Further, the Company’s ability to realize the future cash flows used in its fair value calculations is affected by factors such as changes in economic conditions, changes in the Company’s operating performance and changes in the Company’s business strategies. Significant changes in any of the assumptions involved in calculating these estimates could affect the estimated fair value of the Company’s reporting unit and indefinite‑lived intangible assets and could result in impairment charges in a future period.

Long‑Lived Assets

Long-lived assets, such as fixed assets and intangible assets with finite lives, 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. If the sum of the estimated undiscounted future cash flows related to the asset is less than the asset's carrying value, the Company recognizes a loss equal to the difference between the carrying value and the fair value, usually determined by the estimated discounted cash flow analysis of the asset.

Since there is typically no active market for the Company's definite-lived intangible asset, the Company estimates fair value based on expected future cash flows at the time they are identified. The Company estimates future cash flows based on store-level historical results, current trends and operating and cash flow projections. The Company amortizes the asset with a finite life over its estimated useful life on a straight-line basis. This amortization methodology best matches the pattern of economic benefit that is expected from the definite-lived intangible asset. The Company evaluates the useful life of its intangible asset on an annual basis.

Tenant Improvement Allowances and Deferred Rent

The Company accounts for tenant improvement allowances and deferred rent as liabilities or assets on the balance sheet. Tenant improvement allowances are amounts received from a lessor for improvements to leased properties and are amortized against rent expense over the life of the respective leases. Fixed rents are recognized ratably over the initial non-cancellable lease term. Deferred rent represents differences between the actual cash paid for rent and the amount of straight-line rent over the initial non-cancellable term.

Self‑Insurance Reserves

The Company is partially self-insured for workers' compensation and general liability claims less than certain dollar amounts and maintains insurance coverage with individual and aggregate limits. The Company also has a basket aggregate limit to protect against losses exceeding $7.0 million (subject to adjustment and certain exclusions) for workers' compensation claims and general liability claims. The Company's liabilities represent estimates of the ultimate cost for claims incurred, including loss adjusting expenses, as of the balance sheet date. The estimated liabilities are not discounted and are established based upon analysis of historical data, actuarial estimates, regulatory requirements, an estimate of claims incurred but not yet reported and other relevant factors. Management utilizes independent third-party actuarial studies to help assess the liability on a regular basis.

Commitments and Contingencies

Liabilities for loss contingencies arising from claims, assessments, litigation, fines, penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated.

Asset Retirement Obligations

An asset retirement obligation (“ARO”) represents a legal obligation associated with the retirement of a tangible long-lived asset that is incurred upon the acquisition, construction, development or normal operation of that long-lived asset. The Company’s AROs are primarily associated with leasehold improvements that, at the end of a lease, the Company is contractually obligated to remove in order to comply with certain lease agreements. The ARO is recorded in Other long-term liabilities on the Consolidated Balance Sheets and will be subsequently adjusted for changes in fair value. The associated estimated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset and depreciated over its useful life.

Changes in (i) inflation rates and (ii) the estimated costs, timing and extent of future store closure activities each result in (a) a current adjustment to the recorded liability and related asset and (b) a change in the liability and asset amounts to be recorded prospectively. Any changes related to the assets are then recognized in accordance with our depreciation policy, which would generally result in depreciation expense being recognized prospectively over the shorter of the remaining lease term or estimated useful life.

Fair Value Measurements—Debt

The Company estimates fair values in accordance with ASC 820, Fair Value Measurement. ASC 820 provides a framework for measuring fair value and expands disclosures required about fair value measurements. ASC 820 defines fair value as the price that would be received from the sale of an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. Additionally, ASC 820 defines levels within a hierarchy based upon observable and non-observable inputs.

·

Level 1: Inputs that are quoted prices in active markets for identical assets or liabilities

·

Level 2: Inputs other than quoted prices in active markets for assets or liabilities that are either directly or indirectly observable

·

Level 3: Inputs that are non‑observable that reflect the reporting entity’s own assumptions

The fair values of certain of the Company's debt instruments have been determined by the Company utilizing Level 3 inputs, such as available market information and appropriate valuation methodologies, including the rates for similar instruments and the discounted cash flows methodology.

Derivative Financial Instruments

The Company uses derivative financial instruments to maintain a portion of its long-term debt obligations at a targeted balance of fixed and variable interest rate debt to manage its risk associated with fluctuations in interest rates. In November 2016, the Company entered into two interest rate caps. In 2013, the Company entered into two interest rate swap contracts. We recognize derivative contracts at fair value on our Consolidated Balance Sheets. The fair value is calculated utilizing Level 2 inputs. Unrealized changes in the fair value of hedged derivative instruments are recorded in Accumulated other comprehensive (loss) income within the equity section of our Consolidated Balance Sheets.

The effective portion of the gain or loss on the derivatives is reported as a component of Comprehensive income within the Consolidated Statements of Comprehensive Income and reclassified into earnings in the same period in which the hedged transaction affects earnings. The effective portion of the derivative represents the change in fair value of the hedge that offsets the change in fair value of the hedged item. To the extent changes in fair values of the instruments are not highly effective, the ineffective portion of the hedge is immediately recognized in earnings.

We perform an assessment of the effectiveness of our derivative contracts designated as hedges, including assessing the possibility of counterparty default. If we determine that a derivative is no longer expected to be highly effective, we discontinue hedge accounting prospectively and recognize subsequent changes in the fair value of the hedge in earnings. We believe our derivative contracts, which continue to be designated as cash flow hedges, and which consist of interest rate cap contracts, will continue to be highly effective in offsetting changes in cash flow attributable to floating interest rate risk. In the current year, one of our interest rate caps was de-designated as a result of a debt amendment. See footnote 7. Derivatives and Risk Management for additional information.

Use of Estimates

The preparation of the financial statements requires management of the Company to make a number of estimates and assumptions relating to the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of sales and expenses during the period. Significant items subject to such estimates and assumptions include the carrying amounts of fixed assets and intangibles, asset retirement obligations, allowances for accounts receivable and inventories, reserves for workers' compensation and general liability claims incurred but not reported and deferred income tax assets and liabilities. Actual results could differ from these estimates.

Revenue Recognition

Retail sales at the Company's stores are recorded at the point of sale and are net of sales discounts and estimated returns. In some instances, the Company will allow customers to store their merchandise, generally up to 14 days. In this instance, the Company recognizes revenue and the related cost of sales when both collection or reasonable assurance of collection of payment and final delivery of the product have occurred. For orders placed through our website and shipped to our customers, we recognize revenue and the related cost of sales at the time we estimate the customer receives the merchandise, which is typically within a few days of shipment. The Company arranges and pays for freight to deliver products to customers, and bills the customer for the estimated freight cost, which is included in net sales. Sales taxes collected are not recognized as revenue as these amounts are ultimately remitted to the appropriate taxing authorities.

Gift Cards and Merchandise Credits

We sell gift cards to our customers in our stores and through our website and issue merchandise credits in our stores. We account for the programs by recognizing a liability at the time the gift card is sold or the merchandise credit is issued. The liability is relieved and revenue is recognized when the cards are redeemed. We have an agreement with an unrelated third-party who is the issuer of the Company's gift cards and also assumes the liability for unredeemed gift cards. The Company is not subject to claims under unclaimed property statutes, as the agreement effectively transfers the ownership of such unredeemed gift cards and the related future escheatment liability, if any, to the third-party. Gift card breakage is recognized based upon historical redemption patterns and represents the balance of gift cards for which the Company believes the likelihood of redemption by the customer is remote. Accordingly, in fiscal 2017, fiscal 2016, and fiscal 2015 gift card breakage income of $757 thousand, $627 thousand, and $511 thousand was recognized in net sales in the Consolidated Statements of Income, respectively, for such unredeemed gift cards.

Sales Returns and Allowances

The Company accrues for estimated sales returns based on historical sales return results. The allowance for sales returns at December 28, 2017 and December 29, 2016, was $7,189 thousand and $4,887 thousand, respectively.

Merchandise exchanges of similar product and price are not considered merchandise returns and, therefore, are excluded when calculating the sales returns reserve.

Cost of Sales

Cost of sales consists of merchandise costs as well as freight to transport inventory to our distribution centers and stores, and duty and other costs that are incurred to distribute the merchandise to our stores. Cost of sales also includes shrinkage, damaged product disposals, distribution, warehousing, sourcing and compliance cost and arranging and paying for freight to deliver products to customers. The Company receives cash consideration from certain vendors related to vendor allowances and volume rebates, which is recorded as a reduction of costs of sales when the inventory is sold or as a reduction of the carrying value of inventory if the inventory is still on hand.

Vendor Rebates and Allowances

Vendor allowances consist primarily of volume rebates that are earned as a result of attaining certain inventory purchase levels and advertising allowances or incentives for the promotion of vendors' products. These vendor allowances are accrued, based on annual projections, as earned.

Vendor allowances earned are initially recorded as a reduction to the carrying value of inventory and a subsequent reduction in cost of sales when the related product is sold. Certain incentive allowances that are reimbursements of specific, incremental and identifiable costs incurred to promote vendors' products are recorded as an offset against these promotional expenses.

Total Operating Expenses

Total operating expenses consist primarily of store and administrative personnel wages and benefits, infrastructure expenses, supplies, fixed asset depreciation, store and corporate facility expenses, pre-opening costs, training and advertising costs. Credit card fees, insurance, personal property taxes, legal expenses and other miscellaneous operating costs are also included.

Advertising

The Company expenses advertising costs as the advertising takes place. Advertising costs incurred during the years ended December 28, 2017,  December 29, 2016, and December 31, 2015, were $43,560 thousand, $33,497 thousand, and $24,478 thousand respectively, and are included in Selling and store operating expenses and Pre‑opening expenses in the accompanying Consolidated Statements of Income.

Pre‑Opening Expenses

The Company accounts for non-capital operating expenditures incurred prior to opening a new store as "pre-opening" expenses in its Consolidated Statements of Income. The Company's pre-opening expenses begin on average three to six months in advance of a store opening or relocating due to, among other things, the amount of time it takes to prepare a store for its grand opening. Pre-opening expenses primarily include: advertising, rent, staff training, staff recruiting, utilities, personnel and equipment rental. A store is considered to be relocated if it is closed temporarily and re-opened within the same primary trade area. Pre‑opening expenses for the years ended December 28, 2017,  December 29, 2016, and December 31, 2015, totaled $16,485 thousand, $13,732 thousand, and $7,380 thousand, respectively.

Loss on Early Extinguishment of Debt

On May 2, 2017, the Company completed its initial public offering (“IPO”), pursuant to which it sold an aggregate of 10,147,025 shares of Class A common stock, par value $0.001 per share. The Company received aggregate net proceeds of approximately $192.0 million after deducting underwriting discounts and commissions and other offering expenses. The Company used net proceeds from the IPO of approximately $192.0 million to repay a portion of the amounts outstanding under the Term Loan Facility, including accrued and unpaid interest. The partial paydown resulted in a loss on extinguishment of debt in the amount of approximately $5.4 million related to unamortized original issue discount and unamortized deferred debt issuance costs.

Stock‑Based Compensation

The Company accounts for employee stock options in accordance with ASC 718, Compensation – Stock Compensation. The Company obtains independent third-party valuation studies to assist it with determining the grant date fair value of our stock price. Stock options are granted with exercise prices equal to or greater than the estimated fair market value on the date of grant as authorized by the board of directors or compensation committee. Options granted have vesting provisions ranging from three to five years. Stock option grants are generally subject to forfeiture if employment terminates prior to vesting. The Company has selected the Black-Scholes option pricing model for estimating the grant date fair value of stock option awards granted. The Company bases the risk-free interest rate on the yield of a zero coupon U.S. Treasury security with a maturity equal to the expected life of the option from the date of the grant. The Company estimates the dividend yield to be zero as the Company does not intend to pay dividends in the future. The Company estimates the volatility of the share price of its common stock by considering the historical volatility of the stock of similar public entities. The Company considers a number of factors in determining the appropriateness of the public entities included in the volatility assumption, including the entity's life cycle stage, growth profile, size, financial leverage and products offered. Stock-based compensation cost is measured at the grant date based on the value of the award and is recognized as expense over the requisite service period based on the number of years for which the requisite service is expected to be rendered. The Company elected to early adopt Accounting Standards Update (“ASU”) No. 2016-09 “Improvements to Employee Share-Based Payment Accounting” in 2016 and now recognizes forfeitures in earnings as they occur; prior to the adoption, the Company had considered the retirement and forfeiture provisions of the options and utilized its historical experience to estimate the expected life of the options.

Income Taxes

The Company accounts for income taxes under the liability method in accordance with ASC 740, Income Taxes, which requires the recognition of deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts and tax basis of existing assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Changes in tax laws and rates could affect recorded deferred tax assets and liabilities in the future. The effect on deferred tax assets and liabilities of a change in tax laws or rates is recognized in the period that includes the enactment date of such a change.

The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which the associated temporary differences became deductible. On a quarterly basis, the Company evaluates whether it is more likely than not that its deferred tax assets will be realized in the future and concludes whether a valuation allowance must be established.

The Company includes any estimated interest and penalties on tax-related matters in income taxes payable and income tax expense. The Company accounts for uncertain tax positions in accordance with ASC 740. ASC 740-10 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements using a two-step process for evaluating tax positions taken, or expected to be taken, on a tax return. The Company may only recognize the tax benefit from an uncertain tax position if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. Uncertain tax positions require determinations and estimated liabilities to be made based on provisions of the tax law, which may be subject to change or varying interpretation. The Company does not believe it has any material risks related to uncertain tax positions.

Segment Information

The Company operates as a specialty retailer of hard surface flooring and related accessories through retail stores located in the United States and through its website. The Company's chief operating decision maker is its Chief Executive Officer who reviews the Company's consolidated financial information for purposes of allocating resources and evaluating the Company's financial performance. Accordingly, the Company concluded it has one reportable segment.

The following table presents the net sales of each major product category for each of the last three fiscal years (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Year Ended

 

 

 

December 28, 2017

 

December 29, 2016

 

December 31, 2015

 

 

    

 

 

    

% of

    

 

 

    

% of

    

 

 

    

% of

 

Product Category

 

Net Sales

 

Net Sales

 

Net Sales

 

Net Sales

 

Net Sales

 

Net Sales

 

Tile

 

$

419,745

 

30

%  

$

325,433

 

31

%  

$

244,902

 

31

%

Decorative Accessories

 

 

257,684

 

19

 

 

188,371

 

18

 

 

138,442

 

18

 

Accessories (Installation Materials and Tools)

 

 

217,427

 

16

 

 

165,330

 

16

 

 

124,162

 

16

 

Laminate / Luxury Vinyl Plank

 

 

208,238

 

15

 

 

131,447

 

12

 

 

77,586

 

10

 

Wood

 

 

167,152

 

12

 

 

142,751

 

14

 

 

116,999

 

15

 

Natural Stone

 

 

104,670

 

 8

 

 

90,866

 

 9

 

 

78,294

 

10

 

Delivery and Other

 

 

9,851

 

 —

 

 

6,561

 

 —

 

 

3,627

 

 —

 

Total

 

$

1,384,767

 

100

%  

$

1,050,759

 

100

%  

$

784,012

 

100

%

 

Recent Accounting Pronouncements

In January 2017, the FASB issued ASU No. 2017-04, "Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment." This standard simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. ASU No. 2017-04 is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted after January 1, 2017. The amendments in this update should be applied using a prospective approach. The adoption of ASU No. 2017-04 did not have a material impact on the Company's Consolidated Financial Statements.

In October 2016, the FASB issued ASU No. 2016-16, "Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory." This standard update requires an entity to recognize the income tax consequences of intra-entity transfers of assets other than inventory when the transfer occurs. ASU No. 2016-16 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. The amendments in this update should be applied using a modified retrospective approach. The adoption of ASU No. 2016-16 is not expected to have a material impact on the Company's Consolidated Financial Statements.

In August 2016, the FASB issued ASU No. 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments." The standard update addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. ASU No. 2016-15 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. The amendments in this update should be applied using a retrospective approach. The adoption of ASU No. 2016-15 is not expected to have a material impact on the Company's consolidated statements of cash flows.

In March 2016, the FASB issued ASU No. 2016-09, "Compensation—Stock Compensation (Topic 718): Improvements to Employees Share-Based Payment Accounting." The update is intended to simplify several areas of accounting for share-based compensation arrangements, including the income tax impact, classification on the statement of cash flows and forfeitures. The amendments in this update are effective for fiscal years beginning after December 15, 2016, and interim periods within those years, with early adoption permitted. Depending on the amendment, methods used to apply the requirements of the update include modified retrospective, retrospective, and prospective. The Company elected to early adopt this standard during the second quarter of 2016. The net cumulative effect of this change was recognized as a $148 thousand reduction to retained earnings and the recognition of $238 thousand of additional paid-in capital. The adoption of this standard resulted in a modified retrospective adjustment on the Company’s consolidated balance sheet as of January 1, 2016, the beginning of the annual period that includes the interim period of adoption.

In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)." ASU No. 2016-02 requires that lessees recognize lease assets and lease liabilities for all leases with greater than 12 month terms on the balance sheet. The guidance also requires disclosures about the amount, timing and uncertainty of cash flows arising from leases. This new guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those years, with early adoption permitted. The standard must be applied using a modified retrospective approach. The Company is currently evaluating the impact that ASU No. 2016-02 will have on our Consolidated Financial Statements. When implemented, the Company believes the new standard will have a material impact on its consolidated balance sheet. The Company is currently evaluating the effect that implementation of this standard will have on the Company's consolidated statements of income, cash flows and related disclosures.

In July 2015, the FASB issued ASU No. 2015-11, "Inventory (Topic 330): Simplifying the Measurement of Inventory." ASU No. 2015-11 provides new guidance for entities using first-in, first-out or average cost to simplify the subsequent measurement of inventory, which proposes that inventory should be measured at the lower of cost and net realizable value. Net realizable value is defined as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. This guidance eliminates the option to subsequently measure inventory at replacement cost or net realizable value less an approximately normal profit margin. This new guidance is effective for fiscal years beginning after December 15, 2016, and interim periods within those years. The amendments in this update should be applied prospectively. The adoption of ASU No. 2015-11 did not have a material impact on the Company's Consolidated Financial Statements.

In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)." ASU No. 2014-09 provides new guidance related to the core principle that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to receive in exchange for those goods or services provided. In July 2015, the FASB issued ASU No. 2015-14, "Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date," to defer the effective date by one year to December 15, 2017 for interim and annual reporting periods beginning after that date, and permitted early adoption of the standard, but not before the original effective date of December 15, 2016. In March 2016, the FASB issued ASU No. 2016-08 "Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)," which clarifies the guidance in ASU No. 2014-09 and has the same effective date as the original standard. In April 2016, the FASB issued ASU No. 2016-10, "Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing." In May 2016, the FASB issued ASU No. 2016-12, "Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients." The 2016 updates to the revenue recognition guidance relate to principal versus agent assessments, identifying performance obligations, the accounting for licenses, and certain narrow scope improvements and practical expedients. This new standard will impact the timing and amounts of revenue recognized for (i) gift card breakage income and (ii) certain transactions for which the Company allows customers to store their merchandise at our retail stores for final delivery at a later date. Gift card breakage income is currently recognized based upon historical redemption patterns. ASU No. 2014-09 requires gift card breakage income to be recognized in proportion to the pattern of rights exercised by the customer when the Company expects to be entitled to breakage. The more significant change of this standard relates to the timing of revenue recognized for certain transactions for which the Company allows customers to store their merchandise at our retail stores for final delivery at a later date. Currently, the Company recognizes revenue when both collection or reasonable assurance of collection of payment and final delivery of the product have occurred. Under the new guidance, the Company will recognize revenue at the time the customer obtains control of the inventory. The Company is adopting this standard in the first quarter of fiscal 2018 and will use the modified retrospective approach. The cumulative adjustment upon adoption will primarily result in a reduction of deferred revenue and related inventories and an increase to retained earnings. The Company does not believe the adoption of the standard will have a material impact to its Consolidated Financial Statements going forward.

. 

Accrued Expenses
Accrued Expenses

2. Accrued Expenses

Accrued expenses consist of the following (in thousands):

 

 

 

 

 

 

 

 

    

December 28,

    

December 29,

 

 

2017

 

2016

Accrued incentive compensation

 

$

17,218

 

$

14,799

Accrued legal fees

 

 

178

 

 

13,642

Other

 

 

57,151

 

 

33,064

Accrued Expenses

 

$

74,547

 

$

61,505

 

Fixed Assets
Fixed Assets

3. Fixed Assets

Fixed assets as of December 28, 2017 and December 29, 2016, consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

December 28,

    

December 29,

 

    

2017

 

2016

Furniture, fixtures and equipment

 

$

126,821

 

$

90,787

Leasehold improvements

 

 

141,174

 

 

89,226

Computer software and hardware

 

 

52,687

 

 

40,699

Land

 

 

4,976

 

 

 —

Fixed assets, at cost

 

 

325,658

 

 

220,712

Less: accumulated depreciation and amortization

 

 

104,706

 

 

70,241

Fixed assets, net

 

$

220,952

 

$

150,471

 

Depreciation and amortization on fixed assets for the years ended December 28, 2017,  December 29, 2016, and December 31, 2015, was $36,255 thousand, $27,459 thousand, and $18,531 thousand, respectively.

Intangible Assets
Intangible Assets

4. Intangible Assets

The following summarizes the balances of identifiable intangible assets as of December 28, 2017 and December 29, 2016 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 28, 2017

 

December 29, 2016

 

    

 

    

Gross

    

 

 

    

Gross

    

 

 

 

 

Estimated

 

Carrying

 

Accumulated

 

Carrying

 

Accumulated

 

 

Useful Lives

 

Amount

 

Amortization

 

Amount

 

Amortization

Amortizable intangible asset:

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Vendor relationships

 

10 years

 

 

319

 

 

(226)

 

 

319

 

 

(194)

Indefinite-lived intangible asset:

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Trade names

 

  

 

 

109,269

 

 

 —

 

 

109,269

 

 

 —

 

 

  

 

$

109,588

 

$

(226)

 

$

109,588

 

$

(194)

 

Amortization expense related to amortizable intangible assets for the years ended December 28, 2017,  December 29, 2016 and December 31, 2015, was $32 thousand, $32 thousand and $327 thousand, respectively.

Estimated intangible asset amortization for the next five years is as follows (in thousands):

 

 

 

 

2018

    

$

32

2019

 

 

32

2020

 

 

29

2021

 

 

 —

2022

 

 

 —

 

Income Taxes
Income Taxes

5. Income Taxes

The components of the provision for income taxes are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

    

Year Ended

    

Year Ended

    

Year Ended

 

 

December 28,

 

December 29,

 

December 31,

 

 

2017

 

2016

 

2015

Current (benefit) / expense:

 

 

  

 

 

  

 

 

  

Federal

 

$

(4,097)

 

$

14,588

 

$

13,183

State

 

 

479

 

 

2,422

 

 

2,552

Total current (benefit) / expense

 

 

(3,618)

 

 

17,010

 

 

15,735

Deferred (benefit) / expense:

 

 

  

 

 

  

 

 

  

Federal

 

 

(250)

 

 

(4,765)

 

 

553

State

 

 

(368)

 

 

(771)

 

 

(89)

Total deferred (benefit) / expense

 

 

(618)

 

 

(5,536)

 

 

464

Provision for income taxes

 

$

(4,236)

 

$

11,474

 

$

16,199

 

The following is a summary of the differences between the total provision for income taxes as shown on the financial statements and the provision for income taxes that would result from applying the federal statutory tax rate of 35% to income before income taxes (in thousands).

 

 

 

 

 

 

 

 

 

 

 

    

Year Ended

    

Year Ended

    

Year Ended

 

 

December 28,

 

December 29,

 

December 31,

 

 

2017

 

2016

 

2015

Computed “expected” provision at statutory rate

 

$

34,499

 

$

19,080

 

$

15,052

State income taxes, net of federal income tax benefit

 

 

(28)

 

 

1,073

 

 

1,594

Permanent differences:

 

 

 

 

 

 

 

 

 

Excess tax benefit related to options exercised

 

 

(20,762)

 

 

 —

 

 

 —

Non-qualified option holder dividend equivalent

 

 

 —

 

 

(7,877)

 

 

 —

Other

 

 

691

 

 

(4)

 

 

113

Total permanent differences

 

 

(20,071)

 

 

(7,881)

 

 

113

Change in U.S. tax rate

 

 

(17,850)

 

 

 —

 

 

 —

Other, net

 

 

(786)

 

 

(798)

 

 

(560)

Provision for income taxes

 

$

(4,236)

 

$

11,474

 

$

16,199

 

The permanent difference of $20,762 thousand in fiscal 2017 is the federal benefit due to the recognition of excess tax deductions for stock options exercised. The state benefit related to the recognition of excess tax benefit of $1.0 million is included in state income taxes, net of federal income tax benefit in the table above. The permanent difference of $7,877 thousand in fiscal 2016 is the federal benefit related to a dividend equivalent payment to certain option holders.

 

The Tax Cuts and Jobs Act (the “Act”) was enacted on December 22, 2017. As it relates to the Company, the Act reduces the US federal corporate tax rate from 35% to 21%, and creates new taxes that may apply on certain foreign sourced earnings. At December 28, 2017, we have not completed our accounting for the tax effects of enactment of the Act; however, in certain cases, as described below, we have made a reasonable estimate of the effects on our existing deferred tax balances. In other cases, we have not been able to make a reasonable estimate and continue to account for those items based on our existing accounting under ASC 740, Income Taxes, and the provisions of the tax laws that were in effect immediately prior to enactment. For the items for which we were able to determine a reasonable estimate, we recognized a provisional amount of $17.9 million, which is included as a component of income tax expense from continuing operations. In all cases, we will continue to make and refine our calculations as additional analysis is completed. In addition, our estimates may also be affected as we continue to analyze the Act.

Provisional amounts

We remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. However, we are still analyzing certain aspects of the Act and refining our calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. The provisional amount recorded related to the remeasurement of our deferred tax balance was $17.9 million.

 

The Act also subjects a US shareholder to tax on global intangible low-taxed income (“GILTI”) earned by certain foreign subsidiaries. The FASB Staff Q&A, Topic 740, No. 5, Accounting for Global Intangible Low-Taxed Income, states that an entity can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or provide for the tax expense related to GILTI in the year the tax is incurred. Given the complexity of the GILTI provisions, we are still evaluating the possible effects of the GILTI provisions and have not yet determined our accounting policy. At  December 28, 2017, because we are still evaluating the GILTI provisions and our analysis of future taxable income that may be subject to GILTI, we are unable to make a reasonable estimate and have not reflected any adjustments related to GILTI in our financial statements.

 

The tax effects of temporary differences that give rise to significant portions of the deferred income tax assets and (liabilities) are presented below (in thousands):

 

 

 

 

 

 

 

 

    

Year Ended

    

Year Ended

 

 

December 28,

 

December 29,

 

 

2017

 

2016

Deferred tax assets:

 

 

  

 

 

  

Accruals not currently deductible for tax purposes

 

$

8,993

 

$

14,342

Tenant improvement allowances

 

 

6,597

 

 

7,690

Inventories

 

 

4,111

 

 

4,050

Stock based compensation

 

 

3,108

 

 

4,179

Other intangibles

 

 

405

 

 

693

Gift card liability

 

 

648

 

 

858

Litigation accrual

 

 

583

 

 

5,299

Other

 

 

846

 

 

47

Total deferred tax assets

 

 

25,291

 

 

37,158

Deferred tax liabilities:

 

 

  

 

 

  

Intangible assets

 

 

(26,868)

 

 

(41,269)

Fixed assets

 

 

(24,225)

 

 

(23,650)

Other

 

 

(1,416)

 

 

(504)

Total deferred tax liabilities

 

 

(52,509)

 

 

(65,423)

Net deferred tax liabilities

 

$

(27,218)

 

$

(28,265)

 

The Company generated $1,066 thousand of state net operating losses available to reduce future income taxes. The state net operating losses expire in various amounts from 2032 to 2037.

In assessing the realization of deferred tax assets, including net operating losses, management considered whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers taxable income in prior carryback periods, future reversals of existing taxable temporary differences, tax planning strategies, and future taxable income exclusive of reversing temporary differences and carryforwards in making this assessment, and accordingly, has concluded that no valuation allowance is necessary as of December 28, 2017 and December 29, 2016

The Company files income tax returns with the U.S. Federal government and various state jurisdictions. Prior tax years beginning in year 2013 remain open to examination by the Internal Revenue Service. The Internal Revenue Service has completed audits of the Company's federal income tax returns for the years through 2011. As of December 28, 2017,  December 29, 2016, and December 31, 2015 the Company had unrecognized tax benefits of $0,  $0, and $0 thousand, respectively. The amounts of unrecognized tax benefits that, if recognized, would favorably impact the effective tax rate were $0,  $0, and $0 thousand as of December 28, 2017,  December 29, 2016, and December 31, 2015, respectively. The Company's policy is to classify interest and penalties related to unrecognized tax benefits in income tax expense.

Fair Value Measurements
Fair Value Measurements

6. Fair Value Measurements

The Company estimates fair values in accordance with ASC 820, Fair Value Measurement. ASC 820 provides a framework for measuring fair value and expands disclosures required about fair value measurements. ASC 820 defines fair value as the price that would be received from the sale of an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. Additionally, ASC 820 defines levels within a hierarchy based upon observable and non-observable inputs.

·

Level 1—Inputs that are quoted prices in active markets for identical assets or liabilities

·

Level 2—Inputs other than quoted prices in active markets for assets or liabilities that are either directly or indirectly observable

·

Level 3—Inputs that are non‑observable that reflect the reporting entity’s own assumptions

Assets (Liabilities) Measured at Fair Value on a Recurring Basis

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of

 

 

 

 

 

 

 

 

 

 

 

December 28,

 

 

 

 

 

 

 

 

 

(in thousands)

 

2017

    

Level 1

    

Level 2

    

Level 3

Designated as hedges:

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate cap (cash flow hedge)

 

$

710

 

$

 

$

710

 

$

Not designated as hedges:

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate cap

 

$

710

 

$

 

$

710

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of

 

 

 

 

 

 

 

 

 

 

 

December 29,

 

 

 

 

 

 

 

 

 

(in thousands)

    

2016

    

Level 1

    

Level 2

    

Level 3

Interest rate caps (cash flow hedges)

 

$

2,473

 

$

 

$

2,473

 

$

 

Our derivative contracts are negotiated with counterparties without going through a public exchange. Accordingly, our fair value assessments give consideration to the risk of counterparty default (as well as our own credit risk). Our interest rate derivatives consist of interest rate cap contracts and are valued primarily based on data readily observable in public markets.

Derivatives and Risk Management
Derivatives and Risk Management

7. Derivatives and Risk Management

Changes in interest rates impact our results of operations. In an effort to manage our exposure to this risk, we enter into derivative contracts and may adjust our derivative portfolio as market conditions change.

Designated as Cash Flow Hedge

For derivative contracts designated as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of Accumulated Other Comprehensive Income (“AOCI”) and reclassified into earnings in the same period in which the hedged transaction affects earnings. The effective portion of the derivative represents the change in fair value of the hedge that offsets the change in fair value of the hedged item. To the extent the change in the fair value of the hedge does not perfectly offset the change in the fair value of the hedged item, the ineffective portion of the hedge is immediately recognized in earnings.

Not Designated as Accounting Hedge

During fiscal 2017, we de-designated one of our interest rate cap derivative contracts as an accounting hedge, as such, the change in the fair value is reflected through earnings. These changes in fair value are mark-to-market adjustments ("MTM adjustments"). MTM adjustments are defined as fair value changes recorded in periods other than the settlement period. The change in fair value of our derivative not designated as a hedge resulted in $154 thousand recorded directly as an increase to interest expense. Such fair value changes are not necessarily indicative of the actual settlement value of the underlying hedge in the contract settlement period. The AOCI related to the interest rate cap prior to the de-designation is being amortized over the remaining maturity period.

Derivative Position as of December 28, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

Final Maturity

 

Other

 

AOCI, Net

(in thousands)

    

Notional Balance

    

Date

    

Assets

    

of Tax

Designated as hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate cap (cash flow hedge)

 

$

102,500

 

U.S. dollars

 

December 2021

 

$

710

 

$

(133)

Not designated as hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate cap

 

$

102,500

 

U.S. dollars

 

December 2021

 

$

710

 

$

(72)

 

Derivative Position as of December 29, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

Final Maturity

 

Other

 

AOCI, Net

(in thousands)

    

Notional Balance

    

Date

    

Assets

 

of Tax

Interest rate caps (cash flow hedges)

 

$

205,000

 

U.S. dollars

 

December 2021

 

$

2,473

    

$

176

Interest rate swaps (cash flow hedges)

 

$

17,500

 

U.S. dollars

 

January 2017

 

$

 —

 

$

 —

 

Designated Hedge Gain (Losses)

Gains (losses) related to our designated hedge contracts are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Effective Portion Reclassified

 

Effective Portion Recognized in

 

 

From AOCI to Earnings

 

Other Comprehensive Income (Loss)

 

 

Year Ended

 

 

December 28,

 

December 29,

 

December 31,

 

December 28,

 

December 29,

 

December 31,

(in thousands)

    

2017

    

2016

    

2015

    

2017

    

2016

    

2015

Interest rate cap (cash flow hedge)

 

$

 —

 

$

 

$

 

$

(381)

 

$

176

 

$

Interest rate swaps (cash flow hedges)

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

100

 

$

43

 

Interest Rate Risk

Our exposure to market risk from adverse changes in interest rates is primarily associated with our long term debt obligations, which carry variable interest rates. Market risk associated with our variable interest rate long term debt relates to the potential reduction in fair value and negative impact to future earnings, respectively, from an increase in interest rates.

In an effort to manage our exposure to the risk associated with our variable interest rate long term debt, we periodically enter into interest rate derivative contracts. We designate interest rate derivative contracts used to convert the interest rate exposure on a portion of our debt portfolio from a floating rate to a capped rate as cash flow hedges.

Credit Risk

To manage credit risk associated with our interest rate hedging program, we select counterparties based on their credit ratings and limit our exposure to any one counterparty.

The counterparties to our derivative contracts are financial institutions with investment grade credit ratings. To manage our credit risk related to our derivative financial instruments, we periodically monitor the credit risk of our counterparties, limit our exposure in the aggregate and to any single counterparty, and adjust our hedging position, as appropriate. The impact of credit risk, as well as the ability of each party to fulfill its obligations under our derivative financial instruments, is considered in determining the fair value of the contracts. Credit risk has not had a significant effect on the fair value of our derivative contracts. We do not have any credit risk‑related contingent features or collateral requirements with our derivative financial instruments.

Commitments and Contingencies
Commitments and Contingencies

8. Commitments and Contingencies

Lease Commitments

The Company leases its corporate office, retail locations and distribution centers under long‑term operating lease agreements that expire in various years through 2032. Additionally, certain equipment is leased under short‑term operating leases.

Certain lease agreements include escalating rents over the lease terms. The Company expenses rent on a straight‑line basis over the life of the lease, which commences on the date the Company has the right to control the property. The cumulative expense recognized on a straight‑line basis in excess of the cumulative payments is included in deferred rent in the accompanying Consolidated Balance Sheets. Future minimum lease payments under non‑cancelable operating leases (with initial or remaining lease terms in excess of one year) as of December 28, 2017, are:

 

 

 

 

(in thousands)

    

Amount

2018

 

$

79,872

2019

 

 

85,279

2020

 

 

83,048

2021

 

 

79,041

2022

 

 

74,052

Thereafter

 

 

389,344

Total minimum lease payments

 

$

790,636

 

Lease expense for the years ended December 28, 2017,  December 29, 2016, and December 31, 2015, was approximately $71,524 thousand, $53,899 thousand, and $41,756 thousand, respectively.

Litigation

The Company is subject to other various legal actions, claims and proceedings arising in the ordinary course of business, including claims related to breach of contracts, products liabilities, intellectual property matters and employment related matters resulting from its business activities. The Company establishes reserves for specific legal proceedings when it determines that the likelihood of an unfavorable outcome is probable and the amount of loss can be reasonably estimated. These proceedings are not expected to have a material impact on the Company’s Consolidated Financial Statements.

During fiscal 2017, F&D received final approval for a classwide settlement to resolve a class action lawsuit related to certain labeling of F&D’s products. The final amounts paid did not materially differ from our estimated losses previously accrued.

Debt
Debt

9. Debt

The following table summarizes our long‑term debt as of December 28, 2017 and December 29, 2016 (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Rate Per

 

 

 

 

 

 

 

 

 

 

Annum at

 

 

 

 

 

 

 

 

Maturity

 

December 28,

 

December 28,

 

December 29,

 

 

Date

 

2017

 

2017

 

2016

Credit Facilities:

    

  

    

  

    

  

    

 

  

    

 

  

Wells Facility Term Loan A

 

September 30, 2023

 

4.64

%  

Variable

 

$

152,500

 

$

350,000

Wells Facility Revolving Line of Credit

 

September 30, 2021

 

2.92

%  

Variable

 

 

41,000

 

 

50,000

Total secured debt

 

  

 

  

 

  

 

 

193,500

 

 

400,000

Less: current maturities

 

  

 

  

 

  

 

 

3,500

 

 

3,500

Long-term debt maturities

 

  

 

  

 

  

 

 

190,000

 

 

396,500

Less: unamortized discount and debt issuance costs

 

  

 

  

 

  

 

 

4,438

 

 

9,257

Total long-term debt

 

  

 

  

 

  

 

$

185,562

 

$

387,243

 

Repayment of Debt with Proceeds from Initial Public Offering

On May 2, 2017, the Company completed its IPO, pursuant to which it sold an aggregate of 10,147,025 shares of Class A common stock, par value $0.001 per share (after giving effect to the underwriters’ exercise in full of their option to purchase additional shares) at a price of $21.00 per share. The Company received aggregate net proceeds of approximately $192.0 million after deducting underwriting discounts and commissions and other offering expenses.

The Company used net proceeds from the IPO of approximately $192.0 million to repay a portion of the amounts outstanding under the Term Loan Facility, including accrued and unpaid interest. The partial paydown resulted in a loss on extinguishment of debt in the amount of approximately $5.4 million related to unamortized original issue discount and unamortized deferred debt issuance costs.

Dividend

On September 30, 2016, the board of directors declared the Special Dividend and authorized the Option Payments. Payment of the Special Dividend and the Option Payments was made on September 30, 2016 to all shareholders and option holders of record at the close of business on September 30, 2016. In connection with the dividend, the Company refinanced its existing indebtedness by amending the prior asset-based revolving credit facility with an amended and restated $200.0 million asset-based revolving credit facility maturing on September 30, 2021 (the “ABL Facility”), entering into a $350.0 million senior secured term loan facility maturing on September 30, 2023 (the “Term Loan Facility” and together with the ABL Facility, our “Credit Facilities”) and repaying and terminating the prior term loan facility and the prior senior secured term loan facility with GCI Capital Markets LLC (the “GCI Facility”). As a result of the refinancing, the Company recorded $162 thousand of loss on extinguishment of debt related to unamortized deferred debt issuance cost for the Company’s prior asset-based revolving credit facility, as well as recorded $1,319 thousand of loss on extinguishment of debt related to unamortized original issue discount and unamortized deferred debt issuance cost for the prior term loan facility and GCI Facility. In addition, the Company recorded $10,347 thousand of original issue discount and deferred debt issuance cost related to new third‑party fees associated with the refinancing.

Term Loan Facility

As of December 28, 2017, the Term Loan Facility had an outstanding balance of $152.5 million and requires quarterly repayments of $875 thousand, which commenced on December 31, 2016, with the remainder due and payable at maturity.

As of December 28, 2017, the Term Loan Facility bore interest based on one of the following rates, at the Company’s option:

i)Adjusted LIBO Rate plus a margin of 2.75%

ii)Base Rate plus a margin of 1.75%. Base Rate defined as the greater of the following:

(a)the base rate in effect on such day,

(b)the federal funds rate plus 0.50%,

(c)the adjusted LIBO rate for the interest period of one month plus a margin of 1.00%

ABL Facility

As of December 28, 2017, the ABL Facility had a maximum availability of $200.0 million with actual available borrowings limited to the sum, at the time of calculation, of eligible credit card receivables, plus the cost of eligible inventory, net of inventory reserves, multiplied by the product of appraisal percentage multiplied by the appraised value of eligible inventory, plus 85% of eligible net trade receivables, plus all eligible cash on hand minus certain Availability Reserves as defined in the credit agreement governing the ABL Facility. The ABL Facility is available for issuance of letters of credit and contains $30.0 million for standby letters of credit and commercial letters of credit. Available borrowings under the facility are reduced by the face amount of outstanding letters of credit. As of December 28, 2017, the borrowings bear interest at a floating rate, which is based on one of the following rates at the option of the Company:

i)LIBO Rate plus a margin percentage ranging from 1.25% to 1.50% based on the level of borrowings or

ii)Base Rate plus a margin (ranging from 0.25% to 0.50% based on the level of borrowings). The Base Rate is defined as the highest of the following:

(a)the federal funds rate plus 0.50%,

(b)Adjusted LIBO Rate plus 1.00%, or

(c)the lender’s prime rate

As of December 28, 2017, the Company had net availability under the ABL Facility of $146,154 thousand, including outstanding letters of credit of $12,846 thousand.

The following table summarizes scheduled maturities of our debt, including current maturities, as of December 28, 2017 (in thousands):

 

 

 

 

 

    

Amount

2018

 

$

3,500

2019

 

 

3,500

2020

 

 

4,375

2021

 

 

43,625

2022

 

 

3,500

Thereafter

 

 

135,000

Total minimum debt payments

 

$

193,500

 

Covenants

The credit agreements governing our Credit Facilities contain customary restrictive covenants that, among other things and with certain exceptions, limit the ability of the Company to (i) incur additional indebtedness and liens in connection therewith; (ii) pay dividends and make certain other restricted payments; (iii) effect mergers or consolidations; (iv) enter into transactions with affiliates; (v) sell or dispose of property or assets and (vi) engage in unrelated lines of business. In addition, these credit agreements subject us to certain reporting obligations and require that we satisfy certain financial covenants, including, among other things:

a requirement that if borrowings under the ABL Facility exceed 90% of availability, we will maintain a certain fixed charge coverage ratio (defined as consolidated EBITDA less non‑financed capital expenditures and income taxes paid to consolidated fixed charges, in each case as more fully defined in the credit agreement governing the ABL Facility).

The Term Loan Facility has no financial maintenance covenants. As of December 28, 2017, we were in compliance with the covenants of the Credit Facilities.

Deferred Debt Issuance Cost and Original Issue Discount

Deferred debt issuance cost related to our ABL Facility and our prior asset-based revolving credit facility of $1,005 thousand and $1,274 thousand as of December 28, 2017 and December 29, 2016, respectively, are included in Other assets on our Consolidated Balance Sheets. Deferred debt issuance cost and original issue discount related to our Term Loan Facility of $4,438 thousand as of December 28, 2017 and $9,257 thousand as of December 29, 2016 are included in Term loans on our Consolidated Balance Sheets. Amortization expense was $1,205 thousand, $954 thousand, and $692 thousand for the years ended December 28, 2017,  December 29, 2016, and December 31, 2015.

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 was based primarily on discounted cash flows utilizing estimated interest rates, maturities, credit risk, and underlying collateral and is classified primarily as Level 3 within the fair value hierarchy. At December 28, 2017 and December 29, 2016, the fair values of the Company’s debt are as follows (in thousands):

 

 

 

 

 

 

 

 

    

December 28,

    

December 29,

(in thousands)

 

2017

 

2016

Total debt at par value

 

$

193,500

 

$

400,000

Less: unamortized discount and debt issuance costs

 

 

4,438

 

 

9,257

Net carrying amount

 

$

189,062

 

$

390,743

Fair value

 

$

193,881

 

$

400,000

 

Stockholder's Equity
Stockholders' Equity

10. Stockholder’s Equity

Common Stock

The Company has three classes of common stock: Class A, Class B and Class C. The holders of Class A common stock, Class B common stock and Class C common stock are entitled to share equally, on a per share basis, in dividends or other distributions. Class A common stockholders are entitled to one vote per share held. Class B and Class C common stockholders have no voting rights, except as otherwise provided by law. In the event of the voluntary liquidation or dissolution of the Company, each class of stock will share equally, on a per share basis, in all the assets of the Company that are available for distribution to stockholders. A shareholders agreement restricts the terms and conditions under which the shares held by the parties to the shareholders agreement may be sold or transferred.

Conversion Features

On May 2, 2017, all of the Class B common stock outstanding shares, upon completion of our initial public offering, were converted to Class A common stock.

Shares of Class C common stock may be converted, upon the election of holders of such shares of Class C common stock, into the same number of shares of Class A common stock under certain circumstances as provided in the Company’s certificate of incorporation.

On July 26, 2017, all of the Class C common stock outstanding shares, upon the election of holders of such shares of Class C common stock, were converted to Class A common stock.

Stock Incentive Plans

 On January 13, 2011, the Company adopted the 2011 Stock Option Plan (as amended, restated, supplemented or otherwise modified from time to time, the “2011 Plan”) to provide for the grant of stock options to employees (including officers), consultants and non‑employee directors of the Company and its subsidiaries. Pursuant to the terms of the 2011 Plan, the Company was authorized to grant options for the purchase of up to 12,520,407 shares as of December 29, 2016 and 10,780,970 shares as of December 31, 2015. As of December 29, 2016 and December 31, 2015, there were 179,575 and 104,269 options available for grant under the 2011 Plan, respectively.

We ceased granting awards under the 2011 Plan upon the implementation of the 2017 Plan, described below.

On April 13, 2017, the board of directors approved the Floor & Decor Holdings, Inc. 2017 Stock Incentive Plan (the “2017 Plan”), which was subsequently approved by the Company’s stockholders. The 2017 Plan authorizes the Company to grant options and restricted stock awards to eligible employees (including officers), consultants and non-employee directors up to an aggregate of 5,000,000 shares of Class A common stock. In connection with the IPO, the Company granted options to purchase an aggregate of 1,254,465 shares of our Class A common stock to certain of our eligible employees and 15,475 shares of restricted stock to certain of our non-employee directors, in each case pursuant to the 2017 Plan and based on the public offering price of $21.00 per share. As of December 28, 2017 there were 3,690,255 options available for grant under the 2017 Plan.

Secondary Offerings

On July 25, 2017, certain of the Company’s stockholders completed a secondary public offering (the “July Secondary Offering”) of an aggregate of 10,718,550 shares of common stock at a price to the public of $40.00 per share. The Company did not sell any shares in the July Secondary Offering and did not receive any proceeds from the sales of shares by the selling stockholders.

On November 16, 2017, certain of the Company’s stockholders completed a secondary public offering (the “November Secondary Offering”) of an aggregate of 7,475,000 shares of common stock at a price to the public of $36.00 per share. The Company did not sell any shares in the November Secondary Offering and did not receive any proceeds from the sales of shares by the selling stockholders.

Stock Options

The Company accounts for stock‑based compensation pursuant to ASC 718, Compensation – Stock Compensation