FLOOR & DECOR HOLDINGS, INC., 10-K filed on 2/25/2019
Annual Report
v3.10.0.1
Document and Entity Information - USD ($)
$ in Billions
12 Months Ended
Dec. 27, 2018
Feb. 20, 2019
Jun. 28, 2018
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. 27, 2018    
Amendment Flag false    
Current Fiscal Year End Date --12-27    
Entity Current Reporting Status Yes    
Entity Voluntary Filers No    
Entity Well-known Seasoned Issuer Yes    
Entity Shell Company false    
Entity Filer Category Large Accelerated Filer    
Entity Small Business false    
Entity Emerging Growth Company false    
Entity Public Float     $ 2.3
Entity Common Stock, Shares Outstanding   97,727,273  
Document Fiscal Period Focus FY    
Document Fiscal Year Focus 2018    
v3.10.0.1
Condensed Consolidated Balance Sheets - USD ($)
$ in Thousands
Dec. 27, 2018
Dec. 28, 2017
Current assets:    
Cash and cash equivalents $ 644 $ 556
Income taxes receivable 4,324 12,472
Receivables, net 67,527 54,041
Inventories, net 471,014 427,950
Prepaid expenses and other current assets 15,949 8,193
Total current assets 559,458 503,212
Fixed assets, net 328,366 220,952
Intangible assets, net 109,330 109,362
Goodwill 227,447 227,447
Other assets 9,490 7,019
Total long-term assets 674,633 564,780
Total assets 1,234,091 1,067,992
Current liabilities:    
Current portion of term loans 3,500 3,500
Trade accounts payable 313,503 258,730
Accrued expenses and other current liabilities 82,038 74,547
Deferred revenue 5,244 22,523
Total current liabilities 404,285 359,300
Term loans 141,834 144,562
Revolving line of credit   41,000
Deferred rent 36,980 25,570
Deferred income tax liabilities, net 26,838 27,218
Tenant improvement allowances 37,295 26,779
Other liabilities 2,550 703
Total long-term liabilities 245,497 265,832
Total liabilities 649,782 625,132
Commitments and contingencies
Capital stock:    
Additional paid-in capital 340,462 323,419
Accumulated other comprehensive income (loss), net 186 (205)
Retained earnings 243,563 119,550
Total stockholders' equity 584,309 442,860
Total liabilities and stockholders' equity 1,234,091 1,067,992
Class A Common Stock    
Capital stock:    
Common stock $ 98 $ 96
v3.10.0.1
Condensed Consolidated Balance Sheets (Parenthetical) - $ / shares
Dec. 27, 2018
Dec. 28, 2017
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 0 0
Preferred stock, shares outstanding 0 0
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 97,588,539 95,509,179
Common stock, shares outstanding 97,588,539 95,509,179
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 0 0
Common stock, shares outstanding 0 0
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 0 0
Common stock, shares outstanding 0 0
v3.10.0.1
Condensed Consolidated Statements of Income - USD ($)
$ in Thousands
12 Months Ended
Dec. 27, 2018
Dec. 28, 2017
Dec. 29, 2016
Income Statement [Abstract]      
Net Sales $ 1,709,848 $ 1,384,767 $ 1,050,759
Type of Revenue [Extensible List] us-gaap:ProductMember    
Cost of sales $ 1,007,580 812,203 621,497
Type of Cost, Good or Service [Extensible List] us-gaap:ProductMember    
Gross profit $ 702,268 572,564 429,262
Operating expenses:      
Selling and store operating 439,495 353,647 271,876
General and administrative 105,327 84,661 64,025
Pre-opening 26,145 16,485 13,732
Litigation settlement     10,500
Total operating expenses 570,967 454,793 360,133
Operating income 131,301 117,771 69,129
Interest expense 8,917 13,777 12,803
Loss on extinguishment of debt   5,442 1,813
Income before income taxes 122,384 98,552 54,513
Provision for income taxes 6,197 (4,236) 11,474
Net income $ 116,187 $ 102,788 $ 43,039
Basic earnings per share $ 1.20 $ 1.13 $ 0.52
Diluted earnings per share $ 1.11 $ 1.03 $ 0.49
v3.10.0.1
Condensed Consolidated Statements of Comprehensive Income - USD ($)
$ in Thousands
12 Months Ended
Dec. 27, 2018
Dec. 28, 2017
Dec. 29, 2016
Statement of Comprehensive Income [Abstract]      
Net income $ 116,187 $ 102,788 $ 43,039
Other comprehensive income (loss) - change in fair value of hedge instruments, net of tax 391 (381) 276
Total comprehensive income $ 116,578 $ 102,407 $ 43,315
v3.10.0.1
Condensed Consolidated Statements of Stockholders' Equity - USD ($)
$ in Thousands
Common stock
Class A Common Stock
Common stock
Class B Common Stock
Common stock
Class C Common Stock
Additional paid-in capital
Restatement Adjustment [Member]
Additional paid-in capital
Accumulated other comprehensive income (loss)
Retained earnings
Restatement Adjustment [Member]
Retained earnings
Class A Common Stock
Class B Common Stock
Class C Common Stock
Restatement Adjustment [Member]
Total
Increase (Decrease) in Stockholders' Equity [Roll Forward]                          
Cumulative effect from adoption of ASU No. 2016-09 | Accounting Standards Update 2016-09 [Member]       $ 238     $ (148)         $ 90  
Balance at Dec. 31, 2015 $ 77   $ 6   $ 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
Tax benefit/deficiency from employee stock options           276             $ 276
Other comprehensive gain, net of tax                         276
Dividend declared         (150,722)     (74,278)         (225,000)
Net income               43,039         43,039
Balance at Dec. 29, 2016 $ 77   $ 6   117,270 176   16,754         134,283
Balance (in shares) at Dec. 29, 2016 76,847,000 396,000 6,275,000                    
Increase (Decrease) in Stockholders' Equity [Roll Forward]                          
Stock-based compensation expense         4,951     8         4,959
Conversion of Class B common stock (in shares) 396,000 (396,000)                      
Conversion of Class C Common Stock $ 6   $ (6)                    
Conversion of Class C Common Stock (in shares) 6,275,000   (6,275,000)                    
Exercise of stock options $ 2       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 0 0    
Increase (Decrease) in Stockholders' Equity [Roll Forward]                          
Cumulative effect from adoption of ASU No. 2016-09 | Accounting Standards Update 2016-09 [Member]             $ 7,826         $ 7,826  
Stock-based compensation expense         6,514               6,514
Exercise of stock options $ 2       10,529               $ 10,531
Exercise of stock options (in shares) 2,069,000                       2,069,195
Issuance of restricted stock award (in shares) 10,000                        
Other comprehensive gain, net of tax           391             $ 391
Net income               116,187         116,187
Balance at Dec. 27, 2018 $ 98       $ 340,462 $ 186   $ 243,563         $ 584,309
Balance (in shares) at Dec. 27, 2018 97,588,000               97,588,539 0 0    
v3.10.0.1
Condensed Consolidated Statements of Cash Flows - USD ($)
$ in Thousands
12 Months Ended
Dec. 27, 2018
Dec. 28, 2017
Dec. 29, 2016
Operating activities      
Net income $ 116,187 $ 102,788 $ 43,039
Adjustments to reconcile net income to net cash provided by operating activities:      
Depreciation and amortization 51,992 38,062 28,604
Non-cash loss on early extinguishment of debt   5,442 1,813
Loss on asset disposals 23 128 451
Amortization of tenant improvement allowances (4,494) (3,311) (2,561)
Deferred income taxes (968) (557) (5,536)
Interest cap derivative contracts (212)    
Stock based compensation expense 6,514 4,959 3,229
Changes in operating assets and liabilities:      
Receivables, net (13,486) (19,508) (10,793)
Inventories, net (53,557) (134,248) (21,133)
Other assets (9,921) (1,591) (4,817)
Trade accounts payable 54,773 100,264 11,145
Accrued expenses and other current liabilities (1,731) 9,485 27,244
Income taxes 6,221 (18,259) 8,271
Deferred revenue 3,002 8,067 2,311
Deferred rent 14,455 9,243 3,870
Tenant improvement allowances 15,010 7,984 4,244
Other 1,816 259 75
Net cash provided by operating activities 185,624 109,207 89,456
Investing activities      
Purchases of fixed assets (151,397) (102,253) (74,648)
Net cash used in investing activities (151,397) (102,253) (74,648)
Financing activities      
Borrowings on revolving line of credit 217,050 236,700 171,850
Payments on revolving line of credit (258,050) (245,700) (214,750)
Proceeds from term loans     362,000
Payments on term loans (3,500) (197,500) (98,334)
Prepayment penalty on term loan extinguishment     (179)
Cash dividends     (225,000)
Net proceeds from initial public offering   192,336  
Proceeds from exercise of stock options 10,531 8,874 284
Debt issuance costs (170) (1,559) (10,546)
Net cash used in financing activities (34,139) (6,849) (14,675)
Net (decrease) increase in cash and cash equivalents 88 105 133
Cash and cash equivalents, beginning of the period 556 451 318
Cash and cash equivalents, end of the period 644 556 451
Supplemental disclosures of cash flow information      
Cash paid for interest 7,563 15,748 6,922
Cash paid for income taxes 1,082 14,392 8,929
Fixed assets accrued at the end of the period $ 15,120 8,521 5,387
Fixed assets acquired as part of lease - paid for by lessor   $ 1,786 $ 2,290
v3.10.0.1
Summary of Significant Accounting Policies
12 Months Ended
Dec. 27, 2018
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, 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 the products for professional installation (“Buy it Yourself” or “BIY”). We operate within one reportable segment.

As of December 27, 2018, the Company, through its wholly owned subsidiary, Floor and Decor Outlets of America, Inc. (“F&D”), operates 100 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 ended December 27, 2018 (“fiscal 2018”), December 28, 2017 (“fiscal 2017”), and December 29, 2016 (“fiscal 2016”) 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 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. 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 27, 2018 and December 28, 2017, was $184 thousand and $349 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. Beginning in fiscal 2018, the Company began offering limited credit to its commercial clients. The total exposure at the end of fiscal 2018 was $251 thousand.

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 $4,265 thousand and $2,936 thousand as of December 27, 2018 and December 28, 2017, 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 the reporting unit exceeds 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 2018. Based on such goodwill impairment analysis performed qualitatively as of October 26, 2018, 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 $8.6 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 requires disclosures 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. 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. See footnote 8.  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

We recognize revenue and the related cost of sales when we satisfy the performance obligations in contracts with our customers. Our performance obligations for our retail store sales as well as for orders placed through our website and shipped to our customers are satisfied at the point-of-sale, which is the point at which the customer obtains control of the inventory as described under Accounting Standards Update (ASU) No. 2014-09, "Revenue from Contracts with Customers” (Topic 606). Shipping and handling activities are performed after the customer obtains control of the goods and are accounted for as activities to fulfill the promise to transfer goods, rather than a separate performance obligation as outlined within Topic 606. Payment is due from the customer immediately at the point-of-sale for both retail store sales and website sales. The nature of the goods offered include hard surface flooring and related accessories. We do not perform installation services, and we offer free design services in-store. The transaction price recognized in revenues represents the selling price of the products offered. Sales taxes collected are not recognized as revenue as these amounts are ultimately remitted to the appropriate taxing authorities.

Our customers have the right to return the goods sold to them within a reasonable period, typically 90 days. The right of return is an element of variable consideration as defined within Topic 606. We reserve for future returns of previously sold goods based on historical experience and various other assumptions that we believe to be reasonable. This reserve reduces sales and cost of sales as well as establishes a return asset and refund liability as defined with Topic 606. For the fiscal year ended December 27, 2018, the return asset is included within Prepaid expenses and other current assets and the refund liability is included within Accrued expenses and other current liabilities, each respectively on the Consolidated Balance Sheets. We adopted the standard using the modified retrospective transition method within Topic 606; therefore, we accounted for the return asset and all provisions of Topic 606 prospectively. The return asset is included in Inventories, net on the December 28, 2017 Consolidated Balance Sheets. The refund liability under Topic 605 and Topic 606 is included within Accrued expenses and other current liabilities. Merchandise exchanges of similar product and price are not considered merchandise returns and, therefore, are excluded when calculating the sales returns reserve.

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 upon redemption. Additionally, we recognize breakage income in proportion to the pattern of rights exercised by the customer when we expect to be entitled to breakage. Net sales related to the estimated breakage are included in net sales in the Consolidated Statement of Income. 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 2018, fiscal 2017, and fiscal 2016 gift card breakage income of $1,584 thousand, $757 thousand, and $627 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 27, 2018 and December 28, 2017, was $8,335 thousand and $7,189 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 27, 2018,  December 28, 2017, and December 29, 2016, were $55,283 thousand, $43,560 thousand, and $33,497 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 27, 2018,  December 28, 2017, and December 29, 2016, totaled $26,145 thousand, $16,485 thousand, and $13,732 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, restricted stock, and employee stock purchase plans 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 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 one 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.

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 50 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.

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 Company elected to early adopt this standard during the fourth quarter of 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 did not 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 did not 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. We will adopt the ASU in the first quarter of our fiscal year 2019, using the modified retrospective approach. We also plan to elect the package of practical expedients to use in transition, which permits us not to reassess under the new standard our prior conclusions about lease identification and lease classification. We will utilize our lease accounting software to facilitate implementation that will retain the lease classification and initial direct costs for any leases that exist prior to adoption of the standard. We have performed procedures to evaluate the landscape of our real estate, personal property and other arrangements that may meet the definition of a lease. Based on these efforts, we expect that the adoption will result in a significant increase to our long-term assets and liabilities as, at a minimum, substantially all of our current lease commitments will be subject to balance sheet recognition. We do not expect the adoption to have a material impact to our Consolidated Statements of Income or Statements of Cash Flows.

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. We adopted this standard in the first quarter of fiscal 2018 using the modified retrospective approach, effective December 29, 2017. The cumulative adjustment upon adoption primarily resulted in a reduction of deferred revenue and related inventories and an increase to retained earnings of $7.8 million, net of tax. The adoption of ASU No. 2014-09 did not have a material impact to the Company’s Consolidated Financial Statements.

. 

v3.10.0.1
Revenues
12 Months Ended
Dec. 27, 2018
Revenue from Contract with Customer [Abstract]  
Revenues

2. Revenues

Adoption of ASC Topic 606, “Revenue from Contracts with Customers”

On December 29, 2017, the Company adopted Topic 606 using the modified retrospective method applied to those contracts that were not completed as of December 29, 2017. Results for reporting periods beginning after December 28, 2017 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under ASC 605, Revenue Recognition (Topic 605).

The Company recorded a net increase to opening retained earnings of $7.8 million, net of tax, as of December 29, 2017 due to the cumulative impact of adopting Topic 606, with the impact primarily related to transactions for which it allows customers to store their merchandise at its retail stores for final delivery at a later date. The cumulative adjustment primarily resulted in a reduction of deferred revenue and related inventories and an increase to retained earnings. The impact to revenues as a result of applying Topic 606 was immaterial for the fiscal year ended December 27, 2018.

Deferred Revenue

Under Topic 605, the Company recognized revenue for certain transactions for which it allowed customers to store their merchandise at its retail stores for final delivery at a later date when both collection, or reasonable assurance of collection of payment and final delivery of the product had occurred. Under Topic 605, the amount of revenue for which final delivery of the product had not occurred for these transactions was reflected in the Deferred revenue caption on the Consolidated Balance Sheet as of December 28, 2017. Under Topic 606, the Company evaluated the bill-and-hold criteria, and now recognizes revenue at the point-of-sale, when the customer obtains control of the inventory. Amounts in Deferred revenue at period-end reflect orders for which the inventory is not currently ready for physical transfer to the customer.

Gift Card Breakage

Under Topic 605, gift card breakage income was recognized based upon historical redemption patterns. Under Topic 606, gift card breakage income is recognized in proportion to the pattern of rights exercised by the customer when the Company expects to be entitled to breakage. The amount of revenue related to gift card breakage income in the cumulative transition adjustment, and for the fiscal year ended December 27, 2018 was immaterial to the Consolidated Financial Statements.

Disaggregated Revenue

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 27, 2018

 

December 28, 2017

 

December 29, 2016

 

 

    

 

 

    

% of

    

 

 

    

% of

    

 

 

    

% of

 

Product Category

 

Net Sales

 

Net Sales

 

Net Sales

 

Net Sales

 

Net Sales

 

Net Sales

 

Tile

 

$

476,337

 

27

%  

$

419,745

 

30

%  

$

325,433

 

31

%

Decorative Accessories

 

 

325,139

 

19

 

 

257,684

 

19

 

 

188,371

 

18

 

Laminate / Luxury Vinyl Plank

 

 

316,109

 

18

 

 

208,238

 

15

 

 

131,447

 

12

 

Installation Materials and Tools

 

 

272,994

 

16

 

 

217,427

 

16

 

 

165,330

 

16

 

Wood

 

 

192,087

 

12

 

 

167,152

 

12

 

 

142,751

 

14

 

Natural Stone

 

 

113,565

 

 7

 

 

104,670

 

 8

 

 

90,866

 

 9

 

Delivery and Other

 

 

13,617

 

 1

 

 

9,851

 

 —

 

 

6,561

 

 —

 

Total

 

$

1,709,848

 

100

%  

$

1,384,767

 

100

%  

$

1,050,759

 

100

%

 

v3.10.0.1
Accrued Expenses and Other Current Liabilities
12 Months Ended
Dec. 27, 2018
Accrued Expenses  
Accrued Expenses and Other Current Liabilities

3. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consist of the following (in thousands):

 

 

 

 

 

 

 

 

    

December 27,

    

December 28,

 

 

2018

 

2017

Accrued incentive compensation

 

$

12,473

 

$

17,218

Sales tax payable

 

 

 12,046

 

 

9,171

Insurance reserve- incurred but not reported

 

 

8,229

 

 

6,390

Other

 

 

49,290

 

 

41,768

Accrued Expenses

 

$

82,038

 

$

74,547

 

v3.10.0.1
Fixed Assets
12 Months Ended
Dec. 27, 2018
Fixed Assets  
Fixed Assets

4. Fixed Assets

Fixed assets as of December 27, 2018 and December 28, 2017, consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

December 27,

    

December 28,

 

    

2018

 

2017

Furniture, fixtures and equipment

 

$

174,663

 

$

126,821

Leasehold improvements

 

 

216,461

 

 

141,174

Computer software and hardware

 

 

83,628

 

 

52,687

Land

 

 

5,297

 

 

4,976

Fixed assets, at cost

 

 

480,049

 

 

325,658

Less: accumulated depreciation and amortization

 

 

151,683

 

 

104,706

Fixed assets, net

 

$

328,366

 

$

220,952

 

Depreciation and amortization on fixed assets for the years ended December 27, 2018,  December 28, 2017, and December 29, 2016, were $50,478 thousand, $36,255 thousand, and $27,459 thousand, respectively.

v3.10.0.1
Intangible Assets
12 Months Ended
Dec. 27, 2018
Goodwill and Intangible Assets Disclosure [Abstract]  
Intangible Assets

5. Intangible Assets

The following summarizes the balances of identifiable intangible assets as of December 27, 2018 and December 28, 2017 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 27, 2018

 

December 28, 2017

 

    

 

    

Gross

    

 

 

    

Gross

    

 

 

 

 

Estimated

 

Carrying

 

Accumulated

 

Carrying

 

Accumulated

 

 

Useful Lives

 

Amount

 

Amortization

 

Amount

 

Amortization

Amortizable intangible asset:

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Vendor relationships

 

10 years

 

$

319

 

$

(258)

 

$

319

 

$

(226)

Indefinite-lived intangible asset:

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Trade names

 

  

 

 

109,269

 

 

 —

 

 

109,269

 

 

 —

 

 

  

 

$

109,588

 

$

(258)

 

$

109,588

 

$

(226)

 

Amortization expense related to amortizable intangible assets for the years ended December 27, 2018,  December 28, 2017 and December 29, 2016, was $32 thousand, $32 thousand and $32 thousand, respectively.

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

 

 

 

 

2019

    

$

32

2020

 

 

29

2021

 

 

 —

2022

 

 

 —

2023

 

 

 —

 

v3.10.0.1
Income Taxes
12 Months Ended
Dec. 27, 2018
Income Taxes  
Income Taxes

6. Income Taxes

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

 

 

 

 

 

 

 

 

 

 

 

    

Year Ended

    

Year Ended

    

Year Ended

 

 

December 27,

 

December 28,

 

December 29,

 

 

2018

 

2017

 

2016

Current expense / (benefit):

 

 

  

 

 

  

 

 

  

Federal

 

$

5,496

 

$

(4,097)

 

$

14,588

State

 

 

1,669

 

 

479

 

 

2,422

Total current expense / benefit

 

 

7,165

 

 

(3,618)

 

 

17,010

Deferred expense / (benefit):

 

 

  

 

 

  

 

 

  

Federal

 

 

922

 

 

(250)

 

 

(4,765)

State

 

 

(1,890)

 

 

(368)

 

 

(771)

Total deferred (benefit) / expense

 

 

(968)

 

 

(618)

 

 

(5,536)

Provision for income taxes

 

$

6,197

 

$

(4,236)

 

$

11,474

 

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 21% for the year ended December 27, 2018 (35% for years ended December 28, 2017 and December 29, 2016) to income before income taxes (in thousands).

 

 

 

 

 

 

 

 

 

 

 

    

Year Ended

    

Year Ended

    

Year Ended

 

 

December 27,

 

December 28,

 

December 29,

 

 

2018

 

2017

 

2016

Computed “expected” provision at statutory rate

 

$

25,700

 

$

34,499

 

$

19,080

State income taxes, net of federal income tax benefit

 

 

(627)

 

 

(28)

 

 

1,073

Permanent differences:

 

 

 

 

 

 

 

 

 

Excess tax benefit related to options exercised

 

 

(17,478)

 

 

(20,762)

 

 

 —

Non-qualified option holder dividend equivalent

 

 

 —

 

 

 —

 

 

(7,877)

Other

 

 

457

 

 

691

 

 

(4)

Total permanent differences

 

 

(17,021)

 

 

(20,071)

 

 

(7,881)

Change in U.S. tax rate

 

 

(573)

 

 

(17,850)

 

 

 —

Provision to return

 

 

(739)

 

 

(63)

 

 

(236)

Federal tax credits

 

 

(685)

 

 

(577)

 

 

(413)

Other, net

 

 

142

 

 

(146)

 

 

(149)

Provision for income taxes

 

$

6,197

 

$

(4,236)

 

$

11,474

 

The permanent differences of $17,478 thousand and  $20,762 thousand in fiscal 2018 and fiscal 2017,  respectively, are the federal benefits due to the recognition of excess tax deductions for stock options exercised. In the table above, the 2018 and 2017 state benefits related to the recognition of excess tax benefits of $3.3 million and $1.0 million, respectively, are included in state income taxes, net of federal income tax benefit.  

 

The Tax Cuts and Jobs Act (the “Act “), which was enacted on December 22, 2017, reduced the U.S. federal corporate income tax rate from 35% to 21% and created new taxes that may apply on certain foreign sourced earnings. As of December 28, 2017, we had not yet completed our accounting for the enactment-date income tax effects of the Act under ASC 740 for the remeasurement of deferred tax assets and liabilities and tax on global intangible low-tax income.

 

In 2017 and the first nine months of 2018, we recorded provisional amounts for certain enactment-date effects of the Act by applying the guidance in Staff Accounting Bulletin No. 118 (“SAB 118”). As of December 28, 2017, 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%, and recorded a provisional amount of $17.9 million. Upon further analysis of certain aspects of the Act and refinement of our calculations prior to the end of the measurement period and during the twelve months ended December 27, 2018, we completed our accounting for all the enactment-date income tax effects of the Act and adjusted our provisional amount by an additional $600 thousand, which was included as a component of income tax expense from continuous operations. The changes to 2017 enactment-date provisional amounts decreased the effective tax rate for the year ended December 27, 2018 by 0.47%.

 

The Act also subjects a U.S. 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. We have elected to recognize the resulting tax on GILTI as a period expense in the period the tax is incurred. However, we did not incur tax for the period ended December 27, 2018.

 

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 27,

 

December 28,

 

 

2018

 

2017

Deferred tax assets:

 

 

  

 

 

  

Accruals not currently deductible for tax purposes

 

$

13,338

 

$

8,993

Tenant improvement allowances

 

 

9,239

 

 

6,597

Inventories

 

 

3,948

 

 

4,111

Stock based compensation

 

 

3,684

 

 

3,108

Other intangibles

 

 

361

 

 

405

Gift card liability

 

 

242

 

 

648

Litigation accrual

 

 

172

 

 

583

Other

 

 

2,858

 

 

846

Total deferred tax assets

 

 

33,842

 

 

25,291

Deferred tax liabilities:

 

 

  

 

 

  

Intangible assets

 

 

(27,023)

 

 

(26,868)

Fixed assets

 

 

(30,681)

 

 

(24,225)

Other

 

 

(2,976)

 

 

(1,416)

Total deferred tax liabilities

 

 

(60,680)

 

 

(52,509)

Net deferred tax liabilities

 

$

(26,838)

 

$

(27,218)

 

The Company generated $776 thousand of state net operating losses in fiscal 2018, resulting in a total of $2.2 million state net operating losses available to reduce future income taxes. The state net operating losses expire in various amounts beginning in 2032.

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 27, 2018 or December 28, 2017

The Company files income tax returns with the U.S. Federal government and various state jurisdictions. Prior tax years beginning in year 2015 remain open to examination by the Internal Revenue Service. As of December 27, 2018,  December 28, 2017, and December 29, 2016 the Company had unrecognized tax benefits of $0,  $0, and $0, respectively. These unrecognized tax benefits as of December 27, 2018,  December 28, 2017, and December 29, 2016 would have no impact on the effective tax rate, if recognized. The Company's policy is to classify interest and penalties related to unrecognized tax benefits in income tax expense.

v3.10.0.1
Fair Value Measurements
12 Months Ended
Dec. 27, 2018
Fair Value Measurements  
Fair Value Measurements

7. 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 27,

 

 

 

 

 

 

 

 

 

(in thousands)

 

2018

    

Level 1

    

Level 2

    

Level 3

Designated as hedges:

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate cap (cash flow hedge)

 

$

1,076

 

$

 

$

1,076

 

$

Not designated as hedges:

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate cap

 

$

1,075

 

$

 

$

1,075

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

 

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.

v3.10.0.1
Derivatives and Risk Management
12 Months Ended
Dec. 27, 2018
Derivatives and Risk Management  
Derivatives and Risk Management

8. 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

For derivative contracts de-designated as accounting hedges, 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. 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 27, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

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

 

$

1,076

 

$

177

Not designated as hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate cap

 

$

102,500

 

U.S. dollars

 

December 2021

 

$

1,075

 

$

 9

 

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)

 

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

 

Year Ended

 

 

December 27,

 

December 28,

 

December 29,

 

December 27,

 

December 28,

 

December 29,

(in thousands)

    

2018

    

2017

    

2016

    

2018

    

2017