FLOOR & DECOR HOLDINGS, INC., 10-Q filed on 8/2/2018
Quarterly Report
v3.10.0.1
Document and Entity Information - shares
6 Months Ended
Jun. 28, 2018
Jul. 31, 2018
Document and Entity Information    
Entity Registrant Name Floor & Decor Holdings, Inc.  
Entity Central Index Key 0001507079  
Document Type 10-Q  
Document Period End Date Jun. 28, 2018  
Amendment Flag false  
Current Fiscal Year End Date --12-27  
Entity Current Reporting Status Yes  
Entity Filer Category Non-accelerated Filer  
Entity Common Stock, Shares Outstanding   97,222,147
Document Fiscal Period Focus Q2  
Document Fiscal Year Focus 2018  
v3.10.0.1
Condensed Consolidated Balance Sheets - USD ($)
$ in Thousands
Jun. 28, 2018
Dec. 28, 2017
Current assets:    
Cash and cash equivalents $ 547 $ 556
Income taxes receivable 15,866 12,472
Receivables, net 41,343 54,041
Inventories, net 432,446 427,950
Prepaid expenses and other current assets 12,107 8,193
Total current assets 502,309 503,212
Fixed assets, net 271,500 220,952
Intangible assets, net 109,346 109,362
Goodwill 227,447 227,447
Other assets 7,808 7,019
Total long-term assets 616,101 564,780
Total assets 1,118,410 1,067,992
Current liabilities:    
Current portion of term loans 3,500 3,500
Trade accounts payable 264,987 258,730
Accrued expenses 62,162 74,547
Deferred revenue 4,683 22,523
Total current liabilities 335,332 359,300
Term loans 143,198 144,562
Revolving line of credit 13,600 41,000
Deferred rent 30,650 25,570
Deferred income tax liabilities, net 30,702 27,218
Tenant improvement allowances 27,650 26,779
Other liabilities 2,604 703
Total long-term liabilities 248,404 265,832
Total liabilities 583,736 625,132
Commitments and contingencies
Capital stock:    
Preferred stock, $0.001 par value; 10,000,000 shares authorized; 0 shares issued and outstanding at June 28, 2018 and December 28, 2017 0 0
Additional paid-in capital 335,024 323,419
Accumulated other comprehensive income (loss), net 460 (205)
Retained earnings 199,093 119,550
Total stockholders' equity 534,674 442,860
Total liabilities and stockholders' equity 1,118,410 1,067,992
Class A Common Stock    
Capital stock:    
Common Stock 97 96
Class B Common Stock    
Capital stock:    
Common Stock 0 0
Class C Common Stock    
Capital stock:    
Common Stock $ 0 $ 0
v3.10.0.1
Condensed Consolidated Balance Sheets (Parenthetical) - $ / shares
Jun. 28, 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 97,218,543 95,509,179
Common stock, shares outstanding 97,218,543 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
3 Months Ended 6 Months Ended
Jun. 28, 2018
Jun. 29, 2017
Jun. 28, 2018
Jun. 29, 2017
Income Statement [Abstract]        
Net Sales $ 434,279 $ 344,047 $ 837,227 $ 651,343
Type of Revenue [Extensible List]     us-gaap:ProductMember  
Cost of sales 256,641 201,819 $ 494,203 383,644
Type of Cost, Good or Service [Extensible List]     us-gaap:ProductMember  
Gross profit 177,638 142,228 $ 343,024 267,699
Operating expenses:        
Selling and store operating 108,626 85,650 211,193 166,401
General and administrative 25,179 19,518 48,518 37,399
Pre-opening 6,588 2,958 9,562 7,125
Total operating expenses 140,393 108,126 269,273 210,925
Operating income 37,245 34,102 73,751 56,774
Interest expense 2,145 3,353 3,929 8,767
Loss on extinguishment of debt 0 5,442 0 5,442
Income before income taxes 35,100 25,307 69,822 42,565
Provision for income taxes (4,746) 4,878 (1,895) 11,008
Net income $ 39,846 $ 20,429 $ 71,717 $ 31,557
Basic earnings per share $ 0.41 $ 0.22 $ 0.75 $ 0.36
Diluted earnings per share $ 0.38 $ 0.20 $ 0.68 $ 0.33
v3.10.0.1
Condensed Consolidated Statements of Comprehensive Income - USD ($)
$ in Thousands
3 Months Ended 6 Months Ended
Jun. 28, 2018
Jun. 29, 2017
Jun. 28, 2018
Jun. 29, 2017
Statement of Comprehensive Income [Abstract]        
Net income $ 39,846 $ 20,429 $ 71,717 $ 31,557
Other comprehensive income (loss) - change in fair value of hedge instruments, net of tax 235 (484) 665 (766)
Total comprehensive income $ 40,081 $ 19,945 $ 72,382 $ 30,791
v3.10.0.1
Condensed Consolidated Statements of Cash Flows - USD ($)
$ in Thousands
6 Months Ended
Jun. 28, 2018
Jun. 29, 2017
Operating activities    
Net income $ 71,717 $ 31,557
Adjustments to reconcile net income to net cash provided by operating activities:    
Depreciation and amortization 23,632 18,058
Non-cash loss on early extinguishment of debt 0 5,442
Amortization of tenant improvement allowances (2,165) (1,547)
Deferred income taxes 2,822 7,586
Interest cap derivative contracts (794) 0
Stock based compensation expense 2,952 2,135
Changes in operating assets and liabilities:    
Receivables, net 12,697 (3,967)
Inventories, net (14,989) (73,771)
Other assets (3,306) (1,643)
Trade accounts payable 6,257 85,118
Accrued expenses (21,912) (10,901)
Income taxes (5,320) (7,868)
Deferred revenue 2,441 7,063
Deferred rent 4,955 5,994
Tenant improvement allowances 3,034 3,124
Other 1,902 59
Net cash provided by operating activities 83,923 66,439
Investing activities    
Purchases of fixed assets (63,438) (45,498)
Net cash used in investing activities (63,438) (45,498)
Financing activities    
Borrowings on revolving line of credit 129,300 111,700
Payments on revolving line of credit (156,700) (129,900)
Payments on term loans (1,750) (195,750)
Net proceeds from initial public offering 0 192,082
Proceeds from exercise of stock options 8,656 1,855
Debt issuance costs 0 (993)
Net cash used in financing activities (20,494) (21,006)
Net increase (decrease) in cash and cash equivalents (9) (65)
Cash and cash equivalents, beginning of the period 556 451
Cash and cash equivalents, end of the period 547 386
Supplemental disclosures of cash flow information    
Cash paid for interest 3,844 11,682
Cash paid for income taxes 637 11,134
Fixed assets accrued at the end of the period 18,596 8,472
Fixed assets acquired as part of lease - paid for by lessor $ 0 $ 1,786
v3.10.0.1
Summary of Significant Accounting Policies
6 Months Ended
Jun. 28, 2018
Summary of Significant Accounting Policies  
Summary of Significant Accounting Policies

1. Summary of Significant Accounting Policies

Nature of Business

Floor & Decor Holdings, Inc., together with its subsidiaries (the “Company,” “we,” “our” or “us”) is a highly differentiated, rapidly growing specialty retailer of hard surface flooring and related accessories. We offer a broad in stock assortment of tile, wood, laminate 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 June 28, 2018, the Company, through its wholly owned subsidiary, Floor and Decor Outlets of America, Inc. (“F&D”), operates 88 warehouse-format stores, which average 74,000 square feet, and one small-format standalone design center in 22 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”) and December 28, 2017 (“fiscal 2017”) 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 unaudited condensed consolidated financial statements include the accounts of the Company and our wholly owned subsidiaries. These financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information. The Condensed Consolidated Balance Sheet as of December 28, 2017 has been derived from the audited Consolidated Balance Sheet for the fiscal year then ended. The interim condensed consolidated financial statements should be read together with the audited consolidated financial statements and related footnote disclosures included in the Company’s Annual Report on Form 10-K for fiscal 2017, filed with the Securities and Exchange Commission (the “SEC”) on March 5, 2018 (the “Annual Report”). Unless indicated otherwise, the information in this quarterly report on Form 10-Q (the “Quarterly 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. Certain prior year amounts have been reclassified in the consolidated financial statements to conform to the current year presentation.

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

Results of operations for the thirteen and twenty-six weeks ended June 28, 2018 and June 29, 2017 are not necessarily indicative of the results to be expected for the full year.

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 ninety days. The right of return is an element of variable consideration as defined with 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. The return asset is included within Inventories, net and the refund liability is included within Accrued Expenses, each respectively on the Condensed Consolidated Balance Sheets. 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 Condensed Consolidated Statements of Income. We have an agreement with an unrelated third-party who is the issuer of our gift cards and also assumes the liability for unredeemed gift cards. We are 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. Accordingly, in the twenty-six weeks ended June 28, 2018 and June 29, 2017, gift card breakage income of $1,172 thousand and $348 thousand, respectively was recognized in net sales in the Condensed Consolidated Statements of Income, respectively, for such unredeemed gift cards.

There have been no other additional updates to our Significant Accounting Policies since the Annual Report. For information regarding our Significant Accounting Policies and Estimates, see the “Summary of Significant Accounting Policies” section of “Item 8. Financial Statements And Supplementary Data” of our Annual Report.

Recently Issued Accounting Pronouncements

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

Recently Adopted Accounting Pronouncements

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 in the first quarter of fiscal 2018 did not have a material impact on the Company's Condensed 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 in the first quarter of fiscal 2018 did not have a material impact on the Company's Condensed Consolidated Statements of Cash Flows.

In May 2014, the FASB issued Accounting Standards Update (ASU) No. 2014-09, "Revenue from Contracts with Customers." ASU No. 2014-09 provided 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 using the modified retrospective approach in the first quarter of fiscal 2018, effective December 29, 2017. Under the new guidance, we recognize revenue at the time the customer obtains control of the inventory. The cumulative adjustment upon adoption primarily resulted in a reduction of deferred revenue and related inventories and an increase to retained earnings. The adoption of ASU No. 2014-09 did not have a material impact to the Company’s Condensed Consolidated Financial Statements.

 

v3.10.0.1
Revenues
6 Months Ended
Jun. 28, 2018
Revenue from Contract with Customer [Abstract]  
Revenues

2. Revenues

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

On December 29, 2017, we 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 29, 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).

We 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 we allow customers to store their merchandise at our 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 thirteen and twenty-six weeks ended June 28, 2018.

Deferred Revenue

Under Topic 605 we recognized revenue for certain transactions for which we allow customers to store their merchandise at our 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 Condensed Consolidated Balance Sheet as of December 28, 2017. Under Topic 606, we evaluated the bill-and-hold criteria and recognize 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 is 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 we expect to be entitled to breakage. The timing and amounts of revenue related to gift card breakage income in the cumulative transition adjustment, and for the thirteen and twenty-six weeks ended June 28, 2018 were immaterial to the Condensed Consolidated Financial Statements.

Disaggregated Revenue

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Thirteen Weeks Ended

 

Twenty-six Weeks Ended

 

 

 

March 29, 2018

 

June 28, 2018

 

June 28, 2018

 

 

    

 

 

    

% of

    

 

 

    

% of

    

 

 

    

% of

    

Product Category

 

Net Sales

 

Net Sales

 

Net Sales

 

Net Sales

 

Net Sales

 

Net Sales

 

Tile

 

$

117,402

 

29

%  

$

123,408

 

28

%  

$

240,810

 

29

%  

Decorative Accessories

 

 

78,489

 

19

 

 

82,976

 

19

 

 

161,465

 

19

 

Laminate / Luxury Vinyl Plank

 

 

66,892

 

17

 

 

77,436

 

18

 

 

144,328

 

17

 

Accessories (Installation Materials and Tools)

 

 

63,581

 

16

 

 

68,201

 

16

 

 

131,782

 

16

 

Wood

 

 

46,485

 

12

 

 

48,911

 

11

 

 

95,396

 

11

 

Natural Stone

 

 

28,006

 

 7

 

 

29,533

 

 7

 

 

57,539

 

 7

 

Delivery and Other

 

 

2,093

 

 —

 

 

3,814

 

 1

 

 

5,907

 

 1

 

Total

 

$

402,948

 

100

%  

$

434,279

 

100

%  

$

837,227

 

100

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Thirteen Weeks Ended

 

Twenty-six Weeks Ended

 

 

 

March 30, 2017

 

June 29, 2017

 

June 29, 2017

 

 

    

 

 

    

% of

    

 

 

    

% of

    

 

 

    

% of

    

Product Category

 

Net Sales

 

Net Sales

 

Net Sales

 

Net Sales

 

Net Sales

 

Net Sales

 

Tile

 

$

92,682

 

30

%  

$

103,794

 

30

%  

$

196,476

 

30

%  

Decorative Accessories

 

 

60,300

 

20

 

 

64,975

 

19

 

 

125,275

 

19

 

Laminate / Luxury Vinyl Plank

 

 

42,539

 

14

 

 

50,943

 

15

 

 

93,482

 

14

 

Accessories (Installation Materials and Tools)

 

 

48,552

 

16

 

 

54,167

 

16

 

 

102,719

 

16

 

Wood

 

 

36,993

 

12

 

 

41,789

 

12

 

 

78,782

 

12

 

Natural Stone

 

 

24,500

 

 8

 

 

26,927

 

 8

 

 

51,427

 

 8

 

Delivery and Other

 

 

1,730

 

 —

 

 

1,452

 

 —

 

 

3,182

 

 1

 

Total

 

$

307,296

 

100

%  

$

344,047

 

100

%  

$

651,343

 

100

%  

 

In the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 29, 2018, the product category titles Laminate / Luxury Vinyl Plank and Accessories (Installation Materials and Tools) were inadvertently transposed in the Company’s net sales by product category table for the thirteen weeks ended March 29, 2018 and March 30, 2017. The correct amounts are shown in the table above.

v3.10.0.1
Fair Value Measurements
6 Months Ended
Jun. 28, 2018
Fair Value Measurements  
Fair Value Measurements

3. Fair Value Measurements

We estimate 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

 

 

 

 

 

 

 

 

 

 

 

June 28,

 

 

 

 

 

 

 

 

 

(in thousands)

 

2018

    

Level 1

    

Level 2

    

Level 3

Designated as hedges:

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate cap (cash flow hedge)

 

$

1,541

 

$

 

$

1,541

 

$

Not designated as hedges:

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate cap

 

$

1,541

 

$

 

$

1,541

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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
6 Months Ended
Jun. 28, 2018
Derivatives and Risk Management  
Derivatives and Risk Management

4. 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.

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.

Hedge Position as of June 28, 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

 

$

1,541

 

$

479

Not designated as hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate cap

 

$

102,500

 

U.S. dollars

 

December 2021

 

$

1,541

 

$

(19)

 

Hedge 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 Gains (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)

 

 

Thirteen Weeks Ended

 

 

June 28,

 

June 29,

 

June 28,

 

June 29,

(in thousands)

    

2018

    

2017

    

2018

    

2017

Interest rate caps (cash flow hedges)

 

$

 —

 

$

 

$

235

 

$

(484)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Effective Portion Reclassified

 

Effective Portion Recognized in

 

 

From AOCI to Earnings

 

Other Comprehensive Income (Loss)

 

 

Twenty-six Weeks Ended

 

 

June 28,

 

June 29,

 

June 28,

 

June 29,

(in thousands)

    

2018

    

2017

    

2018

    

2017

Interest rate cap (cash flow hedge)

 

$

 —

 

$

 

$

665

 

$

(766)

 

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 large 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.

v3.10.0.1
Debt
6 Months Ended
Jun. 28, 2018
Debt  
Debt

5. Debt

Fair Value of Debt

Market risk associated with our fixed and variable rate long‑term debt relates to the potential change in fair value and negative impact to future earnings, respectively, from a change in interest rates. The aggregate fair value of debt is based primarily on our estimates of interest rates, maturities, credit risk, and underlying collateral and is classified as Level 3 within the fair value hierarchy. At June 28, 2018 and December 28, 2017, the fair values of our debt were as follows:

 

 

 

 

 

 

 

 

    

June 28,

    

December 28,

(in thousands)

 

2018

 

2017

Total debt at par value

 

$

164,350

 

$

193,500

Less: unamortized discount and debt issuance costs

 

 

4,052

 

 

4,438

Net carrying amount

 

$

160,298

 

$

189,062

Fair value

 

$

164,350

 

$

193,881

 

v3.10.0.1
Income Taxes
6 Months Ended
Jun. 28, 2018
Income Taxes  
Income Taxes

6. Income Taxes

Income Taxes

Our effective income tax rates were (2.7)% and 25.9% for the twenty-six weeks ended June 28, 2018 and June 29, 2017, respectively. The lower effective rate for the twenty-six weeks ended June 28, 2018 was primarily due to tax reform passed in December 2017 and the recognition of excess tax benefits related to stock options exercised.

Provisional amounts

In connection with the Tax Cuts and Jobs Act (the “Act”) passed in December 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% for federal income tax purposes and 3.6% currently estimated for state income tax purposes. We recorded a provisional amount of $17.9 million as of December 28, 2017 related to the remeasurement of certain deferred tax balances, and we have not made any adjustments to this provisional amount during the twenty-six weeks ended June 28, 2018. 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 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. 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 June 28, 2018, 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.

 

v3.10.0.1
Commitments and Contingencies
6 Months Ended
Jun. 28, 2018
Commitments and Contingencies.  
Commitments and Contingencies

7. Commitments and Contingencies

Lease Commitments

We lease our corporate office, retail locations and distribution centers through F&D, under long‑term operating lease agreements that expire in various years through 2038. Additionally, certain equipment is leased under short‑term operating leases.

Certain lease agreements include escalating rents over the lease terms. We expense rent on a straight‑line basis over the life of the lease, which commences on the date we have 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 balance sheets. Future minimum lease payments under non‑cancelable operating leases (with initial or remaining lease terms in excess of one year) as of June 28, 2018, were:

 

 

 

 

(in thousands)

    

Amount

Twenty-six weeks ended December 27, 2018

 

$

46,427

2019

 

 

106,594

2020

 

 

109,808

2021

 

 

106,013

2022

 

 

99,695

Thereafter

 

 

636,396

Total minimum lease payments

 

$

1,104,933

 

Lease expense for the twenty-six weeks ended June 28, 2018 and June 29, 2017 was approximately $44,113 thousand and $33,905 thousand, respectively.

Litigation

We are subject to other various legal actions, claims and proceedings arising in the ordinary course of business, which may include claims related to general liability, workers’ compensation, product liability, intellectual property and employment-related matters resulting from our business activities. We establish reserves for specific legal proceedings when we determine that the likelihood of an unfavorable outcome is probable and the amount of loss can be reasonably estimated. These proceedings are not expected to have a material impact on our consolidated financial position, cash flows or results of operations.

v3.10.0.1
Stock-Based Compensation
6 Months Ended
Jun. 28, 2018
Stock-Based Compensation  
Stock-Based Compensation

8. Stock Based Compensation

At our 2018 annual meeting of stockholders held on May 17, 2018, our stockholders approved the Floor & Decor Holdings, Inc. Employee Stock Purchase Plan (“ESPP”). The ESPP will be offered to substantially all employees beginning in the third quarter of fiscal 2018. The ESPP permits eligible employees to purchase shares of our common stock through payroll deductions, subject to certain limitations. The purchase price of the shares under the ESPP in no event will be less than the lesser of 85% of the lower of the fair market value of our common stock on either the first or last trading day of each six-month offering period. There are 1,500,000 shares of the Class A common stock, par value $0.001 per share, approved for issuance under the ESPP.

v3.10.0.1
Earnings Per Share
6 Months Ended
Jun. 28, 2018
Earnings Per Share  
Earnings Per Share

9. Earnings Per Share

Net Income per Common Share

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

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Thirteen Weeks Ended

    

Twenty-six Weeks Ended

 

 

June 28,

 

June 29,

 

June 28,

 

June 29,

(in thousands, except per share data)

 

2018

    

2017

 

2018

    

2017

Net income

 

$

39,846

 

$

20,429

 

$

71,717

 

$

31,557

Basic weighted average shares outstanding

 

 

96,684

 

 

90,861

 

 

96,199

 

 

87,195

Dilutive effect of share based awards

 

 

8,253

 

 

9,058

 

 

8,609

 

 

7,705

Diluted weighted average shares outstanding

 

 

104,937

 

 

99,919

 

 

104,808

 

 

94,900

Basic earnings per share

 

$

0.41

 

$

0.22

 

$

0.75

 

$

0.36

Diluted earnings per share

 

$

0.38

 

$

0.20

 

$

0.68

 

$

0.33

 

The following awards have been excluded from the computation of dilutive effect of share based awards because the effect would be anti‑dilutive:

 

 

 

 

 

 

 

 

 

 

 

    

Thirteen Weeks Ended

    

Twenty-six Weeks Ended

    

 

 

June 28,

 

June 29,

 

June 28,

 

June 29,

 

(in thousands)

 

2018

 

2017

 

2018

 

2017

 

Stock options

 

181

 

892

 

130

 

453

 

v3.10.0.1
Summary of Significant Accounting Policies (Policies)
6 Months Ended
Jun. 28, 2018
Summary of Significant Accounting Policies  
Fiscal Year

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”) and December 28, 2017 (“fiscal 2017”) 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

Basis of Presentation 

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and our wholly owned subsidiaries. These financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information. The Condensed Consolidated Balance Sheet as of December 28, 2017 has been derived from the audited Consolidated Balance Sheet for the fiscal year then ended. The interim condensed consolidated financial statements should be read together with the audited consolidated financial statements and related footnote disclosures included in the Company’s Annual Report on Form 10-K for fiscal 2017, filed with the Securities and Exchange Commission (the “SEC”) on March 5, 2018 (the “Annual Report”). Unless indicated otherwise, the information in this quarterly report on Form 10-Q (the “Quarterly 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. Certain prior year amounts have been reclassified in the consolidated financial statements to conform to the current year presentation.

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

Results of operations for the thirteen and twenty-six weeks ended June 28, 2018 and June 29, 2017 are not necessarily indicative of the results to be expected for the full year.

Revenue Recognition, Gift Cards and Merchandise Credits and Sales Returns and Allowances

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 ninety days. The right of return is an element of variable consideration as defined with 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. The return asset is included within Inventories, net and the refund liability is included within Accrued Expenses, each respectively on the Condensed Consolidated Balance Sheets. 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 Condensed Consolidated Statements of Income. We have an agreement with an unrelated third-party who is the issuer of our gift cards and also assumes the liability for unredeemed gift cards. We are 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. Accordingly, in the twenty-six weeks ended June 28, 2018 and June 29, 2017, gift card breakage income of $1,172 thousand and $348 thousand, respectively was recognized in net sales in the Condensed Consolidated Statements of Income, respectively, for such unredeemed gift cards.

Recent Accounting Pronouncements

Recently Issued Accounting Pronouncements

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

Recently Adopted Accounting Pronouncements

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 in the first quarter of fiscal 2018 did not have a material impact on the Company's Condensed 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 in the first quarter of fiscal 2018 did not have a material impact on the Company's Condensed Consolidated Statements of Cash Flows.

In May 2014, the FASB issued Accounting Standards Update (ASU) No. 2014-09, "Revenue from Contracts with Customers." ASU No. 2014-09 provided 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 using the modified retrospective approach in the first quarter of fiscal 2018, effective December 29, 2017. Under the new guidance, we recognize revenue at the time the customer obtains control of the inventory. The cumulative adjustment upon adoption primarily resulted in a reduction of deferred revenue and related inventories and an increase to retained earnings. The adoption of ASU No. 2014-09 did not have a material impact to the Company’s Condensed Consolidated Financial Statements.

v3.10.0.1
Revenues (Tables)
6 Months Ended
Jun. 28, 2018
Disaggregation of Revenue [Abstract]  
Disaggregated Revenue

 

 

Thirteen Weeks Ended

 

Twenty-six Weeks Ended

 

 

 

March 29, 2018

 

June 28, 2018

 

June 28, 2018

 

 

    

 

 

    

% of

    

 

 

    

% of

    

 

 

    

% of

    

Product Category

 

Net Sales

 

Net Sales

 

Net Sales

 

Net Sales

 

Net Sales

 

Net Sales

 

Tile

 

$

117,402

 

29

%  

$

123,408

 

28

%  

$

240,810

 

29

%  

Decorative Accessories

 

 

78,489

 

19

 

 

82,976

 

19

 

 

161,465

 

19

 

Laminate / Luxury Vinyl Plank

 

 

66,892

 

17

 

 

77,436

 

18

 

 

144,328

 

17

 

Accessories (Installation Materials and Tools)

 

 

63,581

 

16

 

 

68,201

 

16

 

 

131,782

 

16

 

Wood

 

 

46,485

 

12

 

 

48,911

 

11

 

 

95,396

 

11

 

Natural Stone

 

 

28,006

 

 7

 

 

29,533

 

 7

 

 

57,539

 

 7

 

Delivery and Other

 

 

2,093

 

 —

 

 

3,814

 

 1

 

 

5,907

 

 1

 

Total

 

$

402,948

 

100

%  

$

434,279

 

100

%  

$

837,227

 

100

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Thirteen Weeks Ended

 

Twenty-six Weeks Ended

 

 

 

March 30, 2017

 

June 29, 2017

 

June 29, 2017

 

 

    

 

 

    

% of

    

 

 

    

% of

    

 

 

    

% of

    

Product Category

 

Net Sales

 

Net Sales

 

Net Sales

 

Net Sales

 

Net Sales

 

Net Sales

 

Tile

 

$

92,682

 

30

%  

$

103,794

 

30

%  

$

196,476

 

30

%  

Decorative Accessories

 

 

60,300

 

20

 

 

64,975

 

19

 

 

125,275

 

19

 

Laminate / Luxury Vinyl Plank

 

 

42,539

 

14

 

 

50,943

 

15

 

 

93,482

 

14

 

Accessories (Installation Materials and Tools)

 

 

48,552

 

16

 

 

54,167

 

16

 

 

102,719

 

16

 

Wood

 

 

36,993

 

12

 

 

41,789

 

12

 

 

78,782

 

12

 

Natural Stone

 

 

24,500

 

 8

 

 

26,927

 

 8

 

 

51,427

 

 8

 

Delivery and Other

 

 

1,730

 

 —

 

 

1,452

 

 —

 

 

3,182

 

 1

 

Total

 

$

307,296

 

100

%  

$

344,047

 

100

%  

$

651,343

 

100

%  

 

v3.10.0.1
Fair Value Measurements (Tables)
6 Months Ended
Jun. 28, 2018
Fair Value Measurements  
Schedule of Assets (Liabilities) Measured at Fair Value on a Recurring Basis

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of

 

 

 

 

 

 

 

 

 

 

 

June 28,

 

 

 

 

 

 

 

 

 

(in thousands)

 

2018

    

Level 1

    

Level 2

    

Level 3

Designated as hedges: