Annual report pursuant to Section 13 and 15(d)

Commitments and Contingencies

v3.20.4
Commitments and Contingencies
 12 Months Ended
Dec. 31, 2020
Commitments and Contingencies Disclosure [Abstract]  
Commitments and Contingencies Commitments and Contingencies
Lease Commitments
In the first quarter of fiscal 2019, we adopted ASU No. 2016-02, “Leases (Topic 842),” which requires that lessees recognize lease assets and lease liabilities for all leases on the balance sheet with an option to exclude short-term leases (leases with terms of 12 months or less), which we elected. We adopted ASU No. 2016-02 using the modified retrospective approach and elected the package of practical expedients to use in transition, which permitted us not to reassess, under the new standard, our prior conclusions about lease identification and lease classification. The cumulative effect adjustment upon adoption of ASU No. 2016-02 resulted in an immaterial adjustment to retained earnings. The adoption also resulted in the addition of $620.8 million of right-of-use assets and a corresponding $683.0 million of lease liabilities to our balance sheet, while eliminating deferred rent and tenant improvement allowances. Additionally, we do not separate lease and nonlease components of contracts.
The majority of our long-term operating lease agreements are for our corporate office, retail locations, and distribution centers, which expire in various years through 2041. Most of these agreements are retail leases where both the land and building are leased. For a small number of retail locations, the Company has ground leases where only the land is leased. The initial lease terms for the Company's corporate office, retail, and distribution center facilities range from 10-20 years. The majority of these leases also include options to extend, which are factored into the recognition of their respective assets and liabilities when appropriate based on management’s assessment of the probability that the options will be exercised. Lease payments used in measurement of the lease liability typically do not include executory costs, such as taxes, insurance, and maintenance, unless those costs can be reasonably estimated at lease commencement. Additionally, one building lease contains variable lease payments, which are determined based on a percentage of retail sales over a contractual level, and we sublease real estate within one distribution center to a third party. Certain of our lease agreements include escalating rents over the lease terms which, under Topic 842, results in rent being expensed on a straight-line basis over the life of the lease that commences on the date we have the right to control the property. Our lease agreements do not contain any residual value guarantees or restrictive covenants that would reasonably be expected to have a material impact on our business.
When readily determinable, the rate implicit in the lease is used to discount lease payments to present value; however, substantially all of our leases do not provide a readily determinable implicit rate. If the rate implicit in the lease is not readily determinable, we use a third party to assist in the determination of a secured incremental borrowing rate, determined on a collateralized basis, to discount lease payments based on information available at lease commencement. The secured incremental borrowing rate is estimated based on yields obtained from Bloomberg for U.S. consumers with a BB- credit rating and is adjusted for collateralization as well as inflation. As of December 31, 2020 and December 26, 2019, the Company's weighted average discount rate was 5.3% and 5.3%, respectively. As of December 31, 2020 and December 26, 2019, the Company's weighted average remaining lease term was approximately 11 years and 10 years, respectively.
Lease Position
The table below presents supplemental balance sheet information related to operating leases.
in thousands, except lease term and discount rate
Classification
 As of December 31, 2020 As of December 26, 2019
Assets
Building
Right-of-use assets
 $ 851,092  $ 808,989 
Equipment
Right-of-use assets
 6,865  7,322 
Land
Right-of-use assets
 56,708  2,378 
Software
Right-of-use assets
 1,660  3,567 
Total operating lease assets
916,325  822,256 
Liabilities
Current
Building
Current portion of lease liabilities
 88,287  67,500 
Equipment
Current portion of lease liabilities
 3,941  3,758 
Land
Current portion of lease liabilities
 440  170 
Software
Current portion of lease liabilities
 1,834  3,164 
Total current operating lease liabilities
94,502  74,592 
Noncurrent
Building
Lease liabilities
 873,098  837,510 
Equipment
Lease liabilities
 2,924  3,902 
Land
Lease liabilities
 65,103  2,357 
Software
Lease liabilities
 —  500 
Total noncurrent operating lease liabilities
941,125  844,269 
Total operating lease liabilities
$ 1,035,627  $ 918,861 
Weighted-average remaining lease term
11 years 10 years
Weighted-average discount rate
5.3% 5.3%
Lease Costs
The table below presents components of lease expense for operating leases.
Fiscal Year Ended
in thousands Classification December 31, 2020 December 26, 2019 (3)
Fixed operating lease cost: Selling and store operating $ 105,207  $ 87,124 
Cost of sales 22,672  17,132 
Pre-opening 7,886  5,959 
General and administrative 4,118  2,272 
Total fixed operating lease cost $ 139,883  $ 112,487 
Variable lease cost (1): Selling and store operating $ 34,499  $ 28,894 
Cost of sales 4,860  3,570 
Pre-opening 657  151 
General and administrative 151  5 
Total variable lease cost $ 40,167  $ 32,620 
Sublease income Cost of sales (2,713) (2,414)
Operating lease right-of-use asset impairment General and administrative —  4,136 
Total operating lease cost (2) $ 177,337  $ 146,829 
(1)Includes variable costs for common area maintenance, property taxes, and insurance on leased real estate.
(2)Excludes short-term lease costs, which were immaterial for the fiscal years ended December 31, 2020 and December 26, 2019.
(3)To conform to the current period presentation, the presentation of the components of operating lease expense for the fiscal year ended December 26, 2019 has been updated within this table to provide disclosure of variable lease costs and additional information related to the classification of operating lease costs within the Consolidated Statements of Operations and Comprehensive Income.
Undiscounted Cash Flows
Future minimum lease payments under non-cancelable operating leases (with initial or remaining lease terms in excess of one year) as of December 31, 2020, were:
in thousands
Amount
2021 $ 145,813 
2022 141,815 
2023 136,289 
2024 133,866 
2025 125,790 
Thereafter
 713,557 
Total minimum lease payments (1) (2) 1,397,130 
Less: amount of lease payments representing interest
 361,503 
Present value of future minimum lease payments
 1,035,627 
Less: current obligations under leases
 94,502 
Long-term lease obligations
 $ 941,125 
(1)Future lease payments exclude approximately $132.9 million of legally binding minimum lease payments for operating leases signed but not yet commenced.
(2)Operating lease payments include $59.3 million related to options to extend lease terms that are reasonably certain of being exercised.
For the fiscal years ended December 31, 2020 and December 26, 2019, cash paid for operating leases was $131.3 million and $112.8 million.
Right-of-Use Asset Impairment and Write Off
During the third quarter of fiscal 2019, we began the move from our former store support center in Smyrna, Georgia to a nearby location in Atlanta, Georgia. Prior to this period, we expected to fully cover future payments under the operating lease agreement with proceeds from a sublease. As of the end of our fiscal third quarter, we no longer expected to find a sublease tenant that would fully cover these future payments and concluded that the right-of-use asset related to the operating lease was not recoverable. Therefore, we determined the fair value of the right-of-use asset based on a discounted cash flow analysis reflective of the income expected from a sublease. Based on the excess of the asset’s carrying value over fair value, we recognized an impairment of $4.1 million in the third quarter of fiscal 2019 in general and administrative expenses on the Consolidated Statements of Operations and Comprehensive Income.
In addition, during the fourth quarter of fiscal 2019, we completed the move to our new location and terminated the lease for our previous store support center facility in Smyrna, Georgia. As a result, we recognized a loss of $1.9 million related to the settlement of our remaining obligations under the lease and the write off of the remaining right-of-use asset for the facility upon lease termination. This loss was recognized in general and administrative expenses on the Consolidated Statements of Operations and Comprehensive Income.
Litigation
On May 20, 2019, an alleged stockholder of the Company filed a putative class action lawsuit, Taylor v. Floor & Decor Holdings, Inc., et al., No. 1:19-cv-02270-SCJ (N.D. Ga.), in the United States District Court for the Northern District of Georgia against the Company and certain of our officers, directors and stockholders. On August 14, 2019, the Court named a lead plaintiff, and the case was re-captioned In re Floor & Decor Holdings, Inc. Securities Litigation, No. 1:19-cv-02270-SCJ (N.D. Ga.). The operative complaint alleged certain violations of federal securities laws based on, among other things, purported materially false and misleading statements and omissions allegedly made by the Company between May 23, 2018 and August 1, 2018 and sought class certification, unspecified monetary damages, costs and attorneys’ fees and equitable relief. The Company denied the material allegations and moved to dismiss the lawsuit. On September 21, 2020, the District Court granted the Company’s motion to dismiss in its entirety. The plaintiff did not appeal that decision, meaning the dismissal is final.
On June 18, 2020, an alleged stockholder filed a putative derivative complaint, Lincolnshire Police Pension Fund v. Taylor, et al., No. 2020-0487-JTL, in the Delaware Court of Chancery, purportedly on behalf of the Company against certain of the Company’s officers, directors, and stockholders. The complaint alleges breaches of fiduciary duties and unjust enrichment. The factual allegations underlying these claims are similar to the factual allegations made in the In re Floor & Decor Holdings, Inc. Securities Litigation described above. The complaint seeks unspecified damages and restitution for the Company from the individual defendants and the payment of costs and attorneys’ fees. The time for the defendants to respond to the complaint has not yet expired.
The Company maintains insurance that may cover any liability arising out of the above-referenced litigation up to the policy limits and subject to meeting certain deductibles and to other terms and conditions thereof. Estimating an amount or range of possible losses resulting from litigation proceedings is inherently difficult, particularly where the matters involve indeterminate claims for monetary damages and are in the stages of the proceedings where key factual and legal issues have not been resolved. For these reasons, we are currently unable to predict the ultimate timing or outcome of or reasonably estimate the possible losses or a range of possible losses resulting from the above-referenced litigation.
The Company is also subject to various other legal actions, claims and proceedings arising in the ordinary course of business, which may include claims related to general liability, workers’ compensation, product liability, intellectual property and employment-related matters resulting from our business activities. As with most actions such as these, an estimation of any possible and/or ultimate liability cannot always be determined. The Company establishes reserves for specific legal proceedings when it determines that the likelihood of an unfavorable outcome is probable and the amount of loss can be reasonably estimated. These various other ordinary course proceedings are not expected to have a material impact on the Company's consolidated financial position, cash flows, or results of operations, however regardless of the outcome, litigation can have an adverse impact on the Company because of defense and settlement costs, diversion of management resources, and other factors.