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Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________________
FORM 10-Q
_________________________________________
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2022
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____        
Commission file number 001-38070
_________________________________________
Floor & Decor Holdings, Inc.
(Exact name of registrant as specified in its charter)
_________________________________________
Delaware27-3730271
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
2500 Windy Ridge Parkway SE
Atlanta,Georgia30339
(Address of principal executive offices)(Zip Code)
(404)471-1634Not Applicable
(Registrant’s telephone number, including area code)(Former name, former address and former fiscal year,
if changed since last report)
_________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Class A common stock, $0.001 par value per shareFNDNew York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
Accelerated Filer
Non-Accelerated Filer
Smaller Reporting Company
Emerging Growth Company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
Outstanding at August 1, 2022
Class A common stock, $0.001 par value per share106,037,344


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PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
Floor & Decor Holdings, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
in thousands, except for share and per share dataAs of June 30, 2022As of December 30,
2021
Assets    
Current assets:    
Cash and cash equivalents$6,177 $139,444 
Income taxes receivable14,188 3,507 
Receivables, net97,502 81,463 
Inventories, net1,344,136 1,008,151 
Prepaid expenses and other current assets49,265 40,780 
Total current assets1,511,268 1,273,345 
Fixed assets, net1,085,779 929,083 
Right-of-use assets1,177,686 1,103,750 
Intangible assets, net151,620 151,935 
Goodwill255,473 255,473 
Deferred income tax assets, net8,090 9,832 
Other assets9,461 7,277 
Total long-term assets2,688,109 2,457,350 
Total assets$4,199,377 $3,730,695 
Liabilities and stockholders’ equity
Current liabilities:
Current portion of term loans$1,577 $2,103 
Current portion of lease liabilities112,987 104,602 
Trade accounts payable770,198 661,883 
Accrued expenses and other current liabilities292,297 248,935 
Deferred revenue20,220 14,492 
Total current liabilities1,197,279 1,032,015 
Term loan195,557 195,762 
Revolving line of credit68,600  
Lease liabilities1,191,223 1,120,990 
Deferred income tax liabilities, net42,887 40,958 
Other liabilities9,545 17,771 
Total long-term liabilities1,507,812 1,375,481 
Total liabilities2,705,091 2,407,496 
Commitments and Contingencies (Note 5)
Stockholders’ equity
Capital stock:
Preferred stock, $0.001 par value; 10,000,000 shares authorized; 0 shares issued and outstanding at June 30, 2022 and December 30, 2021
  
Common stock Class A, $0.001 par value; 450,000,000 shares authorized; 105,992,508 shares issued and outstanding at June 30, 2022 and 105,760,650 issued and outstanding at December 30, 2021
106 106 
Common stock Class B, $0.001 par value; 10,000,000 shares authorized; 0 shares issued and outstanding at June 30, 2022 and December 30, 2021
  
Common stock Class C, $0.001 par value; 30,000,000 shares authorized; 0 shares issued and outstanding at June 30, 2022 and December 30, 2021
  
Additional paid-in capital466,260 450,332 
Accumulated other comprehensive income, net2,911 535 
Retained earnings1,025,009 872,226 
Total stockholders’ equity1,494,286 1,323,199 
Total liabilities and stockholders’ equity$4,199,377 $3,730,695 
See accompanying notes to condensed consolidated financial statements.
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Floor & Decor Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations and Comprehensive Income
(Unaudited)
Thirteen Weeks EndedTwenty-six Weeks Ended
in thousands, except for per share dataJune 30,
2022
July 1,
2021
June 30,
2022
July 1,
2021
Net sales$1,089,846 $860,108 $2,118,580 $1,642,645 
Cost of sales653,564 494,670 1,274,240 940,274 
Gross profit436,282 365,438 844,340 702,371 
Operating expenses:
Selling and store operating268,202 205,072 517,702 395,018 
General and administrative53,107 52,819 107,752 96,860 
Pre-opening8,563 8,990 18,504 15,987 
Total operating expenses329,872 266,881 643,958 507,865 
Operating income106,410 98,557 200,382 194,506 
Interest expense, net1,672 1,293 2,834 2,681 
Income before income taxes104,738 97,264 197,548 191,825 
Provision for income taxes22,906 14,348 44,765 33,113 
Net income$81,832 $82,916 $152,783 $158,712 
Change in fair value of hedge instruments, net of tax822 (7)2,376 76 
Total comprehensive income$82,654 $82,909 $155,159 $158,788 
Basic earnings per share$0.78 $0.79 $1.45 $1.52 
Diluted earnings per share$0.76 $0.77 $1.42 $1.48 
See accompanying notes to condensed consolidated financial statements.


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Floor & Decor Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited)
Common StockAdditional Paid-in CapitalAccumulated Other Comprehensive IncomeRetained EarningsTotal Stockholders’ Equity
Class A
in thousandsSharesAmount
Balance, December 31, 2021105,761 $106 $450,332 $535 $872,226 $1,323,199 
Stock-based compensation expense— — 5,980 — — 5,980 
Exercise of stock options32  577 — — 577 
Issuance of common stock upon vesting of restricted stock units47 — — — — — 
Shares issued under employee stock purchase plan21 — 1,963 — — 1,963 
Common stock redeemed for tax liability(19)— (1,807)— — (1,807)
Other comprehensive gain, net of tax— — — 1,554 — 1,554 
Net income— — — — 70,951 70,951 
Balance, March 31, 2022105,842 $106 $457,045 $2,089 $943,177 $1,402,417 
Stock-based compensation expense— — 4,889 — — 4,889 
Exercise of stock options209  4,599 — — 4,599 
Forfeiture of restricted stock awards(59)— — — — — 
Issuance of common stock upon vesting of restricted stock units5 — — — — — 
Common stock redeemed for tax liability(4)— (273)— — (273)
Other comprehensive gain, net of tax— — — 822 — 822 
Net income— — — — 81,832 81,832 
Balance, June 30, 2022105,993 $106 $466,260 $2,911 $1,025,009 $1,494,286 
Common StockAdditional Paid-in CapitalAccumulated Other Comprehensive IncomeRetained EarningsTotal Stockholders' Equity
Class A
in thousandsSharesAmount
Balance, January 1, 2021104,368 $104 $408,124 $164 $588,996 $997,388 
Stock-based compensation expense— — 4,734 — — 4,734 
Exercise of stock options195 1 2,382 — — 2,383 
Issuance of restricted stock awards27 — — — — — 
Forfeiture of restricted stock awards(2)— — — — — 
Issuance of common stock upon vesting of restricted stock units25 — — — — — 
Shares issued under employee stock purchase plan26 — 1,302 — — 1,302 
Common stock redeemed for tax liability(10)— (966)— — (966)
Other comprehensive gain, net of tax— — — 83 — 83 
Net income— — — — 75,796 75,796 
Balance, April 1, 2021104,629 $105 $415,576 $247 $664,792 $1,080,720 
Stock-based compensation expense— — 5,319 — — 5,319 
Exercise of stock options409  3,943 — — 3,943 
Issuance of restricted stock awards2 — — — — — 
Issuance of common stock upon vesting of restricted stock units2 — — — — — 
Shares issued under employee stock purchase plan21 — 1,761 — — 1,761 
Issuance of stock related to acquisition50 — 5,000 — — 5,000 
Common stock redeemed for tax liability(1)— (50)— — (50)
Other comprehensive loss, net of tax— — — (7)— (7)
Net income— — — — 82,916 82,916 
Balance, July 1, 2021105,112 $105 $431,549 $240 $747,708 $1,179,602 
See accompanying notes to condensed consolidated financial statements.
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Floor & Decor Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Twenty-six Weeks Ended
in thousandsJune 30,
2022
July 1,
2021
Operating activities    
Net income$152,783 $158,712 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization72,566 54,097 
Stock-based compensation expense10,869 10,053 
Deferred income taxes2,475 6,520 
Change in fair value of contingent earn-out liabilities1,389  
Interest cap derivative contracts57 76 
Changes in operating assets and liabilities, net of effects of acquisition:
Receivables, net(15,936)(11,109)
Inventories, net(335,968)(25,338)
Trade accounts payable110,923 105,103 
Accrued expenses and other current liabilities26,174 (19,065)
Income taxes(10,681)(8,541)
Deferred revenue5,728 11,765 
Other, net(12,526)(25,656)
Net cash provided by operating activities7,853 256,617 
Investing activities
Purchases of fixed assets(214,283)(132,091)
Acquisitions, net of cash acquired(1,121)(63,354)
Proceeds from sales of property4,773  
Net cash used in investing activities(210,631)(195,445)
Financing activities
Borrowings on revolving line of credit336,800 4,453 
Payments on revolving line of credit(268,200)(3,592)
Proceeds from term loans 65,000 
Payments on term loans(1,577)(75,676)
Payments of contingent earn-out consideration(2,571) 
Proceeds from exercise of stock options5,176 6,326 
Proceeds from employee stock purchase plan1,963 3,063 
Debt issuance costs (1,409)
Tax payments for stock-based compensation awards(2,080)(1,016)
Net cash provided by (used in) financing activities69,511 (2,851)
Net (decrease) increase in cash and cash equivalents(133,267)58,321 
Cash and cash equivalents, beginning of the period139,444 307,772 
Cash and cash equivalents, end of the period$6,177 $366,093 
Supplemental disclosures of cash flow information
Buildings and equipment acquired under operating leases$133,237 $185,349 
Cash paid for interest, net of capitalized interest$1,862 $1,340 
Cash paid for income taxes, net of refunds$52,943 $35,118 
Fixed assets accrued at the end of the period$109,939 $101,708 
See accompanying notes to condensed consolidated financial statements.
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Floor & Decor Holdings, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation and Summary of Significant Accounting Policies
Nature of Business
Floor & Decor Holdings, Inc., together with its subsidiaries (the “Company,” “we,” “our,” or “us”) is a multi-channel specialty retailer and commercial flooring distributor. The Company offers a broad assortment of in-stock hard-surface flooring, including tile, wood, laminate, vinyl, and natural stone along with decorative accessories and wall tile, installation materials, and adjacent categories at everyday low prices. Our stores appeal to a variety of customers, including professional installers and commercial businesses (“Pro”), Do it Yourself customers (“DIY”), and customers who buy our products for professional installation (“Buy it Yourself” or “BIY”). We operate within one reportable segment.
As of June 30, 2022, the Company, through its wholly owned subsidiary, Floor and Decor Outlets of America, Inc. (“F&D” or“Outlets”), operates 174 warehouse-format stores, which average 78,000 square feet, and five small-format standalone design studios in 34 states, as well as four distribution centers and an e-commerce site, FloorandDecor.com.
Fiscal Year
The Company’s fiscal year is the 52- or 53-week period ending on the Thursday on or preceding December 31st. The fiscal year ending December 29, 2022 (“fiscal 2022”) and the fiscal year ended December 30, 2021 (“fiscal 2021”) include 52 weeks. When a 53-week fiscal year occurs, we report the additional week at the end of the fiscal fourth quarter. 52-week fiscal years consist of thirteen-week periods in each quarter of the fiscal year.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. These financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information. The Condensed Consolidated Balance Sheet as of December 30, 2021 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 2021, filed with the Securities and Exchange Commission (the “SEC”) on February 24, 2022 (the “Annual Report”).
Management believes the accompanying unaudited condensed consolidated financial statements reflect all normal recurring adjustments considered necessary for a fair statement of results for the interim periods presented.
Results of operations for the twenty-six weeks ended June 30, 2022 and July 1, 2021 are not necessarily indicative of the results to be expected for the full years.
Impact of the COVID-19 Pandemic
The ongoing presence of COVID-19 and its potential impact on the Company’s business remains an evolving situation and is highly uncertain. While the Company’s operations during the first twenty-six weeks of fiscal 2022 did not appear to be negatively impacted, the COVID-19 pandemic could have additional negative impacts in the future. The extent of the impact of the pandemic on the Company’s business and financial results will depend on future developments, including the duration of the pandemic, the success of vaccination programs, the spread of COVID-19, including its developing variants, within the markets in which the Company operates, as well as the countries from which the Company sources inventory, fixed assets, and other supplies, the effect of the pandemic on consumer confidence and spending, and actions taken by government entities in response to the pandemic, all of which are highly uncertain.
Summary of Significant Accounting Policies
There have been no updates to our Significant Accounting Policies since the Annual Report. For more information regarding our Significant Accounting Policies and Estimates, see the “Summary of Significant Accounting Policies” section of “Item 8. Financial Statements and Supplementary Data” of our Annual Report.
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Recently Issued Accounting Pronouncements
Reference Rate Reform. In January 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2021-01, “Reference Rate Reform (Topic 848),” which provides optional guidance to ease the potential accounting and financial reporting burden of reference rate reform, including the expected market transition from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates. The new guidance provides temporary optional expedients and exceptions for applying U.S. GAAP to transactions affected by reference rate reform if certain criteria are met. These transactions include contract modifications, hedging relationships, and the sale or transfer of debt securities classified as held-to-maturity. Entities may apply the provisions of the new standard as of the beginning of the reporting period when the election is made. Unlike other topics, the provisions of this update are only available until December 31, 2022, by which time the reference rate replacement activity is expected to be completed. The Company is currently evaluating the impact of this standard on its consolidated financial statements and related disclosures and has yet to elect an adoption date.
Business Combinations. In October 2021, the FASB issued ASU No. 2021-08, “Business Combinations (Topic 805), Accounting for Contract Assets and Contract Liabilities from Contracts with Customers.” The ASU addresses diversity and inconsistency related to the recognition and measurement of contract assets and contract liabilities acquired in a business combination and requires that an acquirer recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606, Revenue from Contracts with Customers. This standard is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, and should be applied prospectively to business combinations occurring on or after the effective date of the amendments. Early adoption of the standard is permitted, including adoption in an interim period. The adoption of this standard is not expected to have a material impact on the Company's consolidated financial statements or related disclosures.
2. Revenue
Net sales consist of revenue associated with contracts with customers for the sale of goods and services in amounts that reflect the consideration the Company is entitled to receive in exchange for those goods and services.
Deferred Revenue & Contract Liabilities
In accordance with Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers, the Company recognizes revenue when the customer obtains control of the inventory. Amounts in deferred revenue at period-end reflect orders for which the inventory was not yet ready for physical transfer to customers.
Contract liabilities within the Condensed Consolidated Balance Sheets as of June 30, 2022 and December 30, 2021 primarily consisted of deferred revenue as well as amounts in accrued expenses and other current liabilities related to the Pro Premier loyalty program and unredeemed gift cards. As of June 30, 2022, contract liabilities totaled $57.1 million and included $20.2 million of deferred revenue, $27.5 million of loyalty program liabilities, and $9.4 million of unredeemed gift cards. As of December 30, 2021, contract liabilities totaled $40.2 million and included $14.5 million of deferred revenue, $20.4 million of loyalty program liabilities, and $5.3 million of unredeemed gift cards. Of the contract liabilities outstanding as of December 30, 2021, approximately $14.9 million was recognized in revenue during the twenty-six weeks ended June 30, 2022.
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Disaggregated Revenue
The Company has one reportable segment. The following table presents the net sales of each major product category (in thousands):
Thirteen Weeks Ended
June 30, 2022July 1, 2021
Product CategoryNet Sales% of Net SalesNet Sales% of Net Sales
Laminate / luxury vinyl plank$299,610 27 %$214,642 25 %
Tile248,295 23 208,379 24 
Decorative accessories / wall tile190,966 18 163,956 19 
Installation materials and tools178,319 16 141,369 16 
Wood71,489 7 66,158 8 
Natural stone55,248 5 51,983 6 
Adjacent categories (1)17,837 2 13,587 2 
Other (2)28,082 2 34  
Total$1,089,846 100 %$860,108 100 %
Twenty-six Weeks Ended
June 30, 2022July 1, 2021
Product CategoryNet Sales% of Net SalesNet Sales% of Net Sales
Laminate / luxury vinyl plank$581,845 27 %$400,677 24 %
Tile478,906 23 397,815 24 
Decorative accessories / wall tile382,001 18 321,330 20 
Installation materials and tools346,164 16 271,970 17 
Wood143,435 7 128,289 8 
Natural stone108,704 5 101,234 6 
Adjacent categories (1)34,025 2 25,823 1 
Other (2)43,500 2 (4,493) 
Total$2,118,580 100 %$1,642,645 100 %
(1) Adjacent categories primarily includes bathroom and kitchen products and accessories.
(2) Other includes delivery, sample, and other product revenue and adjustments for deferred revenue, sales returns reserves, customer rewards under the Company’s Pro Premier Loyalty program, and other revenue related adjustments that are not allocated on a product-level basis.
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3. Debt
The following table summarizes the Company’s long-term debt as of June 30, 2022 and December 30, 2021:
in thousandsMaturity DateInterest Rate Per Annum at June 30, 2022June 30, 2022December 30, 2021
Credit Facilities:
Term Loan FacilityFebruary 14, 20273.06%Variable$205,025 $206,602 
Asset-based Loan Facility (“ABL”)February 14, 20252.87%Variable68,600  
Total secured debt at par value273,625 206,602 
Less: current maturities1,577 2,103 
Long-term debt maturities272,048 204,499 
Less: unamortized discount and debt issuance costs7,891 8,737 
Total long-term debt$264,157 $195,762 
Market risk associated with the Company’s 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 the Company’s estimates of interest rates, maturities, credit risk, and underlying collateral.
The estimated fair values and classifications within the fair value hierarchy of the Term Loan Facility and ABL were as follows as of June 30, 2022 and December 30, 2021:
in thousandsFair Value Hierarchy ClassificationJune 30, 2022December 30, 2021
Term Loan FacilityLevel 3$191,698 $202,986 
ABL FacilityLevel 268,600  
Total$260,298 $202,986 
The following table summarizes scheduled maturities of the Company’s debt as of June 30, 2022:
in thousandsAmount
Twenty-six weeks ending December 29, 2022$526 
20232,103 
20242,103 
202570,703 
20262,103 
Thereafter196,087 
Total minimum debt payments$273,625 
Components of interest expense are as follows for the periods presented:
Thirteen Weeks EndedTwenty-six Weeks Ended
in thousandsJune 30, 2022July 1, 2021June 30, 2022July 1, 2021
Total interest costs$2,650 $1,862 $4,525 $3,831 
Interest capitalized978 569 1,691 1,150 
Interest expense, net$1,672 $1,293 $2,834 $2,681 
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Term Loan Facility
The Term Loan Facility provides a margin for loans of: (x) in the case of ABR Loans (as defined in the Term Loan Facility) 1.00% per annum (subject to a leverage-based step-up to 1.25% if Outlets exceeds certain leverage ratio tests), and (y) in the case of Eurodollar Loans (as defined in the Term Loan Facility) 2.00% per annum (subject to a leverage-based step-up to 2.25% if Outlets exceeds certain leverage ratio tests and a 0.00% floor on Eurodollar Loans).
All obligations under the Term Loan Facility are secured by (1) a first-priority security interest in substantially all of the property and assets of Outlets and the other guarantors under the Term Loan Facility, with certain exceptions, and (2) a second-priority security interest in the collateral securing the asset-based loan facility (“ABL” or “ABL Facility”).
ABL Facility
As of June 30, 2022, the Company’s ABL Facility had a maximum availability of $400.0 million with actual available borrowings limited to the sum, at the time of calculation, of (a) eligible credit card receivables multiplied by the credit card advance rate, plus (b) the cost of eligible inventory, net of inventory reserves, multiplied by the applicable appraisal percentage, plus (c) 85% of eligible net trade receivables, plus (d) all eligible cash on hand, plus (e) 100% of the amount for which the eligible letter of credit must be honored after giving effect to any draws, minus certain Availability Reserves (each component as defined in the ABL Facility). The ABL Facility is available for issuance of letters of credit and contains a sublimit of $50.0 million for standby letters of credit and commercial letters of credit combined. Available borrowings under the facility are reduced by the face amount of outstanding letters of credit.
All obligations under the ABL Facility are secured by (1) a first-priority security interest in the cash and cash equivalents, accounts receivable, inventory, and related assets of Outlets and the other guarantors under the ABL Facility, with certain exceptions, and (2) a second-priority security interest in substantially all of the other property and assets of Outlets and the other guarantors under the Term Loan Facility.
Net availability under the ABL Facility, as reduced by outstanding borrowings of $68.6 million and letters of credit of $22.5 million, was $308.9 million based on financial data as of June 30, 2022.
Covenants
The credit agreements governing the Term Loan Facility and ABL Facility contain customary restrictive covenants, which, among other things and with certain exceptions, limit the Company’s ability to (i) incur additional indebtedness and liens in connection with such indebtedness, (ii) pay dividends and make certain other restricted payments, (iii) effect mergers or consolidations, (iv) enter into transactions with affiliates, (v) sell or dispose of property or assets, and (vi) engage in unrelated lines of business. In addition, these credit agreements subject the Company to certain reporting obligations and require that the Company satisfy certain financial covenants, including, among other things, a requirement that if borrowings under the ABL Facility exceed 90% of availability, the Company will maintain a certain fixed charge coverage ratio (defined as Consolidated EBITDA less non-financed capital expenditures and income taxes paid to consolidated fixed charges, in each case as more fully defined in the ABL Facility).
The Term Loan Facility has no financial maintenance covenants. The Company is currently in compliance with all material covenants under the credit agreements.
4. Income Taxes
Effective tax rates for the thirteen and twenty-six weeks ended June 30, 2022 and July 1, 2021 were based on the Company’s forecasted annualized effective tax rates and were adjusted for discrete items that occurred within each period. The Company’s effective income tax rate was 21.9% and 14.8% for the thirteen weeks ended June 30, 2022 and July 1, 2021, respectively, and 22.7% and 17.3% for the twenty-six weeks ended June 30, 2022 and July 1, 2021, respectively. For the thirteen and twenty-six weeks ended June 30, 2022, the effective income tax rate was higher than the statutory federal income tax rate of 21.0% primarily due to state income taxes. For the thirteen and twenty-six weeks ended July 1, 2021, the effective income tax rate was lower than the statutory federal income tax rate of 21.0% primarily due to the recognition of income tax benefits from tax deductions in excess of book expense related to stock option exercises and other discrete items.
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5. Commitments and Contingencies
Lease Commitments
The Company accounts for leases in accordance with ASC 842, Leases. The majority of the Company’s long-term operating lease agreements are for its corporate office, retail locations, and distribution centers, which expire in various years through 2042. Most of these agreements are retail leases wherein both the land and building are leased. For a small number of retail locations, the Company has ground leases in which only the land is leased. The initial lease terms for the Company's corporate office, retail, and distribution center facilities generally range from 10-20 years. The majority of the Company’s retail and ground 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.
When readily determinable, the rate implicit in the lease is used to discount lease payments to present value; however, substantially all of the Company’s leases do not provide a readily determinable implicit rate. If the rate implicit in the lease is not readily determinable, the Company uses 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 June 30, 2022 and July 1, 2021, the Company’s weighted average discount rate was 5.2% and 5.2%, respectively. As of both June 30, 2022 and July 1, 2021, the Company’s weighted average remaining lease term was approximately 11 years.
Lease Costs
The table below presents components of lease expense for operating leases.
Thirteen Weeks EndedTwenty-six Weeks Ended
in thousandsClassificationJune 30, 2022July 1, 2021June 30, 2022July 1, 2021
Fixed operating lease cost:Selling and store operating$35,584 $30,820 $69,044 $59,588 
Cost of sales6,323 5,656 12,824 11,316 
Pre-opening2,631 3,020 4,984 4,655 
General and administrative1,130 1,030 2,271 2,059 
Total fixed operating lease cost$45,668 $40,526 $89,123 $77,618 
Variable lease cost (1):Selling and store operating$12,703 $9,975 $24,926 $19,751 
Cost of sales1,236 1,184 2,655 2,592 
Pre-opening73 2 240 70 
General and administrative178 (110)404 (88)
Total variable lease cost$14,190 $11,051 $28,225 $22,325 
Sublease incomeCost of sales(680)(597)(1,360)(1,194)
Total operating lease cost (2)$59,178 $50,980 $115,988 $98,749 
(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 twenty-six weeks ended June 30, 2022 and July 1, 2021.
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Undiscounted Cash Flows
Future minimum lease payments under non-cancelable operating leases (with initial or remaining lease terms in excess of one year) as of June 30, 2022 were as follows:
in thousandsAmount
Twenty-six weeks ending December 29, 2022$83,803 
2023186,105 
2024177,128 
2025165,580 
2026156,229 
Thereafter1,013,830 
Total minimum lease payments (1) (2)1,782,675 
Less: amount of lease payments representing interest478,465 
Present value of future minimum lease payments1,304,210 
Less: current obligations under leases112,987 
Long-term lease obligations$1,191,223 
(1) Future lease payments exclude approximately $220.3 million of legally binding minimum lease payments for operating leases signed but not yet commenced.
(2) Operating lease payments include $138.3 million related to options to extend lease terms that are reasonably certain of being exercised.
For the twenty-six weeks ended June 30, 2022 and July 1, 2021, cash paid for operating leases was $86.7 million and $89.6 million, respectively. Typically, cash paid for operating leases during a fiscal quarter includes only three months of lease payments. Cash paid for operating leases during the twenty-six weeks ended July 1, 2021 included approximately seven months of lease payments due to the majority of July payments being made on the final day of the fiscal quarter.
Litigation
On November 15, 2021, the Company was added as a defendant in a wrongful death lawsuit, Nguyen v. Inspections Now, Inc., No. 21-DCV-287142, pending in the 434th Judicial District Court of Fort Bend County, Texas. Inspections Now, Inc. and Jason Post Homes, LLC were also named as defendants in the case. On March 28, 2022, Plaintiff voluntarily dismissed her claims against Jason Post Homes without prejudice. Plaintiff’s petition alleges that unspecified “wood paneling” allegedly purchased from the Company was installed in the vicinity of plaintiff’s fireplace and caught fire while the fireplace was lit. The fire consumed plaintiff’s home and resulted in injuries to plaintiff and the death of plaintiff’s three children and mother. Plaintiff alleges product defect and failure to warn claims against the Company and negligent inspection claims against Inspections Now. Plaintiff’s petition seeks damages in excess of $1.0 million for property damage, personal injury, and wrongful death. The petition also seeks exemplary damages. The Company responded to Plaintiff’s petition on December 13, 2021, denying the allegations, and the case is in the early stages of discovery.
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 previously dismissed In re Floor & Decor Holdings, Inc. Securities Litigation. 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, the Company is 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.
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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 its 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.
6. Stock-based Compensation
The Company accounts for stock-based compensation in accordance with ASC 718, Compensation-Stock Compensation (“ASC 718”). In accordance with ASC 718, the Company measures compensation cost for all stock-based awards at fair value on the date of grant and recognizes compensation expense, net of forfeitures, using the straight-line method over the requisite service period of awards expected to vest, which for each of the awards is the service vesting period. Stock-based compensation expense for the twenty-six weeks ended June 30, 2022 and July 1, 2021 was $10.9 million and $10.1 million, respectively, and was included in general and administrative expenses within the Company’s Condensed Consolidated Statements of Operations and Comprehensive Income.
Stock Options
The table below summarizes stock option activity for the twenty-six weeks ended June 30, 2022.
OptionsWeighted Average Exercise Price
Outstanding at December 31, 20212,503,654 $26.81 
Exercised(240,735)21.50 
Forfeited or expired(34,211)52.88 
Outstanding at June 30, 2022
2,228,708 $26.99 
Vested and exercisable at June 30, 2022
1,831,270 $22.01 
Restricted Stock Units
During the twenty-six weeks ended June 30, 2022, the Company granted service-based restricted stock units (“RSUs”) to certain employees, executive officers, and non-employee directors and performance-based restricted stock units (“PSUs”) to certain executive officers that represent an unfunded, unsecured right to receive a share of the Company’s Class A common stock upon vesting. The RSUs granted during the period have an aggregate grant-date fair value of $21.4 million and vest in three ratable annual installments on each of the first three anniversaries of the grant date, subject to the grantee’s continued service through the applicable vesting date. The PSUs granted during the period have an aggregate grant-date fair value of $3.5 million and cliff vest after a three-year period based on the achievement of specific targets for adjusted EBIT (earnings before interest and taxes) growth and return on invested capital, subject to the grantee’s continued service through the applicable vesting date. Based on the extent to which the performance goals are achieved, vested shares may range from 0% to 200% of the target award amount, and the Company assesses the probability of achieving these performance goals on a quarterly basis. The fair values of the service-based and performance-based restricted stock units were determined based on the closing price of the Company’s Class A common stock on the date of grant.
The following table summarizes restricted stock unit activity during the twenty-six weeks ended June 30, 2022:
Restricted Stock Units
Service-basedPerformance-basedTotal Restricted Stock Units
Unvested at December 31, 2021214,778  214,778 
Granted230,208 36,566 266,774 
Vested(52,351) (52,351)
Forfeited(9,718) (9,718)
Unvested at June 30, 2022382,917 36,566 419,483 
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Table of Contents

Restricted Stock Awards
The following table summarizes restricted stock award activity during the twenty-six weeks ended June 30, 2022:
Restricted Stock Awards
Service-basedPerformance-basedTotal Stock Return (TSR)Total Restricted Stock Awards
Unvested at December 31, 2021144,725 160,315 104,456 409,496 
Vested(24,656)  (24,656)
Forfeited(16,195)(25,997)(16,939)(59,131)
Unvested at June 30, 2022103,874 134,318 87,517 325,709 
7. Earnings Per Share
Net Income per Common Share
The Company calculates 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 share-based awards.
The following table shows the computation of basic and diluted earnings per share:
Thirteen Weeks EndedTwenty-six Weeks Ended
in thousands, except per share dataJune 30, 2022July 1, 2021June 30, 2022July 1, 2021
Net income$81,832 $82,916 $152,783 $158,712 
Basic weighted average shares outstanding105,545 104,544 105,471 104,309 
Dilutive effect of share-based awards1,755 2,721 1,960 2,877 
Diluted weighted average shares outstanding107,300 107,265 107,431 107,186 
Basic earnings per share$0.78 $0.79 $1.45 $1.52 
Diluted earnings per share$0.76 $0.77 $1.42 $1.48 
The following potentially dilutive securities were excluded from the computation of diluted earnings per share as a result of their anti-dilutive effect:
Thirteen Weeks EndedTwenty-six Weeks Ended
in thousandsJune 30, 2022July 1, 2021June 30, 2022July 1, 2021
Stock options73 67 71 81 
Restricted stock12