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Table of Contents

74
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 September 29, 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 October 31, 2022
Class A common stock, $0.001 par value per share106,117,628


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Table of Contents
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2

Table of Contents

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 September 29, 2022As of December 30,
2021
Assets    
Current assets:    
Cash and cash equivalents$7,687 $139,444 
Income taxes receivable9,867 3,507 
Receivables, net102,580 81,463 
Inventories, net1,320,456 1,008,151 
Prepaid expenses and other current assets56,502 40,780 
Total current assets1,497,092 1,273,345 
Fixed assets, net1,164,119 929,083 
Right-of-use assets1,157,347 1,103,750 
Intangible assets, net150,851 151,935 
Goodwill255,473 255,473 
Deferred income tax assets, net8,024 9,832 
Other assets11,762 7,277 
Total long-term assets2,747,576 2,457,350 
Total assets$4,244,668 $3,730,695 
Liabilities and stockholders’ equity
Current liabilities:
Current portion of term loans$2,103 $2,103 
Current portion of lease liabilities107,258 104,602 
Trade accounts payable642,136 661,883 
Accrued expenses and other current liabilities294,022 248,935 
Deferred revenue15,907 14,492 
Total current liabilities1,061,426 1,032,015 
Term loan195,454 195,762 
Revolving line of credit176,400  
Lease liabilities1,177,413 1,120,990 
Deferred income tax liabilities, net42,584 40,958 
Other liabilities8,772 17,771 
Total long-term liabilities1,600,623 1,375,481 
Total liabilities2,662,049 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 September 29, 2022 and December 30, 2021
  
Common stock Class A, $0.001 par value; 450,000,000 shares authorized; 106,117,337 shares issued and outstanding at September 29, 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 September 29, 2022 and December 30, 2021
  
Common stock Class C, $0.001 par value; 30,000,000 shares authorized; 0 shares issued and outstanding at September 29, 2022 and December 30, 2021
  
Additional paid-in capital476,905 450,332 
Accumulated other comprehensive income, net4,424 535 
Retained earnings1,101,184 872,226 
Total stockholders’ equity1,582,619 1,323,199 
Total liabilities and stockholders’ equity$4,244,668 $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 EndedThirty-nine Weeks Ended
in thousands, except for per share dataSeptember 29,
2022
September 30,
2021
September 29,
2022
September 30,
2021
Net sales$1,097,824 $876,553 $3,216,404 $2,519,198 
Cost of sales650,349 511,245 1,924,589 1,451,519 
Gross profit447,475 365,308 1,291,815 1,067,679 
Operating expenses:
Selling and store operating280,735 218,690 798,437 613,708 
General and administrative54,697 52,488 162,449 149,348 
Pre-opening10,386 10,733 28,890 26,720 
Total operating expenses345,818 281,911 989,776 789,776 
Operating income101,657 83,397 302,039 277,903 
Interest expense, net3,032 1,124 5,866 3,805 
Income before income taxes98,625 82,273 296,173 274,098 
Provision for income taxes22,450 7,628 67,215 40,741 
Net income$76,175 $74,645 $228,958 $233,357 
Change in fair value of hedge instruments, net of tax1,513 (36)3,889 40 
Total comprehensive income$77,688 $74,609 $232,847 $233,397 
Basic earnings per share$0.72 $0.71 $2.17 $2.23 
Diluted earnings per share$0.71 $0.69 $2.13 $2.17 
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 
Stock-based compensation expense— — 6,360 — — 6,360 
Exercise of stock options81 — 1,924 — — 1,924 
Issuance of common stock upon vesting of restricted stock units2 — — — — — 
Shares issued under employee stock purchase plan41 — 2,416 — — 2,416 
Common stock redeemed for tax liability— — (55)— — (55)
Other comprehensive gain, net of tax— — — 1,513 — 1,513 
Net income— — — — 76,175 76,175 
Balance, September 29, 2022106,117 $106 $476,905 $4,424 $1,101,184 $1,582,619 
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, 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 — — — — — 
Forfeiture of restricted stock awards(1)— — — — — 
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, 2021105,111 $105 $431,549 $240 $747,708 $1,179,602 
Stock-based compensation expense— — 5,282 — — 5,282 
Exercise of stock options468 1 5,428 — — 5,429 
Common stock redeemed for tax liability— — (12)— — (12)
Other comprehensive loss, net of tax— — — (36)— (36)
Net income— — — — 74,645 74,645 
Balance, September 30, 2021105,579 $106 $442,247 $204 $822,353 $1,264,910 
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)
Thirty-nine Weeks Ended
in thousandsSeptember 29,
2022
September 30,
2021
Operating activities    
Net income$228,958 $233,357 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization112,691 84,496 
Stock-based compensation expense17,229 15,335 
Deferred income taxes1,747 5,599 
Change in fair value of contingent earn-out liabilities1,530  
Loss on asset impairments and disposals, net 475 
Interest cap derivative contracts85 40 
Changes in operating assets and liabilities, net of effects of acquisitions:
Receivables, net(21,014)(19,785)
Inventories, net(312,288)(174,649)
Trade accounts payable(25,761)202,386 
Accrued expenses and other current liabilities27,796 38,492 
Income taxes(6,360)(10,838)
Deferred revenue1,415 9,840 
Other, net(18,703)(19,856)
Net cash provided by operating activities7,325 364,892 
Investing activities
Purchases of fixed assets(322,825)(277,688)
Acquisitions, net of cash acquired(1,121)(63,567)
Proceeds from sales of property4,773  
Net cash used in investing activities(319,173)(341,255)
Financing activities
Borrowings on revolving line of credit663,200 13,466 
Payments on revolving line of credit(486,800)(15,969)
Proceeds from term loans 65,000 
Payments on term loans(1,577)(76,202)
Payments of contingent earn-out consideration(2,571) 
Proceeds from exercise of stock options7,100 11,755 
Proceeds from employee stock purchase plan4,379 3,063 
Debt issuance costs(1,505)(1,409)
Tax payments for stock-based compensation awards(2,135)(1,028)
Net cash provided by (used in) financing activities180,091 (1,324)
Net (decrease) increase in cash and cash equivalents(131,757)22,313 
Cash and cash equivalents, beginning of the period139,444 307,772 
Cash and cash equivalents, end of the period$7,687 $330,085 
Supplemental disclosures of cash flow information
Buildings and equipment acquired under operating leases$148,665 $238,023 
Cash paid for interest, net of capitalized interest$3,437 $1,676 
Cash paid for income taxes, net of refunds$71,800 $45,996 
Fixed assets accrued at the end of the period$118,453 $94,839 
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 September 29, 2022, the Company, through its wholly owned subsidiary, Floor and Decor Outlets of America, Inc. (“F&D” or“Outlets”), operates 178 warehouse-format stores, which average 78,000 square feet, and five small-format standalone design studios in 35 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 thirty-nine weeks ended September 29, 2022 and September 30, 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 thirty-nine 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.
Supplier Finance Programs. In September 2022, the FASB issued ASU No. 2022-04, “Liabilities - Supplier Finance Programs (Subtopic 405-50).” The ASU requires that buyers in a supplier finance program disclose sufficient information for a user of the financial statements to understand the program's nature, activity, changes since prior period, and potential magnitude. The guidance in ASU 2022-04 is effective for interim and fiscal years beginning after December 15, 2022. Once adopted, it should be applied retrospectively to each period in which a balance sheet is presented, excluding the amendment on roll forward information, which should be presented prospectively. Early adoption of the standard is permitted. 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.
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 September 29, 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 September 29, 2022, contract liabilities totaled $58.9 million and included $15.9 million of deferred revenue, $31.7 million of loyalty program liabilities, and $11.3 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 $15.8 million was recognized in revenue during the thirty-nine weeks ended September 29, 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
September 29, 2022September 30, 2021
Product CategoryNet Sales% of Net SalesNet Sales% of Net Sales
Laminate / luxury vinyl plank$314,502 29 %$230,279 26 %
Tile246,336 22 201,674 23 
Decorative accessories / wall tile187,369 17 160,195 18 
Installation materials and tools183,495 17 138,794 16 
Wood69,691 6 64,798 7 
Natural stone52,670 5 48,267 6 
Adjacent categories (1)17,338 2 13,685 2 
Other (2)26,423 2 18,861 2 
Total$1,097,824 100 %$876,553 100 %
Thirty-nine Weeks Ended
September 29, 2022September 30, 2021
Product CategoryNet Sales% of Net SalesNet Sales% of Net Sales
Laminate / luxury vinyl plank$896,347 28 %$630,956 25 %
Tile725,242 22 599,489 24 
Decorative accessories / wall tile569,370 18 481,525 19 
Installation materials and tools529,659 16 410,764 16 
Wood213,126 7 193,087 8 
Natural stone161,374 5 149,501 6 
Adjacent categories (1)51,363 2 39,508 2 
Other (2)69,923 2 14,368  
Total$3,216,404 100 %$2,519,198 100 %
(1) Adjacent categories primarily include 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 September 29, 2022 and December 30, 2021:
in thousandsMaturity DateInterest Rate Per Annum at 9/29/2022 (1)September 29, 2022December 30, 2021
Credit Facilities:
Term Loan FacilityFebruary 14, 20274.53%Variable$205,025 $206,602 
Asset-based Loan Facility (“ABL”)August 4, 20273.92%Variable176,400  
Total secured debt at par value381,425 206,602 
Less: current maturities2,103 2,103 
Long-term debt maturities379,322 204,499 
Less: unamortized discount and debt issuance costs7,468 8,737 
Total long-term debt$371,854 $195,762 
(1) The applicable interest rate for the Term Loan Facility does not include the effect of interest rate cap agreements.
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 September 29, 2022 and December 30, 2021:
in thousandsFair Value Hierarchy ClassificationSeptember 29, 2022December 30, 2021
Term Loan FacilityLevel 3$199,899 $202,986 
ABL FacilityLevel 2176,400  
Total$376,299 $202,986 
The following table summarizes scheduled maturities of the Company’s debt as of September 29, 2022:
in thousandsAmount
Thirteen weeks ending December 29, 2022$526 
20232,103 
20242,103 
20252,103 
20262,103 
Thereafter372,487 
Total minimum debt payments$381,425 
Components of interest expense are as follows for the periods presented:
Thirteen Weeks EndedThirty-nine Weeks Ended
in thousandsSeptember 29, 2022September 30, 2021September 29, 2022September 30, 2021
Total interest costs$4,092 $1,906 $8,617 $5,737 
Interest capitalized1,060 782 2,751 1,932 
Interest expense, net$3,032 $1,124 $5,866 $3,805 
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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
On August 4, 2022, the Company entered into a second amendment to the ABL Facility which, among other things, (a) increased the Company’s revolving commitments to a total aggregate principal amount of $800 million, (b) allows for the Company, under certain circumstances, to increase the size of the facility by an additional amount of up to $200 million, and (c) extended the stated maturity date of the ABL Facility to August 4, 2027.
As of September 29, 2022, the Company’s ABL Facility had a maximum availability of $800.0 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 $176.4 million and letters of credit of $29.5 million, was $594.1 million based on financial data as of September 29, 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 thirty-nine weeks ended September 29, 2022 and September 30, 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 22.8% and 9.3% for the thirteen weeks ended September 29, 2022 and September 30, 2021, respectively, and 22.7% and 14.9% for the thirty-nine weeks ended September 29, 2022 and September 30, 2021, respectively. For the thirteen and thirty-nine weeks ended September 29, 2022, the effective income tax rate was higher than the statutory federal income tax rate of 21.0% primarily due to state income taxes and other permanent differences including meals and entertainment expenses that were partially offset by tax deductions in excess of book expense related to stock option exercises. For the thirteen and thirty-nine weeks ended September 30, 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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On August 16, 2022, the U.S. enacted the Inflation Reduction Act of 2022, which, among other things, implements a 15% minimum tax on book income of certain large corporations, a 1% excise tax on net stock repurchases and several tax incentives to promote clean energy. Based on our current analysis of the provisions, we do not believe this legislation will have a material impact on our consolidated financial statements.
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 September 29, 2022 and September 30, 2021, the Company’s weighted average discount rate was 5.3% and 5.2%, respectively. As of both September 29, 2022 and September 30, 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 EndedThirty-nine Weeks Ended
in thousandsClassificationSeptember 29, 2022September 30, 2021September 29, 2022September 30, 2021
Fixed operating lease cost:Selling and store operating$33,991 $31,940 $103,035 $91,528 
Cost of sales6,354 5,668 19,178 16,984 
Pre-opening2,558 3,272 7,542 7,927 
General and administrative1,136 1,029 3,407 3,088 
Total fixed operating lease cost$44,039 $41,909 $133,162 $119,527 
Variable lease cost (1):Selling and store operating$13,524 $10,605 $38,450 $30,356 
Cost of sales1,231 1,101 3,886 3,693 
Pre-opening114 13 354 83 
General and administrative194 78 598 (10)
Total variable lease cost$15,063 $11,797 $43,288 $34,122 
Sublease incomeCost of sales(681)(597)(2,041)(1,791)
Total operating lease cost (2)$58,421 $53,109 $174,409 $151,858 
(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 thirty-nine weeks ended September 29, 2022 and September 30, 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 September 29, 2022 were as follows:
in thousandsAmount
Thirteen weeks ending December 29, 2022$32,202 
2023183,545 
2024180,086 
2025167,940 
2026157,889 
Thereafter1,039,871 
Total minimum lease payments (1) (2)1,761,533 
Less: amount of lease payments representing interest476,862 
Present value of future minimum lease payments1,284,671 
Less: current obligations under leases107,258 
Long-term lease obligations$1,177,413 
(1) Future lease payments exclude approximately $237.4 million of legally binding minimum lease payments for operating leases signed but not yet commenced.
(2) Operating lease payments include $146.8 million related to options to extend lease terms that are reasonably certain of being exercised.
For the thirty-nine weeks ended September 29, 2022 and September 30, 2021, cash paid for operating leases was $131.3 million and $115.7 million, respectively.
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. On August 8, 2022, Plaintiff’s ex-husband filed a petition in intervention, intervening as a plaintiff in the lawsuit. Intervenor alleges the same claims and seeks damages in excess of $10.0 million for property damage, personal injury, wrongful death, and exemplary damages. The Company has responded to Plaintiff’s and Intervenor’s petitions, 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. An amended complaint was filed on September 14, 2022. 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. On October 31, 2022, the Company, along with the other defendants, filed a motion to dismiss the operative complaint.
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.
The table below presents components of stock-based compensation expense within the Company’s Condensed Consolidated Statements of Operations and Comprehensive Income:
Thirty-nine Weeks Ended
in thousandsSeptember 29, 2022September 30, 2021
General and administrative$16,911 $15,335 
Selling and store operating318  
Total stock-based compensation expense$17,229 $15,335 
Stock Options
The table below summarizes stock option activity for the thirty-nine weeks ended September 29, 2022.
OptionsWeighted Average Exercise Price
Outstanding at December 31, 2021 2,503,654 $26.81 
Exercised(321,756)22.07 
Forfeited or expired(45,215)51.72 
Outstanding at September 29, 2022
2,136,683 $27.00 
Vested and exercisable at September 29, 2022
1,761,333 $</