fnd-20220929

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 September 29, 2022

☐ 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)

_________________________________________


Delaware						27-3730271
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)

2500 Windy Ridge Parkway SE

Atlanta,

Georgia

30339

(Address of principal executive offices)

(Zip Code)


	(404)	471-1634	Not 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 class	Trading Symbol(s)	Name of each exchange on which registered
Class A common stock, $0.001 par value per share	FND	New 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 share						106,117,628

Table of Contents


			Page
Part I – Financial Information			3
	Item 1.	Financial Statements	3
		Condensed Consolidated Balance Sheets (Unaudited)	3
		Condensed Consolidated Statements of Operations and Comprehensive Income (Unaudited)	4
		Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)	5
		Condensed Consolidated Statements of Cash Flows (Unaudited)	7
		Notes to Condensed Consolidated Financial Statements (Unaudited)	8
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
		Forward-Looking Statements	18
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	29
	Item 4.	Controls and Procedures	30
Part II – Other Information			30
	Item 1.	Legal Proceedings	30
	Item 1A.	Risk Factors	30
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	30
	Item 3.	Defaults Upon Senior Securities	30
	Item 4.	Mine Safety Disclosures	30
	Item 5.	Other Information	30
	Item 6.	Exhibits	31
	Signatures		32

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 data	As of September 29, 2022		As of December 30, 2021
Assets
Current assets:
Cash and cash equivalents	$	7,687	$	139,444
Income taxes receivable	9,867		3,507
Receivables, net	102,580		81,463
Inventories, net	1,320,456		1,008,151
Prepaid expenses and other current assets	56,502		40,780
Total current assets	1,497,092		1,273,345
Fixed assets, net	1,164,119		929,083
Right-of-use assets	1,157,347		1,103,750
Intangible assets, net	150,851		151,935
Goodwill	255,473		255,473
Deferred income tax assets, net	8,024		9,832
Other assets	11,762		7,277
Total long-term assets	2,747,576		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 liabilities	107,258		104,602
Trade accounts payable	642,136		661,883
Accrued expenses and other current liabilities	294,022		248,935

Deferred revenue	15,907		14,492
Total current liabilities	1,061,426		1,032,015
Term loan	195,454		195,762
Revolving line of credit	176,400		—
Lease liabilities	1,177,413		1,120,990
Deferred income tax liabilities, net	42,584		40,958
Other liabilities	8,772		17,771
Total long-term liabilities	1,600,623		1,375,481
Total liabilities	2,662,049		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 capital	476,905		450,332
Accumulated other comprehensive income, net	4,424		535
Retained earnings	1,101,184		872,226
Total stockholders’ equity	1,582,619		1,323,199
Total liabilities and stockholders’ equity	$	4,244,668	$	3,730,695

See accompanying notes to condensed consolidated financial statements.

Table of Contents

Floor & Decor Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations and Comprehensive Income

(Unaudited)


	Thirteen Weeks Ended				Thirty-nine Weeks Ended
in thousands, except for per share data	September 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 sales	650,349		511,245		1,924,589		1,451,519
Gross profit	447,475		365,308		1,291,815		1,067,679
Operating expenses:
Selling and store operating	280,735		218,690		798,437		613,708
General and administrative	54,697		52,488		162,449		149,348
Pre-opening	10,386		10,733		28,890		26,720
Total operating expenses	345,818		281,911		989,776		789,776
Operating income	101,657		83,397		302,039		277,903
Interest expense, net	3,032		1,124		5,866		3,805
Income before income taxes	98,625		82,273		296,173		274,098
Provision for income taxes	22,450		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 tax	1,513		(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.

Table of Contents

Floor & Decor Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited)


	Common Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Income		Retained Earnings		Total Stockholders’ Equity
	Class A
in thousands	Shares	Amount
Balance, December 31, 2021	105,761	$	106	$	450,332	$	535	$	872,226	$	1,323,199
Stock-based compensation expense	—	—		5,980		—		—		5,980
Exercise of stock options	32	—		577		—		—		577
Issuance of common stock upon vesting of restricted stock units	47	—		—		—		—		—
Shares issued under employee stock purchase plan	21	—		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, 2022	105,842	$	106	$	457,045	$	2,089	$	943,177	$	1,402,417
Stock-based compensation expense	—	—		4,889		—		—		4,889
Exercise of stock options	209	—		4,599		—		—		4,599

Forfeiture of restricted stock awards	(59)	—		—		—		—		—
Issuance of common stock upon vesting of restricted stock units	5	—		—		—		—		—


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, 2022	105,993	$	106	$	466,260	$	2,911	$	1,025,009	$	1,494,286
Stock-based compensation expense	—	—		6,360		—		—		6,360
Exercise of stock options	81	—		1,924		—		—		1,924
Issuance of common stock upon vesting of restricted stock units	2	—		—		—		—		—
Shares issued under employee stock purchase plan	41	—		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, 2022	106,117	$	106	$	476,905	$	4,424	$	1,101,184	$	1,582,619

See accompanying notes to condensed consolidated financial statements.

Table of Contents

Floor & Decor Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited)


	Common Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Income		Retained Earnings		Total Stockholders' Equity
	Class A
in thousands	Shares	Amount
Balance, January 1, 2021	104,368	$	104	$	408,124	$	164	$	588,996	$	997,388
Stock-based compensation expense	—	—		4,734		—		—		4,734
Exercise of stock options	195	1		2,382		—		—		2,383
Issuance of restricted stock awards	27	—		—		—		—		—
Forfeiture of restricted stock awards	(2)	—		—		—		—		—
Issuance of common stock upon vesting of restricted stock units	25	—		—		—		—		—
Shares issued under employee stock purchase plan	26	—		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, 2021	104,629	$	105	$	415,576	$	247	$	664,792	$	1,080,720
Stock-based compensation expense	—	—		5,319		—		—		5,319
Exercise of stock options	409	—		3,943		—		—		3,943
Issuance of restricted stock awards	2	—		—		—		—		—
Forfeiture of restricted stock awards	(1)	—		—		—		—		—
Issuance of common stock upon vesting of restricted stock units	2	—		—		—		—		—
Shares issued under employee stock purchase plan	21	—		1,761		—		—		1,761
Issuance of stock related to acquisition	50	—		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, 2021	105,111	$	105	$	431,549	$	240	$	747,708	$	1,179,602
Stock-based compensation expense	—	—		5,282		—		—		5,282
Exercise of stock options	468	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, 2021	105,579	$	106	$	442,247	$	204	$	822,353	$	1,264,910

See accompanying notes to condensed consolidated financial statements.

Table of Contents

Floor & Decor Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)


	Thirty-nine Weeks Ended
in thousands	September 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 amortization	112,691		84,496
Stock-based compensation expense	17,229		15,335
Deferred income taxes	1,747		5,599
Change in fair value of contingent earn-out liabilities	1,530		—
Loss on asset impairments and disposals, net	—		475
Interest cap derivative contracts	85		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 liabilities	27,796		38,492
Income taxes	(6,360)		(10,838)
Deferred revenue	1,415		9,840
Other, net	(18,703)		(19,856)
Net cash provided by operating activities	7,325		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 property	4,773		—
Net cash used in investing activities	(319,173)		(341,255)
Financing activities
Borrowings on revolving line of credit	663,200		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 options	7,100		11,755
Proceeds from employee stock purchase plan	4,379		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 activities	180,091		(1,324)
Net (decrease) increase in cash and cash equivalents	(131,757)		22,313
Cash and cash equivalents, beginning of the period	139,444		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.

Table of Contents

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.

Table of Contents

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.

Table of Contents

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, 2022				September 30, 2021
Product Category	Net Sales		% of Net Sales		Net Sales		% of Net Sales
Laminate / luxury vinyl plank	$	314,502	29	%	$	230,279	26	%
Tile	246,336		22		201,674		23
Decorative accessories / wall tile	187,369		17		160,195		18
Installation materials and tools	183,495		17		138,794		16
Wood	69,691		6		64,798		7
Natural stone	52,670		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, 2022				September 30, 2021
Product Category	Net Sales		% of Net Sales		Net Sales		% of Net Sales
Laminate / luxury vinyl plank	$	896,347	28	%	$	630,956	25	%
Tile	725,242		22		599,489		24
Decorative accessories / wall tile	569,370		18		481,525		19
Installation materials and tools	529,659		16		410,764		16
Wood	213,126		7		193,087		8
Natural stone	161,374		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.

Table of Contents

3. Debt

The following table summarizes the Company’s long-term debt as of September 29, 2022 and December 30, 2021:


in thousands	Maturity Date	Interest Rate Per Annum at 9/29/2022 (1)		September 29, 2022		December 30, 2021
Credit Facilities:
Term Loan Facility	February 14, 2027	4.53%	Variable	$	205,025	$	206,602

Asset-based Loan Facility (“ABL”)	August 4, 2027	3.92%	Variable	176,400		—
Total secured debt at par value				381,425		206,602
Less: current maturities				2,103		2,103
Long-term debt maturities				379,322		204,499
Less: unamortized discount and debt issuance costs				7,468		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 thousands	Fair Value Hierarchy Classification	September 29, 2022		December 30, 2021
Term Loan Facility	Level 3	$	199,899	$	202,986
ABL Facility	Level 2	176,400		—
Total		$	376,299	$	202,986

The following table summarizes scheduled maturities of the Company’s debt as of September 29, 2022:


in thousands	Amount
Thirteen weeks ending December 29, 2022	$	526
2023	2,103
2024	2,103
2025	2,103
2026	2,103
Thereafter	372,487
Total minimum debt payments	$	381,425

Components of interest expense are as follows for the periods presented:


	Thirteen Weeks Ended				Thirty-nine Weeks Ended
in thousands	September 29, 2022		September 30, 2021		September 29, 2022		September 30, 2021
Total interest costs	$	4,092	$	1,906	$	8,617	$	5,737
Interest capitalized	1,060		782		2,751		1,932
Interest expense, net	$	3,032	$	1,124	$	5,866	$	3,805

Table of Contents

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.

Table of Contents

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 Ended				Thirty-nine Weeks Ended
in thousands	Classification	September 29, 2022		September 30, 2021		September 29, 2022		September 30, 2021
Fixed operating lease cost:	Selling and store operating	$	33,991	$	31,940	$	103,035	$	91,528
	Cost of sales	6,354		5,668		19,178		16,984
	Pre-opening	2,558		3,272		7,542		7,927
	General and administrative	1,136		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 sales	1,231		1,101		3,886		3,693
	Pre-opening	114		13		354		83
	General and administrative	194		78		598		(10)
Total variable lease cost		$	15,063	$	11,797	$	43,288	$	34,122

Sublease income	Cost 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.

Table of Contents

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 thousands	Amount
Thirteen weeks ending December 29, 2022	$	32,202
2023	183,545
2024	180,086
2025	167,940
2026	157,889
Thereafter	1,039,871
Total minimum lease payments (1) (2)	1,761,533
Less: amount of lease payments representing interest	476,862
Present value of future minimum lease payments	1,284,671
Less: current obligations under leases	107,258
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.

Table of Contents

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 thousands	September 29, 2022		September 30, 2021
General and administrative	$	16,911	$	15,335
Selling and store operating	318		—
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.


	Options	Weighted 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	$</