10-Q 1 fnd-20210930.htm 10-Q fnd-20210930
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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 30, 2021
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 November 1, 2021
Class A common stock, $0.001 par value per share105,591,567


Table of Contents
Page

2

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 30,
2021
As of December 31,
2020
Assets    
Current assets:    
Cash and cash equivalents$330,085 $307,772 
Receivables, net81,480 50,427 
Inventories, net833,122 654,000 
Prepaid expenses and other current assets49,522 28,257 
Total current assets1,294,209 1,040,456 
Fixed assets, net836,310 579,359 
Right-of-use assets1,082,031 916,325 
Intangible assets, net152,678 109,269 
Goodwill255,473 227,447 
Other assets7,409 7,569 
Total long-term assets2,333,901 1,839,969 
Total assets$3,628,110 $2,880,425 
Liabilities and stockholders’ equity
Current liabilities:
Current portion of term loans$1,577 $1,647 
Current portion of lease liabilities98,238 94,502 
Trade accounts payable634,339 417,898 
Accrued expenses and other current liabilities255,106 162,283 
Income taxes payable1,553 12,391 
Deferred revenue21,173 10,115 
Total current liabilities1,011,986 698,836 
Term loans195,865 207,157 
Lease liabilities1,106,812 941,125 
Deferred income tax liabilities, net33,589 27,990 
Other liabilities14,948 7,929 
Total long-term liabilities1,351,214 1,184,201 
Total liabilities2,363,200 1,883,037 
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 30, 2021 and December 31, 2020
  
Common stock Class A, $0.001 par value; 450,000,000 shares authorized; 105,578,555 shares issued and outstanding at September 30, 2021 and 104,368,212 issued and outstanding at December 31, 2020
106 104 
Common stock Class B, $0.001 par value; 10,000,000 shares authorized; 0 shares issued and outstanding at September 30, 2021 and December 31, 2020
  
Common stock Class C, $0.001 par value; 30,000,000 shares authorized; 0 shares issued and outstanding at September 30, 2021 and December 31, 2020
  
Additional paid-in capital442,247 408,124 
Accumulated other comprehensive income, net204 164 
Retained earnings822,353 588,996 
Total stockholders’ equity1,264,910 997,388 
Total liabilities and stockholders’ equity$3,628,110 $2,880,425 
See accompanying notes to condensed consolidated financial statements.
3

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 30,
2021
September 24,
2020
September 30,
2021
September 24,
2020
Net sales$876,553 $684,847 $2,519,198 $1,702,136 
Cost of sales511,245 390,219 1,451,519 974,784 
Gross profit365,308 294,628 1,067,679 727,352 
Operating expenses:
Selling and store operating218,690 171,513 613,708 463,036 
General and administrative52,488 39,286 149,348 103,857 
Pre-opening10,733 5,027 26,720 13,894 
Total operating expenses281,911 215,826 789,776 580,787 
Operating income83,397 78,802 277,903 146,565 
Interest expense, net1,124 2,024 3,805 6,134 
Gain on early extinguishment of debt   (1,015)
Income before income taxes82,273 76,778 274,098 141,446 
Provision for income taxes7,628 8,004 40,741 3,605 
Net income$74,645 $68,774 $233,357 $137,841 
Change in fair value of hedge instruments, net of tax(36)89 40 249 
Total comprehensive income$74,609 $68,863 $233,397 $138,090 
Basic earnings per share$0.71 $0.67 $2.23 $1.35 
Diluted earnings per share$0.69 $0.65 $2.17 $1.30 
See accompanying notes to condensed consolidated financial statements.


4

Floor & Decor Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited)
Common StockAdditional Paid-in CapitalAccumulated Other Comprehensive Income (Loss)Retained 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, 2021105,111 $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 
Common StockAdditional Paid-in CapitalAccumulated Other Comprehensive Income (Loss)Retained EarningsTotal Stockholders' Equity
Class A
in thousandsSharesAmount
Balance, December 27, 2019101,458 $101 $370,413 $(193)$394,015 $764,336 
Stock-based compensation expense— — 2,908 — — 2,908 
Exercise of stock options453 1 3,782 — — 3,783 
Issuance of restricted stock awards368 — — — — — 
Shares issued under employee stock purchase plan30 — 1,131 — — 1,131 
Other comprehensive gain, net of tax— — — 68 — 68 
Net income— — — — 37,063 37,063 
Balance, March 26, 2020102,309 $102 $378,234 $(125)$431,078 $809,289 
Stock-based compensation expense— — 4,234 — — 4,234 
Exercise of stock options838 1 4,876 — — 4,877 
Other comprehensive gain, net of tax— — — 92 — 92 
Net income— — — — 32,004 32,004 
Balance, June 25, 2020103,147 $103 $387,344 $(33)$463,082 $850,496 
Stock-based compensation expense— — 4,400 — — 4,400 
Exercise of stock options735 1 6,532 — — 6,533 
Shares issued under employee stock purchase plan27 — 1,213 — — 1,213 
Other comprehensive gain, net of tax— — — 89 — 89 
Net income— — — — 68,774 68,774 
Balance, September 24, 2020103,909 $104 $399,489 $56 $531,856 $931,505 
See accompanying notes to condensed consolidated financial statements.
5

Floor & Decor Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Thirty-nine Weeks Ended
in thousandsSeptember 30,
2021
September 24,
2020
Operating activities    
Net income$233,357 $137,841 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization84,496 67,249 
Stock-based compensation expense15,335 11,542 
Deferred income taxes5,599 22,173 
Loss on asset impairments and disposals, net475 84 
Interest cap derivative contracts40 264 
Gain on early extinguishment of debt (1,015)
Changes in operating assets and liabilities, net of effects of acquisition:
Receivables, net(19,785)14,008 
Inventories, net(174,649)(16,596)
Trade accounts payable202,386 (6,002)
Accrued expenses and other current liabilities38,492 40,331 
Income taxes(10,838)(22,849)
Deferred revenue9,840 4,170 
Other, net(19,856)18,485 
Net cash provided by operating activities364,892 269,685 
Investing activities
Purchases of fixed assets(277,688)(109,653)
Acquisition, net of cash acquired(63,567) 
Net cash used in investing activities(341,255)(109,653)
Financing activities
Borrowings on revolving line of credit13,466 275,000 
Payments on revolving line of credit(15,969)(275,000)
Proceeds from term loans65,000 75,000 
Payments on term loans(76,202)(1,598)
Proceeds from exercise of stock options11,755 15,193 
Proceeds from employee stock purchase plan3,063 2,344 
Debt issuance costs(1,409)(6,882)
Tax payments for stock-based compensation awards(1,028) 
Net cash (used in) provided by financing activities(1,324)84,057 
Net increase in cash and cash equivalents22,313 244,089 
Cash and cash equivalents, beginning of the period307,772 27,037 
Cash and cash equivalents, end of the period$330,085 $271,126 
Supplemental disclosures of cash flow information
Buildings and equipment acquired under operating leases$238,023 $129,803 
Cash paid for interest, net of capitalized interest$1,676 $4,897 
Cash paid for income taxes, net of refunds$45,996 $4,272 
Fixed assets accrued at the end of the period$94,839 $26,441 
See accompanying notes to condensed consolidated financial statements.

6

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 highly differentiated, rapidly growing specialty retailer of hard surface flooring and related accessories. We offer a broad in-stock assortment of tile, wood, laminate, vinyl, and natural stone flooring along with decorative and installation accessories 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.
On June 4, 2021, the Company acquired Spartan Surfaces, Inc. (“Spartan”), a commercial specialty hard-surface flooring distribution company for total estimated purchase consideration of $77.7 million. Refer to Note 8 for additional information.
As of September 30, 2021, the Company, through its wholly owned subsidiary, Floor and Decor Outlets of America, Inc. (“Outlets”), operates 153 warehouse-format stores, which average 78,000 square feet, and two small-format standalone design studios in 33 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. Fiscal year ending December 30, 2021 (“fiscal 2021”) includes 52 weeks, and the fiscal year ended December 31, 2020 (“fiscal 2020”) included 53 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 31, 2020 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 2020, filed with the Securities and Exchange Commission (the “SEC”) on February 25, 2021 (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 thirteen and thirty-nine weeks ended September 30, 2021 and September 24, 2020 are not necessarily indicative of the results to be expected for the full years.
Impact of the COVID-19 Pandemic
On March 11, 2020, the World Health Organization announced that infections of the coronavirus (“COVID-19”) had become a pandemic, and on March 13, 2020, the President of the United States announced a National Emergency relating to the COVID-19 pandemic. The full impact that the COVID-19 pandemic could continue to have 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 2021 did not appear to be negatively impacted, the COVID-19 pandemic had a material negative impact on the Company’s operations and financial results during the first half of fiscal 2020 and 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.
7

Summary of Significant Accounting Policies
Other than as noted below, 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.
Business Combinations
The Company accounts for acquisitions in accordance with Accounting Standards Codification (“ASC”) 805, Business Combinations. The purchase price of an acquisition is measured as the aggregate fair value of the consideration transferred at the date of acquisition. The purchase price is allocated to the fair values of the tangible and intangible assets acquired and liabilities assumed, with any excess recorded as goodwill. These fair value determinations require judgment and may involve the use of significant estimates and assumptions. The purchase price allocation may be provisional during a measurement period of up to one year from the acquisition date to provide reasonable time to obtain the information necessary to identify and measure the assets acquired and liabilities assumed. Only facts and circumstances that existed as of the acquisition date are considered for subsequent adjustment to the purchase price allocation, and any such adjustment will be recognized in the period in which it is determined prior to completion of the measurement period. Transaction costs associated with acquisitions are expensed as incurred.
Recently Adopted Accounting Pronouncements
Simplifying the Accounting for Income Taxes. In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” The ASU simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The ASU also clarifies and amends existing guidance to improve consistent application among reporting entities. In the first quarter of fiscal 2021, the Company adopted ASU No. 2019-12 on a prospective basis. The adoption of ASU No. 2019-12 did not have a material impact on the Company’s condensed consolidated financial statements.
Recently Issued Accounting Pronouncements
Reference Rate Reform. In January 2021, the FASB issued 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.
Presentation of Financial Statements, Financial Services—Depository and Lending, Financial Services—Investment Companies. In August 2021, the FASB issued ASU No. 2021-06, “Presentation of Financial Statements (Topic 205), Financial Services—Depository and Lending (Topic 942), and Financial Services—Investment Companies (Topic 946).” The ASU includes Release No.33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses. This update amends certain SEC disclosure guidance that is included in the accounting standards codification to reflect the SEC’s recent issuance of rules intended to modernize and streamline disclosure requirements, including updates to business acquisition and disposition significance tests used, the significance thresholds for proforma statement disclosures, the number of preceding years of financial statements required for disclosure, and other provisions in the SEC releases. The guidance is effective upon its addition to the FASB codification. The Company is assessing the impact of ASU No. 2021-06 but does not expect that it will have a material impact on its consolidated financial statements and related disclosures.
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 require 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 update is not expected to have a material impact on the Company's consolidated financial statements and related disclosures.
8

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
Under 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 30, 2021 and December 31, 2020 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 30, 2021, contract liabilities totaled $43.0 million and included $21.2 million of deferred revenue, $18.4 million of loyalty program liabilities, and $3.4 million of unredeemed gift cards. As of December 31, 2020, contract liabilities totaled $24.8 million and included $10.1 million of deferred revenue, $12.1 million of loyalty program liabilities, and $2.6 million of unredeemed gift cards. Of the contract liabilities outstanding as of December 31, 2020, approximately $8.5 million was recognized in revenue during the thirty-nine weeks ended September 30, 2021.
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 30, 2021September 24, 2020 (1)
Product CategoryNet Sales% of Net SalesNet Sales% of Net Sales
Laminate / luxury vinyl plank$230,279 26 %$157,795 23 %
Tile201,674 23 173,466 25 
Decorative accessories / wall tile (1)160,195 18 130,136 19 
Installation materials and tools138,794 16 113,202 17 
Wood64,798 7 60,515 9 
Natural stone48,267 6 41,712 6 
Adjacent categories (1)13,685 2 5,732 1 
Other (2)18,861 2 2,289  
Total$876,553 100 %$684,847 100 %
Thirty-nine Weeks Ended
September 30, 2021September 24, 2020 (1)
Product CategoryNet Sales% of Net SalesNet Sales% of Net Sales
Laminate / luxury vinyl plank$630,956 25 %$388,216 23 %
Tile599,489 24 427,359 25 
Decorative accessories / wall tile (1)481,525 19 325,397 19 
Installation materials and tools410,764 16 280,991 17 
Wood193,087 8 151,411 9 
Natural stone149,501 6 106,908 6 
Adjacent categories (1)39,508 2 11,615 1 
Other (2)14,368  10,239  
Total$2,519,198 100 %$1,702,136 100 %
9

(1) To conform to the current period presentation, the presentation of revenue by product category for the thirteen and thirty-nine weeks ended September 24, 2020 has been updated within this table to provide disclosure of adjacent categories, which primarily includes bathroom and kitchen products and accessories, as a separate category. In prior periods, adjacent categories revenue was included as a component of the decorative accessories / wall tile product category.
(2) Other includes delivery, sample, and other product revenue and adjustments for deferred revenue, sales returns reserves, customer rewards under our Pro Premier Loyalty program, and other revenue related adjustments that are not allocated on a product-level basis.
3. Debt
The following table summarizes the Company’s long-term debt as of September 30, 2021 and December 31, 2020:
in thousandsMaturity DateInterest Rate Per Annum at September 30, 2021September 30, 2021December 31, 2020
Credit Facilities:
Term Loan BFebruary 14, 20272.09%Variable$206,602 $143,179 
Term Loan B-1February 14, 2027n/an/a 74,625 
Total secured debt at par value206,602 217,804 
Less: current maturities1,577 1,647 
Long-term debt maturities205,025 216,157 
Less: unamortized discount and debt issuance costs9,160 9,000 
Total long-term debt$195,865 $207,157 
Total debt at fair value$204,536 $215,626 
n/a - not applicable
Market risk associated with the Company’s fixed and variable rate long-term debt relates to the potential change in fair value and negative impact to future earnings, respectively, from a change in interest rates. The aggregate fair value of debt is based primarily on the Company’s estimates of interest rates, maturities, credit risk, and underlying collateral and is classified as Level 3 within the fair value hierarchy.
The following table summarizes scheduled maturities of the Company’s debt, including current maturities, as of September 30, 2021:
in thousandsAmount
Thirteen weeks ending December 30, 2021$ 
20222,103 
20232,103 
20242,103 
20252,103 
Thereafter198,190 
Total minimum debt payments$206,602 
Components of interest expense are as follows for the periods presented:
Thirteen Weeks EndedThirty-nine Weeks Ended
in thousandsSeptember 30, 2021September 24, 2020September 30, 2021September 24, 2020
Total interest costs$1,906 $2,489 $5,737 $6,915 
Interest capitalized782 465 1,932 781 
Interest expense, net$1,124 $2,024 $3,805 $6,134 
10

Term Loan Facility
On February 9, 2021 (the “Effective Date”), Outlets entered into a fifth amendment to the credit agreement governing its senior secured term loan facility (as amended, the “Term Loan Facility”). The fifth amendment provided for, among other things, a supplemental term loan in the aggregate principal amount of $65.0 million (the “Supplemental Term Loan Facility”) that increased the term loan B facility. The Supplemental Term Loan Facility has the same maturity date (February 14, 2027) and terms as the term loan B facility, except that voluntary prepayments made within six months after the Effective Date are subject to a 1% soft call prepayment premium. The other terms of loans under the Term Loan Facility remain unchanged, including the applicable margin for loans under the term loan B facility. The proceeds of the Supplemental Term Loan Facility, together with cash on hand, were used to (i) repay the $75.0 million term loan B-1 facility and (ii) pay fees and expenses incurred in connection with the Supplemental Term Loan Facility.
The Term Loan Facility (including loans under the Supplemental 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 (including loans under the Supplemental 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 revolving credit facility (“ABL Facility”).
The Company evaluated the fifth amendment to the Term Loan Facility in accordance with ASC 470-50, Debt, and determined that the amendment resulted in a debt modification that was not an extinguishment. Therefore, no loss on debt extinguishment was recognized. The Company incurred costs of $1.6 million in connection with the refinancing which were comprised of (i) $1.4 million of fees to creditors that were accounted for as debt issuance costs and are amortizing to interest expense over the term of the Term Loan Facility using the interest method and (ii) $0.2 million of professional fees to other third parties that were expensed during the thirteen week period ended April 1, 2021 and included in general and administrative expense on the consolidated statements of operations and comprehensive income.
Asset-based Loan Facility (“ABL”)
As of September 30, 2021, 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 has a maturity date of February 14, 2025 and 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 letters of credit of $21.2 million, was $378.8 million based on financial data as of September 30, 2021.
Spartan Revolving Line of Credit Facility
In connection with its June 4, 2021 acquisition of Spartan, the Company assumed Spartan’s existing short-term line of credit facility (the “Spartan LOC”), which has a maximum borrowing availability of $8.0 million with actual available borrowings based on Spartan’s eligible working capital balances. The Spartan LOC is an on-demand line of credit that has no stated maturity date, although it is cancellable at any time by either the Company or the lender with any amounts outstanding upon cancellation becoming immediately due and payable. Net availability under the Spartan LOC was $8.0 million as of September 30, 2021.
11

Covenants
The credit agreements governing the Term Loan Facility, ABL Facility, and Spartan LOC 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 30, 2021 and September 24, 2020 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 9.3% and 10.4% for the thirteen weeks ended September 30, 2021 and September 24, 2020, respectively. The Company’s effective income tax rate was 14.9% and 2.5% for the thirty-nine weeks ended September 30, 2021 and September 24, 2020, respectively. For each period, 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. Additionally, the thirty-nine weeks ended September 24, 2020 included income tax benefits resulting from the enactment of the CARES Act.
The Company recognizes discrete expense for loss contingencies related to uncertain tax positions, including estimated interest and penalties. The Company recognized no expense related to uncertain tax positions during the thirteen and thirty-nine weeks ended September 30, 2021. The Company recognized a $0.3 million benefit and $2.2 million expense related to uncertain tax positions during the thirteen and thirty-nine weeks ended September 24, 2020, respectively.
The Company accounts for income taxes under the asset and liability method in accordance with ASC 740, Income Taxes, which requires the recognition of deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts and tax basis of existing assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Changes in tax laws and rates could affect recorded deferred tax assets and liabilities in the future. The effect on deferred tax assets and liabilities of a change in tax laws or rates is recognized in the period that includes the enactment date of such a change.
The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which the associated temporary differences become deductible. On a quarterly basis, the Company evaluates whether it is more likely than not that its deferred tax assets will be realized in the future and concludes whether or not a valuation allowance must be established.
The Company accounts for uncertain tax positions in accordance with ASC 740, Income Taxes. ASC 740-10 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements using a two-step process for evaluating tax positions taken, or expected to be taken, on a tax return. The Company may only recognize the tax benefit from an uncertain tax position if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement. In addition, the Company recognizes a loss contingency for uncertain tax positions when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. The amounts recognized for uncertain tax positions require that management make estimates and judgments based on provisions of the tax law, which may be subject to change or varying interpretations. The Company includes estimated interest and penalties related to uncertain tax position accruals within accrued expenses and other current liabilities in the Condensed Consolidated Balance Sheets and within income tax expense in the Condensed Consolidated Statements of Operations and Comprehensive Income.
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Coronavirus Aid, Relief, and Economic Security Act (CARES Act)
The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) provides for, among other things, the temporary deferral of the employer portion of social security taxes incurred through the end of calendar 2020 and an employee retention credit for 50% of wages and health benefits paid to employees not providing services due to the COVID-19 pandemic. In December 2020, the Consolidated Appropriations Act, 2021 was signed into law and generally extended and expanded the availability of the CARES Act employee retention credit through June 30, 2021. Subsequently, the American Rescue Plan Act of 2021, enacted in March 2021, generally extended and expanded the availability of the CARES Act employee retention credit through December 31, 2021.
As of September 30, 2021, the Company has deferred $12.1 million of employer social security taxes under the CARES Act, of which 50% are required to be deposited by December 2021 and the remaining 50% by December 2022. Of the deferred employer social security taxes outstanding as of September 30, 2021, approximately $6.1 million is included in accrued expenses and other current liabilities and $6.0 million is included in other liabilities within the Condensed Consolidated Balance Sheets.
During the thirty-nine weeks ended September 30, 2021 and September 24, 2020, the Company recognized employee retention credits totaling $1.0 million and $1.4 million, respectively. No employee retention credits were recognized during the thirteen weeks ended September 30, 2021, while the Company recognized $0.3 million of employee retention credits during the thirteen weeks ended September 24, 2020. Within the Condensed Consolidated Statements of Operations and Comprehensive Income, employee retention credits recorded during the periods presented were recognized as a reduction to selling and store operating expenses with the exception of $0.2 million of such credits that were recognized as an offset to general and administrative expenses during the thirty-nine weeks ended September 24, 2020.
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 2041. 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 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, we use a third party to assist in the determination of a secured incremental borrowing rate, determined on a collateralized basis, to discount lease payments based on information available at lease commencement. The secured incremental borrowing rate is estimated based on yields obtained from Bloomberg for U.S. consumers with a BB- credit rating and is adjusted for collateralization as well as inflation. As of September 30, 2021 and September 24, 2020, the Company’s weighted average discount rate was 5.2% and 5.3%, respectively, and the Company’s weighted average remaining lease term was approximately 11 years and 10 years, respectively.
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Lease Costs
The table below presents components of lease expense for operating leases.
Thirteen Weeks EndedThirty-nine Weeks Ended
in thousandsClassificationSeptember 30, 2021September 24, 2020 (3)September 30, 2021September 24, 2020 (3)
Fixed operating lease cost:Selling and store operating$31,940 $26,549 $91,528 $77,325 
Cost of sales5,668 5,676 16,984 17,005 
Pre-opening3,272 2,230 7,927 6,103 
General and administrative1,029 1,029 3,088 3,088 
Total fixed operating lease cost$41,909 $35,484 $119,527 $103,521 
Variable lease cost (1):Selling and store operating$10,605 $8,583 $30,356 $25,702 
Cost of sales1,101 1,397 3,693 3,616 
Pre-opening13 128 83 297 
General and administrative78 40 (10)112 
Total variable lease cost$11,797 $10,148 $34,122 $29,727 
Sublease incomeCost of sales(597)(597)(1,791)(1,791)
Total operating lease cost (2)$53,109 $45,035 $151,858 $131,457 
(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 thirteen and thirty-nine weeks ended September 30, 2021 and September 24, 2020.
(3) To conform to the current period presentation, the presentation of the components of operating lease expense for the thirteen weeks and thirty-nine weeks ended September 24, 2020 has been updated within this table to provide disclosure of variable lease costs and additional information related to the classification of operating leases within the Condensed Consolidated Statements of Operations and Comprehensive Income.
Undiscounted Cash Flows
Future minimum lease payments under non-cancelable operating leases (with initial or remaining lease terms in excess of one year) as of September 30, 2021 were as follows:
in thousandsAmount
Thirteen weeks ending December 30, 2021$40,422 
2022159,154 
2023162,826 
2024158,644 
2025147,164 
Thereafter970,806 
Total minimum lease payments (1) (2)1,639,016 
Less: amount of lease payments representing interest433,966 
Present value of future minimum lease payments1,205,050 
Less: current obligations under leases98,238 
Long-term lease obligations$1,106,812 
(1) Future lease payments exclude approximately $74.2 million of legally binding minimum lease payments for operating leases signed but not yet commenced.
(2) Operating lease payments include $108.5 million related to options to extend lease terms that are reasonably certain of being exercised.
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For the thirty-nine weeks ended September 30, 2021 and September 24, 2020, cash paid for operating leases was $115.7 million and $92.6 million, respectively.
Litigation
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 described in our Annual Report on Form 10-K. The complaint seeks unspecified damages and restitution for the Company from the individual defendants and the payment of costs and attorneys’ fees. The time for the defendants to respond to the complaint has not yet expired.
The Company maintains insurance that may cover any liability arising out of the above-referenced litigation up to the policy limits and subject to meeting certain deductibles and to other terms and conditions thereof. Estimating an amount or range of possible losses resulting from litigation proceedings is inherently difficult, particularly where the matters involve indeterminate claims for monetary damages and are in the stages of the proceedings where key factual and legal issues have not been resolved. For these reasons, we are currently unable to predict the ultimate timing or outcome of or reasonably estimate the possible losses or a range of possible losses resulting from the above-referenced litigation.
The Company is also subject to various other legal actions, claims and proceedings arising in the ordinary course of business, which may include claims related to general liability, workers’ compensation, product liability, intellectual property and employment-related matters resulting from 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, which requires measurement of compensation cost for all stock awards at fair value on the date of grant and recognition of compensation, net of forfeitures, over the requisite service period for awards expected to vest. Stock-based compensation expense for the thirty-nine weeks ended September 30, 2021 and September 24, 2020 was $15.3 million and $11.5 million, respectively, and was included in general and administrative expenses within the Company’s Condensed Consolidated Statements of Operations and Comprehensive Income.
Stock Options
Stock options are granted with an exercise price greater than or equal to the fair market value on the date of grant, as authorized by the Company’s board of directors or compensation committee. Options granted have contractual terms of ten years and vesting provisions ranging from one year to five years. The stock options granted to eligible employees during the thirty-nine weeks ended September 30, 2021 vest in four ratable annual installments on each of the first four anniversaries of the grant date, subject to the grantee’s continued service through the applicable vesting date. Stock option grants are generally subject to forfeiture if employment terminates prior to vesting.
The fair value of stock option awards granted during the thirty-nine weeks ended September 30, 2021 was estimated using the Black-Scholes-Merton option pricing model with the following weighted-average assumptions:
Thirty-nine Weeks Ended
September 30, 2021
Weighted average fair value per stock option$41.75
Risk-free interest rate0.8%
Expected volatility48.1%
Expected life (in years)5.4
Dividend yield%
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The Company determines the grant date fair value of stock options with assistance from a third-party valuation specialist. Expected volatility is estimated based on the historical volatility of the Company’s Class A common stock since its initial public offering in 2017 as well as the historical volatility of the common stock of similar public entities. The Company considers various factors in determining the appropriateness of the public entities used in determining expected volatility, including the entity's life cycle stage, industry, growth profile, size, financial leverage, and products offered. To determine the expected life of the options granted, the Company relied upon a combination of the observed exercise behavior of prior grants with similar characteristics and the contractual terms and vesting schedules of the current grants. The risk-free interest rate is based on the term structure of interest rates at the time of the option grant.
The table below summarizes stock option activity for the thirty-nine weeks ended September 30, 2021:
OptionsWeighted Average Exercise Price
Outstanding at January 1, 20213,740,604 $20.72 
Granted66,505 95.68 
Exercised(1,071,838)