Company Quick10K Filing
Quick10K
Lumber Liquidators
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$12.48 29 $358
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-06-19 Regulation FD, Exhibits
8-K 2019-05-22 Officers, Shareholder Vote, Exhibits
8-K 2019-04-30 Earnings, Exhibits
8-K 2019-03-15 Earnings, Officers, Exhibits
8-K 2019-03-12 Enter Agreement, Exhibits
8-K 2018-11-07 Officers
8-K 2018-10-30 Earnings, Exhibits
8-K 2018-09-28 Officers, Exhibits
8-K 2018-08-02 Regulation FD, Exhibits
8-K 2018-07-31 Earnings, Exhibits
8-K 2018-07-26 Officers, Other Events, Exhibits
8-K 2018-05-23 Shareholder Vote, Other Events, Exhibits
8-K 2018-05-09 Regulation FD, Exhibits
8-K 2018-03-28 Officers
8-K 2018-03-15 Enter Agreement
AJRD Aerojet Rocketdyne Holdings 2,980
CRC California Resources 976
TISI Team 486
CBIO Catalyst Biosciences 104
CVU CPI Aerostructures 78
SDPI Superior Drilling Products 25
DARE Dare Bioscience 16
FXF Invesco Currencyshares Swiss Franc Trust 0
SENR Strategic Environmental & Energy Resources 0
MPMI MPM Holdings 0
LL 2019-03-31
Part Ifinancial Information
Item 1. Financial Statements.
Note 1. Basis of Presentation
Note 2. Summary of Significant Accounting Policies
Note 3. Stockholders’ Equity
Note 4. Stock-Based Compensation
Note 5. Credit Agreement
Note 6. Income Taxes
Note 7.Leases
Note 8. Commitments and Contingencies
Item 2. Management’S Discussion and Analysis of Financial Condition and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Item 4. Controls and Procedures.
Part Iiother Information
Item 1. Legal Proceedings.
Item 1A. Risk Factors.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Item 3. Defaults Upon Senior Securities.
Item 4. Mine Safety Disclosures.
Item 5. Other Information.
Item 6. Exhibits.
EX-31.1 ll-20190331ex3116cb543.htm
EX-31.2 ll-20190331ex312353363.htm
EX-32.1 ll-20190331ex321ae9b5e.htm

Lumber Liquidators Earnings 2019-03-31

LL 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 ll-20190331x10q.htm 10-Q ll_Current_Folio_10Q

 

 

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 March 31, 2019

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: 001‑33767

 

Picture 2

Lumber Liquidators Holdings, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware

27‑1310817

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

 

3000 John Deere Road

Toano, Virginia

23168

(Address of Principal Executive Offices)

(Zip Code)

 

(757) 259‑4280

(Registrant’s telephone number, including area code)

Not Applicable

(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:

 

Name of exchange on which registered:

Common Stock, par value $0.001 per share

 

LL

 

New York Stock Exchange

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 of 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 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

As of April 25, 2019, there are 28,685,271 shares of the registrant’s common stock, par value of $0.001 per share, outstanding.

 

 

 

 


 

LUMBER LIQUIDATORS HOLDINGS, INC.

Quarterly Report on Form 10‑Q

For the quarter ended March 31, 2019

 

TABLE OF CONTENTS

 

 

 

 

 

Page

 

 

 

 

PART I – FINANCIAL INFORMATION

3

 

 

 

Item 1. 

Condensed Consolidated Financial Statements

3

 

 

 

Item 2. 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

19

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

26

 

 

 

Item 4. 

Controls and Procedures

26

 

 

 

 

PART II – OTHER INFORMATION

28

 

 

 

Item 1. 

Legal Proceedings

28

 

 

 

Item 1A. 

Risk Factors

34

 

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

34

 

 

 

Item 3. 

Defaults Upon Senior Securities

35

 

 

 

Item 4. 

Mine Safety Disclosures

35

 

 

 

Item 5. 

Other Information

35

 

 

 

Item 6. 

Exhibits

35

 

 

 

 

Signatures

36

 

 

2


 

PART I
FINANCIAL INFORMATION

Item 1. Financial Statements.

Lumber Liquidators Holdings, Inc.
Condensed Consolidated
Balance Sheets
(Unaudited, in thousands)

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

    

2019

    

2018

Assets

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

Cash and Cash Equivalents

 

$

17,090

 

$

11,565

Merchandise Inventories

 

 

299,886

 

 

318,272

Prepaid Expenses

 

 

9,255

 

 

6,299

Deposit for Legal Settlement

 

 

21,500

 

 

21,500

Other Current Assets

 

 

9,733

 

 

8,667

Total Current Assets

 

 

357,464

 

 

366,303

Property and Equipment, net

 

 

92,049

 

 

93,689

Operating Lease Right-of-Use

 

 

110,974

 

 

 —

Goodwill

 

 

9,693

 

 

9,693

Other Assets

 

 

6,226

 

 

5,832

Total Assets

 

$

576,406

 

$

475,517

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

Accounts Payable

 

$

55,943

 

$

73,412

Customer Deposits and Store Credits

 

 

47,633

 

 

40,332

Accrued Compensation

 

 

7,575

 

 

9,265

Sales and Income Tax Liabilities

 

 

5,841

 

 

4,200

Accrual for Legal Matters and Settlements Current

 

 

97,475

 

 

97,625

Operating Lease Liabilities - Current

 

 

30,207

 

 

 —

Other Current Liabilities

 

 

19,425

 

 

17,290

Total Current Liabilities

 

 

264,099

 

 

242,124

Other Long-Term Liabilities

 

 

12,833

 

 

20,203

Operating Lease Liabilities - Long-Term

 

 

88,330

 

 

 —

Deferred Tax Liability

 

 

828

 

 

792

Credit Agreement

 

 

67,000

 

 

65,000

Total Liabilities

 

 

433,090

 

 

328,119

 

 

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

 

Common Stock ($0.001 par value; 35,000 shares authorized; 31,661 and 31,578 shares issued and 28,682 and 28,627 shares outstanding, respectively)

 

 

32

 

 

32

Treasury Stock, at cost (2,979 and 2,951 shares, respectively)

 

 

(142,157)

 

 

(141,828)

Additional Capital

 

 

214,798

 

 

213,744

Retained Earnings

 

 

71,911

 

 

76,835

Accumulated Other Comprehensive Loss

 

 

(1,268)

 

 

(1,385)

Total Stockholders’ Equity

 

 

143,316

 

 

147,398

Total Liabilities and Stockholders’ Equity

 

$

576,406

 

$

475,517

 

See accompanying notes to condensed consolidated financial statements

3


 

Lumber Liquidators Holdings, Inc.
Condensed Consolidated Statements of Operations
(Unaudited, in thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

2019

    

2018

 

 

 

 

 

 

Net Sales

 

 

 

 

 

 

Net Merchandise Sales

 

$

237,899

 

$

236,492

Net Services Sales

 

 

28,321

 

 

25,280

Total Net Sales

 

 

266,220

 

 

261,772

Cost of Sales

 

 

 

 

 

 

Cost of Merchandise Sold

 

 

151,425

 

 

148,383

Cost of Services Sold

 

 

21,184

 

 

18,417

Total Cost of Sales

 

 

172,609

 

 

166,800

Gross Profit

 

 

93,611

 

 

94,972

Selling, General and Administrative Expenses

 

 

97,032

 

 

96,418

Operating Loss

 

 

(3,421)

 

 

(1,446)

Other Expense

 

 

1,290

 

 

321

Loss Before Income Taxes

 

 

(4,711)

 

 

(1,767)

Income Tax Expense

 

 

213

 

 

205

Net Loss

 

$

(4,924)

 

$

(1,972)

Net Loss per Common Share—Basic

 

$

(0.17)

 

$

(0.07)

Net Loss per Common Share—Diluted

 

$

(0.17)

 

$

(0.07)

Weighted Average Common Shares Outstanding:

 

 

  

 

 

  

Basic

 

 

28,646

 

 

28,508

Diluted

 

 

28,646

 

 

28,508

 

See accompanying notes to condensed consolidated financial statements

4


 

Lumber Liquidators Holdings, Inc.
Condensed Consolidated Statements of Comprehensive Loss 
(Unaudited, in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

2019

    

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Loss

 

$

(4,924)

 

$

(1,972)

Other Comprehensive Income (Loss):

 

 

  

 

 

  

Foreign Currency Translation Adjustments

 

 

117

 

 

(32)

Total Other Comprehensive Income (Loss)

 

 

117

 

 

(32)

Comprehensive Loss

 

$

(4,807)

 

$

(2,004)

 

See accompanying notes to condensed consolidated financial statements

5


 

Lumber Liquidators Holdings, Inc.
Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited, in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

Common Stock

 

Treasury Stock

 

Additional

 

Retained

 

 

 

Stockholders'

 

    

Shares

    

Value

    

Shares

    

Value

    

Capital

    

Earnings

    

AOCL

     

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

28,490

 

$

31

 

2,907

 

$

(140,875)

 

$

208,629

 

$

131,214

 

$

(1,152)

 

$

197,847

Stock-Based Compensation Expense

 

 —

 

 

 —

 

 —

 

 

 —

 

 

1,007

 

 

 —

 

 

 —

 

 

1,007

Exercise of Stock Options

 

 3

 

 

 —

 

 —

 

 

 —

 

 

40

 

 

 —

 

 

 —

 

 

40

Release of Restricted Shares

 

47

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Common Stock Repurchased

 

 —

 

 

 —

 

23

 

 

(564)

 

 

 —

 

 

 —

 

 

 —

 

 

(564)

Translation Adjustment

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(32)

 

 

(32)

Net Loss

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(1,972)

 

 

 —

 

 

(1,972)

March 31, 2018

 

28,540

 

$

31

 

2,930

 

$

(141,439)

 

$

209,676

 

$

129,242

 

$

(1,184)

 

$

196,326

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

28,627

 

$

32

 

2,951

 

$

(141,828)

 

$

213,744

 

$

76,835

 

$

(1,385)

 

$

147,398

Stock-Based Compensation Expense

 

 —

 

 

 —

 

 —

 

 

 —

 

 

1,054

 

 

 —

 

 

 —

 

 

1,054

Release of Restricted Shares

 

55

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Common Stock Repurchased

 

 —

 

 

 —

 

28

 

 

(329)

 

 

 —

 

 

 —

 

 

 —

 

 

(329)

Translation Adjustment

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

117

 

 

117

Net Income

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(4,924)

 

 

 —

 

 

(4,924)

March 31, 2019

 

28,682

 

$

32

 

2,979

 

$

(142,157)

 

$

214,798

 

$

71,911

 

$

(1,268)

 

$

143,316

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements

6


 

Lumber Liquidators Holdings, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited, in thousands)

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

    

2019

    

2018

 

 

 

 

 

 

Cash Flows from Operating Activities:

 

 

  

 

 

  

Net Loss

 

$

(4,924)

 

$

(1,972)

Adjustments to Reconcile Net Loss:

 

 

  

 

 

  

Depreciation and Amortization

 

 

4,312

 

 

4,723

Stock-Based Compensation Expense

 

 

1,033

 

 

858

Loss on Disposal of Fixed Assets

 

 

53

 

 

 7

Changes in Operating Assets and Liabilities:

 

 

  

 

 

  

Merchandise Inventories

 

 

17,275

 

 

(14,483)

Accounts Payable

 

 

(16,932)

 

 

(7,079)

Customer Deposits and Store Credits

 

 

7,426

 

 

5,062

Prepaid Expenses and Other Current Assets

 

 

(4,059)

 

 

(1,090)

Accrual for Legal Matters and Settlements

 

 

350

 

 

250

Other Assets and Liabilities

 

 

1,943

 

 

(1,157)

Net Cash Provided by (Used in) Operating Activities

 

 

6,477

 

 

(14,881)

 

 

 

 

 

 

 

Cash Flows from Investing Activities:

 

 

  

 

 

  

Purchases of Property and Equipment

 

 

(3,247)

 

 

(3,048)

Other Investing Activities

 

 

17

 

 

 6

Net Cash Used in Investing Activities

 

 

(3,230)

 

 

(3,042)

 

 

 

 

 

 

 

Cash Flows from Financing Activities:

 

 

  

 

 

  

Borrowings on Credit Agreement

 

 

13,000

 

 

15,000

Payments on Credit Agreement

 

 

(11,000)

 

 

(4,000)

Other Financing Activities

 

 

(727)

 

 

(891)

Net Cash Provided by Financing Activities

 

 

1,273

 

 

10,109

Effect of Exchange Rates on Cash and Cash Equivalents

 

 

1,005

 

 

482

Net Increase (Decrease) in Cash and Cash Equivalents

 

 

5,525

 

 

(7,332)

Cash and Cash Equivalents, Beginning of Year

 

 

11,565

 

 

19,938

Cash and Cash Equivalents, End of Year

 

$

17,090

 

$

12,606

 

See accompanying notes to condensed consolidated financial statements

7


 

Lumber Liquidators Holdings, Inc.
Notes to Condensed Consolidated Financial Statements
(Amounts in thousands, except per share amounts)

Note 1.       Basis of Presentation

Lumber Liquidators Holdings, Inc. and its direct and indirect subsidiaries (collectively and, where applicable, individually, the “Company”) engage in business as a multi-channel specialty retailer of hard-surface flooring, and hard-surface flooring enhancements and accessories, operating as a single operating segment. The Company offers an extensive assortment of exotic and domestic hardwood species, engineered hardwood, laminate, resilient vinyl, waterproof vinyl plank and porcelain tile flooring direct to the consumer. The Company also features the renewable flooring products, bamboo and cork, and provides a wide selection of flooring enhancements and accessories, including moldings, noise-reducing underlayment, adhesives and flooring tools. The Company also provides in-home delivery and installation services to its customers. The Company sells primarily to homeowners or to contractors on behalf of homeowners through a network of store locations in metropolitan areas. As of March 31, 2019, the Company’s stores spanned 47 states in the United States (“U.S.”) and included eight stores in Canada. In addition to the store locations, the Company’s products may be ordered, and customer questions/concerns addressed, through both its call center in Toano, Virginia and its website, www.lumberliquidators.com.  The Company finished the majority of its Bellawood products on its finishing lines in Toano, Virginia, which along with the call center, corporate offices, and a distribution center, represent the “Corporate Headquarters.” In July of 2018, the Company announced its plan to sell its finishing line equipment to an unaffiliated third-party purchaser and to relocate its corporate headquarters to Richmond, Virginia, in 2019. The Company ceased finishing floors in January 2019.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10‑Q for interim financial reporting pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). In the opinion of management, all adjustments (consisting of normal and recurring adjustments except those otherwise described herein) considered necessary for a fair presentation have been included in the accompanying condensed consolidated financial statements. However, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements. Therefore, the interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in the Company’s annual report filed on Form 10‑K for the year ended December 31, 2018.

The condensed consolidated financial statements of the Company include the accounts of its wholly-owned subsidiaries. All intercompany transactions have been eliminated in consolidation.

Results of operations for the three months ended March 31, 2019 are not necessarily indicative of future results to be expected for the full year due to a number of factors, including seasonality.

 

Note 2.       Summary of Significant Accounting Policies

Fair Value of Financial Instruments

 

The carrying amounts of financial instruments such as cash and cash equivalents, accounts payable and other liabilities approximates fair value because of the short-term nature of these items. The carrying amount of obligations under the Credit Agreement approximates fair value due to the variable rate of interest.

 

Merchandise Inventories

 

The Company values merchandise inventories at the lower of merchandise cost or net realizable value. The Company determines merchandise cost using the weighted average method.  All of the hardwood flooring we purchase from suppliers is either prefinished or unfinished and in immediate saleable form. Inventory cost includes the costs of bringing an article to its existing condition and location such as shipping and handling and import tariffs. The Company periodically reviews the carrying value of items in inventory and records a lower of cost or net realizable value

8


 

adjustment when there is evidence that the utility of inventory will be less than its cost. In determining net realizable value, the Company makes judgments and estimates as to the market value of its products, based on factors such as historical results and current sales trends. Although the Company believes its products are appropriately valued as of the balance sheet date, there can be no assurance that future events or changes in key assumptions would not significantly impact their value.

 

Recognition of Net Sales

The Company generates revenues primarily by retailing merchandise flooring and accessories in the form of solid and engineered hardwood, bamboo, cork, laminate, resilient vinyl, waterproof vinyl plank and porcelain tile flooring. Additionally, the Company expands its revenues by offering services to deliver and/or install this merchandise for its customers; it considers these services to be separate performance obligations. The separate performance obligations are detailed on the customer’s invoice(s) and the customer often purchases flooring merchandise without purchasing installation or delivery services. Sales occur through a network of 413 stores, which spanned 47 states including eight stores in Canada, at March 31, 2019. In addition, both the merchandise and services can be ordered through a call center and from the Company’s website, www.lumberliquidators.com. The Company’s agreements with its customers are of short duration (less than a year) and as such the Company has elected not to disclose revenue for partially satisfied contracts that will be completed in the days following the end of a period as permitted by GAAP. The Company reports its revenues exclusive of sales taxes collected from customers and remitted to governmental taxing authorities, consistent with past practice.

Revenue is based on consideration specified in a contract with a customer, and excludes any sales incentives from vendors and amounts collected on behalf of third parties. The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product to a customer or performing service for a customer. Revenues from installation and freight services are recognized when the delivery is made or the installation is complete, which approximates the recognition of revenue over time due to the short duration of service provided. The price of the Company’s merchandise and services are specified in the respective contracts and detailed on the invoice agreed to with the customer including any discounts. The Company generally requires customers to pay a deposit, equal to approximately half of the retail sales value, when ordering merchandise not regularly carried in a given location or not currently in stock. In addition, the Company generally does not extend credit to its customers with payment due in full at the time the customer takes possession of merchandise or when the service is provided. Customer payments and deposits received in advance of the customer taking possession of the merchandise or receiving the services are recorded as deferred revenues in the accompanying condensed consolidated balance sheet caption Customer Deposits and Store Credits.

The following table shows the activity in this account for the periods noted:

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31,

 

    

2019

    

2018

Customer Deposits and Store Credits, Beginning Balance

 

$

(40,332)

 

$

(38,546)

New Deposits

 

 

(291,833)

 

 

(285,522)

Recognition of Revenue

 

 

266,220

 

 

261,772

Sales Tax included in Customer Deposits

 

 

16,781

 

 

16,605

Other

 

 

1,531

 

 

2,198

Customer Deposits and Store Credits, Ending Balance

 

$

(47,633)

 

$

(43,493)

 

Subject to limitations under the Company’s policy, return of unopened merchandise is accepted for 90 days. The amount of revenue recognized for flooring merchandise is adjusted for expected returns, which are estimated based on the Company’s historical data, current sales levels, and forecasted economic trends. The Company uses the expected value method to estimate returns because it has a large number of contracts with similar characteristics. The Company previously recognized revenue in full, recorded an allowance for expected returns (contra-revenue), and recorded a separate refund liability for expected returns. The Company reduces revenue by the amount of expected returns and records it within accrued expenses and other on the condensed consolidated balance sheet. The Company continues to

9


 

estimate the amount of returns based on the historical data. In addition, the Company recognizes a related asset for the right to recover returned merchandise and records it in the other current assets caption of the accompanying condensed consolidated balance sheet. This amount was $1.4 million at March 31, 2019. The Company recognizes sales commissions as incurred since the amortization period is less than one year. The Company offers a range of limited warranties for the durability of the finish on its prefinished products. These limited warranties range from one to 100 years, with lifetime warranties for certain of the Company’s products. Warranty reserves are based primarily on claims experience, sales history and other considerations. Warranty costs are recorded in cost of sales.

In total, the Company offers hundreds of different flooring products; however, no single flooring product represented a significant portion of its sales mix. By major product category, the Company’s sales mix was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Three Months Ended March 31,

 

 

 

2019

    

2018

    

Manufactured Products 1

 

$

110,450

 

41

%  

$

90,929

 

35

%  

Solid and Engineered Hardwood

 

 

81,817

    

31

%  

 

96,684

    

37

%  

Moldings and Accessories and Other

 

 

45,632

 

17

%  

 

48,879

 

19

%  

Installation and Delivery Services

 

 

28,321

 

11

%  

 

25,280

 

 9

%  

Total

 

$

266,220

 

100

%  

$

261,772

 

100

%  


1     Includes laminate, vinyl, engineered vinyl plank and porcelain tile.

Cost of Sales

 

Cost of sales includes the cost of products sold, including tariffs, the cost of installation services, and transportation costs from vendors to the Company’s distribution centers or store locations. It also includes any applicable finishing costs related to production of the Company’s proprietary brands, transportation costs from distribution centers to store locations, transportation costs for the delivery of products from store locations to customers, certain costs of quality control procedures, warranty and customer satisfaction costs, inventory adjustments including obsolescence and shrinkage, and costs to produce samples, which are net of vendor allowances. The Company ceased finishing floors in January 2019, as previously disclosed in the Form 10-K for the year ended December 31, 2018.

Leases

 

In February 2016, the FASB issued Accounting Standards Update No. 2016-02 (“ASU 2016-02”), which creates ASC Topic 842, Leases, and supersedes the lease accounting requirements in Topic 840, Leases. In summary, Topic 842 requires organizations that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. In August 2018, the FASB issued ASU 2018-11, Targeted Improvements to ASC 842, which included an option to not restate comparative periods in transition and elect to use the effective date of ASC 842 as the date of initial application of transition, which the Company elected. As a result of the adoption of ASC 842 on January 1, 2019, the Company recorded both operating lease right-of-use (“ROU”) assets of $113 million and lease liabilities of $121 million. The adoption of ASC 842 had an immaterial impact on the Company’s condensed consolidated statements of operations and condensed consolidated statements of cash flows for the three-month period ended March 31, 2019. The Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed the Company to carryforward the historical lease classification.

The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease ROU assets and operating lease liabilities on the condensed consolidated balance sheets. The operating lease ROU assets and operating lease liabilities are recognized as the present value of the future minimum lease payments over the lease term at commencement date. As most of the leases do not provide an implicit rate, the Company used its incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The operating lease ROU asset also is adjusted for any lease payments made and excludes lease incentives and initial direct costs incurred. The Company’s lease terms may include options to extend or terminate the lease typically at the Company’s own discretion.  The Company regularly evaluates the renewal options and when they

10


 

are reasonably certain of exercise, the Company includes the renewal period in its lease term. Many of the Company’s leases include both lease (e.g., payments including rent, taxes, and insurance costs) and non-lease components (e.g., common-area or other maintenance costs) which are accounted for as a single lease component as the Company has elected the practical expedient to group lease and non-lease components for all leases. Lease expense for minimum lease payments is recognized on a straight-line basis over the term of the agreement.

The Company made an accounting policy election that payments under agreements with an initial term of 12 months or less will not be included on the condensed consolidated balance sheet but will be recognized in the condensed consolidated statements of operations on a straight-line basis over the term of the agreement.

 

Additional information and disclosures required by this new standard are contained in “Note 7, Leases.”

 

Recent Accounting Pronouncements Not Yet Adopted

In August 2018, the FASB issued Accounting Standards Update No. 2018‑15 (“ASU 2018‑15”), which provides guidance on the accounting for costs of implementation activities performed in a cloud computing arrangement that is a service contract, as initially published in Accounting Standards Update No. 2015‑05, Intangibles—Goodwill and Other—Internal-Use Software: Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement. In summary, the new standard requires customers of cloud computing services to recognize an intangible asset for the software license and, to the extent that payments attributable to the software license are made over time, a liability is also recognized. The new standard also allows customers of cloud computing services to capitalize certain implementation costs. The amendments in ASU 2018‑15 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Therefore, the new standard will become effective for the Company at the beginning of its 2020 fiscal year, although early adoption is permitted for all entities. The Company will evaluate the impact of ASU 2018‑15 when recording cloud computing arrangements.

 

 

Note 3.       Stockholders’ Equity

Net Loss per Common Share

The following table sets forth the computation of basic and diluted net loss per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

2019

    

2018

Net Loss

 

$

(4,924)

    

$

(1,972)

Weighted Average Common Shares Outstanding—Basic

 

 

28,646

 

 

28,508

Effect of Dilutive Securities:

 

 

  

 

 

  

Common Stock Equivalents

 

 

 —

 

 

 —

Weighted Average Common Shares Outstanding—Diluted

 

 

28,646

 

 

28,508

Net Loss per Common Share—Basic

 

$

(0.17)

 

$

(0.07)

Net Loss per Common Share—Diluted

 

$

(0.17)

 

$

(0.07)

 

The following shares have been excluded from the computation of Weighted Average Common Shares Outstanding—Diluted because the effect would be anti-dilutive:

 

 

 

 

 

 

 

 

 

 

 

 

As of March 31, 

 

 

2019

    

2018

Stock Options

 

688

    

688

Restricted Shares

 

408

 

347

 

11


 

Stock Repurchase Program

The Company’s board of directors has authorized the repurchase of up to $150 million of the Company’s common stock. At March 31, 2019, the Company had approximately $14.7 million remaining under this authorization. The Company has not repurchased any shares of its common stock under this program in more than three years.

 

Note 4.       Stock-based Compensation

The following table summarizes share activity related to stock options and restricted stock awards (“RSAs”):

 

 

 

 

 

 

    

 

    

Restricted Stock

 

 

Stock Options

 

Awards

Options Outstanding/Nonvested RSAs, December 31, 2018

 

733

 

487

Granted

 

 —

 

494

Options Exercised/RSAs Released

 

 —

 

(84)

Forfeited

 

(45)

 

(11)

Options Outstanding/Nonvested RSAs, March 31, 2019

 

688

 

886

 

The Company granted a target of 100,281 performance-based RSAs with a grant date fair value of $1.1 million during the three months ended March 31, 2019 and a target of 30,887 performance-based RSAs with a grant date fair value of $0.7 million during the three months ended March 31, 2018. These shares were awarded to certain members of senior management in connection with the achievement of specific key financial metrics measured over a two-year period and vest over a three-year period. The number of awards that will ultimately vest is contingent upon the achievement of these key financial metrics by the end of year two. The Company assesses the probability of achieving these metrics on a quarterly basis. Once these amounts have been determined, half of the shares will vest at the end of year two and the remaining half will vest at the end of year three. These awards are included above in RSAs Granted.

 

Note 5.      Credit Agreement

On March 29, 2019, the Company entered into a Fourth Amended and Restated Credit Agreement (the “Credit Agreement”) with Bank of America, N.A. and Wells Fargo Bank, National Association (the “Lenders”). The Credit Agreement amended and restated the Third Amended and Restated Revolving Credit Agreement (the “Prior Agreement”). Under the Credit Agreement, the Lenders increased the maximum amount of borrowings under the revolving credit facility (the “Revolving Credit Facility”) from $150 million under the Prior Agreement to $175 million and added a new first in-last out $25 million term loan (the “FILO Term Loan”) for a total of $200 million, subject to the borrowing bases described below. The Company also has the option to increase the Revolving Credit Facility to a maximum total amount of $225 million, subject to the satisfaction of the conditions to such increase as specified in the Credit Agreement.

 

As of March 31, 2019, a total of $42 million was outstanding under the Revolving Credit Facility and $25 million was outstanding under the FILO Term Loan. The Company also had $2.6 million in letters of credit which factor into its remaining availability.

 

The Revolving Credit Facility and the FILO Term Loan mature on March 29, 2024 and are secured by security interests in the Collateral (as defined in the Credit Agreement), which includes substantially all assets of the Company including, among other things, the Company’s inventory and accounts receivables, and the Company’s East Coast distribution center located in Sandston, Virginia.  Under the terms of the Credit Agreement, the Company has the ability to release the East Coast distribution center from the Collateral under certain conditions.

 

The Revolving Credit Facility is available to the Company up to the lesser of (1) $175 million or (2) a revolving borrowing base equal to the sum of specified percentages of the Borrowers’ eligible credit card receivables, eligible inventory (including eligible in-transit inventory), and eligible owned real estate, less certain reserves, all of which are defined by the terms of the Credit Agreement (the “Revolving Borrowing Base”).  If the outstanding FILO Term Loan

12


 

exceeds the FILO Borrowing Base (as defined in the Credit Agreement), the amount of such excess reduces availability under the Revolving Borrowing Base.

   

Loans outstanding under the Credit Agreement can bear interest based on the Base Rate (as defined in the Credit Agreement) or the LIBOR Rate (as defined in the Credit Agreement).  Interest on Base Rate loans is charged at varying per annum rates computed by applying a margin ranging from (i) 0.25% to 0.75% over the Base Rate with respect to revolving loans and (ii) 1.25% to 2.00% over the Base Rate with respect to the FILO Term Loan, in each case depending on the Borrowers’ average daily excess borrowing availability under the Revolving Credit Facility during the most recently completed fiscal quarter. Interest on LIBOR Rate loans and fees for standby letters of credit are charged at varying per annum rates computed by applying a margin ranging from (i) 1.25% to 1.75% over the applicable LIBOR Rate with respect to revolving loans and (ii) 2.25% to 3.00% over the applicable LIBOR Rate with respect to the FILO Term Loan, in each case depending on the Company’s’ average daily excess borrowing availability under the Revolving Credit Facility during the most recently completed fiscal quarter. 

 

The Credit Agreement contains a fixed charge coverage ratio covenant that becomes effective only when specified availability under the Revolving Credit Facility falls below the greater of $17.5 million or 10% of the Combined Loan Cap (as defined in the Credit Agreement).

  

Note 6.       Income Taxes

The Company has a full valuation allowance recorded against its net deferred tax assets which effectively offsets its federal taxes at the statutory rate of 21%. However, it does record tax expense each period for income taxes incurred in certain state and foreign jurisdictions. For the three months ended March 31, 2019 and 2018, the resulting effective tax rate was (4.5)% and (11.6)%, respectively.

The Company intends to maintain a valuation allowance on its deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of these allowances. A reduction in the valuation allowance could result in a significant decrease in income tax expense in the period that the release is recorded. However, the exact timing and amount of any reduction in the Company’s valuation allowance are unknown at this time and will be subject to the earnings level it achieves in future periods.

 

Note 7.Leases

The Company has operating leases for all of its stores, current corporate headquarters in Toano, Virginia, its distribution center on the west coast, supplemental office facilities and certain equipment. The Company has also entered into an agreement for a future corporate headquarters in Richmond, Virginia which has a ten-year term and expected future minimum rental payments of approximately $15.4 million that commences in late 2019 once the Company takes possession of the property. The store location leases are operating leases and generally have five-year base periods with one or more five-year renewal periods. The current corporate headquarters in Toano, Virginia and the supplemental office facility in Richmond, Virginia have operating leases with base terms running through December 31, 2019 and November 30, 2020, respectively. The distribution center on the west coast has an operating lease with a base term running through October 31, 2024.

 

The cost components of the Company’s operating leases recorded in SG&A on the condensed consolidated statement of operations were as follows for the period ended March 31, 2019:

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2019

 

Store Leases

    

Other Leases

    

Total

 

 

 

 

 

 

 

 

 

Operating lease costs

$

8,043

 

$

993

 

$

9,036

Variable lease costs

 

1,953

 

 

199

 

 

2,152

Total

$

9,996

 

$

1,192

 

$

11,188

 

 

 

 

 

 

 

 

 

 

13


 

Variable lease costs consist primarily of taxes, insurance, and common area or other maintenance costs for our leased facilities which are paid as incurred.

Other information related to leases were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2019

 

 

Store Leases

    

Other Leases

    

Total

 

 

 

 

 

 

 

 

 

 

 

Supplemental Cash Flows Information

 

 

 

 

 

 

 

 

 

Cash paid for amounts included in the measurement of lease liabilities:

 

 

 

 

 

 

 

 

 

Operating cash flows from operating leases

$

8,318

 

$

1,092

 

$

9,410

 

 

 

 

 

 

 

 

 

 

 

Right-of-use assets obtained or modified in exchange for operating lease obligations

$

5,132

 

$

 —

 

$

5,132

 

 

 

 

 

 

 

 

 

 

 

Weighted Average Remaining Lease Term (years)

 

4.61

 

 

4.90

 

 

4.64

 

 

 

 

 

 

 

 

 

 

 

Weighted Average Discount Rate

 

6.10

%

 

6.18

%

 

6.12

%

 

At March 31, 2019, the future minimum rental payments under non-cancellable operating leases were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

Operating Leases

 

 

Store Leases

 

Other Leases

 

Total

2019  1

 

$

24,684

 

$

3,112

 

$

27,796

2020

 

 

30,115

 

 

2,536

 

 

32,651

2021

 

 

23,883

 

 

2,168

 

 

26,051

2022

 

 

17,849

 

 

2,147

 

 

19,996

2023

 

 

11,798

 

 

2,186

 

 

13,984

Thereafter

 

 

14,815

 

 

2,054

 

 

16,869

Total future minimum lease payments

 

 

123,144

 

 

14,203

 

 

137,347

Less imputed interest

 

 

(16,800)

 

 

(2,010)

 

 

(18,810)

Total

 

$

106,344

 

$

12,193

 

$

118,537

 

 

 

 

 

 

 

 

 

 

1 Represents the future minimum rental payments from April 1, 2019 through December 31, 2019.

 

Note 8.       Commitments and Contingencies

Governmental Investigations

In 2015 and early 2016, the Company received subpoenas issued in connection with a criminal investigation being conducted by the DOJ and the SEC.  The focus of the investigations primarily related to compliance with disclosure and financial reporting and requirements under the federal securities laws. The Company cooperated with the investigations and produced documents and other information responsive to subpoenas and other requests received from the parties. In March of 2019 prior to filing its Form 10-K, the Company reached an agreement with the U.S. Attorney, the DOJ and SEC regarding the investigation (the “Settlement Agreements”). The Company entered into a Deferred Prosecution Agreement (“DPA”) with the U.S. Attorney and the DOJ and a Cease-and-Desist Order (the “Order”) with the SEC, under which it is required, among other things, to (1) pay a fine in the amount of $19.1 million to the United States Treasury, (2) forfeit to the U.S. Attorney and the DOJ the sum of $13.9 million, of which up to $6.1 million will be submitted by the Company to the SEC in disgorgement and prejudgment interest under the Order and (3) adopt a new compliance program, or modify its existing one, including internal controls, compliance policies, and procedures in order to ensure that the Company maintains an effective system of internal account controls designed to ensure the making and

14


 

keeping of fair and accurate books, records and accounts, as well as a compliance program designed to prevent and detect violations of certain federal securities laws throughout its operations. 

   

The Settlement Agreements also provide that the Company will continue to cooperate with the U.S. Attorney, the DOJ and the SEC in all matters relating to the conduct described in the Settlement Agreements and, at the request of the U.S. Attorney, the DOJ or the SEC, the Company will cooperate fully with other domestic or foreign law enforcement authorities and agencies in any investigation of the Company in any and all matters relating to the Settlement Agreements. In the event the Company breaches the DPA, there is a risk the government would seek to impose remedies provided for in the DPA, including instituting criminal prosecution against the Company.

   

The Company accrued a charge of $33 million within selling, general and administrative (“SG&A”) expenses in its December 31, 2018 financial statements, reflecting the amounts owed under the Settlement Agreements. Subsequent to March 31, 2019, the Company remitted all amounts due to the applicable governmental parties and has relieved the applicable portion of the liability in the caption “Accrual for Legal Matters and Settlements Current” on its balance sheet.

 

Litigation Relating to Bamboo Flooring

In 2014, Dana Gold (“Gold”) filed a purported class action lawsuit alleging that certain bamboo flooring that the Company sells (the “Strand Bamboo Product”) is defective (the “Gold Litigation”). The plaintiffs sought financial damages and, in addition to attorneys’ fees and costs, the plaintiffs wanted a declaration that the Company’s actions violated the law.

On March 15, 2019 prior to filing its Form 10-K, the Company entered into a Memorandum of Understanding (the “MOU”), which would resolve the Gold Litigation on a nationwide basis. Under the terms of the MOU, the Company will contribute $14 million in cash and provide $14 million in store-credit vouchers, with a potential additional $2 million in store-credit vouchers based on obtaining a claim’s percentage of more than 7%, for an aggregate settlement of up to $30 million. The MOU is subject to certain contingencies, including the execution of a definitive settlement agreement, board approval and court approvals of the definitive settlement agreement. The entry into the MOU or any subsequent execution of a definitive settlement agreement does not constitute an admission by the Company of any fault or liability and the Company does not admit any fault or liability. There can be no assurance that a settlement will be finalized and approved or as to the ultimate outcome of the litigation. If a final, court-approved settlement is not reached, the Company will defend the matter vigorously and believes there are meritorious defenses and legal standards that must be met for, among other things, success on the merits. The Company accrued within SG&A a $28 million liability with the offset in the caption “other current liabilities” in its December 31, 2018 financial statements. The Company has notified its insurance carriers and continues to pursue coverage, but the insurers to date have denied coverage. As the insurance claim is still pending, the Company has not recognized any insurance recovery related to the Gold Litigation.

In addition, there are a number of other claims and lawsuits alleging damages similar to those in the Gold Litigation. The Company disputes these claims and intends to defend such matters vigorously. Given the uncertainty of litigation, the preliminary stage of the cases, and the legal standards that must be met for success on the merits, the Company is unable to estimate the amount of loss, or range of possible loss, at this time that may result from these actions. Accordingly, no accruals have been made with respect to these matters. Any such losses could, potentially, have a material adverse effect, individually or collectively, on the Company’s results of operations, financial condition, and liquidity.

 

Litigation Relating to Chinese Laminates

Formaldehyde-Abrasion MDLs

On March 15, 2018, the Company entered into a settlement agreement with the lead plaintiffs in the Formaldehyde MDL (as defined in Part II, Item 1 of this Form 10-Q) and Abrasion MDL (as defined in Part II, Item 1 of this Form 10-Q), cases more fully described in Part II, Item 1 of this Form 10-Q. Under the terms of the settlement agreement, the Company agreed to fund $22 million in cash and provide $14 million in store-credit vouchers for an aggregate settlement of $36 million to settle claims brought on behalf of purchasers of Chinese-made laminate flooring

15


 

sold by the Company between January 1, 2009 and May 31, 2015. The Company deposited $22 million into an escrow account administered by the court and plaintiffs’ counsel in accordance with the final settlement. The final approval order by the United States District Court for the Eastern District of Virginia has been appealed and is pending. The Company does not anticipate any change to its obligations, but must wait until the appeals are adjudicated or withdrawn.  If the appeals were to result in the settlement being set aside, the Company would receive $21.5 million back from the escrow agent. Accordingly, the Company has accounted for the payment of $21.5 million as a deposit in the accompanying condensed consolidated financial statements. The $36 million aggregate settlement amount was accrued within SG&A expenses in 2017.

   

For approximately three years after a final ruling has been reached in this matter, plaintiffs will be able to redeem vouchers for product. Some of the states have alternative expiration dates while others have an indefinite amount of time to redeem vouchers. The Company will account for the sales of these products by relieving the relevant liability, reducing inventory used in the transaction and offsetting SG&A expenses for any profit. The Company does not know the timing or pace of voucher redemption. 

   

In addition to those purchasers who opted out of the above settlement (the “Opt Outs”), there are a number of individual claims and lawsuits alleging personal injuries, breach of warranty claims, or violation of state consumer protection statutes that remain pending (collectively, the “Related Laminate Matters”). Certain of these Related Laminate Matters were settled in 2019 and 2018, while some remain in settlement negotiations. The Company recognized charges to earnings of $0.4 million and $0.3 million for the three months ended March 31, 2019 and 2018, respectively, within SG&A expenses for these Remaining Laminate Matters. As of March 31, 2019, the remaining accrual related to these matters was $0.9 million, which has been included in the caption “Accrual for Legal Matters and Settlements Current” on the condensed consolidated balance sheet. While the Company believes that a further loss associated with the Opt Outs and Related Laminate Matters is reasonably possible, the Company is unable to reasonably estimate the amount or range of possible loss beyond what has been provided. If the Company incurs losses with the respect to the Opt Outs or further losses with respect to Related Laminate Matters, the ultimate resolution of these actions could have a material adverse effect on the Company’s results of operations, financial condition, and liquidity. 

 

Canadian Litigation

On or about April 1, 2015, Sarah Steele (“Steele”) filed a purported class action lawsuit in the Ontario, Canada Superior Court of Justice against the Company. In the complaint, Steele’s allegations include strict liability, breach of implied warranty of fitness for a particular purpose, breach of implied warranty of merchantability, fraud by concealment, civil negligence, negligent misrepresentation and breach of implied covenant of good faith and fair dealing. Steele did not quantify any alleged damages in her complaint, but seeks compensatory damages, punitive, exemplary and aggravated damages, statutory remedies, attorneys’ fees and costs. While the Company believes that a loss associated with the Steele litigation is possible, the Company is unable to reasonably estimate the amount or range of possible loss.

 

Employee Classification Matters

During the second half of 2017, current and former store managers, filed purported class action lawsuits in New York and California on behalf of all current and former store managers, store managers in training, installation sales managers, and similarly situated current and former employees holding comparable positions but different titles (collectively, the “Putative Class Employees”), alleging that the Company violated the Fair Labor Standards Act and certain state laws by classifying the Putative Class Employees as exempt. In both cases the plaintiffs did not quantify any alleged damages but, in addition to attorneys’ fees and costs, the plaintiffs seek class certification, unspecified amount for unpaid wages and overtime wages, liquidated and/or punitive damages, declaratory relief, restitution, statutory penalties, injunctive relief and other damages. The Company disputes the claims and intends to defend both matters vigorously. Given the uncertainty of litigation, the preliminary stage of the case and the legal standards that must be met for, among other things, class certification and success on the merits, the Company is unable to estimate the amount of loss, or range of possible loss, at this time that may result from these actions.  Accordingly, no accruals have been made with respect to these matters. Any such losses could potentially have a material adverse effect, individually or collectively, on the Company’s results of operations, financial condition, and liquidity. 

16


 

 

Antidumping and Countervailing Duties Investigation

In October 2010, a conglomeration of domestic manufacturers of multilayered wood flooring filed a petition seeking the imposition of antidumping (“AD”) and countervailing duties (“CVD”) with the United States Department of Commerce (“DOC”) and the United States International Trade Commission (“ITC”) against imports of multilayered wood flooring from China. This ruling applies to companies importing multilayered wood flooring from Chinese suppliers subject to the AD and CVD orders. The Company’s multilayered wood flooring imports from China accounted for approximately 7% and 8% of its flooring purchases in 2018 and 2017, respectively. The Company’s consistent view through the course of this matter has been, and remains, that its imports are neither dumped nor subsidized. As such, it has appealed the original imposition of AD and CVD fees.

As part of its processes in these proceedings, the DOC conducts annual reviews of the AD and CVD rates. In such cases, the DOC will issue preliminary rates that are not binding and are subject to comment by interested parties. After consideration of the comments received, the DOC will issue final rates for the applicable period, which may lag by a year or more. At the time of import, the Company makes deposits at the then prevailing rate, even while the annual review is in process. When rates are declared final by the DOC, the Company accrues a receivable or payable depending on where that final rate compares to the deposits it has made. The Company and/or the domestic manufacturers can appeal the final rate for any period and can place a hold on final settlement by U.S. Customs and Border Protection while the appeals are pending.

In addition to its overall appeal of the imposition of AD and CVD, which is still pending, the Company as well as other involved parties have appealed many of the final rate determinations. Those appeals are pending and, at times, have resulted in delays in settling the shortfalls and refunds shown in the table below. Because of the length of time for finalization of rates as well as appeals, any subsequent adjustment of AD and CVD rates typically flows through a period different from those in which the inventory was originally purchased and/or sold.

The first 5‑year Sunset Review of the AD and CVD orders on multilayered wood flooring (the “Sunset Review”) began in November 2016 at the ITC to determine whether to terminate the orders. The Company participated fully in this Sunset Review. In December 2017, the ITC determined that the AD and CVD orders will remain in place.

Results by period for the Company are shown below. The column labeled ‘March 31, 2019 Receivable/Liability Balance’ represents the amount the Company would receive or pay (net of any collections or payments) as the result of subsequent adjustment to rates whether due to finalization by the DOC or because of action of a court based on appeals by various parties. It does not include any initial amounts paid for AD or CVD in the current period at the in-effect rate at that time.

 

The Company recorded net interest expense related to antidumping of $0.4 million, with the amount included in other expense on the condensed consolidated statements of operations. The estimated associated interest payable and receivable for each period is not included in the table below and is included in the same financial statement line item on the Company’s condensed consolidated balance sheet as the associated liability and receivable balance for each period.

 

   

17


 

The Company recorded net interest expense related to antidumping of $1.2 million, with the amount included in other expense on the Statements of Operations. The estimated associated interest payable and receivable for each period is not included in the table below and is included in the same financial statement line item on the Company’s consolidated balance sheet as the associated liability and receivable balance for each period.

 

 

 

 

Review

    

Rates at which

    

March 31, 2019

Period

Period Covered

Company

Final Rate

Receivable/Liability

 

 

Deposited

 

Balance

Antidumping

1

May 2011 through

6.78% and 3.3%

0.73%1

$1.3 million

 

November 2012

 

 

receivable1

2

December 2012 through

3.30%

13.74%

$4.1 million

 

November 2013

 

 

liability

3

December 2013 through

3.3% and 5.92%

17.37%

$5.5 million

 

November 2014

 

 

liability

4

December 2014 through

5.92% and 13.74%

0.0%

$0.03 million

 

November 2015

 

 

receivable

5

December 2015 through

5.92%.  13.74%. and 17.37%

0.0%2

$2.6 million

 

November 2016

 

 

receivable2

6

December 2016 through

17.37% and 0.0%

Pending3

NA

 

November 2017

 

 

 

7

December 2017 through

0.00%

Pending

NA

 

November 2018

 

 

 

 

 

 

Included on the Condensed Consolidated Balance Sheet in

Other Current Assets

$2.63 million

 

 

 

Included on the Condensed Consolidated Balance Sheet in

Other Assets

$1.3 million

 

 

 

Included on the Condensed Consolidated Balance Sheet in

Other Long-Term Liabilities

$9.6 million

Countervailing

1&2

April 2011 through

1.50%

0.83% / 0.99%

$0.2 million

 

December 2012

 

 

receivable

3

January 2013 through
December 2013

1.50%

1.38%

$0.05 million
receivable

4

January 2014 through
December 2014

1.50% and 0.83%

1.06%

$0.02 million
receivable

5

January 2015 through
December 2015

0.83% and 0.99%

Final at 0.11% and 0.85%4

$0.08 million
receivable
 4

6

January 2016 through
December 2016

0.99% and 1.38%

Pending

NA

7

January 2017 through
December 2017

1.38% and 1.06%

Pending

NA

8

January 2018 through
December 2018

1.06%

Pending

NA

 

 

 

Included on the Condensed Consolidated Balance Sheet in

Other Current Assets

$0.08 million

 

 

 

Included on the Condensed Consolidated Balance Sheet in

Other Assets

$0.27 million

 

 

 

 

 

1

In June 2018, the Court of International Trade sustained the DOC’s recommendation to reduce the rate for the first annual review period to 0.73% (from 5.92%). As a result, in the second quarter of 2018 the Company reversed its $0.8 million liability and recorded a $1.3 million receivable with a corresponding reduction of cost of sales.

2

In July 2018, the DOC issued the final rates for review period 5 at 0.0%. As a result, in the third quarter of 2018 the Company recorded a receivable of $2.8 million with a corresponding reduction of cost of sales.

3

The preliminary AD rate was a maximum of 48.26%. If the preliminary ruling regarding the AD Rate were to be finalized, the Company anticipates it would record a net liability of approximately $1.1 million.

4

In June 2018, the DOC issued the final rates for review period 5 at 0.11% and 0.85% depending on vendor. As a result, in the second quarter of 2018 the Company recorded a receivable of $0.07 million for deposits made at previous preliminary rates, with a corresponding reduction of cost of sales.

18


 

Other Matters

The Company is also, from time to time, subject to claims and disputes arising in the normal course of business. In the opinion of management, while the outcome of any such claims and disputes cannot be predicted with certainty, its ultimate liability in connection with these matters is not expected to have a material adverse effect on the Company’s results of operations, financial position or liquidity.

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Cautionary Note Regarding Forward-Looking Statements

This report includes statements of the Company’s expectations, intentions, plans and beliefs that constitute “forward-looking statements” within the meanings of the Private Securities Litigation Reform Act of 1995. These statements, which may be identified by words such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “thinks,” “estimates,” “seeks,” “predicts,” “could,” “projects,” “potential” and other similar terms and phrases, are based on the beliefs of the Company’s management, as well as assumptions made by, and information currently available to, the Company’s management as of the date of such statements. These statements are subject to risks and uncertainties, all of which are difficult to predict and many of which are beyond the Company’s control. These risks include, without limitation, the impact on us of any of the following:

·

the outcomes of legal proceedings, and the related impact on liquidity;

·

reputational harm;

·

obligations related to and impacts of new laws and regulations, including pertaining to tariffs;

·

obtaining products from abroad, including the effects of tariffs, as well as the effects of antidumping and countervailing duties;

·

obligations under various settlement agreements and other compliance matters;

·

disruptions related to our corporate headquarters relocation;

·

impact of the Tax Cuts and Jobs Act;

·

inability to open new stores and fund other capital expenditures;

·

inability to execute on our key initiatives or such key initiatives do not yield desired results;

·

managing growth;

·

transportation costs;

·

damage to our assets;

·

disruption in our ability to distribute our products;

·

operating stores in Canada and an office in China;

·

managing third-party installers and product delivery companies;

·

renewing store or warehouse leases;

·

having sufficient suppliers;

·

our, and our suppliers’, compliance with complex and evolving rules, regulations, and laws at the federal, state, and local level;

·

disruption in our ability to obtain products from our suppliers;

·

product liability claims;

·

availability of suitable hardwood, including due to disruptions from the impacts of severe weather;

·

changes in economic conditions, both domestic and abroad;

·

sufficient insurance coverage;

·

access to capital;

·

disruption due to cybersecurity threats;

·

the handling of confidential customer information, including the impacts from the California Consumer Privacy Act;

·

management information systems disruptions;

·

alternative e-commerce offerings;

·

our advertising strategy;

19


 

·

anticipating consumer trends;

·

competition;

·

impact of changes in accounting guidance, including the implementation guidelines and interpretations;

·

maintenance of valuation allowances on deferred tax assets and the impacts thereof;

·

internal controls including those over tariffs;

·

stock price volatility; and

·

anti-takeover provisions.

Information regarding risks and uncertainties is contained in the Company’s other reports filed with the SEC, including the Item 1A, “Risk Factors,” section of the Form 10‑K for the year ended December 31, 2018.

This management discussion should be read in conjunction with the financial statements and notes included in Part I, Item 1. “Financial Statements” of this quarterly report and the audited financial statements and notes and management discussion included in the Company’s annual report filed on Form 10‑K for the year ended December 31, 2018.

Overview

Lumber Liquidators is one of the leading specialty retailers of hard-surface flooring in North America, offering a complete purchasing solution across an extensive assortment of domestic and exotic hardwood species, engineered hardwood, laminate, resilient vinyl, waterproof vinyl plank and porcelain tile. We also feature the renewable flooring products, bamboo and cork, and provide a wide selection of flooring enhancements and accessories, including moldings, noise-reducing underlayment, adhesives and flooring tools. We offer installation and delivery services through third-party independent contractors for customers who purchase our floors. At March 31, 2019, we sold our products through 413 Lumber Liquidators stores in 47 states in the United States and in Canada, a call center and websites.

We believe we have achieved a reputation for offering great value, superior service and a broad selection of high-quality flooring products. With a balance of price, selection, quality, availability and service, we believe our value proposition is the most complete within a highly fragmented hard-surface flooring market. The foundation for our value proposition is strengthened by our unique store model, the industry expertise of our people, our singular focus on hard-surface flooring, and our advertising reach and frequency.

To supplement the financial measures prepared in accordance with GAAP, we use the following non-GAAP financial measures: (i) Adjusted SG&A and (ii) Adjusted Operating (Loss) Income. The non-GAAP financial measures should be viewed in addition to, and not in lieu of, financial measures calculated in accordance with GAAP. These supplemental measures may vary from, and may not be comparable to, similarly titled measures by other companies.

The non-GAAP financial measures are presented because management uses these non-GAAP financial measures to evaluate our operating performance and to determine incentive compensation. Therefore, we believe that the presentation of non-GAAP financial measures provides useful supplementary information to, and facilitates additional analysis by, investors. The presented non-GAAP financial measures exclude items that management does not believe reflect our core operating performance, which include regulatory and legal settlements and associated legal and operating costs, and changes in antidumping and countervailing duties, as such items are outside of our control or due to their inherent unusual, non-operating, unpredictable, non-recurring, or non-cash nature.

Executive Summary

We continue to focus on several key initiatives related to our core business that we believe will strengthen our sales and operating margin and provide an improved shopping experience for our customers. During the first quarter of 2019 and throughout the remainder of the year, our focus will be on driving DIY, DIFM and Pro traffic into our stores, enhancing the customer experience across both our digital platform and within our stores and improving our operational effectiveness. Our research indicates that the initial interest in purchasing a floor begins with digital browsing on our website, and we believe that by providing an improved digital experience and better website performance, we will not

20


 

only grow our e-commerce sales, but also drive traffic into our stores. Once customers are in our stores, we believe that our store model provides a competitive advantage by allowing our knowledgeable sales associates to assist customers throughout the project design and purchase process in a more intimate environment, from product selection to installation. 

Net sales in the first quarter of 2019 increased $4.4 million, or 1.7%, to $266 million from $262 million in the first quarter of 2018. Net sales from stores open less than 13 months were $6.4 million.  However, net sales in comparable stores decreased $2 million, or 0.8%, as a slight decline in merchandise sales was partially offset by the expansion of installation services.  We opened two new stores and closed two in the first quarter. 

Gross profit decreased 1.4% in the first quarter of 2019 to $94 million from $95 million in the comparable period in 2018. Gross margin decreased to 35.2% in the first quarter of 2019 from 36.3% in the first quarter of 2018, primarily driven by higher tariff costs on products originating in China partially offset by an improved mix of higher-margin manufactured products and lower warranty costs.