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, 2020

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 1

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.)

 

 

4901 Bakers Mill Lane

Richmond,  Virginia

23230

(Address of Principal Executive Offices)

(Zip Code)

 

(804) 463-2000

(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 May 20, 2020, there are 28,815,050 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, 2020

 

TABLE OF CONTENTS

 

 

1

PART I
FINANCIAL INFORMATION

Item 1. Financial Statements.

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

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

    

2020

    

2019

Assets

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

Cash and Cash Equivalents

 

$

22,424

 

$

8,993

Merchandise Inventories

 

 

269,636

 

 

286,369

Prepaid Expenses

 

 

6,053

 

 

8,288

Income Tax Receivable

 

 

1,972

 

 

 —

Deposit for Legal Settlement

 

 

21,500

 

 

21,500

Tariff Recovery Receivable

 

 

27,157

 

 

27,025

Other Current Assets

 

 

5,995

 

 

6,938

Total Current Assets

 

 

354,737

 

 

359,113

Property and Equipment, net

 

 

98,471

 

 

98,733

Operating Lease Right-of-Use Assets

 

 

120,070

 

 

121,796

Goodwill

 

 

9,693

 

 

9,693

Other Assets

 

 

6,848

 

 

6,674

Total Assets

 

$

589,819

 

$

596,009

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

Accounts Payable

 

$

68,634

 

$

59,827

Customer Deposits and Store Credits

 

 

37,836

 

 

41,571

Accrued Compensation

 

 

9,937

 

 

11,742

Sales and Income Tax Liabilities

 

 

4,657

 

 

7,225

Accrual for Legal Matters and Settlements - Current

 

 

67,466

 

 

67,471

Operating Lease Liabilities - Current

 

 

31,383

 

 

31,333

Other Current Liabilities

 

 

18,841

 

 

18,937

Total Current Liabilities

 

 

238,754

 

 

238,106

Other Long-Term Liabilities

 

 

14,011

 

 

13,757

Operating Lease Liabilities - Long-Term

 

 

98,916

 

 

100,470

Deferred Tax Liability

 

 

804

 

 

426

Credit Agreement

 

 

64,000

 

 

82,000

Total Liabilities

 

 

416,485

 

 

434,759

 

 

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

 

Common Stock ($0.001 par value; 35,000 shares authorized; 30,105 and 29,958 shares issued and 28,812 and 28,714 shares outstanding, respectively)

 

 

30

 

 

30

Treasury Stock, at cost (1,293 and 1,245 shares, respectively)

 

 

(142,630)

 

 

(142,314)

Additional Capital

 

 

218,736

 

 

218,616

Retained Earnings

 

 

98,733

 

 

86,498

Accumulated Other Comprehensive Loss

 

 

(1,535)

 

 

(1,580)

Total Stockholders’ Equity

 

 

173,334

 

 

161,250

Total Liabilities and Stockholders’ Equity

 

$

589,819

 

$

596,009

 

See accompanying notes to condensed consolidated financial statements

2

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

2020

    

2019

 

 

 

 

 

 

Net Sales

 

 

 

 

 

 

Net Merchandise Sales

 

$

238,782

 

$

237,899

Net Services Sales

 

 

28,592

 

 

28,321

Total Net Sales

 

 

267,374

 

 

266,220

Cost of Sales

 

 

 

 

 

 

Cost of Merchandise Sold

 

 

140,745

 

 

151,425

Cost of Services Sold

 

 

21,657

 

 

21,184

Total Cost of Sales

 

 

162,402

 

 

172,609

Gross Profit

 

 

104,972

 

 

93,611

Selling, General and Administrative Expenses

 

 

96,207

 

 

97,032

Operating Income (Loss)

 

 

8,765

 

 

(3,421)

Other Expense

 

 

883

 

 

1,290

Income (Loss) Before Income Taxes

 

 

7,882

 

 

(4,711)

Income Tax (Benefit) Expense

 

 

(4,353)

 

 

213

Net Income (Loss)

 

$

12,235

 

$

(4,924)

Net Income (Loss) per Common Share—Basic

 

$

0.43

 

$

(0.17)

Net Income (Loss) per Common Share—Diluted

 

$

0.42

 

$

(0.17)

Weighted Average Common Shares Outstanding:

 

 

  

 

 

  

Basic

 

 

28,739

 

 

28,646

Diluted

 

 

28,853

 

 

28,646

 

See accompanying notes to condensed consolidated financial statements

3

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

2020

    

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income (Loss)

 

$

12,235

 

$

(4,924)

Other Comprehensive Income:

 

 

  

 

 

  

Foreign Currency Translation Adjustments

 

 

45

 

 

117

Total Other Comprehensive Income

 

 

45

 

 

117

Comprehensive Income (Loss)

 

$

12,280

 

$

(4,807)

 

See accompanying notes to condensed consolidated financial statements

4

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

January 1, 2019

 

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 Loss

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(4,924)

 

 

 —

 

 

(4,924)

March 31, 2019

 

28,682

 

$

32

 

2,979

 

$

(142,157)

 

$

214,798

 

$

71,911

 

$

(1,268)

 

$

143,316

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

January 1, 2020

 

28,714

 

$

30

 

1,245

 

$

(142,314)

 

$

218,616

 

$

86,498

 

$

(1,580)

 

$

161,250

Stock-Based Compensation Expense

 

 —

 

 

 —

 

 —

 

 

 —

 

 

120

 

 

 —

 

 

 —

 

 

120

Release of Restricted Shares

 

98

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Common Stock Repurchased

 

 —

 

 

 —

 

48

 

 

(316)

 

 

 —

 

 

 —

 

 

 —

 

 

(316)

Translation Adjustment

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

45

 

 

45

Net Income

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

12,235

 

 

 —

 

 

12,235

March 31, 2020

 

28,812

 

$

30

 

1,293

 

$

(142,630)

 

$

218,736

 

$

98,733

 

$

(1,535)

 

$

173,334

 

 

See accompanying notes to condensed consolidated financial statements

5

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

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

    

2020

    

2019

 

 

 

 

 

 

Cash Flows from Operating Activities:

 

 

  

 

 

  

Net Income (Loss)

 

$

12,235

 

$

(4,924)

Adjustments to Reconcile Net Income (Loss):

 

 

  

 

 

  

Depreciation and Amortization

 

 

4,493

 

 

4,312

Deferred Income Taxes Provision

 

 

378

 

 

 —

Stock-Based Compensation Expense

 

 

120

 

 

1,033

Provision for Inventory Obsolescence Reserves

 

 

452

 

 

177

(Gain) Loss on Disposal of Fixed Assets

 

 

(743)

 

 

53

Changes in Operating Assets and Liabilities:

 

 

 

 

 

  

Merchandise Inventories

 

 

16,379

 

 

17,098

Accounts Payable

 

 

9,055

 

 

(16,932)

Customer Deposits and Store Credits

 

 

(3,735)

 

 

7,426

Prepaid Expenses and Other Current Assets

 

 

1,998

 

 

(4,059)

Accrual for Legal Matters and Settlements

 

 

 —

 

 

350

Other Assets and Liabilities

 

 

(4,667)

 

 

1,943

Net Cash Provided by Operating Activities

 

 

35,965

 

 

6,477

 

 

 

 

 

 

 

Cash Flows from Investing Activities:

 

 

  

 

 

  

Purchases of Property and Equipment

 

 

(4,480)

 

 

(3,247)

Other Investing Activities

 

 

306

 

 

17

Net Cash Used in Investing Activities

 

 

(4,174)

 

 

(3,230)

 

 

 

 

 

 

 

Cash Flows from Financing Activities:

 

 

 

 

 

  

Borrowings on Credit Agreement

 

 

8,000

 

 

13,000

Payments on Credit Agreement

 

 

(26,000)

 

 

(11,000)

Other Financing Activities

 

 

(316)

 

 

(727)

Net Cash (Used in) Provided by Financing Activities

 

 

(18,316)

 

 

1,273

Effect of Exchange Rates on Cash and Cash Equivalents

 

 

(44)

 

 

1,005

Net Increase in Cash and Cash Equivalents

 

 

13,431

 

 

5,525

Cash and Cash Equivalents, Beginning of Period

 

 

8,993

 

 

11,565

Cash and Cash Equivalents, End of Period

 

$

22,424

 

$

17,090

 

 

 

 

 

 

 

Supplemental disclosure of non-cash operating and financing activities:

 

 

  

 

 

  

Tenant Improvement Allowance for Leases

 

$

(496)

 

$

(146)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements

6

Lumber Liquidators Holdings, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited, 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 features 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 primarily sells to homeowners or to contractors on behalf of homeowners through a network of store locations in metropolitan areas. As of March 31, 2020, 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 customer relationship center in Richmond, Virginia and its website, LLFlooring.com.

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, 2019.

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, 2020 are not necessarily indicative of future results to be expected for the full year due to a number of factors, including seasonality and general economic conditions that may impact sales for the remainder of fiscal 2020. 

 

Impact of the COVID-19 Pandemic

 

On March 11, 2020, the World Health Organization announced that infections of COVID-19 had become a pandemic, and on March 13, 2020, the U.S. President announced a National Emergency relating to the COVID-19 pandemic.  The Company is uncertain of the magnitude of the adverse impact of the COVID-19 pandemic to its sales, supply chain, and distribution as well as to the overall economy and consumer spending, including the construction-renovation industry.  The Company currently anticipates that disruptions resulting from COVID-19 will have a material negative impact on its sales and results of operations, financial position, and cash flows during 2020.

 

While these potential negative effects will not be fully reflected in the Company's results of operations and overall financial performance until future periods, the Company has already experienced an impact to financial results due to the COVID-19 pandemic.  Most notably, starting as of the week of March 22, 2020 the Company closed as many as 56 stores for a period of time while all other stores operated under reduced hours and/or warehouse-only conditions, offering curbside pickup and job site delivery for our Pro and DIY customers.  The Company’s comparable store sales results were down from the prior year by approximately 45% in the last week of the month of March.  As of the date of this report, in compliance with local and state regulatory orders, approximately 60% of our stores are fully operational, approximately 25% are scheduling appointments to allow customers to visit our showrooms, and approximately 15% are utilizing our warehouse-only model, while less than 10 stores remain closed.

7

 

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 approximate 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 cost or net realizable value. The method by which amounts are removed from inventory is weighted average cost. All of the hardwood flooring purchased from vendors is either prefinished or unfinished, and in immediate saleable form.  The Company relies on a select group of international and domestic suppliers to provide imported flooring products that meet the Company’s specifications.  In 2019, approximately 46% of the Company’s product was sourced from China.  The Company is subject to risks associated with obtaining products from abroad, including disruptions or delays in production, shipments, delivery or processing, including due to the COVID-19 pandemic.  While the Company is uncertain as to the full impact of COVID-19 to the supply chain, the Company is executing contingency plans to minimize anticipated and potential disruptions to supply chain, domestic distribution centers and store operations.

 

Included in merchandise inventories are tariff related costs, including Section 301 tariffs.  In late 2019, with an additional update in the first quarter 2020, the United States Trade Representative (“USTR”) ruled on a request made by certain interested parties, including the Company, and retroactively excluded certain flooring products imported from China from the Section 301 tariffs.  The tariff exclusions are currently scheduled to expire in August 2020.  Approximately 46% of the Company’s product was subject to Section 301 tariffs through most of 2019, but that declined to approximately 10% to 15% following the November 2019 exclusion on click vinyl and engineered products granted by the USTR.  As of March 31, 2020, the Company has recorded a $27 million receivable related to these tariffs in the caption “Tariff Recovery Receivable” on the condensed consolidated balance sheets and expects to receive payments by the end of 2020.

 

Recognition of Net Sales

The Company generates revenues primarily by retailing merchandise in the form of hard-surface and porcelain flooring and accessories. 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 420 stores, which spanned 47 states including eight stores in Canada, at March 31, 2020. In addition, both the merchandise and services can be ordered through a call center and from the Company’s website, LLFlooring.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 services 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 is specified in the respective contract 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

8

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, 

 

2020

 

2019

Customer Deposits and Store Credits, Beginning Balance

$

(41,571)

 

$

(40,332)

New Deposits

 

(280,852)

 

 

(291,833)

Recognition of Revenue

 

267,374

 

 

266,220

Sales Tax included in Customer Deposits

 

16,681

 

 

16,781

Other

 

532

 

 

1,531

Customer Deposits and Store Credits, Ending Balance

$

(37,836)

 

$

(47,633)

 

Subject to limitations under the Company’s policy, return of unopened merchandise is accepted for 90 days.  Due to the impact of COVID-19, the Company has temporarily extended its return policy an additional 60 days starting in March 2020. 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 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 estimate the amount of returns based on 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 $1.1 million at March 31, 2020. The Company recognizes sales commissions as incurred since the amortization period is less than one year.

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,

 

 

2020

    

2019

    

Manufactured Products 1

 

$

119,052

 

44

%  

$

110,450

 

41

%  

Solid and Engineered Hardwood

 

 

76,622

    

29

%  

 

81,817

    

31

%  

Moldings and Accessories and Other

 

 

43,108

 

16

%  

 

45,632

 

17

%  

Installation and Delivery Services

 

 

28,592

 

11

%  

 

28,321

 

11

%  

Total

 

$

267,374

 

100

%  

$

266,220

 

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 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 offers a range of limited warranties for the durability of the finish on its prefinished products to its services provided. 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, including payments made to satisfy customers for claims not directly related to the warranty on the Company’s products.

9

Warranty costs are recorded in cost of sales.  The Company seeks recovery from its vendors and third-party independent contractors of installation services for certain amounts paid.

Vendor allowances primarily consist of volume rebates that are earned as a result of attaining certain purchase levels and reimbursement for the cost of producing samples. Vendor allowances are accrued as earned, with those allowances received as a result of attaining certain purchase levels accrued over the incentive period based on estimates of purchases. Volume rebates earned are initially recorded as a reduction in merchandise inventories and a subsequent reduction in cost of sales when the related product is sold. Reimbursement received for the cost of producing samples is recorded as an offset against cost of sales.

 

Note 3.       Stockholders’ Equity

Net Income (Loss) per Common Share

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

2020

    

2019

Net Income (Loss)

 

$

12,235

    

$

(4,924)

Weighted Average Common Shares Outstanding—Basic

 

 

28,739

 

 

28,646

Effect of Dilutive Securities:

 

 

  

 

 

  

Common Stock Equivalents

 

 

114

 

 

 —

Weighted Average Common Shares Outstanding—Diluted

 

 

28,853

 

 

28,646

Net Income (Loss) per Common Share—Basic

 

$

0.43

 

$

(0.17)

Net Income (Loss) per Common Share—Diluted

 

$

0.42

 

$

(0.17)

 

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

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

2020

    

2019

Stock Options

 

676

    

688

Restricted Shares

 

277

 

408

 

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, 2020, 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.

 

10

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, 2019

 

693

 

911

Granted

 

170

 

273

Options Exercised/RSAs Released

 

 —

 

(147)

Forfeited

 

(78)

 

(159)

Options Outstanding/Nonvested RSAs, March 31, 2020

 

785

 

878

 

The Company granted a target of 67,091 performance-based RSAs with a grant date fair value of $0.7 million during the three months ended March 31, 2020 and 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. The 2020 performance-based RSAs were awarded to certain members of senior management in connection with the achievement of specific key financial metrics and a relative total shareholder return multiple measured over a three-year period and also vest over a three-year period. The number of 2020 performance-based awards that will ultimately vest is contingent upon the achievement of these key financial metrics and the results of the relative total shareholder return multiple by the end of year three.  The 2019 performance-based RSAs 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 2019 performance-based 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. For these awards, the Company recognizes the fair value expense ratably over the performance and vesting period. These awards are included above in RSAs Granted.

 

Note 5.      Credit Agreement

The Company has a credit agreement (the “Credit Agreement”) with Bank of America, N.A. and Wells Fargo Bank, National Association (the “Lenders”). Under the Credit Agreement, the maximum amount of borrowings under the revolving credit facility (the “Revolving Credit Facility”) was $175 million and there is a 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, 2020, a total of $39 million was outstanding under the Revolving Credit Facility and $25 million was outstanding under the FILO Term Loan.  As of March 31, 2020 there was $109 million of availability under the Revolving Credit Facility.  The Company also had $3.8 million in letters of credit which reduces 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.

 

Prior to a temporary increase discussed below, 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 Company’s eligible inventory (including eligible in-transit inventory), eligible credit card receivables, 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 exceeds the FILO Borrowing Base (as defined in the Credit Agreement), the amount of such excess reduces availability under the Revolving Borrowing Base.

   

11

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 Company’s 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).

 

On April 17, 2020, the Company entered into a First Amendment to the Credit Agreement (the “Amendment”) with the Lenders. The execution of the Amendment, among other things, temporarily increases the maximum amount of borrowings under the Revolving Credit Facility from $175 million to $212.5 million until August 30, 2020. The total size of the Credit Agreement increased to $237.5 million, inclusive of the $25 million FILO Term Loan. The maturity date of the Credit Agreement remains March 29, 2024. 

 

The Amendment permanently increased the margin for LIBOR Rate Loans (as defined in the Amendment) to (i) 2.50% to 3.00% over the applicable LIBOR Rate (as defined in the Amendment) with respect to Revolving Loans (as defined in the Amendment) and (ii) 3.75% to 4.50% over the applicable LIBOR Rate with respect to FILO Term Loans (as defined in the Amendment), in each case (for one, two, three or six month interest periods as selected by the Company) depending on the Company’s average daily excess borrowing availability under the Revolving Credit Facility during the most recently completed fiscal quarter.  The Amendment also permanently increased the unused commitment fee of 0.25% per annum to 0.50% per annum on the average daily unused amount of the Revolving Credit Facility during the most recently completed calendar quarter.

 

Except as set forth in the Amendment, all other terms and conditions of the Credit Agreement remain in place. 

  

Note 6.       Income Taxes

The Company calculates its quarterly tax provision pursuant to the guidelines in Accounting Standards Codification ("ASC") 740-270 "Income Taxes." Generally, ASC 740-270 requires companies to estimate the annual effective tax rate for current year ordinary income. The estimated annual effective tax rate represents the best estimate of the tax provision in relation to the best estimate of pre-tax ordinary income or loss. The estimated annual effective tax rate is then applied to year-to-date ordinary income or loss to calculate the year-to-date interim tax provision. Due to the current disruption in the economy related to the COVID-19 pandemic and the impact this has on making a reliable estimate of the annual effective tax rate as of the current reporting period, the Company has applied the actual year-to-date effective tax rate for the current period tax provision.

The CARES Act (the “Act”) was enacted on March 27, 2020.  The Act retroactively changed the eligibility of certain assets for expense treatment in the year placed in service, back to 2018, and permitted any net operating loss for the tax years 2018, 2019 and 2020 to be carried back for five years. The Company recorded an income tax benefit of $4.7 million in the first quarter associated with the income tax components contained in the Act. As of March 31, 2020, the Company has completed an initial analysis of the tax effects of the Act but continues to monitor developments by federal and state rulemaking authorities regarding implementation of the Act. The Company has made reasonable estimates of the effects of the Act and will adjust, if needed, as new laws or guidance becomes available.

 

For the three months ended March 31, 2020, the Company recognized an income tax benefit of $4.4 million, which represented an effective tax rate of (55.2)%. For the three months ended March 31, 2019, the Company

12

recognized income tax expense of $0.2 million, which represented an effective tax rate of (4.5)%. The income tax benefit for the three months ended March 31, 2020 included the impact of the enactment of the Act, as discussed above.

The Company has a full valuation allowance recorded against its net deferred tax assets of $27 million.  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.       Commitments and Contingencies

Litigation Relating to Bamboo Flooring

In 2014, Dana 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”).   

On September 30, 2019, the parties finalized a settlement agreement that is consistent with the terms of the Memorandum of Understanding previously disclosed by the Company, which would resolve the Gold Litigation on a nationwide basis.  Under the terms of the settlement agreement, 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 settlement agreement makes clear that the settlement does not constitute or include an admission by the Company of any fault or liability and the Company does not admit any fault, wrongdoing or liability. 

On December 18, 2019, the court issued an order that, among other things, granted preliminary approval of the settlement agreement.  Following the preliminary approval, and pursuant to the terms of the settlement agreement, in December 2019, the Company paid $1 million for settlement of administrative costs, which is part of the Gold Cash Payment, to the plaintiff’s settlement escrow account.

Notice has been disseminated to the class members by the settlement administrator and a Final Approval and Settlement Hearing is currently scheduled for September 24, 2020. The settlement agreement is subject to certain contingencies, including court approval. There can be no assurance that a settlement will be finalized and approved by the court at the Final Approval and Settlement Hearing 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 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.

The Company recognized a charge to earnings of $28 million within selling, general and administrative expense during the fourth quarter of 2018 as its loss became probable and estimable. As of March 31, 2020, the remaining accrual related to these matters was $27 million, which has been included in the caption “Accrual for Legal Matters and Settlements Current” on its condensed consolidated balance sheet.  If the settlement agreement is not approved by the court or the Company incurs additional losses with respect to the Bamboo Flooring Litigation (as defined below), the actual losses that may result from these actions may exceed this amount. Any such losses could, potentially, have a material adverse effect, individually or collectively, on the Company’s results of operations, financial condition and liquidity.

In addition, there are a number of individual claims and lawsuits alleging damages involving Strand Bamboo Product (the “Bamboo Flooring Litigation”). While the Company believes that a loss associated with the Bamboo Flooring Litigation is reasonably possible, the Company is unable to reasonably estimate the amount or range of possible loss. Any such losses could, potentially, have a material adverse effect, individually or collectively, on the Company’s results of operations, financial condition and liquidity. The Company disputes the claims in the Bamboo Flooring Litigation and intends to defend such matters vigorously.

13

 

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-manufactured laminate flooring 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.  While insurance carriers initially denied coverage with respect to the Formaldehyde MDL and Abrasion MDL, the Company continues to pursue recoveries that the Company believes are appropriate.  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 did not have any expense for this matter for the three months ended March 31, 2020. As of March 31, 2020, the remaining accrual related to these matters was $0.1 million, which has been included in the caption “Accrual for Legal Matters and Settlements Current” on the condensed consolidated balance sheet. For the three months ended March 31, 2019, the Company recognized charges to earnings of $0.4 million within SG&A expenses for these Remaining Laminate Matters. 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.

 

14

 

Employee Classification Matters

Mason Lawsuit

In August  2017, Ashleigh Mason, Dan Morse, Ryan Carroll and Osagie Ehigie filed a purported class action lawsuit in the United States District Court for the Eastern District of New York on behalf of all current and former store managers, store managers in training, installation sales managers and similarly situated current and former employees  (collectively, the “Mason Putative Class Employees”) alleging that the Company violated the Fair Labor Standards Act (“FLSA”) and New York Labor Law (“NYLL”) by classifying the Mason Putative Class Employees as exempt. The alleged violations include failure to pay for overtime work. The plaintiffs sought certification of the Mason Putative Class Employees for (i) a collective action covering the period beginning three years prior to the filing of the complaint (plus a tolling period) through the disposition of this action for the Mason Putative Class Employees nationwide in connection with FLSA and (ii) a class action covering the period beginning six years prior to the filing of the complaint (plus a tolling period) through the disposition of this action for members of the Mason Putative Class Employees who currently are or were employed in New York in connection with NYLL. The plaintiffs did not quantify any alleged damages but, in addition to attorneys’ fees and costs, the plaintiffs seek class certification, unspecified amounts for unpaid wages and overtime wages, liquidated and/or punitive damages, declaratory relief, restitution, statutory penalties, injunctive relief and other damages.

 

In November 2018, the plaintiffs filed a motion requesting conditional certification for all store managers and store managers in training who worked within the federal statute of limitations period.  In May 2019, the magistrate judge granted the plaintiffs’ motion for conditional certification.  The litigation is in the discovery stage, which was extended by the Court from May 2020 to December 18, 2020.

 

The Company disputes the Mason Putative Class Employees’ claims and continues to defend the matter 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 cannot reasonably estimate the possible loss or range of loss, if any, that may result from this action and therefore no accrual has been made related to this.  Any such losses could, potentially, have a material adverse effect, individually or collectively, on the Company’s results of operations, financial condition and liquidity.

 

Kramer lawsuit

 

In November 2017, Robert J. Kramer, on behalf of himself and all others similarly situated (collectively, the “Kramer Plaintiffs”) filed a purported class action lawsuit in the Superior Court of California, County of Sacramento on behalf of all current and former store managers, all others with similar job functions and/or titles and all current and former employees classified as non-exempt or incorrectly classified as exempt and who worked for the Company in the State of California (collectively, the “CSM Employees”) alleging violation of the California Labor Code including, among other items, failure to pay wages and overtime and engaging in unfair business practices (the “Kramer matter”).  The Company reached settlement for this matter in the third quarter of 2019. As of March 31, 2020, the remaining accrual related to this matter is $4.75 million, which is included on the condensed consolidated balance sheet within the caption “Accrual for Legal Matters and Settlements- Current.” Payment of $4.75 million was made to the settlement administrator on April 6, 2020, for distribution to class members.

 

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 6% and 7% of its flooring purchases in 2019 and 2018, respectively. The Company’s consistent view

15

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. 

Results by period for the Company are shown below. The column labeled ‘March 31, 2020 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 $0.1 million for the three months ended March 31, 2020, 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 but 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.

 

16

 

 

 

 

 

Review

    

Rates at which

    

March 31, 2020

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%

3.92% 2

$4.1 million

 

November 2013

 

 

liability2

3

December 2013 through

3.3% and 5.92%

17.37%

$4.7 million

 

November 2014

 

 

liability

4

December 2014 through

5.92% and 13.74%

0.00%

Settled

 

November 2015

 

 

 

5

December 2015 through

5.92%.  13.74%. and 17.37%

0.00%

Settled

 

November 2016

 

 

 

6

December 2016 through

17.37% and 0.00%

42.57% and 0.00%3

$0.5 million receivable

 

November 2017

 

 

$1.5 million liability3

7

December 2017 through

0.00%

Pending4

NA

 

November 2018

 

 

 

 

 

 

Included on the Condensed Consolidated Balance Sheet in Other Current Assets

$0.5 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

$10.3 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%5

$0.07 million
receivable
 5

6

January 2016 through
December 2016

0.99% and 1.38%

Final at 3.10% and 2.96%

$0.04 million
liability
 6

7

January 2017 through
December 2017

1.38% and 1.06%

Pending7

NA

8

January 2018 through
December 2018

1.06%

Pending

NA

 

 

 

Included on the Condensed Consolidated Balance Sheet in Other Current Assets

$0.1 million

 

 

 

Included on the Condensed Consolidated Balance Sheet in Other Assets

$0.3 million

 

 

 

Included on the Condensed Consolidated Balance Sheet in Other Current Liabilities

$0.04 million

1

In the second quarter of 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, the Company reversed its $0.8 million liability and recorded a $1.3 million receivable with a corresponding reduction of cost of sales during the year ended December 31, 2018.

 

2

In the second quarter of 2020, the Court of International Trade received a recommendation from the DOC to reduce the rate for the second annual review period to 3.92% (from 13.74%).  If accepted by the Court of International Trade, the Company will reverse $3.9 million of its $4.1 million liability currently recorded, with a corresponding reduction of cost of sales during the second quarter of 2020.

 

17

3

In the third quarter of 2019, the DOC issued the final rates for the sixth annual review period at 42.57% and 0% depending on the vendor.  As a result, the Company recorded a liability of $0.8 million with a corresponding reduction of cost of sales during the year ended December 31, 2019.  The Company received payments during 2019 for its vendor with a final rate of 0% and the remaining balance of $0.5 million as of March 31, 2020 was included in other current assets on the condensed consolidated balance sheet.  The vendors with a final rate of 42.57% are under appeal and the balance of $1.5 million as of March 31, 2020 was included in other long-term liabilities on the condensed consolidated balance sheet.

 

4

In January 2020, the DOC issued a preliminary rate of 0.0% for the seventh annual review period. 

 

5

In the second quarter of 2018, the DOC issued the final rates for the fifth annual review period at 0.11% and 0.85% depending on the 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.

 

6

In the third quarter of 2019, the DOC issued the final rates for the sixth annual review period at 3.1% and 2.96% depending on the vendor.  As a result, the Company recorded a liability of $0.4 million with a corresponding reduction of cost of sales during the year ended December 31, 2019.

 

7

In January 2020, the DOC issued a preliminary rate of 24.61% for the seventh annual review period.  If the preliminary rate remains at 24.61%, the Company will record a liability of $2 million in the period in which the ruling is finalized.

 

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:

·

an overall decline in the health of the economy, the hard-surface flooring industry, the housing market and overall consumer spending, including the effects of the COVID-19 pandemic;

·

impact on sales, ability to obtain and distribute products, and employee safety and retention, including the effects of the COVID-19 pandemic;

·

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

·

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

·

reputational harm;

·

obtaining products from abroad, including the effects of COVID-19 and tariffs, as well as the effects of antidumping and countervailing duties;

·

obligations under various settlement agreements and other compliance matters;

·

disruption due to cybersecurity threats, including any impacts from a network security incident;

·

inability to open new stores, find suitable locations for our new store concept, 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, including due to disruptions from the impacts of severe weather;

·

operating stores in Canada and an office in China;

18

·

managing third-party installers and product delivery companies;

·

renewing store, warehouse, or other corporate 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;

·

sufficient insurance coverage, including cybersecurity insurance;

·

access to and costs of capital;

·

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 and overall marketing strategy;

·

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;

·

stock price volatility; and

·

anti-takeover provisions

 

Information regarding risks and uncertainties is contained in the Company’s reports filed with the SEC, including the Item 1A, “Risk Factors,” section of this quarterly report and the Form 10‑K for the year ended December 31, 2019.

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, 2019.

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, 2020, we sold our products through 420 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,  (ii) Adjusted SG&A as a percentage of sales, (iii) Adjusted Operating Income, (iv) Adjusted Operating Margin, (v) Adjusted Earnings and (vi) Adjusted Earnings per Diluted Share. The non-GAAP financial measures should be viewed in addition to, and not in lieu of, financial measures calculated in accordance with

19

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 due to their inherent unusual, non-operating, unpredictable, non-recurring, or non-cash nature.

Impact of COVID-19 Pandemic on Our Business

The end of the first quarter of 2020 was marked by the impact of the COVID-19 pandemic but we remain focused on serving our customers while keeping the health and safety of employees paramount. Aligning with these priorities, we are executing a variety of flexible operating models that utilize safety measures such as personal protective equipment for employees and allow for contact-free engagement.  We have also established a crisis team in reaction to the pandemic to identify and execute our business continuity plan in order to mitigate the impact while safely serving customers across our national footprint. Starting March 22, 2020 we closed as many as 56 stores for a period of time while all other stores operated under reduced hours and/or warehouse-only conditions, offering curbside pickup and job site delivery for our Pro and DIY customers.  Our comparable store sales results were down from the prior year by approximately 45% in the last week of the month of March.  As of the date of this report, in compliance with state and local regulatory orders, approximately 60% of our stores are fully operational, approximately 25% are scheduling appointments to allow customers to visit our showrooms, and approximately 15% are utilizing our warehouse-only model, while less than 10 stores remain closed.. In addition, we are leveraging strategic investments in digital capabilities made over the past 18 months, including the Floor Finder and Picture It! tools, to serve customers at LLFlooring.com. Web traffic has increased meaningfully in recent weeks, and adapting to the change in consumer behaviors, we have expanded availability of online flooring samples and are currently offering extended hours for voice and click-to-chat customer support, curbside store pickup and enhanced home-delivery options.

As a result of reduced demand and the changes in the current operating model related to COVID-19, we made the difficult decision to temporarily furlough a number of store associates and reduce operating hours in our distribution centers in April. Subsequently we have recalled a number of these associates, and returned to normal operations in our Virginia distribution center. Impacted employees received two weeks of pay and have the opportunity to utilize up to 80 hours of paid time off. In addition, we are currently paying the employee portion of benefit premiums for any employee impacted beyond four weeks. We have implemented a range of other measures to increase financial flexibility and maintain agility during this challenging time. These measures include reducing costs, managing inventory flow, deferring payments, and delaying or stopping non-critical projects, including a pause in the planned opening of certain new stores and reducing capital spending. We also implemented a temporary reduction in all salaried employee compensation including a 25% reduction in the base pay of the interim President, the Chief Financial Officer and certain other C-level executives, and a corresponding 30% reduction in the cash compensation of the Board of Directors.

As of March 31, 2020, the Company had $39 million outstanding under its revolving credit facility and $25 million outstanding under its FILO Term Loan. Collectively, this is an $18 million decrease from the end of the fourth quarter 2019 while the cash and cash equivalents balance increased by $13 million. As of March 31, 2020, the Company had $131 million in liquidity, comprised of $22 million of cash and cash equivalents and $109 million of availability under the Credit Agreement.

 

On April 17, 2020, the Company amended its Credit Agreement.  While the Credit Agreement maturity remains March, 2024, the amendment is effective through August 30, 2020 and provides:

 

·

A temporary increase in the senior asset-based revolving credit facility from $175 million to $212.5 million which increases the total availability under the Revolving Credit Facility from $200 million to $237.5 million, subject to the borrowing base calculation

20

·

A temporary increased in advance rate against inventory under the borrowing base

·

Pricing permanently increased by 1.25% with respect to the margin rate on LIBOR Rate loans, and permanently increased by 1.50% with respect to the margin rate on the FILO Term Loan.  Pricing on the unused commitment fee also permanently increased by 0.25%.

 

 

Executive Summary

Results of operations for the three months ended March 31, 2020 as described below are not necessarily indicative of future results to be expected for the full year due to a number of factors, including seasonality and general economic conditions that may impact sales for the remainder of fiscal 2020.  Additionally, we cannot predict the impact of the COVID-19 pandemic to our sales, supply chain, and distribution as well as to overall construction, renovation and consumer spending.

Net sales in the first quarter of 2020 increased $1.2 million, or 0.4%, to $267 million from the first quarter of 2019.  Through the week ending March 21, 2020, the Company’s quarter-to-date comparable store sales increased approximately 4%, but as the impact of COVID-19 began to broadly impact consumers, orders declined significantly and first quarter comparable stores sales fell to negative 0.9% by the end of the quarter.  Partially offsetting the decline from COVID-19 was the impact of one additional day, February 29, in the first quarter of 2020. We opened one new store in the first quarter of 2020 bringing total store count to 420 as of March 31, 2020. 

Gross profit increased 12% in the first quarter of 2020 to $105 million from $94 million in the comparable period in 2019.  Gross margin increased to 39.3% in the first quarter of 2020 from 35.2% in the first quarter of 2019 as margin enhancement efforts, tariff exclusions and supply chain efficiency positively impacted results.  Gross margin was also aided by a mix of higher-margin manufactured products and reduced discounting in stores.

SG&A expense decreased 0.9% to $96 million in the first quarter of 2020 from the comparable period in 2019 but included certain costs in both periods related to investigations and lawsuits.  Excluding these items as shown in the table that follows, Adjusted SG&A (a non-GAAP measure) was essentially flat to the same period in the prior year and Adjusted SG&A as a percentage of sales decreased to 35.7% in the first quarter of 2020 from 35.8% in the first quarter of 2019.  A focus on expense management and process efficiency helped deliver the year-over-year reduction in Adjusted SG&A as a percent of sales in the quarter. 

Operating income was $8.8 million for the first quarter of 2020 compared to an operating loss of $3.4 million for the first quarter of 2019. Adjusted Operating Income (a non-GAAP measure) was $9.6 million for the first quarter of 2020,  a year-over-year increase of over $11 million compared to an Adjusted Operating Loss of $1.6 million for the first quarter of 2019. The most significant driver of the increase was the impact on gross margin for the reasons outlined above.

 

Income tax benefit was $4.4 million for the first quarter of 2020 compared to income tax expense of $0.2 million for the first quarter of 2019.  The benefit in 2020 was driven by the impact of the March 27, 2020 CARES Act which allowed us to carryback certain losses to prior periods and deduct certain capital expenditures from prior periods more quickly giving rise to a $4.9 million Federal tax refund which is expected to be received later this year.

 

Net income for the first quarter of 2020 was $12 million, or $0.42 per diluted share, compared to a net loss of $4.9 million, or $0.17 per diluted share, for the first quarter of 2019.  Adjusted Earnings and Adjusted Earnings per Diluted Share (non-GAAP measures) for the first quarter of 2020 increased $16 million and $0.57 year over year and were $13 million and $0.44 per diluted share, compared to an Adjusted Loss of $3.6 million and $0.13 per diluted share for the first quarter of 2019.

 

 

21

Results of Operations

We believe the selected sales data, the percentage relationship between net sales and major categories in the condensed consolidated statements of operations and the percentage change in the dollar amounts of each of the items presented below are important in evaluating the performance of our business operations.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

% Increase (Decrease)

 

 

% of Net Sales

in Dollar Amounts

 

 

Three Months Ended March 31, 

2020

    

 

    

2020

    

2019

    

vs. 2019

 

Net Sales

 

 

 

 

 

 

 

 

 

Net Merchandise Sales

 

 

89.3

%  

 

89.4

%  

0.4

%  

Net Services Sales

 

 

10.7

%  

 

10.6

%  

1.0

%  

Total Net Sales

 

 

100.0

%  

 

100.0

%  

0.4

%  

Gross Profit

 

 

39.3

%  

 

35.2

%  

12.1

%  

Selling, General, and Administrative Expenses

 

 

36.0

%  

 

36.5

%  

(0.9)

%  

Operating Income (Loss)

 

 

3.3

%  

 

(1.3)

%  

NM

 

Other Expense

 

 

0.3

%  

 

0.5

%  

(31.6)

%  

Income (Loss)/ Before Income Taxes

 

 

2.9

%  

 

(1.8)

%  

NM

 

Income Tax (Benefit) Expense

 

 

(1.6)

%  

 

0.1

%  

NM

 

Net Income (Loss)

 

 

4.6

%  

 

(1.9)

%  

NM

 

 

 

 

 

 

 

 

 

 

 

SELECTED SALES DATA

 

 

 

 

 

 

 

 

 

Average Sale1

 

$

1,355

 

$

1,303

 

4.0

%  

Average Retail Price per Unit Sold2

 

 

2.5

%  

 

(1.9)

%  

  

 

Comparable Store Sales (Decrease) Increase (%)

 

 

(0.9)

%  

 

(0.8)

%  

  

 

 

 

 

 

 

 

 

 

 

 

Number of Stores Open, end of period

 

 

420

 

 

413

 

  

 

Number of Stores Opened in Period, net

 

 

 1

 

 

 —

 

  

 

Number of Stores Relocated in Period3

 

 

 1

 

 

 —

 

  

 

 

 

 

 

 

 

 

 

 

 

Comparable Stores4 (% change to prior year):

 

 

  

 

 

  

 

  

 

Customers Invoiced5

 

 

(4.9)

%  

 

(1.0)

%  

  

 

Net Sales of Stores Operating for 13 to 36 months

 

 

4.6

%  

 

2.5

%  

  

 

Net Sales of Stores Operating for more than 36 months

 

 

(1.2)

%  

 

(0.9)

%  

  

 

 

 

 

 

 

 

 

 

 

 

Net Sales in Markets with all Stores Comparable (no cannibalization)

 

 

(0.5)

%