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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 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

GRAPHIC

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)

(804463-2000

(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 August 1, 2020, there are 28,852,998 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 June 30, 2020

TABLE OF CONTENTS

Page

PART I – FINANCIAL INFORMATION

2

Item 1.

Condensed Consolidated Financial Statements

2

Item 2.

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

19

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

31

Item 4.

Controls and Procedures

31

PART II – OTHER INFORMATION

32

Item 1.

Legal Proceedings

32

Item 1A.

Risk Factors

38

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

39

Item 3.

Defaults Upon Senior Securities

39

Item 4.

Mine Safety Disclosures

39

Item 5.

Other Information

39

Item 6.

Exhibits

39

Signatures

41

1

PART I
FINANCIAL INFORMATION

Item 1. Financial Statements.

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

June 30,

December 31, 

    

2020

    

2019

Assets

Current Assets:

Cash and Cash Equivalents

$

126,737

$

8,993

Merchandise Inventories

248,722

286,369

Prepaid Expenses

8,544

8,288

Deposit for Legal Settlement

21,500

21,500

Tariff Recovery Receivable

18,285

27,025

Other Current Assets

5,545

6,938

Total Current Assets

429,333

359,113

Property and Equipment, net

96,864

98,733

Operating Lease Right-of-Use

121,544

121,796

Goodwill

9,693

9,693

Other Assets

7,046

6,674

Total Assets

$

664,480

$

596,009

Liabilities and Stockholders’ Equity

Current Liabilities:

Accounts Payable

$

68,516

$

59,827

Customer Deposits and Store Credits

55,492

41,571

Accrued Compensation

11,506

11,742

Sales and Income Tax Liabilities

9,722

7,225

Accrual for Legal Matters and Settlements Current

62,786

67,471

Operating Lease Liabilities - Current

36,740

31,333

Other Current Liabilities

23,998

18,937

Total Current Liabilities

268,760

238,106

Other Long-Term Liabilities

15,708

13,757

Operating Lease Liabilities - Long-Term

101,131

100,470

Deferred Tax Liability

921

426

Credit Agreement

101,000

82,000

Total Liabilities

487,520

434,759

Stockholders’ Equity:

Common Stock ($0.001 par value; 35,000 shares authorized; 30,161 and 29,959 shares issued and 28,852 and 28,714 shares outstanding, respectively)

30

30

Treasury Stock, at cost (1,309 and 1,245 shares, respectively)

(142,752)

(142,314)

Additional Capital

219,618

218,616

Retained Earnings

101,372

86,498

Accumulated Other Comprehensive Loss

(1,308)

(1,580)

Total Stockholders’ Equity

176,960

161,250

Total Liabilities and Stockholders’ Equity

$

664,480

$

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

Six Months Ended

June 30,

June 30,

    

2020

    

2019

    

2020

    

2019

 

Net Sales

Net Merchandise Sales

$

210,055

$

250,658

$

448,837

$

488,557

Net Services Sales

20,229

37,909

48,821

66,230

Total Net Sales

230,284

288,567

497,658

554,787

Cost of Sales

Cost of Merchandise Sold

125,953

157,801

266,699

309,226

Cost of Services Sold

16,039

28,279

37,696

49,463

Total Cost of Sales

 

141,992

 

186,080

 

304,395

 

358,689

Gross Profit

 

88,292

 

102,487

 

193,263

 

196,098

Selling, General and Administrative Expenses

 

82,288

 

103,864

 

178,495

 

200,896

Operating Income (Loss)

 

6,004

 

(1,377)

 

14,768

 

(4,798)

Other Expense

 

1,142

 

1,068

 

2,024

 

2,358

Income (Loss) Before Income Taxes

 

4,862

 

(2,445)

 

12,744

 

(7,156)

Income Tax Expense (Benefit)

 

2,223

 

411

 

(2,130)

 

624

Net Income (Loss)

$

2,639

$

(2,856)

$

14,874

$

(7,780)

Net Income (Loss) per Common Share—Basic

$

0.09

$

(0.10)

$

0.52

$

(0.27)

Net Income (Loss) per Common Share—Diluted

$

0.09

$

(0.10)

$

0.51

$

(0.27)

Weighted Average Common Shares Outstanding:

 

  

 

  

 

  

 

  

Basic

 

28,831

 

28,692

 

28,776

 

28,669

Diluted

 

28,892

 

28,692

 

28,889

 

28,669

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

Six Months Ended

June 30,

June 30,

    

2020

    

2019

    

2020

    

2019

 

Net Income (Loss)

$

2,639

$

(2,856)

$

14,874

$

(7,780)

Other Comprehensive Income (Loss):

 

  

 

  

 

  

 

  

Foreign Currency Translation Adjustments

 

227

 

(309)

 

272

 

(192)

Total Other Comprehensive Income (Loss)

 

227

 

(309)

 

272

 

(192)

Comprehensive Income (Loss)

$

2,866

$

(3,165)

$

15,146

$

(7,972)

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

 

April 1, 2019

28,682

$

32

 

2,979

$

(142,157)

$

214,798

$

71,911

$

(1,268)

$

143,316

Stock-Based Compensation Expense

 

 

 

 

 

1,361

 

 

 

1,361

Release of Restricted Shares

 

19

 

 

 

 

 

 

 

Common Stock Repurchased

 

 

(2)

 

(1,740)

 

(112)

 

 

 

 

(114)

Translation Adjustment

 

 

 

 

 

 

 

(309)

 

(309)

Net Loss

 

 

 

 

 

 

(2,856)

 

 

(2,856)

June 30, 2019

 

28,701

$

30

 

1,239

$

(142,269)

$

216,159

$

69,055

$

(1,577)

$

141,398

April 1, 2020

 

28,812

$

30

 

1,293

$

(142,630)

$

218,736

$

98,733

$

(1,535)

$

173,334

Stock-Based Compensation Expense

 

 

 

 

 

846

 

 

 

846

Exercise of Stock Options

 

3

 

 

 

 

36

 

 

 

36

Release of Restricted Shares

 

37

 

 

 

 

 

 

 

Common Stock Repurchased

 

 

 

16

 

(122)

 

 

 

 

(122)

Translation Adjustment

 

 

 

 

 

 

 

227

 

227

Net Income

 

 

 

 

 

 

2,639

 

 

2,639

June 30, 2020

 

28,852

$

30

 

1,309

$

(142,752)

$

219,618

$

101,372

$

(1,308)

$

176,960

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

 

 

 

 

 

2,415

 

 

 

2,415

Release of Restricted Shares

 

74

 

 

 

 

 

 

 

Common Stock Repurchased

 

 

(2)

 

(1,712)

 

(441)

 

 

 

 

(443)

Translation Adjustment

 

 

 

 

 

 

 

(192)

 

(192)

Net Loss

 

 

 

 

 

 

(7,780)

 

 

(7,780)

June 30, 2019

 

28,701

$

30

 

1,239

$

(142,269)

$

216,159

$

69,055

$

(1,577)

$

141,398

January 1, 2020

28,714

$

30

1,245

$

(142,314)

$

218,616

$

86,498

$

(1,580)

$

161,250

Stock-Based Compensation Expense

 

 

 

 

 

966

 

 

 

966

Exercise of Stock Options

 

3

 

 

 

 

36

 

 

 

36

Release of Restricted Shares

 

135

 

 

 

 

 

 

 

Common Stock Repurchased

 

 

 

64

 

(438)

 

 

 

 

(438)

Translation Adjustment

 

 

 

 

 

 

 

272

 

272

Net Income

 

 

 

 

 

 

14,874

 

 

14,874

June 30, 2020

 

28,852

$

30

 

1,309

$

(142,752)

$

219,618

$

101,372

$

(1,308)

$

176,960

See accompanying notes to condensed consolidated financial statements

5

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

Six Months Ended June 30,

    

2020

    

2019

Cash Flows from Operating Activities:

 

  

 

  

Net Income (Loss)

$

14,874

$

(7,780)

Adjustments to Reconcile Net Income (Loss):

 

  

 

Depreciation and Amortization

 

8,934

 

8,599

Deferred Income Taxes Provision

 

495

 

71

Stock-Based Compensation Expense

 

966

 

2,415

Provision for Inventory Obsolescence Reserves

 

1,574

 

626

(Gain) Loss on Disposal of Fixed Assets

 

(827)

 

50

Changes in Operating Assets and Liabilities:

 

 

Merchandise Inventories

 

35,897

 

12,883

Accounts Payable

 

9,150

 

(4,729)

Customer Deposits and Store Credits

 

13,921

 

2,652

Prepaid Expenses and Other Current Assets

 

10,330

 

(3,557)

Accrual for Legal Matters and Settlements

 

148

 

4,575

Payments for Legal Matters and Settlements

 

(4,833)

 

(33,725)

Deferred Rent Payments

5,813

Other Assets and Liabilities

 

9,225

 

3,828

Net Cash Provided by (Used in) Operating Activities

 

105,667

 

(14,092)

Cash Flows from Investing Activities:

 

  

 

  

Purchases of Property and Equipment

 

(7,212)

 

(8,907)

Other Investing Activities

 

949

 

64

Net Cash Used in Investing Activities

 

(6,263)

 

(8,843)

Cash Flows from Financing Activities:

 

  

 

  

Borrowings on Credit Agreement

 

45,000

 

63,000

Payments on Credit Agreement

 

(26,000)

 

(38,500)

Other Financing Activities

 

(637)

 

(1,074)

Net Cash Provided by Financing Activities

 

18,363

 

23,426

Effect of Exchange Rates on Cash and Cash Equivalents

 

(23)

 

671

Net Increase in Cash and Cash Equivalents

 

117,744

 

1,162

Cash and Cash Equivalents, Beginning of Period

 

8,993

 

11,565

Cash and Cash Equivalents, End of Period

$

126,737

$

12,727

Supplemental disclosure of non-cash operating and financing activities:

 

  

 

  

Tenant Improvement Allowance for Leases

$

(611)

$

(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 June 30, 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 and six months ended June 30, 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 could 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. As reported in the Company’s first quarter earnings release, quarter-to-date comparable store sales were down approximately 30% through the week ended May 23. Improving performance in June resulted in a negative 21.3% comparable store sales for the full quarter. By early July, 98% of stores were fully open, with less than 10 operating by appointment only. Only one store remained

7

closed since the onset of the pandemic due to a unique store design while others closed periodically as warranted by market conditions.

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 continues to be 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 June 30, 2020, the Company has an $18 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 422 stores, which spanned 47 states including eight stores in Canada, at June 30, 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

8

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

Six Months Ended

June 30,

June 30,

    

2020

    

2019

    

2020

    

2019

Customer Deposits and Store Credits, Beginning Balance

$

(37,836)

$

(47,633)

$

(41,571)

$

(40,332)

New Deposits

 

(264,473)

 

(302,429)

 

(545,326)

 

(594,262)

Recognition of Revenue

 

230,284

 

288,567

 

497,658

 

554,787

Sales Tax included in Customer Deposits

 

14,862

 

17,483

 

31,543

 

34,264

Other

 

1,671

 

1,124

 

2,204

 

2,655

Customer Deposits and Store Credits, Ending Balance

$

(55,492)

$

(42,888)

$

(55,492)

$

(42,888)

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 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 “Other Current Liabilities” 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 $1.3 million at June 30, 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 June 30,

Six Months Ended June 30,

 

2020

    

2019

    

2020

2019

Manufactured Products 1

$

112,441

49

%  

$

118,212

41

%  

$

231,478

46

%

$

228,679

41

%

Solid and Engineered Hardwood

62,164

    

27

%  

83,547

    

29

%  

138,773

    

28

%

165,382

    

30

%

Moldings and Accessories and Other

 

35,450

 

15

%  

 

48,899

 

17

%  

 

78,586

 

16

%

 

94,496

 

17

%

Installation and Delivery Services

 

20,229

 

9

%  

 

37,909

 

13

%  

 

48,821

 

10

%

 

66,230

 

12

%

Total

$

230,284

 

100

%  

$

288,567

 

100

%  

$

497,658

 

100

%

$

554,787

 

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

9

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. 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.

Recent Accounting Pronouncements Adopted

In April 2020, the FASB staff issued a question and answer document (the “Lease Modification Q&A”) focused on the application of lease accounting guidance to lease concessions obtained as a result of the COVID-19 pandemic. Under existing lease guidance, the Company would have to determine, on a lease by lease basis, if a lease concession obtained was a result of a new arrangement reached with the lessor (treated within the lease modification accounting framework) or if a lease concession obtained was under the enforceable rights and obligations within the existing lease agreement (precluded from applying the lease modification accounting framework). The Lease Modification Q&A allows lessees, if certain criteria have been met, to bypass the lease-by-lease analysis, and instead elect to either apply the lease modification accounting framework or not, with such election applied consistently to leases with similar characteristics and similar circumstances. The Company has elected to apply this practical expedient for the period beginning as of April 1, 2020 for those agreements where total payments under the modified lease are substantially the same or less than the original agreement. Included in “Operating Lease Liabilities - Current” on the condensed consolidated balance sheet is a $5.4 million liability as of June 30, 2020 related to deferred payments as a result of the COVID-19 rent concessions, as well as an additional $0.4 million included in “Operating Lease Liabilities - Long-Term.” The deferred payments will be made over the remainder of the lease term in accordance with each concession agreement.

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

Six Months Ended

June 30,

June 30,

    

2020

    

2019

    

2020

    

2019

 

Net Income (Loss)

$

2,639

$

(2,856)

$

14,874

$

(7,780)

Weighted Average Common Shares Outstanding—Basic

 

28,831

 

28,692

 

28,776

 

28,669

Effect of Dilutive Securities:

 

  

 

  

 

  

 

  

Common Stock Equivalents

 

61

 

 

113

 

Weighted Average Common Shares Outstanding—Diluted

 

28,892

 

28,692

 

28,889

 

28,669

Net Income (Loss) per Common Share—Basic

$

0.09

$

(0.10)

$

0.52

$

(0.27)

Net Income (Loss) per Common Share—Diluted

$

0.09

$

(0.10)

$

0.51

$

(0.27)

10

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

Six Months Ended

June 30,

June 30,

    

2020

    

2019

    

2020

    

2019

 

Stock Options

598

644

544

644

 

Restricted Shares

742

839

419

613

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 June 30, 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.

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, January 1, 2020

 

693

 

911

Granted

 

197

 

451

Options Exercised/RSAs Released

 

(3)

 

(200)

Forfeited

 

(271)

 

(225)

Options Outstanding/Nonvested RSAs, June 30, 2020

 

616

 

937

The Company granted a target of 94,591 performance-based RSAs with a grant date fair value of $0.9 million during the six months ended June, 2020 and a target of 100,281 performance-based RSAs with a grant date fair value of $1.1 million during the six months ended June 30, 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”). 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 (the “Revolving Credit Facility”) from $175 million to $212.5 million until August 30, 2020, subject to the borrowing bases described below. The total size of the Credit Agreement increased to $237.5 million, inclusive of the first in-last out $25 million term loan (the “FILO Term Loan”).

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

11

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 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. As of June 30, 2020, the Company’s Revolving Credit Facility carried an average interest rate of 3.50% and the FILO Term Loan carried an interest rate of 4.75%.

Prior to the Amendment, loans outstanding under the Credit Agreement bore 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 was 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 were 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.

As of June 30, 2020, a total of $76 million was outstanding under the Revolving Credit Facility and $25 million was outstanding under the FILO Term Loan. As of June 30, 2020, there was $59 million of availability under the Revolving Credit Facility. The Company also had $4 million in letters of credit which reduces its remaining availability.

The Revolving Credit Facility is available to the Company up to the lesser of (1) $175 million (temporarily increased to $212.5 million under the Amendment) 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. The Company retained to 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.

 

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 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.

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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 $4.8 million in the first six months of 2020 associated with the income tax components contained in the Act, and as of June 2020 the Company has collected the full amount of the income tax benefit. As of June 30, 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 June 30, 2020, the Company recognized income tax expense of $2.2 million, which represented an effective tax rate of 45.7%. For the three months ended June 30, 2019, the Company recognized income tax expense of $0.4 million, which represented an effective tax rate of (16.8)%. The variability of our tax rate in 2020 reflects the timing of deductions and the Act on our quarterly earnings.

For the six months ended June 30, 2020, the Company recognized an income tax benefit of $2.1 million, which represented an effective tax rate of (16.7)%. For the six months ended June 30, 2019, the Company recognized income tax expense of $0.6 million, which represented an effective tax rate of (8.7)%. The income tax benefit for the six months ended June 30, 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 clearly indicates 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. Only seven objectors filed objections to the settlement agreement that will be addressed at the Final Approval and Settlement Hearing. 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

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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 June 30, 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.

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 which is included in the caption “Deposit for Legal Settlement” on its condensed consolidated balance sheet. 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 six months ended June 30, 2020. As of June 30, 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 six months ended June 30, 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

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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

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, and due to COVID-19 complications impacting discovery, the deadline has again been extended to March 31, 2021.

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,

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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. Payment of $4.75 million was made to the settlement administrator on April 6, 2020, for distribution to class members.

Savidis Lawsuit

On April 9, 2020, Lumber Liquidators was served with a lawsuit filed by Tanya Savidis, on behalf of herself and all others similarly situated (collectively, the “Savidis Plaintiffs”). Ms. Savidis filed a purported class action lawsuit in the Superior Court of California, County of Alameda on March 6, 2020, on behalf of all current and former Lumber Liquidators employees employed as non-exempt employees. The complaint alleges violation of the California Labor Code including, among other items, failure to pay minimum wages and overtime wages, failure to provide meal periods, failure to permit rest breaks, failure to reimburse business expenses, failure to provide accurate wage statements, failure to pay all wages due upon separation within the required time, and engaging in unfair business practices (the “Savidis matter”). On or about May 22, 2020, the Savidis Plaintiffs provided notice to the California Department of Industrial Relations requesting they be permitted to seek penalties under the California Private Attorney General Act for the same substantive alleged violations asserted in the Complaint. The Savidis Plaintiffs seek certification of a class action covering the prior four-year period prior to the filing of the complaint to the date of class certification (the “California Employee Class”), as well as a subclass of class members who separated their employment within three years of the filing of the suit to the date of class certification (the “Waiting Time Subclass”). The Savidis Plaintiffs did not quantify any alleged damages but, in addition to attorneys’ fees and costs, seek statutory penalties, unspecified amounts for unpaid wages, benefits, and penalties, interest, and other damages.

The Company disputes the Savidis Putative Class Employees’ claims and intends 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 estimate the reasonably 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.

Visnack Lawsuit

On June 29, 2020, Michael Visnack, on behalf of himself and all others similarly situated (collectively, the “Visnack Plaintiffs”) filed a purported class action lawsuit in the Superior Court of California, County of San Diego, on behalf of all current and former store managers, and others similarly situated. The Complaint alleges violation of the California Labor Code including, among other items, failure to pay wages and overtime, wage statement violations, meal and rest break violations, unpaid reimbursements and waiting time, and engaging in unfair business practices (the “Visnack matter”). The Visnack Plaintiffs seek certification of a class period beginning September 20, 2019, through the date of Notice of Class Certification, if granted. The Visnack Plaintiffs did not quantify any alleged damages but, in addition to attorneys’ fees and costs, they seek unspecified amounts for each of the causes of action such as unpaid wages and overtime wages, failure to provide meal periods and rest breaks, payroll record and wage statement violations, failure to reimburse expenses and waiting time, liquidated and/or punitive damages, declaratory relief, restitution, statutory penalties, injunctive relief and other damages.

The Company is evaluating the Visnack Putative Class Employees' claims and intends to defend itself vigorously in this matter. 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 estimate the reasonably 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.

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

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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 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 ‘June 30, 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 six months ended June 30, 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.

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Review

    

Rates at which

    

June 30, 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

liability 2

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%

0.0%

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 0.0%

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

$0.08 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 quarter when it is accepted.

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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 June 30, 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 June 30, 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;
· obtaining products from abroad, including the effects of COVID-19 and tariffs, as well as the effects of antidumping and countervailing duties;
· reputational harm;
· 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, 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;
· managing third-party installers and product delivery companies;

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· 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 June 30, 2020, we sold our products through 422 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, and our singular focus on hard-surface flooring.

To supplement the financial measures prepared in accordance with GAAP, we use the following non-GAAP financial measures: (i) Adjusted Gross Profit, (ii) Adjusted Gross Margin, (iii) Adjusted SG&A, (iv) Adjusted SG&A as a percentage of sales, (v) Adjusted Operating Income, (vi) Adjusted Operating Margin, (vii) Adjusted Earnings and (viii) 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 GAAP. These supplemental measures may vary from, and may not be comparable to, similarly titled measures by other companies.

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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 second quarter of 2020 was significantly affected by the COVID-19 pandemic but throughout we remained focused on serving our customers while keeping the health and safety of employees and customers paramount. The results of the second quarter were atypical; readers should exercise caution before drawing conclusions, in considering trends, and/or in making judgements about profitability and cash flows. We operated in a variety of operating models (fully open, curbside-pickup, online) during the quarter and utilized safety measures such as personal protective equipment for employees and customers. Additional measures included contact-free and appointment-based engagement with customers, adding barriers at registers and social distancing signage and guidelines to our stores. These practices were implemented to comply with state and local ordinances along with recommendations from the CDC and State Boards of Health. By early July, 98% of stores were fully open, with less than 10 operating by appointment only. Only one store remained closed since the onset of the pandemic due to a unique store design while others closed periodically as warranted by market conditions. In addition, late in the first quarter we suspended third-party inventory count procedures at our stores, but we resumed these third-party count procedures by the end of the second quarter. As reported in the Company’s first quarter earnings release, quarter-to-date comparable store sales were down approximately 30% through the week ended May 23. Improving performance in June resulted in a negative 21.3% comparable store sales for the full quarter.

Throughout the quarter, we leveraged 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 particularly when store showrooms were less available. We have also expanded availability of online flooring samples and extended our hours for voice and click-to-chat customer support, while also continuing to offer curbside store pickup and enhanced home-delivery options.

In April, as a result of reduced demand and the changes in our operating models due to COVID-19, we temporarily furloughed a number of store associates and reduced operating hours in our distribution centers. As demand returned through the quarter, we recalled associates, and as of late June, had invited all furloughed employees back to work and had returned to normal operations in our distribution centers. We implemented a range of other measures to increase financial flexibility and maintain agility during this challenging time. These measures included reducing costs, managing inventory flow, deferring and abating certain 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 corporate employee compensation and Board of Directors’ compensation. As a result of improved business trends, the temporary reduction ended effective July 1, 2020.

As a result of these actions and managing working capital, the Company’s liquidity position has improved during the second quarter by $55 million from March 31, 2020. As of June 30, 2020, the Company had $76 million outstanding under its revolving credit facility and $25 million outstanding under its FILO Term Loan along with $127 million of cash and cash equivalents on its balance sheet. As of June 30, 2020, the Company had $186 million in liquidity, comprised of $127 million of cash and cash equivalents and $59 million of availability under the Credit Agreement. In April 2020, the Company amended its Credit Agreement as described in Note 5 of this Form 10-Q. Please see the “Liquidity and Capital Resources” discussion later in this MD&A for further discussion of cash in the quarter. Material items affecting the income statement will be discussed in their respective areas within this MD&A.

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Executive Summary

Results of operations for the three and six months ended June 30, 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 second quarter of 2020 decreased $58 million, or 20%, to $230 million from the second quarter of 2019. Comparable store sales for the second quarter of 2020 were down 21.3% driven by the impact of COVID-19, but improved sequentially as the quarter progressed and improved compared to the previously reported quarter-to-date decline of approximately 30% through May 23. The Company opened two net new stores in the second quarter of 2020 bringing total store count to 422 as of June 30, 2020.

Gross profit decreased 14% in the second quarter of 2020 to $88 million from $102 million in the comparable period in 2019, including the 2019 positive impact of classification adjustments related to tariffs as shown in the tables that follow. Without this item, Adjusted Gross Profit (a non-GAAP measure) decreased approximately $13 million. Adjusted Gross Margin (a non-GAAP measure) increased 309 basis points to 38.3% in the second quarter of 2020 from 35.2% in the second quarter of 2019 as margin enhancement efforts, Section 301 tariff exclusions and supply chain efficiency positively impacted results. Adjusted Gross Margin was also aided by a larger mix of higher-margin manufactured products, a lower mix of installation labor sales, and reduced discounting in stores. These items were somewhat offset by a higher year-over-year inventory obsolescence charge and higher customer delivery costs associated with delivery promotions.

SG&A expense decreased 21% to $82 million in the second 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) decreased 17%, or $16 million, compared to the same period in the prior year. The reduction in Adjusted SG&A was primarily driven by lower advertising expense as the Company reduced its promotional cadence in response to the COVID crisis; lower payroll and benefits expense as the Company took steps to align staffing with demand levels while also implementing temporary salary reductions for corporate office personnel and the Board of Directors; and lower transaction- and business-related costs due to lower sales. The Company’s focus on expense management, liquidity preservation measures and process efficiency helped deliver the year-over-year reduction in Adjusted SG&A in the quarter.

Operating income was $6 million for the second quarter of 2020 compared to an operating loss of $1.4 million for the second quarter of 2019. Adjusted Operating Income (a non-GAAP measure) was $6.5 million for the second quarter of 2020, a year-over-year increase of over $2.9 million compared to adjusted operating income of $3.6 million for the second quarter of 2019. The year-over-year increase was primarily driven by the work to enhance gross margin while also diligently managing expenses.

Income tax expense was $2.2 million for the second quarter of 2020 compared to income tax expense of $0.4 million for the second quarter of 2019. The variability of our tax rate in 2020 reflects the timing of deductions and the CARES Act on our quarterly earnings.

Net income for the second quarter of 2020 increased $5.5 million to $2.6 million compared to a net loss of $2.9 million for the second quarter of 2019, while Adjusted Earnings (a non-GAAP measure) for the second quarter of 2020 was $3 million, a year-over-year increase of $2.2 million compared to Adjusted Earnings of $820 thousand for the second quarter of 2019.

Earnings per diluted share was $0.09 for the second quarter 2020 versus a loss per share of $0.10 in the year ago quarter. On an adjusted basis, second quarter earnings per diluted share increased $0.07 to $0.10 compared to an adjusted earnings per diluted share of $0.03 for the second quarter of 2019.

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As of June 30, 2020, the Company had $76 million outstanding under its revolving credit facility and $25 million outstanding under its FILO Term Loan. Collectively, this is a $19 million increase from the end of the fourth quarter 2019 while the cash and cash equivalents balance increased by $118 million. As of June 30, 2020, the Company had $186 million in liquidity, comprised of $127 million of cash and cash equivalents and $59 million of availability under the Credit Agreement.

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.

% Improvement

% of Net Sales

(Decline) in

Three Months Ended June 30,

Dollar Amounts

2020

    

2019

    

2020 VS 2019

    

Net Sales

Net Merchandise Sales

91.2

%

86.9

%

(16.2)

%

Net Services Sales

8.8

%

13.1

%

(46.6)

%

Total Net Sales

100.0

%

100.0

%

(20.2)

%

Gross Profit

38.3

%

35.5

%

(13.9)

%

Selling, General, and Administrative Expenses

35.7

%

36.0

%

(20.8)

%

Operating Income (Loss)

2.6

%

(0.5)

%

NM

%

Other Expense (Income)