UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K10‑K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 | | |
x | | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2015
2018
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
| | |
o | | 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: 001-33767001‑33767
Lumber Liquidators Holdings, Inc.
(Exact Name of Registrant as Specified in its Charter)
Delaware | | 27‑1310817 |
Delaware | | 27-1310817 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| |
3000 John Deere Road, Toano, Virginia | | 23168 |
(Address of principal executive offices) | | (Zip Code) |
(757) 259-4280259‑4280
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| | |
Title of each class | | Name of each exchange on which registered |
Common Stock, par value $0.001 per share | | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act:None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.YesoAct. Yes ☐ Nox ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.YesoAct. Yes ☐ Nox ☒
Indicate by check mark whether the registrantregistrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrantregistrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.Yesxdays. Yes ☒ Noo ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).Yesx. Yes ☒ Noo ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K10‑K or any amendment to this Form 10-K.x10‑K. ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ☐ | ☒ Accelerated filer | ☐ Non-accelerated filer | ☐ Smaller reporting company | | | |
Large Accelerated Filerx | | Accelerated Filero | | Non-accelerated Filero
(do not check if a smaller reporting company) | | Smaller Reporting Companyo☐ 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-212b‑2 of the Act).Yeso. Yes ☐ Nox ☒
As of June 30, 2015,2018, the last business day of the registrant’s most recent second quarter, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $542.6$686.4 million based on the closing sale price as reported on the New York Stock Exchange.
Indicate the number of shares outstanding of each of the registrant’s classes of common stock as of February 25, 2016:
March 1, 2019:
| | |
Title of Class | | Number of Shares |
Common Stock, $0.001 par value | | 27,088,46028,640,264 |
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates certain information by reference from the registrant’s proxy statement for the 20162019 annual meeting of stockholders, which will be filed no later than 120 days after the close of the registrant’s fiscal year ended December 31, 2015.2018.
LUMBER LIQUIDATORS HOLDINGS, INC.
ANNUAL REPORT ON FORM 10-K
10‑K
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENT
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. Forward-looking statements in this report mayThese risks include, without limitation, statements regarding legal matters and settlement discussions, the terms of and compliance with the Plea Agreement with the Department of Justice (the “Plea Agreement”) and the associated environmental compliance plan (the “Compliance Plan”), the Company’s ability to borrow under its asset-backed revolving credit facility, elevated levels of legal and professional fees, elevated levels of payroll and stock-based compensation expense, sales growth, comparable store net sales, number of stores providing installation services, impact of cannibalization, impact of inflation, price changes, inventory availability and inventory per store, inventory valuation, earnings performance, stock-based compensation expense, margins, return on invested capital, advertising costs, costs to administer the Company’s indoor air quality testing program, intention to conduct additional investigation and reviews in connection with certain consumers’ indoor air quality tests, strategic direction, the scale of the expansion of and transition to the Company’s laminate products sourced from Europe and North America, supply chain, the demand for the Company’s products, benefits from an improving housing market, construction of engineered hardwood as to not be subject to anti-dumping and countervailing duties, ultimate resolution of governmental investigations, and store openings and remodels.
The Company’s actual results could differ materially from those projected in or contemplated by the forward-looking statements as a result of potential risks, uncertainties and other factors including, but not limited to, changes in general economic and financial conditions, such as the rate of unemployment, consumer access to credit, and interest rate; the volatility in mortgage rates; the legislative/regulatory climate; political unrest in the countries of the Company’s suppliers; the ability to retain and motivate Company employees; the availability of sufficient suitable hardwood; the impact on the Company if the Company is unable to maintain quality control over its products; the cost and effect on the Company’s reputationus of and consumers’ purchasing decisions in connection with, unfavorable allegations surrounding the product qualityany of the Company’s laminates sourced from China; the Company’s suppliers’ ability to meet its quality assurance requirements; disruption in the Company’s suppliers’ abilities to supply needed inventory; the impact on the Company’s businessfollowing:
| · | | the outcomes of government investigations and legal proceedings, and the related impact on liquidity; |
| · | | obligations related to and impacts of new laws and regulations, including pertaining to tariffs; |
| · | | obtaining products from abroad, including the effects of tariffs, as well as the effects of antidumping and countervailing duties; |
| · | | obligations under various settlement agreements and other compliance matters; |
| · | | disruptions related to our corporate headquarters relocation; |
| · | | impact of the Tax Cuts and Jobs Act (the “Tax Act”); |
| · | | the inability to open new stores and fund other capital expenditures needs; |
| · | | increased transportation costs; |
| · | | disruption in our ability to distribute our products; |
| · | | operating stores in Canada and an office in China; |
| · | | managing third-party installers and product delivery companies, including the quality of service; |
| · | | renewing store or warehouse leases; |
| · | | having sufficient suppliers; |
| · | | our, and our suppliers’, compliance with complex and evolving rules, regulations, and laws at the federal, state, and local level; |
| · | | disruption in our ability to obtain products from our suppliers; |
| · | | product liability claims; |
| · | | availability of suitable hardwood, including due to disruptions from the impacts of severe weather; |
| · | | changes in economic conditions, both domestic and abroad; |
| · | | sufficient insurance coverage; |
| · | | disruption due to cybersecurity threats; |
| · | | the handling of confidential customer information, including the impacts from the California Consumer Privacy Act; |
| · | | management information systems disruptions; |
| · | | alternative e-commerce offerings; |
| · | | our advertising strategy; |
| · | | anticipating consumer trends; |
| · | | impact of changes in accounting guidance, including implementation guidelines and interpretations; |
| · | | maintenance of valuation allowances on deferred tax assets and the impacts thereof; |
| · | | stock price volatility; and |
| · | | anti-takeover provisions. |
The Company specifically disclaims any obligation to update these statements, which speak only as of the dates on which such statements are made, except as may be required under the federal securities laws. These risks and other factors include those listed in this Item 1A. “Risk Factors,”Factors” and elsewhere in this report.
References to “we,” “our,” “us,” “the Company” and “Lumber Liquidators” generally refers to Lumber Liquidators Holdings, Inc. and its consolidated subsidiaries collectively and, where applicable, individually.
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PART I
Item 1. Business.
Overview
Lumber Liquidators is one of the largestleading specialty retailerretailers of hardwoodhard-surface flooring in North America, offering a complete purchasing solution across an extensive assortment of exoticdomestic and domesticexotic hardwood species, engineered hardwood, laminate, resilient vinyl, waterproof vinyl plank and porcelain tile. We also feature the renewable flooring products, bamboo and cork.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. We operate as a single operatingbusiness segment, with our call center, website and customer service network supporting our retail store operations.
We believe we have achieved a reputation for offering great value, superior service and a broad selection of high-quality hardwoodhard-surface flooring products. With a balance of price, selection, quality, availability, service and service,price, we believe our value proposition is the most complete within a highly-fragmented hardwoodhighly 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 and our expansion of our advertising reach and frequency.flooring.
Lumber Liquidators is a Delaware corporation with its headquarters in Toano, Virginia. We were founded in 1994 and our initial public offering was in November 2007. Our common stock trades on the New York Stock Exchange under the symbol “LL.” We operate in a holding company structure with Lumber Liquidators Holdings, Inc. serving as our parent company and certain direct and indirect subsidiaries, including Lumber Liquidators, Inc., Lumber Liquidators Services, LLC, Lumber Liquidators Production, LLC, and Lumber Liquidators Canada, Inc.,ULC, conducting our operations.
Our Business
Market
According to the July 20152018 Issue of Floor Covering Weekly, U.S. installed floor covering product sales in 20142017 were $35.6$40.8 billion, excluding installation.not including labor. Within this market, U.S. hardwood, laminate and laminatevinyl flooring sales accounted for 19.1%38.7% of the total. Flooring sales are driven by a number of factors including discretionary income and the housing market. Including installation, the overall flooring industry has grown at a compound annual growth rate of 5.1%5.4% from 20092012 through 2014.2017. Over the same period, hardwood, laminate and laminatevinyl flooring sales, including the cost of installation grew at a compound annual growth rate of 5.5%8.3%. We believe improvements in the quality and construction of certain products, increasing resiliency and water-tolerance of products, ease of installation, andavailability in a broad range of retail price points, and movement away from soft surfaces will drive continued hard surfacehard-surface flooring share gain versus soft surface flooring in the future.
Competition
We compete for customers in a highly fragmented marketplace, where we believe no one retailer has captured more than a 15%17% share of the consumer market for hardwoodhard-surface flooring. Although the market includes the national home improvement warehouse chains, warehouse clubs and online retailers, we believe the majoritynearly half of the industry
consists of local one-store flooring retailers, small chains of stores that may specialize in one or two flooring categories, and a limited number of regional chains. Catalina Research, Inc., a company providing market research on various flooring types, estimates there are approximately 9,000 specialty floor coverings stores in the U.S.
Customers
We target several distinct customer groups who each have varied needs with respect to their flooring purchase,purchases, including do-it-yourself (“DIY”) customers, do-it-for-me (“DIFM”) customers, and commercial customers. EachWe believe that each of the customer groups we serve areis passionate about their flooring purchase and value our wide assortment of flooring products, availability, and the quality of those products. EachWhile our offering to each of these groups begins with the same broad assortment, convenient stores, and knowledgeable store associates, each of these customer groups require a unique customer service approachcomponents based on the ability of our associates to share detailed product knowledge and preferred installation methods. We offer DIFM customers installation services, while our DIY and commercial customers receive additional support throughoutmore personal attention when completing their purchase, including dedicated call center resources. All customer groups are offered delivery services.
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Products and Services
Product Selection
We offer an extensive assortment of woodhard-surface flooring under 19more than 15 proprietary brand names, led by our flagship, Bellawood.Bellawood®. We have invested significant resources developing these national brand names, as well as the Lumber Liquidators name. Our hardwoodhard-surface flooring products are available in various widths and lengths and are generally differentiated in terms of quality and price based on wood versus manufactured materials, the species, wood grade warranty and durability of finish. Prefinished floors are the dominant choice for residential customers over unfinished wood planks that have a finish applied after installation. We also offer an assortment of flooring enhancements, installation services and accessories, including moldings, underlays and tools. Our revenue by major product category is included in Note 1 of our consolidated financial statements in Item 8 of this report.
Direct Sourcing
SourcingWe source directly from mills and other vendors which enables us to offer a broad assortment of high-quality, proprietary products to our customers at a consistently lowcompetitive cost. We seek to establish strong, long-term relationships with our vendor partners around the world. In doing so, we look for vendors that have demonstrated an ability to meet our demanding specifications, our rigorous compliance standards and the capability to provide sustainable and growing supplies of high-quality innovative, trend-right products. We source from both domestic and innovative products.international vendors, and in 2018, approximately 47% of our product was sourced from Asia, 7% was sourced from Europe and Australia, and 5% was sourced from South America.
Supply Chain
Our supply chain is wholly focused on delivering a complete assortment of products to our customers in an efficient manner. In the first quarter of 2014, we began operatingWe operate a 500,000 square foot leased distribution center in Pomona, California as the primary distribution center for our western stores. In 2014, we completed construction ofWe own a one million square foot distribution center on 110approximately 100 acres of land we own in Henrico County, Virginia, to consolidatewhich serves the distribution facilities located in Hampton Roads, Virginia, increase the efficiency of our East Coast operations and provide a foundation for future store base expansion. We began the transition of our operations from those facilities to the new facility in 2014, and the facility was fully operational in 2015.
During 2015, we leased third party consolidation services to break bulk shipments from mills into quantities and assortments that can be sent directly to our store locations. We terminated these services at the end of the second quarter of 2015 as we enhanced our utilization of our distribution centers. Additionally, astores. A number of our vendors maintain certain inventory levels for shipment directly to our stores or our customers. Our product is generally transported boxed and palletized, and the weight of our product generally is correlated witha key driver of our supply chain costs.
Compliance and Quality Control
The Company’sOur compliance programs are designed to ensure the products we sell are safe and responsibly sourced, and meet all regulatory and statutory requirements, including without limitation requirements associated with the Lacey Act, Environment Protection Agency ("EPA") and the California Air Resources Board (“CARB”). We utilize a variety of due diligence processes and controls, including supplier audits, periodic on siteon-site visits, and product testing. The Company utilizesWe utilize a risk-based approach to implement and operate the various aspects of itsour compliance program. Our compliance program considers, among other things, product risk, the level of vertical integration at our suppliers’ mills, legality concerns
noted by both private and government parties, and the results of on-site audits performed by, or on behalf of, the Company.that we perform. Our evaluation of sourcing risk is a key component in our allocation of resources to ensure the Company meets itswe meet our standards for product compliance and safety. We believe our Lacey Act Compliance program is one of the most stringent programs in the industry. Compliance and Quality Control teams located in the United States and in China are supplemented with external resources that provide independent analyses, which are incorporated into our review processes and monitor our sourcing efforts across all areas from which we source product. Compliance programs are continually under review, updated and enhanced as appropriate to stay current with statutory and regulatory requirements. Our compliance and regulatory affairs committee of the board of directors provides oversight of our compliance programs.
Additionally, we began operatingmaintain and operate a 1,500 square foot lab within our new East Coast distribution facility during the first quarter of 2015.center. The lab features two temperature and humidity controlled conditioning rooms and two emission chambers correlated to a CARB-approved Third PartyThird-Party Certifier standard. We believe this equipment mirrors the capabilities of CARB and other state-of-the-art emission testing facilities. We believe
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no other flooring retailer has comparable facilities. This new lab, will complement and augment the capabilities of the facilities we operate in Toano, Virginia and in Shanghai, China, as well as those utilized byalong with our suppliersthird-party providers, supports our process to help ensure compliance with CARB and EPA requirements.
Installation
Historically, approximatelyApproximately one in 10 of our customers opt to utilize the fully-insured and licensedpurchase professional installation services which we make availablethrough us to measure and install flooring at competitive pricesprices. We offer these services at eachall of our stores. As of December 31, 2015,2018, we utilized a network of associates to perform certain customer-facing, consultative services and coordinatedcoordinate the installation of our flooring products by third-party professional installersindependent contractors in 186 of our stores. Service revenue for installation transactions we control along with freight is included in net services sales, with the corresponding costs in cost of sales.services sold. We believe our greater interaction with the customer and greater control overbetter relationships with the third partythird-party independent contractors on services provided will ultimately result in a better customer experience and higher utilization by the customer. Installation services are offered in our remaining stores through a national arrangement with a third-party. Under this national arrangement, we receive certain reimbursements based on volume, which offset other expenses.
Store Model
As of December 31, 2015,2018, we operated 374413 retail stores, with 366405 located throughoutin 47 states in the United States and eight in Ontario, Canada, after closingCanada. We opened 21 new stores and closed one of our Canadian stores at the end of its lease term during the fourth quarter.
store in 2018. We generally seekhistorically had sought locations with lower rent than retailers requiring high traffic or impulse purchases and are able to adapt a range of existing buildings to our format, from free-standingfreestanding buildings to strip centers to small shopping centers. Generally, ourcenters. Our stores are approximatelytypically 6,500 to 7,500 square feet, which includes a showroom format designed to emphasize our products and a small warehouse. Our real estate strategy considers total long-term share within a market over unit-based analysis.feet. We enter into short leases, generally for a base term of five to seven years with renewal options, to maximize our real estate flexibility.
We routinely evaluate our store site selection criteria and are currently targeting retail corridors within a market over the more industrial locations we historically sought. We consistently monitor performance of current stores as well as the market opportunity for new locations, adjusting as needed to optimize the profitability and growth potential of our network. We have recently opened a larger store format in a single-test location. This format includes a showroom that is four times the size of our traditional store, and includes more items in stock and other amenities.
Sales Approach
We strive to have an integrated multi-channel sales model that enables our stores, call center, website and catalogs to work together in a coordinated manner. We believe that due to the average size of the sale and the general infrequency of a hardwood flooring purchase, many of our customers conduct extensive research using multiple channels before making a purchase decision. Though our customers utilize a range of these channels in the decision-making process, the final sale is most often completed in the store, working with our flooring experts. Our customers typically plan well in advance for the inconvenience of removing old flooring and installing new flooring. In larger, more complex projects, greater lead time and preparation is often required. Our research indicates that the length of a hardwood flooring purchase can vary significantly from initial interest to final sale, but averages approximately 100 days.sale.
Our objective is to help the consumercustomer through the entire purchase cycle from aspirationinspiration to installation, whether in our store or in their home. Our goal is to provide our customers with everything needed to complete their flooring project —– to remove the existing floor, install the new floor with complementary moldings and accessories, and finally, maintain the floor for its lifetime.
Our sales strategy emphasizes customer service by providing superior, convenient, educational tools for our customers to learn about our products and the installation process. We invest heavily in training our store associates on all of our products and install techniques. Flooring samples of most of the products we offer are available in our stores, or can be ordered through our call center and website. Once an order is placed, customers may choose to either have their purchases delivered or pick them up at a nearby store location.
We are committed to responding to our potential and existing customers in a timely manner. Our call center is staffed by flooring experts cross-trained in sales, customer service and product support. In addition to
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receiving telephone calls, our call center associates chat online with visitors to our website, respond to emails from our customers and engage in telemarketing activities. Customers can contact our call center to place an order, to make an inquiry or to order a catalog.
Knowledgeable Salespeople
AWe believe a large segment of residential homeowners are in need of a trusted expert, whether as a guide through a range of flooring alternatives and services or as a resource to both DIY and DIFM customers. We train and position our store management and associates to establish these individual customer relationships, which often last beyond the current purchase to subsequent purchases forof additional rooms in the existing house or even to the remodeling of a new home.flooring.
We place an emphasis on identifying, hiring and empowering employees who share a passion for our business philosophy. Many of our store managers have previous experience with the home improvement, retail flooring or flooring installation industries. We provide continuous training for our store associates, ranging from topic-specific modules offered through our online learning management system to participation in our Lumber Liquidators University (“LLU”) program. LLU is a training event for all of our regional and store managers that focusesfocused on selling techniques and in-depth product training.knowledge for our store associates, who, we believe, are a key driver in a customer’s purchasing decision.
Digital / Omni-Channel
Our website contains a broad range of information on our products and services, including a comprehensive knowledge base of tools on wood flooring,all things related to flooring. We also offer extensive product reviews, before and after photos from previous customers, product information and how-to installation videos. A consumercustomer also has the ability to chat live with a flooring expert, either online or over the phone, regarding questions about a flooring purchase or installation, either online or over the phone.
installation. We continue to develop several new features and responsive mobile, tablet and website functionsfunctionality to assist consumers withcustomers, and to ensure they have robust tools at their disposal that are effective at helping them make the ideal flooring choice.choice as they move between online and offline channels. We also have an active presence on Facebook, Instagram, Pinterest, YouTube and Twitter.
Advertising and Financing
Advertising: We utilize a mix of traditional and online media, ecommerce, direct mail, social media, and financing offers to emphasize product credibility, value, brand awareness, customer education and direct selling. We increase brand awareness in a variety of ways, including through sports, celebrity endorsements and product placement opportunities. Overall, we actively manage the mix of our media to efficiently drive sales while building brand awareness of our value proposition. We are investing in enhanced digital capabilities.
Financing: We offer our residential customers a financing alternative through a proprietary credit card, the Lumber Liquidators credit card, underwritten by a third partythird-party financial institution, generally with no recourse to us. This program serves the dual function of providing financial flexibility to our customers and offering us promotional opportunities featuring deferred interest, which we often combine with product promotions. Our customers may also use their Lumber Liquidators credit card for installation services. Additionally, weWe also offer our commercial customers a financing alternative. This programalternative, which is also underwritten by a third partythird-party financial institution, generally at no recourse to us. The commercial credit program provides our professional customers a range of additional services that we believe add efficiency to their businesses.
Employees
As of December 31, 2015,2018, we had 1,842approximately 2,200 employees, 96%95% of whom were full-time and none of whom were represented by a union. Of these employees, 71%72% work in our stores, 17%18% work in corporate store support infrastructure or similar functions (including our call center employees) and 12%10% work either on our finishing line or in one of our distribution centers. We believe that we have good relations with our employees.
Seasonality and Quarterly Results
Our quarterly results of operations can fluctuate depending on the timing of our advertising expenses and the timing of, and income contributed by, our new stores. Our net sales fluctuate slightly as a result of seasonal factors, and we adjust merchandise inventories in anticipation of those factors, causing variations in
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our build of merchandise inventories. Generally, we experience higher than average net sales in the spring and fall, when more home remodeling activities typically are taking place, and lower than average net sales in the colder winter months and during the hottest summer months.
Intellectual Property and Trademarks
We have a number of marks registered in the United States, including Lumber Liquidators®, Hardwood Floors For Less!®, Bellawood®, 1-800-HARDWOOD®, 1-800-FLOORING®1‑800‑HARDWOOD®, Quickclic®, Virginia Mill Works Co. Hand Scraped and Distressed Floors®, Morning Star Bamboo Flooring®, Dream Home Laminate Floors®, Builder’s Pride®, Schön Engineered Floors®, Casa de Colour Collection®, Avella®, Coreluxe® and other product line names. We have also registered certain marks in jurisdictions outside the United States, including the European Union, Canada, China, Australia and Japan. We regard our intellectual property as having significant value and these names are an important factor in the marketing of our brands. Accordingly, we take steps intended to protect our intellectual property including, where warranted,necessary, the filing of lawsuits and administrative actions to enforce our rights.
Government Regulation
We are subject to extensive and varied federal, provincial, state and local government regulations in the jurisdictions in which we operate, including laws and regulations relating to our relationships with our employees and customers, independent, third-party installers, public health and safety, zoning, accommodations for persons with disabilities, and fire codes. We are also subject to a number of compliance obligations pursuant to various settlement agreements we have entered into over the past few years. We operate each of our stores, offices finishing facility and distribution centers in accordance with standards and procedures designed to comply with all applicable laws, codes, licensing requirements and regulations. Certain of our operations and properties are also subject to federal, provincial, state and local laws and regulations relating to the use, storage, handling, generation, transportation, treatment, emission, release, discharge and disposal of hazardous materials, substances and wastes and relating to the investigation and cleanup of contaminated properties, including off-site disposal locations. We do not currently incur significant costs complying with the laws and regulations related to hazardous materials. However, we could be subject to material costs, liabilities or claims relating to compliance in the future, especially in the event of changes in existing laws and regulations or in their interpretation, as well as the passage of new laws and regulations.
Our suppliers are subject to the laws and regulations of their home countries, as well as those relative to the import of their products into the United States, including, in particular, laws regulating labor, forestry and the environment. Our suppliers are subject to periodic compliance audits, onsite visits and other reviews, as appropriate, in efforts to ensure that they are in compliance with all laws and regulations. We also support social and environmental responsibility among our supplier community and our suppliers agree to comply with our expectations concerning environmental, labor and health and safety matters. Those expectations include representations and warranties that our suppliers comply with the laws, rules and regulations of the countries in which they operate.
Products that we import into the United States and Canada are subject to laws and regulations imposed in conjunction with such importation, including those issued and/or enforced by U.S. Customs and Border Protection and the Canadian Border Services Agency. In addition, certain of our products are subject to laws and regulations relating to
the importation, acquisition or sale of illegally harvested plants and plant products and the emissions of hazardous materials. We work closely with our suppliers to address the applicable laws and regulations in these areas.
Available Information
We maintain a website atwww.lumberliquidators.com. The information on or available through our website is not, and should not be considered, a part of this report.annual report on Form 10‑K. You may access our annual reports on Form 10-K,10‑K, quarterly reports on Form 10-Q,10‑Q, current reports on Form 8-K8‑K and amendments to those reports, as well as other reports relating to us that are filed with or furnished to the Securities and Exchange Commission (“SEC”) free of charge on our website as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. In addition, you may read and copy any materials we file with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site,www.sec.gov,, which contains reports, proxy and information statements, and other information that we file electronically with the SEC.
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Item 1A. Risk Factors.
The risks described below could materially and adversely affect our business, results of operations, financial condition and cash flows. These risks are not the only risks that we face. Our business operations could also be affected by additional factors that apply generally to all companies operating in the U.S. and globally, as well as other risks that are not presently known to us or that we currently consider to be immaterial.
Risks Related to Our Operations
Unfavorable allegations, government investigations and legal actions surrounding our products or us could harm our reputation and impair our ability to grow or sustain our business.
We rely on our reputation for offering great value, superior service and a broad selection of high-quality, safe flooring products. We are currentlyhave been involved in a number of government investigations and legal actions, many of which have resulted from unfavorable allegations regarding our products and us. Negative publicity surrounding these government investigations and legal actions could continue to harm our reputation and the demand for our products. Additional unfavorable allegations, government investigations and legal actions involving our products and us could also affect our perception in the market and our brands and negatively impact our business and financial condition. For instance, unfavorable allegations surrounding the product quality of our laminates sourced from China has negatively affected and could continue to negatively affect our operations. If this negative impact is significant, our ability to maintain our liquidity and grow or sustain our business could be jeopardized. The cost to defend ourselves and our former employees could be significant.
We are involved in a number of legal proceedings and, while we cannot predict the outcomes of suchthese proceedings and other contingencies with certainty, some of the outcomes of these outcomesproceedings could adversely affect our business and financial condition.
We are, or may become, involved in legal proceedings, government and agency investigations, and consumer, employment, tort and other litigation (see discussion of Legal Proceedings in Item 3 of this Annual Report and Note 10 to the consolidated financial statements includedReport). While we have accrued material liabilities in Item 8connection with certain of this Annual Report). Wethese proceedings, we cannot predict with certainty the outcomes of these legal proceedings.ultimate outcomes. The outcome of some of these legal proceedingproceedings could require us to take or refrain from taking, actions which could be costly to implement or otherwise negatively affect our operations or could require us to pay substantial amounts of money that could have a material adverse effect on our liquidity, financial condition and results of operations and could affect our ability to obtain capital or access our revolving line of creditloan and continue as a going concern. Additionally, defending against lawsuits and legal proceedings may involveinvolves significant expense and diversion of management'smanagement’s attention and resources.
Implementing our Environmental
Our overall compliance program, including the Lacey Compliance Plan, will beis complex and costly to implement and themaintain. A failure to implement the planmanage these programs could adversely affect our ability to importconduct business, result in significant fines and therefore,other penalties, damage our brand and reputation, and, consequently, negatively impact our financial position and results of operations.
As disclosed on October 7, 2015, we reached a settlement with the United States Department of Justice (“DOJ”) regarding our compliance with the Lacey Act. In connection with that settlement, we agreed to implement an environmental compliance plan (the “Compliance Plan”)the Lacey Compliance Plan, and we will beare subject to a probation period of five years. TheOur implementation of the Lacey Compliance Plan, will betogether with requirements resulting from other settlement agreements we have entered into over the past few years (including the Deferred Prosecution Agreement (the “DPA”) with the United States Attorney’s Office for the Eastern District of Virginia (the “U.S. Attorney”) and the DOJ entered into on March 12, 2019), is costly and, if the implementation costs are more than we anticipate, it could adversely impactaffect our operating results. Further, inIn the event we fail to fully implement and comply with the Lacey Compliance Plan as required and in accordance with set deadlines, the government may require us to cease the importation of hardwood flooring from China until the DOJ determines that we are in full compliance with the Lacey Compliance Plan has been satisfactorily implemented.Plan. If we have to cease the importation of hardwood flooring, our ability to operate would be substantially harmed and our business, including our results of operations, would be adversely affected. In the event we breach the DPA, there is a risk the U.S. Attorney and the DOJ would seek to impose remedies provided for in the DPA, including criminal prosecution. Further, the failure to properly manage our overall compliance program and fully comply with the obligations imposed upon us by these various settlement agreements or implement any of the compliance requirements arising from these obligations could adversely affect our ability to conduct business, result in significant fines and other penalties, damage our brand and reputation and negatively impact our financial position and results of operations.
Federal, provincial, state or local laws and regulations, including tariffs, or our failure to comply with such laws and regulations, and our obligations under certain settlement agreements related to our products could increase our expenses, restrict our ability to conduct our business and expose us to legal risks.
We are subject to a wide range of general and industry-specific laws and regulations imposed by federal, provincial, state and local authorities in the countries in which we operate, including those related to tariffs, customs, the environment, foreign operations (such as the Foreign Corrupt Practices Act), truth-in-advertising, consumer
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protection, privacy, zoning and occupancy matters as well as the operation of retail stores and warehouse, production and distribution facilities and provision of installation services. In addition, various federal, provincial and state laws govern our relationship with and other matters pertaining to our employees, including wage and hour laws, requirements to provide meal and rest periods or other benefits, health care insurance issues, minimum wage standards, family leave mandates, requirements regarding working conditions and accommodations to certain employees, citizenship or work authorization and related requirements, insurance and workers’ compensation rules and anti-discriminationhour-related laws. If we fail to comply with these laws and regulations, we could be subject to legal risk, our operations could be impacted negatively and our reputation could be damaged. Likewise, if such laws and regulations should change, including labor laws that impact exempt status and overtime eligibility, our costs of compliance may increase, thereby impacting our results and hurting our profitability.
Certain portions of our operations are subject to laws and regulations governing the use, storage, handling, generation, treatment, emission, release, discharge and disposal of certain hazardous materials and wastes, the remediation of contaminated soil and groundwater and the health and safety of employees. If we are unable to comply with, extend or renew a material approval, license or permit required by such laws, or if there is a delay in renewing any material approval, license or permit, our net sales and operating results could deteriorate or otherwise cause harm to our business.
With regard to our products, we may spend significant time and resources in order to comply with applicable advertising, importation, exportation, environmental and health and safety laws and regulations. If we should violate these laws and regulations, we could experience delays in shipments of our goods, be subject to fines, penalties, criminal charges, or other legal risks, be liable for costs and damages, or suffer reputational harm, which could reduce demand for our merchandise and hurt our business and results of operations. Further, if such laws and regulations should change we may experience increased costs or incur decreased efficiency in order to adhere to the new standards. We are also subject to a number of settlement agreements that impose certain obligations on us with respect to the operation of our business. If we fail to comply with these obligations, we may experience additional costs and expenses and could be subject to additional legal risks.
Our growth strategy is impacted bydepends in part on our ability to open new stores and is subject to many unpredictable factors.
As of December 31, 2015,2018, we had 374413 stores throughout the United States and Canada, 152 of which we opened after January 1, 2011.Canada. Assuming the continued success of our store model and satisfaction of our internal criteria, we plan to open a significant number of new storescontinue our selective approach to future openings over the next several years. This growth strategy and the investment associated with the development of each new store may cause our operating results to fluctuate and be unpredictable or decrease our profits. Our future results and ability to implement our growth strategy will depend on various factors, including the following:
our ability to maintain our reputation of providing safe, compliant products; | · | | as we open more stores, our rate of expansion relative to the size of our store base will decline; |
consumer recognition of the quality of our products; | · | | consumers in new markets may be less familiar with our brands, and we may need to increase brand awareness in those markets through additional investments in advertising; |
the successful resolution of the various pending government investigations and legal proceedings; | · | | new stores may have higher construction, occupancy or operating costs, inventory requirements, or may have lower average store net sales, than stores opened in the past; |
the successful selection of new markets and store locations; | · | | competitive pressures could cause changes to our store model and making necessary changes could prove costly; |
the implementation of and results generated by our new showroom format; | · | | newly opened stores may reach profitability more slowly than we expect in the future, as we enter more mid-sized and smaller markets and add stores to larger markets where we already have a presence; and |
our ability to negotiate leases on acceptable terms;
management of store opening costs;
the quality of our operations;
our ability to meet customer demand;
the continued popularity of hardwood flooring;
our cash flow, access to capital and business condition; and
general economic conditions.
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In addition, the following may impact the net sales and performance of our new stores compared to prior years:
as we open more stores, our rate of expansion relative to the size of our store base will decline;
we may not be able to identify suitable store locations in markets into which we seek to expand and may not be able to open as many stores as planned;
consumers in new markets may be less familiar with our brands, and we may need to increase brand awareness in those markets through additional investments in advertising;
new stores may have higher construction, occupancy or operating costs, or may have lower average store net sales, than stores opened in the past;
we may experience difficulties, delays or failures in obtaining the necessary licenses, permits or other approvals necessary to open and operate particular store locations;
we may incur higher maintenance costs than in the past;
newly opened stores may not succeed or may reach profitability more slowly than we expect, and the ramp-up to profitability may become longer in the future as we enter more mid-sized and smaller markets and add stores to larger markets where we already have a presence; and
future markets and stores may not be successful and, even if we are successful, our average store net sales and our comparable store net sales may not increase at historical rates. | · | | our Canadian stores may require additional investment in advertising due to our limited penetration in the Canadian market. |
Finally, our progress in opening new stores from quarter to quarter may occur at an uneven rate, which may result in quarterly net sales and profit growth falling short of market expectations in some periods.
Our net sales and profit growth could be adversely affected if comparable store net sales are less than we expect.
While future net sales growth will depend substantially on our plans for new store openings, the level of comparable store net sales (which represent the change in period-over-period net sales for stores beginning their thirteenth full month of operation) will also affect our net sales growth and business results. Among other things, increases in our baseline store volumes and the number of new stores opened in existing markets, which tend to open at a higher base level of net sales, will impact our comparable store net sales. As a result, it is possible that we will not achieve our targeted comparable store net sales growth or that the change in comparable store net sales could be negative. If this were to happen, net sales and profit growth would be adversely affected.
Increased transportation costs, particularly those relating to the cost of fuel, could harm our results of operations.
The efficient transportation of our products through our supply chain is a critical component of our operations. If the cost of fuel or other costs, such as import tariffs, duties and international container rates, rise, it could result in increases in our cost of sales due to additional transportation charges and in the fees delivery companies charge us to transport our products to our stores and customers. We may be unable to increase the price of our products to offset increased transportation charges, which could cause our operating results to deteriorate.
Business and operation risks exist in connection with our distribution centers.
In 2013, we purchased 110 acres of undeveloped land in Henrico County, Virginia upon which we constructed a million square foot distribution center. The facility became fully operational in January 2015. This was our first real estate purchase and is the first distribution center owned by us. The cost of operating and managing the East Coast distribution center may exceed our expectations and we may not achieve the benefits that we anticipate from consolidating our East Coast facilities into this East Coast distribution center.
In addition, since early 2014, we have leased and operated a 500,000 square foot distribution center in Pomona, California, our first distribution center located outside of Virginia. The costs of operating may exceed
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our expectations and we may not achieve the benefits that we anticipate. Further, we may face challenges relating to the management of inventory in separate warehouse facilities located on opposite coasts and the impact of the East Coast distribution facility.
If either of these facilities or our inventory held in those locations were damaged or destroyed by fire, wood infestation or other causes, our distribution processes would be disrupted, which could cause significant delays in delivery. This could impede our ability to stock our stores and deliver products to our customers, and cause our net sales and operating results to deteriorate.
Damage, destruction or disruption of our Toano facility or equipment could significantly impact our operations and impede our ability to finish and distribute certain of our products.
Our Toano, Virginia facility serves as our corporate headquarters and, among other things, houses our primary computer systems, which control our management information and inventory management systems. In addition, in 2015, we finished approximately 79% of all Bellawood products, as well as small quantities of certain other products, there. In 2015, Bellawood flooring accounted for approximately 13% of our net sales. If the Toano facility or equipment were damaged or destroyed, it could harm our operations, cause significant lost production and impact our ability to fulfill customer demand.
The operation of stores in Canada may present increased legal and operational risks.
We opened our first stores in Canada in 2011 and currently operate eight store locations there. As a result of our limited penetration and operation history in the Canadian market, these stores may continue to be less successful than we expect. Additionally, greater investments in advertising and promotional activity may be required to continue to build brand awareness in that market. Furthermore, by comparison, we have limited experience with the legal and regulatory environments and market practices outside of the United States and cannot guarantee that we will be able to operate profitably in the Canadian market or in a manner and with results similar to our U.S. stores. We may also incur increased costs in complying with applicable Canadian laws and regulations as they pertain to both our products and our operations.
The operation of our Representative Office in China may present increased legal and operational risks.
We established a representative office in Shanghai, China to facilitate our product sourcing in Asia and we may incur additional costs associated with its operation. In addition, we may incur increased costs to comply with applicable Chinese laws and regulations that exceed our expectations. Further, if we fail to comply with applicable laws and regulations, we could be subject to, among other things, litigation and government and agency investigations.
Failure to effectively manage our third party installers may present increased legal and operational risks.
In certain geographical regions, we manage third party installers who provide installation services to some of our customers. In some of these jurisdictions, we are subject to regulatory requirements and risks applicable to general contractors, which include management of licensing, permitting and quality of our third party installers. We have established processes and procedures designed to manage these requirements and ensure customer satisfaction with the services provided by our third party installers. If we fail to manage these processes effectively or provide proper oversight of these services, we may be subject to regulatory enforcement and litigation and our net sales and our profitability and reputation could be harmed.
Failure to manage our growth effectively could harm our business and operating results.
Our plans call for a significant numberour selective approach in the addition of new stores over the next several years, and increased orders from our website, call center and catalogs. Our existing management information systems, including our store management systems, compliance procedures and financial and reporting controls, may be unable to support our expansion. Managing our growth effectively will require us to continue to enhance these systems, procedures and controls and to hire, train and retain regional and store managers and personnel for our compliance and financial and reporting departments. We may not respond quickly enough to the changing demands that our expansion will impose on us. Any failure to manage our growth effectively could harm our business and operating results.
Increased transportation costs could harm our results of operations.
The efficient transportation of our products through our supply chain is a critical component of our operations. If the cost of fuel or other costs, such as import tariffs, duties and international container rates, rise, it could result in increases in our cost of sales due to additional transportation charges and fees. Additionally, there are a limited number of delivery companies capable of efficiently transporting our products from our suppliers. Consolidation within this industry could result in increased transportation costs. A reduction in the availability of qualified drivers and an increase in driver regulations could continue to increase our costs. We may be unable to increase the price of our products to offset increased transportation charges, which could cause our operating results to deteriorate.
Damage, destruction or disruption of our distribution centers could significantly impact our operations and impede our ability to distribute certain of our products.
We have two distribution centers which house products for the direct shipment of flooring to our stores or to our customers. If either of our distribution centers or our inventory held in those locations were damaged or destroyed by fire, wood infestation or other causes, our distribution processes would be disrupted, which could cause significant
delays in delivery. This could impede our ability to stock our stores and self-insurance reservesdeliver products to our customers, and cause our net sales and operating results to deteriorate.
The operation of stores in Canada and our representative office in China may not cover existing or future claims.present increased legal and operational risks.
We maintain various insurance policies for employee health, workers’ compensation, general liability, property damage, cyber security and professional liability, including directors and officers insurance:
We are self-insured on certain health insurance plans and are responsible for losses up tocurrently operate eight store locations in Canada. As a certain limit forresult of our limited penetration in the Canadian market, these respective plans.
Beginning in 2013, we are self-insured with regard to workers’ compensation coverage, in which case we are responsible for losses up to certain retention limits on both a per-claim and aggregate basis.
Westores may continue to be responsible for losses up to a certain limit for general liabilityless successful than we expect. Additionally, investments in advertising and property damage insurance.
Our professional liability and cyber security insurance contain limitations on the amount and scope of coverage.
With the large number of cases and government investigations we have pending, wepromotional activity may be required to defendcontinue to build brand awareness in that market.
We also have a representative office in Shanghai, China to facilitate our product sourcing in Asia. We have limited experience with the Company, its officers, directorslegal and former employeesregulatory environments and market practices outside of the United States and cannot guarantee that we will be able to operate profitably in these markets or in a manner and with results similar to those in the United States. We may also incur increased costs in complying with applicable Canadian and Chinese laws and regulations as they pertain to both our products and our operations. Further, if we fail to comply with applicable laws and regulations, we could be subject to, among other things, litigation and government and agency investigations.
Failure to effectively manage our third-party installers may present increased legal and operational risks.
We manage third-party installers who provide installation services to some of our customers. In some of these jurisdictions, we are subject to regulatory requirements and risks applicable to general contractors, which include management of licensing, permitting and quality of our third-party installers. We have established procedures designed to manage these requirements and ensure customer satisfaction with the services provided by our third-party installers. If we fail to manage these procedures effectively or provide proper oversight of these services, we may be subject to financial harm inregulatory enforcement and litigation and our net sales and our profitability and reputation could be harmed.
Our founder is the event such cases or investigations are adversely determined and insurance coverage will not, or is not sufficient to, cover any related losses. For policies under which we are responsible for losses, we record a liability that represents our estimated cost of claims incurred and unpaid as of the balance sheet date. Our estimated liability is not discounted and is basedlessor on a significant number of assumptionsour leases and factors, including historical trends, actuarial assumptionsthe satisfactory renewal of these as each comes due is a risk to our occupancy costs and economic conditions, and is closely monitored and adjusted when warranted by changing circumstances. Fluctuating healthcare costs, our growth rate and changes from our past experience with workers’ compensation claims could affect the accuracy of estimates based on historical experience. Should a greater amount of claims occur compared to what was estimated or medical costs increase beyond what was expected, our accrued liabilities might not be sufficient and we may be required to record additional expense. Unanticipated changes may produce materially different amounts of expense than that reported under these programs, which could adversely impact our operating results.store count.
We have entered into a number of lease agreements with companies controlled by our founder and this concentration of leases may pose certain business risks.
As of December 31, 2015,2018, we leaseleased our Toano facility, which includes a store location, a warehouse and 3029 of our other store locations from entities owned, in whole or in part, by Tom Sullivan, our founder and a current member of our board of directors.founder. Although our percentage of total stores leased from such entities has decreased overand our lease at the last year,Toano facility ends on December 31, 2019, this concentration of leases subjects us to the risk of increased costs or reduction of store count in the event of an adverse action or inaction by TomMr. Sullivan or such entities impactsentities. Mr. Sullivan no longer serves as an employee or as a director of the Company.
Our success dependsupon the retention of our leasehold interests inpersonnel.
We believe that our success has depended and continues to depend on the locations.efforts and capabilities of our employees. The loss of the services of key employees due to any negative market or industry perception, the Company’s stock price, the Company’s headquarters move, and/or litigation may prevent us from achieving operational goals and harm our reputation.
Risks Related to Our Suppliers, Products and Product Sourcing
Our ability and cost to obtain cost-effective products, especially from China and other international suppliers, and the operations of many of our international suppliers are subject to risks that may be beyond our control and that could harm our operations and profitability.
We rely on a select group of international suppliers to provide us with imported flooring products that meet our specifications. In 2018, our imported product was sourced from Asia, Europe, Australia and South America. As a result, we are subject to risks associated with obtaining products from abroad, including:
| · | | the imposition of duties (including antidumping and countervailing duties), tariffs, taxes and/or other charges on exports or imports; |
| · | | political unrest, terrorism and economic instability resulting in the disruption of trade from foreign countries where our products originate; |
| · | | currency exchange fluctuations; |
| · | | the imposition of new laws and regulations, including those relating to environmental matters and climate change issues, labor conditions, quality and safety standards, trade restrictions, and restrictions on funds transfers; |
| · | | disruptions or delays in production, shipments, delivery or processing through ports of entry; and |
| · | | differences in product standards, acceptable business practices and legal environments of the country of origin. |
In 2018, we sourced approximately 47% of our products from China. Virtually all of these products had a 10% tariff imposed upon them in late 2018 and many of these products could increase further should the tariff rate increase as has been announced but postponed indefinitely, go into effect. Potential costs and any attendant impact on pricing arising from these tariffs could have a material adverse effect on our results of operations, financial condition and liquidity.
These and other factors beyond our control could disrupt the ability of our suppliers to ship certain products to us cost-effectively or at all, which could harm our operations. If our product costs and consumer demand are adversely affected by foreign trade issues (including import tariffs and other trade restrictions with China), our sales and profitability may suffer.
Failure to identify and develop relationships with a sufficient number of qualified suppliers could affect our ability to obtain products that meet our high quality standards.
We purchase flooring directly from mills located around the world. We believe that these direct supplier relationships are important to our business. In order to retain the competitive advantage that we believe results from these relationships, we need to continue to identify, develop and maintain relationships with qualified suppliers that can satisfy our high standards for quality and our requirements for the delivery of hardwood in a timely and efficient manner. We expect the need to develop new relationships to be particularly important as we seek to expand our operations, enhance our product offerings, and expand our product assortment and geographic source of origin in the future. Any inability to do so could reduce our competitiveness, slow our plans for further expansion and cause our net sales and operating results to deteriorate.
We rely on a concentrated number of suppliers for a significant portion of our supply needs. We generally do not use ethical business practices,have long-term contracts with our suppliers. In the future, our suppliers may be unable to supply us, or supply us on acceptable terms, due to various factors, which could include political instability in the supplier’s country, insufficient production capacity, product line failures, collusion, a supplier’s financial instability, inability or refusal to comply with
applicable laws, trade restrictions, tariffs or our standards, duties, insufficient transport capacity and other factors beyond our control. In these circumstances, we could experience deterioration in our net sales and operating results.
The failure of our suppliers to comply with applicable laws, use ethical practices, and regulations and ensure that their products meet our quality standards could result in our reputationsuspending purchasing from them, negatively impacting net sales, and could be harmed dueexpose us to negative publicityreputational and we could be subject to legal risk.risks.
While our suppliers agree to operate in compliance with applicable laws and regulations, including those relating to environmental and labor practices, we do not control our suppliers. Accordingly, despite our continued investment in quality control, we cannot guarantee that they comply with such laws and regulations or operate in a legal, ethical and responsible manner. Violation of environmental, labor or other laws by our suppliers or their failure to operate in a legal, ethical and responsible manner could cause us to violate such laws and could reduce demand for our products if, as a result of such violation or failure, we were to attract negative publicity. Further, we require our suppliers to adhere to our quality standards. While we do monitor our suppliers’ adherence to suchour quality standards, there is no guarantee that we will be able to identify their non-compliance. Moreover, the failure of our suppliers to adhere to applicable legal requirements and the quality standards that we set for our products could lead to government investigations, litigation, write-offs and recalls, which could damage our reputation and our brands, increase our costs, and otherwise hurt our business.
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Product liability claims could adversely affect our reputation, which could adversely affect our net sales profitability and reputation.
profitability.We have faced and continue to face an inherentthe risk of exposure to product liability claims in the event that the use of our products is alleged to have resulted in economic loss, personal injury or property damage or violated environmental or other laws. In the event that any of our products proves to be defective or otherwise in violation of applicable law,laws, we may be required to recall or redesign such products. Further, in such instances, we may be subject to legal action. We maintain insurance against some forms of product liability claims, but such coverage may not be available or adequate for the liabilities actually incurred. A successful claim brought against us in excess of available insurance coverage, or any claim or product recall that results in significant adverse publicity against us, may have a material adverse effect on our net sales and operating results.
Our ability to obtain products from abroad and the operations of many of our international suppliers are subject to risks that are beyond our control and that could harm our operations.
We rely on a select group of international suppliers to provide us with flooring products that meet our specifications. In 2015, approximately 48% of our product was sourced from North America, approximately 39% of our product was sourced from Asia, approximately 8% was sourced from Europe and Australia and approximately 5% was sourced South America. As a result, we are subject to risks associated with obtaining products from abroad, including:
political unrest, terrorism and economic instability resulting in the disruption of trade from foreign countries where our products originate;
currency exchange fluctuations;
the imposition of new laws and regulations, including those relating to environmental matters and climate change issues; labor conditions; quality and safety standards; trade restrictions; and restrictions on funds transfers;
the imposition of new or different duties (including antidumping and countervailing duties), tariffs, taxes and/or other charges on exports or imports, including as a result of errors in the classification of products upon entry or changes in the interpretation or application of rates or regulations relating to the import or export of our products;
disruptions or delays in production, shipments, delivery or processing through ports of entry (including those resulting from strikes, lockouts, work-stoppages or slowdowns, or other forms of labor unrest);
changes in local economic conditions in countries where our suppliers are located; and
differences in product standards, acceptable business practice and legal environments.
These and other factors beyond our control could disrupt the ability of our suppliers to ship certain products to us cost-effectively or at all, which could harm our operations.
Our ability to offer hardwood flooring, particularly products made of more exotic species of hardwood, depends on the continued availability of sufficient suitable hardwood.
hardwood at reasonable cost.Our business strategy depends on offering a wide assortment of hardwood flooring to our customers. We sell flooring made from species ranging from domestic maple, oak and pine to imported cherry, koa, mahogany and teak. Some of these species are scarce, and we cannot be assured of their continued availability. Our ability to obtain an adequate volume and quality of hard-to-find species depends on our suppliers’ ability to furnish those species, which, in turn, could be affected by many things including events such as forest fires, insect infestation, tree diseases, prolonged drought and other adverse weather and climate conditions. Government regulations relating to forest management practices also affect our suppliers’ ability to harvest or export timber, and changes to regulations and forest management policies, or the implementation of new laws or regulations, could impede their ability to do so. If our suppliers cannot deliver sufficient hardwood and we cannot find replacement suppliers, our net sales and operating results may be negatively impacted.
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Our dependence on certain suppliers makes us vulnerable to the extent we rely on them.
We rely on a concentrated number of suppliers for a significant portion of our supply needs. We generally do not have long-term contracts with our suppliers, and we typically obtain our hardwood supplies on an order-by-order basis, writing orders for future deliveries from 90 to 180 days before delivery. In the future, our suppliers may be unable to supply us, or supply us on acceptable terms, due to various factors, which could include political instability in the supplier’s country, insufficient production capacity, product line failures, collusion, a supplier’s financial instability, inability or refusal to comply with applicable laws, trade restrictions, tariffs or our standards, duties, insufficient transport capacity and other factors beyond our control. If we can no longer obtain merchandise from our larger suppliers, or they refuse to continue to supply us on commercially reasonable terms or at all, and we cannot find replacement suppliers, we could experience deterioration in our net sales and operating results.
If we fail to identify and develop relationships with a sufficient number of qualified suppliers, our ability to obtain products that meet our high quality standards could be harmed.
We purchase flooring directly from mills located around the world. We believe that these direct supplier relationships are important to our business. In order to retain the competitive advantage that we believe results from these relationships, we need to continue to identify, develop and maintain relationships with qualified suppliers that can satisfy our high standards for quality and our requirements for hardwood in a timely and efficient manner. The need to develop new relationships will be particularly important as we seek to expand our operations, enhance our product offerings, and expand our product assortment and geographic source of origin in the future. Any inability to do so could reduce our competitiveness, slow our plans for further expansion and cause our net sales and operating results to deteriorate.
Increased hardwood costs could harm our results of operations.
The cost of the various species of hardwood that are used in our products is important to our profitability. Hardwood lumber costs fluctuate as a result of a number of factors including changes in domestic and international supply and demand, labor costs, competition, market speculation, product availability, environmental restrictions, government regulation and trade policies, duties, weather conditions, processing and freight costs, and delivery delays and disruptions. We generally do not have long-term supply contracts or guaranteed purchase amounts. As a result, we may not be able to anticipate or react to changing hardwood costs by adjusting our purchasing practices, and we may not always be able to increase the selling prices of our products in response to increases in supply costs. If we cannot address changing hardwood costs appropriately, it could cause our operating results to deteriorate.
We may not be able to successfully anticipate consumer trends and our failure to do so may adversely impact our net sales and profitability.
As part
Risks Related to Economic Factors and Our Industry
Changes in economic conditions may adversely impact demand for our products, reduce accessAccess to credit and cause our customers and others with whom we do business to suffer financial hardship, all of which could adversely impact our business, results of operations and financial condition.
CapitalOur business, financial condition and results of operations have and may continue to be affected by various economic factors. ChangesCyclicality in the current economic environment and uncertainty about the future could lead to reduced consumer and business spending, including by our customers. Such changes may also cause customers to shift their spending to products we either do not sell or do not sell as profitably. Further, a reduced access to credit may adversely affect the ability of consumers to purchase our products. This potential
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reduction in access to credit may impact our ability to offer customers credit card financing through third party credit providers on terms similar to those offered previously, or at all. In addition, economic conditions, including decreased access to credit, may result in financial difficulties leading to restructurings, bankruptcies, liquidations and other unfavorable events for our customers, suppliers and other service providers. If such conditions deteriorate, our industry, business and results of operations may be severely impacted.
The hardwoodhome flooring industry, depends on the economy, home remodeling activity, the homebuilding industrycoupled with our lack of diversity in our lines of business, could cause volatility and other important factors.
risk to our business.The hardwood flooring industry is highly dependent on the remodeling of existing homes and new home construction. In turn, remodelingRemodeling and new home construction are cyclical and depend on a number of factors which are beyond our control, including interest rates, tax policy, employment levels, consumer confidence, credit availability, real estate prices, demographic trends, weather conditions, natural disasters and general economic conditions. For example, discretionary consumer spending could be limited, spending on remodeling of existing homes could be reduced and purchases of new homes could decline if:
the national economy or any regional or local economy where we operate weakens;
interest rates rise;
credit becomes less available;
tax rates and health care costs increase;
regions where we operate experience unfavorable demographic trends;
fuel costs or utility expenses increase; or
home prices depreciate.
In the event of a decrease in discretionary spending, home remodeling activity or new home construction, demand for our products, including hardwood flooring, could be impacted negatively and our business and operating results could be harmed.
Competition could cause price declines, decrease demand for
Our insurance coverage and self-insurance reserves may not cover existing or future claims.
With the large number of pending cases and government investigations, we may be required to defend ourselves and our productsofficers, directors and decrease our market share.
We operateformer employees and we may be subject to financial harm in the wood flooring industry,event such cases or investigations are adversely determined and insurance coverage will not, or is not sufficient to, cover any related losses. We maintain various insurance policies, including directors and officers insurance, as well as the following:
| · | | We are self-insured on certain health insurance plans and workers’ compensation coverage and are responsible for losses up to a certain limit for these respective plans. |
| · | | We continue to be responsible for losses up to a certain limit for general liability and property damage insurance. |
| · | | Our professional liability and cyber security insurance policies contain limitations on the amount and scope of coverage. |
For policies under which is highly fragmentedwe are responsible for losses, we record a liability that represents our estimated cost of claims incurred and competitive. We face significant competition from national and regional home improvement chains, national and regional specialty flooring chains, Internet-based companies and privately-owned single-site enterprises. We compete on the basis of price, customer service, store location and range, quality and availabilityunpaid as of the hardwood flooring that we offerbalance sheet date. Unanticipated changes may produce materially different amounts of expense than those recorded, which could adversely impact our customers. Ifoperating results. Additionally, our positioning with regardrecent experience could limit our ability to oneobtain satisfactory insurance coverage, subjecting us to further loss, or more of these factors should erode, deteriorate, fail to resonate with consumers or misalign with demand or expectations, our business and results may be impacted negatively.could require significantly increased premiums.
Our competitive position is also influenced by the availability, quality and cost of merchandise, labor costs, finishing, distribution and sales efficiencies and our productivity compared to that of our competitors. Further, as we expand into new and unfamiliar markets, we may face different competitive environments than in the past. Likewise, as we continue to enhance and develop our product offerings, we may experience new competitive conditions.
Some of our competitors are larger organizations, have existed longer, are more diversified in the products they offer and have a more established market presence with substantially greater financial, marketing, personnel and other resources than we have. In addition, our competitors may forecast market developments more accurately than we do, develop products that are superior to ours or produce similar products at a lower cost, or adapt more quickly to new technologies or evolving customer requirements than we do. Intense competitive pressures from one or more of our competitors could cause price declines, decrease demand for our products and decrease our market share.
Hardwood flooring may become less popular as compared to other types of floor coverings in the future. For example, our products are made using various hardwood species, including rare exotic hardwood species, and concern over the environmental impact of tree harvesting could shift consumer preference towards
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synthetic or inorganic flooring. In addition, hardwood flooring competes against carpet, vinyl sheet, vinyl tile, ceramic tile, natural stone and other types of floor coverings. If consumer preferences shift toward types of floor coverings other than hardwood flooring, we may experience decreased demand for our products.
All of these competitive factors may harm us and reduce our net sales and operating results.
If we are unableThe inability to access our credit facilityRevolving Credit Facility or other sources of capital, could cause our financial position, liquidity, and results of operations could suffer,
to suffer.We have relied on and expect to continue to rely on a bank credit facilityagreement to fund our seasonal needs for working capital. We have signed a commitment letter to increase the amounts available under this Revolving Credit Facility and may need to access additional sources of capital to satisfy our liquidity needs. Our continued access to this facilitythe Revolving Credit Facility depends on our ability to meet the conditions tofor borrowing, including that all representations are true and correct at the time of the borrowing. There is no assurance that we will be able to consummate the commitment letter. Also, there is no assurance that we could obtain additional financing on acceptable terms, if at all. Our failure to meet these requirements or obtain additional or alternative sources of capital could impact:
| · | | our ability to fund working capital, capital expenditures, store expansion and other general corporate purposes; |
our ability to meet liquidity needs; | · | | our ability to meet our liquidity needs, arising from, among other things, legal matters; and |
our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate. | · | | our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate. |
Risks Related to Our Information Technology
If our management information systems experience disruptions, it could disrupt our business and reduce our net sales.
We depend on our management information systems to integrate the activities of our stores, website and call center, to process orders, to respond to customer inquiries, to manage inventory, to purchase merchandise and to sell and ship goods on a timely basis. We may experience operational problems with our information systems as a result of system failures, viruses, computer “hackers” or other causes. We may incur significant expenses in order to repair any such operational problems. Any significant disruption or slowdown of our systems could cause information, including data related to customer orders, to be lost or delayed, which could result in delays in the delivery of products to our stores and customers or lost sales. Moreover, our entire corporate network, including our telephone lines, is on an Internet-based network. Accordingly, if our network is disrupted, we may experience delayed communications within our operations and between our customers and ourselves, and may not be able to communicate at all via our network, including via telephones connected to our network.
The selection and implementation of information technology initiatives may impact our operational efficiency and productivity.
In order to better manage our business, we expect to invest in our information systems. In doing so, we must select the correct investments and implement them in an efficient manner. The costs, potential problems and interruptions associated with implementing technology initiatives could disrupt or reduce the efficiency of our operations. Furthermore, these initiatives might not provide the anticipated benefits or provide them in a delayed or more costly manner. Accordingly, issues relating to our selection and implementation of information technology initiatives may negatively impact our business and operating results.
Any disruption of our website or our call center could disrupt our business and lead to reduced net sales and reputational damage.
Our website and our call center are integral parts of our integrated multi-channel strategy. Customers use our website and our call center as information sources on the range of products available to them and to order our products, samples or catalogs. Our website, in particular, is vulnerable to certain risks and uncertainties associated with the Internet, including changes in required technology interfaces, website downtime and other technical failures, security breaches and consumer privacy concerns. If we cannot successfully maintain our website and call center in good working order, it could reduce our net sales and damage our reputation. Further, the costs associated with such maintenance may exceed our estimations.
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We may incur costs and losses resulting from security risks we face in connection with our electronic processing, transmission and storage of confidential customer information.
We accept electronic payment cards for payment in our stores and through our call center. In addition, our online operations depend upon the secure transmission of confidential information over public networks, including information permitting cashless payments. As a result, we may become subject to claims for purportedly fraudulent transactions arising out of the actual or alleged theft of credit or debit card information, and we may also be subject to lawsuits or other proceedings relating to these types of incidents. Further, a compromise of our security systems that results in our customers’ personal information being obtained by unauthorized persons could adversely affect our reputation with our customers and others, as well as our operations, results of operations and financial condition, and could result in litigation against us or the imposition of penalties. A security breach could also require that we expend significant additional resources related to the security of information systems and could result in a disruption of our operations, particularly our online sales operations.
Additionally, privacy and information security laws and regulations change, and compliance with them may result in cost increases due to necessary systems changes and the development of new administrative processes. If we fail to comply with these laws and regulations or experience a data security breach, our reputation could be damaged, possibly resulting in lost future business, and we could be subjected to additional legal risk as a result of non-compliance.
Risks Related to Our Personnel
Our success depends substantially upon the continued retention of certain key personnel.
We believe thatIf our success has depended and continues to depend to a significant extent on the efforts and abilities ofmanagement information systems, including our senior management team and other key personnel. The loss, for any reason, of the services of any of these key individuals and any negative marketwebsite or industry perception arising from such loss,our call center, experience disruptions, it could damagedisrupt our business and harmreduce our reputation.net sales.
We announceddepend on our management information systems to integrate the appointment of John M. Presley as our chief executive officer in November 2015. Mr. Presley replaced Thomas D. Sullivan, who had been serving as acting chief executive officer since Robert M. Lynch’s resignation in May 2015. Earlier in 2015, we appointed Gregory A. Whirley, Jr. as our interim Chief Financial Officer to replace Daniel E. Terrell, who had served as our Chief Financial Officer since October 2006. Also in 2015, we integrated the leadershipactivities of our merchandisingstores, website and marketing departmentscall center, to process orders, to respond to customer inquiries, to manage inventory, to purchase merchandise and promoted Marco Q. Pescara from Chief Marketing Officer to Chief Merchandisingsell and Marketing Officer.ship goods on a timely basis. We may experience operational problems with our information systems as a result of system failures, viruses, computer “hackers” or other causes. We may incur significant expenses in order to repair any such operational problems. Any significant leadership changedisruption or executive management transition involves inherent risk,slowdown of our systems could cause information, including data related to customer orders, to be lost or delayed, which could result in delays in the delivery of products to our stores and customers or lost sales. Moreover, our entire corporate network, including our telephone lines, is on an Internet-based network, which is vulnerable to certain risks and uncertainties, including changes in required technology interfaces, website downtime and other technical failures, security breaches and customer privacy concerns. Accordingly, if our network is disrupted or if we cannot successfully maintain our website and call center in good working order, we may experience delayed communications within our operations and between our customers and ourselves, and may not be able to communicate at all via our network, including via telephones connected to our network.
Alternative e-commerce and online shopping offerings may erode our customer base and adversely affect our business.
Our long-term future depends heavily upon the general public’s willingness to use our stores as a means to purchase goods. In recent years, e-commerce has become more widely accepted as a means of purchasing consumer goods and services, which could experience disruptionsadversely impact customer traffic in our executive management transition, or any executive management transition that may occur in the future, which could hinderstores. Additionally, certain of our strategic planning, executioncompetitors offer alternative e-commerce and future performance.
Our success depends upon our ability to meet our labor needs.
Our success depends in part on our ability to attract, hire, trainonline shopping. If consumers use alternative e-commerce and retain qualified managers and associates. Buying hardwood flooring is an infrequent event, and typical consumers have very little knowledge of the range, characteristics and suitability of the products available to them before starting the purchasing process. Therefore, consumers in the hardwood flooring market expect to have sales associates serving them who are knowledgeable about the entire assortment of products offered by the retailer and the process of choosing and installing hardwood flooring. As a result, competition for qualified store managers and sales associates among flooring retailers is intense. We may not succeed in attracting and retaining the personnel we requireonline shopping offerings to conduct business as opposed to our current operations and support our potential future growth. In addition, as we expand into new markets, we may find it more difficult to hire, motivate and retain qualified employees.
Although none of our employees are currently covered under collective bargaining agreements, we cannot guarantee that our employees will not elect to be represented by labor unions in the future. If some or our entire workforce were to become unionized and collective bargaining agreement terms were significantly different from our current compensation arrangements or work practices,store locations, it could have a material adverse effect onmaterially adversely impact our businessnet sales and operating results.
Risks Relating to Our Marketing and Advertising
Our success depends on the effectivenessCompetitive Positioning
A tarnished brand or ineffectiveness of our advertising strategy.strategy could result in reduced customer traffic, thereby impacting net sales and profitability.
We believe that our growth thus far was achieved in part through our successful investment in local and national advertising. Historically, we have used extensive advertising to encourage customers to drive to our stores, which were typicallygenerally located some distance from population centers in areas that have lower rents than traditional retail locations. Further, a significant portion of our advertising was directed at the DIY and DIFM consumers.customers. While our marketing strategy continues to support our real estate strategy and remains focused on retaining the DIY and DIFM customers,these strategies, we have broadened the reach and frequency of our advertising to increase the recognitionawareness of our value proposition and the number of customers served. We may needIf there is are negative perceptions about our brand to further increase our advertising expense to support our business strategies in the future. Ifcustomers, our advertisements fail to draw customers in the future, or if the cost of advertising or other marketing materials increases significantly, we could experience declines in our net sales and operating results.
Competition could cause price declines, decrease demand for our products and decrease our market share.
We may not be able to adequately protect our intellectual property,operate in the wood flooring industry, which could harmis highly fragmented and competitive. We face significant competition from national and regional home improvement chains, national and regional specialty flooring chains, Internet-based companies and privately owned single-site enterprises. We compete on the valuebasis of our brands and impact our business.
Our intellectual property is material to the conduct of our business. The successful implementation of our business plan depends in part on our ability to further build brand recognition using our trademarks,price, customer service, marks and other proprietary intellectual property, including our name and logostore location and the namesrange, quality and logosavailability of the hardwood flooring that we offer our brands. We may incur significant costs and expenses relating to our efforts to enforce our intellectual property rights.customers. If our effortspositioning with regard to protect our intellectual property are inadequate,one or if any third party infringes onmore of these factors should erode, deteriorate, fail to resonate with consumers or misappropriates our intellectual property, the value of our brands may be harmed, which could adversely affectmisalign with demand or expectations, our business and might preventresults may be negatively impacted.
Our competitive position is also influenced by the availability, quality and cost of merchandise, labor costs, distribution and sales efficiencies and our brands from achieving or maintaining market acceptance.
We may initiate claims or litigation against parties for infringementproductivity compared to that of our intellectual property rights or to establish the invalidity, non-infringement, or unenforceability of the proprietary rights of others. Likewise,competitors. Further, as we expand into new and unfamiliar markets, we may have similar claims or litigation brought against us by competitorsface different competitive environments than in the past. Likewise, as we continue to enhance and others. Under either situation and regardless of any ultimate determination on the merits,develop our product offerings, we could incur significant expense and be forced to divert the efforts of key employees from our operations. Moreover, such claims or litigation could harm our image, brand ormay experience new competitive position and cause us to incur significant penalties and costs.conditions.
Risks Relating to Our Common Stock
Our common stock price may be volatile and all or part of any investment in our common stock may be lost.
The market priceSome of our common stock could fluctuate significantly. Those fluctuations could be based on various factorscompetitors are larger organizations, have existed longer, are more diversified in the products they offer and have a more established market presence with substantially greater financial, marketing, personnel and other resources than we have. In addition, our competitors may forecast market developments more accurately than we do, develop products that are superior to those otherwise described in this report, including:
our operating performance and the performanceours, produce similar products at a lower cost or adapt more quickly to new technologies or evolving customer requirements than we do. Intense competitive pressures from one or more of our competitors;
the public’s reaction to our filings with the SEC, our press releases and other public announcements;
unfavorable market reactions to allegations regarding the safety ofcompetitors could cause price declines, decrease demand for our products and
decrease our market share.Hardwood flooring may become less popular as compared to other types of floor coverings in the related litigation and/future. For example, our products are made using various hardwood species, including rare exotic hardwood species, and concern over the environmental impact of tree harvesting could shift consumer preferences towards synthetic or government investigations resulting therefrom, as well as any payments, judgments or other losses in connection with such lawsuits and/or investigations;
changes in recommendations or earnings estimates by research analysts who follow Lumber Liquidators or other companies in our industry;
variations in general economic conditions;
actions of our current stockholders, including sales of common stock by our directors and executive officers;
the arrival or departure of key personnel; and
other developments affecting us, our industry or our competitors.
inorganic flooring. In addition, the stock markethardwood flooring competes against carpet, vinyl sheet, vinyl tile, ceramic tile, natural stone and other types of floor coverings. If consumer preferences shift toward types of floor coverings that we do not sell, we may experience significant pricedecreased demand for our products.
All of these competitive factors may harm us and volume fluctuations. These fluctuations may be unrelated to the operating performance of particular companies but may cause declines in the market
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price ofreduce our common stock. The price of our common stock could fluctuate based upon factors that have little or nothing to do with our company or its performance.
Our quarterly operating results may fluctuate significantly and could fall below the expectations of research analysts and investors due to various factors.
Our quarterly operating results may fluctuate significantly because of various factors, including:
changes in comparable store net sales and customer transactions, including as a result of declining consumer confidence or the introduction of new products;
the timing of new store openings and related net sales and expenses;
profitability and performance of our stores;
the timing of remodels and relocations of existing stores and related net sales and expenses;
the impact of inclement weather, natural disasters and other calamities;
variations in general economic conditions;
unfavorable customer reactions to allegations regarding the safety of our products, the impact of litigation and/or government investigations to which we are subject, as well as any payments, judgments or other losses in connection with such lawsuits and/or investigations;
the timing and scope of sales promotions and product introductions;
changes in consumer preferences and discretionary spending;
fluctuations in supply prices; and
tax expenses, impairment charges and other non-operating costs.
Due to these factors, results for any one quarter are not necessarily indicative of results to be expected for any other quarter or for any year. Average store net sales or comparable store net sales in any particular future period may decrease. In the future, operating results may fall below the expectations of research analysts and investors, which could cause the price of our common stock to fall.results.
Our anti-takeover defense provisions may cause our common stock to trade at market prices lower than it might absent such provisions.
Our certificate of incorporation and bylaws contain several provisions that may make it more difficult or expensive for a third party to acquire control of us without the approval of our board of directors. These provisions include a staggered board, the availability of “blank check” preferred stock, provisions restricting stockholders from calling a special meeting of stockholders or requiring one to be called or from taking action by written consent and provisions that set forth advance notice procedures for stockholders’ nominations of directors and proposals of topics for consideration at meetings of stockholders. Our certificate of incorporation also provides that Section 203 of the Delaware General Corporation Law, which relates to business combinations with interested stockholders, applies to us. These provisions may delay, prevent or deter a merger, acquisition, tender offer, proxy contest or other transaction that might otherwise result in our stockholders receiving a premium over the market price for their common stock. In addition, these provisions may cause our common stock to trade at a market price lower than it might absent such provisions.
RiskRisks Related to Accounting Standards
and Internal Controls
Changes in accounting standards, and subjective assumptions, estimates and judgments by management related to complex accounting matters, and failures in internal control could significantly affect our financial results.
Generally accepted accounting principles and related accounting pronouncements, implementation guidelines and interpretations with regard to a wide range of matters that are relevant to our business, including but not limited to, consolidation, revenue recognition, stock-based compensation, lease accounting, sales returns reserves, inventories, self-insurance, income taxes, deferred taxes, valuation allowances, unclaimed property laws and litigation, are highly
complex and involve many subjective assumptions, estimates and judgments by our management.
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Changes in these rules or their interpretation or changes in underlying assumptions, estimates or judgments by our management could significantly change our reported or expected financial performance.performance, which may have a material effect on our results of operation.
Failure to maintain effective systems of internal and disclosure control could have a material adverse effect on our results of operation and financial condition.
Effective internal and disclosure controls are necessary for us to provide reliable financial reports and effectively prevent fraud, and to operate successfully as a public company. If we cannot provide reliable financial reports or prevent fraud, our reputation and operating results would be harmed. As part of our ongoing monitoring of internal control, we may discover material weaknesses or significant deficiencies in internal control that require remediation. A “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that
In the current period, we identified a material misstatement of a company's annual or interim financial statements will not be prevented or detected on a timely basis.
Weweakness as discussed in Item 9A. Additionally, we have in the past discovered, and may in the future discover, areas of its internal controls that need improvement. Even so,Regardless, we continue to work to remediate and improve our internal controls. We cannot be certain that these measures will ensure that we implement and maintain adequate controls over our financial processes and reporting in the future. Any failure to maintain effective controls or to timely implement any necessary improvement of our internal and disclosure controls could, among other things, result in losses from fraud or error, harm our reputation, or cause investors to lose confidence in the reported financial information, all of which could have a material adverse effect on our results of operation and financial condition.
Risks Relating to Our Common Stock
Our common stock price may be volatile and all or part of any investment in our common stock may be lost.
The market price of our common stock could fluctuate significantly based on various factors, including, but not limited to:
| · | | unfavorable market reactions to allegations regarding the safety of our products and the related litigation and/or government investigations resulting therefrom, as well as any payments, judgments or other losses in connection with such lawsuits and/or investigations; |
| · | | trading activity of our current or future stockholders, including common stock transactions by our directors and executive officers; |
| · | | industry-related trends and growth prospects; and |
| · | | our concentration in the cyclical home furnishings industry. |
In addition, the stock market may experience significant price and volume fluctuations. These fluctuations may be unrelated to the operating performance of particular companies but may cause declines in the market price of our common stock. The price of our common stock could fluctuate based upon factors that have little or nothing to do with us or our performance.
Our quarterly operating results may fluctuate significantly and could fall below the expectations of research analysts and investors due to various factors.
Research analysts and investors develop expectations on how we may perform using a variety of metrics, including, but not limited to, sales, comparable store sales and gross profit. However, in any given quarter, actual performance may vary from these expectations, causing significant fluctuations in our stock price.
Our anti-takeover defense provisions may cause our common stock to trade at market prices lower than it might absent such provisions.
Our certificate of incorporation and bylaws contain provisions that may make it more difficult or expensive for a third party to acquire control of us without the approval of our board of directors. These provisions include a staggered board, the availability of “blank check” preferred stock, provisions restricting stockholders from calling a special meeting of stockholders or from taking action by written consent and provisions that set forth advance notice procedures for stockholders’ nominations of directors and proposals of topics for consideration at meetings of stockholders. Our certificate of incorporation also provides that Section 203 of the Delaware General Corporation Law, which relates to business combinations with interested stockholders, applies to us. These provisions may delay, prevent or deter a merger, or other transaction that might otherwise result in our stockholders receiving a premium over the market price for their common stock. In addition, these provisions may cause our common stock to trade at a market price lower than it might absent such provisions.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
As of February 25, 2016,March 1, 2019, we operated 375412 stores located in 4647 states and Canada, including one openedopening and two closings since December 31, 2015.2018. In addition to our eight stores in Ontario, Canada, the table below sets forth the locations (alphabetically by state) of our 367404 U.S. stores in operation as of February 25, 2016.March 1, 2019.
| | | | | | | | | | | | | | |
State | | Stores | | State | | Stores | | State | | Stores | | State | | Stores |
Alabama | | 6 | | Iowa | | 3 | | Nebraska | | 2 | | Rhode Island | | 1 |
Arizona | | 6 | | Kansas | | 3 | | Nevada | | 4 | | South Carolina | | 10 |
Arkansas | | 2 | | Kentucky | | 5 | | New Hampshire | | 5 | | South Dakota | | 1 |
California | | 45 | | Louisiana | | 6 | | New Jersey | | 14 | | Tennessee | | 6 |
Colorado | | 9 | | Maine | | 3 | | New Mexico | | 1 | | Texas | | 29 |
Connecticut | | 8 | | Maryland | | 10 | | New York | | 21 | | Utah | | 3 |
Delaware | | 4 | | Massachusetts | | 10 | | North Carolina | | 14 | | Vermont | | 1 |
Florida | | 31 | | Michigan | | 11 | | North Dakota | | 1 | | Virginia | | 15 |
Georgia | | 11 | | Minnesota | | 7 | | Ohio | | 13 | | Washington | | 9 |
Idaho | | 2 | | Mississippi | | 3 | | Oklahoma | | 3 | | West Virginia | | 3 |
Illinois | | 15 | | Missouri | | 5 | | Oregon | | 8 | | Wisconsin | | 6 |
Indiana | | 8 | | Montana | | 1 | | Pennsylvania | | 20 | | | | |
| | | | | | | | | | | | | | |
| State | | Stores | | State | | Stores | | State | | Stores | | State | | Stores |
| Alabama | | 5 | | Iowa | | 3 | | Nevada | | 3 | | Rhode Island | | 1 |
| Arizona | | 5 | | Kansas | | 3 | | New Hampshire | | 5 | | South Carolina | | 8 |
| Arkansas | | 2 | | Kentucky | | 4 | | New Jersey | | 13 | | South Dakota | | 1 |
| California | | 40 | | Louisiana | | 5 | | New Mexico | | 1 | | Tennessee | | 6 |
| Colorado | | 7 | | Maine | | 3 | | New York | | 19 | | Texas | | 30 |
| Connecticut | | 8 | | Maryland | | 10 | | North Carolina | | 12 | | Utah | | 2 |
| Delaware | | 3 | | Massachusetts | | 10 | | North Dakota | | 1 | | Vermont | | 1 |
| Florida | | 26 | | Michigan | | 10 | | Ohio | | 13 | | Virginia | | 13 |
| Georgia | | 10 | | Minnesota | | 6 | | Oklahoma | | 3 | | Washington | | 7 |
| Idaho | | 2 | | Mississippi | | 2 | | Oregon | | 5 | | West Virginia | | 3 |
| Illinois | | 16 | | Missouri | | 5 | | Pennsylvania | | 20 | | Wisconsin | | 5 |
| Indiana | | 8 | | Nebraska | | 2 | | | | | | | | |
We lease all of our stores andas well as our corporate headquarters, which is currently located in Toano, Virginia, which includes our call center, corporate offices, and distribution and finishing facility.Virginia. Our corporate headquarters hasis located on a 74-acre plot, is 307,784 square feet, of which approximately 32,000 square feet are office space, and is locatedincludes our call center, corporate offices, a distribution facility and two finishing lines. In July 2018, we announced that we will relocate our corporate headquarters and call center from Toano, Virginia to Richmond, Virginia. On October 19, 2018, we entered into an agreement to lease the new headquarters location, which covers an existing building consisting of approximately 53,000 rentable square feet. We currently lease space near the new headquarters location as a satellite office for various administrative functions and expect to continue that lease or lease similar property in Richmond, Virginia for our call center operations. We expect the relocation to the new headquarters to take place in late 2019. Based on the Company’s internal review of its Bellawood products finishing operation and related equipment in 2018, the Company ceased finishing flooring in January 2019 and outsourced this business to focus on its core retail operations.
In addition, we own a 74-acre plot. We ownone million square foot distribution center on approximately 110100 acres of land in Henrico County, Virginia where we constructed a million square foot distribution center that became fully operational in January 2015.Virginia. We lease a 504,016 square feetfoot facility in Pomona, California, which, along with our new facility in Virginia, serve as our primary distribution facilities.
As
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Item 3. Legal Proceedings.Government
Governmental Investigations
Lacey Act Related Matters
On September 26, 2013, sealed search warrants were executed at our corporate offices in Toano and Richmond, Virginia by the Department of Homeland Security’s Immigration and Customs Enforcement and the U.S. Fish and Wildlife Service. The search warrants requested information, primarily documentation, related to the importation of certain of our wood flooring products in accordance with the Lacey Act. Since then, we have cooperated with the federal authorities, including the Department of Justice (“DOJ”), in their investigation.
On October 7, 2015, Lumber Liquidators, Inc. (“LLI”) reached a settlement with the DOJ in connection with this investigation. Under the terms of a Plea Agreement with the DOJ (the “Plea Agreement”) executed on October 7, 2015, LLI agreed to plead guilty to one felony count for entry of goods by means of false statements and four misdemeanor due care counts under the Lacey Act. These violations do not require LLI to have acted with a deliberate or willful intent to violate the law, and LLI did not stipulate that it acted with such deliberate or willful intent. As part of the settlement, LLI agreed to pay a combined total of $10.0 million in fines, community service payments and forfeited proceeds. The payments include a $7.8 million fine, community service contributions of $0.9 million and $0.3 million to the National Fish and Wildlife Foundation and the Rhinoceros and Tiger Conservation fund, respectively, and a $1.0 million forfeiture payment. We had previously recorded this amount in SG&A expenses in the first quarter of 2015. At December 31, 2015, $6.2 million was included in current liabilities and $3.8 million was included in other long-term liabilities on the accompanying consolidated balance sheet. We paid $6.2 million of the settlement amount in the first quarter of 2016, and we expect to pay $2.0 million in the first quarter of 2017 and $1.8 million in the first quarter of 2018.
LLI also agreed in the Plea Agreement to implement an environmental compliance plan (the “Compliance Plan”) for a probation period of five years. If LLI fails to implement the Compliance Plan within three months of sentencing, the government may require us to cease the importation of hardwood flooring from China until the DOJ determines that the Compliance Plan has been satisfactorily implemented. During the first four years, LLI has agreed to engage an outside consulting firm to conduct audits of compliance with the Compliance Plan and certain requirements of the Lacey Act.
We have agreed to guarantee all payments and performance due from LLI, including but not limited to payments for fines, community service, forfeited proceeds and special assessments and the performance of LLI’s obligations under and compliance with the Compliance Plan and related audits.
In addition, as part of its internal compliance review procedures in the second quarter of 2015, we determined that there were Lacey Act compliance concerns related to a limited amount of our engineered hardwood flooring. As a result, we suspended sales of approximately $4.1 million of this product pending further investigation, and brought this matter to the attention of the DOJ. During the investigation, we determined that there were no compliance concerns with respect to approximately $0.9 million of the suspended engineered hardwood flooring. In connection with the Plea Agreement with the DOJ, we also reached a settlement with the DOJ related to the remaining $3.2 million of suspended engineered hardwood flooring. Pursuant to a Complaint for ForfeitureIn Rem and a Stipulation for Settlement and Joint Motion for Entry of Consent Order of Forfeiture (the “Consent”), the DOJ agreed to accept a $3.2 million payment in lieu of a civil forfeiture of this product. We had previously recorded this amount in SG&A expenses in the second quarter of 2015. We paid this amount in October 2015 pending entry of the Consent and, pursuant to a motion granted, are now permitted to sell the suspended engineered hardwood flooring and retain any proceeds of the sale. The Consent was entered by the court on January 7, 2016, and final judgment was entered on January 8, 2016.
The Plea Agreement was approved by the United States District Court for the Eastern District of Virginia on October 22, 2015. A sentencing hearing was held on February 1, 2016 and the court entered a final judgment on February 3, 2016. The terms of the final judgment are consistent with the Plea Agreement.
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Securities Laws
In March 2015, wethe Company received a grand jury subpoena issued in connection with a criminal investigation being conducted by the U.S. Attorney’s Office for the Eastern District of Virginia (the “U.S. Attorney”). In addition, on May 19, 2015, and July 13, 2015 and March 11, 2016, the Company received subpoenas from the New York Regional Office of the SEC in connection with an inquiry by the SEC staff. Based on the subpoenas, we believe theThe focus of both the U.S. Attorney investigation and SEC investigationinvestigations primarily relaterelated to compliance with disclosure, financial reporting and trading requirements under the federal securities laws since 2011. We are fully cooperatinglaws. The Company cooperated with the investigations and produced documents and other information responsive to subpoenas and other requests received from the parties.
The Company has recently concluded negotiations with the U.S. Attorney’s subpoena,Attorney, the SEC’s subpoenasDOJ and the relatedSEC concerning the resolution of their criminal and civil investigations byinto the public disclosures the Company made in March 2015 concerning whether its Chinese made laminates were compliant with certain California state regulatory requirements (the “Investigations”). In connection with the Investigations, the Company (i) entered into a Deferred Prosecution Agreement (“DPA”) with the U.S. Attorney and the DOJ on March 12, 2019 and (ii) submitted an Offer of Settlement to the SEC staff. Given thaton March 12, 2019. On March 12, 2019 the investigation bySEC approved the Offer and issued an Order Instituting Cease-and-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making Findings, and Imposing a Cease-and-Desist Order (the “Order”). The DPA and the Order are collectively referred to herein as the “Agreements”. Pursuant to the DPA, the U.S. Attorney and SEC staff are still ongoing, we cannot estimate the reasonably possible loss or range of loss that may result from this matter.
California Air Resources Board
We believe that the California Air Resources Board (“CARB”) is regularly looking at the entire industry to ensure compliance with its emissions standards. While conducting routine inspections of our products, CARB has performed “deconstructive” testing on our products as well as, we believe, products from others in the industry. In CARB’s preliminary findings, some of the samples of our finished product that CARB deconstructed and tested exceeded the CARB limits for raw composite wood cores. This could occur for numerous reasons, including one or more of the variability factors associated with this type of testing. In May 2015, CARB notified us that additional samples of finished products were obtained in 2014, some of which, based on deconstructive testing, exceeded the CARB limits for raw composite wood cores. CARB has further informed us that it has performed additional deconstructive testing on certain finished products it obtained in March 2015, with certain of the samples of our products exceeding the CARB limits for raw composite wood cores.
We have been fully cooperative with CARB as CARB continues to work on this matter by, among other things, providing CARB with requested information related to the products CARB tested and removing laminate flooring sourced from China from our stores in California. Based on discussions with CARB, our best estimate of the probable loss that may result from this matter is approximately $1.5 million, which we recorded in other current liabilities and selling, general and administrative expenses in the fourth quarter of 2015. We believe that there is at least a reasonable possibility that a loss greater than the amount accrued may be incurred, but we are unable to estimate the amount at this time.
Securities Litigation Matter
On or about November 26, 2013, Gregg Kiken (“Kiken”)DOJ filed a securities class action lawsuit (the “Kiken Lawsuit”), which was subsequently amended,one count criminal information in the United States District Court for the Eastern District of Virginia, against us, our founder, former Chief Executive Officer and President, former Chief Financial Officer and former Chief Merchandising Officer (collectively,charging the “Kiken Defendants”). On or about September 17, 2014, the City of Hallandale Beach Police Officers' and Firefighters' Personnel Retirement Trust (“Hallandale”) filed aCompany with securities class action lawsuit (the “Hallandale Lawsuit”) in the United States District Court for the Eastern District of Virginia against us, our former Chief Executive Officer and President and our former Chief Financial Officer (collectively, the “Hallandale Defendants,” and with the Kiken Defendants, the “Defendants”). On March 23, 2015, the court consolidated the Kiken Lawsuit with the Hallandale Lawsuit, appointed lead plaintiffs and lead counsel for the consolidated action, and captioned the consolidated action asIn re Lumber Liquidators Holdings, Inc. Securities Litigation.
The lead plaintiffs filed a consolidated amended complaint on April 22, 2015. The consolidated amended complaint alleges that the Defendants made material false and/or misleading statements that caused losses to investors. In particular, the lead plaintiffs allege that the Defendants made material misstatements or omissions related to our compliance with the Lacey Act, the chemical content of certain of our wood products, and our supply chain and inventory position. The lead plaintiffs do not quantify any alleged damages in their consolidated amended complaint but, in addition to attorneys' fees and costs, they seek to recover damages on behalf of themselves and other persons who purchased or otherwise acquired our stock during the putative class period at allegedly inflated prices and purportedly suffered financial harm as a result. The Defendants moved to dismiss the consolidated amended complaint but, on December 21, 2015, the court denied this motion. We dispute these claims and intend to defend the matter vigorously. Given the uncertainty of
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litigation, the current status of the case, and the legal standards that must be met for, among other things, class certification and success on the merits, we cannot estimate the reasonably possible loss or range of loss that may result from this action.
NW Bamboo Matter
On February 27, 2014, NW Bamboo Trim, Inc. (“NWBT”) filed suit in the Circuit Court of the City of Richmond, Virginia against us and a supplier of bamboo trim products (the “Supplier”). In its complaint, NWBT alleges that (i) we breached a contract with NWBT by not purchasing certain products from NWBT, (ii) we tortiously interfered with NWBT’s relationship with the Supplier, and (iii) we and the Supplier conspired to harm NWBT’s business. We filed a motion seeking to dismiss the claims, which was granted as it pertained to the breach of contract claim. The case then proceeded on the two remaining causes of action.
On October 12, 2015, as part of its required discovery disclosures, NWBT identified a valuation of its business of approximately $2.8 million as the basis for its compensatory damages claim. Subsequently, we filed a motion for summary judgment seeking dismissal of NWBT’s case. On December 21, 2015, the Court granted our motion for summary judgment and dismissed the two remaining causes of action in NWBT’s complaint. On January 20, 2016, NWBT filed a notice of appealfraud in connection with the trial court’s dismissalMarch 2015 8-K. The U.S. Attorney and the DOJ agreed that if the Company fully complies with all of NWBT’s case.
In lightits obligations under the DPA, the U.S. Attorney and the DOJ will, at the conclusion of the trial court’s rulingDPA’s three-year term, seek dismissal with prejudice of the criminal information filed against the Company. Pursuant to the Order, the SEC ordered the Company to cease and our views regardingdesist from committing or causing any violations and any future violations of the meritsrelevant provisions of NWBT’s appeal, the likelihood of a material loss in connection with this matter is now remote.
TCPA Matter
On or about March 4, 2014, Richard Wade Architects, P.C. (“RWA”) filed a lawsuitfederal securities laws and required disgorgement as discussed in the United States District Court for the Northern District of Illinois (the “RWA Lawsuit”), which was subsequently amended, alleging that we violated the Telephone Consumer Protection Act (“TCPA”), the Illinois Consumer Fraud Act and the common law by sending an unsolicited facsimile advertisement to RWA and a proposed class. RWA sought recourse on its own behalf as well as other similarly situated parties who are members of the proposed class that received unsolicited facsimile advertisements from us. The TCPA provides for recovery of actual damages or five hundred dollars for each violation, whichever is greater. If it is determined that a defendant acted willfully or knowingly in violating the TCPA, the amount of the award may be increased by up to three times the amount provided above.following paragraph.
Although we believed we had valid defenses to the claims asserted, we entered into a settlement of the claims in the RWA Lawsuit. On September 3, 2015, the Court entered an order granting final approval to the settlement and certifying a settlement class. Under the settlement agreement, we paidDPA, the Company is required, among other things, to (1) pay a total of $0.3 million including the plaintiffs’ attorneys’ fees, class notice and administration costs, a sum to RWA and cash payments to members of the settlement class who file valid claims. The settlement amount was accrued in 2014 and was paid into an escrow fund on August 18, 2015. The settlement payment was released to class counsel on October 16, 2015 after the final approval order became a final and non-appealable order. Settlement payments to class members who submitted claims have now been issued by the claims administrator, with a final accounting of the settlement fund to be filed with the court by March 4, 2016.
Prop 65 Matter
On or about July 23, 2014, Global Community Monitor and Sunshine Park LLC (together, the “Prop 65 Plaintiffs”) filed a lawsuit, which was subsequently amended, in the Superior Court of the State of California, County of Alameda, against us. In the amended complaint, the Prop 65 Plaintiffs allege that we violated California’s Safe Drinking Water and Toxic Enforcement Act of 1986, Health and Safety Code section 25249.5, et seq. (“Proposition 65”). In particular, the Prop 65 Plaintiffs allege that we failed to warn consumers in California that certain of our products (collectively, the “Products”) emit formaldehyde in excess of the applicable safe harbor limits. The Prop 65 Plaintiffs did not quantify any alleged damages in their amended complaint but, in addition to attorneys’ fees and costs, the Prop 65 Plaintiffs seek (i) equitable relief involving the reformulation of the Products, additional warnings related to the Products, the issuance of notices to certain of the purchasers of the Products (the “Customers”) and the waiver of restocking fees for Customers who return the Products and (ii) civil penaltiesfine in the amount of two thousand five hundred dollars per day for each violation$19,095,648 to the United States Treasury, (2) forfeit to the U.S. Attorney and the DOJ the sum of Proposition 65.
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We dispute$13,904,352, of which up to $6,097,298 will be submitted by the claimsCompany to the SEC in disgorgement and prejudgment interest under the Order and (3) adopt a new compliance program, or modify its existing one, including internal controls, compliance policies, and procedures in order to ensure that the Company maintains an effective system of internal account controls designed to ensure the making and keeping of fair and accurate books, records and accounts, as well as a compliance program designed to prevent and detect violations of certain federal securities laws throughout its operations. The Company will also be required to report to the U.S. Attorney and DOJ annually during the term of the Prop 65 PlaintiffsDPA regarding remediation and intend to defend the matter vigorously. Our best estimateimplementation of the probable loss that may result from this action is approximately $0.9 million, which we accruedcompliance measures described in the fourth quarterDPA.
The Agreements also provide that the Company will continue to cooperate with the U.S. Attorney, the DOJ and the SEC in all matters relating to the conduct described in the Agreements and, at the request of 2015. We believe thatthe U.S. Attorney, the DOJ, or the SEC, the Company will cooperate fully with other domestic or foreign law enforcement authorities and agencies in any investigation of the Company in any and all matters relating to the Agreements. In the event the Company breaches the DPA, there is at least a reasonable possibility thatrisk the government would seek to impose remedies provided for in the DPA, including instituting criminal prosecution against the Company.
The Company has accrued a loss may differ fromcharge of $33 million within selling, general and administrative expenses in its December 31, 2018 financial statements, reflecting the amount accrued, but we are unableamounts owed under the Agreements. The Company expects to estimateremit all amounts within 30 days of entering into the amount at this time.Agreements and has included the liability in the caption “Accrual for Legal Matters and Settlements Current” on its balance sheet. The Company expects to remit all amounts within 30 days of entering into the Agreements and has included the liability in the caption “Accrual for Legal Matters and Settlements Current” on its balance sheet.
Gold Matter
Litigation Relating to Bamboo Flooring
On or about December 8, 2014, Dana Gold (“Gold”) filed a purported class action lawsuit in the United States District Court for the Northern District of California alleging that the Morning Star bamboo flooring that the Company sells is defective (the “Bamboo“Gold Litigation”). Plaintiffs have narrowed the complaint to the Company’s Morning Star Strand Bamboo flooring (the “Strand Bamboo Product”) that we sell is defective. On February 13, 2015, Gold filed an amended complaint that added three additional plaintiffs (collectively with Gold, “Gold Plaintiffs”). We movedsold to dismiss the amended complaint. After holding a hearing and taking the motion under submission, the court dismissed most of Gold Plaintiffs’ claims but allowed certain omission-based claims to proceed. Gold Plaintiffs filed a Second Amended Complaint on December 16, 2015, and then a Third Amended Complaint on January 20, 2016. In the Third Amended Complaint, Gold Plaintiffs allege that we have engaged in unfair business practices and unfair competition by falsely representing the quality and characteristics of the Bamboo Product and by concealing the Bamboo Product’s defective nature. Gold Plaintiffs seek the certification of a class of individuals in the United States who purchased the Bamboo Product, as well as 7 state subclasses of individuals who are residents of California, New York,Florida, Illinois, West Virginia, Minnesota, Pennsylvania and Florida, respectively, and purchased the Bamboo ProductWest Virginia for personal, family or household use. The Gold PlaintiffsLitigation plaintiffs allege that the Company has engaged in deceptive trade practice acts in conjunction with the sale of the Strand Bamboo Products. The plaintiffs did not quantify any alleged damages in their complaint but, in addition to attorneys’ fees and costs, Gold Plaintiffs seek (i)the plaintiffs sought a declaration that ourthe Company’s actions violate the law and that we areit is financially responsible for notifying all purported class members, (ii) injunctive relief requiring usthe Company to replace and/or repair all of the Strand Bamboo Product installed in structures owned by the purported class members and (iii) a declaration that wethe Company must disgorge, for the benefit of the purported classes, all or part of ourthe profits received from the sale of the allegedly defective Strand Bamboo Product and/or to make full restitution to Gold Plaintiffsthe plaintiffs and the purported class members.
We filed our answer In November 2017, the court granted the plaintiffs’ motion for class certification with respect to the Third Amended Complaintsix states. The Company appealed the decision, but the petition for appeal was denied. On January 2, 2019, the court denied the Company’s motion for summary judgment. The Company has participated in court-ordered mediation sessions. Trial, which was previously scheduled for February 25, 2019, has been postponed.
Following settlement discussions with the respect to the Gold Litigation, on FebruaryMarch 15, 2019, the Company entered into a Memorandum of Understanding with Gold and certain other lead plaintiffs in the Gold Litigation (the “MOU”), which would resolve all disputes on a nationwide basis. Under the terms of the MOU, the Company will contribute $14 million in cash and provide $14 million in store-credit vouchers, with a potential additional $2 million in store-credit vouchers based on obtaining a claim’s percentage of more than 7%, for an aggregate settlement of up to $30 million. The MOU is subject to certain contingencies, including the execution of a definitive settlement agreement, board approval of the definitive settlement agreement, and court approvals. The entry into the MOU or any subsequent execution of a definitive settlement agreement does not constitute an admission by the Company of any fault or liability and the Company does not admit any fault or liability. There can be no assurance that a settlement will be finalized and approved or as to the ultimate outcome of the litigation. If a final, court-approved settlement is not reached, the Company will defend the matter vigorously and believes there are meritorious defenses and legal standards that must be met for, among other things, success on the merits. The Company has notified its insurance carriers and continues to pursue coverage. As the insurance claim is still pending, the Company has not recognized any insurance recovery related to the Gold Litigation.
As a result of these developments, the Company has determined that a probable loss has been incurred and has recognized a charge to earnings of $28 million within selling general and administrative expense during the fourth quarter of 2018 with the offset in the caption “Accrual for Legal Matters – Current” on its balance sheet related to this potential settlement as of December 31, 2018. If the Company does not execute a definitive settlement agreement consistent with the MOU or incurs losses with the respect to the Bamboo Flooring Litigation, 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 other claims and lawsuits alleging damages similar to those in the Gold Litigation (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
Beginning on or about March 3, 2015, numerous purported class action cases were filed in various U.S. federal district courts and state courts involving claims of excessive formaldehyde emissions from the Company’s Chinese-
manufactured laminate flooring products. The purported classes consisted of all U.S. consumers that purchased the relevant products during certain time periods. Plaintiffs in these cases challenged the Company’s labeling of its products as compliant with the California Air Resources Board Regulation and alleged claims for fraudulent concealment, breach of warranty, negligent misrepresentation and violation of various state consumer protection statutes. The plaintiffs sought various forms of declaratory and injunctive relief and unquantified damages, including restitution and actual, compensatory, consequential and, in certain cases, punitive damages, as well as interest, costs and attorneys’ fees incurred by the plaintiffs and other purported class members in connection with the alleged claims. The United States Judicial Panel on Multidistrict Litigation (the “MDL Panel”) transferred and consolidated the federal cases to the United States District Court for the Eastern District of Virginia (the “Virginia Court”). The consolidated case in the Virginia Court is captioned In re: Lumber Liquidators Chinese-Manufactured Flooring Products Marketing, Sales, Practices and Products Liability Litigation (the “Formaldehyde MDL”).
Beginning on or about May 20, 2015, multiple class actions were filed in the United States District Court for the Central District of California and other district courts located in the place of residence of each non-California plaintiffs consisting of U.S. consumers who purchased the Company’s Chinese-manufactured laminate flooring products challenging certain representations about the durability and abrasion class ratings of such products. These plaintiffs asserted claims for fraudulent concealment, breach of warranty and violation of various state consumer protection statutes. The plaintiffs did not quantify any alleged damages in these cases; however, in addition to attorneys’ fees and costs, they did seek an order (i) certifying the action as a class action, (ii) adopting the plaintiffs’ class definitions and finding that the plaintiffs are their proper representatives, (iii) appointing their counsel as class counsel, (iv) granting injunctive relief to prohibit the Company from continuing to advertise and/or sell laminate flooring products with false abrasion class ratings, (v) providing restitution of all monies the Company received from the plaintiffs and class members and (vi) providing damages (actual, compensatory and consequential), as well as punitive damages. On October 3, 2016, the MDL Panel transferred and discoveryconsolidated the abrasion class actions to the Virginia Court. The consolidated case is captioned In re: Lumber Liquidators Chinese-Manufactured Laminate Flooring Durability Marketing and Sales Practices Litigation (the “Abrasion MDL”).
On March 15, 2018, the Company entered into a settlement agreement to jointly settle the Formaldehyde MDL and the Abrasion MDL. Under the terms of the settlement agreement, the Company has agreed to fund $22 million (the “Cash Payment”) and provide $14 million in store-credit vouchers for an aggregate settlement amount of $36 million to settle claims brought on behalf of purchasers of Chinese-made laminate flooring sold by the Company between January 1, 2009 and May 31, 2015. The $36 million aggregate settlement amount was accrued in 2017. On June 16, 2018, the Virginia 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, the Company, in June, paid $0.5 million for settlement administration costs, which is part of the Cash Payment, to the plaintiffs’ settlement escrow account. Subsequent to the Final Approval and Fairness Hearing held on October 3, 2018, the Court approved the settlement on October 9, 2018 and, as a result, the Company paid $21.5 million in cash into the plaintiffs’ settlement escrow account. To date, insurers have denied coverage with respect to the Formaldehyde MDL and Abrasion MDL.
On November 8, 2018, an individual filed a Notice of Appeal in the matterUnited States Court of Appeals for the Fourth Circuit (the “Appeals Court”) challenging the settlement. On December 14, 2018, another individual filed a Notice of Appeal in the Appeals Court. Subsequently, the Appeals Court consolidated both appeals and entered a briefing schedule. Vouchers, which generally have a three-year life, will be distributed by the administrator upon order of the Court. At December 31, 2018, the Company’s obligations related to Formaldehyde MDL and Abrasion MDL consisted of a short-term payable of $35.5 million with $14 million expected to be satisfied by the issuance of vouchers. 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 consolidated financial statements. The Company has no liability accrued related to the appeals.
In addition to those purchasers who elected to opt 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 “Remaining Laminate Matters”). Certain of these Remaining Laminate Matters were settled in 2018. The Company recognized charges to earnings of $3 million and $1 million for the years ended December 31, 2018 and 2017, respectively, within selling, general and administrative
expenses for these Remaining Laminate Matters. While the Company believes that a further loss associated with the Opt Outs and Remaining Laminate Matters is possible, the Company is unable to reasonably estimate the amount or range of possible loss beyond what has been provided. Any such losses could, potentially, have a material adverse effect, individually or collectively, 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 further loss associated with the Steele litigation is possible, the Company is unable to reasonably estimate the amount or range of possible loss.
Employment Cases
Mason Lawsuit
On or about August 15, 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 holding comparable positions but different titles (collectively, the “Putative Class Employees”) alleging that the Company violated the Fair Labor Standards Act (“FLSA”) and New York Labor Law (“NYLL”) by classifying the Putative Class Employees as exempt. The alleged violations include failure to pay for overtime work. The plaintiffs seek certification of the Putative Class Employees for (i) a collective action covering the period beginning three years and 115 days prior to the filing of the complaint through the disposition of this action for the Putative Class Employees nationwide in connection with FLSA and (ii) a class action covering the period beginning six years and 115 days prior to the filing of the complaint through the disposition of this action for members of the 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 amount 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 Putative Class Employees who worked within the federal statute of limitations period. The Company filed its opposition to this motion, which is now proceeding. We disputepending before the Goldcourt.
Kramer Lawsuit
On or about November 17, 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 Plaintiffs seek certification of the CSM Employees for a class action covering the prior four-year period prior to the filing of the complaint through the disposition of this action for the CSM Employees who currently are or were employed in California (the “California SM Class”). The Kramer Plaintiffs did not quantify any alleged damages but, in addition to attorneys’ fees and costs, the Kramer Plaintiffs seek unspecified amounts for unpaid wages and overtime wages, liquidated and/or punitive damages, declaratory relief, restitution, statutory penalties, injunctive relief and other damages. The Company disputes the Kramer Plaintiffs’ claims and intendintends 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, wethe Company cannot estimate the reasonably possible loss or range
of loss, if any, that may result from this action.
Litigation Relating to Products Liability
Beginning on or about March 3, 2015, numerous purported class action cases were filed in various U.S. federal district courts and state courts involving claims of excessive formaldehyde emissions from our flooring products (collectively, the “Products Liability Cases”). The plaintiffs in these various actions sought recovery under a variety of theories, which although not identical are generally similar, including negligence, breach of warranty, state consumer protection act violations, state unfair competition act violations, state deceptive trade practices act violations, false advertising, fraudulent concealment, negligent misrepresentation, failure to warn, unjust enrichment and similar claims. The purported classes consisted either or both of all U.S. consumers or state consumers that purchased the subject products in certain time periods. The plaintiffs also sought various forms of declaratory and injunctive relief and various damages, including restitution, actual, compensatory, consequential, and, in certain cases, punitive damages, and interest, costs, and attorneys’ fees incurred by the plaintiffs and other purported class members in connection with the alleged claims, and orders certifying the actions as class actions. Plaintiffs had not quantified damages sought from us in these class actions.
On June 12, 2015, United States Judicial Panel on Multi District Litigation, (the “MDL Panel”) issued an order transferring and consolidating 10 of the related federal class actions to the United States District Court for the Eastern District of Virginia (the “Virginia Court”). In a series of subsequent conditional transfer orders, the MDL Paneltherefore no accrual has transferred the other cases to the Virginia Court. We continue to seek to have any newly filed cases transferred and consolidated in the Virginia Court and ultimately, we expect all federal class actions involving formaldehyde allegations, including any newly filed cases, to be transferred and consolidated in the Virginia Court. The consolidated case in the Virginia Court is captionedIn re: Lumber Liquidators Chinese-Manufactured Flooring Products Marketing, Sales, Practices and Products Liability Litigation.
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Pursuant to court order, plaintiffs filed a Representative Class Action Complaint in the Virginia Court on September 11, 2015. The complaint challenged the labeling of our flooring products and asserted claims under California, New York, Illinois, Florida and Texas law for fraudulent concealment, violation of consumer protection statutes, negligent misrepresentation and declaratory relief, as well as a claim for breach of implied warranty under California law. Thereafter, on September 18, 2015, plaintiffs filed the First Amended Representative Class Action Complaint (“FARC”) in which they added implied warranty claims under New York, Illinois, Florida and Texas law, as well as a federal warranty claim. We filed a motion to dismiss and answered the FARC. The Virginia Court granted the motion as to claims for negligent misrepresentation filed on behalf of certain plaintiffs, deferred as to class action allegations, and otherwise denied the motion. We also filed a motion to strike nationwide class allegations and a motion to strike all claims of personal injurybeen made in class action complaints, on which the Virginia court has not yet ruled. Discovery is now proceeding in this matter.
In addition, on or about April 1, 2015, Sarah Steele (“Steele”) filed a purported class action lawsuit in the Ontario, Canada Superior Court of Justice against us. In the complaint, Steele’s allegations include (i) strict liability, (ii) breach of implied warranty of fitness for a particular purpose, (iii) breach of implied warranty of merchantability, (iv) fraud by concealment, (v) civil negligence, (vi) negligent misrepresentation, and (vii) breach of implied covenant of good faith and fair dealing. Steele did not quantify any alleged damages in her complaint but, in addition to attorneys’ fees and costs, Steele seeks (i) compensatory damages, (ii) punitive, exemplary and aggravated damages, and (iii) statutory remedies related to our breach of various laws including the Sales of Goods Act, the Consumer Protection Act, the Competition Act, the Consumer Packaging and Labelling Act and the Canada Consumer Product Safety Act.
We dispute the plaintiffs’ claims and intend to defend these matters vigorously. Given the uncertainty of litigation, the preliminary stage of these cases and the legal standards that must be met for, among other things, class certification and successthis. Any such losses could, potentially, have a material adverse effect, individually or collectively, on the merits, we cannot estimate the reasonably possible loss or rangeCompany’s results of loss that may result from these actions.operations, financial condition and liquidity.
In connection with the Products Liability Cases, on April 22, 2015, five of our general and umbrella liability insurers brought an action in the United States District Court for the Eastern District of Virginia, (the “Virginia Action”). Through the Virginia Action, these insurers sought a declaratory judgment that they were not obligated to defend or indemnify us in connection with the lawsuits asserted against us arising out of its sale of laminate flooring sourced from China. One insurer also asserted a claim seeking reformation of one policy to include a “total pollution exclusion” endorsement, contending that it was omitted from that policy as the result of a mutual mistake.
On April 27, 2015, we filed a similar but more comprehensive action against nine of our general, umbrella and excess insurers (including the five Plaintiffs in the Virginia Action) in the Circuit Court for Dane County, Wisconsin (where four of the insurers are domiciled) (the “Wisconsin Action”). In the Wisconsin Action, we asserted breach of contract claims against its general liability insurers, alleging that these insurers had wrongfully failed to defend us in connection with the Chinese-manufactured laminate flooring claims. We also asserted breach of contract and bad faith claims against two of its general liability insurers, arising out of the manner in which those insurers computed retrospective premiums under their policies in connection with the Chinese-manufactured laminate flooring lawsuits. Finally, we sought declaratory relief from the court as to its rights and the insurers’ responsibilities under their policies.
We moved to dismiss the Virginia Action, contending that the federal court should abstain from deciding the case in favor of the more comprehensive state-court Wisconsin Action. Thereafter, the four insurers who were not plaintiffs in the Virginia Action have filed motions to intervene as plaintiffs in the Virginia Action, in an effort to make the Virginia Action “as comprehensive” as the Wisconsin Action. We have opposed the motions to intervene. By order dated September 4, 2015, the court largely denied our motion to dismiss, allowing the Virginia Action to proceed. While the court dismissed the reformation claim without prejudice, as pled with insufficient specificity, the court granted leave to amend, and an amended complaint was filed on September 15, 2015. On October 2, 2015, we stipulated to entry of judgment on the reformation claim, and moved to dismiss the remaining claims in favor of proceeding in Wisconsin. The defendant-insurers in the Wisconsin Action have filed motions to dismiss or stay the Wisconsin Action in favor of the Virginia Action.
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The defendants in the Wisconsin Action have also moved for protective orders seeking to forestall their obligation to respond to discovery requests that we promulgated in the Wisconsin Action.
On February 1, 2016, the Wisconsin court stayed the Wisconsin Action in favor of the proceedings in Virginia. On February 5, 2016, we moved for reconsideration and that motion remains pending.
On February 9, 2016, the Virginia court denied our motion to dismiss. The Virginia court also granted the remaining insurers’ motion to intervene, but stayed proceedings on their excess and umbrella insurance policies pending resolution of the primary insurers’ claims.
Litigation Relating to Abrasion Claims
On May 20, 2015, a purported class action titledAbad v. Lumber Liquidators, Inc. was filed in the United States District Court for the Central District of California and two amended complaints were subsequently filed. In the Second Amended Complaint (“SAC”), the plaintiffs (collectively, the “Abrasion Plaintiffs”)seek to certify a national class composed of “All Persons in the United States who purchased Defendant’s Dream Home brand laminate flooring products from Defendant for personal use in their homes,” or, in the alternative, 32 statewide classes from California, North Carolina, Texas, New Jersey, Florida, Nevada, Connecticut, Iowa, Minnesota, Nebraska, Georgia, Maryland, Massachusetts, New York, West Virginia, Kansas, Kentucky, Mississippi, Pennsylvania, South Carolina, Tennessee, Virginia, Washington, Maine, Michigan, Missouri, Ohio, Oklahoma, Wisconsin, Indiana, Illinois and Louisiana. The SAC alleges violations of each of these states’ consumer protections statutes and the federal Magnuson-Moss Warranty Act, as well as breach of implied warranty and fraudulent concealment. The Abrasion Plaintiffs did not quantify any alleged damages in the SAC but, in addition to attorneys’ fees and costs, seek an order certifying the action as a class action, an order adopting the Abrasion Plaintiffs’ class definitions and finding that the Abrasion Plaintiffs are their proper representatives, an order appointing their counsel as class counsel, injunctive relief prohibiting us from continuing to advertise and/or sell laminate flooring products with false abrasion class ratings, restitution of all monies it received from the Abrasion Plaintiffs and class members, damages (actual, compensatory, and consequential) and punitive damages.
We filed a motion to dismiss the SAC and the Abrasion Plaintiffs filed a motion for leave to file a corrected SAC. Our motion was subsequently granted in part and denied in part. The court also denied the Abrasion Plaintiffs’ motion for leave to file a corrected SAC. The Abrasion Plaintiffs have until March 1, 2016, to file a Third Amended Complaint. We dispute the Abrasion Plaintiffs’ claims and intend to defend these matters vigorously. Given the uncertainty of litigation, the preliminary stage of these cases, the legal standards that must be met for, among other things, class certification and success on the merits, we cannot estimate the reasonably possible loss or range of loss that may result from these actions.
Morris Matter
On or about August 18, 2015, Kevin Morris (“Morris”) filed a purported class action lawsuit in the Circuit Court of the Twentieth Judicial Circuit in St. Clair County, Illinois alleging that the Casa de Colour Collection by Dura-Wood flooring (the “Morris Product”), a brand of solid wood flooring sold by us, is defective due to warping, cupping and buckling. Morris alleges that we have engaged in unfair business practices and unfair competition by falsely representing the quality and characteristics of the Morris Product and by concealing the Morris Product’s defective nature. In particular, Morris’s allegations include (i) common law fraud, (ii) breach of implied warranty, (iii) breach of express warranty, (iv) breach of contract, (v) breach of duty of good faith and fair dealing, (vi) violation of the Illinois Consumer Fraud and Deceptive Business Practices Act (the “ICFA”) and (vii) violation of the Uniform Deceptive Trade Practices Act (the “UDTPA”). Morris did not quantify any alleged damages in his complaint but, in addition to attorneys’ fees and costs, Morris seeks (i) certification of the purposed class, (ii) injunctive relief requiring us to replace and/or repair all Morris Products installed in structures owned by the purported class, (iii) an award of compensatory, consequential and statutory damages, pre-judgment interest and post-judgment interest, (iv) a declaration that we must disgorge, for the benefit of the purported class, all or part of our profits received from the sale of the Morris Product and/or to make full restitution to Morris and the purported class, (v) a judgment for actual damages for injuries suffered by Morris and the purported class as a result of our violation of the ICFA and (vi) a judgment awarding Morris and the purported class reasonable attorneys’ fees and costs in accordance with the UDTPA. On September 25, 2015, we removed the action to the United States District Court for the
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Southern District of Illinois. Subsequently, we filed a motion to dismiss. Morris failed to respond to the motion and, as a result, the lawsuit was dismissed without prejudice on November 10, 2015.
Ross Matter
On or about February 23, 2016, Joseph Ross and Linda Ross (collectively, “Ross”) filed a purported class action lawsuit in the Second Judicial District Court, State of Nevada, County of Washoe. Ross seeks the certification of a class of individuals in the State of Nevada who purchased certain hardwood flooring products produced in China (the “Ross Products”). Ross alleges that the Ross Products are defective due to the Ross Products being contaminated with certain wood-boring insects. In particular, Ross’s allegations include (i) breach of warranty, (ii) negligence, (iii) strict liability, (iv) negligent misrepresentation, (v) willful misconduct, and (vi) unjust enrichment. In the complaint, Ross seeks (i) general and special damages according to proof in excess of fifty thousand dollars, (ii) attorneys’ fees and costs according to proof, (iii) prejudgment and post-judgment interest on all sums awarded, according to proof at the maximum legal rate, (iv) costs of the lawsuit incurred, (v) restitution as authorized by law, (vi) punitive damages as authorized by law, and (vii) specific performance under our express warranties. We dispute Ross’s claims and intend 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, we cannot estimate the reasonably possible loss or range of loss that may result from this action.
Derivative Litigation Matters
Consolidated Cases
On or about March 11, 2015, R. Andre Klein (“Klein”) filed a shareholder derivative suit in the United States District Court for the Eastern District of Virginia against our directors at that time, as well as our Senior Vice President, Supply Chain, former Chief Merchandising Officer, and former Chief Financial Officer (collectively, the “Klein Defendants”). On or about April 1, 2015, Phuc Doan (“Doan”) filed a shareholder derivative suit in the United States District Court for the Eastern District of Virginia against our directors at that time, as well as our Senior Vice President, Supply Chain, former Chief Merchandising Officer, and former Chief Financial Officer (collectively, the “Doan Defendants”). On or about April 15, 2015, Amalgamated Bank, as trustee for the Longview 600 Small Cap Index Fund, filed a shareholder derivative suit in the United States District Court for the Eastern District of Virginia against our directors at that time, as well as our former Chief Merchandising Officer, former Chief Financial Officer, Senior Vice President, Supply Chain and its former Chief Executive Officer and President (collectively, the “Amalgamated Defendants,” and, with the Klein and Doan Defendants, the “Individual Defendants”). We were named as a nominal defendant only in these three suits.
On May 27, 2015, the court consolidated the Klein, Doan, and Amalgamated Bank suits, appointed lead plaintiffs and lead counsel for the consolidated action, and captioned the consolidated action asIn re Lumber Liquidators Holdings, Inc. Shareholder Derivative Litigation. In the complaints, Klein��s, Doan’s and Amalgamated Bank’s (collectively, “Plaintiffs”) allegations include (i) breach of fiduciary duties, (ii) abuse of control, (iii) gross mismanagement, (iv) unjust enrichment, (v) insider trading, (vi) corporate waste, (vii) common-law conspiracy, and (viii) statutory conspiracy. Plaintiffs did not quantify any alleged damages in their complaints but, in addition to attorneys’ fees and costs, Plaintiffs seek (1) a declaration that the Individual Defendants have breached and/or aided and abetted the breach of their fiduciary duties to us, (2) a determination and award to us of the damages sustained by us as a result of the violations of each of the Individual Defendants, jointly and severally, (3) a directive to us and the Individual Defendants to take all necessary actions to reform and improve our corporate governance and internal procedures to comply with applicable laws and to protect us and our shareholders from a repeat of the events that led to the filing of this action, (4) a determination and award to us of exemplary damages in an amount necessary to punish the Individual Defendants and to make an example of the Individual Defendants to the community according to proof of trial, (5) the awarding of restitution to us from the Individual Defendants, (6) a requirement that we establish corporate policies and procedures prohibiting the use of Chinese manufacturers of its products, (7) a prohibition against us using wood or wood products from the Russian Far East, (8) a requirement that we establish corporate policies and procedures to ensure compliance with CARB standards for all of our flooring products, and (9) disgorgement and payment to us of all compensation and profits made by the Individual
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Defendants, and each of them, at any time during which such Individual Defendants were breaching fiduciary duties owed to us and/or committing, or aiding and abetting the commitment of, corporate waste.
Additionally, in May 2015, we received a shareholder demand from Timothy Horton (“Horton”). The allegations and demands made by Horton overlap substantially with those raised in the consolidated action. On June 11, 2015, the Special Committee of the Board of Directors (the “Special Committee”) exercised its authority to create a three-person Demand Review Committee, which is comprised of three independent directors and tasked with investigating the claims made in the consolidated action and the Horton demand letter and making a recommendation to the board of directors as to whether it would be in the best interests of the Company to pursue any of those claims. Thereafter, the members of the Demand Review Committee filed a motion to stay the consolidated action pending completion by the Demand Review Committee of its investigation and recommendation to the board of directors.
Further, in the consolidated action, we filed a motion to dismiss based on the failure to make a demand upon our board of directors, and the Individual Defendants filed a motion to dismiss based on the failure to state a claim. These motions are fully briefed and pending before the court. Based on the uncertainty of litigation and the preliminary stage of the case, we cannot estimate the reasonably possible loss or range of loss that may result from this action.
Costello Matter
On or about March 6, 2015, James Costello (“Costello”) filed a shareholder derivative suit in the Court of Chancery of the State of Delaware against our directors at that time (the “Costello Derivative Defendants”). We were named as a nominal defendant only. On April 1, 2015, the case was voluntarily stayed. On June 19, 2015, the stay was lifted at Costello’s request and Costello subsequently filed an amended complaint. The amended complaint added our Senior Vice President, Supply Chain, former Chief Merchandising Officer and former Chief Financial Officer as defendants (along with the Derivative Defendants, the “Costello Defendants”). Costello’s allegations include (i) breach of fiduciary duties, (ii) gross mismanagement, (iii) unjust enrichment, and (iv) insider selling and the misappropriation of certain of our information in connection therewith. Costello did not quantify any alleged damages in the amended complaint but, in addition to attorneys’ fees and costs, Costello seeks (i) against the Costello Defendants and in our favor the amount of damages sustained by us as a result of the Costello Defendants’ breaches of fiduciary duties, gross mismanagement and unjust enrichment, (ii) extraordinary equitable and/or injunctive relief, including attaching, impounding, imposing a constructive trust on or otherwise restricting the proceeds of the Costello Defendants’ trading activities or their assets, (iii) awarding to us restitution from the Costello Defendants, and each of them, and ordering disgorgement of all profits, benefits and other compensation obtained by the Costello Defendants; and (iv) additional equitable and/or injunctive relief that would require us to institute certain compliance policies and procedures.
We filed a motion to dismiss the amended complaint based on the failure to make a demand upon our board of directors and the Costello Defendants filed a motion to dismiss based on the failure to state a claim and the exculpatory provision in the Company’s Certificate of Incorporation. On September 14, 2015, the parties entered into a stipulation voluntarily staying the case until the Demand Review Committee has an opportunity to investigate Costello’s allegations and make a recommendation to our board of directors, and the board of directors has the opportunity to act on that recommendation. The court has approved the stipulation.
Based on the uncertainty of litigation and the preliminary stage of the case, we cannot estimate the reasonably possible loss or range of loss that may result from this action.
McBride Matter
On or about March 27, 2015, James Michael McBride (“McBride”) filed a shareholder derivative suit in the Circuit Court of the City of Williamsburg and County of James City, Virginia against our directors at that time, as well as our former Chief Merchandising Officer and former Chief Financial Officer (collectively, the “McBride Defendants”). We were named as a nominal defendant only. In the complaint, McBride’s allegations include (i) breach of fiduciary duties, (ii) gross mismanagement, (iii) abuse of control, (iv) insider trading, and (v) unjust enrichment. McBride did not quantify any alleged damages in his complaint but, in addition to attorneys’ fees and costs, McBride seeks (i) the awarding, against the McBride Defendants, and in favor of us, of damages sustained by us as a result of certain of the McBride Defendants’ breaches of their
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fiduciary duties and (ii) a directive to us to (a) take all necessary actions to reform and improve our corporate governance and internal procedures, (b) comply with our existing governance obligations and all applicable laws and (c) protect us and our investors from a recurrence of the events that led to the filing of this action. On July 6, 2015, McBride filed an amended complaint. The amended complaint added claims for statutory conspiracy and common law conspiracy and, in connection with the statutory conspiracy claim, seeks damages in the amount of three times the actual damages incurred by us as the result of the alleged wrongful acts. Pursuant to a voluntary agreement between the parties, the defendants have not yet responded to the amended complaint. Based on the uncertainty of litigation and the preliminary stage of the case, we cannot estimate the reasonably possible loss or range of loss that may result from this action.
Antidumping and Countervailing Duties Investigation
In October 2010, a conglomeration of domestic manufacturers of multilayered wood flooring (“Petitioners”) 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 our engineered hardwood importedcompanies importing multilayered wood flooring from China, which accounted for approximately 10% of our flooring purchases in 2014 and approximately 6% of our flooring purchases in 2015.
The DOC made preliminary determinations regarding CVD and AD rates in April 2011 and May 2011, respectively. In December 2011, after certain determinations were made by the ITC and DOC, orders were issued setting final AD and CVD rates at 3.3% and 1.5%, respectively. These rates became effective in the form of additional duty deposits, which we have paid, and applied retroactivelyChinese suppliers subject to the DOC preliminary determinations of April 2011 and May 2011.
Following the issuance of the orders, a number of appeals were filed by several parties, including us, with the Court of International Trade (“CIT”) challenging various aspects of the determinations made by both the ITC and DOC, including certain aspects that may impact the validity of the AD and CVD ordersorders. The Company’s multilayered wood flooring imports from China accounted for approximately 7% and 8% of its flooring purchases in 2018 and 2017, respectively. The Company’s consistent view through the applicable rates. The appealcourse of the CVD order was dismissed in June 2015. On January 23, 2015, the CIT issued a decision rejecting the challenge of the AD rate for all but one Chinese exporter. This decision was finalized on July 6, 2015, appealed to the Court of Appeals for the Federal Circuit on July 31, 2015this matter has been, and may take a year to conclude.remains, that its imports are neither dumped nor subsidized.
As part of its processes in these proceedings, following the original investigation, the DOC conducts annual administrative reviews of the CVD and AD rates. In such cases, the DOC will issue preliminary rates that are not binding and wereare 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. As rates are adjusted through the administrative reviews, we adjust ourthe Company adjusts its payments prospectively based on the final rate. The Company will begin to pay the finalized rates on each applicable future purchase when recognized by U.S. Customs and Border Protection.
The DOC made its initial determinations in the original investigation regarding CVD and AD rates on April 6, 2011 and May 26, 2011, respectively. On December 8, 2011, orders were issued setting final AD and CVD rates at a maximum of 3.3% and 1.5%, respectively. These rates became effective in the form of additional duty deposits, which the Company has paid, and applied retroactively to the DOC initial determinations.
Following the issuance of these orders, a number of appeals were filed by several parties, including the Company, with the Court of International Trade (“CIT”) challenging, among other things, certain facts and methodologies that may impact the validity of the AD and CVD orders and the applicable rates. The Company participated in appeals of both the AD order and CVD order. On February 15, 2017, the Court of Appeals for the Federal Circuit (“CAFC”) vacated the CIT’s prior decision and remanded with instructions to the DOC to recalculate its AD rate. On remand, the DOC granted a 0% AD rate to eight Chinese suppliers, but did not exclude them permanently from the AD order. Nor did the CIT terminate the AD order. In July 2018, the CIT issued a judgment sustaining the DOC’s calculation of 0% for the eight suppliers, but also excluded three of them from the AD order. Certain Chinese suppliers and the Petitioners have appealed this judgment to the CAFC. The Company is evaluating the impact of the CIT’s judgment on its previously recorded expense related to the AD rates in the original investigation and subsequent annual reviews discussed below. Because of the length of time for finalization of rates as well as appeals, any subsequent adjustment of CVD and AD rates typically flows through a period different from those in which the inventory was originally purchased and/or sold.
In the first DOC annual review in this matter, AD rates for the period from May 26, 2011 through November 30, 2012, and CVD rates from April 6, 2011 through December 31, 2011, were modified for AD rates through November 2012 and for CVD rates through 2011. Specifically, the AD rate was set atto a maximum of 5.92% and the CVD rate was set ata maximum of 0.83%. These rates are being appealed to the CIT by several parties, including us. Based on what has been paid by us to date, respectively, which resulted in an additional payment obligation for the periods covered by the first annual review, we believed ourCompany, based on best estimate of the probable loss was approximately $0.8 million forestimates and shipments during the applicable time periods covered by the first annual review, which wewindow, of $0.8 million. The Company recorded this as a long-term liability in ouron its accompanying consolidated balance sheet and in cost of sales in ourits second quarter 2015 consolidated financial statements. These AD rates were appealed to the CIT by several parties, including the Company. On remand from the CIT, the DOC has reduced the AD rate to 0.73%. In June 2018, the CIT sustained the reduced AD rate of 0.73% but did remand back to the DOC the issue regarding the calculation of the electricity rate, which, depending on that outcome, may cause a revision to the final AD rate. That remand from the DOC is still pending. This ruling from the CIT resulted in the Company reversing the $0.8 million accrual and recording a receivable of approximately $1.3 million during the second quarter of 2018.
In January 2015, pursuant
The second annual review of the AD and CVD rates was initiated in February 2014. Pursuant to the second annual review, the DOC issued a non-binding preliminary AD rate of 18.27% for purchases from December 2012 through November 2013 and a preliminary CVD rate of 0.97% for purchases in fiscal year 2012. The rates were finalized in early July 2015, withthe DOC finalized the AD rate setfor the period from December 1, 2012 through November 30, 2013 at a maximum of 13.74% and the CVD rate setfor the period from January 1, 2012 through December 31, 2012 at a maximum of 0.99%. We have appealed these rates. Notwithstanding our appeal, as these rates are now confirmed, we believe ourThe Company believes the best estimate of the probable lossadditional amounts owed was approximately $4.1 million for shipments during the applicable time periods, which wewas recorded as a long-term liability in ouron its accompanying consolidated balance sheet and included in cost of sales in ourits second quarter 2015 consolidated financial statements. Beginning in July 2015, wethe Company began payingdepositing these rates on each applicable purchase. The Company and other parties appealed the AD rates relating to this second annual review to the CIT. In June 2018, the court remanded the case back to the DOC to recalculate several of its adjustments, which is likely to cause a revision to the AD rate. The DOC has requested an extension to issue its recalculation on remand to the CIT until November 2018. However, that remand from the DOC is still pending.
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The third annual review of the AD and CVD rates was initiated in February 2015. The third AD review covered shipments from December 1, 2013 through November 30, 2014. The third CVD review covered shipments from January 1, 2013 through December 31, 2013. In JanuaryMay 2016, the DOC issued non-binding preliminary resultsthe final CVD rate in the third annual review. The preliminaryreview, which was a maximum of 1.38%. On July 13, 2016, the DOC set the final AD rate was 13.34% andat a maximum of 17.37%. The Company appealed the CVD preliminary rate was 1.43%. TheseAD rates are expected to be finalized inthe CIT. In November 2018, the CIT issued an opinion sustaining the DOC’s final results, that decision was appealed to the CAFC by certain plaintiff interveners in May 2016. Any change inJanuary 2019. The Company’s best estimate of the probable additional amounts owed associated with AD and CVD is approximately $5.5 million for shipments during the applicable ratestime periods. During the quarter ended June 30, 2016, the Company recorded this amount in other long-term liabilities in its balance sheet and as a resultcharge to earnings in cost of the third annual review would apply to imports occurring after the second periodsales on its statement of review.operations.
Based on the preliminary rates set in January 2016 in the third annual review for shipments subsequent to November 2013 (AD) and shipments subsequent to December 2012 (CVD), we would owe an additional $5.3 million for all shipments through December 31, 2015. As no rates have been finalized for these periods, we have not recorded an accrual in our consolidated financial statements for the impact of higher rates for the time periods subsequent to the second annual review. Based on the information available, we believe there is at least a reasonable possibility that an additional charge may be incurred in the range of $0 to $5.3 million. A loss greater than this amount may be incurred, but we are unable to estimate the amount at this time.
In February 2016, the DOC initiated the fourth annual review of AD and CVD rates, which we expect will followfollowed a similar schedule as the preceding review. The AD review covered shipments from December 1, 2014 through November 30, 2015. The CVD review covered shipments from January 1, 2014 through December 31, 2014. In May 2017, the DOC issued the final CVD rate in the fourth review, which was a maximum of 1.45%, and, in June 2017, the final AD rate in the fourth review, which was a maximum of 0.00%. In October 2017, Petitioners withdrew their CIT appeal of the AD rates. As a result, the CIT dismissed the case and these rates are now final. The Company paid AD rates in excess of the final rates during the periods impacted by the fourth annual review in the amount of $2.5 million and recorded a benefit in cost of sales with a corresponding receivable. The Company collected most of this receivable during 2018 and as of December 31, 2018, had a $0.1 million receivable remaining.
The DOC initiated the fifth annual review of AD and CVD rates in February 2017. The AD review covers shipments from December 1, 2015 through November 30, 2016. The CVD review covers shipments from January 1, 2015 through December 31, 2015. In June 2018, the DOC issued the final CVD rate in the fifth review, which was a maximum of 0.85% (with one company having a rate of 0.11%). In July 2018, the DOC issued the final AD rate in the fifth review, which was a maximum of 0.00% and, the Company recorded a receivable in the amount of $2.8 million in other current assets in its balance sheet. In connection with the issuance of the final CVD rate, with one company having a rate of 0.11%, the Company recorded a receivable of less than $100 thousand.
The first 5-year Sunset Review of the AD and CVD orders on multilayered wood flooring (the “Sunset Review”) began in November 2016 at the ITC to determine whether to terminate the orders. The Company participated fully in this Sunset Review. In December 2017, the ITC determined that the AD and CVD orders will remain in place. The appeal of this determination by certain importers was filed but not subsequently pursued.
The DOC initiated the sixth annual review of AD and CVD rates in February 2018. The AD review covers shipments from December 1, 2016 through November 30, 2017. The CVD review covers shipments from January 1, 2016 through December 31, 2016. In December 2018, the DOC issued non-binding preliminary results in the sixth annual review for CVD rates and AD rates. The preliminary AD rate was a maximum of 48.26% due in part to one of the two individually reviewed companies’ failure to respond fully to the DOC’s request for information. The preliminary CVD rate was a maximum of 2.81%. The final CVD and AD rates in the sixth annual review are currently expected to be issued in April 2019. If the preliminary AD rate were to be finalized, the Company currently expects that it would appeal such ruling. If the preliminary ruling regarding the AD Rate were to be finalized, the Company anticipates it would record a net liability of approximately $1.1 million.
The DOC initiated the seventh annual review of the AD and CVD rates in March 2019, which is expected to follow the same schedule as the preceding reviews.The AD review covers shipments from December 1, 2017 through November 30, 2018. The CVD review covers shipments from January 1, 2017 through December 31, 2017.
Outstanding AD and CVD duties are subject to interest based on the IRS quarterly published rate. The Company has recorded a net $1.2 million of interest expense through the line item Other Expense on the Statement of Operations.
Other Matters
We are
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, ourits 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 cash flows.liquidity.
Item 4. Mine Safety Disclosures.
None.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
Our common stock trades on the New York Stock Exchange (“NYSE”) under the trading symbol “LL.” We are authorized to issue up to 35,000,000 shares of common stock, par value $0.001. Total shares of common stock outstanding at February 25, 2016March 1, 2019 were 27,088,460,28,640,264 and we had eightsix stockholders of record.
The following table sets forth the range of high and low sales prices per share as reported by the NYSE for each quarter during the last two fiscal years.
| | | | |
| | Price Range |
| | | High | | Low |
2015:
| | | | | | | | |
| Fourth Quarter | | $ | 21.74 | | | $ | 12.80 | |
| Third Quarter | | | 21.42 | | | | 11.62 | |
| Second Quarter | | | 35.18 | | | | 20.01 | |
| First Quarter | | | 69.99 | | | | 27.15 | |
2014:
| | | | | | | | |
| Fourth Quarter | | $ | 67.86 | | | $ | 47.76 | |
| Third Quarter | | | 77.27 | | | | 52.76 | |
| Second Quarter | | | 96.75 | | | | 72.86 | |
| First Quarter | | | 111.74 | | | | 86.26 | |
Issuer Purchases of Equity Securities
The following table presents our share repurchase activity for the quarter ended December 31, 20152018 (dollars in thousands, except per share amounts):
| | | | | | | | |
| Period | | Total
Number of
Shares
Purchased(1) | | Average
Price Paid
per Share | | Total
Number of
Shares
Purchased as
Part of
Publicly
Announced
Plans or
Programs | | Maximum
Dollar Value
that May Yet
Be Purchased
Under the
Plans or
Programs(2) |
| October 1, 2015 to October 31, 2015 | | | — | | | $ | — | | | | — | | | $ | 14,728 | |
| November 1, 2015 to November 30, 2015 | | | 581 | | | | 13.71 | | | | — | | | | 14,728 | |
| December 1, 2015 to December 31, 2015 | | | — | | | | — | | | | — | | | | 14,728 | |
| Total | | | 581 | | | $ | 13.71 | | | | — | | | $ | 14,728 | |
| (1) | We repurchased 581 shares | | | | | | |
| | | | | | Total Number | | Maximum Dollar Value |
| | | | | | of our common stock in connection with the net settlement Shares | | of shares issuedShares That May Yet |
| | | | | | Purchased as a result | | Be Purchased as |
| | Total Number | | Average | | Part of the vestingPublicly | | Part of restricted shares during the quarter endedPublicly |
| | of Shares | | Price Paid | | Announced | | Announced |
Period | | Purchased1 | | Per Share1 | | Programs2 | | Programs2 |
October 1, 2018 to October 31, 2018 | | — | | — | | — | | — |
November 1, 2018 to November 30, 2018 | | — | | — | | — | | — |
December 1, 2018 to December 31, 2015.2018 | | — | | — | | — | | — |
Total | | — | | — | | — | | — |
| (2) | Our initial stock repurchase program, which authorized the repurchase of up to $50 million in common stock, was authorized by our board of directors and publicly announced on February 22, 2012. Our board of directors subsequently authorized two additional stock repurchase programs, each of which authorized the repurchase of up to an additional $50 million in common stock. These programs were publicly announced on November 15, 2012 and February 19, 2014, respectively. |
1 We repurchased 1,567 shares of our common stock, at an average price of $12.57, in connection with the net settlement of shares issued as a result of the vesting of restricted shares during the quarter ended December 31, 2018.
2 Our initial stock repurchase program, which authorized the repurchase of up to $50 million in common stock, was authorized by our board of directors and publicly announced on February 22, 2012. Our board of directors subsequently authorized two additional stock repurchase programs, each of which authorized the repurchase of up to an additional $50 million in common stock. These programs were publicly announced on November 15, 2012 and
February 19, 2014, respectively, and are currently indefinitely suspended until we are better able to evaluate the long-term customer demand and assess our estimates of operations and cash flow. At December 31, 2018, we had approximately $14.7 million remaining under this authorization.
Dividend Policy
We have never paid any dividends on our common stock. Any future decisionstock and do not expect to pay cash dividends will be atthem in the discretion of our board of directors and will be dependent on our results of operations, financial condition, contractual restrictions and other factors that the board of directors considers relevant.near future.
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Securities Authorized for Issuance Under Equity Compensation Plans
See Item 12. “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” for information regarding securities authorized for issuance under our equity compensation plans.
Performance Graph
The following graph compares the performance of our common stock during the period beginning December 31, 20102013 through December 31, 2015,2018, to that of the total return index for the NYSE Composite the Dow Jones US Furnishings Index and the S&P SmallCap 600 Index (which includes Lumber Liquidators)a Custom Peer Group whose members are listed below assuming an investment of $100 on December 31, 2010.2013. In calculating total annual stockholder return, reinvestment of dividends, if any, is assumed. The indices are included for comparative purpose only. They do not necessarily reflect management’s opinion that such indices are an appropriate measure of the relative performance of our common stock.
| | | | | | | | | | | | |
| | 12/31/2013 | | 12/31/2014 | | 12/31/2015 | | 12/30/2016 | | 12/31/2017 | | 12/31/2018 |
| | | | | | | | | | | | |
Lumber Liquidators Holdings, Inc. | | 100.00 | | 64.45 | | 16.87 | | 15.30 | | 30.51 | | 9.25 |
| | | | | | | | | | | | |
NYSE Composite | | 100.00 | | 106.87 | | 102.62 | | 115.02 | | 136.76 | | 124.72 |
| | | | | | | | | | | | |
Peer Group1 | | 100.00 | | 132.38 | | 158.26 | | 160.76 | | 227.44 | | 214.61 |
1The Peer Group consists of industry competitors and other retailers of a similar size to the Company. They include: The Home Depot, Inc., Lowe’s Companies, Inc., Floor & Décor Holdings, Inc., Tile Shop Holdings, Inc., The Sherwin-Williams Company, Pier 1 Imports, Inc., Vitamin Shoppe, Inc., Hibbett Sports, Inc. and Haverty Furniture Companies, Inc. Mattress Firm Holding Corp. ceased trading so they have been omitted from our peer group.
Item 6. Selected Financial Data.
The selected statements of income data for the years ended December 31, 2015, 20142018, 2017 and 20132016 and the balance sheet data as of December 31, 20152018 and 20142017 have been derived from our audited consolidated financial statements included in Item 8. “Consolidated Financial Statements and Supplementary Data” of this report. This information should be read in conjunction with those audited financial statements, the notes thereto, and Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this report.
The selected balance sheet data set forth below as of December 31, 2013, 20122016, 2015 and 2011,2014, and income data for the years ended December 31, 20122015 and 20112014 are derived from our audited consolidated financial statements contained in reports previously filed with the SEC, which are not included herein. Our historical results are not necessarily indicative of our results for any future period.
| | | | | | | | | | | | | | | | |
| | Year Ended December 31, | |
| | 2018 1 | | 2017 2 | | 2016 3 | | 2015 4 | | 2014 | |
| | (dollars in thousands, except per share amounts) | |
Statement of Income Data | | | | | | | | | | | | | | | | |
Net Sales | | $ | 1,084,636 | | $ | 1,028,933 | | $ | 960,588 | | $ | 978,776 | | $ | 1,047,419 | |
Comparable Store Net Sales Increase (Decrease) 5 | | | 2.6 | % | | 5.4 | % | | (4.6) | % | | (11.1) | % | | (4.3) | % |
Cost of Sales | | | 691,696 | | | 659,872 | | | 656,719 | | | 699,918 | | | 629,252 | |
Gross Profit | | | 392,940 | | | 369,061 | | | 303,869 | | | 278,858 | | | 418,167 | |
Selling, General and Administrative Expenses | | | 443,513 | | | 406,027 | | | 397,504 | | | 362,051 | | | 314,094 | |
Operating (Loss) Income | | | (50,573) | | | (36,966) | | | (93,635) | | | (83,193) | | | 104,073 | |
Other Expense | | | 2,827 | | | 1,591 | | | 638 | | | 234 | | | 490 | |
(Loss) Income Before Income Taxes | | | (53,400) | | | (38,557) | | | (94,273) | | | (83,427) | | | 103,583 | |
Income Tax Expense (Benefit) | | | 979 | | | (734) | | | (25,710) | | | (26,994) | | | 40,212 | |
Net (Loss) Income | | $ | (54,379) | | $ | (37,823) | | $ | (68,563) | | $ | (56,433) | | $ | 63,371 | |
Net (Loss) Income per Common Share: | | | | | | | | | | | | | | | | |
Basic | | $ | (1.90) | | $ | (1.33) | | $ | (2.51) | | $ | (2.08) | | $ | 2.32 | |
Diluted | | $ | (1.90) | | $ | (1.33) | | $ | (2.51) | | $ | (2.08) | | $ | 2.31 | |
Weighted Average Common Shares Outstanding: | | | | | | | | | | | | | | | | |
Basic | | | 28,571 | | | 28,407 | | | 27,284 | | | 27,082 | | | 27,265 | |
Diluted | | | 28,571 | | | 28,407 | | | 27,284 | | | 27,082 | | | 27,486 | |
1 Results for the year ended December 31, 2018 include: (i) a favorable adjustment of antidumping costs and countervailing duties of $4.9 million associated with applicable shipments of engineered hardwood from China in a
| | | | | | | | | | |
| | Year Ended December 31, |
| | | 2015(1) | | 2014 | | 2013 | | 2012 | | 2011 |
| | | (dollars in thousands, except per share amounts) |
Statement of Income Data
| | | | | | | | | | | | | | | | | | | | |
| Net Sales | | $ | 978,776 | | | $ | 1,047,419 | | | $ | 1,000,240 | | | $ | 813,327 | | | $ | 681,587 | |
| Comparable store net sales (decrease) increase(2) | | | (11.1 | )% | | | (4.3 | )% | | | 15.8 | % | | | 11.4 | % | | | (2.0 | )% |
| Cost of Sales | | | 699,918 | | | | 629,252 | | | | 589,257 | | | | 504,542 | | | | 440,912 | |
| Gross Profit | | | 278,858 | | | | 418,167 | | | | 410,983 | | | | 308,785 | | | | 240,675 | |
| Selling, General and Administrative Expenses | | | 362,051 | | | | 314,094 | | | | 284,960 | | | | 230,439 | | | | 198,237 | |
| Operating (Loss) Income | | | (83,193 | ) | | | 104,073 | | | | 126,023 | | | | 78,346 | | | | 42,438 | |
| Interest expense | | | 309 | | | | 84 | | | | — | | | | — | | | | — | |
| Other (Income) Expense(3) | | | (75 | ) | | | 406 | | | | (442 | ) | | | (140 | ) | | | (587 | ) |
(Loss) Income Before Income
Taxes | | | (83,427 | ) | | | 103,583 | | | | 126,465 | | | | 78,486 | | | | 43,025 | |
| Provision for income taxes | | | (26,994 | ) | | | 40,212 | | | | 49,070 | | | | 31,422 | | | | 16,769 | |
| Net (Loss) Income | | $ | (56,433 | ) | | $ | 63,371 | | | $ | 77,395 | | | $ | 47,064 | | | $ | 26,256 | |
Net (loss) income per common share:
| | | | | | | | | | | | | | | | | | | | |
| Basic | | $ | (2.08 | ) | | $ | 2.32 | | | $ | 2.82 | | | $ | 1.71 | | | $ | 0.95 | |
| Diluted | | $ | (2.08 | ) | | $ | 2.31 | | | $ | 2.77 | | | $ | 1.68 | | | $ | 0.93 | |
Weighted average common shares outstanding:
| | | | | | | | | | | | | | | | | | | | |
| Basic | | | 27,082,299 | | | | 27,264,882 | | | | 27,484,790 | | | | 27,448,333 | | | | 27,706,629 | |
| Diluted | | | 27,082,299 | | | | 27,485,852 | | | | 27,914,322 | | | | 28,031,453 | | | | 28,379,693 | |
28
| (1) | Results for the year ended December 31, 2015 include pre-tax expenses of $9.4 million related to the purchase of testing kits and professional fees in connection with our indoor air quality testing program, incremental legal and professional fees and settlement expenses, related to our defense of various legal matters of approximately $37.0 million, asset impairment charges and other expenses related to the simplification of our business and employee retention totaling approximately $16.2 million, and the write down of our laminates and associated moldings sourced from China totaling approximately $22.5 million. |
| (2) | A store is generally considered comparable on the first day of the thirteenth full calendar month after opening. |
| (3) | Includes interest income. |
TABLE OF CONTENTSprior period, (ii) duties related to prior periods, (iii) incremental legal and professional fees and settlement expenses, related to our defense of various legal matters of approximately $75.7 million and (iv) other expenses primarily related to an impairment of certain assets related to our decision to exit the finishing business totaling approximately $1.8 million.
2 Results for the year ended December 31, 2017 include: (i) a favorable adjustment of antidumping costs and countervailing duties of $2.8 million associated with applicable shipments of engineered hardwood from China in a prior period, (ii) reduced reserves for estimated costs to be incurred related to our indoor air quality testing program by approximately $1 million, (iii) incremental legal and professional fees and settlement expenses, related to our defense of various legal matters of approximately $48.3 million and (iv) other expenses primarily related to costs to dispose of certain Chinese laminate products whose sales were discontinued in 2015 and an impairment of certain assets related to a vertical integration initiative totaling approximately $3.1 million.
3 Results for the year ended December 31, 2016 include: (i) an unfavorable adjustment of antidumping costs and countervailing duties of $5.5 million associated with applicable shipments of engineered hardwood from China in a prior period, (ii) pre-tax expenses of $6.2 million related to the purchase of testing kits and professional fees in connection with our indoor air quality testing program, (iii) incremental legal and professional fees and settlement expenses, related to our defense of various legal matters of approximately $47.7 million and (iv) other expenses primarily related to employee retention initiatives totaling approximately $2.8 million.
4 Results for the year ended December 31, 2015 include: (i) the write down of our laminates and associated moldings sourced from China totaling approximately $22.5 million and other inventory adjustments of $6.6 million, (ii) an adjustment of antidumping costs and countervailing duties of $4.9 million associated with applicable shipments of engineered hardwood from China in a prior period, (iii) pre-tax expenses of $9.4 million related to the purchase of testing kits and professional fees in connection with our indoor air quality testing program, (iv) incremental legal and professional fees and settlement expenses, related to our defense of various legal matters of approximately $34.2 million and (v) other expenses related to the simplification of our business and employee retention totaling approximately $11.1 million.
5 A store is generally considered comparable on the first day of the thirteenth full calendar month after opening.
| | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
| | (dollars in thousands) |
Balance Sheet Data | | | | | | | | | | | | | | | |
Cash and Cash Equivalents | | $ | 11,565 | | $ | 19,938 | | $ | 10,271 | | $ | 26,703 | | $ | 20,287 |
Merchandise Inventories | | | 318,272 | | | 262,280 | | | 301,892 | | | 244,402 | | | 314,371 |
Total Assets | | | 475,517 | | | 410,795 | | | 482,544 | | | 445,564 | | | 482,904 |
Customer Deposits and Store Credits | | | 40,332 | | | 38,546 | | | 32,639 | | | 33,771 | | | 34,943 |
Total Debt and Capital Lease Obligations | | | 65,000 | | | 15,000 | | | 40,351 | | | 20,000 | | | — |
Total Stockholders’ Equity | | | 147,398 | | | 197,847 | | | 230,892 | | | 277,568 | | | 332,054 |
Working Capital1 | | | 124,179 | | | 119,835 | | | 173,683 | | | 195,044 | | | 213,030 |
| | | | | | | | | | | | | | | |
Other Data | | | | | | | | | | | | | | | |
Total Stores in Operation (end of period) | | | 413 | | | 393 | | | 383 | | | 374 | | | 352 |
Average Sale2 | | $ | 1,355 | | $ | 1,310 | | $ | 1,255 | | $ | 1,230 | | $ | 1,260 |
1 Working capital is defined as current assets minus current liabilities.
2Average Sale is defined as the average invoiced sales order, measured quarterly, excluding returns as well as transactions under $100 (which are generally sample orders or add-on/accessories to existing orders).
| | | | | | | | | | |
| | Year Ended December 31, |
| | | 2015 | | 2014 | | 2013 | | 2012 | | 2011 |
| | | (dollars in thousands, except per share amounts) |
Balance Sheet Data
| | | | | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | | $ | 26,703 | | | $ | 20,287 | | | $ | 80,634 | | | $ | 64,167 | | | $ | 61,675 | |
| Merchandise inventories | | | 244,402 | | | | 314,371 | | | | 252,428 | | | | 206,704 | | | | 164,139 | |
| Total assets | | | 456,202 | | | | 493,462 | | | | 429,559 | | | | 347,387 | | | | 294,854 | |
| Customer deposits and store credits | | | 33,771 | | | | 34,943 | | | | 22,377 | | | | 25,747 | | | | 18,120 | |
| Total debt and capital lease obligations, including current maturities | | | 20,000 | | | | — | | | | — | | | | — | | | | — | |
| Total stockholders' equity | | | 277,568 | | | | 332,054 | | | | 309,329 | | | | 234,541 | | | | 215,084 | |
| Working capital | | | 195,044 | | | | 213,030 | | | | 245,207 | | | | 187,118 | | | | 167,248 | |
Other Data
| | | | | | | | | | | | | | | | | | | | |
| Total stores in operation | | | 374 | | | | 352 | | | | 318 | | | | 288 | | | | 263 | |
| Average sales | | $ | 1,625 | | | $ | 1,675 | | | $ | 1,705 | | | $ | 1,600 | | | $ | 1,560 | |
| (1) | Working capital is defined as current assets minus current liabilities. |
| (2) | Average sale, calculated on a total company basis, is defined as the average invoiced sale per customer, measured on a monthly basis and excluding transactions of less than $250 (which are generally sample orders, or add-ons or fill-ins to previous orders) and of more than $30,000 (which are usually contractor orders). |
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Overview
Lumber Liquidators is one of the largestleading specialty retailerretailers of hardwoodhard-surface flooring in North America, offering a complete purchasing solution across an extensive assortment of exoticdomestic and domesticexotic hardwood species, engineered hardwood, laminate, resilient vinyl, waterproof vinyl plank and porcelain tile. We also feature the renewable flooring products, bamboo and cork.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 December 31, 2015,2018, we sold our products through 374413 Lumber Liquidators stores in 4647 states in the United States (“U.S.”) and in Canada, a call center websites and catalogs.website.
We believe we have achieved a reputation for offering great value, superior service and a broad selection of high-quality hardwood 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 hardwoodhighly 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 expansion of our advertising reach and frequency.
Executive Summary
For
To supplement the fiscal year ended December 31, 2015financial measures prepared in accordance with GAAP, we reported a net loss of $56.4 million, or $(2.08) per diluted share, compared to net income of $63.4 million, or $2.31 per diluted share inuse the year ended December 31, 2014. Our operating results for the year ended December 31, 2015 included:
Expenses of $9.4 million related to the purchase of testing kits and professional fees in connection with our indoor air quality testing program,
Incremental legal and professional fees and settlement expenses, related to our defense of various legal matters of approximately $37.0 million,
Asset impairment charges and other expenses related to the simplification of our business totaling approximately $10.9 million,
Employee retention expenses totaling approximately $5.3 million and
Write down of our laminates and associated moldings sourced from China totaling approximately $22.5 million.
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Our net sales for the year ended December 31, 2015 were $978.8 million, a decrease of $68.6 million from the $1.05 billion recorded during the year ended December 31, 2014. Our comparable store sales decreased 11.1%, driven by a 8.0% decrease in the number of customers invoiced and a 3.1% decrease in our average sale.
We believe our net sales were negatively impacted by certain unfavorable allegations made surrounding the product quality, and subsequent suspension, of our laminates sourced from China. The allegations were part of a 60 Minutes episode that originally aired on March 1, 2015 (“the Broadcast”). During 2015, we responded to the impact of these allegations on our sales by focusing our efforts on getting back to basics, taking care of our customers, and executing on our value proposition. As a result of these efforts, we accomplished the following:
Reduced our inventory levels and improved the quality of our on hand inventory while conserving cash flow,
Simplified our product assortment by eliminating approximately 140 flooring varieties and related moldings, which were identified as duplicative, discontinued or less popular products, to improve the customer shopping experience,
Returned to the core of our business by ending planned vertical integration initiatives and tile expansions,
Improved our vendor relationships across the globe, and
| • | Distributed over 48,000 free indoor air quality screening kits as part of our voluntary commitment to help our customers better understand the air quality in their homes. Refer toOther Matters for further discussion of the indoor air quality testing program. |
Settlement of the Lacey Act Investigation
Additionally, in conjunction with the Special Committee of the Board of Directors (the “Special Committee”), we continue to address various legal matters and regulatory matters facing the Company. As previously disclosed, during the fourth quarter of 2015, we entered into a settlement with the DOJ related to our compliance with the Lacey Act. The settlement requires the Company to implement an Environmental Compliance Program (the “Compliance Plan”) and pay certain fines and forfeit assets totaling approximately $13.2 million. Based on our current expectations, we anticipate implementation and ongoing compliance costs of these enhancements to cost up to $3.5 million through 2016, of which approximately $0.5 million was incurred in the fourth quarter of 2015. We believe the ongoing costs of our compliance program will be higher than historical levels as we implement the Compliance Plan, however, the scope of those costs will be determined by future sourcing initiatives and other factors. Refer to Part I, Item 3. — Legal Proceedings for a complete description of legal and regulatory issues facing the Company.
Update on Laminate Flooring Sourced from China
On May 7, 2015, we suspended the sale of our laminate products sourced from China pending further assessment of the situation. As a part of our assessment, we considered expectations regarding customer sentiment, market conditions, findings by regulatory agencies, legal proceedings, channels for disposition and other factors. During the quarter ended December 31, 2015, we determined that we would not sell our current inventory of laminate flooring sourced from China in our stores as a result of strategic and operational considerations including the potential distraction these products could have on our employees and our business. As a result of this decision, we reduced the carrying value of this laminate flooring and related moldings to its net realizable value of zero, resulting in a charge of approximately $22.5 million to cost of sales. We expect to incur certain costs in the first half of 2016 related to the consolidation of this laminate inventory to a central warehouse of between $1.0 million and $3.0 million. We may also incur additional costs in future periods related to the ultimate disposition of this product.
In order to meet customer demand, we shifted the sourcing of laminate products previously manufactured in China to suppliers located in Europe and North America. We believe our laminate assortment has been received positively by our customers and further believe the sales of such products will approach historical
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levelsfollowing 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 or Loss; (vi) Adjusted Operating Margin and (vii) 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.
The non-GAAP financial measures are presented because management and analysts use these non-GAAP financial measures to evaluate our sales mix. Laminates represented approximately 15.7%operating performance and management uses them to determine incentive compensation and/or to address questions it receives. 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 from prior periods, as such items are outside of our sales in 2015 comparedcontrol or due to 19.1% and 19.6% in 2014 and 2013, respectively.their inherent unusual, non-operating, unpredictable, non-recurring, or non-cash nature.
Consumer Product Safety Commission Investigation
Executive Summary
In March 2015,2018, we received notice from the Consumer Product Safety Commission (“CPSC”) that it was opening an investigation into the safety of formaldehyde in our laminate flooring sourced from China. We have cooperated with the CPSC throughout its investigation. During its investigation, the CPSC shared test results related to its independent testing of our laminate flooring sourced from China with the Agency for Toxic Substances and Disease Registry (“ATSDR”). On February 10, 2016, the Agency for Toxic Substances and Disease Registry (“ATSDR”) published its findings regarding formaldehyde emissions from a limited sample set of our flooring that had been tested by the CPSC. The ATSDR report concluded that the 33 samples tested posed a low risk of cancer from exposure and that the amount of formaldehyde released could lead to health symptoms such as an increase in breathing problems in certain susceptible populations as well as short-term eye, nose or throat irritation. On February 18, 2016, the ATSDR issued a statement indicating its February 10, 2016 report contained certain errors in their calculations. In their statement, the ATSDR, after correcting their model, preliminarily revised its assessment of the possible health effects indicating that the samples tested could cause increased symptoms and other respiratory issues for people with asthma and COPD. Additionally, the statement noted that individuals could experience eye, nose and throat irritation at the lowest modeled levels of formaldehyde. Finally, the statement indicated the ATSDR had preliminarily increased the estimated risk of cancer from 2-9 cases per 100,000 people to 6-30 cases per 100,000 people but reconfirmed the model used was conservative and that the calculated cancer risk is likely lower. The ATSDR has indicated that its recommendations will likely remain the same, but the agency will conduct a quality review of the model and revised results before issuing its revised report.
The CPSC’s investigation has not concluded, and we will continue to work with the CPSC.
Strategic Direction
We are focused on several key initiatives related to our core business that we believe will strengthenbelieved strengthened our operationssales and provideoperating margin and provided an improved shopping experience to our customers. These initiatives were improving operational effectiveness, enhancing the customer experience, responsible, compliant sourcing activities and expanding our business to better serve our customers.
Our results for the year ended December 31, 2018 were as follows:
| · | | Net sales for the year ended December 31, 2018 increased $55.7 million, or 5.4%, to $1.08 billion from $1.03 billion in the year ended December 31, 2017. Net sales in comparable stores increased $26.6 million, or 2.6%, and net sales in non-comparable stores increased $29.1 million. We opened 21 new stores and closed one during 2018, for a total of 413 stores as of December 31, 2018. |
| · | | Gross margin was 36.2% and 35.9% for the years ended December 31, 2018 and 2017, respectively. Gross profit was slightly negatively affected by the tariffs imposed on our Chinese-sourced products beginning September 24, 2018, reflecting only a partial impact of the currently imposed 10% tariff rate due to timing of goods flowing through inventory. |
| · | | Selling, general and administrative (“SG&A”) expenses increased $37.5 million, or 9.2%, in 2018 to $443.5 million from $406.0 million in 2017. Excluding the items shown in the table that follows in Results of Operations, Adjusted SG&A (a non-GAAP measure) increased $11.5 million in 2018, driven by a combination of higher payroll and occupancy costs, which are primarily related to the 21 new stores opened this year, and increases in on-going professional fees and credit card and banking fees. These increases were partially offset by a $2.3 million, or 3.1%, reduction in advertising. |
| · | | Included in SG&A were legal-related costs and settlements of $75.7 million and $48.3 million in 2018 and 2017, respectively. |
| · | | Operating loss for the year ended December 31, 2018 was $50.6 million compared to an operating loss of $37.0 million in the year ended December 31, 2017. Operating loss for both periods was impacted by the unusual items summarized in the tables that follow in Results of Operations. Excluding these items, Adjusted Operating Income (a non-GAAP measure) was $20.2 million and Adjusted Operating Margin (a non-GAAP measure) was 1.9% in 2018, compared to $10.7 million, or 1.0%, in 2017. |
| · | | Net loss for the year ended December 31, 2018 was $54.4 million, or $1.90 per diluted share, compared to a net loss of $37.8 million, or $1.33 per diluted share for the year ended December 31, 2017. Losses related to both periods were the result of litigation-related costs and settlements. Adjusted Earnings per Diluted Share (a non-GAAP measure) was $0.57 in 2018 and $0.34 in 2017. |
| · | | On March 8, 2019, we entered into a commitment letter with the lenders, subject to customary closing conditions, that provides for an increase in the Revolving Loan up to a maximum amount of $175 million, and a new “First in Last Out” tranche of $25 million incremental to the $175 million but within the same Revolving Credit Facility. This will also extend the term of the Revolving Credit Facility until March 2024. We expect to close on this expanded Revolving Credit Facility in late March or early April 2019. |
As we head into 2019, our focus will be on driving DIY, DIFM and Pro traffic into our stores, enhancing the Company on getting “backcustomer experience across both our digital platform and within our stores and improving operational effectiveness. Our research indicates that the initial interest in purchasing a floor begins with digital browsing. We believe that by providing an improved digital experience and better website performance, we will not only grow our e-commerce sales, but also drive traffic into our stores. Once customers are in our stores, we believe that our store model provides a competitive advantage by allowing our knowledgeable sales associates to assist customers throughout the project design and purchase process in a more intimate environment, from product selection to installation.
Working capital and liquidity
At December 31, 2018, we had $79.5 million in liquidity, comprised of $11.6 million of cash and $67.9 million in availability under our asset-based revolving loan (the “Revolving Loan”). We also had $318.3 million in inventory and $73.4 million in accounts payable, while borrowings against our Revolving Loan were $65 million. At December 31, 2017, we had $145.9 million in liquidity, comprised of $19.9 million of cash and $126 million in availability under our Revolving Loan. We also had $262.3 million in inventory and $67.7 million in accounts payable, while borrowings against our Revolving Loan were $15 million. The reduction in liquidity at December 31, 2018 from the year earlier was driven primarily by a $56 million investment in inventory, and the $22 million cash deposit made to fund our obligation under the settlement related to the basics”MDL litigation matter.
Table of what we do well and include:Contents
| • | Focusing on store performance: We believe our store model highlights our assortment in a good-better-best format and provides a competitive advantage by allowing our associates to maximize the amount of time they devote to assisting customers throughout the buying process. We intend to place additional focus on training our store associates and will also ensure our incentive programs appropriately align store goals to our corporate strategy. |
| • | Strengthening our value proposition: We offer a broad assortment of high quality flooring in varying widths, species, and constructions, as well as moldings and accessories, in addition to focusing on emerging product categories such as wood look tile and butcher block countertops. We seek to ensure that these products are available to meet customer demand at attractive retail prices and train our store associates to be experts in the products we sell. We have devoted significant resources to identify opportunities and execute corrective actions to improve underperforming stores. Additionally, we are placing an increased emphasis on associate training and store procedures. |
| • | Responsible, compliant sourcing activities: We continue to enhance certain compliance procedures, which we believe will allow the Company to confidently source products from anywhere in the world. |
| • | Opportunistically expanding our business to better serve our customers: We serve both DIY customers as well as DIFM customers who choose to select their flooring products but prefer to have those products installed for them. Since 2013, we have increased the number of stores which offer installation services coordinated by our associates, which increases our average sale as well as the gross profit generated from those customers. |
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Results of Operations
We believe the selected sales data, the percentage relationship between Net Sales and major categories in the 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 | |
| | Year Ended December 31, | | 2018 | | 2017 | |
| | 2018 | | 2017 | | 2016 | | vs. 2017 | | vs. 2016 | |
Net Sales | | | | | | | | | | | | | | |
Net Merchandise Sales | | | 88.1 | % | | 91.2 | % | | 93.2 | % | 1.9 | % | 4.8 | % |
Net Services Sales | | | 11.9 | % | | 8.8 | % | | 6.8 | % | 41.9 | % | 39.5 | % |
Total Net Sales | | | 100.0 | % | | 100.0 | % | | 100.0 | % | 5.4 | % | 7.1 | % |
Gross Profit | | | 36.2 | % | | 35.9 | % | | 31.6 | % | 6.5 | % | 21.5 | % |
Selling, General, and Administrative Expenses | | | 40.9 | % | | 39.5 | % | | 41.4 | % | 9.2 | % | 2.1 | % |
Operating Loss | | | (4.7) | % | | (3.6) | % | | (9.8) | % | 36.8 | % | (60.5) | % |
Other Expense (Income) | | | 0.2 | % | | (0.2) | % | | — | % | 77.7 | % | 149.5 | % |
Loss Before Income Taxes | | | (4.9) | % | | (3.8) | % | | (9.8) | % | 38.5 | % | (59.1) | % |
Income Tax Expense (Benefit) | | | 0.1 | % | | (0.1) | % | | (2.7) | % | (233.3) | % | (97.1) | % |
Net Loss | | | (5.0) | % | | (3.7) | % | | (7.1) | % | 43.8 | % | (44.8) | % |
SELECTED SALES DATA | | | | | | | | | | | | | | |
Average Sale1 | | $ | 1,355 | | $ | 1,310 | | $ | 1,255 | | 3.4 | % | 4.3 | % |
Average Retail Price per Unit Sold2 | | | (0.8) | % | | 0.4 | % | | (4.0) | % | | | | |
Comparable Store Sales Increase (Decrease) (%) | | | 2.6 | % | | 5.4 | % | | (4.6) | % | | | | |
| | | | | | | | | | | | | | |
Number of Stores Open, end of period | | | 413 | | | 393 | | | 383 | | | | | |
Number of Stores Opened in Period, net | | | 20 | | | 10 | | | 9 | | | | | |
Number of Stores Relocated in Period3 | | | 1 | | | — | | | 3 | | | | | |
| | | | | | | | | | | | | | |
Comparable Stores4 (% change to prior year): | | | | | | | | | | | | | | |
Customers Invoiced5 | | | (0.8) | % | | 1.1 | % | | (6.7) | % | | | | |
Net Sales of Stores Operating for 13 to 36 months | | | 13.1 | % | | 14.2 | % | | 0.4 | % | | | | |
Net Sales of Stores Operating for more than 36 months | | | 2.3 | % | | 5.0 | % | | (5.2) | % | | | | |
| | | | | | | | | | | | | | |
Net Sales in Markets with all Stores Comparable (no cannibalization) | | | 3.4 | % | | 6.1 | % | | (2.8) | % | | | | |
1Average Sale is defined as the average invoiced sales order, measured quarterly, excluding returns as well as transactions under $100 (which are generally sample orders or add-on/accessories to existing orders).
2 Average retail price per unit (square feet for flooring and other units of measures for moldings and accessories) sold is calculated on a total company basis and excludes non-merchandise revenue.
3 A relocated store remains a comparable store as long as it is relocated within the primary trade area.
4 A store is generally considered comparable on the first day of the thirteenth full calendar month after opening.
5 Change in number of customers invoiced is calculated by applying the average sale to total net sales at comparable stores.
The definitions of average sale and customers invoiced were revised in the quarter ended December 31, 2018 to improve the reporting of our Pro customers to better reflect separate Pro projects and transactions that had been
| (1) | Average sale, calculated on a total company basis, is defined as the average invoiced sale per customer, measured on a monthly basis and excluding transactions of less than $250 (which are generally sample orders, or add-ons or fill-ins to previous orders) and of more than $30,000 (which are usually contractor orders). |
| (2) | Average retail price per unit sold is calculated on a total company basis and excludes non-merchandise revenue. |
| (3) | A remodeled store remains a comparable store as long as it is relocated within the primary trade area. |
| (4) | A store is generally considered comparable on the first day of the thirteenth full calendar month after opening. |
| (5) | Change in number of customers invoiced is calculated by applying the average sale to total net sales at comparable stores. |
| (6) | A cannibalized market has at least one comparable store and one non-comparable store. |
TABLE OF CONTENTSaggregated into single larger transactions under the previous definition. All historical periods have been restated under this new definition. The average sale and change in customers invoiced amounts under both the old and new definitions for the quarterly and annual periods in 2018 and 2017 are shown below:
Results | | | | | | | | | | |
| | Quarter Ended | | Year Ended |
| | March 31,
2018 | | June 30,
2018 | | September 30,
2018 | | December 31,
2018 | | December 31,
2018 |
| | | | | | | | | | |
New Definition1 | | | | | | | | | | |
Average Sale | | $ 1,300 | | $ 1,371 | | $ 1,384 | | $ 1,365 | | $ 1,355 |
Change in Customers Invoiced | | -1.2% | | 1.0% | | -1.7% | | -1.8% | | -0.8% |
| | | | | | | | | | |
Previous Definition2 | | | | | | | | | | |
Average Sale | | $ 1,706 | | $ 1,784 | | $ 1,830 | | $ 1,791 | | $ 1,777 |
Change in Customers Invoiced | | -1.8% | | 0.1% | | -3.4% | | -2.7% | | -1.9% |
| | | | | | | | | | |
| | | | | | | | | | |
| | Quarter Ended | | Year Ended |
| | March 31,
2017 | | June 30,
2017 | | September 30,
2017 | | December 31,
2017 | | December 31,
2017 |
| | | | | | | | | | |
New Definition1 | | | | | | | | | | |
Average Sale | | $ 1,249 | | $ 1,322 | | $ 1,333 | | $ 1,336 | | $ 1,310 |
Change in Customers Invoiced | | 0.0% | | 4.2% | | 0.3% | | 0.2% | | 1.1% |
| | | | | | | | | | |
Previous Definition2 | | | | | | | | | | |
Average Sale | | $ 1,630 | | $ 1,706 | | $ 1,735 | | $ 1,738 | | $ 1,700 |
Change in Customers Invoiced | | -0.1% | | 5.4% | | 0.8% | | 1.1% | | 1.7% |
1The new definition of Operationsaverage sale is defined as the average invoiced sales order, measured quarterly, excluding returns as well as transactions under $100 (which are generally sample orders or add-on/accessories to existing orders). Invoiced sales orders include all merchandise and services added to an individual order over the course of a calendar quarter. An individual customer with multiple orders in the same quarter (often due to multiple projects) count as two or more transactions in calculating average sale and customer count. The new definition of the change in number of customers invoiced is calculated by applying the revised definition of average sale, described above, to total net sales at comparable stores.
2The previous definition of average sale, calculated on a total company basis, is defined as the average invoiced sale per customer, measured on a monthly basis, excluded transactions less than $250 (which are generally sample orders, or add-ons or fill-ins to previous orders) and more than $30,000 (which are usually contractor orders). It also aggregated Pro transactions into a single large transaction, rather than treating these as multiple projects, which they often are. The previous definition of the change in number of customers invoiced is calculated by applying the average sale to total net sales at comparable stores.
For an understanding of the significant factors that influenced our performance during the past three fiscal years, the following discussion should be read in conjunction with the Consolidated Financial Statements and the Notes to Consolidated Financial Statements presented in this report.
Fiscal 2015 Compared to Fiscal 2014
Net Sales
Net sales for 2015 decreased $68.6in 2018 increased $55.7 million, or 6.6%5.4%, from 20142017 as net sales in comparable stores decreased $116.2increased $26.6 million, or 2.6%, and the net sales in non-comparable stores increased $29.1 million. The growth in comparable store
sales reflected a 3.4% increase in average sale, which was driven by larger sales transactions from the additional attachment of installation services to transactions, as well as the growth in the mix of Pro customers. This increase was partially offset by a 0.8% decrease in the number of customers invoiced. The increased transaction size and decreased transaction count in part reflect reduced promotional activity and increased focus on Pro customers and customers seeking installation, both of which have a more involved and larger sales transaction. Installation and delivery services represented 11.9% of our sales for the year, which increased through the year, reaching 12.9% in the fourth quarter of 2018. Our Pro customer sales represented 28.5% of merchandise sales, up from 23% in the prior year.
The comparable store growth of 2.6% consisted of a decline in merchandise sales of (0.6)%, more than offset by an increase in non-comparable storesinstallation sales of $47.6 million. 41%. The growth in installation sales reflects the expansion of this program into Florida and California in late 2017 that generated incremental sales throughout 2018. The decline in merchandise sales reflect the reduced promotional activity and declines in the bamboo and hardwood categories. We believe industry softness in the fourth quarter and other competitive pressures also contributed to the declines in comparable store merchandise sales growth. In terms of categories, the manufactured category consisting of vinyl and laminate products grew 24.5% compared to prior year, reaching 36% of our merchandise sales in 2018, while the hardwood category declined 13.3% and represented 34% of our sales in 2018. The vinyl sub-category within manufactured products continues to drive the growth in that category due to its outstanding aesthetics, high resilience and waterproof characteristics.
Net sales in 2015 were impacted by2017 increased $68.3 million, or 7.1%, from 2016 as net sales in comparable stores increased $52.2 million, or 5.4%, and the net sales in non-comparable stores increased $16.1 million. The growth in comparable store sales reflected a decreasecombination of 8.0% attributable toan increase of 1.1% in the number of customers invoiced and a decreasean increase of 3.1%4.3% in the average sale.
We believe the number of customers invoiced decreased as a result of a number of factors, including therose due to improved customer experience in our stores, our more complete assortment and waning negative impact of unfavorable media and assortment limitations during the Broadcast on our reputation, our suspensionfirst half of sales2016. The increase in average sale was driven by higher attachment of all laminate product sourced from China during a large portion of 2015, and disruptionsinstallation services, the growth in our supply chain related to certain engineered product.
The Company’sPro business that carries higher average
sale decreased as a result of a decreaseticket size, and improvements in the average selling price of our
products.Gross Profit
Gross profit in 2018 increased 6.5% to $392.9 million from $369.1 million in 2017. Both years’ gross margins were favorably impacted by the unusual items highlighted in the table that follows, and, when excluding these items, Adjusted Gross Margin (a non-GAAP measure) improved by 10 basis points. This was driven by a favorable category mix toward vinyl products with improved margins, offset by slighthigher transportation costs, dilution from increased installation sales mix that have lower margins, and tariffs that were imposed on goods received starting September 24, 2018. This tariff impact of approximately 40 basis points reflects only a partial impact of the currently imposed 10% tariff rate on Chinese-sourced products due to the timing of goods flowing through inventory. We expect this adverse effect to continue in 2019 as the goods are fully cycled through inventory, and could increase further should the tariff rate increase. (See Risk Factors for more details on these tariffs).
Gross profit in 2017 increased 21.5% to $369 million from $303.9 million in 2016. Gross margin increased to 35.9% from 31.6% in 2016. This comparison was favorably impacted by the unusual items highlighted in the table below, and when excluding these items, Adjusted Gross Margin (a non-GAAP measure) improved from 32.8% to 35.5%, or 270 basis points. This was driven by a shift in mix toward vinyl and engineered products with improved margins, lower transportation costs, as well as improved margins within engineered, vinyl, laminate, and tile categories due to sourcing and pricing initiatives. These advances were slightly offset by a higher mix of installation sales that carry lower margins, and higher warranty costs.
We believe that each of the items below can distort the visibility of our ongoing performance and that the evaluation of our financial performance can be enhanced by use of supplemental presentation of our results that exclude the impact of these items.
| | | | | | | | | | | | | | | | | |
| | | | |
| | | Year Ended December 31, | |
| | | 2018 | | 2017 | | 2016 | |
| | | $ | | % of Sales | | $ | | % of Sales | | $ | | % of Sales | |
| | | (dollars in thousands) | |
Gross Profit/Margin, as reported (GAAP) | | | $ | 392,940 | | 36.2 | % | $ | 369,061 | | 35.9 | % | $ | 303,869 | | 31.6 | % |
| | | | | | | | | | | | | | | | | |
Antidumping Adjustments 1 | | | | (4,948) | | (0.5) | % | | (2,797) | | (0.3) | % | | 5,450 | | 0.6 | % |
HTS Classification Adjustments 2 | | | | (1,711) | | (0.1) | % | | — | | — | % | | — | | — | % |
Indoor Air Quality Testing Program 3 | | | | — | | — | % | | (993) | | (0.1) | % | | 6,187 | | 0.6 | % |
Sub-Total Items above | | | | (6,659) | | (0.6) | % | | (3,790) | | (0.4) | % | | 11,637 | | 1.2 | % |
| | | | | | | | | | | | | | | | | |
Adjusted Gross Profit/Margin (non-GAAP measures) | | | $ | 386,281 | | 35.6 | % | $ | 365,271 | | 35.5 | % | $ | 315,506 | | 32.8 | % |
1 We recognized adjustments to countervailing and antidumping duties of a favorable $4.9 million, a favorable $2.8 million and an unfavorable $5.5 million associated with applicable shipments of engineered hardwood from China related to prior periods for the years ended December 31, 2018, 2017 and 2016, respectively.
2We recognized classification adjustments related to Harmonized Tariff Schedule (“HTS”) duty categorization in prior periods during the year ended December 31, 2018.
3 Prior to June 30, 2016, $3.1 million of costs related to our indoor air quality testing program agreed to with the Consumer Product Safety Commission (“CPSC”) were expensed as incurred. During the second quarter of 2016, we recorded an accrual of $3 million, which represented our best estimate of costs to be incurred in the future periods related to this program and is included in the total for 2016. In the second quarter 2017, we reduced the reserve for estimated costs to be incurred related to the testing program by approximately $1 million. Costs in 2018 were nominal and expensed as incurred.
Selling, General and Administrative Expenses
SG&A expenses in 2018 increased 9.2% to $443.5 million from $406.0 million in 2017. Excluding the items shown in the table that follows, Adjusted SG&A (a non-GAAP measure) increased $11.5 million, primarily driven by increases in payroll of $4.7 million and occupancy of $3.3 million, both of which are primarily related to the volume of product sold. During 2015, the Company reduced the selling price of its products by 6.0%21 new stores opened this year and focused on the sale of less productive inventory in order to drive traffic and reduce inventory levels, and in response to negative allegations impacting the Company’s reputation. These price decreases were found across allfull-year effects of the products we sell.
Less than favorable net sales at comparable11 stores opened in 2017. Adjusted SG&A (a non-GAAP measure) was also negatively impacted by promotional financing fees of $3.0 million, ongoing legal and professional fees of $1.8 million, and depreciation of $1 million. These increases were partially offset by the expansionlower advertising costs of the Company’s installation program which increased 40.9% to $30.0 million in fiscal year 2015.
Gross Profit
Gross profit decreased 33.3% to $278.9 million from $418.2 million in 2014. Gross profit decreased$2.3 million. Payroll related costs as a percentage of sales were 14.2% in 2018 and 14.5% in 2017.
SG&A expenses in 2017 increased 2.1% in 2017 to $406.0 million from $397.5 million in 2016. Excluding the items shown in the table below, Adjusted SG&A (a non-GAAP measure) increased $7.6 million, driven by $7.5 million in higher payroll-related costs due to a numbergreater store level staffing, commissions, and investments in corporate capabilities and $3.0 million in higher occupancy costs, both of factors including,which were offset by $2.9 million in other decreases, primarily lower advertising and promotion costs. Excluding retention-related costs, and charges incurredpayroll related costs as a resultpercentage of changessales were 14.5% in 2017 and 2016, respectively.
We believe that each of these items can distort the Company’s business in response to the Broadcast, reductions in the average selling pricevisibility of our products,ongoing performance and other changesthat the evaluation of our financial performance can be enhanced by use of supplemental presentation of our results that exclude the impact of these items.
| | | | | | | | | | | | | | | | |
| | Year Ended December 31, | |
| | 2018 | | 2017 | | 2016 | |
| | $ | | % of Sales | | $ | | % of Sales | | $ | | % of Sales | |
| | (dollars in thousands) | |
SG&A, as reported (GAAP) | | $ | 443,513 | | 40.9 | % | $ | 406,027 | | 39.5 | % | $ | 397,504 | | 41.4 | % |
| | | | | | | | | | | | | | | | |
Accrual for Legal Matters and Settlements 1 | | | 63,951 | | 5.9 | % | | 36,960 | | 3.6 | % | | — | | — | % |
Securities and Derivatives Class Action 2 | | | — | | — | % | | — | | — | % | | 19,260 | | 2.0 | % |
Legal and Professional Fees 3 | | | 11,707 | | 1.1 | % | | 11,314 | | 1.1 | % | | 28,414 | | 3.0 | % |
All Other 4 | | | 1,769 | | 0.2 | % | | 3,146 | | 0.3 | % | | 2,800 | | 0.3 | % |
Sub-Total Items above | | | 77,427 | | 7.2 | % | | 51,420 | | 5.0 | % | | 50,474 | | 5.3 | % |
| | | | | | | | | | | | | | | | |
Adjusted SG&A (a non-GAAP measure) | | $ | 366,086 | | 33.7 | % | $ | 354,607 | | 34.5 | % | $ | 347,030 | | 36.1 | % |
1This amount represents the charge to our business. Notable items impacting gross margin include:
Certain planned reductionsearnings related to Bamboo Flooring Litigation, governmental investigations and Related Laminate Matters in retail prices implemented2018 as well as the charge to earnings in late 2014 and greater promotional pricing beginning in March 2015 to drive customer traffic and reduce inventory levels.
We incurred costs of $9.4 million for purchases of testing kits and professional fees2017 related to the Company’s indoor air quality testing program.
We recorded a write-offFormaldehyde MDL and Abrasion MDL settlements, all of which are described more fully in the Legal Proceedings section of this Annual Report.2 This amount represents the net charge to earnings related to the stock-based element of our settlement in the securities class action lawsuit in addition to $2.5 million related to our suspensionderivatives class action lawsuit.
3 Represents charges to earnings related to our defense of significant legal actions, described in notes 1 and 2 above, during the period. This does not include all legal costs incurred by the Company.
4 All Other consisted of the salefollowing: an impairment of Chinese laminate products totaling $22.5 million.
| • | As more fully described in Part II, Item I — Legal Proceedings,Antidumping and Countervailing Duties Investigation, we recorded $4.9 million during fiscal 2015 as our best estimate of the probable loss for antidumping and countervailing duties owed on applicable shipments of engineered hardwood imported from China. |
We incurred approximately $1.6 million of incremental expenses in conjunction with the consolidation and transition of the East Coast distribution center, which was completed by the end of the first quarter of 2015.
Gross margin in 2015 included approximately $6.6 million in costscertain assets related to our decision to discontinueexit the finishing business in 2018, an impairment of certain non-core investments.
We incurred approximately $1.2 million in additional expense during 2014 primarily related to our Bellawood Re-Launch and higher inventory levels.
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Selling, General, and Administrative Expenses
Selling, General and Administrative expenses increased 15.3% to $362.1 million from $314.1 million in 2014. Notable items impacting SG&A include:
We recorded employee retention incentives totaling approximately $5.3 million.
We incurred costs of $10.0 million related to our settlement with the Environment and Natural Resources Division of the DOJ related to our compliance with the Lacey Act and $3.2 million related to our settlement regarding Lacey Act compliance concernsassets related to a limited amountvertical integration initiative discontinued in 2017 and a retention initiative and the net impact of engineered hardwood flooring.
We recorded asset impairment charges totaling approximately $4.3 million related to discontinuing certain non-core investments.
We incurred significant legalthe CARB and
professional fees related to our defense of various legalProp 65 settlements in 2016.Operating Loss and regulatory matters of approximately $23.8 million.
Operating Income (Loss)
MarginOperating loss for 2015in 2018 was $83.2$50.6 million compared to an operating incomeloss of $104.1$37.0 million in 2014.2017. Excluding the items shown in the table that follows, 2018 resulted in an Adjusted Operating (loss) income as a percentIncome (a non-GAAP measure) of net sales was (8.5)% for fiscal 2015$20.2 million, or an Adjusted Operating Margin (a non-GAAP measure) of 1.9%, compared to 9.9%$10.7 million, or 1.0%, in 2014.2017. The improvement primarily reflects the growth in sales from both new and comparable stores, and slightly higher gross margin, which was partially offset by the $11.5 million growth in Adjusted SG&A (a non-GAAP measure).
Operating loss in 2017 was $37.0 million compared to an operating loss of $93.6 million in 2016. Excluding the items shown below, Adjusted Operating Income (a non-GAAP measure) in 2017 was $10.7 million, and Adjusted Operating Margin (a non-GAAP measure) was 1.0%, compared to an Adjusted Operating Loss (a non-GAAP measure) of $31.5 million, or (3.3)% in 2016. The improvement primarily reflects the growth in sales and higher gross margin.
We believe that each of these items can distort the visibility of our ongoing performance and that the evaluation of our financial performance can be enhanced by use of supplemental presentation of our results that exclude the impact of these items.
| | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 | |
| | $ | | % of Sales | | $ | | % of Sales | | $ | | % of Sales | |
| | (in thousands) |
Operating Loss, as reported (GAAP) | | $ | (50,573) | | (4.7) | % | $ | (36,966) | | (3.6) | % | $ | (93,635) | | (9.8) | % |
| | | | | | | | | | | | | | | | |
Gross Margin Items: | | | | | | | | | | | | | | | | |
Antidumping Adjustments 1 | | | (4,948) | | (0.5) | % | | (2,797) | | (0.3) | % | | 5,450 | | 0.6 | % |
HTS Classification Adjustments 2 | | | (1,711) | | (0.1) | % | | — | | — | % | | — | | — | % |
Indoor Air Quality Testing Program (Income) Charges 3 | | | — | | — | % | | (993) | | (0.1) | % | | 6,187 | | 0.6 | % |
Gross Margin Subtotal | | | (6,659) | | (0.6) | % | | (3,790) | | (0.4) | % | | 11,637 | | 1.2 | % |
| | | | | | | | | | | | | | | | |
SG&A Items: | | | | | | | | | | | | | | | | |
Accrual for Legal Matters and Settlements 4 | | | 63,951 | | 5.9 | % | | 36,960 | | 3.6 | % | | — | | — | % |
Securities and Derivatives Class Action 5 | | | — | | — | % | | — | | — | % | | 19,260 | | 2.0 | % |
Legal and Professional Fees 6 | | | 11,707 | | 1.1 | % | | 11,314 | | 1.1 | % | | 28,414 | | 3.0 | % |
All Other 7 | | | 1,769 | | 0.2 | % | | 3,146 | | 0.3 | % | | 2,800 | | 0.3 | % |
SG&A Subtotal | | | 77,427 | | 7.2 | % | | 51,420 | | 5.0 | % | | 50,474 | | 5.3 | % |
| | | | | | | | | | | | | | | | |
Adjusted Operating Income (Loss) (a non-GAAP measure) | | $ | 20,195 | | 1.9 | % | $ | 10,664 | | 1.0 | % | $ | (31,524) | | (3.3) | % |
1,2,3 See the Gross Margin section above for more detailed explanations of these individual items.
4,5,6,7 See the SG&A section above for more detailed explanations of these individual items.
Provision for Income Taxes
The
We have a full valuation allowance recorded against our net deferred tax assets which effectively offsets our federal taxes at the statutory rate of 21% and have had this in place for each of the years ended December 31, 2018, 2017 and 2016. However, we record as tax expense each period for income taxes incurred in certain state and foreign jurisdictions resulting in an effective tax ratesrate of (1.8)%, 1.9% and 27.3% for 2015the years ended December 31, 2018, 2017 and 2014 were 32.4%2016, respectively.
The Tax Act, which was enacted on December 22, 2017, reduced the U.S. federal corporate tax rate from 35% to 21%, eliminated the 20-year limit on the carryforward of losses, and 38.8%resulted in the Company remeasuring its existing deferred tax balances in 2017. Generally, the Tax Act became effective in 2018, and it altered the deductibility of certain items (e.g., respectively.certain compensation, interest, entertainment expenses), and allowed qualifying capital expenditures to be deducted fully in the year of purchase. As of December 31, 2018, the Company has completed the analysis of the tax effects of the Tax Act and has reflected all applicable changes in its financial statements, based on guidance issued to-date. The Company continues to monitor developments by federal and state rulemaking authorities regarding implementation of the Tax Act. As further guidance and clarification is issued by the IRS or state tax jurisdictions, the Company will recognize the impact through its provision for income taxes in the period that the guidance becomes effective.
We intend to maintain a valuation allowance on our 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 our valuation allowance are unknown at this time and will be subject to the earnings level we achieve in future periods.
We file income tax returns with the U.S. federal government and various state and foreign jurisdictions. In the normal course of business, we are subject to examination by taxing authorities. During 2017, the Internal Revenue Service completed audits of our income tax returns through 2016.
Diluted Earnings per Share
Net loss for the year ended December 31, 20152018 was $56.4$54.4 million, or $1.90 per diluted share. Net loss for the year ended December 31, 2017 was $37.8 million, resulting in a loss of $2.08$1.33 per diluted share compared to net income of $63.4 million, or $2.31 per diluted share,share. Net loss for the year ended December 31, 2014.
Fiscal 2014 Compared to Fiscal 2013
Net Sales
Net sales for 2014 increased $47.22016 was $68.6 million, or 4.7%, over 2013 as net salesresulting in comparable stores decreased $42.9 milliona loss of $2.51 per diluted share.
We believe that each of these items can distort the visibility of our ongoing performance and net sales in non-comparable stores increased $90.1 million. Net sales in 2014 were impactedthat the evaluation of our financial performance can be enhanced by a decreaseuse of 2.5% attributable tosupplemental presentation of our results that exclude the number of customers invoiced and a decrease of 1.8% in the average sale.
We believed the number of customers invoiced decreased partially due to lower inventory levels in certain key merchandise categories, primarily laminates, resilient vinyl and engineered hardwoods, overall weakness in customer demand for wood flooring and the adverse impact of
unusually severe winter weather experienced in U.S. and Canada during 2014.these items. | | | | | | |
| | Year Ended December 31, |
| | 2018 | 2017 |
| | (in thousands) |
Net Loss, as reported (GAAP) | | $ | (54,379) | | $ | (37,823) |
Net Loss per Diluted Share (GAAP) | | $ | (1.90) | | $ | (1.33) |
| | | | | | |
Gross Margin Items: | | | | | | |
Antidumping Adjustments 1 | | | (4,948) | | | (2,797) |
HTS Classification Adjustments 2 | | | (1,711) | | | — |
Indoor Air Quality Testing Program (Income) Charges 3 | | | — | | | (993) |
Gross Margin Subtotal | | | (6,659) | | | (3,790) |
| | | | | | |
SG&A Items: | | | | | | |
Accrual for Legal Matters and Settlements 4 | | | 63,951 | | | 36,960 |
Securities and Derivatives Class Action 5 | | | — | | | — |
Legal and Professional Fees 6 | | | 11,707 | | | 11,314 |
All Other 7 | | | 1,769 | | | 3,146 |
SG&A Subtotal | | | 77,427 | | | 51,420 |
| | | | | | |
Tax Impact of Adjustments to Net Loss 8 | | | — | | | (3,108) |
| | | | | | |
Adjusted Earnings | | $ | 16,389 | | $ | 6,699 |
Adjusted Earnings per Diluted Share (a non-GAAP measure) | | $ | 0.57 | | $ | 0.23 |
| | | | | | |
We also believed that lower average sale in 2014 was due to a 1.9% net decrease in
1,2,3 See the average retail price per unit sold, partially offset by an increase inGross Margin section above for more detailed explanations of these individual items.
4,5,6,7 See the number of units sold. Changes in the sales mix of flooring, including clearance of products not a part of our continuing assortment, an increase in liquidation deals and greater ad-hoc discounting at the point of sale drove down the average retail price per unit sold. Partially offsetting this decrease were increases in sales mix of moldings and accessories, non-merchandise services and Bellawood products.
Positive effect of the increase in net sales were attributable to the seven store locations serving communities recovering from the effects of Hurricane Sandy, store base expansion and the 2014 increase of $16.2 million in sales related to delivery and installation services, up from $16.1 million in 2013.
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Gross Profit
Gross profit increased 1.7% to $418.2 million from $411.0 million in 2013. Notable items attributing to increasing gross profit as a percentage of sales include:
Increases in merchandise sales mix related to moldings and accessories, which generally produce a gross margin higher than flooring.
Changes in our supply chain structure, changes in international and domestic transportation rates and certain operational efficiencies as well as greater costs of merchandise obsolescence and shrink, including increased inventory reserves, and our increased investment in quality control and assurance, offset by lower sample and customer satisfaction costs.
These increases were partially offset by adverse factors related to net shifts in our sales mix of flooring products, greater ad-hoc discounting at the point of sale, sourcing initiatives and increases in customers choosing installation and delivery services, which have average gross margins less than our average merchandise transaction.
Selling, General and Administrative Expenses
Selling, General and Administrative expenses increased 10.2% to $314.1 million from $285.0 million in 2013. Notable items impacting SG&A include:
Salaries, commissions and benefits in 2014 increased primarily due to store base growth, corporate support, including global compliance, our testsection above for more detailed explanations of
installation services management,these individual items.8 We considered the start-up and operations of the West Coast distribution center and higher net cost of benefits. These expenses were partially offset in 2014 by lower commission rates earned by our store management and lower accruals related to our management bonus plan, as compared to 2013.
We incurred cost increases in occupancy and depreciation and amortization primarily due to store base expansion and incremental expensetax impact related to the West Coast distribution center,pre-tax adjustments above. The Company has a full valuation allowance recorded against its net deferred tax assets, which became fully operational duringeffectively offsets its federal taxes, other than a $3.1 million tax benefit the first quarter of 2014.
Our stock-based compensation costs, which included a special grant of restricted stockCompany recognized related to certain members of management in March 2013 which fully vested in March 2014 and a special award to our former chief executive officer Rob Lynch, resulted in approximately $0.8 million and $0.6 million of expense in 2014 and 2013, respectively.
Operating Income
Operating income for 2014 decreased $21.9 million over 2013 as the $7.2 million increase in gross profit was more than fully offset by a $29.1 million increase in SG&A expenses.Tax Act.
Provision for Income Taxes
The effective tax rate for both 2014 and 2013 was 38.8%.
Diluted Earnings per Share
Net income for the year ended December 31, 2014 was $63.4 million, or $2.31 per diluted share compared to net income of $77.4 million, or $2.77 per diluted share, for the year ended December 31, 2013.
Liquidity and Capital Resources
Our principal liquidity and capital requirements are for capital expenditures to maintain and grow our business, satisfying our obligations on the recent settlements for the governmental investigations and litigation related to bamboo flooring, working capital, and general corporate purposes. We periodically use excess cash flow to repurchase shares of our common stock under our stock repurchase program, however, we have suspended our share repurchase plan until we are better able to evaluate the long-term customer demand and assess our estimates of operations and cash flow. Our principal sources of liquidity at December 31, 20152018 were $26.7$11.6 million of cash and cash equivalents our cash flow from operations and including potential limitations, $67.2$67.9 million of availability under our revolving credit facility.Revolving Loan. As December 31, 2018, the outstanding balance of the Revolving Loan was $65 million and it carried an interest rate of 4.125%.
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During 2015, we reducedWe expect the DOJ and SEC settlements totaling $33 million will be paid in the next 30 days. We anticipate funding $1.0 million of the cash portion of the Gold Litigation upon the court’s preliminary approval in the next few months and then fund the remaining $13 million upon the court’s final approval, which may be as early as the fourth quarter of 2019, and as late as 2020, which would be at the end of the claims notice period.
Our liquidity at year end was $79.5 million. After funding the above mentioned items our liquidity would be $45.5 million. We expect to rebuild liquidity by reducing inventory levels which generated significantthat was purposefully purchased in advance of an announced, but subsequently postponed, 25% tariff on purchases of Chinese goods, expanding our Revolving Loan to add incremental borrowing capacity of $35 million, as discussed in more detail under the Revolving Credit Facility header in this MD&A, through operating cash flow. flows expected as the business benefits from the resolution of historical legal matters.
In 2018, the near term, we do not expect significant further declines inCompany reported a use of cash of $43.0 million. This included building inventory, levels. As such, our ability to produce operating cash flow will be dependent upon our ability to generate net salesof payables, by $54.3 million for and operating income in future periods. Additionally, there are significant uncertainties associated with the extentfunding of the negative impactMDL of the unfavorable product allegations against us and unresolved government investigations and legal matters. However,$21.5 million. If we believe thatset those two items aside which are not expected to recur, cash flow from operations together with existing liquidity sources, will be sufficientwould have been a positive $32.8 million in 2018. The Company also generated a positive cash from operations of $39.4 million in 2017, which was favorably affected by income tax refunds but unfavorably impacted by a net outflow to fund our operations and anticipated capital expenditures for the foreseeable future. If the impactpay down extended trade payables carried into 2017. The Company brought terms current so it could again take advantage of these allegations is more negative than anticipated or the outcome of legal matters is unfavorable, we may need to seek additional sources of liquidity.vendor discounts.
In 2016, weWe currently expect capital expenditures for 2019 to total between $10$15 million and $20$18 million, but we will continue to assess and adjust our level of capital expenditures based on changing circumstances. Included in our capital requirements, we expectrequirement for 2019, is the funding to selectively evaluate the opening of newopen 10 to 15 stores, remodel and/or relocate some existing stores and meet any obligations related to the remodelingrelocation of our corporate headquarters.
Although certain matters remain outstanding, we have taken significant steps to eliminate uncertainty associated with legal and relocating of existing stores while continuingregulatory matters previously discussed. We believe that cash flow from operations, together with liquidity sources mentioned above, will be sufficient to focus onfund our current store base.
Cashsettlements and Cash Equivalents
In 2015, cashoperations and cash equivalents increased $6.4 million to $26.7 million. The increase of cash and cash equivalents was primarily due to $9.2 million of net cash provided by operating activities and $20.0 million borrowed under the revolving credit facility, which were partially offset by the use of $22.5 million for capital expenditures.
In 2014, cash and cash equivalents decreased $60.3 million to $20.3 million. The decrease of cash and cash equivalents was primarily due to $53.3 million of net cash used to repurchase common stock and $71.1 million foranticipated capital expenditures includingfor the construction ofnext 12 months. We prepare our East Coast distribution center, partially offset by netforecasted cash provided by operating activities of $57.1 million.flow and liquidity estimates based on assumptions that we believe to be reasonable, but are also inherently uncertain. Actual future cash flows could differ from these estimates.
In 2013, cash and cash equivalents increased $16.5 million to $80.6 million. The increase of cash and cash equivalents was primarily due to $53.0 million of net cash provided by operating activities and $27.4 million of proceeds received from stock option exercises which was partially offset by the use of $34.8 million to repurchase common stock and $28.6 million for capital expenditures.
Merchandise Inventories
Merchandise inventory is our most significant asset and is considered either “available for sale” or “inbound in-transit,” based on whether we have physically received and inspected the products at an individual store location, in our distribution centers or in another facility where we control and monitor inspection. During the fourth quarter of 2018, we purposefully purchased inventory in advance of an announced, but subsequently postponed, 25% tariff on purchases of Chinese goods.
Merchandise inventories and available inventory per store in operation on December 31 were as follows:
| | | | | | | | | |
| | As of | | As of | | As of |
| | December 31, 2018 | | December 31, 2017 | | December 31, 2016 |
| | (in thousands) |
Inventory – Available for Sale | | $ | 275,036 | | $ | 226,750 | | $ | 257,537 |
Inventory – Inbound In-Transit | | | 43,236 | | | 35,530 | | | 44,355 |
Total Merchandise Inventories | | $ | 318,272 | | $ | 262,280 | | $ | 301,892 |
| | | | | | | | | |
Available Inventory Per Store | | $ | 666 | | $ | 577 | | $ | 672 |
| | | | | | |
| | 2015 | | 2014 | | 2013 |
| | | (in thousands) |
| Inventory – Available for Sale | | $ | 215,903 | | | $ | 265,949 | | | $ | 212,617 | |
| Inventory – Inbound In-Transit | | | 28,499 | | | | 48,422 | | | | 39,811 | |
| Total Merchandise Inventories | | $ | 244,402 | | | $ | 314,371 | | | $ | 252,428 | |
| Available Inventory Per Store | | $ | 577 | | | $ | 756 | | | $ | 669 | |
Available inventory per store at December 31, 20152018 was lowerhigher than bothavailable inventory per store at December 31, 20142017 and close to the amount at December 31, 2013. The simplification2016. In addition to the tariff-related purchases, the higher level at December 31, 2018 was primarily due to our holding extra inventory as we transitioned the finishing lines out of Toano, increased safety stock to improve customer service and an initiative to have more of our producttop-selling floors on-
hand in store for customers to take with them, as well as an initiative to expand our engineered assortment was partwith new looks to meet customer demand. Available inventory per store at December 31, 2016 reflected a higher level of our strategy to get back to basics and allowed us to reduce our inventory levels while ensuring that each store location has the right mix of product available for the customer. We believe this will enhance the shopping experience for our customers. We recorded a lower of cost or market adjustment of approximately $22.5 million related to our inventory of laminate products sourced from China.new product expansion.
Inbound in-transit inventory generally varies due to the timing of certain international shipments and certain seasonal factors, including international holidays, rainy seasons and specific merchandise category planning.
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Cash Flows
The following table summarizes our cash flow activities for the years ended December 31, 2018, 2017 and 2016:
| | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 |
Net Cash (used in) provided by: | | | | | | |
Operating Activities | | (42,986) | | 39,392 | | (27,547) |
Investing Activities | | (13,461) | | (4,338) | | (8,333) |
Financing Activities | | 49,205 | | (26,193) | | 18,704 |
Effect of Exchange Rates | | (1,131) | | 806 | | 744 |
Total | | (8,373) | | 9,667 | | (16,432) |
Operating Activities. Net cash used in operating activities was $43.0 million in 2018 and was primarily due to a $54.3 million increase in inventory, net of payables, which was the result of the build in inventory previously discussed, as well payments of $21.5 million on the remaining cash portion of the Formaldehyde MDL and Abrasion MDL obligation. Absent the build in inventory and the settlement payment, cash from operating activities would have been a positive $32.8 million.
Net cash provided by operating cash flows was $39.4 million in 2017. The overall improvement in operating cash flows for 2017 was due to higher sales, improved gross margin and lower SG&A expenses as a percentage of net sales. Cash for certain working capital items also affected operating cash flows. During 2017, operating cash flows benefited by a $29.2 million tax refund related to our 2016 carry-back, and a $32.5 million reduction in merchandise inventories, offset by a $52.5 million reduction in accounts payable.
Net cash used in operating activities was $9.2$27.5 million in 2016 and included a net loss of $68.6 million, which included non-cash amounts for 2015, $57.1depreciation and amortization of $17.5 million, for 2014changes in deferred taxes of $14.2 million, stock-based compensation of $5.6 million, a charge related to the settlement of the Securities Class Action of $16.8 million and $53.0 million for 2013. The $47.9 million decrease in netlower of cost or market inventory adjustments of $3.7 million. After these adjustments, the cash flow from earnings was a use of cash of $10.8 million. Inclusive in this, is a cash refund of $22.1 million in taxes received in the third quarter related to our carryback of 2015 net operating activities comparing 2015 to 2014 is primarily due to unprofitable operations, a decrease in merchandise inventories of $42.8 million,losses, and a decreasenoncash tax benefit recorded that reflects a similar carryback of the 2016 net losses. This use of cash was negatively impacted by the elevated legal and professional fees discussed in accounts payablethe SG&A section above. In 2016, we also generated cash of $21.5 million. The $4.1$2.0 million increasethrough increased trade payables, net of increases in netinventory, by extending terms with vendors, used cash flow from operating activities comparing 2014of $6.2 million related to 2013 is primarily duethe settlement of the Lacey Act investigation that was finalized in October 2015 and used $2.5 million in cash related to our profitable operations, an increase in customer deposits and store creditsthe settlement of $12.6 million, an increase in merchandise inventories of $62.1 million, and an increase in accounts payable of $21.5 million.the Derivatives Class Action.
Investing Activities.Activities. Net cash used in investing activities was $22.5$13.5 million for 2015, $71.1in 2018, $4.3 million for 2014in 2017 and $28.6$8.3 million for 2013.in 2016. Net cash used in investing activities in each year tracks with our store openings which were 21, 11 and 9 for the years ended December 31, 2018, 2017 and 2016, respectively. In addition, 2018 included capital purchases for store base expansion, andelevated investments in and maintenance of forklifts, our integrated information technology solution, our finishing lines and our Corporate Headquarters. In 2014 and 2013, capital expenditures also included remodeling of existing stores to our expanded showroom format and $37.6 million and $8.4 million, respectively, for land, buildings and equipment for the East Coast distribution facility and $1.2 million and $2.1 million, respectively, for equipment and leasehold improvements for the West Coast distribution facility.initiatives.
Financing Activities. Net cash provided by financing activities was $19.7$49.2 million in 2015.2018 and was primarily attributable to $50 million in net borrowings on the Revolving Loan. Net cash used in financing activities was $46.2$26.2 million in 20142017 and $7.4was primarily attributable to $25 million in 2013. We usednet payments on the Revolving Loan. Net cash provided
by financing activities was $18.7 million in 2015, 20142016 and 2013, respectively,was primarily attributable to repurchase our common stock, primarily under our stock repurchase program initiated in February 2012. Stock option exercises provided $7.2 million and $27.3$20 million in 2014 and 2013, respectively. During 2015, we had net borrowings of $20.0 million under our revolving credit facility to fund capital expenditures and inventory purchases.on the Revolving Loan.
Revolving Credit AgreementFacility
On April 24, 2015, the Company, exclusive of its non-domestic subsidiaries,August 17, 2016, we entered into a SecondThird Amended and Restated Credit Agreement (as amended on May 21, 2015 and November 20, 2015, the “Credit Agreement”(the “Revolving Credit Facility”) with Bank of America, N.A. (the “Bank”) and Wells Fargo Bank, N.A. (“Wells Fargo” and, collectively with the Bank, the “Lenders”) with the Bank as administrative agent and collateral agent and lender (the “Bank”). The Credit Agreement amended and restated the Amended and Restated Credit Agreement that was entered into between Lumber Liquidators, Inc. and the Bank on February 21, 2012 and amended on March 27, 2015.Wells Fargo as syndication agent. Under the Revolving Credit Agreement,Facility, which matures on August 17, 2021, the BankLenders agreed to provide us with the Company with an asset-based revolving credit facility (the “Revolving Credit Facility”)Revolving Loan under which the Companywe may obtain loans and letters of credit from the Bank up to a maximum aggregate outstanding principal amount of the lesser of $100.0$150 million or a calculated borrowing base. Letters of credit are subject to a sublimit of $20.0 million (subject to the borrowing base). The Credit Agreement expires on April 24, 2020, is guaranteed by the Company and certain of its domestic subsidiaries and is secured primarily by the Company’s inventory, including certain in-transit inventory, and credit card receivables.
The Revolving Credit Facility has no mandated payment provisions andrequires customary covenants, including a fee of 0.15% per annum on any unused portion, paid quarterly in arrears. Loans outstanding under the Revolving Credit Facility can bear interest based on the Base Rate or the LIBOR Rate, each 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 0.125%financial covenant to 0.375% (dependent on the Company’s average daily excess borrowing availability during the most recently completed fiscal quarter) over the applicable base interest rate (defined as the greatest of the prime rate, a specified federal funds rate plus 0.50%, or the one-month LIBOR Rate plus 1.00%). 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 1.125% to 1.375% (dependent on the Company’s average daily excess borrowing availability during the most recently completed fiscal quarter) over the applicable LIBOR rate for one, two, three or six month interest periods as selected by the Company. At December 31, 2015, the applicable interest rate for outstanding borrowings was 1.4375%. For the year ended December 31, 2015, the Company paid cash for interest in the amount of $0.2 million.
The Credit Agreement containsmaintain a fixed charge coverage ratio covenantof at least 1.0 to 1.0, calculated quarterly on a trailing four quarters basis that becomes effective in the event that the Company’s excess borrowingonly when specified availability under the Revolving Credit Facility at any time during the term of the Revolving Credit FacilityLoan falls below the greater of $10.0$15 million or 10% of the borrowing base.
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maximum revolver amount. At December 31, 2015, the Company2018, we had approximately $67.2$67.9 million available to borrow under the Revolving Credit Facility, $20.0this facility, which was net of $2.1 million in outstanding letters of credit, $65 million in outstanding borrowings and supported $2.8subject to certain limitations as a result of our borrowing base and the fixed charge coverage ratio covenant, as of December 31, 2018.
On March 8, 2019, we entered into a commitment letter with the Lenders, subject to customary closing conditions, that provides for an increase in the Revolving Loan up to a maximum amount of $175 million, and $2.7a new “First in Last Out” tranche of $25 million of letters of credit at December 31, 2015 and 2014, respectively.
Related Party Transactions
See the discussion of related party transactions in Note 5incremental to the consolidated financial statements included$175 million but within the same Revolving Credit Facility. This will also extend the term of the loan until March 2024. We expect to close on this expanded Revolving Credit Facility in Item 8 of this report and within Certain Relationships and Related Transactions, and Director Independence in Item 13 of this report.late March or early April 2019.
Contractual Commitments and Contingencies
Our significant contractual obligations and commitments as of December 31, 20152018 are summarized in the following table:
| | | | | | | | | | |
| | Payments Due by Period |
| | | Total | | Less Than
1 Year | | 1 to 3
Years | | 3 to 5
Years | | 5+ Years |
Contractual obligations
| | | | | | | | | | | | | | | | | | | | |
| Operating lease obligations(1) | | $ | 131,904 | | | $ | 30,285 | | | $ | 48,729 | | | $ | 30,841 | | | $ | 22,049 | |
| Purchase obligations(2) | | | 436 | | | | 436 | | | | — | | | | — | | | | — | |
| Borrowings on revolving credit facility | | | 20,000 | | | | — | | | | — | | | | 20,000 | | | | — | |
| Total contractual obligations | | $ | 152,340 | | | $ | 30,721 | | | $ | 48,729 | | | $ | 50,841 | | | $ | 22,049 | |
| | | | | | | | | | | | | | | |
| | Payments Due by Period |
| | Total | | Less Than 1 Year | | 1 to 3 Years | | 3 to 5 Years | | 5+ Years |
| | (in thousands) |
Contractual Obligations | | | | | | | | | | | | | | | |
Operating Lease Obligations 1 | | $ | 155,213 | | $ | 36,074 | | $ | 59,390 | | $ | 35,321 | | $ | 24,428 |
Purchase Obligations 2 | | | 196 | | | 196 | | | — | | | — | | | — |
Total Debt Obligations, including current maturities | | | 65,000 | | | — | | | 65,000 | | | — | | | — |
Total Contractual Obligations | | $ | 220,409 | | $ | 36,270 | | $ | 124,390 | | $ | 35,321 | | $ | 24,428 |
| (1) | Included in this table is the base period or current renewal period for our operating leases. The operating leases generally contain varying renewal provisions. |
| (2) | Purchase obligations represent capital expenditure commitments. |
2 Purchase obligations represent capital expenditure commitments.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements or other financing activities with special-purpose entities.
Inflation
Inflationary factors such as increases in the costNew Accounting Pronouncements
See Summary of our product and overhead costs may adversely affect our operating results. Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, a high rate of inflation in the future may have an adverse effect on our ability to maintain current levels of gross profit and SG&A expenses as a percentage of net sales if the selling prices of our products do not increase with these increased costs.
Other Matters
Legal Matters
We are involved in various lawsuits, claims, investigations, and proceedings. See the discussion of commitments and contingenciesSignificant Accounting Policies in Note 10 to the consolidated financial statements1 that is included in Item 8 of this reportForm 10‑K for a discussionfurther information about new accounting pronouncements adopted during 2018 and accounting pronouncements issued but not yet effective.
Table of these matters.
Indoor Air Quality Testing Program Results
In early March 2015, we began voluntarily offering free indoor air quality screening to certain of our flooring customers, predominately those who had purchased laminate flooring sourced from China, to address customer questions about the air quality in their homes. Home air test kits were selected as a quick, effective way to measure the total level of formaldehyde in indoor air from all sources, not just from the flooring.
We retained Building Health Check, LLC (“BHC”) to coordinate our indoor air quality testing program. The customer receives the home test kit from BHC and controls the sampling process, with clear instructions on how to conduct the sampling. The samples are then sent by the customer to EDLab at Pure Air Control Services, Inc. (“EDLab”) where EDLab then forwards them to one of EDLab’s partner laboratories, which are all accredited for formaldehyde analysis by the American Industrial Hygiene Association’s LaboratoryContents
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Accreditation Programs, LLC. We have also engaged independent monitoring resources to review the work flow process in connection with the testing program and to perform quality review services relating to the compilation and dissemination of testing results.
In 2015, over 48,000 testing kits were sent to Lumber Liquidators customers through the program. In total, approximately 30,500 of testing kits have been returned (“Phase 1”). Of those returned, over 90% had indicated indoor air concentrations of formaldehyde that were within the guidelines set by the World Health Organization (“WHO”) as protective against sensory irritation and long-term health effects. While various groups have recommended higher or lower levels, there is currently no national standard for recommended indoor home air concentrations of formaldehyde in the United States. We have chosen to use the guideline established by the WHO, which is an international consensus standard that draws on recent research and the expertise of the many governments, academic institutions and researchers that have studied formaldehyde emissions.
We have been and continue to directly contact the customers whose test results indicate an indoor formaldehyde level in excess of the WHO guideline for additional investigation and next steps. These “Phase 2” steps primarily consist of independent third-party laboratory testing of flooring samples from these customers. Throughout the third and fourth quarters of 2015, we facilitated customers with elevated Phase 1 testing results to complete Phase 2. If the results of this testing indicates that the flooring is contributing to formaldehyde levels in a customer’s home at elevated levels, we will work with the customer, at the Company’s discretion, to replace the customer’s floor or compensate the customer for the cost of the floor as part of “Phase 3”. We did not record a reserve for Phase 3 based on the results we have received to date from the testing of customer flooring samples. We believe the test results and number of tests obtained to date provided a reasonable basis to support our assertion that a material reserve related to the replacement of customer floors was not warranted. We will, however, continue to evaluate the results of each phase of the indoor air quality testing program. Should our results differ from current trends, we could record a material charge in future periods.
Costs related to this testing program and subsequent follow-up with customers were included in cost of sales for the year ended December 31, 2015. At December 31, 2015, we adjusted the reserve for an estimate of actual and future costs related to the air quality testing program. The reserve was based on actual experience to date, estimated using information through the filing date of the financial statements and was included in other current liabilities on the consolidated balance sheet as a portion of the total warranty and customer satisfaction reserve.
| | | | |
| | Cost of Sales
Year Ended | | Reserve
As of |
| | | December 31, 2015 |
| Phase 1: Cost and administration for test kits which were probable of being sent to the Company’s customers as part of the air quality testing program | | $ | 7,307 | | | $ | — | |
| Phase 2: Costs to service certain customers not satisfied by the results of the air quality testing program, primarily consisting of testing of flooring samples | | | 2,138 | | | | 809 | |
| Phase 3: Costs to satisfy remaining customer concerns based on results of floor sample testing results received to date | | | — | | | | — | |
| Total | | $ | 9,445 | | | $ | 809 | |
Should our actual experience related to results of our indoor air quality testing program and subsequent follow-up with customers differ from these estimates, additional reserves may be recorded in the future.
Critical Accounting Policies and Estimates
Critical accounting policies are those that we believe are both significant and that require us to make difficult, subjective or complex judgments, often because we need to estimate the effect of inherently uncertain matters. We base our estimates and judgments on historical experiences and various other factors that we believe to be appropriate under the circumstances. Actual results may differ from these estimates, and we
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might obtain different estimates if we used different assumptions or conditions. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our financial statements:
Recognition of Net Sales
We recognize net sales for products purchased at the time the customer takes possession of the merchandise. We recognize service revenue, which consists primarily of installation revenue and freight charges for in-home delivery, when the service has been rendered. We report sales exclusive of sales taxes collected from customers and remitted to governmental taxing authorities. Net sales are reduced by an allowance for anticipated sales returns that we estimate based on historical and current sales trends and experience. We believe that our estimate for sales returns is an accurate reflection of future returns. Any reasonably likely changes that may occur in the assumptions underlying our allowance estimates would not be expected to have a material impact on our financial condition or operating performance. Actual sales returns did not vary materially from estimated amounts for 2015, 2014 or 2013.
In addition, customers who do not take immediate delivery of their purchases are generally required to pay a deposit, equal to approximately half of the retail sales value, with the balance payable when the customer takes possession of the merchandise. These customer deposits benefit our cash flow and return on investment capital, because we receive partial payment for our customers’ purchases immediately. We record these deposits as a liability on our balance sheet in customer deposits and store credits until the customer takes possession of the merchandise.
Merchandise Inventories
We value our merchandise inventories at the lower of merchandise cost or market value. We determine merchandise cost using the average cost method. All of the hardwood flooring we purchase from suppliers is either prefinished or unfinished, and in immediate saleable form. To the extent that we finish and box unfinished products, we include those costs in the average unit cost of related merchandise inventory. In determining market value, we make judgments and estimates as to the market value of our products, based on factors such as historical results and current sales trends. Any reasonably likely changes that may occur in those assumptions in the future may require us to record charges for losses or obsolescence against these assets, but would not be expected to have a material impact on our financial condition or operating performance. Actual losses and obsolescence charges did not vary materially from estimated amounts for 2015, 2014 or 2013.
Stock-Based Compensation
We currently utilize a single equity incentive plan under which we may grant non-qualified stock options, restricted shares, stock appreciation rights and other equity awards to employees, non-employee directors and other service providers. We recognize expense for our stock-based compensation based on the fair value of the awards that are granted. Compensation expense is recognized only for those awards expected to vest, with forfeitures estimated at the date of grant based on our historical experience and future expectations. Measured compensation cost is recognized ratably over the service period of the entire related stock-based compensation award.
The fair value of stock options was estimated at the date of grant using the Black-Scholes-Merton valuation model. In order to determine the related stock-based compensation expense, we used the following assumptions for stock options granted during 2015:
Expected life of 5.5 years;
Expected stock price volatility of 50%;
Risk-free interest rate of 1.7%; and
Dividends are not expected to be paid in any year.
The expected stock price volatility is based on the historical volatility of our stock price. The volatility is estimated for a period of time equal to the expected term of the related option. The risk-free interest rate is based on the implied yield of U.S. Treasury zero-coupon issues with an equivalent remaining term. The
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expected term of the options represents the estimated period of time until exercise and is determined by considering the contractual terms, vesting schedule and expectations of future employee behavior. Had we arrived at different assumptions of stock price volatility or expected terms of our options, our stock-based compensation expense and results of operations could have been different.
Loss Contingencies
We are involved in various lawsuits, claims, investigations, and proceedings. Certain of these matters include speculative claims for substantial or indeterminate amounts of damages. We record a liability when we believe that it is both probable that a loss has been incurred and the amount can be reasonably estimated. If we determine that a loss is reasonably possible and a loss or range of the loss can be estimated, we disclose such amounts. Significant judgment is required to determine both probability and the estimated amount of any loss or range of loss. We assess each legal matter and any related provisions at least quarterly and adjust them accordingly to reflect the impact of negotiations, settlements, rulings, advice of legal counsel, and updated information.
Until a final resolution related to loss contingencies for legal and other contingencies is reached, there may be an exposure to loss in excess of the amount we have recorded, and such amounts could be material, either individually or in the aggregate, to our business, consolidated financial position, results of operations, or cash flows. Therefore, if one or more of these matters were resolved against us for amounts in excess of management'smanagement’s expectations, our results of operations and financial condition, including in a particular reporting period, could be materially adversely affected.
Valuation of Deferred Tax Assets
We account for income taxes and the related accounts in accordance with FASB ASC Topic 740, “Income Taxes.” Deferred tax liabilities and assets are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted rates expected to be in effect during the year in which the differences reverse. We periodically assess the likelihood that we will be able to recover our deferred tax assets and reflect any changes in estimates in the valuation allowance. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion, or all, of the deferred tax asset will not be realized. The current year analysis was impacted by the new tax law in December. At December 31, 2018, we had a valuation allowance of $26.3 million primarily attributable to the uncertainty related to the realizability of our deferred tax assets. We considered all available evidence, both positive and negative, in determining the need for a valuation allowance. Based upon this analysis, including a consideration of our cumulative loss history in the three-year period ended December 31, 2018, we determined that it is not more likely than not that our deferred tax assets will be realized.
Significant management judgment is required in determining our provision for income taxes, deferred tax assets and liabilities and the valuation allowance recorded against our net deferred tax assets, if any. Management considers estimates of the amount and character of future taxable income in assessing the likelihood of realization of deferred tax assets. Our actual effective tax rate and income tax expense could vary from estimated amounts due to the future impacts of various items, including changes in income tax laws, tax planning and the Company’s forecasted financial condition and results of operations in future periods. Although management believes current estimates are reasonable, actual results could differ from these estimates.
Stock-Based Compensation
We currently utilize a single equity incentive plan under which we may grant non-qualified stock options, restricted shares, stock appreciation rights and other equity awards to employees, non-employee directors and other service providers. We recognize expense for our stock-based compensation based on the fair value of the awards that are granted. Compensation expense is recognized only for those awards expected to vest, with forfeitures estimated at the date of grant based on our historical experience and future expectations. Measured compensation cost is recognized ratably over the service period of the entire related stock-based compensation award.
The fair value of stock options was estimated at the date of grant using the Black-Scholes-Merton valuation model. In order to determine the related stock-based compensation expense, we used the following assumptions for stock options granted during 2018:
| · | | Expected life of 5.5 years; |
| · | | Expected stock price volatility of 55%; |
| · | | Risk-free interest rate of 2.8%; and |
| · | | Dividends are not expected to be paid in any year. |
The expected stock price volatility is based on the historical volatility of our stock price. The volatility is estimated for a period of time equal to the expected term of the related option. The risk-free interest rate is based on the implied yield of U.S. Treasury zero-coupon issues with an equivalent remaining term. The expected term of the options represents the estimated period of time until exercise and is determined by considering the contractual terms, vesting schedule and expectations of future employee behavior. We have never paid a dividend. Had we arrived at different assumptions of stock price volatility or expected terms of our options, our stock-based compensation expense and results of operations could have been different.
Recognition of Net Sales
We recognize net sales for products purchased at the time the customer takes possession of the merchandise. We recognize service revenue, which consists primarily of installation revenue and freight charges for in-home delivery, when the service has been rendered. We report sales exclusive of sales taxes collected from customers and remitted to governmental taxing authorities. Net sales are reduced by an allowance for anticipated sales returns that we estimate based on historical and current sales trends and experience. We believe that our estimate for sales returns is an accurate reflection of future returns. Any reasonably likely changes that may occur in the assumptions underlying our allowance estimates would not be expected to have a material impact on our financial condition or operating performance. Actual sales returns did not vary materially from estimated amounts for 2018, 2017 or 2016.
In addition, customers who do not take immediate delivery of their purchases are generally required to pay a deposit, equal to approximately half of the retail sales value, with the balance payable when the customer takes possession of the merchandise. These customer deposits benefit our cash flow and return on investment capital, because we receive partial payment for our customers’ purchases immediately. We record these deposits as a liability on our balance sheet in Customer Deposits and Store Credits until the customer takes possession of the merchandise.
Merchandise Inventories
We value our merchandise inventories at the lower of cost or net realizable value. We determine merchandise cost using the weighted average method. All of the hardwood flooring we purchase from suppliers is either prefinished or unfinished, and in immediate saleable form. Inventory cost includes the costs of bringing an article to its existing condition and location such as shipping and handling and import tariffs. To the extent that we finish and box unfinished products, we include those costs in the average unit cost of related merchandise inventory. In determining market value, we make judgments and estimates as to the market value of our products, based on factors such as historical results and current sales trends. Any reasonably likely changes that may occur in those assumptions in the future may require us to record charges for losses or obsolescence against these assets, but would not be expected to have a material impact on our financial condition or operating performance. Actual losses and obsolescence charges did not vary materially from estimated amounts for 2018, 2017 or 2016.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Interest Rate Risk.Risk
We are exposed to interest rate risk through the investment of our cash and cash equivalents.equivalents and our Revolving Loan. We may invest our cash in short-term investments with maturities of three months or less. Changes in interest rates affect the interest income we earn, and therefore impact our cash flows and results of operations. In addition, borrowingsBorrowings under our revolving credit agreementRevolving Loan are exposed to interest rate risk due to the variable rate of the facility.Revolving Credit Facility. As of December 31, 2015,2018, we had $20.0$65 million outstanding under our revolving credit agreement.Revolving Loan. If the interest rate had varied by 1% in either direction throughout 2018, interest expense would have fluctuated by $650,000.
We currently do not engage in any interest rate hedging activity and currently have no current intention to do so in the foreseeable future.so. However, in the future, in an effort to mitigate losses associated with these risks, we may at times enter into derivative financial instruments, although we have not historically done so. We do not, and do not intend to, engage in the practice of trading derivative securities for profit.
Exchange Rate Risk.Risk
Less than two percent of our revenue, expense and capital purchasing activities are transacted in currencies other than the U.S. dollar, including the Euro, Canadian dollar, Chinese yuan and Brazilian real.
We currently do not engage in any exchange rate hedging activity and currently have no intention to do soas the vast majority of our foreign purchases are denominated in the foreseeable future.U.S. dollars. However, in the future, in an effort to mitigate losses associated with these risks, we may at times engage in transactions involving various derivative instruments to hedge revenues, inventory purchases, assets and liabilities denominated in foreign currencies. If the exchange rate on December 31, 2018 had varied by 10% in either direction, net income from Canadian operations would have fluctuated nominally.
Item 8. Consolidated Financial Statements and Supplementary Data.
| | |
| | Page |
Index to Consolidated Financial Statements
| | | | |
ReportReports of Ernst & Young LLP, Independent Registered Public Accounting Firm
| | | 47 | 46 |
Report of Ernst & Young LLP, Independent Registered Public Accounting Firm, on Internal Control over Financial Reporting | | | 48 | |
Consolidated Balance Sheets as of December 31, 20152018 and 20142017 | | | 49 | |
Consolidated Statements of Operations for the years ended December 31, 2015, 20142018, 2017 and 20132016 | | | 50 | |
Consolidated Statements of Other Comprehensive (Loss) IncomeLoss for the years ended December 31, 2015, 20142018, 2017 and 20132016 | | | 51 | |
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2015, 2014
2018, 2017 and 20132016 | | | 52 | |
Consolidated Statements of Cash Flows for the years ended December 31, 2015, 20142018, 2017 and 20132016 | | | 53 | |
Notes to Consolidated Financial Statements | | | 54 | |
Report of Ernst & Young LLP, Independent Registered Public Accounting Firm
The
To the Stockholders and the Board of Directors and Stockholders of Lumber Liquidators Holdings, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Lumber Liquidators Holdings, Inc. (the Company) as of December 31, 20152018 and 2014, and2017, the related consolidated statements of operations, comprehensive income stockholders’(loss), stockholders' equity and cash flows for each of the three years in the period ended December 31, 2015. Our audits also included 2018, and the related notes and Financial Statement Schedule II —- Analysis of Valuation and Qualifying Accounts (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2015. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.2018, in conformity with U.S. generally accepted accounting principles.
We conducted our auditsalso have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated March 18, 2019 expressed an adverse opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includesmisstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the financial statements. An auditOur audits also includes assessingincluded evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statement presentation.statements. We believe that our audits provide a reasonable basis for our opinion.
In our opinion,
/s/ Ernst & Young LLP
We have served as the financial statements referred to above present fairly, in all material respects,Company’s auditor since 2003.
Richmond, Virginia
March 18, 2019
Report of Independent Registered Public Accounting Firm
To the consolidated financial positionStockholders and the Board of Directors of Lumber Liquidators Holdings, Inc. at
Opinion on Internal Control Over Financial Reporting
We have audited Lumber Liquidators Holdings, Inc.’s internal control over financial reporting as of December 31, 2015 and 2014, and2018, based on criteria established in Internal Control—Integrated Framework issued by the consolidated resultsCommittee of its operations and its cash flows for eachSponsoring Organizations of the three years inTreadway Commission (2013 framework) (the COSO criteria). In our opinion, because of the period endedeffect of the material weakness described below on the achievement of the objectives of the control criteria, Lumber Liquidators Holdings, Inc. (the Company) has not maintained effective internal control over financial reporting as of December 31, 2015,2018, based on the COSO criteria.
A material weakness is a deficiency, or combination of deficiencies, in conformity with U.S. generally accepted accounting principles. Also,internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified and included in our opinion, themanagement’s assessment. Management has identified a material weakness in transaction level and review controls related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.calculation and measurement of import tariff obligations on inventory purchases.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), Lumber Liquidators Holdings, Inc.’s internal control overthe 2018 consolidated financial reporting as of December 31, 2015, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizationsstatements of the Treadway Commission (2013 framework)Company. This material weakness was considered in determining the nature, timing and extent of audit tests applied in our audit of the 2018 consolidated financial statements, and this report does not affect our report dated February 29, 2016March 18, 2019, which expressed an adverseunqualified opinion thereon.
/s/ Ernst & Young LLP
Richmond, Virginia
February 29, 2016
TABLE OF CONTENTSBasis for Opinion
Report of Ernst & Young LLP, Independent Registered Public Accounting Firm,
on Internal Control over Financial Reporting
The Board of Directors and Stockholders of Lumber Liquidators Holdings, Inc.
We have audited Lumber Liquidators Holdings, Inc.’s internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). Lumber Liquidators Holdings, Inc.’sCompany’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’sCompany's internal control over financial reporting based on our audit.We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified and included in management’s assessment. Management has identified a material weakness related to the design and operating effectiveness of user access controls related to the Company’s enterprise resource planning system that are relevant to the preparation of the consolidated financial statements and system of internal control over financial reporting. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Lumber Liquidators Holdings, Inc. as of December 31, 2015 and 2014, and the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2015. This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2015 financial statements, and this report does not affect our report dated February 29, 2016, which expressed an unqualified opinion on those financial statements.
In our opinion, because of the effect of the material weakness described above on the achievement of the objectives of the control criteria, Lumber Liquidators Holdings, Inc. has not maintained effective internal control over financial reporting as of December 31, 2015, based on the COSO criteria.
/s/ Ernst & Young LLP
Richmond, Virginia
February 29, 2016
March 18, 2019
TABLE OF CONTENTS
Lumber Liquidators Holdings, Inc.
Consolidated Balance Sheets
(in thousands, except share data)
thousands)
| | | | | | | |
| | | | | | December 31, | | December 31, |
| | December 31,
2015 | | December 31,
2014 | | 2018 | | 2017 |
Assets
| | | | | | | | | | | | | |
Current Assets:
| | | | | | | | | | | | | | |
| Cash and Cash Equivalents | | $ | 26,703 | | | $ | 20,287 | | | $ | 11,565 | | $ | 19,938 |
| Merchandise Inventories | | | 244,402 | | | | 314,371 | | | | 318,272 | | | 262,280 |
| Prepaid Expenses | | | 5,931 | | | | 5,575 | | | | 6,299 | | | 9,108 |
| Refundable Income Taxes | | | 19,596 | | | | — | | |
| Deferred Tax Asset | | | 21,045 | | | | 8,901 | | |
Deposit for Legal Settlement | | | | 21,500 | | | — |
| Other Current Assets | | | 5,111 | | | | 8,143 | | | | 8,667 | | | 6,670 |
| Total Current Assets | | | 322,788 | | | | 357,277 | | | | 366,303 | | | 297,996 |
| Property and Equipment, net | | | 121,997 | | | | 124,867 | | | | 93,689 | | | 100,491 |
| Goodwill | | | 9,693 | | | | 9,693 | | | | 9,693 | | | 9,693 |
| Other Assets | | | 1,724 | | | | 1,625 | | | | 5,832 | | | 2,615 |
| Total Assets | | $ | 456,202 | | | $ | 493,462 | | | $ | 475,517 | | $ | 410,795 |
| | | | | | | |
Liabilities and Stockholders’ Equity
| | | | | | | | | | | | | | |
Current Liabilities:
| | | | | | | | | | | | | | |
| Accounts Payable | | $ | 55,247 | | | $ | 80,303 | | | $ | 73,412 | | $ | 67,676 |
| Customer Deposits and Store Credits | | | 33,771 | | | | 34,943 | | | | 40,332 | | | 38,546 |
| Accrued Compensation | | | 6,057 | | | | 3,693 | | | | 9,265 | | | 12,101 |
| Sales and Income Tax Liabilities | | | 3,914 | | | | 7,472 | | | | 4,200 | | | 4,273 |
Accrual for Legal Matters and Settlements Current | | | | 97,625 | | | 36,960 |
| Other Current Liabilities | | | 28,755 | | | | 17,836 | | | | 17,290 | | | 18,605 |
| Total Current Liabilities | | | 127,744 | | | | 144,247 | | | | 242,124 | | | 178,161 |
| Other Long-Term Liabilities | | | 20,252 | | | | 6,603 | | | | 20,203 | | | 19,235 |
| Deferred Tax Liability | | | 10,638 | | | | 10,558 | | | | 792 | | | 552 |
| Revolving Credit Facility | | | 20,000 | | | | — | | | | 65,000 | | | 15,000 |
| Total Liabilities | | | 178,634 | | | | 161,408 | | | | 328,119 | | | 212,948 |
| | | | | | | |
Stockholders’ Equity:
| | | | | | | | | | | | | | |
| Common Stock ($0.001 par value; 35,000,000 shares authorized; 27,088,460 and 27,069,307 shares outstanding, respectively) | | | 30 | | | | 30 | | |
| Treasury Stock, at cost (2,824,814 and 2,816,780 shares, respectively) | | | (138,987 | ) | | | (138,692 | ) | |
Common Stock ($0.001 par value; 35,000 shares authorized; 31,578 and 31,397 shares issued and 28,627 and 28,490 shares outstanding at December 31, 2018 and 2017, respectively) | | | | 32 | | | 31 |
Treasury Stock, at cost (2,951 and 2,907 shares, respectively) | | | | (141,828) | | | (140,875) |
| Additional Capital | | | 180,590 | | | | 177,479 | | | | 213,744 | | | 208,629 |
| Retained Earnings | | | 237,600 | | | | 294,033 | | | | 76,835 | | | 131,214 |
| Accumulated Other Comprehensive Loss | | | (1,665 | ) | | | (796 | ) | | | (1,385) | | | (1,152) |
| Total Stockholders’ Equity | | | 277,568 | | | | 332,054 | | | | 147,398 | | | 197,847 |
| Total Liabilities and Stockholders’ Equity | | $ | 456,202 | | | $ | 493,462 | | | $ | 475,517 | | $ | 410,795 |
See accompanying notes to consolidated financial statementsstatements.
TABLE OF CONTENTS
Lumber Liquidators Holdings, Inc.
Consolidated Statements of Operations
(in thousands except share data and per share amounts)
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | Year Ended December 31, |
| | Year Ended December 31, | | 2018 | | 2017 | | 2016 |
| | | 2015 | | 2014 | | 2013 | | | | | | | |
| Net Sales | | $ | 978,776 | | | $ | 1,047,419 | | | $ | 1,000,240 | | | | | | | | | | |
Net Merchandise Sales | | | $ | 955,949 | | $ | 938,269 | | $ | 895,612 |
Net Services Sales | | | | 128,687 | | | 90,664 | | | 64,976 |
Total Net Sales | | | | 1,084,636 | | | 1,028,933 | | | 960,588 |
| Cost of Sales | | | 699,918 | | | | 629,252 | | | | 589,257 | | | | | | | | | | |
Cost of Merchandise Sold | | | | 596,411 | | | 591,087 | | | 608,834 |
Cost of Services Sold | | | | 95,285 | | | 68,785 | | | 47,885 |
Total Cost of Sales | | | | 691,696 | | | 659,872 | | | 656,719 |
| Gross Profit | | | 278,858 | | | | 418,167 | | | | 410,983 | | | | 392,940 | | | 369,061 | | | 303,869 |
| Selling, General and Administrative Expenses | | | 362,051 | | | | 314,094 | | | | 284,960 | | | | 443,513 | | | 406,027 | | | 397,504 |
| Operating (Loss) Income | | | (83,193 | ) | | | 104,073 | | | | 126,023 | | |
| Other Expense (Income) | | | 234 | | | | 490 | | | | (442 | ) | |
| (Loss) Income Before Income Taxes | | | (83,427 | ) | | | 103,583 | | | | 126,465 | | |
| Income Tax (Benefit) Expense | | | (26,994 | ) | | | 40,212 | | | | 49,070 | | |
| Net (Loss) Income | | $ | (56,433 | ) | | $ | 63,371 | | | $ | 77,395 | | |
| Net (Loss) Income per Common Share – Basic | | $ | (2.08 | ) | | $ | 2.32 | | | $ | 2.82 | | |
| Net (Loss) Income per Common Share – Diluted | | $ | (2.08 | ) | | $ | 2.31 | | | $ | 2.77 | | |
Operating Loss | | | | (50,573) | | | (36,966) | | | (93,635) |
Other Expense | | | | 2,827 | | | 1,591 | | | 638 |
Loss Before Income Taxes | | | | (53,400) | | | (38,557) | | | (94,273) |
Income Tax Expense (Benefit) | | | | 979 | | | (734) | | | (25,710) |
Net Loss | | | $ | (54,379) | | $ | (37,823) | | $ | (68,563) |
Net Loss per Common Share—Basic | | | $ | (1.90) | | $ | (1.33) | | $ | (2.51) |
Net Loss per Common Share—Diluted | | | $ | (1.90) | | $ | (1.33) | | $ | (2.51) |
Weighted Average Common Shares Outstanding:
| | | | | | | | | | | | | | | | | | | | | |
| Basic | | | 27,082,299 | | | | 27,264,882 | | | | 27,484,790 | | | | 28,571 | | | 28,407 | | | 27,284 |
| Diluted | | | 27,082,299 | | | | 27,485,852 | | | | 27,914,322 | | | | 28,571 | | | 28,407 | | | 27,284 |
See accompanying notes to consolidated financial statementsstatements.
TABLE OF CONTENTS
Lumber Liquidators Holdings, Inc.
Consolidated Statements of Comprehensive Income (Loss)
Loss
(in thousands)
| | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | | | | | | | |
| | | 2015 | | 2014 | | 2013 | | Year Ended December 31, |
| Net (Loss) Income | | $ | (56,433 | ) | | $ | 63,371 | | | $ | 77,395 | | |
| | | 2018 | | 2017 | | 2016 |
| | | | | | | | |
| | | | | | | | | | |
Net Loss | | | $ | (54,379) | | $ | (37,823) | | $ | (68,563) |
Other Comprehensive (Loss) Income:
| | | | | | | | | | | | | | | | | | | | | |
| Foreign Currency Translation Adjustments | | | (869 | ) | | | (234 | ) | | | (635 | ) | | | (233) | | | 304 | | | 209 |
| Total Other Comprehensive (Loss) Income | | | (869 | ) | | | (234 | ) | | | (635 | ) | | | (233) | | | 304 | | | 209 |
| Comprehensive (Loss) Income | | $ | (57,302 | ) | | $ | 63,137 | | | $ | 76,760 | | |
Comprehensive Loss | | | $ | (54,612) | | $ | (37,519) | | $ | (68,354) |
See accompanying notes to consolidated financial statementsstatements.
TABLE OF CONTENTS
Lumber Liquidators Holdings, Inc.
Consolidated Statements of Stockholders’ Equity
(in thousands, except share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Treasury Stock | | Additional Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Total Stockholders’ Equity | | | | | | | | | | | | | | | | | | Accumulated | | | |
| | | Shares | | Par
Value | | Shares | | Value | | | | | | | | | | | | | | | | | | Other | | Total |
| December 31, 2012 | | | 27,214,144 | | | $ | 29 | | | | 1,719,706 | | | $ | (50,552 | ) | | $ | 131,724 | | | $ | 153,267 | | | $ | 73 | | | $ | 234,541 | | |
| | | Common Stock | | Treasury Stock | | Additional | | Retained | | Comprehensive | | Stockholders’ |
| | | Shares | | Par Value | | Shares | | Value | | Capital | | Earnings | | Income (Loss) | | Equity |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2015 | | | 27,088 | | $ | 30 | | 2,825 | | $ | (138,987) | | $ | 180,590 | | $ | 237,600 | | $ | (1,665) | | $ | 277,568 |
| | | | | | | | | | | | | | | | | | | | | | | |
| Stock-Based Compensation Expense | | | — | | | | — | | | | — | | | | — | | | | 5,471 | | | | — | | | | — | | | | 5,471 | | | — | | | — | | — | | | — | | | 5,487 | | | — | | | — | | | 5,487 |
| Exercise of Stock Options | | | 718,665 | | | | 1 | | | | — | | | | — | | | | 10,254 | | | | — | | | | — | | | | 10,255 | | | 59 | | | — | | — | | | — | | | 539 | | | — | | | — | | | 539 |
| Excess Tax Benefits on Stock Option Exercises | | | — | | | | — | | | | — | | | | — | | | | 17,132 | | | | — | | | | — | | | | 17,132 | | |
| Release of Restricted Shares | | | 38,362 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | |
| Common Stock Repurchased | | | (413,601 | ) | | | — | | | | 413,601 | | | | (34,830 | ) | | | — | | | | — | | | | — | | | | (34,830 | ) | |
| Translation Adjustment | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (635 | ) | | | (635 | ) | |
| Net Income | | | — | | | | — | | | | — | | | | — | | | | — | | | | 77,395 | | | | — | | | | 77,395 | | |
| December 31, 2013 | | | 27,557,570 | | | $ | 30 | | | | 2,133,307 | | | $ | (85,382 | ) | | $ | 164,581 | | | $ | 230,662 | | | $ | (562 | ) | | $ | 309,329 | | |
| Stock-Based Compensation Expense | | | — | | | | — | | | | — | | | | — | | | | 5,744 | | | | — | | | | — | | | | 5,744 | | |
| Exercise of Stock Options | | | 149,707 | | | | — | | | | — | | | | — | | | | 3,150 | | | | — | | | | — | | | | 3,150 | | |
| Excess Tax Benefits on Stock Option Exercises | | | — | | | | — | | | | — | | | | — | | | | 4,004 | | | | — | | | | — | | | | 4,004 | | |
| Release of Restricted Shares | | | 45,503 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | |
| Common Stock Repurchased | | | (683,473 | ) | | | — | | | | 683,473 | | | | (53,310 | ) | | | — | | | | — | | | | — | | | | (53,310 | ) | |
| Translation Adjustment | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (234 | ) | | | (234 | ) | |
| Net Income | | | — | | | | — | | | | — | | | | — | | | | — | | | | 63,371 | | | | — | | | | 63,371 | | |
| December 31, 2014 | | | 27,069,307 | | | $ | 30 | | | | 2,816,780 | | | $ | (138,692 | ) | | $ | 177,479 | | | $ | 294,033 | | | $ | (796 | ) | | $ | 332,054 | | |
| Stock-Based Compensation Expense | | | — | | | | — | | | | — | | | | — | | | | 4,080 | | | | — | | | | — | | | | 4,080 | | |
| Tax Effect of Stock-Based Compensation | | | — | | | | — | | | | — | | | | — | | | | (969 | ) | | | — | | | | — | | | | (969 | ) | | — | | | — | | — | | | — | | | (675) | | | — | | | — | | | (675) |
Stock Issued upon Legal Settlement | | | 1,000 | | | 1 | | | | | | | | 16,759 | | | | | | | | | 16,760 |
| Release of Restricted Shares | | | 19,153 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | 101 | | | — | | — | | | — | | | — | | | — | | | — | | | — |
| Common Stock Repurchased | | | — | | | | — | | | | 8,034 | | | | (295 | ) | | | — | | | | — | | | | — | | | | (295 | ) | | — | | | — | | 29 | | | (433) | | | — | | | — | | | — | | | (433) |
| Translation Adjustment | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (869 | ) | | | (869 | ) | | — | | | — | | — | | | — | | | — | | | — | | | 209 | | | 209 |
| Net Loss | | | — | | | | — | | | | — | | | | — | | | | — | | | | (56,433 | ) | | | — | | | | (56,433 | ) | | — | | | — | | — | | | — | | | — | | | (68,563) | | | — | | | (68,563) |
| December 31, 2015 | | | 27,088,460 | | | $ | 30 | | | | 2,824,814 | | | $ | (138,987 | ) | | $ | 180,590 | | | $ | 237,600 | | | $ | (1,665 | ) | | $ | 277,568 | | |
December 31, 2016 | | | 28,248 | | $ | 31 | | 2,854 | | $ | (139,420) | | $ | 202,700 | | $ | 169,037 | | $ | (1,456) | | $ | 230,892 |
| | | | | | | | | | | | | | | | | | | | | | | |
Stock-Based Compensation Expense | | | — | | | — | | — | | | — | | | 4,582 | | | — | | | — | | | 4,582 |
Exercise of Stock Options | | | 88 | | | — | | — | | | — | | | 1,347 | | | — | | | — | | | 1,347 |
Release of Restricted Shares | | | 154 | | | — | | — | | | — | | | — | | | — | | | — | | | — |
Common Stock Repurchased | | | — | | | — | | 53 | | | (1,455) | | | — | | | — | | | — | | | (1,455) |
Translation Adjustment | | | — | | | — | | — | | | — | | | — | | | — | | | 304 | | | 304 |
Net Loss | | | — | | | — | | — | | | — | | | — | | | (37,823) | | | — | | | (37,823) |
December 31, 2017 | | | 28,490 | | $ | 31 | | 2,907 | | $ | (140,875) | | $ | 208,629 | | $ | 131,214 | | $ | (1,152) | | $ | 197,847 |
| | | | | | | | | | | | | | | | | | | | | | | |
Stock-Based Compensation Expense | | | — | | | — | | — | | | — | | | 4,346 | | | — | | | — | | | 4,346 |
Exercise of Stock Options | | | 44 | | | — | | — | | | — | | | 770 | | | — | | | — | | | 770 |
Release of Restricted Shares | | | 93 | | | 1 | | — | | | — | | | (1) | | | — | | | — | | | — |
Common Stock Repurchased | | | — | | | — | | 44 | | | (953) | | | — | | | — | | | — | | | (953) |
Translation Adjustment | | | — | | | — | | — | | | — | | | — | | | — | | | (233) | | | (233) |
Net Loss | | | — | | | — | | — | | | — | | | — | | | (54,379) | | | — | | | (54,379) |
December 31, 2018 | | | 28,627 | | $ | 32 | | 2,951 | | $ | (141,828) | | $ | 213,744 | | $ | 76,835 | | $ | (1,385) | | $ | 147,398 |
See accompanying notes to consolidated financial statementsstatements.
TABLE OF CONTENTS
Lumber Liquidators Holdings, Inc.
Consolidated Statements of Cash Flows
(in thousands)
| | | | | | | | | | |
| | | | | | | | Year Ended December 31, |
| | Year Ended December 31, | | 2018 | | 2017 | | 2016 |
| | | 2015 | | 2014 | | 2013 | | | | | | | |
Cash Flows from Operating Activities:
| | | | | | | | | | | | | | | | | | | | | |
| Net (Loss) Income | | $ | (56,433 | ) | | $ | 63,371 | | | $ | 77,395 | | |
Adjustments to Reconcile Net (Loss) Income to Net Cash Provided by Operating Activities:
| | | | | | | | | | | | | |
Net Loss | | | $ | (54,379) | | $ | (37,823) | | $ | (68,563) |
Adjustments to Reconcile Net Loss: | | | | | | | | | | |
| Depreciation and Amortization | | | 17,392 | | | | 14,714 | | | | 11,666 | | | | 18,425 | | | 17,739 | | | 17,505 |
| Deferred Income Taxes | | | (12,064 | ) | | | (152 | ) | | | (846 | ) | |
Deferred Income Taxes (Benefit) Provision | | | | 240 | | | (3,246) | | | 14,205 |
| Stock-Based Compensation Expense | | | 3,941 | | | | 5,593 | | | | 5,974 | | | | 4,091 | | | 4,735 | | | 5,568 |
| Impairment Charges related to Property and Equipment | | | 4,392 | | | | — | | | | — | | |
| Inventory Lower of Cost or Market Adjustments | | | 26,162 | | | | — | | | | — | | |
| Deconsolidation of Variable Interest Entity | | | 1,457 | | | | — | | | | — | | |
Provision for Inventory Obsolescence Reserves | | | | 3,108 | | | 6,349 | | | 3,723 |
Impairment and Loss on Disposal of Fixed Assets | | | | 1,818 | | | 1,498 | | | — |
Stock-Based Portion of Provision for Securities Class Action | | | | — | | | — | | | 16,760 |
Changes in Operating Assets and Liabilities:
| | | | | | | | | | | | | | | | | | | | | |
| Merchandise Inventories | | | 42,773 | | | | (62,140 | ) | | | (45,834 | ) | | | (59,179) | | | 32,614 | | | (62,054) |
| Accounts Payable | | | (21,450 | ) | | | 21,478 | | | | (15 | ) | | | 4,852 | | | (52,475) | | | 64,025 |
| Customer Deposits and Store Credits | | | (1,075 | ) | | | 12,623 | | | | (3,354 | ) | | | 1,685 | | | 6,001 | | | (988) |
| Prepaid Expenses and Other Current Assets | | | (18,385 | ) | | | (1,836 | ) | | | (257 | ) | | | 2,902 | | | 28,962 | | | (11,411) |
Accrual for Legal Matters and Settlements | | | | 63,951 | | | 36,960 | | | — |
Deposit for Legal Settlement | | | | (21,500) | | | — | | | — |
| Other Assets and Liabilities | | | 22,494 | | | | 3,436 | | | | 8,271 | | | | (9,000) | | | (1,922) | | | (6,317) |
| Net Cash Provided by Operating Activities | | | 9,204 | | | | 57,087 | | | | 53,000 | | |
Net Cash (Used in) Provided by Operating Activities | | | | (42,986) | | | 39,392 | | | (27,547) |
| | | | | | | | | | |
Cash Flows from Investing Activities:
| | | | | | | | | | | | | | | | | | | | | |
| Purchases of Property and Equipment | | | (22,478 | ) | | | (71,138 | ) | | | (28,585 | ) | | | (14,332) | | | (7,411) | | | (8,908) |
Proceeds from Disposal of Fixed Assets | | | | 871 | | | 2,273 | | | — |
Other Investing Activities | | | | — | | | 800 | | | 575 |
| Net Cash Used in Investing Activities | | | (22,478 | ) | | | (71,138 | ) | | | (28,585 | ) | | | (13,461) | | | (4,338) | | | (8,333) |
| | | | | | | | | | |
Cash Flows from Financing Activities:
| | | | | | | | | | | | | | | | | | | | | |
| Payments for Stock Repurchases | | | (295 | ) | | | (53,310 | ) | | | (34,830 | ) | |
| Proceeds from the Exercise of Stock Options | | | — | | | | 3,150 | | | | 10,255 | | |
| Excess Tax Benefit from Stock-Based Compensation | | | — | | | | 4,004 | | | | 17,132 | | |
| Borrowings on Revolving Credit Facility | | | 39,000 | | | | 53,000 | | | | — | | | | 74,000 | | | 40,000 | | | 37,000 |
| Payments on Revolving Credit Facility | | | (19,000 | ) | | | (53,000 | ) | | | — | | | | (24,000) | | | (65,000) | | | (17,000) |
Proceeds from the Exercise of Stock Options | | | | 770 | | | 1,347 | | | 539 |
Payments for Stock Repurchases | | | | (953) | | | (1,455) | | | (433) |
Payments on Financed Insurance Obligations | | | | (612) | | | (734) | | | — |
Payments on Capital Lease Obligations | | | | — | | | (351) | | | (469) |
Payments for Debt Issuance Costs | | | | — | | | — | | | (933) |
| Net Cash Provided by (Used in) Financing Activities | | | 19,705 | | | | (46,156 | ) | | | (7,443 | ) | | | 49,205 | | | (26,193) | | | 18,704 |
| Effect of Exchange Rates on Cash and Cash Equivalents | | | (15 | ) | | | (140 | ) | | | (505 | ) | | | (1,131) | | | 806 | | | 744 |
| Net Increase (Decrease) in Cash and Cash Equivalents | | | 6,416 | | | | (60,347 | ) | | | 16,467 | | |
Net (Decrease) Increase in Cash and Cash Equivalents | | | | (8,373) | | | 9,667 | | | (16,432) |
| Cash and Cash Equivalents, Beginning of Year | | | 20,287 | | | | 80,634 | | | | 64,167 | | | | 19,938 | | | 10,271 | | | 26,703 |
| Cash and Cash Equivalents, End of Year | | $ | 26,703 | | | $ | 20,287 | | | $ | 80,634 | | | $ | 11,565 | | $ | 19,938 | | $ | 10,271 |
| | | | | | | | | | |
Supplemental disclosure of non-cash operating and financing activities: | | | | | | | | | | |
Financed Insurance Premiums | | | $ | — | | $ | 1,346 | | $ | — |
| | | | | | | | | | |
Supplemental disclosure of non-cash investing and financing activities: | | | | | | | | | | |
Borrowing on Capital Lease Obligation to Acquire Equipment | | | $ | — | | $ | — | | $ | 351 |
See accompanying notes to consolidated financial statementsstatements.
TABLE OF CONTENTS
Lumber Liquidators Holdings, Inc.
Notes to Consolidated Financial Statements
(amounts in thousands, except share data and per share amounts)
Note 1. Summary of Significant Accounting Policies
Nature of Business
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 hardwoodhard-surface flooring, and hardwoodhard-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, and resilient vinyl, waterproof vinyl plank and porcelain tile flooring direct to the consumer. The Company also features the renewable flooring products, bamboo and cork, and provides a wide selection of flooring enhancements and accessories, including moldings, noise-reducing underlay,underlayment, adhesives and flooring tools. The Company also provides in-home delivery and installation services to certain of its customers. The Company sells primarily to homeowners or to contractors on behalf of homeowners through a network of 366 store locations in primary or secondary metropolitan areasareas. The Company’s stores spanned 47 states in 46 statesthe United States (“U.S.”) and included eight store locationsstores in Canada at December 31, 2015.2018. In addition to the store locations, the Company’s products may be ordered, and customer questions/concerns addressed, through both its call center in Toano, Virginia, and its website,www.lumberliquidators.com. The Company finishesfinished the majority of theits Bellawood products on its finishing lines in Toano, Virginia, which along with the call center, corporate offices, and a distribution center, represent the “Corporate Headquarters.” In July of 2018, the Company announced its plan to sell its finishing line equipment to an unaffiliated third-party purchaser and to relocate its corporate headquarters to Richmond, Virginia, in 2019. The Company ceased finishing floors in January 2019.
Organization and Basis of Financial Statement Presentation
The consolidated financial statements of Lumber Liquidators Holdings, Inc., a Delaware corporation, include the accounts of its wholly owned subsidiaries. All significant intercompany transactions have been eliminated in consolidation.
In 2014, the Company entered into an arrangement to begin to vertically integrate its domestic hardwood supply to feed its finishing lines. During the quarter ended June 30, 2015, the Company decided to discontinue certain of these vertical integration initiatives, which were previously consolidated as a variable interest entity, and terminated its prior arrangement. As a result, the Company has recorded a charge of $1,457 in cost of sales in its consolidated statements of income upon deconsolidation of the variable interest entity. The charge was measured as the difference between the fair value of the assets received upon termination and the carrying value of the related net assets.
In order to conform to the current year presentation, the Company has reclassified the deferred tax assetnet services sales and net cost of services sold on the accompanying consolidated statements of operations for the years ended December 31, 2014 consolidated balance sheet2017 and 2016, respectively, to a separate line itemitems from other current assets.total net sales with the remainder being classified as net merchandise sales and cost of merchandise sold.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United StatesU.S. requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. During 2018 and 2017, the Company has recognized significant liabilities related to various legal and regulatory matters. While the payment of these liabilities has had, and is expected to have, a material adverse impact on the Company’s liquidity and cash flow from operations, the Company estimates that it has sufficient liquidity through amounts available under its Revolving Credit Facility and forecasted cash flows from operations to fund its working capital, including these legal and regulatory liabilities. The Company prepares its forecasted cash flow and liquidity estimates based on assumptions that it believes to be reasonable but are also inherently uncertain. Actual resultsfuture cash flows could differ from thosethese estimates.
Cash and Cash Equivalents
The Company had cash and cash equivalents of $8,551$11.6 million and $12,700$19.9 million at December 31, 20152018 and 2014,2017, respectively. The Company considers all highly liquid investments with a maturity date of three months or less when purchased to be cash equivalents, of which there was nilzero at December 31, 20152018 and 2014,2017, respectively. The
Company accepts a range of debit and credit cards, and these transactions are generally transmitted to a bank for reimbursement within 24 hours. The payments due from the banks for these debit and credit card transactions are generally received, or settled, within 24 to 48 hours of the transmission date. The Company considers all debit and credit card transactions that settle in less than seven days to be cash and cash equivalents. Amounts due from the banks for these transactions classified as cash and cash equivalents totaled $8,551 $7.3 millionand $12,700$13.3 million at December 31, 20152018 and 2014,2017, respectively.
TABLE OF CONTENTS
Lumber Liquidators Holdings, Inc.
Notes to Consolidated Financial Statements
(amounts in thousands, except share data and per share amounts)
Note 1. Summary of Significant Accounting Policies – (continued)
Credit Programs
Credit is offered to the Company’s customers through a proprietary credit card, underwritten by a third partythird-party financial institution and generally at no recourse to the Company. A credit line is offered to the Company’s professional customers through the Lumber Liquidators Commercial Credit Program. This commercial credit program is underwritten by a third partythird-party financial institution, generally with no recourse to the Company.
As part of the credit program, the Company’s customers may tender their Lumber Liquidators credit card to receive installation services. As of December 31, 2018, the Company utilized a network of associates to perform certain customer-facing, consultative services provided by the Company’s third party installation provider, who is responsible for all credits and program fees for the related transactions. The Company has agreed to indemnify the financial institution against any losses related to these credits or fees. There are no maximum potential future payments under the guarantee. The Company is able to seek recovery fromcoordinate the installation provider of any amounts paid on its behalf. The Company believes that the riskflooring products by third-party independent contractors in all of significant loss from the guarantee of these obligations is remote.its stores.
Fair Value of Financial Instruments
The carrying amounts of financial instruments such as cash and cash equivalents, accounts payable and other liabilities approximateapproximates fair value because of the short-term nature of these items and theitems. The carrying amount of obligations under our revolving credit facility approximateits Revolving Credit Facility approximates fair value due to the variable rate of interest. Of these financial instruments, the cash equivalents are classified as Level 1 as defined in the Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) 820 fair value hierarchy.
Certain non-financial assets, including property and equipment, have been written down and measured in the consolidated financial statements at fair value. Fair value was based on expected future cash flows using Level 3 inputs under ASC 820.
Merchandise Inventories
The Company values merchandise inventories at the lower of cost or marketand net realizable value. Merchandise costThe method by which amounts are removed from inventory is determined using theweighted average cost method.cost. All of the hardwood flooring purchased from vendors is either prefinished or unfinished, and in immediate saleable form. TheInventory cost includes the costs of bringing an article to its existing condition and location such as shipping and handling and import tariffs. Prior to the sale of the finishing line equipment in 2018, the Company addswould add the finish to, and boxes,box, various species of unfinished product, to produce certain proprietary products, primarily Bellawood, at its finishing facility. TheseBellawood. Any finishing and boxing costs arewere included in the average unit cost of related merchandise inventory. TheIn addition, the Company maintains an inventory reserve for loss or obsolescence based on historical results and current sales trends. This reserve was $26,882$6.8 million and $3,242$5.6 million at December 31, 20152018 and 2014,2017, respectively.
On May 7, 2015, the Company suspended the sale of laminate products sourced from China after certain allegations were made regarding these products. This inventory has been held in stores and distribution centers as the Company has continued to evaluate and assess alternatives for the disposition of these products and the potential implications these alternatives could have on the net realizable value of the laminate flooring inventory sourced from China. During the quarter ended June 30, 2015, the Company recorded a charge of approximately $339 related to its laminate flooring sourced from China, primarily for flooring with less than job-lot quantities on hand as the Company did not intend to purchase additional quantities of such product. During the quarter ended December 31, 2015, in connection with changes in the executive management team and based on the most recent evaluation of the alternatives for disposal, which considered strategic and operational considerations including potential distractions these products could have on the Company’s employees and business, the Company determined that it would not sell the current inventory of laminate flooring sourced from China in its stores. As a result of this decision, the Company recorded a charge to reduce the remaining carrying value of this laminate flooring and related moldings to its net realizable value of zero. The Company recorded total charges related to laminate flooring sourced from China of $22,499 in cost of sales for the year ended December 31, 2015 in the accompanying consolidated statements of
TABLE OF CONTENTS
Lumber Liquidators Holdings, Inc.
Notes to Consolidated Financial Statements
(amounts in thousands, except share data and per share amounts)
Note 1. Summary of Significant Accounting Policies – (continued)
operations. The Company is considering its options for disposal of this product. Costs related to shipping and disposal will be recognized as incurred.
During the quarter ended June 30, 2015, the Company appointed its founder as acting chief executive officer. In connection with this and other management changes, the Company determined that it would refocus on its core business and it would not pursue an expansion into the tile flooring business in the near term. In 2014, the Company had begun to sell tile flooring and related accessories in three stores as a potential growth opportunity. As a result, in the second quarter of 2015, the Company recorded a lower of cost or market adjustment of $3,663 for certain tile flooring and related accessories, which is recorded in cost of sales for the year ended December 31, 2015 in the accompanying consolidated statements of operations.
Impairment of Long-Lived Assets
The Company evaluates potential impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets may be impaired, and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets. If impairment exists and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of those assets, an impairment loss is recorded based on the difference between the carrying value and fair value of the assets.
In the third quarter of 2015,During 2018, the Company finalizeddecided to exit the termination of itsfinishing business and entered into an agreement relating to certain vertical integration initiativessell this equipment to a third party, which changedaltered the Company’s expectations of future cash flows from relatedthese long-lived assets. As a result, the Company tested certain long-lived assets for impairment. The Companyimpairment and recorded a $3,043$1.8 million impairment charge within selling, general and administrative (“SG&A”) expenses for the three months ended September 30, 3015 in its accompanying consolidated statements of income.operations. The impairment charge was measured under an income approach utilizing forecasted discounted cash flows. Fairas the difference between the fair value was based on expected future cash flows using Level 3(Level 2 inputs under ASC 820.820) of the assets and the carrying value of the related net assets based on the contract to sell to a third party. The most significant unobservable input usedCompany received $0.8 million in connection with this transaction during 2018 and has $1.0 million in assets held-for-sale, included in Other Current Assets on the Consolidated Balance Sheet as of December 31, 2018.
During 2017, the Company determined that the carrying value of certain assets that had once been part of a discontinued vertical integration strategy was above their fair value and recorded an impairment charge of $1.5 million within SG&A expenses in the consolidated statements of operations. The charge was measured as the difference between the fair value analysis relates to the estimated sales price of the long-lived assets.
In the second quarter of 2015, the Company concluded that its decision not to pursue an expansion into the tile flooring business in the near term was a triggering event requiring assessment of recoverability for certain of its long-lived assets. As a result, the Company tested the long-lived assets for impairment related to its store locations selling a significant assortment of tile flooring. In the second quarter of 2015, the Company recorded a $1,350 impairment charge, which is recorded within SG&A expenses for the year ended December 31, 3015 in the accompanying consolidated statements of income. The impairment charge was measured under an income approach utilizing forecasted discounted cash flows. Fair value was based on expected future cash flows using Level 3(Level 2 inputs under ASC 820. The most significant unobservable input used in the fair value analysis relates to the estimated sales pricehierarchy) of the long-lived assets.assets and the carrying value of the related net assets based on a contract to sell to a third party.
No impairment charges were recognized in 2014 or 2013.2016.
Goodwill and Other Indefinite-Lived Intangibles
Goodwill represents the costs in excess of the fair value of net assets acquired associated with acquisitions by the Company. Other assets include $800$0.8 million for an indefinite-lived intangible asset for the phone number 1-800-HARDWOOD1‑800‑HARDWOOD and related internet domain names. The Company evaluates these assets for impairment on an annual basis, or whenever events or changes in circumstance indicate that the asset carrying value exceeds its fair value.value. Based on the analysis performed, the Company has concluded that no impairment in the value of these assets has occurred.
Self-Insurance
The Company is self-insured for certain employee health benefit claims and for certain workers’ compensation claims. The Company estimates a liability for aggregate losses below stop-loss coverage limits
TABLE OF CONTENTS
Lumber Liquidators Holdings, Inc.
Notes to Consolidated Financial Statements
(amounts in thousands, except share data and per share amounts)
Note 1. Summary of Significant Accounting Policies – (continued)
based on estimates of the ultimate costs to be incurred to settle known claims and claims incurred but not reported as of the balance sheet date. The estimated liability is not discounted and is based on a number of assumptions and factors including historical and industry trends and economic conditions. This liability could be affected if future occurrences and claims differ from these assumptions and historical trends. As of December 31, 20152018 and 2014, an accrual2017, the Company had accruals of $1,976$2.4 million and $1,585$2.1 million, respectively, related to estimated claims was included in other current liabilities, respectively.liabilities.
Recognition of Net Sales
In May 2014, the FASB issued Accounting Standards Update No. 2014-09 (“Topic 606”), Revenue from Contracts with Customers, which superseded the revenue recognition requirements in Topic 605, Revenue Recognition, including most industry-specific revenue recognition guidance. The core principle of Topic 606 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services and when control of those goods and services has passed to the customer. The Company adopted Topic 606 as of January 1, 2018 using the modified retrospective transition method. However, because adoption of the standard did not change the timing or amount of the Company’s recognition of revenue and because the Company does not recognize revenues for partial contracts, there was no adjustment to retained earnings needed as part of the adoption of the new standard.
The Company recognizes net salesgenerates revenues primarily by retailing merchandise in the form of hardwood and porcelain flooring and accessories. Additionally, the Company expands its revenues by offering services to deliver and/or install this merchandise for products purchased atits customers; it considers these services to be separate performance obligations. The separate performance obligations are detailed on the timecustomer’s invoice(s) and the customer takes possessionoften purchases flooring merchandise without purchasing installation or delivery services. Sales occur through a network of 413 stores, which spanned 47 states, including eight stores in Canada at December 31, 2018. In addition, both the merchandise. Servicemerchandise and services can be ordered through a call center and from the Company’s website, www.lumberliquidators.com. The Company’s agreements with its customers are of short duration (less than a year) and as such the Company has elected not to disclose revenue primarily installation revenue and freight charges for in-home delivery, is includedpartially satisfied contracts that will be completed in net sales and recognized when the service has been rendered.days following the end of a period as permitted by GAAP. The Company reports salesits revenues exclusive of sales taxes collected from customers and remitted to governmental taxing authorities, and net of an allowance for anticipated sales returnsconsistent with past practice.
Revenue is based on historicalconsideration specified in a contract with a customer and currentexcludes any sales trendsincentives from vendors and experience.amounts collected on behalf of third parties. The sales returns allowanceCompany recognizes revenue when it satisfies a performance obligation by transferring control over a product to a customer or performing service for a customer.
Revenues from installation and related changes were not significant for 2015, 2014freight services are recognized when the delivery is made or 2013.
In total, we offer more than 400 different flooring product stock-keeping units; however, no single flooring product represented more than 2%the installation is complete, which approximates the recognition of our sales mix. By major product category, our sales mix was as follows:
| | | | | | |
| | 2015 | | 2014 | | 2013 |
| Solid and Engineered Hardwood | | $ | 378,501 | | | $ | 406,887 | | | $ | 413,709 | |
| Laminate | | | 153,722 | | | | 199,775 | | | | 195,382 | |
| Bamboo, Cork, Vinyl Plank and Other | | | 221,776 | | | | 212,735 | | | | 193,960 | |
| Moldings and Accessories | | | 184,144 | | | | 195,539 | | | | 180,713 | |
| Non-Merchandise Services | | | 40,633 | | | | 32,483 | | | | 16,476 | |
| Total | | $ | 978,776 | | | $ | 1,047,419 | | | $ | 1,000,240 | |
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 purchasingordering merchandise inventories not regularly carried in a given store location or not currently in stock. These deposits are includedIn addition, the Company generally does not extend credit to its customers with payment due in customer deposits and store credits untilfull at the time the customer takes possession of merchandise or when the merchandise.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 consolidated balance sheet caption Customer Deposits and Store Credits.
The following table shows the activity in this account for the periods noted:
| | | | | | | | |
| Year Ended December 31, |
| 2018 | | 2017 | | 2016 |
Customer Deposits and Store Credits, Beginning Balance | $ | (38,546) | | $ | (32,639) | | $ | (33,771) |
New Deposits | | (1,155,019) | | | (1,101,841) | | | (1,021,880) |
Recognition of Revenue | | 1,084,636 | | | 1,028,933 | | | 960,588 |
Sales Tax included in Customer Deposits | | 67,125 | | | 66,028 | | | 63,422 |
Other | | 1,472 | | | 973 | | | (998) |
Customer Deposits and Store Credits, Ending Balance | $ | (40,332) | | $ | (38,546) | | $ | (32,639) |
Subject to limitations under the Company’s policy, return of unopened merchandise is accepted for 90 days. The amount of revenue recognized for flooring merchandise is adjusted for expected returns, which are estimated based on the Company’s historical data, current sales levels and forecasted economic trends. The Company uses the expected value method to estimate returns because it has a large number of contracts with similar characteristics. The Company previously recognized revenue in full, recorded an allowance for expected returns (contra-revenue) and recorded a separate refund liability for expected returns. The Company reduces revenue by the amount of expected returns and records it within Accrued Expenses and Other on the consolidated balance sheet. The Company continues to estimate the amount of returns based on the historical data. In addition, the Company recognizes a related asset for the right to recover returned merchandise and records it in the Other Current Assets caption of the accompanying consolidated balance sheet. This amount was $1.2 million at December 31, 2018. The Company recognizes sales commissions as incurred since the amortization period is less than one year. The Company offers a range of limited warranties for the durability of the finish on its prefinished products. These limited warranties range from one to 100 years, with lifetime warranties for certain of the Company’s products. Warranty reserves are based primarily on claims experience, sales history and other considerations. Warranty costs are recorded in Cost of Sales.
We offer hundreds of different flooring products; however, no single flooring product represented a significant portion of our sales mix. By major product category, our sales mix was as follows:
| | | | | | | | | | | | | | | | |
| | Year Ended December 31, | |
| | 2018 | | 2017 | | 2016 | |
Manufactured Products 1 | | $ | 392,512 | | 36 | % | $ | 315,369 | | 31 | % | $ | 248,234 | | 26 | % |
Solid and Engineered Hardwood | | | 367,026 | | 34 | % | | 423,301 | | 41 | % | | 452,248 | | 47 | % |
Moldings and Accessories and Other | | | 196,411 | | 18 | % | | 199,599 | | 19 | % | | 195,130 | | 20 | % |
Installation and Delivery Services | | | 128,687 | | 12 | % | | 90,664 | | 9 | % | | 64,976 | | 7 | % |
Total | | $ | 1,084,636 | | 100 | % | $ | 1,028,933 | | 100 | % | $ | 960,588 | | 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 product sold, cost of installation services, and transportation costs from vendorvendors to the Company’s distribution centers or store locations,locations. It also includes any applicable
finishing costs related to production of the Company’s proprietary brands, transportation costs from distribution centers to store locations, transportation costs for the delivery of products from store locations to customers, certain costs of quality control procedures, warranty and customer satisfaction costs, inventory adjustments including obsolescence and shrinkage, and costs to produce samples, reduced bywhich are net of vendor allowances.
In early March 2015, the Company began voluntarily offering free indoor air quality screening to certain of its flooring customers, predominately those who had purchased laminate flooring sourced from China, to address customer questions about the air quality in their homes. During the year ended December 31, 2015, over approximately 48,000 testing kits were sent to Lumber Liquidators customers through the program. In total, approximately 30,500 testing kits have been returned. Of those returned, over 90% indicated indoor air concentrations of formaldehyde within the guidelines set by the World Health Organization (“WHO”) as protective against sensory irritation and long-term health effects. The Company has been and continues to directly contact the customers whose test results indicate an indoor formaldehyde level in excess of the WHO guideline for additional investigation and next steps. These “Phase 2” steps primarily consist of independent third-party laboratory testing of flooring samples from these customers. If the results of this testing indicates
TABLE OF CONTENTS
Lumber Liquidators Holdings, Inc.
Notes to Consolidated Financial Statements
(amounts in thousands, except share data and per share amounts)
Note 1. Summary of Significant Accounting Policies – (continued)
that the flooring is contributing to formaldehyde levels in a customer’s home at elevated rates, the Company will work with the customer, at the Company’s discretion, to replace the customer’s floor or compensate the customer for the cost of the floor as part of “Phase 3”. Throughout 2015, the Company facilitated customers with elevated Phase 1 testing results to complete Phase 2. To date, the Company did not record a reserve for Phase 3 based on the results it has received to date from the testing of customer flooring samples. The Company believes the test results and number of tests obtained to date provided a reasonable basis to support its assertion that a material reserve related to the replacement of customer floors was not warranted. The Company will, however, continue to evaluate the results of each phase of the indoor air quality testing program. Should its results differ from current trends, the Company could record a material charge in future periods.
The Company incurred $9,445 of direct costs primarily related to purchases of testing kits and professional fees for the year ended December 31, 2015. At December 31, 2015, the Company had a reserve of $809 for estimated future costs to evaluate whether the laminate flooring purchased from the Company was the primary driver of the air quality testing results being above WHO standards. The reserve was based on actual experience to date, estimated using information through the filing date of the financial statements and was included in other current liabilities. Should the Company’s actual experience related to results of its indoor air quality testing program and subsequent follow-up with customers differ from these estimates, additional reserves may be recorded in the future.
A rollforward of the reserve for the Company’s air quality testing program was as follows:
| | |
| Balance at December 31, 2014 | | $ | — | |
| Provision | | | 10,873 | |
| Reversal | | | (1,428 | ) |
| Payments | | | (8,636 | ) |
| Balance at December 31, 2015 | | $ | 809 | |
Additionally, for the year ended December 31, 2015, the Company incurred customer satisfaction costs of $1,200, primarily related to projects using certain laminate or engineered hardwood products that were incomplete as of the date sales of such laminate and engineered hardwood products were suspended during the second quarter of 2015. These costs were incurred to ensure customers could complete their projects in a satisfactory manner. Refer to Note 10,Commitments and Contingencies, for a discussion of these products.
The Company offers a range of limited warranties fromfor the durability of the finish on its prefinished products to its services provided. These limited warranties range from one to 100 years.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. This reserve was $1,688$1.4 million and $1,568$1.6 million at December 31, 20152018 and 2014,2017, respectively. The Company is able to seekseeks recovery from its vendors and third-party independent contractors of installation providersservices 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.
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Lumber Liquidators Holdings, Inc.
Notes
Accrual for Air Quality Emissions Screening Test Costs
The Company offers a free indoor air quality testing program for customers who purchased laminate flooring sourced from China during the period from February 22, 2012 to Consolidated Financial Statements
(amountsFebruary 27, 2015. The Company established a reserve to provide for the estimated future expenses required to support the program. Reserve estimates are based on management’s judgment, considering such factors as cost per air quality testing request, recent historical experience, and the anticipated number of future requests for the duration of the program. Management reviews and adjusts these estimates, if necessary, on a quarterly basis based on any differences in thousands, except share dataactual and per share amounts)
Note 1. Summaryexpected program cost experience.
During the second quarter of Significant Accounting Policies – (continued)
2017, the Company reduced its estimate of the number of test kit requests based on its experience, and reduced its estimate of the administrative costs of the Air Quality Testing Program. The revised estimates were in part prompted by the CPSC’s July 2017 decision to close this case with the Company and terminate its monitoring activity of the Air Quality Testing Program. The Company will continue to offer tests kits to qualifying customers, but the lower total estimated future costs of the Air Quality Testing Program resulted in a reduction in the reserve and the corresponding offset to cost of sales of $1 million. At December 31, 2017, the Company’s estimate of its future costs for the Air Quality Testing Program through June 30, 2018 was approximately $0.1 million. Since that time, costs related to the Company’s Air Quality Testing Program have been expensed as incurred and have not been significant.
Advertising Costs
Advertising costs charged to selling, general and administrative (“SG&A”) expenses, net of vendor allowances, were $77,455, $82,604$74,242, $76,586 and $75,506$80,079 in 2015, 20142018, 2017 and 2013,2016, respectively. The Company uses various types of media to brand its name and advertise its products. Media production costs are generally expensed as incurred, except for direct mail, which is expensed when the finished piece enters the postal system. Media placement costs are generally expensed in the month the advertising occurs, except for contracted endorsements and sports agreements, which are generally expensed ratably over the contract period. Amounts paid in advance are included in prepaid expenses and totaled $1,495$564 and $1,549$1,077 at December 31, 20152018 and 2014,2017, respectively.
Store Opening Costs
Costs to open new store locations are charged to SG&A expenses as incurred, net of any vendor support.
Other Vendor Consideration
Consideration from non-merchandise vendors, including royalties and rebates, are generally recorded as an offset to SG&A expenses when earned.
Depreciation and Amortization
Property and equipment is carried at cost and depreciated on the straight-line method over the estimated useful lives. The estimated useful lives for leasehold improvements are the shorter of the estimated useful lives or the remainder of the lease terms. For leases with optional renewal periods for which renewal is not reasonably assured, the Company uses the original lease term, excluding optional renewal periods, to determine the appropriate estimated useful lives. Capitalized software costs are capitalized from the time that technological feasibility is established until the software is ready for use. The estimated useful lives are generally as follows:
| | |
| | Years |
Buildings and Building Improvements | | | 157 to 40 | |
Property and Equipment | | | 53 to 25 | 15 |
Computer Software and Hardware | | | 3 to 10 | |
Leasehold Improvements | | | 1 to 15 | |
Operating Leases
The Company has operating leases for its stores, Corporate Headquarters,current corporate headquarters in Toano, Virginia, certain of its distribution facilities, supplemental office facilities and certain equipment. The lease agreements for certain stores and distribution facilities contain rent escalation clauses, rent holidays and tenant improvement allowances. For scheduled rent escalation clauses during the lease terms or for rental payments commencing at a date other than the date of initial occupancy, the Company records minimum rental expenses in SG&A expenses on a straight-line basis over the terms of the leases. The difference between the rental expense and rent paid is recorded as deferred rent on the consolidated balance sheets. For tenant improvement allowances, the Company records deferred rent on the consolidated balance sheets and amortizes the deferred rent over the terms of the leases as reductions to rental expense.
Stock-Based Compensation
The Company records compensation expense associated with stock options and other forms of equity compensation in accordance with FASB ASC 718. The Company may issue incentive awards, including performance-based awards, in the form of stock options, restricted shares and other equity awards to employees, non-employee directors and other service providers. The Company recognizes expense for the majority of its stock-based compensation based on the fair value
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Lumber Liquidators Holdings, Inc.
Notes to Consolidated Financial Statements
(amounts in thousands, except share data and per share amounts)
Note 1. Summary of Significant Accounting Policies – (continued)
of the awards that are granted. For awards granted to non-employee directors, expense is recognized based on the fair value of the award at the end of a reporting period. For performance-based awards granted to certain members of senior management, the Company recognizes expense after assessing the probability of the achievement of certain financial metrics on a periodic basis. Compensation expense is recognized only for those awards expected to vest, with forfeitures estimated at the date of grant based on historical experience and future expectations. Measured compensation cost is recognized ratably over the requisite service period of the entire related stock-based compensation award.
Foreign Currency Translation
The Company’s Canadian operations use the Canadian dollar as the functional currency. Assets and liabilities are translated at exchange rates in effect at the balance sheet date. Revenues and expenses are translated at the average monthly exchange rates during the year. Resulting translation adjustments are recorded as a component of accumulated other comprehensive income on the consolidated balance sheets.
Income Taxes
Income taxes are accounted for in accordance with FASB ASC 740 (“ASC 740”). Income taxes are provided for under the asset and liability method and consider differences between the tax and financial accounting bases. The tax effects of these differences are reflected on the consolidated balance sheets as deferred income taxes and measured using the effective tax rate expected to be in effect when the differences reverse. ASC 740 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion of the deferred tax asset will not be realized. In evaluating the need for a valuation allowance, the Company takes into account various factors, including the nature, frequency and severity of current and cumulative losses, expected level of future taxable income, the duration of statutory carryforward periods and tax planning alternatives. In future periods, any valuation allowance will be re-evaluated in accordance with ASC 740, and a change, if required, will be recorded through income tax expense in the period such determination is made.
The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the relevant taxing authorities, based on the technical merits of its position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The Company classifies interest and penalties related to income tax matters as a component of income tax expense.
Net Income per Common Share
Basic net income per common share is determined by dividing net income by the weighted average number of common shares outstanding during the year. Diluted net income per common share is determined by dividing net income by the weighted average number of common shares outstanding during the year, plus the dilutive effect of common stock equivalents, including stock options and restricted shares. Common stock and common stock equivalents included in the computation represent shares issuable upon assumed exercise of outstanding stock options and release of restricted shares, except when the effect of their inclusion would be antidilutive.
Recent Accounting Pronouncements Not Yet Adopted
In February 2016, the FASB issued Accounting Standards Update No. 2016-02 (“ASU 2016-02”), which creates ASC Topic 842,Leases, and supersedes the lease accounting requirements in Topic 840,Leases.Leases. In summary, Topic 842 requires organizations that lease assets — referred to as “lessees” — to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. The amendments in ASU 2016-02 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Therefore,The Company adopted this ASU on January 1, 2019 on a modified retrospective basis and will not restate prior periods. The Company has implemented software to track and account for the leases, assessed the impact of the new guidance on its consolidated financial statements and financial controls. Presentation of leases within the consolidated statements of operations and consolidated statements of cash flows will be generally consistent with the current lease accounting guidance. The Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, will allow the Company to carryforward the historical lease classification. On January 1, 2019, the Company will make an accounting policy election that payments under agreements with an initial term of 12 months or less will not be included on the Consolidated Balance Sheet but will be recognized in the Consolidated Statements of Operations on a straight-line basis over the term of the agreement. The Company estimates that the adoption of the standard will result in recognition of right-of-use lease assets and lease liabilities in the approximate range of $115 million to $125 million on the Company’s consolidated Balance Sheet primarily related to more than 400 store operating leases.
In August 2018, the FASB issued Accounting Standards Update No. 2018-15 (“ASU 2018-15”), which provides guidance on the accounting for costs of implementation activities performed in a cloud computing arrangement that is a service contract, as initially published in Accounting Standards Update No. 2015-05, Intangibles—Goodwill and Other—Internal-Use Software: Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement. In summary, the new standard requires customers of cloud computing services to recognize an intangible asset for the software license and, to the extent that payments attributable to the software license are made over time, a liability is also recognized.
The new standard also allows customers of cloud computing services to capitalize certain implementation costs. The amendments in ASU 2016-022018-15 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Therefore, the new standard will become effective for the Company at the beginning of its 20192020 fiscal year. The Company is currently assessing the impact of implementing the new guidance on its consolidated financial statements. When implemented, the standard is expected to have a material impact as its operating leases will be recognized on the consolidated balance sheet.
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Lumber Liquidators Holdings, Inc.
Notes to Consolidated Financial Statements
(amounts in thousands, except share data and per share amounts)
Note 1. Summary of Significant Accounting Policies – (continued)
In November 2015, the FASB issued Accounting Standards Update No. 2015-17 (“ASU 2015-17”), which amends ASC Topic 740, Balance Sheet Classification of Deferred Taxes. In summary, the core principle of Topic 740 is that an entity classify both current and noncurrent deferred income tax assets and liabilities in the noncurrent section of the statement of financial position. The current requirement that deferred tax liabilities and assets of a tax-paying component of an entity be offset and presented as a single amount is not affected by this amendment. The amendments in ASU 2015-17 are effective for annual reporting periods beginning after December 15, 2017 and interim periods beginning after December 31, 2018. Early applicationyear, although early adoption is permitted for all entities as of the beginning of an interim or annual reporting period.entities. The Company is currently assessingwill evaluate the impact of implementing the new guidance on its consolidated financial statements and has not yet selected a method of adoption.
In May 2014, the FASB issued Accounting Standards Update No. 2014-09 (“ASU 2014-09”), which creates ASC Topic 606, Revenue from Contracts with Customers, and supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, including most industry-specific revenue recognition guidance throughout the Industry Topics of the Codification. In addition, ASU 2014-09 supersedes the cost guidance in Subtopic 605-35, Revenue Recognition — Construction-Type and Production-Type Contracts, and creates new Subtopic 340-40, Other Assets and Deferred Costs — Contracts with Customers. In summary, the core principle of Topic 606 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The amendments in ASU 2014-09 are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, and early application is not permitted. Therefore, the amendments in ASU 2014-09 will become effective for the Company at the beginning of its 2017 fiscal year. The Company is currently assessing the impact of implementing the new guidance on its consolidated financial statements and has not yet selected a method of adoption.2018-15 when recording cloud computing arrangements.
Note 2. Property and Equipment
Property and equipment consisted of:
| | | | | | | | | | |
| | December 31, | | December 31, |
| | | 2015 | | 2014 | | 2018 | | 2017 |
| Land | | $ | 4,937 | | | $ | 4,937 | | | $ | 4,937 | | $ | 4,937 |
| Building | | | 44,234 | | | | — | | | | 44,319 | | | 44,299 |
| Property and Equipment | | | 59,015 | | | | 51,409 | | | | 53,411 | | | 60,337 |
| Computer Software and Hardware | | | 44,026 | | | | 40,071 | | | | 54,375 | | | 50,415 |
| Leasehold Improvement | | | 35,495 | | | | 30,715 | | | | 46,297 | | | 40,277 |
| Assets under Construction | | | 1,623 | | | | 51,097 | | | | 767 | | | 596 |
| | | | 189,330 | | | | 178,229 | | | | 204,106 | | | 200,861 |
| Less: Accumulated Depreciation and Amortization | | | 67,333 | | | | 53,362 | | | | 110,417 | | | 100,370 |
| Property and Equipment, net | | $ | 121,997 | | | $ | 124,867 | | | $ | 93,689 | | $ | 100,491 |
As of December 31, 20152018 and 2014,2017, the Company had cumulatively capitalized $34,024 $40,230and $31,230$37,905 of computer software costs, respectively. Amortization expense related to these assets was $3,501, $3,212$4,331, $3,875 and $2,659$3,604 for 2015, 20142018, 2017 and 2013,2016, respectively.
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Lumber Liquidators Holdings, Inc.
Notes to Consolidated Financial Statements
(amounts in thousands, except share data and per share amounts)
Note 3. Other Current Liabilities
Other currentlong-term liabilities consisted of:
| | | | | | |
| | December 31, |
| | 2018 | | 2017 |
Antidumping and Countervailing Duties Accrual | | $ | 11,456 | | $ | 10,372 |
Deferred Rent | | | 4,850 | | | 5,150 |
Lease Incentive Obligation | | | 2,864 | | | 2,872 |
Other | | | 1,033 | | | 841 |
Other Long Term Liabilities | | $ | 20,203 | | $ | 19,235 |
| | | | |
| | December 31, |
| | | 2015 | | 2014 |
| Accrued Legal and Settlement Expense | | $ | 14,011 | | | $ | 2,087 | |
| Other | | | 14,744 | | | | 15,749 | |
| Other Current Liabilities, net | | $ | 28,755 | | | $ | 17,836 | |
Note 4. Revolving Credit AgreementFacility
On April 24, 2015,August 17, 2016, the Company, exclusive ofLumber Liquidators, Inc. (“LLI”) and Lumber Liquidators Services, LLC (“LL Services” and collectively with LLI, the non-domestic subsidiaries,“Borrowers”), entered into a SecondThird Amended and Restated Credit Agreement (as amended on May 21, 2015 and November 20, 2015, the “Credit Agreement”(the “Revolving Credit Facility”) with Bank of America, N.A. (the “Bank”) and Wells Fargo Bank, N.A. (“Wells Fargo” and, collectively with the Bank, the “Lenders”) with the Bank as administrative agent and collateral agent (in this capacity, the “Agent”) and lender (the “Bank”).Wells Fargo as syndication agent. The maximum amount of borrowings under the Revolving Credit Agreement amended and restatedFacility is $150 million (but subject to the Amended and Restated Credit Agreement that was entered into between Lumber Liquidators, Inc. andborrowing base as described in the Bank on February 21, 2012 and amended on March 27, 2015. Under the Credit Agreement, the Bank agreed to provideagreement).
At December 31, 2018, the Company with an asset-based revolving credit facility (the “Revolving Credit Facility”)had $67.9 million available to borrow under the Revolving Loan, which the Company may obtain loans andwas net of $2.1 million in outstanding letters of credit, from the Bank up to a maximum aggregate$65 million in outstanding principal amount of the lesser of $100,000 or a calculated borrowing base. Letters of credit are subject to a sublimit of $20,000 (subject toborrowings and certain limitations based on the borrowing base). base and the fixed charge coverage ratio covenant.
The Revolving Credit Agreement expiresFacility matures on April 24, 2020,August 17, 2021, is guaranteed by the Company and certain of its other domestic subsidiaries other than LLI and isLL Services and secured primarily by security interests in the Collateral (as defined in
the agreement), which includes substantially all assets of the Company including, among other things, the Company’s inventory includingand accounts receivables and the Company’s East Coast distribution center located in Sandston, Virginia. Under the terms of the agreement, the Company has the ability to release the East Coast distribution center from the Collateral under certain in-transit inventory, and credit card receivables.
conditions. The Revolving Credit Facility has no mandated payment provisions and a fee of 0.15%0.25% per annum on anythe average daily unused portion, paid quarterly in arrears. Loans outstanding under the Revolving Credit Facility can bear interest based on the Base Rate or the LIBOR Rate, each as defined in the Credit Agreement.agreement. Interest on Base Rate loans is charged at varying per annum rates computed by applying a margin ranging from 0.125%0.50% to 0.375%0.75% (dependent on the Company’s average daily excess borrowing availability under the Revolving Credit Facility during the most recently completed fiscal quarter) over the applicable base interest rate (defined as the greatest of the prime rate, a specified federal funds rate plus 0.50%, or the one-month LIBOR Rate plus 1.00%).Base Rate. 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 1.125%1.50% to 1.375%1.75% (dependent on the Company’s average daily excess borrowing availability under the Revolving Credit Facility during the most recently completed fiscal quarter) over the applicable LIBOR rate for one, two, three or six month interest periods as selected by the Company. At December 31, 2015,2018, the applicableCompany’s Revolving Credit Facility carried an interest rate for outstanding borrowings was 1.4375%. For the year ended December 31, 2015, the Company paid cash for interest in the amount of $237.4.125%.
The Credit Agreement contains a fixed charge coverage ratio covenant that becomes effective in the event that the Company’s excess borrowing availability under the Revolving Credit Facility at any time during the term of the Revolving Credit Facility falls below the greater of $10,000$15 million, or 10% of the borrowing base.
Atmaximum revolver amount. This covenant – though not currently operable – would not have been met at December 31, 2015,2018. This covenant was met at December 31, 2017.
On March 8, 2019, we entered into a commitment letter with the Company had $67,200 availableLenders, subject to borrow undercustomary closing conditions, that provides for an increase in the Revolving Loan up to a maximum amount of $175 million, and a new “First in Last Out” tranche of $25 million incremental to the $175 million but within the same Revolving Credit Facility. This will also extend the term of the loan until March 2024. We expect to close on this expanded Revolving Credit Facility and $20,000 in outstanding borrowings and supported approximately $2,800 and $2,700 of letters of credit at December 31, 2015 and 2014, respectively.late March or early April 2019.
Note 5. Leases
The Company has operating leases for its stores, Corporate Headquarters andcurrent corporate headquarters in Toano, Virginia, West Coast distribution center, supplemental office facilities and certain equipment. The Company has also entered into an agreement for a future corporate headquarters in Richmond, Virginia which has a ten-year term that commences in late 2019 once the Company takes possession of the property. The store location leases are operating leases and generally have five-year base periods with one or more five-year renewal periods. The Corporate Headquarters has ancurrent corporate headquarters in Toano, Virginia and the supplemental office facility in Richmond, Virginia have operating leaseleases with a base termterms running through December 31, 2019. The West Coast distribution center has an operating lease with a base term running through October 31, 2024.
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Lumber Liquidators Holdings, Inc.
Notes to Consolidated Financial Statements
(amounts Total rent expense was $34.1 million, $32.5 million and $30.3 million in thousands, except share data2018, 2017 and per share amounts)
Note 5. Leases – (continued)
2016, respectively.As of December 31, 2015, 2014 and 2013,2016, the Company leased the Corporate Headquarters,current corporate headquarters, which includes a store location and 30, 30 and 29 of its locations, representing 8.3%, 8.8% and 9.4%7.8% of the total number of store leases then in operation respectively, from entities controlled by the Company’s founder, who also serves as a member of the Board of Directors (“Controlled Companies”).founder. During 2015,2016, the Company also leased a warehouse from oneits founder, which was subsequently vacated in December 2017. Effective December 31, 2016, upon the departure of the Controlled Companies.
RentalCompany’s founder from the board of directors, these entities no longer meet the criteria of a related party. Rent expense is as follows:to this related party was $3.4 million in 2016.
At December 31, 2018, the future minimum rental payments under non-cancellable operating leases segregating Controlled Companies leases from all other operating leases, were as follows at December 31, 2015:
follows:
| | | | | | | | | | | | | | | | | | |
| | Operating Leases | | Operating Leases |
| | | Controlled Companies | | Store
Leases
| | Distribution
Centers & Other
Leases | | Total
Operating
Leases | | | | | Distribution | | Total |
| | | Store
Leases | | Headquarters
Lease | | | Headquarters & | | Centers & Other | | Operating |
| 2016 | | $ | 2,066 | | | $ | 1,271 | | | $ | 24,537 | | | $ | 2,411 | | | $ | 30,285 | | |
| 2017 | | | 1,611 | | | | 1,309 | | | | 21,214 | | | | 2,435 | | | | 26,569 | | |
| 2018 | | | 1,490 | | | | 1,348 | | | | 16,928 | | | | 2,394 | | | | 22,160 | | |
| | | Store Leases | | Leases | | Leases |
| 2019 | | | 1,121 | | | | 1,388 | | | | 13,046 | | | | 2,305 | | | | 17,860 | | | $ | 33,689 | | $ | 2,385 | | $ | 36,074 |
| 2020 | | | 836 | | | | — | | | | 9,785 | | | | 2,361 | | | | 12,982 | | | | 30,697 | | 2,123 | | | 32,820 |
2021 | | | | 24,402 | | 2,168 | | | 26,570 |
2022 | | | | 18,492 | | 2,147 | | | 20,639 |
2023 | | | | 12,496 | | 2,186 | | | 14,682 |
| Thereafter | | | 1,390 | | | | — | | | | 12,206 | | | | 8,452 | | | | 22,048 | | | | 22,374 | | | 2,054 | | | 24,428 |
| Total minimum lease payments | | $ | 8,514 | | | $ | 5,316 | | | $ | 97,716 | | | $ | 20,358 | | | $ | 131,904 | | | $ | 142,150 | | $ | 13,063 | | $ | 155,213 |
Note 6. Stockholders’ Equity
Net Income per Common Share
The following table sets forth the computation of basic and diluted net income per common share:
| | | | | | | | | |
| | | | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 |
Net Loss | | $ | (54,379) | | $ | (37,823) | | $ | (68,563) |
Weighted Average Common Shares Outstanding—Basic | | | 28,571 | | | 28,407 | | | 27,284 |
Effect of Dilutive Securities: | | | | | | | | | |
Common Stock Equivalents | | | — | | | — | | | — |
Weighted Average Common Shares Outstanding—Diluted | | | 28,571 | | | 28,407 | | | 27,284 |
Net Loss per Common Share—Basic | | $ | (1.90) | | $ | (1.33) | | $ | (2.51) |
Net Loss per Common Share—Diluted | | $ | (1.90) | | $ | (1.33) | | $ | (2.51) |
| | | | | | |
| | Year Ended December 31, |
| | | 2015 | | 2014 | | 2013 |
| Net (Loss) Income | | $ | (56,433 | ) | | $ | 63,371 | | | $ | 77,395 | |
| Weighted Average Common Shares Outstanding – Basic | | | 27,082,299 | | | | 27,264,882 | | | | 27,484,790 | |
Effect of Dilutive Securities:
| | | | | | | | | | | | |
| Common Stock Equivalents | | | — | | | | 220,970 | | | | 429,532 | |
| Weighted Average Common Shares Outstanding – Diluted | | | 27,082,299 | | | | 27,485,852 | | | | 27,914,322 | |
| Net (Loss) Income per Common Share – Basic | | $ | (2.08 | ) | | $ | 2.32 | | | $ | 2.82 | |
| Net (Loss) Income per Common Share – Diluted | | $ | (2.08 | ) | | $ | 2.31 | | | $ | 2.77 | |
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Lumber Liquidators Holdings, Inc.
Notes to Consolidated Financial Statements
(amounts in thousands, except share data and per share amounts)
Note 6. Stockholders’ Equity – (continued)
The following have been excluded from the computation of Weighted Average Common Shares Outstanding — Outstanding—Diluted because the effect would be antidilutive:
| | | | | | |
| | | | | | |
| | As of December 31, |
| | 2018 | | 2017 | | 2016 |
Stock Options | | 643,422 | | 653,019 | | 666,538 |
Restricted Shares | | 407,319 | | 432,777 | | 516,072 |
| | | | | | |
| | As of December 31, |
| | | 2015 | | 2014 | | 2013 |
| Stock Options | | | 650,759 | | | | 184,252 | | | | 103,329 | |
| Restricted Shares | | | 225,027 | | | | 16,999 | | | | 176 | |
Stock Issuance
On November 17, 2016, the Company issued 1 million shares of its common stock to a court approved settlement fund in connection with a final court approval of a definitive settlement agreement as discussed in Note 10. These shares were valued at $16.8 million based on the closing price of the Company shares of $16.76 on the settlement date. These shares have been included in the Company’s calculation of weighted average common shares outstanding from the date of issuance.
Stock Repurchase Program
In 2012, the Company’s Board of Directors (“Board”) authorized the repurchase of up to $100,000$100 million of the Company’s common stock from time to time on the open market or in privately negotiated transactions. In January 2014,
the Company’s Board authorized the repurchase of up to an additional $50,000$50 million of the Company’s common stock, bringing the total authorization to $150,000$150 million and at December 31, 2015, the Company had $14,728$14.7 million remaining under this authorization. The Company hasdid not purchasedpurchase any stock through privately negotiated transactions. Purchasesshares under this program were as follows:during the three-years ended December 31, 2018.
| | | | | | |
| | Year Ended December 31, |
| | | 2015 | | 2014 | | 2013 |
| Shares Repurchased | | | — | | | | 671,200 | | | | 403,630 | |
| Average Price per Share | | $ | — | | | $ | 77.68 | | | $ | 84.40 | |
| Total Aggregate Costs | | $ | — | | | $ | 52,138 | | | $ | 34,066 | |
Note 7. Stock-Based Compensation
Stock-based compensation expense included in SG&A expenses consisted of:
Overview
| | | | | | |
| | Year Ended December 31, |
| | | 2015(1) | | 2014 | | 2013 |
| Stock Options, Restricted Shares and Stock Appreciation Rights | | $ | 3,941 | | | $ | 5,593 | | | $ | 5,974 | |
| (1) | Includes the impact of actual forfeitures in the period due to the resignation of certain senior executives. |
Overview
On May 6, 2011, the Company’s stockholders approved the Lumber Liquidators Holdings, Inc. 2011 Equity Compensation Plan (the “2011 Plan”), which succeeded the Lumber Liquidators Holdings, Inc. 2007 Equity Compensation Plan. The 2011 Plan isCompany has an equity incentive plan (the “Plan”) for employees, non-employee directors and other service providers from which the Company may grant stock options, restricted shares, stock appreciation rights (“SARs”) and other equity awards. The total number of shares of common stock authorized for issuance under the 2011 Plan is 5.36.1 million. As of December 31, 2015, 1.02018, 0.8 million shares of common stock were available for future grants. Stock options granted under the 2011 Plan expire no later than ten years from the date of grant and the exercise price shall not be less than the fair market value of the shares on the date of grant. Vesting periods are assigned to stock options and restricted shares on a grant by grantgrant-by-grant basis at the discretion of the Board. The Company issues new shares of common stock upon exercise of stock options and vesting of restricted shares.
The Company also maintains the Lumber Liquidators Holdings, Inc. Outside Directors Deferral Plan under which each of the Company’s non-employee directors has the opportunity to elect annually to defer certain fees until departure from the Board. A non-employee director may elect to defer up to 100% of his or her fees and have such fees invested in deferred stock units. Deferred stock units must be settled in common
TABLE OF CONTENTS
Lumber Liquidators Holdings, Inc.
Notes to Consolidated Financial Statements
(amounts in thousands, except share data and per share amounts)
Note 7. Stock-Based Compensation – (continued)
stock upon the director’s departure from the Board. There were 95,553132,348 and 63,279122,007 deferred stock units outstanding at December 31, 20152018 and 2014,2017, respectively.
Stock Options
The following table summarizes activity related to stock options:
| | | | | | | | | | | | | | | | | | |
| | Shares | | Weighted Average Exercise Price | | Remaining Average Contractual Term (Years) | | Aggregate Intrinsic Value | | | | | | | Remaining | | | |
| Balance, December 31, 2012 | | | 1,311,377 | | | $ | 17.79 | | | | 6.5 | | | $ | 45,954 | | |
| | | | | Weighted | | Average | | Aggregate |
| | | | | Average | | Contractual | | Intrinsic |
| | | Shares | | Exercise Price | | Term (Years) | | Value |
Balance, December 31, 2015 | | | 692,776 | | $ | 31.45 | | 7.7 | | $ | 1,283 |
| Granted | | | 214,966 | | | | 62.52 | | | | | | | | | | | 443,147 | | | 13.51 | | | | | |
| Exercised | | | (718,665 | ) | | | 14.35 | | | | | | | | | | | (60,781) | | | 9.37 | | | | | |
| Forfeited | | | (58,188 | ) | | | 29.04 | | | | | | | | | | | (239,528) | | | 27.16 | | | | | |
| Balance, December 31, 2013 | | | 749,490 | | | $ | 33.04 | | | | 7.3 | | | $ | 52,358 | | |
Balance, December 31, 2016 | | | 835,614 | | $ | 24.86 | | 7.5 | | $ | 1,167 |
| Granted | | | 79,126 | | | | 100.05 | | | | | | | | | | | 127,984 | | | 22.09 | | | | | |
| Exercised | | | (149,707 | ) | | | 21.04 | | | | | | | | | | | (87,955) | | | 15.31 | | | | | |
| Forfeited | | | (26,101 | ) | | | 60.71 | | | | | | | | | | | (185,975) | | | 25.62 | | | | | |
| Balance, December 31, 2014 | | | 652,808 | | | $ | 42.81 | | | | 6.9 | | | $ | 18,113 | | |
Balance, December 31, 2017 | | | 689,668 | | $ | 25.31 | | 7.7 | | $ | 8,530 |
| Granted | | | 410,164 | | | | 25.34 | | | | | | | | | | | 215,297 | | | 20.54 | | | | | |
| Exercised | | | — | | | | 0.00 | | | | | | | | | | | (43,510) | | | 17.70 | | | | | |
| Forfeited | | | (370,196 | ) | | | 44.71 | | | | | | | | | | | (128,870) | | | 33.25 | | | | | |
| Balance, December 31, 2015 | | | 692,776 | | | $ | 31.45 | | | | 7.7 | | | $ | 1,283 | | |
| Exercisable at December 31, 2015 | | | 221,561 | | | $ | 29.28 | | | | | | | $ | 540 | | |
| Vested and expected to vest December 31, 2015 | | | 692,776 | | | $ | 31.45 | | | | | | | $ | 1,283 | | |
Balance, December 31, 2018 | | | 732,585 | | $ | 22.97 | | 7.3 | | $ | — |
| | | | | | | | | | | |
Exercisable at December 31, 2018 | | | 303,898 | | $ | 28.47 | | | | $ | — |
Vested and expected to vest December 31, 2018 | | | 732,585 | | $ | 22.97 | | | | $ | — |
The aggregate intrinsic value is the difference between the exercise price and the closing price of the Company’s common stock on December 31. The intrinsic value of the stock options exercised during 2015, 20142018, 2017 and 20132016 was nil, $10,278$341, $828 and $49,137,$343, respectively.
As of December 31, 2015,2018, total unrecognized compensation cost related to unvested options was approximately $4,570,$2,704, net of estimated forfeitures, which is expected to be recognized over a weighted average period of approximately 3.02.2 years.
The fair value of each stock option award is estimated by management on the date of the grant using the Black-Scholes-Merton option pricing model. The weighted average fair value of options granted during 2015, 20142018, 2017 and 20132016 was $11.87, $43.21$10.69, $11.20 and $29.66,$6.75, respectively.
The following are the ranges ofaverage assumptions for the periods noted:
| | | | | | | |
| | Year Ended December 31, | |
| | 2018 | | 2017 | | 2016 | |
Expected dividend rate | | — | % | — | % | — | % |
Expected stock price volatility | | 55 | % | 55 | % | 55 | % |
Risk-free interest rate | | 2.8 | % | 1.7 | % | 1.3 | % |
Expected term of options | | 5.5 | years | 5.5 | years | 5.5 | years |
| | | | | | |
| | Year Ended December 31, |
| | | 2015 | | 2014 | | 2013 |
| Expected dividend rate | | | 0%
| | | | 0%
| | | | 0%
| |
| Expected stock price volatility | | | 50%
| | | | 45%
| | | | 45%
| |
| Risk-free interest rate | | | 1.7%
| | | | 1.8%
| | | | 1.3 – 2.0%
| |
| Expected term of options | | | 5.5 years | | | | 5.5 years | | | | 6.0 – 7.5 years | |
The expected stock price volatility is based on the historical volatility of the Company’s stock price and in 2013, also included the historical volatilities of companies included in a peer group that was selected by management whose shares or options are publicly available.price. The volatilities are estimated for a period of time equal to the expected term of the related option. The risk-free interest rate is based on the implied yield of
TABLE OF CONTENTS
Lumber Liquidators Holdings, Inc.
Notes to Consolidated Financial Statements
(amounts in thousands, except share data and per share amounts)
Note 7. Stock-Based Compensation – (continued)
U.S. Treasury zero-coupon issues with an equivalent remaining term. The expected term of the options represents the estimated period of time until exercise and is determined by considering the contractual terms, vesting schedule and expectations of future employee behavior.
Restricted Shares
The following table summarizes activity related to restricted shares:
| | | | | | | | | |
| | Shares | | Weighted
Average Grant
Date Fair
Value | | | | Weighted Average |
| Nonvested, December 31, 2012 | | | 152,405 | | | $ | 15.19 | | |
| | | | | Grant Date Fair |
| | | Shares | | Value |
Nonvested, December 31, 2015 | | | 461,671 | | $ | 23.61 |
| Granted | | | 80,814 | | | | 66.11 | | | 343,517 | | | 12.41 |
| Released | | | (38,362 | ) | | | 75.73 | | | (130,523) | | | 24.23 |
| Forfeited | | | (16,522 | ) | | | 37.51 | | | (88,478) | | | 18.29 |
| Nonvested, December 31, 2013 | | | 178,335 | | | $ | 22.82 | | |
Nonvested, December 31, 2016 | | | 586,187 | | $ | 17.71 |
| Granted | | | 38,260 | | | | 89.46 | | | 207,196 | | | 19.56 |
| Released | | | (45,503 | ) | | | 95.02 | | | (205,349) | | | 18.31 |
| Forfeited | | | (14,003 | ) | | | 54.90 | | | (108,288) | | | 15.68 |
| Nonvested, December 31, 2014 | | | 157,089 | | | $ | 15.00 | | |
Nonvested, December 31, 2017 | | | 479,746 | | $ | 18.71 |
| Granted | | | 386,517 | | | | 18.30 | | | 224,835 | | | 22.39 |
| Released | | | (27,187 | ) | | | 41.57 | | | (137,064) | | | 18.67 |
| Forfeited | | | (54,748 | ) | | | 45.93 | | | (80,305) | | | 17.98 |
| Nonvested, December 31, 2015 | | | 461,671 | | | $ | 12.95 | | |
Nonvested, December 31, 2018 | | | 487,212 | | $ | 20.54 |
The fair value of restricted shares released during 2015, 20142018, 2017 and 20132016 was $941, $4,371$2,923, $5,151 and $3,060,$1,617, respectively. As of December 31, 2015,2018, total unrecognized compensation cost related to unvested restricted shares was approximately $5,141,$3,953, net of estimated forfeitures, which is expected to be recognized over a weighted average period of approximately 2.42.1 years.
During 2018, the Company granted 30,887 shares of performance-based restricted stock awards, vesting over a three-year period, with a grant date fair value of approximately $0.7 million to certain members of senior management in connection with the achievement of specific key financial metrics measured over a two-year period. The number of awards that will ultimately vest is contingent upon the achievement of these key financial metrics by the end of year two. The Company assesses the probability of achieving these metrics on a quarterly basis. Once these amounts have been
determined, half of the shares will vest at the end of year two and the remaining half will vest at the end of year three. These awards are included above in Restricted Shares Granted for 2018.
Stock Appreciation Rights
The following table summarizes activity related to SARs:
| | | | | | | | | | |
| | | | | | | Remaining | | |
| | | | Weighted | | Average | | Aggregate |
| | | | Average | | Contractual | | Intrinsic |
| | Shares | | Exercise Price | | Term (Years) | | Value |
Balance, December 31, 2015 | | 16,057 | | $ | 47.58 | | 6.8 | | $ | — |
Granted | | 13,071 | | | 15.31 | | | | | |
Exercised | | — | | | — | | | | | |
Forfeited | | (460) | | | 62.87 | | | | | |
Balance, December 31, 2016 | | 28,668 | | $ | 32.63 | | 7.5 | | $ | 6 |
Granted | | 2,899 | | | 17.39 | | | | | |
Exercised | | (165) | | | 24.35 | | | | | |
Forfeited | | (14,852) | | | 45.93 | | | | | |
Balance, December 31, 2017 | | 16,550 | | $ | 18.10 | | 8.6 | | $ | 251 |
Granted | | 1,738 | | | 23.31 | | | | | |
Exercised | | — | | | — | | | | | |
Forfeited | | (335) | | | 86.16 | | | | | |
Balance, December 31, 2018 | | 17,953 | | $ | 17.33 | | 7.8 | | $ | — |
| | | | | | | | | | |
Exercisable at December 31, 2018 | | 7,504 | | $ | 17.69 | | 7.5 | | $ | — |
| | | | | | | | |
| | Shares | | Weighted
Average
Exercise
Price | | Remaining
Average
Contractual
Term (Years) | | Aggregate
Intrinsic
Value |
| Balance, December 31, 2012 | | | 9,301 | | | $ | 17.79 | | | | 6.5 | | | $ | 261 | |
| Granted | | | 7,533 | | | | 62.52 | | | | | | | | | |
| Forfeited | | | (678 | ) | | | 29.04 | | | | | | | | | |
| Balance, December 31, 2013 | | | 16,156 | | | $ | 33.04 | | | | 7.3 | | | $ | 938 | |
| Granted | | | 1,941 | | | | 100.05 | | | | | | | | | |
| Forfeited | | | (1,870 | ) | | | 60.71 | | | | | | | | | |
| Balance, December 31, 2014 | | | 16,227 | | | $ | 42.81 | | | | 6.9 | | | $ | 389 | |
| Granted | | | — | | | | 0.00 | | | | | | | | | |
| Forfeited | | | (170 | ) | | | 93.68 | | | | | | | | | |
| Balance, December 31, 2015 | | | 16,057 | | | $ | 47.58 | | | | 6.8 | | | $ | — | |
| Exercisable at December 31, 2015 | | | 10,420 | | | $ | 41.59 | | | | 6.6 | | | $ | — | |
The fair value method, estimated by management using the Black-Scholes-Merton option pricing model, is used to recognize compensation cost associated with SARs.
TABLE OF CONTENTS
Lumber Liquidators Holdings, Inc.
Notes to Consolidated Financial Statements
(amounts in thousands, except share data and per share amounts)
Note 8. Income Taxes
The Tax Cuts and Jobs Act (the “Tax Act”) was enacted in the fourth quarter of 2017. The Tax Act reduced the U.S. federal corporate tax rate from 35% to 21%, eliminated the 20‑year limit on the carryforward of losses, and resulted in the Company remeasuring its existing deferred tax balances as of December 31, 2017. Generally, the Tax Act became effective in 2018, and it altered the deductibility of certain items (e.g., certain compensation, interest, entertainment expenses), and allowed qualifying capital expenditures to be deducted fully in the year of purchase. As of December 31, 2018, the Company has completed the analysis of the tax effects of the Tax Act based on guidance issued to-date and has reflected all applicable changes (including, to executive compensation, deductibility of meals and entertainment expenses, and interest expense) in its financial statements. Changes from our original estimates were minimal. The Company continues to monitor developments by federal and state rulemaking authorities regarding implementation of the Tax Act. As further guidance and clarification is issued by the IRS or state tax jurisdictions, the Company will recognize the impact through its provision for income taxes in the period that the guidance becomes effective.
The Company’s deferred tax assets and liabilities are based on the rates at which they are expected to reverse in the future, which is generally 21%. The Company’s valuation allowance is based on the new provisions in the Tax Act including the elimination of the 20‑year net operating loss carryforward, the 80% limitation on the usage of certain net operating losses going forward and the impact of these provisions on the Company’s indefinite-lived deferred tax assets and liabilities. The amount recorded related to the remeasurement of the deferred tax balance and valuation allowance was $8.1 million as of December 31, 2017. The net effect of the Tax Act was a $3.1 million tax benefit recorded in 2017.
The components of incomeLoss before income taxesIncome Taxes were as follows:
| | | | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 |
United States | | $ | (52,473) | | $ | (38,258) | | $ | (92,874) |
Foreign | | | (927) | | | (299) | | | (1,399) |
Total Loss before Income Taxes | | $ | (53,400) | | $ | (38,557) | | $ | (94,273) |
| | | | | | |
| | Year Ended December 31, |
| | | 2015 | | 2014 | | 2013 |
| United States | | $ | (80,136 | ) | | $ | 105,447 | | | $ | 128,482 | |
| Foreign | | | (3,291 | ) | | | (1,864 | ) | | | (2,017 | ) |
| Total Income before Income Taxes | | $ | (83,427 | ) | | $ | 103,583 | | | $ | 126,465 | |
The provisionexpense (benefit) for income taxes consisted of the following:
| | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Year Ended December 31, |
| | | 2015 | | 2014 | | 2013 | | 2018 | | 2017 | | 2016 |
Current
| | | | | | | | | | | | | | | | | | | | | |
| Federal | | $ | (14,088 | ) | | $ | 34,615 | | | $ | 43,159 | | | $ | — | | $ | 2,254 | | $ | (36,801) |
| State | | | (975 | ) | | | 5,614 | | | | 6,637 | | | | 607 | | | 146 | | | (3,269) |
| Foreign | | | 133 | | | | 135 | | | | 120 | | | | 132 | | | 112 | | | 155 |
| Total Current | | | (14,930 | ) | | | 40,364 | | | | 49,916 | | | | 739 | | | 2,512 | | | (39,915) |
| | | | | | | | | | |
Deferred
| | | | | | | | | | | | | | | | | | | | | |
| Federal | | | (9,276 | ) | | | (22 | ) | | | (745 | ) | | | 140 | | | (2,087) | | | 11,184 |
| State | | | (2,788 | ) | | | (130 | ) | | | (101 | ) | | | 100 | | | (1,159) | | | 3,021 |
| Foreign | | | — | | | | — | | | | — | | |
| Total Deferred | | | (12,064 | ) | | | (152 | ) | | | (846 | ) | | | 240 | | | (3,246) | | | 14,205 |
| Total Provision for Income Taxes | | $ | (26,994 | ) | | $ | 40,212 | | | $ | 49,070 | | |
Income Tax Expense (Benefit) | | | $ | 979 | | $ | (734) | | $ | (25,710) |
The reconciliation
Tax expense in the amount of significant differences between$216 was recognized as a component of income tax expense applyingduring 2018 resulting from the federal statutory rateexercise of stock options and the actual incomerelease of restricted shares. Prior to the adoption of Accounting Standards Update No. 2016-09, which amends ASC Topic 718, Compensation – Stock Compensation, in 2017, excess tax expense at the effective rate arebenefits and shortfalls were recognized as follows:adjustments to additional paid-in capital.
| | | | | | | | | | | | | | | |
| Year Ended December 31, | |
| 2018 | | 2017 | | 2016 | |
Income Tax Benefit at Federal Statutory Rate | $ | (11,214) | | 21.0 | % | $ | (13,495) | | 35.0 | % | $ | (32,995) | | 35.0 | % |
| | | | | | | | | | | | | | | |
Increases (Decreases): | | | | | | | | | | | | | | | |
State Income Taxes, Net of Federal Income Tax Benefit | | 723 | | (1.3) | % | | (740) | | 1.9 | % | | (2,275) | | 2.4 | % |
Valuation Allowance | | 3,897 | | (7.3) | % | | 3,826 | | (10.0) | % | | 15,207 | | (16.1) | % |
Foreign Operations | | 132 | | (0.3) | % | | 221 | | (0.5) | % | | (2,465) | | 2.6 | % |
Uncertain Tax Position related to Investigatory Settlements | | 2,919 | | (5.5) | | | — | | — | % | | — | | — | % |
Non-Deductible Fines and Penalties | | 4,011 | | (7.5) | % | | 1,156 | | (3.0) | % | | 875 | | (0.9) | % |
Federal Rate Change | | — | | — | % | | 8,088 | | (21.0) | % | | — | | — | % |
Capital Loss | | — | | — | % | | — | | — | % | | (4,020) | | 4.3 | % |
Other | | 511 | | (0.9) | % | | 210 | | (0.5) | % | | (37) | | — | % |
Income Tax Expense (Benefit) | $ | 979 | | (1.8) | % | $ | (734) | | 1.9 | % | $ | (25,710) | | 27.3 | % |
| | | | | | | | | | | | |
| | Year Ended December 31, |
| | | 2015 | | 2014 | | 2013 |
| Income Tax Expense at Federal Statutory Rate | | $ | (29,200 | ) | | | 35.0 | % | | $ | 36,254 | | | | 35.0 | % | | $ | 44,263 | | | | 35.0 | % |
(Decreases) Increases:
| | | | | | | | | | | | | | | | | | | | | | | | |
| State Income Taxes, Net of Federal Income Tax Benefit | | | (2,401 | ) | | | 2.9 | % | | | 3,711 | | | | 3.6 | % | | | 4,146 | | | | 3.3 | % |
| Valuation Allowance | | | 210 | | | | (0.2 | )% | | | 458 | | | | 0.4 | % | | | 498 | | | | 0.4 | % |
| Foreign Operations | | | 1,075 | | | | (1.3 | )% | | | 329 | | | | 0.3 | % | | | 328 | | | | 0.2 | % |
| Non-deductible penalty | | | 3,887 | | | | (4.7 | )% | | | — | | | | — | % | | | — | | | | — | % |
| Other | | | (565 | ) | | | 0.7 | % | | | (540 | ) | | | (0.5 | )% | | | (165 | ) | | | (0.1 | )% |
| Total | | $ | (26,994 | ) | | | 32.4 | % | | $ | 40,212 | | | | 38.8 | % | | $ | 49,070 | | | | 38.8 | % |
TABLE OF CONTENTS
Lumber Liquidators Holdings, Inc.
Notes to Consolidated Financial Statements
(amounts in thousands, except share data and per share amounts)
Note 8. Income Taxes – (continued)
The tax effects of temporary differences that result in significant portions of the deferred tax accounts based on a 21% federal rate in both 2018 and 2017, are as follows:
| | | | | | |
| | December 31, |
| | 2018 | | 2017 |
Deferred Tax Liabilities: | | | | | | |
Depreciation and Amortization and Other | | $ | (10,672) | | $ | (11,664) |
Total Gross Deferred Tax Liabilities | | | (10,672) | | | (11,664) |
| | | | | | |
Deferred Tax Assets: | | | | | | |
Stock-Based Compensation Expense | | | 2,348 | | | 2,375 |
Legal Settlement Reserves | | | 14,251 | | | 9,120 |
Other Accruals and Reserves | | | 4,811 | | | 5,598 |
Employee Benefits | | | 1,018 | | | 1,745 |
Inventory Reserves | | | 1,896 | | | 1,708 |
Inventory Capitalization | | | 3,492 | | | 2,647 |
Foreign Net Operating Losses | | | 3,153 | | | 2,891 |
Net Operating Loss Carryforwards | | | 2,445 | | | 3,789 |
Capital Loss Carryforwards and Other | | | 2,784 | | | 2,815 |
Total Gross Deferred Tax Assets | | | 36,198 | | | 32,688 |
Less Valuation Allowance | | | (26,318) | | | (21,576) |
Total Net Deferred Tax Assets | | | 9,880 | | | 11,112 |
Net Deferred Tax Liability | | $ | (792) | | $ | (552) |
| | | | |
| | December 31, |
| | | 2015 | | 2014 |
Deferred Tax Liabilities:
| | | | | | | | |
| Prepaid Expenses and Other | | $ | (1 | ) | | $ | (77 | ) |
| Depreciation and Amortization | | | (20,367 | ) | | | (16,900 | ) |
| Total Gross Deferred Tax Liabilities | | | (20,368 | ) | | | (16,977 | ) |
Deferred Tax Assets:
| | | | | | | | |
| Stock-Based Compensation Expense | | | 3,794 | | | | 3,785 | |
| Reserves and Accruals | | | 9,825 | | | | 4,296 | |
| Employee Benefits | | | 1,034 | | | | 15 | |
| Inventory Reserves | | | 10,699 | | | | 1,606 | |
| Inventory Capitalization | | | 4,457 | | | | 5,582 | |
| Foreign Net Operating Losses | | | 2,433 | | | | 2,223 | |
| Other | | | 966 | | | | 37 | |
| Total Gross Deferred Tax Assets | | | 33,208 | | | | 17,544 | |
| Less Valuation Allowance | | | (2,433 | ) | | | (2,223 | ) |
| Total Net Deferred Tax Assets | | | 30,775 | | | | 15,321 | |
| Net Deferred Tax Asset (Liability) | | $ | 10,407 | | | $ | (1,656 | ) |
In both 2015For 2018 and 2014,2017, the CanadianCompany’s U.S. operations were in a cumulative loss position. As such, the Company has recorded a full valuation allowance on theits net deferred tax assets in Canada. For the year ended December 31, 2015, theassets. The valuation allowance increased by $836 primarily as a result of an increase in$4,742 and $3,826 for the Canadian net operating loss that was partially offset by a currency exchange loss of $626.years ended December 31, 2018 and 2017, respectively. In future periods, the allowance could be reduced if sufficient evidence exists indicating that it is more likely than not that a portion or all of these deferred tax assets will be realized.
In both 2018 and 2017, the Company’s Canadian operations were in a cumulative loss position. As such, the Company has recorded a full valuation allowance on the net deferred tax assets in Canada. The valuation allowance increased by $232 and $110 for the years ended December 31, 2018 and 2017, respectively. In future periods, the allowance could be reduced if sufficient evidence exists indicating that it is more likely than not that a portion or all of these deferred tax assets will be realized.
As of December 31, 20152018 and 2014,2017, the Company had U.S. federal net operating loss carryforwards of $11,483 and $5,183, respectively, of which the pre-2018 net operating losses begin to expire in 2037. However, under the 2017 Tax Act net operating losses in years 2018 and future will not expire. As of December 31, 2018 and 2017, respectively, the Company had state net loss carryforwards of $52,230 and $48,247, which begin to expire in 2022. The Company had foreign net operating loss carryforwards of $11,797$12,239 and $8,577,$11,522 at December 31, 2018 and 2017, respectively, which begin to expire in 2030. These net operating losses may be carried forward up to 20 years to offset future taxable income.
The Company madereceived income tax paymentsrefunds (net of $7,855, $33,281payments) of $148, $29,467 and $30,154$27,422 in 2015, 20142018, 2017 and 2013,2016, respectively.
The reconciliation of unrecognized tax benefits was as follows:
| | | | |
| | Year Ended December 31, |
| | | 2015 | | 2014 |
| Balance at beginning of year | | $ | 1,232 | | | $ | 915 | |
| (Decrease) increase based on tax position related to the current year | | | (180 | ) | | | 430 | |
| Increases in tax positions for prior years | | | — | | | | 161 | |
| Decreases in tax positions for prior years | | | (434 | ) | | | — | |
| Settlements | | | (11 | ) | | | — | |
| Lapse of statute | | | (211 | ) | | | (274 | ) |
| Balance at end of year | | $ | 396 | | | $ | 1,232 | |
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Lumber Liquidators Holdings, Inc.
Notes to Consolidated Financial Statements
(amounts in thousands, except share data and per share amounts)
Note 8. Income Taxes – (continued)
As of December 31, 2015,2018 and 2017, the Company had $0.4 million$3,610 and $27, respectively of gross unrecognized tax benefits $0.3 millionrelated to Uncertain Tax Positions ($3,465 and $21, respectively net of which, if recognized, would affect the effectivefederal tax rate.benefit). It is reasonably possible that the amount of the unrecognized tax benefit with respect to certain of the uncertain tax positions will increase or decrease during the next 12 months; however, the Company does not expect the change to have a significant effect on its results of operations, financial position or cash flows. As
A reconciliation of the Company had $1.2 millionbeginning and ending amount of gross unrecognized tax benefits, $0.8excluding interest and penalties, is as follows:
| | | | | | | | |
| Year Ended December 31, |
| 2018 | 2017 | 2016 |
Balance at beginning of year | | 27 | | | 208 | | | 396 |
Increases for tax positions related to current year | | 3,583 | | | — | | | 123 |
Increases for tax positions related to prior years | | — | | | 33 | | | — |
Lapse of statue | | — | | | (208) | | | (311) |
Federal tax rate change | | — | | | (6) | | | — |
Balance at end of year | $ | 3,610 | | $ | 27 | | $ | 208 |
Included in the additions of unrecognized tax benefits in the fiscal year ended December 31, 2018, is approximately $3.6 million for an uncertain tax position related to the deductibility of which, if recognized, would affect the effective tax rate.$33 million settlement related to the governmental investigations.
The Company files income tax returns with the U.S. federal government and various state and foreign jurisdictions. In the normal course of business, the Company is subject to examination by taxing authorities. TheAs of December 31, 2018, the Internal Revenue Service has completed audits of the Company’s federal income tax returns for years through 2009.2016.
Note 9. Profit-sharing401(k) Plan
The Company maintains a profit-sharing plan, qualified under Section 401(k) of the Internal Revenue Code, for all eligible employees. Employees are eligible to participate following the completion of three months of service and attainment of age 21. In 2013, the Company amended theThe plan tois a safe harbor plan, and beganwith company matching contributions of 100% of the first 3% of employee contributions and 50% of the next 2% of employee contributions. Both deferrals and Roth contributions are allowed up to 50% of an employee’s eligible compensation, subject to annual IRS limits. Additionally, employees are now immediately 100% vested in the Company’s matching contributions. Prior to 2013, the Company matched 50% of employee contributions up to 6% of eligible compensation. The Company’s matching contributions, included in SG&A expenses, totaled $2,019, $1,937$2,642, $2,284 and $1,590$2,286 in 2015, 20142018, 2017 and 2013,2016, respectively.
Note 10. Commitments and Contingencies
Government
The Company has been actively resolving various legal and other matters that have arisen in recent years. Certain other matters remain outstanding. More detailed discussion of many of the matters noted below are included in this Form 10‑K under the caption “Item 3 Legal Proceedings.”
2018, 2017 and 2016 Settlements and Resolutions
During 2018, 2017 and 2016, the Company recorded accruals in accordance with GAAP related to several legal matters. These include:
2018 | 2017 | 2016 |
Governmental Investigations | Formaldehyde-Abrasion MDLs | Lacey Act Related Matter |
Litigation Related to Bamboo | | California Air Resources Board |
| | CPSC Matter |
| | Securities Class Action |
| | Derivative Litigation Matters |
Governmental Investigations
Lacey Act Related Matters
On September 26, 2013, sealed search warrants were executedIn 2015 and early 2016, the Company received subpoenas issued in connection with a criminal investigation being conducted by the DOJ and the SEC. The focus of the investigations primarily related to compliance with disclosure, financial reporting and trading requirements under the federal securities laws. The Company cooperated with the investigations, produced documents and other information responsive to subpoenas and other requests
received from the parties. Subsequent to year end, the Company reached an agreement with the U.S. Attorney, the DOJ and SEC regarding the investigation. The Company has entered into a DPA with the U.S. Attorney and the DOJ and a Cease-and-Desist Order with the SEC, under which it is required, among other things, to (1) pay a fine in the amount of $19,095,648 to the United States Treasury, (2) forfeit to the U.S. Attorney and the DOJ the sum of $13,904,352, of which up to $6,097,298 will be submitted by the Company to the SEC in disgorgement and prejudgment interest under the Order and (3) adopt a new compliance program, or modify its existing one, including internal controls, compliance policies, and procedures in order to ensure that the Company maintains an effective system of internal account controls designed to ensure the making and keeping of fair and accurate books, records and accounts, as well as a compliance program designed to prevent and detect violations of certain federal securities laws throughout its operations.
The Agreements also provide that the Company will continue to cooperate with the U.S. Attorney, the DOJ and the SEC in all matters relating to the conduct described in the Agreements and, at the request of the U.S. Attorney, the DOJ or the SEC, the Company will cooperate fully with other domestic or foreign law enforcement authorities and agencies in any investigation of the Company in any and all matters relating to the Agreements. In the event the Company breaches the DPA, there is a risk the government would seek to impose remedies provided for in the DPA, including instituting criminal prosecution against the Company.
The Company has accrued the fines in Selling, General, and Administrative expense in 2018, with $33 million recorded in Accrual for Legal Matters and Settlements Current in its Consolidated Balance Sheet.
Litigation Relating to Bamboo Flooring
In 2014, Dana Gold (“Gold”) filed a purported class action lawsuit alleging that certain bamboo flooring that the Company sells (the “Strand Bamboo Product”) is defective (the “Gold Litigation”). The plaintiffs sought financial damages and, in addition to attorneys’ fees and costs, the plaintiffs wanted a declaration that the Company’s corporate officesactions violated the law. The trial was scheduled to begin in Toanolate February 2019.
Following settlement discussions with the respect to the Gold Litigation, on March 15, 2019, the Company entered into a Memorandum of Understanding with Gold and Richmond, Virginiacertain other lead plaintiffs in the Gold Litigation (the “MOU”), which would resolve all disputes on a nationwide basis. Under the terms of the MOU, the Company will contribute $14 million in cash and provide $14 million in store-credit vouchers, with a potential additional $2 million in store-credit vouchers based on obtaining a claim’s percentage of more than 7%, for an aggregate settlement of up to $30 million. The MOU is subject to certain contingencies, including the execution of a definitive settlement agreement, board approval, and court approvals of the definitive settlement agreement. The entry into the MOU or any subsequent execution of a definitive settlement agreement does not constitute an admission by the DepartmentCompany of Homeland Security’s Immigration and Customs Enforcementany fault or liability and the U.S. FishCompany does not admit any fault or liability. There can be no assurance that a settlement will be finalized and Wildlife Service.approved or as to the ultimate outcome of the litigation. If a final, court-approved settlement is not reached, the Company will defend the matter vigorously and believes there are meritorious defenses and legal standards that must be met for, among other things, success on the merits. The search warrants requested information, primarily documentation,Company has accrued within SG&A a $28 million liability in 2018 with the offset in the caption “Other Current Liabilities”. The Company has notified its insurance carriers and continues to pursue coverage. As the insurance claim is still pending, the Company has not recognized any insurance recovery related to the importationGold Litigation.
In addition, there are a number of certainother claims and lawsuits alleging damages similar to those in the Gold Litigation. The Company disputes these claims and intends to defend such matters vigorously. Given the uncertainty of litigation, the preliminary stage of the cases, and the legal standards that must be met for success on the merits, the Company is unable to estimate the amount of loss, or range of possible loss, at this time that may result from these actions. Accordingly, no accruals have been made with respect to these matters. Any such losses could, potentially, have a material adverse effect, individually or collectively, on the Company’s woodresults of operations, financial condition, and liquidity.
Litigation Relating to Chinese Laminates
Formaldehyde-Abrasion MDLs
On March 15, 2018, the Company entered into a settlement agreement with the lead plaintiffs in the Formaldehyde MDL (as defined in Item 3 of this Form 10-K) and Abrasion MDL (as defined in Item 3 of this Form 10-K), cases more fully described in Item 3 of this Annual Report on Form 10-K. Under the terms of the settlement agreement, the Company agreed to fund $22 million in cash and provide $14 million in store-credit vouchers for an aggregate settlement of $36 million to settle claims brought on behalf of purchasers of Chinese-made laminate flooring productssold 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 Lacey Act. Since then, the Company cooperated with the federal authorities, including the Department of Justice (“DOJ”), in their investigation.
On October 7, 2015, Lumber Liquidators, Inc. (“LLI”) reached a settlement with the DOJ in connection with this investigation. Under the terms of a Plea Agreement with the DOJ (the “Plea Agreement”) executed on October 7, 2015, LLI agreed to plead guilty to one felony count for entry of goods by means of false statements and four misdemeanor due care counts under the Lacey Act. These violations do not require LLI to have acted with a deliberate or willful intent to violate the law, and LLI did not stipulate that it acted with such deliberate or willful intent. As part of the settlement, LLI agreed to pay a combined total of $10,000 in fines, community service payments and forfeited proceeds.final settlement. The payments include a $7,800 fine, community service contributions of $880 and $350 to the National Fish and Wildlife Foundation and the Rhinoceros and Tiger Conservation fund, respectively, and a $969 forfeiture payment. The Company had previously recorded this amount in SG&A expenses in the first quarter of 2015. At December 31, 2015, $6,200 was included in current liabilities and $3,800 was included in other long-term liabilities on the accompanying consolidated balance sheet. The Company paid $6,200 of the settlement amount in the first quarter of 2016, and the Company expects to pay $2,000 in the first quarter of 2017 and $1,800 in the first quarter of 2018.
LLI also agreed in the Plea Agreement to implement an environmental compliance plan (the “Compliance Plan”) for a probation period of five years. If LLI fails to implement the Compliance Plan within three months of sentencing, the government may require the Company to cease the importation of
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Lumber Liquidators Holdings, Inc.
Notes to Consolidated Financial Statements
(amounts in thousands, except share data and per share amounts)
Note 10. Commitments and Contingencies – (continued)
hardwood flooring from China until the DOJ determines that the Compliance Plan has been satisfactorily implemented. During the first four years, LLI has agreed to engage an outside consulting firm to conduct audits of compliance with the Compliance Plan and certain requirements of the Lacey Act.
The Company has agreed to guarantee all payments and performance due from LLI, including but not limited to payments for fines, community service, forfeited proceeds and special assessments and the performance of LLI’s obligations under and compliance with the Compliance Plan and related audits.
In addition, as part of its internal compliance review procedures in the second quarter of 2015, the Company determined that there were Lacey Act compliance concerns related to a limited amount of its engineered hardwood flooring. As a result, the Company suspended sales of approximately $4,069 of this product pending further investigation, and brought this matter to the attention of the DOJ. During the investigation, the Company determined that there were no compliance concerns with respect to approximately $914 of the suspended engineered hardwood flooring. In connection with the Plea Agreement with the DOJ, the Company also reached a settlement with the DOJ related to the remaining $3,155 of suspended engineered hardwood flooring. Pursuant to a Complaint for ForfeitureIn Rem and a Stipulation for Settlement and Joint Motion for Entry of Consent Order of Forfeiture (the “Consent”), the DOJ agreed to accept a $3,155 payment in lieu of a civil forfeiture of this product. The Company previously recorded this amount in SG&A expenses in the second quarter of 2015. The Company paid this amount in October 2015 pending entry of the Consent and, pursuant to a motion granted, is now permitted to sell the suspended engineered hardwood flooring and retain any proceeds of the sale. The Consent was entered by the court on January 7, 2016, and final judgment was entered on January 8, 2016.
The Plea Agreement was approvedapproval 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 consolidated financial statements. To date, insurers have denied coverage with respect to the Formaldehyde MDL and Abrasion MDL. The $36 million aggregate settlement amount was accrued within Selling, General and Administrative 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 2018, while some remain in settlement negotiations. The Company recognized charges to earnings of $3 million and $1 million for the years ended December 31, 2018 and 2017, respectively, within selling, general and administrative expenses for these Remaining Laminate Matters. As of December 31, 2018 the remaining accrual related to these matters is $1.0 million, which has been included in the Accrual for Legal Settlements on the Consolidated Balance Sheet. While the Company believes that a further loss associated with the Opt Outs and Related Laminate Matters is reasonably possible, the Company is unable to reasonably estimate the amount or range of possible loss beyond what has been provided. If the Company incurs losses with the respect to the Opt Outs or further losses with respect to Related Laminate Matters, the ultimate resolution of these actions could have a material adverse effect on the Company’s results of operations, financial condition, and liquidity.
Canadian Litigation
On or about April 1, 2015, Sarah Steele (“Steele”) filed a purported class action lawsuit in the Ontario, Canada Superior Court of Justice against the Company. In the complaint, Steele’s allegations include strict liability, breach of implied warranty of fitness for a particular purpose, breach of implied warranty of merchantability, fraud by concealment, civil negligence, negligent misrepresentation and breach of implied covenant of good faith and fair dealing. Steele did not quantify any alleged damages in her complaint, but seeks compensatory damages, punitive, exemplary and aggravated damages, statutory remedies, attorneys’ fees and costs. While the Company believes that a loss associated with the Steele litigation is possible, the Company is unable to reasonably estimate the amount or range of possible loss.
Lacey Act Related Matters
OnOctober 22, 2015. A sentencing hearing was held on February 1, 20167, 2015, the Company reached a settlement with the Department of Justice (DOJ) with respect to its allegations of violations of the Lacey Act in its importation of certain wood flooring products and the court entered a final
judgment on February 3, 2016. In connection with this settlement the Company agreed to pay a total of $10 million in fines, community service payments and forfeited proceeds and is subject to a five-year probation period and implemented the Lacey Compliance Plan. The termsCompany has paid the settlement amount including the remaining $1.8 million in the first quarter of 2018. In addition, the final judgment are consistentCompany reached a settlement with the Plea Agreement.
Securities Laws
In March 2015,DOJ and paid $3.2 million with respect to certain engineered hardwood flooring determined by the Company received a grand jury subpoena issued in connection with a criminal investigation being conducted by the U.S. Attorney’s Office for the Eastern District of Virginia (the “U.S. Attorney”). In addition, on May 19, 2015 and July 13, 2015, the Company received subpoenas from the New York Regional Office of the SEC in connection with an inquiry by the SEC staff. Based on the subpoenas, the Company believes the focus of both the U.S. Attorney investigation and SEC investigation primarily relate to have Lacey Act compliance with disclosure, financial reporting and trading requirements under the securities laws since 2011. The Company is fully cooperating with the U.S. Attorney’s subpoena, the SEC’s subpoenas and the related investigations by the U.S. Attorney and SEC staff. Given that the investigation by the U.S. Attorney and SEC staff are still ongoing, the Company cannot estimate the reasonably possible loss or range of loss that may result from this matter.concerns.
California Air Resources Board
TheIn March 2016, the Company believes thatentered into a settlement agreement with the California Air Resources Board (“CARB”) is regularly looking at the entire industry to ensure compliance with its emissions standards. While conducting routine inspections of the Company’s products, CARB has performed “deconstructive” testing on its products as well as, the Company believes, products from others in the industry. In CARB’s preliminary findings, some of the samples of the Company’s finished product that CARB deconstructed and tested exceeded the CARB limits for raw composite wood cores. This could occur for numerous reasons, including one or more of the variability factors associated with this type of testing. In May 2015, CARB notified the Company that additional samples of finished products were obtained in 2014, some of which, based on deconstructive testing, exceeded the CARB limits for raw composite wood cores. CARB has further informed the Company that it has performed
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Lumber Liquidators Holdings, Inc.
Notes to Consolidated Financial Statements
(amounts in thousands, except share data and per share amounts)
Note 10. Commitments and Contingencies – (continued)
additional deconstructive testing on certain finished products it obtained in March 2015, with certain of the samples of the Company’s products exceeding the CARB limits for raw composite wood cores.
The Company has been fully cooperative with CARB as CARB continues to work on this matter by, among other things, providing CARB with requested information related to the products CARB tested and removing laminate flooring sourced from China from its stores in California. Based on discussions with CARB, the Company’s best estimate of the probable loss that may result from this matter is approximately $1,500, which the Company recorded in other current liabilities and selling, general and administrative expenses in the fourth quarter of 2015. The Company believes that there is at least a reasonable possibility that a loss greater than the amount accrued may be incurred, but the Company is unable to estimate the amount at this time.
Securities Litigation Matter
On or about November 26, 2013, Gregg Kiken (“Kiken”) filed a securities class action lawsuit (the “Kiken Lawsuit”), which was subsequently amended, in the United States District Court for the Eastern Districtdid not constitute an admission of Virginia against the Company, its founder, former Chief Executive Officer and President, former Chief Financial Officer and former Chief Merchandising Officer (collectively, the “Kiken Defendants”). On or about September 17, 2014, the City of Hallandale Beach Police Officers’ and Firefighters’ Personnel Retirement Trust (“Hallandale”) filed a securities class action lawsuit (the “Hallandale Lawsuit”) in the United States District Court for the Eastern District of Virginia against the Company, its former Chief Executive Officer and President and its former Chief Financial Officer (collectively, the “Hallandale Defendants,” and with the Kiken Defendants, the “Defendants”). On March 23, 2015, the court consolidated the Kiken Lawsuit with the Hallandale Lawsuit, appointed lead plaintiffs and lead counsel for the consolidated action, and captioned the consolidated action asIn re Lumber Liquidators Holdings, Inc. Securities Litigation.
The lead plaintiffs filed a consolidated amended complaint on April 22, 2015. The consolidated amended complaint alleges that the Defendants made material false and/or misleading statements that caused losses to investors. In particular, the lead plaintiffs allege that the Defendants made material misstatements or omissions related to their compliance with the l Lacey Act, the chemical content of certain of their wood products, and their supply chain and inventory position. The lead plaintiffs do not quantify any alleged damages in their consolidated amended complaint but, in addition to attorneys’ fees and costs, they seek to recover damages on behalf of themselves and other persons who purchased or otherwise acquired the Company’s stock during the putative class period at allegedly inflated prices and purportedly suffered financial harm as a result. The Defendants moved to dismiss the consolidated amended complaint but, on December 21, 2015, the court denied this motion. The Company disputes these claims and intends to defend the matter vigorously. Given the uncertainty of litigation, the current status 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 that may result from this action.
NW Bamboo Matter
On February 27, 2014, NW Bamboo Trim, Inc. (“NWBT”) filed suit in the Circuit Court of the City of Richmond, Virginia againstwrongdoing by the Company and a supplier of bamboo trim products (the “Supplier”). In its complaint, NWBT allegesprovided that (i)CARB release the Company breached a contract with NWBT by not purchasingfrom any and all claims that CARB may have had related to certain products from NWBT, (ii) the Company tortiously interfered with NWBT’s relationship with the Supplier, and (iii) the Company and the Supplier conspired to harm NWBT’s business. The Company filed a motion seeking to dismiss the claims, which was granted as it pertained to the breach of contract claim. The case then proceeded on the two remaining causes of action.
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Lumber Liquidators Holdings, Inc.
Notes to Consolidated Financial Statements
(amounts in thousands, except share data and per share amounts)
Note 10. Commitments and Contingencies – (continued)
On October 12, 2015, as part of its required discovery disclosures, NWBT identified a valuationlaminate products imported from China. Under the terms of its business of approximately $2,800 as the basis for its compensatory damages claim. Subsequently, the Company filed a motion for summary judgment seeking dismissal of NWBT’s case. On December 21, 2015, the Court granted the Company’s motion for summary judgment and dismissed the two remaining causes of action in NWBT’s complaint. On January 20, 2016, NWBT filed a notice of appeal in connection with the trial court’s dismissal of NWBT’s case.
In light of the trial court’s ruling and the Company’s views regarding the merits of NWBT’s appeal, the likelihood of a material loss in connection with this matter is now remote.
TCPA Matter
On or about March 4, 2014, Richard Wade Architects, P.C. (“RWA”) filed a lawsuit in the United States District Court for the Northern District of Illinois (the “RWA Lawsuit”), which was subsequently amended, alleging that the Company violated the Telephone Consumer Protection Act (“TCPA”), the Illinois Consumer Fraud Act and the common law by sending an unsolicited facsimile advertisement to RWA and a proposed class. RWA sought recourse on its own behalf as well as other similarly situated parties who are members of the proposed class that received unsolicited facsimile advertisements from the Company. The TCPA provides for recovery of actual damages or five hundred dollars for each violation, whichever is greater. If it is determined that a defendant acted willfully or knowingly in violating the TCPA, the amount of the award may be increased by up to three times the amount provided above.
Although the Company believed it had valid defenses to the claims asserted, it entered into a settlement of the claims in the RWA Lawsuit. On September 3, 2015, the Court entered an order granting final approval to the settlement and certifying a settlement class. Under the settlement agreement, the Company paid a total of $300$2.5 million. Additionally, the Company agreed to implement certain voluntary measures, including a risk-based supplier audit program and testing research program.
Consumer Product Safety Commission Matter
On June 15, 2016, the plaintiffs’ attorneys’ fees, class noticeCompany entered into an agreement with the Office of Compliance and administration costs, a sum to RWA and cash payments to membersField Operations of the settlement class who file valid claims.Consumer Product Safety Commission (“CPSC”) with respect to its laminate products sourced from China. The settlement amount was accrued in 2014agreement marked the completion of the CPSC’s evaluation of the safety of those products and was paid intodid not constitute an escrow fund on August 18, 2015. The settlement payment was released to class counsel on October 16, 2015 after the final approval order became a final and non-appealable order. Settlement payments to class members who submitted claims have now been issuedadmission of wrongdoing by the claims administrator,Company. Under the terms of the agreement, the Company has continued to offer an indoor air quality testing program to its customers at no cost. The CPSC ceased its monitoring of the Company’s program in July of 2017.
Securities Class Action
On November 17, 2016, the Company received final court approval of the Securities Class Action Stipulation. As a result of the Securities Class Action Stipulation, the Company, through its insurers and in conjunction with the settlement of the Derivative Class Action Settlement described below, contributed $26 million to a final accountingsettlement fund that will be used to compensate individuals who purchased the Company’s shares of common stock between February 22, 2012 and February 27, 2015. Additionally, the Company issued 1 million shares of its common stock to the settlement fund to be filed with the court by March 4, 2016.
Prop 65 Matter
On or about July 23, 2014, Global Community Monitor and Sunshine Park LLC (together, the “Prop 65 Plaintiffs”) filed a lawsuit, which was subsequently amended,on November 17, 2016, valued at $16.8 million in the Superior Courtaggregate based on the closing price of the Stateshares at that date.
Derivative Litigation Matters
On November 17, 2016, the Company received final court approval the Consolidated Derivative Stipulation. As a result of the Consolidated Derivative Stipulation, the Company implemented certain corporate governance changes, received a $26 million insurance payment (which the Company used to fully fund the securities class action settlement summarized above), and paid additional net expenses of $2.5 million related to the derivative class action settlement.
Employee Classification Matter
During the second half of 2017, current and former store managers, filed purported class action lawsuits in New York and California Countyon behalf of Alameda, againstall current and former store managers, store managers in training, installation sales managers, and similarly situated current and former employees holding comparable positions but different titles (collectively, the Company. In the amended complaint, the Prop 65 Plaintiffs allege“Putative Class Employees”), alleging that the Company violated California’s Safe Drinking Waterthe Fair Labor Standards Act and Toxic Enforcement Act of 1986, Health and Safety Code section 25249.5, et seq. (“Proposition 65”).certain state laws by classifying the Putative Class Employees as exempt. In particular,both cases the Prop 65 Plaintiffs allege that the Company failed to warn consumers in California that certain of the Company’s products (collectively, the “Products”) emit formaldehyde in excess of the applicable safe harbor limits. The Prop 65 Plaintiffsplaintiffs did not quantify any alleged damages in their amended complaint but, in addition to attorneys’ fees and costs, the Prop 65 Plaintiffsplaintiffs seek (i) equitableclass certification, unspecified amount for unpaid wages and overtime wages, liquidated and/or punitive damages, declaratory relief, involving the reformulation of the Products, additional warnings related to the Products, the issuance of notices to certain of the purchasers of the Products (the “Customers”)restitution, statutory penalties, injunctive relief and the waiver of restocking fees for Customers who return the Products and (ii) civil penalties in the amount of two thousand five hundred dollars per day for each violation of Proposition 65.
other damages. The Company disputes the claims of the Prop 65 Plaintiffs and intends to defend the matter vigorously. The Company’s best estimate of the probable loss that may result from this action is approximately $900, which was accrued in the fourth quarter of 2015. The Company believes that there is at least a reasonable possibility that a loss may differ from the amount accrued, but it is unable to estimate the amount at this time.
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Lumber Liquidators Holdings, Inc.
Notes to Consolidated Financial Statements
(amounts in thousands, except share data and per share amounts)
Note 10. Commitments and Contingencies – (continued)
Gold Matter
On or about December 8, 2014, Dana Gold (“Gold”) filed a purported class action lawsuit in the United States District Court for the Northern District of California alleging that the Morning Star bamboo flooring (the “Bamboo Product”) that the Company sells is defective. On February 13, 2015, Gold filed an amended complaint that added three additional plaintiffs (collectively with Gold, “Gold Plaintiffs”). The Company moved to dismiss the amended complaint. After holding a hearing and taking the motion under submission, the court dismissed most of Gold Plaintiffs’ claims but allowed certain omission-based claims to proceed. Gold Plaintiffs filed a Second Amended Complaint on December 16, 2015, and then a Third Amended Complaint on January 20, 2016. In the Third Amended Complaint, Gold Plaintiffs allege that the Company has engaged in unfair business practices and unfair competition by falsely representing the quality and characteristics of the Bamboo Product and by concealing the Bamboo Product’s defective nature. Gold Plaintiffs seek the certification of a class of individuals in the United States who purchased the Bamboo Product, as well as 7 state subclasses of individuals who are residents of California, New York, Illinois, West Virginia, Minnesota, Pennsylvania, and Florida, respectively, and purchased the Bamboo Product for personal, family, or household use. Gold Plaintiffs did not quantify any alleged damages in their complaint but, in addition to attorneys’ fees and costs, Gold Plaintiffs seek (i) a declaration that the Company’s actions violate the law and that the Company is financially responsible for notifying all purported class members, (ii) injunctive relief requiring the Company to replace and/or repair all of the Bamboo Product installed in structures owned by the purported class members, and (iii) a declaration that the Company must disgorge, for the benefit of the purported classes, all or part of its profits received from the sale of the allegedly defective Bamboo Product and/or to make full restitution to Gold Plaintiffs and the purported class members.
The Company filed its answer to the Third Amended Complaint on February 3, 2016, and discovery in the matter is now proceeding. The Company disputes the Gold Plaintiffs’ claims and intends to defend the matterboth matters vigorously. Given the uncertainty of litigation, the preliminary stage of the case and the legal standards that must be met for, among other things, class certification and success on the merits, the Company cannotis unable to estimate the reasonably possibleamount of loss, or range of loss that may result from this action.
Litigation Relating to Products Liability
Beginning on or about March 3, 2015, numerous purported class action cases were filed in various U.S. federal district courts and state courts involving claims of excessive formaldehyde emissions from the Company’s flooring products (collectively, the “Products Liability Cases”). The plaintiffs in these various actions sought recovery under a variety of theories, which although not identical are generally similar, including negligence, breach of warranty, state consumer protection act violations, state unfair competition act violations, state deceptive trade practices act violations, false advertising, fraudulent concealment, negligent misrepresentation, failure to warn, unjust enrichment and similar claims. The purported classes consisted either or both of all U.S. consumers or state consumers that purchased the subject products in certain time periods. The plaintiffs also sought various forms of declaratory and injunctive relief and various damages, including restitution, actual, compensatory, consequential, and, in certain cases, punitive damages, and interest, costs, and attorneys’ fees incurred by the plaintiffs and other purported class members in connection with the alleged claims, and orders certifying the actions as class actions. Plaintiffs had not quantified damages sought from the Company in these class actions.
On June 12, 2015, United States Judicial Panel on Multi District Litigation (the “MDL Panel”) issued an order transferring and consolidating 10 of the related federal class actions to the United States District Court for the Eastern District of Virginia (the “Virginia Court”). In a series of subsequent conditional transfer orders, the MDL Panel has transferred the other cases to the Virginia Court. The Company continues to seek to have any newly filed cases transferred and consolidated in the Virginia Court and ultimately, the Company expects all federal class actions involving formaldehyde allegations, including any newly filed cases, to be
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Lumber Liquidators Holdings, Inc.
Notes to Consolidated Financial Statements
(amounts in thousands, except share data and per share amounts)
Note 10. Commitments and Contingencies – (continued)
transferred and consolidated in the Virginia Court. The consolidated case in the Virginia Court is captionedIn re: Lumber Liquidators Chinese-Manufactured Flooring Products Marketing, Sales, Practices and Products Liability Litigation.
Pursuant to court order, plaintiffs filed a Representative Class Action Complaint in the Virginia Court on September 11, 2015. The complaint challenged the Company’s labeling of its flooring products and asserted claims under California, New York, Illinois, Florida and Texas law for fraudulent concealment, violation of consumer protection statutes, negligent misrepresentation and declaratory relief, as well as a claim for breach of implied warranty under California law. Thereafter, on September 18, 2015, plaintiffs filed the First Amended Representative Class Action Complaint (“FARC”) in which they added implied warranty claims under New York, Illinois, Florida and Texas law, as well as a federal warranty claim. The Company filed a motion to dismiss and answered the FARC. The Virginia Court granted the motion as to claims for negligent misrepresentation filed on behalf of certain plaintiffs, deferred as to class action allegations, and otherwise denied the motion. The Company also filed a motion to strike nationwide class allegations and a motion to strike all claims of personal injury made in class action complaints, on which the Virginia court has not yet ruled. Discovery is now proceeding in this matter.
In addition, 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 (i) strict liability, (ii) breach of implied warranty of fitness for a particular purpose, (iii) breach of implied warranty of merchantability, (iv) fraud by concealment, (v) civil negligence, (vi) negligent misrepresentation, and (vii) breach of implied covenant of good faith and fair dealing. Steele did not quantify any alleged damages in her complaint but, in addition to attorneys’ fees and costs, Steele seeks (i) compensatory damages, (ii) punitive, exemplary and aggravated damages, and (iii) statutory remedies related to the Company’s breach of various laws including the Sales of Goods Act, the Consumer Protection Act, the Competition Act, the Consumer Packaging and Labelling Act and the Canada Consumer Product Safety Act.
The Company disputes the plaintiffs’ claims and intends to defend these matters vigorously. Given the uncertainty of litigation, the preliminary stage of these cases 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 lossat this time that may result from these actions.
In connection Accordingly, no accruals have been made with the Products Liability Cases,respect to these matters. Any such losses could potentially have a material adverse effect, individually or collectively, on April 22, 2015, five of the Company’s generalresults of operations, financial condition, and umbrella liability insurers brought an action in the United States District Court for the Eastern District of Virginia, (the “Virginia Action”). Through the Virginia Action, these insurers sought a declaratory judgment that they were not obligated to defend or indemnify the Company in connection with the lawsuits asserted against the Company arising out of its sale of laminate flooring sourced from China. One insurer also asserted a claim seeking reformation of one policy to include a “total pollution exclusion” endorsement, contending that it was omitted from that policy as the result of a mutual mistake.liquidity.
On April 27, 2015, the Company filed a similar but more comprehensive action against nine of its general, umbrella and excess insurers (including the five Plaintiffs in the Virginia Action) in the Circuit Court for Dane County, Wisconsin (where four of the insurers are domiciled) (the “Wisconsin Action”). In the Wisconsin Action, the Company asserted breach of contract claims against its general liability insurers, alleging that these insurers had wrongfully failed to defend the Company in connection with the Chinese-manufactured laminate flooring claims. The Company also asserted breach of contract and bad faith claims against two of its general liability insurers, arising out of the manner in which those insurers computed retrospective premiums under their policies in connection with the Chinese-manufactured laminate flooring lawsuits. Finally, the Company sought declaratory relief from the court as to its rights and the insurers’ responsibilities under their policies.
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Lumber Liquidators Holdings, Inc.
Notes to Consolidated Financial Statements
(amounts in thousands, except share data and per share amounts)
Note 10. Commitments and Contingencies – (continued)
The Company moved to dismiss the Virginia Action, contending that the federal court should abstain from deciding the case in favor of the more comprehensive state-court Wisconsin Action. Thereafter, the four insurers who were not plaintiffs in the Virginia Action have filed motions to intervene as plaintiffs in the Virginia Action, in an effort to make the Virginia Action “as comprehensive” as the Wisconsin Action. The Company has opposed the motions to intervene. By order dated September 4, 2015, the court largely denied the Company’s motion to dismiss, allowing the Virginia Action to proceed. While the court dismissed the reformation claim without prejudice, as pled with insufficient specificity, the court granted leave to amend, and an amended complaint was filed on September 15, 2015. On October 2, 2015, the Company stipulated to entry of judgment on the reformation claim, and moved to dismiss the remaining claims in favor of proceeding in Wisconsin.
The defendant-insurers in the Wisconsin Action have filed motions to dismiss or stay the Wisconsin Action in favor of the Virginia Action. The defendants in the Wisconsin Action have also moved for protective orders seeking to forestall their obligation to respond to discovery requests that the Company promulgated in the Wisconsin Action.
On February 1, 2016, the Wisconsin court stayed the Wisconsin Action in favor of the proceedings in Virginia. On February 5, 2016, the Company moved for reconsideration and that motion remains pending.
On February 9, 2016, the Virginia court denied its motion to dismiss. The Virginia court also granted the remaining insurers’ motion to intervene, but stayed proceedings on their excess and umbrella insurance policies pending resolution of the primary insurers’ claims.
Litigation Relating to Abrasion Claims
On May 20, 2015, a purported class action titledAbad v. Lumber Liquidators, Inc. was filed in the United States District Court for the Central District of California and two amended complaints were subsequently filed. In the Second Amended Complaint (“SAC”), the plaintiffs (collectively, the “Abrasion Plaintiffs”) seek to certify a national class composed of “All Persons in the United States who purchased Defendant’s Dream Home brand laminate flooring products from Defendant for personal use in their homes,” or, in the alternative, 32 statewide classes from California, North Carolina, Texas, New Jersey, Florida, Nevada, Connecticut, Iowa, Minnesota, Nebraska, Georgia, Maryland, Massachusetts, New York, West Virginia, Kansas, Kentucky, Mississippi, Pennsylvania, South Carolina, Tennessee, Virginia, Washington, Maine, Michigan, Missouri, Ohio, Oklahoma, Wisconsin, Indiana, Illinois and Louisiana. The SAC alleges violations of each of these states’ consumer protections statutes and the federal Magnuson-Moss Warranty Act, as well as breach of implied warranty and fraudulent concealment. The Abrasion Plaintiffs did not quantify any alleged damages in the SAC but, in addition to attorneys’ fees and costs, seek an order certifying the action as a class action, an order adopting the Abrasion Plaintiffs’ class definitions and finding that the Abrasion Plaintiffs are their proper representatives, an order appointing their counsel as class counsel, injunctive relief prohibiting the Company from continuing to advertise and/or sell laminate flooring products with false abrasion class ratings, restitution of all monies it received from the Abrasion Plaintiffs and class members, damages (actual, compensatory, and consequential) and punitive damages.
The Company filed a motion to dismiss the SAC and the Abrasion Plaintiffs filed a motion for leave to file a corrected SAC. The Company’s motion was subsequently granted in part and denied in part. The court also denied the Abrasion Plaintiffs’ motion for leave to file a corrected SAC. The Abrasion Plaintiffs have until March 1, 2016, to file a Third Amended Complaint. The Company disputes the Abrasion Plaintiffs’ claims and intends to defend these matters vigorously. Given the uncertainty of litigation, the preliminary stage of these cases, 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 that may result from these actions.
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Notes to Consolidated Financial Statements
(amounts in thousands, except share data and per share amounts)
Note 10. Commitments and Contingencies – (continued)
Morris Matter
On or about August 18, 2015, Kevin Morris (“Morris”) filed a purported class action lawsuit in the Circuit Court of the Twentieth Judicial Circuit in St. Clair County, Illinois alleging that the Casa de Colour Collection by Dura-Wood flooring (the “Morris Product”), a brand of solid wood flooring sold by the Company, is defective due to warping, cupping and buckling. Morris alleges that the Company has engaged in unfair business practices and unfair competition by falsely representing the quality and characteristics of the Morris Product and by concealing the Morris Product’s defective nature. In particular, Morris’s allegations include (i) common law fraud, (ii) breach of implied warranty, (iii) breach of express warranty, (iv) breach of contract, (v) breach of duty of good faith and fair dealing, (vi) violation of the Illinois Consumer Fraud and Deceptive Business Practices Act (the “ICFA”) and (vii) violation of the Uniform Deceptive Trade Practices Act (the “UDTPA”). Morris did not quantify any alleged damages in his complaint but, in addition to attorneys’ fees and costs, Morris seeks (i) certification of the purposed class, (ii) injunctive relief requiring the Company to replace and/or repair all Morris Products installed in structures owned by the purported class, (iii) an award of compensatory, consequential and statutory damages, pre-judgment interest and post-judgment interest, (iv) a declaration that the Company must disgorge, for the benefit of the purported class, all or part of the Company’s profits received from the sale of the Morris Product and/or to make full restitution to Morris and the purported class, (v) a judgment for actual damages for injuries suffered by Morris and the purported class as a result of the Company’s violation of the ICFA and (vi) a judgment awarding Morris and the purported class reasonable attorneys’ fees and costs in accordance with the UDTPA. On September 25, 2015, the Company removed the action to the United States District Court for the Southern District of Illinois. Subsequently, the Company filed a motion to dismiss. Morris failed to respond to the motion and, as a result, the lawsuit was dismissed without prejudice on November 10, 2015.
Ross Matter
On or about February 23, 2016, Joseph Ross and Linda Ross (collectively, “Ross”) filed a purported class action lawsuit in the Second Judicial District Court, State of Nevada, County of Washoe. Ross seeks the certification of a class of individuals in the State of Nevada who purchased certain hardwood flooring products produced in China (the “Ross Products”). Ross alleges that the Ross Products are defective due to the Ross Products being contaminated with certain wood-boring insects. In particular, Ross’s allegations include (i) breach of warranty, (ii) negligence, (iii) strict liability, (iv) negligent misrepresentation, (v) willful misconduct, and (vi) unjust enrichment. In the complaint, Ross seeks (i) general and special damages according to proof in excess of $50,000, (ii) attorneys’ fees and costs according to proof, (iii) prejudgment and post-judgment interest on all sums awarded, according to proof at the maximum legal rate, (iv) costs of the lawsuit incurred, (v) restitution as authorized by law, (vi) punitive damages as authorized by law, and (vii) specific performance under our express warranties. The Company disputes Ross’s 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 that may result from this action.
Derivative Litigation Matters
Consolidated Cases
On or about March 11, 2015, R. Andre Klein (“Klein”) filed a shareholder derivative suit in the United States District Court for the Eastern District of Virginia against the Company’s directors at that time, as well as its Senior Vice President, Supply Chain, former Chief Merchandising Officer and former Chief Financial Officer (collectively, the “Klein Defendants”). On or about April 1, 2015, Phuc Doan (“Doan”) filed a shareholder derivative suit in the United States District Court for the Eastern District of Virginia against the Company’s directors at that time, as well as its Senior Vice President, Supply Chain, former Chief Merchandising Officer and former Chief Financial Officer (collectively, the “Doan Defendants”). On or about
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Notes to Consolidated Financial Statements
(amounts in thousands, except share data and per share amounts)
Note 10. Commitments and Contingencies – (continued)
April 15, 2015, Amalgamated Bank, as trustee for the Longview 600 Small Cap Index Fund, filed a shareholder derivative suit in the United States District Court for the Eastern District of Virginia against the Company’s directors at that time, as well as its former Chief Merchandising Officer, former Chief Financial Officer, Senior Vice President, Supply Chain and its former Chief Executive Officer and President (collectively, the “Amalgamated Defendants,” and, with the Klein and Doan Defendants, the “Individual Defendants”). The Company was named as a nominal defendant only in these three suits.
On May 27, 2015, the court consolidated the Klein, Doan, and Amalgamated Bank suits, appointed lead plaintiffs and lead counsel for the consolidated action, and captioned the consolidated action asIn re Lumber Liquidators Holdings, Inc. Shareholder Derivative Litigation. In the complaints, Klein’s, Doan’s and Amalgamated Bank’s (collectively, “Plaintiffs”) allegations include (i) breach of fiduciary duties, (ii) abuse of control, (iii) gross mismanagement, (iv) unjust enrichment, (v) insider trading, (vi) corporate waste, (vii) common-law conspiracy, and (viii) statutory conspiracy. Plaintiffs did not quantify any alleged damages in their complaints but, in addition to attorneys’ fees and costs, Plaintiffs seek (1) a declaration that the Individual Defendants have breached and/or aided and abetted the breach of their fiduciary duties to the Company, (2) a determination and award to the Company of the damages sustained by the Company as a result of the violations of each of the Individual Defendants, jointly and severally, (3) a directive to the Company and the Individual Defendants to take all necessary actions to reform and improve the Company’s corporate governance and internal procedures to comply with applicable laws and to protect the Company and its shareholders from a repeat of the events that led to the filing of this action, (4) a determination and award to the Company of exemplary damages in an amount necessary to punish the Individual Defendants and to make an example of the Individual Defendants to the community according to proof of trial, (5) the awarding of restitution to the Company from the Individual Defendants, (6) a requirement that the Company establish corporate policies and procedures prohibiting the use of Chinese manufacturers of its products, (7) a prohibition against the Company using wood or wood products from the Russian Far East, (8) a requirement that the Company establish corporate policies and procedures to ensure compliance with CARB standards for all of its flooring products, and (9) disgorgement and payment to the Company of all compensation and profits made by the Individual Defendants, and each of them, at any time during which such Individual Defendants were breaching fiduciary duties owed to the Company and/or committing, or aiding and abetting the commitment of, corporate waste.
Additionally, in May 2015, the Company received a shareholder demand from Timothy Horton (“Horton”). The allegations and demands made by Horton overlap substantially with those raised in the consolidated action. On June 11, 2015, the Special Committee of the Board of Directors (the “Special Committee”) exercised its authority to create a three-person Demand Review Committee, which is comprised of three independent directors and tasked with investigating the claims made in the consolidated action and the Horton demand letter and making a recommendation to the board of directors as to whether it would be in the best interests of the Company to pursue any of those claims. Thereafter, the members of the Demand Review Committee filed a motion to stay the consolidated action pending completion by the Demand Review Committee of its investigation and recommendation to the board of directors.
Further, in the consolidated action, the Company filed a motion to dismiss based on the failure to make a demand upon the Company’s board of directors, and the Individual Defendants filed a motion to dismiss based on the failure to state a claim. These motions are fully briefed and pending before the court. Based on the uncertainty of litigation and the preliminary stage of the case, the Company cannot estimate the reasonably possible loss or range of loss that may result from this action.
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Lumber Liquidators Holdings, Inc.
Notes to Consolidated Financial Statements
(amounts in thousands, except share data and per share amounts)
Note 10. Commitments and Contingencies – (continued)
Costello Matter
On or about March 6, 2015, James Costello (“Costello”) filed a shareholder derivative suit in the Court of Chancery of the State of Delaware against the Company’s directors at that time (the “Costello Derivative Defendants”). The Company was named as a nominal defendant only. On April 1, 2015, the case was voluntarily stayed. On June 19, 2015, the stay was lifted at Costello’s request and Costello subsequently filed an amended complaint. The amended complaint added the Company’s Senior Vice President, Supply Chain, former Chief Merchandising Officer and former Chief Financial Officer as defendants (along with the Derivative Defendants, the “Costello Defendants”). Costello’s allegations include (i) breach of fiduciary duties, (ii) gross mismanagement, (iii) unjust enrichment, and (iv) insider selling and the misappropriation of certain of our information in connection therewith. Costello did not quantify any alleged damages in the amended complaint but, in addition to attorneys’ fees and costs, Costello seeks (i) against the Costello Defendants and in the Company’s favor the amount of damages sustained by the Company as a result of the Costello Defendants’ breaches of fiduciary duties, gross mismanagement and unjust enrichment, (ii) extraordinary equitable and/or injunctive relief, including attaching, impounding, imposing a constructive trust on or otherwise restricting the proceeds of the Costello Defendants’ trading activities or their assets, (iii) awarding to the Company restitution from the Costello Defendants, and each of them, and ordering disgorgement of all profits, benefits and other compensation obtained by the Costello Defendants; and (iv) additional equitable and/or injunctive relief that would require the Company to institute certain compliance policies and procedures.
The Company filed a motion to dismiss the amended complaint based on the failure to make a demand upon the Company’s board of directors and the Costello Defendants filed a motion to dismiss based on the failure to state a claim and the exculpatory provision in the Company’s Certificate of Incorporation. On September 14, 2015, the parties entered into a stipulation voluntarily staying the case until the Demand Review Committee has an opportunity to investigate Costello’s allegations and make a recommendation to the Company’s board of directors, and the board of directors has the opportunity to act on that recommendation. The court has approved the stipulation.
Based on the uncertainty of litigation and the preliminary stage of the case, the Company cannot estimate the reasonably possible loss or range of loss that may result from this action.
McBride Matter
On or about March 27, 2015, James Michael McBride (“McBride”) filed a shareholder derivative suit in the Circuit Court of the City of Williamsburg and County of James City, Virginia against the Company’s directors at that time, as well as its former Chief Merchandising Officer and former Chief Financial Officer (collectively, the “McBride Defendants”). The Company was named as a nominal defendant only. In the complaint, McBride’s allegations include (i) breach of fiduciary duties, (ii) gross mismanagement, (iii) abuse of control, (iv) insider trading, and (v) unjust enrichment. McBride did not quantify any alleged damages in his complaint but, in addition to attorneys’ fees and costs, McBride seeks (i) the awarding, against the McBride Defendants, and in favor of the Company, of damages sustained by the Company as a result of certain of the McBride Defendants’ breaches of their fiduciary duties and (ii) a directive to the Company to (a) take all necessary actions to reform and improve its corporate governance and internal procedures, (b) comply with its existing governance obligations and all applicable laws and (c) protect the Company and its investors from a recurrence of the events that led to the filing of this action. On July 6, 2015, McBride filed an amended complaint. The amended complaint added claims for statutory conspiracy and common law conspiracy and, in connection with the statutory conspiracy claim, seeks damages in the amount of three times the actual damages incurred by the Company as the result of the alleged wrongful acts. Pursuant to a voluntary agreement between the parties, the defendants have not yet responded to the amended complaint.
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Lumber Liquidators Holdings, Inc.
Notes to Consolidated Financial Statements
(amounts in thousands, except share data and per share amounts)
Note 10. Commitments and Contingencies – (continued)
Based on the uncertainty of litigation and the preliminary stage of the case, the Company cannot estimate the reasonably possible loss or range of loss that may result from this action.
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 engineered hardwood importedmultilayered wood flooring imports from China which accounted for approximately 10%7%, 8%, and 7% of its flooring purchases in 20142018, 2017 and approximately 6%2016, respectively. The Company’s consistent view through the course of this matter has been, and remains, that its flooring purchases in 2015.
The DOC made preliminary determinations regarding CVD and AD rates in April 2011 and May 2011, respectively. In December 2011, after certain determinations were made byimports are neither dumped nor subsidized. As such, it has appealed the ITC and DOC, orders were issued setting finaloriginal imposition of AD and CVD rates at 3.3% and 1.5%, respectively. These rates became effective in the form of additional duty deposits, which the Company has paid, and applied retroactively to the DOC preliminary determinations of April 2011 and May 2011.fees.
Following the issuance of the orders, a number of appeals were filed by several parties, including the Company, with the Court of International Trade (“CIT”) challenging various aspects of the determinations made by both the ITC and DOC, including certain aspects that may impact the validity of the AD and CVD orders and the applicable rates. The appeal of the CVD order was dismissed in June 2015. On January 23, 2015, the CIT issued a decision rejecting the challenge of the AD rate for all but one Chinese exporter. This decision was finalized on July 6, 2015, appealed to the Court of Appeals for the Federal Circuit on July 31, 2015 and may take a year to conclude.
As part of its processes in these proceedings, the DOC conducts annual reviews of the CVDAD and ADCVD rates. In such cases, the DOC will issue preliminary rates that are not binding and wereare 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. AsAt the time of import, the Company makes deposits at the then prevailing rate, even while the annual review is in process. When rates are adjusted throughdeclared final by the administrative reviews,DOC, the Company adjusts its payments prospectively basedaccrues 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.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 first DOC annual reviewimposition 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 this matter,delays in settling the shortfalls and refunds shown in the table below. Because of the length of time for finalization of rates were modified foras well as appeals, any subsequent adjustment of AD rates through November 2012 and for CVD rates typically flows through 2011. Specifically, the AD rate was set at 5.92% and the CVD rate was set at 0.83%. These rates are being appealed to the CIT by several parties, including the Company. Based on what has been paid by the Company to date for the periods covered by the first annual review, the Company believes its best estimate of the probable loss was approximately $833 for shipments during the applicable time periods covered by the first annual review,a period different from those in which the Company recorded as a long-term liability in its accompanying consolidated balance sheet and in cost of sales in its second quarter 2015 consolidated financial statements.inventory was originally purchased and/or sold.
In January 2015, pursuant to the second annual review, the DOC issued a non-binding preliminary AD rate of 18.27% for purchases from December 2012 through November 2013 and a preliminary CVD rate of 0.97% for purchases in fiscal year 2012. The rates were finalized in early July 2015 with the AD rate set at 13.74% and the CVD rate set at 0.99%. The Company has appealed these rates. Notwithstanding our appeal, as these rates are now confirmed, the Company believes its best estimate of the probable loss was $4,089 for shipments during the applicable time periods, which the Company recorded as a long-term liability on its accompanying consolidated balance sheet and in cost of sales in its second quarter 2015 consolidated financial statements. Beginning in July 2015, the Company began paying these rates on each applicable purchase.
The third annual reviewfirst 5-year Sunset Review of the AD and CVD rates was initiatedorders on multilayered wood flooring (the “Sunset Review”) determined, in February 2015. In January 2016,December 2017, that the DOC issued non-binding preliminary resultsAD and CVD orders will remain in place.
Results by period for the third annual review.Company are shown below. The preliminary AD rate was 13.34% andcolumn labeled ‘December 31, 2018 Receivable/Liability Balance’ represents the CVD preliminary rate was 1.43%. These rates are expected to be finalized in the DOC’s final results
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Notes to Consolidated Financial Statements
(amounts in thousands, except share data and per share amounts)
Note 10. Commitments and Contingencies – (continued)
in May 2016. Any change in the applicable rates as a result of the third annual review would apply to imports occurring after the second period of review.
Based on the preliminary rates set in January 2016 in the third annual review for shipments subsequent to November 2013 (AD) and shipments subsequent to December 2012 (CVD),amount the Company would owe an additional $5,300receive 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 all shipments through December 31, 2015. As no rates have been finalized for these periods,AD or CVD in the current period at the in-effect rate at that time.
The Company has not recorded an accrualnet interest expense related to antidumping of $1.2 million, with the amount included in its consolidated financial statements for the impact of higher rates for the time periods subsequent to the second annual review. Basedother expense on the information available, the Company believes there Statements of Operations. The estimated associated interest payable and receivable for each period
is at least a reasonable possibility that an additional charge may be incurrednot included in the range of $0 to $5,300. A loss greater than this amount may be incurred, buttable below and is included in the Company is unable to estimatesame financial statement line item on the amount at this time.
In February 2016, the DOC initiated the fourth annual review of AD and CVD rates, which the Company expects will follow a similar scheduleCompany’s consolidated balance sheet as the preceding review.associated liability and receivable balance for each period.
| | | | |
Review | | Rates at which | | December 31, 2018 |
Period | Period Covered | Company | Final Rate | Receivable/Liability |
| | Deposited | | Balance |
Antidumping |
1 | May 2011 through | 6.78% and 3.3% | 0.73%1 | $1.3 million |
| November 2012 | | | receivable1 |
2 | December 2012 through | 3.30% | 13.74% | $4.1 million |
| November 2013 | | | liability |
3 | December 2013 through | 3.3% and 5.92% | 17.37% | $5.5 million |
| November 2014 | | | liability |
4 | December 2014 through | 5.92% and 13.74% | 0.0% | $0.03 million |
| November 2015 | | | receivable |
5 | December 2015 through | 5.92%. 13.74%. and 17.37% | 0.0%2 | $2.6 million |
| November 2016 | | | receivable2 |
6 | December 2016 through | 17.37% and 0.0% | Pending3 | NA |
| November 2017 | | | |
7 | December 2017 through | 0.00% | Pending | NA |
| November 2018 | | | |
| | | Included on the Consolidated Balance Sheet in Other Current Assets | $2.63 million |
| | | Included on the Consolidated Balance Sheet in Other Assets | $1.3 million |
| | | Included on the Consolidated Balance Sheet in Other Long-Term Liabilities | $9.6 million |
Countervailing |
1&2 | April 2011 through | 1.50% | 0.83% / 0.99% | $0.2 million |
| December 2012 | | | receivable |
3 | January 2013 through
December 2013 | 1.50% | 1.38% | $0.05 million
receivable |
4 | January 2014 through
December 2014 | 1.50% and 0.83% | 1.06% | $0.02 million
receivable |
5 | January 2015 through
December 2015 | 0.83% and 0.99% | Final at 0.11% and 0.85%4 | $0.08 million
receivable 4 |
6 | January 2016 through
December 2016 | 0.99% and 1.38% | Pending | NA |
7 | January 2017 through
December 2017 | 1.38% and 1.06% | Pending | NA |
8 | January 2018 through
December 2018 | 1.06% | Pending | NA |
| | | Included on the Consolidated Balance Sheet in Other Current Assets | $0.08 million |
| | | Included on the Consolidated Balance Sheet in Other Assets | $0.27 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 third quarter of 2018, the DOC issued the final rates for review period 5 at 0.0%. As a result, the Company recorded a receivable of $2.8 million with a corresponding reduction of Cost of Sales during the year ended December 31, 2018. |
| 3 | | The preliminary AD rate was a maximum of 48.26%. If the preliminary ruling regarding the AD Rate were to be finalized, the Company anticipates it would record a net liability of approximately $1.1 million. |
| 4 | | In June 2018, the DOC issued the final rates for review period 5 at 0.11% and 0.85% depending on vendor. As a result, in the second quarter of 2018 the Company recorded a receivable of $0.07 million for deposits made at previous preliminary rates, with a corresponding reduction of Cost of Sales. |
Other Matters
We areThe 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, ourits 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 cash flows.liquidity.
Note 11. CondensedSelected Quarterly Financial Information (unaudited)
The following tables present the Company’s unaudited quarterly results for 20152018 and 2014.2017.
| | | | | | | | | | | | | |
| | Quarter Ended | |
| | March 31, | | June 30, | | September 30, | | December 31, | |
| | 2018 | | 2018 | | 2018 | | 2018 | |
Net Sales | | $ | 261,772 | | $ | 283,474 | | $ | 270,469 | | $ | 268,921 | |
Gross Profit | | | 94,972 | | | 101,310 | | | 100,682 | | | 95,976 | |
Selling, General and Administrative Expenses | | | 96,418 | | | 102,223 | | | 93,987 | | | 150,885 | |
Operating (Loss) Income | | | (1,446) | | | (913) | | | 6,695 | | | (54,909) | |
Net (Loss) Income | | $ | (1,972) | | $ | (1,454) | | $ | 5,923 | | $ | (56,876) | |
Net (Loss) Income per Common Share - Basic | | $ | (0.07) | | $ | (0.05) | | $ | 0.21 | | $ | (1.99) | |
Net (Loss) Income per Common Share - Diluted | | $ | (0.07) | | $ | (0.05) | | $ | 0.21 | | $ | (1.99) | |
Number of Stores Opened in Quarter, net | | | 5 | | | 8 | | | 3 | | | 4 | |
Comparable Store Net Sales Increase | | | 2.9 | % | | 4.7 | % | | 2.1 | % | | 0.4 | % |
| | | | | | | | | | | | | |
| | Quarter Ended | |
| | March 31, | | June 30, | | September 30, | | December 31, | |
| | 2017 | | 2017 | | 2017 | 2017 | |
Net Sales | | $ | 248,389 | | $ | 263,500 | | $ | 257,185 | | $ | 259,859 | |
Gross Profit | | | 86,799 | | | 97,455 | | | 92,687 | | | 92,120 | |
Selling, General and Administrative Expenses | | | 112,215 | | | 92,335 | | | 109,962 | | | 91,515 | |
Operating (Loss) Income | | | (25,416) | | | 5,120 | | | (17,275) | | | 605 | |
Net (Loss) Income | | $ | (26,372) | | $ | 4,475 | | $ | (18,915) | | $ | 2,989 | |
Net (Loss) Income per Common Share - Basic | | $ | (0.93) | | $ | 0.16 | | $ | (0.66) | | $ | 0.10 | |
Net (Loss) Income per Common Share - Diluted | | $ | (0.93) | | $ | 0.16 | | $ | (0.66) | | $ | 0.10 | |
Number of Stores Opened in Quarter | | | 2 | | | — | | | 2 | | | 6 | |
Comparable Store Net Sales Increase | | | 4.7 | % | | 8.8 | % | | 3.8 | % | | 4.5 | % |
The following tables present certain items impacting gross profit and SG&A in the Company’s unaudited quarterly results for 2018 and 2017. Operating loss for each of the quarterly periods was impacted by the unusual items
in both gross profit and SG&A discussed above and summarized below. These items either relate to revised estimates of legacy reserves, or are significant and infrequent in nature.
| | | | | | | | | | | | |
| | Quarter Ended |
| | March 31, | | June 30, | | September 30, | | December 31, |
| | 2018 | | 2018 | | 2018 | | 2018 |
Gross Margin Items: | | | | | | | | | | | | |
Antidumping Adjustments | | $ | — | | $ | (2,126) | | $ | (2,822) | | $ | — |
Tariff Adjustments | | | — | | | — | | | — | | | (1,711) |
Sub-Total Items above | | $ | — | | $ | (2,126) | | $ | (2,822) | | $ | (1,711) |
| | | | | | | | | | | | |
SG&A Items: | | | | | | | | | | | | |
Accrual for Legal Matters and Settlements | | $ | 250 | | $ | 2,701 | | $ | — | | $ | 61,000 |
Legal and Professional Fees 1 | | | 3,067 | | | 3,325 | | | 2,991 | | | 2,324 |
All Other 2 | | | — | | | — | | | 1,769 | | | — |
Sub-Total Items above | | $ | 3,317 | | $ | 6,026 | | $ | 4,760 | | $ | 63,324 |
| | | | | | | | | | | | |
| | Quarter Ended |
| | March 31, | | June 30, | | September 30, | | December 31, |
| | 2017 | | 2017 | | 2017 | | 2017 |
Gross Margin Items: | | | | | | | | | | | | |
Antidumping Adjustments | | $ | — | | $ | (2,797) | | $ | — | | $ | — |
Indoor Air Quality Testing Program | | | — | | | (993) | | | — | | | — |
Sub-Total Items above | | $ | — | | $ | (3,790) | | $ | — | | $ | — |
| | | | | | | | | | | | |
SG&A Items: | | | | | | | | | | | | |
Securities and Derivatives Class Action | | $ | 18,000 | | $ | — | | $ | 18,000 | | $ | 960 |
Legal and Professional Fees 1 | | | 2,408 | | | 3,526 | | | 2,940 | | | 2,440 |
All Other 2 | | | — | | | — | | | 1,459 | | | 1,687 |
Sub-Total Items above | | $ | 20,408 | | $ | 3,526 | | $ | 22,399 | | $ | 5,087 |
1 Represents charges to earnings related to our defense of various significant legal actions during the period. This does not include all legal costs incurred by the Company.
2 All other primarily relates to various payroll factors, including our retention initiatives, and impairment charges related to discontinuing non-core investments.
| | | | | | | | |
| | Quarter Ended |
| | | March 31,
2015 | | June 30,
2015 | | September 30,
2015 | | December 31,
2015 |
| Net Sales | | $ | 259,961 | | | $ | 247,944 | | | $ | 236,064 | | | $ | 234,807 | |
| Gross Profit | | | 91,612 | | | | 62,284 | | | | 70,996 | | | | 53,966 | |
| Selling, General and Administrative Expenses | | | 97,680 | | | | 90,551 | | | | 88,333 | | | | 85,487 | |
| Operating (Loss) Income | | | (6,068 | ) | | | (28,267 | ) | | | (17,337 | ) | | | (31,521 | ) |
| Net (Loss) Income(1),(2),(3) | | $ | (7,780 | ) | | $ | (20,347 | ) | | $ | (8,479 | ) | | $ | (19,827 | ) |
| Net income per Common Share – Basic | | $ | (0.29 | ) | | $ | (0.75 | ) | | $ | (0.31 | ) | | $ | (0.73 | ) |
| Net income per Common Share – Diluted | | $ | (0.29 | ) | | $ | (0.75 | ) | | $ | (0.31 | ) | | $ | (0.73 | ) |
| Number of Stores Opened in Quarter | | | 4 | | | | 7 | | | | 7 | | | | 4 | |
| Comparable store net sales (Decrease) Increase | | | (1.8 | )% | | | (10.0 | )% | | | (14.6 | )% | | | (17.2 | )% |
| (1) | Includes pretax lower of cost or market inventory adjustments recorded for Chinese laminate and tile inventory of $4,002 in the Second Quarter and $22,160 in the Fourth Quarter. See “Note 1. Summary of Significant Accounting Policies” above. |
| (2) | Includes pretax charges for legal matters of $10,000 in the First Quarter, $8,077 in the Second Quarter, and $2,400 in the Fourth Quarter. See “Note 10. Commitments and Contingencies” above. |
| (3) | Includes pretax impairment charges related to long-lived assets of $1,350 in the Second Quarter and $3,043 in the Third Quarter. See “Note 1. Summary of Significant Accounting Policies” above. |
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Lumber Liquidators Holdings, Inc.
Notes to Consolidated Financial Statements
(amounts in thousands, except share data and per share amounts)
Note 11. Condensed Quarterly Financial Information (unaudited) – (continued)
| | | | | | | | |
| | Quarter Ended |
| | | March 31,
2014 | | June 30,
2014 | | September 30,
2014 | | December 31,
2014 |
| Net Sales | | $ | 246,291 | | | $ | 263,085 | | | $ | 266,067 | | | $ | 271,976 | |
| Gross Profit | | | 101,287 | | | | 106,238 | | | | 104,158 | | | | 106,484 | |
| Selling, General and Administrative Expenses | | | 78,866 | | | | 79,066 | | | | 78,377 | | | | 77,805 | |
| Operating (Loss) Income | | | 22,421 | | | | 27,172 | | | | 25,781 | | | | 28,679 | |
| Net (Loss) Income | | $ | 13,694 | | | $ | 16,607 | | | $ | 15,725 | | | $ | 17,345 | |
| Net income per Common Share – Basic | | $ | 0.50 | | | $ | 0.61 | | | $ | 0.58 | | | $ | 0.64 | |
| Net income per Common Share – Diluted | | $ | 0.49 | | | $ | 0.60 | | | $ | 0.58 | | | $ | 0.64 | |
| Number of Stores Opened in Quarter | | | 13 | | | | 13 | | | | 5 | | | | 3 | |
| Comparable store net sales (Decrease) Increase | | | (0.6 | )% | | | (7.1 | )% | | | (4.9 | )% | | | (4.2 | )% |
76
Note 12. Subsequent Events
In February 2016, the Company paid settlement amounts totaling $6,200, as described in Note 10, under Lacey Act Related Matters.
Due to a planned build in inventory, the Company borrowed an additional $10,000 under its Revolving Credit Facility, as described in Note 4. As of February 29, 2016, the Company has $30,000 in outstanding borrowings under the Revolving Credit Facility.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures
We maintainOur management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in RuleRules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”),) as of the end of the period covered by this report. Disclosure controls and procedures are designed to provide reasonable assurance that are intended to ensure thatthe information that would be required to be disclosed in the reports that we file or submit under the Exchange Act reports ishas been appropriately recorded, processed, summarized and reported within the time periods specifiedon a timely basis and are effective in the SEC’s rules and forms, andensuring that such information is accumulated and communicated to ourthe Company’s management, including theour Chief Executive Officer and the Interim Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Interim Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2015. Based on thissuch evaluation, our Chief Executive Officer and Interim Chief Financial Officer have concluded that, as of December 31, 2018, our disclosure controls and procedures were not effective as of December 31, 2015 due to thea material weakness in internal control over financial reporting, related to deficiencies in our information technology general controls described below.
Management has identified a material weakness in its internal control over financial reporting related to information technology general controls in the area of user access. For additional information regarding the nature of this material weakness, see “Management’s Report on Internal Control Over Financial Reporting” below. We have developed a remediation plan for this material weakness, which is described below under “Remediation Activities.”
Notwithstanding the identified material weakness and management’s assessment that internal control over financial reporting was ineffective as of December 31, 2015, management believes that the audited consolidated financial statements contained in this Annual Report on Form 10-K fairly present, in all material respects, our financial condition, results of operations and cash flows for the fiscal years presented in conformity with accounting principles generally accepted in the United States of America. Additionally, this material weakness did not result in any adjustments or restatements of the Company’s audited and unaudited consolidated financial statements or disclosures for any prior period previously reported by the Company.
(b) Management’s Report on Internal Control Overover Financial Reporting
Management of the CompanyOur management is responsible for establishing and maintaining an adequate system of internal control over financial reporting. Internalreporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act), pursuant to Rule 13a-15(c) of the Exchange Act. Our internal control over financial reporting is defined in Rule 13a-15(f) promulgated under the Exchange Act as a process, designed by, or under the supervision of the Company’s principal executive and principal financial officer and affected by the Company’s Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. InternalGAAP.
A company’s internal control over financial reporting includes maintainingpolicies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect ourthe transactions and dispositiondispositions of assets; providingthe assets of the company, (ii) provide reasonable assurance that transactions are recorded as necessary forto permit preparation of our financial statements in accordance with generally accepted accounting principles; providing reasonable assuranceGAAP, and that receipts and expenditures of the company are being made only in accordance with appropriate authorizations;authorizations of management and providingdirectors of the company, and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of ourthe company’s assets that could have a material effect on ourthe financial statements.
Because of its inherent limitations, internal control over financial reporting ismay not intended to provide absolute assurance that a misstatement of our financial statements would be preventedprevent or detected. Also, projectionsdetect misstatements. Projections of any evaluation of effectiveness tofor future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
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Management,Under the supervision and with the participation of the Company’s principal executive and principal financial officer, conducted an evaluation ofour management, we assessed the effectiveness of our internal control over financial reporting as of December 31, 2015 based on2018, using the framework and criteria established in Internal Control — Integrated Framework (2013) issuedset forth by the Committee of Sponsoring Organizations of the Treadway Commission. This evaluation included review of the documentation of controls, evaluation of the design effectiveness of controls, testing of the operating effectiveness of controls and a conclusion on this evaluation. Based on the foregoing, management concluded that the Company’s internal control over financial reporting was not effective as of December 31, 2015 for the reasons described below.
In the course of completing its assessment of internal control over financial reporting as of December 31, 2015, management identified deficiencies related to the design and operating effectiveness of its information technology (“IT”) general controls for the Company’s enterprise resource planning system (referred to hereinafter as the “ERP system”). The ERP system is utilizedCommission (COSO) in the performance of transactional and management review controls that comprise the principal element of the Company’s system of internal control over financial reporting and are relevant to the preparation of its consolidated financial statements. These deficiencies involve user access controls that are intended to ensure that access and revisions to financial applications and data is adequately restricted to appropriate personnel. The ineffective user access controls resulted in ineffective segregation of duties within the Company’s IT environment, whereby certain personnel and contractors have the capability to perform conflicting duties within the ERP system. Finally, the Company did not maintain effective controls over certain periodic reviews of user access. As a result of the aggregate deficiencies identified, there is a reasonable possibility that the effectiveness of business process controls that utilize electronic data and financial reports generated from the affected ERP system could be adversely affected. While these control deficiencies did not result in any audit adjustments, these control deficiencies could result in a material misstatement to the annual or interim consolidated financial statements and disclosures that would not be prevented or detected on a timely basis. Accordingly, management has concluded that these control deficiencies constitute a material weakness. Therefore, management has concluded that, as of December 31, 2015, there was a material weakness in internal control over financial reporting related to information technology general controls in the area of user access for the Company’s ERP system.Internal Control—Integrated Framework (2013). A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
OurWe identified a material weakness in our internal controls related to the classification of imported products under the Harmonized Tariff System. This classification is the basis on which tariff obligations on imported products are calculated. We believe that this weakness was the result of: inconsistent documentation of product specifications, an overreliance upon the knowledge and expertise of certain individuals, and review controls that did not operate at a level of precision to detect and correct these classification and measurement errors. Management believes that the design and operation of controls in place as of December 31, 2018 created a reasonable possibility that a material misstatement to the consolidated financial statements may not have been prevented or detected on a timely basis.
The Company’s independent registered public accounting firm, Ernst & Young LLP has issued an adverse audit report on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2015 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated2018, which appears in their report, which follows below.Item 8 of this Annual Report.
(c) Remediation Activities
We are actively engaged inAs a result of the implementation identification of a remediation planthe material weakness, and prior to filing this Annual Report, we performed further analysis and completed additional procedures intended to ensure that controls contributing to this material weakness are designed appropriatelyour consolidated financial statements for the year ended December 31, 2018 were prepared in accordance with GAAP. Based on these procedures and will operate effectively. The remediation actions we are takinganalysis, and expect to take include the following:
| — | Improving the design, operation and monitoring of control activities and procedures associated with user and administrator access to the affected IT system, including both preventive and detective control activities; |
| — | Standardize the assignment of user access roles and responsibilities within the Company’s ERP system; |
| — | Reviewing the responsibilities in the functional areas that support and monitor our IT systems |
Management believes that these efforts will effectively remediate the material weakness. However,notwithstanding the material weakness in our internal control over financial reporting, our management has concluded that our consolidated financial statements and related notes thereto included in this Annual Report have been prepared in accordance with GAAP. Our Chief Executive Officer and Chief Financial Officer have certified that, based on each such officer’s knowledge, the consolidated financial statements, as well as the other financial information included in this Annual Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this Annual Report. In addition, Ernst & Young LLP has issued an unqualified opinion on our consolidated financial statements, which is included in Item 8 of this Annual Report, and we have developed a remediation plan for the material weakness, which is described below.
Remediation
In addition to the further analysis and procedures noted above to ensure that the consolidated financial statements were in accordance with GAAP, management has been implementing and continues to implement measures designed to ensure that control deficiencies contributing to the material weakness are remediated, such that these controls are designed, implemented, and operating effectively. The remediation actions include: designing a process whereby 1) complete specifications including a sample have been documented in a consistent manner, 2) multiple parties independently assign a proposed tariff code, 3) review processes are consistently applied for newly created products, and 4) review processes are added to sample previously assigned codes to ensure continued applicability. Employees hired as part of this process will have requisite experience and expertise with customs and duties. Management will also be providing regular reporting on remediation measures to the Audit Committee of the Board of Directors.
We believe that these actions will remediate the material weakness. The material weakness will not be considered remediated, however, until the newapplicable controls are fully implemented, in operationoperate for a sufficient period of time and tested andour management has concluded, by management to be designed andthrough testing, that these controls are operating effectively. We cannot provide any assuranceexpect that thesethe remediation effortsof this material weakness will be successful or thatcompleted by the end of fiscal 2019.
Changes in Internal Control over Financial Reporting
Except for the material weakness identified above, as of December 31, 2018, there have been no other changes in our internal control over financial reporting will be effective as a result(as defined in Rules 13a-15(f) or 15d-15(f) of these efforts. In addition, as the Company continues to evaluate and work to improve its internal control over financial reporting within the area of IT general controls, management may determine to take additional measures to address control deficiencies or determine to modify the remediation plan described above.
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Management will test and evaluate the implementation of these new processes and internal controlsExchange Act) during the year ended December 31, 2016 to ascertain whether they are designed and operating effectively to provide reasonable assurance that they will prevent or detect a material error in the Company’s financial statements on a timely basis. Subject to the foregoing, management is working towards having these remediation efforts completed by December 31, 2016. Management is committed to continuous improvement of our internal control over financial reporting and will continue to diligently review our financial reporting controls and procedures.
(d) Changes in Internal Control over Financial Reporting
Except as noted in the preceding paragraphs, there have been no changes in the Company’s internal control over financial reporting during thefourth quarter ended December 31, 20152018 that have materially affected, or are reasonably likely to materially affect, the Company’sour internal control over financial reporting.
Item 9B. Other Information.
None.
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PART III
Item 10. Directors, Executive Officers and Corporate Governance.
The information required by this Item is incorporated by reference from the definitive proxy statement for our 20162019 annual meeting of shareholders, which will be filed no later than 120 days after December 31, 2015.2018.
Code of Ethics
We have a Code of Business Conduct and Ethics, which applies to all employees, officers and directors of Lumber Liquidators Holdings, Inc. and its direct and indirect subsidiaries. Our Code of Business Conduct and Ethics meets the requirements of a “code of ethics” as defined by Item 406 of Regulation S-K, and applies to our Chief Executive Officer, Chief Financial Officer (who is both our principal financial and principal accounting officer), as well as all other employees. Our Code of Business Conduct and Ethics also meets the requirements of a code of conduct under Rule 303A.10 of the NYSE Listed Company Manual. Our Code of Business Conduct and Ethics is posted on our website atwww.lumberliquidators.comin the “Corporate Governance” section of our Investor Relations home page.
We intend to provide any required disclosure of an amendment to or waiver from our Code of Business Conduct and Ethics on our website atwww.lumberliquidators.com in the “Corporate Governance” section of our Investor Relations home page promptly following the amendment or waiver. We may elect to disclose any such amendment or waiver in a report on Form 8-K8‑K filed with the SEC either in addition to or in lieu of the website disclosure. The information contained on or connected to our website is not incorporated by reference in this report and should not be considered part of this or any other report that we file with or furnish to the SEC.
Item 11. Executive Compensation.
The information required by this Item is incorporated by reference from the definitive proxy statement for our 20162019 annual meeting of shareholders, which will be filed no later than 120 days after December 31, 2015.2018.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this Item is incorporated by reference from the definitive proxy statement for our 20162019 annual meeting of shareholders, which will be filed no later than 120 days after December 31, 2015.2018.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this Item is incorporated by reference from the definitive proxy statement for our 20162019 annual meeting of shareholders, which will be filed no later than 120 days after December 31, 2015.2018.
Item 14. Principal Accountant Fees and Services.
The information required by this Item is incorporated by reference from the definitive proxy statement for our 20162019 annual meeting of shareholders, which will be filed no later than 120 days after December 31, 2015.2018.
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PART IV
Item 15. Exhibits, Financial Statement Schedules.
(a) The following documents are filed as part of this annual report:
Consolidated Financial Statements
Refer to the financial statements filed as part of this annual report in Part II, Item 8.
1. Financial Statement Schedules.
The following financial statement schedule is filed as part of this annual report under Schedule II —– Analysis of Valuation and Qualifying Accounts for the years ended December 31, 2015, 20142018, 2017 and 2013.2016. All other financial statement schedules have been omitted because the required information is either included in the financial statements or the notes thereto or is not applicable.
2. Exhibits
The exhibits listed on the accompanying Exhibit Index are filed or incorporated by reference as part of this report.
Item 16. Form 10‑K Summary.
None.
Lumber Liquidators Holdings, Inc.
Schedule II —– Analysis of Valuation and Qualifying Accounts
For the Years Ended December 31, 2015, 20142018, 2017 and 2013
2016
(in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Balance
Beginning
of Year | | Additions
Charged to
Cost and
Expenses | | Deductions(1) | | Other | | Balance End
of Year | | | | Additions | | | | | | |
For the Year Ended December 31, 2013
| | | | | | | | | | | | | | | | | | | | | |
| | | Balance | | Charged to | | | | | | |
| | | Beginning | | Cost and | | | | | | Balance End |
| | | of Year | | Expenses | | Deductions (1) | | Other | | of Year |
For the Year Ended December 31, 2016 | | | | | | | | | | | | | | | | |
Reserve deducted from assets to which it applies
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Inventory reserve for loss or obsolescence | | $ | 1,035 | | | $ | 1,465 | | | $ | (1,225 | ) | | $ | — | | | $ | 1,275 | | | $ | 26,882 | | $ | 3,723 | | $ | (23,535) | | $ | — | | $ | 7,070 |
| Income tax valuation allowance | | $ | 1,267 | | | $ | 498 | | | $ | — | | | $ | — | | | $ | 1,765 | | | $ | 2,433 | | $ | 15,207 | | $ | — | | $ | — | | $ | 17,640 |
For the Year Ended December 31, 2014
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
For the Year Ended December 31, 2017 | | | | | | | | | | | | | | | | |
Reserve deducted from assets to which it applies
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Inventory reserve for loss or obsolescence | | $ | 1,275 | | | $ | 3,198 | (2) | | $ | (1,231 | ) | | $ | — | | | $ | 3,242 | | | $ | 7,070 | | $ | 6,349 | | $ | (7,788) | | $ | — | | $ | 5,631 |
| Income tax valuation allowance | | $ | 1,765 | | | $ | 458 | | | $ | — | | | $ | — | | | $ | 2,223 | | | $ | 17,640 | | $ | 3,936 | (2) | $ | — | | $ | — | | $ | 21,576 |
For the Year Ended December 31, 2015
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
For the Year Ended December 31, 2018 | | | | | | | | | | | | | | | | |
Reserve deducted from assets to which it applies
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Inventory reserve for loss or obsolescence | | $ | 3,242 | | | $ | 28,897 | (3) | | $ | (5,257 | ) | | $ | — | | | $ | 26,882 | | | $ | 5,631 | | $ | 3,108 | | $ | (1,932) | | $ | — | | $ | 6,807 |
| Income tax valuation allowance | | $ | 2,223 | | | $ | 210 | | | $ | — | | | $ | — | | | $ | 2,433 | | | $ | 21,576 | | $ | 4,742 | | $ | — | | $ | — | | $ | 26,318 |
| (1) | 1Deductions are for the purposes for which the reserve was created. |
| (2) | Addition of $1,200 for reserves related to the Company’s Bellawood transition. |
| (3) | Includes $22,499 for laminate flooring sourced from China and $3,663 related to the tile exit. |
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SIGNATURES
Pursuant to the requirementspurposes for which the reserve was created, including the write-off of Section 13 or 15(d)laminate flooring in 2016.
2 Includes the impact of the Securities ExchangeTax Act, of 1934, as amended, the registrant has duly caused this report to be signedwhich was enacted on its behalf by the undersigned, thereunto duly authorized on February 29, 2016.December 22, 2017.
LUMBER LIQUIDATORS HOLDINGS, INC.
(Registrant)
| By: | /s/ John M. Presley
John M. Presley
Chief Executive Officer |
Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on February 29, 2016.
| | |
Exhibit
Number | | Exhibit Description |
| 3.01 | | Certificate of Incorporation of Lumber Liquidators Holdings, Inc. (filed as Exhibit 3.1 to the Company’s current report on Form 8-K, filed on January 4, 2010 (File No. 001-33767), and incorporated by reference) |
| 3.02 | | By-Laws of Lumber Liquidators Holdings, Inc. (as revised effective December 1, 2016) (filed as Exhibit 3.23.1 to the Company’s current report on Form 8-K, filed on January 4, 2010December 6, 2016 (File No. 001-33767), and incorporated by reference) |
| 4.01 | | Form of Certificate of Common Stock of Lumber Liquidators Holdings, Inc. (filed as Exhibit 4.1 to the Company’s current report on Form 8-K, filed on January 4, 2010 (File No. 001-33767), and incorporated by reference) |
10.01*10.1* | | Lumber Liquidators Holdings, Inc. Amended and Restated 2011 Equity Compensation Plan (filed as Exhibit 10.1 to the Company’s current report on Form 8-K, filed May 25, 2016 (File No. 001-33767), and incorporated by reference) |
10.2* | | Lumber Liquidators Holdings, Inc. 2011 Equity Compensation Plan (filed as Exhibit 10.1A to the Company’s Registrationdefinitive Proxy Statement, on Form S-8, filed MayApril 6, 2011 (File No. 333-173981)001-33767), and incorporated by reference) |
10.02*10.3* | | Lumber Liquidators 2007 Equity Compensation Plan (filed as Exhibit 10.1 to the Company’s Post –effective Amendment No. 1 to its Registration Statement on Form S-8, filed January 4, 2010 (File No. 333-147247), and incorporated by reference) |
10.03*10.4* | | Lumber Liquidators 2006 Equity Plan for Non-Employee Directors (filed as Exhibit 10.2 to the Company’s Post –effective Amendment No. 1 to its Registration Statement on Form S-8, filed January 4, 2010 (File No. 333-147247), and incorporated by reference) |
10.04* | | Offer Letter Agreement with Marco Pescara (filed as Exhibit 10.06 to the Company’s Registration Statement on Form S-1, filed April 23, 2007 (File No. 333-142309), and incorporated by reference) |
10.05*10.5 | | Form of Non-Qualified Employee Stock Option Agreement, effective October 18, 2006 (filed as Exhibit 10.07 to the Company’s Registration Statement on Form S-1, filed April 23, 2007 (File No. 333-142309), and incorporated by reference) |
10.06 | | Lease by and between ANO LLC and Lumber Liquidators (relating to Toano facility) (filed as Exhibit 10.08 to the Company’s Amendment No. 1 to its Registration Statement on Form S-1, filed May 30, 2007 (File No. 333-142309), and incorporated by reference) |
10.07*10.6* | | Form of Option Award Agreement, effective November 16, 2007 (filed as Exhibit 10.10 to the Company’s annual report on Form 10-K, filed on March 12, 2008 (File No. 001-33767), and incorporated by reference) |
10.08*10.7* | | Form of Restricted Stock Agreement, effective November 16, 2007 (filed as Exhibit 10.11 to the Company’s annual report on Form 10-K, filed on March 12, 2008 (File No. 001-33767), and incorporated by reference) |
10.09 | | Form of Option Award Agreement, effective December 31, 2010 (filed as Exhibit 10.13 to the Company’s annual report on Form 10-K, filed on February 23, 20102011 (File No. 001-33767), and incorporated by reference) |
10.10*10.8* | | Form of Restricted Stock Agreement, effective December 31, 2010 (filed as Exhibit 10.14 to the Company’s annual report on Form 10-K, filed on February 23, 2010 (File No. 001-33767), and incorporated by reference) |
10.11* | | Form of Option Award Agreement, effective May 6, 2011 (filed as Exhibit 10.2 to the Company’s current report on Form 8-K, filed May 6, 2011 (File No. 001-33767), and incorporated by reference) |
10.12*10.9 | | Form of Restricted Stock Agreement, effective May 6, 2011 (filed as Exhibit 10.1 to the Company’s current report on Form 8-K, filed May 6, 2011 (File No. 001-33767), and incorporated by reference) |
| | |
Exhibit
Number | | Exhibit Description |
10.13* | | Employment Agreement with Robert M. Lynch (filed as Exhibit 10.1 to the Company’s current report on Form 8-K, filed December 21, 2010 (File No. 005-83765), and incorporated by reference) |
10.14* | | Amendment to Employment Agreement with Robert M. Lynch (filed as Exhibit 10.1 to the Company’s current report on Form 8-K, filed December 21, 2011 (File No. 005-83765), and incorporated by reference) |
10.15 | | SecondThird Amended and Restated Credit Agreement, dated as of April 24, 2015,August 17, 2016, among Lumber Liquidators Holdings, Inc. and its domestic subsidiaries, including Lumber Liquidators, Inc. and Lumber Liquidators Services, LLC (collectively, the “Borrowers”) and, Bank of America, N.A. as administrative agent and collateral agent, and lender.Bank of America, N.A. and Wells Fargo Bank, National Association, as lenders (filed as Exhibit 10.1 to the Company’s current report on Form 8-K, filed April 29, 2015August 19, 2016 (File No. 001-33767), and incorporated by reference) |
10.16 10.10* | | First Amendment to Second Amended and Restated Credit Agreement, dated as of May 21, 2015, among Lumber Liquidators Holdings, Inc. and its domestic subsidiaries, including Lumber Liquidators, Inc. and Lumber Liquidators Services, LLC (collectively, the “Borrowers”) and Bank of America, N.A. as administrative agent, collateral agent and lender. (filed as Exhibit 10.1 to the Company’s current report on Form 8-K, filed May 21, 2015 (File No. 001-33767), and incorporated by reference) |
10.17 | | Second Amendment to Second Amended and Restated Credit Agreement, dated as of November 20, 2015, among Lumber Liquidators Holdings, Inc. and its domestic subsidiaries, including Lumber Liquidators, Inc. and Lumber Liquidators Services, LLC (collectively, the “Borrowers”) and Bank of America, N.A. as administrative agent, collateral agent and lender (filed as Exhibit 10.1 to the Company’s current report on Form 8-K, filed November 20, 2015 (File No. 001-33767), and incorporated by reference) |
10.18* | | Amended and Restated Annual Bonus Plan (filed as Exhibit 10.17 to the Company’s annual report on Form 10-K, filed on February 20, 2013 (File No. 001-33767), and incorporated by reference) |
10.19*10.11* | | Form of Option Award Agreement, effective January 24, 2013 (filed as Exhibit 10.18 to the Company’s annual report on Form 10-K, filed on February 20, 2013 (File No. 001-33767), and incorporated by reference) |
10.20*10.12* | | Form of Restricted Stock Agreement, effective January 24, 2013 (filed as Exhibit 10.19 to the Company’s annual report on Form 10-K, filed on February 20, 2013 (File No. 001-33767), and incorporated by reference) |
10.21*10.13* | | Form of Stock Appreciation Right Agreement, effective January 24, 2013 (filed as Exhibit 10.20 to the Company’s annual report on Form 10-K, filed on February 20, 2013 (File No. 001-33767), and incorporated by reference) |
10.22*10.14* | | Form of Option Award Agreement (Employee), effective November 23, 2015 (filed as Exhibit 10.22 to the Company’s annual report on Form 10-K, filed on February 29, 2016 (File No. 001-33767), and incorporated by reference) |
10.23*10.15* | | Form of Restricted Stock Agreement (Director), effective November 23, 2015 |
10.24* | | Form of Restricted Stock Agreement (Employee), effective November 23, 2015 (filed as Exhibit 10.24 to the Company’s annual report on Form 10-K, filed on February 29, 2016 (File No. 001-33767), and incorporated by reference) |
10.25*10.16* | | RelocationForm of Option Award Agreement with Robert M. Lynch, dated(Employee), effective August 1, 2016 (filed as Exhibit 10.24 to the Company’s annual report on Form 10-K, filed on February 5, 201421, 2017 (File No. 001-33767), and incorporated by reference) |
10.17* | | Form of Restricted Stock Agreement (Employee), effective August 1, 2016 (filed as Exhibit 10.26 to the Company’s annual report on Form 10-K, filed on February 21, 2017 (File No. 001-33767), and incorporated by reference) |
10.18* | | Form of Restricted Stock Agreement (Director), effective May 24, 2017 (filed as Exhibit 10.1 to the Company’s currentquarterly report on Form 8-K,10-Q, filed February 5, 2014on August 1, 2017 (File No. 005-83765)001-33767), and incorporated by reference) |
| | |
Exhibit
Number10.19* | | Exhibit Description |
10.26* | | Offer Letter Agreement with Gregory A. Whirley, Jr., dated April 24, 2015Form of NEO Performance Award, effective March 1, 2018 (filed as Exhibit 10.3 to the Company’s currentquarterly report on Form 8-K,10-Q, filed on April 29, 2015May 1, 2018 (File No. 001-33767), and incorporated by reference) |
10.27*10.20* | | Consultancy, Separation and ReleaseForm of Restricted Award Agreement dated April 28, 2015, by and between Lumber Liquidators Holdings, Inc. and Daniel E. Terrell.(Director), effective February 7, 2018 (filed as Exhibit 10.2 to the Company’s currentquarterly report on Form 8-K,10-Q, filed on April 29, 2015May 1, 2018 (File No. 001-33767), and incorporated by reference) |
10.28*10.21 | | Form of Service Option Award Agreement (Tom Sullivan) (filed as Exhibit 10.1 to the Company’s current report on Form 8-K, filed August 5, 2015 (File No. 001-33767) and incorporated by reference) |
10.29* | | Form of Service Option Award Agreement, (Tom Sullivan) |
10.30* | | Form of Performance Option Award Agreement (Tom Sullivan) (filed as Exhibit 10.2 to the Company’s current report on Form 8-K, filed August 1, 2015 (File No. 001-33767) and incorporated by reference) |
10.31* | | Form of Performance Option Award Agreement (Tom Sullivan) |
10.32* | | Separation and Release Agreement between Lumber Liquidators Services, LLC and William K. Schlegel, dated July 21, 2015 (filed as Exhibit 10.3 to the Company’s current report on Form 8-K, filed August 5, 2015 (File No. 001-33767) and incorporated by reference) |
10.33* | | Form of Severance Benefit Agreement (filed as Exhibit 99.2 to the Company’s current report on Form 8-K, filed August 5, 2015 (File No. 001-33767) and incorporated by reference) |
10.34* | | Form of Retention Agreement (filed as Exhibit 99.3 to the Company’s current report on Form 8-K, filed August 1, 2015 (File No. 001-33767) and incorporated by reference) |
10.35 | | Plea Agreement between Lumber Liquidators, Inc. and the Department of Justice (filed as Exhibit 10.1 to the Company’s current report on Form 8-K, filed October 7, 2015 (File
No. 001-33767) and incorporated by reference) |
10.36 10.22 | | Stipulation for Settlement and Joint Motion for Entry of Consent Order of Forfeiture between Lumber Liquidators, Inc. and the Department of Justice (filed as Exhibit 10.2 to the Company’s current report on Form 8-K, filed October 7, 2015 (File No. 001-33767) and incorporated by reference) |
10.37*10.23 | | Option AwardClass Action Settlement Agreement with John M. Presley,in Formaldehyde MDL and Durability MDL dated November 9, 2015March 15, 2018 by and between Plaintiffs in the Formaldehyde MDL and the Durability MDL and Lumber Liquidators, Inc. (filed as Exhibit 10.1 to the Company’s quarterly report on Form 10-Q, filed on May 1, 2018 (File No. 001-33767), and incorporated by reference) |
10.38*10.24 | | Deferred Prosecution Agreement, dated March 12, 2019, by and between Lumber Liquidators Holdings, Inc., the United States Attorney’s Office for the Eastern District of Virginia and the United States Department of Justice, Criminal Division, Fraud Section. (filed as Exhibit 10.1 to the Company’s current report on Form 8-K, filed March 12, 2019 (File No. 001-33767) and incorporated by reference) |
| 10.25 | | Order Instituting Cease-and-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making Findings, and Imposing a Cease-and-Desist Order, dated March 12, 2019, between the United States Securities and Exchange Commission and Lumber Liquidators, Holdings, Inc. (filed as Exhibit 10.2 to the Company’s current report on Form 8-K, filed March 12, 2019 (File No. 001-33767) and incorporated by reference) |
10.26* | | Offer Letter Agreement with Carl R. Daniels, dated September 7, 2011 (filed as Exhibit 10.38 to the Company’s annual report on Form 10-K, filed on February 29, 2016 (File No. 001-33767), and incorporated by reference) |
10.39*10.27* | | Offer Letter Agreement with Jill Witter,Dennis R. Knowles, dated August 14, 2015 |
10.40* | | Executive Employment Agreement with John M. PresleyFebruary 23, 2016 (filed as Exhibit 10.110.2 to the Company’s current report on Form 8-K, filed February 29, 2016 (File No. 001-33767) and incorporated by reference) |
10.41*10.28* | | Amendment, dated November 7, 2016, to Offer Letter, Agreement withdated as of February 23, 2016, between Lumber Liquidators Holdings, Inc. and Dennis R. Knowles dated February 23, 2016 (filed as Exhibit 10.10.1 to the Company’s current report on Form 8-K, filed February 29,November 7, 2016 (File No. 001-33767) and incorporated by reference) |
21.01 10.29* | | Offer Letter Agreement with Martin D. Agard, dated August 31, 2016 (filed as Exhibit 10.1 to the Company’s current report on Form 8-K, filed September 9, 2016 (File No. 001-33767) and incorporated by reference) |
10.30* | | Offer Letter Agreement with Timothy J. Mulvaney, dated March 22, 2017 (filed as Exhibit 10.1 to the Company’s current report on Form 8-K, filed May 26, 2017 (File No. 001-33767) and incorporated by reference) |
10.31* | | Offer Letter Agreement with M. Lee Reeves, dated June 16, 2017 (filed as Exhibit 10.36 to the Company’s annual report on Form 10-K, filed February 27, 2018 (File No. 001-33769) and incorporated by reference) |
10.32* | | Severance Agreement, dated as of July 26, 2018, between Lumber Liquidators Holdings, Inc. and Dennis R. Knowles (filed as exhibit 10.1 to the Company’s current report on Form 8-K, filed July 31, 2018 (File No. 001-33769) and incorporated by reference) |
10.33* | | Severance Agreement, dated as of July 26, 2018, between Lumber Liquidators Holdings, Inc. and Martin D. Agard (filed as exhibit 10.2 to the Company’s current report on Form 8-K, filed July 31, 2018 (File No. 001-33769) and incorporated by reference) |
10.34* | | Severance Agreement, dated as of July 26, 2018, between Lumber Liquidators Holdings, Inc. and M. Lee Reeves (filed as exhibit 10.3 to the Company’s current report on Form 8-K, filed July 31, 2018 (File No. 001-33769) and incorporated by reference) |
| 10.35 | | Office Deed of Lease Agreement dated October 19, 2018, by and between LM Retail, LLC and Lumber Liquidators Services, LLC |
10.36* | | Offer Letter Agreement with Jennifer Bohaty, dated March 30, 2018 |
10.37* | | Offer Letter Agreement with Charles E. Tyson, dated May 17, 2018 |
10.38* | | Severance Agreement, dated as of July 26, 2018, between Lumber Liquidators Holdings, Inc. and Jennifer Bohaty |
10.39* | | Severance Agreement, dated as of July 26, 2018, between Lumber Liquidators Holdings, Inc. and Charles E. Tyson |
| 21.1 | | Subsidiaries of Lumber Liquidators Holdings, Inc. |
23.01 23.1 | | Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm |
31.01 31.1 | | Certification of Principal Executive Officer of Lumber Liquidators Holdings, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
TABLE OF CONTENTS
| | |
Exhibit
Number31.2 | | Exhibit Description |
31.02 | | Certification of Principal Financial Officer of Lumber Liquidators Holdings, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
32.01 32.1 | | Certification of Principal Executive Officer and Principal Financial Officer of Lumber Liquidators Holdings, Inc. pursuant to Section 906 of the Sarbanes-Oxley act of 2002 |
| 101 | | The following financial statements from the Company’s Form 10-K for the year ended December 31, 2015,2018, formatted in XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income,Operations, (iii) Consolidated Statements of Other Comprehensive Income,Loss, (iv) Consolidated Statements of Stockholders’ Equity, (v) Consolidated Statements of Cash Flows, (vi) Notes to Consolidated Financial Statements |
| * | |
* | | Indicates a management contract or compensation plan, contract or agreement. |
92
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on March 18, 2019.
| | LUMBER LIQUIDATORS HOLDINGS, INC. |
| | (Registrant) |
| | |
| By: | /s/ Dennis R. Knowles |
| | Dennis R. Knowles |
| Chief Executive Officer |
Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 18, 2019.
| | |
Signature | | Title |
| | |
/s/ Dennis R. Knowles | | Chief Executive Officer and Director |
Dennis R. Knowles | | (Principal Executive Officer) |
| | |
/s/ Martin D. Agard | | Chief Financial Officer |
Martin D. Agard | | (Principal Financial Officer) |
| | |
/s/ Timothy J. Mulvaney | | Chief Accounting Officer |
Timothy J. Mulvaney | | (Principal Accounting Officer) |
| | |
/s/ Nancy M. Taylor | | Chairperson of the Board |
Nancy M. Taylor | | |
| | |
/s/ W. Stephen Cannon | | Director |
W. Stephen Cannon | | |
| | |
/s/ Terri F. Graham | | Director |
Terri F. Graham | | |
| | |
/s/ David A. Levin | | Director |
David A. Levin | | |
| | |
/s/ Douglas T. Moore | | Director |
Douglas T. Moore | | |
| | |
/s/ Famous P. Rhodes | | Director |
Famous P. Rhodes | | |
| | |
/s/ Martin F. Roper | | Director |
Martin F. Roper | | |
| | |
/s/ Jimmie L. Wade | | Director |
Jimmie L. Wade | | |