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LL Lumber Liquidators

Filed: 3 Aug 21, 8:00pm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2021

or

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

For the transition period from              to             

Commission File Number: 001-33767

Graphic

Lumber Liquidators Holdings, Inc.

(Exact name of registrant as specified in its charter)

Delaware

27-1310817

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

4901 Bakers Mill Lane

Richmond, Virginia

23230

(Address of Principal Executive Offices)

(Zip Code)

(800366-4204

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class:

Trading Symbol:

Name of exchange on which registered:

Common Stock, par value $0.001 per share

LL

New York Stock Exchange

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 of 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes    No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes    No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

◻  Large accelerated filer

  Accelerated filer

◻  Non-accelerated filer

  Smaller reporting company

  Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ◻

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes     No

As of July 30, 2021, there are 29,081,658 shares of the registrant’s common stock, par value of $0.001 per share, outstanding.

PART I
FINANCIAL INFORMATION

Item 1. Financial Statements.

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

June 30,

December 31, 

    

2021

    

2020

Assets

Current Assets:

Cash and Cash Equivalents

$

112,395

$

169,941

Merchandise Inventories

223,907

244,409

Prepaid Expenses

9,602

9,370

Tariff Recovery Receivable

429

4,078

Other Current Assets

10,594

10,354

Total Current Assets

356,927

438,152

Property and Equipment, net

95,055

97,557

Operating Lease Right-of-Use

115,792

109,475

Goodwill

9,693

9,693

Deferred Tax Asset

11,583

11,611

Other Assets

8,858

7,860

Total Assets

$

597,908

$

674,348

Liabilities and Stockholders’ Equity

Current Liabilities:

Accounts Payable

$

69,367

$

70,543

Customer Deposits and Store Credits

67,731

61,389

Accrued Compensation

10,714

15,347

Sales and Income Tax Liabilities

4,513

5,793

Accrual for Legal Matters and Settlements

35,750

30,398

Operating Lease Liabilities - Current

32,640

33,024

Other Current Liabilities

24,689

25,761

Total Current Liabilities

245,404

242,255

Other Long-Term Liabilities

6,793

13,293

Operating Lease Liabilities - Long-Term

94,646

90,194

Credit Agreement

101,000

Total Liabilities

346,843

446,742

Stockholders’ Equity:

Common Stock ($0.001 par value; 35,000 shares authorized; 30,455 and 30,229 shares issued and 29,063 and 28,911 shares outstanding, respectively)

30

30

Treasury Stock, at cost (1,392 and 1,318 shares, respectively)

(144,788)

(142,977)

Additional Capital

225,287

222,628

Retained Earnings

170,536

147,925

Total Stockholders’ Equity

251,065

227,606

Total Liabilities and Stockholders’ Equity

$

597,908

$

674,348

See accompanying notes to condensed consolidated financial statements

2

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

Three Months Ended

Six Months Ended

June 30,

June 30,

    

2021

    

2020

    

2021

    

2020

 

Net Sales

Net Merchandise Sales

$

259,542

$

210,055

$

509,585

$

448,837

Net Services Sales

41,842

20,229

75,249

48,821

Total Net Sales

301,384

230,284

584,834

497,658

Cost of Sales

Cost of Merchandise Sold

156,597

125,953

298,607

266,699

Cost of Services Sold

32,057

16,039

57,905

37,696

Total Cost of Sales

 

188,654

 

141,992

 

356,512

 

304,395

Gross Profit

 

112,730

 

88,292

 

228,322

 

193,263

Selling, General and Administrative Expenses

 

96,116

 

82,288

 

198,602

 

178,495

Operating Income

 

16,614

 

6,004

 

29,720

 

14,768

Other Expense (Income)

 

498

 

1,142

 

(270)

 

2,024

Income Before Income Taxes

 

16,116

 

4,862

 

29,990

 

12,744

Income Tax Expense (Benefit)

 

4,127

 

2,223

 

7,379

 

(2,130)

Net Income

$

11,989

$

2,639

$

22,611

$

14,874

Net Income per Common Share—Basic

$

0.41

$

0.09

$

0.78

$

0.52

Net Income per Common Share—Diluted

$

0.41

$

0.09

$

0.77

$

0.51

Weighted Average Common Shares Outstanding:

 

  

 

  

 

 

  

Basic

 

29,042

 

28,831

 

28,993

 

28,776

Diluted

 

29,488

 

28,892

 

29,543

 

28,889

See accompanying notes to condensed consolidated financial statements

3

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

Three Months Ended

Six Months Ended

June 30,

June 30,

    

2021

    

2020

    

2021

    

2020

 

Net Income

$

11,989

$

2,639

$

22,611

$

14,874

Other Comprehensive Income:

 

  

 

  

 

  

 

  

Foreign Currency Translation Adjustments

 

 

227

 

 

272

Total Other Comprehensive Income

 

 

227

 

 

272

Comprehensive Income

$

11,989

$

2,866

$

22,611

$

15,146

See accompanying notes to condensed consolidated financial statements

4

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

Total

Common Stock

Treasury Stock

Additional

Retained

Stockholders'

    

Shares

    

Value

    

Shares

    

Value

    

Capital

    

Earnings

    

AOCL

    

Equity

 

April 1, 2020

28,812

$

30

 

1,293

$

(142,630)

$

218,736

$

98,733

$

(1,535)

$

173,334

Stock-Based Compensation Expense

 

 

 

 

 

846

 

 

 

846

Exercise of Stock Options

 

3

 

 

 

 

36

 

 

 

36

Release of Restricted Shares

 

37

 

 

 

 

 

 

 

Common Stock Repurchased

 

 

 

16

 

(122)

 

 

 

 

(122)

Translation Adjustment

 

 

 

 

 

 

 

227

 

227

Net Income

 

 

 

 

 

 

2,639

 

 

2,639

June 30, 2020

 

28,852

$

30

 

1,309

$

(142,752)

$

219,618

$

101,372

$

(1,308)

$

176,960

April 1, 2021

 

29,025

$

30

 

1,373

$

(144,352)

$

223,899

$

158,547

$

$

238,124

Stock-Based Compensation Expense

 

 

 

 

 

1,365

 

 

 

1,365

Exercise of Stock Options

 

3

 

 

 

 

23

 

 

 

23

Release of Restricted Shares

 

35

 

 

 

 

 

 

 

Common Stock Repurchased

 

 

 

19

 

(436)

 

 

 

 

(436)

Net Income

 

 

 

 

 

 

11,989

 

 

11,989

June 30, 2021

 

29,063

$

30

 

1,392

$

(144,788)

$

225,287

$

170,536

$

$

251,065

Total

Common Stock

Treasury Stock

Additional

Retained

Stockholders'

    

Shares

    

Value

    

Shares

    

Value

    

Capital

    

Earnings

    

AOCL

     

Equity

January 1, 2020

 

28,714

$

30

1,245

$

(142,314)

$

218,616

$

86,498

$

(1,580)

$

161,250

Stock-Based Compensation Expense

 

 

 

 

 

966

 

 

 

966

Exercise of Stock Options

 

3

 

 

 

 

36

 

 

 

36

Release of Restricted Shares

 

135

 

 

 

 

 

 

 

Common Stock Repurchased

 

 

 

64

 

(438)

 

 

 

 

(438)

Translation Adjustment

 

 

 

 

 

 

 

272

 

272

Net Income

 

 

 

 

 

 

14,874

 

 

14,874

June 30, 2020

 

28,852

$

30

 

1,309

$

(142,752)

$

219,618

$

101,372

$

(1,308)

$

176,960

January 1, 2021

28,911

$

30

1,318

$

(142,977)

$

222,628

$

147,925

$

$

227,606

Stock-Based Compensation Expense

 

 

 

 

 

2,596

 

 

 

2,596

Exercise of Stock Options

 

6

 

 

 

 

63

 

 

 

63

Release of Restricted Shares

 

146

 

 

 

 

 

 

 

Common Stock Repurchased

 

 

 

74

 

(1,811)

 

 

 

 

(1,811)

Net Income

 

 

 

 

 

 

22,611

 

 

22,611

June 30, 2021

 

29,063

$

30

 

1,392

$

(144,788)

$

225,287

$

170,536

$

$

251,065

See accompanying notes to condensed consolidated financial statements

5

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

Six Months Ended June 30,

    

2021

    

2020

Cash Flows from Operating Activities:

 

  

 

  

Net Income

$

22,611

$

14,874

Adjustments to Reconcile Net Income:

 

  

 

  

Depreciation and Amortization

 

9,282

 

8,934

Deferred Income Taxes Provision

 

28

 

495

Income on Vouchers Redeemed for Legal Settlements

(821)

Stock-Based Compensation Expense

 

2,596

 

966

Provision for Inventory Obsolescence Reserves

 

1,420

 

1,574

Loss (Gain) on Disposal of Fixed Assets

 

18

 

(827)

Changes in Operating Assets and Liabilities:

 

 

Merchandise Inventories

 

17,583

 

35,897

Accounts Payable

 

(596)

 

9,150

Customer Deposits and Store Credits

 

6,342

 

13,921

Accrued Compensation

(4,633)

(236)

Tariff Recovery Receivable

3,649

8,740

Operating Lease Right-of-Use

(6,317)

252

Prepaid Expenses and Other Current Assets

 

293

 

1,590

Accrual for Legal Matters and Settlements

 

7,733

 

148

Payments for Legal Matters and Settlements

 

(62)

 

(4,833)

Deferred Rent Payments

(2,015)

5,813

Other Assets and Liabilities

 

(3,777)

 

9,209

Net Cash Provided by Operating Activities

 

53,334

 

105,667

Cash Flows from Investing Activities:

 

  

 

  

Purchases of Property and Equipment

 

(7,435)

 

(7,212)

Other Investing Activities

 

57

 

949

Net Cash Used in Investing Activities

 

(7,378)

 

(6,263)

Cash Flows from Financing Activities:

 

  

 

  

Borrowings on Credit Agreement

 

 

45,000

Payments on Credit Agreement

 

(101,000)

 

(26,000)

Common Stock Repurchased

 

(1,811)

 

(438)

Other Financing Activities

 

(691)

 

(199)

Net Cash (Used in) Provided by Financing Activities

 

(103,502)

 

18,363

Effect of Exchange Rates on Cash and Cash Equivalents

 

 

(23)

Net (Decrease) Increase in Cash and Cash Equivalents

 

(57,546)

 

117,744

Cash and Cash Equivalents, Beginning of Period

 

169,941

 

8,993

Cash and Cash Equivalents, End of Period

$

112,395

$

126,737

Supplemental disclosure of non-cash operating activities:

Relief of Inventory for Vouchers Redeemed for Legal Settlements

$

1,498

$

Supplemental disclosure of non-cash operating and financing activities:

 

  

 

  

Tenant Improvement Allowance for Leases

$

(765)

$

(611)

See accompanying notes to condensed consolidated financial statements

6

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

Note 1.       Basis of Presentation

Lumber Liquidators Holdings, Inc. and its direct and indirect subsidiaries (collectively and, where applicable, individually, the “Company”) engage in business as a multi-channel specialty retailer of hard-surface flooring, and hard-surface flooring enhancements and accessories, operating as a single operating segment. The Company offers an extensive assortment of exotic and domestic hardwood species, engineered hardwood, laminate, resilient vinyl, water-resistant vinyl plank and porcelain tile flooring direct to the consumer. The Company features renewable flooring products, bamboo and cork, and provides a wide selection of flooring enhancements and accessories, including moldings, noise-reducing underlayment, adhesives and flooring tools. The Company also provides in-home delivery and installation services to its customers. The Company primarily sells to homeowners or to contractors on behalf of homeowners through a network of store locations in metropolitan areas. As of June 30, 2021, the Company’s stores spanned 47 states in the United States (“U.S.”). In addition to the store locations, the Company’s products may be ordered, and customer questions/concerns addressed, through both its customer relationship center in Richmond, Virginia and its digital platform, LLFlooring.com.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q for interim financial reporting pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). In the opinion of management, all adjustments (consisting of normal and recurring adjustments except those otherwise described herein) considered necessary for a fair presentation have been included in the accompanying condensed consolidated financial statements. However, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements. Therefore, the interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in the Company’s annual report filed on Form 10-K for the year ended December 31, 2020.

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

Results of operations for the three and six months ended June 30, 2021 are not necessarily indicative of future results to be expected for the full year due to a number of factors, including seasonality, tariffs, supply chain, and general economic conditions, as well as the uncertainty and ongoing impact of the COVID-19 pandemic that may impact supply chain and/or sales for the remainder of fiscal 2021.

Note 2.       Summary of Significant Accounting Policies

Fair Value of Financial Instruments

The carrying amounts of financial instruments such as cash and cash equivalents, accounts payable and other liabilities approximates fair value because of the short-term nature of these items.

Merchandise Inventories

The Company values merchandise inventories at the lower of cost or net realizable value. The method by which amounts are removed from inventory is weighted average cost. All of the hardwood flooring purchased from vendors is either prefinished or unfinished, and in immediate saleable form. The Company relies on a select group of international and domestic suppliers to provide imported flooring products that meet the Company’s specifications. The Company is subject to risks associated with obtaining products from abroad, including disruptions or delays in production, shipments, supply chain, delivery or processing, including due to the COVID-19 pandemic. The Company continues to execute contingency plans to minimize ongoing disruptions to supply chain, domestic distribution centers and store operations.

7

Included in merchandise inventories are tariff-related costs, including Section 301 tariffs on certain products imported from China in recent years. A subset of these imports for certain click vinyl and other engineered products (the “Subset Products”) received an exemption that was made retroactive to the beginning of the Section 301 Tariffs for a period of time. The Company has deployed strategies to mitigate tariffs and improve gross margin, primarily through adjusting its pricing and promotion strategies and alternative country sourcing. The Company continues to monitor market pricing and promotional strategies to inform and guide its decisions. The following chart provides a timeline and tariff levels for the key events related to Section 301 Tariffs.

Section 301 tariff

Corresponding approximate

Event

Timing

level on imports

Tariff level on

percentage of Company's

from China

Subset Products

merchandise subject to tariff

Imposition of Tariffs

September 2018

10%

10% then 0%1

48%

Increase in Tariffs

June 2019

25%

25% then 0%1

44%

Retroactive Exemption on Subset Products1

November 2019

25%

0%

10%

Exemption Not Renewed and Tariffs Re-imposed on Subset Products

August 2020

25%

25%

32%

June 30, 2021

25%

25%

22%

1On November 7, 2019, the U.S. Trade Representative granted a retroactive exclusion to September 2018 on Subset Products as defined in the Section 301 Tariffs section above bringing the rate to 0%.

Recognition of Net Sales

The Company generates revenues primarily by retailing merchandise in the form of hard-surface and porcelain flooring and accessories. Additionally, the Company expands its revenues by offering services to deliver and/or install this merchandise for its customers; it considers these services to be separate performance obligations. The separate performance obligations are detailed on the customer’s invoice(s) and the customer often purchases flooring merchandise without purchasing installation or delivery services. Sales occur through a network of 416 stores, which spanned 47 states in the U.S. at June 30, 2021. In addition, both the merchandise and services can be ordered through a call center and from the Company’s digital platform, LLFlooring.com. The Company’s agreements with its customers are of short duration (less than a year) and as such the Company has elected not to disclose revenue for partially satisfied contracts that will be completed in the days following the end of a period as permitted by GAAP. The Company reports its revenues exclusive of sales taxes collected from customers and remitted to governmental taxing authorities, consistent with past practice.

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

8

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

Three Months Ended

Six Months Ended

June 30,

June 30,

    

2021

    

2020

    

2021

    

2020

Customer Deposits and Store Credits, Beginning Balance

$

(68,211)

$

(37,836)

$

(61,389)

$

(41,571)

New Deposits

 

(320,513)

 

(264,473)

 

(630,972)

 

(545,326)

Recognition of Revenue

 

301,384

 

230,284

 

584,834

 

497,658

Sales Tax included in Customer Deposits

 

18,231

 

14,862

 

35,772

 

31,543

Other

 

1,378

 

1,671

 

4,024

 

2,204

Customer Deposits and Store Credits, Ending Balance

$

(67,731)

$

(55,492)

$

(67,731)

$

(55,492)

Subject to limitations under the Company’s policy, return of unopened merchandise is accepted for 90 days, subject to the discretion of the store manager. The amount of revenue recognized for flooring merchandise is adjusted for expected returns, which are estimated based on the Company’s historical data, current sales levels, and forecasted economic trends. The Company uses the expected value method to estimate returns because it has a large number of contracts with similar characteristics. The Company reduces revenue by the amount of expected returns and records it within “Other Current Liabilities” on the condensed consolidated balance sheet. The Company continues to estimate the amount of returns based on historical data. In addition, the Company recognizes a related asset for the right to recover returned merchandise and records it in the “Other Current Assets” caption of the accompanying condensed consolidated balance sheet. This amount was $1.3 million at June 30, 2021. The Company recognizes sales commissions as incurred since the amortization period is less than one year.

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

    

Three Months Ended June 30,

Six Months Ended June 30,

 

2021

    

2020

    

2021

2020

Manufactured Products 1

$

139,736

46

%  

$

112,441

49

%  

$

271,829

46

%

$

231,478

46

%

Solid and Engineered Hardwood

75,602

    

25

%  

62,164

    

27

%  

151,797

    

26

%

138,773

    

28

%

Moldings and Accessories and Other

 

44,204

 

15

%  

 

35,450

 

15

%  

 

85,959

 

15

%

 

78,586

 

16

%

Installation and Delivery Services

 

41,842

 

14

%  

 

20,229

 

9

%  

 

75,249

 

13

%

 

48,821

 

10

%

Total

$

301,384

 

100

%  

$

230,284

 

100

%  

$

584,834

 

100

%

$

497,658

 

100

%

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

Cost of Sales

Cost of sales includes the cost of products sold, including tariffs, the cost of installation services, and transportation costs from vendors to the Company’s distribution centers or store locations. It also includes transportation costs from distribution centers to store locations, transportation costs for the delivery of products from store locations to customers, certain costs of quality control procedures, warranty and customer satisfaction costs, inventory adjustments including obsolescence and shrinkage, and costs to produce and ship samples, which are net of vendor allowances.

The Company offers a range of limited warranties for the durability of the finish on its prefinished products to its services provided. These limited warranties range from one to 100 years, with lifetime warranties for certain of the Company’s products. Warranty reserves are based primarily on claims experience, sales history and other considerations, including payments made to satisfy customers for claims not directly related to the warranty on the Company’s products. Warranty costs are recorded in cost of sales. This warranty reserve was $1.0 million at June 30, 2021. The Company seeks recovery from its vendors and third-party independent contractors of installation services for certain amounts paid.

9

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

Note 3.       Stockholders’ Equity

Net Income per Common Share

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

Three Months Ended

Six Months Ended

June 30,

June 30,

    

2021

    

2020

    

2021

    

2020

 

Net Income

$

11,989

$

2,639

$

22,611

$

14,874

Weighted Average Common Shares Outstanding—Basic

 

29,042

 

28,831

 

28,993

 

28,776

Effect of Dilutive Securities:

 

  

 

  

 

  

 

  

Common Stock Equivalents

 

446

 

61

 

550

 

113

Weighted Average Common Shares Outstanding—Diluted

 

29,488

 

28,892

 

29,543

 

28,889

Net Income per Common Share—Basic

$

0.41

$

0.09

$

0.78

$

0.52

Net Income per Common Share—Diluted

$

0.41

$

0.09

$

0.77

$

0.51

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

Three Months Ended

Six Months Ended

June 30,

June 30,

    

2021

    

2020

    

2021

    

2020

 

Stock Options

193

598

148

544

 

Restricted Shares

127

742

125

419

Note 4.       Stock-based Compensation

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

    

    

Restricted Stock

Stock Options

Awards

Options Outstanding/Nonvested RSAs, January 1, 2021

 

554

 

872

Granted

 

109

 

262

Options Exercised/RSAs Released

 

(6)

 

(220)

Forfeited

 

(11)

 

(25)

Options Outstanding/Nonvested RSAs, June 30, 2021

 

646

 

889

The Company granted a target of 47,768 performance-based RSAs with a grant date fair value of $1.1 million during the six months ended June 30, 2021 and a target of 94,591 performance-based RSAs with a grant date fair value of $0.9 million during the six months ended June 30, 2020. The 2021 performance-based RSAs were awarded to certain members of senior management in connection with the achievement of a specific key financial metric that will be measured over a three-year period and which will vest at the end of the three-year period if the performance condition is met. The number of 2021 performance-based awards that will ultimately vest is contingent upon the achievement of this key financial metric by the end of year three. The 2020 performance-based RSAs were awarded to certain members of senior management in connection with the achievement of specific key financial metrics and a relative total shareholder return multiple measured over a three-year period and also vest at the end of a three-year period if the performance conditions are met. The number of 2020 performance-based awards that will ultimately vest is contingent upon the

10

achievement of these key financial metrics and the results of the relative total shareholder return multiple by the end of year three. The Company assesses the probability of achieving these metrics on a quarterly basis. For these awards, the Company recognizes the fair value expense ratably over the performance and vesting period. These awards are included above in RSAs Granted.

Note 5.      Credit Agreement

The Company has a credit agreement (the “Credit Agreement”) with Bank of America, N.A. and Wells Fargo Bank, N.A. (the “Lenders”). On April 30, 2021, the Company entered into a Second Amendment to the Credit Agreement (the “Second Amendment”) with the Lenders. The execution of the Second Amendment, among other things, terminated the FILO Term Loans and converted those commitments to the Revolving Credit Facility. The total size of the Credit Agreement remained at $200 million, and the Company has an option to the increase the Revolving Credit Facility to a maximum total amount of $250 million. The maturity date of the Credit Agreement was extended to April 30, 2026.

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

The Second Amendment decreased the margin for LIBOR Rate Loans (as defined in the Second Amendment) to a range of 1.25% to 1.75% over the applicable LIBOR Rate with respect to revolving loans (as defined in the Second Amendment) depending on the Company’s’ average daily excess borrowing availability, a decrease of 1.25% from rates prior to the Second Amendment. As previously stated, the FILO Term Loans were terminated by this Second Amendment. The amendment decreased the LIBOR Rate Floor from 1% to 0.25%. The Second Amendment also decreased the unused commitment fee of 0.50% per annum to 0.25% per annum on the average daily unused amount of the Revolving Credit Facility during the most recently completed calendar quarter. As of June 30, 2021, had we borrowed, the Company’s Revolving Credit Facility would have carried an interest rate of 1.75%.

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

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

The Company repaid all $101 million of borrowings during the second quarter of 2021. As of June 30, 2021, there was no amount outstanding under the Revolving Credit Facility. The Company had $3.0 million in letters of credit which reduces its availability. As of June 30, 2021, there was $128.6 million of availability under the Revolving Credit Facility.

Note 6.       Income Taxes

The Company calculates its quarterly tax provision pursuant to the guidelines in Accounting Standards Codification ("ASC") 740-270 "Income Taxes." Generally, ASC 740-270 requires companies to estimate the annual effective tax rate for current year ordinary income. The estimated annual effective tax rate represents the best estimate of the tax provision in relation to the best estimate of pre-tax ordinary income or loss. The estimated annual effective tax rate is then applied to year-to-date ordinary income or loss to calculate the year-to-date interim tax provision. This process has been employed in 2021. Due to disruption related to the COVID-19 pandemic in 2020, the Company applied the actual year-to-date effective tax rate for the tax provision in the three and six month periods ended June 30, 2020.

11

For the three months ended June 30, 2021, the Company recognized income tax expense of $4.1 million, which represented an effective tax rate of 25.6%. For the three months ended June 30, 2020, the Company recognized income tax expense of $2.2 million, which represented an effective tax rate of 45.7%.

For the six months ended June 30, 2021, the Company recognized income tax expense of $7.4 million, which represented an effective tax rate of 24.6%. For the six months ended June 30, 2020, the Company recognized an income tax benefit of $2.1 million, which represented an effective tax rate of (16.7)%. The large benefit in the Company’s 2020 tax rate reflected the March 27, 2020 Coronavirus Aid, Relief, and Economic Security Act (CARES Act) which allowed the Company to carryback certain losses to prior periods and deduct certain capital expenditures from prior periods more quickly giving rise to a $4.8 million Federal tax benefit in the period.

The Company has a valuation allowance recorded against certain of its net deferred tax assets of $5.6 million as of June 30, 2021 because the jurisdiction and nature of the assets makes realization of these deferred tax assets uncertain. The Company intends to maintain this valuation allowance on its deferred tax assets until there is sufficient evidence to support the realizability of those deferred tax assets or time lapses without opportunity to realize those assets.

Note 7.       Commitments and Contingencies

The following chart shows the activity related to the Balance Sheet “Accrual for Legal Matters and Settlements”. The matters themselves are described in greater detail in the paragraphs that follow the chart.

January 1, 2021

June 30, 2021

Litigation Matter

Accrual for Legal Matters

Accrual for Legal Matters

Description

and Settlements

Accruals

Settlement Payments

Vouchers Redeemed

and Settlements

MDL

$

14,000

$

$

$

(2,319)

$

11,681

1

Gold

16,000

16,000

1

Mason

7,000

7,000

Other Matters

398

733

(62)

1,069

$

30,398

$

7,733

$

(62)

$

(2,319)

$

35,750

January 1, 2020

June 30, 2020

Litigation Matter

Accrual for Legal Matters

Accrual for Legal Matters

Description

and Settlements

Accruals

Settlement Payments

Vouchers Redeemed

and Settlements

MDL

$

35,500

$

$

$

$

35,500

Gold

27,000

27,000

Kramer

4,750

(4,750)

Other Matters

221

148

(83)

286

$

67,471

$

148

$

(4,833)

$

$

62,786

1The remaining accrual will be fulfilled by redeeming vouchers as discussed below.

Employment Cases

Mason Lawsuit

In August 2017, Ashleigh Mason, Dan Morse, Ryan Carroll and Osagie Ehigie filed a purported class action lawsuit in the United States District Court for the Eastern District of New York on behalf of all current and former store managers, store managers in training, and similarly situated current and former employees (collectively, the “Mason Putative Class Employees”) alleging that the Company violated the Fair Labor Standards Act (“FLSA”) and New York Labor Law (“NYLL”) by classifying the Mason Putative Class Employees as exempt. The alleged violations include

12

failure to pay for overtime work. The plaintiffs sought certification of the Mason Putative Class Employees for (i) a collective action covering the period beginning three years prior to the filing of the complaint (plus a tolling period) through the disposition of this action for the Mason Putative Class Employees nationwide in connection with FLSA and (ii) a class action covering the period beginning six years prior to the filing of the complaint (plus a tolling period) through the disposition of this action for members of the Mason Putative Class Employees who currently are or were employed in New York in connection with NYLL. The plaintiffs did not quantify any alleged damages but, in addition to attorneys’ fees and costs, the plaintiffs seek class certification, unspecified amounts for unpaid wages and overtime wages, liquidated and/or punitive damages, declaratory relief, restitution, statutory penalties, injunctive relief and other damages.

In November 2018, the plaintiffs filed a motion requesting conditional certification for all store managers and store managers in training who worked within the federal statute of limitations period. In May 2019, the magistrate judge granted plaintiffs’ motion for conditional certification. On January 6, 2021, the magistrate judge ruled in favor of a motion by the Company to exclude from the Mason Putative Class the claims of 55 opt-in plaintiffs who participated in a prior California state class-action settlement that released all claims arising from the same facts on which the Mason matter is based.

In April 2021, the Company entered into a Memorandum of Understanding (“Mason MOU”) with counsel for the lead plaintiffs in the Mason matter. Under the terms of the Mason MOU, the Company will pay up to $7 million to settle the claims asserted in the Mason matter on behalf of all Mason Putative Class Employees who (i) opted-in to the collective action (“Collective Members”) and (ii) are currently or were employed in New York and did not previously file an opt-in notice to participate in the collective action (the “New York Non Opt-Ins”). The New York Non Opt-Ins will have an opportunity to file an opt-in notice to participate in the settlement. To the extent that a New York Non Opt-In does not subsequently file such a notice, then the amount apportioned to that claim shall revert to the Company. In addition, any checks issued to the Collective Members and the New York Non Opt-Ins which are not cashed within one hundred eighty days will revert to the Company. The Mason MOU is subject to certain contingencies, including the execution of a definitive settlement agreement and court approval of the definitive settlement agreement. 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 success on the merits. If the parties are unable to finalize the settlement, the Mason matter could have a material adverse effect on the Company’s financial condition and results of operations. As a result of these developments, the Company determined that a probable loss has been incurred and has accrued within SG&A a $7 million liability during the first quarter of 2021. As of June 30, 2021, the remaining accrual related to this matter is $7 million, which has been included in the caption “Accrual for Legal Matters and Settlements” on its condensed consolidated balance sheet.

Savidis Lawsuit

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

13

In December 2020, the Company began contacting individuals who constitute the Savidis Plaintiffs and offered individual settlements in satisfaction of their claims. In April 2021, the Company entered into a Memorandum of Understanding (“Savidis MOU”) with counsel for the lead plaintiffs in the Savidis matter. Under the terms of the Savidis MOU, the Company will pay $0.9 million reduced by a credit of $0.1 million for amounts already paid to the individuals who accepted the Company’s prior settlement offer. The Company accrued an additional $675 thousand related to this matter in the first quarter 2021. The Savidis MOU is subject to certain contingencies, including the execution of a definitive settlement agreement and court approval of the definitive settlement agreement. There can be no assurance that a settlement will be finalized or 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 success on the merits. If the parties are unable to finalize the settlement, the Savidis matter could have a material adverse effect on the Company’s financial condition and results of operations.

Visnack Lawsuit

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

On December 14, 2020, the court ruled in favor of a motion by the Company to compel arbitration for Michael Visnack under the existing agreement between the Company and Mr. Visnack. The court declined to outright dismiss the putative class claims but stayed the putative class claims and Private Attorneys General Act claims pending arbitration. The court denied plaintiff’s request to conduct discovery. In the first quarter of 2021, the Company received notice that Mr. Visnack has filed an arbitration claim, which the Company intends to defend. Mr. Visnack is a Collective Member of the Mason Putative Class and will have the opportunity to decide whether to participate in the Mason settlement and release his claims against the Company, in which case he would be removed as the lead Plaintiff in the Visnack matter. In December 2020, the Company began contacting individuals who constitute the purported class in the Visnack matter and has offered individual settlements in satisfaction of their claims. To the extent individuals accepted these settlement offers, they have released the Company from the claims and been removed from the purported class. As of March 31, 2021, the Company had reached agreement with a portion of the purported class incurring less than $50 thousand in fees, taxes, and other costs. The Company included those amounts in “Other Matters” in the chart above.

The Company is evaluating the Visnack Putative Class Employees' claims and intends to defend itself vigorously in this matter. Given the uncertainty of litigation, the preliminary stage of the case and the legal standards that must be met for, among other things, class certification and success on the merits, the Company cannot estimate the reasonably possible loss or range of loss, if any, that may result from this action and therefore no accrual has been made related to this. Any such losses could, potentially, have a material adverse effect, individually or collectively, on the Company’s results of operations, financial condition and liquidity.

Kramer lawsuit

In November 2017, Robert J. Kramer, on behalf of himself and all others similarly situated (collectively, the “Kramer Plaintiffs”) filed a purported class action lawsuit in the Superior Court of California, County of Sacramento on behalf of all current and former store managers, all others with similar job functions and/or titles and all current and former employees classified as non-exempt or incorrectly classified as exempt and who worked for the Company in the State of California alleging violation of the California Labor Code including, among other items, failure to pay wages

14

and overtime and engaging in unfair business practices (the “Kramer matter”). The Company reached settlement for this matter for $4.75 million in the third quarter of 2019 and paid that amount to the settlement administrator in the second quarter of 2020 for distribution to class members.

 

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 companies importing multilayered wood flooring from Chinese suppliers subject to the AD and CVD orders. The Company’s multilayered wood flooring imports from China accounted for approximately 4% and 6% of its flooring purchases in 2020 and 2019, respectively. The Company’s consistent view through the course of this matter has been, and remains, that its imports are neither dumped nor subsidized. As such, it has appealed the original imposition of AD and CVD fees.

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

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

Results by period for the Company are shown below. The column labeled ‘June 30, 2021 Receivable/Liability Balance’ represents the amount the Company would receive or pay (net of any collections or payments) as the result of subsequent adjustment to rates whether due to finalization by the DOC or because of action of a court based on appeals by various parties. It does not include any initial amounts paid for AD or CVD in the current period at the in-effect rate at that time.

The Company recorded net interest income related to antidumping of $1.8 million for the six months ended June 30, 2021, with the amount included in other expense on the condensed consolidated statements of operations. The estimated associated interest payable and receivable for each period is not included in the table below but is included in the same financial statement line item on the Company’s condensed consolidated balance sheet as the associated liability and receivable balance for each period.

15

Review

    

Rates at which

    

June 30, 2021

Period

Period Covered

Company

Final Rate

Receivable/Liability

Deposited

Balance

Antidumping

1

May 2011 through

6.78% and 3.3%

0.73%1

$1.3 million

November 2012

receivable1

2

December 2012 through

3.30%

3.92% 2

$0.2 million

November 2013

liability 2

3

December 2013 through

3.3% and 5.92%

0.0%3

$1.8 million

November 2014

receivable3

4

December 2014 through

5.92% and 13.74%

0.0%

Settled

November 2015

5

December 2015 through

5.92%. 13.74%. and 17.37%

0.00%

Settled

November 2016

6

December 2016 through

17.37% and 0.0%

42.57% and 0.0%4

$0.5 million receivable

November 2017

$1.5 million liability4

7

December 2017 through

0.00%

Pending5

NA

November 2018

Included on the Condensed Consolidated Balance Sheet in
Other Current Assets

$2.3 million

Included on the Condensed Consolidated Balance Sheet in
Other Assets

$1.3 million

Included on the Condensed Consolidated Balance Sheet in Other Current Liabilities

$0.2 million

Included on the Condensed Consolidated Balance Sheet in
Other Long-Term Liabilities

$1.5 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%6

$0.07 million
receivable 6

6

January 2016 through
December 2016

0.99% and 1.38%

Final at 3.10% and 2.96%

$0.04 million
liability 7

7

January 2017 through
December 2017

1.38% and 1.06%

20.75%8

$1.7 million
liability 8

8

January 2018 through
December 2018

1.06%

Pending

NA

Included on the Condensed Consolidated Balance Sheet in
Other Current Assets

$0.07 million

Included on the Condensed Consolidated Balance Sheet in
Other Assets

$0.3 million

Included on the Condensed Consolidated Balance Sheet in Other Current Liabilities

$0.04 million

Included on the Condensed Consolidated Balance Sheet in Other Long-Term Liabilities

$1.7 million

16

1In the second quarter of 2018, the Court of International Trade (“CIT”) 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.

2In the second quarter of 2020, the CIT received a recommendation from the DOC to reduce the rate for the second annual review period to 3.92% (from 13.74%). The recommendation was accepted by the CIT in the fourth quarter of 2020, and the Company reversed $3.9 million of its $4.1 million liability, with a corresponding reduction of cost of sales.

3In the third quarter of 2020, the CIT received a recommendation from the DOC to reduce the rate for the third annual review period to 0.0% from 17.37%. The recommendation was accepted by the CIT in the first quarter of 2021, and the Company reversed the entire $4.7 million liability, with a corresponding reduction of cost of sales, and recorded a $1.8 million receivable and favorable adjustment to cost of sales for deposits made at previous preliminary rates.

4In the third quarter of 2019, the DOC issued the final rates for the sixth annual review period at 42.57% and 0% depending on the vendor. As a result, the Company recorded a liability of $0.8 million with a corresponding reduction of cost of sales during the year ended December 31, 2019. The Company received payments during 2019 for its vendor with a final rate of 0% and the remaining balance of $0.5 million as of June 30, 2021 was included in other current assets on the condensed consolidated balance sheet. The vendors with a final rate of 42.57% are under appeal and the balance of $1.5 million as of June 30, 2021 was included in other long-term liabilities on the condensed consolidated balance sheet.

5In the first quarter of 2020, the DOC issued a preliminary rate of 0.0% for the seventh annual review period.

6In the second quarter of 2018, the DOC issued the final rates for the fifth annual review period at 0.11% and 0.85% depending on the vendor.  As a result, in the second quarter of 2018, the Company recorded a receivable of $0.07 million for deposits made at previous preliminary rates, with a corresponding reduction of cost of sales.

7In the third quarter of 2019, the DOC issued the final rates for the sixth annual review period at 3.1% and 2.96% depending on the vendor. As a result, the Company recorded a liability of $0.4 million with a corresponding reduction of cost of sales during the year ended December 31, 2019. The remaining balance, after payments, was approximately $40 thousand as of June 30, 2021.

8In the fourth quarter of 2020, the DOC issued the final rate 20.75% for the seventh annual review period. As a result, the Company recorded a liability of $1.7 million with a corresponding increase to cost of sales during the year ended December 31, 2020. The Company has appealed this final rate during the first quarter of 2021.

Litigation Relating to Bamboo Flooring

Dana 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 was defective (the “Gold Litigation”). In the third quarter of 2019, the parties finalized a settlement agreement that is consistent with the terms of the Memorandum of Understanding previously disclosed by the Company, to resolve the Gold Litigation on a nationwide basis. Under the terms of the settlement agreement, the Company contributed $14 million in cash (the “Gold Cash Payment”) and provided $16 million in store-credit vouchers, for an aggregate settlement of up to $30 million. The settlement agreement made clear that the settlement does not constitute or include an admission by the Company of any fault or liability and the Company does not admit any fault, wrongdoing or liability. Following the preliminary approval, and pursuant to the terms of the settlement agreement, in December 2019, the Company paid $1 million for settlement administrative costs, which is part of the Gold Cash Payment, to the plaintiff’s settlement escrow account. Notice has been disseminated to class members by the settlement administrator, and final approval was granted by the court on October 22, 2020. The Company has notified its insurance carriers and continues to pursue coverage, but the insurers to date have denied coverage. As the insurance claim is still pending, the Company has not recognized any insurance recovery related to the Gold Litigation.

The Company recognized a charge to earnings of $28 million within selling, general and administrative expense during the fourth quarter of 2018 as its loss became probable and estimable. During the third quarter of 2020, the Company recognized an additional charge to earnings for in-store vouchers of $2 million within selling, general and administrative expense as the Company became aware that a threshold in the settlement agreement was met. The Company paid the remaining $13 million of the Gold Cash Payment in the fourth quarter of 2020. As of June 30, 2021, the remaining accrual related to these matters was $16 million for vouchers, which has been included in the caption “Accrual for Legal Matters and Settlements” on its condensed consolidated balance sheet. Based on a current court order, the vouchers are expected to be issued in the middle of the third quarter 2021.

In addition, there are a number of individual claims and lawsuits alleging damages involving Strand Bamboo Product (the “Bamboo Flooring Litigation”). While the Company believes that a loss associated with the Bamboo

17

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 Related to Formaldehyde-Abrasion MDLs

Beginning in 2015, numerous purported class action cases were filed in various United States federal district courts and state courts involving claims of excessive formaldehyde emissions and product claims about durability and abrasion from the Company’s Chinese-manufactured laminate flooring products. The United States Judicial Panel on Multidistrict Litigation transferred and consolidated the federal cases to the United States District Court for the Eastern District of Virginia (the “Virginia Court”) as two cases: Lumber Liquidators Chinese-Manufactured Flooring Products Marketing, Sales, Practices and Products Liability Litigation (the “Formaldehyde MDL”) and Lumber Liquidators Chinese-Manufactured Laminate Flooring Durability Marketing and Sales Practices Litigation (the “Abrasion MDL”).

In 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 agreed to fund $22 million (the “MDL 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-manufactured laminate flooring sold by the Company between January 1, 2009 and May 31, 2015. The Court approved the settlement in the fourth quarter of, 2018 and the Company paid $21.5 million in cash into the plaintiffs’ settlement escrow account.

Cash and vouchers, which generally have a three-year life, were distributed by the administrator in the fourth quarter of 2020 upon order of the Virginia Court. The Company will monitor and evaluate the redemption of vouchers on a quarterly basis. The Company’s current expectation is that recipients bargained for this compensation as part of the settlement and therefore will redeem their voucher for product as intended.

The $36 million aggregate settlement amount was accrued in 2017. The Company had held $21.5 million of the Settlement as a deposit pending the appeals and the distribution of cash by the administrator, which occurred in the fourth quarter of 2020. As of June 30, 2021, the remaining accrual related to these matters was $11.7 million for vouchers, which has been included in the caption “Accrual for Legal Matters and Settlements – Current” on its condensed consolidated balance sheet. As $2.3 million of vouchers were redeemed during the first six months of 2021, the Company relieved the accrual for legal matters and settlements for the full amount, relieved inventory at its cost, and the remaining amount -- the gross margin for the items sold of $0.8 million was recorded as a reduction in “Selling, General and administrative Expenses” (“SG&A”) on the condensed consolidated statement of operations.

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 “Related Laminate Matters”). Certain of these Related Laminate Matters were settled in 2019. The Company did 0t have any expense for these matters for the six months ended June 30, 2021, or for the six months ended June 30, 2020. As of June 30, 2021 and 2020, the remaining accrual related to these matters was $0.1 million, which has been included in the caption “Accrual for Legal Matters and Settlements” on the condensed consolidated balance sheet. While the Company believes that a further loss associated with the Opt Outs and Related 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 relating to the Company’s Chinese-manufactured laminate flooring products. Steele did not quantify any alleged

18

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 reasonably possible, the Company is unable to reasonably estimate the amount or range of possible loss.

Section 301 Tariffs

Since September 2018, pursuant to Section 301 of the Trade Act of 1974, the United States Trade Representative (“USTR”) has imposed tariffs on certain goods imported from China over four tranches or Lists. Products imported by the Company fall within Lists 3 and 4 for which tariffs range from 10% to 25%. On September 10, 2020 several importers of vinyl flooring filed a lawsuit with the CIT challenging the Section 301 tariffs under Lists 3 and 4. The Company has also filed a companion case at the CIT challenging Section 301 tariffs it has paid. The action is in its early stages and the Company is unable to predict the timing or outcome of the ruling by the CIT. If these appeals are successful, the Company should qualify for refunds on these Section 301 tariffs.

Other Matters

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

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

Cautionary Note Regarding Forward-Looking Statements

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

having sufficient inventory for consumer demand;
obtaining products from abroad, including the effects of the COVID-19 pandemic and tariffs, delays in shipping, as well as the effects of antidumping and countervailing duties;
an overall decline in the health of the economy, the hard-surface flooring industry, the housing market and overall consumer spending, including the effects of the COVID-19 pandemic;
a sustained period of inflation impacting consumer spending;
impact on sales, ability to obtain and distribute products, and employee safety and retention, including the effects of the COVID-19 pandemic and continued roll-out of vaccine;
the outcomes of legal proceedings, and the related impact on liquidity;
reputational harm;
obligations under various settlement agreements and other compliance matters;
disruptions due to cybersecurity threats, including any impacts from a network security incident;
inability to open new stores, find suitable locations for our new store concept, and fund other capital expenditures;
inability to execute on our key initiatives or such key initiatives do not yield desired results;
disruption in our ability to distribute our products, including due to disruptions from the impacts of severe weather;
operating an office in China;
managing third-party installers and product delivery companies;

19

our ability to develop, grow and maintain business relationships with professional contractors;
renewing store, warehouse, or other corporate leases;
having sufficient warehouse capacity;
international and domestic transportation costs and availability;
having sufficient suppliers;
our, and our suppliers’, compliance with complex and evolving rules, regulations, and laws at the federal, state, and local level;
product liability claims, marketing substantiation claims, wage and hour claims, employment classification claims and other labor and employment claims;
availability of suitable hardwood, including due to disruptions from the impacts of severe weather;
sufficient insurance coverage, including cybersecurity insurance;
access to and costs of capital;
the handling of confidential customer information, including the impacts from the California Consumer Privacy Act and other applicable data privacy laws and regulations;
our ability to develop digital technology needed to grow our business and meet customer expectations;
management information systems disruptions;
alternative e-commerce offerings;
our advertising and overall marketing strategy, including anticipating consumer trends;
competition;
impact of changes in accounting guidance, including implementation guidelines and interpretations;
internal controls;
stock price volatility; and
anti-takeover provisions.

Information regarding risks and uncertainties is contained in the Company’s reports filed with the SEC, including the Item 1A, “Risk Factors,” section of this quarterly report and the Form 10-K for the year ended December 31, 2020.

This management discussion should be read in conjunction with the financial statements and notes included in Part I, Item 1. “Financial Statements” of this quarterly report and the audited financial statements and notes and management discussion included in the Company’s annual report filed on Form 10-K for the year ended December 31, 2020.

Overview

Lumber Liquidators (“LL Flooring” or “Company”) is one of North America's leading specialty retailers of hard-surface flooring with 416 stores as of June 30, 2021. Our Company seeks to offer the best customer experience online and in stores, with more than 500 varieties of hard-surface floors featuring a range of quality styles and on-trend designs. Our online tools also help empower customers to find the right solution for the space they’ve envisioned. Our extensive selection includes vinyl plank, solid and engineered hardwood, laminate, bamboo, porcelain tile, and cork, with a wide range of flooring enhancements and accessories to complement. Our stores are staffed with flooring experts who provide advice, pro partnership services and installation options for all of our products, the majority of which is in stock and ready for delivery.

Our vision is to be the customer’s first choice in hard-surface flooring by providing the best experience, from start to finish. We offer a wide selection of high-quality, stocked products and the accessible flooring expertise and service of a local store, with the scale, omni-channel convenience and value of a national chain. We plan to leverage this advantage to differentiate ourselves in the highly fragmented flooring market. We launched our new digital platform, LLFlooring.com, in December 2020. In February 2021, we launched our new mobile app featuring our popular Picture It and Floor Finder tools and making it easy to order installations.

To supplement the financial measures prepared in accordance with U.S. generally accepted accounting principles (GAAP), the Company uses the following non-GAAP financial measures: (I ) Adjusted Gross Profit; (ii)

20

Adjusted Gross Margin; (iii) Adjusted SG&A; (iv) Adjusted SG&A as a percentage of net sales; (v) Adjusted Operating Income; (vi) Adjusted Operating Margin; (vii) Adjusted Other (Income) Expense; (viii) Adjusted Earnings; and (ix) Adjusted Earnings per Diluted Share. These non-GAAP financial measures should be viewed in addition to, and not in lieu of, financial measures calculated in accordance with GAAP. These supplemental measures may vary from, and may not be comparable to, similarly titled measures by other companies.

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

Results of operations for the three and six months ended June 30, 2021 are not necessarily indicative of future results to be expected for the full year due to a number of factors, including seasonality, tariffs, supply chain, and general economic conditions, as well as the uncertainty and ongoing impact of the COVID-19 pandemic that may impact sales for the remainder of fiscal 2021.

Second Quarter Financial Highlights

Net sales of $301.4 million increased 30.9% compared to the same period last year, driven primarily by strong pro customer and service sales.
Total comparable store sales increased 31.3% versus the same period last year.
Gross margin of 37.4% decreased 90 basis points as a percent of sales compared to the same period last year, Adjusted Gross Margin (a non-GAAP measure) of 37.4% decreased 90 basis points as a percent of sales compared to last year, primarily reflecting higher tariffs, materials and inbound transportation costs that were partially offset by pricing, promotion and sourcing strategies.
SG&A as a percent of sales of 31.9% leveraged 380 basis points compared to the second quarter of last year on higher net sales. Adjusted SG&A (a non-GAAP measure) as a percent of sales of 31.8% leveraged 370 basis points compared to the second quarter of last year on higher net sales.
Operating margin of 5.5% increased 290 basis points compared to the second quarter of last year. Adjusted operating margin (a non-GAAP measure) of 5.6% increased 280 basis points compared to the second quarter of last year.
Diluted EPS of $0.41 increased $0.32 compared to the second quarter of last year. Adjusted Earnings per Diluted Share (a non-GAAP measure) of $0.41 increased $0.31 compared to the second quarter of last year.
During the second quarter, the Company repaid all $101.0 million of outstanding debt.
During the second quarter, the Company opened four new stores, bringing total stores to 416 as of June 30, 2021.

Other Items

Liquidity and Credit Agreement Amendment

As of June 30, 2021, the Company had liquidity of $241.0 million, consisting of excess availability under its Credit Agreement of $128.6 million, and cash and cash equivalents of $112.4 million. This represents an increase in liquidity of $55.0 million from June 30, 2020 and an increase of $27 million from December 31, 2020. During the second quarter the Company repaid all $101.0 million of its outstanding debt.

On April 30, 2021, the Company amended its Credit Agreement to provide:

·An extension in maturity date from March 2024 to April 2026.
·Termination of the FILO Term Loans and conversion of those commitments to the Revolving Credit Facility. The total size of the Credit Agreement remains at $200 million.

21

·The margin for LIBOR Rate Loans (as defined in the Second Amendment) decreased by 1.25% to a range of 1.25% to 1.75% over the applicable LIBOR Rate (as defined in the Second Amendment) with respect to Revolving Loans (as defined in the Second Amendment), and reduced the LIBOR floor from 1.00% to 0.25%. The Second Amendment also decreased the unused commitment fee by 0.25% per annum.
·Except as set forth in the Second Amendment, all other terms and conditions of the Credit Agreement remain in place.

Based on what we know today about the impact of COVID-19, the Company believes that cash flows from operations, together with the liquidity under its Credit Agreement, provides sufficient liquidity to navigate the current environment.

Impact of COVID-19 on Supply Chain

During the second quarter of 2020 we limited our inventory purchases as a direct result COVID-19. Supply chain disruption on replenishment and strong second half of 2020 sales kept inventory below our targeted level during the second half of 2020 and first half of 2021. As a result, we believe we could have captured more sales in the fourth quarter of 2020 and first half of 2021 if our inventories had been higher. While our supply chain teams continue to work diligently to bring in new inventory and allocate it effectively across our stores, we anticipate the supply chain to remain constrained for the foreseeable future, limiting inventory availability and increasing costs. Supply chain constraints include international container access and a shortage of domestic truckers, as well as renewed COVID-19 related shutdowns for some of our sourcing partners across southeast Asia and we do not expect the solid domestic hardwood supply to normalize until 2022 at the earliest. As a result of continued supply chain pressures, we expect increasing transportation and materials costs in the second half of 2021, which may persist into the foreseeable future.

Section 301 Tariffs

The Company’s financial statements have been impacted by Section 301 tariffs on certain products imported from China in recent years. A subset of these imports for certain click vinyl and other engineered products (the “Subset Products”) received an exemption that was made retroactive to the beginning of the Section 301 Tariffs for a period of time but were reinstated in August 2020. The tariffs flow through the income statement as the product is sold. The Company has deployed strategies to mitigate tariffs and improve gross margin, primarily through adjusting its pricing and promotion strategies and alternative country sourcing. The following chart provides a timeline of tariff levels for the key events related to Section 301 Tariffs.

Section 301 tariff

Corresponding approximate

Event

Timing

level on imports

Tariff level on

percentage of Company's

from China

Subset Products

merchandise subject to tariff

Imposition of Tariffs

September 2018

10%

10% then 0%1

48%

Increase in Tariffs

June 2019

25%

25% then 0%1

44%

Retroactive Exemption on Subset Products1

November 2019

25%

0%

10%

Exemption Not Renewed and Tariffs Re-imposed on Subset Products

August 2020

25%

25%

32%

June 30, 2021

25%

25%

22%

1On November 7, 2019, the U.S. Trade Representative granted a retroactive exclusion to September 2018 on Subset Products as defined in the Section 301 Tariffs section above bringing the rate to 0%.

22

Results of Operations

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

% Increase

% of Net Sales

(Decrease) in

Three Months Ended June 30,

Dollar Amounts

2021

    

2020

    

2021 VS 2020

    

Net Sales

Net Merchandise Sales

86.1

%

91.2

%

23.6

%

Net Services Sales

13.9

%

8.8

%

106.8

%

Total Net Sales

100.0

%

100.0

%

30.9

%

Gross Profit

37.4

%

38.3

%

27.7

%

Selling, General, and Administrative Expenses

31.9

%

35.7

%

16.8

%

Operating Income

5.5

%

2.6

%

176.7

%

Other Expense

0.2

%

0.5

%

(56.4)

%

Income Before Income Taxes

5.3

%

2.1

%

231.5

%

Income Tax Expense

1.3

%

1.0

%

85.7

%

Net Income

4.0

%

1.1

%

354.3

%

% Increase

% of Net Sales

(Decrease) in

Six Months Ended June 30,

Dollar Amounts

2021

    

2020

    

2021 VS 2020

    

Net Sales

Net Merchandise Sales

87.1

%

90.2

%

13.5

%

Net Services Sales

12.9

%

9.8

%

54.1

%

Total Net Sales

100.0

%

100.0

%

17.5

%

Gross Profit

39.0

%

38.8

%

18.1

%

Selling, General, and Administrative Expenses

34.0

%

35.9

%

11.3

%

Operating Income

5.1

%

3.0

%

101.2

%

Other Expense

(0.0)

%

0.4

%

NM

%

Income Before Income Taxes

5.1

%

2.6

%

135.3

%

Income Tax Expense (Benefit)

1.2

%

(0.4)

%

NM

%

Net Income

3.9

%

3.0

%

52.0

%

Three Months Ended

Six Months Ended

June 30,

June 30,

SELECTED SALES DATA

2021

2020

2021

2020

Average Sale1

$

1,564

$

1,209

$

1,488

$

1,284

Average Retail Price per Unit Sold Increase (Decrease)2

9.9

%  

 

(4.8)

%  

 

 

6.8

%  

 

(1.1)

%  

Comparable Store Sales Increase (Decrease)3

31.3

%  

(21.3)

%  

18.2

%  

(11.6)

%  

Customers Invoiced Increase (Decrease)4

2.0

%  

(7.3)

%  

2.3

%  

(6.4)

%  

Number of Stores Open, end of period

416

 

422

 

 

416

 

422

Number of Stores Opened in Period, net

4

 

2

 

 

6

 

3

Number of Stores Relocated in Period5

 

 

 

 

1

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).
2Average 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.
3A store is generally considered comparable on the first day of the thirteenth full calendar month after opening.

23

4Change in number of customers invoiced is calculated by applying the average sale, described above, to total net sales at comparable stores.
5A relocated store remains a comparable store as long as it is relocated within the primary trade area.

NM Not meaningful.

Net Sales

Second quarter 2021 net sales of $301.4 million increased $71.1 million, or 30.9%, versus the second quarter of 2020, driven primarily by strong pro customer and service sales. Net merchandise sales increased 23.6% and net service sales (install and freight) increased 106.8% over the prior year. The increase in net service sales primarily reflects consumers’ comfort with having professionals enter their homes compared to the severe shutdowns due to COVID-19 in the second quarter 2020. Comparable store sales for the second quarter of 2021 increased 31.3% from the second quarter of 2020. Comparable sales growth in 2021 primarily reflected the impact from the onset of COVID-19 shutdowns that began in March 2020 and continued throughout a significant part of the second quarter 2020, as well the continued execution on our transformation initiatives and strong consumer demand for installation and home improvement projects. Average ticket increased 29.4% and average retail unit price per unit sold also increased 9.9% during the same time period. During the second quarter of 2021, the Company opened four new stores bringing the total store count to 416 as of June 30, 2021.

Net sales for the six months ended June 30, 2021 increased 17.5% from the comparable period in 2020. Net merchandise sales increased 13.5% and net service sales increased 54.1% over the comparable period in 2020. Comparable store sales for the six months ended June 30, 2021 increased 18.2% from the comparable period in 2020.

Gross Profit

Gross profit increased 27.7% in the second quarter of 2021 to $112.7 million from $88.3 million in the comparable period in 2020 and gross margin decreased 90 basis points to 37.4% in the second quarter of 2021 from 38.3% in the second quarter of 2020. The decrease in gross margin for the second quarter of 2021 primarily reflected higher tariffs on certain goods imported from China (discussed in the “Section 301 Tariffs” section above) and higher materials and inbound transportation costs, which were partially offset by pricing, promotion and sourcing strategies.

Gross profit increased 18.1% for the six months ended June 30, 2021 to $228.3 million from $193.3 million in the comparable period in 2020 and gross margin increased 20 basis points to 39.0% in the six month period 2021 from 38.8% in 2020. For the first six months of 2021, the Company reported a positive $6.6 million impact from anti-dumping duty rate changes compared to 2020. Excluding this item as shown on the table that follows, Adjusted Gross Profit (a non-GAAP measure) increased by $28.5 million and Adjusted Gross Margin (a non-GAAP measure) of 37.9% decreased by 90 basis points. The decrease in adjusted gross margin was due primarily to the August 2020 reinstatement of tariffs on certain flooring products imported from China (discussed in the “Section 301 Tariffs” section that follows) partially offset by pricing, promotion and sourcing strategies.

We believe that the following item set forth in the table 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.

Three Months Ended June 30,

Six Months Ended June 30,

2021

2020

2021

2020

 

$

% of Sales

$

% of Sales

$

% of Sales

$

% of Sales

(dollars in thousands)

(dollars in thousands)

Gross Profit, as reported (GAAP)

    

$

112,730

37.4

%

$

88,292

38.3

%

$

228,322

39.0

%

$

193,263

38.8

%

Antidumping Adjustments 1

%

%

(6,566)

(1.1)

%

%

Sub-Total Items above

 

%

 

%

 

(6,566)

(1.1)

%

 

%

Adjusted Gross Profit (non-GAAP measures)

$

112,730

37.4

%

$

88,292

38.3

%

$

221,756

37.9

%

$

193,263

38.8

%

1Represents antidumping expense associated with applicable prior-year shipments of engineered hardwood from China.

24

Selling, General and Administrative Expenses

SG&A expense for the second quarter of 2021 was $96.1 million, or 31.9% of sales, improving by 380 basis points in the second quarter of 2021 from the comparable period in 2020. SG&A in both quarters included certain costs related to legal matters and settlements. Excluding these items as shown in the table that follows, Adjusted SG&A (a non-GAAP measure) for the second quarter of 2021 was $95.8 million, compared to $81.8 million in the second quarter of 2020. As a percent of sales, adjusted SG&A improved 370 basis points, to 31.8% of sales, compared to 35.5% for the same period in the prior year, which was a result of the much higher sales volume in 2021. The higher overall adjusted SG&A expense in 2021 compared to 2020 reflected substantial actions taken last year to address the COVID-19 pandemic, including lower payroll and benefits expense as we proactively aligned staffing with demand levels, temporary salary reductions for corporate office personnel and the Board of Directors, and lower advertising expense.

SG&A expense for the first six months of 2021 was $198.6 million, or 34.0% of sales, improving by 190 basis points from the comparable period in 2020. SG&A in both periods included certain costs related to legal matters and settlements. Excluding these items as shown in the table that follows, Adjusted SG&A (a non-GAAP measure) was $190.5 million for the 2021 six-month period, compared to $177.2 million in 2020. As a percent of sales, adjusted SG&A improved 300 basis points, to 32.6% of sales, compared to 35.6% for the same period in the prior year, which was a result of the higher sales volume in 2021. The higher overall SG&A was primarily driven by the substantial actions taken last year to address the COVID-19 pandemic as described in the paragraph above. The Company redeemed $2.3 million of vouchers during the six months of 2021 and relieved the accrual for legal matters and settlements for the full amount, relieved inventory at its cost, and the remaining amount -- the gross margin for the items sold of $0.8 million was recorded as a reduction in SG&A expense.

We believe that the following items set forth in the table 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.

Three Months Ended June 30,

Six Months Ended June 30,

2021

2020

2021

2020

$

% of Sales

$

% of Sales

$

% of Sales

$

% of Sales

(dollars in thousands)

(dollars in thousands)

SG&A, as reported (GAAP)

$

96,116

31.9

%

$

82,288

35.7

%

$

198,602

34.0

%

$

178,495

35.9

%

Accrual (Recovery) for Legal Matters and Settlements 2

 

%

 

(500)

(0.2)

%

 

7,675

1.3

%

 

(500)

(0.1)

%

Legal and Professional Fees 3

 

279

0.1

%

 

995

0.4

%

 

427

0.1

%

 

1,788

0.4

%

Sub-Total Items above

 

279

0.1

%

 

495

0.2

%

 

8,102

1.4

%

 

1,288

0.3

%

Adjusted SG&A (a non-GAAP measure)

$

95,837

31.8

%

$

81,793

35.5

%

$

190,500

32.6

%

$

177,207

35.6

%

2This amount represents the charge to earnings for the Mason and Savidis matters for the six months ended June 30, 2021 which are described more fully in Item 1, Note 7 to the condensed consolidated financial statements. The 2020 amounts represent a $0.5 million insurance recovery of legal fees related to certain significant legal action.
3Represents charges to earnings related to our defense of certain significant legal actions during the period. This does not include all legal costs incurred by the Company.

Operating Income and Operating Margin

Operating income was $16.6 million for the second quarter of 2021 compared to $6.0 million for the second quarter of 2020. Adjusted Operating Income (a non-GAAP measure) was $16.9 million for the second quarter of 2021, a year-over-year increase of $10.4 million compared to adjusted operating income of $6.5 million for the second quarter of 2020. As a percent of net sales, adjusted operating margin for the second quarter of 2021 was 5.6%, up 280 basis points from the second quarter of 2020. The higher operating margin reflects good progress on our profit improvement initiatives, with our merchant and sourcing teams implementing strategies to mitigate tariffs, our marketing teams deploying more efficient and effective marketing spend, and our overall organization driving disciplined expense management, somewhat offset by higher transportation and raw materials costs, as well the continued investment in our growth initiatives.

25

Operating income was $29.7 million for the first six months of 2021 compared to $14.8 million for the comparable period in 2020. Adjusted Operating Income was $31.3 million for the six months ended June 30, 2021, a year-over-year increase of $15.2 million compared to Adjusted Operating Income of $16.1 million in 2020, for the same reasons as described above.

We believe that the following items set forth in the table 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.

Three Months Ended June 30,

Six Months Ended June 30,

    

2021

    

2020

    

2021

    

2020

    

$

% of Sales

$

% of Sales

$

% of Sales

$

% of Sales

(dollars in thousands)

(dollars in thousands)

Operating Income, as reported (GAAP)

$

16,614

5.5

%

$

6,004

2.6

%

$

29,720

5.1

%

$

14,768

3.0

%

Gross Margin Items:

 

  

 

 

  

 

  

Antidumping Adjustments 1

%

%

(6,566)

(1.1)

%

%

Gross Margin Subtotal

 

%

 

%

 

(6,566)

(1.1)

%

 

%

SG&A Items:

 

  

 

  

 

  

 

  

Accrual (Recovery) for Legal Matters and Settlements 2

 

%

 

(500)

(0.2)

%

 

7,675

1.3

%

 

(500)

(0.1)

%

Legal and Professional Fees 3

 

279

0.1

%

 

995

0.4

%

 

427

0.1

%

 

1,788

0.3

%

SG&A Subtotal

 

279

0.1

%

 

495

0.2

%

 

8,102

1.4

%

 

1,288

0.2

%

Adjusted Operating Income (a non-GAAP measure)

$

16,893

5.6

%

$

6,499

2.8

%

$

31,256

5.3

%

$

16,056

3.2

%

1,2,3    See the Gross Profit and SG&A sections above for more detailed explanations of these individual items.

Other Expense (Income)

The Company had other expense of $0.5 million for the second quarter 2021 compared to other expense of $1.1 million for the comparable period 2020. The decrease of $0.6 million was driven by lower interest rate on our Credit Agreement due to the amendment in April 2021 and the repayment of the outstanding debt during the second quarter of 2021.

The Company had other income of $0.3 million for the first six months of 2021 compared to other expense of $2.0 million for the comparable period 2020. Both years included interest on borrowings on our Credit Agreement. The interest expense on borrowings in 2021 was offset by a favorable adjustment of $1.8 million for the reversal of interest expense associated with the $6.6 million anti-dumping duty rate refund recognized during the first quarter. Adjusted Other Expense (a non-GAAP measure) was $1.6 million for the first six months of 2021, which is a decrease of $0.5 million compared to the first six months of 2020 driven by lower interest rates on our Credit Agreement due to the amendment in April 2021.

26

We believe that the following item set forth in the table 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.

Three Months Ended June 30,

 

Six Months Ended June 30,

 

2021

2020

 

2021

2020

 

    

    

% of Sales

    

    

% of Sales

 

  

    

% of Sales

    

    

% of Sales

 

(dollars in thousands)

 

(dollars in thousands)

 

Other Expense (Income), as reported (GAAP)

$

498

 

0.2

%  

$

1,142

 

0.5

%

$

(270)

 

(0.0)

%  

$

2,024

 

0.4

%

Interest impact related to antidumping adjustment 4

 

 

%  

 

 

%

 

(1,841)

 

(0.3)

%  

 

 

%

Sub-Total Items above

 

 

%  

 

 

%

 

(1,841)

 

(0.3)

%  

 

 

%

Adjusted Other Expense/Adjusted Other Expense as a % of Sales (a non-GAAP measure)

$

498

 

0.2

%  

$

1,142

 

0.5

%

$

1,571

 

0.3

%  

$

2,024

 

0.4

%

4Represents the interest income impact of certain antidumping adjustments related to applicable prior-year shipments of engineered hardwood from China.

Provision for Income Taxes

The Company calculates its quarterly tax provision pursuant to the guidelines in Accounting Standards Codification ("ASC") 740-270 "Income Taxes." Generally, ASC 740-270 requires companies to estimate the annual effective tax rate for current year ordinary income. The estimated annual effective tax rate represents the best estimate of the tax provision in relation to the best estimate of pre-tax ordinary income or loss. The estimated annual effective tax rate is then applied to year-to-date ordinary income or loss to calculate the year-to-date interim tax provision. This process was employed in 2021. Due to disruption related to the COVID-19 pandemic in 2020, the Company applied the actual year-to-date effective tax rate for the tax provision in the three and six month periods ended June 30, 2020.

For the three months ended June 30, 2021, the Company recognized income tax expense of $4.1 million, which represented an effective tax rate of 25.6%. For the three months ended June 30, 2020, the Company recognized income tax expense of $2.2 million, which represented an effective tax rate of 45.7%.

For the six months ended June 30, 2021, the Company recognized income tax expense of $7.4 million, which represented an effective tax rate of 24.6%. For the six months ended June 30, 2020, the Company recognized an income tax benefit of $2.1 million, which represented an effective tax rate of (16.7)%. The large benefit in the Company’s 2020 tax rate reflected the CARES Act which allowed the Company to carryback certain losses to prior periods and deduct certain capital expenditures from prior periods more quickly giving rise to a $4.8 million income tax benefit in the period.

The Company has a valuation allowance recorded against certain of its net deferred tax assets of $5.6 million as of June 30, 2021 because the jurisdiction and nature of the assets makes realization of these deferred tax assets uncertain. The Company intends to maintain this valuation allowance on its deferred tax assets until there is sufficient evidence to support the realizability of those deferred tax assets or time lapses without opportunity to realize those assets.

Diluted Earnings per Share

Earnings per diluted share was $0.41 for the second quarter of 2021 compared to $0.09 in the year ago quarter, and second quarter 2021 Adjusted Earnings Per Diluted Share (a non-GAAP measure) was $0.41 compared to $0.10 for the second quarter of 2020.

Earnings per diluted share was $0.77 for the six months ended June 30, 2021, compared to $0.51 for the six months ended June 30, 2020. Adjusted Earnings Per Diluted Share was $0.76 for the six months ended June 30, 2021, compared to $0.55 for the six months ended June 30, 2020.

27

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.

Three Months Ended June 30,

Six Months Ended June 30, 

2021

2020

2021

2020

(dollars in thousands, except per share amounts)

(dollars in thousands, except per share amounts)

Net Income, as reported (GAAP)

$

11,989

$

2,639

$

22,611

$

14,874

Net Income per Diluted Share (GAAP)

$

0.41

$

0.09

$

0.77

$

0.51

Gross Margin Items:

 

  

 

  

 

  

 

  

Antidumping Adjustments 1

 

(4,852)

 

Gross Margin Subtotal

 

 

 

(4,852)

 

SG&A Items:

 

  

 

  

 

  

 

  

Accrual (Recovery) for Legal Matters and Settlements 2

 

(369)

 

5,672

 

(369)

Legal and Professional Fees 3

206

735

316

1,321

SG&A Subtotal

 

206

 

366

 

5,988

 

952

Other Expense Items:

 

 

 

Antidumping Adjustments Interest 4

(1,360)

Other (Income) Expense Subtotal

 

 

 

(1,360)

 

Adjusted Earnings

$

12,195

$

3,005

$

22,387

$

15,826

Adjusted Earnings per Diluted Share (a non-GAAP measure)

$

0.41

$

0.10

$

0.76

$

0.55

1,2,3,4    See the Gross Profit, SG&A and Other Expense (Income) sections above for more detailed explanations of these individual items. These items have been tax affected at the Company’s federal incremental rate of 26.1%.

Seasonality

Our net sales fluctuate slightly as a result of seasonal factors, and we adjust merchandise inventories in anticipation of those factors, causing variations in our build of merchandise inventories. Generally, we experience higher-than-average net sales in the spring and fall, when more home remodeling activities are taking place, and lower-than-average net sales in the winter months and during the hottest summer months. These seasonal fluctuations, however, are minimized to some extent by our national presence, as markets experience different seasonal characteristics. Those historical trends have been and continue to be affected by the COVID-19 pandemic.

Liquidity, Capital Resources and Cash Flows

Our strong balance sheet and liquidity provide us with the financial flexibility to fund our growth initiatives and position LL Flooring for long-term success. We had cash and cash equivalents of $112.4 million as of June 30, 2021 and repaid all $101.0 of our outstanding debt during the second quarter of 2021.

Our principal sources of liquidity at June 30, 2021 were cash from our ongoing operations, $112.4 million of cash and cash equivalents on our balance sheet and $128.6 million of availability under our Revolving Loan. As of

28

June 30, 2021, there was no outstanding balance on our Revolving Loan, but had we borrowed, it would have carried an interest rate of 1.75%.

Our cash flows from operating activities was $53.3 million during the first six months of 2021 which was primarily the result of our net income during the period ($22.6 million), sell through of inventory ($17.6 million), and growth in customer deposits ($6.3 million).

Through the six months ended June 30, 2021, net cash flows used in investing activities included $7.4 million in capital expenditures for store rebranding, opening 6 new stores and investments in digital. For 2021 we currently expect capital expenditure investments of up to $24 million to $28 million as our business results support the opening of 12 to 15 new stores and the continuation of the investing activities described above.

Through the six months ended June 30, 2021, net cash used in financing activities was $103.5 million, compared to $18.4 million provided by financing activities in the six months ended June 30, 2020. This activity in the current six-month period was primarily due to the paydown of all our outstanding debt under the Credit Agreement of $101.0 million. The comparable 2020 six-month period was primarily due to net borrowings of $19.0 million under our Credit Agreement.

On April 30, 2021 we entered into a Second Amendment to the Credit Agreement to extend the maturity date to April 30, 2026, convert the FILO Term Loan into the Revolving Credit Facility, decrease the margin for LIBOR Rate Loans, and reduce the LIBOR floor, which is described more fully in Item 1, Note 5 to the condensed consolidated financial statements.

Our focus on liquidity since the onset of the COVID-19 pandemic in March 2021 has allowed us to build a strong position to navigate the continuing COVID-19 environment, and our business continues to generate solid cash flow. We are monitoring the current macro-economic conditions and the impact of COVID-19, including the potential impact of emerging variants. We believe that cash flows from operations, together with cash on hand, and the liquidity under our Credit Agreement will be sufficient to meet our obligations, fund our settlements, operations, and anticipated capital expenditures for the next 12 months. We also plan to increase our inventories as supply chain disruptions abate. We prepare our forecasted cash 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.

Merchandise Inventories

Merchandise inventories at June 30, 2021 decreased $20.5 million from December 31, 2020 primarily due to supply chain constraints on replenishment and strong sales during the first six months of 2021. We consider merchandise inventories 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. 

Merchandise inventories and available inventory per store in operation were as follows:

As of
June 30, 2021

    

As of
December 31, 2020

    

As of
June 30, 2020

(in thousands)

Inventory – Available for Sale

$

190,916

$

205,664

$

227,418

Inventory – Inbound In-Transit

 

32,991

 

38,745

 

21,304

Total Merchandise Inventories

$

223,907

$

244,409

$

248,722

Available Inventory Per Store

$

459

$

502

$

539

29

Available inventory per store at June, 2021 was lower than at December 31, 2020 and significantly lower than June 30, 2020. The decrease in available inventory compared to June 30, 2020 was primarily driven by supply chain constraints on replenishment and strong sales that continue to keep inventory below our targeted levels.

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.

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 might obtain different estimates if we used different assumptions or conditions. We have had no significant changes in our Critical Accounting Policies and Estimates since our annual report on Form 10-K for the year ended December 31, 2020.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Interest Rate Risk.

We are exposed to interest rate risk through the investment of our cash and cash equivalents. Our policy is to 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. Borrowings under our Credit Agreement are exposed to interest rate risk due to the variable rate of the facility, and the expected transition from the LIBOR reference rate in 2021. As of June 30, 2021, we had no amount outstanding under our Credit Agreement. If the interest rate had varied by 1% in either direction during the 2020 annual period, interest expense would have fluctuated by $1 million.

We currently do not engage in any interest rate hedging activity. However, in the future, in an effort to mitigate losses associated with interest rate 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.

Item 4. Controls and Procedures.

Evaluation of disclosure controls and procedures. Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined under Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the quarter ended June 30, 2021. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of June 30, 2021.

Changes in Internal Control over Financial Reporting. There has been no change in our internal control over financial reporting that occurred during the most recent quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

30

PART II
OTHER INFORMATION

Item 1. Legal Proceedings.

Information with respect to this item may be found in Note 7, “Commitments and Contingencies”, to the condensed consolidated financial statements in Item 1 of Part I, which is incorporated herein by reference.

Item 1A. Risk Factors.

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A, “Risk Factors,” in our annual report on Form 10-K for the year ended December 31, 2020, which could materially affect our business, financial condition or future results.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

The following table presents our share repurchase activity for the quarter ended June 30, 2021 (in thousands, except per share amounts):

    

    

    

Total Number

    

Maximum Dollar Value

of Shares

of Shares That May Yet

Purchased as

Be Purchased as

Total Number

Average

Part of Publicly

Part of Publicly

of Shares

Price Paid

Announced

Announced

Period

Purchased1

per Share1

Programs

Programs

April 1, 2021 to April 30, 2021

 

 

 

 

May 1, 2021 to May 31, 2021

 

 

 

 

June 1, 2021 to June 30, 2021

 

 

 

 

Total

 

 

 

 

1We repurchased 19,025 shares of our common stock, at an average price of $23.04, in connection with the net settlement of shares issued as a result of the vesting of restricted shares during the quarter ended June 30, 2021.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

None.

Item 5. Other Information.

None.

Item 6. Exhibits.

The exhibits listed in the following exhibit index are furnished as part of this report.

31

EXHIBIT INDEX

Exhibit

Number

    

Exhibit Description

31.1

Certification of Principal Executive Officer of Lumber Liquidators Holdings, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2

Certification of Principal Financial Officer of Lumber Liquidators Holdings, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

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-Q for the quarter ended June 30, 2021, formatted in XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statements of Comprehensive Loss, (iv) Condensed Consolidated Statements of Stockholders’ Equity, (v) Condensed Consolidated Statements of Cash Flows, and (vi) Notes to Condensed Consolidated Financial Statements

104

Cover Page Interactive Data File (embedded within the Inline XBRL document)

32

SIGNATURES

Pursuant to the requirements 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.

LUMBER LIQUIDATORS HOLDINGS, INC.

(Registrant)

Date: August 3, 2021

By:

/s/ Nancy A. Walsh

Nancy A. Walsh

Chief Financial Officer

(Principal Financial Officer)

33