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LL Flooring (LL) - 2020 Q1 - Quarterly Report

PART I – FINANCIAL INFORMATION Condensed Consolidated Financial Statements The company's Q1 2020 financials show a net income of $12.2 million, a significant turnaround from a prior-year loss Condensed Consolidated Balance Sheet (in thousands) | Assets & Liabilities | March 31, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Total Current Assets | $354,737 | $359,113 | | Cash and Cash Equivalents | $22,424 | $8,993 | | Merchandise Inventories | $269,636 | $286,369 | | Total Assets | $589,819 | $596,009 | | Total Current Liabilities | $238,754 | $238,106 | | Credit Agreement | $64,000 | $82,000 | | Total Liabilities | $416,485 | $434,759 | | Total Stockholders' Equity | $173,334 | $161,250 | Condensed Consolidated Statement of Operations (in thousands, except per share amounts) | Metric | Q1 2020 | Q1 2019 | | :--- | :--- | :--- | | Total Net Sales | $267,374 | $266,220 | | Gross Profit | $104,972 | $93,611 | | Operating Income (Loss) | $8,765 | $(3,421) | | Net Income (Loss) | $12,235 | $(4,924) | | Diluted Net Income (Loss) per Share | $0.42 | $(0.17) | Condensed Consolidated Statement of Cash Flows (in thousands) | Cash Flow Activity | Q1 2020 | Q1 2019 | | :--- | :--- | :--- | | Net Cash Provided by Operating Activities | $35,965 | $6,477 | | Net Cash Used in Investing Activities | $(4,174) | $(3,230) | | Net Cash (Used in) Provided by Financing Activities | $(18,316) | $1,273 | | Net Increase in Cash and Cash Equivalents | $13,431 | $5,525 | Note 1. Basis of Presentation The company operates as a single-segment retailer whose operations were significantly impacted by COVID-19 in late March 2020 - The company operates as a single-segment specialty retailer of hard-surface flooring with 420 stores as of March 31, 2020, across 47 U.S. states and Canada18 - The COVID-19 pandemic is expected to have a material negative impact on sales, operations, and financial position in 202021 - Due to COVID-19, the company closed up to 56 stores temporarily, with others operating on reduced hours, and comparable store sales dropped by approximately 45% in the last week of March22 Note 2. Summary of Significant Accounting Policies Key policies cover inventory valuation, revenue recognition, and a $27 million receivable from tariff exclusions - The company recorded a $27 million receivable as of March 31, 2020, for retroactive Section 301 tariff exclusions on certain flooring products from China, with payment expected by the end of 202025 - Cost of sales includes product costs, tariffs, installation services, and transportation, as well as warranty reserves and inventory adjustments, net of vendor allowances31 Sales Mix by Major Product Category (Q1 2020 vs Q1 2019) | Product Category | Q1 2020 % of Sales | Q1 2019 % of Sales | | :--- | :--- | :--- | | Manufactured Products | 44% | 41% | | Solid and Engineered Hardwood | 29% | 31% | | Moldings and Accessories | 16% | 17% | | Installation and Delivery Services | 11% | 11% | Note 5. Credit Agreement The company amended its credit agreement in April 2020 to temporarily increase liquidity in response to the pandemic - As of March 31, 2020, the company had $39 million outstanding under its Revolving Credit Facility and $25 million under its FILO Term Loan, with $109 million of availability41 - On April 17, 2020, the Credit Agreement was amended to temporarily increase the Revolving Credit Facility from $175 million to $212.5 million until August 30, 202046 - The amendment permanently increased interest rate margins for LIBOR Rate Loans by 1.25% to 1.50% and the unused commitment fee from 0.25% to 0.50%4785 Note 6. Income Taxes The company recorded a $4.4 million income tax benefit in Q1 2020, primarily due to a $4.7 million benefit from the CARES Act - The CARES Act, enacted March 27, 2020, allowed the company to carry back net operating losses, resulting in a recorded income tax benefit of $4.7 million in Q1 202050 - For Q1 2020, the company recognized an income tax benefit of $4.4 million (effective rate of -55.2%), compared to a $0.2 million tax expense (effective rate of -4.5%) in Q1 201951 - A full valuation allowance of $27 million is maintained against net deferred tax assets, which will be reversed when there is sufficient evidence of future profitability52 Note 7. Commitments and Contingencies The company faces significant legal proceedings, including settlements for flooring litigation and ongoing duty investigations - A settlement for the Gold Litigation (bamboo flooring) was finalized for up to $30 million ($14M cash, $14M vouchers, plus a potential $2M in vouchers), and as of March 31, 2020, a $27 million accrual remains53 - The Formaldehyde MDL settlement (Chinese laminates) for $36 million ($22M cash, $14M vouchers) has been approved but is pending appeal, and the company has deposited $21.5 million into escrow54 - The Kramer lawsuit (employee classification in California) was settled for $4.75 million, which was paid in April 202061 - The company is subject to ongoing antidumping (AD) and countervailing (CVD) duty investigations on multilayered wood flooring from China, resulting in fluctuating liabilities and receivables as rates are reviewed and appealed6264 Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Performance improved due to higher gross margins, though sales were impacted by COVID-19, prompting liquidity preservation measures - The company's key initiatives, reputation for value, and unique store model are central to its strategy in the fragmented hard-surface flooring market77 - Management uses non-GAAP measures like Adjusted SG&A and Adjusted Operating Income to evaluate performance, excluding items like legal settlements and antidumping duty changes7880 Impact of COVID-19 Pandemic on Our Business The pandemic led to store disruptions, a sharp sales decline, and significant cost-saving measures to preserve liquidity - In response to COVID-19, the company closed up to 56 stores, operated others with reduced hours, and saw comparable store sales fall by ~45% in the last week of March81 - Cost-saving measures included furloughing store associates, reducing distribution center hours, and implementing temporary pay cuts for salaried employees, executives (25%), and the Board of Directors (30%)82 - As of March 31, 2020, the company had $131 million in liquidity, comprising $22 million in cash and $109 million of availability under its Credit Agreement83 Results of Operations Q1 2020 net sales rose 0.4%, while gross margin improved significantly, driving operating income to $8.8 million - Gross margin improvement was driven by margin enhancement efforts, tariff exclusions on Chinese products, supply chain efficiency, a mix of higher-margin manufactured products, and reduced discounting9899 - Adjusted SG&A as a percentage of sales decreased slightly to 35.7% from 35.8% in Q1 2019, reflecting expense management and process efficiency100103 Q1 2020 vs Q1 2019 Performance | Metric | Q1 2020 | Q1 2019 | | :--- | :--- | :--- | | Total Net Sales | $267.4M | $266.2M | | Comparable Store Sales | -0.9% | -0.8% | | Gross Margin | 39.3% | 35.2% | | Operating Income (Loss) | $8.8M | $(3.4)M | | Net Income (Loss) | $12.2M | $(4.9)M | | Diluted EPS | $0.42 | $(0.17) | Liquidity and Capital Resources The company maintains sufficient liquidity through cash and credit, while reducing 2020 capital expenditures by approximately 50% - The company is reducing planned 2020 capital expenditures by approximately 50% in response to COVID-19120 - Net cash from operating activities was $36 million for Q1 2020, a significant increase from $6.5 million in Q1 2019, primarily due to a reduction in inventory and higher net income125 Merchandise Inventory (in thousands) | Date | Total Inventory | Available Inventory Per Store | | :--- | :--- | :--- | | March 31, 2020 | $269,636 | $580 | | Dec 31, 2019 | $286,369 | $608 | | March 31, 2019 | $299,886 | $663 | Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks are interest rate exposure from its variable-rate debt and the upcoming LIBOR transition - The company is exposed to interest rate risk on its Credit Agreement, with $64 million in variable-rate borrowings outstanding as of March 31, 2020129 - Exchange rate risk is minimal, with less than 2% of revenue, expense, and capital purchases transacted in currencies other than the U.S. dollar131 - The company does not currently engage in hedging activities for interest rate or exchange rate risks130132 Controls and Procedures Management concluded that disclosure controls and procedures were effective with no material changes in the quarter - Management concluded that the company's disclosure controls and procedures were effective as of March 31, 2020133 - No material changes to internal control over financial reporting occurred during the first quarter of 2020134 PART II – OTHER INFORMATION Legal Proceedings This section details procedural updates on major litigation, including settlements and ongoing duty investigations - The Gold Litigation settlement (up to $30M) received preliminary approval, with a final hearing set for September 24, 2020, and the company has a remaining accrual of $27 million135 - The $36 million Formaldehyde/Abrasion MDL settlement was upheld by the Appeals Court as fair, but the calculation of attorneys' fees was remanded to the district court139140 - The Kramer lawsuit (California employee classification) was settled for $4.75 million, with payment made to the settlement administrator on April 6, 2020147 - The company provides a detailed history of the antidumping (AD) and countervailing (CVD) duty investigations on Chinese multilayered wood flooring, noting that multiple annual rate reviews are in various stages of finalization and appeal, creating ongoing financial uncertainty148149151 Risk Factors A new risk factor was added to address the significant and uncertain business and financial impact of the COVID-19 pandemic - A new risk factor was added to address the ongoing COVID-19 pandemic's potential adverse effects on the business161 - Risks include disruptions to the supply chain, employee availability, facility closures, and reduced customer demand due to the economic downturn162163 - The company states that the length, scope, and severity of the pandemic's impact are highly uncertain and that business disruption will continue to negatively affect the economy and the company's results164 Unregistered Sales of Equity Securities and Use of Proceeds The company's stock repurchase program remains suspended, with no shares repurchased under the plan during Q1 2020 - No shares were repurchased under the publicly announced program in Q1 2020165 - The stock repurchase program is indefinitely suspended, with approximately $14.7 million remaining under its authorization as of March 31, 2020166 Other Information The company utilized an SEC extension to delay its Form 10-Q filing due to business disruptions from the COVID-19 pandemic - The company delayed the filing of its Q1 2020 Form 10-Q, relying on an SEC order that provided extensions due to the COVID-19 pandemic167 - The delay was caused by operational disruptions, work-from-home transitions, and the need to analyze and apply the newly enacted CARES Act168