LL Flooring (LL) - 2020 Q2 - Quarterly Report

PART I – FINANCIAL INFORMATION This section presents the company's unaudited condensed consolidated financial statements and management's discussion and analysis of financial condition and results of operations Item 1. Condensed Consolidated Financial Statements This section presents the unaudited condensed consolidated financial statements, including balance sheets, statements of operations, comprehensive income (loss), stockholders' equity, and cash flows, along with detailed notes explaining the basis of presentation, significant accounting policies, and specific financial items Condensed Consolidated Balance Sheets This section provides a snapshot of the company's financial position, detailing assets, liabilities, and stockholders' equity at specific reporting dates Condensed Consolidated Balance Sheets (Unaudited, in thousands) | Assets / Liabilities and Stockholders' Equity | June 30, 2020 | December 31, 2019 | | :-------------------------------------------- | :------------ | :---------------- | | Assets | | | | Cash and Cash Equivalents | $126,737 | $8,993 | | Merchandise Inventories | 248,722 | 286,369 | | Tariff Recovery Receivable | 18,285 | 27,025 | | Total Current Assets | 429,333 | 359,113 | | Total Assets | $664,480 | $596,009 | | Liabilities and Stockholders' Equity | | | | Accounts Payable | $68,516 | $59,827 | | Customer Deposits and Store Credits | 55,492 | 41,571 | | Accrual for Legal Matters and Settlements Current | 62,786 | 67,471 | | Credit Agreement | 101,000 | 82,000 | | Total Liabilities | 487,520 | 434,759 | | Total Stockholders' Equity | 176,960 | 161,250 | | Total Liabilities and Stockholders' Equity | $664,480 | $596,009 | - Cash and Cash Equivalents increased significantly from $8,993 thousand at December 31, 2019, to $126,737 thousand at June 30, 2020[5] - Merchandise Inventories decreased from $286,369 thousand to $248,722 thousand during the period[5] Condensed Consolidated Statements of Operations This section outlines the company's financial performance over specific periods, presenting net sales, cost of sales, gross profit, operating income, and net income (loss) Condensed Consolidated Statements of Operations (Unaudited, in thousands, except per share amounts) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :-------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net Sales | $230,284 | $288,567 | $497,658 | $554,787 | | Cost of Sales | 141,992 | 186,080 | 304,395 | 358,689 | | Gross Profit | 88,292 | 102,487 | 193,263 | 196,098 | | SG&A Expenses | 82,288 | 103,864 | 178,495 | 200,896 | | Operating Income (Loss) | 6,004 | (1,377) | 14,768 | (4,798) | | Income (Loss) Before Taxes | 4,862 | (2,445) | 12,744 | (7,156) | | Income Tax Expense (Benefit)| 2,223 | 411 | (2,130) | 624 | | Net Income (Loss) | $2,639 | $(2,856) | $14,874 | $(7,780) | | EPS—Basic | $0.09 | $(0.10) | $0.52 | $(0.27) | | EPS—Diluted | $0.09 | $(0.10) | $0.51 | $(0.27) | - Net Sales decreased by 20% for the three months ended June 30, 2020, compared to the same period in 2019, and by 10.3% for the six months ended June 30, 2020[8] - The company reported a Net Income of $2,639 thousand for the three months ended June 30, 2020, a significant improvement from a Net Loss of $(2,856) thousand in the prior year period[8] Condensed Consolidated Statements of Comprehensive Income (Loss) This section details the company's comprehensive income or loss, including net income (loss) and other comprehensive income (loss) items like foreign currency translation adjustments Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited, in thousands) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :-------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net Income (Loss) | $2,639 | $(2,856) | $14,874 | $(7,780) | | Foreign Currency Translation Adjustments| 227 | (309) | 272 | (192) | | Total Other Comprehensive Income (Loss) | 227 | (309) | 272 | (192) | | Comprehensive Income (Loss) | $2,866 | $(3,165) | $15,146 | $(7,972) | - Comprehensive Income for the three months ended June 30, 2020, was $2,866 thousand, a positive shift from a loss of $(3,165) thousand in the prior year[10] Condensed Consolidated Statements of Stockholders' Equity This section tracks changes in the company's equity over time, reflecting impacts from net income, stock-based compensation, and share transactions Condensed Consolidated Statements of Stockholders' Equity (Unaudited, in thousands) | Item | April 1, 2020 | June 30, 2020 | | :------------------------------------ | :------------ | :------------ | | Total Stockholders' Equity, April 1, 2020 | $173,334 | | | Stock-Based Compensation Expense | 846 | | | Exercise of Stock Options | 36 | | | Common Stock Repurchased | (122) | | | Translation Adjustment | 227 | | | Net Income | 2,639 | | | Total Stockholders' Equity, June 30, 2020 | | $176,960 | - Total Stockholders' Equity increased from $173,334 thousand at April 1, 2020, to $176,960 thousand at June 30, 2020, primarily due to net income and stock-based compensation[11][12] Condensed Consolidated Statements of Cash Flows This section categorizes cash inflows and outflows from operating, investing, and financing activities, illustrating changes in the company's cash position Condensed Consolidated Statements of Cash Flows (Unaudited, in thousands) | Cash Flow Activity | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :-------------------------------------- | :----------------------------- | :----------------------------- | | Net Cash Provided by (Used in) Operating Activities | $105,667 | $(14,092) | | Net Cash Used in Investing Activities | $(6,263) | $(8,843) | | Net Cash Provided by Financing Activities | $18,363 | $23,426 | | Net Increase in Cash and Cash Equivalents | $117,744 | $1,162 | | Cash and Cash Equivalents, End of Period | $126,737 | $12,727 | - Net cash provided by operating activities significantly improved to $105,667 thousand for the six months ended June 30, 2020, compared to net cash used of $(14,092) thousand in the prior year[15] - The company experienced a net increase in cash and cash equivalents of $117,744 thousand, ending the period with $126,737 thousand[15] Note 1. Basis of Presentation This note describes the company's business operations, the basis for preparing the financial statements, and the significant impact of the COVID-19 pandemic on its performance - Lumber Liquidators Holdings, Inc. operates as a multi-channel specialty retailer of hard-surface flooring and related accessories, serving homeowners and contractors through 422 stores in 47 U.S. states and 8 stores in Canada, a customer relationship center, and its website LLFlooring.com[17][26] - The COVID-19 pandemic significantly impacted Q2 2020, leading to the temporary closure of up to 56 stores and reduced hours for others, with comparable store sales down 21.3% for the quarter, improving from a 30% decline through May 23[20][21][93] - By early July, 98% of stores were fully open, with less than 10 operating by appointment only, and only one store remaining closed since the pandemic's onset[21][22][93] Note 2. Summary of Significant Accounting Policies This note details the key accounting principles and methods used in preparing the financial statements, including inventory valuation, revenue recognition, and lease accounting - Merchandise inventories are valued at the lower of cost or net realizable value using the weighted average cost method, with approximately 46% of the company's product sourced from China in 2019, exposing it to supply chain risks, including those from COVID-19[24] - The company has an $18 million Tariff Recovery Receivable as of June 30, 2020, related to retroactive exclusions from Section 301 tariffs on certain flooring products imported from China, with payments expected by the end of 2020[25] Customer Deposits and Store Credits Activity (Unaudited, in thousands) | Item | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2020 | | :---------------------------------------- | :------------------------------- | :----------------------------- | | Customer Deposits and Store Credits, Beginning Balance | $(37,836) | $(41,571) | | New Deposits | (264,473) | (545,326) | | Recognition of Revenue | 230,284 | 497,658 | | Sales Tax included in Customer Deposits | 14,862 | 31,543 | | Other | 1,671 | 2,204 | | Customer Deposits and Store Credits, Ending Balance | $(55,492) | $(55,492) | Sales Mix by Major Product Category | Product Category | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Manufactured Products | 49% | 41% | 46% | 41% | | Solid and Engineered Hardwood | 27% | 29% | 28% | 30% | | Moldings and Accessories and Other | 15% | 17% | 16% | 17% | | Installation and Delivery Services | 9% | 13% | 10% | 12% | | Total | 100% | 100% | 100% | 100% | - The company adopted a practical expedient for lease concessions due to COVID-19, resulting in a $5.4 million current liability and $0.4 million long-term liability for deferred payments as of June 30, 2020[36] Note 3. Stockholders' Equity This note provides details on the components of stockholders' equity, including common stock, additional paid-in capital, and retained earnings, along with per-share data Net Income (Loss) per Common Share (Unaudited) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :-------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net Income (Loss) | $2,639 | $(2,856) | $14,874 | $(7,780) | | Weighted Average Common Shares Outstanding—Basic | 28,831 | 28,692 | 28,776 | 28,669 | | Net Income (Loss) per Common Share—Basic | $0.09 | $(0.10) | $0.52 | $(0.27) | | Net Income (Loss) per Common Share—Diluted | $0.09 | $(0.10) | $0.51 | $(0.27) | - The company has approximately $14.7 million remaining under its $150 million common stock repurchase authorization but has not repurchased shares under this program in over three years[40] Note 4. Stock-based Compensation This note outlines the company's stock-based compensation plans, including activity for stock options and restricted stock awards, and related expense recognition Stock Option and Restricted Stock Award Activity (Unaudited, in thousands) | Item | Stock Options | Restricted Stock Awards | | :------------------------------------ | :------------ | :---------------------- | | Options Outstanding/Nonvested RSAs, January 1, 2020 | 693 | 911 | | Granted | 197 | 451 | | Options Exercised/RSAs Released | (3) | (200) | | Forfeited | (271) | (225) | | Options Outstanding/Nonvested RSAs, June 30, 2020 | 616 | 937 | - The company granted 94,591 performance-based RSAs with a fair value of $0.9 million during the six months ended June 30, 2020, contingent on achieving specific financial metrics and relative total shareholder return over a three-year period[41] Note 5. Credit Agreement This note details the company's credit facilities, including amendments to the revolving credit facility, outstanding balances, and available liquidity - On April 17, 2020, the company amended its Credit Agreement, temporarily increasing the Revolving Credit Facility from $175 million to $212.5 million until August 30, 2020, and increasing interest margins and unused commitment fees[42][44] - As of June 30, 2020, $76 million was outstanding under the Revolving Credit Facility (average interest rate 3.50%) and $25 million under the FILO Term Loan (interest rate 4.75%), with $59 million of availability remaining under the Revolving Credit Facility[44][46] Note 6. Income Taxes This note provides information on the company's income tax expense or benefit, effective tax rates, and the impact of tax legislation like the CARES Act Income Tax Expense (Benefit) and Effective Tax Rate (Unaudited) | Period | Income Tax Expense (Benefit) | Effective Tax Rate | | :-------------------------- | :--------------------------- | :----------------- | | Three Months Ended June 30, 2020 | $2.2 million | 45.7% | | Three Months Ended June 30, 2019 | $0.4 million | (16.8)% | | Six Months Ended June 30, 2020 | $(2.1) million | (16.7)% | | Six Months Ended June 30, 2019 | $0.6 million | (8.7)% | - The CARES Act, enacted March 27, 2020, resulted in an income tax benefit of $4.8 million for the first six months of 2020, which has been fully collected[50] - The company maintains a full valuation allowance of $27 million against its net deferred tax assets, intending to keep it until sufficient evidence supports its reversal[53] Note 7. Commitments and Contingencies This note discloses the company's various legal and regulatory commitments and contingencies, including class action lawsuits and antidumping duty investigations - The Gold Litigation (bamboo flooring) settlement, preliminarily approved, involves $14 million in cash and $14 million in store-credit vouchers (potential additional $2 million), with a remaining accrual of $27 million as of June 30, 2020[54][56] - The Formaldehyde-Abrasion MDLs (Chinese laminates) settlement of $36 million ($22 million cash, $14 million vouchers) was upheld on appeal, with $21.5 million accounted for as a deposit for legal settlement[57][165] - Multiple employee classification lawsuits (Mason, Savidis, Visnack) are ongoing, alleging labor code violations, and the company disputes these claims and cannot reasonably estimate potential losses, thus no accruals have been made[65][70][72] Antidumping and Countervailing Duties (AD/CVD) Investigation Status (Unaudited) | Review Period | Period Covered | Rates at which Company Deposited Antidumping | Final Rate Antidumping | June 30, 2020 Receivable/Liability Balance | | :------------ | :---------------------------- | :------------------------------------------- | :--------------------- | :----------------------------------------- | | 1 | May 2011 – Nov 2012 | 6.78% and 3.3% | 0.73% | $1.3 million receivable | | 2 | Dec 2012 – Nov 2013 | 3.30% | 3.92% | $4.1 million liability | | 3 | Dec 2013 – Nov 2014 | 3.3% and 5.92% | 17.37% | $4.7 million liability | | 6 | Dec 2016 – Nov 2017 | 17.37% and 0.0% | 42.57% and 0.00% | $0.5 million receivable, $1.5 million liability | | 7 | Dec 2017 – Nov 2018 | 0.00% | Pending (Preliminary 0.0%) | NA | | Countervailing Duties | | | | | | 1&2 | April 2011 – Dec 2012 | 1.50% | 0.83% / 0.99% | $0.2 million receivable | | 6 | Jan 2016 – Dec 2016 | 0.99% and 1.38% | 3.10% and 2.96% | $0.04 million liability | | 7 | Jan 2017 – Dec 2017 | 1.38% and 1.06% | Pending (Preliminary 24.61%) | NA | - The company recorded net interest expense related to antidumping of $0.1 million for the six months ended June 30, 2020[78][191] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial performance and condition for the quarter and six months ended June 30, 2020, detailing the impact of the COVID-19 pandemic, key financial results, operational changes, liquidity management, and inventory trends Cautionary Note Regarding Forward-Looking Statements This note advises readers that the report contains forward-looking statements subject to various risks and uncertainties, including economic conditions and legal proceedings - The report contains forward-looking statements subject to risks and uncertainties, including the impact of the COVID-19 pandemic on the economy, housing market, consumer spending, supply chain, and employee safety[86] - Other key risks include legal proceedings, new laws and regulations (tariffs), reputational harm, cybersecurity threats, inability to open new stores, managing growth, transportation costs, and supplier disruptions[86][87] Overview This section provides a high-level description of the company's business as a specialty retailer of hard-surface flooring and its use of non-GAAP financial measures for performance evaluation - Lumber Liquidators is a leading specialty retailer of hard-surface flooring in North America, offering a complete purchasing solution through 422 stores, a call center, and websites[89] - The company uses non-GAAP financial measures (Adjusted Gross Profit, Adjusted Gross Margin, Adjusted SG&A, Adjusted Operating Income, Adjusted Earnings, Adjusted EPS) to evaluate core operating performance, excluding items like regulatory/legal settlements and changes in antidumping/countervailing duties[91][92] Impact of COVID-19 Pandemic on Our Business This section details the significant operational and financial impacts of the COVID-19 pandemic on the company, including store operations, sales, and liquidity management - Q2 2020 operations were significantly affected by COVID-19, leading to varied operating models (fully open, curbside-pickup, online) and safety measures, with comparable store sales down 21.3% for the quarter[93] - The company leveraged digital capabilities, expanded online samples, and extended customer support hours, leading to increased web traffic[94] - Measures to increase financial flexibility included temporary furloughs and salary reductions, cost reductions, inventory management, deferring payments, and pausing new store openings, with all furloughed employees invited back by late June[95] - Liquidity improved by $55 million in Q2 2020, reaching $186 million as of June 30, 2020, comprising $127 million cash and $59 million credit availability[96] Executive Summary This section provides a concise overview of the company's key financial highlights for Q2 2020, including net sales, gross margin, operating income, and liquidity Q2 2020 Key Financial Highlights (Unaudited, in millions, except per share amounts) | Metric | Q2 2020 (GAAP) | Q2 2019 (GAAP) | YoY Change (GAAP) | Q2 2020 (Adjusted) | Q2 2019 (Adjusted) | YoY Change (Adjusted) | | :-------------------------- | :------------- | :------------- | :---------------- | :----------------- | :----------------- | :-------------------- | | Net Sales | $230 | $288.6 | (20%) | - | - | - | | Comparable Store Sales | (21.3%) | - | - | - | - | - | | Gross Profit | $88 | $102 | (14%) | $88.3 | $101.7 | (13%) | | Gross Margin | 38.3% | 35.5% | +2.8 pp | 38.3% | 35.2% | +3.1 pp | | SG&A Expense | $82 | $103.9 | (21%) | $81.8 | $98.1 | (17%) | | Operating Income (Loss) | $6 | $(1.4) | NM | $6.5 | $3.6 | +$2.9 | | Net Income (Loss) | $2.6 | $(2.9) | +$5.5 | $3 | $0.82 | +$2.2 | | Diluted EPS | $0.09 | $(0.10) | +$0.19 | $0.10 | $0.03 | +$0.07 | - As of June 30, 2020, liquidity was $186 million, comprising $127 million in cash and cash equivalents and $59 million in Credit Agreement availability[106] Results of Operations This section analyzes the company's financial performance across key operational metrics, including net sales, gross profit, and selling, general, and administrative expenses Net Sales This section analyzes the company's net sales performance, including comparable store sales, average sale value, and sales mix by product category Selected Sales Data (Unaudited) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :-------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Average Sale | $1,209 | $1,405 | $1,284 | $1,354 | | Comparable Store Sales (Decrease) (%) | (21.3%) | (0.1%) | (11.6%) | (0.4%) | | Number of Stores Open, end of period | 422 | 415 | 422 | 415 | | Number of Stores Opened in Period, net | 2 | 2 | 3 | 2 | | Customers Invoiced (% change to prior year) | (7.3%) | (2.5%) | (6.4%) | (0.3%) | - Net sales decreased by $58 million (20%) to $230 million in Q2 2020, with comparable store sales down 21.3% due to COVID-19, though performance improved sequentially[111] - Manufactured products grew from 41% to 49% of sales in Q2 2020, driven by vinyl, while net services sales decreased 47% due to COVID-19's impact on installations[111] Gross Profit This section details the company's gross profit and adjusted gross profit, analyzing the factors influencing gross margin, such as tariff exclusions and product mix Gross Profit and Adjusted Gross Profit (Unaudited, in thousands) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :-------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Gross Profit, as reported (GAAP) | $88,292 | $102,487 | $193,263 | $196,098 | | % of Sales (GAAP) | 38.3% | 35.5% | 38.8% | 35.3% | | HTS Classification Adjustments | — | (779) | — | (779) | | Adjusted Gross Profit (non-GAAP) | $88,292 | $101,708 | $193,263 | $195,319 | | Adjusted % of Sales (non-GAAP) | 38.3% | 35.2% | 38.8% | 35.2% | - Adjusted Gross Margin increased by 309 basis points to 38.3% in Q2 2020, driven by margin enhancement efforts, Section 301 tariff exclusions, supply chain efficiency, and a higher mix of manufactured products[114] - The company recorded a $27 million receivable in Q4 2019 related to tariff exclusions, with $9 million collected through H1 2020, and expects to receive the remaining payments by year-end[116] Selling, General and Administrative Expenses (SG&A) This section examines the company's selling, general, and administrative expenses, highlighting changes in advertising, payroll, and legal costs SG&A and Adjusted SG&A (Unaudited, in thousands) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :-------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | SG&A, as reported (GAAP) | $82,288 | $103,864 | $178,495 | $200,896 | | % of Sales (GAAP) | 35.7% | 36.0% | 35.9% | 36.2% | | (Recovery) Accrual for Legal Matters and Settlements | (500) | 4,750 | (500) | 4,575 | | Legal and Professional Fees | 995 | 1,017 | 1,788 | 2,995 | | Adjusted SG&A (non-GAAP) | $81,793 | $98,097 | $177,207 | $193,326 | | Adjusted % of Sales (non-GAAP) | 35.5% | 34.0% | 35.6% | 34.9% | - Adjusted SG&A decreased by $16 million (17%) in Q2 2020, primarily due to lower advertising expense, reduced payroll and benefits (including temporary salary reductions), and lower transaction-related costs[101][117][120] Operating Income (Loss) and Operating Margin This section analyzes the company's operating income and margin, reflecting the combined impact of sales, cost of sales, and SG&A expenses Operating Income (Loss) and Adjusted Operating Income (Unaudited, in thousands) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :-------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Operating Income (Loss), as reported (GAAP) | $6,004 | $(1,377) | $14,768 | $(4,798) | | % of Sales (GAAP) | 2.6% | (0.5%) | 3.0% | (0.9%) | | Adjusted Operating Income (non-GAAP) | $6,499 | $3,611 | $16,056 | $1,993 | | Adjusted % of Sales (non-GAAP) | 2.8% | 1.2% | 3.2% | 0.3% | - Operating income was $6 million in Q2 2020, a significant improvement from an operating loss of $1.4 million in Q2 2019, driven by gross margin enhancement and diligent expense management[102][124] Other Expense This section details other expenses incurred by the company, primarily focusing on interest expenses related to borrowings - Other expense was $1.1 million for both Q2 2020 and Q2 2019, primarily reflecting interest on borrowings under the Credit Agreement[127] Provision for Income Taxes This section discusses the company's income tax provision, effective tax rate, and the impact of tax legislation on its financial results Income Tax Expense (Benefit) and Effective Tax Rate (Unaudited) | Period | Income Tax Expense (Benefit) | Effective Tax Rate | | :-------------------------- | :--------------------------- | :----------------- | | Three Months Ended June 30, 2020 | $2.2 million | 45.7% | | Three Months Ended June 30, 2019 | $0.4 million | (16.8)% | | Six Months Ended June 30, 2020 | $(2.1) million | (16.7)% | | Six Months Ended June 30, 2019 | $0.6 million | (8.7)% | - The income tax benefit for the six months ended June 30, 2020, included a $4.8 million benefit from the CARES Act[129][131] - The company applies the actual year-to-date effective tax rate for the current-period tax provision due to economic disruption from COVID-19 impacting reliable annual effective tax rate estimates[128] Diluted Earnings per Share This section presents the company's diluted earnings per share, both on a GAAP and adjusted non-GAAP basis, reflecting profitability per share Diluted Earnings per Share (Unaudited) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :-------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net Income (Loss) per Diluted Share (GAAP) | $0.09 | $(0.10) | $0.51 | $(0.27) | | Adjusted Earnings (Loss) per Diluted Share (non-GAAP) | $0.10 | $0.03 | $0.55 | $(0.10) | - Adjusted Earnings per Diluted Share increased to $0.10 in Q2 2020 from $0.03 in Q2 2019, and to $0.55 for H1 2020 from $(0.10) in H1 2019[133][134] Seasonality This section describes the typical seasonal fluctuations in the company's net sales, noting the impact of the COVID-19 pandemic on these historical trends - The company typically experiences higher net sales in spring and fall due to home remodeling, and lower sales in winter and hot summer months, though COVID-19 has affected these historical trends[137] Liquidity and Capital Resources This section discusses the company's strategies for managing liquidity and capital, including cash position, credit availability, and capital expenditure plans - Key actions to manage liquidity during COVID-19 included renegotiating the Credit Agreement, altering store models and staffing, adjusting advertising, managing inventory, negotiating vendor terms, implementing temporary salary reductions, and pausing new store openings[138] - As of June 30, 2020, principal liquidity sources were $127 million in cash and cash equivalents and $59 million in Revolving Loan availability, totaling $186 million[139] - The $104 million increase in cash from March to June was driven by credit amendment borrowings ($37M), inventory sell-through ($21M), customer deposit growth ($18M), payment deferrals ($9M), tariff receivable collections ($9M), operations ($9M), and tax refunds ($5M)[141] - Capital expenditures for H1 2020 were $7.2 million, including four new store openings, with plans to reduce capital expenditures from original 2020 plans, and a small number of new store openings dependent on demand and liquidity[142] Merchandise Inventories This section provides an overview of the company's merchandise inventory levels, detailing changes due to buying patterns, supply chain, and cost management Merchandise Inventories (Unaudited, in thousands) | Inventory Category | June 30, 2020 | December 31, 2019 | June 30, 2019 | | :-------------------------- | :------------ | :---------------- | :------------ | | Inventory – Available for Sale | $227,418 | $254,812 | $267,089 | | Inventory – Inbound In-Transit | 21,304 | 31,557 | 36,611 | | Total Merchandise Inventories | $248,722 | $286,369 | $303,700 | | Available Inventory Per Store | $539 | $608 | $644 | - Merchandise inventories decreased by $38 million from December 31, 2019, due to reduced buying in response to lower activity volumes and delays in shipments from Asia, both impacted by COVID-19[144] - The decrease in available inventory compared to June 30, 2019, was largely due to lower average cost of inventory from tariff exclusions, improved country-of-origin sourcing, and cost-out negotiations[145] - The company anticipates average inventory to be in the range of $280 million to $300 million by year-end, including expected COVID-19 effects[145] Cash Flows This section analyzes the company's cash flows from operating, investing, and financing activities, explaining the drivers behind changes in cash and cash equivalents - Net cash provided by operating activities was $106 million for H1 2020, primarily driven by a $36 million inventory reduction, $15 million net income, $14 million increase in customer deposits, and $10 million in tariff recovery receivables[147] - Net cash used in investing activities was $6.3 million for H1 2020, mainly for purchases of property and equipment related to new store openings and IT initiatives[148] - Net cash provided by financing activities was $18 million for H1 2020, primarily from net borrowings on the Credit Agreement[149] Critical Accounting Policies and Estimates This section confirms that there have been no significant changes to the company's critical accounting policies and estimates since its last annual report - There have been no significant changes in the company's Critical Accounting Policies and Estimates since its annual report on Form 10-K for the year ended December 31, 2019[150] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section outlines the company's exposure to market risks, specifically interest rate risk and exchange rate risk, and its current approach to managing these risks Interest Rate Risk This section details the company's exposure to interest rate fluctuations through its variable-rate borrowings and short-term cash investments - The company is exposed to interest rate risk through short-term cash investments and variable-rate borrowings under its Credit Agreement, with $76 million outstanding on the Revolving Credit Facility and $25 million on the FILO Term Loan as of June 30, 2020[151] - The company does not currently engage in interest rate hedging activities but may consider derivative financial instruments in the future to mitigate losses[152] Exchange Rate Risk This section describes the company's exposure to foreign currency exchange rate fluctuations from its limited international transactions - Less than two percent of the company's revenue, expense, and capital purchasing activities are transacted in foreign currencies (Euro, Canadian dollar, Chinese yuan, Brazilian real)[153] - The company does not currently engage in exchange rate hedging but may use derivative instruments in the future to hedge foreign currency exposures[154] Item 4. Controls and Procedures This section reports on the effectiveness of the company's disclosure controls and procedures and any changes in internal control over financial reporting Evaluation of Disclosure Controls and Procedures This section confirms management's conclusion regarding the effectiveness of the company's disclosure controls and procedures as of the reporting date - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of June 30, 2020[155] Changes in Internal Control over Financial Reporting This section states that there have been no material changes in the company's internal control over financial reporting during the most recent quarter - There has been no change in the company's internal control over financial reporting during the most recent quarter that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting[156] PART II – OTHER INFORMATION This section provides additional information not covered in the financial statements, including legal proceedings, risk factors, and other required disclosures Item 1. Legal Proceedings This section provides detailed updates on various legal proceedings, including class action lawsuits related to bamboo flooring and Chinese laminate products, employee classification matters, and ongoing antidumping and countervailing duties investigations Litigation Relating to Bamboo Flooring This section details the status of the Gold Litigation, a class action lawsuit concerning defective bamboo flooring, including settlement terms and accruals - The Gold Litigation, a class action lawsuit concerning defective Morning Star bamboo flooring, has a finalized settlement agreement for up to $30 million ($14 million cash, $14 million store-credit vouchers, plus potential $2 million), with preliminary approval granted and a final approval hearing scheduled for September 24, 2020[157] - As of June 30, 2020, the remaining accrual for these matters was $27 million, included in 'Accrual for Legal Matters and Settlements Current' on the balance sheet[157] Litigation Relating to Chinese Laminates This section provides updates on class action lawsuits related to Chinese-manufactured laminate flooring, including the Formaldehyde-Abrasion MDLs and Canadian litigation Formaldehyde-Abrasion MDLs This section details the settlement and appeal status of class action lawsuits concerning formaldehyde and abrasion issues in Chinese laminate flooring - The $36 million settlement ($22 million cash, $14 million store-credit vouchers) for class actions regarding Chinese-manufactured laminate flooring (Formaldehyde MDL and Abrasion MDL) was upheld on appeal, with the court reconsidering attorney's fees[162][163][164][165] - The company has accounted for $21.5 million of the cash payment as a deposit for legal settlements, and no liability is accrued related to the appeals[165] Canadian Litigation This section describes a purported class action lawsuit in Ontario, Canada, related to Chinese-manufactured laminate flooring and the company's stance on potential losses - A purported class action lawsuit in Ontario, Canada, filed by Sarah Steele, alleges various claims related to Chinese-manufactured laminate flooring, and the company believes a loss is possible but cannot reasonably estimate the amount[167] Employee Classification Matters This section provides updates on ongoing employee classification lawsuits, including Mason, Savidis, and Visnack, alleging labor code violations Mason Lawsuit This section details the Mason class action lawsuit, alleging misclassification of store managers and FLSA/NYLL violations, with ongoing discovery - The Mason class action lawsuit alleges FLSA and NYLL violations for misclassifying store managers as exempt, with discovery extended to March 31, 2021, due to COVID-19 complications, and the company disputes the claims and cannot reasonably estimate potential losses[168][171][172] Savidis Lawsuit This section describes the Savidis class action lawsuit in California, alleging various Labor Code violations for non-exempt employees - The Savidis class action lawsuit, filed in California, alleges various California Labor Code violations for non-exempt employees, and the company disputes the claims and cannot reasonably estimate potential losses[173][174] Visnack Lawsuit This section outlines the Visnack class action lawsuit in California, alleging Labor Code violations for store managers, with the company evaluating claims - The Visnack class action lawsuit, filed in California, alleges California Labor Code violations for store managers, and the company is evaluating the claims and intends to defend vigorously, unable to estimate potential losses[175][176][177] Antidumping and Countervailing Duties Investigation This section details the company's involvement in ongoing antidumping and countervailing duties investigations on multilayered wood flooring from China - The company is involved in ongoing antidumping (AD) and countervailing duties (CVD) investigations on multilayered wood flooring from China, with appeals pending for various review periods[178][181] Antidumping and Countervailing Duties (AD/CVD) Investigation Status (Unaudited) | Review Period | Period Covered | Rates at which Company Deposited Antidumping | Final Rate Antidumping | June 30, 2020 Receivable/Liability Balance | | :------------ | :---------------------------- | :------------------------------------------- | :--------------------- | :----------------------------------------- | | 1 | May 2011 – Nov 2012 | 6.78% and 3.3% | 0.73% | $1.3 million receivable | | 2 | Dec 2012 – Nov 2013 | 3.30% | 3.92% | $4.1 million liability | | 3 | Dec 2013 – Nov 2014 | 3.3% and 5.92% | 17.37% | $4.7 million liability | | 6 | Dec 2016 – Nov 2017 | 17.37% and 0.0% | 42.57% and 0.00% | $0.5 million receivable, $1.5 million liability | | 7 | Dec 2017 – Nov 2018 | 0.00% | Pending (Preliminary 0.0%) | NA | | Countervailing Duties | | | | | | 1&2 | April 2011 – Dec 2012 | 1.50% | 0.83% / 0.99% | $0.2 million receivable | | 6 | Jan 2016 – Dec 2016 | 0.99% and 1.38% | 3.10% and 2.96% | $0.04 million liability | | 7 | Jan 2017 – Dec 2017 | 1.38% and 1.06% | Pending (Preliminary 24.61%) | NA | - The company recorded a net $0.1 million of interest expense related to antidumping duties during the three months ended June 30, 2020[191] Other Matters This section states management's belief that other routine claims and disputes are not expected to materially affect the company's financial results or position - Management believes that the ultimate liability from other claims and disputes arising in the normal course of business is not expected to have a material adverse effect on the company's results of operations, financial position, or liquidity[192] Item 1A. Risk Factors This section supplements previously disclosed risk factors with a focus on the ongoing and potential adverse impacts of the COVID-19 pandemic on the company's business, including supply chain disruptions, operational restrictions, and economic downturn effects Impact of COVID-19 Pandemic on Our Business This section details the significant risks posed by the COVID-19 pandemic, including supply chain disruptions, economic downturn, and operational challenges - The COVID-19 pandemic has disrupted and may continue to disrupt the company's supply chain, employee work effectiveness, and store operations, potentially leading to delivery delays, order cancellations, and adverse financial effects[193] - The widespread health crisis has caused an economic downturn and spike in unemployment, negatively affecting demand for products, and the company is working with partners to reduce contractual obligations and obtain concessions[194] - The extent of COVID-19's impact is highly uncertain and depends on future developments, including the pandemic's spread, severity, and governmental responses, with potential impacts not fully recoverable[194][195] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details the company's share repurchase activity for the quarter ended June 30, 2020, and the status of its publicly announced stock repurchase programs Share Repurchase Activity for the Quarter Ended June 30, 2020 (in thousands, except per share amounts) | Period | Total Number of Shares Purchased | Average Price Paid per Share | | :-------------------------- | :------------------------------- | :--------------------------- | | April 1, 2020 to April 30, 2020 | — | — | | May 1, 2020 to May 31, 2020 | — | — | | June 1, 2020 to June 30, 2020 | — | — | | Total | — | — | - The company repurchased 16,151 shares of common stock at an average price of $7.37 for the net settlement of shares issued from restricted stock vesting during Q2 2020[196] - The publicly announced stock repurchase programs, with $14.7 million remaining authorization, are indefinitely suspended to evaluate long-term customer demand and assess operational estimates[196] Item 3. Defaults Upon Senior Securities This section confirms that there were no defaults upon senior securities during the reporting period - There were no defaults upon senior securities[197] Item 4. Mine Safety Disclosures This section states that there are no mine safety disclosures to report - There are no mine safety disclosures[197] Item 5. Other Information This section indicates that there is no other information to report - There is no other information to report[197] Item 6. Exhibits This section lists all exhibits filed as part of the Form 10-Q report, including key agreements, certifications, and financial statements in XBRL format - Key exhibits include the First Amendment to Fourth Amended and Restated Credit Agreement, a Severance Agreement with Charles E. Tyson, certifications from the Principal Executive and Financial Officers (Sections 302 and 906 of Sarbanes-Oxley Act), and XBRL formatted financial statements[198] Signatures This section contains the official signatures certifying the accuracy and completeness of the report, including the signing officer and date - The report was signed on August 4, 2020, by Nancy A. Walsh, Chief Financial Officer of Lumber Liquidators Holdings, Inc[200]