Tile Shop(TTSH) - 2018 Q4 - Annual Report

PART I ITEM 1. BUSINESS Tile Shop Holdings, Inc. is a specialty retailer of natural stone and man-made tiles, setting materials, and accessories in the U.S., operating 140 stores across 31 states as of December 31, 2018, emphasizing product assortment, customer service, store presentation, global sourcing, proprietary branding, and a centralized distribution system - The Company is a specialty retailer of natural stone and man-made tiles, setting and maintenance materials, and related accessories in the United States[8] - As of December 31, 2018, the Company operated 140 stores in 31 states and the District of Columbia, with an average size of approximately 20,200 square feet[8] Key Financial and Operational Highlights (2016-2018) | Metric | 2018 | 2017 | 2016 | | :----------------------- | :--------- | :--------- | :--------- | | Net Sales | $357.3 million | $344.6 million | $324.2 million | | Income from Operations | $18.1 million | $25.8 million | $32.9 million | | New Stores Opened | 2 | - | - | | Total Assets (as of Dec 31) | $297.6 million | $270.7 million | - | - In 2018, the company added over 2,000 products, discontinued advertised price promotions, expanded its regional leadership team, hired over 20 pro market managers, launched a pro loyalty program, refined compensation structures, completed 10 remodels, remerchandised all 140 stores, implemented new CRM, and positioned for a new ERP system[17][25] - Key elements of the 2019 strategy include maintaining a best-in-class product assortment (approx. 6,000 products), providing high-degree in-store service, inspiring customer experience through product presentation, and reaccelerating store growth by opening five to seven new stores in existing markets[18][19][20][21] Overview Competitive Strengths Strategic Plan Sales Model Marketing Products Suppliers Distribution and Order Fulfillment Competition Employees Property and Trademarks Government Regulation Financial Information about Geographic Areas Available Information ITEM 1A. RISK FACTORS The company faces significant risks including intense competition in the retail tile industry, challenges in managing planned growth and store expansion, fluctuations in same-store sales, dependence on adequate capital for expansion, and the ability to maintain supplier relationships - The retail tile industry is highly competitive, with participants competing on product variety, customer service, store location, and price[45] - Planned growth and store expansion (5-7 new stores in 2019) pose challenges such as identifying favorable sites, obtaining permits, hiring qualified staff, attracting customers in new markets, and potential cannibalization of existing store sales[46][49] - The company's expansion strategy is dependent on adequate capital, which may not be available on satisfactory terms, potentially limiting new store openings, distribution centers, and manufacturing facilities[50] - Dependence on a global network of approximately 250 suppliers (top ten accounting for 49% of tile purchases in 2018) exposes the company to risks from financial instability, political instability, trade restrictions, tariffs, currency exchange rates, and transport disruptions[51][52] - The company's credit facility includes restrictive covenants that limit its ability to incur additional debt, create liens, make acquisitions, and engage in certain transactions, with a breach potentially leading to immediate debt repayment obligations[61][62] ITEM 1B. UNRESOLVED STAFF COMMENTS There are no unresolved staff comments from the SEC - No unresolved staff comments[89] ITEM 2. PROPERTIES As of December 31, 2018, the company operated 140 leased stores across 31 states and D.C., with an average size of 20,200 square feet, and owns four regional distribution and manufacturing facilities while leasing one distribution facility in New Jersey, with plans to open 5-7 new stores in 2019 - As of December 31, 2018, the company operated 140 stores in 31 states and the District of Columbia, with an average square footage of approximately 20,200 square feet[23][91] - The company owns four regional facilities for distribution and manufacturing in Spring Valley, Wisconsin (69,000 sq ft); Ottawa Lake, Michigan (271,000 sq ft); Ridgeway, Virginia (134,000 sq ft); and Durant, Oklahoma (260,000 sq ft), and also leases a 103,000 sq ft distribution facility in Dayton, New Jersey[92] - The company intends to open five to seven new stores in 2019[93] ITEM 3. LEGAL PROCEEDINGS The company is subject to claims and disputes in the normal course of business, and management believes that the ultimate liability from these matters is not expected to have a material adverse effect on operations, financial position, or cash flows - The Company is, from time to time, subject to claims and disputes arising in the normal course of business[94] - Management believes that the Company's ultimate liability in connection with these matters is not expected to have a material adverse effect on the results of operations, financial position, or cash flows[94] ITEM 4. MINE SAFETY DISCLOSURES There are no mine safety disclosures to report - None[95] PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES The company's common stock trades on Nasdaq under 'TTS', with 52,921,546 shares outstanding as of February 22, 2019, and a quarterly dividend program of $0.05 per share since March 2017, while Q4 2018 equity purchases were for tax withholding on restricted stock grants, not publicly announced programs, and stock performance declined compared to benchmarks from 2013 to 2018 - The company's common stock is traded on The Nasdaq Stock Market under the symbol 'TTS'[98] - As of February 22, 2019, the registrant had 52,921,546 shares of common stock outstanding[5][99] Dividends Paid Per Share (2017-2018) | Date Paid | Amount | | :---------- | :------- | | March 24, 2017 | $0.05 | | May 16, 2017 | $0.05 | | August 15, 2017 | $0.05 | | November 14, 2017 | $0.05 | | March 16, 2018 | $0.05 | | May 11, 2018 | $0.05 | | August 10, 2018 | $0.05 | | November 9, 2018 | $0.05 | - Issuer purchases of equity securities in Q4 2018 totaled 58,226 shares, primarily for satisfying tax withholding obligations upon vesting of restricted stock grants and repurchases at par value ($0.0001 per share), not part of publicly announced plans[102][103][104] Cumulative Total Stockholder Returns (2013-2018) | Date | Tile Shop Holdings, Inc. | S&P Small Cap 600 | Dow Jones U.S. Furnishings Index | | :---------------- | :----------------------- | :---------------- | :------------------------------- | | December 31, 2013 | $100.00 | $100.00 | $100.00 | | December 31, 2014 | $49.14 | $104.44 | $112.97 | | December 31, 2015 | $90.76 | $100.93 | $124.17 | | December 31, 2016 | $108.19 | $125.91 | $137.39 | | December 31, 2017 | $53.90 | $140.68 | $157.31 | | December 31, 2018 | $31.70 | $126.96 | $88.98 | ITEM 6. SELECTED FINANCIAL DATA The selected financial data provides a five-year overview (2014-2018) of the company's financial performance, including income statement, balance sheet, and cash flow data, showing fluctuating net sales, declining income from operations and net income in recent years, and an increase in total debt and inventories, with Adjusted EBITDA and its margin also declining from 2016 to 2018 Selected Statement of Income Data (2014-2018, in thousands) | Metric | 2018 | 2017 | 2016 | 2015 | 2014 | | :-------------------------------- | :--------- | :--------- | :--------- | :--------- | :--------- | | Net sales | $357,254 | $344,600 | $324,157 | $292,987 | $257,192 | | Gross profit | $251,339 | $236,222 | $226,896 | $203,610 | $178,892 | | Selling, general and administrative expenses | $233,201 | $210,376 | $193,983 | $174,384 | $157,316 | | Income from operations | $18,138 | $25,846 | $32,913 | $29,226 | $21,576 | | Net income | $10,442 | $10,819 | $18,463 | $15,696 | $10,547 | | Earnings per share | $0.20 | $0.21 | $0.36 | $0.31 | $0.21 | Selected Balance Sheet Data (2014-2018, in thousands) | Metric | 2018 | 2017 | 2016 | 2015 | 2014 | | :-------------------------------- | :--------- | :--------- | :--------- | :--------- | :--------- | | Cash and cash equivalents | $5,557 | $6,621 | $6,067 | $10,330 | $5,759 | | Inventories | $110,095 | $85,259 | $74,295 | $69,878 | $68,857 | | Total assets | $297,630 | $270,725 | $265,273 | $245,007 | $252,190 | | Total debt and capital lease obligations | $53,576 | $27,712 | $29,208 | $56,812 | $93,264 | | Total stockholders' equity | $146,347 | $143,874 | $138,899 | $115,201 | $93,695 | Selected Cash Flow Data (2014-2018, in thousands) | Metric | 2018 | 2017 | 2016 | 2015 | 2014 | | :-------------------------------- | :--------- | :--------- | :--------- | :--------- | :--------- | | Net cash provided by operating activities | $18,170 | $45,691 | $53,552 | $60,264 | $47,201 | | Net cash used in investing activities | $(34,143) | $(40,549) | $(27,252) | $(18,994) | $(40,552) | | Net cash provided by (used in) financing activities | $14,931 | $(10,620) | $(23,866) | $(36,688) | $(2,651) | Adjusted EBITDA and Margins (2014-2018) | Metric | 2018 | 2017 | 2016 | 2015 | 2014 | | :-------------------- | :------- | :------- | :------- | :------- | :------- | | Adjusted EBITDA | $49,355 | $55,411 | $60,429 | $57,137 | $45,612 | | Adjusted EBITDA margin | 13.8% | 16.1% | 18.6% | 19.5% | 17.7% | | Gross margin rate | 70.4% | 68.5% | 70.0% | 69.5% | 69.6% | | Operating income margin | 5.1% | 7.5% | 10.2% | 10.0% | 8.4% | | Same stores sales growth (decline) | (0.6%) | 0.5% | 7.6% | 7.4% | (0.4%) | Reconciliation of Non-GAAP Adjusted EBITDA to GAAP Net Income ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section provides management's perspective on the company's financial condition and results of operations, highlighting key performance drivers and future outlook, detailing components of consolidated statements of operations, reconciling non-GAAP measures, analyzing year-over-year financial changes, and covering liquidity, capital resources, cash flows, contractual obligations, critical accounting policies, and new accounting pronouncements - The company is a specialty retailer of natural stone and man-made tiles, setting and maintenance materials, and related accessories in the United States, operating 140 stores as of December 31, 2018[119] - Management believes the highly-fragmented U.S. retail tile market offers significant expansion opportunities, with plans to open five to seven new stores in 2019, expecting comparable store sales growth and store unit growth to drive profitability[121] Net Sales, Operating Income, and New Stores (2016-2018, in thousands) | Metric | 2018 | 2017 | 2016 | | :-------------------------------- | :--------- | :--------- | :--------- | | Net sales | $357,254 | $344,600 | $324,157 | | Income from operations | $18,138 | $25,846 | $32,913 | | Net cash provided by operating activities | $18,170 | $45,691 | $53,552 | | New stores opened during period | 2 | 15 | 9 | Overview Key Components of our Consolidated Statements of Operations Non-GAAP Measures The company uses non-GAAP measures like Adjusted EBITDA and Pretax Return on Capital Employed to provide insights into financial trends and operational effectiveness, with Adjusted EBITDA calculated by adjusting net income for interest expense, income taxes, depreciation and amortization, and stock-based compensation, and Pretax Return on Capital Employed assessing capital allocation effectiveness by dividing income from operations by capital employed, using these measures for internal performance comparison, incentive compensation, budgeting, and investor evaluation, but not as substitutes for GAAP results - Adjusted EBITDA is calculated by taking net income and adjusting for interest expense, income taxes, depreciation and amortization, and stock-based compensation expense[130] - Pretax Return on Capital Employed is calculated by dividing income from operations by capital employed (total assets less accounts payable, income taxes payable, other accrued liabilities, deferred rent, and other long-term liabilities)[137] - These non-GAAP measures are used by management for trend analyses, incentive compensation, budgeting, and planning, and are provided to investors for evaluating ongoing operating results and comparing with other specialty retailers[131] Reconciliation of Non-GAAP Adjusted EBITDA to GAAP Net Income Pretax Return on Capital Employed Comparison of the Year Ended December 31, 2018 to the Year Ended December 31, 2017 Net sales increased by 3.7% to $357.3 million in 2018, driven by new store sales, despite a 0.6% decline in comparable store sales due to weaker traffic from a shift in promotional strategy, while gross profit rose 6.4% to $251.3 million with the gross margin rate improving to 70.4%, but selling, general and administrative expenses increased 10.8% to $233.2 million, leading to a 29.8% decrease in income from operations to $18.1 million, and interest expense increased 44.9% due to higher rates and debt balance, while the income tax provision decreased significantly due to the Tax Cuts and Jobs Act of 2017, lowering the effective tax rate to 33.1% from 55.2% Financial Performance Comparison (2018 vs. 2017, in thousands) | Metric | 2018 | % of sales | 2017 | % of sales | Change ($) | Change (%) | | :-------------------------------- | :--------- | :--------- | :--------- | :--------- | :--------- | :--------- | | Net sales | $357,254 | 100.0% | $344,600 | 100.0% | $12,654 | 3.7% | | Gross profit | $251,339 | 70.4% | $236,222 | 68.5% | $15,117 | 6.4% | | Selling, general and administrative expenses | $233,201 | 65.3% | $210,376 | 61.0% | $22,825 | 10.8% | | Income from operations | $18,138 | 5.1% | $25,846 | 7.5% | $(7,708) | (29.8%) | | Interest expense | $(2,690) | (0.8%) | $(1,857) | (0.5%) | $(833) | 44.9% | | Provision for income taxes | $(5,158) | (1.4%) | $(13,340) | (3.9%) | $8,182 | (61.3%) | | Net income | $10,442 | 2.9% | $10,819 | 3.1% | $(377) | (3.5%) | - Comparable store sales declined 0.6% in 2018, compared to 0.5% growth in 2017, primarily due to weaker store traffic resulting from a shift in promotional strategy[141] - The effective tax rate decreased to 33.1% in 2018 from 55.2% in 2017, primarily due to the Tax Cuts and Jobs Act of 2017, which reduced the U.S. federal statutory tax rate from 35% to 21%[147] Comparison of the Year Ended December 31, 2017 to the Year Ended December 31, 2016 Net sales increased by 6.3% to $344.6 million in 2017, driven by sales from 15 new stores and a 0.5% comparable store sales increase, while gross profit grew 4.1% to $236.2 million, but the gross margin rate decreased to 68.5% from 70.0% due to promotions, competitive pricing, and product mix changes, and SG&A expenses increased 8.5% to $210.4 million, mainly due to new store opening costs, leading to a 21.5% decrease in income from operations to $25.8 million, and the effective tax rate increased to 55.2% from 41.1% due to a $4.6 million charge to reduce deferred tax assets under the Tax Act Financial Performance Comparison (2017 vs. 2016, in thousands) | Metric | 2017 | % of sales | 2016 | % of sales | Change ($) | Change (%) | | :-------------------------------- | :--------- | :--------- | :--------- | :--------- | :--------- | :--------- | | Net sales | $344,600 | 100.0% | $324,157 | 100.0% | $20,443 | 6.3% | | Gross profit | $236,222 | 68.5% | $226,896 | 70.0% | $9,326 | 4.1% | | Selling, general and administrative expenses | $210,376 | 61.0% | $193,983 | 59.8% | $16,393 | 8.5% | | Income from operations | $25,846 | 7.5% | $32,913 | 10.2% | $(7,067) | (21.5%) | | Interest expense | $(1,857) | (0.5%) | $(1,715) | (0.5%) | $(142) | 8.3% | | Provision for income taxes | $(13,340) | (3.9%) | $(12,876) | (4.0%) | $(464) | 3.6% | | Net income | $10,819 | 3.1% | $18,463 | 5.7% | $(7,644) | (41.4%) | - Net sales for fiscal year 2017 increased $20.4 million, or 6.3%, over fiscal year 2016, primarily due to an increase in net sales generated by 15 stores opened in 2017 and a comparable store sales increase of 0.5%[149] - The effective tax rate increased to 55.2% in 2017 from 41.1% in 2016, primarily due to a $4.6 million charge taken during Q4 2017 to reduce the value of deferred tax assets in accordance with the Tax Act[155] Liquidity and Capital Resources The company's primary liquidity sources are cash and cash equivalents ($5.6 million at Dec 31, 2018), cash flow from operations, and a $100 million revolving line of credit (with $45.9 million available as of Dec 31, 2018), used for new store openings, inventory, existing store maintenance, debt reduction, and general corporate purposes, with a new credit agreement entered into in September 2018, secured by company assets and subject to financial covenants, which the company was in compliance with as of December 31, 2018 - Principal liquidity requirements are for working capital and capital expenditures, funded by cash and cash equivalents ($5.6 million at Dec 31, 2018), cash flow from operations, and a $100 million revolving line of credit[156][157] - As of December 31, 2018, $53.0 million was borrowed on the revolving line of credit, leaving $45.9 million available for future borrowings to support growth and working capital[159] - The Credit Agreement is secured by virtually all company assets and contains restrictive covenants, including financial covenants for fixed charge coverage and total rent adjusted leverage ratios, with the company in compliance as of December 31, 2018[158] Capital Expenditures Capital expenditures totaled $35.3 million in 2018, down from $40.6 million in 2017, primarily allocated to new store building, existing store remodels, information technology infrastructure (including a new ERP system), and distribution/manufacturing facilities, with total capital expenditures projected to be approximately $25 million in fiscal year 2019, supporting the planned opening of five to seven new stores Capital Expenditures (2016-2018, in millions) | Category | 2018 | 2017 | 2016 | | :-------------------------------- | :----- | :----- | :----- | | New store building and existing store remodels | $25.3 | $26.2 | $16.2 | | Information technology infrastructure | $7.2 | $7.1 | $6.9 | | Distribution and manufacturing facilities | $2.6 | $3.1 | $4.2 | | General corporate | $0.2 | $4.2 | $- | | Total | $35.3 | $40.6 | $27.3 | - Total capital expenditures are expected to be approximately $25 million in fiscal year 2019, supporting the planned opening of five to seven stores[162] Cash Flows Net cash provided by operating activities decreased significantly to $18.2 million in 2018 from $45.7 million in 2017, primarily due to an $8.2 million decrease in accounts payable and a $24.8 million increase in inventory, while net cash used in investing activities was $34.1 million in 2018, mainly for new stores, remodels, IT infrastructure, and distribution centers, and net cash provided by financing activities was $14.9 million in 2018, driven by $129.1 million in revolving line of credit advances, partially offset by $103.3 million in debt payments and $10.4 million in dividends Cash Flow Summary (2016-2018, in thousands) | Category | 2018 | 2017 | 2016 | | :-------------------------------- | :--------- | :--------- | :--------- | | Net cash provided by operating activities | $18,170 | $45,691 | $53,552 | | Net cash used in investing activities | $(34,143) | $(40,549) | $(27,252) | | Net cash provided by (used in) financing activities | $14,931 | $(10,620) | $(23,866) | - The decrease in operating cash flows in 2018 was due to an $8.2 million decrease in accounts payable and a $24.8 million increase in inventory[166] - Cash provided by financing activities in 2018 included $129.1 million in advances on the revolving line of credit, offset by $103.3 million in debt payments and $10.4 million in dividends[168] Off-balance Sheet Arrangements As of December 31, 2018 and 2017, the company did not have any off-balance sheet arrangements that could materially affect its financial condition, results of operations, or liquidity - As of December 31, 2018 and 2017, the company did not have any 'off-balance sheet arrangements' as defined by SEC regulations[169] Contractual Arrangements The company's contractual obligations as of December 31, 2018, primarily consist of operating lease obligations totaling $563.0 million, with the largest portion due in periods beyond five years, long-term debt (principal and interest) amounting to $66.2 million, capital lease obligations of $0.7 million, and self-insurance liabilities of $2.2 million Contractual Obligations as of December 31, 2018 (in thousands) | Obligation | Total | Less than 1 Year | 2-3 Years | 4-5 Years | 5+ Years | | :-------------------------------- | :--------- | :--------------- | :---------- | :---------- | :--------- | | Long-term debt, including principal and interest | $66,176 | $2,396 | $4,791 | $4,791 | $54,198 | | Operating lease obligations | $562,967 | $35,247 | $71,515 | $72,025 | $384,180 | | Capital lease obligations | $736 | $215 | $431 | $90 | $- | | Self-insurance | $2,155 | $1,232 | $619 | $191 | $113 | | Total contractual obligations | $632,034 | $39,090 | $77,356 | $77,097 | $438,491 | Critical Accounting Policies and Estimates The company's critical accounting policies involve significant estimates and judgments, including revenue recognition (with reserves for sales returns), inventory valuation (lower of cost or net realizable value, with provisions for shrinkage), property, plant and equipment (depreciation, amortization, and impairment evaluations), and income taxes (deferred tax assets/liabilities and valuation allowances), all based on historical experience and assumptions, where actual results could differ materially - Revenue recognition involves estimating sales returns based on historical trends, which impacts net sales and requires judgment[175] - Inventory is valued at the lower of cost (weighted-average method) or net realizable value, with provisions for shrinkage and unrecoverable amounts based on sales rates, age, salability, and profitability[176][391] - Property, plant and equipment are depreciated/amortized over their useful lives and evaluated for impairment when circumstances indicate carrying value may not be recoverable, requiring estimates of future cash flows and fair values[178] - Income taxes involve recognizing deferred tax liabilities and assets based on temporary differences and assessing the realizability of tax assets through valuation allowances, which depends on expected profitability[180] New Accounting Pronouncements The company adopted new revenue recognition standards (Topic 606) and guidance on restricted cash in 2018, with the revenue standard having a minor cumulative impact on retained earnings and no material impact on 2018 revenues, and the restricted cash guidance changed presentation in cash flow statements, while new lease accounting standards (ASC 842) will be adopted effective January 1, 2019, expected to significantly impact the balance sheet by recognizing $142-$147 million in right-of-use assets and $165-$170 million in lease liabilities, but not materially impact net income or cash flows, and a new standard on credit losses will be effective in fiscal 2020 - Adopted Topic 606, 'Revenue from Contracts with Customers,' on January 1, 2018, using the modified retrospective method, resulting in a $0.1 million cumulative impact adjustment to opening retained earnings and no material impact on 2018 revenues[181][421] - Adopted new guidance on restricted cash (ASU 2016-09) on March 31, 2018, retrospectively, changing the presentation of restricted cash in the statement of cash flows[182][415] - Will adopt new lease accounting standard (ASC 842) effective January 1, 2019, expecting a significant balance sheet impact with recognition of $142 million-$147 million in right-of-use assets and $165 million-$170 million in lease liabilities, but no material impact on net income or cash flows[183][187][418] - A new standard on accounting for credit losses will be effective for the company in fiscal 2020, requiring a change to the expected loss method[188][419] ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The company is exposed to market risks including inflation, interest rate risk, credit concentration risk, and foreign currency exchange rate risk, where inflation could adversely affect operating results, a one percentage point increase in interest rates would decrease pre-tax earnings and cash flow by approximately $0.5 million, cash deposits exceed FDIC limits, and foreign currency risk is not significant as purchases in Chinese yuan were less than 15% of total inventory purchases - Inflationary factors may adversely affect operating results if product and overhead costs increase without corresponding increases in selling prices[191] - The company is exposed to interest rate risk through variable-rate borrowings under its credit facility; a one percentage point increase in interest rates would decrease pre-tax earnings and cash flow by approximately $0.5 million[192] - Credit concentration risk exists as cash balances at financial institutions generally exceed FDIC insurance limits[194] - Foreign currency exchange rate risk is not significant, with purchases in Chinese yuan being less than 15% of total inventory purchases in 2018 and 2017[195] ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements and reports of the independent registered public accounting firm are included as a separate section of this report, starting on page 55, and are incorporated by reference - The consolidated financial statements and the reports of the independent registered public accounting firm are included as a separate section of this report beginning on page 55 and are incorporated herein by reference[197] ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There have been no changes in or disagreements with accountants on accounting and financial disclosure - None[198] ITEM 9A. CONTROLS AND PROCEDURES The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of December 31, 2018, and management also assessed and concluded that internal control over financial reporting was effective as of December 31, 2018, based on the COSO framework, with Ernst & Young, LLP issuing an unqualified opinion on internal control over financial reporting, and no material changes in internal control over financial reporting during Q4 2018, while acknowledging inherent limitations in control systems - The Chief Executive Officer and Chief Financial Officer evaluated and concluded that the company's disclosure controls and procedures were effective as of December 31, 2018[200] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2018, based on criteria set forth by COSO (2013 Framework)[202] - Ernst & Young, LLP, the independent registered public accounting firm, issued an unqualified opinion on the company's internal control over financial reporting as of December 31, 2018[203][358][363] - No changes in internal control over financial reporting materially affected or are reasonably likely to materially affect the company's internal control over financial reporting during the quarter ended December 31, 2018[204] Disclosure Controls and Procedures Management's Annual Report on Internal Control over Financial Reporting Changes in Internal Control over Financial Reporting Inherent Limitations on Effectiveness of Controls ITEM 9B. OTHER INFORMATION There is no other information to report under this item - None[208] PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE This section outlines the executive officers and Board of Directors, their biographical information, and corporate governance practices, with Cabell H. Lolmaugh as CEO and President and Kirk L. Geadelmann as CFO, a classified Board with three staggered three-year terms, a Code of Business Conduct and Ethics, and established Audit, Compensation, and Nominating and Corporate Governance Committees composed of independent directors (except for the CEO and former interim CEO), and a Director Recommendation and Nomination Process emphasizing integrity, experience, and diversity, and outlining procedures for stockholder proposals Executive Officers (as of report date) | Name | Age | Position | | :---------------- | :-- | :------------------------------------ | | Cabell H. Lolmaugh | 40 | Chief Executive Officer and President, Director | | Kirk L. Geadelmann | 50 | Chief Financial Officer | - The Board of Directors is divided into three classes with staggered three-year terms, with specific directors assigned to each class[226][233] - The company has a Code of Business Conduct and Ethics applicable to all officers, directors, and employees, available on its investor relations website[233][234] - The Board has established an Audit Committee, a Compensation Committee, and a Nominating and Corporate Governance Committee, with all members of these committees (except for the CEO and former interim CEO) being independent directors[236][239][241][245][336] - The Governance Committee considers criteria such as personal/professional integrity, corporate management experience, industry experience, and diversity (age, skills, viewpoint, professional experience, education, skill, race, ethnicity, gender identity, sexual orientation, and national origin) when recommending director candidates[246][251] Executive Officers Board of Directors Involvement in Certain Legal Proceedings Section 16(a) Beneficial Ownership Reporting Compliance Code of Business Conduct and Ethics Committees of the Board of Directors The Board has three standing committees: Audit, Compensation, and Nominating and Corporate Governance, with the Audit Committee overseeing financial reporting, auditor independence, and risk assessment, with Mr. Livingston as the financial expert, the Compensation Committee reviewing and recommending executive and director compensation, aligning incentives with corporate strategies, and the Nominating and Corporate Governance Committee focusing on corporate governance, director nominations, and Board composition, with all committee members being independent under applicable rules - The Audit Committee oversees corporate accounting, financial reporting, the audit of financial statements, and internal controls, and evaluates the independent auditor's qualifications and independence[237] - The Compensation Committee reviews and recommends policies for executive and employee compensation and benefits, evaluates executive performance, and administers equity compensation plans[240] - The Nominating and Corporate Governance Committee makes recommendations on corporate governance, identifies and nominates director candidates, and oversees Board and committee structure and composition[244] - All current members of the Audit, Compensation, and Nominating and Corporate Governance Committees are independent directors as defined by SEC and Nasdaq rules[239][241][245] Audit Committee Compensation Committee Nominating and Corporate Governance Committee Director Recommendation and Nomination Process Stockholder Proposals for 2019 Annual Meeting and 2020 Annual Meeting ITEM 11. EXECUTIVE COMPENSATION This section details the compensation philosophy and practices for named executive officers, aiming to align incentives with corporate strategies, motivate performance, and ensure competitive compensation, covering base salaries, equity awards (stock options and restricted stock under the 2012 Omnibus Award Plan), cash performance awards tied to Adjusted EBITDA targets, retirement savings (401(k) matching), and perquisites, with the Compensation Committee, advised by Willis Towers Watson, reviewing compensation annually, and outlining potential payments upon termination or change in control for executives - The executive compensation program aims to align incentives with corporate strategies, motivate and retain executives, and ensure fair, reasonable, and competitive total compensation[253] - Base salaries are established through negotiation, considering qualifications, experience, responsibilities, and individual performance, with periodic reviews and adjustments[258] - Equity incentive awards (stock options and restricted stock) are granted under the 2012 Omnibus Award Plan to link executive interests with stockholders, with vesting typically dependent on continued employment and, in some cases, stock appreciation[261][262][268] - Cash performance awards for executives are based on achieving Adjusted EBITDA targets, with payout levels ranging from partial to double the target incentive[265][289] - Messrs. Lolmaugh and Geadelmann are eligible for severance benefits upon termination without cause or for good reason, and full vesting acceleration of unvested equity awards upon a change of control under specific conditions[286][292][304] Compensation Discussion and Analysis Executive Compensation Program Components Summary Compensation Table The Summary Compensation Table details the total compensation for named executive officers (Robert A. Rucker, Kirk L. Geadelmann, and Cabell H. Lolmaugh) for fiscal years 2016-2018, showing Mr. Rucker received a nominal salary of $24,000 in 2018, Mr. Geadelmann's total compensation was $392,025 including a $285,000 salary, and Mr. Lolmaugh, promoted to SVP and COO in Feb 2018, received $494,523 including a $240,625 salary and significant stock and option awards, with no non-equity incentive plan compensation paid in 2018 due to not meeting Adjusted EBITDA targets Summary Compensation Table (2016-2018, in $) | Name and Principal Position | Fiscal Year | Salary ($) | Stock Awards ($) | Option Awards ($) | Non-Equity Incentive Plan Compensation ($) | All other Compensation ($) | Total ($) | | :-------------------------- | :---------- | :--------- | :--------------- | :---------------- | :----------------------------------------- | :------------------------- | :-------- | | Robert A. Rucker, Interim CEO | 2018 | 24,000 | - | - | - | 600 | 24,600 | | | 2017 | 5,250 | 100,004 | - | - | 25 | 105,279 | | | 2016 | - | 95,349 | - | - | - | 95,349 | | Kirk Geadelmann, CFO | 2018 | 285,000 | 49,950 | 49,950 | - | 7,125 | 392,025 | | | 2017 | 279,977 | 222,290 | 224,152 | - | 14,145 | 740,564 | | | 2016 | 240,500 | 117,975 | 120,742 | 137,500 | 3,735 | 620,452 | | Cabell Lolmaugh, SVP & COO | 2018 | 240,625 | 124,875 | 125,392 | - | 3,631 | 494,523 | - Mr. Rucker, as Interim CEO, elected to receive a nominal annual base salary of $24,000 in 2018 due to his long history, major stockholder interests, and the interim nature of his position[259][283] - No non-equity incentive plan compensation was paid to named executive officers in fiscal years 2017 or 2018, as the company did not achieve its Adjusted EBITDA targets[267][290] Grants of Plan-Based Awards for Fiscal Year 2018 In fiscal year 2018, Kirk Geadelmann received 9,000 shares of restricted stock (fair value $49,950) and Cabell Lolmaugh received 22,500 shares of restricted stock (fair value $124,875) and 56,000 non-qualified stock options (fair value $125,392), with all restricted stock and options vesting in four equal annual installments based on continued service, and both executives were eligible for cash incentive compensation based on Adjusted EBITDA targets, but no payouts were made as targets were not met Grants of Plan-Based Awards (Fiscal Year 2018) | Name | Grant Date | All other stock awards: Number of shares of stock or units () | All other option awards: Number of securities underlying options () | Exercise or base price of option awards ($/Sh) | Grant date fair value of stock and option awards ($) | | :---------------- | :--------- | :------------------------------------------------ | :------------------------------------------------- | :-------------------------------------------- | :--------------------------------------------- | | Kirk Geadelmann | 2/22/2018 | 9,000 | - | 5.55 | 49,950 | | Cabell Lolmaugh | 2/22/2018 | 22,500 | - | 5.55 | 124,875 | | Cabell Lolmaugh | 2/22/2018 | - | 56,000 | 5.55 | 125,392 | - Restricted stock and stock options granted in 2018 to Messrs. Geadelmann and Lolmaugh are subject to time-based vesting over a four-year period, with the first installment beginning on February 22, 2019[282] - Messrs. Lolmaugh and Geadelmann were eligible for target cash incentive compensation equal to 50% of their base salaries, based on Adjusted EBITDA, but no payouts were made for fiscal year 2018 as the target was not achieved[281][290] Offer Letter Agreements Mr. Rucker, as Interim CEO, received a nominal annual base salary of $24,000 in 2018, while Mr. Geadelmann's offer letter provides for six months of base salary and health insurance premium payments upon termination without cause, and full vesting acceleration of unvested equity upon a change of control if not offered employment or terminated, and Mr. Lolmaugh's offer letter, updated for his CEO promotion, includes similar severance benefits and change of control vesting acceleration, with both Messrs. Lolmaugh and Geadelmann having non-compete and non-solicit clauses for one year post-employment, extendable to two years with additional compensation - Mr. Rucker's 2018 annual base salary was a nominal $24,000 due to his interim position and significant stockholder interest[283] - Mr. Geadelmann's offer letter includes severance of six months' base salary and health insurance premiums upon termination without cause, and full equity vesting acceleration upon a change of control under specific conditions[284] - Mr. Lolmaugh's offer letter, updated for his CEO promotion, provides similar severance and change of control equity vesting acceleration benefits[285][286] - Both Messrs. Lolmaugh and Geadelmann are subject to non-compete and non-solicit agreements for one year post-employment, extendable to two years with additional compensation[287] Non-Equity Incentive Plan Compensation For fiscal year 2018, Messrs. Lolmaugh and Geadelmann were eligible for target cash incentive compensation equal to 50% of their base salaries, contingent on achieving Adjusted EBITDA targets, but the actual Adjusted EBITDA achieved was $49.4 million, which was 75% of the target, resulting in no cash incentive compensation payouts for either executive for 2018 - Messrs. Lolmaugh and Geadelmann were eligible for target cash incentive compensation equal to 50% of their base salaries, based on the company's Adjusted EBITDA for fiscal year 2018[289] - The actual Adjusted EBITDA achieved in fiscal year 2018 was $49.4 million, which was 75% of the target, leading to no cash incentive compensation payouts for named executive officers[290] Equity Grants All stock options and restricted stock awards issued to named executive officers in fiscal year 2018 were granted under the Omnibus Plan, including provisions for accelerated vesting in the event of a change of control, particularly if executives are terminated without cause or constructively terminated within one year of the change of control, aligning executive interests with stockholders in corporate transactions - All stock options and restricted stock awards issued in fiscal year 2018 to named executive officers were granted pursuant to the Omnibus Plan[291] - Equity awards granted to Messrs. Lolmaugh and Geadelmann include provisions for full vesting acceleration upon a change of control if they are terminated without cause or constructively terminated prior to the first anniversary of the change of control[292] Outstanding Equity Awards at Fiscal Year-end for Fiscal Year 2018 As of December 31, 2018, Kirk Geadelmann held 80,000 exercisable options and 20,000 unexercisable options, along with 23,888 unvested restricted stock units, while Cabell Lolmaugh held 13,644 exercisable options and 78,319 unexercisable options, plus 31,536 unvested restricted stock units, with the unvested awards for both executives subject to various time-based vesting schedules over multiple years Outstanding Equity Awards at Fiscal Year-end 2018 | Name | Grant Date | Number of Securities Underlying Unexercised Options Exercisable () | Number of Securities Underlying Unexercised Options Unexercisable () | Option Exercise Price ($) | Option Expiration Date | Number of Shares of Stock That Have Not Vested () | | :---------------- | :--------- | :---------------------------------------------------- | :-------------------------------------------------------- | :------------------------ | :--------------------- | :------------------------------------------ | | Kirk Geadelmann | 8/12/2014 | 80,000 | 20,000 | 10.93 | 8/12/2021 | - | | Kirk Geadelmann | 4/20/2016 | 5,000 | 7,500 | 18.15 | 4/20/2026 | 3,900 | | Kirk Geadelmann | 5/11/2017 | 3,300 | 9,900 | 20.35 | 5/11/2027 | 2,250 | | Kirk Geadelmann | 11/2/2017 | 6,625 | 19,875 | 8.60 | 11/2/2027 | 8,738 | | Kirk Geadelmann | 2/22/2018 | - | - | - | - | 9,000 | | Cabell Lolmaugh | 8/21/2012 | 2,750 | - | 10.00 | 8/21/2022 | - | | Cabell Lolmaugh | 10/21/2014 | 4,200 | 1,500 | 8.58 | 10/21/2021 | - | | Cabell Lolmaugh | 7/14/2015 | 969 | 644 | 14.19 | 7/14/2022 | - | | Cabell Lolmaugh | 10/17/2017 | - | - | - | - | 9,036 | | Cabell Lolmaugh | 11/6/2017 | 6,725 | 20,175 | 8.50 | 11/6/2027 | - | | Cabell Lolmaugh | 2/22/2018 | - | 56,000 | 5.55 | 2/22/2028 | 22,500 | - Unexercisable options for Kirk Geadelmann include 20,000 vesting on Aug 12, 2019, 7,500 in three annual installments from April 20, 2019, 9,900 in three annual installments from May 11, 2019, and 19,875 in three annual installments from Nov 2, 2019[295][296] - Unexercisable options for Cabell Lolmaugh include 1,500 vesting on Oct 21, 2019, 644 in two annual installments from July 14, 2019, 20,175 in three annual installments from Nov 6, 2019, and 56,000 in four annual installments from Feb 22, 2019[297][298] - Unvested restricted stock for Kirk Geadelmann includes 3,900 with purchase option lapsing in three annual installments from April 20, 2019, 2,250 in three annual installments from May 11, 2019, 8,738 with forfeiture risks lapsing in three annual installments from Nov 2, 2019, and 9,000 with forfeiture risks lapsing in four annual installments from Feb 22, 2019[295][296][297] - Unvested restricted stock for Cabell Lolmaugh includes 9,036 with forfeiture risks lapsing in three annual installments from Oct 17, 2019, and 22,500 with forfeiture risks lapsing in four annual installments from Feb 22, 2019[297] Option Exercises and Stock Vested for Fiscal Year 2018 In fiscal year 2018, Robert Rucker had 5,038 shares of stock vest, realizing a value of $42,067, Kirk Geadelmann had 4,962 shares vest, realizing $32,102, and Cabell Lolmaugh had 3,012 shares vest, realizing $20,211, with no stock options exercised by named executive officers during fiscal year 2018 Stock Awards Vested (Fiscal Year 2018) | Name | Number of Shares Acquired on Vesting () | Value Realized on Vesting ($) | | :-------------- | :--------------------------------------- | :---------------------------- | | Robert Rucker | 5,038 | 42,067 | | Kirk Geadelmann | 4,962 | 32,102 | | Cabell Lolmaugh | 3,012 | 20,211 | - No stock options were exercised by named executive officers during fiscal year 2018[459] Pension Benefits The company did not sponsor any defined benefit pension or other actuarial plan for its named executive officers during fiscal year 2018 - The company did not sponsor any defined benefit pension or other actuarial plan for its named executive officers during fiscal year 2018[302] Nonqualified Deferred Compensation No nonqualified deferred compensation was paid to or earned by the named executive officers during fiscal year 2018 - No nonqualified deferred compensation was paid to or earned by the named executive officers during fiscal year 2018[303] Potential Payments Upon Termination or Change in Control Messrs. Lolmaugh and Geadelmann are eligible for severance benefits upon termination without cause or for good reason, including six months of base salary and company-contributed health insurance costs, and are entitled to full vesting acceleration of outstanding equity awards upon a change of control if terminated without cause or constructively terminated within one year, while Mr. Rucker's unvested equity awards may be accelerated at the Compensation Committee's discretion upon a change in control Potential Payments Upon Termination or Change in Control (as of Dec 31, 2018, in $) | Name | In Connection with a Change in Control ($) | By Company Not for Cause ($) | By NEO for Good Reason ($) | | :-------------- | :--------------------------------------- | :--------------------------- | :------------------------- | | Robert Rucker | - (3) | - | - | | Kirk Geadelmann | 787,867 | 146,120 | 146,120 | | Cabell Lolmaugh | 553,507 | 128,620 | 128,620 | - Messrs. Lolmaugh and Geadelmann are eligible for continued payment of six months of base salary and company-contributed health insurance costs upon termination by the company not for cause or by the NEO for good reason[306] - Upon a change in control, Messrs. Lolmaugh and Geadelmann are entitled to full vesting acceleration of unvested equity awards if not offered employment by the successor entity, or if terminated without cause or constructively terminated prior to the first anniversary of the change of control[304] ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS This section details the beneficial ownership of common stock by major stockholders, executive officers, and directors as of February 22, 2019, with BlackRock, Inc. as the largest 5% stockholder with 12.2%, followed by JWTS, Inc. (8.4%), The Tile Shop, Inc. (6.9%), and Capital World Investors (6.0%), and Robert A. Rucker beneficially owning 10.8%, while all executive officers and directors as a group beneficially hold 27.1% of outstanding common stock, and the company's equity compensation plan has 1,388,079 securities to be issued upon exercise of outstanding options and 1,734,518 shares remaining available for future issuance Security Ownership of Certain Beneficial Owners and Management (as of Feb 22, 2019) | Name of Beneficial Owner | Number of Shares Beneficially Owned | Percent | | :-------------------------------- | :---------------------------------- | :------ | | BlackRock, Inc. | 6,448,065 | 12.2% | | JWTS, Inc. | 4,441,180 | 8.4% | | The Tile Shop, Inc. | 3,662,428 | 6.9% | | Capital World Investors | 3,158,000 | 6.0% | | Robert A. Rucker | 5,711,293 | 10.8% | | All Executive Officers and Directors as a Group (8 persons) | 14,385,417 | 27.1% | - As of February 22, 2019, the calculation of beneficial ownership is based on 52,921,546 shares of common stock outstanding[327] Equity Compensation Plan Information (as of Dec 31, 2018) | Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights ($) | Number of securities remaining available for future issuance under equity compensation plans | | :--------------------------------------- | :------------------------------------------------------------------------ | :------------------------------------------------------------------- | :--------------------------------------------------------------------------------- | | Equity compensation plans approved by stockholders | 1,388,079 | 12.34 | 1,734,518 | | Equity compensation plans not approved by stockholders | - | - | - | | Total | 1,388,079 | 12.34 | 1,734,518 | Security Ownership of Certain Beneficial Owners and Management Equity Compensation Plan Information ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE A majority of the Board members (Messrs. Cook, Jacullo, Kamin, Krasnow, and Livingston) are independent, with the CEO and former interim CEO not considered independent, and the company has related party transactions, including purchases from Nanyang Helin Stone Co. Ltd., a key vendor majority-owned by Fumitake Nishi (brother-in-law of former Interim CEO Robert A. Rucker), totaling $12.0 million in 2018, which the Audit Committee reviewed and approved due to Nanyang's quality, availability, and pricing, and Adam Rucker, son of Robert A. Rucker, was employed as Director of IT until December 2018, receiving $112,000 in 2018, and the company has a written policy for related person transactions, requiring Audit Committee review and approval for transactions exceeding $50,000 - Five of the seven directors (Messrs. Cook, Jacullo, Kamin, Krasnow, and Livingston) are independent, while the CEO (Mr. Lolmaugh) and prior Interim CEO (Mr. Rucker) are not independent due to their employment[336] - The company purchased $12.0 million in products from Nanyang Helin Stone Co. Ltd. in 2018, a key vendor majority-owned by Fumitake Nishi, brother-in-law of former Interim CEO Robert A. Rucker[338][449] - The Audit Committee evaluated and approved the continuation of purchases from Nanyang, believing it provides an important combination of quality, product availability, and pricing[339][450] - Adam Rucker, son of Robert A. Rucker, was employed as Director of Information Technology until December 12, 2018, receiving $112,000 in 2018[340][451] - The company has a written related person transaction policy requiring Audit Committee review and approval for transactions exceeding $50,000, with specific criteria for evaluation[343][344] Independence of the Board of Directors Certain Relationships and Related Transactions Policies and Procedures for Related Person Transactions ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The company paid Ernst & Young, LLP $643,000 in total fees for professional services in fiscal year 2018, a decrease from $651,000 in 2017, with audit fees of $615,000 in 2018 and $651,000 in 2017 covering annual financial statement audits, internal control audits, and quarterly report reviews, and tax fees of $28,000 in 2018 for compliance, advice, and planning, with no tax fees in 2017, and no audit-related or other fees in either year, and all audit and non-audit services performed by the independent auditors were pre-approved by the Audit Committee Principal Accountant Fees and Services (2017-2018, in $) | Category | 2018 | 2017 | | :---------------- | :--------- | :--------- | | Audit Fees | $615,000 | $651,000 | | Audit-Related Fees | - | - | | Tax Fees | $28,000 | - | | All Other Fees | - | - | | Total | $643,000 | $651,000 | - Audit Fees primarily covered the annual financial statement audit, audit of internal control over financial reporting, and reviews of quarterly reports and registration statements[346] - Tax Fees in 2018 were for professional services related to tax compliance, advice, and planning[350] - All audit and non-audit services performed by the independent auditors in fiscal year 2018 were pre-approved by the Audit Committee, in accordance with its written charter[349] Pre-Approval Policies and Procedures PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES This section lists the documents filed as part of the report, including the consolidated financial statements (Balance Sheets, Statements of Operations, Comprehensive Income, Stockholders' Equity, and Cash Flows) and their related notes, starting on page 56, and also confirms the inclusion of financial statement schedules and an exhibit index - The consolidated financial statements of the Company and its subsidiaries are filed as part of this Form 10-K, including Reports of Independent Registered Public Accounting Firm, Consolidated Balance Sheets, Statements of Operations, Comprehensive Income (Loss), Stockholders' Equity, Cash Flows, and Notes to Consolidated Financial Statements[352] - The information required for Schedule II – Valuation and Qualifying Accounts is provided within the Consolidated Financial Statements[3