0001558370-20-009207.txt : 20200805 0001558370-20-009207.hdr.sgml : 20200805 20200804184204 ACCESSION NUMBER: 0001558370-20-009207 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 50 CONFORMED PERIOD OF REPORT: 20200630 FILED AS OF DATE: 20200805 DATE AS OF CHANGE: 20200804 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Lumber Liquidators Holdings, Inc. CENTRAL INDEX KEY: 0001396033 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-LUMBER & OTHER BUILDING MATERIALS DEALERS [5211] IRS NUMBER: 271310817 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-33767 FILM NUMBER: 201074823 BUSINESS ADDRESS: STREET 1: 4901 BAKERS MILL LANE CITY: RICHMOND STATE: VA ZIP: 23230 BUSINESS PHONE: 757-259-4280 MAIL ADDRESS: STREET 1: 4901 BAKERS MILL LANE CITY: RICHMOND STATE: VA ZIP: 23230 FORMER COMPANY: FORMER CONFORMED NAME: Lumber Liquidators, Inc. DATE OF NAME CHANGE: 20070410 10-Q 1 ll-20200630x10q.htm 10-Q
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2020

or

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

For the transition period from              to             

Commission File Number: 001-33767

Graphic

Lumber Liquidators Holdings, Inc.

(Exact name of registrant as specified in its charter)

Delaware

27-1310817

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

4901 Bakers Mill Lane

Richmond, Virginia

23230

(Address of Principal Executive Offices)

(Zip Code)

(804463-2000

(Registrant’s telephone number, including area code)

Not Applicable

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

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

Title of each class:

Trading Symbol:

Name of exchange on which registered:

Common Stock, par value $0.001 per share

LL

New York Stock Exchange

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

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

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

  Large accelerated filer

  Accelerated filer

  Non-accelerated filer

  Smaller reporting company

  Emerging growth company

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

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

As of August 1, 2020, there are 28,852,998 shares of the registrant’s common stock, par value of $0.001 per share, outstanding.

LUMBER LIQUIDATORS HOLDINGS, INC.

Quarterly Report on Form 10-Q

For the quarter ended June 30, 2020

TABLE OF CONTENTS

Page

PART I – FINANCIAL INFORMATION

2

Item 1.

Condensed Consolidated Financial Statements

2

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

19

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

31

Item 4.

Controls and Procedures

31

PART II – OTHER INFORMATION

32

Item 1.

Legal Proceedings

32

Item 1A.

Risk Factors

38

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

39

Item 3.

Defaults Upon Senior Securities

39

Item 4.

Mine Safety Disclosures

39

Item 5.

Other Information

39

Item 6.

Exhibits

39

Signatures

41

1

PART I
FINANCIAL INFORMATION

Item 1. Financial Statements.

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

June 30,

December 31, 

    

2020

    

2019

Assets

Current Assets:

Cash and Cash Equivalents

$

126,737

$

8,993

Merchandise Inventories

248,722

286,369

Prepaid Expenses

8,544

8,288

Deposit for Legal Settlement

21,500

21,500

Tariff Recovery Receivable

18,285

27,025

Other Current Assets

5,545

6,938

Total Current Assets

429,333

359,113

Property and Equipment, net

96,864

98,733

Operating Lease Right-of-Use

121,544

121,796

Goodwill

9,693

9,693

Other Assets

7,046

6,674

Total Assets

$

664,480

$

596,009

Liabilities and Stockholders’ Equity

Current Liabilities:

Accounts Payable

$

68,516

$

59,827

Customer Deposits and Store Credits

55,492

41,571

Accrued Compensation

11,506

11,742

Sales and Income Tax Liabilities

9,722

7,225

Accrual for Legal Matters and Settlements Current

62,786

67,471

Operating Lease Liabilities - Current

36,740

31,333

Other Current Liabilities

23,998

18,937

Total Current Liabilities

268,760

238,106

Other Long-Term Liabilities

15,708

13,757

Operating Lease Liabilities - Long-Term

101,131

100,470

Deferred Tax Liability

921

426

Credit Agreement

101,000

82,000

Total Liabilities

487,520

434,759

Stockholders’ Equity:

Common Stock ($0.001 par value; 35,000 shares authorized; 30,161 and 29,959 shares issued and 28,852 and 28,714 shares outstanding, respectively)

30

30

Treasury Stock, at cost (1,309 and 1,245 shares, respectively)

(142,752)

(142,314)

Additional Capital

219,618

218,616

Retained Earnings

101,372

86,498

Accumulated Other Comprehensive Loss

(1,308)

(1,580)

Total Stockholders’ Equity

176,960

161,250

Total Liabilities and Stockholders’ Equity

$

664,480

$

596,009

See accompanying notes to condensed consolidated financial statements

2

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

Three Months Ended

Six Months Ended

June 30,

June 30,

    

2020

    

2019

    

2020

    

2019

 

Net Sales

Net Merchandise Sales

$

210,055

$

250,658

$

448,837

$

488,557

Net Services Sales

20,229

37,909

48,821

66,230

Total Net Sales

230,284

288,567

497,658

554,787

Cost of Sales

Cost of Merchandise Sold

125,953

157,801

266,699

309,226

Cost of Services Sold

16,039

28,279

37,696

49,463

Total Cost of Sales

 

141,992

 

186,080

 

304,395

 

358,689

Gross Profit

 

88,292

 

102,487

 

193,263

 

196,098

Selling, General and Administrative Expenses

 

82,288

 

103,864

 

178,495

 

200,896

Operating Income (Loss)

 

6,004

 

(1,377)

 

14,768

 

(4,798)

Other Expense

 

1,142

 

1,068

 

2,024

 

2,358

Income (Loss) Before Income 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)

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)

Weighted Average Common Shares Outstanding:

 

  

 

  

 

  

 

  

Basic

 

28,831

 

28,692

 

28,776

 

28,669

Diluted

 

28,892

 

28,692

 

28,889

 

28,669

See accompanying notes to condensed consolidated financial statements

3

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

Three Months Ended

Six Months Ended

June 30,

June 30,

    

2020

    

2019

    

2020

    

2019

 

Net Income (Loss)

$

2,639

$

(2,856)

$

14,874

$

(7,780)

Other Comprehensive Income (Loss):

 

  

 

  

 

  

 

  

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)

See accompanying notes to condensed consolidated financial statements

4

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

Total

Common Stock

Treasury Stock

Additional

Retained

Stockholders'

    

Shares

    

Value

    

Shares

    

Value

    

Capital

    

Earnings

    

AOCL

    

Equity

 

April 1, 2019

28,682

$

32

 

2,979

$

(142,157)

$

214,798

$

71,911

$

(1,268)

$

143,316

Stock-Based Compensation Expense

 

 

 

 

 

1,361

 

 

 

1,361

Release of Restricted Shares

 

19

 

 

 

 

 

 

 

Common Stock Repurchased

 

 

(2)

 

(1,740)

 

(112)

 

 

 

 

(114)

Translation Adjustment

 

 

 

 

 

 

 

(309)

 

(309)

Net Loss

 

 

 

 

 

 

(2,856)

 

 

(2,856)

June 30, 2019

 

28,701

$

30

 

1,239

$

(142,269)

$

216,159

$

69,055

$

(1,577)

$

141,398

April 1, 2020

 

28,812

$

30

 

1,293

$

(142,630)

$

218,736

$

98,733

$

(1,535)

$

173,334

Stock-Based Compensation Expense

 

 

 

 

 

846

 

 

 

846

Exercise of Stock Options

 

3

 

 

 

 

36

 

 

 

36

Release of Restricted Shares

 

37

 

 

 

 

 

 

 

Common Stock Repurchased

 

 

 

16

 

(122)

 

 

 

 

(122)

Translation Adjustment

 

 

 

 

 

 

 

227

 

227

Net Income

 

 

 

 

 

 

2,639

 

 

2,639

June 30, 2020

 

28,852

$

30

 

1,309

$

(142,752)

$

219,618

$

101,372

$

(1,308)

$

176,960

Total

Common Stock

Treasury Stock

Additional

Retained

Stockholders'

    

Shares

    

Value

    

Shares

    

Value

    

Capital

    

Earnings

    

AOCL

     

Equity

January 1, 2019

 

28,627

$

32

 

2,951

$

(141,828)

$

213,744

$

76,835

$

(1,385)

$

147,398

Stock-Based Compensation Expense

 

 

 

 

 

2,415

 

 

 

2,415

Release of Restricted Shares

 

74

 

 

 

 

 

 

 

Common Stock Repurchased

 

 

(2)

 

(1,712)

 

(441)

 

 

 

 

(443)

Translation Adjustment

 

 

 

 

 

 

 

(192)

 

(192)

Net Loss

 

 

 

 

 

 

(7,780)

 

 

(7,780)

June 30, 2019

 

28,701

$

30

 

1,239

$

(142,269)

$

216,159

$

69,055

$

(1,577)

$

141,398

January 1, 2020

28,714

$

30

1,245

$

(142,314)

$

218,616

$

86,498

$

(1,580)

$

161,250

Stock-Based Compensation Expense

 

 

 

 

 

966

 

 

 

966

Exercise of Stock Options

 

3

 

 

 

 

36

 

 

 

36

Release of Restricted Shares

 

135

 

 

 

 

 

 

 

Common Stock Repurchased

 

 

 

64

 

(438)

 

 

 

 

(438)

Translation Adjustment

 

 

 

 

 

 

 

272

 

272

Net Income

 

 

 

 

 

 

14,874

 

 

14,874

June 30, 2020

 

28,852

$

30

 

1,309

$

(142,752)

$

219,618

$

101,372

$

(1,308)

$

176,960

See accompanying notes to condensed consolidated financial statements

5

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

Six Months Ended June 30,

    

2020

    

2019

Cash Flows from Operating Activities:

 

  

 

  

Net Income (Loss)

$

14,874

$

(7,780)

Adjustments to Reconcile Net Income (Loss):

 

  

 

Depreciation and Amortization

 

8,934

 

8,599

Deferred Income Taxes Provision

 

495

 

71

Stock-Based Compensation Expense

 

966

 

2,415

Provision for Inventory Obsolescence Reserves

 

1,574

 

626

(Gain) Loss on Disposal of Fixed Assets

 

(827)

 

50

Changes in Operating Assets and Liabilities:

 

 

Merchandise Inventories

 

35,897

 

12,883

Accounts Payable

 

9,150

 

(4,729)

Customer Deposits and Store Credits

 

13,921

 

2,652

Prepaid Expenses and Other Current Assets

 

10,330

 

(3,557)

Accrual for Legal Matters and Settlements

 

148

 

4,575

Payments for Legal Matters and Settlements

 

(4,833)

 

(33,725)

Deferred Rent Payments

5,813

Other Assets and Liabilities

 

9,225

 

3,828

Net Cash Provided by (Used in) Operating Activities

 

105,667

 

(14,092)

Cash Flows from Investing Activities:

 

  

 

  

Purchases of Property and Equipment

 

(7,212)

 

(8,907)

Other Investing Activities

 

949

 

64

Net Cash Used in Investing Activities

 

(6,263)

 

(8,843)

Cash Flows from Financing Activities:

 

  

 

  

Borrowings on Credit Agreement

 

45,000

 

63,000

Payments on Credit Agreement

 

(26,000)

 

(38,500)

Other Financing Activities

 

(637)

 

(1,074)

Net Cash Provided by Financing Activities

 

18,363

 

23,426

Effect of Exchange Rates on Cash and Cash Equivalents

 

(23)

 

671

Net Increase in Cash and Cash Equivalents

 

117,744

 

1,162

Cash and Cash Equivalents, Beginning of Period

 

8,993

 

11,565

Cash and Cash Equivalents, End of Period

$

126,737

$

12,727

Supplemental disclosure of non-cash operating and financing activities:

 

  

 

  

Tenant Improvement Allowance for Leases

$

(611)

$

(146)

See accompanying notes to condensed consolidated financial statements

6

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

Note 1.       Basis of Presentation

Lumber Liquidators Holdings, Inc. and its direct and indirect subsidiaries (collectively and, where applicable, individually, the “Company”) engage in business as a multi-channel specialty retailer of hard-surface flooring, and hard-surface flooring enhancements and accessories, operating as a single operating segment. The Company offers an extensive assortment of exotic and domestic hardwood species, engineered hardwood, laminate, resilient vinyl, waterproof vinyl plank and porcelain tile flooring direct to the consumer. The Company features renewable flooring products, bamboo and cork, and provides a wide selection of flooring enhancements and accessories, including moldings, noise-reducing underlayment, adhesives and flooring tools. The Company also provides in-home delivery and installation services to its customers. The Company primarily sells to homeowners or to contractors on behalf of homeowners through a network of store locations in metropolitan areas. As of June 30, 2020, the Company’s stores spanned 47 states in the United States (“U.S.”) and included eight stores in Canada. In addition to the store locations, the Company’s products may be ordered, and customer questions/concerns addressed, through both its customer relationship center in Richmond, Virginia and its website, LLFlooring.com.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q for interim financial reporting pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). In the opinion of management, all adjustments (consisting of normal and recurring adjustments except those otherwise described herein) considered necessary for a fair presentation have been included in the accompanying condensed consolidated financial statements. However, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements. Therefore, the interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in the Company’s annual report filed on Form 10-K for the year ended December 31, 2019.

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

Results of operations for the three and six months ended June 30, 2020 are not necessarily indicative of future results to be expected for the full year due to a number of factors, including seasonality and general economic conditions that may impact sales for the remainder of fiscal 2020.

Impact of the COVID-19 Pandemic

On March 11, 2020, the World Health Organization announced that infections of COVID-19 had become a pandemic, and on March 13, 2020, the U.S. President announced a National Emergency relating to the COVID-19 pandemic. The Company is uncertain of the magnitude of the adverse impact of the COVID-19 pandemic to its sales, supply chain, and distribution as well as to the overall economy and consumer spending, including the construction-renovation industry. The Company currently anticipates that disruptions resulting from COVID-19 could have a material negative impact on its sales and results of operations, financial position, and cash flows during 2020.

While these potential negative effects will not be fully reflected in the Company's results of operations and overall financial performance until future periods, the Company has already experienced an impact to financial results due to the COVID-19 pandemic. Most notably, starting as of the week of March 22, 2020 the Company closed as many as 56 stores for a period of time while all other stores operated under reduced hours and/or warehouse-only conditions, offering curbside pickup and job site delivery for our Pro and DIY customers. As reported in the Company’s first quarter earnings release, quarter-to-date comparable store sales were down approximately 30% through the week ended May 23. Improving performance in June resulted in a negative 21.3% comparable store sales for the full quarter. By early July, 98% of stores were fully open, with less than 10 operating by appointment only. Only one store remained

7

closed since the onset of the pandemic due to a unique store design while others closed periodically as warranted by market conditions.

Note 2.       Summary of Significant Accounting Policies

Fair Value of Financial Instruments

The carrying amounts of financial instruments such as cash and cash equivalents, accounts payable and other liabilities approximate fair value because of the short-term nature of these items. The carrying amount of obligations under the Credit Agreement approximates fair value due to the variable rate of interest.

Merchandise Inventories

The Company values merchandise inventories at the lower of cost or net realizable value. The method by which amounts are removed from inventory is weighted average cost. All of the hardwood flooring purchased from vendors is either prefinished or unfinished, and in immediate saleable form. The Company relies on a select group of international and domestic suppliers to provide imported flooring products that meet the Company’s specifications. In 2019, approximately 46% of the Company’s product was sourced from China. The Company is subject to risks associated with obtaining products from abroad, including disruptions or delays in production, shipments, delivery or processing, including due to the COVID-19 pandemic. While the Company continues to be uncertain as to the full impact of COVID-19 to the supply chain, the Company is executing contingency plans to minimize anticipated and potential disruptions to supply chain, domestic distribution centers and store operations.

Included in merchandise inventories are tariff related costs, including Section 301 tariffs. In late 2019, with an additional update in the first quarter 2020, the United States Trade Representative (“USTR”) ruled on a request made by certain interested parties, including the Company, and retroactively excluded certain flooring products imported from China from the Section 301 tariffs. The tariff exclusions are currently scheduled to expire in August 2020. Approximately 46% of the Company’s product was subject to Section 301 tariffs through most of 2019, but that declined to approximately 10% to 15% following the November 2019 exclusion on click vinyl and engineered products granted by the USTR. As of June 30, 2020, the Company has an $18 million receivable related to these tariffs in the caption “Tariff Recovery Receivable” on the condensed consolidated balance sheets and expects to receive payments by the end of 2020.

Recognition of Net Sales

The Company generates revenues primarily by retailing merchandise in the form of hard-surface and porcelain flooring and accessories. Additionally, the Company expands its revenues by offering services to deliver and/or install this merchandise for its customers; it considers these services to be separate performance obligations. The separate performance obligations are detailed on the customer’s invoice(s) and the customer often purchases flooring merchandise without purchasing installation or delivery services. Sales occur through a network of 422 stores, which spanned 47 states including eight stores in Canada, at June 30, 2020. In addition, both the merchandise and services can be ordered through a call center and from the Company’s website, LLFlooring.com. The Company’s agreements with its customers are of short duration (less than a year) and as such the Company has elected not to disclose revenue for partially satisfied contracts that will be completed in the days following the end of a period as permitted by GAAP. The Company reports its revenues exclusive of sales taxes collected from customers and remitted to governmental taxing authorities, consistent with past practice.

Revenue is based on consideration specified in a contract with a customer and excludes any sales incentives from vendors and amounts collected on behalf of third parties. The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product to a customer or performing services for a customer. Revenues from installation and freight services are recognized when the delivery is made or the installation is complete, which approximates the recognition of revenue over time due to the short duration of service provided. The price of the Company’s merchandise and services is specified in the respective contract and detailed on the invoice agreed to with

8

the customer including any discounts. The Company generally requires customers to pay a deposit, equal to approximately half of the retail sales value, when ordering merchandise not regularly carried in a given location or not currently in stock. In addition, the Company generally does not extend credit to its customers with payment due in full at the time the customer takes possession of merchandise or when the service is provided. Customer payments and deposits received in advance of the customer taking possession of the merchandise or receiving the services are recorded as deferred revenues in the accompanying condensed consolidated balance sheet caption “Customer Deposits and Store Credits.”

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

Three Months Ended

Six Months Ended

June 30,

June 30,

    

2020

    

2019

    

2020

    

2019

Customer Deposits and Store Credits, Beginning Balance

$

(37,836)

$

(47,633)

$

(41,571)

$

(40,332)

New Deposits

 

(264,473)

 

(302,429)

 

(545,326)

 

(594,262)

Recognition of Revenue

 

230,284

 

288,567

 

497,658

 

554,787

Sales Tax included in Customer Deposits

 

14,862

 

17,483

 

31,543

 

34,264

Other

 

1,671

 

1,124

 

2,204

 

2,655

Customer Deposits and Store Credits, Ending Balance

$

(55,492)

$

(42,888)

$

(55,492)

$

(42,888)

Subject to limitations under the Company’s policy, return of unopened merchandise is accepted for 90 days. Due to the impact of COVID-19, the Company temporarily extended its return policy an additional 60 days starting in March 2020. The amount of revenue recognized for flooring merchandise is adjusted for expected returns, which are estimated based on the Company’s historical data, current sales levels, and forecasted economic trends. The Company uses the expected value method to estimate returns because it has a large number of contracts with similar characteristics. The Company reduces revenue by the amount of expected returns and records it within “Other Current Liabilities” on the condensed consolidated balance sheet. The Company continues to estimate the amount of returns based on historical data. In addition, the Company recognizes a related asset for the right to recover returned merchandise and records it in the “Other Current Assets” caption of the accompanying condensed consolidated balance sheet. This amount was $1.3 million at June 30, 2020. The Company recognizes sales commissions as incurred since the amortization period is less than one year.

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

    

Three Months Ended June 30,

Six Months Ended June 30,

 

2020

    

2019

    

2020

2019

Manufactured Products 1

$

112,441

49

%  

$

118,212

41

%  

$

231,478

46

%

$

228,679

41

%

Solid and Engineered Hardwood

62,164

    

27

%  

83,547

    

29

%  

138,773

    

28

%

165,382

    

30

%

Moldings and Accessories and Other

 

35,450

 

15

%  

 

48,899

 

17

%  

 

78,586

 

16

%

 

94,496

 

17

%

Installation and Delivery Services

 

20,229

 

9

%  

 

37,909

 

13

%  

 

48,821

 

10

%

 

66,230

 

12

%

Total

$

230,284

 

100

%  

$

288,567

 

100

%  

$

497,658

 

100

%

$

554,787

 

100

%

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

Cost of Sales

Cost of sales includes the cost of products sold, including tariffs, the cost of installation services, and transportation costs from vendors to the Company’s distribution centers or store locations. It also includes transportation costs from distribution centers to store locations, transportation costs for the delivery of products from store locations to

9

customers, certain costs of quality control procedures, warranty and customer satisfaction costs, inventory adjustments including obsolescence and shrinkage, and costs to produce samples, which are net of vendor allowances.

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

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

Recent Accounting Pronouncements Adopted

In April 2020, the FASB staff issued a question and answer document (the “Lease Modification Q&A”) focused on the application of lease accounting guidance to lease concessions obtained as a result of the COVID-19 pandemic. Under existing lease guidance, the Company would have to determine, on a lease by lease basis, if a lease concession obtained was a result of a new arrangement reached with the lessor (treated within the lease modification accounting framework) or if a lease concession obtained was under the enforceable rights and obligations within the existing lease agreement (precluded from applying the lease modification accounting framework). The Lease Modification Q&A allows lessees, if certain criteria have been met, to bypass the lease-by-lease analysis, and instead elect to either apply the lease modification accounting framework or not, with such election applied consistently to leases with similar characteristics and similar circumstances. The Company has elected to apply this practical expedient for the period beginning as of April 1, 2020 for those agreements where total payments under the modified lease are substantially the same or less than the original agreement. Included in “Operating Lease Liabilities - Current” on the condensed consolidated balance sheet is a $5.4 million liability as of June 30, 2020 related to deferred payments as a result of the COVID-19 rent concessions, as well as an additional $0.4 million included in “Operating Lease Liabilities - Long-Term.” The deferred payments will be made over the remainder of the lease term in accordance with each concession agreement.

Note 3.       Stockholders’ Equity

Net Income (Loss) per Common Share

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

Three Months Ended

Six Months Ended

June 30,

June 30,

    

2020

    

2019

    

2020

    

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

Effect of Dilutive Securities:

 

  

 

  

 

  

 

  

Common Stock Equivalents

 

61

 

 

113

 

Weighted Average Common Shares Outstanding—Diluted

 

28,892

 

28,692

 

28,889

 

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)

10

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

Three Months Ended

Six Months Ended

June 30,

June 30,

    

2020

    

2019

    

2020

    

2019

 

Stock Options

598

644

544

644

 

Restricted Shares

742

839

419

613

Stock Repurchase Program

The Company’s board of directors has authorized the repurchase of up to $150 million of the Company’s common stock. At June 30, 2020, the Company had approximately $14.7 million remaining under this authorization. The Company has not repurchased any shares of its common stock under this program in more than three years.

Note 4.       Stock-based Compensation

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

    

    

Restricted Stock

Stock Options

Awards

Options Outstanding/Nonvested RSAs, January 1, 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 a target of 94,591 performance-based RSAs with a grant date fair value of $0.9 million during the six months ended June, 2020 and a target of 100,281 performance-based RSAs with a grant date fair value of $1.1 million during the six months ended June 30, 2019. The 2020 performance-based RSAs were awarded to certain members of senior management in connection with the achievement of specific key financial metrics and a relative total shareholder return multiple measured over a three-year period and also vest over a three-year period. The number of 2020 performance-based awards that will ultimately vest is contingent upon the achievement of these key financial metrics and the results of the relative total shareholder return multiple by the end of year three. The 2019 performance-based RSAs were awarded to certain members of senior management in connection with the achievement of specific key financial metrics measured over a two-year period and vest over a three-year period. The number of 2019 performance-based awards that will ultimately vest is contingent upon the achievement of these key financial metrics by the end of year two. The Company assesses the probability of achieving these metrics on a quarterly basis. For these awards, the Company recognizes the fair value expense ratably over the performance and vesting period. These awards are included above in RSAs Granted.

Note 5.      Credit Agreement

The Company has a credit agreement (the “Credit Agreement”) with Bank of America, N.A. and Wells Fargo Bank, National Association (the “Lenders”). On April 17, 2020, the Company entered into a First Amendment to the Credit Agreement (the “Amendment”) with the Lenders. The execution of the Amendment, among other things, temporarily increases the maximum amount of borrowings under the Revolving Credit Facility (the “Revolving Credit Facility”) from $175 million to $212.5 million until August 30, 2020, subject to the borrowing bases described below. The total size of the Credit Agreement increased to $237.5 million, inclusive of the first in-last out $25 million term loan (the “FILO Term Loan”).

The Revolving Credit Facility and the FILO Term Loan mature on March 29, 2024 and are secured by security interests in the Collateral (as defined in the Credit Agreement), which includes substantially all assets of the Company including, among other things, the Company’s inventory and accounts receivables, and the Company’s East Coast

11

distribution center located in Sandston, Virginia. Under the terms of the Credit Agreement, the Company has the ability to release the East Coast distribution center from the Collateral under certain conditions.

The Amendment permanently increased the margin for LIBOR Rate Loans (as defined in the Amendment) to (i) 2.50% to 3.00% over the applicable LIBOR Rate (as defined in the Amendment) with respect to Revolving Loans (as defined in the Amendment) and (ii) 3.75% to 4.50% over the applicable LIBOR Rate with respect to FILO Term Loans (as defined in the Amendment), in each case (for one, two, three or six month interest periods as selected by the Company) depending on the Company’s average daily excess borrowing availability under the Revolving Credit Facility during the most recently completed fiscal quarter. The Amendment also permanently increased the unused commitment fee of