UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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LUMBER LIQUIDATORS HOLDINGS, INC.
Quarterly Report on Form 10-Q
For the quarter ended September 30, 2021
TABLE OF CONTENTS
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Management’s Discussion and Analysis of Financial Condition and Results of Operations | 19 | |
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1
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
Lumber Liquidators Holdings, Inc.
Condensed Consolidated Balance Sheets
(Unaudited, in thousands)
September 30, | December 31, | |||||
| 2021 |
| 2020 | |||
Assets | ||||||
Current Assets: | ||||||
Cash and Cash Equivalents | $ | | $ | | ||
Merchandise Inventories | | | ||||
Prepaid Expenses | | | ||||
Tariff Recovery Receivable | — | | ||||
Other Current Assets | | | ||||
Total Current Assets | | | ||||
Property and Equipment, net | | | ||||
Operating Lease Right-of-Use | | | ||||
Goodwill | | | ||||
Deferred Tax Asset | | | ||||
Other Assets | | | ||||
Total Assets | $ | | $ | | ||
Liabilities and Stockholders’ Equity | ||||||
Current Liabilities: | ||||||
Accounts Payable | $ | | $ | | ||
Customer Deposits and Store Credits | | | ||||
Accrued Compensation | | | ||||
Sales and Income Tax Liabilities | | | ||||
Accrual for Legal Matters and Settlements | | | ||||
Operating Lease Liabilities - Current | | | ||||
Other Current Liabilities | | | ||||
Total Current Liabilities | | | ||||
Other Long-Term Liabilities | | | ||||
Operating Lease Liabilities - Long-Term | | | ||||
Credit Agreement | — | | ||||
Total Liabilities | | | ||||
Stockholders’ Equity: | ||||||
Common Stock ($ | | | ||||
Treasury Stock, at cost ( | ( | ( | ||||
Additional Capital | | | ||||
Retained Earnings | | | ||||
Total Stockholders’ Equity | | | ||||
Total Liabilities and Stockholders’ Equity | $ | | $ | |
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 | Nine Months Ended | ||||||||||||
September 30, | September 30, | ||||||||||||
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| |||||
Net Sales | |||||||||||||
Net Merchandise Sales | $ | | $ | | $ | | $ | | |||||
Net Services Sales | | | | | |||||||||
Total Net Sales | | | | | |||||||||
Cost of Sales | |||||||||||||
Cost of Merchandise Sold | | | | | |||||||||
Cost of Services Sold | | | | | |||||||||
Total Cost of Sales |
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Gross Profit |
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Selling, General and Administrative Expenses |
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Operating Income |
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Other Expense (Income) |
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| ( |
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Income Before Income Taxes |
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Income Tax Expense |
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Net Income | $ | | $ | | $ | | $ | | |||||
Net Income per Common Share—Basic | $ | | $ | | $ | | $ | | |||||
Net Income per Common Share—Diluted | $ | | $ | | $ | | $ | | |||||
Weighted Average Common Shares Outstanding: |
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Basic |
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Diluted |
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See accompanying notes to condensed consolidated financial statements
3
Lumber Liquidators Holdings, Inc.
Condensed Consolidated Statements of Comprehensive Income
(Unaudited, in thousands)
Three Months Ended | Nine Months Ended | ||||||||||||
September 30, | September 30, | ||||||||||||
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| |||||
Net Income | $ | | $ | | $ | | $ | | |||||
Other Comprehensive Income: |
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Foreign Currency Translation Adjustments |
| — |
| |
| — |
| | |||||
Total Other Comprehensive Income |
| — |
| |
| — |
| | |||||
Comprehensive Income | $ | | $ | | $ | | $ | |
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 | |||||||
| ||||||||||||||||||||||
July 1, 2020 | | $ | |
| | $ | ( | $ | | $ | | $ | ( | $ | | |||||||
Stock-Based Compensation Expense |
| — |
| — |
| — |
| — |
| |
| — |
| — |
| | ||||||
Exercise of Stock Options |
| |
| — |
| — |
| — |
| |
| — |
| — |
| | ||||||
Release of Restricted Shares |
| |
| — |
| — |
| — |
| — |
| — |
| — |
| — | ||||||
Common Stock Repurchased |
| — |
| — |
| |
| ( |
| — |
| — |
| — |
| ( | ||||||
Translation Adjustment |
| — |
| — |
| — |
| — |
| — |
| — |
| |
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Net Income |
| — |
| — |
| — |
| — |
| — |
| |
| — |
| | ||||||
September 30, 2020 |
| | $ | |
| | $ | ( | $ | | $ | | $ | ( | $ | | ||||||
July 1, 2021 |
| | $ | |
| | $ | ( | $ | | $ | | $ | — | $ | | ||||||
Stock-Based Compensation Expense |
| — |
| — |
| — |
| — |
| |
| — |
| — |
| | ||||||
Release of Restricted Shares |
| |
| — |
| — |
| — |
| — |
| — |
| — |
| — | ||||||
Common Stock Repurchased | — |
| — |
| |
| ( |
| — |
| — |
| — |
| ( | |||||||
Net Income |
| — |
| — |
| — |
| — |
| — |
| |
| — |
| | ||||||
September 30, 2021 |
| | $ | |
| | $ | ( | $ | | $ | | $ | — | $ | |
Total | ||||||||||||||||||||||
Common Stock | Treasury Stock | Additional | Retained | Stockholders' | ||||||||||||||||||
| Shares |
| Value |
| Shares |
| Value |
| Capital |
| Earnings |
| AOCL |
| Equity | |||||||
January 1, 2020 |
| | $ | | | $ | ( | $ | | $ | | $ | ( | $ | | |||||||
Stock-Based Compensation Expense |
| — |
| — |
| — |
| — |
| |
| — |
| — |
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Exercise of Stock Options |
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| — |
| — |
| — |
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| — |
| — |
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Release of Restricted Shares |
| |
| — |
| — |
| — |
| — |
| — |
| — |
| — | ||||||
Common Stock Repurchased |
| — |
| — |
| |
| ( |
| — |
| — |
| — |
| ( | ||||||
Translation Adjustment |
| — |
| — |
| — |
| — |
| — |
| — |
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Net Income |
| — |
| — |
| — |
| — |
| — |
| |
| — |
| | ||||||
September 30, 2020 |
| | $ | |
| | $ | ( | $ | | $ | | $ | ( | $ | | ||||||
January 1, 2021 | | $ | | | $ | ( | $ | | $ | | $ | — | $ | | ||||||||
Stock-Based Compensation Expense |
| — |
| — |
| — |
| — |
| |
| — |
| — |
| | ||||||
Exercise of Stock Options |
| |
| — |
| — |
| — |
| |
| — |
| — |
| | ||||||
Release of Restricted Shares |
| |
| — |
| — |
| — |
| — |
| — |
| — |
| — | ||||||
Common Stock Repurchased |
| — |
| — |
| |
| ( |
| — |
| — |
| — |
| ( | ||||||
Net Income |
| — |
| — |
| — |
| — |
| — |
| |
| — |
| | ||||||
September 30, 2021 |
| | $ | |
| | $ | ( | $ | | $ | | $ | — | $ | |
See accompanying notes to condensed consolidated financial statements
5
Lumber Liquidators Holdings, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited, in thousands)
Nine Months Ended September 30, | ||||||
| 2021 |
| 2020 | |||
Cash Flows from Operating Activities: |
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Net Income | $ | | $ | | ||
Adjustments to Reconcile Net Income: |
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Depreciation and Amortization |
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Deferred Income Taxes Provision |
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Income on Vouchers Redeemed for Legal Settlements | ( | — | ||||
Stock-Based Compensation Expense |
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Provision for Inventory Obsolescence Reserves |
| |
| | ||
Impairment of Operating Lease Right-of-Use | — | | ||||
Loss (Gain) on Disposal of Fixed Assets |
| |
| ( | ||
Changes in Operating Assets and Liabilities: |
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| ||||
Merchandise Inventories |
| |
| | ||
Accounts Payable |
| ( |
| | ||
Customer Deposits and Store Credits |
| |
| | ||
Accrued Compensation | ( | | ||||
Tariff Recovery Receivable | | | ||||
Prepaid Expenses and Other Current Assets |
| ( |
| | ||
Accrual for Legal Matters and Settlements |
| |
| | ||
Payments for Legal Matters and Settlements |
| ( |
| ( | ||
Deferred Rent Payments | ( | | ||||
Other Assets and Liabilities |
| ( |
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Net Cash Provided by Operating Activities |
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Cash Flows from Investing Activities: |
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Purchases of Property and Equipment |
| ( |
| ( | ||
Other Investing Activities |
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Net Cash Used in Investing Activities |
| ( |
| ( | ||
Cash Flows from Financing Activities: |
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Borrowings on Credit Agreement |
| — |
| | ||
Payments on Credit Agreement |
| ( |
| ( | ||
Common Stock Repurchased |
| ( |
| ( | ||
Other Financing Activities |
| ( |
| | ||
Net Cash (Used in) Provided by Financing Activities |
| ( |
| | ||
Effect of Exchange Rates on Cash and Cash Equivalents |
| — |
| ( | ||
Net (Decrease) Increase in Cash and Cash Equivalents |
| ( |
| | ||
Cash and Cash Equivalents, Beginning of Period |
| |
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Cash and Cash Equivalents, End of Period | $ | | $ | | ||
Supplemental disclosure of non-cash operating activities: | ||||||
Relief of Inventory for Vouchers Redeemed for Legal Settlements | $ | | $ | — | ||
Supplemental disclosure of non-cash operating and financing activities: |
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|
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| ||
Tenant Improvement Allowance for Leases | $ | ( | $ | ( |
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, “LL Flooring” or the “Company”) engage in business as a multi-channel specialty retailer of hard-surface flooring, and hard-surface flooring enhancements and accessories, operating as a single operating segment. The Company offers an extensive assortment of exotic and domestic hardwood species, engineered hardwood, laminate, resilient vinyl, water-resistant vinyl plank and porcelain tile flooring direct to the consumer. The Company features renewable flooring products, bamboo and cork, and provides a wide selection of flooring enhancements and accessories, including moldings, noise-reducing underlayment, adhesives and flooring tools. The Company also provides in-home delivery and installation services to its customers. The Company primarily sells to homeowners or to contractors on behalf of homeowners through a network of store locations in metropolitan areas. As of September 30, 2021, the Company’s network of
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q for interim financial reporting pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). In the opinion of management, all adjustments (consisting of normal and recurring adjustments except those otherwise described herein) considered necessary for a fair presentation have been included in the accompanying condensed consolidated financial statements. However, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements. Therefore, the interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in the Company’s annual report filed on Form 10-K for the year ended December 31, 2020.
The condensed consolidated financial statements of the Company include the accounts of its wholly owned subsidiaries. All intercompany transactions have been eliminated in consolidation.
Results of operations for the three and nine months ended September 30, 2021 are not necessarily indicative of future results to be expected for the full year due to a number of factors, including supply chain, seasonality, tariffs, and general economic conditions, as well as the uncertainty and ongoing impact of the COVID-19 pandemic that may impact supply chain and/or sales for the remainder of fiscal 2021.
Note 2. Summary of Significant Accounting Policies
Fair Value of Financial Instruments
The carrying amounts of financial instruments such as cash and cash equivalents, accounts payable and other liabilities approximates fair value because of the short-term nature of these items.
Merchandise Inventories
The Company values merchandise inventories at the lower of cost or net realizable value. The method by which amounts are removed from inventory is weighted average cost. All of the hardwood flooring purchased from vendors is either prefinished or unfinished, and in immediate saleable form. The Company relies on a select group of international and domestic suppliers to provide imported flooring products that meet the Company’s specifications. The Company is subject to risks associated with obtaining products from abroad, including disruptions or delays in production, shipments, supply chain, delivery or processing, including due to the COVID-19 pandemic. The Company continues to execute contingency plans to minimize ongoing disruptions to supply chain, domestic distribution centers and store operations.
7
Included in merchandise inventories are tariff-related costs, including Section 301 tariffs on certain products imported from China in recent years. A subset of these imports for certain click vinyl and other engineered products (the “Subset Products”) received an exemption that was made retroactive to the beginning of the Section 301 Tariffs for a period of time. The Company has deployed strategies to mitigate tariffs and improve gross margin, primarily through adjusting its pricing and promotion strategies and alternative country sourcing. The Company continues to monitor market pricing and promotional strategies to inform and guide its decisions. The following chart provides a timeline and tariff levels for the key events related to Section 301 Tariffs.
Section 301 tariff | Corresponding approximate | |||
Event | Timing | level on imports | Tariff level on | percentage of Company's |
from China | Subset Products | merchandise subject to tariff | ||
Imposition of Tariffs | September 2018 | 10% | 10% then 0%1 | |
Increase in Tariffs | June 2019 | 25% | 25% then 0%1 | |
Retroactive Exemption on Subset Products1 | November 2019 | 25% | 0% | |
Exemption Not Renewed and Tariffs Re-imposed on Subset Products | August 2020 | 25% | 25% | |
September 30, 2021 | 25% | 25% |
1 | On November 7, 2019, the U.S. Trade Representative granted a retroactive exclusion to September 2018 on Subset Products as defined in the Section 301 Tariffs section above bringing the rate to 0%. |
Recognition of Net Sales
The Company generates revenues primarily by retailing merchandise in the form of hard-surface and porcelain flooring and accessories. Additionally, the Company expands its revenues by offering services to deliver and/or install this merchandise for its customers; it considers these services to be separate performance obligations. The separate performance obligations are detailed on the customer’s invoice(s) and the customer often purchases flooring merchandise without purchasing installation or delivery services. Sales occur through a network of
Revenue is based on consideration specified in a contract with a customer and excludes any sales incentives from vendors and amounts collected on behalf of third parties. The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product to a customer or performing services for a customer. Revenues from installation and freight services are recognized when the delivery is made or the installation is complete, which approximates the recognition of revenue over time due to the short duration of service provided. The price of the Company’s merchandise and services is specified in the respective contract and detailed on the invoice agreed to with the customer including any discounts. The Company generally requires customers to pay a deposit, equal to approximately half of the retail sales value, when ordering merchandise not regularly carried in a given location or not currently in stock. In addition, the Company generally does not extend credit to its customers with payment due in full at the time the customer takes possession of merchandise or when the service is provided. Customer payments and deposits received in advance of the customer taking possession of the merchandise or receiving the services are recorded as deferred revenues in the accompanying condensed consolidated balance sheet caption “Customer Deposits and Store Credits.”
8
The following table shows the activity in this account for the periods noted:
Three Months Ended | Nine Months Ended | |||||||||||
September 30, | September 30, | |||||||||||
| 2021 |
| 2020 |
| 2021 |
| 2020 | |||||
Customer Deposits and Store Credits, Beginning Balance | $ | ( | $ | ( | $ | ( | $ | ( | ||||
New Deposits |
| ( |
| ( |
| ( |
| ( | ||||
Recognition of Revenue |
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Sales Tax included in Customer Deposits |
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Other |
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Customer Deposits and Store Credits, Ending Balance | $ | ( | $ | ( | $ | ( | $ | ( |
Subject to limitations under the Company’s policy, return of unopened merchandise is accepted for 90 days, subject to the discretion of the store manager. The amount of revenue recognized for flooring merchandise is adjusted for expected returns, which are estimated based on the Company’s historical data, current sales levels, and forecasted economic trends. The Company uses the expected value method to estimate returns because it has a large number of contracts with similar characteristics. The Company reduces revenue by the amount of expected returns and records it within “Other Current Liabilities” on the condensed consolidated balance sheet. The Company continues to estimate the amount of returns based on historical data. In addition, the Company recognizes a related asset for the right to recover returned merchandise and records it in the “Other Current Assets” caption of the accompanying condensed consolidated balance sheet. This amount was $
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 September 30, | Nine Months Ended September 30, |
| ||||||||||||||||||
2021 |
| 2020 |
| 2021 | 2020 | ||||||||||||||||
Manufactured Products 1 | $ | | | % | $ | | | % | $ | | | % | $ | | | % | |||||
Solid and Engineered Hardwood | |
| | % | |
| | % | |
| | % | |
| | % | |||||
Moldings and Accessories and Other |
| |
| | % |
| |
| | % |
| |
| | % |
| |
| | % | |
Installation and Delivery Services |
| |
| | % |
| |
| | % |
| |
| | % |
| |
| | % | |
Total | $ | |
| | % | $ | |
| | % | $ | |
| | % | $ | |
| | % |
1 Includes engineered vinyl plank, laminate, vinyl and porcelain tile.
Cost of Sales
Cost of sales includes the cost of products sold, including tariffs, the cost of installation services, and transportation costs from vendors to the Company’s distribution centers or store locations. It also includes transportation costs from distribution centers to store locations, transportation costs for the delivery of products from store locations to customers, certain costs of quality control procedures, warranty and customer satisfaction costs, inventory adjustments including obsolescence and shrinkage, and costs to produce and ship samples, which are net of vendor allowances.
The Company offers a range of limited warranties for the durability of the finish on its prefinished products to its services provided. These limited warranties range from
9
Vendor allowances mostly consist of volume rebates and are accrued as earned, with those allowances received as a result of attaining certain purchase levels accrued over the incentive period based on estimates of purchases. Volume rebates earned are initially recorded as a reduction in merchandise inventories and a subsequent reduction in cost of sales when the related product is sold. Reimbursement received for the cost of producing samples is recorded as an offset against cost of sales.
Note 3. Stockholders’ Equity
Net Income per Common Share
The following table sets forth the computation of basic and diluted net income per common share:
Three Months Ended | Nine Months Ended | ||||||||||||
September 30, | September 30, | ||||||||||||
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| |||||
Net Income | $ | | $ | | $ | | $ | | |||||
Weighted Average Common Shares Outstanding—Basic |
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Effect of Dilutive Securities: |
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Common Stock Equivalents |
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Weighted Average Common Shares Outstanding—Diluted |
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Net Income per Common Share—Basic | $ | | $ | | $ | | $ | | |||||
Net Income per Common Share—Diluted | $ | | $ | | $ | | $ | |
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 | Nine Months Ended | ||||||||
September 30, | September 30, | ||||||||
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| |
Stock Options | | | | |
| ||||
Restricted Shares | | | | |
Note 4. Stock-based Compensation
The following table summarizes share activity related to stock options and restricted stock awards (“RSAs”):
|
| Restricted Stock | ||
Stock Options | Awards | |||
Options Outstanding/Nonvested RSAs, January 1, 2021 |
| |
| |
Granted |
| |
| |
Options Exercised/RSAs Released |
| ( |
| ( |
Forfeited |
| ( |
| ( |
Options Outstanding/Nonvested RSAs, September 30, 2021 |
| |
| |
The Company granted a target of
10
Note 5. Credit Agreement
The Company has a credit agreement (the “Credit Agreement”) with Bank of America, N.A. and Wells Fargo Bank, N.A. (the “Lenders”). On April 30, 2021, the Company entered into a Second Amendment to the Credit Agreement (the “Second Amendment”) with the Lenders. The execution of the Second Amendment, among other things, terminated the FILO Term Loans and converted those commitments to the Revolving Credit Facility. The total size of the Credit Agreement remained at $
The Revolving Credit Facility is secured by security interests in the Collateral (as defined in the Credit Agreement), which includes substantially all assets of the Company including, among other things, the Company’s inventory and credit card receivables, and the Company’s East Coast distribution center located in Sandston, Virginia. Under the terms of the Credit Agreement, the Company has the ability to release the East Coast distribution center from the Collateral under certain conditions.
The Second Amendment decreased the margin for LIBOR Rate Loans (as defined in the Second Amendment) to a range of
The Credit Agreement contains a fixed charge coverage ratio covenant that becomes effective only when specified availability under the Revolving Credit Facility falls below the greater of $
Except as set forth in the Second Amendment, all other terms and conditions of the Credit Agreement remain in place.
The Company repaid all $
Note 6. Income Taxes
The Company calculates its quarterly tax provision pursuant to the guidelines in Accounting Standards Codification ("ASC") 740-270 "Income Taxes." Generally, ASC 740-270 requires companies to estimate the annual effective tax rate for current year ordinary income. The estimated annual effective tax rate represents the best estimate of the tax provision in relation to the best estimate of pre-tax ordinary income or loss. The estimated annual effective tax rate is then applied to year-to-date ordinary income or loss to calculate the year-to-date interim tax provision and is adjusted for discrete items that occur within the period. This process has been employed in 2021. Due to disruption related to the COVID-19 pandemic in 2020, the Company applied the actual year-to-date effective tax rate for the tax provision in the three and nine-month periods ended September 30, 2020.
For the three months ended September 30, 2021, the Company recognized income tax expense of $
11
For the nine months ended September 30, 2021, the Company recognized income tax expense of $
The Company has a valuation allowance recorded against certain of its net deferred tax assets of $
Note 7. Commitments and Contingencies
The following chart shows the activity related to the Balance Sheet “Accrual for Legal Matters and Settlements”. The matters themselves are described in greater detail in the paragraphs that follow the chart.
January 1, 2021 | September 30, 2021 | |||||||||||||||
Litigation Matter | Accrual for Legal Matters | Accrual for Legal Matters | ||||||||||||||
Description | and Settlements | Accruals | Settlement Payments | Vouchers Redeemed | and Settlements | |||||||||||
MDL | $ | | $ | — | $ | — | $ | ( | $ | | 1 | |||||
Gold | | — | — | ( | | 1 | ||||||||||
Mason | — | | — | — | | |||||||||||
Other Matters | | | ( | — | | |||||||||||
$ | | $ | | $ | ( | $ | ( | $ | | |||||||
January 1, 2020 | September 30, 2020 | |||||||||||||||
Litigation Matter | Accrual for Legal Matters | Accrual for Legal Matters | ||||||||||||||
Description | and Settlements | Accruals | Settlement Payments | Vouchers Redeemed | and Settlements | |||||||||||
MDL | $ | | $ | — | $ | — | $ | — | $ | | ||||||
Gold | | | — | — | | |||||||||||
Kramer | | — | ( | — | — | |||||||||||
Other Matters | | | ( | — | | |||||||||||
$ | | $ | | $ | ( | $ | — | $ | |
1 | The remaining accrual will be fulfilled by redeeming vouchers as discussed below. |
Employment Cases
Mason Lawsuit
In August 2017, Ashleigh Mason, Dan Morse, Ryan Carroll and Osagie Ehigie filed a purported class action lawsuit in the United States District Court for the Eastern District of New York on behalf of all current and former store managers, store managers in training, and similarly situated current and former employees (collectively, the “Mason Putative Class Employees”) alleging that the Company violated the Fair Labor Standards Act (“FLSA”) and New York Labor Law (“NYLL”) by classifying the Mason Putative Class Employees as exempt. The alleged violations include failure to pay for overtime work. The plaintiffs sought certification of the Mason Putative Class Employees for (i) a collective action covering the period beginning
12
(ii) a class action covering the period beginning
In November 2018, the plaintiffs filed a motion requesting conditional certification for all store managers and store managers in training who worked within the federal statute of limitations period. In May 2019, the magistrate judge granted plaintiffs’ motion for conditional certification. On January 6, 2021, the magistrate judge ruled in favor of a motion by the Company to exclude from the Mason Putative Class the claims of
In April 2021, the Company entered into a Memorandum of Understanding (“Mason MOU”) with counsel for the lead plaintiffs in the Mason matter. Under the terms of the Mason MOU, the Company will pay up to $
Savidis Lawsuit
On April 9, 2020, Lumber Liquidators was served with a lawsuit filed by Tanya Savidis, on behalf of herself and all others similarly situated (collectively, the “Savidis Plaintiffs”). Ms. Savidis filed a purported class action lawsuit in the Superior Court of California, County of Alameda on March 6, 2020, on behalf of all current and former Lumber Liquidators employees employed as non-exempt employees. The complaint alleges violation of the California Labor Code including, among other items, failure to pay minimum wages and overtime wages, failure to provide meal periods, failure to permit rest breaks, failure to reimburse business expenses, failure to provide accurate wage statements, failure to pay all wages due upon separation within the required time, and engaging in unfair business practices (the “Savidis matter”). On or about May 22, 2020, the Savidis Plaintiffs provided notice to the California Department of Industrial Relations requesting they be permitted to seek penalties under the California Private Attorney General Act for the same substantive alleged violations asserted in the Complaint. The Savidis Plaintiffs seek certification of a class action covering the prior
In December 2020, the Company began contacting individuals who constitute the Savidis Plaintiffs and offered individual settlements in satisfaction of their claims. In April 2021, the Company entered into a Memorandum of Understanding (“Savidis MOU”) with counsel for the lead plaintiffs in the Savidis matter. Under the terms of the Savidis MOU, the Company will pay $
13
individuals who accepted the Company’s prior settlement offer. The Company accrued an additional $
Visnack Lawsuit
On June 29, 2020, Michael Visnack, on behalf of himself and all others similarly situated (collectively, the “Visnack Plaintiffs”) filed a purported class action lawsuit in the Superior Court of California, County of San Diego, on behalf of all current and former store managers, and others similarly situated. The Complaint alleges violation of the California Labor Code including, among other items, failure to pay wages and overtime, wage statement violations, meal and rest break violations, unpaid reimbursements and waiting time, and engaging in unfair business practices (the “Visnack matter”). The Visnack Plaintiffs seek certification of a class period beginning September 20, 2019, through the date of Notice of Class Certification, if granted. The Visnack Plaintiffs did not quantify any alleged damages but, in addition to attorneys’ fees and costs, they seek unspecified amounts for each of the causes of action such as unpaid wages and overtime wages, failure to provide meal periods and rest breaks, payroll record and wage statement violations, failure to reimburse expenses and waiting time, liquidated and/or punitive damages, declaratory relief, restitution, statutory penalties, injunctive relief and other damages.
On December 14, 2020, the court ruled in favor of a motion by the Company to compel arbitration for Michael Visnack under the existing agreement between the Company and Mr. Visnack. The court declined to outright dismiss the putative class claims but stayed the putative class claims and Private Attorneys General Act claims pending arbitration. The court denied plaintiff’s request to conduct discovery. In the first quarter of 2021, the Company received notice that Mr. Visnack has filed an arbitration claim, which the Company intends to defend. Mr. Visnack is a Collective Member of the Mason Putative Class and will have the opportunity to decide whether to participate in the Mason settlement and release his claims against the Company, in which case he would be removed as the lead Plaintiff in the Visnack matter. In December 2020, the Company began contacting individuals who constitute the purported class in the Visnack matter and has offered individual settlements in satisfaction of their claims. To the extent individuals accepted these settlement offers, they have released the Company from the claims and been removed from the purported class. As of March 31, 2021, the Company had reached agreement with a portion of the purported class incurring less than $
The Company is evaluating the Visnack Putative Class Employees' claims and intends to defend itself vigorously in this matter. Given the uncertainty of litigation, the preliminary stage of the case and the legal standards that must be met for, among other things, class certification and success on the merits, the Company cannot estimate the reasonably possible loss or range of loss, if any, that may result from this action and therefore no accrual has been made related to this. Any such losses could, potentially, have a material adverse effect, individually or collectively, on the Company’s results of operations, financial condition and liquidity.
Kramer lawsuit
In November 2017, Robert J. Kramer, on behalf of himself and all others similarly situated (collectively, the “Kramer Plaintiffs”) filed a purported class action lawsuit in the Superior Court of California, County of Sacramento on behalf of all current and former store managers, all others with similar job functions and/or titles and all current and former employees classified as non-exempt or incorrectly classified as exempt and who worked for the Company in the State of California alleging violation of the California Labor Code including, among other items, failure to pay wages and overtime and engaging in unfair business practices (the “Kramer matter”). The Company reached settlement for this matter for $
14
Antidumping and Countervailing Duties Investigation
In October 2010, a conglomeration of domestic manufacturers of multilayered wood flooring (“Petitioners”) filed a petition seeking the imposition of antidumping (“AD”) and countervailing duties (“CVD”) with the United States Department of Commerce (“DOC”) and the United States International Trade Commission (“ITC”) against imports of multilayered wood flooring from China. This ruling applies to companies importing multilayered wood flooring from Chinese suppliers subject to the AD and CVD orders. The Company’s multilayered wood flooring imports from China accounted for approximately
As part of its processes in these proceedings, the DOC conducts annual reviews of the AD and CVD rates. In such cases, the DOC will issue preliminary rates that are not binding and are subject to comment by interested parties. After consideration of the comments received, the DOC will issue final rates for the applicable period, which may lag by a year or more. At the time of import, the Company makes deposits at the then prevailing rate, even while the annual review is in process. When rates are declared final by the DOC, the Company accrues a receivable or payable depending on where that final rate compares to the deposits it has made. The Company and/or the domestic manufacturers can appeal the final rate for any period and can place a hold on final settlement by U.S. Customs and Border Protection while the appeals are pending.
The Company as well as other involved parties have appealed many of the final rate determinations. Certain of those appeals are pending and, at times, have resulted in delays in settling the shortfalls and refunds shown in the table below. Because of the length of time for finalization of rates as well as appeals, any subsequent adjustment of AD and CVD rates typically flows through a period different from those in which the inventory was originally purchased and/or sold.
Results by period for the Company are shown below. The column labeled ‘September 30, 2021 Receivable/Liability Balance’ represents the amount the Company would receive or pay (net of any collections or payments) as the result of subsequent adjustment to rates whether due to finalization by the DOC or because of action of a court based on appeals by various parties. It does not include any initial amounts paid for AD or CVD in the current period at the in-effect rate at that time.
The Company recorded net interest income related to antidumping of $
15
Review |
| Rates at which |
| September 30, 2021 |
Period | Period Covered | Company | Final Rate | Receivable/Liability |
Deposited | Balance | |||
Antidumping | ||||
1 | May 2011 through | $ | ||
November 2012 | receivable1 | |||
2 | December 2012 through | $ | ||
November 2013 | liability 2 | |||
3 | December 2013 through | $ | ||
November 2014 | receivable3 | |||
4 | December 2014 through | Settled | ||
November 2015 | ||||
5 | December 2015 through | Settled | ||
November 2016 | ||||
6 | December 2016 through | $ | ||
November 2017 | $ | |||
7 | December 2017 through | NA | ||
November 2018 | ||||
8 | December 2018 through | NA | ||
November 2019 | ||||
Included on the Condensed Consolidated Balance Sheet in | $ | |||
Included on the Condensed Consolidated Balance Sheet in | $ | |||
Included on the Condensed Consolidated Balance Sheet in Other Current Liabilities | $ | |||
Included on the Condensed Consolidated Balance Sheet in | $ | |||
Countervailing | ||||
1&2 | April 2011 through | $ | ||
December 2012 | receivable | |||
3 | January 2013 through | $ | ||
4 | January 2014 through | $ | ||
5 | January 2015 through | Final at | $ | |
6 | January 2016 through | Final at | $ | |
7 | January 2017 through | $ | ||
8 | January 2018 through | NA | ||
Included on the Condensed Consolidated Balance Sheet in | $ | |||
Included on the Condensed Consolidated Balance Sheet in | $ | |||
Included on the Condensed Consolidated Balance Sheet in Other Current Liabilities | $ | |||
Included on the Condensed Consolidated Balance Sheet in Other Long-Term Liabilities | $ |
16
1 | In the second quarter of 2018, the Court of International Trade (“CIT”) sustained the DOC’s recommendation to reduce the rate for the first annual review period to |
2 | In the second quarter of 2020, the CIT received a recommendation from the DOC to reduce the rate for the second annual review period to |
3 | In the third quarter of 2020, the CIT received a recommendation from the DOC to reduce the rate for the third annual review period to |
4 | In the third quarter of 2019, the DOC issued the final rates for the sixth annual review period at |
5 | In the first quarter of 2020, the DOC issued a preliminary rate of |
6 | In April 2021, the DOC issued a preliminary rate of |
7 | In the second quarter of 2018, the DOC issued the final rates for the fifth annual review period at |
8 | In the third quarter of 2019, the DOC issued the final rates for the sixth annual review period at |
9 | In the fourth quarter of 2020, the DOC issued the final rate |
10 | In October 2021, the DOC issued the final rate of |
Litigation Relating to Bamboo Flooring
Dana Gold filed a purported class action lawsuit in the United States District Court for the Northern District of California alleging that the Morning Star bamboo flooring that the Company sells was defective (the “Gold Litigation”). In the third quarter of 2019, the parties finalized a settlement agreement that is consistent with the terms of the Memorandum of Understanding previously disclosed by the Company, to resolve the Gold Litigation on a nationwide basis. Under the terms of the settlement agreement, the Company contributed $
The Company recognized a charge to earnings of $
17
Settlements” on its condensed consolidated balance sheet. As $
In addition, there are a number of individual claims and lawsuits alleging damages involving Strand Bamboo Product (the “Bamboo Flooring Litigation”). While the Company believes that a loss associated with the Bamboo Flooring Litigation is reasonably possible, the Company is unable to reasonably estimate the amount or range of possible loss. Any such losses could, potentially, have a material adverse effect, individually or collectively, on the Company’s results of operations, financial condition and liquidity. The Company disputes the claims in the Bamboo Flooring Litigation and intends to defend such matters vigorously.
On September 9, 2021, Larry and Kathy Fluharty filed a purported class action lawsuit in the United States District Court for the Eastern District of Arkansas alleging substantially the same allegations as the Gold Litigation, for a class period beginning March 16, 2019 to present (the “Fluharty Litigation”). The Company is evaluating the Fluharty Litigation and is unable to determine if a loss is reasonably possible or to estimate the amount or range of possible loss, if any. The Company disputes the claims in the Fluharty Litigation and intends to defend the matter vigorously.
Litigation Related to Formaldehyde-Abrasion MDLs
Beginning in 2015, numerous purported class action cases were filed in various United States federal district courts and state courts involving claims of excessive formaldehyde emissions and product claims about durability and abrasion from the Company’s Chinese-manufactured laminate flooring products. The United States Judicial Panel on Multidistrict Litigation transferred and consolidated the federal cases to the United States District Court for the Eastern District of Virginia (the “Virginia Court”) as two cases: Lumber Liquidators Chinese-Manufactured Flooring Products Marketing, Sales, Practices and Products Liability Litigation (the “Formaldehyde MDL”) and Lumber Liquidators Chinese-Manufactured Laminate Flooring Durability Marketing and Sales Practices Litigation (the “Abrasion MDL”).
In 2018, the Company entered into a settlement agreement to jointly settle the Formaldehyde MDL and the Abrasion MDL. Under the terms of the settlement agreement, the Company agreed to fund $
Cash and vouchers, which generally have a three-year life, were distributed by the administrator in the fourth quarter of 2020 upon order of the Virginia Court. The Company will monitor and evaluate the redemption of vouchers on a quarterly basis. The Company’s current expectation is that recipients bargained for this compensation as part of the settlement and therefore will redeem their voucher for product as intended.
The $
In addition to those purchasers who elected to opt out of the above settlement (the “Opt Outs”), there are a number of individual claims and lawsuits alleging personal injuries, breach of warranty claims or violation of state consumer protection statutes that remain pending (collectively, the “Related Laminate Matters”). Certain of these Related Laminate Matters were settled in 2019. The Company did
18
months ended September 30, 2021, or for the nine months ended September 30, 2020. As of September 30, 2021 and 2020, the remaining accrual related to these matters was $
During the third quarter of 2021, the Company reached a settlement with its insurance carrier related to legal fees for the MDL matter for $
Canadian Litigation
On or about April 1, 2015, Sarah Steele (“Steele”) filed a purported class action lawsuit in the Ontario, Canada Superior Court of Justice against the Company. In the complaint, Steele’s allegations include strict liability, breach of implied warranty of fitness for a particular purpose, breach of implied warranty of merchantability, fraud by concealment, civil negligence, negligent misrepresentation and breach of implied covenant of good faith and fair dealing relating to the Company’s Chinese-manufactured laminate flooring products. Steele did not quantify any alleged damages in her complaint, but seeks compensatory damages, punitive, exemplary and aggravated damages, statutory remedies, attorneys’ fees and costs. While the Company believes that a further loss associated with the Steele litigation is reasonably possible, the Company is unable to reasonably estimate the amount or range of possible loss.
Section 301 Tariffs
Since September 2018, pursuant to Section 301 of the Trade Act of 1974, the United States Trade Representative (“USTR”) has imposed tariffs on certain goods imported from China over four tranches or Lists. Products imported by the Company fall within Lists 3 and 4 for which tariffs range from 10% to 25%. On September 10, 2020 several importers of vinyl flooring filed a lawsuit with the CIT challenging the Section 301 tariffs under Lists 3 and 4. The Company has also filed a companion case at the CIT challenging Section 301 tariffs it has paid. The Company is unable to predict the timing or outcome of the ruling by the CIT. If these appeals are successful, the Company should qualify for refunds on these Section 301 tariffs.
Other Matters
The Company is also, from time to time, subject to claims and disputes arising in the normal course of business. In the opinion of management, while the outcome of any such claims and disputes cannot be predicted with certainty, its ultimate liability in connection with these matters is not expected to have a material adverse effect on the Company’s results of operations, financial position or liquidity.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Cautionary Note Regarding Forward-Looking Statements
This report includes statements of the Company’s expectations, intentions, plans and beliefs that constitute “forward-looking statements” within the meanings of the Private Securities Litigation Reform Act of 1995. These statements, which may be identified by words such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “thinks,” “estimates,” “seeks,” “predicts,” “could,” “projects,” “potential” and other similar terms and phrases, are based on the beliefs of the Company’s management, as well as assumptions made by, and information currently available to, the Company’s management as of the date of such statements. These statements are subject to risks and uncertainties, all of which are difficult to predict and many of which are beyond the Company’s control. These risks include, without limitation, the impact on us of any of the following:
● | obtaining products from abroad, including the effects of the COVID-19 pandemic and tariffs, delays in shipping, as well as the effects of antidumping and countervailing duties; |
19
● | having sufficient inventory for consumer demand; |
● | a sustained period of inflation impacting consumer spending; |
● | inability to hire and/or retain employees; |
● | an overall decline in the health of the economy, the hard-surface flooring industry, the housing market and overall consumer spending, including the effects of the COVID-19 pandemic; |
● | impact on sales, ability to obtain and distribute products, and employee safety and retention, including the effects of the COVID-19 pandemic; |
● | the outcomes of legal proceedings, and the related impact on liquidity; |
● | reputational harm; |
● | obligations under various settlement agreements and other compliance matters; |
● | disruptions due to cybersecurity threats, including any impacts from a network security incident; |
● | inability to open new stores, find suitable locations for our new store concept, and fund other capital expenditures; |
● | inability to execute on our key initiatives or such key initiatives do not yield desired results; |
● | disruption in our ability to distribute our products, including due to disruptions from the impacts of severe weather; |
● | operating an office in China; |
● | managing third-party installers and product delivery companies; |
● | our ability to develop, grow and maintain business relationships with professional contractors; |
● | renewing store, warehouse, or other corporate leases; |
● | international and domestic transportation costs and availability; |
● | having sufficient suppliers; |
● | our, and our suppliers’, compliance with complex and evolving rules, regulations, and laws at the federal, state, and local level; |
● | product liability claims, marketing substantiation claims, wage and hour claims, employment classification claims and other labor and employment claims; |
● | availability of suitable hardwood, including due to disruptions from the impacts of severe weather; |
● | sufficient insurance coverage, including cybersecurity insurance; |
● | access to and costs of capital; |
● | the handling of confidential customer information, including the impacts from the California Consumer Privacy Act and other applicable data privacy laws and regulations; |
● | our ability to develop digital technology needed to grow our business and meet customer expectations; |
● | management information systems disruptions; |
● | alternative e-commerce offerings; |
● | our advertising and overall marketing strategy, including anticipating consumer trends; |
● | competition; |
● | impact of changes in accounting guidance, including implementation guidelines and interpretations; |
● | internal controls; |
● | stock price volatility; and |
● | anti-takeover provisions. |
Information regarding risks and uncertainties is contained in the Company’s reports filed with the SEC, including the Item 1A, “Risk Factors,” section of this quarterly report and the Form 10-K for the year ended December 31, 2020.
This management discussion should be read in conjunction with the financial statements and notes included in Part I, Item 1. “Financial Statements” of this quarterly report and the audited financial statements and notes and management discussion included in the Company’s annual report filed on Form 10-K for the year ended December 31, 2020.
Overview
LL Flooring is one of the leading specialty retailers of hard-surface flooring in the U.S. with 422 stores as of
20
September 30, 2021. Our Company seeks to offer the best customer experience online and in stores, with more than 500 varieties of hard-surface floors featuring a range of quality styles and on-trend designs. Our online tools also help empower customers to find the right solution for the space they’ve envisioned. Our extensive selection includes vinyl plank, solid and engineered hardwood, laminate, bamboo, porcelain tile, and cork, with a wide range of flooring enhancements and accessories to complement. Our stores are staffed with flooring experts who provide advice, Pro partnership services and installation options for all of our products, the majority of which is in stock and ready for delivery.
Our vision is to be the customer’s first choice in hard-surface flooring by providing the best experience, from start to finish. We offer a wide selection of high-quality, stocked products and the accessible flooring expertise and service of a local store, with the scale, omni-channel convenience and value of a national chain. We plan to leverage this advantage to differentiate ourselves in the highly fragmented flooring market. We launched our new digital platform, LLFlooring.com, in December 2020. In February 2021, we launched our new mobile app featuring our popular Picture It and Floor Finder tools and making it easy to order installations.
To supplement the financial measures prepared in accordance with U.S. generally accepted accounting principles (GAAP), the Company uses the following non-GAAP financial measures: (i) Adjusted Gross Profit; (ii) Adjusted Gross Margin; (iii) Adjusted SG&A; (iv) Adjusted SG&A as a percentage of net sales; (v) Adjusted Operating Income; (vi) Adjusted Operating Margin; (vii) Adjusted Other Expense; (viii) Adjusted Other Expense as a percentage of net sales; (ix) Adjusted Earnings; and (x) Adjusted Earnings per Diluted Share. These non-GAAP financial measures should be viewed in addition to, and not in lieu of, financial measures calculated in accordance with GAAP. These supplemental measures may vary from, and may not be comparable to, similarly titled measures by other companies.
The non-GAAP financial measures are presented because management uses these non-GAAP financial measures to evaluate our operating performance and, in certain cases, to determine incentive compensation. Therefore, we believe that the presentation of non-GAAP financial measures provides useful supplementary information to, and facilitates additional analysis by, investors. The presented non-GAAP financial measures exclude items that management does not believe reflect our core operating performance, which include store closures, regulatory and legal settlements and associated legal and operating costs, and changes in antidumping and countervailing duties, as such items are outside of our control due to their inherent unusual, non-operating, unpredictable, non-recurring, or non-cash nature.
Results of operations for the three and nine months ended September 30, 2021 are not necessarily indicative of future results to be expected for the full year due to a number of factors, including supply chain, seasonality, tariffs, and general economic conditions, as well as the uncertainty and ongoing impact of the COVID-19 pandemic that may impact sales for the remainder of fiscal 2021.
Third Quarter Financial Highlights
● | Net sales of $282.2 million decreased 4.6% compared to the same period last year, as double-digit growth in Pro and services sales partially offset a decrease in DIY sales. |
● | Total comparable store sales decreased 4.5% versus the same period last year. |
● | Gross margin of 37.3% decreased 210 basis points as a percentage of sales compared to the same period last year, Adjusted Gross Margin (a non-GAAP measure) of 37.3% decreased 240 basis points as a percentage of sales compared to the same period last year, primarily reflecting significantly higher transportation and material costs, and higher tariffs (collectively up more than 700 basis points) that the Company was able to partially mitigate by pricing, promotion and alternative country/vendor sourcing strategies. |
● | SG&A expense as a percentage of sales of 33.0% increased 140 basis points compared to the third quarter of last year. Adjusted SG&A (a non-GAAP measure) as a percentage of sales of 33.1% increased 320 basis points compared to the third quarter of last year, primarily due to increased investment in the field and to support growth initiatives, as well as last year’s $2.5 million favorable business interruption insurance settlement. |
● | Operating margin of 4.3% decreased 350 basis points compared to the third quarter of last year. Adjusted operating margin (a non-GAAP measure) of 4.1% decreased 560 basis points compared to the third quarter of last year. |
21
● | Diluted EPS of $0.30 decreased $0.23 compared to the third quarter of last year. Adjusted Earnings per Diluted Share (a non-GAAP measure) of $0.29 decreased $0.38 compared to the third quarter of last year. |
● | During the third quarter, the Company opened six new stores, bringing total stores to 422 as of September 30, 2021. |
Other Items
Liquidity and Credit Agreement
As of September 30, 2021, we had liquidity of $232.2 million, consisting of excess availability under our Credit Agreement of $128.0 million, and cash and cash equivalents of $104.2 million. This represents an increase in liquidity of $18.2 million from December 31, 2020. We repaid all $101.0 million of our outstanding debt in the second quarter of 2021 and did not access borrowings under the Credit Agreement during the third quarter.
We believe that cash flows from operations, together with cash on hand, and the availability under our Credit Agreement will be sufficient to meet our obligations, fund our settlements, operations, and anticipated capital expenditures for the next 12 months. In the coming quarters we also plan to increase our inventories as supply chain disruptions abate. We prepare our forecasted cash flow and liquidity estimates based on assumptions that we believe to be reasonable but are also inherently uncertain. Actual future cash flows could differ from these estimates.
Impact of Macroeconomic Environment
We continue to navigate uncertainty in the macroeconomic environment related to global supply chain disruptions, consumer spending, inflation and a challenging labor market. During the second quarter of 2020 we limited our inventory purchases as a direct result COVID-19. Supply chain disruption on replenishment kept inventory below our targeted level during the second half of 2020 and first nine months of 2021. As a result, we believe we could have captured more sales in the fourth quarter of 2020 and first nine months of 2021 if our inventories had been higher. While our supply chain teams continue to work diligently to bring in new inventory and allocate it effectively across our stores, we anticipate the supply chain to remain constrained into 2022, limiting inventory availability and increasing transportation and material costs. Supply chain constraints include international container access, congestion in major ports, and a shortage of domestic truckers, as well as renewed COVID-19 related shutdowns for some of our sourcing partners across southeast Asia.
Section 301 Tariffs
The Company’s financial statements have been impacted by Section 301 tariffs on certain products imported from China in recent years. A subset of these imports for certain click vinyl and other engineered products (the “Subset Products”) received an exemption that was made retroactive to the beginning of the Section 301 Tariffs for a period of time but were reinstated in August 2020. The tariffs flow through the income statement as the product is sold. The Company has deployed strategies to mitigate tariffs and improve gross margin, primarily through adjusting its pricing and promotion strategies and alternative country sourcing. The following chart provides a timeline of tariff levels for the key events related to Section 301 Tariffs.
Section 301 tariff | Corresponding approximate | |||
Event | Timing | level on imports | Tariff level on | percentage of Company's |
from China | Subset Products | merchandise subject to tariff | ||
Imposition of Tariffs | September 2018 | 10% | 10% then 0%1 | 48% |
Increase in Tariffs | June 2019 | 25% | 25% then 0%1 | 44% |
Retroactive Exemption on Subset Products1 | November 2019 | 25% | 0% | 10% |
Exemption Not Renewed and Tariffs Re-imposed on Subset Products | August 2020 | 25% | 25% | 32% |
September 30, 2021 | 25% | 25% | 22% |
22
1 | On November 7, 2019, the U.S. Trade Representative granted a retroactive exclusion to September 2018 on Subset Products as defined in the Section 301 Tariffs section above bringing the rate to 0%. |
Results of Operations
We believe the selected sales data, the percentage relationship between net sales and major categories in the condensed consolidated statements of operations and the percentage change in the dollar amounts of each of the items presented below are important in evaluating the performance of our business operations.
% Increase | |||||||||
% of Net Sales | (Decrease) in | ||||||||
Three Months Ended September 30, | Dollar Amounts | ||||||||
2021 |
| 2020 |
| 2021 VS 2020 |
| ||||
Net Sales | |||||||||
Net Merchandise Sales | 85.3 | % | 88.2 | % | (7.7) | % | |||
Net Services Sales | 14.7 | % | 11.8 | % | 19.0 | % | |||
Total Net Sales | 100.0 | % | 100.0 | % | (4.6) | % | |||
Gross Profit | 37.3 | % | 39.4 | % | (9.7) | % | |||
Selling, General, and Administrative Expenses | 33.0 | % | 31.6 | % | (0.2) | % | |||
Operating Income | 4.3 | % | 7.8 | % | (48.0) | % | |||
Other Expense | 0.0 | % | 0.2 | % | (97.4) | % | |||
Income Before Income Taxes | 4.3 | % | 7.6 | % | (46.5) | % | |||
Income Tax Expense | 1.2 | % | 2.4 | % | (53.5) | % | |||
Net Income | 3.1 | % | 5.2 | % | (43.4) | % | |||
% Increase | |||||||||
% of Net Sales | (Decrease) in | ||||||||
Nine Months Ended September 30, | Dollar Amounts | ||||||||
2021 |
| 2020 |
| 2021 VS 2020 |
| ||||
Net Sales | |||||||||
Net Merchandise Sales | 86.5 | % | 89.5 | % | 5.7 | % | |||
Net Services Sales | 13.5 | % | 10.5 | % | 39.5 | % | |||
Total Net Sales | 100.0 | % | 100.0 | % | 9.3 | % | |||
Gross Profit | 38.5 | % | 39.0 | % | 7.7 | % | |||
Selling, General, and Administrative Expenses | 33.7 | % | 34.3 | % | 7.3 | % | |||
Operating Income | 4.8 | % | 4.8 | % | 10.1 | % | |||
Other Expense | 0.0 | % | 0.3 | % | NM | % | |||
Income Before Income Taxes | 4.8 | % | 4.4 | % | 19.3 | % | |||
Income Tax Expense | 1.2 | % | 0.6 | % | 119.7 | % | |||
Net Income | 3.6 | % | 3.8 | % | 3.3 | % |
Three Months Ended | Nine Months Ended | ||||||||||||
September 30, | September 30, | ||||||||||||
SELECTED SALES DATA | 2021 | 2020 | 2021 | 2020 | |||||||||
Average Sale1 | $ | 1,625 | $ | 1,366 | $ | 1,530 | $ | 1,313 | |||||
Average Retail Price per Unit Sold Increase (Decrease)2 | 6.8 | % |
| 0.7 | % |
|
| 7.9 | % |
| (0.3) | % | |
Comparable Store Sales (Decrease) Increase3 | (4.5) | % | 10.9 | % | 9.8 | % | (4.3) | % | |||||
Customers Invoiced (Decrease) Increase 4 | (23.5) | % | 13.8 | % | (9.4) | % | (1.0) | % | |||||
Number of Stores Open, end of period | 422 |
| 423 |
|
| 422 |
| 423 | |||||
Number of Stores Opened in Period, net | 6 |
| 1 |
|
| 12 |
| 4 | |||||
Number of Stores Relocated in Period5 | — |
| — |
|
| — |
| 1 |
23
1 | Average sale is defined as the average invoiced sales order, measured quarterly, excluding returns as well as transactions under $100 (which are generally sample orders or add-on/accessories to existing orders). |
2 | Average retail price per unit (square feet for flooring and other units of measures for moldings and accessories) sold is calculated on a total company basis and excludes non-merchandise revenue. |
3 | A store is generally considered comparable on the first day of the thirteenth full calendar month after opening. |
4 | Change in number of customers invoiced is calculated by applying the average sale, described above, to total net sales at comparable stores. |
5 | A relocated store remains a comparable store as long as it is relocated within the primary trade area. |
NM Not meaningful.
Net Sales
Third quarter 2021 net sales of $282.2 million decreased $13.6 million, or 4.6%, versus the third quarter of 2020. Net merchandise sales decreased 7.7%, partially offset by a 19.0% increase in net service sales (install and freight). The increase in net service sales primarily reflects consumers’ increased comfort with having professionals enter their homes compared to the third quarter 2020. Average ticket increased 19.0%, reflecting a greater penetration of installation sales as well as higher merchandise average ticket. This was a result of us refreshing our assortment with new higher-quality products and sharing a portion of increased costs with consumers. Comparable store sales for the third quarter of 2021 decreased 4.5% from the third quarter of 2020, due to consumer demand shifts given increased consumer mobility this year, continued supply chain constraints, as well as the substantial nesting spending that we saw in the third quarter of 2020. We also had a 23.5% decrease in transaction count compared to the same period in 2020, primarily reflecting the decrease in sales to DIY customers, as well as lower than optimal inventory levels. During the third quarter of 2021, the Company opened six new stores bringing the total store count to 422 as of September 30, 2021.
Net sales for the nine months ended September 30, 2021 increased 9.3% from the comparable period in 2020. Net merchandise sales increased 5.7% and net service sales increased 39.5% over the comparable period in 2020. Comparable store sales for the nine months ended September 30, 2021 increased 9.8% from the comparable period in 2020.
Gross Profit
Gross profit decreased 9.7% in the third quarter of 2021 to $105.2 million from $116.5 million in the comparable period in 2020 and gross margin decreased 210 basis points to 37.3% in the third quarter of 2021 from 39.4% in the third quarter of 2020. The third quarter of 2020 was impacted by store closure costs of Canadian and certain U.S. stores. Excluding this item as shown on the table that follows, Adjusted Gross Margin (a non-GAAP measure) of 37.3% decreased 240 basis points as a percentage of sales compared to the same period last year, primarily reflecting significantly higher transportation and material costs, and higher tariffs (collectively up more than 700 basis points) that the Company was able to partially mitigate by pricing, promotion and alternative country/vendor sourcing strategies.
Gross profit increased 7.7% for the nine months ended September 30, 2021 to $333.5 million from $309.8 million in the comparable period in 2020 and gross margin decreased 50 basis points to 38.5% in the nine month period 2021 from 39.0% in 2020. For the first nine months of 2021, the Company reported a positive $6.6 million impact from anti-dumping duty rate changes. Excluding this item as shown on the table that follows, Adjusted Gross Profit (a non-GAAP measure) increased by $16.4 million and Adjusted Gross Margin (a non-GAAP measure) of 37.7% decreased by 140 basis points compared to 2020. The decrease in adjusted gross margin was due primarily to the August 2020 reinstatement of tariffs on certain flooring products imported from China (discussed in the “Section 301 Tariffs” section that follows) and higher transportation and material costs (collectively up more than 400 basis points) that the Company was able to partially mitigate by pricing, promotion and alternative country/vendor sourcing strategies.
We believe that the following items set forth in the table below can distort the visibility of our ongoing performance and that the evaluation of our financial performance can be enhanced by use of supplemental presentation of our results that exclude the impact of these items.
24
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||
2021 | 2020 | 2021 | 2020 |
| ||||||||||||||||||
$ | % of Sales | $ | % of Sales | $ | % of Sales | $ | % of Sales | |||||||||||||||
(dollars in thousands) | (dollars in thousands) | |||||||||||||||||||||
Gross Profit, as reported (GAAP) |
| $ | 105,201 | 37.3 | % | $ | 116,526 | 39.4 | % | $ | 333,523 | 38.5 | % | $ | 309,789 | 39.0 | % | |||||
Antidumping Adjustments 1 | — | — | % | — | — | % | (6,566) | (0.8) | % | — | — | % | ||||||||||
Store Closure Costs 2 |
| — | — | % |
| 761 | 0.3 | % |
| — | — | % |
| 761 | 0.1 | % | ||||||
Sub-Total Items above |
| — | — | % |
| 761 | 0.3 | % |
| (6,566) | (0.8) | % |
| 761 | 0.1 | % | ||||||
Adjusted Gross Profit (non-GAAP measures) | $ | 105,201 | 37.3 | % | $ | 117,287 | 39.7 | % | $ | 326,957 | 37.7 | % | $ | 310,550 | 39.1 | % |
1 | Represents antidumping expense associated with applicable prior-year shipments of engineered hardwood from China. |
2 | Represents the inventory write-offs related to the Canadian and U.S. store closures described more fully in Note 8 to the condensed consolidated financial statements filed in the September 30, 2020 10-Q, |
Selling, General and Administrative Expenses
SG&A expense for the third quarter of 2021 decreased $0.2 million to $93.2 million, or 33.0% of sales, compared to $93.4 million, or 31.6% of sales, in the third quarter of 2020. SG&A in both quarters included certain recoveries and costs related to legal matters and settlements. Additionally, the third quarter of 2020 included costs related to Canadian and U.S. store closures. Excluding these items as shown in the table that follows, Adjusted SG&A (a non-GAAP measure) for the third quarter of 2021 was $93.5 million, compared to $88.6 million in the third quarter of 2020. As a percentage of sales, adjusted SG&A increased 320 basis points, to 33.1% of sales, compared to 29.9% for the third quarter in 2020, which reflected increased investment in the field and our growth initiatives, as well as last year’s $2.5 million favorable final settlement of the business insurance claim related to the August 2019 network security incident.
SG&A expense for the first nine months of 2021 was $291.8 million, or 33.7% of sales, improving by 60 basis points from the comparable period in 2020. SG&A in both periods included certain costs related to legal matters and settlements. Additionally, the 2020 period included costs related to Canadian and U.S. store closures. Excluding these items as shown in the table that follows, Adjusted SG&A (a non-GAAP measure) was $284.0 million for the 2021 nine-month period, compared to $265.8 million in 2020. As a percentage of sales, adjusted SG&A improved 70 basis points, to 32.8% of sales, compared to 33.5% for the same period in the prior year, which was a result of the higher sales volume in 2021. The higher overall SG&A was primarily driven by the substantial actions taken last year to address the COVID-19 pandemic, including lower payroll and benefits expense as we proactively aligned staffing with demand levels, temporary salary reductions for corporate office personnel and the Board of Directors, and lower advertising expense. The Company redeemed $3.1 million of MDL and Gold vouchers during the first nine months of 2021 and relieved the accrual for legal matters and settlements for the full amount, relieved inventory at its cost, and the remaining amount -- the gross margin for the items sold of $1.2 million was recorded as a reduction in SG&A expense.
25
We believe that the following items set forth in the table below can distort the visibility of our ongoing performance and that the evaluation of our financial performance can be enhanced by use of supplemental presentation of our results that exclude the impact of these items.
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||
2021 | 2020 | 2021 | 2020 | |||||||||||||||||
$ | % of Sales | $ | % of Sales | $ | % of Sales | $ | % of Sales | |||||||||||||
(dollars in thousands) | (dollars in thousands) | |||||||||||||||||||
SG&A, as reported (GAAP) | $ | 93,165 | 33.0 | % | $ | 93,374 | 31.6 | % | $ | 291,767 | 33.7 | % | $ | 271,869 | 34.3 | % | ||||
(Recovery) Accrual for Legal Matters and Settlements 3 |
| (400) | (0.1) | % |
| 2,000 | 0.7 | % |
| 7,275 | 0.8 | % |
| 1,500 | 0.2 | % | ||||
Legal and Professional Fees 4 |
| 43 | 0.0 | % |
| 999 | 0.3 | % |
| 470 | 0.1 | % |
| 2,787 | 0.4 | % | ||||
Store Closure Costs 5 |
| — | — | % |
| 1,803 | 0.6 | % |
| — | — | % |
| 1,803 | 0.2 | % | ||||
Sub-Total Items above |
| (357) | (0.1) | % |
| 4,802 | 1.6 | % |
| 7,745 | 0.9 | % |
| 6,090 | 0.8 | % | ||||
Adjusted SG&A (a non-GAAP measure) | $ | 93,522 | 33.1 | % | $ | 88,572 | 29.9 | % | $ | 284,022 | 32.8 | % | $ | 265,779 | 33.5 | % |
3 | The 2021 amounts represent the charge to earnings for the Mason and Savidis matters in the first quarter of 2021 and a $0.4 million insurance recovery in the third quarter of 2021 of legal fees related to certain significant legal action. The 2020 amounts reflect expense of $2 million related to the Gold matter in the third quarter of 2020 and $0.5 million insurance recovery in the second quarter of 2020 of legal fees related to certain significant legal action. These items are described more fully in Item 1, Note 7 to the condensed consolidated financial statements filed in the September 30, 2021 10-Q. |
4 | Represents charges to earnings related to our defense of certain significant legal actions during the period. This does not include all legal costs incurred by the Company. |
5 | Represents store lease impairments, write down on fixed assets and employee termination benefits related to the Canadian and U.S. store closures described more fully in Note 8 to the condensed consolidated financial statements filed in the September 30, 2020 10-Q. |
Operating Income and Operating Margin
Operating income was $12.0 million for the third quarter of 2021 compared to $23.2 million for the third quarter of 2020. Adjusted Operating Income (a non-GAAP measure) in the third quarter of 2021 was $11.7 million, down $17.0 million from the $28.7 million for the prior-year period. As a percentage of net sales, adjusted operating margin (a non-GAAP measure) for the third quarter of 2021 was 4.1%, down 560 basis points from 9.7% in the third quarter of 2020, which reflected the decreased gross margin and increased SG&A expenses as described in the above sections.
Operating income was $41.8 million for the first nine months of 2021 compared to $37.9 million for the comparable period in 2020. Adjusted Operating Income was $42.9 million for the nine months ended September 30, 2021, a year-over-year decrease of $1.8 million compared to Adjusted Operating Income of $44.8 million in 2020.
26
We believe that the following items set forth in the table below can distort the visibility of our ongoing performance and that the evaluation of our financial performance can be enhanced by use of supplemental presentation of our results that exclude the impact of these items.
Three Months Ended September 30, | Nine Months Ended September 30, |
| ||||||||||||||||||
2021 |
| 2020 |
| 2021 |
| 2020 |
| |||||||||||||
$ | % of Sales | $ | % of Sales | $ | % of Sales | $ | % of Sales | |||||||||||||
(dollars in thousands) | (dollars in thousands) | |||||||||||||||||||
Operating Income, as reported (GAAP) | $ | 12,036 | 4.3 | % | $ | 23,152 | 7.8 | % | $ | 41,756 | 4.8 | % | $ | 37,920 | 4.8 | % | ||||
Gross Margin Items: |
|
|
|
|
|
|
| |||||||||||||
Antidumping Adjustments 1 | — | — | % | — | — | % | (6,566) | (0.8) | % | — | — | % | ||||||||
Store Closure Costs 2 |
| — | — | % |
| 761 | 0.3 | % |
| — | — | % |
| 761 | 0.1 | % | ||||
Gross Margin Subtotal |
| — | — | % |
| 761 | 0.3 | % |
| (6,566) | (0.8) | % |
| 761 | 0.1 | % | ||||
SG&A Items: |
|
|
|
|
|
|
| |||||||||||||
(Recovery) Accrual for Legal Matters and Settlements 3 |
| (400) | (0.1) | % |
| 2,000 | 0.7 | % |
| 7,275 | 0.8 | % |
| 1,500 | 0.2 | % | ||||
Legal and Professional Fees 4 |
| 43 | 0.0 | % |
| 999 | 0.3 | % |
| 470 | 0.1 | % |
| 2,787 | 0.4 | % | ||||
Store Closure Costs 5 | — | — | % | 1,803 | 0.6 | % | — | — | % | 1,803 | 0.2 | % | ||||||||
SG&A Subtotal |
| (357) | (0.1) | % |
| 4,802 | 1.6 | % |
| 7,745 | 0.9 | % |
| 6,090 | 0.8 | % | ||||
Adjusted Operating Income (a non-GAAP measure) | $ | 11,679 | 4.1 | % | $ | 28,715 | 9.7 | % | $ | 42,935 | 5.0 | % | $ | 44,771 | 5.6 | % |
1,2,3,4,5 See the Gross Profit and SG&A sections above for more detailed explanations of these individual items.
Other Expense (Income)
In the third quarter of 2021 we had other expense of $18 thousand compared to other expense of $685 thousand for the third quarter of 2020. The decrease of $667 thousand was due to the absence of interest because of the repayment of all outstanding debt during the second quarter of 2021.
We had other income of $252 thousand for the first nine months of 2021 compared to other expense of $2.7 million for the comparable period 2020. Both periods included interest on borrowings on our Credit Agreement. The interest expense on borrowings in 2021 was offset by a favorable adjustment of $1.8 million for the reversal of interest expense associated with the $6.6 million anti-dumping duty rate refund recognized during the first quarter. Adjusted Other Expense (a non-GAAP measure) was $1.6 million for the first nine months of 2021, which is a decrease of $1.1 million compared to the first nine months of 2020 driven by the repayment of all outstanding debt during the second quarter of 2021 and lower interest rates on our Credit Agreement due to the amendment in April 2021.
27
We believe that the following item set forth in the table below can distort the visibility of our ongoing performance and that the evaluation of our financial performance can be enhanced by use of supplemental presentation of our results that exclude the impact of these items.
Three Months Ended September 30, |
| Nine Months Ended September 30, |
| |||||||||||||||||||
2021 | 2020 |
| 2021 | 2020 |
| |||||||||||||||||
| $ |
| % of Sales |
| $ |
| % of Sales |
|
| $ |
| % of Sales |
| $ |
| % of Sales |
| |||||
(dollars in thousands) |
| (dollars in thousands) |
| |||||||||||||||||||
Other Expense (Income), as reported (GAAP) | $ | 18 |
| 0.0 | % | $ | 685 |
| 0.2 | % | $ | (252) |
| (0.0) | % | $ | 2,709 |
| 0.3 | % | ||
Interest impact related to antidumping adjustment 6 |
| — |
| — | % |
| — |
| — | % |
| (1,841) |
| (0.2) | % |
| — |
| — | % | ||
Sub-Total Items above |
| — |
| — | % |
| — |
| — | % |
| (1,841) |
| (0.2) | % |
| — |
| — | % | ||
Adjusted Other Expense/Adjusted Other Expense as a % of Sales (a non-GAAP measure) | $ | 18 |
| 0.0 | % | $ | 685 |
| 0.2 | % | $ | 1,589 |
| 0.2 | % | $ | 2,709 |
| 0.3 | % |
6 | Represents the interest income impact of certain antidumping adjustments related to applicable prior-year shipments of engineered hardwood from China. |
Provision for Income Taxes
The Company calculates its quarterly tax provision pursuant to the guidelines in Accounting Standards Codification ("ASC") 740-270 "Income Taxes." Generally, ASC 740-270 requires companies to estimate the annual effective tax rate for current year ordinary income. The estimated annual effective tax rate represents the best estimate of the tax provision in relation to the best estimate of pre-tax ordinary income or loss. The estimated annual effective tax rate is then applied to year-to-date ordinary income or loss to calculate the year-to-date interim tax provision and is adjusted for discrete items that occur within the period. This process was employed in 2021. Due to disruptions related to the COVID-19 pandemic in 2020, the Company applied the actual year-to-date effective tax rate for the tax provision in the three and nine-month periods ended September 30, 2020.
For the three months ended September 30, 2021, the Company recognized income tax expense of $3.2 million, which represented an effective tax rate of 27.0%. For the three months ended September 30, 2020, the Company recognized income tax expense of $7.0 million, which represented an effective tax rate of 31.0%.
For the nine months ended September 30, 2021, the Company recognized income tax expense of $10.6 million, which represented an effective tax rate of 25.3%. For the nine months ended September 30, 2020, the Company recognized an income tax expense of $4.8 million, which represented an effective tax rate of 13.7%. The variability of the tax rate between the two periods is due to the use of the effective tax rate method in 2021 compared to discrete provision in 2020, including the favorable impact of the CARES Act.
The Company has a valuation allowance recorded against certain of its net deferred tax assets of $5.6 million as of September 30, 2021 because the jurisdiction and nature of the assets makes realization of these deferred tax assets uncertain. The Company intends to maintain this valuation allowance on its deferred tax assets until there is sufficient evidence to support the realizability of those deferred tax assets or time lapses without opportunity to realize those assets.
Net Income per Diluted Share
Net income per diluted share was $0.30 for the third quarter of 2021 compared to $0.53 in the year ago quarter. Adjusted Earnings Per Diluted Share (a non-GAAP measure) was $0.29 for the third quarter of 2021 compared to $0.67 for the third quarter of 2020.
28
Net income per diluted share was $1.06 for the nine months ended September 30, 2021, compared to $1.04 for the nine months ended September 30, 2020. Adjusted Earnings Per Diluted Share was $1.05 for the nine months ended September 30, 2021, compared to $1.21 for the nine months ended September 30, 2020.
We believe that each of the items below can distort the visibility of our ongoing performance and that the evaluation of our financial performance can be enhanced by use of supplemental presentation of our results that exclude the impact of these items.
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||
2021 | 2020 | 2021 | 2020 | ||||||||
(dollars in thousands, except per share amounts) | (dollars in thousands, except per share amounts) | ||||||||||
Net Income, as reported (GAAP) | $ | 8,779 | $ | 15,503 | $ | 31,390 | $ | 30,377 | |||
Net Income per Diluted Share (GAAP) | $ | 0.30 | $ | 0.53 | $ | 1.06 | $ | 1.04 | |||
Gross Margin Items: |
|
|
|
|
|
|
|
| |||
Antidumping Adjustments 1 | — |
| — | (4,846) |
| — | |||||
Store Closure Costs 2 | — | 561 | — | 561 | |||||||
Gross Margin Subtotal |
| — |
| 561 |
| (4,846) |
| 561 | |||
SG&A Items: |
|
|
|
|
|
|
|
| |||
(Recovery) Accrual for Legal Matters and Settlements 3 |
| (295) | 1,476 |
| 5,369 |
| 1,107 | ||||
Legal and Professional Fees 4 | 32 | 737 | 347 | 2,057 | |||||||
Store Closure Costs 5 | — | 1,331 | — | 1,331 | |||||||
SG&A Subtotal |
| (263) |
| 3,544 |
| 5,716 |
| 4,495 | |||
Other Expense Items: |
|
|
| ||||||||
Antidumping Adjustments Interest 6 | — | — | (1,359) | — | |||||||
Other (Income) Expense Subtotal |
| — |
| — |
| (1,359) |
| — | |||
Adjusted Earnings | $ | 8,516 | $ | 19,608 | $ | 30,901 | $ | 35,433 | |||
Adjusted Earnings per Diluted Share (a non-GAAP measure) | $ | 0.29 | $ | 0.67 | $ | 1.05 | $ | 1.21 |
1,2,3,4,5,6 See the Gross Profit, SG&A and Other Expense (Income) sections above for more detailed explanations of these individual items. These items have been tax affected at the Company’s federal incremental rate, which was 26.2% for the 2021 periods and 26.1% for the 2020 periods.
Seasonality
Our net sales fluctuate slightly as a result of seasonal factors, and we adjust merchandise inventories in anticipation of those factors, causing variations in our build of merchandise inventories. Generally, we experience higher-than-average net sales in the spring and fall, when more home remodeling activities are taking place, and lower-than-average net sales in the winter months and during the hottest summer months. These seasonal fluctuations, however, are minimized to some extent by our national presence, as markets experience different seasonal characteristics. Those historical trends have been and continue to be affected by supply chain constraints and the COVID-19 pandemic.
29
Liquidity, Capital Resources and Cash Flows
Our strong balance sheet and liquidity provide us with the financial flexibility to fund our growth initiatives and position LL Flooring for long-term success. We had cash and cash equivalents of $104.2 million as of September 30, 2021 and repaid all $101.0 of our outstanding debt during the second quarter of 2021.
Our principal sources of liquidity at September 30, 2021 were cash from our ongoing operations, $104.2 million of cash and cash equivalents on our balance sheet and $128.0 million of availability under our Revolving Loan. As of September 30, 2021, there was no outstanding balance on our Revolving Loan.
Our cash flows from operating activities were $50.3 million during the first nine months of 2021 which was primarily the result of our net income during the period ($31.4 million), sell through of inventory ($15.7 million), growth in customer deposits ($8.8 million), and accruals for legal matters and settlements ($7.7 million), partially offset by decreased accounts payable of $17.3 million.
Through the nine months ended September 30, 2021, net cash flows used in investing activities included $12.3 million in capital expenditures for store rebranding, opening 12 net new stores and investments in digital. For 2021 we currently expect capital expenditure investments of $19 million to $23 million as our business results support the opening of 15 new stores and the continuation of the investing activities described above.
Through the nine months ended September 30, 2021, net cash used in financing activities was $103.8 million, compared to $18.5 million provided by financing activities in the nine months ended September 30, 2020. This activity in the current nine-month period was primarily due to the paydown of all our outstanding debt under the Credit Agreement of $101.0 million in the second quarter of 2021. The comparable 2020 nine-month period was primarily due to net borrowings of $19.0 million under our Credit Agreement.
On April 30, 2021 we entered into a Second Amendment to the Credit Agreement to extend the maturity date to April 30, 2026, convert the FILO Term Loan into the Revolving Credit Facility, decrease the margin for LIBOR Rate Loans, and reduce the LIBOR floor, which is described more fully in Item 1, Note 5 to the condensed consolidated financial statements.
Our focus on liquidity since the onset of the COVID-19 pandemic in March 2020 has allowed us to build a strong position to navigate the continuing COVID-19 environment, and our business continues to generate solid cash flow. We are monitoring the current macroeconomic conditions, including the increasing cost of transportation and supply chain disruptions and the impact of COVID-19, including the potential impact of emerging variants. We believe that cash flows from operations, together with cash on hand, and the liquidity under our Credit Agreement will be sufficient to meet our obligations, fund our settlements, operations, and anticipated capital expenditures for the next 12 months. In the coming quarters we also plan to increase our inventories as supply chain disruptions abate. We prepare our forecasted cash flow and liquidity estimates based on assumptions that we believe to be reasonable but are also inherently uncertain. Actual future cash flows could differ from these estimates.
Merchandise Inventories
Merchandise inventories at September 30, 2021 decreased $19.4 million from December 31, 2020 primarily due to supply chain constraints on replenishment. We consider merchandise inventories either “available for sale” or “inbound in-transit,” based on whether we have physically received and inspected the products at an individual store location, in our distribution centers or in another facility where we control and monitor inspection.
30
Merchandise inventories and available inventory per store in operation were as follows:
As of |
| As of |
| As of September 30, 2020 | |||||
(in thousands) | |||||||||
Inventory – Available for Sale | $ | 190,985 | $ | 205,664 | $ | 199,609 | |||
Inventory – Inbound In-Transit |
| 34,013 |
| 38,745 |
| 37,831 | |||
Total Merchandise Inventories | $ | 224,998 | $ | 244,409 | $ | 237,440 | |||
Available Inventory Per Store | $ | 453 | $ | 502 | $ | 472 |
Available inventory per store at September 30, 2021 was lower than at December 31, 2020 and September 30, 2020. The decrease in available inventory was primarily driven by supply chain constraints on replenishment.
Inbound in-transit inventory generally varies due to the timing of certain international shipments and certain seasonal factors, including international holidays, rainy seasons, and specific merchandise category planning.
Critical Accounting Policies and Estimates
Critical accounting policies are those that we believe are both significant and that require us to make difficult, subjective, or complex judgments, often because we need to estimate the effect of inherently uncertain matters. We base our estimates and judgments on historical experiences and various other factors that we believe to be appropriate under the circumstances. Actual results may differ from these estimates, and we might obtain different estimates if we used different assumptions or conditions. We have had no significant changes in our Critical Accounting Policies and Estimates since our annual report on Form 10-K for the year ended December 31, 2020.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Interest Rate Risk.
We are exposed to interest rate risk through the investment of our cash and cash equivalents. Our policy is to invest our cash in short-term investments with maturities of three months or less. Changes in interest rates affect the interest income we earn, and therefore impact our cash flows and results of operations. Borrowings under our Credit Agreement are exposed to interest rate risk due to the variable rate of the facility, and the expected transition from the LIBOR reference rate in 2021. As of September 30, 2021, we had no amount outstanding under our Credit Agreement. If the interest rate had varied by 1% in either direction during the 2020 annual period, interest expense would have fluctuated by $1 million.
We currently do not engage in any interest rate hedging activity. However, in the future, in an effort to mitigate losses associated with interest rate risks, we may at times enter into derivative financial instruments, although we have not historically done so. We do not, and do not intend to, engage in the practice of trading derivative securities for profit.
Item 4. Controls and Procedures.
Evaluation of disclosure controls and procedures. Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined under Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the quarter ended September 30, 2021. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of September 30, 2021.
31
Changes in Internal Control over Financial Reporting. There has been no change in our internal control over financial reporting that occurred during the most recent quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
Information with respect to this item may be found in Note 7, “Commitments and Contingencies”, to the condensed consolidated financial statements in Item 1 of Part I, which is incorporated herein by reference.
Item 1A. Risk Factors.
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A, “Risk Factors,” in our annual report on Form 10-K for the year ended December 31, 2020, which could materially affect our business, financial condition or future results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
The following table presents our share repurchase activity for the quarter ended September 30, 2021 (in thousands, except per share amounts):
|
|
| Total Number |
| Maximum Dollar Value | |||
of Shares | of Shares That May Yet | |||||||
Purchased as | Be Purchased as | |||||||
Total Number | Average | Part of Publicly | Part of Publicly | |||||
of Shares | Price Paid | Announced | Announced | |||||
Period | Purchased1 | per Share1 | Programs | Programs | ||||
July 1, 2021 to July 31, 2021 |
| — |
| — |
| — |
| — |
August 1, 2021 to August 31, 2021 |
| — |
| — |
| — |
| — |
September 1, 2021 to September 30, 2021 |
| — |
| — |
| — |
| — |
Total |
| — |
| — |
| — |
| — |
1 | We repurchased 15,404 shares of our common stock, at an average price of $18.80, in connection with the net settlement of shares issued as a result of the vesting of restricted shares during the quarter ended September 30, 2021. |
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
None.
Item 5. Other Information.
None.
Item 6. Exhibits.
The exhibits listed in the following exhibit index are furnished as part of this report.
32
EXHIBIT INDEX
Exhibit | ||
Number |
| Exhibit Description |
31.1 | ||
31.2 | ||
32.1 | ||
101 | The following financial statements from the Company’s Form 10-Q for the quarter ended September 30, 2021, formatted in XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statements of Comprehensive Loss, (iv) Condensed Consolidated Statements of Stockholders’ Equity, (v) Condensed Consolidated Statements of Cash Flows, and (vi) Notes to Condensed Consolidated Financial Statements | |
104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
LIQUIDATORS HOLDINGS, INC. | ||
(Registrant) | ||
Date: November 2, 2021 | By: | /s/ Nancy A. Walsh |
Nancy A. Walsh | ||
Chief Financial Officer (Principal Financial Officer) | ||
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