| Commitments and Contingencies | Note 6. Commitments and Contingencies
Governmental Investigations
In 2015 and early 2016, the Company received subpoenas issued in connection with a criminal investigation being conducted by the U.S. Department of Justice (the “DOJ”) and the SEC. Based on the subpoenas and the Company’s discussions to date, the Company believes the focus of both investigations primarily relates to compliance with disclosure, financial reporting and trading requirements under the federal securities laws since 2011. The Company is fully cooperating with the investigations and continues to produce documents and other information responsive to subpoenas and other requests received from the parties. Given that the investigations are still ongoing and that no civil or criminal claims have been brought to date, the Company cannot predict the outcome of the investigations, the timing of the ultimate resolution of these matters, or reasonably estimate the possible range of loss, if any, that may result. Accordingly, no accruals have been made with respect to these matters. Any action by the DOJ or SEC with respect to these matters could include civil or criminal proceedings and could involve fines, damage awards, regulatory consequences, or other sanctions which could have a material adverse effect, individually or collectively, on the Company’s liquidity, financial condition or results of operations.
Litigation Relating to Chinese Laminates
Formaldehyde-Abrasion MDLs
On March 15, 2018 , the Company entered into a settlement agreement with the lead plaintiffs in the Formaldehyde MDL (as defined in Part II – Item 1 of this Form 10-Q) and Abrasion MDL (as defined in Part II – Item 1 of this Form 10-Q), cases more fully described in the Company’s 2017 Annual Report on Form 10-K. Under the terms of the settlement agreement, the Company has agreed to fund $22 million and provide $14 million in store-credit vouchers for an aggregate settlement of $36 million to settle claims brought on behalf of purchasers of Chinese-made laminate flooring sold by the Company between January 1, 2009 and May 31, 2015. The Company may fund the $22 million through a combination of cash and/or common stock. The settlement agreement is subject to certain contingencies, including court approvals. On June 16, 2018, the United States District Court for the Eastern District of Virginia issued an order that, among other things, granted preliminary approval of the settlement agreement. Following the preliminary approval and pursuant to the terms of the settlement agreement, the Company paid $500 thousand for settlement administration costs, which is part of the cash payment, to a settlement escrow account. A Final Approval and Fairness Hearing is currently scheduled for October 3, 2018. There can be no assurance that the settlement agreement will be approved or as to the ultimate outcome of the litigation. If a final, court-approved settlement is not reached, the Company will defend the litigation vigorously and believes there are meritorious defenses and legal standards that must be met for class certification and success on the merits. To date, insurers have denied coverage with respect to the Formaldehyde MDL and Abrasion MDL. The $36 million aggregate settlement amount was accrued within Selling, General and Administrative expense in 2017.
In addition to those purchasers who elect 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 the first and second quarters of 2018, while some are in settlement negotiations. The Company recognized a $1 million charge during the fourth quarter of 2017 and a $ 2.9 million charge in the first half of 2018 (including $2.7 million in the second quarter) to earnings within selling general and administrative expense for these Related Laminate Matters. While the Company believes that a further loss associated with the Opt Outs and Related Laminate Matters is reasonably possible, the Company is unable to reasonably estimate the amount or range of possible loss beyond what has been provided. If the court does not approve the settlement agreement or if the Company incurs losses with the respect to the Opt Outs or further losses with respect to Related Laminate Matters, the ultimate resolution of these actions could have a material adverse effect on the Company’s results of operations, financial condition, and liquidity .
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. 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 loss associated with the Steele litigation is possible, the Company is unable to reasonably estimate the amount or range of possible loss.
Litigation Relating to Bamboo Flooring
Beginning in 2014, Dana Gold (“Gold”) filed a purported class action lawsuit alleging that certain bamboo flooring that the Company sells (the “Strand Bamboo Product”) is defective (the “Gold matter”). On February 2, 2018, plaintiffs filed their Fifth Amended Complaint, and have narrowed it to Strand Bamboo Product sold to residents of certain states for personal, family, or household use. The plaintiffs did not quantify any alleged damages in their complaint but, in addition to attorneys’ fees and costs, the plaintiffs seek a declaration that the Company’s actions violated the law and that it is financially responsible for notifying all purported class members, injunctive relief requiring the Company to replace and/or repair all of the Strand Bamboo Product installed in structures owned by the purported class members, and a declaration that the Company must disgorge, for the benefit of the purported classes, all or part of the profits received from the sale of the allegedly defective Strand Bamboo Product and/or to make full restitution to the plaintiffs and the purported class members. The trial is currently scheduled to begin in February 2019 and, while no resolution has been achieved, the Company has participated in court-ordered mediation sessions.
In addition, there are a number of other claims and lawsuits alleging damages similar to those in the Gold matter. The Company disputes these and the plaintiffs’ claims in the Gold matter and intends to defend such matters vigorously. Given the uncertainty of litigation, the preliminary stage of the case, and the legal standards that must be met for success on the merits, the Company is unable to estimate the amount of loss, or range of possible loss, at this time that may result from this action. Accordingly, no accruals have been made with respect to this matter. Any such losses could, potentially, have a material adverse effect, individually or collectively, on the Company’s results of operations, financial condition, and liquidity.
Employee Classification Matters
During the second half of 2017, current and former store managers, store managers in training, installation sales managers and similarly situated current and former employees holding comparable positions but different titles filed purported class action lawsuits in New York and California on behalf of all current and former store managers, store managers in training, installation sales managers, and similarly situated current and former employees holding comparable positions but different titles (collectively, the “Putative Class Employees”), in both cases alleging that the Company violated the Fair Labor Standards Act and certain state laws by classifying the Putative Class Employees as exempt. In both cases the plaintiffs did not quantify any alleged damages but, in addition to attorneys’ fees and costs, the plaintiffs seek class certification, unspecified amount for unpaid wages and overtime wages, liquidated and/or punitive damages, declaratory relief, restitution, statutory penalties, injunctive relief and other damages. The Company disputes the claims and intends to defend both matters vigorously. 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 is unable to estimate the amount of loss, or range of possible loss, at this time that may result from these actions. Accordingly, no accruals have been made with respect to these matters. Any such losses could potentially have a material adverse effect, individually or collectively, on the Company’s results of operations, financial condition, and liquidity.
Antidumping and Countervailing D u ties Investigation
In O ctober 2010, a conglomerat i on of domestic manufactur e rs of multilayered wood flooring filed a p e tition se e k ing the imposition of a n tidumping ( “ AD”) and c o untervailing duti e s (“C V D ”) with the U n ited States D ep a rtment of Comm e rce (“DOC ” ) and the United St a tes Intern a tional Tr a d e Commis s i o n (“I T C”) a g a inst imports of multilayered wood flooring from China. T h is 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 ac c ounted for app r oximately 8% and 7% o f its fl o o ri n g purchases in 2017 and 2016 , respectively. The Company’s consistent view through the course of this matter has been, and remains, that its imports are neither dumped nor subsidized. As such, it has appealed the original imposition of AD and CVD fees.
As part of its p r o c esses in these procee d ing s , the DOC con d u c ts a n nual r eviews of the AD and CVD r ates. In such cases, the DOC will issue pr e liminary rat e s th a t are not binding and are subject to comment by inter e s t ed p a rties. Aft e r c o nsideration of the comm e n ts rece i ved, the D O C will issue f inal r a tes for the applicable pe r iod, 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.
In addition to its overall appeal of the imposition of AD and CVD, which is still pending, the Company as well as other involved parties have appealed many of the final rate determinations. 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.
The first 5 -year Sunset Review of the AD and CVD orders on multilayered wood flooring (the “Sunset Review”) began in November 2016 at the ITC to determine whether to terminate the orders. The Company participated fully in this Sunset Review. In December 2017, the ITC determined that the AD and CVD orders will remain in place.
Results by period for the Company are shown below. The column labeled ‘June 30, 2018 Receivable/Liability Balance’ represents the amount the Company would receive or pay 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 amounts paid for AD or CVD in the current period at the in-effect rate at that time.
Review
Period
Period Covered
Rates at which Company Deposited
Final Rate
June 30, 2018
Receivable/Liability Balance
Antidumping
1
May 2011 through
November 2012
6.78% and 3.3%
0.73% 1
$ 1.3 million receivable 1
2
December 2012 through November 2013
3.30%
13.74%
$4.1 million liability
3
December 2013 through November 2014
3.3% and 5.92%
17.37%
$5.5 million liability
4
December 2014 through November 2015
5.92% and 13.74%
0.0%
$2.1 million receivable
5
December 2015 through November 2016
5.92% , 13.74% , and 17.37%
Pending but preliminary determination was 0.0%
NA
6
December 2016 through November 2017
17.37% and 0.0%
Pending
NA
7
December 2017 through November 2018
0.0%
Pending
NA
Countervailing
1&2
April 2011 through
December 2012
1.50%
0.83% / 0.99%
$0.2 million receivable
3
January 2013 through December 2013
1.50%
1.38%
$.05 million receivable
4
January 2014 through December 2014
1.50% and 0.83%
1.06%
$.02 million receivable
5
January 2015 through December 2015
0.83% and 0.99%
Final at 0.11%
and 0.85 % 2
$.07 million receivable 2
6
January 2016 through December 2016
0.99% and 1.38%
Pending
NA
7
January 2017 through December 2017
1.38% and 1.06%
Pending
NA
8
January 2018 through December 2018
1.06%
Pending
NA
1
In June 2018, the Court of International Trade sustained the DOC’s recommendation to reduce the rate for the first annual review period to 0.73% (from 5.92% ). As a result, the Company reversed its $0.8 million liability and recorded a $1.3 million receivable in the second quarter of 2018 with a corresponding reduction of Cost of Sales.
2
In June 2018, the DOC issued the final rates for review period 5 at 0.11% and 0.85% depending on vendor. As a result, the Company recorded a receivable of $0.07 million in the second quarter of 2018 for deposits made at previous preliminary rates, with a corresponding reduction of Cost of Sales.
Oth e r 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. |
