5/1/2015
The old adage still remains true even if the names have changed. As a business owner, when 60-Minutes comes to your door, it is probably not going to be a good day. Lumber Liquidators is the largest hardwood flooring retailer in the world, with annual revenues of over a billion dollars. Yet, that may not be for long following a March story the program aired, in which experts found an extremely high amount of cancer-causing formaldehyde in laminate flooring products imported from China. Now, less than two months after that segment aired, the company announced in a regulatory filing on Wednesday, April 29th, that the Department of Justice is bringing criminal charges against the company, accusing them of violating the Lacey Act. Lumber Liquidators also noted a $10 million charge related to the investigation on its quarterly report. These charges come in addition to at least 103 class-action lawsuits pending, and the company’s stock price dropping over 20 percent during Wednesday trading. Also, the filing announced the impending June departure of Chief Financial Officer, Daniel Tarrell.
(Photo Courtesy of CBS News)
Although the 60-Minutes special brought the investigation to the forefront and was likely the catalyst for the DOJ to bring forth the criminal charges, the investigation into the company began in 2013, when the U.S. Fish and Wildlife Service, along with the Department of Homeland Security raided the company’s Virginia offices accusing them of importing illegally sourced wood products. The subsequent charges fall under the Lacey Act, a 1900 anti-wildlife trafficking law that was amended in 2008 to also include illegally-imported wood products. During the 60-Minutes special, Anderson Cooper teamed up with attorney Richard Drury and activist Denny Larson to test over 150 boxes of laminate flooring for formaldehyde. The lab results found that American made laminate flooring from Lumber Liquidators; along with laminate purchased from Home Depot were well under the formaldehyde limit; however every sample of laminate flooring that came from China reached the upper-limit of the testing equipment. This led scientists at the lab to initially believe that their equipment was broken.
Drury estimates that hundreds of thousands of households nationwide have the Chinese laminate flooring in their homes. Dr. Philip Landrigan, also featured on the 60-Minutes segment, said that long-term exposure to these levels of formaldehyde can cause chronic lung irritation, change in lung function, and increase the risk of asthma, especially among children. As a known carcinogen, It depends on how much formaldehyde is contained within the layers of wood that comprise the flooring as well as the ventilation of the house as to how intense the exposure. The company’s web site claims that it “meets or exceeds rigorous emissions standards,” and claims that “we not only comply with laws, we exceed them.” Drury, however, insists that the products they purchased for the 60-Minutes segment were in no way legal in state of California, where filming occurred. The company also makes a point to note in its advertisements that the company donates flooring products for institutions like Habitat for Humanity and Ronald McDonald House Charities, as well as local community centers and schools.
The company said in a post-earnings phone call that 52 percent of their laminate flooring comes from China; however, they will cease adding Chinese products to their inventory for now. Stunningly, Cantor Fitzgerald analyst, Laura Champine, believes that the company will resume importing wood products from China even in light of the pending charges. She states that, “It would make sense if the company goes back to getting laminates from China once demand returns.” The company said in March that manufacturing the products that they had previously purchased in China would add 8 to 15 percent to the company’s expenses. This appears to be a small price to pay considering that the $10 million charge as a result of the investigation dropped the company to a $7.8 million loss for the first quarter. These numbers could be a drop in the bucket, however, to the potential financial loss from class-action settlements and judgments, along with a precipitous drop in sales revenue. In addition to the plummeting stock price, orders were down in April by 8.2 percent, a nominal sum with potential to fall much further. Information regarding the specificity of the criminal charges should also be forthcoming from the Department of Justice.
Sources:
CBS News – Anderson Cooper
NPR – Krishnadev Calamur
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