Let’s Talk About Formaldehyde Testing Regulations

It was just yesterday that I wrote a post about how the Lumber Liquidators ($LL: no positions) saga intrigues me because the parties seem to be arguing about an objective topic, mainly: when you use CARB-compliant testing procedures, do LL’s Chinese-made laminate flooring products have formaldehyde in excess of the legal limit?

60 Minutes profiled the company and detailed multiples parties who found and tested seemingly significant quantities of LL products that they claimed violated the CARB2 limits on formaldehyde.   60 Minutes did their own tests, although on product that wasn’t subject to California CARB regulations, and found similarly high levels of formaldehyde.

Lumber Liquidators promptly denied the accusations, noting:

“We believe that 60 Minutes used an improper test method in its reporting that is not included in CARB’s regulations and does not measure a product according to how it is actually used by consumers. Our laminate floors are completely safe to use as intended. In our attempt to be fair and transparent, we provided significant testing results to 60 Minutes, including the results of the random testing performed on products from each of our laminate suppliers. We also went to great lengths to document issues between the validated test method and that used by 60 Minutes. Our Chairman addressed the differences and our position on the test methodology but 60 Minutes chose not to include it.”

In yesterday’s blog post, I noted that I found it odd that there seems to be an argument about something that should be easy to clarify:  what test method did the LL critics who found high levels of formaldehyde use?   Does their method comply with CARB protocol?   I wrote that I didn’t know the answer but that I don’t think it should be a matter of rocket science to remedy the mystery.

Today, I came across a few tidbits of information which purport to be explanations from Whitney Tilson himself.   I have no reason to believe that these quotes did not come from Tilson, although I cannot verify that they are in fact from him.  Regardless, I think they are still central to the “debate” that shouldn’t even be a debate.  Let’s look at these tweets from @QuothTheRaven and see how they relate to what I wrote yesterday.  Excerpt 1:

tilson_tests_1

Notice how Tilson says that LL’s testing is “disconnected from rigorous, credible tests that others (regulators, Home Depot, Lowe’s) use and rely on.”   Per the point of yesterday’s post, if LL’s tests indeed fail to conform to regulations, that would obviously be a problem, right?   So let’s look at the second excerpt:

tilson_tests_2

Here’s where I have a problem.  Tilson writes (with the caveat that it’s a “complex story”): “the generally accepted and used test is to sand off the outer layer of the laminate and then test it.”

This single sentence struck a number of chords with me:  first the semantic one:  why is Tilson using the phrase “generally accepted”?  We’re talking about regulations.  There are detailed methods.  These methods are the methods approved by the regulations.   There’s nothing that people have just “generally accepted” as an ok way to test the products.  But moving on:  Tilson says that the method is to sand off the outer layer.   Again, this seems to be what Lumber Liquidators was getting at when they said that the test results used by the critics don’t reflect how the product is actually “used by consumers.”

I, however, don’t really care about what Tilson or LL “think” is a good method!  I think there is a legal method, and that was the point of yesterday’s post, and of today’s!   There’s just one problem:  I’m not qualified to tell you what the legal method is.  Let me be clear: I am not an expert on CARB testing, or on legal interpretation of CARB-related documents that I found on the internet.   That said, when I looked at what I think are the relevant CARB testing procedures, left here by a helpful commenter (@GeneticBiscuit) on my prior post, I can’t find any reference to what Tilson is talking about with sanding off the outer layer.

I read the ASTM standards procedure, and I don’t see anything about sanding off any outer laminate layer.

LL_atsm_test

In fact, there’s actually a specific reference to products where only one side is exposed to the indoor living space:

ll_atsm_back2back

and the relevant footnote:

ll_atsm_footnoteAnyway, what I’d really like is for someone to show me where I’m wrong – where in the regulations does it say anything about the method Whitney Tilson alleged, regarding sanding off a layer of laminate.   Is it possible I just missed that part in all the legal-eze?  Maybe…

I have no dog in this fight: I am not touching the stock (neither long nor short), and I have no related interests with any of the parties involved.   I remain fascinated that, as I wrote yesterday, there seems to be ample debate around Stuff Which Should Not Be Debatable.

What say you CNBC?  Fox Business?  NY Post?  60 Minutes?   Whitney Tilson?  Let’s get the testing methodology used by each party out in the open, and compare them to the regulations.   It should be noted that Lumber Liquidators claims to have explained the differences and their “position” on the test methodology to 60 Minutes, but 60 Minutes chose not to air it.

EDIT: 4:30pm 3/3/2015:

I write posts like this because I lack the expertise needed to evaluate the situation and I’m hoping that someone can help me shed some light on the situation.   In this case, a reader in the comments quickly pointed me toward the source of Tilson’s “boards are sanded prior to testing” comments:  the CARB guide for Standard Operating Procedure for Finished Goods Testing, which notes:

LL_SOP_finished_goods

This certainly changes my view of Tilson’s test method, and I’d love to hear how Lumber Liquidators can rationalize their method – or what their method even is.   Nevertheless, the point of my original post remains:  this should be a black and white matter for regulators to evaluate,  not a case of “he said / she said.”

I’d be remiss if I didn’t point out one more thing though, which again, will be easy for regulators to evaluate:  note the language:

“For finished goods that consist of a laminated product in which one side is not laminated or coated, the  product may be cut and tested as a panel with a surface coating on one side (see SOP for composite wood panels).”

The SOP for Finished Goods specifically mentions flooring, but this clause above implies that flooring laminated on only one side (which is what we’re talking about, right?) may be tested without removing the laminate.

I’m pretty much done ignorantly speculating on what the proper CARB protocol is.   I now understand where Tilson got his explanation that the proper method involves sanding off the laminate, and I’ll leave it to the regulators and experts to determine which test method applies to LL’s products in question.

Lumber Liquidators: Black and White

ASTM E1333 Standards

60 Minutes:  Lumber Liquidators Linked To Health and Safety Violations

Tilson: Why I’m Short $LL

California CARB Regulations

Xuaha Zhou: Illegal Products Could Spell Big Trouble at Lumber Liquidators

Lumber Liquidators SEC 8-k response to 60 Minutes piece

-KD

no positions in $LL

ps – nothing in this post should be construed as an attempt to take a bullish or bearish view on $LL, regardless of what the proper CARB testing protocol is…

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